Common Misunderstandings About Bankruptcy

So you’ve made an appointment with a bankruptcy attorney. Things are getting out of hand with the bills, the calls, the stress — and you’re just ready for a break. And you’ve heard that bankruptcy might be a good solution . . . .bu-u-u-u-t . . .you’ve also heard some things that make you nervous. Well, sit tight. A lot of what you may have heard is either inaccurate or just plain wrong. Here are a few of the things I hear a lot from people considering bankruptcy but feeling, well, nervous about the whole process.

1.  Bankruptcy will ruin my credit for 10 years.

No. No it won’t. The fact that you filed a bankruptcy will show up on your credit report for 10 years. That doesn’t mean that your credit is ruined for that amount of time. In fact, far from it. After the discharge order is entered, your creditors must accurately report the status of your accounts, and it should reflect that the account has a $0.00 balance and that it was discharged in bankruptcy. Something to remember, too, is that you will not be able to receive another discharge for 8 years after the filing of your recent one. So how does this all add up to not ruining your credit? To some extent, that depends on you. If you get a credit card or qualify for a car loan following your discharge and you demonstrate that you can pay on time and, in the case of a credit card, keep the balance low, you will see your credit score begin to move up. Another year or two of “good behavior” and you might even find yourself in better credit shape than you were before! So although there might be a bankruptcy in your past, it doesn’t have to cut you off from better credit in the near future! A bankruptcy attorney can explain in much greater detail what you can expect and help to guide you along the way.

2.    They’re going to take all my stuff and sell it to pay creditors.

This is really a misconception. In  a chapter 7 bankruptcy, if you DO have valuable assets, there is a possibility that you will have to turn some of those assets over to the bankruptcy trustee so that they can be converted to cash to pay creditors. Depending on the state in which you file, however, it is likely that you can keep all of your assets and not have to be concerned about losing anything. This is because the bankruptcy code permits you to keep things . . .household furnishings and goods, clothing, jewelry, a vehicle, tools and other items. You’re permitted have some equity in your house. The reason for this is that the law governing bankruptcy lets people exempt much of their personal property and their residence out of the bankruptcy estate. OK  . . .great . . . what does THAT mean?

When a bankruptcy is filed, something called the “bankruptcy estate” comes into being. From that point forward (at least while the case is open) your stuff now belongs to the bankruptcy estate, and is under the control of the trustee appointed to administer the estate. BUT . . .here’s where the exemptions come into the picture . . .under the federal bankruptcy code and/or under state law, you are permitted to keep property . . .real estate, money, furniture, cars, etc . . .as long as the value of those things is not more than the law allows you to keep. And for this analysis, the value of your things is what they are worth right now, in their current condition. In other words, your stuff is valued at what someone else would be willing to give you for it on Craigslist or at a yard sale. In Pennsylvania we can choose to use either  the Federal exemptions or the  the state exemptions. In most cases, people are able to keep all of their stuff. But to get a full analysis of your particular situation, it is best to contact a bankruptcy attorney.

3.      I was told I could keep 1 credit card out of the bankruptcy and use it to rebuild credit.

Aaaaaack!!!!! Oh dear oh dear oh dear no!! There is one short, blunt word for this . . .FRAUD!! Whew . . .I need to calm down here . . .  OK. Here’s the thing: when you file a bankruptcy, you are required to provide the court with a list of all your assets (your house; your stuff); all your liabilities; a list of your income, and a list of your ordinary and necessary expenses. When you list your liabilities (debts), you must list every loan, every medical bill, every credit card or store credit card you have–even if it has a zero balance. Bankruptcy is about disclosure and transparency. You don’t play a shell game with the bankruptcy court. There will be opportunities to rebuild your credit after a bankruptcy. So list it all. And consult with a bankruptcy attorney to get the full picture of what you can and cannot do.

The Minimum Payment Swamp

Credit cards are great, aren’t they? They offer you some freedom, some flexibility . . .and you can pay them off over time rather than having to come up with a big pile of cash all at once. Of course, you pay a price for that that flexibility in the form of interest on the balance. But still, you pay it off in a couple-few months, it’s not so bad, right?

OK, but what happens when you can’t do that? I mean, suppose you’ve had a really big expense and now you have a larger balance than you usually like to carry. Suppose your income has gone down recently so now you have to rework your budget, you know, so you can pay rent AND eat this month. Where do the credit card payments fit in?

Of course!!! Minimum payments!!! Our friends at TBTF Bank, NA (To Big To Fail Bank . . .) have generously offered to allow you to pay off your debt in increments called “minimum payments.” This is the lowest amount you are required to pay in order to pay off your balance. Paying the minimum payment each month keeps the creditor happy and keeps you from defaulting. Sweet! Right?

Not so fast. When you pay only the minimum each month, you are doing very little to decrease the principal you owe. A lot of that minimum payment is being applied to interest. For example, if you have a $3,000.00 balance on a card that carries an interest rate of 14.99%, a likely monthly minimum payment will about $120.00. This will decrease a bit each month as you pay down the principal. At that rate, it will take you almost 9 years to pay off that balance. And that’s assuming you don’t use that card at all during that time. Add to that the other minimum payments on your other cards and you could be looking at hundreds of dollars each month going out just to keep the banks off your back. After a while it can feel like your way through a dense, muddy swamp; take a couple of steps forward, sink down into the muck, pull yourself out, couple more steps forward, sink down . . .lather, rinse, repeat.

So . . .what do you do?  If you have regular income and your ordinary living expenses are manageable, you might want to consult with a credit counselor to see if you qualify for a debt management plan. If you qualify, you should be able to pay off the credit card debt at greatly reduced interest over a period of 4 to 5 years. If, however, the debt has become completely unmanageable and you are having to pick and choose between paying a bill and going to the grocery store this week, it may be time to contact a bankruptcy attorney. A bankruptcy practitioner will explain the pros and cons of filing a bankruptcy and will outline the steps necessary to do so. He or she should also explain your non-bankruptcy options.

Or . . .you can just keep slogging through that swamp.

Reaffirmation . . .

Look in the mirror. Smile confidently. Say, “I’m good enough; I’m smart enough, and, doggone it, people like me.” (Apologies to Al Franken and Stuart Smalley . . .) OK, that’s NOT what I’m talking about when I say “reaffirmation.”

A reaffirmation in bankruptcy is a process by which you agree that a secured debt will not be discharged along with the rest of your dischargeable debt. In a typical Chapter 7 bankruptcy, an individual (or a married couple) will receive a discharge of all of their dischargeable debt. Certain debts, such as past-due income taxes, student loans and domestic support obligations cannot be discharged. (Well, under certain circumstances, some past-due income tax debt may be dischargeable, but that’s a topic for another post).

Certain secured debts though  may need to be reaffirmed if your intention is to keep the collateral. A secured debt is one which is associated with some piece of property which the lender can repossess if the debt is not paid. Probably the debt that most people might think of is a car loan. You don’t pay, they send out the roll-back. A mortgage is also a secured debt. If a secured debt is discharged in bankruptcy, that means that if you stop paying, the lender can still take back their collateral, such as your car, but they cannot pursue you for any deficiency or shortfall they might experience when they resell the collateral.

If you have reaffirmed the debt, however, then the debt survives the bankruptcy as though you had never filed; the lender can not only repossess the collateral, it can go after you for the difference when they sell the thing for less than you owe. This is something you often see with car loans; you have a car and you owe, let’s say, $17,000.00, It’s a 2009 something-or-other and it’s in good shape. But you fall behind on the payments, and the lender sends out the guy with the truck and repossesses the car. They sell it at auction and get $8,000.00 for it. You still owe them $9,000.00. If, however, you have filed a Chapter 7 bankruptcy and have voluntarily surrendered the car, then the entire debt will be discharged. If, on the other hand, you filed the Chapter 7 and you reaffirmed that debt, you are still going to be on the hook for the difference.

There are many instances where reaffirming a debt is not a bad idea, and there are times when it really IS a bad idea. Your bankruptcy attorney will be able to explore all of your options with you and help you to decide what is likely to be your best course of action.

What About My Refund . . .????

Ah yes . . .January is over, February has slapped us in the face and is sitting back and laughing about it, and the W-2s have bloomed. Unless I miss my guess, it must be tax time again.  And for many people, that means that a refund is in the cards.

But wait . . .says a client . . . I’m filing bankruptcy!!  WHAT ABOUT MY REFUND??? Are they going to take that? Well . . .your’re going to hate me for this . . .it depends.

It depends on how much you are expecting to receive and on how much of it (or even all of it) can be exempted under the available exemptions. Let’s say you are expecting to receive about $5,000.00. But you are just on the verge of a bankruptcy filing; all that’s left to do is go to your lawyer’s office to review your petition and schedules, and sign it. And let’s say that you own your house, and by some miracle (in this climate!) you actually have some equity in it . . .for this example, let’s say you have in the neighborhood of $10,000.00 in net equity. (Net equity would be what you get to put in your pocket after the mortgage, the broker’s commission and all closing costs have been paid). Under the federal exemptions you are permitted to keep up to $21,975.00 in equity in your house; in this example, after exempting (keeping) your $10,000.00 worth of equity, about $11,625.00 remains. In Pennsylvania, we can choose whether to use the federal exemptions or the state exemptions. Using the federal exemptions there is good news!!

The Bankruptcy Code allows you to use up to $11,500.00 of the unused portion of the amount you were allowed to use for your house. So, under this scenario, you would be able to keep your tax refund. Using the same analysis, if you have no equity in your house, or if you don’t have a house, then you would still be able to use the unused portion of the homestead exemption, and you would be able to keep your tax refund.

Of course, the above example is just a hypothetical situation, and there are other factors that each individual client may have to consider when looking at the exemptions. This is just one reason why there are no easy answers in bankruptcy!

Why File Bankruptcy?

Why should I file a bankruptcy?  For some, the question might elicit a “duh . .” response. As in, “Why should I file a bankruptcy?.”  “Duh . . .to get rid of your debt.”  (Shrugging, head-shaking and eye-rolling are optional).

But seriously . . . a lot of my clients ask me this. It usually stems from a sense of wanting to do the right thing, which usually includes paying your creditors. And while that is a good and moral and appropriate goal, for many people it just is not a feasible goal. Even making your best effort and paying the minimum payments each month, even one credit card with a $6,000.00 balance can take years . . .YEARS . . .to pay in full. Multiply that by three or four or even eight and, unless you are still not old enough to drink, your grandchildren might be paying that off some day. Okay, I exaggerate. A bit. The point is, if you have so much debt that, realistically, you will be paying and paying and paying and never hopping off that treadmill for the foreseeable future, bankruptcy should be something you are considering.

Ask yourself questions like these:  is it possible to completely pay off all my debt over the next five years just paying the minimum? Is it possible to pay it all off in about five years if I doubled the minimum payments? Can I afford  to consistently pay out $                 regularly while covering all ordinary and necessary expenses? If you can reasonably see this happening; if you can see fitting regularly monthly payments into your budget over the next five years; then you may be able to avoid bankruptcy.  If, however, you cannot see yourself being able to do that, it is probably time to consider filing bankruptcy.

Bankruptcy: Lets Get Started!

The main purpose of this blog is to provide consumer bankruptcy information.  I am an attorney in Lancaster, Pennsylvania, and I practice primarily in the areas of bankruptcy, student loan issues, and other consumer issues. In the course of my bankruptcy practice, certain questions seem to come up more frequently than others, so, with this blog I hope to address and answer them.

It probably goes without saying that bankruptcy is a huge and difficult step for most people to take.  No one likes to feel as though they’re shirking responsibility by not paying their bills. No one likes to feel like they’re just giving up. But most of my clients are on a debt treadmill, running and running and never losing any weight . . . never catching up and certainly never getting ahead.  Bankruptcy is, for many people, the best and most viable solution.

But because it is a big and intimidating step, and because it can seem like a complicated process, I want to try to help clear up some of the mystery and answer some common questions for anyone who might stumble upon this page. (Of course, if you found my website and clicked on the blog link . . .YAY!! And thanks!)

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