BANKRUPTCY BASICS

 

  Here are some bankruptcy basics.  If your question does not appear, please go to our section of frequently asked questions .  There you will find many more questions answered.

What is bankruptcy?

Bankruptcy is a legal proceeding in which a person who cannot pay his or her bills can get a financial fresh start . The right to file for bankruptcy is provided by federal law, and all bankruptcy cases are handled in federal bankruptcy court. Filing bankruptcy immediately prohibits all of your creditors from seeking to collect debts from you, at least until your debts are sorted out according to the law.

How do I decide if bankruptcy is right for me?

Things you should consider to determine if bankruptcy is the best solution: the interest charges on debts are so large that the monthly payments you can make cover only the interest; there are unpaid bills that will be difficult or impossible to pay off in the foreseeable future; there is a threat of a lawsuit, repossession of a car or foreclosure of your house; you are receiving frequent calls from creditors, or you have already been sued and the creditor is trying to take all your cash.

Ask yourself this: "Am I able to pay all of my obligations to creditors as they come due (i.e. on time)?" If your answer is that you cannot pay all of your bills on time, then you should consider bankruptcy further. Part of the analysis in deciding if bankruptcy is right for you is to ask, "How much debt was I in at this time last year?" If you are in less debt this year than last year, then you are making headway on reducing your debt, and bankruptcy may not be the best decision for you. On the other hand, if your current debt is the same or more than it was last year, then this is one indication that you should consider the pros and cons of bankruptcy.

What can bankruptcy do for me?

Bankruptcy may make it possible for you to:

Stop the frustration that comes from harassing phone calls, rude creditors, and threats of a lawsuit, repossession or foreclosure.

Get peace of mind that comes from becoming debt free.

Eliminate the legal obligation to pay most or all of your debts. This is called a "discharge" of debts. It is designed to give you a financial fresh start .

Stop foreclosure on your house or mobile home and allow you an opportunity to catch up on missed payments. Bankruptcy does not, however, automatically eliminate mortgages and other liens on your property without payment.  As a general rule, if you want to keep your possessions, then you must continue to pay for your possessions.

Prevent repossession of a car or other property, or force the creditor to return property even after it has been repossessed.

Stop wage garnishment, debt collection harassment, and similar creditor actions to collect a debt.

Restore or prevent termination of utility services.

Allow you to challenge the claims of creditors who have committed fraud or who are otherwise trying to collect more than you really owe.

The benefit of bankruptcy is the reduction or elimination of your debt. Often, this is a huge weight lifted off your shoulders. Calls from creditors are automatically prohibited once you file your case, via the protection called the automatic stay . The fresh start you are given can release the emotional burden of the debt that you have been struggling with.

What bankruptcy CANNOT do?

Bankruptcy cannot, however, cure every financial problem. Nor is it the right step for every individual. In bankruptcy, it is usually not possible to:

Eliminate certain rights of "secured" creditors. A "secured" creditor has taken a mortgage or other lien on property as collateral for the loan. Common examples are car loans and home mortgages. You can force secured creditors to take payments over time in the bankruptcy process. Nevertheless, you generally cannot keep the collateral unless you continue to pay the debt.  As a general rule, if you want to keep your possessions, then you must continue to pay for your possessions.

Discharge types of debts singled out by the bankruptcy law for special treatment, such as child support, alimony, student loans, court restitution orders, criminal fines, and some taxes.

Protect cosigners on your discharged debts . When a relative or friend has cosigned a loan, and the consumer discharges the loan in bankruptcy, then the cosigner may still have to repay all or part of the loan. The only way to protect cosigners is to pay in the cosigned debt in full.

Discharge debts that arise after bankruptcy has been filed .

What are the different types of bankruptcy?

There are four types of bankruptcy cases provided under the law, but most people filing bankruptcy will want to file under either Chapter 7 or Chapter 13. Either type of case may be filed individually or by a married couple filing jointly.

Chapter 7 is most easily understood as the form of bankruptcy in which the case is only open for 90 days after the case is filed in bankruptcy court, and there are NO payments made to a trustee on a monthly basis. The reason why there are no payments made to trustee is because the person filing bankruptcy has no money to pay creditors, except the secured debts the person wants to keep paying, which are typically the house and the car. Chapter 7 is also known as "straight" bankruptcy or "liquidation." (There is never a liquidation because if I determine that a client has property that he wants to keep and that is not exempt and would be liquidated in Chapter 7 bankruptcy, the client always chooses to file a Chapter 13 bankruptcy to protect the non-exempt property .) Chapter 7 is typically not advisable for those people that want to keep a home or a car and they are behind on the payments on the house or car. There are several reasons why Chapter 7 is not advisable in those situations, but for now, please note that you have to be current on the house and car as of the date of the filing and during the 90 days that the case is pending. If you are behind on house or car payments and are considering a Chapter 7, then you have to add the cost of getting current on the house and car to the other costs of a Chapter 7 bankruptcy to determine the total cost of a Chapter 7 bankruptcy.

Chapter 13 is most easily understood as the form of bankruptcy where the person filing bankruptcy makes a payment to the Chapter 13 Trustee for 3 to 5 years to repay creditors. The main reason that someone would have to file a Chapter 13 over a Chapter 7 is that they have over $100 left over after they have covered their living expenses, house payment and car payment. Chapter 13 bankruptcy is also called "debt adjustment" or "Debt Consolidation."  In a Chapter 13 case, you are required to make a monthly payment to the Chapter 13 Trustee, to repay some portion of the debt you have. You file a "plan" showing how you will pay off some of your past-due and current debts over three to five years.

Chapter 11 , known as "reorganization," is used by businesses and a few individual debtors whose debts are very large. This probably won't apply to you.

Chapter 12 is reserved for family farmers. This probably won't apply to you.

Why Would I Choose Chapter 13 over Chapter 7?

When I see clients that are qualified for either a Chapter 7 or a Chapter 13 bankruptcy, about 8 out of 10 of them will choose a Chapter 13 bankruptcy. The most common reasons they give me for their choice are that it is more affordable and quicker for them to file a Chapter 13 bankruptcy. In a Chapter 7, you have to get current on house or car payments, pay all attorneys fees, court costs, and all other costs to file a Chapter 7 bankruptcy . Although you can pay those costs over time, the Bankruptcy Code provides that the case cannot be filed until all those costs are paid in full. However, monthly Chapter 13 payments can be as low as $125 per month . What’s easier? Paying as low as $125 a month for a Chapter 13, or paying for all the costs of a Chapter 7 bankruptcy upfront? You be the judge!

What Property Can I Keep?

The practical answer is that all of my clients have been able to keep all of their stuff that they want to keep, and they have been able to get rid of the things they did not want to keep. The reason for that is this: if someone has lots of stuff that they cannot keep after going through bankruptcy, then they have the ability to handle their debts on their own. The clearest example of this is when someone came to me for advice as to whether bankruptcy was a viable option. That person owned 3 rent houses that were fully paid for! It’s easy to protect the house you live in, but not an additional house that is fully paid for. Not only would bankruptcy not work well for that person, but more importantly, that person did not NEED bankruptcy because the sale of one of the rent houses would have brought that person enough cash to get debt free.

The technical answer is that the federal Bankruptcy Code allows each individual in bankruptcy to protect certain property using certain exemptions while still consolidating and/or discharging their debts. If something of yours is exempt , then you get to keep it. This is accomplished by using protections that are set forth in federal law or under state law. Typically, property that can be kept and protected while in a bankruptcy includes your homestead, your vehicles, household furnishings and personal effects, jewelry, health aids, tools of the trade, life insurance, personal injury claims, retirement accounts and packages, bank accounts to a certain amount, and other types of miscellaneous property. The typical individual filing for bankruptcy is able to protect ALL of their property by using these protections.

Will I lose my home or car if I file bankruptcy?

The only reason that I have had clients lose a house or car is because they stopped paying for them. As a general rule, if you want to keep your possessions, then you must continue to pay for your possessions.

Can I own anything after bankruptcy?

Yes! Many people believe they cannot own anything for a period of time after filing for bankruptcy. This is not true. You can keep your exempt property and anything you obtain after the bankruptcy is filed. However, if you receive an inheritance, a property settlement, or life insurance benefits within 180 days after filing for bankruptcy, that money or property may have to be paid to your creditors if the property or money is not exempt .

Will Bankruptcy Wipe Out All My Debts?

Yes, with some exceptions. Bankruptcy will not wipe out:

• Money owed for child support or alimony, fines, and some taxes;
• Debts not listed on your bankruptcy petition;
• Loans you got by fraud, misrepresentation, or by knowingly giving false information to a creditor, who reasonably relied on it in making you the loan;
• Debts resulting from "willful and malicious" harm;
• Student loans owed to a school or government body;
• Home loans or car loans, unless you want to give the house or car back to the creditor.

Will I Have to Go to Court?

About 98% of my clients NEVER go to court. In most bankruptcy cases, you only have to go to a proceeding called the "meeting of creditors" or "341 meeting" to meet with the bankruptcy trustee and any creditor who chooses to come. The primary purpose of this meeting is to allow the trustee to identify you and to make sure that it is your signature on the paperwork that we file in court for you. This meeting occurs about 4-6 weeks after filing, and in Chapter 7 cases the meeting last about 6 minutes. The 341 meeting in Chapter 13 cases lasts about 15 minutes because there is the additional task of making sure that the plan is feasible. I will be there with you, you will be told by my staff what to bring, what questions you will be asked and how to handle yourself in front of the trustee.

Will Bankruptcy Affect My Credit?

Yes, bankruptcy will affect your credit, and that’s part of the reason that people file bankruptcy. Your credit report will show that you filed bankruptcy, BUT IT WILL ALSO SHOW THAT YOU DON’T OWE ALL THE DEBT THAT HAS BEEN GIVING YOU SO MANY PROBLEMS.

Be sure to consider this in context of your current situation. If you are behind on your bills, your credit may already be bad. Bankruptcy will probably not make things any worse. As I tell some clients, there’s not much difference between “Bottom” and “Rock Bottom.”

Can I Get Credit After Filing Bankruptcy?

Now, I recommend that someone who completes a bankruptcy case think long and hard before they incur new debt, because the bankruptcy process is just a piece of the larger process of reestablishing credit . When it is appropriate for your situation to incur new debt, you are you are likely to be in a better position to get new credit after your successfully complete your bankruptcy case because bankruptcy wipes out your old debts. Look at it from the point of a creditor when the creditor is deciding to whom to lend money: Would you want to give a new loan to someone who owes of a lot of other debts, or would you feel safer lending to someone who has no other debts? Sure, it’s safer for the creditor to lend to someone that owes no other debts, regardless if they filed bankruptcy. That’s why people that complete their bankruptcy case are sent lots of pre-approved credit offers after their case is completed.

Here’s a case in point: I had a receptionist that filed a Chapter 7 bankruptcy before she came to work for me. That’s the form of bankruptcy where no payments are made to creditors, and the case is only open for 90 days. She and her spouse were able to purchase a house and a truck within a year of the filing of the case. It’s no secret that they had to borrow money to buy the house and truck. The home loan was at market interest rate, but the truck was at a high interest rate. After 6 months of on-time payments on the truck, they were able to refinance the truck at 6%. Will everyone who files bankruptcy have the same outcome? No, because not everyone could afford the new payments. You still have to be able to afford the new payment on the loan you want.

The other point that is seldom made about the effect of the filing of the bankruptcy case on your credit SCORE. A person’s credit score is determined by comparing their record to that of other people in the country. However, the credit score for someone who has filed bankruptcy is determined by comparing their record with that small subset of people in the country who have filed bankruptcy. As a result, if you manage your finances well after you complete your bankruptcy case, then it is possible for you to increase your credit score much higher than if you never filed bankruptcy. For more information on this point, read this book: The Ultimate Credit Handbook, by Gerri Detweiler, president, Ultimate Credit Solutions, Inc., Sarasota, Florida

As a general rule, you may need credit in the future for three things: to obtain a credit card, to purchase a car, or to purchase a house.

Credit Cards: Many people don't ever want to see a credit card again after filing bankruptcy. However, many others do, because it can be hard to do things, such as make airline or hotel reservations, without one. If you obtain one, be sure it is only one and be sure it is paid in full at the end of each month. There are two ways to obtain a credit card or two after filing bankruptcy:

• Wait for a pre-approved credit offer that so many of my clients get in the mail. Some of the offers are sent to my office! The only reason the creditor has my office address is because I filed the bankruptcy case for my client!
• Look on the internet for a "secured card." You put, for example, $500 down in a CD at a bank and they give you a credit card with a $500 balance. As you demonstrate an ability to pay on time, they raise the credit limit. Within a year or two, it is common that they extend you credit in an amount 3-5 times the value of the CD you put up as collateral.

Automobiles: The biggest challenge in obtaining a vehicle loan is having room in your monthly budget for the new vehicle payment this month and for the next 48 - 72 months. That’s especially difficult soon after completing a Chapter 7 bankruptcy, because the only way to qualify is by showing that you have no money left over after paying for your living expenses and the debts you intend to keep!

If you have room in your budget, then your next step is the SHOP AROUND for a good deal and a good interest rate. It’s easy to obtain a car loan – just look in the newspaper and you will see lot’s of ads stating “Good Credit, Bad Credit, Bankruptcy OK,” but those places are most likely to stick you with a high interest rate. So, SHOP AROUND before you buy.

I think the best way to look at a vehicle loan is to view it at something you should only do ONCE, if at all possible. Here’s what I recommend to clients: If you have a vehicle that is financed for 4 years / 48 months, be sure to keep it and drive it and you pay it off. Continue to use the vehicle for an additional 48 months and keep making the vehicle payment, except not to the creditor!Instead, you make the payment to your bank account via an automatic deduction with your employer or with your bank. If you do that, you will have held the vehicle for 8 years. By the end of the the 8-year period, you can then take one-half the cash you saved to buy a very good, slightly used vehicle that is likely to last about 300,000 miles, like a Toyota Camry or Honda Accord. Other vehicles may be able to last 300,000 miles, but there are more Camrys and Accords to choose from, so it’s easier to find a good one. If you do that, you will have no vehicle payment and you will still have lots of cash in the bank. Which would be better, having good credit to buy a vehicle or having cash to buy a vehicle? You be the judge!

The most common objection to that plan is the concern about increased repair costs for the vehicle in years 5 through 8? That’s a valid concern, and estimates from clients as to likely maintenance and repair costs for an older vehicle over the course of year could be as high as $2,000. If we use that as an average annual repair cost for the vehicle, then the monthly average is $166.67. Compare that to the maintenance and repair cost of a newer vehicle. The monthly average cost for tires, brakes, oil changes, filters and scheduled maintenance for a newer vehicle could average as low as $40 monthly. That would make is $126.67 more expensive on a monthly basis to maintain an older vehicle. This is where people then shake their head and tell me that they can’t afford that in their budget. Well, if you chose not to follow this plan to maintain the vehicle you finished paying off, then the most likely scenario is for you to buy a newer vehicle. Most clients tell me that their car payment would likely be about $400 or more. If that’s the case, the you would be spending $273.33 a month MORE than the $126.67 monthly maintenance differential for an older vehicle. So, which is easier to afford? Four hundred dollars for a monthly car payment, or a $126.67 monthly maintenance differential for an older vehicle? (That’s a difference of $3279.96 over the course of a year!)

Homes: Assuming that you have the income to afford the “pride of home ownership,” you may be able to qualify for a home purchase mortgage within two years of filing a bankruptcy. This assumes that you have managed your finances and credit well during the 24-month period since your bankruptcy filing.

What Other Options are Available to Me?

Other options include 1) pay each bill as required by your agreement with the creditor, or 2) Choose which bills to pay first (if at all), or 3) keep doing what you’ve been doing to handle your debt, or 4) do nothing, or 5) enter into a debt management plan, or 6) enter into a debt settlement plan, or 7) get a Home Equity Loan to consolidate your payments, or 8) borrow money from your 401(k) or get a distribution from your IRA.

Do spouses have to file bankruptcy together?

No, spouses may file jointly or individually.

Can I put my assets in someone else's name before filing?

No.  Transfer to family, friends, or business partners within the past 24 months must be disclosed and the assets transferred may be used to pay debts.

Does a previous bankruptcy prevent me from filing?

No, but if you re-file a case within one year of the dismissal of a prior case, then the automatic stay protection is only in-place for 30 days, unless you get an order from the court within 30 days of the filing of your case, extending the automatic stay protection. This requires quick action and possible a court hearing, so the up-front costs for you to file will be much higher. If you filed a bankruptcy case that ended over a year ago, then that limitation on the automatic stay protection will not apply to you. Instead, you there are limitations on whether a discharge can be granted.

What effect does bankruptcy have on a co-debtor?

A non-filing co-debtor remains liable. However, you may be able to protect the co-debtor by paying for the debt in full through a Chapter 13 plan.

Can I keep my checking account?

Yes. Now I recommend to my clients that they do NOT keep any money in banks that you owe money for any type of debt, like a credit card, signature loan or car loan. Let’s say you keep all your money in a checking or savings account at Bank X, and you get behind on one of your debts that you owe to Bank X. The bank has the Right Of Offset, which allows them to grab money out of your account to get you current on your loan at Bank X. If that happens, it could make it quite difficult to have enough money left over to cover all your other living expenses.

Do I have to list all of my debts?

You are required by law to list all debts that you have when you file for bankruptcy, even if you want to keep them. As I tell clients, all cards on the table face up.

Call (210) 930-7000 to schedule a Free Initial Consultation.

Relief is just a phone call away!