In this blog, I'm going to give you a quick overview of bankruptcy law and in particular, personal bankruptcy. I'll discuss:
If you are someone who…
then this post is especially pertinent to you.
If you are going through a very tough financial period and can't pay your bills, bankruptcy protection can bring peace of mind.
It's a rough process that requires a lot of disclosure. Plus, you're subject to a court looking through everything you do financially. But in the end, because you're in bankruptcy court, you get to clean up a mess that you couldn’t handle otherwise, and that leads to fresh start.
Bankruptcy is roughly six months in length unless you have some unusual issues. Although stressful, it is no more stressful than going through the emotional strain of trudging on in the difficult financial situation you’ve found yourself in.
Personal bankruptcy is reserved solely for when you are completely overwhelmed with your financial situation.
Otherwise, you would need to have slowly put yourself in so much debt that you just can't make all the payments. So much so that you're not going to be able to make those payments in the future.
Under those conditions, if you just can't work out those debts with your lenders, you should seek bankruptcy protection. The issue is that you can only file Chapter 7 personal bankruptcy once every eight years. With this in mind, you do not want to file bankruptcy unless you absolutely have to do it.
Mainly, you're going to need to provide your attorney (unless you're doing it on your own, which I would not recommend) with all of your financial information and records. You're going to have to answer a bunch of tough questions (to see a sample of these questions click here. In the end, your attorney should be able to put all these answers together in a package that's filed with the court. Then comes a waiting period until the court wants to talk to you.
One of the most important parts of your bankruptcy case will be the bankruptcy meeting of creditors– sometimes called the 341 Meeting of Creditors. You will walk into a room, with an assemblage of people sitting at a table, (the bankruptcy judge, people representing creditors, etc.). They will ask you a series of questions based on your filings.
The bankruptcy trustee assigned to your case will want to review your bank account statements before your 341 meeting to verify that the information you put on your bankruptcy forms matches your bank statements. The trustee will use these statements to get a glimpse into your financial history.
Section 341 of the United States Bankruptcy Code is the bankruptcy law that makes this meeting a mandatory requirement for all bankruptcy proceedings. Section 341 also states that creditors are invited to participate, but it’s pretty rare that creditors attend.
The trustee assigned to your case will look at your income and expenses and question you about your transactions. The trustee will request certain documents before your 341 meeting of creditors. Aside from your bank statements, the trustee will request 60 days of pay stubs and two years of tax returns. The trustee will match the requested information to your bank statements to ensure they match with your forms.
What the trustee is trying to uncover is whether you have any assets they can take into your bankruptcy estate and distribute to your creditors. For example,
A 341 meeting is generally pretty quick, unless you have some unusual issues. Sometime after the 341, you will either hear that that they have additional questions through your attorney, or they will just grant you a discharge.
Rarely does this turn into a repeat performance in front of the court, other than specific follow-up questions that they provide in advance to your attorney.
We're presuming here that you are so financially underwater that your creditors are not willing to work with you, so you must seek protection from the courts.
That said, leading up to that decision, you should approach your creditors and let them know you're contemplating bankruptcy. Often these creditors will work with you on a payment schedule or close up your credit line and fix the amount that you owe. Potentially, they will even cease or reduce interest or some other incentive that may allow you to pay back what you owe.
You are required as part of the bankruptcy procedure to seek credit counseling, and often credit counselors can assist you in approaching your creditors this way. If, however, there are just too many creditors or the payment options they provide you are not satisfactory to your income and your other needs, then you’ll want to strongly consider a Chapter 7 bankruptcy.
The pro is that you get an automatic stay upon filing the bankruptcy from the collection of the debts that are already accumulated against you. So, you will cease having creditor calls or any other collection efforts while the bankruptcy procedure is ongoing.
The good news is that the Chapter 7 process only lasts around six months. Bankruptcy is just a financial snapshot of that moment. If you make money the next day, it's not involved in the calculations of the bankruptcy estate.
Also, assuming you receive a discharge at the end of the procedure, you will have a clean slate. You will not owe any of the debts that you had at the time of declaration other than a couple of exclusions, called super creditors.
Super creditors include, for example, the IRS for taxes. If you owe income taxes or other taxes, you are going to have to pay those over time or work something out with the IRS. However, until you are discharged, while the automatic stay is on, the IRS cannot collect against you.
Another type of super creditor would be if you owe alimony or spousal support, you're not going to be discharged from these obligations and you will be required to continue these payments at the agreed upon rate.
So, with the exception of a couple of super creditors, you will be able to get a discharge of your debts and get to start over.
The cons are:
If you can do debt consolidation, it is much preferable to bankruptcy. Bankruptcy is your last resort. You only want to file bankruptcy if a debt consolidation or other financial program with your creditors is just not an option.
If you have any way of structuring your debts where you can make the payments without filing bankruptcy, you should! Because under bankruptcy, you end up in a creditor purgatory where for a number of years, (and this varies by the creditor) you'll have a difficult time getting any kind of loan or credit card.
Federally backed student loans currently cannot be discharged in a Chapter 7 bankruptcy. There are proposals on the Hill that may allow for some bankruptcy protection for student loans. But as of right now, there is no such protection, and you'll be stuck paying them.
You can file without having a lawyer, but I cannot imagine someone actually doing that. The changes to the 2005 bankruptcy act created a great level of detail and a number of requirements. Navigating this space without the assistance of an attorney would be difficult for the average person. Also, when engaging with the courts and potential creditors, it's really good to have somebody who is your representative dealing with this stressful situation in your stead. During this bankruptcy court meeting, you only get one shot to make your case, to get the peace of mind that comes with an automatic stay (i.e., a ruling by a court to stop or suspend a proceeding, or in this case creditor collections).
Following bankruptcy, most creditors will not provide you credit. However, if only one spouse in a marriage has to file bankruptcy, the other one does not. And the non-filer can put you on their credit cards as an authorized user where they will report to your credit report and each payment. Each monthly payment will increase your credit score.
Otherwise, you can get a secured credit card. That means you make it a deposit of cash into a bank and they issue a virtual debit card, but it acts as a credit card. The bank can maintain the amount on-file and they report it as a credit card. Every time you make a monthly payment, your credit score will go up.
It is very difficult to get a mortgage, a car loan or anything else that would help establish credit until a number of years have passed after your filing.
You need to plan for your credit score to stay near the bottom for quite some time. If you follow the above steps, your credit will slowly creep its way back up.
You get an automatic stay from your creditors the minute that you have filed for bankruptcy. So, most people get real peace of mind. Prior to that, they under constant pressure and harassment from collection efforts, phone calls, and letters from their creditors. After you file for bankruptcy and your attorney notifies the creditors of such, they will cease all that collection.
You then enter a kind of a waiting period where you wait to go and have your 341 creditors meeting, and in that timeframe, you keep making money and you keep paying your regular bills. Every penny you legitimately make after you file Chapter 7 bankruptcy is yours to spend of regular bills such as food, gas, etc.
You do get general peace of mind. Then once you get a discharge, you do not owe any more money to the creditors that were chasing you– as long as you fully disclosed everything and got a proper discharge.
What are the principal differences between Chapter 7, Chapter 11 and Chapter 13 bankruptcies?
However, you can only file Chapter 7 once every eight years. So, if you play that card, just know, you cannot get into financial trouble and wipe it all out again for eight years.
Most individuals elect for Chapter 7 if they have to file bankruptcy. But if you just want to restructure the debts over a period of time and need the court's protection to do so, then you would file for Chapter 13.
By Beckett Cantley
Author, Professor of Tax Law and Senior Partner at the law firm of Cantley Dietrich
To watch my video on Bankruptcy, go to https://www.youtube.com/watch?v=Ys8l9V5 WMoE
For more information on the services Cantley Dietrich provides to our clients, please visit the Cantley Dietrich website at https://www.cantleydietrich.com
