Introduction
When the sub-prime mortgage crisis began last year, there was a significant rise in bankruptcy filings. As the economic downturn continued, statistics showed that in 2008 Chapter 7 filings rose more than 40%; Chapter 11 to almost 50%; and Chapter 13 went up almost 15%. These statistics, while shocking, reveal that both consumers and businesses filed a close to 50% of all bankruptcies last year.
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What is bankruptcy? It is the process by which all or part of one’s debt is discharged by a judge; whether it is for an individual or a business. Depending upon the type of chapter you file determines the method of payment.
Here we will delineate the difference between Chapter 7, 11, and 13, which are the most common bankruptcies filed. We will also cover the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which was an amendment to the original bankruptcy code that changed the requirements for filing under Chapters 7 and13.
We will also touch on how to find a lawyer, and give you a step by step account of what to do and how to do it. There will also be information on how to repair your credit after filing bankruptcy
When an individual files bankruptcy, this information is noted on all three credit reporting agencies for ten years. Thus, we will also provide you with the link to The Fair and Accurate Credit Transaction Act so that you can peruse your rights as it pertains to these reports.
While fees may vary from lawyer to lawyer, the bankruptcy filing fee for Chapter 7 is $299.00, for Chapter 13 it costs $274.00, and for Chapter 11 the cost is $1,039. In addition, because you will have to seek credit counseling as part of the bankruptcy law, a fee may be incurred here as well.
It cannot be stressed enough that filing bankruptcy is a serious undertaking. It requires that you provide specific paperwork and information on everything you own as well as your income. There are many online bankruptcy companies and self-help books available; however, it is extremely crucial that you seek a lawyer. Their expertise in this area will allow them to guide you through the process without causing further stress.
Finally, think long and hard about this process. Explore every alternative before you make this decision. If you find that there is nothing more you can do, and you are becoming more stressed over the dire circumstances, then find a good bankruptcy lawyer and proceed.
Chapter 7
Before the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was enacted, Chapter 7 bankruptcy was an easy process. Those consumers who had mounting debt and could no longer afford to pay or whose accounts were put into collection were able to take advantage of Chapter 7. This is not the case today.
The basic process of Chapter 7 requires that all non-exempt property is placed in the hands of a trustee who sells these assets in order to pay the debtors. However, most people who file bankruptcy do not have non-exempt property and, therefore, this part of the filing is a moot point.
Today, filing Chapter 7 does not automatically liquidate all debt. Moreover, depending upon your income – you may not be able to file Chapter 7 at all but would have to file Chapter 13 instead. The reasoning behind this is that if you have a higher income, the court would determine that you have enough funds to at least pay part of the debts owed.
How is the determination made as to whether or not you can file Chapter 7 or not? The income you make is measured against what is called “the median.” If your income is more than the median, it is literally put through the “means test.”
This test is the process by which it is determined if your income, after all debts are paid, is sufficient enough to make payments towards that debt. If the test shows that you have sufficient capital, Chapter 13 is then filed. If not, then you will be able to file under Chapter 7.
Another change added to the Chapter 7 bankruptcy requirement is that you are mandated to obtain credit counseling before you file. The counseling agency must be approved by the U.S. Trustee’s office.
This counseling serves two purposes: (1) It determines whether or not you need to file; and (2) whether you can utilize a repayment schedule to pay down the debt.
Of course, neither of these situations may fit your specific needs. Nonetheless, because this is a requirement, you will have to engage. Let’s assume, for example, that through counseling there is a way you can repay the debt you owe. In this case, you can submit the repayment plan to the court along with the certificate stating that you participated in and completed the service.
If bankruptcy is filed, there is one more counseling session you will have to attend. Again, you will have to submit a certificate in order for your debts to be discharged by the court.
Chapter 13
Chapter 13 bankruptcy is required if a consumer does not pass the “means test” as stated in Chapter 7. In addition, this process allows for the consumer to keep all assets but because their income is higher, he or she is required to pay a portion of the debts over a period of years.
Chapter 11
Chapter 11 bankruptcy is filed by businesses. You may have heard or read about many companies filing Chapter 11 even though their businesses continue to operate. This is due to the fact that they keep control of their assets while, at the same time, working out an arrangement with their creditors and the court to come to an agreement to pay off the debt.
Once a deal is struck, the owner of the business will continue with operations and payments will commence. There is one caveat; however, creditors have to vote on whether or not they approve of the deal beforehand. If they vote no, then the court becomes involved to mediate the terms of the agreement so that everyone is satisfied with the terms.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
When this bill enacted in October of 2005, many consumer groups and judges were opposed to it. Not surprisingly, the lenders were strong advocates of this new legislation. Thus, this act led to the many changes that prevented consumers from filing Chapter 7 based on their income.
The “means test” was added to ensure that Chapter 7 filings would be converted to Chapter 13, under the conditions set forth in Chapter 7.
However, there was one bright spot to this act. As a result of incorporating the “means test,” it was found that consumers could have their debts discharged more easily.
Since 2005, it was also found that the mandated counseling sessions were of little or no use since most consumers had thoroughly explored their options before seeking this last resort.
How is the “means test” applied? According to the BAPCPA, a consumer has an income net expense of less than $100 per month would qualify for Chapter 7. Conversely, if a consumer had an income net expense in excess of $166.67 per month, that he or she would qualify for Chapter 13. Thus, if one’s income less expenses falls somewhere between $6,000 and $10,000, then 25% of that income would be relegated to pay the debt.
Bankruptcy abuse is applied if a person asks to have all debt discharged even though that person may have enough income to pay for a portion of the debt. In is under the provisions of this act and the “means test” that this determination is made.
The Bankruptcy Process
Finding a Lawyer. This should not be too difficult. If you have an attorney on retainer he may be able to refer you to a qualified bankruptcy lawyer. If not, check out Jacoby and Meyers. They offer reasonable rates, and you can check their offices online by referring to the Resource page at the end of this report.
Here is the process, step by step:
1. Call the lawyer and set up an appointment as soon as possible. Before you meet with the lawyer, some preparation needs to be done.
• Bring all the previous month’s bills reflecting how much you owe. This includes credit cards, loans, rent, mortgage, and other bills not mentioned.
• Bring the last two payroll stubs from your company and bank account records.
• Include your latest credit report and FICO scores as well.
• Make a list of everything you own. This includes pension statements, and if applicable, child support payments, rental income (if you own a home), and other sources of income.
• If you have a household budget, bring that as well. This is important because the lawyer needs to assess how much you expend each month compared to your income.
Note: It is advisable to place all paperwork in an according folder and label the tabs so that it will be easier for the lawyer to find what he needs.
Once he has perused this information, he will determine if you qualify for bankruptcy and under what chapter. If you do qualify, the lawyer will ask for the fee to be paid and the next phase will begin – preparing for court.
2. Due to the fact that there are numerous documents to prepare, the lawyer will contact you when he is ready to meet with you again to have read a copy of the petition. If everything is in order and you have not made any additional changes (such as forgetting to add a bill), you will be requested to sign the formal petition.
3. After signing the petition, you will have to pay a fee to file the petition. The lawyer will do so and a case number will be given to the petition. The good news is that from here on in, any creditor who calls, mails, or contacts you to collect payment on debts will be required to stop doing so. To ensure this, a letter will be sent by the Court to all creditors advising of the petition.
4. Once the petition is filed with the court, another attorney will be assigned to act as your trustee. He will be present with you at a designated place, date, and time specified.
Note: Don’t panic! The trustee will act on your behalf and the procedure takes a few minutes. Moreover, it is unusual for creditors to appear at all; but if they do, know that you are being fully represented by the trustee.
This is an informal proceeding and it is designed to ensure that the debts you are trying to have discharged are in fact in accordance with the bankruptcy law. You will be asked to attest to the truth of the petition you are filing.
5. After several months (less than four) from the date you attested to the correctness of the petition, you will receive from the court a “Discharge of Debtor” document. This means that all debts have been wiped out and have been eliminated.
With this document in hand, it is recommended that you place it and all pertinent material in a safe place so that you can refer to it later on when needed.
Note: It’s a good idea to request your credit report and FICO scores again. Check the report to determine if all is in order and then file it away with the aforementioned papers.
How to Repair Your Credit
Before the changes to the bankruptcy laws, the judge who presided over the discharge of debt would offer recommendations to those who filed petitions. The advice given to assist petitioners was to begin the task of repairing their credit.
The best way to repair your credit is to call a reputable credit card company and ask if they have a program wherein you can utilize their debit card to make purchases. This requires that you deposit a sufficient sum of money into their account (usually $500.00) and then the card is issued to you.
The purchase amount is deducted from your account. It is up to you to keep the account active and replenish it when you go below $125.00, for example. After one year (or depending upon the company’s terms) if you have been paying your bills on time, they may offer you a new credit card with a minimal line of credit.
Again, as long as you pay your bills on time (or better yet, pay off the balance each month), the company will increase the line of credit commensurate with your income.
This serves two purposes: (1) It establishes you as a credit card holder; and (2) it allows you to begin the process of repairing credit as it relates to the credit reporting agencies.
Remember, the credit reporting agencies will have bankruptcy listed on each report. After ten years, this statement is removed from all credit reports. But, in the mean time you are helping to establish a basis from which your credit standing will improve as well as your FICO scores.
Note: With the new Recovery Act passed this year, you may be able to apply for credit through a bank. The best advice one can offer is to call or visit banks in your area to determine if they offer a debit card that can be changed to a credit card at some later date.
You may still receive credit card applications at home. Be careful! Some of these companies may offer 0% interest rates for a year, but may go as high as 29% afterward. Resist the temptation.
Consequences of Filing Bankruptcy
Bankruptcy is filed as a result of the inability to pay long standing debts. It is neither taken lightly nor meant to “get away” with something. It does, however, have an affect on those who file.
We would all like to think we are in control. But, sometimes there are circumstances in which we have no control and we have to deal with the situation at hand.
Whether someone in your family has become seriously ill and the bills are mounting; the economic crisis caused a dramatic decrease in savings and you can no longer meet your debts; the home you own is “under water,” a term that denotes that the mortgage payments are higher than the value of the home; or you can no longer pay the mortgage which may result in foreclosure. All of these life-changing events are contributory factors that may lead you to bankruptcy.
No one sets out to file bankruptcy; it just happens. Is it embarrassing? Yes. Is it stressful? Yes. But you cannot allow those emotions to interfere with the task at hand. Like most people who have been in deep debt, you may have turned over every stone to find an answer to your dilemma.
The only answer for you may be bankruptcy. If this is the case, there is no shame or label attached to this difficult decision. The best you can do is find a bankruptcy lawyer and proceed to file the petition.
Furthermore, other than the lawyer, the court, the creditors, and the IRS – no one can know that you filed bankruptcy unless someone is willing to pay a hefty sum to investigate your records online. It is a matter of public record, but should not deter you in any way.
In addition, the new stimulus bill may have information pertaining to bankruptcy, so it is advisable to stay informed and read all of the latest information regarding this matter.
Finally, the reasons for filing bankruptcy may have been out of your control. The statistics mentioned in the Forward of this report seem to indicate this is the case. Once the dust settles, make a point of re-establishing your credit but try to keep only one credit card for emergencies.
At a time when everyone is re-assessing their spending habits, it may be a good idea to go back to the old days when everything was paid with cash.
Please bear in mind the advice at our Disclaimer Page with regards to the information contained on this page
