A Baker’s Dozen of Your Questions About Bankruptcy
When it comes to information about bankruptcy, you want direct, easy to read specific tips, strategies and suggestions. We want you to be well informed before and after you declare bankruptcy. Which is why, when it came time to create the basic bankruptcy information for our website, we turned to the folks who wrote the book that explains the ins and outs of bankruptcy in simple, fun, direct English.
We are grateful to bankruptcy attorney James Caher (co-author with his brother John) of Personal Bankruptcy Laws For Dummies (Wiley, 2006) for permission to reprint these excerpts from their book. We highly recommend getting a copy of this book if you’re considering filing bankruptcy.
We’ve found most people ask the same initial questions about bankruptcy. So we selected a baker’s dozen (13) that Jim and John answer with in a way you can truly understand. Read on to find out the information you’re looking for regarding bankruptcy.
ONE LAST THING: Please realize that this is information, NOT advice. Even though Jim is a lawyer, he can’t actually give you legal advice unless you’re a client of his. So please use this information as background for your personal bankruptcy education and consult with a lawyer about your specific case.
What Can Bankruptcy Actually Do for My Situation?
Is bankruptcy the best option for you, or even an option for you? What happens if you file? What happens if you don’t? And what’s this new bankruptcy law mean? Do you need a lawyer? How can you stop the hemorrhaging? Where do you even start? Many people begin with the assumption that even considering bankruptcy is an admission of failure. Actually, it can be a first step toward taking responsible control of your financial future.
Thankfully, you have a way – a perfectly legitimate way – to stop foreclosures and repossessions, put an end to lawsuits, protect your paycheck from garnishments, get those menacing debt collectors off your back, and regain control of your life: bankruptcy.
* Halt almost every kind of lawsuit
* Prevent garnishment of any wages you earn after filing
* Stop most evictions if bankruptcy is filed before a state court enters a judgment for possession
* Avert repossessions
* Stop foreclosures
* Bring IRS seizures to a skidding stop.
Bankruptcy generally won’t prevent:
* Criminal prosecutions
* Proceedings against someone who cosigned your loan, unless you file a “Chapter 13” repayment plan and propose paying the loan in full
* Contempt of court hearings
* Actions to collect back child support or alimony, unless you file Chapter 13 and propose to pay that obligation off during the life of your plan
* Government regulatory proceedings
The moment you file a bankruptcy petition, a legal shield called the automatic stay kicks in, prohibiting creditors from contacting you, suing you, repossessing your property, or garnishing your wages.
In a Chapter 13 bankruptcy (one where you pay what you can toward your debts and the remainder is forgiven), you can propose a partial repayment plan to avoid foreclosure and make up back mortgage payments over a five year span. You can prevent repossession of your car by catching up on back payments of the life of the plan. In some situations, you have to pay only what the vehicle is worth – rather than the whole loan balance.
What Am I Likely to Lose in Bankruptcy?
You can lose assets. Depending on how much your home is worth and where you live, it is possible, but unlikely, that you’ll lose it by filing bankruptcy.
* Bankruptcy is a matter of public record.
* Bankruptcy affects your credit rating. That fact may fall into the “So what?” category for you. For a few years after bankruptcy, you may have to pay higher interest rates on new credit, but this result will ease over time, even if your credit report still shows a bankruptcy.
* Friends and relatives can be forced to give back money or property.
* Bankruptcy may cause more problems than it solves when you’ve transferred assets to keep them away from creditors.
How Can I Prevent Further Financial Damage?
Until you’ve met with a bankruptcy lawyer and know just where you stand, do not:
* Borrow an more money. Period. No balance transfers. No bill consolidation loans. No pension loans. No home-equity loans. And certainly no loans from friends or relatives.
* Make any payments on debts to friends, business partners, or relatives.
* Provide information about your income or expenses to any credit counseling or debt consolidation outfit.
* Provide information about your income or expenses to any credit counseling or debt consolidation outfit.
* Call or write to any creditor who does not already know how to contact you.
* Get married – or divorced.
* Sell any valuable assets.
* Make any gifts (other than charitable contributions you normally make) or transfer property in an attempt to keep those assets away from creditors.
* Ignore lawsuits.
* Give any creditor a postdated check.
* Reveal to a creditor who holds the title to your car that you’re considering bankruptcy.
* Agree to pay join debts if you’re in the middle of a divorce matter.
* File any past-due income tax returns. (However, have them prepared and ready to file.)
* Make any unusual or large contributions to a pension fund.
* Make any withdrawals from your pension.
* Move out of your homestead or enter into a contract to sell it.
* Allow a foreclosure sale to occur or give a creditor a deed in lieu of foreclosure.
* Leave any money on deposit in an institution where you owe money.
* Allow health insurance to lapse.
* Voluntarily leave your job.
What Are My Alternatives to Bankruptcy?
* Selling assets to pay debts in full
* Negotiating with creditors to reduce your debts to a manageable level
* Restructuring your home mortgage
* Taking out a home-equity loan
* Doing nothing at all if you have nothing, expect to acquire nothing, and don’t care about your present or future credit rating
Many people, ravaged by guilt and shame, think they need to fully exhaust every alternative before considering bankruptcy, including:
* Making payments that never reduce the principal balance owed
* Taking out second mortgages to pay credit-card debts
* Borrowing against pensions
* Withdrawing funds from retirement accounts
* Obtaining loans from friends and relatives
* Taking second jobs
You must think seriously about the strain your financial distress places on your health, marriage and family. Think of it in these terms: If you have some blocked arteries, it just may be smarter to have bypass surgery before you have a heart attack The same is true of bankruptcy. Think of bankruptcy as preventative medicine.
How Can I Tell if a Financial Professional is Actually Helping Me?
One of the challenges of putting your financial house in order is getting an accurate, trustworthy, and unbiased assessment of your particular options. Obtaining objective advice is absolutely essential because you’re going to be bombarded with conflicting information and opinions about bankruptcy.
* Credit counselors, may inappropriately discourage you from filing for bankruptcy. Although they may appear to be independent, many of them are on creditors’ payrolls, so their interests may be completely at odds with yours.
* Debt consolidators, offering to replace your many monthly bills with a single “low-interest, easy payment loan” to dazzle you into believing that you can get out of debt by borrowing money. You can’t.
* Bill collectors are willing to tell you just about anything to squeeze some money out of you.
You need to act with your head, and not your heart. This section explains why you need a lawyer, how to find one, and how to deal with legal and other costs associated with filing bankruptcy.
What Are the Different Types of Personal Bankruptcy?
Consumer bankruptcies are covered mainly under two parts of the U.S. Bankruptcy Code: Liquidations (Chapter 7) and Consumer Reorganizations (Chapter 13)
Chapter 7 Bankruptcy
In its simplest form, Chapter 7 wipes out most of your debts and, in return, you may have to surrender some of your property. Chapter 7 doesn’t include a repayment plan. Your debts are simply eliminated forever. If you buy a lottery ticket the day after filing and hit the jackpot, yippee! for you and tough beans for your creditors. You obviously can voluntarily pay back your creditors if you suddenly strike it rich, but legally, you don’t owe a dime after your debt is discharged. Most property you receive after filing Chapter 7 doesn’t become part of your bankruptcy, but there are a few exceptions. Income tax refunds for prebankruptcy tax years go to pay your debts as well as divorce property awards, inheritance, and life insurance that you become entitled to receive within 180 days of bankruptcy.
Theoretically, a debtor’s assets can be seized and sold for the benefit of creditors. All nonexempt assets owned on the petition date are fair game. They can be sold, with the proceeds distributed to your creditors. But in practice, 96 percent of consumer bankruptcy are no-asset cases, meaning that no property is taken away from the debtor because it’s all except or worth so little that it’s not worth the trouble.
In order to qualify for Chapter 7, if you earn more than the median income for your state, you’ll have to pass a new Means Test where you show that you don’t have enough income to pay a significant portion of your debts. Although the test is ungodly complicated, when all is said and done, just about everyone can pass. The toughest part is just assembling the information you have to provide.
Chapter 13 Bankruptcy
Chapter 13 involves a repayment plan in which you pay all or part of your debts during a three- to five-year period. In a Chapter 13, you propose a debt repayment plan that requires court approval and thereafter keeps creditors at bay as long as you keep making payments. This plan can be a great relief, when you’re able to establish and live within the confines of a budget.
Every chapter 13 plan must pass two tests:
* The best-interest test, which mandates that unsecured creditors be paid at least as much as they would receive if you filed a Chapter 7 instead of a Chapter 13.
* The best-efforts test, which requires that you pay all your disposable income (the amount left over after paying reasonable living expenses) to the trustee for at least the first 36 months of your plan. If your monthly income is more than the median for your state, allowable expenses will be based on Internal Revenue Collection Financial Standards, and the plan must run for five years Otherwise, the amount of your payment will be based on your actual expenses, as long as they are reasonable.
How Do I Decide Between Chapter 7 and Chapter 13 Bankruptcy?
Your lawyer must take the time to fully discuss the relative advantages and disadvantages of your choice between Chapter 7 and Chapter 13, but in some situations, making the right choice can be devilishly difficult.
Chapter 7 is probably your best choice when all the following statements are true:
* You don’t have any assets that you’d have to surrender to a trustee
* You’re current on home and car payments, or willing to give them up.
* You don’t have much money left over each month after paying expenses.
* You haven’t received a bankruptcy discharge in an earlier case filed within the past eight years.
Chapter 13 is probably the way to go in any of these situations:
* You want to catch up on mortgage payments.
* You need time to pay off past-due support obligations.
* You owe tax debts that you want to pay of without interest or penalties.
* You received a discharge in a bankruptcy case filed within the past eight years.
* You earn enough money to pay monthly expenses with ease and want to do your best to repay creditors at least some amount.
Advantages of Chapter 13:
* You can pay taxes over time, possibly – note we emphasize possibly – without interest or penalties.
* Your overdue alimony and child support can be stretched out and paid of over three to five years.
* You can get your house and car payments up to date over the life of the plan.
* You can reduce payments on some secured loans to the value of the collateral.
* You can keep nonexempt property.
* You can get some bankruptcy relief even though you received a discharge in a prior Chapter 7, 11 or 12 bankruptcy case filed less than eight years ago.
* You can protect a cosigner from creditor harassment by proposing to pay the cosigned debt over the life of the plan.
Advantages of Chapter 13 over Nonbankruptcy Repayment Plans:
Filing Chapter 13 is usually better than repayment agreements worked out by consumer counseling outfits because:
* You pay only a small percentage of your total debts. Nonbankruptcy repayment plans usually require you to pay your debts in full (except perhaps some interest).
* You can deal with secured debts such as your home and car. Nonbankruptcy plans typically do not address those debts.
* You don’t need the permission of the creditor to cut your obligation.
* You can invoke the automatic stay, which immediately stops creditors from pursing you.
* You’ll be allowed to catch up on back alimony and support obligations. (Nonbankruptcy plans don’t deal with those problems.
Why Is Filing With a Lawyer So Important?
With a new and remarkably obtuse new law on the books, even attorneys and judges struggle to figure out just what Congress meant when it rewrote the bankruptcy code. A conscientious bankruptcy lawyer will have to monitor developments regularly just to stay in the game, and that’s the person you need at your side. Filing bankruptcy is not the time to rely on paralegals and document preparation services.
Prior to changes in the bankruptcy law some folks did manage to successfully file bankruptcy without a lawyer, but things have changed – dramatically!
Finding a Good Lawyer:
Certainly no shortage of “free” advice exists out there, but most of it is worth about what it costs – nothing, if that. When you’re serious about considering bankruptcy, you need a lawyer – simple as that. So how do you go about finding one?
You can check with friends and relatives who have filed bankruptcy, and if you already know a reputable attorney whose firm does not handle bankruptcy cases, he is likely to know a good source of advice. They won’t knowingly send their clients to hacks.
Understanding What to Expect From Your Lawyer:
Some lawyers offer a “free” initial consultation, which means the only way they can make any money is if you end up filing bankruptcy. That approach can skew their judgment.
You’re probably better off paying an attorney for an hour of his or her time, expecting to pay roughly $100 to $200 per hour. When you’re paying a fee, you have every right to insist on a consultation with the attorney who actually would be handling your case, not some paralegal or assistant. Whenever a law firm won’t make this commitment or tries to shift you to someone else, take yoru business and your money elsewhere.
In a Chapter 7 bankruptcy, all attorney fees must be paid before filing. You can pay fees over an extended time period in a Chapter 13 filing.
What Should I Expect From My First Meeting With My Lawyer?
Reputable bankruptcy lawyers have different styles of practice, and one isn’t necessarily better than the other. Some handle a high volume of cases on an assembly line basis, relying heavily on paralegals. Others opt for a lower volume of cases with more personal contact between lawyer and client. Go with whichever makes you more comfortable.
Lawyers who specialize in personal bankruptcy are usually more efficient and tend to charge less and do a better job than lawyers who just file an occasional bankruptcy case.
What Are the Requirements of the New Bankruptcy Law?
* Within 180 days before bankruptcy, you undergo credit counseling from an approved agency and obtain a certificate that you’ve done so. If you’ve got to file immediately and can’t get counseling within five days, you can catch up within 30 days after filing. Additionally, the court can give you an additional five days if you really need it. Whether you receive counseling in person, over the phone, or online, you still need your certificate – as well as a copy of any repayment plan drawn up during your counseling session.
* Shortly after filing bankruptcy, you must send copies of your most recent federal income tax returns or official summaries of your returns (transcripts) to the trustee and to any creditor who requests a copy. Further, if any creditor or trustee so requests, you must hand over to the bankruptcy court all federal income tax returns that you file with the IRS while your bankruptcy case is open. If you don’t provide copies of your most recent return, your case can be dismissed. If you don’t give the bankruptcy court copies of the federal returns filed with the IRS while your case is open, your discharge may e denied, and your debts will follow you like a shadow.
* In Chapter 13, prior to the 341 meeting, you also must have filed with the taxing authorities all federal, state, and local tax returns that you should have filed in the past four years. You can get an extension of up to 120 days. If you don’t comply, your case can be dismissed.
* You must file with the bankruptcy court pay stubs or other evidence of income you’ve received in the 60 days prior to bankruptcy.
* As a condition of having your debts discharged in either a Chapter 7 or 13, you must, after filing, complete a U.S. Trustee-approved course in personal financial management.
* Every year in Chapter 13, you are required to submit an updated statement of income and expenses.
When Will I Receive Notice of the Creditors Meeting?
Within about ten days after the filing of your bankruptcy petition, the court sends notice to all of your creditors (using the address you provided in your schedules), informing them of your case, announcing the appointment of a case trustee (who represents the interests of the creditors) and setting the date for a meeting with creditors (the so-called 341 meeting).
The one and only time in most bankruptcies where you and your creditors might come face to face is at the 341 meeting.
When Should I Sign Up for My Financial Management Course?
As a condition of getting your debts wiped out in either Chapter 7 or Chapter 13, you must complete an approved course in personal financial management after you file bankruptcy, but before your case is closed. The sooner you get started, the better. In Chapter 7, you have to complete the course within about 60 days after the 341 meeting. You have more time in Chapter 13, but there is no reason to delay. The Coalition for Consumer Bankruptcy Debtor Education is one of the few organizations offering quality debtor education. Check them out at http://www.debtoreducation.org.
What Bills Should I Keep Paying Right Now?
When you can’t pay everyone, you need to invest your money where it does the most good or avoids the gravest of problems. Dribbling out money to the most aggressive collectors without an overall plan is a mistake. The payments at the top of your priority list (in order) should be your:
* Rent or mortgage, if you intend to keep your house
* Essential vehicle
* Fines, if nonpayment would land you in jail
* Child support and alimony
* Income taxes
* Possibly student loans
What’s Your Most Pressing Question About Bankruptcy?
Of course, Personal Bankruptcy Laws for Dummies includes information to answer thousands of other questions, including how to work your way through Chapter 7 or Chapter 13, detailed information on what to expect at the different 341 Creditor Meetings and so on. Get a copy and get informed so you’re making a decision from a place of strength and knowledge.
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