Basic Common Causes of Bankruptcy
Common causes of financial distress are job loss, divorce, illness, business failure. A combination of these events can easily overwhelm even the most fiscally prudent. In San Diego, these events can be particularly devastating because our housing and consequently many other services, costs demand a premium.
A typical collection process begins with creditor phone calls and threatening letters. There may be text messages, robocalls. Eventually the creditors are likely to move on to lawsuits, judgments, wage garnishments, bank levy, recording liens on debtor’s current and future property. Debtors can exhaust precious assets hoping to turn things around, wanting to catch up.
The critical part of alternatives to Bankruptcy in resolving debts, such as credit consolidation or debt settlement, is that these are good options if the proposed budget is truly realistic. Often people underestimate household expenses, especially ones that come sporatically like costly vehicle repairs, out of pocket healthcare, but need to be averaged and factored in when proposing an affordable alternative payment plan. This is particularly true if there is no cushion, not even a $1,000 emergency fund. In that case, the debtor is really riding the rails, no room for any mishap, unfortunate circumstance. Therefore, the true cost of these non-bankruptcy alternatives need to be examined carefully. This could also potentially include income tax consequences on forgiven debt and other personal sacrifices.
If the creditors cooperate and the financial setback was temporary, the amounts owed are still manageable, borrower may be able to get back on track with some negotiations and restructuring. But an unrealistic budget to fund a credit consolidation fantasy plan is a waste of precious time, energy and money and leaves the borrower worse off.
After a bankruptcy is filed, the automatic stay offers potent legal protection against bill collectors.
The automatic stay is an injunction that instructs creditors to immediately stop their collection activities against you and your property. If you are at risk of being evicted, being foreclosed on, being found in contempt for failure to pay child support, having wages garnished, or losing basic resources the automatic stay may provide a powerful reason to file for bankruptcy. There are exceptions to Automatic Stay so you should discuss your situation with the Attorney to get proper advice.
What the Automatic Stay Can Prevent
Here is how the automatic stay affects some common emergencies:
- Utility disconnections If the utility company is threatening to disconnect your water, electric, gas, or telephone service, the automatic stay will prevent the disconnection for at least 20 days. Although the amount of a utility bill itself rarely justifies a bankruptcy filing, preventing electrical service cutoff might be justification enough.
- Foreclosure. If your home is being foreclosed on, the automatic stay temporarily stops the proceedings. The creditor however will often be able to proceed with the foreclosure so if you are facing foreclosure Chapter 13 is likely a better remedy if you want to keep your property.
- Eviction. If you are being evicted from your home, the automatic stay may provide some help. However the assistance here is very limited. If your landlord already has a judgment of possession when you file Bankruptcy the automatic stay won’t affect these eviction proceedings. Here the landlord can continue just as if you hadn’t filed for bankruptcy. If the landlord alleges that you’ve been endangering the property or using controlled substances there, the automatic stay won’t do you much good, either. In other cases, the automatic stay might buy you a few days or weeks, but the landlord will probably ask the court to lift the stay and allow the eviction. The court will probably agree to do so.
- Collection of over payments of public benefits. If you receive public benefits and were overpaid, normally the agency is entitled to collect out of your future checks. The automatic stay prevents this collection. However the automatic stay doesn’t prevent the agency from denying or terminating benefits.
- Multiple wage garnishments. Filing for bankruptcy stops garnishments dead in their tracks. Not only will you take home a full salary, but you also may be able to discharge the debt in bankruptcy. No more than 25% of your wages may be taken to satisfy court judgments, up to 50% for child support and alimony. Many people file for bankruptcy when more than one wage garnishment is threatened.
What the Automatic Stay Cannot Prevent
In a few instances automatic stay won’t help you:
- Certain tax proceedings: The IRS can still audit you. They can issue a tax deficiency notice, demand a tax return, issue a tax assessment, or demand payment of such an assessment. However, the automatic stay does stop the IRS from issuing a tax lien or seizing your property or income.
- Support actions: A lawsuit against you seeking to establish paternity or to establish, modify, or collect child support or alimony isn’t stopped by filing bankruptcy.
- Criminal proceedings: A criminal proceeding that can be broken down into criminal and debt components will be divided. The criminal component won’t be stopped by the automatic stay. For example, if you are convicted of writing a bad check, sentenced to community service, and ordered to pay a fine, your obligation to do community service won’t be stopped by the bankruptcy.
- Loans from a pension: Money can still be withheld from your income to repay a loan from certain types of pensions including most job-related pensions and IRAs.
- Multiple filings: If you had a bankruptcy case pending during the previous year, then the stay will automatically terminate after 30 days unless you, the trustee, the U.S. Trustee, or a creditor asks for the stay to continue. To get this approved it must be shown that the the current case was filed in good faith. If a creditor had a motion to lift the stay pending during the previous case, the court will presume that you acted in bad faith. You’ll have to overcome this presumption to get the protection of the stay in your current case.
How Creditors Can Get Around the Automatic Stay
A creditor can get around the automatic stay by asking the court to lift the stay if it is not serving its intended purpose. For example, lets say you file for bankruptcy the day before your house is to be sold in foreclosure. You have no equity in the house, you can’t pay your mortgage arrears, and you have no way of keeping the property. The foreclosing creditor is apt to ask and get from the court permission to proceed with the foreclosure.
Hiding property from a bankruptcy court could come back to haunt you.
Your bankruptcy papers are signed under penalty of perjury. You are swearing that everything in the petition is true. You swear that the forms are complete. The forms ask you to list “all” property, income, and debts. Filing incomplete or inaccurate bankruptcy forms can result in your case being dismissed. There are even worse consequences if the court finds that you omitted information or made false statements intentionally.
The laws isn’t meant to punish those who make honest mistakes. If you accidentally leave something off your papers or misstate something on your forms, you can usually correct your papers or explain the mistake to the trustee. But if you leave out so much that it appears that you were careless, the court can find that your actions demonstrate an indifference to the truth and can dismiss your case on that basis. If you deliberately attempt to hide assets or use a false Social Security number, it will probably come back to haunt you more profoundly than your current debt crisis.
List Every Creditor
Bankruptcy can’t help you if you hide information. If you fail to list creditors, the debts you owe them may not be wiped out by your bankruptcy discharge. So, be sure to list every person who claims that you owe them money. Even if you don’t think you owe them a cent, list them. You can indicate on the petition form that you “dispute” the debt. If the debt is already the subject of a pending lawsuit, the debt can be listed as “contingent”, depends on how the lawsuit comes out.
When your bankruptcy is finished, you will no longer owe any debts that have been discharged. If a disputed debt is discharged, the entire dispute will be irrelevant. The creditor will be legally barred from collecting anything more from you regardless of who is right.
Don’t Omit Creditors Just Because You Like Them
Some filers consider omitting creditors whom they like, relative, friendly local business person, to avoid having that debt wiped out. This is a bad idea, no matter how honorable your intentions. Bankruptcy doesn’t allow you to play favorites. In fact, a central purpose of bankruptcy is to ensure that all creditors get a fair share and that certain like obligations, like child support, are not shortchanged. If the bankruptcy trustee learns that you’ve omitted creditors from your list, you’ll have to add them, and it will raise suspicion about other statements on your forms.
Include money you have coming to you when you list your property. You must include not only property you have when you file, but also property that you may have coming to you. Here are some examples:
- an inheritance from a recently deceased relative that you have not yet received
- stock options, trust funds, or tax refunds
- pensions, retirement funds, annuities, and life insurance, and
- judgments from lawsuits you’ve filed or could file, arising from a personal injury or other matter.
All of these are examples of property that you must list on your forms. You may get to keep some or all of this property by claiming it as exempt, but you must list it so that the trustee has a complete picture of all of your finances.
Don’t Deliberately Hide Assets or Other Financial Details
If you deliberately fail to disclose property, omit material information about your financial affairs, or use a false Social Security number to hide your identity as a prior filer, and the court discovers your action, your case will be dismissed and you may be prosecuted for fraud. The punishment for fraud is serious. Prison time and hefty fines comes to those who get caught hiding property.
Chapter 7 bankruptcy may make you sacrifice property, yet not discharge all your debt. If you are inclined to file for Chapter 7 bankruptcy, take a moment to decide whether it makes economic sense. You need to consider three questions:
- Are you judgment proof? Are creditors legally barred from taking your property or income even if you don’t file for Chapter 7?
- Will Chapter 7 bankruptcy discharge enough of your debts to make it worth your while?
- Will you have to give up property you really want to keep?
Are You Judgment Proof?
Most unsecured creditors are required to obtain a court judgment before they can start collection procedures such as a wage garnishment or seizure of personal property. Collections for taxes, child support, and student loans are exceptions to this general rule. If your debts are mainly of the type that require a judgment, the next question is whether you have income or property that your creditors can seize after obtaining a judgment. If all of your income comes from Social Security, which is protected from most creditors, and all of your property is exempt, what can the creditors take from you to satisfy their judgment? You are considered “judgment proof”. While you may still wish to file for Chapter 7 bankruptcy to get a fresh start, no property needs protection even if you don’t file Bankruptcy and no matter how much you owe.
Will Chapter 7 Bankruptcy Discharge Enough of Your Debts?
It doesn’t make sense to file for Chapter 7 if your primary goal is to eliminate nondischargeable debts. Certain categories of debts cannot be discharged in Chapter 7 bankruptcy. The main non-dischargeable debts are:
- back child support and alimony obligations
- most student loans, unless repayment would cause you undue hardship
- income taxes less than three years past due
- recent debts for luxuries (more than $550 to any one creditor incurred within 90 days before you file for bankruptcy, and cash advances of more than $825 within 70 days before you file), and
- court judgments for injuries or death to someone arising from your intoxicated driving.
The bankruptcy judge may rule some types of debts as non-dischargeable if the creditor objects to a discharge. These debts include:
- debts incurred on the basis of fraud, such as lying on a credit application or writing a bad check or
- from willful or malicious injury to another or another’s property or
- from larceny (theft), breach of trust, or embezzlement, or
- arising out of a marital settlement agreement or divorce decree that aren’t otherwise automatically non-dischargeable as support or alimony.
If the bulk of your indebtedness is from debts that creditors may object to being discharged, it may still make sense to file for Chapter 7 and hope your creditors don’t object. Note that co-debtors will still be on the hook. If you want to discharge debts for which you have a co-debtor, bankruptcy won’t wipe out the debt. If the debt is of a type that can be discharged in Chapter 7 bankruptcy, you will no longer be legally responsible for paying it, but your co debtor will.
How Much Property Will You Have to Give Up?
Whether or not you decide to file for bankruptcy may depend on what property is non exempt and will be taken to pay your creditors. You can keep exempt property. Certain kinds of property are exempt in almost every state, while others are almost never exempt. The following are items you can typically keep (exempt property):
- motor vehicles, up to a certain value
- reasonably necessary clothing (no mink coats)
- reasonably needed household furnishings and goods (the second TV may have to go)
- household appliances
- jewelry, up to a certain value
- personal effects
- life insurance (cash or loan value, or the proceeds of life insurance), up to a certain value
- part of the equity in your home
- tools of your trade or profession, up to a certain value
- a portion of unpaid but earned wages, and
- public benefits (welfare, Social Security, unemployment compensation) accumulated in a bank account.
Items you might*** need to give up (nonexempt property) include:
- expensive musical instruments (unless you’re a professional musician)
- stamp, coin, and other collections
- family heirlooms
- cash, bank accounts, stocks, bonds, and other investments
- a second car or truck, and
- a second or vacation home.
- Note though that California offers a wildcard to individuals who do not have equity in a home. Typically the wildcard offers enough of an exemption to keep these items. Wildcards are like jokers in a deck of cards.
- Talk to your attorney. Don’t assume it’s not exempt.
You may be considering bankruptcy just to stop harassment by your creditors. However, in most cases, you can stop creditors from making telephone calls to your home or work by simply telling them to stop in writing. See a sample Cease and Desist Letter
Deciding Whether to File Chapter 7 Bankruptcy
Chapter 7 is not right for you if you will be stuck with significant debts following a Chapter 7 discharge , have to give up too much property or are and will continue to be judgment proof. For a discussion of other options continue reading about Chapter 13.
Generally, in Chapter 7 certain debts are discharged in about 90 days and the Debtor gets a fresh start. It is often referred to as a liquidation bankruptcy because non exempt assets are sold by the Trustee and the resulting funds are used to pay creditors to the extent that they can. Debtors gets to keep the exempt property.
In Chapter 13, on the other hand, the Debtors makes payments over either a 3 or a 5 year period. Debtors who are not eligible for discharge under Chapter 7 or who need additional benefits not available under Chapter 7 look toward Chapter 13. In a way, a chapter 13 is a settlement and consolidation rolled into one, but without tax consequences.
Bankruptcy brings relief to those who can’t make good on their debts within a reasonable time. Bankruptcy stops creditor actions, wipes out dischargeable debts, allows the Debtor to keep exempt assets and to get a fresh start.