What you do not know about bankruptcy can and will hurt you. What you think you know about bankruptcy can hurt you even more.
When you seriously consider bankruptcy, first know your terms. Pay special attention to the radical difference between Chapter 7 and Chapter 13 filings. Chapter 7 bankruptcy, your most extreme financial solution, absolves you of all your unsecured debts, but it cripples your credit for a decade. Chapter 13 bankruptcy, debt restructuring, takes almost all your assets to pay your outstanding debts, but it does create opportunities for refinancing your home. When the court discharges your bankruptcy, it does not make the whole thing go away; it simply closes your case.
Second, be on guard against the five most common myths and misconceptions about bankruptcy, because they put you seriously at-risk of major financial and legal trouble. When you hear pompous people pontificating as if they really know their stuff, simply pay no heed. Just as you always walked away from playground brawls, walk away from these five false claims:
• You can do the whole thing yourself online.
You can and should educate yourself about bankruptcy laws and procedures by studying the wealth of material easily available online. You should not, however, attempt a do-it-yourself bankruptcy. Although the Bankruptcy Code does not mandate legal representation for petitioners, no one ever does it in pro per. The laws, disclosure requirements, paperwork procedures, and technical standards are so complex, demanding, and subject to disqualification on technicalities that even experienced attorneys approach them tremendous respect for everything that can go wrong. When you decide bankruptcy really does represent your best choice, secure extremely well-qualified, experienced legal representation. You always should double-check attorney’s qualifications and experience, but looking for the right bankruptcy attorney, you should seek-out the bankruptcy attorney who has an undergraduate degree in accounting or an MBA in finance to complement his law school diploma.
• Bankruptcy is really no big deal.
Qualification for bankruptcy has become considerably more difficult since Congress enacted the 2005 Bankruptcy Abuse and Consumer Protection Act (BACPA). You cannot just raise your right hand and swear, Sorry, no money. Can’t pay. Forgive me. You must comply with the means test, proving your income falls below your state’s median, your net monthly income totals $166.67 or less, and you absolutely cannot satisfy 25% of your monthly obligations. The BACPA also tightened restrictions on repeat filings. You must wait at least two years between Chapter 13 filings, and you must wait eight years between Chapter 7 filings. Bankruptcy does not have the same terrible social stigma it once carried, but it does have serious, long-lasting consequences. Your declaration and discharge remain on your credit history for approximately a decade, and they can disqualify you from some professional positions—especially those that require handling large amounts of money. Whereas you eventually will be able to buy property and get unsecured credit cards, you will have to establish an extra-strong record of timely bill payment and wise use of the credit you do have. The statistics indicate most debtors are far more likely to fall back into their old spendthrift habits than to rebuild exemplary credit histories. Only 30% of petitioners approved for Chapter 13 debt restructuring actually complete their plans and satisfy all their obligations.
• Bankruptcy wipes the slate clean and gives you a fresh start.
Discharge of a Chapter 7 bankruptcy goes a long way toward wiping-out your credit card debt and other unsecured obligations, but the slate never erases completely. The Bankruptcy Code specifies a number of obligations that cannot be forgiven: child support and tax obligations lead the list of debts that cannot be discharged. In fact, before he grants your discharge, the judge in your case will require proof that you have remained consistent and current in your family support payments after you file your bankruptcy petition. He will require similar proof you have made regular payments on legal judgments or fines, your student loans, and non-support obligations incurred in divorce such as payments for dental care or car insurance. Moreover, your creditors may continue to garnish your wages and seize your tax refunds even after discharge of your bankruptcy.
• You get to keep all your stuff.
If you qualify for Chapter 7 relief, you probably will keep all your personal possessions, including your car; but the bankruptcy will not discharge your home mortgage and regular car payments. You frequently hear bankruptcy attorneys advertising, Eliminate debt and keep your home! Make your second mortgage disappear! They base their claims on your filing for Chapter 13 debt restructuring, in which you forfeit most of your assets to pay your bills, and then the court holds you to a strict budget for meeting your mortgage obligations and other major bills. In most cases, bankruptcy trustees work with mortgage lenders to refinance your home at its current value and reduced interest rates, but they attach your wages to make certain you pay on time. You will forfeit all your luxury possessions, including all but essential personal electronics. Your children’s computers and iPhones, however, remain safe from seizure.
• You can beat the system if you prepare in advance.
The 2005 BACPA originated in widespread abuse of the existing bankruptcy laws, and the law’s Congressional sponsors studied patterns of fraud, malpractice, and neglect as they drafted their legislation. BACPA anticipates and prevents filers’ attempts to hide or shelter assets. For example, you cannot charge more than $500 with any single creditor during the sixty days prior to your filing; nor can you take more than $750 in cash advances on a credit card during those sixty days. Similarly, although college savings plans and tax-exempt retirement savings cannot be seized by bankruptcy trustees, you cannot contribute more than $5000 to any of those plans in the year before you file.
Bankruptcy is still your very last resort. File for bankruptcy only when all your other financial and legal remedies have failed. If you are barely treading water or if you are under water in your house payments and other obligations, you probably have seen the sharks in these dangerous waters. When the predatory lenders left the market, the predatory collection agencies and debt counselors took their place. Do not imagine you can fend-off the schemers and scammers without professional help. Find a well-qualified bankruptcy attorney with extensive experience in financial planning or accounting; and work with your attorney to develop a workable plan for relief and recovery.
Paperwork by Scot Campbell/flickr Author Samantha Hathaway is a financial consultant and suggests there are times when payday loans may come in handy when you have financial needs prior to a pay date.