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I recently had the privilege of meeting Susan Blum, an Atlanta, Georgia, based bankruptcy attorney, to see if I could put together some advice for CreditForums readers contemplating filing for bankruptcy.
The following is a summary of our conversation.
And, if you are in Georgia, feel free to contact Susan at [email protected] or 770-393-4985 to discuss whether bankruptcy makes sense and would work for you.
What is the Purpose of Bankruptcy Law?
Bankruptcy is to protect you from adverse creditor action, ranging from, but not limited to, harassing creditor calls, pending lawsuits filed by creditors, car repossession and foreclosure.
With limited exceptions, the minute your attorney files your bankruptcy claim, you and your assets are protected by the bankruptcy law’s automatic stay. The automatic stay is a type of injunction that prevents creditors from contacting and trying to collect while your bankruptcy case is being resolved. The automatic stay also stops a lawsuit in its tracks so it doesn’t become a judgment, and will stop any impending repossession or foreclosure.
While either a Chapter 7 or a Chapter 13 bankruptcy (see discussion below) will have the same effect of immediately stopping a repossession or foreclosure, you can use a Chapter 13 bankruptcy to rehabilitate a situation and actually save the car or house by making monthly plan payments to pay back the arrears.
Are There Drawbacks to Filing for Bankruptcy?
You should think carefully about the decision to file for bankruptcy.
Because bankruptcy is a legal proceeding you will have to attend a "341 meeting" of creditors (usually for a brief hearing only) and everything you include in your bankruptcy petition must be truthful, under penalty of perjury.
Once your case is opened and a case number assigned, your credit report will show that you have sought protection from the bankruptcy court. Even if your case later gets dismissed – either voluntarily or by court action – your credit report will show that you have filed a bankruptcy. But that same credit report will also reflect a $0 balance owed on the debts discharged in bankruptcy, which goes a long way in driving up your credit score.
Experienced consumer bankruptcy lawyers can help you decide if bankruptcy makes sense for you, how to best prepare for your filing and what type of bankruptcy to file.
Are There Different Types of Bankruptcy Protection?
The federal bankruptcy law allows individuals to file four different types of bankruptcy.
The Bankruptcy Code is divided in to a number of chapters, some of which give their name to specific types of bankruptcy filings. This is why you will hear people refer to “Chapter 7” or “Chapter 13” bankruptcy claims.
Chapter 7 and Chapter 13 are the most common types of bankruptcy claims. In fact, over 90% of the bankruptcy cases filed in Georgia by individuals or families are filed as either a Chapter 7 liquidation or as a Chapter 13 bill consolidation.
Tell Us More About Chapter 7 Bankruptcies…
A Chapter 7 bankruptcy filing will mean that all of your assets can be sold off to pay off your creditors, if it’s an “asset” case. However, most of the Chapter 7 bankruptcies that I see are “non-asset” cases, which means that I am able to protect the debtor’s assets by using the Georgia or federal bankruptcy exemptions.
In general, Chapter 7 bankruptcy makes sense if you want to start over, as it provides a means to completely wipe away – or discharge – all of your debt.
Chapter 7 debtors usually do not own very much property (although you often can keep your house and car), and frequently file because of credit card debt or medical bills.
Under the current bankruptcy law, you can only file Chapter 7 if your household income is below the average household income for a family of your size in your state. This is called the means test. [Editor's Note: You can find the form to calculate whether you qualify by clicking here.]
The income analysis and means test calculations can often be tricky, and it is recommended that you use an attorney specializing in bankruptcy to help you navigate through the bankruptcy process and to discuss whether bankruptcy makes sense and would work for you.
In addition, prior to filing bankruptcy, you are now required to complete a credit counseling session with an approved credit counseling service. This credit counseling session can be taken online if you wish.
How Does that Differ From Chapter 13?
By contrast, Chapter 13 is a personal reorganization that makes sense if you are trying to hang on to everything you own, or if you do not qualify for Chapter 7 because of household income or a previous bankruptcy discharge within a specified period.
You still must undergo pre-bankruptcy credit counseling prior to filing Chapter 13.
Specifically, Chapter 13 is frequently used to stop a mortgage foreclosure or vehicle repossession.
How Do I Know Which to Choose?
Definitely consider consulting with an attorney to file for bankruptcy. But, in general:
Consider filing for Chapter 7 Bankruptcy when you have …
- High credit card balances with no reasonable expectation to pay these bills in a reasonable time.
- High medical bills you cannot pay.
- Unexpected lawsuit such as repossession deficiency, credit card or old apartment complex.
- Loss of job and need to downsize your lifestyle.
- Recent divorce that damaged your budget.
- A lot of stress.
Consider a Chapter 13 Bankruptcy petition when you are…
- Facing mortgage foreclosure and you want to keep the house.
- Facing car repossession and you want to keep the car.
- Had income interruption and now need time to catch up.
- Have too much equity in a house or car for Chapter 7 to make sense.
- Trying to pay back as much as you can.
- Needing to file for bankruptcy but do not qualify under Chapter 7.
- Under a lot of stress.
Should I Consider Alternatives to Bankruptcy First?
Bankruptcy is a last resort. Before filing bankruptcy, do your own research about non-bankruptcy alternatives. And even if you do file, you will be required to explore a credit counseling alternative first. [Editor’s Note: You can find a list of accredited counseling services at this link.].
One word of caution is to watch out for credit counseling and debt settlement services you may see advertised on TV or the radio. Debt settlement companies promote their services as an alternative to bankruptcy. But our experience is that the debt settlement industry is plagued by fraud and deceptive practices. I generally advise my clients to avoid the debt negotiation services that you hear advertised on the radio or television.
Also, you may want to create your own payment plan whereby you allocate portions of your disposable income to your various creditors. Honestly, there are no secrets that the credit companies don’t want you to know. Credit companies will negotiate a lower balance. But, generally, they will not even start to negotiate until you are 3 to 4 months behind, and if you want to settle, you will need cash, at least 50% of what you currently owe.
If you enter into a payment plan, do your best to stick to it.
Creditors may want you to sign “consent judgments” or other legal papers spelling out the terms of your agreement to pay. In my opinion, you should avoid entering into any written contract or consent judgments with creditors without first speaking with an attorney since the paperwork you sign could contain admissions of certain facts or could waive rights.
Finally, you should realize that it takes a great deal of discipline and money to pay off substantial credit card debt. For example, if you have $10,000 in credit card debt and you want to pay it off in two years, you will need to pay $520 per month; in three years, you will need $382 per month. If you wanted to pay off the $10,000 at $200 per month, it would take you over ten years. Credit card debt is especially stubborn to eliminate because of the high (18% to 20%) interest that keeps adding up.
Before entering into any negotiations directly with the creditor you should explore all options by speaking to a bankruptcy attorney. I can’t tell you how many times I talk to clients who have spent thousands of dollars paying off stubborn debt that just won’t go away, or who have liquidated 401(k) or other retirement plans (all of which would have been protected if they filed bankruptcy!), only to come back to me and eventually have to file bankruptcy anyway.
So Why Should I Consider Bankruptcy?
Bankruptcy offers some significant advantages over non-bankruptcy debt settlement, but there are some pitfalls as well.
The biggest benefit arises from the nature of bankruptcy – it is a legal process, not a voluntary one. The minute you file bankruptcy, the automatic bankruptcy stay provides enforceable legal protection against creditor action. Any creditor or collection agency that violates the automatic stay can be fined or worse by the bankruptcy judge.
Check Out This Video of Attorney Susan Blum Discussing the Decision to File for Bankruptcy
Any legitimate creditor or collection agency recognizes the power of bankruptcy relief and usually will not attempt to circumvent it.
By contrast, in a voluntary debt settlement situation, creditors and collection agencies will try to negotiate the best possible deal to benefit their company.
Bankruptcy also offers a more complete and predictable solution. All your creditors will be bound by the law. And your relief will be more complete. When a debt is discharged in bankruptcy the certainty of the legal process means that that debt is gone forever.
Debts “resolved” through a negotiated settlement sometimes have a nasty habit of reappearing when the loan paperwork is sold to a new debt buyer.
Bankruptcy will be more damaging to your credit in the short run and certain creditors will not do business with you going forward. But bankruptcy also usually results in a faster rebuild to your credit because of the certainty factor.