Bankruptcy Counseling and Education

Bankruptcy exists for a reason…It is a legal process that offers financially distressed consumers the opportunity to receive a fresh start. There are many reasons why someone might file for bankruptcy – unexpected healthcare costs, loss of employment, divorce, unexpected disaster or out of control expenses. Whether you've filed for bankruptcy or you're thinking about filing, it's important to be fully informed of the process, implications, and consequences before moving forward.

Not sure if you should file for bankruptcy?

Before making any major financial decisions, it's important to have all of the facts. No one can tell you for sure if bankruptcy is right for you, but armed with the right information you can move forward with confidence knowing that you are making the right choice. The following is not intended to be legal advice, but helpful education in understanding bankruptcy as a whole. Please contact an attorney if you have questions that are of a specific legal nature.

Help with bankruptcy

There are two types of consumer bankruptcy – Chapter 7 and Chapter 13. Both offer relief from unmanageable debt, but are very different in how this relief is granted. Filing for bankruptcy can also be a lengthy and costly procedure. Chapter 7 filings can take several months and cost over $1,000. Chapter 13 filings can last up to five years and cost over $2,000. Following are some of the basics of both chapters and what consumers should be aware of throughout the process:

Chapter 7

Sometimes referred to as "liquidation bankruptcy", chapter 7 eliminates all dischargeable debts after the filer liquidates (sells) any non-exempt property for the benefit of their creditors. Any debts that are still unpaid after liquidation are discharged (eliminated) after the case is completed. To be eligible for chapter 7 bankruptcy, filers must possess income that is less than their state's median income for a family of the same size.

Summary of Chapter 7 Proceedings

Chapter 7 begins when a filer submits a two-page petition to the court along with other required forms and documents that list:

  • Current income and sources
  • Current monthly living expenses
  • Current property
  • Current debts
  • Property that is being claimed as exempt (more on this later)
  • Property owned, sold, or gave away, and money spent during the previous two years
  • A certificate of credit counseling completed within the 180 days prior to filing

In the case of an emergency (foreclosure or eviction), the debtor can file the two page petition solely and file the rest of the paperwork within 15 days.

Once a petition is filed with the court, an "automatic stay" is put into effect. This stops all actions by a creditor to collect what is owed and provides relief from garnishments, foreclosures, repossessions, etc.

A 341 meeting or what is known as a "meeting of creditors" is scheduled a week or two after the petition is filed. This meeting is run by the trustee, who is a court ordered representative that swears the debtor in and asks questions concerning the case to verify the accuracy of all the documents submitted and to see if there are assets that can be liquidated.

As long as no other issues arise, within 3 to 6 months, the filer receives a court notice that states: "All debts that qualified for discharge were discharged." This means that the filer no longer legally owes those debts.

What property is exempt in a Chapter 7 proceeding? Exempt property is property that will not be liquidated by the court for the benefit of creditors. Typical exemptions are the things necessary to support a filer and their dependents, such as:

  • Motor vehicles, to a certain value
  • A portion of equity in a home
  • Necessary household furnishings and appliances
  • Tools necessary for employment
  • Pensions
  • Life insurance
  • Public benefits such as welfare, Social Security, and unemployment

What are considered to be non-dischargeable debts? Non-dischargeable debts are debts that will survive a bankruptcy discharge. Some examples of non-dischargeable debts are:

  • Student loans
  • Delinquent taxes
  • Child support
  • Alimony
  • Debts incurred through fraud or theft

Chapter 13

Also known as "repayment bankruptcy", chapter 13 allows you to keep your property and eliminates all dischargeable debts through a court-ordered repayment plan carried out over a period of three or five years. In the plan, payments have to be maintained on all secured debts (those backed by collateral such as a car loan or home loan). Any income left over after those payments are made is committed to non-secured debts such as credit cards. Any unpaid balance that remains on these non-secured debts after the completion of the repayment plan is discharged. To be eligible for chapter 13, filers must have sufficient disposable income to make payments according to the plan.

Summary of Chapter 13 Proceedings

  • Chapter 13 begins when a filer submits a repayment plan to the court. Included are forms that list monthly expenses, income, assets, debts, and a certificate of credit counseling.
  • The filer is required to begin making payments to the trustee within 30 days of filing. The trustee oversees the distribution of the plan payments to the creditors who are included in the plan.
  • Monthly payments must be maintained for the remainder of the 3 or 5 year period and all financial affairs remain under the supervision of the court. Modifications are made as necessary due to life circumstances such as a change in income. In the event that sufficient modification cannot be made, a filer has the right to convert to a chapter 7 in certain cases
  • Any non-secured debts that remain after the repayment plan is completed are discharged.

Any non-secured debts that remain after the repayment plan is completed are discharged.

Both Chapter 7 and Chapter 13 bankruptcy have a significant negative impact on an individual's personal credit report. Chapter 7 remains on file as a public record for a period of 10 years from the date the case is filed. Chapter 13 remains on file as a public record for 7 years from the date the case is filed. Even though these proceedings eliminate the legal obligation to pay certain debts, they do not eliminate account information from credit report. This means that after filing for bankruptcy, there will be a public record showing the chapter that was filed and each account that was included in the bankruptcy will be on our report showing that it was included in the filing. Granted, regular negative information is removed from a credit report after a period of 7 years from the date the negative event occurred, but bankruptcy filings typically cause a lot of confusion when it comes to a credit report.

In addition, bankruptcy has the largest negative impact to a credit score – over 200 points in some cases. There are instances where individuals who are facing high debt levels continue to maintain good payment history and consequently have a good credit score - possibly 700 or higher. After filing for bankruptcy, they could see their score drop below 500 – well under the level required for qualifying for conventional loans.

Should you file for bankruptcy?

This is a question that only you can answer, but there are some experts who provide helpful guidelines to follow. Personal finance columnist Liz Weston offers the following:

"Bankruptcy can give you a fresh start by erasing much of your debt (under a Chapter 7 liquidation) or giving you the breathing room to pay it off over five years (under a Chapter 13 repayment plan). But it's not for everyone. You probably can't — or shouldn't — file if:

  • You have little income and no assets. You are "judgment proof"; there's nothing for creditors to take.
  • You have little income and no assets. You are "judgment proof"; there's nothing for creditors to take.
  • Your debt is mainly student loans, recent taxes or child support. These debts typically cannot be discharged through bankruptcy.
  • You transferred significant money, assets or property to someone else within the past four years. These are a red flag signaling for bankruptcy trustees and may cause a bankruptcy court to reject your filing.
  • You've run up big credit card bills for luxuries in recent months. Bankruptcy law presumes fraud if cash advances over $750 were made during the 70 days preceding a filing, or "luxury" purchases totaling more than $500 during the 90 days before a filing.
  • You co-signed a loan with someone and don't want to stick them with the debt. Your co-signer is legally responsible for repayment of your debt if you can't pay it.

Bankruptcy is sometimes the best of bad options, particularly when you're facing unsecured debts such as credit card bills that equal more than your annual income or that would take you five or more years to repay. Five years is typically how long you'd be required to chip away at your unsecured debt in a Chapter 13 bankruptcy repayment plan, although given your lack of employment you may qualify for a Chapter 7 liquidation bankruptcy, which would erase your credit card debt.

Your student loans typically can't be wiped out in a bankruptcy, nor can your mortgage. But you probably qualify for economic hardship options that would allow you to reduce or suspend payments on any federal student loans. Private student loans don't have similar provisions, but you may be able to work out a payment plan with your lenders or you may have enough financial room to pay them if your other debt is wiped out.

By federal law, a bankruptcy can't be used against you in employment decisions. Employers may, however, hold against you the late payments, charge-offs and collection accounts that frequently precede bankruptcy, so the protection offered by the federal law may not be of much help.

It's a tough call to make, and you'd benefit from some advice. Consider contacting a legitimate credit counselor, such as one affiliated with the National Foundation for Credit Counseling, to see if a debt management plan could help you. But you also should talk to an experienced bankruptcy attorney so you understand all your options and the possible consequences of each."

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