Bankruptcy Topics and FAQ's

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In deciding whether to file a bankruptcy case, several other factors must be considered. Are you likely to fall further into debt? For some the answer is not; their debts arose before they lost a job because of layoff, disability or retirement. For many, though, there is a prospect of medical bills or other continuing financial problems that will result in greater debt. There is also a slight possibility of a motor vehicle accident or other incident creating a large liability.
Some debtors have only a few debts and have strong defenses against them. For those debtors, the best avenue might be either litigation or settlement outside of bankruptcy court. This decision may also depend on whether resources are available to make the alternative of vigorous litigation a possibility.

In all of these cases, a debtor should bear in mind that the same relief in bankruptcy will probably be available later but that filing a bankruptcy case now will impair the right to file another in years to come. Thus, unless a judgment-proof debtor expects to acquire nonexempt property soon, he or she may wish to wait.

Ultimately, you must make a decision. Do the advantages of bankruptcy outweigh the disadvantages? Will bankruptcy have a positive effect on life? For many consumer who face real threats that can be dealt with in bankruptcy, the answer is yes. But even those who are not in danger of sustaining a tangible loss may value the peace of mind that comes from having their burden of debt lifted. Whether you yhope to somdeday make it out of a life of poverty or simply seek relief from the constant pressure to pay what is owed, these feelings should not be discounted.

The Benefits of Bankruptcy

The key benefit of bankruptcy is the discharge of debts, which enables a debtor to start over with a clean slate. However, there are many other advantages, including protection of property and an automatic stay.

Discharge of Most Debt

The principal goal of most bankruptcies is to have most unsecured debts discharged. The bankruptcy discharge totally eliminates any personal obligation to pay many types of debts. (A few types of debts are not dischargeable. Also, if a creditor has a lien on property taken as collateral, the debt owed to that creditor may still have to be dealt with after bankruptcy because the lien will, in some cases, survive.) For most debtors, bankruptcy is a relatively quick and easy way to end the creditor harassment, hardship, anxiety and marital stress normally associated with debt overload.

Protection of Property and Income From Unsecured Creditors

Bankruptcy is often the only sure way to protect a debtor's property from unsecured creditors (those who did not take a lien on property as collateral at  the time of the transaction). Bankruptcy may provide total protection for a home, car or other vital property.

The amount of property that debtors can protect from creditors through exemptions in bankruptcy is, in many states, far greater than the amount that they can protect under the state law execution processes through which creditors attempt to seize debtors' property or income. Even where state execution exemptions are similar to or better than the federal bankruptcy exemptions or where the federal exemptions are not available, bankruptcy allows the debtor to avoid having to assert the exemptions repeatedly in response to the execution attempts of different creditors.

Normally, bankruptcy also serves to prevent any garnishment (attachment or seizure)  of wages or other income after the petition is filed. This, in turn, may protect an individual's job if the employer does not favor multiple wage garnishments. Even attempts to reduce Social Security or other public benefit payments to get back previous overpayments should be preventable by a timely bankruptcy petition.

Tools for Eliminating or Modifying Secured Debts

A bankruptcy discharge does not, by itself, eliminate the liens on a debtor's property that secured creditors have obtained before bankruptcy. However, other provisions in the Bankruptcy Code do give debtors mechanisms to deal with most secured creditors. Many types of liens may be eliminated or reduced, either because they impair exemptions or because they are on property that is worth less than the liens. In a Chapter 13 case, payments on most other secured debts can be lowered, and a reasonable time can be gained to cure almost any defaulted secured debt. Often, one or more of these aspects of bankruptcy enable a debtor to retain a home, car or furniture that would otherwise be lost.

Automatic Stay

The most valuable feature of a bankruptcy is sometimes the automatic stay, which the debtor gains instantaneously on filing a petition. The stay is an automatic court order that prohibits all sorts of collection attempts by creditors, allowing the bankruptcy to proceed in an orderly fashion. It forces an abrupt halt of most creditor actions against the debtor, including repossessions, garnishments or attachments, utility shutoffs, foreclosures and  evictions. Many of these can thereafter be permanently prevented. The stay is also an effective way (though hardly the only way) to end creditor collection efforts. Creditors who violate the stay risk contempt of court, money damages and attorneys' fees. Beyond all this, the stay gives the debtor a breathing spell, time to sort things out.

Other Protections Available Through Bankruptcy

Bankruptcy may offer the only possible way for an individual to keep or regain a driver's license that is subject to revocation because of an unpaid debt arising from a motor vehicle accident. This, in turn, may mean employment and income for the individual's family. In some cases, bankruptcy may mean freedom for a debtor who might otherwise be incarcerated for failure to pay support obligations or as a result of a contempt proceeding involving some other debt.  The Bankruptcy Code also protects the debtor from many types of discriminatory actions by government bodies and private employers on the basis of unpaid debts discharged in bankruptcy.

The Pitfalls of Bankruptcy

Despite all of the advantages that bankruptcy may provide, there are many valid reasons for choosing not to file a petition. Some of these concern problems in the cases of particular debtors; others relate simply to the fact that bankruptcy is not the only means to address the debtor's legal problems and may not be  necessary.

Loss of Property

One consequence of a Chapter 7 bankruptcy is the loss of nonexempt property or its value in cash. This is not a problem for many debtors because consumer debtors rarely have any nonexempt property. Except in those few states that have low exemptions and have passed laws making the federal bankruptcy exemptions unavailable to their residents, the amount of property a debtor is  allowed to keep is generous enough to protect the property of most  nonhomeowners and many homeowners. In Florida, debtors with equity of substantially more than $140,000 per debtor in a home, $1,000 of equity and $1,000 in personal property are likely to have problems under the federal exemptions. Even in those cases, a Chapter 13 bankruptcy often presents a viable alternative through which debtors may retain all of their possessions.

Effect on Credit and Reputation

A bankruptcy will be part of a debtor's credit history for as long as the law allows, that is, 10 years under the Fair Credit Reporting Act. This means that anyone who requests a credit report will be informed of the bankruptcy filing.  The effect this will have on future credit cannot be predicted, but it is an understandable concern of many people who are considering bankruptcy.

There is no definite response to this concern. However, debtors who owe substantial amounts, especially if they are in default, already have poor credit ratings. In the eyes of some creditors, a bankruptcy that wipes the slate clean will be an improvement. Not only will the potential customer be free of other financial obligations, but he or she will also be unable to obtain a Chapter 7 discharge for another eight years in most cases. For these reasons, some creditors have been known to actively solicit recent bankruptcy debtors.

As bankruptcy has become more prevalent in the United States, creditors have increasingly considered it only one factor in their decision about granting credit, and most have chosen not to automatically exclude the ever-growing number of people who have filed a bankruptcy case. Some debtors have been able to obtain an unsecured credit card with in a few months of the bankruptcy discharge and a mortgage 2 – 4 years after the discharge. Even mortgage lenders are often willing to disregard a bankruptcy that is more than a few years old.

Bankruptcy's effect on a debtor's reputation in the community is almost always imperceptible. In a small town, however, especially if debts are owed to local people, the stigma of bankruptcy cannot be entirely discounted. The potential harm can only be evaluated locally, on a case-by-case basis, and weighed against the advantages that bankruptcy offers. Again, the possibility of voluntarily paying selected debts should not be overlooked if it would ameliorate the problem.

Possible Discrimination After Bankruptcy

Closely related to the problem of reputation is that of discrimination against debtors who have filed bankruptcy cases. To a large extent, the Bankruptcy Code alleviates this problem.

Government bodies generally may not discriminate on the basis of a bankruptcy or because of a debt discharged in bankruptcy. Thus, a housing authority or grantor of government assistance benefits cannot deny benefits to a person based on previously discharged debts. Similarly, utilities may not deny service based on a bankruptcy or discharged debts, though they may demand a security deposit for continued service. Private employers may not discriminate with respect to employment or terminate employment based on bankruptcy or discharged debts. Debtors can rest assured that the law protects them in this regard and that they will be able to enforce their rights in court, if necessary.

However, the distinction between discrimination based on bankruptcy or discharged debts and discrimination based on future financial responsibility should be clearly understood. That is, even creditors who are precluded from discrimination based on bankruptcy may refuse new credit or other services if the refusal is properly based on other considerations.

The law regarding discrimination by other private entities, such as creditors who provide essential services, is not as clear. It should be pointed out that this type of discrimination is extremely rare, especially in urban areas where many providers of goods and services are available. It would be most likely to occur in a small town, where only one merchant offered a particular product or service. In that case, if it could be shown that later discrimination was a prohibited attempt to coerce payment of the debt, the debtor could go to court to seek damages because the creditor violated the bankruptcy laws.

Again, the situation can best be assessed locally, on a case-by-case basis.  Discrimination against debtors who have filed bankruptcy cases is normally not a problem, but if a debtor is in doubt, he or she should consult an experienced bankruptcy attorney.

Cost of Filing a Petition

Besides any attorneys' fee, bankruptcy carries an out-of-pocket cost of at least $274 - $299 for the court fees and fees for a pre-bankruptcy credit counseling briefing and a credit education course required after the case is filed. Some of these fees may be waived for people too poor to pay them. Other fees may raise this figure somewhat. In a Chapter 13 case, for example, the trustee is usually entitled to a commission of up to 10 percent of the payments made through the plan. In some cases, various utilities may require security deposits to ensure continued service.

These costs, like the less tangible costs, must be weighed when deciding whether to file a bankruptcy case. Where the debts are not large or troublesome, it may simply not be worthwhile to spend the amount necessary to eliminate them.

Failure to Solve the Underlying Problem

In some cases, bankruptcy is simply the wrong tool to use, and none of the advantages will be realized. One such situation is that of the debtor whose debts are fully secured by security interests or other liens on property that cannot be impaired through bankruptcy and who does not have sufficient income to remedy a default even with all of the help bankruptcy provides. Unless there is some advantage to litigating in bankruptcy court, bankruptcy will not solve this debtor's basic problems. At most, it may discharge the debtor's personal liability for the debts and gain the advantage of the automatic stay for a month or more. Although in some cases this could be worthwhile, in most it will not ultimately benefit the debtor.

The problem of debtors in this predicament is often that their current expenses exceed their income. Because bankruptcy (except for Chapter 13's ability to stretch out or reduce certain types of short-term expenses) basically deals with assets and liabilities, it does not address this problem directly in most cases.

The opposite situation can also sometimes cause problems. If a debtor has substantial and valuable nonliened property that cannot be exempted from creditors, a premature bankruptcy will generally hasten property loss rather than prevent it. Because unsecured creditors must sue the debtor to obtain judgment liens or levies on the debtor's property, loss of the property outside bankruptcy may be quite slow. On the other hand, liquidation of nonexempt property generally occurs quickly in the bankruptcy process. And, because unsecured creditors are entitled to the present value of nonexempt property in Chapter 13, a case under that chapter would be quite costly. In this situation, the best option is probably to wait at least until execution on the property appears imminent,  unless the debtor can afford the necessary Chapter 13 case.

Some debtors may be barred altogether from filing a bankruptcy for some period of time. An individual cannot file if he or she had a previous bankruptcy case dismissed in the past 180 days and the dismissal was (1) for willful failure to abide by court orders or to appear in court in proper prosecution of the case or (2) a voluntary dismissal following a request for relief from the automatic stay of section 362 of the Code.

Finally, some debtors may stand to gain little from a Chapter 7 bankruptcy because they cannot receive a discharge due to a prior bankruptcy. For these people, the prospect is somewhat brighter. In most cases, a Chapter 13 case can still provide significant relief.

Will Bankruptcy Get  Rid of My Debts?

Before deciding to file for bankruptcy, you must understand what bankruptcy will and will not do for you. Bankruptcy won't solve every problem or get rid of every debt.

Types of debts

Whether bankruptcy is the right choice depends in large part on the type of debt you have. There are two main types of debts: secured and unsecured.  Bankruptcy will discharge most unsecured debts, but not secured debts. It is important to know the difference between the types.

The Problems Bankruptcy Will Remedy

Bankruptcy won't get rid of all debts, but it will remedy many common problems including credit cards and utility bills, and wage garnishments. Other debts, such as mortgages and car loans, can be paid down through a Chapter 13 bankruptcy.

The debts bankruptcy will not eliminate

Some debts cannot be discharged through bankruptcy. These include alimony and child support, student loans and taxes as well as debts incurred through fraud.

Analyzing  Your Budget To Determine If Bankruptcy Will Help

A final ingredient in the financial picture of a family or individual is a complete analysis of ongoing expenses and income. Only with this information in hand can the likely outcome of a bankruptcy be projected, for the family will continue to have its usual expenses, even if most or all debts are discharged, and will have to pay them with the anticipated available income.

A family or individual that is considering bankruptcy must therefore put together a budget of ongoing anticipated expenses and income. Once this is done, it may become apparent that bankruptcy by itself will do little to solve the financial problem because, even with the elimination of most or all debts, ongoing expenses still significantly exceed anticipated income. In such cases, at least part of the solution will be to reduce expenses or to raise income.

Rreducing expenses is never easy. Families must look at such major items as housing expenses. Is cheaper housing available? Other items, such as restaurant meals, fancy automobiles, vacations, expensive clothes and other luxuries must sometimes be given up. Smaller savings can be made by conserving energy, cutting out extra phone service options, reducing or eliminating cable television bills, and cost-conscious shopping at thrift stores, garage sales  and supermarkets.

The alternative, of course, is to increase income. This can sometimes be achieved by a spouse working outside the home, though these gains may be offset by expenses for child care and transportation. A lower income family may be eligible for government benefits such as food stamps, energy assistance payments or public assistance.

In any case, budget information is important for analyzing whether bankruptcy makes sense. It is also critical for determining whether a Chapter 13 case is feasible, and it is required on the schedules filed in every bankruptcy case.  Creditors and the court are permitted to examine this information if they wish, though usually they do not.

Some Alternatives to  Bankruptcy 

Although bankruptcy is often a solution to a debtor's problems, bankruptcy is not always the best solution. Although bankruptcy is almost always available, it may not always be needed.

Disputed Debts

One alternative is to fight disputed debts. If a creditor sues you for a payment on a debt you don't believe is justified, you may be able to defend against the creditor's action.

There may sometimes be a real dispute about whether a debt is owed. For example, a home improvement contractor may arrange a mortgage loan to pay for the job but then do shoddy work or not complete the job. Similarly, there may be misrepresentations in a transaction to buy a car or to finance some other major purchase.

In such cases, the solution may be to fight the debt in court. Of course, unless free legal counsel is available, the costs of such a lawsuit may be considerable. If the debt is large enough, though, it may be worth the investment to obtain a fair settlement. In many cases where a consumer protection statute is violated, the creditor may be required to pay the debtor's attorney if the debtor ultimately wins the case or obtains a favorable settlement.

Nondisputed debts

If a debt is not disputed, some of the other alternatives to bankruptcy include:

Working out informal payment agreements with creditors. If your debts are relatively small, you may be able to enter into agreements with your creditors and avoid a bankruptcy proceeding. Nonprofit credit counseling agencies can usually assist in working out such arrangements.

Refinancing debts. A debtor may be able to arrange a debt consolidation loan that will allow him or her to pay bills as they fall due. Although a debt consolidation loan does not eliminate any of your debt, the new loan may have a longer maturity and be at a lower interest rate than the individual debts. However, debtors should be very wary of consolidating unsecured debts such as credit card debts into a mortgage loan, because in doing so they will usually transform debts that can be eliminated in bankruptcy into debts that cannot be eliminated.

Financial assistance under state law. Often states have programs that will help you with utility or mortgage bills.  Before filing for bankruptcy, you should investigate these programs. In deciding whether to file a bankruptcy case, several other factors must be considered. Is the debtor likely to fall further into debt? For some the answer is no; their debts arose before they lost a job because of layoff, disability or retirement. For many, though, there is the prospect of medical bills or other continuing financial problems that will result in greater debt. There is also a slight possibility of a motor vehicle accident or other incident creating a large liability.

Some debtors have only a few debts and have strong defenses against them. For those debtors, the best avenue might be either litigation or settlement outside of bankruptcy court. This decision may also depend on whether resources are available to make the alternative of vigorous litigation a possibility.

In all of these cases, a debtor should bear in mind that the same relief in bankruptcy will probably be available later but that filing a bankruptcy case now will impair the right to file another in years to come. Thus, unless a judgment-proof debtor expects to acquire nonexempt property soon, he or she may wish to wait.

Ultimately, the debtor must make a decision. Do the advantages of bankruptcy outweigh the disadvantages? Will bankruptcy have a positive effect on the debtor's life? For many consumers who face real threats that can be dealt with in bankruptcy, the answer is yes. But even those who are not in danger of sustaining a tangible loss may value the peace of mind that comes from having their burden of debt lifted. Whether debtors hope to someday make it out of a life of poverty or simply seek relief from the constant pressure to pay what is owed, these feelings should not be discounted.

Filing Bankruptcy Process

Those faced with the overwhelming fact that their debts have grown to such a large amount might decide it is time to investigate into filing for bankruptcy.   They may not know how to go about this course of action.  The first and foremost step to take is to seek advice of a bankruptcy attorney to review and analyze your case. 

How Do I File Bankruptcy?

First of all, you should keep in mind that filing for bankruptcy is a legal process.  For this reason, and for your own financial wellbeing, each decision that you make about bankruptcy should be well informed choices.  That is to say, is this process something you want to take up on your own, or do you want a professional to help you?  It is possible to file for bankruptcy on your own; however, it is a process that would take a lot of knowledge, patience and diligence. 

Chapter 7 or Chapter 13?

If you decide that you want to file for bankruptcy on your own, the first decision you have to make is which kind of bankruptcy you should file:  Chapter 7 or Chapter 13?   Once again, these decisions cannot be made fast and it can be a complicated decision.  It would be a good idea to visit your local library and talk to a few people who might know more technical information about filing for bankruptcy. 

Get Help with Your Bankruptcy Filing

On the other hand, it might be a safer option to consult with a bankruptcy lawyer who can guide you through the complicated procedure of filing for bankruptcy.  You will have to provide you bankruptcy lawyer with your personal and financial information in order to prepare and file your voluntary petition and schedules of your assets and debt, income and expenses.  Once the documents are filed at the bankruptcy court, you will be assigned a trustee who will see to it that all the information that is needed is collected from you and that all the information provided is accurate. Then the court notifies your creditors that you have filed for bankruptcy and they have to stop all actions they might be taking against you to collect on those debts.  There will be a meeting scheduled before your trustee at the federal courthouse in your county.

Can I Keep My Things?

Filing for bankruptcy is not simple.  There are many factors to take into consideration, including lifestyle changes.  Often times, people filing for bankruptcy fear that they will not be allowed to keep their possessions and will end up losing all or most of their belongings.  

Even though every bankruptcy case has to be evaluated separately, it would be safe to say that in most cases the debtor does not have to give up their property or possessions.  The reason for this is that the law allows a comfortable amount of property exemptions.  During and after the closing of the bankruptcy case, the exempted property is protected by law from the creditors.  In fact, exempted property allows you to keep not only the property that belongs to you entirely, but also the equity that you might have on the property.  Equity means the difference between the value of your exempted property and the remaining debt. 

Even within exemptions, there are a number of different points to keep track of. According to bankruptcy law, each state has the right to determine which kind of exemption, federal bankruptcy exemption or state exemption, should be applied to you. Florida has elected to use the Florida state exemption laws for all people filing for bankruptcy.
Whatever the choice you make as the person filing for bankruptcy be sure you are acting on the advice of an expert.  To understand the property exemption that would apply to you, it is important that you talk to a qualified bankruptcy attorney.  Moreover, these processes have legal implications so you need to make sure you are doing the right thing. 

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