Filing for bankruptcy is your legal right and this option should be considered on the basis of its legal and financial advantages and disadvantages, rather than on moralistic grounds.
Is Bankruptcy the Right Choice For You? – 10 Important Considerations
- Bankruptcy may be the easiest and fastest way to deal with all types of debt problems. Bankruptcy is a process under federal law designed to help people and business get protection from their creditors. Bankruptcy can be the right choice if you have no better way to deal with your debts. Although you may want to try other options first, you should not wait until the last minute to think about bankruptcy because some important bankruptcy rights may be lost by delay. For example, you must receive budget and credit counseling from an approved credit counseling agency within 180 days before your bankruptcy case is filed.
- Most bankruptcy cases are complicated. You should consider getting professional help. Bankruptcy is a legal proceeding with complicated rules and paperwork. You may want to get professional legal help, especially if you hope to use bankruptcy to prevent foreclosure or repossession. Most bankruptcy attorneys will provide a free consultation to help you decide whether bankruptcy is the right choice.
- Bankruptcy temporarily stops almost all creditors from taking any steps against you except through the bankruptcy process. The assistance is provided by the “automatic stay” that arises as soon as you file the necessary paperwork at the beginning of a bankruptcy case. Foreclosures, repossessions, utility shut-offs, lawsuits, and other creditor actions will be immediately (but perhaps only temporarily) stopped. However, there are a few exceptions, usually based on prior bankruptcy filings, when the stay does not automatically go into effect or may later stop applying.
- Bankruptcy can permanently wipe out your legal obligations to pay back many of your debts. This benefit arises because of the bankruptcy “discharge” that you get for successfully completing a bankruptcy case. But not all debts can be discharged. Certain debts, such as most student loans, liens associated with secured debts, alimony, child support, and debts you incurred after the bankruptcy case was started, may not be discharged. After bankruptcy, you will continue to owe those debts.
- When bankruptcy does not wipe out a debt, a Chapter 13 bankruptcy (a “reorganization”) gives you an opportunity to catch up on that debt. For example, if you are behind on a home mortgage or car loan, bankruptcy will not usually allow you to cancel the mortgage or lien and still keep the property without repayment. If you want to deal with debts of that type in the bankruptcy process, you will need to propose a Chapter 13 repayment plan. That requires affordable payments from your income to be made over a period of three to five years.
- In most cases, you will not lose property by filing for bankruptcy. Most of your property is likely to be protected from sale during the bankruptcy process by bankruptcy “exemptions”. However, if you have certain types of very valuable property, the bankruptcy law may not allow you to keep it unless you pay its value to your creditors over a number of years in a Chapter 13 plan.
- If you file bankruptcy, you usually do not need to go to court. You will have to attend one meeting with the bankruptcy trustee (not with a judge). Creditors are invited to that meeting but rarely attend. You will not usually have to go to court for your bankruptcy case unless something out of the ordinary occurs. If you do not receive a notice to go to court, it is important that you go. Before your case is closed, you must also take a course in personal finances, which will last for approximately 2 hours.
- Bankruptcy will usually not make your credit report any worse. Most people filing for bankruptcy already are behind on their bills and already have problems with their credit report. It is unlikely that bankruptcy will make a bad credit report worse. Some creditors may be more willing to lend you money than if you have a number of debts remaining in default. However, the fact that you filed bankruptcy can remain on your credit report for ten years, while your defaults may stay on your report for only 7 years.
- Watch out for bankruptcy related scams. There are many people and companies that advertise bankruptcy related services in order to take advantage of vulnerable, financially distressed consumers. Some advertise help with foreclosure when all they really do is put you into bankruptcy without providing any advice on how this will help or assistance in getting through the process. Many of these businesses charge enormous fees. Others make promises which they cannot possible keep. Do not pay money for debt counseling, foreclosure assistance, or bankruptcy without being sure you are dealing with a reputable business.
What Bankruptcy Can and Cannot Do For You
Source: National Consumer Law Center: Surviving Debt, pp. 406-407
Bankruptcy may make it possible for you to:
- Eliminate legal responsibility for many of your debts and get a fresh start. This is called a “discharge”. When a debt is discharged at the close of a successful bankruptcy case, you will have no further legal obligation to pay that debt.
- Stop foreclosure on your home or manufactured home and allow you an opportunity to catch up on missed payments.
- Prevent repossession of your car or other property, or force the creditor to return property even after it has been repossessed.
- Stop wage garnishments, debt collection harassment, and other similar collection activities and give you some breathing room.
- Prevent termination of utility service or restore service if it has already been terminated.
- Lower monthly payments on some debts, including some secured debts such as car loans.
- Allow you an opportunity to challenge the claims of certain creditors who have committed fraud or who are otherwise seeking to collect more than they are legally entitled to.
Bankruptcy, however, cannot cure every financial problem, nor is it an appropriate step for every individual. In bankruptcy, it is usually not possible to:
- Eliminate certain rights of “secured” creditors. A “secured” creditor has taken some form of lien on your property as collateral for a debt. Common examples are car loans and home mortgages. Although you can force secured creditors to take payments over time in the bankruptcy process, you generally cannot keep the collateral unless you continue to pay the debt.
- Discharge types of debts singled out by the federal bankruptcy law for special treatment, such as child support, alimony, most student loans, court restitution orders, criminal fines and some taxes.
- Protect all cosigners on their debts. When a relative or friend has cosigned a loan and you discharge the loan in bankruptcy, the consigner may still have an obligation to replay all or part of the loan.
- Discharge debts that are incurred after bankruptcy has been filed.
Chapter 7 Bankruptcy
Source: Source: National Consumer Law Center: Surviving Debt, pp. 423-424
A case under Chapter 7 of the bankruptcy laws is often called a “liquidation.” In a liquidation case, your assets are examined by a court appointed trustee to determine if anything is available to be sold for the benefit of creditors. Property that cannot be sold and that you get to keep is called “exempt”.
At the end of a chapter 7 case, you obtain a discharge of most unsecured debts. This means that you will no longer have a legal obligation to pay those debts. Generally, the discharge will include credit card debts, medical bills, utility arrearages, and other similar debts for which the creditor does not have collateral.
Some unsecured debts, such as most student loans, debts based on fraud or malicious conduct, drunk driving debts, most tax debts, government fines, alimony and child support are not likely to be discharged.
Chapter 7 bankruptcies rarely help with large secured debts, such as home mortgages, because the creditor keeps its rights in the collateral. While bankruptcy cancels your legal obligation to pay most personal debts, it does not prevent secured creditors from recovering their collateral if a debt is not repaid. This means that a chapter 7 case will not affect, except temporarily, the rights of a bank to foreclose on a home or repossess a car that is loan collateral. However, if you received a chapter 7 discharge and a creditor later sells its collateral, the creditor may not sue you for any balances still owed.
The trustee may sell only property that is either not exempt or has value exceeding the exemption limits. In most consumer bankruptcies, nearly all of the assets are exempt. This means that little or no property is taken away and sold. If property is partly exempt and partly non-exempt, the trustee may sell it and pay you the value of your exemption in cash. Or, if you have the money, you may pay the trustee the amount of the non-exempt value and keep the property.
Exemption laws vary from state to state and may be fairly complicated. You cannot make a final choice about bankruptcy without understanding the exemption laws for your particular state.
The best way to do this is to ask for a list of exemptions from a neighborhood legal services office, a private attorney, or pro bono bar organization. Another approach is to see if there is an accurate and up-to-date listing in a legal publication for your state.
In deciding what can be sold, the trustee will only look to your equity in property. If you owe money on a mortgage or other lien on a home, that mortgage or lien reduces your equity in the home. The trustee will not sell property if your equity in the property is fully exempt. For example, if your state exemption for your home is $50,000, the home’s value is $150,000, and you have a $100,000 mortgage, all of your $50,000 equity in the home is exempt. The trustee will not sell your home in a Chapter 7 liquidation. The trustee is also unlikely to sell your home if there is a small amount of non-exempt equity. This is because the equity would not cover the costs of sale, including the realtor’s fees and taxes.
Chapter 13 Bankruptcy
Source: Source: National Consumer Law Center: Surviving Debt, pp. 433-434
A case under Chapter 13 of the bankruptcy law is often called a “reorganization”. Reorganization cases under Chapter 13 work very differently from Chapter 7 liquidations. In a Chapter 13 case, you submit a plan to repay your creditors some or all of what you owe them over time, usually from future income.
Most consumer reorganization cases take place under Chapter 13 of the bankruptcy law. However, some debtors with large amounts of debt may be required (or may prefer) to proceed under Chapter 11. Family farmers can also proceed under Chapter 12. Consult with a bankruptcy attorney to understand your options.
In certain circumstances, there are advantages to filing a Chapter 13 case rather than a Chapter 7. Most importantly, in a Chapter 13 case, you are allowed to get caught up on mortgages or car loans over a period of time.
For example, most mortgages and car loans allow the bank to call the whole loan due when you miss a payment or two. Although the bank may let you work out an agreement to catch up over time on back payments (and you should call and find out if this is possible), the bank usually is not legally required to let you catch up. Where the bank or any creditor is uncooperative, a Chapter 13 bankruptcy may be the only way to force it to let you keep the property while you make the back payments over a period of years.
Chapter 13 cases also allow you to keep both exempt property, which would be protected in Chapter 7, and non-exempt property, which would be sold in Chapter 7. You can keep the property by paying its non-exempt value to creditors under a court approved plan, usually over a period of three to five years.
The heart of a Chapter 13 case is your bankruptcy plan. This is a document outlining how you propose to make payments to various creditors while the plan is in effect.
The law places certain limits on what you may do under a plan. Nevertheless, there are substantial opportunities for reorganizing your debt payments and protecting your property from creditors, including mortgage and other lien holders, as long as appropriate payments are made.
A Chapter 13 bankruptcy plan normally requires monthly payments to a bankruptcy trustee over a period of three to five years. Consumers with higher incomes that are above the median family income in their state may be required to make payments that equal a five-year plan.
Once your payments are completed under the plan, you are entitled toa discharge just as in a Chapter 7 bankruptcy. If you have caught up on any mortgage debt or other secured loan, the loan will be reinstated and the law requires the creditor to treat you as if you never fell behind.
Reorganization cases can be quite complicated. Working out the best possible bankruptcy plan is frequently difficult. If you are considering a reorganization in bankruptcy, consult with an attorney specializing in bankruptcy as quickly as possible. Your delay may allow a foreclosure or repossession to proceed to the point where bankruptcy can no longer help.
Source: National Consumer Law Center: Surviving Debt, pp. 403-405