The Online Bankruptcy Blog

While bankruptcy is designed to help people escape serious debt problems, the situation becomes interesting when it comes to credit accounts with zero balances. These are typically credit card debts, either through credit card companies or those issued by individual businesses. When filing for bankruptcy, debtors only need to include actual debts, so in theory, they do not need to list those zero balance accounts. The situation becomes a little murkier if these accounts include monthly or annual fees, and those fees will become due during the bankruptcy process.

In most instances, you can leave these accounts out of your bankruptcy petition. You should be aware that your petition for bankruptcy does become a matter of public record and that most credit providers regularly data match bankruptcy petition notices and their own records. While your account may have a zero balance, your credit provider is quite within their rights to cancel those cards to prevent you incurring new debt.

Should your credit provider not cancel those accounts, they will be available for post bankruptcy. This can help to kick start a new positive credit history post bankruptcy so it is well worth considering paying down any credit accounts with low balances prior to filing for bankruptcy. Paying down those accounts will not guarantee they survive the bankruptcy process, however, it can be well worth exploring the option.

Bankruptcy will, especially in a Chapter 7 bankruptcy, discharge all eligible debt no matter how large or small the balance is. Paying down to zero any low value (less than $200) balances makes sense for a number of reasons, most particularly, having that account survive bankruptcy and available post bankruptcy.

When filing for bankruptcy, the bankruptcy court, and more particularly the appointed trustee, needs to know what assets you own and what their value are. This enables the trustee to place a value on the bankruptcy estate and to determine how to proceed with the bankruptcy petition. It is important to list every asset that you own, or have a share in, and to accurately place a value on those assets.

Under a Chapter 7 petition for bankruptcy, you can exempt some of your assets from the bankruptcy estate. Each state has its own set of exemptions and values, for example, one state may have a homestead exemption of $100,000 while another only allows $20,000. Any assets in excess of those exemptions could be seized and sold by the trustee. Under a Chapter 13, the value of your assets is used to determine the minimum amount that you must pay. This is determined by working out how much creditors would have received under a Chapter 7 petition, then applying that amount to the your total payments. This is why some Chapter 13 petitions could extend to five years.

So how do you value assets when filing for bankruptcy? Wherever possible, your asset values should be obtained through independent sources. Your home could be valued by an appraiser or, at the very least, a real estate agent. Your car has a current market value that any car salesperson can look up while jewelry can appraised by a jeweler.  You can use a guesstimate for most of your smaller assets such as television sets and appliances. Collector items such as stamps and coins generally have a catalog value that can be used.

If you own shares, then the current share value is appropriate. If you part own assets, for example, you have part ownership of a holiday home, then you only need to include the value of your share, however, that does need to be your share of the current market value.

What is important to note is that a trustee will revalue assets before seizing and selling them under a Chapter 7 petition. This takes into account the costs associated with seizing and selling those assets. So a television set that has a resale of $50 probably wouldn’t be seized and sold since, at auction, it will sell for less than this, possibly even less than the cost of seizing and selling. However, under a Chapter 13 petition, the trustee doesn’t always make that discrimination, so the total value of your assets under a Chapter 13 could be higher than under a Chapter 7. This is why it is important to secure the services of a bankruptcy attorney – they will ensure your petition receives a fair hearing under either Chapter.

Most people know that bankruptcy is a process that eventually cancels monies owed to creditors. In legal terms, the canceling of a debt is referred to as a discharge of that debt. There is always some confusion about which debts can and cannot be discharged. As a rough guide, consumer debts that have not been secured can be discharged while non-consumer debts often cannot. There are exceptions to this, and that’s where a bankruptcy attorney is best placed to advise.

How then are debts discharged? There are some misconceptions over this process. I know several people who claim that bankruptcy costs taxpayers billions every year. Why? They are under the impression the bankruptcy court pays the debts on behalf of the debtor, and that money of course would come out of taxpayer’s funds. I am sure creditors would appreciate that. Unfortunately, for creditors, that is not the case. In fact, creditors watch as the debt is cancelled, wiped from their books – creditors take the loss. This is one reason why credit becomes harder during tough economic times, they don’t want to be handing out credit if people cannot make the repayments.

When a debtor files for bankruptcy, the court follows a process which, at the conclusion, discharges any eligible debts. This is in the form of a court order that pronounces the debts discharged, and which then effectively bans creditors from contacting debtors in order to collect those debts. Creditors are free to contact the various credit reporting agencies to list your debt as discharged in bankruptcy, and that will stay on your history for up to ten years.

In many cases, debtors are able to start life again completely debt free since their debts have all been consumer related, particularly credit card related. Others are able to start all over again, however, they may still have their home (and its mortgage) and car (and its repayments). Every debtor is different and every debtor will have a different outcome.

Business owners are often advised to set up a limited liability company (LLC) in order to protect themselves should the business fail and require bankruptcy protection. In most cases, a business owners liability is then limited to the value of the shares they have in the company, not the debts themselves. An LLC is a legal entity and as such stands at arms lengths from the owners. A small business that is formed as a sole proprietorship doesn’t have that same protection – the owner(s) and the business are one. In fact, legally, the business is not a legal entity, therefore it cannot be sued, or file for bankruptcy.

While most business owners who set up LLCs feel they are completely safe from creditor action in Bankruptcy, this is not always the fact. Business owners, particularly when a business is in its infancy, are often required to personally guarantee some debts. Credit cards are a good example. While the credit card may be in the business name, and the responsibility of the business, they may still carry those personal guarantees.

A personal guarantee is just that – you are personally guaranteeing that line of credit. If the business is forced into bankruptcy, the lender can, and will, seek any outstanding balances from the guarantee; in other words, you. The only way to avoid this debt is by filing a personal bankruptcy petition at the same time.  If you do need to file for bankruptcy as an LLC, be sure to discuss any personal guarantees with your lawyer as they will have a big impact on your petition.

For those who are in business, part of your annual review should, perhaps, be a review of all debts. If you do have personal guarantees on any lines of credit, it may be time to close those lines and to establish new lines that are not guaranteed. This will provide you with protection in the future should your business find hard times.

There is one area of an individual’s finances that really peeves bankruptcy lawyers, and that’s their taxation returns. You can only file for a Chapter 7 petition for bankruptcy if your tax returns are all up to date. It’s not unusual for a bankruptcy attorney to send a client to the local tax office as part of their bankruptcy preparation, and you’d be surprised at how many people haven’t filed that return.

Why do you need to file your tax return? A number of reasons, the primary one being the IRS wants their share of your bankruptcy estate before unsecured creditors get their hands on it. The bankruptcy court also requires this, along with last year’s return, to determine your financial state (how much money you have been earning) in comparison to your current situation. Creditors are also entitled to request copies of those tax returns before responding to your petition for bankruptcy.

Once you have filed your taxation return, the IRS will send a copy of the return to the bankruptcy trustee once an assessment has been made. This will advise the trustee of any refunds owing to you, which the trustee will claim as part of your bankruptcy estate, or how much you owe, which then becomes another debt that needs to be paid.

If you know you are going to be eligible for a refund, it is often a good idea to file your return early and to receive that refund prior to filing for bankruptcy. If you use the refund for your living expenses, then the trustee will most likely not request it, however, if you waste it on a holiday or expensive gifts, then the trustee may consider this an abuse of the bankruptcy process, possibly even dismissing your petition for bankruptcy. If you haven’t filed a tax return this year, and bankruptcy is a possibility, then you will need to see to it first, especially if you’re considering a Chapter 7 petition for bankruptcy.

When filing for bankruptcy, one of the tests that is applied by a trustee is whether or not your petition and its components have been filed in ‘good faith’. In a Chapter 13 petition, for example, the trustee will look at how much you are proposing to pay in your monthly plan, and whether or not you are, within reason, paying as much as possible. While bankruptcy is designed to help debtors make a fresh start in life, the underwriting principle is that every creditor receives as much as possible from the process.

The principle of ‘good faith’ then is where you are representing everything honestly, and that you are trying to deliver as much as possible to your creditors. In effect, you are saying, “This is everything I can spare; take it, then leave me in peace.” And that is exactly what the Bankruptcy Act is designed to do. While the trustee is independent to an extent, their role is to follow the Bankruptcy Act in the best interests of everyone and that includes your creditors.

Creditors will often lodge objections to Chapter 13 payment plans based on that argument of good faith.  From the debtor’s perspective, the important person in the equation is the trustee. If the trustee supports the creditor and also lodges an objection based on good faith, then you know your petition is in for a rough ride – you (and your attorney) are going to have to prove that good faith. On the other hand, if the trustee does not support the creditor, then it’s rare for their objection to succeed.

Your good faith commences when you first start talking to your attorney. You need to be honest and open about every aspect of your finances. Your attorney can juggle (where allowed in the Bankruptcy Act) your information in order to present the possible case for you. If you don’t act in good faith with your attorney, you may find a few unpleasant surprises waiting for you.

There are a lot of debtors using services designed to bring all of their debts together into a single payment. The problem with these services is the cost – you are often extending the period of all monies owed, and paying a higher interest rate. Sure, the monthly payment plan is lower, but the final total paid can be substantially higher. Of course, your creditors will need to approve of this approach as well. You can achieve the same result through a Chapter 13 petition for bankruptcy, interest free, and your creditors have to accept the plan.

A chapter 13 bankruptcy comes with added bonuses. If your home is underwater, then you may be able strip back any secondary mortgages. You may even be in a position to modify your car loan if that too is underwater. The end result for most petitioners is a monthly payment plan that is interest free, is less than what they are required to pay pre-bankruptcy, yet will, over the life of the plan, repay most of their debts. Your mortgage payments should also be brought up to date as well.

If you do enter a payment plan that pays out debts rather than having the debts discharged, be sure to check your credit history. If it doesn’t show the debt paid in full, ask your attorney to contact the lender to update your credit history. While bankruptcy may appear on your credit history, it will also show that many of your debts were fully paid through the payment plan. This will help you rebuild your credit score post-bankruptcy.

Payment plans are expensive and often put together by those who are paid by creditors. This means their allegiance is not to you, but to the credit providers, so these plans will always work in their interest, not yours. Instead, consult a bankruptcy attorney – they will work towards a solution that favors your interests instead.

We have frequently mentioned the need to challenge credit card companies when they file a suit to recover the debt owed. Credit card companies rely on one factor when filing for a judgement on a debt, and that’s the habit of most debtors to ignore the matter altogether. When the suit is not defended, the credit card company receives a default judgement; in effect, a rubber stamp on their law suit. If the credit card company is looking for a garnishment on your wages, or a bank levy, then filing for bankruptcy can stop that judgement. If the credit card company seeks to gain a lien on your property, then bankruptcy may not stop that process. The credit card company has, in effect, turned an unsecured debt into a secured debt, and that’s how the bankruptcy court will see it.

If you engage an attorney, they can file a “Complaint to Avoid a Judgment Lien” – this is a special action that is asking the bankruptcy court to set aside the lien on your property.  If the property is exempt under the Bankruptcy Act, then the court may also set aside the lien. These are certainly complex processes to navigate, especially if your are filing pro se (without an attorney).

Naturally, it is always better to avoid these situations where possible. Once you receive notification that a credit card company (or any other unsecured creditor for that matter) has filed a suit to recover a debt, contact an attorney. What most people don’t realize is that credit card companies are dealing with thousands of overdue accounts each day. They are looking for a quick fix, and too recover as much money as possible at the lowest cost possible.

For a creditor, seeking a judgement, then having your assets assessed, seized and sold all cost a considerable amount. If your attorney contacts them with a reasonable offer, they will most likely accept it – it fulfills their aim of collecting as much as possible as cheaply as possible. Of course, that means you have to have access to the funds required to settle on that debt. If you do, then you’ll save yourself the costly (in many ways) process of bankruptcy, and avoid having a default judgement entered on your credit history.

When filing a Chapter 7 petition for bankruptcy, you can include reaffirmations of secured loans. These would typically involve your home and your motor vehicle. Reaffirmation is a process that advises the court that you are maintaining full responsibility for the loan, and that it isn’t to be included in the bankruptcy process. There are some real dangers in reaffirming these loans, particularly after the bankruptcy process has been completed.

Filing for bankruptcy automatically triggers an event known as a stay. A stay is a legal requirement that prevents all creditors from taking any further action – this includes lenders that own your mortgage. Once your bankruptcy petition has been discharged, that stay is lifted, and a lender is free to continue on with foreclosure action. Under the Bankruptcy Act, lenders cannot sue for the outstanding balance after a home is foreclosed and sold – that difference is automatically discharged.

The one exception to that rule is when a petitioner has reaffirmed a loan. As mentioned, reaffirmation removes that debt from the bankruptcy process, so if the home is foreclosed post-bankruptcy, the lender is free to sue the outstanding balance. In most cases, reaffirmation protects the lender, not the borrower. The only exception to this is if the lender agrees to modify the loan in any way. In that case, the new terms should favor the borrower, however, a borrower should not agree to a modified loan unless they are sure they can maintain the new mortgage schedule.

Before reaffirming a loan, you should first seek the advice of a bankruptcy attorney. They will determine if the reaffirmation is really in your best interests, both short and long term. While the reaffirmation may feel like the right thing to do now, you also need to look at the longer term effect.

There’s a saying we hear a lot in law – “what a difference a day makes.” In law, this is very true. If you file for bankruptcy on a Thursday, you may be ineligible for a Chapter 7 – submit that same petition on the Friday, and you could be eligible. It all comes to the average of your income over the past six months. By waiting one day, you could move from one pay period to another, with the second being unemployment, and that can significantly drop your average income to below the state’s median.

Here’s the bad news then – from November 1 2011, the median income in all states is dropping. For one person households, the drop is only a few hundred dollars per year. For a four person household, the drop could be as high as $4000 depending on the state you live in. Every state’s median income is derived from data collected by the Census Bureau and with unemployment high it’s only natural that median income levels are going to drop. This means you could be eligible for a Chapter 7 on the October 31, yet 24 hours later on November 1, you are suddenly ineligible.

To qualify for a Chapter 7 petition for bankruptcy, your average income for the six months prior to filing has to be below the median income for your state. If you are slightly over, then you may still qualify if you adjust your income according to the longer schedule that can be included in your petition. This looks at allowable expenses such as car costs, rent, education and medical expenses.

What is important to note is that bankruptcy law is always in flux. What is true today may not be true tomorrow, especially when judges enter new interpretations of the law. The smartest move anyone can make when considering bankruptcy is to engage the services of an experienced bankruptcy attorney. It is their job to keep up to date with all the latest changes in bankruptcy.  Latest median incomes can be found on the Justice website.

Farmers and fishermen have one advantage over other people when it comes to filing for bankruptcy. They can modify their mortgage through the bankruptcy process. One theme that you will often read when looking through our pages is that bankruptcy is not the best solution for distressed mortgages. Under a Chapter 7 petition, filing will freeze any actions by the lender when it comes to foreclosing, however, once you have been discharged, the lender can proceed with foreclosure. Chapter 13 petitions do provide an opportunity to catch up on arrears, so preventing the need for foreclosure – until you fall behind again.

A Chapter 12 petition for bankruptcy is designed solely for primary produces. These are family farmers and fishermen. Under the provisions for a Chapter 12 petition, your lawyer can propose a modification of your mortgage. This includes both the interest rate and the principal. The principal can only be modified if the properties value is less than the balance of the mortgage.

It doesn’t stop there. A Chapter 12 petition for bankruptcy can also help farmers and fishermen can also eliminate the extra charges that come with mortgages in default. This includes late fees and interest that may be charged because your mortgage payments are overdue. One of the real benefits to petitioners is that their lender does not have to approve the loan modification – if it is fair and reasonable, then it will be come an order of the bankruptcy court that the lender must adhere too. The lender will get the opportunity to argue their side of the case, however, it comes back to that fair and reasonable assessment. If it meets that assessment, then the bankruptcy court rarely refuses a loan modification – but only for family farmers and fishermen through a Chapter 12 petition for bankruptcy.

Bankruptcy is a very complex piece of legislation made more complex by the fact that some states have enacted their own versions of what is, essentially, a federal act. Despite having state bankruptcy laws in place, bankruptcy is still petitioned through the Federal Bankruptcy Court system. While it is fairly rare, it is technically possible to be ineligible for bankruptcy because of your income. As I stated, it is rare, however, the legal system is starting to see more people fitting this criteria every week.

So why would income make you ineligible for bankruptcy? To qualify for a Chapter 7 petition for bankruptcy, your income needs to be below the state median. The term ‘income’ in this situation is actually a figure that is determined by averaging your actual before tax income over the proceeding six months. If you had a high income job, and then found yourself out of work, that high income job may push you over the state median – this means your ineligible for a Chapter 7.

For a Chapter 13 petition for bankruptcy, you need submit a payment plan that will cover you secured and priority debts as a minimum. If you are not working and you have a very small income, you may not be in a position to submit a plan that adequately covers those debts. The trustee may then refuse to accept your payment plan. This leaves you in a catch 22 situation, technically ineligible for either forms of bankruptcy.

There are options available that an experienced bankruptcy attorney can consider. While you may not qualify for a Chapter 7 petition based on income, there is an alternate route whereby your attorney can work through every expense – this may well modify your income and bring you below the states median. You may also qualify for a special circumstances, or totality of circumstances – the latter will look at your lost employment to determine if this is going to be a long term situation. After all, if you don’t qualify today, you may well in two or three months when your past employment has a reduced effect on your average income.

That indeed may well become your final option – waiting two or three months. Of course, that is only an option if you have that time up your sleeve. This well depend on your circumstances and the amount of pressure coming from creditors. See a bankruptcy attorney – they can almost always resolve the issue.

While filing for bankruptcy is a legal process that involved the Bankruptcy Court, few petitioners ever get to see a bankruptcy judge. Once you have filed your bankruptcy  petition, the paperwork makes its way to a bankruptcy trustee. It is their job to manage the bankruptcy process all the way though to its conclusion. While we often discuss what a trustee does in bankruptcy, we rarely discuss who they are.

There are three different trustees in bankruptcy. Bankruptcy are, in theory, managed by the United States Trustee. There are 21 regional centers across the country, each controlled by a U.S. Trustee. Your petition is passed on from the U.S. Trustee to either a Standing or Interim Trustee. These are two different trustees and their roles are very different.

The Standing Trustees manage Chapter 13 bankruptcy petitions. Their role is to approve, manage and disperse the funds from Chapter 13 payment plans. Standing Trustees rarely file adverse proceedings since their role is not so much inquisitorial as management. At the end of the Chapter 13 payment plan, the Standing Trustee’s role is to sign off on the collection and disbursement of funds, and to discharge the debtor and any remaining debts.

The Interim Trustee is charged with managing Chapter 7 bankruptcy petitions. This role is a much more hands on and inquisitorial since the trustee is trying to find as many assets as possible that could be seized and sold. You are more likely to see adverse proceedings in a Chapter 7 than a Chapter 13, especially if there is some dispute over the way exemptions have been applied. The Interim Trustee’s role is much heavier in that they must test a petitioners eligibility for a Chapter 7 petition, and then test every exemption on assets. When granting a discharge from bankruptcy, the Interim Trustee needs to be sure that every thing possible was done to recover as much as possible for creditors.

The Standing and Interim Trustee’s are generally attorneys, often from within your own community. They are paid a set amount from your bankruptcy estate, for example, as much as ten percent of a Chapter 13 payment plan. The U.S. Trustees are generally the only trustees appointed full time.

When people are pushed, their emotions take over and they often do rash things. Being hopelessly behind in debts such as a mortgage often triggers this response, especially if threatened with court actions or foreclosures. Here are four actions that some people often take when threatened with bankruptcy – and they generally lead to more tears.

• Seeking a second mortgage – most people will find it impossible to obtain a second mortgage if they are struggling with their primary mortgage, however, people do try, and sometimes they are successful. The problem is, you’re now further in debt.
• Taking retirement funds – drawing on retirement funds may help you catch up on overdue payments. However, if you’re struggling, you will continue to do so. Retirement funds are generally protected in bankruptcy, so keep them where they are safe – in the fund.
• Taking cash from credit cards – never draw large amounts (over $600) in cash from credit cards to pay bills, especially if bankruptcy is looming. The bankruptcy court does not take well to large cash withdrawals and these amounts may not be discharged through bankruptcy.
• Paying back friends and relatives – using cash reserves to back friends and relatives is another no no. The bankruptcy trustee will soon be on to them to return those funds to your bankruptcy estate to be distributed to creditors.

Those activities are not well received by the bankruptcy court especially when, in most cases, they are temporary measures that only stall the inevitable. Rather than trying extremes to prevent bankruptcy, seek the advice of a bankruptcy attorney. For most people, bankruptcy is only a minor irritation that comes with a big payoff – the chance to start again debt free.

Not being able to pay bills is one thing, but filing for bankruptcy is another. Many people find it difficult to file for bankruptcy, even though they are up to their eye-balls in debt. Some debtors hide from creditors, some even reaching a point where they are too afraid to open a door or answer a phone, just in case it is another debt collector. Filing for bankruptcy can end all of that.

In fact, when filing for bankruptcy, you will need to notify the court of every debt you have – and here’s the good news, the bankruptcy court will contact every one of those creditors telling them you have filed for bankruptcy. That letter, while not so blunt, effectively tells the creditor to lay off, not to contact you, and to stop all harassment and collection activities.

And that’s just the start. If a creditor does contact you without the court’s permission, they are said to be in contempt of court and could face sanctions, serious sanctions if they continually ignore the court orders preventing that contact. This court order extend to the period following bankruptcy if that debt is discharged (wiped). Once a debt is discharged, you no longer owe anything on it, therefore the creditor no longer has the right to chase you for payment.

If you file for a Chapter 7 petition for bankruptcy, the whole process can be completed within three months. That’s three months of freedom from all creditors, however, once you have been discharged from bankruptcy, your secured creditors (car loan, mortgage) can recommence action against you. The only way to seek freedom from these creditors is by giving up the asset that is attached to the loan – this means giving up your car to have the car loan wiped.

When filing for bankruptcy, the court takes over all notifications. You will only need to deal with your own lawyer, and with the court appointed trustee who will manage your bankruptcy case.

In what many would consider an absurdity, the cost of filing for bankruptcy is set to rise. It’s not a huge rise, but when you’re broke, any additional costs hurt.  What is important for anyone who is considering bankruptcy is that the cost of filing for bankruptcy is charged every time you lodge a petition. If you make mistakes and your petition is dismissed, you will have to pay those filing fees again when resubmitting your petition – that’s when these fees really start to hurt.

For Chapter 7 petitions for bankruptcy, the cost will rise from $299 to $306. While most would argue that a mere $7 is nothing, you have to find that whole $306 in cash at the time of filing. While fee waivers and payment plans are available, there is no guarantee that you will be approved.

For Chapter 13 petitions for bankruptcy, the cost will rise from $274 to $281. Converting from a Chapter 13 to a Chapter 7 incurs a fee of $25 while a filing fee for a Chapter 11 petition for bankruptcy will rise to $1046. These new fees will come into affect from November 1, 2011.

By engaging a bankruptcy attorney you will generally only need to file once, unless you are forgetful or dishonest when revealing information to your attorney. If you are honest, and your attorney has all the information, then they will ensure your documentation is filed in the correct manner. They will also ensure you are well represented throughout the bankruptcy process, thus avoiding any risk of having your bankruptcy dismissed. Just as importantly, your attorney will ensure that you retain as many assets (in a Chapter 7 case) as legally possible, and that you only pay what you can afford under a Chapter 13 payment plan. Yes – it’s now going to cost more to tell the world you’re broke!

Bankruptcy is a tool that is designed to help people who are underwater with debt gain a fresh start. While that is sound in principle, there is one group in our society who don’t really need a fresh start, they just need a clean end, and that’s the elderly. We have a rapidly growing senior citizen population and while many have been able to plan for the future with quality pension and health insurance plans, there are just as many who rely on social security. Problems really develop when this same group are suddenly hit with demands from creditors on debts that they have co-signed on, often for their children or grandchildren.

In most cases, if a senior citizen is collecting social security, then they will most likely travel through the bankruptcy process totally unscathed – they won’t lose a thing. In some states, bankruptcy can be a painful process, even for our elderly. If they own their homes outright, and the state has a low homestead exemption, then the trustee may well take the home to repay these debts. An attorney can help senior homeowners, in fact, they may even be eligible for a reverse mortgage which will avoid the whole bankruptcy process, and enable them to stay in their home.

Social security and pension plan payments are exempt from bankruptcy.  When it comes to assets, many of our seniors have little to show for their life’s work and what they do have is often well aged and with little resale value. These assets are worthless to a bankruptcy trustee since the cost of selling them may well exceed the value earned.

What does concern many welfare workers in this area is the pressure our seniors place on themselves to pay debts when they are really struggling to pay for food and medication. For our seniors, bankruptcy is not an option that provides a fresh start – it’s an option that may allow them to ‘retire’ with a more comfortable lifestyle.

People are often wary about filing for bankruptcy, often based on stories they have heard about the process. In most cases, those stories are nothing more than myths and once the air is cleared, they find that bankruptcy is not only not scary, it was the best thing they ever did. Here are ten bankruptcy myths that are just not true.

• Bankruptcy brings shame – this is perhaps the worst myth of all. Bankruptcy is there for a reason – to help people when they need it most. Do you recognize any of these names – they have all filed for bankruptcy? President Abraham Lincoln, Mark Twain, Henry Ford, Francis Ford Coppola, Larry King, Mickey Rooney, Burt Reynolds, Kim Basinger, Jerry Lee Lewis, Wayne Newton, M.C. Hammer, Continental Airlines, General Motors and US Airways (twice).
• You’ll lose your job – the court will not notify your employer of your bankruptcy petition. In fact, you may have several work colleagues who have filed for bankruptcy – you just never know, and they won’t know about yours either.
• You’ll lose everything – the majority of bankruptcy cases now involve debtors with few if any eligible assets. Most people are discharged from bankruptcy having lost nothing but their credit score, and that was on the way down anyway through overdue debts.
• You have to be flat broke to file – income has little effect on your ability to file for bankruptcy. If your income is not large enough to cover your debts, then you may need to file. Your income will determine which Chapter you are eligible to file under.
• You need a lot of debt to file – the amount of debt you carry is not important. As mentioned, it’s whether or not you have sufficient income to service your debts, that’s what’s important.
• Bankruptcy destroys your credit – bankruptcy will affect your credit. In the eyes of some lenders, you’re a better risk after bankruptcy than before. Your credit score will return to normal if you are wise with your future spending and credit activities.
• Your spouse must file as well – another myth is the opposite, you and your spouse have to file separately. The truth is, if you are legally married, then it’s your decision whether to file jointly, or for only one of you to file.
• You’ll lose your house in bankruptcy – you can only lose your home through bankruptcy if you have a lot of debt and a lot of equity in your home. In most states, there are large homestead deductions in place that protect homes. Bankruptcy will stall foreclosure, however, bankruptcy will not clear your mortgage debt. Few people lose their homes because of bankruptcy.
• Bankruptcy will take my pension plan – the vast majority of pension plans are protected in bankruptcy. You may have difficulties if you have drawn large amounts out of your plan, or made very large payments into your plan just prior to bankruptcy, otherwise, your pension plan is perfectly safe.
• Bankruptcy affects citizenship status – bankruptcy has no bearing on your current or future citizenship statues provided there is no fraudulent acts discovered through bankruptcy.

Bankruptcy is fairly easy process if your engage the services of an attorney first. Rather than listening to what others have to say about bankruptcy, get the real facts from a real attorney – remember, every person’s situation is different.

Personal bankruptcy is often seen as a low point in people’s lives. It shouldn’t be. The low point should be the event that has forced you into considering bankruptcy, for example, illness or job loss. Bankruptcy itself should be viewed as an opportunity for a fresh start – after all, that is the real reason that bankruptcy was created.

Bankruptcy gives a debtor the opportunity to clear away many (not all) of their debts. This can often free up what income they have for secured debts such as a mortgage. More importantly, once discharged from bankruptcy, there is far less pressure from creditors trying to get every penny possible.

When events such as illness, divorce and unemployment strike, the last thing anyone needs is the stress created by debt collection agencies. Unfortunately, you’re not human to them, you’re a name, a number and a dollar value that needs to be collected. In fairness to debt collection agencies, they work with people in default all day every day, and they have heard every sad ‘excuse’ known to mankind – it hardens them, even when that ‘excuse’ is true and valid.

If you change your mindset from looking at personal bankruptcy as a low, or as a failure, to being a chance for a fresh start, you will find the process is actually quite painless, and often quite quick. One of the hardest tasks that most bankruptcy lawyers face is trying to remove the negative image that most individuals hold for bankruptcy. If you have been forced into a position where bankruptcy is an option, don’t take a negative view. Square your shoulders and think about the fresh start and new hope that bankruptcy offers – then head off to your local bankruptcy lawyer for some professional advice on whether or not bankruptcy is the right option. If it is – welcome to a new start in life – a relatively debt free new start in life.

A bankruptcy creditors meeting is known by its technical name – a 341a meeting. This is a meeting that is called by the court-appointed trustee and includes all of your listed creditors, your lawyer (if you have engaged one), and both yourself and your partner (if you have filed a joint petition). While the event is referred to as a meeting, it does have court-appointed powers such as swearing under oath before answering questions. A creditors meeting can last anywhere from 30 minutes to several hours depending on the complexity of your petition, and how honest you have been when providing information. In many cases, creditors don’t bother attending so the process is fairly fast and smooth.

In a typical 341a meeting, the procedure should flow along this path:

• Introduction – the trustee introduces themselves and the meeting room. You will be shown where to sit and the trustee will explain the format of the meeting.
• Identification – you will need to provide identification (needed to enter most court houses anyway). Your lawyer and creditors will also identify themselves.
• Examination – you will then be examined, first by the trustee. The questions you are going to be quizzed on include:
• Have you read and personally signed all of the documents?
• Is everything in the documents true and correct?
• Do you need to make any changes to your paperwork?
• Have you listed all of your creditors?
• Have you made a payment of more than $600 to any one creditor in the last 90 days?
• Have you paid a family member any sum money in the last year?
• Have you given away any assets during the last 12 months?
• Are expecting to inherit any money within the next 6 months?
• Does anyone owe you any money?
• Do you have the legal right (not are you going to) to sue anyone for any reason?
• Special Questions – the trustee will then quiz you over any special issues included in your petition.
• Creditors Questions – creditors are also allowed to quiz you over any issues they may have.
• Creditors Quizzed – there are occasions where the trustee may also quiz a creditor over specific issues.
• Conclusion – once the trustee is satisfied they have all the answers they need, they meeting will terminate.

In most cases, a straightforward 341a meeting is over within 30 minutes. What is important is to remember to answer every question truthfully. If you are caught out on a lie at any time, the trustee can recommend your petition is dismissed and you will lose any protection offered through bankruptcy. It is also important to understand that every question is driven by a motive, so don’t treat any questions as flippant or unnecessary – this is where most debtors slip up. Use the right approach and a bankruptcy creditors meeting is a piece of cake.

The leading cause for bankruptcy in the U.S. is credit card debt. Yet filing for bankruptcy to resolve this debt is not always the best option. However, there is certainly one practice that every citizen should avoid, and that’s ignoring a court summons for a default judgement. In fact, credit card companies are relying on you doing just that, ignoring the summons. Why? When lodging lawsuit documents, credit card companies generally only provide the barest minimum required in that state, often not even proving that you actually owe any money.

If you are issued with a summons to answer a credit card lawsuit, your first step should be to consult a lawyer. However, if that lawyer suggests submitting a repayment plan, either tell them no, or find another lawyer. That may sound blunt, but you need to be. You need to find a lawyer that will make the credit card prove the debt, prove that you owe them money, and that the interest being charged is lawful. You will be surprised at how many credit card contracts are actually invalid.

One example is where a credit card company has sold the debt on to a debt collection agency. Often, the sale is not done correctly and legally, you owe the debt collection agency nothing at all. You may still owe the original credit card company, but their right to claim interest may have terminated when they ‘sold’ the debt. Other examples of where problems may arise include credit card companies that have changed name, often after a merger or buy-out by a larger enterprise.

If you turn the tables on whomever is instigating the lawsuit for credit card debt, you may suddenly find they are more than willing to negotiate a suitable repayment plan, so avoiding a judgement. Your credit score may not take a hit, especially if you lawyer can include the removal of bad reports from your credit report as part of the agreement. Credit card companies rely on you not fighting their action – the sad fact is, 90% of credit card lawsuits end in a default judgement – don’t let that be you.

Mention the term bankruptcy and most people think it’s escape from debt responsibilities. This is not always the case. While most debtors do have some or all of their debt discharged (wiped) through bankruptcy, some debtors use the bankruptcy process to control their debt repayments and to pay off all of their debt. This is a handy option when debts are in default and you are being pressured into making payments you cannot afford.

Under a Chapter 13 bankruptcy, debtors enter into a payment plan. For most debtors, this payment plan covers priority debts, secured debts, and a small payment for unsecured debts. The payment plan runs for three to five years and at the conclusion of the plan, any eligible unsecured debts are discharged. For some debtors, there are no debts remaining to discharge, so the debtor is discharged, effectively debt free with all creditors paid.

So why use bankruptcy to pay these debts? There are a number of benefits. First, creditors are forced to accept the payment plan. Instead of having the debt repaid over twelve or twenty-four months (as per contract), you can force the creditor to accept payments over a much longer period, without extra interest or penalty fees. At the same time, the creditor is prevented from taking action such as seeking a wage garnishment – in fact, any current actions are also suspended.

This can be a useful process for those with overdue mortgage payments as well. Foreclosure can be suspended giving the debtor time to repay all overdue payments, a situation made possible because unsecured creditors are forced to accept less each month, thus freeing up money that can go to your mortgage. If you do file for a Chapter 13 bankruptcy, and you can repay all overdue accounts, and pay off all unsecured creditors, you can seek an early discharge from bankruptcy. If you have no priority or secured debts, your bankruptcy petition will automatically discharge once all of your unsecured debts have been paid. Bankruptcy is not just an escape from debt, it can be a valuable tool for controlling and paying all current debts.

There are some sectors of our society that have become so reliant on payday loans, it’s almost like addiction. It’s arguable as to whether or not payday loans provide a useful service. They are high interest loans taken over short periods of time and they tend to place more pressure on finances rather than relieving any pressure. Bankruptcy lawyers often see clients who have payday loans with three or four different companies, using one to pay another in a vicious circle – the problem is, the interest being charged is coming from the paycheck, leaving less money for daily expenses.

Bankruptcy can be a useful tool that may help you escape this addiction. If your payday loan is unsecured, then the debt can be completely wiped through bankruptcy. If you have used a payday loan that insists on placing a lien on your car or another asset, then the story is slightly different. If your payday loan is a second lien against your car, in other words, you are still paying off your car, then you be able to have some of that payday loan wiped. This will depend on how much equity you have on the car, how much you owe on the primary loan, and what the car’s true worth is.

At worst, a Chapter 13 bankruptcy petition will stop further interest charges on the payday loan, and give you three to five years to pay off that loan. At the same time, unsecured debts such as credit card debt will be wiped at the end of that three to five year period.

The downside to bankruptcy is the hit your credit score will take, however, if you are jumping from payday loan to payday loan, your credit score will take a hit over time anyway. Bankruptcy is a useful tool for those who are in a financial crises. Rather than paying high interest fees for payday loans, talk to a bankruptcy lawyer, there are better alternatives. If you are addicted to payday loans, a bankruptcy lawyer can soon cure of that problem.

Under a Chapter 13 bankruptcy plan, you set aside an agreed amount each month which is used to pay down some of your debts. The trustee’s role is to pay debts in a specific order: priority debts, secured debts, unsecured debts. However, the trustee doesn’t do this for free – they charge 10% as a fee for their services. If you have a repayment plan for $1100 per month, the first $100 is going to the trustee.

When creating your payment plan, this fee has to be taken into account. If you have priority debts, for example, child support of $400 per month, $100 in legal fees per month (and you can include these in a payment plan), secured debts of $800 per month for your mortgage and $200 per month for a car, that’s a total of $1500 per month. You then need to include a small amount for unsecured creditors, say $100 per month plus the trustee’s fees of $160 per month – at or around $1760 per month – and you’re bankrupt!

In most states, you can pick and choose which debts are included in your payment plan. For example, if you are up to date on your mortgage, then you can exclude that debt from your payment plan. By doing so, you also reduce the trustee’s fees by $80 per month (10% of $800). If your car payments are up to date, you may be able to exclude those payments as well. There are dangers in excluding payments from a payment plan. You are responsible for making these payments yourself and the trustee may insist on more than the $100 per month for unsecured debts – however, even doubling that to $200 will only increase the trustee’s fees by $10 per month.

If you are in financial difficulty, it often pays to concentrate on your secured debts, particularly your mortgage. Keep those payments up to date and the bankruptcy process can be so much easier, and a little cheaper.

When a husband and wife are both working, credit can be easy to manage. However, if just one of that couple loses their job, that credit can suddenly get out of control. There are some bankruptcy proponents who suggest filing for bankruptcy as soon as you lose your job rather than waiting for your debt situation to get out of hand. This raises the question as to when you should file – immediately, or should you wait.

Like all legal questions, there is no cut and dried single answer. Every person (or couple) is different so it takes a close assessment of their finances to determine the best approach. The situation should also be looked at from the medium to long term perspective as well – for example, how likely is that the unemployed partner will return to the workplace?

If you have a mortgage that you want to protect, and you can afford a payment plan, then filing for a Chapter 13 petition for bankruptcy early could be a good idea. In most states, lenders have a three strikes policy when it comes to a mortgage – miss three payments and they start the foreclosure process. By filing for bankruptcy and entering a payment plan, you will be meeting your mortgage obligations as a priority debt, and so not getting behind.

When one partner of a couple is working, it can be hard to qualify for a Chapter 7 petition for bankruptcy, unless the unemployed partner files as an individual. This can become complicated when there are shared debts since creditors can chase the non-filing partner for those debts. Since Chapter 7 eligibility is based on the six month average income, you may still struggle to meet those requirements if you file for bankruptcy too soon after losing your job.

Acting early can be a smart move, however, there are barriers if you act too early. Your best approach is to discuss your situation with a bankruptcy attorney. They are best placed to help you assess your situation and to plan the best approach to filing for bankruptcy.

A Chapter 13 bankruptcy petition lasts for a minimum of three years (maximum five years) and given the turbulence we have seen in the economy in recent years, anything can happen in that three year period. The prime factor behind a Chapter 13 petition for bankruptcy is the payment plan that debtors enter in to. This payment plan is designed to ensure secured creditors are paid and that unsecured creditors receive at least some portion of the debt owed. So why would you want to terminate a Chapter 13 bankruptcy petition?

Circumstances change. You may find a better job that pays more, or your spouse may return to the workforce restoring your double income. Of course, the opposite may happen. You and/or your spouse may lose your job. In the first situation, you are probably able to control your debts while in the second situation, you may find your agreed monthly payments impossible to maintain. Here are four ways that you can terminate a Chapter 13 bankruptcy petition.

Request a dismissal – if you are in a financial position to take control of your finances again, then you can request the court to dismiss your petition. A word of warning, there may be limitations on re-filing your petition, and you will become fully responsible for all debts. The court will generally dismiss a bankruptcy petition when the request comes from a debtor.

Convert to Chapter 7 – if you cannot meet your repayments, and the situation is unlikely to change in the short to medium term, then you can request a conversion to a Chapter 7 petition. The court will look at your payment history, how much you have already paid, and what assets you have. If you meet the income tests, then the bankruptcy court will generally allow a conversion.

Hardship discharge – if you meet hardship guidelines, and you have made a significant contribution to your bankruptcy petition, then the court may order a complete discharge on hardship grounds. The court will compare what you have paid to what creditors could have received had you filed using a Chapter 7 petition. Hardship cases are hard to win and the court will generally prefer to convert to a Chapter 7 bankruptcy.

Plan modification – a Chapter 13 plan modification will not terminate the bankruptcy process. Bankruptcy law does make allowances for changes in circumstances, and there are times when a trustee will insist on a plan modification, for example, when your income increases. Your payments can be reduced (with the time line extended if necessary) when your income drops. Plan modifications are very common in both Chapter 13 and Chapter 11 bankruptcy petition.

If you are struggling with a payment plan in a Chapter 13 bankruptcy, talk to you lawyer. There are options available that can either modify or terminate that plan.

Whether a person is buying a car, filing tax reports, renting an apartment or running for political office, the establishment of their net worth is essential. Businesses must calculate net worth each time a financial report is filed. In order to arrive at an accurate estimate of net worth a person must know two basic things. He must know what he owns and what he owes.

There are three basic fields of information that make up the financial situation of an individual or a business. The sum total of what is owned or Assets as adjusted by what is owed or liabilities will render the total Capital or net worth of that individual or business. Simple stated the value of possessions less the cost of obligations equals net worth.

Assets can be described as either tangible or intangible. A simple way to understand the terms is to replace the word tangible with “touchable” and to replace the word intangible with “untouchable.” Tangible or “touchable” assets could be desks, chairs, filing cabinets, vehicles, property etc. Intangible or “untouchable” assets on the other hand represent the value of retirement plans, annuities, stocks, deferred compensation programs etc. Businesses can classify copyrights, patents, trade secrets or even reputations as intangible assets.

Cash whether in checking accounts or savings accounts is an asset. In today’s market, a person who has accessible bank accounts must seek out the best possible cheap insurance quotes of interest produced by financial institution. Banks and Credit Unions offer programs for timed deposits with guaranteed interest percentages. Banks also offer what is referred to as a Money Market account in which cash in a checking account is invested by the bank and an additional amount of interest is credited to the account.

Safe deposit boxes offer a haven for valuables but offer little in the way of increasing the value of the items. Personal assets such as stamp collections, coin collections, art collections and antiques can and should be stored for protection. However, these assets can also be used as collateral for loans and should be included in the net worth of the individual. This value cannot be covered by cheap car insurance quotes but should be covered by insurance companies that are well established and trustworthy.

Asset owners have the responsibility of protecting their assets. All assets, whether personal or business, tangible or intangible, should be insured. Most auto insurance or home insurance policies carry riders guaranteeing the coverage of personal assets contained within the automobile or home should an accident, incident or theft occur. Prudent owners insure their possessions for their appraised value rather that their market value when taking into account the possibility of future sales.

Liabilities of the individual or business include the financing of assets. Banks as well as mortgage companies require their interest in that asset to be safeguarded. Supplemental plans guaranteeing asset protection can be added to some car and home insurance policies. This insurance can pay off the vehicle or dwelling should the owner pass away or become disabled.

Assets should be enjoyed and protected.

Wisconsin residents have a legal option, known as a Chapter 128, that can be used to help reduce their debts. Although referred to as a Chapter 128, it is not really bankruptcy. Rather, it’s more like a forced debt consolidation plan. Is it a good idea, and should Wisconsin residents use it? Better yet, would it serve everyone if it was implemented in every state?

While a Chapter 128 claim does include many of the features of a bankruptcy petition, the one thing it doesn’t do is discharge debt. You will still have to pay 100% of your debts. What the Chapter 128 does do is put in place a stay from other collection activities, and for most debts, freezes them from further interest and penalty payments. As a debtor, you can include and exclude debts – you are in control of which debts are to be included. While there are no additional interest or fees charged by creditors, you will need to pay a court filing fee, pay for an attorney, and pay trustee fees to manage your Chapter 128 payments.

The biggest downside is that secured debts such as your home and car cannot be included the monthly payments unless the creditor accepts your request to be included. Chapter 128 is only for unsecured debts, however, you can include payment such as child support arrears, Wisconsin taxes, student loans, and the overdue portion of a car loan – in fact, almost any type of debt, or the component that is in arrears.

You can enter a Chapter 128 agreement for up to three years, and unlike bankruptcy, you can enter a new plan as soon as your three year plan has expired. Previous bankruptcy petitions have no affect on when you can file a Chapter 128. The downside is that this is only for those with a regular income, and the ability to pay the equivalent of $600 per month per $20,000 of debt ($600x12monthsx3years=$21600).

Is this option a good option? It is certainly an alternative that could be viable for those who are in arrears through unemployment, but who are now employed and looking to clear those arrears. For those whose homes are in jeopardy, and for those with no income, a Chapter 128 is no help at all. It’s certainly an interesting concept – and a Wisconsin oddity since no one else has access to this option.

Getting behind in debts can result in a number of outcomes. When it comes to a mortgage, your lender can foreclose and sell the home. For credit cards, the most common action is a wage garnishment while cars are generally repossessed and sold. In all three cases, timely intervention using a petition for bankruptcy can stop these outcomes. What many people don’t realize is that a bankruptcy petition can often reverse an action, if the petition for bankruptcy is filed quickly.

Having a car repossessed is never fun, especially if you still have personal effects inside that car. Your lender is only entitled to the car, not the car’s contents. If you have added extras such as car stereo or baby’s capsule, you are often entitled to collect these from the repossession agent. If the car is sold with items included, then you are entitled to compensation for their loss. More importantly, if you file for bankruptcy before the car has been sold off, then you can generally reclaim the whole car.

By filing for bankruptcy, the debt is added to the secured creditor’s list of debts. If you are filing for a Chapter 13 bankruptcy, part of your monthly payment will be used to pay down the debt owed on the car. If you are filing for a Chapter 7 petition, your assets will be seized and sold to help pay down your debt. The downside to filing for bankruptcy is that you may still lose your car if you cannot afford to pay the monthly amount owed.

Bankruptcy is only ever a delaying action when it comes to secured debts. You will still need to organize your finances in such a way that you are able to maintain these debts. A Chapter 7 petition for bankruptcy can be completed in as little as four months – if you are still in arrears at that point, the lender is entitled to repossess your vehicle, and you will no longer have access to bankruptcy to help protect you. You should consult an attorney when threatened with foreclosure or repossession. Your attorney may be able to prevent either, and to help you put together a plan that can save these assets.

Bankruptcy is an insolvency solution that will have a serious impact on your finances. It’s designed to help people with unmanageable debts who simply can’t afford to repay them within a realistic amount of time – and is basically considered a suitable approach only once all other potential solutions have been considered.

However, if bankruptcy isn’t the best approach for your circumstances, there are several alternatives that might be able to help you, depending on where in the UK you live, which could provide another way out of debt.

Let’s look at one of those other approaches: an Individual Voluntary Arrangement (IVA).

IVAs & bankruptcy

An Individual Voluntary Arrangement is an insolvency solution available to residents of England, Wales and Northern Ireland with unsecured debts they can’t afford to repay.

It’s a legally binding agreement in which you’ll make an agreed monthly payment – tailored specifically to your circumstances – into the IVA over an agreed period: usually five years.

On successful completion of the IVA, any remaining debt included in the agreement will be written off, so you can look forward to making a new start with your finances.

However, unlike bankruptcy, which may result in your home being repossessed in order to help pay off your debts, it’s unlikely that you’ll have to sell your home under an IVA – though you may have to release some equity in the 54^th month of the agreement.

As a legal process, an IVA can only be set up by a qualified Insolvency Practitioner (IP), who will help you draw up an IVA proposal – which tells your unsecured lenders how much you can afford to pay into the IVA every month after all your essential costs have been covered – if your IP thinks it’s the most appropriate solution for your situation.

This proposal will then be sent to your unsecured lenders, and if enough of them (that is, those who account for 75% or more of the total debt value) accept the terms of your IVA proposal, the IVA can go ahead – and as long as you stick to the terms and make all the payments you’re meant to, it cannot fail.

Similar to bankruptcy, once your IVA is agreed, you’ll be protected from any further action from your lenders, but you won’t face any employment restrictions or what some people see as the ‘social stigma’ that can come with being declared bankrupt.

Finally, as with bankruptcy, an IVA will remain on your credit file for six years – which can affect a) your ability to get further credit, and b) the interest rate you’re charged on any credit you successfully apply for.