Bankruptcy 101

Bankruptcy 101
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BY STEVE NUBIE

It’s not as easy as it used to be. Here are the realities if you’re considering bankruptcy.

Bankruptcies by individual Americans and couples continue to rise. However, laws put into place a few years ago have made it more difficult and demanding to declare bankruptcy. There are now two forms of bankruptcy for individuals: Chapter 7 and Chapter 13. Both have the potential to show up on someone’s credit record for up to 10 years, and both have stiff and strict requirements.

Reasons for declaring bankruptcy

Bankruptcy is an extreme decision driven by extreme events. Some include:

  • Repossession of property such as an automobile or furniture.
  • Garnishment of wages to satisfy any unpaid debt.
  • Foreclosure on your home.
  • Debts greater than one year’s gross income.
  • Consistent and persistent collection calls or letters.
  • More than 30 days behind on monthly bills on a consistent basis.
  • Insurmountable medical bills not covered by insurance.

You can always negotiate some of these situations with the debtor, but when it simply gets out of hand, bankruptcy may be the only option. Just make sure you know what you’re getting into with today’s bankruptcy laws.

Chapter 7

Chapter 7 bankruptcy will essentially dissolve all debt. But there’s a catch. You have to sell-off nearly every asset you own to pay back as much debt as possible. This could include your home especially if the bankruptcy involves a home-equity loan, vacation homes, jewelry, furniture; most everything that is considered a non-exempt asset. These are things you own that are NOT protected under the bankruptcy laws.

Chapter 7 can leave you penniless and without most assets or possessions. At that point, all debts are forgiven.   It’s a rough road and it’s why it’s often referred to as “liquidation.”

Some people sell-off or give property to kids and family members to avoid this brutal condition. But be forewarned, attorneys will be watching. Also, some debts will not be forgiven including alimony, child support, certain taxes and student loans. criminal restitution; debts that could have been listed in a previous bankruptcy; luxury goods or services, or cash advances obtained shortly before filing; recent income tax debts; fines, penalties, and restitution imposed for violating the law; and debts for personal injury or death caused by intoxicated driving.

It’s a relatively quick elimination of most debts and does not require future payments to debtors like Chapter 13, but it’s still a harsh decision with specific limitations.

Also, not everyone is eligible for Chapter 7. This includes people with high incomes. If you’re making a lot of money you won’t be forgiven in court for missing payments or trying to file for bankruptcy.

You’ll need an attorney to file for Chapter 7 and they can advise you about your eligibility and necessary steps you will have to take. Many people with formidable medical bills, divorce or a catastrophic loss of investments or income often consider Chapter 7 bankruptcy. Don’t go it alone. Talk to an attorney to assess your options and the realities of this kind of filing.

Chapter 13 Bankruptcy

Chapter 13 is typically described as a form or bankruptcy for individuals or couples with a regular source of income. This could include a job, payments from a retirement plan or Social Security.

With Chapter 13 the court proposes a plan for repayment of debt to creditors. This plan is usually scheduled over 3 to 5 years and can be longer depending on the level of debt. Debts will typically not be discharged or relieved with Chapter 13. Some debts may be paid in full, some partially paid, and others dismissed with no payment. It’s all up to the court and your situation.

You will be expected to satisfy the debts to a large degree. You will also find that credit-reporting agencies can record this form of bankruptcy for up to 10 years.

Passing the “Means Test” for any form of bankruptcy

A law passed in 2005 requires you pass the “Means Test.” A bill signed into law by George W. Bush. This requires that you:

  • Demonstrate eligibility for bankruptcy based on your income versus the state’s median income.
  • You agree to mandatory credit counseling before filing.
  • You agree to mandatory debtor education before your debts are discharged in any way.
  • You understand new homestead exemption rules.
  • You agree to a six year wait before filling for bankruptcy again.
  • You will be dismissed for failure to provide a certificate of credit counseling.
  • You will need to report payments from employers for 60 days before the filing and a regular statement of monthly income.

The “Means Test” essentially determines whether or not you’re eligible for Chapter 7, and if not will require you to file for Chapter 13.

And if that’s not hard enough… 

Insurance companies base premiums on your credit report. If you don’t have an established relationship with an insurer, new insurance carriers may penalize you for your diminished credit rating.

Landlords are also unforgiving. If you sell your home and want to rent, a landlord may require a significant upfront payment and security fee before renting to you based on your credit score and bankruptcy history.

There is another way 

Negotiate. You don’t have to let a lawyer do it for you. Call your creditor and see if you can negotiate a way to pay debt that doesn’t impose such a burden on you. Be careful what you say. One tactic is to simply say that monthly expenses exceeded expectations and you want to make a reduced payment in good faith.   Don’t argue and don’t be belligerent. You may be surprised by the programs and options they can offer you. Just don’t volunteer too much information. Get the deal and move on.

The old “reduce expenses and increase income” argument

There’s a lot of advice out there that says you should reduce debt and increase income. That seems a bit simplistic. Most people confronting bankruptcy have already taken those steps to no avail. If you can reduce debt or expense you should definitely do so. Chances are you’ve already taken those steps.

What’s in it for you? 

As soon as you file bankruptcy, you will receive immediate protection called an “automatic stay. This will immediately protect you from almost all types of collection activity. The automatic stay can stop foreclosures, repossessions, garnishments, seizures, license suspensions, and creditor harassment. 

You may also find that some of your possessions and assets are determined to be exempt either by your state or the federal government. You need to choose which set of exemptions work best for you. You can’t mix and match state and federal exemptions. 

Next steps

 If you suspect you need to file for bankruptcy your first and next step is to consult an attorney that specializes in bankruptcy law. They will advise you as to which Chapter you may be eligible for or offer other advice that you can pursue before filing.

Bankruptcy is a tough decision, but if you feel you are out of options for debts, it’s one thing to consider to get a fresh start and maybe sleep through the night a little better.

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Steve Nubie
Steve Nubie has been writing professionally for 38 years. He is a published author with 10 books to his credit, has written for CBS Entertainment for the Twilight Zone series, and has written hundreds of articles for magazines and the Internet. He has served as Chief Creative officer in the marketing and advertising industry, was an Executive career-coach, is a chef and has traveled extensively living in Asia for two years, and London for two years.