To File or Not File Bankruptcy
Statistics and the Leading Cause of Bankruptcy
As published annually by the Administrative Office of the U.S. Courts, a total number of 796, 037 bankruptcy filings were recorded in June 2017. This figure was 2.8 percent lower as compared to the filings made in June 2016. Around 97% or 772, 594 were non-business (personal) filings and only 3% or 23, 443 were business filings. Based on filings by chapter, Chapter 7 and Chapter 13 dominated the bankruptcy filings respectively. These two major types of personal bankruptcy will be discussed further in this article. On the other hand, most of you may think that the number one reason of consumer debt is luxurious lifestyle or extravagant shopping. However, statistics revealed that the leading cause of personal bankruptcy in the U.S. is medical debt. Consequently, there are also reports that people who are 65 years old and older are under this trend. According to an expert, the recession of 2008 affected that particular age group quite badly as well as the high cost of health care, and the 2005 Bankruptcy Reform Act did not deliver its purpose of diminishing bankruptcy filings.
Overview of Bankruptcy
According to www.debt.org, bankruptcy is defined as “a court proceeding in which a judge and court trustee examine the assets and liabilities of individuals and businesses who can’t pay their bills and decide whether to discharge those debts so that they are no longer legally required to pay them.” Bankruptcy laws were enacted in order to give a chance to people or businesses who are financially burdened to start all over again with a clean slate. The Federal Trade Commission advises those who are planning to file for bankruptcy to undergo credit counselling from a government-accredited organization within 180 days before filing. A debtor education course must also be completed before any debts will be discharged.
Before you decide whether or not to file for bankruptcy, you must be aware that bankruptcy is the best indicator of risk in a credit report; it can heavily affect your application for new credit. This means that filing for bankruptcy should always be the last resort. In addition, it is also helpful to obtain copies of your credit report from the three credit reporting agencies and try to create a list of all debts you owe. You may also seek the advice of qualified credit counselor or financial advisor as they may recommend other options available. As early as now, you might ask yourself, should I file or not? This will mainly depend on your overall objectives or goals in line with your fundamental purpose in filing for bankruptcy.
There are two major types of bankruptcy protection for consumers under federal law. Chapter 7 and Chapter 13 are the two chapters in the bankruptcy code commonly used under which cases are filed. These two chapters will be explained thoroughly later on.
When to File for Bankruptcy
You have the option to file for bankruptcy if the following situation arises:
- An existing large amount of medical bills or credit card debt.
- Inability to pay the required minimum amount due on your credit accounts.
- To prevent home foreclosure or repossession of your vehicle.
- A notification from your employer regarding wage garnishment (a lender or creditor will start deducting money from your salary).
- Possibility of using your retirement account just to pay the bills.
- A lawsuit is filed against you.
- Diminished sources of income.
Based from the list mentioned above, majority of these problems can be solved by filing a Chapter 7 bankruptcy if you make less than your state’s median income. On the other hand, if you make more than the median income or you want to catch up on payment for your property, then you can choose Chapter 13 bankruptcy as your option.
When not to File for Bankruptcy
It would not make sense to file for bankruptcy under the following circumstances especially when you commit bankruptcy fraud:
- You are considered as judgement proof (it means that the creditors are unable to collect anything from you because you have no income or properties).
- You have currently filed for bankruptcy, & you have no privilege to erase more debt.
- Intentionally used your credit card to its maximum limit while planning to file for bankruptcy.
- You purposely transferred a property to another person, which has a lower fair market value before filing for bankruptcy in order to avoid paying the creditors.
- Not disclosing your property or other assets in your bankruptcy petition.
- You willfully utilized business assets for personal use before filing for bankruptcy.
- You have an existing lawsuit with an accusation of fraud from other court.
If you commit any of the bankruptcy fraud mentioned above (including those not listed), a lawsuit will be filed against you by the creditor or prosecutor. The bankruptcy court will always spot financial dishonesty and the consequences can be tough. This means that you will remain responsible for your debt, could face imprisonment for 20 years, and will have to pay a fine of up to $250,000.
Consequences of Filing Bankruptcy
- It will reflect on your credit report for seven to ten years.
- Difficulty in renting an apartment or finding a job.
- High interest rate on car purchase.
- It will cost you a lot of money.
Basic Types of Bankruptcy for Consumers
Based on the provisions of the U.S. Constitution, a person has the capacity to be absolved from all or part of his debts if he is unable to fulfill his obligations to creditors or lenders. Consequently, there are two kinds of personal bankruptcy protection that can be utilized by consumers namely Chapter 7 and Chapter 13, which are under the bankruptcy code.
Chapter 7 Bankruptcy
Chapter 7 is known as “straight” bankruptcy and considered as the fastest and most widely-used type of consumer bankruptcy. This particular type of bankruptcy will pardon most unsecured debts, which include medical bills, credit card debt, and personal loans. Under chapter 7, most debtors may give up some liquid assets to repay the creditors.
What are liquid assets?
These are assets in your possession that can be converted into cash such as checking and savings account. Liquid assets should be turned over to the courts to be divided among the creditors as partial repayment for debts. These are also known as non-exempt assets. Meanwhile, those assets that are not eligible to repay creditors are called exempt assets. Please note that every state has its own laws that determine which liquid assets are exempt or non-exempt.
Once non-exempt assets are distributed to the creditors, the remaining debt will be discharged. Therefore, you will have no liability for any debt discharged. Creditors or any third-party collectors are no longer authorized to attempt to collect the debts included in the bankruptcy from you.
In contrast, other forms of debt such as back taxes, court judgments, alimony and child support as well as student loans will not qualify under Chapter 7. As mentioned in the consequences of bankruptcy, Chapter 7 will stay on your credit report for ten years.
Qualifications for Chapter 7
- Pass the ‘means test’, which will prove that your income is less than the median income for your family size in your state.
- No prior Chapter 7 discharge in the last eight years or a Chapter 13 bankruptcy within the last six years.
- You must not have filed for bankruptcy petition (chapter 7 or 13) within 180 days, which resulted to dismissal due to failure of appearance in court or disobedience of court orders. Also, you willfully dismissed your filing due to the action of the creditors obtaining court relief to recover property.
- Once you pass the ‘means test’, you must attend a credit counselling from an accredited agency.
In case you fail to pass the ‘means test’, you will not be allowed to file for Chapter 7. However, you still have a chance to file for Chapter 13.
Steps in filing for Chapter 7
This process may be completed within six months. The steps are as follows:
- Attend a government-accredited credit counselling.
-Select counselors and educators who are included in the U.S. Trustee Program’s list. This program does not operate in two states namely, Alabama and North Carolina. The court officials in the said states have to follow certain guidelines in the accreditation process.
- Hire a qualified bankruptcy attorney.
– This is a crucial stage in your life; hence, you need to hire a professional that will guide you through the process and will help you become debt-free.
- Gather all pertinent documents.
– Although your attorney will assist you in filing your petition and in doing the paperwork, it is still your responsibility to compile pertinent documents including, proof of income, assets and debts. Take note that ‘automatic stay’ becomes effective from hereon. Thus, most creditors will not be able to sue you, call you for payment nor garnish your wages.
- A court-appointed bankruptcy trustee will then manage the process after your petition has been filed.
- Meeting of the parties involved.
– A meeting will be arranged by the trustee who will be attended by yourself, your lawyer and the creditors. This is an opportunity for you to answer questions from the creditors and trustee pertaining your financial status and bankruptcy forms.
- Confirmation of eligibility.
– Once your application has been reviewed and processed, the trustee will then confirm your eligibility for Chapter 7.
- Handling of non-exempt property.
– Your non-exempt assets such as jewelry and savings account will be handled by the trustee. A decision shall also be made by the trustee whether these assets are worth selling in order to repay the creditors.
- Secured debts.
– In order to resolve secured debts, an order to return the property to the creditor held as collateral shall be made. You may also redeem the collateral (by paying the creditor) or confirm the debt (arrange to not include the debt and just continue the payment.)
- Attend a financial education course.
– As mentioned earlier, you must take a financial education course only from accredited agencies before your case will be discharged.
- Case discharged.
– Within three to six months from the date you filed your petition, your case will be discharged. This means to say that you are relieved from eligible debts. After some time, your case will finally be closed.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy will make sense if you want to keep your house, car or other valuable property in your possession. Furthermore, this type of bankruptcy protection can help you set up a repayment period of three to five years under the protection of a federal court. Chapter 13 bankruptcy is also known as “wage earners” bankruptcy for the reason that having a regular income is a requirement to qualify.
The following questions will determine if you qualify for a Chapter 13 bankruptcy:
- Does your income exceed the requirement for Chapter 7?
- Would you prefer to keep your nonexempt property?
- Would you like to protect your house from foreclosure or even repossession of your car?
- Do you have non-dischargeable debts in Chapter 7?
- Were you able to file a Chapter 7 bankruptcy from the last eight years?
An affirmative answer to any of these questions is an indication that filing for Chapter 13 bankruptcy is right for you. On the other hand, having multiple debt problems can make you feel uncertain on what to do. In times like this, you must seek the help of a bankruptcy attorney to review your case to help you understand which chapter is right for you. Take advantage of the free initial consultation offered by most bankruptcy attorneys and credit counselors to know more about bankruptcy and debt relief options; for example, debt management plan from credit counselling agencies.
Filing for Chapter 13 bankruptcy will affect your credit report for seven years, which can result to having difficulty in getting new credit. Nevertheless, you can still recover or improve your credit score in due time. In fact, a study conducted from 2010-2012 revealed that individuals who completed their repayment plans and their bankruptcy was discharged, saw their scores improved on an average from 535 to 610.
Steps in filing for Chapter 13 Bankruptcy
If you are contemplating to file for Chapter 13 bankruptcy, you must consult first a credit counselor from a nonprofit credit counseling agency and a bankruptcy attorney. The following steps will guide you through the process:
(Note: Follow steps 1-4 and 9 in the Chapter 7 steps, which are the same as Chapter 13)
- Proposed payment plan.
– You must submit a proposed payment plan within 14 days from the day you filed the petition. Payment should commence within 30 days from the date of filing.
- Meeting of the parties.
– The trustee will facilitate a meeting between you and the creditors within 21 and 50 days from the day you filed your petition.
- Court Confirmation
– All the parties involved will meet in court to settle the payment plan. This should not be later than 45 days from the previous meeting.
- Creditors shall be paid within three to five years in conformity with the agreed payment plan.
What to do in order to restore your credit?
As you already know, bankruptcy will stay on your credit report for seven to ten years. You will need to start rebuilding your credit right away. Even though it may be difficult to find creditors to extend credit to you, they do exist. You may have to start off with secure credit cards and/or secure loans. You may be surprised at how quickly your credit scores will recover. Note that it is also essential that you create and follow a personal budget and use your credit conscientiously.