Common reasons to consider bankruptcy

In your experience, what are some of the most common reasons people consider bankruptcy?

Common reasons to consider bankruptcy include the loss of a job, a decrease in overtime, divorce, (i.e. going from two incomes to one income) and overwhelming medical bills. For many people who served in the military, the retirement they receive isn’t sufficient to cover their bills, and this too can lead to bankruptcy.

When someone contacts you regarding their financial issues, what are some of the key questions that you ask to determine whether bankruptcy would be a good idea for them?

When trying to determine whether bankruptcy would be a good idea for a client, we consider how much and what type of debt they have. Different types of bankruptcy may be recommended for secured debts (e.g. mortgages, car loans, furniture loans) as opposed to unsecured debts (e.g. credit card debt, medical bills, personal loans). Chapter 7 bankruptcy is a great option for eliminating unsecured debts, while Chapter 13 bankruptcy can be better for dealing with secured debts, while also eliminating unsecured debts in most cases.

I've decided to file for bankruptcy. What are some things I should do or need to do before I actually see an attorney?

If someone has decided to file for bankruptcy, they should speak with an attorney as soon as possible, before making any transfers or payments on debts.

What exactly is a Chapter 7 bankruptcy and what requirements would need to be met in order to qualify for Chapter 7 bankruptcy?

Chapter 7 bankruptcy is called a straight bankruptcy wherein the goal is to keep and pay for your assets such as a house or car, and discharge the unsecured debts. In order to qualify, a person must pass the means test, which involves an analysis of the person’s income during the six months preceding the filing. The purpose of this test is to determine whether the client’s income qualifies for Chapter 7 bankruptcy. After the initial consultation, we usually have a pretty good idea as to whether or not someone will qualify for Chapter 7 bankruptcy, but we will know for sure once we have collected six months’ worth of pay stubs. 

What assets will I be able to keep after completing a Chapter 7 bankruptcy?

The goal in Chapter 7 bankruptcy is to ensure that the client does not lose any personal property. When a client files for Chapter 7 bankruptcy, we complete an extensive worksheet to review the client’s assets and the value of those assets to ensure that they are protected by the bankruptcy exemption laws.

What is a Chapter 13 bankruptcy?

Chapter 13 bankruptcy is also called debt consolidation, debt restructure, or wage-earner bankruptcy. If a client has an auto loan with an outrageous interest rate of 28 percent, we may be able to decrease that interest rate to a fair market interest rate.  This may allow us to reduce the auto loan payment in most cases. If the client has had their vehicle for more than 910 days or 2.5 years, then the creditor would only need to be paid the actual value of the vehicle, which can potentially save people a lot of money on their vehicle loan.

Chapter 13 bankruptcy is also an option for debtors who don't qualify for Chapter 7 bankruptcy because of “above median” income. For example, if someone has a really great job with above median income, we can usually propose a payment plan to minimize and consolidate unsecured creditors while hopefully decreasing the monthly payment to secured creditors. Additionally, through Chapter 13 bankruptcy, we can deal with tax debt, and no additional late fees or interest charges will be accrued while paying off priority debts.  

What requirements must be met in order to file for Chapter 13 bankruptcy?

In order to file for Chapter 13 bankruptcy, an individual must be able to show that they can afford to make the Chapter 13 plan payments.

In a Chapter 13 bankruptcy, what personal property or assets am I able to keep?

The goal in Chapter 13 bankruptcy is to ensure that the client is able to keep all of the assets they want to keep. Clients hire us because their goal is the same as ours: to protect the assets they want to protect while discharging unsecured debts.

What can I expect after filing for bankruptcy?

As soon as someone files for bankruptcy, they will have peace and calm; the creditors are required to stop calling and harassing for payment. Under a Chapter 7 bankruptcy, an individual may continue making car and house payments; under a Chapter 13 bankruptcy, an individual will have their debt restructured and will begin making payments 30 days later.

What does the Chapter 7 bankruptcy process entail?

After the no fee initial consultation, we will begin working on a Chapter 7 case as soon as the retainer has been paid. We are here Monday through Friday from 8:30am to 5pm, so if someone wants to drop by once a week and pay $50, if that’s what your budget allows, great. Once we file the case, the automatic stay goes into effect, which means all creditors must cease contacting the client. We also stop wage garnishments.

The next step is to go to court for a short hearing which is also known as the 341 meeting. This usually involves two or three minutes in the so-called “hot seat,” and I will be right there with you. Sixty days after this meeting, the client will have their debts discharged. The purpose of having such a long consultation and asking so many questions (which can be aggravating for a lot of folks) is to make sure there are no problems with the bankruptcy, and that everything moves as smoothly as possible in court. In total, the process usually takes four to six months.  

What does the Chapter 13 bankruptcy process entail?

Once we file for Chapter 13 bankruptcy, the client will attend the 341 meeting of creditors. This usually involves two or three minutes in the so-called “hot seat,” and I will be right there with you. Thirty days after filing the petition, the client begins making payments in accordance with the Chapter 13 payment plan, which can last anywhere from three to five years (although we can occasionally obtain an extension). During this time, the client can begin rebuilding their credit by making mortgage payments on time and/or by obtaining a secured credit card after filing.

When will I have the 341 meeting of creditors in my Chapter 7 or Chapter 13 bankruptcy, and what should I expect?

The 341 meeting of creditors occurs four to six weeks after filing the petition. It is the creditor’s opportunity to ask questions of the client but they usually do not appear at these meetings. The trustee will ask a few questions but we prepare our clients for this meeting by reviewing a list of questions that could be asked; there is no need for anyone to be nervous about these hearings, I’m right there with you. From now until the end of 2020 (and maybe longer), these meetings will be held in the comfort of our office, not in court.  

What happens if I were to fall behind in payments after filing a Chapter 13 bankruptcy?

Unfortunately, some people are unable to make payments in accordance with the Chapter 13 payment plan. If this happens, then the Chapter 13 trustee will file a motion to dismiss. There will be a hearing that provides the debtor and their attorney to determine why the debtor fell behind on payments and what can be done to remedy the situation. If the debtor can catch up with the payments and get back on track, the trustee may withdraw the motion to dismiss and the debtor will be allowed to continue making payments in accordance with the payment plan.

If the debtor falls behind on their mortgage payments while in a Chapter 13 bankruptcy case, then the mortgage company can file a motion for relief. This is a bit more strict, and will require the debtor to arrange a way to catch up with the mortgage payments within six months. If this happens schedule an appointment with your attorney to discuss remedies as soon as possible.

Once I have completed a bankruptcy, what courses am I required to take?

A course called the credit counseling certificate is required in order to begin a bankruptcy case online, or by telephone. Once the Chapter 7 bankruptcy case is filed, the debtor has two to three months to complete online debtor education, which costs about $10 per person. A person who has filed Chapter 13 bankruptcy does not have to do this as quickly, but we strongly recommend taking the course early on and getting it out of the way.

How many years does a bankruptcy actually stay on someone's credit report?

Bankruptcy remains on credit reports for 7 to 10 years. At the seven-year mark, it is recommended that debtors contact the three major credit reporting agencies to see if they will remove the bankruptcy from the credit report.  

Will filing bankruptcy ruin my credit forever?

Filing bankruptcy will not ruin a person’s credit score forever. In fact, depending on the person’s credit score before filing for bankruptcy, it may even help. However, no one should file bankruptcy for the sole purpose of expecting their credit score to increase. We can provide clients with an estimate of what their credit score will be after filing for bankruptcy.

How do your clients get back on their feet after successfully completing a Chapter 7 or Chapter 13 bankruptcy?

The best way for a person to get back on their feet after successfully completing a Chapter 7 or Chapter 13 bankruptcy is by paying bills on time. If you are able to control spending, we recommend obtaining a secured credit card after filing. It is important to make credit card payments on time and at no point during the month should your balance be more than 30% of your credit limit. Maxing out your credit card every month, even if you pay on time and in full, actually harms your credit score.

Many people wonder how long after filing for bankruptcy they will have to wait before buying a house. I explain that qualifying for a mortgage involves a lot more than just a consideration of the credit score; it involves an analysis of work history, prior foreclosures, and other factors. A prior client of ours was able to purchase a house with a fairly good interest rate even before we finalized his bankruptcy case; this was possible because he had a good work history and his bankruptcy only involved an issue with taxes.

Should I file bankruptcy now or wait to see what happens with the economic situation after the COVID-19 crisis subsides?

During the COVID-19 pandemic, mortgage companies are offering forbearance and applying it to the end of loans, which is great. Many mortgage companies are granting six months’ worth of forbearance. However, some mortgage companies require the skipped payments paid in full at the end of the forbearance period (who can do that?). Chapter 13 can help deal with missed payments.

Are you holding Zoom meetings for clients who don’t want to go to your office?

We are holding video meetings through FaceTime, Skype and phone appointments for clients who do not want to meet in person.

Are the courts taking bankruptcy cases during the COVID-19 situation?

The courts are absolutely taking bankruptcy cases during the COVID-19 situation. We are limiting court appearances to phone appointments and adhering to strict safety guidelines when we have to appear in court for contested matters. Anyone who is thinking about filing for bankruptcy shouldn’t wait until they are sued or until they return to work and realize their wages are being garnished; it is a lot easier to get a handle on the situation ahead of time than to wait and try to retroactively stop a garnishment that’s already taken 25 percent of a person’s income.

For more information on Filing Bankruptcy, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (706) 940-0594 today.