Generally there are two (2) types of bankruptcy protection available to individuals and married couples.
CHAPTER 13 BANKRUPTCY – WAGE EARNER PLAN
The easiest way to understand this program is to think of it as a debt consolidation loan (is NOT a loan but it works in a similar way). You are set up on a monthly payment plan for 3 to 5 years. It is especially helpful if you are behind on home and/or vehicle payments as it can stop foreclosure or repossession if the Chapter 13 is filed quickly enough. When finished with the program, your debts will be either payed or discharged (legally forgiven), except for student loans, and house payments, which continue to the full term of the mortgage. When you have completed your plan your vehicle will be paid off and your house payments will be up to date.
CHAPTER 7 – STRAIGHT BANKRUPTCY
Under this program most, if not all, of your debts are wiped out and you start over. You will not necessarily lose or have to give up your property. Most of the time it is possible to arrange to keep your home, vehicles, etc., depending on the value of the property, the amount of debt and what you can afford to continue to make payments on. Just what will happen depends on what kind of debts you have. We will go over this detail in the consultation.
Which program is best for you and which one the court will allow depends on your individual circumstances. The Chapter 13 is favored by the court if your finances allow it (and it may face fewer problems from creditors).
This is a form of bankruptcy used by large companies. It is very costly and complicated. These factors make it a poor choice for most individuals.
RECENT CREDITOR TACTICS WHEN YOU FILE BANKRUPTCY
Credit card banks and some finance companies are beginning to scrutinize the charging pattern of those who file Chapter 7 (does not seem to apply to Chapter 13 filers). They claim fraud against the person who is filing, insinuating that charges were run up with the intent to not pay but file bankruptcy. In the past creditors would have had little success with this line of attack and would likely have had to pay the filer’s lawyer’s fees. Recently, they’ve had enough success to cause them to redouble their efforts.
Following is a partial list of some of the things a creditor may look for in deciding whether to challenge their debt being discharged through the bankruptcy: 1) recent charges over $1,000; 2) multiple charges on the same day; 3) many charges under $50 when you are near your credit limit; 4) recent increases in your credit spending; 5) cash advances or using a new card to “pay off” existing credit card debts; 6) incurring more debt after seeing a bankruptcy attorney; 7) charging to credit cards or cashing loan company checks when you or your spouse are out of work; 8) luxury item purchases (restaurants, hotels, trips, gifts, etc.).
WHO WILL KNOW I’VE FILED BANKRUPTCY?
Bankruptcy filings are a matter of public record and are therefore available to anyone who wants to look at the bankruptcy court records. Since you can’t randomly access the files at the U.S. Bankruptcy Courthouse, someone would have to have a pretty good idea someone filed and where, because they would have to ask for the file by name or file number. Information is now also available on the internet to certain people with access codes. If you live in Winston-Salem or Greensboro, it is unlikely your filing would be published in the paper, but some small town newspapers may publish lists of those who have filed. In a Chapter 13 filing, because your wages will be garnished, your employer would know.
WILL BANKRUPTCY HURT MY CREDIT RECORD?
Bankruptcy does appear on your credit report and does hurt your credit; however, if you are behind in payments, have been sued or turned over to collection agents, etc., it may not make that much difference. Although creditors do check your credit record, there is nothing in the law that keeps them from loaning you money (except while you are under Chapter 13, ask the lawyer about this). It will be more difficult to get loans and, as more businesses rely on credit histories, you may have difficulty renting housing, opening bank accounts, and even in applying for a job. For loans you will most likely pay a higher interest rate and/or larger down payment than someone who hasn’t filed, but again bad credit also leads to this. Bankruptcy is designed to give people a fresh start. Because there is a limit to how often you can file bankruptcy, decisions on getting into debt again should be looked at very carefully.
DOES A CHAPTER 13 LOOK BETTER ON MY CREDIT RECORD THAN A CHAPTER 7?
Both programs will appear on your credit report. It is hard to predict how a creditor looks at Chapter 7 versus Chapter 13 because every creditor has its own guidelines. Some creditors may take into consideration that you paid back at least part of your debt in Chapter 13.
CAN I PICK WHICH TYPE OF BANKRUPTCY I FILE?
Sometimes but usually not. If you have income left each month after paying your reasonable living expenses, you may be required by the bankruptcy court to file Chapter 13 because you could afford to pay back at least part of what you owe. It is therefore important that the monthly expenses you list accurately reflect what you spend each month to meet the needs of you and your family.
WILL I LOSE MY PROPERTY IF I FILE BANKRUPTCY?
It is unusual for people to lose property in bankruptcy, especially under Chapter 13, which is designed to help people protect their property from foreclosure and/or repossession. Chapter 7 works a little differently. If you are still making payments on the poperty, whether it be house, vehicles (some recent complications on this, ask about this), appliances, etc., creditors usually let you keep the property, if you are willing to make the payments as agreed. If you have property that is paid for in full, we will need to look at the value. Chapter 7 bankruptcy allows you to protect property value up to a certain point. We will need to determine if your property is worth more than the amount allowed by the court.
WILL BANKRUPTCY FREE ME FROM DEBTS FOR STUDENT LOANS AND/OR BACK TAXES?
For all practical purposes the answer is “no” due to a change in the law in 1998. In some cases the debt can be wiped out due to hardship but the conditions for this to happen are so hard to meet that it is seldom allowed. The court’s idea of hardship is very limited – check with the student loan company to see if your situation meets their policy on financial hardship. Under Chapter 13, part of the debt might be paid as part of your monthly plan payment but may not necessarily be paid in full and you would then be responsible for any balance left over (along with possible interest and penalties) at the end of the program. Be sure the lawyer knows if you owe back taxes or have a student loan.
WHEN BANKRUPTCY IS SMARTER:
(material from May/June 2009 AARP Magazine p. 21) by Walecia Konrad used below.
Q: I’m doing everything I can to avoid bankruptcy, but I have little home equity left to tap. What do I do?
A: The AARP article notes that bankruptcy makes more sense than decimating retirement or college savings accounts, which in bankruptcy are largely protected from creditors. “When people are in real trouble, they often wait too long to get the relief they need,” says Jane Bryant Quinn, Newsweek’s personal-finance columnist. “Bankruptcy is designed to give people with no other way out a fresh start.”
The law provides two routes. If your income is low enough, you may qualify under Chapter 7 of the bankruptcy code, which wipes out medical bills and credit card debts. If you have sufficient income, a Chapter 13 filing to reduce and reschedule your debt is more likely. You and your lawyer–and you’ll want a lawyer–work out a three-to-five year plan with the court. Filing for bankruptcy stops foreclosure action, at least temporarily, but only Chapter 13 allows you to bring mortgage payments up to date as part of your plan
As for concerns about ruining credit, Quinn states, “chances are your score is already terrible.” The bigger issue is avoiding debt in the future so you won’t have to file bankruptcy again.
**12 percent of Americans have considered filing for bankruptcy. More than a million did in 2008.