Typically, individuals who decide to file for bankruptcy, have two choices: Chapter 7 or Chapter 13. Both stop collection actions against you and will also stop almost all civil lawsuits against you.
Chapter 7 (liquidation) allows you to eliminate most, if not all, of your unsecured debt. This includes medical bills, credit card debt, unsecured loans, utility arrears and the like. Any property of value will be sold or turned into money to pay your creditors. You may be able to keep some personal items, and possibly your house, depending on the law of the state where you reside. The Chapter 7 option is typically chosen by people who have few assets, little income and a lot of debt.
Chapter 13 (debt adjustment) reorganizes your debt to allow an affordable payment plan. A trustee is appointed and will collect the payments from you, pay your creditors and make sure you abide by the terms of your repayment plan. Your bankruptcy is not complete until you pay off all of your creditors, according to the plan. You are usually able to keep your property, but you must earn wages or have some other source of regular income and agree to pay part of your income to your creditors. This plan allows you to catch up on past due auto or home loan payments, and temporarily halts foreclosures and collection actions. It can also help you to pay off past due taxes, child support and student loans.
Changes in the Bankruptcy Law
New bankruptcy rules go into effect on October 17, 2005. Starting on that date, debtors will have to qualify to file for bankruptcy. It will be much harder for some people to get a Chapter 7 discharge. If you make over the state's median income level for your size family, you will be required to file Chapter 13. The new law also tightens the provisions for exempting homes in a bankruptcy proceeding; imposes a longer waiting period to file for bankruptcy; and, mandates financial counseling, debtor education classes, more paperwork and higher fees.
Starting October 17, individuals filing for bankruptcy will be required to:
- Meet a means test that will be used to measure their ability to repay their debts;
- Obtain financial counseling from an approved non-profit credit counseling agency within six months prior to filing;
- Complete an approved "debtor education" class to learn about personal financial management, prior to receiving discharge of their debts; and
- Submit more extensive records regarding proof of income; listing of debts; proof of expenses; tax returns; bank, credit card and loan statements; and a comprehensive listing of personal property.
- Pay higher court filing fees and at least reasonable fees for the counseling and education class.
Steps to Take when Considering Bankruptcy
Bankruptcy is a very important decision. There are no set of rules you can use to determine whether you are a good candidate. What you can do is carefully evaluate your options. At the very least, you will want to know the implications and consequences of filing for bankruptcy and consider the possible alternatives.
- Review the Potential Benefits
The idea of being freed from debt can be appealing. Bankruptcy will provide you with legal protection from your creditors and take care of all or much of your debt. There is the chance you will get to keep your home and car. Bankruptcy will also stop wage garnishment, debt collection harassment and similar creditor actions to collect debts that you owe. It can also stop foreclosure on your house or mobile home, and help restore or prevent shut-off of utility service.
In other words, bankruptcy can "put the brakes on" if you are headed for financial ruin. By wiping out your old debts, you are likely to be in a better position to pay your current bills.
- Know the Consequences
Carefully weigh those positives against the consequences or "cons" of a bankruptcy. While bankruptcy may provide you with a fresh start, your new journey comes with a price tag and no written guarantee. In other words, there is no guarantee you will have a successful future after filing bankruptcy.
It does not cure all financial problems. You probably will not be able to stop "secured" creditors (those that financed your car or house) from collecting money from you; you will still be obligated to pay child support, alimony, most taxes, most student loans, and criminal fines; and you will be responsible for any debts you incur after you file bankruptcy.
You can expect the bankruptcy to have a negative impact on your credit history for several years. This means that it can hinder your ability to rent an apartment, secure a job or purchase insurance. It also means that your ability to obtain credit will be affected, as will the cost of that credit.
Furthermore, you may have to pay some of your debt and/or return collateral to creditors. You may lose your house or your car or both. The bankruptcy becomes a matter of public record and remains on your credit record for 7 to 10 years.
- Consider Your Alternatives
Everyone's financial situation is different. Many times consumers assume that their problems are worse than others, or worse than they really are. Emotional temperaments can vary. Some people are driven crazy by the notion of being deeply in debt; others can tolerate the stress of constant telephone calls from creditors.
Whatever your emotional or financial situation, it makes good sense to seek alternatives before taking the major step of bankruptcy. Looking at your options may give you a brighter outlook on your financial future. It may provide you with needed confidence and a plan of action to solve your problems without going to court.
Among the alternatives you can consider:
- Develop a budget plan. Some people are able to work their way out of moderate debt over a couple of years by putting together a tight budget that commits them to doubling or even tripling their monthly loan payments.
- Reduce your expenses. Look for ways to cut both your mandatory expenses (power, phone service, groceries and rent) and your incidentals (cable and cell phone service, dinners out and clothing).
- Renegotiate your debt. Examine your credit card statements and other debts that you owe. Contact your creditors to renegotiate repayment of your debt under more favorable terms. They may agree to lower or eliminate your interest rate temporarily or lower your monthly payment. If your account has already gone to collections, you may be able to arrange a lump-sum pay-off or a lower or no-interest payment plan.
- Borrow from a family member or friend.
- Sell assets that have cash value, such as a second car, antiques, collectibles or jewelry.
- Get a second job. You may be able to pick up extra work after office hours. Perhaps it makes sense for your spouse or teenage children to get part-time jobs if they are not already contributing to the family's income.
- Obtain a debt consolidation loan. The vast majority of homeowners have an equity cushion, which can be used to consolidate debts.
- Seek Assistance from a Professional
Seeking assistance from a professional is almost always helpful. A certified, experienced credit counselor will review your financial situation thoroughly and make recommendations based on your particular needs and goals. The BBB has tips on choosing a credit counseling agency.
If You Decide to File for Bankruptcy
If you have made up your mind that bankruptcy is the best option for your situation, you will need to choose a credit counseling agency that has been approved by the U.S. Trustee's Office to provide the mandatory financial counseling classes. A list of approved agencies by state location is posted on the Trustee Web site at http://www.usdoj.gov/ust/bapcpa/ccde/cc_approved.htm. Credit counseling agencies may charge a reasonable fee to the consumer for the counseling sessions, so long as the fee is waived for those unable to pay it.
You will also want to check the agency's record with the Better Business Bureau, and find out if it is a member of the National Foundation for Credit Counseling (www.nfcc.org) or the Association of Independent Consumer Credit Counseling Agencies (www.aicca.org). Agencies that are members of these organizations must adhere to strict standards of professionalism and accreditation and use only certified credit counselors.
Once you select an agency, you must receive a counseling and budgeting session, which can last approximately 90 minutes in length. The counseling can be offered one-on-one or in group classes and can take place in-person, over the Internet or by telephone. Upon your completion of the session, the agency will issue you a certificate that permits you to file bankruptcy. If you are found eligible for a Debt Management Plan and the agency prepares such a repayment plan, it also must be submitted with the certificate.
Additionally, you will not be able to complete the bankruptcy process and receive discharge from your debt until you have taken a "debtor education" class in personal financial management. The U.S. Trustee is also responsible for approving the format, curriculum and providers of these instructional classes. A list of approved providers of personal financial management instruction courses, listed by state, can be found at http://www.usdoj.gov/ust/bapcpa/ccde/cc_approved.htm.
What about an Attorney?
Bankruptcy is a legal remedy, so it is recommended that you hire an attorney who specializes in bankruptcy and knows how to navigate federal and state laws. The process is a difficult one and there is a chance that you will lose property or other rights if you do not know the law.
It is widely expected that bankruptcy attorneys will increase their fees for the extra work and liability they will incur under the new bankruptcy law. It is important, however, that you not choose an attorney based on price alone. You will find it of benefit to look for an attorney who wants to meet you individually, answer your questions, and take into account your personal situation.
Hire an attorney who agrees to represent you throughout the bankruptcy proceedings. And, do not make the mistake of assuming that a "bankruptcy petition preparer" can offer you legal advice. They are non-lawyers who can prepare bankruptcy forms for a fee; they offer no services once a bankruptcy case has begun.
If you don't know where to start, ask family, friends, or colleagues if they can recommend an attorney. Check with your local or state bar association, and contact the Better Business Bureau to request a report before you make your decision.
Once you select an attorney, read carefully any retainers, contracts or other documents before signing them.
Beware of the "Easy Fix"
People in financial distress sometimes succumb to the temptation of an "easy fix." They may doubt their own ability or lack the self-discipline to make some hard decisions to pay down their debt, reduce their expenses, or seek credit management counseling and assistance. Or, they may reject bankruptcy as being too complicated or expensive. Instead, they look for an "easy fix."
Beware of advertisements that "guarantee" they can remove negative information from your credit file or "guarantee" to grant you a loan, no matter what your credit score or financial situation. You may be asked to pay a fee in advance without receiving anything of value in return.
Bottom line - Don't succumb to shady offers If you want to improve your financial situation the right way, contact a reputable source for credit-related information, education or counseling. In addition to the Better Business Bureau, the Federal Trade Commission (www.ftc.gov), The National Foundation for Credit Counseling (www.nfcc.org), and the Association of Independent Consumer Credit Counseling Agencies (www.aiccca.org) offer helpful tips on credit issues.