Traditionally filing for bankruptcy was thought of as a sort of “Financial Failure”. However this is becoming less and less the viewpoint of society. The main reason is because of the ever more increasing role that credit plays in the average American’s life, and the realization by many Americans that the “Credit Playing Field” so to speak is not level and is slanted greatly in favor of the banks and credit companies.
The filing of a bankruptcy immediately stops all collection efforts by one’s creditors. This includes wage garnishments, foreclosures, and even lawsuits. In most cities it will not stop a “Kick Out” once an Unlawful Detainer has been granted and a “Writ of Possession” has been ordered by the court. Once a house in foreclosure goes to sale, it will not cause the sale to be reversed as against the new buyer. Also once money has been removed from a bank account by a creditor, it usually cannot be recovered.
Filing for bankruptcy is a way of restructuring one’s debt in a way that allows them to conduct business again, personally or professionally. The idea is to give the debtor a “New Start” financially. It is started by the filling of a petition. For most consumers there are two types of bankruptcy filing(s) – Chapter 7 and Chapter 13. It is critical that the debtor file under the proper chapter considering their particular situation.
The biggest decision is whether or not to file at all. A potential filer should ask themselves one simple question – “Considering my financial situation RIGHT NOW, can I realistically pay off my debt’s within three to five years WITHOUT HARDSHIP”. If the answer is yes, try to stay out of bk. However if the answer is no, then a bk is an alternative that you may want to consider.
Chapter 7 is the form of bankruptcy that we are all familiar with. A Chapter 7 bk is also known as a liquidation. It is usually the least expensive form of bk, the fastest to complete ( About 111 days), and is definitely the most popular. You can typically only file a chapter 7 once every eight years under the current rules.
In theory in a Chapter 7 filing the court takes all of the assets of the debtor and uses them to satisfy the debtor’s outstanding financial obligations according to very specific rules. Since it is not in anyone’s best interest to leave a person destitute, congress has carved out protections for certain types or categories of property. These are called exemptions. It is not unusual for debtor’s to find that most if not all of their property is considered “exempt” and thus cannot be touched by the court or their creditors (i.e. they get to keep their “stuff”). Chapter 7 works well for those saddled with credit card debt or judgments, but doesn’t generally work well for homeowners (This is not always the case however – call for more information).
Once a Chapter 7 has been filed, it cannot normally be stopped. Therefore it is essential that the debtor be sure as to what they are doing.
The next most popular form of bk filing for consumers is the Chapter 13. A Chapter 13 filing is basically a forced payment plan upon the debtor’s creditors. The purpose is to allow the debtor to “Catch up” on missed payments over time rather than demanding the entire amount at once or over a very short period. The plans are usually 36 months, but can be as long as 60 months and as short as is necessary.
With some limitations, a chapter 13 can be filed “At any time” to restructure a debtor’s finances. Chapter 13’s are complicated. The help of a lawyer is almost always a necessity. They are also very expensive since the debtor has to make the underlying payment(s), plus interest, plus a trustee fee. Most chapter 13 filings that are granted fall apart at some point and become Chapter 7 filings or are outright dismissed – usually because for one reason or another the debtor’s just can’t make the payments on time every month.
Chapter 13 filings generally work well for debtor’s with houses that are behind on the payments, and cars that are subject to repossession. So long as the debtor can show on paper that they can make the underlying payments, have a reasonable budget for food, housing and other necessities, AND make the payment on the arrearages according to the plan plus interest and trustee fee(s), the plan should be “Confirmed” by the court. Some may argue, but in my experience the trustee(s) and the court really want to “Confirm” debtor’s plans and give them a chance to catch up - but the plan has to make financial sense.
Some debt’s are not “Dischargeable” in bk. These include child support, judgments which are based on fraud, damages caused by drunk driving, debts owed to “Society” such as tickets, fines and utility payments, and “Usually” student loan debt. Almost everything else is fair game - including taxes.
Once filed, a debtor’s credit will drop to “D minus grade” within hours if not faster. The typical debtor can expect it to stay there for at least 18 months. After that, if there are no new negative reports, it should start to repair itself. A bk will stay on a debtor’s record for 10 years modernly and will prevent most debtors from having “A grade” credit for years no matter what. However, large purchases, including cars and homes, can usually be made after a reasonable amount of time (Cars almost immediately upon discharge, houses after several years). The interest rates that former debtors will pay will be higher than average and additional down payment(s) may be required. Credit Cards also generally become available to former filers “quickly” after receiving a discharge, however the credit limits are low, and they usually involve very high fees and interest rates. Therefore they should be totally avoided.
If you are thinking about filing for bk and would like to speak to a lawyer about your particular situation, feel free to give us a call. All initial consultations are confidential and free.
THE FIVE UNDENIABLE TRUTHS ABOUT BK
1) Filing for bk is not “Financial failure” – It is a restructuring of debt. Some debt simply cannot be helped (examples include medical expenses, fire, theft, natural disaster, and sudden job loss). Our country was founded on the idea that citizens should not have to work simply to pay their creditor’s and forego everything else.
2) You don’t need a credit card when you have cash – Most debtors find that the cost to hire a lawyer and file their bankruptcy is “Less” than what they are paying in minimum credit card payments in a single month. In fact, by the time the bk is completed, many debtors have more cash in the bank than they had “Credit” remaining on any one credit card, making having credit cards unnecessary. If you have to have a credit card for some reason (Including status – let’s face it, status is a huge reason people want at least one credit card), then you can choose from any number of pre-paid cards that are available. In fact most major credit card companies now have a pre-paid option of some sort for just this reason.
3) The banks seem to operate as their own worst enemies – Most people would pay their debt’s if the banks were reasonable about collecting, but they are shocked when after making years of steady payments the bank suddenly raises their interest rate(s), cuts their credit lines, and demands payment in full at the slightest sign of financial trouble – many times actually making it impossible to pay.
4) Filing for bk doesn’t cost the banks as much as you think – The banks “Plan” on a certain number of accounts being charged off every year by bk filings. They “Pump” this into their fees and interest rates. If you “Don’t” file, they actually save money, but not the reverse. The interest rate charged is indeed partially driven by the cost of credit to the bank, but mostly what the customer pays in interest is the maximum amount that the bank can get them to pay for the credit, not what it costs the bank. Thus your filing bk has no appreciable effect on the cost of credit to your neighbors.
5) You have no obligation to pay bills that you truly cannot afford – Our country was founded on the idea that people should not have to work only to pay their debts and have to forego all else. The banks know this when they loan money. In fact, federal law requires that when making lending decisions banks consider whether or not the borrower will actually be able to pay the debt back before making the loan or extending the credit. The credit companies are not “Trusting You” with their money, they are actually “ Middle men” in a multi-billion dollar industry – make no mistake about it – and they will make plenty of money regardless of what you do.