Bankruptcy
There is just no easy way to get out of debt, you have to face up to the consequences. A bankruptcy is not always the answer, as the effects are long lasting. There are four ways to handle debts that are out of control, listed in best to worst in regards to the effect it will have on your credit:
- If your credit isn't in terrible shape, can you reduce your other expenses, even if it means making hard choices or just change your lifestyle to fit your income? Some ways to do this:
- Selling the second car
- Pulling equity out of your home
- Applying for a non-secured signature loan
- Loan from a relative
- Selling your home and paying off your debts with the proceeds and then renting
- Cashing out your 401K/retirement benefits
- Selling family heirlooms/jewelry/guns
- If your credit is already gone or one of the above isn't an option, go through Consumer Credit Counseling Services (CCCS). Check your yellow pages for the local number. In this way you're paying off your debts as if you were in a Chapter 13 BK, but you don't file a BK.
- If CCCS won't take you, you may want to consider bankruptcy. Doing a Ch 13 takes longer, but your credit is in a little better standing than if you do a Ch 7. In the Ch 13 they give you up to 5 years to pay off your debts. The disadvantage is that you're in BK for up to 5 years plus your credit report shows your BK for 7 more years after you have finished paying off your debts.
- If you are so far in debt that you can never repay it, then the best solution may be a Chapter 7 BK. A Ch 7 is the least desirable credit-wise, but you are typically out of BK in 6 months and you don't have to repay any debt. The disadvantage is that this shows on your credit report for 10 years from the date of filing your BK, and creditors are starting to tighten their credit requirements, and you may have a tough time getting future financing.
Issues after filing Bankruptcy
- What happens after I file my bankruptcy?
- Under normal circumstances, the bankruptcy court will automatically issue the discharge 60 to 75 days after the First Meeting of Creditors.
- What happens to my credit rating after bankruptcy?
- You can reestablish credit and be back in "A" credit two years after the discharge of Bankruptcy. The bankruptcy is a judgment and will be listed for a period of up to 10 years after the discharge.
- After bankruptcy, can I get credit?
- Sure. For awhile though, expect to pay high interest rates and fees. There is a whole new mortgage industry springing into action loaning to people with less-than perfect credit.
- If I need to file bankruptcy again, how long do I have to wait?
- You must wait 6 years to file again or if your bankruptcy was dismissed you must usually wait 180 days to refile.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is a liquidation proceeding. The debtor turns over all non exempt property to the bankruptcy trustee, who then converts it to cash for distribution to the creditors. The debtor receives a discharge of all discharageable debts.
To file a Chapter 7 bankruptcy:
- You must reside or have a domicile, a place of business, or property in the United States or a municipality.
- You must not have been granted a Chapter 7 discharge within the last 6 years or completed a Chapter 13 plan.
- You must not have had a bankruptcy filing dismissed for cause within the last 180 days.
- It must not be a "substantial abuse" of Chapter 7 to grant the debtor relief. Generally speaking, if after you pay the monthly expenses for necessities there is not enough money to pay the remaining monthly debts, then granting a discharge would not be an abuse of Chapter 7.
It would not be fundamentally unfair to grant the debtor relief under Chapter 7. The most common reasons for consumer bankruptcy are:
- Unemployment
- Large medical expenses
- Seriously over extended credit
- Marital problems
- Large unexpected expenses
Bankruptcy Questions and Answers
- I am a co-signer for a debt, how does bankruptcy affect my obligation?
- If the debt is a dischargeable debt then you will not have to pay it. However, the cosigner will become primarily responsible for the debt. Be sure to list the co-signer as a creditor in your schedules as they have a contingent claim against you.
- Can I keep my house after bankruptcy?
- Depending upon which exemption scheme is selected and your circumstances, you may exempt up to $100,000 in equity. When calculating your equity you should use a value that is based upon a forced liquidation as opposed to the best selling conditions to arrive at a value for your home. Once you know the value, subtract the amount owed plus selling and transfer costs from the value to calculate the equity. In the depressed California market, liquidated properties are often valued less than what we like to think the property is worth.
- Can I keep my credit cards after bankruptcy?
- Under some circumstances you may keep your credit cards. There are many factors that must be considered. Some of those include the credit card balance at the time of the bankruptcy, what the credit card company is willing to do and your ability to pay the present and future credit card debt.
- Will I lose my job?
- No. Bankruptcy laws prohibits discrimination based upon a debtor filing for protection under the bankruptcy laws.
- Can I go to jail if I file bankruptcy?
- No. There are no debtor's prisons in the United States.
- Will my employer find out about my bankruptcy?
- Under normal circumstances, unless your employer is a creditor, your employer will not know.
- Will bankruptcy stop a wage attachment?
- Yes.
- Will bankruptcy stop a judgment?
- Yes. Most civil judgments are stopped by bankruptcy.
- Will a bankruptcy remove a lien?
- Under some circumstances once the bankruptcy proceedings have started, special motion can be filed to remove certain liens. It will take a bankruptcy court order to remove them. This is a complicated area of the bankruptcy law and an attorney should be consulted.
- Will bankruptcy stop an eviction action?
- Perhaps. However, this will only delay the inevitable. The owner is entitled to possession of his property and at best you will be able to remain in the property until you have received your discharge from bankruptcy or the landlord obtains an order from the bankruptcy court. I must caution you that if the only reason you filed the bankruptcy is to stop an eviction then this might be considered an abuse of Chapter 7. If the bankruptcy court finds that this is true then the court can immediately dismiss the bankruptcy and impose other legal and monetary sanctions on you.
Disclaimer:
This information deals with Chapter 7 consumer bankruptcy. Each state has its own bankruptcy laws, so you need to check with your state for details. Information dealing with Chapter 13 bankruptcy and consumer debt restructuring is not discussed in the above FAQs. The information contained in the following FAQs is provided for general information purposes only and is not intended to be a legal opinion nor legal advice nor is it intended to be a complete discussion of all the issues related to the area of Chapter 7 consumer bankruptcy. Every individual's factual situation is different and unique.