What Bankruptcy Can and Cannot Do

An increasing number of Americans are filing for bankruptcy due to unforeseen circumstances, medical expenses, divorce, or simply poor financial planning.  Because of this, you will hear a lot about bankruptcy from local media sources suggesting that bankruptcy might be a good option for you, as well, if you are struggling to meet your financial responsibilities and to pay your debt. However, there are also several common misconceptions about bankruptcy, and these range from how easy it is to file for bankruptcy to what it will actually do for you. 

First, bankruptcy is one solution for handling your overburden of debt; it is not a guaranteed pass to immediate credit. It is a myth that filing for bankruptcy will always give a consumer a new start with credit right away.  In fact, depending on what type of bankruptcy you file and the circumstances in which you filed it, it could still be 5-7 years before you are able to buy or rent a home without a significant down payment to compensate for your credit history.

Second, bankruptcy is not always a clean slate.  Sometimes, not all debts will be discharged (such as student loans, taxes, etc.) and under Chapter 13, you will still need to pay back some of your debts.  This amount will be determined by the court, which will set you up on a court-ordered payment plan that has been renegotiated to better terms. 

Finally, bankruptcy is a long and tedious process; it is not a quick and easy solution to your financial troubles.  There will be many documents and statements to collect, many forms to fill out, and you will need to spend the money on a lawyer who has expertise in bankruptcy law for your particular state.  Many courts also require that you attend financial planning and budgeting classes as part of your commitment to work toward a more responsible financial future.  

Will My Bankruptcy Hurt My Co-Signer?

The decision to file for bankruptcy isn’t one that most people take lightly, especially if that decision will affect others.  An example of how your bankruptcy could affect others is if there is a co-signer on one or more of your debts.  In cases for which there is a co-signer, the obligation to repay the debt might still fall on your co-signer, even if your bankruptcy is granted.  Whether it does or not is usually dependent on whether you file Chapter 7 or Chapter 13.

In a Chapter 7 bankruptcy, your co-signer will likely be left with the responsibility of paying the debt, and it will likely not be discharged for him/her, even if it is discharged for you.  This means that you will no longer have the responsibility of paying it, but your co-signer will.  This type of situation can cause conflict among people if not carefully discussed, particularly if the co-signer is a close friend or family member with whom you have a lot of contact. 

In a Chapter 13 bankruptcy, your debts will not be completely discharged, but will rather be rearranged and placed on a court-mandated repayment plan.  If you make these payments on time, your co-signer will be under what is called a "co-debtor stay” and will not be held responsible for any of the debt while you pay it off.  They will also not be responsible for any discrepancy in the amount of debt owed before the bankruptcy and the final amount the court orders you to pay for that debt. 

Before you file for bankruptcy, it is important to remember that whatever debt you have in which a co-signer has signed with you, your late payments or missed payments will affect their credit negatively.  Co-signers often have a better credit rating than the primary signer, making their own score more vulnerable to taking hits when they agree to co-sign.  This is why you should be extremely cautious in asking someone to co-sign with you; if you are unable to pay the debt, it might result to a conflict between the two of you.  

Not All Debt is Discharged through Bankruptcy

Just because you file and are granted bankruptcy doesn’t mean you won’t be responsible for paying back some of the credit card debt you’ve accrued.  Some transactions – particularly ones made for non-essentials after the debtor was unable to make payments on time – are looked at unfavorably by the courts. If the courts see that you were unable to make steady, on-time payments, but were still charging nonessential items like travel, entertainment, or electronics to your card, they will likely be hesitant to discharge those debts.  

If you are considering filing for bankruptcy, the best thing to do is to immediately stop using credit.  All types of credit card transactions should be stopped, particularly if they are in a non-essential category or for something other than food or gas.  Even essential purchases can fail to be discharged if your card use was recent. 

Other types of debt that will likely not be discharged through bankruptcy are debts for taxes, fines, alimony, or child support.  Student loan debts are equally as difficult to have discharged – mainly because many of them are funded in part or in full by the government. You might get a portion of the interest rates lowered but depending on the lender of the loan, full discharge of student loan debt is unlikely. 

   

Filing for bankruptcy might be a good option if you have mostly consumer debt on high-interest credit cards.  If most of your debt is not consumer debt, or is debt related to student loans, bankruptcy might still be a viable and wise option for you.  An attorney will be able to look at your specific situation to help you determine all of your options, including whether or not bankruptcy is the best idea for you to get back on track financially.  

Reasons Most People File for Bankruptcy

Of the top reasons people file for Bankruptcy in the U.S., the following list of three factors accounts for the purposes of the bulk of bankruptcies filed in this country. 

1. Medical Debt

Anyone who has ever fallen ill from an unexpected sickness or has been diagnosed with a life-threatening and life-altering disease understands the enormous cost of medical care.  Even if you are insured, many insurance policies are underwritten to save the company as much money as possible, leaving you on your own to pay for high-cost tests or treatment options for life-threatening diseases.  If you are uninsured, then there is no doubt that the medical costs of a major accident or diagnosis can add up quickly, depleting your hard-earned savings and putting your family in debt that seems impossible to escape. 

2. Creditor Harassment

If you have gotten behind on credit card payments, car payments, or other debt, you already know the extent to which creditors can harass you.  Despite legislation limiting how creditors can contact you, they will still call multiple times throughout the day; call your job; call your friends and known relatives; and overall, make the stress of financial problems many times worse. 

3. Downsizing or Loss of Job

If you are one of the millions of Americans affected by the sustained job loss of the past 5 years, you already know how a few months of missed work can eat into your savings and leave you unable to make your payments.  If you lose your job and have a lot of debt, your financial future can seem overwhelming, and bankruptcy then becomes one of the few ways to reestablish a solid financial future.  

How Debts Are Discharged In Bankruptcy

A common misconception is that when debts are discharged during a bankruptcy, the tax payer picks up the burden.  This is simply not true – in the process of a bankruptcy, the creditors are the ones who take a financial hit.  They do this by often getting pennies on the dollar amount of what they originally loaned, so it’s never a pleasant process for them.  

When a court declares your debts discharged, it essentially becomes illegal for creditors to contact you about the debt.  However, not all debts are discharged and this is why it is important for you to contact someone who can advise you regarding bankruptcy law and which part of your debt is most likely to be discharged.  Every bankruptcy is different and bankruptcy laws vary widely, state by state.  A bankruptcy attorney will be able to counsel you regarding the laws that are particular to your state and give you a good indicator if bankruptcy is really your best option. 

Starting fresh is an important part of beginning on a road to financial freedom and recovery.  A court will be able to look at your situation – past, present, and future – and determine your ability to reasonably pay off your debt.  If the court finds that some debts should be discharged, they will focus on the high-interest ones and determine if you will pay them back partially, or not at all.  Since each bankruptcy is different, it is impossible to determine exactly which debts will be cleared by the courts, but a bankruptcy attorney will be able to give you a good estimate of what might happen in your particular situation.  

Embarrassed About Filing for Bankruptcy? Celebrities Aren’t – Why Should You Be?

Have you have been considering bankruptcy for a while but are embarrassed about the idea of filing it?  Maybe you’re worried about your friends and co-workers finding out and attempting to hide your financial distress.  Or maybe you think that there is another way to get out of debt and that with a little time, your financial problems will go away on their own.  Before you wait too much longer, consider this: multiple celebrities and high-profile business owners have filed bankruptcy to get back on track financially.  There is nothing embarrassing about it and everyone has made poor financial decisions.  

In fact, this month, Gary Busey – an American film and stage actor best known for his acting in Gunsmoke, Walker, Texas Ranger, Law & Order, and Entourage – filed Chapter 7 bankruptcy.  Busey received an Academy Award nomination for Best Actor in The Buddy Holly Story. In addition to Busey, Gary Coleman, Burt Reynolds, Jerry Lee Lewis, Anna Nicole Smith, Sarah Ferguson (Duchess of York), P.T. Barnum, Donald Trump, Patricia Kluge, Abraham Lincoln, Walt Disney, and other famous celebrities and business people, all filed bankruptcy.  

What this means is that you should never be embarrassed to take advantage of the debt relief that is legally and rightfully available to you – the same relief that billionaire Donald Trump took.  No one is perfect, and every day, people make unwise financial decisions.  Beyond this, lost jobs, divorce, unexpected medical expenses, a bad economy, and a host of other situations can blindside even the smartest of financial plans, leaving you unable to pay your monthly bills and sinking further and further into debt.  

Filing bankruptcy is a smart move for a lot of people right now.  Sometimes, debt relief through bankruptcy is not only the smartest option – it’s the only option for getting out of debt.  Don’t delay the inevitable, thinking that your financial problems will go away on their own, especially when you have a legal option to forge a fresh financial start. 

One of my top ten favorite bankruptcy cases

The last step of the bankruptcy process is when you receive your discharge notice. Both you and your attorney receive this notice and it means that the court has wiped out your debt and you are now able to start over, debt free. I recently received a discharge notice for Miguel C. that caught my eye. His was an especially rewarding case. He had been a law enforcement officer for ten years and had partial ownership in a business. He earned over 80k a year but had over 50k in credit card debt and a growing family that made meeting his monthly obligations impossible. He had been told time and again by other attorneys that he did not qualify for a chapter 7 bankruptcy due to his income and business ownership. NOT TRUE. The “means test” which determines whether a person qualifies for a chapter 7 bankruptcy is based on both income and expenses. It takes a qualified, skilled bankruptcy attorney to determine whether a person qualifies for a chapter 7. Thanks to us, Mike was able to:

• Keep his primary home

• Get out from under an investment property that was dragging him down

• Keep his 2008 Toyota SUV

• Enjoy a better relationship with his family and loved ones

• Concentrate more at work without distracting collection calls or financial pressures.

Every week I cringe when I talk or meet a perspective client who “heard from a friend”, or “read online” about what a bankruptcy can or cannot do, what happens post bankruptcy or how someone should act prior to filing bankruptcy. Shouldn’t you get your information from a qualified bankruptcy attorney expert? To schedule your free initial consultation call us at 305-663-3281or email john@bankruptcylawclinic.net.