Is Bankruptcy Right for You?

Life is not always smooth.  Lots of unexpected events may cause financial problems in the most stable of families.  A job loss, a family member=s illness, a divorce - many events can push a family into the financial abyss and leave even the most financially conservative person drowning in debt.  Most families in the U.S. today carry some debt.  Late payment penalties and high interest rates can quickly drive up the outstanding balance on your credit cards. 

            Filing bankruptcy can give you a financial fresh start, allowing you to discharge most unsecured debt and to catch up if you are behind on secured debt, such as a house or car note payment.  Bankruptcy can also stop a debt collector's lawsuit, garnishment of your wages, or a scheduled foreclosure.  If your debts are mounting and you are facing great financial strain, filing bankruptcy may be a way to make your situation better.  Here are some questions that many people might ask when considering whether to file for bankruptcy protection. 

Do I need to file bankruptcy? 

Many people who are not working and who don=t own very many assets may not need to file for bankruptcy because creditors cannot collect from them.  Certain federal sources of income such as social security and SSI may not be taken by creditors.  If you are working only part-time and are earning very little income, your creditors might not be able to garnish your wages.  If you are uncertain about whether or not your wages may be taken, you should consult with an attorney.  It may be possible to stop creditor harassment by sending a letter to your creditors explaining that your only source of income is "exempt" from collection. 

If you are unable to pay your debts because of a short-term financial problem, you may be able to work out a payment plan with your creditor.  Some creditors will negotiate with you to accept far less than the amount you owe.  Beware of companies that promise to Afix@ your credit report.  Often they will take your money promising to pay off bills and then do nothing and keep your cash.  Even legitimate consumer credit counseling agencies are limited in what they can do. They can=t do much with secured debts or interest on student loans.  Be cautious about entering into a "debt management plan" or other agreement, and if you feel uncertain about whether the plan is a good deal for you, seek legal advice. 

If a creditor is suing you to collect on a debt that you don't believe you owe, you can try to defend yourself in the lawsuit, with or without an attorney.  You can ask the creditor to provide proof and documentation of the supposed debt.  If the company that is suing you for the debt is not a lender you have ever borrowed money from, it may have an error in its records or may not be able to prove that you owe the debt.  Also, if you are being sued for a very old debt (one that you stopped paying more than 4-6 years ago), the creditor might not be able to collect on the debt because it is outside of the time period for collection (or "statute of limitations").  It is a good idea to seek legal advice if you think you have any of these defenses to a debt collection lawsuit.  If you defeat the creditor's lawsuit or get it dismissed, filing bankruptcy may not be necessary. 

Will filing bankruptcy help me to get rid of my debts? 

Certain debts are not dischargeable in a bankruptcy; namely, most student loans, most taxes, child support, alimony, court fines and criminal restitution and personal injury caused by driving drunk or under the influence of drugs.

Should I file a Chapter 7 or a Chapter 13 bankruptcy?

Most individuals may file either a Chapter 7 bankruptcy or a Chapter 13 bankruptcy, also known as a Awage earner=s@ plan.  A trustee is appointed by the court to take over your property.

             In a Chapter 7, any property you own which is not Aexempt@ must be sold to pay off your creditors.  You may keep certain property that is of limited value.  In Georgia, for example, you are allowed to keep $10,000.00 worth of equity in your home. If you and your spouse file a Chapter 7, you are allowed to keep $20,000 worth of equity in your home.  You may keep your vehicle if you have no more than $3,500.00 worth of interest in the car.  You are allowed to keep $5,000.00 worth of household items and other small things specifically allowed under Georgia law. 

A Chapter 7 is mostly used to discharge or get rid of Aunsecured@ debt such as credit card debt and medical expenses.  A Chapter 7 will also allow you to discharge Asecured@ debt where a creditor has a Alien@ on your property, such as a home mortgage or a car loan, but the lien will survive the bankruptcy.  This means that if you are behind on your payments for secured property, the creditor will still have the right to take back the property (with the Bankruptcy Court=s permission) even though you have filed a Chapter 7.  If you are current on your secured debt, you may simply ask the court to allow you to continue paying the debt. 

Once you=ve received a discharge of your debts in a Chapter 7 bankruptcy, you may not file another one within 8 years.  Because of this, it is a good idea not to file a Chapter 7 bankruptcy until your situation starts to improve--for example, if your income is going back up after a dip and you don't expect to take on any new debt in the future.

A Chapter 13 bankruptcy is mainly used by people who have regular sources of income. You would have to pay a portion of your income to your creditors until your debt or a percentage of it has been paid.  As in a Chapter 7, a trustee is appointed by the court to handle your property.  The advantage of a Chapter 13 is that you would probably be allowed to keep any secured property (like a home or car) where you had fallen behind on the loan so long as you follow the terms of the Chapter 13 payment plan. Generally, creditors receive more money than they would receive from you if you had filed a Chapter 7 bankruptcy.  The court must approve your repayment plan.

A Chapter 13 lasts from three to five years, but no longer than five years from the date of filing of the bankruptcy.  You must strictly follow the repayment plan. Otherwise, the trustee can ask that your bankruptcy case be dismissed.  In addition, you must continue making regular contractual payments on your mortgage or other secured debt as they come due.  You cannot borrow money without the court=s permission while the Chapter 13 plan is going on.  All of your disposable income after your household and living expenses must go towards paying back your creditors. Only about a third of people who file Chapter 13 bankruptcy are able to complete the required monthly payment schedule and receive a discharge of their other debts.   

What are the requirements for filing bankruptcy? 

On October 17, 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) went into effect.  The new law makes major changes to the Bankruptcy Code which are too numerous to go into here, but the changes effectively make it more difficult for most people to file a Chapter 7 bankruptcy.  To file a Chapter 7 bankruptcy, you must either earn less than the median income for your state for a household of your size or, if you are over the median income, you must pass a "means test" that takes into account your monthly income and expenses.  If you don=t qualify for a Chapter 7 bankruptcy, the court may find that you have Aabused@ the bankruptcy process and your creditors may seek to have your bankruptcy dismissed.

Within ninety days before filing a bankruptcy, you must also participate in credit counseling.  There is a fee for the credit counseling, but this fee may be waived if you are very low income or being represented by a legal services office with income eligibility rules.  A list of approved credit counseling agencies is kept on the U.S. Bankruptcy Court=s website.  Within 30 days after the meeting of creditors in your bankruptcy case, you must take a debt management course with a credit counseling agency, or you will not receive a discharge of your debt.   

How will filing bankruptcy affect my credit score? 

A bankruptcy will show up on your credit report for ten years.  Most negative reporting, such as a foreclosure or credit card charge-off, stays on your credit report for seven years.  If you are facing a foreclosure or already have poor credit, bankruptcy can give you a fresh start and allow you to start rebuilding your credit.  Some people report that within several years after completing a bankruptcy, they are able to obtain credit at a reasonable rate again.