SHOULD I FILE BANKRUPTCY?

If you have more month, than income, then you might want to consider bankruptcy. Technically, the question is whether you are insolvent. This is a difficult question which requires a comparison of debt to assets and ability to service debt while living modestly. If you are unable to pay your bills you are probably insolvent.

 

HOW CAN I AVOID BANKRUPTCY?

Many creditors will negotiate with debtors and will take lump sum payoffs. Naturally, this means having the ability to draw money from some source to pay off these debts. Alternatively, you could consult with a debt management company to assist with a repayment schedule. Typically, these companies do not require a lump sum payment and instead allow for monthly payments.

 

HOW DOES BANKRUPTCY AFFECT YOUR LIFE?

A bankruptcy discharge is on your credit for 10 years and is a severe negative on your rating. Because credit rating is dependent upon factors other than bankruptcy, like amount of credit, and payment history, people are able to re-build their credit after filing bankruptcy. Occasionally, job applicants with bankruptcies will face hidden discrimination. Most employers know that they are prohibited from discriminating against a person who filed bankruptcy and therefore do not disclose this is a reason for not hiring. Other than these issues, most people feel tremendous relief from filing and in fact are greatly relieved at the “fresh start.”

 

WHAT TYPES OF BANKRUPTCY CAN I CHOOSE?

The most common bankruptcy is Chapter 7 which is sometimes referred to a “liquidation.” This Chapter is designed for debtors in financial difficulty who do not have the ability to pay their existing debts. Under chapter 7, you may claim certain of your property as exempt under California law. Exempt is a legal term which means basically that the property is “off the table.” In other words, your creditors can’t have it and can’t sell it. In a chapter 7 bankruptcy, a trustee is appointed to review your case. He or she may have the right to take possession of and sell the remaining property that is not exempt (i.e., “on the table”) and use the sale proceeds to pay your creditors (I.e, liquidation.) The purpose of filing a chapter 7 case is to obtain a discharge of your existing debts.

Far less common than a chapter 7, is the chapter 13. Chapter 13 is designed for individuals with regular income who would like to pay all or part of their debts in installments over a period of time. Because most Chapter 13 cases get dismissed because the debtors cannot meet the terms of the repayment, debtors who pass the means test, are usually encouraged to file the chapter 7. However, there are circumstances that warrant filing a chapter 13 over the chapter 7. Specifically, debtors with a completely unsecured second mortgage (i.e., the second mortgage is totally underwater) or debtors who are late on their first mortgage and in danger of foreclosure should seriously consider a chapter 13. The Chapter 13 bankruptcy process permits debtors to extinguish the lien of the completely unsecured second mortgage, and often permits the debtor behind in mortgage payments to cure his or her arrears. You are only eligible for chapter 13 if your debts do not exceed $1,000,000 in secured debt and $336,000 in unsecured debts. Under chapter 13, you must file with the court a plan to repay your creditors all or part of the money that you owe hem, using your future earnings. The period allowed by the court to repay your debts may be three years or five years, depending upon your income and other factors. The court must approve your plan before it can take effect. After completing the payments under your plan, your debts are generally discharged.

 

WHAT IS THE MEANS TEST?

Debtors whose debts are primarily consumer debts (i.e., credit cards, medical bills, home mortgages, etc.) are subject to a “means test” designed to determine whether the case should be permitted to proceed under chapter 7. If your income is greater than the median income for your state of residence and family size, you may not be allowed to file a chapter 7. Many websites provide a simplified means test which can be interesting but should not be relied upon. These website will provide the median income and many people will automatically believe they do not qualify. This is unfortunate because individuals with incomes above the median, can still qualify for a chapter 7 even if their income is over the median. The means test is an eight page document very similar to a 1040 tax form. Just as you would consult an accountant for complicated tax advice, debtors should request counsel in completing the means test.

 

WHAT PROPERTY CAN I KEEP?

You may claim certain of your personal and real property as exempt under California law. Exempt is a legal term which means basically that the property is “off the table.” In other words, your creditors can’t have it and can’t sell it. In a chapter 7 bankruptcy, a trustee is appointed to review your case. He or she may have the right to take possession of and sell the remaining property that is not exempt (i.e., “on the table”) and use the sale proceeds to pay your creditors (I.e, liquidation.)

 

CAN I KEEP MY CAR?

The short answer is Yes. The longer answer is somewhat more complicated. IN a chapter 7, the debtor must agree to reaffirm the debt. In other words, the debtor enters into a written agreement with the creditor whereby the debtor gets to keep the car after the debtor promises to continue to pay the payment. There is a downside to this. If after reaffirming the debt, the debtor stops making payment, then the debtor can be sued for the deficiency on the vehicle.

 

WILL I HAVE TO GO TO COURT?

All debtors are required to attend a meeting with the court appointed trustee. This meeting is called a creditor’s meeting because your creditors are allowed to come to the meeting to ask certain limited questions. Most debtors do not ever appear before the bankruptcy judge.

 

HOW WILL BANKRUPTCY AFFECT MY CREDIT RATING?

A bankruptcy discharge is on your credit for 10 years and is a severe negative on your rating. Because credit rating is dependent upon factors other than bankruptcy, like amount of credit, and payment history, people are able to re-build their credit after filing bankruptcy. It is not unusual to hear debtors report that they have decent credit within three years after discharge

CAN I BE DISCRIMINATED AGAINST FOR FILING BANKRUPTCY? CAN I BE FIRED?

Neither the government nor private employers are permitted to discriminate against individuals who file bankruptcy.

 

WILL MY SPOUSE BE AFFECTED?

Normally, spouses file together, but they are not required to do so. However, if a single spouse decides to file, that spouse must include the spouses income and assets in his or her petition.

 

WHO WILL KNOW?

Bankruptcy is a public record. However, in order to search the records, people have to have an account with the Pacer system. This requires some modest information disclosure and payment ability. As such, most members of the public do not have access (although they could easily get it) and therefore it is usually the case that nobody knows that you filed.

 

WHAT DOES DISCHARGE MEAN?

Discharge is the legal term for the elimination of your debt. However, not all debts are discharged If you are found to have committed certain kinds of improper conduct described in the Bankruptcy Code, the court may deny your discharge and, if it does, the purpose for which you filed the bankruptcy petition will be defeated. . Even if you receive a general discharge, some particular debts are not discharged under the law. Therefore, you may still be responsible for most taxes and student loans; debts incurred to pay nondischargeable taxes; domestic support and property settlement obligations; most fines, penalties, forfeitures, and criminal restitution obligations; certain debts which are not properly listed in your bankruptcy papers; and debts for death or personal injury caused by operating a motor vehicle, vessel, or aircraft while intoxicated from alcohol or drugs. Also, if a creditor can prove that a debt arose from fraud, breach of fiduciary duty, or theft, or from a willful and malicious injury, the bankruptcy court may determine that the debt is not discharged.

 

HOW CAN I GET A DISCHARGE?

Filing a Chapter 7 is the fastest and easiest way to get a discharge. You may also get a discharge through the chapter 13 bankruptcy process. Certain people can also get discharges via the Chapter 11 and 12 process but these are rare for most consumers.