When you've done everything you can to pay your debts and you are still totally overwhelmed by the amount you owe, your final resort may be personal bankruptcy. If you are looking for more information about bankruptcy and how to file, you are not alone. In 1970 there were less than 100,000 personal bankruptcies in the United States. In 1998, a record 1,442,549 were filed! But is bankruptcy the right decision for you?
Filing personal bankruptcy involves a U.S. District Court proceeding in which the obligations of the debtor (the person who owes the debt) are balanced against the claims of the creditors (the individuals or companies to whom the debt is owed). The objective of the debtor is to reduce debt or eliminate it completely. The objective of the creditor is to collect as much of the debt as possible. The bankruptcy proceeding is the legal process to help the debtor and creditors resolve their differences.
You should thoroughly explore other debt payment options prior to considering bankruptcy. You may be able to settle your debts through debt consolidation, with the help of a financial counselor, by generating more income or spending less. The previous sections of this booklet will help you explore these options before you consider filing bankruptcy.
Your debts will either be secured or unsecured. A secured loan has an established installment payment required on a regular schedule. When you agree to a secured loan, you pledge to give up something of greater value, such as your house or car, if you can't repay. The property that the creditor may seize according to the loan agreement is called collateral. Secured loans also allow the seller to repossess the merchandise purchased when payments aren't made on time.
Unsecured debt is not tied directly to a written repayment plan and the creditors have no collateral against the debtor. Common unsecured debt includes medical bills and most credit cards. Interest for an unsecured debt is often much higher than secured debt because the creditor may not be able to collect without taking the debtor to court.
If your primary debts are loans for secured items such as a house or car, you may lose them even if you file for bankruptcy.
Weigh carefully the consequences of filing bankruptcy. If creditors are not beating on your door for payments and your property and wages are not being affected, don't be too quick to file bankruptcy. You may also want to rethink filing if doing so means you will lose assets that have family or sentimental value.
Bankruptcy is governed by federal law and will be handled through the federal court in your area. You will find bankruptcy courts listed in the phone book in the U.S. Government Offices section under Bankruptcy Court. Calling the district Bankruptcy Court may help you gather some helpful information, but their office staff normally deals directly with attorneys who are familiar with the process and have specific questions regarding cases on which they are working. Court clerks cannot give legal advice and therefore don't want to be asked. General information is best obtained through an attorney who is experienced with the federal Bankruptcy Code.
The bankruptcy process normally includes consulting an attorney, filing a petition, filing "schedules" which describe your financial situation, meeting with your creditors, and establishing a liquidation or repayment plan.
A trustee will be assigned to oversee your case. The trustee collects nonexempt property and distributes it to creditors as determined by court order. The trustee works for the Department of Justice and is responsible for checking the required paperwork, reviewing the listing of assets and liabilities and reviewing claimed exemptions. In Chapter 13, the trustee must also meet with you to review your repayment plan, accept your monthly payments and distribute repayment to your creditors.
Filing for bankruptcy is a matter of public record and names of individuals filing are sometimes published in the newspaper. Do not be too eager to accept offers for counseling assistance. There are unscrupulous "counselors" who may see your name and contact you to offer assistance at a price. They will charge fees for their "services" to help you reestablish "good credit" and offer high interest, high-risk loans. "Rip-off" lenders know the bankruptcy laws well and use them to their advantage. They prey on people who have filed bankruptcy because they know that the bankruptcy filer can't file again for six years. They will get their money from you through harassment if need be. Remember, no one but you can reestablish good credit.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 has several requirements that will impact consumers who are considering bankruptcy. There are three major changes in the law. First, before fi ling for bankruptcy, a consumer must obtain credit counseling from a governmentapproved counseling organization. Second, the new law establishes rules for determining which type of bankruptcy the consumer can file by implementation of a “means” test. And, third, an individual must complete a financial education program before the bankruptcy can be discharged.
Consumers filing for bankruptcy are required to go through credit counseling offered by a governmentapproved counseling organization within six months of fi ling for bankruptcy protection. This required counseling can take place in person, on line, or over the phone. You can expect the counseling session to last about 90 minutes and will include an analysis of your budget.
The counseling organization will advise you on managing your money and debts while developing a budget. Sometimes the organization may recommend and negotiate a debt management plan (DMP). A DMP allows you to deposit money each month with the counseling agency, which then uses the money to pay your creditors according to a schedule they have worked out with you and your creditors. A DMP is not required for filing bankruptcy, but if you do use one, a copy must be provided to the bankruptcy court when you file.
A credit counseling organization can charge a reasonable fee (possibly in the $50 range) for its services. The primary purpose of the counseling is to determine whether bankruptcy is necessary or whether you can recover financially using an informal repayment plan. You are only required to participate in the counseling but not the repayment program. If a debt management program is recommended, you will need to submit it to the court, along with a certificate showing that you completed the counseling.
For a list of approved counselors in your area, go to the United States Department of Justice Trustee office web site at www.usdoj.gov/ust and click on Credit Counseling and Debtor Education. This site also lists the agencies and organizations authorized to provide the pre-discharge educational program you will need before your bankruptcy can be discharged. A two-hour class provided by an authorized educational provider is required before your bankruptcy can be discharged. These classes may be offered in person or on-line.
Under the old bankruptcy law, you, the filer (usually in consultation with an attorney), determined which type of bankruptcy (Chapter 7 or Chapter 13) seemed best for your circumstances. Under the new law, there are new rules to prohibit filers with higher incomes from using Chapter 7. First, you must determine your income. This is not your current income, but your average income from the six months prior to filing. Compare this amount to the median income for a family of your size in your state. This data is available at the web site at www.usdoj.gov/ust and click on the Means Testing information. If your income is equal to or less than the median, you can file a Chapter 7. If it is more than the median, you must pass the test using another requirement of the new law. The second means test is designed to determine whether you have enough disposable income after subtracting specific “allowed” expenses and debt payments to make payment on a Chapter 13 plan. Using your “current monthly income” (the average income from the previous six months), you subtract:
Certain expenses in amounts set by the IRS. These expenses include transportation, food, clothing, etc. These amounts are not based on your actual expenses, but on an amount determined by the IRS. These amounts may be lower than your actual expenses.
Monthly expenses you have for secured and higher priority debts. Secured debts are those for which a creditor may seize the property, such as a house or a car. Other priority debts include child support, alimony, tax debts, and wages owed employees.
If, after subtracting these amounts, your disposable income is less than $100 per month, you pass the means test, and you may file for Chapter 7. If your remaining monthly disposable income is more than $166.66, you don’t qualify for a Chapter 7 and must go to test No. 3.
If your disposable income falls between $100 and $166.66, you must calculate whether you have enough money remaining to pay more than 25% of your unsecured, non-priority debts over a five year period. These debts include credit card bills, medical bills, and so on. If you have enough to pay this amount, you fail the means test and cannot file a Chapter 7. If you cannot pay this amount, you can file a Chapter 7.
Chapter 13 filers must pay all of their disposable income to their repayment plan. Disposable income is your average six-month income prior to filing minus the amounts allowed for living expenses based on the IRS allowed expense amounts (not your actual costs). The repayment period for a Chapter 13 is now five years instead of the previous three years.
The new law requires that you be a resident of your state for at least two years in order to use the state’s exemption laws, rather than the federal provisions. Previously, the state of residence could make a large difference in the property you were allowed to keep. To use a state’s homestead exemption, you must live there for at least 40 months prior to filing.
Under the new law, Chapter 7 fi lers must value property at the replacement rate — what it would cost to replace it from a retail vendor, although the age and condition can be considered. Under the previous law, property was valued at what it could be sold for at auction or in a personal sale. This means that furniture, heirlooms, and other property that you might want to keep may not fall within the “exempt property” categories offered in most states. (Exempt property is property that cannot be taken by creditors or the trustee. You are entitled to keep it.) With the higher values expected for property under the new law, you are more likely to have your property taken and sold by the trustee.
The new law allows for landlords to bypass the automatic stay provisions of the previous bankruptcy law. Landlords will be able to proceed with residential evictions. This information highlights some of the major changes in the bankruptcy law with implications for consumers in fragile financial circumstances who are considering bankruptcy for relief from debts. To get detailed information regarding bankruptcy requirements, rules, and the process, consult an attorney. For more information about changes in the bankruptcy law go to: www.usdoj.gov/ust/eo/bapcpa/index.htm.
Chapter 7 allows you to eliminate nearly all personal debt. In simple terms, you list your assets and liabilities and give control of your property to the court. Much of it is sold to repay your debt.
In Chapter 13, you keep your property. A repayment schedule is established that requires you to repay your debts over several years. Past-due mortgage payments are expected to be paid off in three years, but this can be extended to five years if there is a good reason. You may be expected to pay interest on the debt as well as the debt itself. The repayment plan is court-approved and the court-appointed trustee oversees payment to your creditors. Chapter 13 does not eliminate your debt but it can keep creditors from harassing you until a repayment schedule is worked out in the courts.
Bankruptcy is complicated and will have a long-term impact on your life. Most people are therefore advised to seek the help of an attorney. But the law does not require that you retain an attorney to file bankruptcy. "Do-it-yourself" bankruptcy kits are available to help you understand the bankruptcy process, the records you must gather, the paper work required and the consequences of filing for bankruptcy. Kits normally focus on Chapter 7 because other types of bankruptcy are a bit more complex and fewer consumers file Chapter 13. A word of caution - the kits tell you that filing for Chapter 7 is a relatively simple matter. You will need to be very well organized, detail-minded and patient to successfully file bankruptcy without the assistance of an attorney. An attorney will assure that the bankruptcy paperwork is in order and will help steer you through the entire legal process.
There are a number of books available to help prepare for filing bankruptcy:
How to File for Chapter 7 Bankruptcy (8th Edition) by Stephen Elias, Albin Renauer, Robin Leonard (Nolo Press) Feb. 1999. ISBN#: 0873375025.
How to File Your Own Bankruptcy (Or How To Avoid It) (4th Edition) by Edward A Haman (Sourcebooks Trade) Oct. 1997 ISBN#: 1570712239.
Debt Free - Your Guide to Personal Bankruptcy Without Shame by James P. Caher and John M. Caher (Henry Holt) June 1996 ISBN#: 0805042768.
Chapter 13 Bankruptcy: Repay Your Debts (4th Edition) by Attorney Robin Leonard, (Nolo Press) 1999 ISBN#: 0873375017.
Bankruptcy: Is It The Right Solution To Your Debt Problems? by Attorney Robin Leonard, (Nolo Press) 1999.
Dealing with Debt, Your Guide to Bankruptcy and Other Options by Mary Trimble (part of the American Bar Association's "Practical Law Series") 1995. ISBN#: 1-57073-242-6 Telephone 312-988-5522.
Hiring an attorney to help you sort through the bankruptcy process will incur more debt but it may be a comfort to know that someone who understands the complexities of the system is in charge of your case. If you are married, an attorney can advise you if a single or a joint petition is best. An attorney will be able to explain the legal issues involved in transferring assets to avoid criminal prosecution for fraud. Many problems can be prevented if you are honest and thorough with your attorney and the court.
In some communities the Legal Aid Society may provide bankruptcy filing assistance to individuals or families that qualify under certain income limits. Qualifications and services vary from county to county. Contact your local office for information.
Finding a competent, dependable attorney who will charge a reasonable fee for services may seem overwhelming. Keep the following in mind:
Contact several attorneys by telephone and record how they responded to your questions. Filing bankruptcy is an emotional experience. You need an attorney whom you trust and with whom you feel comfortable. Review your findings and set an appointment for a meeting.
When you meet with the attorney:Bankruptcy is intended as a fresh start and may be the best way to handle overwhelming debt.
Caher, James P. and Caher, John M.; Debt Free!, Your Guide to Personal Bankruptcy Without Shame. New York: Henry Holt and Company, 1996
Bankruptcy: Facts and Consequences pamphlet, Consumer Credit Education Foundation; 1996
Steamer, James W.; Wealth on Minimal Wage. Dearborn Financial Publishing, Inc.; 1997
Detweiler, Gerri; The Ultimate Credit Handbook. Plume Penguin Group, 1993
Sheldon, Jonathan and Klein, Gary; Surviving Debt, A Guide for Consumers. National Consumer Law Center, 1996
Edelman, Ric; The Truth About Money. Washington D.C.: Georgetown University Press, 1996