What are the different types of bankruptcies?
Chapter 7 gives one the opportunity to recover from a financial crisis. It is commonly referred to as a “fresh start” proceeding in which a debtor which can be a consumer or a business wherein a bankruptcy court will allow them to eliminate (discharge) the debts owed. Each state allows a debtor to keep some of its property (exempt assets). The remaining property is subject to the court where it will be sold and the proceeds paid to the debtor’s creditors. There are limitations to the discharge and it is strongly recommended to seek professional advice.
Chapter 13 is for individuals (debtors) who are gainfully employed and have disposable income at the end of the month. Disposable income is any money earned over and above the allowed bankruptcy expense deductions. The problem for many people is that the disposable income is not enough to repay all of their debt. The Chapter 13 allows debtors to repay a portion of their debt through a monthly plan that usually is between three and five years. The payments would be administered by a bankruptcy Trustee.
There are many factors that determine how much debt is repaid. Some debt must be repaid in full while others are not. Some debts (secured) you have to pay with interest. The amount of repayment depends on the debtor’s income, the kind of the debt owed and the value of the debtor’s assets. Unlike a Chapter 7, a debtor does not have to turn over any of his or her property to the Chapter 13 trustee. Further, a Chapter 13 also can under the right circumstances can prevent foreclosures and repossessions by allowing the debtor to catch up on past due home and car loans.
Can creditors continue to collect from me once I file for bankruptcy?
The filing of the bankruptcy prohibits creditors from continuing to call and harass you. Any creditor that has knowledge of the bankruptcy filing and continues its collection efforts by way of telephone calls, lawsuits or garnishments violates the law and you can bring a lawsuit against such a creditor.
Is my retirement safe?
The bankruptcy code which is governed by federal law does not allow a bankruptcy trustee to take your retirement (401k, Roth IRA, IRA). State law differs as to the protection given to retirement plans. It is imperative that prior to filing bankruptcy an attorney reviews your retirement to ensure its safety.
What debts, if any, will I still be responsible for after my bankruptcy is over?
There are certain debts that survive the bankruptcy. These are but not limited to student loans, IRS income tax less than three (3) years old, alimony, child support and certain debt related to a marital settlement agreement.
Can my creditors take my car, home?
States treat cars and homes differently. In Florida if you own your car outright and you own a home, you only have up to a $1,000.00 of protection for one car. For example, if your car is worth $5,000.00 a bankruptcy trustee could force a sale of the car and give you the first $1,000.00 while the balance goes to pay the trustees fees and your creditors. In regards to your home, if it was acquired more than 1215 days prior to the filing it is completely safe from the bankruptcy court. All you need to do is continue to pay the mortgage if there is one. If you acquired your home less than 1215 days prior to the filing of bankruptcy than you are limited in the amount of equity you can have before a bankruptcy court can order a sale of your home to pay creditors. Thus, it is imperative that you speak with an attorney prior to filing for bankruptcy.
When my debt becomes unmanageable, what are my options?
1. Do Nothing. This may work in the short term. If you continue to make your monthly payments in all likelihood you are only making the minimum payments. As a result, your balance will continue to grow as this payment would not cover the finance charges that are accruing. Accordingly, your payments will continue to increase until you can no longer afford to pay your debts. Once this occurs a creditor can sue you, obtain a judgment and attach all your unprotected assets.
2. Credit Counseling. There are many companies that offer this service. Credit Counseling Services attempt to work with creditors on your behalf to lower the interest rate and set a monthly payment on the unsecured debt. This may in turn lower your monthly payment, but it will not stop the ballooning of your debt. The major problem is that these companies rely upon the cooperation of the creditors. If a creditor chooses not to participate you not only will be paying a monthly payment to the Credit Counseling Service, but you will still be responsible for the debt on the creditor who refused to cooperate. Further, even if a creditor participates in the Credit Counseling Services plan, it does not prevent the creditor from suing you. Notwithstanding this fact, the process may help you avoid bankruptcy but your credit will be severely impacted while in the program, since your credit will still be reflected as outstanding. Finally, pay-offs typically take years and many people never see it through to the end.
3. Debt Negotiation/Debt Consolidation. A debt negotiation company attempts to secure a reduced sum settlement with your creditors. The advantage is that you may get out of debt in a relatively short time for less than you originally owed and you can avoid bankruptcy. The most glaring issue is that the IRS will require that you pay taxes on the entire amount that you save. The IRS treats this debt as income. For example, if you owe $50,000.00 and you settle for $25,000.00, the IRS will require you to pay taxes on $25,000.00. However, in some circumstances the benefits may often outweigh the risks. Further there are companies that just try to consolidate your debt by combining your various creditors into one creditor. The only time this should be done is if you are transferring unsecured debt (credit card, medical, contract debt) to another unsecured debt instrument. As a homeowner, you should never without consulting with an attorney take out a home equity loan to pay off unsecured debt. This results in unsecured debt becoming secured debt which creates a risk of losing your home to a foreclosure if you are unable to repay the loan.
4. Pay your debts. This is usually not an option. Many people have decided to liquidate stocks, IRAs, 401k plans, vacation property, or their savings to pay off their debt. If one has these assets to liquidate, it is strongly recommended that you seek an attorney’s advice as there are many assets that are protected from creditor attack and should not be used to pay off debt. Also, if you do not have enough money to fully pay off your debts you may not improve your situation and you will be in the same position you were in prior to making the payments. Further, prematurely liquidating an asset may trigger penalties and loss of income.
5. File Bankruptcy. Bankruptcy is not an easy decision to make. One must note that bankruptcy is a legal option that allows you to get a fresh start by eliminating your debt. There are many reasons one may file a bankruptcy such as, loss of a job, illness, failed business or unexpected expenses. Filing bankruptcy is a personal choice. If your financial situation will not change and you have been unable to pay down your debt notwithstanding the fact that you continue to make monthly payments then bankruptcy may be an option. When deciding if bankruptcy is right for you one must weigh his or her options and speak to an attorney who will explain the bankruptcy process and all the effects a bankruptcy will have on ones future.
What are some of the misconceptions about bankruptcy?
1. “I will lose everything I have.”
Each state has its own laws regarding what property a debtor is able to keep outside of the bankruptcy. The law refers to this property as “exempt property”. This property is not subject to attachment from the bankruptcy trustee as well as your creditors. Many states allow exemptions for your home, car, household goods, life insurance cash value, head of household wages and certain retirement plans. If a debtor possesses property that is not exempt and the debtor wants to keep this property then the debtor would consider filing a chapter 13 bankruptcy. The Chapter 13 allows you to maintain possession of this property in exchange for paying at least an equal value to your creditors through a Chapter 13 plan.Please note that there are different classes of debt. There is secured debt and unsecured debt. The unsecured debt would be handled as mentioned above. The secured debt in most cases must be paid in full. As such, filing for bankruptcy would not generally wipe out liens on property that you choose to retain. For example, if you want to keep your house that serves as collateral for a loan, you need to keep paying on that debt. Any decision regarding whether or not an asset is exempt should only be determined by a qualified attorney.
2. “I will never get credit again and it will be ruined for 10 years.”
Almost every client I meet with asks me what will happen to their credit after filing for bankruptcy. I often remind the client that at the point of filing bankruptcy their credit has already been shot and bankruptcy will be the quickest way to reestablish their credit. The Filing of bankruptcy gets rid of debt, which allows you to handle more credit. After the filing of bankruptcy a client who continues to pay on a car, home or utility can demonstrate financial stability and obtain credit within a year or two.
3. “If I am married, both I and my spouse have to file bankruptcy otherwise my spouse who does not file will be affected.”
Just because you are married does not mean that you have to file together. In fact in certain circumstances it may be strategically better to file separately. In most cases both the husband and wife have joint debt and therefore it makes sense and saves money for them to both file. Further, if only one spouse files the non-filing spouse’s credit and debt will not be affected. Although any joint debt will still be owed by the non-filing debt.
4. “Only people who intentionally incurred debt file for bankruptcy.”
The bankruptcy laws do not allow any person to discharge debts that were incurred in anticipation of filing bankruptcy. This would be fraud. Life is unpredictable. There are events that happen which are out of your control that can cause one to fall into debt such as a divorce, the loss of a job, a failed business venture, a serious illness, or some other unexpected loss.
5. “I can’t get rid of taxes through bankruptcy.”
The bankruptcy law allows one to eliminate certain outstanding income tax debt which is more than 3 years old. Further, under a Chapter 13 bankruptcy certain income tax debt that can not be eliminated can be paid back interest and penalty free through a Chapter 13 plan. It is important for you to meet with an attorney to determine if your taxes can be eliminated in a bankruptcy.
6. “I will keep the credit cards I want and only list the property I want to get rid of.”
Absolutely not. The bankruptcy laws specifically require a debtor to list every asset and debt. Failing to do this could be grounds for dismissal of your case. Many times my clients’ state that they would like to keep one of their credit cards to use and further state that they have remained current on this account. Unfortunately, once a bankruptcy is filed a debtor is not able to pick and choose which credit card debt they would like to pay. There are some kinds of debt wherein the bankruptcy law does allow a debtor to repay. A formal reaffirmation agreement may be considered, which essentially places you in the same position with the creditor as you were before you filed bankruptcy. This means that if you default under the agreement, the creditor can file a lawsuit against you personally and obtain a judgment. This is most frequently used regarding your home and car. As long as you stay current on the loan and keep the property insured you are protected under the law and you would not be in jeopardy of losing the property.
Can a bankruptcy help me if a foreclosure is filed against me?
Yes. Through a Chapter 13 bankruptcy a plan can be formulated to allow you to pay all the payments which you are behind on over a five year plan. During this time you would also have to continue making your regular mortgage payments pursuant to the original loan agreement. Under certain circumstances where there is no equity in your home you may have other options as to secondary mortgage liens. If you are facing a foreclosure, speak to an attorney immediately.
Can a bankruptcy help me if I am behind on my vehicle payments?
Yes, if you file a case prior to a repossession of your vehicle. A Chapter 13 bankruptcy stops a repossession and can provide a couple of options through a three to five year repayment plan. A first option is if you have owned your car for more than 910 days you may be able to reduce the amount owed and interest rate pursuant to your loan document with the creditor. If you have owned your car for less than 910 days than you would have to pay the entire loan. In this case you still may be able to reduce the interest rate on your loan. If you are facing a repossession, speak to an attorney immediately.
How can I afford to pay a bankruptcy attorney?
If you are unable to keep up with your monthly bills you may ask yourself, “How can I afford an attorney?” We try to make it easy with affordable fees and payment plans. Once retained, you are the Firm’s client. You have our attention and can call us with questions at any time. Further, once we our retained creditors can no longer make those harassing phone calls to you. Plus, by retaining the Firm you have taken the first step in filing a bankruptcy and thus would stop paying your credit card bills, freeing up cash flow.