Category Archives: Avoid Bankruptcy Information

Pros and Cons of Bankruptcy

When bills are overwhelming, people feel like they are drowning in financial worries.  The phone rings with a creditor on the other end, demanding a date for payment.  When the money isn’t there, many turn to bankruptcy as a solution.  The pros and cons of bankruptcy should be carefully considered before making a final decision.

Chapter 7 Bankruptcy

A Chapter 7 bankruptcy gives people an opportunity to wipe out their debts to get a fresh start.  Also referred to as a straight bankruptcy, all non-exempt property is turned over to a bankruptcy trustee.  The property is converted into cash to payoff creditors.  The debtor gets relief from debts that are permitted to be discharged within about three to six months.  Often these debtors have little to lose and their major concern is to eliminate the pressure of debts they cannot cover.

Pros of Chapter 7 Bankruptcy

There are several advantages to choosing Chapter 7 bankruptcy.  The amount of debt that is erased is unlimited.  After the debtor’s assets are distributed, all other unpaid debt balances are discharged so the debtor no longer owes money.  While large debts can be erased, there is no minimum amount of debt required to claim Chapter 7 bankruptcy.

This type of bankruptcy is beneficial to people with both large and small debts based on the ratio of their income and assets.  Also, the wages earned and property acquired after Chapter 7 bankruptcy is filed belongs to the debtor with the exception of inheritance proceeds.  Typically, a Chapter 7 proceeding takes about four months so debtors gain quick relief from the stress of outstanding debts.

Cons of Chapter 7 Bankruptcy

While there are many pros to claiming bankruptcy, there are also a few cons.  After the case is closed, some debts may continue such as mortgage liens.  Foreclosure proceedings are temporarily stalled by filing bankruptcy but may not be released.  Each situation is different and based on the decision of the bankruptcy trustee. Debtors should check with an attorney if they want to get out of a mortgage they cannot afford.

With Chapter 7 bankruptcy, certain non-exempt property is sold by the trustee.  When debtors must give up property, some feel violated by the loss.  If the debtor had co-signers on loans, they still owe the money unless they also file for bankruptcy protection.  Filing for Chapter 7 bankruptcy has a negative impact on the debtor’s credit rating for two to ten years.  Finally, Chapter 7 bankruptcy can only be filed every eight years.  Debtors must act conscientiously and avoid debts they cannot afford after the bankruptcy is finalized.

Chapter 13 Bankruptcy

A Chapter 13 bankruptcy is typically for people looking to pay off their outstanding debts.  Also referred to as reorganization bankruptcy, the bankruptcy trustee creates a schedule for the debtors to pay off creditors over a period of three to five years.  For people with non-exempt property they don’t want to lose, this can be a viable option.  However, the debtor must have stable income that is enough to cover basic expenses and payoff the outstanding debts according to the schedule.  For those who are financially devastated, this might not be the best choice. It is essential to consider the cost of everyday life and rising costs versus potential income over the next few years.

Pros of Chapter 13 Bankruptcy

One of the major pros of claiming Chapter 13 bankruptcy is debtors keep exempt and non-exempt property so they experience no major losses.  Debts are repaid within three to five years, buying the debtor more time to cover them.  Once the Chapter 13 bankruptcy is filed, debtors are protected against their wages being garnished.  They also have the relief of being protected against collectors.  Those facing the loss of their home are also protected against foreclosure.

When Chapter 13 bankruptcy involves complete payment of debts, co-signers on loans are protected against creditors. This saves the debtor embarrassment and lost relationships over money problems.  On the other hand, if co-signers are still responsible for the loan, an adjusted percentage of payment is worked out.

Also, if a Chapter 7 bankruptcy is filed and liens remain, a Chapter 13 bankruptcy can be filed to make arrangements to pay them off.  Unlike Chapter 7, there is no limited to the number of times Chapter 13 bankruptcy can be filed.

Cons of Chapter 13 Bankruptcy

Chapter 13 bankruptcy has a few cons.  The debtor’s disposable income is used to pay off debts so their money is tied up for a few years. The debt goes on and continues to be a source of stress and financial concern. Typically, legal fees are higher as there are more details involved with Chapter 13 bankruptcy.

After Chapter 13 bankruptcy is closed, some debts may remain.  The debtor is responsible to keep paying them off.  There is also a maximum amount of debt to file for Chapter 13 bankruptcy.  People with debts over $1,000,000 usually do not qualify for this relief.  It depends on the amount of secured and unsecured debt.

Whether a debtor files Chapter 7 or Chapter 13 bankruptcy, they lose all credit cards unless they are completely paid off prior to filing.  Obtaining a mortgage usually impossible for about five years.  It is harder to get any type of credit, qualify for certain jobs or purchase life insurance.  On the plus side, debtors no longer face the actions or harassment of creditors.  Most are able to keep essential property such as a vehicle for transportation, home goods and a home while making a new start.

What Are Exemptions?

Certain debts are exempt from Chapter 7 bankruptcy so the debtor can keep them such as a home, land and some equity, vehicle, business equipment, pension and insurance, some jewelry, clothing, appliances, furniture and public benefits.  The court allows the debtors to keep basic items to carry on with everyday life after bankruptcy.   Certain items might not be exempt such as vacation homes, family heirlooms, collectibles, bank accounts, cash, bonds, stocks and additional vehicles.

Debts That Live On

Some debts are not wiped by by Chapter 7 bankruptcy.  After filing, a 341 meeting with creditors is scheduled by the trustee of the bankruptcy court.  All debts that are not included on the creditor list are not part of the bankruptcy.  Debtors must carefully review what they owe prior to filing.  Other debts that may continue include student loans, damages for injury, child support, alimony, certain luxury consumer debt and cash advances, certain taxes, governmental penalties, personal injury debt and credit obtained on false pretenses.

While debtors are allowed to file bankruptcy on their own, it is wise to consult with an attorney to verify rights, exemptions, non-exemptions and current rules.  Claiming bankruptcy may impact credit, but that is what brought the debtors into problems in the first place.  In most instances, bankruptcy provides sweet relief from debt and a chance to start over.

Types of Bankruptcy

When most people think of bankruptcy, Chapter7, 11 and Chapter 13 tend to come to mind. However, there are a few other types.  The first distinction is that there are some which relate to business and other types for individuals. Before looking at the various types of bankruptcy, it makes sense to know what it is.

What is Bankruptcy?

This is a legal process through which people and businesses can repay part of their debts. In some cases all debts are cleared under certain conditions. The two main ways filing bankruptcy can be used to help manage debt is via processes known as reorganization and liquidation.

Liquidation Bankruptcy

Chapter 7 falls under the liquidation banner. It is called liquidation bankruptcy because the individual’s or company’s assets are sold (liquidated) to pay down or clear outstanding debts. This type of bankruptcy is discussed below:

Chapter 7

This can be filed by both individuals and businesses and is one of the better known types. Chapter 7 generally lasts for a minimum of three months and a maximum of six months.  When filed by a company it is called Business Chapter 7 bankruptcy. On the other hand, when filed by an individual, it is referred to as Consumer Chapter 7 bankruptcy.

Under this type of bankruptcy, most unsecured debts will be cleared by a court, that is, they will no longer exist. The assets of the debtor are sold off by a trustee appointed by the court. However, this type of bankruptcy filing means that the company will cease to exist.

Many advisers recommend finding an alternative to Chapter 7. However, there are cases when it is the best way out of debt.

Reorganization Bankruptcy

There are also various types of reorganization bankruptcy. This one refers to situations where the debtor does not need to sell off assets to clear debts. Instead, special arrangements are made to restructure and reschedule debt repayments. Of course special conditions will need to be met.

Chapter 11

While mostly filed by companies, individuals can also file Chapter 11 bankruptcy. This type of situation enables a business to continue operating while putting in place repayment plans to clear debts. In fact, it allows a company that is facing financial difficulties time in which to try and turn their operations around. Chapter 11 is said to be one of the most expensive and difficult types of bankruptcy to file.

Chapter 12

This type is generally filed by fishermen and farmers. With this plan, the affected person will need to detail how they will pay off or reduce their indebtedness. The period given for this repayment is between three to five years. The repayment plan will be based on the person’s income.  Persons in this category who only earn seasonally have special alternative requirements for filing.

Chapter 13

This type of reorganization bankruptcy is for individuals and some small businesses. Only people who have an income can file under Chapter 13, hence the name wage earners’ bankruptcy. Since they have a source of income they are expected to develop a repayment plan. All debts incurred prior to filing must be paid off within three to five years. There is also no deadline as to when someone can file Chapter 13. The good thing about this type is that the debtor’s property is not taken away and sold.

Thankfully, bankruptcy is not the end of the world. However, knowing about each type is helpful just in case you ever have to consider going this route.  When faced with financial problems that may lead to bankruptcy, it is advisable that you contact a bankruptcy attorney or another person experienced in bankruptcy matters.

Information on Bankruptcy

Bankruptcy Basics You Need to Know

Bankruptcy may not be for everyone who is behind on bills, but for some, bankruptcy can provide the fresh start they need to free them from financial ruin and get on with their lives.  As the American economy flounders, many people who used to live at a fairly high standard of living are finding themselves in financial trouble.  The news runs rampant with stories of credit card payments doubling, interest rates being hiked up, and credit limits being spontaneously lowered by banks to amounts lower than what debtors already owe on their unsecured credit card debts.  Then there are the American mortgage industry’s recent, totally outrageous tactics, which need not be repeated here, as they have been highly-publicized.   People who were financially secure just a few years ago are having to tighten their belts now.

Meanwhile, people who were already having financial difficulty before the current troubles may have plummeted now to the point of severe problems, insolvency, inability to make all of their credit payments as they come due.  Many people are taking advantage of lowered monthly payments obtained with the help of credit counseling companies that negotiate with creditors.  For those whose creditors refuse to negotiate, bankruptcy may be their only option.

If your creditors are threatening collection and foreclosure lawsuits against you in your local courts, the higher authority of the federal bankruptcy court may be your best protection.  Once a bankruptcy suit of any kind is filed, all creditors and courts that receive notice of your bankruptcy are automatically “stayed” from pursuing further collection efforts against you.  After that, they must all file claims with the federal bankruptcy court, and only the bankruptcy court will determine who gets paid, how much they get paid, and when they get it.

There are two main types of bankruptcy available to individuals in the United States.  One is the “Chapter 7,” a bankruptcy that discharges the debtor from the obligation to pay most of the debts involved in the bankruptcy.  The other is a “Chapter 13,” sometimes also called an “Adjustment,” and commonly referred to also as a “Wage Earner’s Plan,” which requires the debtor to make payments on outstanding debts.  These bankruptcy nicknames are taken from the U.S. Bankruptcy Code, which divides bankruptcy law into various chapters, some of which apply to individuals and some of which apply to businesses.

When Congress amended the federal bankruptcy code in 2005, rumors flew widely to the effect that Congress was nearly outlawing Chapter 7 discharges.  This was not exactly true.  Congress did amend the code in a couple of ways, making it more difficult for certain persons to qualify for Chapter 7, in order to curb “abuse” of the system, but most people who need Chapter 7 discharge can still get it.  Although a Chapter 7 does set a person free from overwhelming debt, it may not be the preferred path.  If a person owns real estate and other valuable property that he would like to keep, it is important to know that aside from certain “exempt” assets, a Chapter 7 action may liquidate your property and use the money to pay toward the debts that you are discharging.  That means that you could lose your home, for example, if it has value above the exemption amounts, or even business property that you own as an individual.

Before filing a Chapter 7 now, a person must have undergone credit counseling from an approved agency within 180 days of the date of filing.  Beyond that, the law now utilizes a mathematical formula, in the form of a so-called “means test,” to further determine whether you qualify for a Chapter 7 bankruptcy.  The test deducts certain expenses from your income to determine what amount you would be able to pay to your unsecured creditors (like credit cards, medical bills, or unsecured loans, for example) under a Chapter 13 proceeding.  If you could not pay enough, you “pass” and can file a Chapter 7.  (A means test “calculator” is readily available on the federal bankruptcy court’s website.)  Even if you fail the “means test,” a bankruptcy court judge can still allow you to file a Chapter 7, if you can show “special circumstances,” as described in the bankruptcy law.  However, if you would be able to pay a certain amount toward your unsecured debts, and you have no “special circumstances,” you must instead turn to a Chapter 13 proceeding.

Chapter 13 bankruptcies, generally speaking, involves repaying your debts, either in whole or in part, over the course of three to five years.  It is often preferred by individuals who are self-employed or own their own businesses.  It also offers people a chance to save their homes from foreclosure, without losing them to liquidation as in a Chapter 7 proceeding.  In order to be eligible, an individual must have less than $336,900 in unsecured debt and less than $1,010,650 in secured debt.  You must file statements with the Court listing your assets, liabilities, income, tax returns, and other information, and the Court will develop a repayment plan which you must follow.

In either “Chapter” of bankruptcy, a husband and wife may file a joint petition, or either of them may petition individually.  Currently, the filing fees are set at just under $275, but filing fees are subject to change from time to time.  It is also important to realize that in any bankruptcy action, what happens to individual assets is largely a matter of state law in your state of residence.  The bankruptcy code and other federal court rules prescribe the procedure followed, and to a certain extent, the substance of bankruptcy law, but that federal law itself defers to state law on a number of issues.  Other forms of bankruptcy may apply to you if you do not fit into the eligibility requirements described above.  Corporations or partnerships, for example, file “Chapter 11” bankruptcies.  Bankruptcy law involves a complex synthesis of federal and state law.  It is a very specialized area of legal practice, and if you’re considering bankruptcy to deal with debt problems, you should gather the kind of financial information described in this article and seek the advice of a qualified bankruptcy attorney to find out whether bankruptcy may really be the best solution for you.

Alternatives to Bankruptcy

Record levels of American consumers file for bankruptcy each year.  The idea of putting an end to overwhelming debt and silencing the calls of harassing creditors can make this seem like an undeniably appealing option.  While declaring bankruptcy may seem like a quick fix for financial hardships, in many cases it causes new kinds of challenges and stresses for years to come.

Bankruptcy is far from a simple answer to rising debt.  It has a profoundly negative impact on your credit score, can result in the loss of valuable possessions, and can make it extremely difficult to secure new bank accounts, credit cards, or loans.  Having such a blight on your credit record can make moving on with life after bankruptcy – buying a car, renting a house, getting insurance, or even finding a new job – more challenging than ever.

What are some alternatives to bankruptcy?

Considering the far-reaching, long-lasting, negative implications of bankruptcy, it should be the last step taken after every other option has been exhausted.  So what are some alternatives to bankruptcy?

Sell Your Assets

When you file for bankruptcy, you risk losing some of your most valuable assets.  With this in mind, an alternative to bankruptcy would be taking a proactive approach to your financial situation by selling the items that you no longer use or you can realistically live without.  If you have more than one car, consider selling one and carpooling or using public transportation for your commute.  Look around your house and decide which items of value you’re willing to part with, including jewelry, furniture, and electronics.  You most likely own a number of items that other people would be willing to buy from you.  Use the proceeds from the sale of your assets to pay down your debt.

Consolidate Your Debt

If your debt is spread out across many sources and you’re struggling with high interest rates, consolidating your debt may be a smart alternative to bankruptcy.  The goal of debt consolidation is to lower your overall costs by reducing interest fees and lowering the total amount of your monthly payments.  For example, if you have multiple credit cards with high interest rates, consider transferring your balances to one card with a low APR.  Make sure that the APR is not higher for balance transfers, and also ask the credit card company about transaction fees that may be charged.

Negotiate with Creditors

If you have some income but are finding it impossible to make all of your minimum payments each month, negotiating with creditors may be a viable alternative to bankruptcy.  Many creditors would rather receive some portion of the debt that you owe than to have your debt completely discharged when you declare bankruptcy.  Call your creditors to talk about your options.  You may be able to negotiate a better finance rate or better payment terms.  Some creditors may even agree to settle your debts for less than you owe.

Seek Help from a Debt Counseling Agency

You may not be comfortable with the thought of negotiating with creditors or collection agencies – especially if you’ve been receiving harassing and menacing phone calls from them.  If so, seeking professional help from a reputable credit or debt counseling agency may be your next best alternative to bankruptcy.  These agencies will look at your financial situation and work with you to lower your debt through a debt management plan (DMP).  A DMP can help you to repay your debts over a period of time through reduced payments, fees, and finance rates.  Over time, your financial picture will look far more promising.

It is critical to understand that bankruptcy is not a simple solution to one’s financial hardships.  There are a number of alternatives to bankruptcy that can ease the burden of growing debt without ruining your credit or threatening your most valuable assets.  Take some time to investigate the many options that are available to you, from consolidating loans, to communicating with creditors, to seeking the services of a debt counseling agency.  Considering all of your financial options today will give you a brighter financial outlook tomorrow.

When to File For Bankruptcy

Should I Claim Bankruptcy?

Bankruptcy is a major decision when you are facing mounting debt.  For those who cannot pay off their debts, bankruptcy is a way to maintain essential assets while getting creditors off your back.  On the other hand, bankruptcy also impairs your ability to get credit for up to 10 years.  So how do you know when to file for bankruptcy?

Consult With An Attorney

Ultimately you will need to consult with an attorney to claim bankruptcy.  Filing for bankruptcy is a detailed procedure that requires professional expertise.  An attorney will discuss all possible options with you to improve your financial situation.  Often the initial consultation with an attorney is free.  If you decide to claim bankruptcy, the court and attorney fees are likely to be anywhere from $1,200 to $2,000.  To file for bankruptcy, you need to be able to pay the required legal and court costs.

Review Your Finances

Prior to consulting with an attorney, carefully review your finances so you know your financial bottom line.  Gather all your bills and tally what you owe.  List your valuable assets.  Determine your annual income.  Write down a list of your debts, necessary expenses and income so you can easily present the facts to an attorney.  Order your credit report from each of the three major credit reporting agencies.  You don’t have to join any type of credit repair service to get your credit reports.  By law, you are entitled to a copy of your credit report once annually.

Review Your Credit Reports

Contact TRW, Experian and Equifax directly for copies of your credit reports.  Once you receive your credit reports, carefully review your outstanding debts.  Make sure nothing is listed that does not belong to you.  Old debts are often sold to collection agencies that may attach them to the wrong person.  Admitting to a debt that is not yours means you are still responsible for paying it.  An attorney can help you dispute debts that are not legally yours so you do not have to pay for them.

What Is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy discharges all your unsecured debts.  Typically you are not required to make repayments and debts are simply eradicated.  Within just a few months, all your unsecured debts can be discharged.  A debtor must qualify under the “means test” for Chapter 7 bankruptcy.  The test was established in 2005 and currently 96 percent of applicants pass to claim Chapter 7.  You must complete a pre-filing session with a credit counselor to review your finances before you can formally claim Chapter 7 bankruptcy.  Creditors cannot contact you once a stay is filed for bankruptcy.  Certain secured assets such as a car may be renegotiated so you can keep them if payments are made in a timely manner.

Who Files For Chapter 7 Bankruptcy?

People who benefit from Chapter 7 bankruptcy usually have few assets other than clothing and furniture.  They may rent their home or have no equity left if they are homeowners.  Usually there is little or no money left in the monthly budget after paying for basic expenses.  Chapter 7 helps people get rid of outstanding medical bills, credit card bills and payday loans that they are simply unable to cover.

What Is Chapter 13 Bankruptcy?

A Chapter 13 bankruptcy establishes a repayment schedule with your creditors.  A single payment is made to the Bankruptcy Trustee to distribute to all creditors accordingly.  With a Chapter 13 bankruptcy, you have 3 to 5 years to repay all delinquent accounts per the court’s schedule.  Creditors cannot directly contact you during this period.  When all your debts are repaid, your bankruptcy is discharged so you are financially free.  To qualify for Chapter 13 bankruptcy, your unsecured debts must not exceed $307,675 and your secured debts must be less than $922,975.

Who Claims Chapter 13 Bankruptcy?

If you have home equity you want to protect and outstanding bills you cannot pay, Chapter 13 is a viable solution.  Your regular income may cover all your basic expenses but you just cannot make your minimum credit card payments.  Chapter 13 helps you get back on track so you are debt free within 3 to 5 years.

What Is Chapter 11 Bankruptcy?

Chapter 11 is predominantly for corporations and companies.  It works much like a Chapter 13 bankruptcy proceeding.  Businesses prove their earnings versus what they owe then the court determines whether they must pay back what they owe.

Am I Protected Against Creditors When I Claim Bankruptcy?

Once you receive your bankruptcy discharge, creditors cannot bother you anymore.  Outstanding debts are wiped out so you no longer owe anyone.  For a Chapter 13 or Chapter 11 bankruptcy, this occurs after all repayments are rendered according to schedule.  When you claim Chapter 7, your debts are discharged within a few months.

There are several exceptions:

–  taxes, child support and other government debts cannot be discharged in bankruptcy;

–  secured debts require assets be liquidated to pay a portion of the outstanding debt; and

–  personal injury claims, acts of fraud and court fines are not included in bankruptcy.

Will I Lose All My Major Assets If I Claim Bankruptcy?

In some instances, the court may require you to liquidate certain assets to repay your creditors.  To protect your assets, make sure you are represented by a competent attorney who will negotiate to protect your home, car and other major assets so you don’t lose them during bankruptcy.

Can I Get Turned Down For Bankruptcy?

In rare circumstances, you may be turned down by the courts for bankruptcy.  If you are represented by an attorney, it is highly unlikely you will be turned down.  Even if you get turned down, you can attempt to file bankruptcy again after 180 days.

Can I Get Credit Again After Claiming Bankruptcy?

An increasing number of people are facing financial trouble and filing bankruptcy.  Because of this, the ramifications of claiming bankruptcy are less severe than several years ago.  Typically, a bankruptcy remains on your credit report for 8 to 10 years.  You are likely to have a more difficult time obtaining credit and may have to pay higher interest rates.  It becomes easier to obtain credit within 2 to 3 years after claiming bankruptcy.  Additionally, claiming bankruptcy may have an impact on your future in certain careers such as politics, law and accounting.

Bankruptcy can be a relief if you are stressed about outstanding debts and have no way to pay them.  Although your credit is impacted, bankruptcy gives you the chance to make a fresh start.

New Bankruptcy Law

On October 17, 2005, new bankruptcy laws took effect. Congress felt these new laws were needed for several reasons:

  • When a person files for bankruptcy, the companies who do not get paid pass those expenses on to their other consumers in the form of higher prices.
  • More and more Americans were filing bankruptcy, so more and more other Americans were paying the price. This was having a major impact on the nation’s economy.
  • Congress felt that the laws then in place made it too easy for people to abuse the privilege of declaring bankruptcy, and that many people who filed for bankruptcy were able to pay at least some of their debts. One bill-collector noted the attitude of many people with this true example of a debtor. When the bill-collector called (for the umpteenth time) and finally got the debtor, the debtor said, “You people are driving me nuts with your calls.” The bill collector said, “But, sir, you readily took—and kept—our money.”

In order to try and solve these problems, the new bankruptcy laws have the following changes or additions to the old law:

  • You must complete a government-approved credit-counseling program with six months of applying for bankruptcy. A list of approved credit-counseling programs may be found at the U.S. Trustee Program’s Website:
  • You must show proof of income by providing a federal tax return from the most recent tax year. If you have not filed a return, you must do so before you can declare bankruptcy.
  • If tax returns show your income is above the median income of your state, and if you are able to pay $100 a month to reduce your debt, you must file a Chapter 13 bankruptcy, not a Chapter 7. A formula, not your word, is used to determine if you can afford the $100 per month.

Note: A Chapter 7 bankruptcy is usually best if your income is very modest, your assets are few (because you may be required to give up some of them), and your debts are relatively high. Often called a “straight bankruptcy,” it allows for liquidation of some, but not all, types of debt.

On the other hand, with a Chapter 13 bankruptcy, often called a “wage earner bankruptcy,” you can keep all of your assets, but you must pay all or some of your debts, paying the same amounts as you would without the bankruptcy. A difference is that you do this under the protection of the U.S. Bankruptcy Court.

  • Some automatic protections for those who have filed bankruptcy are no longer in place. For example a spouse can still take legal action to get child support, your landlord can still evict you, and the state can still suspend your driver’s license.
  • If you owe child support or alimony, those “bills” take supremacy over other kinds of bills.
  • Even though you had a credit counseling program before you started the bankruptcy proceedings, once you have finished the bankruptcy proceedings you must take another government-approved education program in financial management before any debt can be discharged. The U.S. Trustee Program also offers a list of approved financial management programs:
  • You are allowed to contribute up to 15% of your income to charity. Some people oppose this, seeing it as a loophole that could permit people who are on the income borderline to go with Chapter 7 bankruptcy, rather than Chapter 13.

If you would like to read the new bankruptcy law for yourself, the Library of Congress has it online:

A summary of the law can be found at

The full law may be read at

How to Avoid Bankruptcy

In today’s economy, many are finding that simply treading water in the budget no longer works. With any little, or not so little, wave—a missed direct deposit, a mortgage adjustment, or even a 10-cent hike in gas prices—threaten to sink the boat. For some, bankruptcy seems like the only way out.

But maybe you have heard the statistics—that most marriages end over money fights and money problems. Maybe you have heard the oft-overlooked facts like student loans and child support payments are not bankrupt-able. You may just not trust the attorneys that may handle your case and are looking for different options.

There are many options—of differing levels of difficulty—when you are looking to avoid bankruptcy. We will explore a few of the most-used options.

Credit Counseling Services

One of the more popular—and more advertised—methods of avoiding bankruptcy today is going through a credit counseling service. There are many for-profit and non-profit agencies that claim to be able to lower monthly payments, lower interest rates, and “get your life back.” These companies usually assign a counselor to your case who will handle contacting your creditors and negotiating on your behalf. Instead of writing five, six, ten, or fifty separate checks each month, you would pay the credit counseling service one check and they are supposed to make payments to your creditors.

Depending on your history with the credit company, how much you owe, and how much they realistically expect to get out of you, this can be a drastic reduction in your monthly payments, or you could end up breaking even. However, if you decide to work with these companies, do your homework before signing up! The Better Business Bureau website is full of credit counseling services that have not done their job!

Before you sign up, get absolutely everything you can in writing. “Everything” includes both your responsibilities, their responsibilities, how much of your monthly payment will go to bills and how much to overhead, and what will happen if either party does not live up to expectations. Before you send your first payment to the counseling service, call all your creditors to double-check they’ve signed off on the deal. Some counseling services may say that they have contacted and gotten approval from your creditors when Visa knows nothing about it and MasterCard refused to deal with the counselors.

When you have all of  this information confirmed and in writing, make sure to check your statements every month to make sure that the credit counseling service is living up to their end of the bargain. The Better Business Bureau is full of complaints about credit counseling services, so do your homework before signing up for a service!

Debt Reduction and Debt Management Services

Debt reduction and management services are companies (both for- and non-profit) that may work similar to a credit counseling services, but there are a few major differences.

Most debt reduction and management services work this way: Like credit counseling service, you make payments to the service. The service puts your payment (minus the obligatory administrative fees) into a trust or a bank account while waiting for a large enough amount to negotiate a settlement with your creditors.

While you continue to make your monthly payments, your creditors are not getting that money because the creditors do not want the small settlement amount the service is offering them. Meanwhile, you would most likely still be getting calls, you debt will be sold from collection company to collection company (yes, credit agencies do sell old debt, despite what they may tell you!), interest will continue to accrue, and you may be sued while you are making monthly payments.

Both credit counseling, debt reduction, and debt management systems show up on your credit report and can

The “Old Fashioned Way”

This is your grandparents’ way of getting out of debt. It is difficult, it is slow, and it may end up being harder on your credit report than bankruptcy, and the debt reduction, management and counseling services mentioned above.

The first thing to do is get on a written budget. Every month sit down and tell your money what to do—and stick with it. Your budget should list the essentials first—food, power, water, heat, gas, insurance, house payment, and car payment. After the essentials, if anything else is due in that month (new tags for the car, a haircut, etc.) were listed and budgeted. After the essentials are paid, every other dollar that doesn’t have a “name” should go to paying off your smallest debt.

After the budget and when you know how much you have to work with that month, contact each of your creditors to put it in their records how much you will be paying that month. Do not completely stress out if you cannot make a payment. Eating is much more important than your credit score, and keeping a roof over your children’s heads is immensely more important than any number.

Have multiple yard sales—sell as many things as you can to not only get some extra cash, but also get out of car loans. Put everything you can toward the smallest debt while making minimum payments to your other debts, if possible.

Call your creditors and see if you can negotiate a better interest rate and a settlement, if you can. Speak with the highest phone associate you can, and ask to speak with supervisors (i.e. the person in the cubicle next to them) as many times as necessary to get what you want.

Don’t let the collectors get to you! Know the Fair Debt Collections Act rules.

According to the Federal government, credit collectors cannot :

  1.  Discuss your debt with a third party (such as friends, family, co-workers, etc.) other than your attorney
  2. Call you at any such place or time which may be known to be inconvenient to you (they usually do not call on holidays, but let them know on the phone and in writing if you sleep odd hours and they cannot call during the day)
  3. Harass, oppress, or abuse in connection with the collection of a debt.
  4. Threaten to do anything they do not intend to do (i.e. lawsuit, garnishment, etc.). The only creditor that can take your house to pay your debt is your mortgage holder.

If the creditors break any of these laws (which they do every single day), they can be fined for your damages plus $1,000 for EACH violation (be sure to record your conversations—be sure to let them know they’re recording conversations—and save all your correspondence). This may be one of the best ways to pay off your debt!

Real debt management is only about 20% numbers and is 80% behaviour. Look at your spending habits for the year and see where your money is going. Are you still paying off the hamburger you put on your credit card six months ago? By this time, you could have purchased the entire cow! Once the behaviour is identified and isolated, it can be changed, and bankruptcy can be taken off the table.

How I Avoided Bankruptcy… and You Can Too!

The avalanche can begin any number of ways. A missed day at work. An unexpected medical bill. A sick child. The car blows up. Your interest rate adjusts. Your job gets outsourced. A missed credit card payment. An unfaithful spouse. Whether by a single small insignificant snowflake or a stick of dynamite, every avalanche looks the same when it’s headed your way.

For my husband and me, life was going well—and bills were being paid—until I became pregnant with our first child. We were overjoyed when we learned the news and decided to work as much as we could so we could pay off debts as quickly as possible to allow me to stay home with the baby.

Life, however, had different plans. While still in my first trimester, my doctor told me to “take it easy”, and get out of my stressful call center job because they couldn’t explain my shortness of breath. In the course of a few weeks, our income was cut in half—with only more bills in the future.

It was at that point that we took a good hard look at our financial situation. We had purchased our first home three years earlier (on a fixed APR). Only four months earlier, we had signed an $11,000 note on a new car. We still had $26,000 left on student loans, and we had over $20,000 in debt over six credit cards and lines of credit. Doing the math, we found out we had debts in excess of $115,000 including the house, and a negative net worth of nearly $50,000!

Looking hard at our finances, we knew that although it would be tight, we could live on one income—if we only paid the necessities (food, utilities, house payment, car payment, gas, etc.), which is what we did.

As you might expect, it didn’t take long for the credit card companies to call. And call. And call. And call. We stopped answering our landline and didn’t take calls from any unknown numbers on our cell phone. When we did decide to speak with the representatives, they were rude, inconsiderate of our situation, and soon my doctor told me that I needed to do anything I could to lower my blood pressure, so we stopped taking their calls altogether.

It was at this time we decided to make an appointment with a bankruptcy attorney. The attorney was considerate, kind, listened to what we had to say, and understood our situation. He took the time to explain the options available to us. He told us that once we filed the paperwork, the creditors couldn’t call anymore. We took the paperwork he handed to us and went home to think

Bankruptcy sounded good—but we still had to take what the attorney said with a grain of salt… it wasn’t as if he was going to be doing this for us out of the kindness of his heart, after all. Doing a bit of research, we found a bit of a disturbing trend. All of the attorneys and organizations that were trying to “sell” bankruptcy painted it in flowery, “happy” terms—we get a clean slate, a fresh start, a second chance; and it’s simply a way to make the harassment stop. But other sources were not so pleased with the fact that nearly one million people in the US file for bankruptcy every year.

Looking at the fine print of the bankruptcy paperwork, we learned a few interesting things, the most important of which is that our student loans were not bankrupt-able. We would not be able to get a clean slate on our largest single debt after our house. We would only be able to declare our car if we were going to give it up, same with the house. We would only be able to clean our slate of just over $20,000 of the over $115,000 we owed.

While it would definitely stop the creditors from calling, it didn’t seem worth the effort to get rid of such a small percentage of the debt, so we began looking for other options.

As it turns out, there are ways to get out of debt, to get that fresh start, the clean slate, and the second chance without declaring bankruptcy. It is not a very easy route, but in the long run, it ended up being the best way out.

The first thing we had to do was get on a written budget. We had to tell our limited money what to do—and stick with it. We sat down at the kitchen table and spent an hour coming up with a budget, listing the essentials first—food, power, water, heat, gas, insurance, house payment, and car payment. After the essentials, if anything else was due in the month (new tags for the car, a haircut, etc.) were listed and budgeted. After the essentials were paid, every other dollar that didn’t have a “name” went to debt. We also stowed away about $1,000 as a “rainy day” fund—just in case.

After we had the budget (which we re-do for each month at the beginning of the month) and knew what we had to work with, we got in contact with each of the creditors to put it in their records what we were doing. We also sent letters (only some of which actually got into the files) to the same effect. We told them that we send what we could, and no more, and we left it at that. Our credit report is just a number, and we decided that we wouldn’t a number dictate what we did any longer.

Next, we worked as much as we could—not easy with a newborn—and sold a few things. In a year, with just simple belt-tightening, we were able to drop our debt $10,000. We were able to save another $4,000 by settling our debt with a credit card company. 

We still have a large amount of debt, but we are working slowly to get out of debt. Every time we pay off a debt we have a little celebration and every time we look in our son’s eyes, we remember why we will never use credit again.

Chapter 11 Bankruptcy

There are four main bankruptcy chapters that are available to individuals. Chapter 7 bankruptcy, often called a “straight bankruptcy,” allows for liquidation of assets and can be used by either consumers or businesses. Chapter 12 was set up entirely for the “family farmer” or the “family fisherman.” Chapter 13, the most common one for individuals, is also known as the “wage earner bankruptcy.”

The purpose of this article is to give more detailed information on the remaining bankruptcy, Chapter 11. Chapter 11 bankruptcies are not often used by individuals because in order to file for one, the individual must owe more money than that allowed in a Chapter 13 bankruptcy (i.e., they must owe at least $336,900 in unsecured debts, or $1,010,650 in secured debts) and they must have an income that would make it possible for them to pay off either the full debt or the debt as reduced by the courts.

Businesses, especially corporations, are the primary users of Chapter 11 bankruptcies, which are often referred to as “reorganization bankruptcies.” Sole proprietorships, like individuals, usually choose to file bankruptcy before their debts reach the amounts required for Chapter 11.

The benefits of bankruptcy to a business are that all creditors can be dealt with in a single integrated proceeding, and it supplies a process for settling creditors’ claims. An addition goal of a Chapter 11 bankruptcy is to reorganize the company.

Unlike a Chapter 7 bankruptcy, in which the business closes down and all of its assets are sold by a trustee and the proceeds given to the creditors, a chapter 11 bankruptcy allows the business keep its assets and to continue operating the business for the benefit of creditors. At the same time they must reorganize, under court supervision, what they owe in contracts and other debts. The court has the power to cancel certain obligations of the business in order to let the company make a “new” start.

If the debts are greater than the company’s assets, stockholders’ rights and interests are usually ended at the termination of the bankruptcy, and the reorganized company is then owned by the original company’s creditors.

A Chapter 11 petition for bankruptcy can be either voluntary (the company itself files the petition) or involuntary (the petition is filed by the creditors). At the time of the filing, the courts are required to charge a case filing fee of $1,000 and a miscellaneous administrative fee of $39—another reason individuals usually don’t file Chapter 11 bankruptcies. If these fees are not paid when due (they may be paid in four installments with the final payment being made within 120 days from the filing or, with court permission, up to 180 days) the case can be dismissed.

As in all types of bankruptcies, once the petition is granted, creditors must stop collection attempts and they may not collect any post-petition debts. Also, if the company is listed on any of the three major stock exchanges, it will be “delisted” from the exchange (NASDAQ indicates the company is in bankruptcy by adding a “Q” as the fifth letter of the company’s stock symbol). However, a delisted company often gets quickly “relisted” as an OTC (over-the-counter) stock.

The company must then present a disclosure statement and a plan for reorganization to the court. This document includes information about the assets and liabilities of the company, as well as enough information regarding the overall business affairs of the company (e.g., a classification of claims and how they will be handled under the plan)  to allow creditors to make informed judgments on the reorganization plans.

If the company does not present this reorganization plan within a specified period of time, the creditors may submit their own plans. Either way, the plan must be approved by the courts.

If the business involved is a small business and there is no creditor who is willing to serve on a creditors’ committee or who is able to give enough attention to the case, then there are different processes that may be applied. The case is labeled as being a “small business debtor.” The small business must fit two qualifications: 1) Their activities must be commercial or business, not just owning or operating real property, and their total non-contingent liquidated debts, both secured and unsecured, must be less than $2,000,001, and 2) The creditors’ committee must either be non-existent or unable to oversee the debtor. The small business debtors are subject to more oversight by the U.S. trustee than larger businesses.

Chapter 11 is often considered to be quite flexible; this makes it more costly for the debtor. It is estimated that only about 10% of Chapter 11 reorganizations are successful.

Chapter 13 Bankruptcy

Some consider filing for Chapter 13 bankruptcy as a stay of execution, while others view it as a dignified means of getting out of a financial mess.

Once upon a time, filing for Chapter 13 bankruptcy was considered an unintelligent choice, especially with the availability of Chapter 7.

Chapter 13 bankruptcy filing is a way for U.S. citizens to undergo financial reorganization as supervised by a federal bankruptcy court. In other words, a system for repayment of debt is created with the law insuring that creditors get their money back.

Chapter 7 bankruptcy filing, the most common form in the U.S., allows an individual to liquidate certain assets as a form of repayment without having to pay anything more. If a substantial amount of assets do not exist, than the creditor is stuck without repayment from its consumer.

Chapter 7 has long been considered an easy way out for financially-strained individuals, while leaving the creditor out in the dust.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was enacted in order to make filings for Chapter 7 bankruptcy more difficult, forcing those seeking financial restitution to file for Chapter 13 bankruptcy instead.

Referred to as the “New Bankruptcy Law,” the bill makes it more difficult for consumers to erase debt by forcing them to repay their debt through the provisions of Chapter 13.

Under Chapter 13 bankruptcy filing, debtors propose a repayment plan to make installments to creditors over three to five years.

If the debtor’s monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period for just cause. If the income is greater than the state median, the repayment plan must be for five years. After the debtor files for Chapter 13 bankruptcy, the law forbids creditors from starting or continuing collection efforts.

The greatest advantage of Chapter 13 is that it saves homeowners from undergoing foreclosure of their house. Individuals can stop foreclosure proceedings and are allowed to cure delinquent mortgage payments over time by filing for Chapter 13.

Chapter 13 bankruptcy filings essentially act like a consolidation of an individual’s loans, which means monthly payments should be lower.

The planned payments are given to a trustee of the court, who distributes the payments to the creditors. For those who are annoyed by creditors and their collection agencies, Chapter 13 eliminates that headache. Creditors are forbidden to have contact with the debtors during the Chapter 13 period. The trustee of the court deals with the creditors.

Co-signers are also free of collection efforts and a negative mark on their credit if repayment is made in full under Chapter 13.

Additionally, an individual’s wages can not be garnished under Chapter 13. And, unlike Chapter 7, no limits are placed on the amount of times an individual can file for Chapter 13 bankruptcy.

As promising as Chapter 13 bankruptcy sounds, opponents view it and its forced legislation under The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 as a way of prolonging (or even adding to) an individual’s financial troubles.

If a debtor has a significant increase in income midway through the three-to-five year period, monthly payments to the trustee may be increased as well. Bankruptcy proceedings for those filing under Chapter 13 last for at least three years; those filing under Chapter 7 have to deal with the bankruptcy court for only four months.

Furthermore, any lump-sum distributions, such as personal injury settlements or inheritances, received during the case normally must be turned over to the trustee. And the individual also has lawyer fees to worry about while filing for Chapter 13 bankruptcy.

The bottom line is the U.S. government, with the passing of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, is trying to protect the creditor while lessening the strain on the financially-strapped individual.

As with anything in life, commitment will dictate the individual’s future. If he or she is committed to following the payment plans under Chapter 13, a promising future remains. If he or she is unable to follow through on that commitment, Chapter 7 might have been a better alternative, and more grief is in store.