Everyone who walks into my office presumes that their credit score will be irretrievably ruined for years to come as a result of their bankruptcy. I am always happy to tell them, “Stop listening to the doomsayers and panicky prognosticators!” Even though the court filing will stay on your credit report for 10 years, that does NOT mean your score will remain low. It also does not mean no one will allow you access to credit.
Of course, most people filing bankruptcy have low credit scores already. The financial challenges that have damaged their credit are the very reason they are filing in the first place. But decent credit can be right around the corner! And with time and a few good strategies, you can bounce your score significantly within a year or two. To fix credit after bankruptcy, all you need to do is follow the following suggestions.
Review Your Credit Report
It is always a good practice to begin each New Year with a review of your credit report. This is especially true for clients who have filed bankruptcy. The reasons for this essential habit are that you:
keep your finger on the pulse of your credit and review the progress of your efforts to improve, refining your strategy of recovery;
uncover any mistakes in how the creditors are reporting so that their proffered information doesn’t unfairly damage you;
see if any creditors are engaged in unlawful conduct (yes, they do!) for which you might be entitled to compensation; and most importantly,
guard against identity theft.
Ordering your credit reports is actually quite simple. You can visit www.annualcreditreport.com or my.bankrate.com once every year and receive free copies for each of the three reporting agencies: Equifax, TransUnion and Experian. We tell our clients to order the first set of reports approximately 2-3 months following their bankruptcy discharge. This allows us the opportunity to review them with trained eyes. We go through the credit report with the client to check for the accuracy of trade lines. We also check whether the client consented to certain credit reviews, and if any creditor is violating the bankruptcy discharge order.
When you are trying to fix credit after bankruptcy, sometimes it will be necessary to dispute information on your credit report. In order to assure that any incorrect entry is either removed or fixed, you must clearly state exactly what the error is and how it should be remedied. We urge clients to include evidence supporting your contention. Also, be sure to send the notice by certified mail, return receipt requested.
Avoid High Interest Debt
Recently discharged folks often become deluged with offers for immediate credit from car dealers, payday lenders and other sources of high-interest debt. The reason they do this is that they know you will not be able to declare bankruptcy again any time soon. They’re looking to get their feet in your door. We urge our clients to resist these entreaties. Instead, consider other ways to find a little breathing room or work on building up your credit scores.
A good way to avoid high-interest debt and to fix credit after bankruptcy is to:
create a monthly budget and
set aside 5-10% of your income for savings.
That way, you make sure you don’t have to resort to high interest debt just to get by or address a sudden emergency. If setting aside something in a savings account doesn’t seem to fit into your budget, consider reducing nonessential expenses such as fees for cable TV or high-speed internet, dining out at restaurants, or renting new furniture.
Avoid Unscrupulous Credit Repair Companies
According to the Federal Trade Commission, “anything a credit repair clinic can do legally, you can do for yourself at little or no cost.” That includes ordering copies of your credit reports and writing letters to the agencies to challenge inaccurate information. Of course, it does not include filing suit against a creditor or one of the three agencies because they are breaking federal law.
But it is important to be aware that some unscrupulous credit repair companies suggest they can accomplish things to fix credit after bankruptcy that they cannot. The Credit Repair Organizations Act prohibits untrue or misleading statements and compels companies to make certain disclosures. The Act the collection of advance payments, requires all contracts to be in writing, and allows consumers an unfettered right to cancel a contract within three business days. If we discover one of our clients has engaged one of these companies, we urge the client to contact us immediately. We can help to ensure they have actually been well-served and that the company has complied with the law.
Consider a Secured Credit Card
Applying for a secured credit card is probably one of the most popular ways of beginning to rebuild a credit score. In order to receive the credit line, the company will usually charge a start-up fee and require you to deposit a certain amount of money (between $200 and $500 is not uncommon). In our estimation, those funds should accumulate interest as a sign the lender is a reputable company. As you use the card and promptly pay it off every month, the lender may slowly increase the debt limit.
It is important to shop around a bit before alighting on a particular company. Some will charge exorbitant up-front fees, insist on high annual fees and include huge hidden costs. Avoid these predators. Keep in mind that many reliable lenders will require a certain waiting period after you receive your discharge before they agree to issue a secured credit line. This is a good sign that they aren’t trying to take advantage of you.
When you do finally receive a credit card, be sure to keep the balances low. The purpose of have the card is NOT to spend. It is merely to run planned expenses through a mechanism that enhances your credit score.
Finally, be sure the lender reports the credit history to the three bureaus. If they are on the up and up, this should not be an issue.
Consider Applying for a Retail Card
After you have begun building credit with a secured card, consider applying for a retail credit card. Retail companies such Sam’s Club, Amazon, Bed Bath & Beyond, Costco, Kohl’s and WalMart offer credit lines with rewards such as cash back on gas, travel and restaurant purchases. Of course, these incentives can lead to a high debt load due to high interest rates and the constant urging to spend more than you can afford. So these credit lines should also be used judiciously and only for the purpose of boosting your credit score.
Do Not Close Accounts
Every time you close an account, your credit score will go down. Seems counterintuitive? Keep in mind that part of your score is determined by how much you owe as a percentage of your total credit limit. Since your limit goes down whenever you close an account, so does your score.
Don’t Try to Remove Bankruptcy From Credit Report
There may be the occasional ad suggesting you can remove a bankruptcy from your credit reports. Nonsense. The only way to eliminate the reporting of a bankruptcy is by illegal means. Why create additional headaches at this point? The bankruptcy will be a matter of public record. And it is not the end of the world if it remains on your reports for 10 years.
Purchasing a Home or Car
Many of our younger clients want to know when after a bankruptcy they will be eligible to purchase a new home or a new car. Purchasing a new car is easy immediately after an order of discharge is received and the bankruptcy case is closed. However, purchasing a house or condo is a different story. It is not uncommon to have to wait 2-3 years after discharge before a lender will even consider issuing a home loan. Then, interest rates may be higher. They may be as much as 0.5% to 3% above conventional rates, depending on the applicant’s credit score. Requirements vary from lender to lender. Therefore, beginning to shop around immediately following the close of one’s bankruptcy case is a good idea.
If you are a first-time homebuyer or are of low-to-moderate income, the Federal Housing Administration has special opportunities and requirements for people in, or coming out of, bankruptcy. The FHA offers unique consideration for those with serious illnesses or those who have just lost a primary household income provider. As of 2018, FHA requires applicants to put down a mere 3.5% of the value of a home as long as they have a credit score of at least 580.
To Learn More About How to Fix Credit After Bankruptcy, Contact Us Today
With the right strategy and the help of a good bankruptcy lawyer, you can fix credit after bankruptcy. Call the Benson Law Firm today to learn more.
Many clients ask about the differences between the various chapters in bankruptcy and whether they have a choice in determining under which chapter they will file. The answer is, as in many things in life, it depends. Qualifying for a Chapter 7 case (liquidation) will require that either:
the debtor’s household income falls below the median income for the area,
if the income exceeds the median, whether the debtor can pass the “means test,” or
the majority of the debtor’s obligations are business debt.
Let’s just assume that the debtor qualifies for liquidation. Should he or she move forward with a Chapter 7? Let’s take a look at some benefits of Chapter 7 bankrtupcy.
In our office, it usually takes around three months from our filing a case to a debtor receiving their order of discharge that permanently releases his or her debts. This is far less time in bankruptcy than your typical Chapter 13 case. Chapter 13 cases customarily last between three and five years. This brief period makes Chapter 7 an attractive option for most below-median debtors.
Once a case is filed, an automatic stay of all collection efforts means that any efforts to collect on any debt. This includes garnishments or attachments of bank accounts that have been ordered by local judges. As a result, employers are required to cease deducting funds from the paychecks of filing debtors. If any money is collected or transferred after the bankruptcy case has been filed, those amounts must be returned to the debtor.
Ends Creditor Calls
The automatic stay also applies to creditor calls. Any creditor continuing to pester a debtor following the filing of a bankruptcy case may be subject to a contempt motion in bankruptcy court. Moreover, any collector intentionally violating the automatic stay may be subject to claims under the Fair Debt Collections Practices Act and other laws.
Even if a foreclosure judgment has been obtained and a sheriff sale is imminent, a Chapter 7 filing will operate to halt the sale and allow a debtor the time necessary to file a loan modification packet or make other arrangements to keep the property. This is only a temporary measure. However, a discharge of competing unsecured debt can lower monthly bills and expenses. This therefore can free up cash to apply either to a modified loan or a plan payment in a Chapter 13 case. Either way, the benefits of Chapter 7 when it comes to facing foreclosure are clear. Chapter 7 can be vital in retaining a family home.
Exemptions Protect Most Property
In Ohio, exemptions for everything from a house and car to an engagement ring and Dad’s old hunting rifle usually result in debtors retaining all of their property. Common exceptions to this rule are found in older vehicles with more than $5,000 in equity and non-retirement investment accounts. Property is reportedly liquidated in about 4 percent of all cases filed.
Discharge Most Obligations
At the end of a Chapter 7 case, the vast majority of debts should be subject to discharge. This includes most credit card balances, medical bills, divorce lawyer statements, remaining liabilities on repossessed vehicles and lines of credit. Not included in the discharge will be, among other things:
most student loans,
domestic support and property settlement obligations,
most fines and penalties, and
injuries caused intentionally or while intoxicated.
Eliminate Some Tax Debt
While most tax debt cannot be purged through bankruptcy, there are exceptions. Certain income taxes that are more than three years old may be purged under rather arcane rules. Whether or not this is possible is usually a separate analysis requiring some special knowledge and tools.
Student Debt Reduced, But Rarely
Given the staggering amount of student loan indebtedness carried by an increasing number of Americans, it is only natural that we are asked increasingly whether there is any potential for a debtor’s student liabilities to be reduced or completely eliminated. Unfortunately, there are few bankruptcy attorneys out there who are willing to take on student loan discharge cases. They are difficult because, generally speaking, one must prove that paying off the loans would prove an “undue hardship.” This standard is not an easy hurdle to clear. But good counsel and evaluation of prior cases within a particular courtroom may lead to a favorable result.
Wipe Out Mortgage Deficiencies
One trap that has tripped up many good-faith debtors has to do with a lender’s treatment of mortgage deficiencies. When a lender gets a judgment in a foreclosure case and the court subsequently issues an order to the county sheriff to place the property for sale, the property may not sell for enough money to pay off the mortgage. If that happens, the lender has two options:
Get a deficiency judgment and continue to pursue the debtor, or
Write off the balance and take a loss deduction on its next tax return.
The problem for the debtor is that both options have serious downsides. The first is that the debtor is not yet off the hook, despite being out of the house and into new lodgings. The second is that the lender may issue a 1099-C and create taxable income for the debtor. With some deficiency balances, this can mean a huge tax hit!
Bankruptcy allows the debtor to wipe out the mortgage deficiency without the tax obligation. Even if the debtor receives the 1099-C, a tax preparer can submit a Form 982 that makes it clear there was no forgiveness-of-debt income since the debtor had no obligation to forgive. The debt had already been discharged in the bankruptcy case.
Lower Vehicle Payments
A Chapter 7 case provides an opportunity to revisit car and truck loans to see if redemption is an attractive option. Redeeming a vehicle allows you to replace your existing loan with a new loan based on the actual value of the vehicle. For example, a late-model midsized car valued at $12,000, that the debtor purchased for $30,000 two years earlier, may be a good candidate for redemption. The debtor would secure a loan for approximately $12,000 from a redemption lender. Then that lender would send funds to the original lender in exchange for holding title. The debtor then pays a lower monthly amount to the new lender and carries the lower balance forward.
Jettison Business Debt
Many small business owners give personal guarantees in order to secure a loan for the business. If the business either goes south or suffers a serious cash-flow crunch, the owner may be called on to pony up for the obligations of the business. In the event that this happens, a Chapter 7 may be an attractive option for ridding the owner of the debt.
If more than 50 percent of the owner’s total debt is business-related, he or she may qualify automatically for a Chapter 7 and unload the burden. This has been a very popular strategy for small businesses. It sometimes allows owners and their businesses to survive and push forward to profitability.
Avoid Unwanted Leases
Chapter 7 gives debtors the opportunity to look at all leases and other contracts to determine whether proceeding with those arrangements is in their best interest. It may be that a car lease payment is too expensive or a furniture contract was unwise. As a result, the option to terminate can vastly improve a debtor’s monthly bottom line.
Likely Never Face a Judge
While a 10-minute meeting with a Chapter 7 panel trustee is a necessary customary visit to the courthouse, very few debtors have to appear before a judge. To date, none of my clients have had to attend a court hearing or visit a judge’s chambers.
Contact a Bankruptcy to Learn More About the Benefits of Chapter 7
To learn more about the benefits of Chapter 7, contact Benson Law Firm today. We can help you determine which chapter of bankruptcy best suits your needs.
If you make more than the median income for your household size and cannot pass the Means Test, you may be unable to qualify to file bankruptcy under Chapter 7. Most debtors who do not clear these two hurdles will then opt for filing under Chapter 13. They will also perform a Wage Earner Plan for the next five years. However, there are limits on who can file under a 13. Effective through all of 2018, the debt limits for filing chapter 13 bankruptcy under section 109(e) of the Bankruptcy Code are:
Total unsecured debt (credit cards, medical bills, utilities, etc.): $394,725
Total secured debt (house, vehicle and other collateralized obligations): $1,184,200
If you cannot file under either Chapters 7 or 13, you will be left with Chapter 11 as your only other bankruptcy option.
Benefits of Chapter 11 Over Chapter 7 or 13
There Are No Time Limits
In Chapters 7 and 13, there are specified waiting periods one must observe before re-entering bankruptcy. Not so under Chapter 11. If you have recently received a discharge under another chapter, there is no time limit to prevent you from filing under Chapter 11.
You Can Extend the Period Over Which Mortgages May Be Paid
In a Chapter 13 case, the plan must propose to pay the entire mortgage arrearage over five years. A Chapter 7 doesn’t address your past due mortgage payments at all. However, a Chapter 11 plan can stretch your payback period to longer than a mere five years and, in some cases, provide a better cash-flow solution to deal with a foreclosed or soon-to-be-foreclosed home.
If You Have Non-Dischargeable Debts
Occasionally, we come across a situation where non-dischargeable debts must be dealt with in the context of a bankruptcy. For example, unpaid payroll taxes can become a personal obligation that must be addressed immediately to stop additional fees and penalties from piling up on already unmanageable sums. A 5-year plan under Chapter 13 may not be feasible in such circumstances. Therefore, the flexibility offered in Chapter 11 may be the best option.
Cram Down All Vehicles
In Chapter 13, a debtor can cram down the loan balance on car and truck loans to the value of the vehicle. For example, a 2011 Dodge Avenger with 100,000 miles in good condition might have a private party value of $5,000 but is encumbered with a loan for $7,000. In bankruptcy, the loan amount can be crammed down to $5,000 to match the value of the car. This option can save substantial amounts of money. It can also provide a way to own a car or truck outright following a bankruptcy discharge.
But this option only applies to vehicles purchased more than 910 days (approximately 2.5 years) prior to the filing of the case. So if the car was purchased last year, this benefit would not be available. But this time restriction found in Chapter 13 does not apply in Chapter 11. So the cram down benefit could be used if a debtor chooses to file under the latter code provision.
The Flexibility Could Be Worth the Added Cost
Make no mistake that achieving the benefits of filing under Chapter 11 comes at a cost and added complexity. For example, filing costs and lawyer fees will often be more than double that of a typical Chapter 13 case. Creditors are afforded the opportunity to vote on a debtor’s proposed plan, which is unique to Chapter 11. There is a lot more paperwork your lawyer will have to file and many hearings your lawyer will have to attend.
But the flexibility afforded a Chapter 11 debtor can definitely be worth the added cost. You as a debtor have the right to fashion a plan that substantially reduces your obligations to certain classes of debt. All it takes is for one class of impaired claimants to approve the plan. And, as long as certain minimum requirements are met, the bankruptcy court can put its stamp of approval on it.
Speak to a Chapter 11 Bankruptcy Attorney Today
If you are considering filing for bankruptcy, contact Benson Law Firm today. We can answer your questions and advise you as to which chapter best suits your needs and individual circumstances.
If you are facing foreclosure, filing bankruptcy may help. At Benson Law Firm, we can answer your questions and guide you through the bankruptcy process. Below, we explain what you need to know about how bankruptcy may be able to stop foreclosure.
Are You Trying to Save Your Home?
You and your husband have a beautiful home in an inner-ring suburb of Cleveland. You love your life there and everything is going smoothly. Your husband is a contractor and you have a part-time job so you can bring in some money but also spend quality time with the kids.
Then, your world is turned upside down when your husband has an unexpected heart attack. He survives but is laid up for months. Now, the money only comes in when he’s working so this hiatus drains your savings and soon you’re unable to keep up with expenses. You have to put food in your kids’ mouths and pay the light bill so you’re not walking around in the dark. But there just isn’t enough money at the end of the month to pay the mortgage.
But things will improve once your husband returns to work. Unfortunately, he’s taking longer to recover than expected because of his diabetes. Now six months behind, you get a FedEx packet in the mail with a Summons and Complaint in Foreclosure. You panic. The bills are piling up and you’re about to be homeless. Is there anything you can do to save this life you’ve built?
The Automatic Stay, a Powerful Tool
As with a garnishment, bankruptcy carries with it a very powerful tool – the automatic stay. That means that not only must your creditors stop calling, but all civil lawsuits must stop as well. And this includes that dreaded foreclosure. So which kind of bankruptcy do you want? That depends.
Chapter 7 Bankruptcy
If you and your husband have a combined income that is below the median for a family your size, you can file for a liquidation of your debts. Although this will temporarily stop foreclosure, it doesn’t kill it. After you get your discharge, the mortgage lender can restart the lawsuit and you’re back to square one. So should you file under Chapter 7? Again, that depends.
Chapter 13 Bankruptcy
Under Chapter 13, you can catch up on your back mortgage payments over as much as five years. This might be attractive if the dip in income was truly only temporary. However, there are other alternatives that might be even more appealing.
“Chapter 20” Bankruptcy
Some folks decide they want the benefits of a liquidation of their credit card and medical debt, but also want to make sure to save their house and stop foreclosure. In this case, those who qualify can file a Chapter 7 case to eliminate their personal debt and then move on to file under Chapter 13 to address their mortgage obligation. This is a nice option because debtors get both a fresh start and save their homes from the clawing reach of the bank.
Bankruptcy is not the only option when served with a foreclosure Summons and Complaint. But the matter must be dealt with promptly in order to maximize the number of options, preferably, before receiving the FedEx packet. The important thing is to talk to your foreclosure/bankruptcy lawyer asap.
In limited cases, a homeowner can go toe-to-toe with a lender when it’s clear that they have made fatal errors, when ownership isn’t clear or where the servicer has failed to follow proper procedures. In our experience, these kinds of cases are few and far between. Thus, it is usually advisable for an attorney to answer the complaint and then request mediation.
In Cleveland, we have a first-rate mediation department that does an excellent job in resolving foreclosure cases through a highly structured facilitation of modification review. In other cities, mediation departments are not available but the courts do designate magistrates or others to perform the same function. All in all, the mediation results are good and, if there is a solution to be had, we can find it through this process.
A modification can transform a previously unattractive mortgage situation into a performable product, in line with the homeowner’s current income and property value. As you might expect, the borrower must articulate a hardship. But we have not had a client who has been denied a modification on this basis.
This is a very complex area of regulatory law and should not be attempted without expert assistance. One of the common problems we have run up against is something called “dual tracking.” Currently, when a lender receives a modification request at least 37 days prior to a sheriff sale of the property, they are not permitted to continue to pursue the sale without first responding to the modification request.
There are other rules that banks must live by, but we don’t want to put you to sleep right in the middle of reading this post.
Contact a Bankruptcy Lawyer to Learn More About How to Stop Foreclosure
If you are facing foreclosure, you are not alone. At Benson Law Firm, we can help you understand your options and decide whether bankruptcy is right for you. Contact us today for a consultation.
In our office, it usually takes around three months from our filing a case to a debtor receiving their order of discharge that permanently releases his or her debts. This is far less time in bankruptcy than your typical Chapter 13 case, which customarily lasts between three and five years. This brief period makes Chapter 7 an attractive option for most below-median debtors.
Contact me at (216) 220-0441 if you have questions concerning Chapter 7 Bankruptcy.
Cleveland bankruptcy attorney discusses 5 Mistakes Bankruptcy Clients Make In Picking A Bankruptcy Attorney
There are many common bankruptcy client mistakes…
Selecting a Cleveland bankruptcy attorney who does not have the appropriate level of familiarity with bankruptcy, debt settlement, mortgage foreclosure, divorce, debilitating injuries and vehicle titling. Although bankruptcy should be the main focus of your lawyer, related areas are not unimportant in deciding what course to take.
Deciding on an attorney because they have rock-bottom prices. It should send up a red flag if an attorney is willing to take your case for substantially below the average charge for your matter. It may be an indication of a lack of experience. And a lack of experience could cost you much more in the long run.
Opting for a “bankruptcy mill” that provides only basic, uniform representation for all their many, many clients. Each bankruptcy case is unique and should be handled with the care and attention it deserves.
Choosing an attorney who does not handle cases under all Chapters of the Bankruptcy Code. Some attorneys limit their bankruptcy practice to Chapter 7 liquidations and are not comfortable handling more complex bankruptcy matters.
Going with an attorney merely because he or she is close to home. This is a serious decision in your life and you should consider downtown attorneys with ready access to the courthouses and the Trustee offices.
Cleveland Bankruptcy Attorney discusses Truth About Bankruptcy and Your Credit
Are you curious about the truth about bankruptcy?
Your creditworthiness after bankruptcy is in part a function of your creditworthiness before you filed
Obviously, filing for protection with the bankruptcy court is not a positive for your credit score, but it doesn’t have to be a complete destruction thereof. If you can, it is beneficial to file before you start missing payments. You will start from a better place when you rebuild after filing.
Filing bankruptcy stops all negative reporting from pre-petition accounts.
Reporting from past due and delinquent accounts will not hold you back from rebuilding your credit. Only credit lines opened post-bankruptcy will report monthly. The Truth about Bankruptcy in Cleveland will guide your decisions as you work to determine whether bankruptcy is the path to debt relief.
You will be offered credit immediately after our bankruptcy.
You will be offered credit immediately after your bankruptcy. Many lenders target people receiving discharge from bankruptcy for credit offers. They aren’t great terms…low limits and high interest rates…but, they do provide an opportunity to re-establish good credit. Offers for auto loans and credit cards will come immediately after your bankruptcy. You will be eligible for FHA financing two years after discharge, and conventional mortgage financing will be available after four years.
Our knowledgeable attorney can evaluate your circumstances and then inform you of your options. The more complicated your situation; the more reason to learn the truth about bankruptcy and consider hiring an attorney who specializes in Bankruptcy Law.
If you are like most people considering bankruptcy, you have probably looked into working with a debt negotiator or debt settlement agency. Here are four reasons why a bankruptcy is usually a superior choice.
In bankruptcy, you pay back no more to unsecured creditors than required by law.
In a no asset chapter 7 case, you repay $0 to unsecured creditors. In a chapter 13 case, you may have to pay back a portion to your unsecured creditors, but how much is a function of your income, your assets, and federal bankruptcy law…not the relative skill of your debt negotiator.
Debts discharged through bankruptcy are not taxable income.
When you settle a debt through a debt negotiator or debt settlement agency, the IRS treats the difference between what you owe and what you settle for as taxable income. This could cause you to owe taxes to the IRS. Debts discharged in a bankruptcy are not considered taxable by the IRS and therefore you will not owe money on the discharged debt.
You are protected from lawsuits by the Federal Bankruptcy Court.
Many of our clients come to us due to lawsuits arising because their debt settlement plans are not paying their debts fast enough. Debt negotiators don’t pay your creditors monthly. Instead, they hold your money in escrow until they have enough to settle with one creditor. Creditors don’t care that you paid the debt negotiation firm monthly…they just know they aren’t getting paid and that is all they care about. Federal bankruptcy law affords you a “stay” from collection during your case, then prohibits creditors from suing in state court over uncollected debts after your case discharges.
Debt settlement plans do more damage to your credit score than bankruptcy.
While bankruptcy prohibits creditors from reporting to the bureaus after the case is filed, debt-settlement plans lead to credit score destruction. Every account that goes unpaid while you’re in the plan will report your non-payment to all three bureaus. It can take years to pay off a debt settlement plan and the entire time your credit report continues to show your non-payment. The bankruptcy is a one-time hit, after which you can then begin to rebuild.
Recent changes in bankruptcy laws make it more difficult for people to file. In 2015, nearly 900,000 people filed for bankruptcy.
Bankruptcy filers aren’t always people who mismanaged their finances. Many suffer major health crisis’ or a life event, such as divorce or losing their job. Economic climate also resulted in record numbers of foreclosures—another factor in growing bankruptcy rates where every demographic is represented.
Many people still see bankruptcy as their only solution to a financial crisis. While it might be the best choice for some, it is not an easy fix for debt. People that file bankruptcy should know that the decision has long-term effects and many consequences.
Early warning signs
Look for serious financial problems. This can help avoid bankruptcy in the future.
Missed payments month over month
Missed or late payments may mean you are not keeping track of when bills are due or, more seriously, you cannot pay. Find out why and adjust your spending as soon as possible.
Overdue out credit cards
Do not use credit cards to extend your income. Look closely at your expenses and make sure your income covers it.
Paying the minimum on your credit card debt will result in more than a decade of payments and usually thousands of dollars in interest. Even $10 extra per month can decrease the amount of interest and time to pay off your credit card debt.
An interruption of income causes a crisis
The simplest way to avoid this is to have 3-6 months of savings set aside for living expenses in case of an emergency. If you do not have, a savings cushion, start today with whatever amount you can afford per month. It adds up over time, set it aside.
When to consider bankruptcy
It might be time to look at bankruptcy if you have one or more of these issues:
Debts greater than one year’s gross income
Garnished wages to satisfy unpaid debts
Constant collection phone calls
30+ days behind on bills
Repossessed property, such as a car or boat
Medical bills not covered by insurance
The decision to file for bankruptcy can be very personal. It’s helpful to seek advice from professionals, such as credit counselors or attorneys, but please weigh all the information before moving forward!
What if I forget to include a creditor in my bankruptcy?
Generally speaking, 11 U.S.C. Section 523(a)(3)(A) excepts from discharge any debt not listed in the debtor’s schedules in time for the creditor to file a timely proof of claim. There is an exception to that rule: Debt not listed in bankruptcy schedules is indeed discharged in Chapter 7 no-asset cases.
Since the Trustee will not be collecting any assets, there is nothing to divide in a no-asset case. As there is nothing to divide, there is no reason to file a proof of claim. In fact, the trustee’s notice to creditors in no-asset cases instructs all creditors to refrain from filing a proof of claim. Consequently, a proof of claim in a no-asset case will never be too late and the debt can never be excepted from discharge, despite its not being listed in the debtor’s schedules. Courts reaching this conclusion include the 6th U.S. Circuit Court of Appeals: In re Madaj, 149 F.3d 467 (6th Cir. 1998).
With the debt discharged, the post-discharge injunction of Section 524 prohibits all collection efforts on the unlisted debt. If the creditor has been notified of the bankruptcy and nevertheless refuses to stop collection efforts, the debtor could re-open the bankruptcy and request sanctions.
Why should I consider bankruptcy?
You can discharge most, if not all, your unsecured debts (e.g., medical debt and credit card balances). You can catch up on past due mortgage payments. You may be able to avoid second mortgages in some cases. You can cram down loans for cars and investment property under certain circumstances.
What will happen to my credit?
Your score will bottom out, but that may not be as big a drop as you think. We have even seen cases where a filing can actually improve ones score. Many of our clients work with a consultant while emerging from bankruptcy to bring the score up significantly in 2-3 years.
How long will my case take?
A Chapter 7 case usually lasts 4-5 months, but can extend to as much as a year if the estate is complex or difficult; A Chapter 11 case can take from approximately a year to several years; A Chapter 13 case typically extends 3-5 years.
How do I know if Chapter 7 is right for me?
If you have property that is largely exempt and your household income is at or below the median, you might benefit most by filing a Chapter 7 case.
Which bankruptcy chapter saves the most money?
A Chapter 7 case generally has the most economic benefit because most unsecured debt can be discharged in full. However, a Chapter 13 case can provide significant benefit in the form of avoided or reduced secured debts. A Chapter 11 case is generally the most expensive since it is utilized primarily by corporations or individuals with significant income and debt/assets.
Can I keep a credit card and not report the debt on my bankruptcy schedules?
No. Every debt must be reported in your bankruptcy case, along with all of your assets.
What is a reaffirmation agreement?
If you want to keep a secured asset like a car, you may have to reaffirm the debt with the lender to avoid repossession of the vehicle. This would mean that, although most of your debts are discharged, you will remain liable for the debt after your case is closed.
What assets are subject to exemption?
Most commonly held assets will be exempt. For example, $21,625 of home equity and $3,450 of vehicle equity are protected. The most common problems involve vehicles owned outright, significant amounts of funds in bank accounts, cash value of certain types of insurance policies and tax refunds.
Will my corporation be affected by my personal bankruptcy?
Generally, no. However, your shares likely must be turned over to the trustee and you may lose your voting rights.
Will I have to appear before a bankruptcy judge?
In the vast majority of cases, no. Your appearances will be limited to your meeting of creditors, a short question and answer meeting with the Trustee.
Who does the trustee represent and what is his or her job?
The Trustee represents the American people. His or her job is to administer, oversee and ensure compliance with bankruptcy procedures and laws. To that end, a Chapter 7 Trustee will pursue nonexempt assets with equity and use them to payoff, first, secured creditors and then unsecured creditors according to priority. A Chapter 13 Trustee will attempt to extract a maximum monthly payment in order to pay secured creditors and return to unsecured creditors the highest percentage payback on debt as possible.
What if I am in a Chapter 7 case and the trustee wants my motorcycle, boat or other non-exempted asset?
Usually, the trustee will allow you to make an offer for the asset in order to keep it. In most cases, the trustee will also allow you to enter into a payment plan if you cannot afford a lump sum payment.
What happens if I change my mind after filing and don’t want to be in bankruptcy?
If you are in Chapter 7, the trustee may object to the dismissal. But only a bankruptcy judge can determine whether or not a case may be dismissed. If you are in a Chapter 13, dismissing your case is usually pretty easy.
Can I stop a foreclosure on my house by filing bankruptcy?
Yes. Upon filing bankruptcy, the automatic stay prevents any collections efforts by any creditor, including foreclosure actions and even sheriff sales. In order to proceed, the creditor must file for relief from stay. If that is granted, the creditor may then proceed with its collections efforts.
Can I leave some debts or assets out of my bankruptcy?
No, you must report all assets and liabilities in your schedules.
If I start a Chapter 13 plan but find I can no longer afford the payments, can I convert to a Chapter 7 case?
Yes, as long as you otherwise qualify as a Chapter 7 debtor.
Can I file a case without naming my spouse?
Yes. However, the income and expenses of the spouse must be reported and may be considered when determining what your Chapter 13 plan payment will be. That said, the bankruptcy will not appear on your spouse’s credit report.
Will everyone find out that I have filed bankruptcy?
Probably not. Most bankruptcies are only known to the attorneys, creditors, trustees and the judge.
Will all my debts be discharged in bankruptcy?
Maybe. But there are debts that are excepted from discharge and will survive the bankruptcy. They include, but are not limited to: mortgage liens, most tax obligations, spousal and child support, criminal fines, fines and penalties, liabilities resulting from fraud, and obligations arising from drunk driving.
Can I reaffirm certain debt?
Yes, you can. Whether you should is another matter. In our office, we are very reticent to advise our clients to reaffirm debts without a clear understanding of the downside.
How do I know whether I should file under Chapter 7 or Chapter 13?
If you have a combined income under the median for your family size and you are current on your payments for your house and car, then you will probably end up benefiting most from a Chapter 7 bankruptcy. However, you may have to file a Chapter 13 case if your family income is over the median and you fail the Means Test (a complicated formula for determining whether you should have sufficient net income to afford a Chapter 13 plan). You may also want to file under Chapter 13 if you have an arrearage on your mortgage or car loan and want to keep your house or car.
Can I file bankruptcy on my own without the assistance of a lawyer?
Yes, but I have seen pro se debtors really make a hash of things and then look to us to undo the mess they’ve made, especially in the case of Chapter 13 filings.
Can I discharge any federal income tax obligations?
In a Chapter 7 case, you can discharge federal income tax debt if: (a) there is no tax lien; (b) you haven’t tried to evade taxes or file fraudulent returns; (c)the tax return was filed with the IRS at least two years prior to the bankruptcy; (d) your return was due more than three years prior to filing; and (e) any tax deficiencies on prior returns were assessed at least 240 days prior to the filing of your bankruptcy case. In a Chapter 13 filing, you’ll pay the IRS as part of your repayment plan.