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Bankruptcy Guide

BANKRUPTCY GUIDE  

 The Bankruptcy Guide Index 

·        Overview 

·        Definitions 

·        Pros and Cons 

·        Bankruptcy Process 

·        Exemptions – keeping some of your assets 

·        Managing your Bankruptcy 

·        Securing Credit After being discharged 

OVERVIEW                        

Bankruptcy is a legal process designed to give debtors relief from legal obligations or debts that they cannot pay. The premise is that you are no longer able to pay the debts due to a job loss, over spending, divorce, injury, etc, etc. In accounting terms, your liabilities exceed your assets or you are insolvent and just hanging on!  

Bankruptcy can give you a fresh start, but it will affect your credit rating for years to come. It is not something to take lightly, but should be seriously studied. Take a HARD LOOK at the pro and con section before you decide.  

A person should file bankruptcy only if they can no longer make their payments on a timely basis, and is about to lose property or have property attached by the courts. Most people manage to keep their homes and cars if they properly manage the process.  

The entire process takes 4-6 months and requires you to provide detailed documentation on income, monthly payments, debt, and asset values for the six months prior to filing. This will include proof of all expenses claimed including utility bills, gas, major entertainment costs, cell phone bills, satellite or cable TV, etc. In essence all the details from your check book or on your credit card statements. They will also require a copy of your latest federal tax return – CAUTION, if it is 2008 and a refund is due, they will confiscate it. Most people hire an attorney for this process at a cost of $1000 to $1500. It is possible to “do-it-yourself”, and pay only court costs of about $500. I will cover some of the basics in the Bankruptcy process section. 

Most people file for bankruptcy only as a last option. Such actions as home equity loans, debt consolidation programs or special deals with creditors are a better option. 

DEFINITIONS 

There are 2 major options for filing bankruptcy and getting relief on paying creditors – Chapter 7 and chapter 13. This section only covers the big picture as the detail filing information is in the bankruptcy process section. 

Chapter 7 – This option allows debtors with primarily unsecured creditors (credit cards, personal loans, etc) to have all this debt discharged assuming they have no assets to sell and raise cash to pay down the debt. Unsecured debt is essentially written off, with a few exclusion that we will cover in the process section. Other secured debt such as house mortgages and car loans are a different story. If you want to walk away from your house (declining value) and/or your automobiles, you can include them in the process and walk away with virtually nothing except a few exempt assets and owe nothing – a fresh start! If you want to keep them, that is an option, again to be covered in the process section. This is by far the most popular type of bankruptcy. 

Chapter 13 – This option more resembles a reorganization plan or a debt consolidation plan. You petition the court to intervene and force the creditors to accept a long term payment plan. No debt is excused, just deferred to a timetable that you can meet (36-60 months excluding real estate). You continue to keep all your assets and the hit to your credit report is somewhat lighter. This assumes you will have the income to pay the debt being deferred. This is similar to the process the government is pursuing with the banks to forestall foreclosure on real estate. This could be the preferred option if your debt is mainly for secured assets. 

PROS AND CONS 

Just what are the pros and cons of filing for bankruptcy? 

PROS 

·        Eliminate burdensome debt that is making your life miserable – a fresh start. 

·        Puts an immediate halt to collection efforts, repossessions, civil lawsuits, or foreclosures until the bankruptcy process is complete 

·        During bankruptcy your driver’s license cannot be suspended, you cannot be evicted, and any wage garnishment actions are halted. 

·        If you are facing foreclosure, bankruptcy may be a better alternative. A person will often be able to rebuild credit and buy a house within 2 years. A re-possession from foreclosure can be more damaging to your credit and government regulations for VA or FHA loans may prohibit your eligibility. 

CONS 

·        A bankruptcy will lower your credit score at least 100 points initially and have an impact for 10 years. 

·        It’s expensive – $500-2000 depending on if you hire an attorney. 

·        Anyone checking your credit down the road will see the bankruptcy. This can be future employers, insurance companies or creditors. 

·        It will take some time to restore your credit worthiness – probably years. Initially, all offers will be at high risk rates. This will be discussed in some depth in the final section. 

·        Not all debt is discharged – such as child support, alimony, taxes, etc (more on this in the process section). 

·        Only some assets can be retained or considered exempt and then to a limited amount (more on this in the exemptions section). 

THE BANKRUPTCY PROCESS 

The process filing a chapter 7 bankruptcy is different that a chapter 13 filing. The outcomes are completely different – one is debt elimination and the other debt deferral. I will itemize all the pertinent information for both filings.  

CHAPTER 7 BANKRUPTCY 

This type of bankruptcy wipes out most of your debt and is especially good for unsecured debt such as credit cards, consumer loans, payday loans, etc. However, some forms of debt will not be discharged in the bankruptcy. 

·        Alimony and child support 

·        Taxes and any associated penalties 

·        Education loans 

·        Court settlements or judgments 

·        Any debt incurred within the 90 day period prior to filing. 

The actual filing process goes as follows: 

·        Gather all of your financial records for the last 6 months – income by source, expenses by type and to who, assets (house, car, boat, camper, etc) as to current value and remaining debt, a listing of all unsecured debt (REMEMBER NOT ON LIST NOT DISCHARGED). This would include names and addresses and account numbers of all creditors so they can be contacted by the court. 

·        Your monthly expenses must exceed your income after allowing reasonable amounts for food and gas in order to qualify – usually by a significant amount. 

·        Select an attorney or secure the forms for filing. Your secretary of states office should be able to supply. If you want to take the chance and file on your own you must file a “reaffirmation” indicating you will represent yourself. This is not done often due to the complexity. Do not use what is termed a BANKRUPTCY MILL and is staffed with inexperience paralegals. 

·        If most of your debt is joint debt with your spouse, file jointly. If it all one sided, file only for yourself and preserve the spouses credit rating. 

·        Present your paperwork to the courts and they will contact you and your creditors in 4-6 weeks for a hearing (341) – BE THERE! 

·        You will be required to take credit counseling 

·        A trustee will be appointed in case some assets or cash is recovered to distribute to the creditors – the trustee handles and is paid a small portion of the recovery. 

·        In about 4-6 months all transactions will be complete and you will be discharged from bankruptcy with no debt. 

CHAPTER 13 BANKRUPTCY 

The process is very similar except the outcome is not a discharge of your debt but a reorganization plan for repaying your debt over the next 3-5 years (excluding mortgage). All creditors will have agreed to the new plan and will be prohibited from harassing you as long as you stick to the payments. 

CHAPTER 7 EXEMPTIONS 

Chapter 7 exemptions vary by state. You have the option to use the federal exemptions in 15 states. To find out your state exemptions google in bankruptcy exemptions in XXXXX.  www.totalbankruptcy.com is a good site, 

                         Federal       Colorado      Illinois          

Homestead                16,150       30,000     15,000 

Household Goods            8,625        3,000         all   

Jewelry                    1,075        1,000 

Vehicle                    2,575        3,000       2.400 

Work Tools                 1,625       10,000       1,500 

Health Aides                 Unlimited 

Any property/Wildcard       8,075         none        4,000            

Definitions 

Homestead – you main place of residence - - a mobile home would be less 

Household – animals, appliances, furnishings, clothing, musical instruments, etc 

Jewelry – all jewelry items including watches 

Vehicle – autos, vans. Trucks 

Work Tools – tools of trade (mechanic, carpenter, etc), books, equipment 

Any property – any asset up to $8,075 of unused real estate exemption per the federal guidelines fits here. Nominal amounts of cash (say $1000) could fit in here.  

MANAGING YOUR BANKRUPTCY 

This is very essential if you want good results. Proper management can leave you with more of your STUFF. You must understand your exemptions and try to arrange your assets to be at the higher end of the exemption. Once you have determined to file bankruptcy in the near future – the following actions might be prudent 

·        Stop paying all bills you intend to list one to three months prior to filing to conserve cash for the attorney and fees. Make sure they are paid upfront as you will only be allowed to keep a minimal amount of cash – around $1000. 

·        If you are expecting a substantial tax refund, file after it is received and parked in exempt assets such as IRA’s or retirement accounts. 

·        If you want to keep your home, make sure your equity does not exceed the exemption – you may be forced to sell to pay creditors. You could take out a second mortgage (at least 6 months prior to filing) to lower your equity to the allowable range. You can park any proceeds in IRA’s which are normally exempt from bankruptcy, or in other type assets where you are not near the exemption cap. 

·        If you want to move from your home and turn it over to the bank, you can use the home equity loan proceeds to purchase a new residence, but keep the equity within the exemption limits. 

·        You may give some cash or assets to relatives or friends if done at least 6 months prior to filing. 

·        If you have been withdrawing from retirement assets to pay bills and there is no light at the end of the tunnel – STOP. These assets will probably be exempt in any amount from bankruptcy proceedings. 

·        If an asset you really want to keep exceeds the exemption limit (such as a car), you can give the trustee the difference in cash and he will not sell the asset. Be sure to use a lowball value such as bluebook in your negotiations. 

SECURING CREDIT AFTER BANKRUPTCY 

Life does not end with bankruptcy, but a change in life style will occur. You will be forced to more prudent spending habits. It will take 2-4 years to rebuild your credi to near earlier levels  

·        The purchase of real property or an automobile will require a larger down payment and a higher interest rate. 

·        Personal credit lines will be impossible unless you offer collateral and then at high risk rates.  

·        Credit card companies will be after you in about 2 months – once bankruptcy records are public. They will tell you they want to help you rebuild your credit – BULL. They want to make a bunch of money on you while you are in your vunerable state. Here is a timeline of what you can expect: 

-        Months 2-6 credit guaranteed – they will offer a $250 limit for an application fee of $89, annual fee of $39, and 19% or higher interest. Wow, once they put the fees on the card you have paid $128 for a net available credit of $122. AVOID AVOID AVOID  

-        Month 6-12 They will drop the application fee but keep the annual fee and add a minimum monthly finance cost of $5. They may raise the credit limit to between $500 and $1000. IF YOU NEED A CARD FOR WORK TAKE ONE OUT. 

-        - After 12 months you will begin seeing reasonable offers but  with a higher risk rate. 

If you really need a credit card early on, try a securitized card – you put a deposit in the bank to cover your limit, or a prepaid card. This allows you the convenience of a credit card (you cannot rent a car or buy over the net with cash!). 

Once you have demonstrated consistency in making timely payments for a couple of years, credit will become more available, However, the stigma of bankruptcy will be on your record for 10 years. 

REMEMBER – IT IS A CRIME TO KNOWINGLY OR FRAUDULENTLY CONCEAL ASSETS, LYING WHILE UNDER OATH AT THE HEARING OR KNOWINGLY FILING FALSE INFORMATION. Be honest, but be smart.