Perhaps you are considering filing bankruptcy and want to know if it will help you solve your financial problems and achieve your financial goals. Or, perhaps you simply want to know more about bankruptcy. An experienced bankruptcy attorney sets forth the basics in this guest post:
What Can Filing Bankruptcy Do For Me?
You Harness the Power of the Automatic Stay
The instant you file a bankruptcy petition, the automatic stay is in effect. This halts all creditor action – harassing phone calls and letters, lawsuits, foreclosure, and sheriff sales. All of this must stop while your bankruptcy case is active.
You Have Unsecured Debt Discharged
Credit card debt, medical debt, certain fines and fees, and perhaps even past due income tax… an experienced bankruptcy attorney can make sure all of this unsecured debt is “discharged”, meaning, you are no longer personally responsible and you don’t have to pay them! This is how filing bankruptcy give you a “fresh start.”
You Can Manage Your Secured Debt
Depending upon which Chapter you file under, you can manage the secured debt you incurred by buying or leasing a car, renting an apartment, or buying a house.
Any of these can be “surrendered” through a bankruptcy filing if you have found that you cannot afford them. You return the collateral to the lender and are discharged of any deficiency on the loan or lease.
Any of these can be “affirmed” and you go on paying as if the bankruptcy did not happen. In some cases, these can be renegotiated and made more affordable.
Cramming down car loans in bankruptcy
When your car is worth less than the amount you have left on your car loan, you may be able to “cram down” the lender to the market value and pay only that. The amount you save is then discharged.
Stripping off a second mortgage in bankruptcy
When your home is worth less than the amount of a first mortgage, and there is a second mortgage on the home, you may be able to strip that mortgage off as unsecured and have it discharged.
What Kind of Bankruptcies Are There?
Bankruptcy is commonly called by the chapter of the Bankruptcy Code where it is found. The two types of bankruptcy most commonly filed by individuals are called “Chapter 7” and “Chapter 13” Bankruptcy. Whether to file under one Chapter or the other depends upon several factors, including your current income, the value of your assets, and your goals in filing a bankruptcy petition.
What is Chapter 7 Bankruptcy?
Chapter 7 Bankruptcy is a 4-6 month liquidation action during which the court and the Chapter 7 Trustee asses your income, assets, expenses, and debts, and determine whether you are entitled to a discharge of your unsecured debt.
You must income-qualify to file under Chapter 7 by passing the “means test” which evaluates your debt and income in relation to the median income for your family size in your state.
Will the Chapter 7 Trustee Seize All of My Assets?
Not necessarily. Your assets constitute your “estate”, less some “exemptions” which your attorney will help you apply. The bankruptcy estate is administered by the Trustee and anything in excess of applied exemptions can be seized and sold by the Trustee for the benefit of your unsecured creditors.
One of the purposes of your initial consultation with your attorney is to determine whether you have and want to retain assets in excess of the applicable exemptions. If so, filing under Chapter 7 may not be right for you. Your attorney will help you explore your other options, including Chapter 13.
What is Chapter 13 Bankruptcy?
Chapter 13 is a three-five year repayment plan during which you can repay a mortgage or car loan arrears and perhaps pay some of your unsecured debt. You must have steady income and be able to afford your monthly Chapter 13 plan payment, as well as your other monthly expenses, in order to file Chapter 13.
Chapter 13 is a powerful tool – it forces your secured creditors to accept payment of any arrears on your loans or leases and you can be discharged of unsecured debt.
Can Bankruptcy Help Me Eliminate or Reduce Student Loan Debt?
It is difficult to get government-backed student loan debt discharged in bankruptcy. Debtors attempting to do so must file under Chapter 13 and must show the court that the loans impose “undue hardship” upon them and their dependents, which is a very high burden to overcome.
You might consider contacting your loan servicer and see if a different repayment plan, such as Income-Based Repayment (IBR) would help you.
It is important that you avoid defaulting on student loans in order to remain eligible for programs such as IBR. If your unsecured or medical debt burden is compromising your ability to pay your student loans and your monthly expenses, perhaps debt consolidation or bankruptcy can help you.
Private loans, however, can be discharged under certain circumstances. The law is complex – consult your attorney.
What Will Filing for Bankruptcy Do to My Credit Score?
A bankruptcy filing remains on your credit report for up to ten years. However, in my experience debtors often find that their credit scores improve because their debt-to-income ration improved once they were discharged of their unsecured debt.
When your case closes, you can help repair your credit by paying all bills, such as student loans, utilities, rent or mortgage, and car loan or lease, on time and in full. Then if you need to borrow money in the future you can show a positive payment history after filing bankruptcy helped you get a fresh start.
What About Debt Settlement? Does it Work?
It can, especially if you only have one creditor. However, the amount of debt that creditor forgives is imputed to you as income and is taxable.
If you have multiple creditors, know that they are not required to negotiate debt settlement with you outside of bankruptcy. Bankruptcy is the power that forces them to work with you, or that gets your debt to them discharged.
What happens when some creditors work with you and some don’t? You’ll be paying the compliant creditors while being harassed or sued by the non-complaint creditors. When you file a bankruptcy petition, the automatic stay prevents this.
Each of your creditors is entitled to be paid in full and they have little incentive to negotiate with you unless the law intervenes somehow. Filing a bankruptcy petition is the only sure way to stop collection efforts and force creditors to the table.
Massive thanks to David M. Offen, Esq. for putting this post together and sharing his knowledge with us. A native to the Philadelphia area, Mr Offen attended Temple University College and Law School. Mr Offen is licensed to practice in the States of Pennsylvania and New Jersey. He is a member of the Eastern District of Pennsylvania Bankruptcy Conference and the National Association of Consumer Bankruptcy Attorneys and maintains an active blog on all aspects of bankruptcy filing and current events.
This is a collaborative post