Bankruptcy brings relief to those who cannot possibly make good on their debts within a reasonable time. What is reasonable depends on the circumstances. Bankruptcy stops creditor actions, wipes out dischargeable debts while allowing the debtor to keep exempt assets.
Chapter 7 or Chapter 13, which is better? Generally, in Chapter 7 certain debts are discharged in 90 days and the debtor gets a fresh start. In Chapter 13, the debtor makes some payments over a 3-5 year period, after which left over debt may be discharged. Some debtors are forced into Chapter 13 because they are ineligible for Chapter 7 filing under the law. Others choose it for a variety of benefits not available in Chapter 7.
When you file for bankruptcy, something called the automatic stay immediately stops any lawsuit filed against you and most actions against your property by a creditor, collection agency, or government entity. Especially if you are at risk of being evicted, being foreclosed on, being found in contempt for failure to pay child support, or losing such basic resources as utility services, welfare, unemployment benefits, or your job (because of a raft of wage garnishments), the automatic stay may provide a powerful reason to file for bankruptcy. What the Automatic Stay Can Prevent Here is how the automatic stay affects some common emergencies:
- Utility disconnections If you’re behind on a utility bill and the 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 in January in New England might be justification enough.
- Foreclosure. If your home mortgage is being foreclosed on, the automatic stay temporarily stops the proceedings, but the creditor will often be able to proceed with the foreclosure sooner or later. If you are facing foreclosure, Chapter 13 bankruptcy is usually a better remedy than Chapter 7 bankruptcy, if you want to keep your house.
- Eviction. If you are being evicted from your home, the automatic stay may provide some help — but the new bankruptcy law makes it easier for landlords to proceed with evictions. If your landlord already has a judgment of possession against you when you file, the automatic stay won’t affect these eviction proceedings; the landlord can continue just as if you hadn’t filed for bankruptcy. And 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 — and the court will probably agree to do so.
- Collection of overpayments of public benefits. If you receive public benefits and were overpaid, normally the agency is entitled to collect the over-payment out of your future checks. The automatic stay prevents this collection. However, if you become ineligible for benefits, the automatic stay doesn’t prevent the agency from denying or terminating benefits for that reason.
- Multiple wage garnishments. Filing for bankruptcy stops garnishments dead in their tracks. (And not only will you take home a full salary, but you also may be able to discharge the debt in bankruptcy.) Although 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 if more than one wage garnishment is threatened.
What the Automatic Stay Cannot Prevent In a few instances, the automatic stay won’t help you.
- Certain tax proceedings. The IRS can still audit you, issue a tax deficiency notice, demand a tax return (which often leads to an audit), 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 your filing for bankruptcy.
- Criminal proceedings. A criminal proceeding that can be broken down into criminal and debt components will be divided, and the criminal component won’t be stopped by the automatic stay. For example, if you were 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 your filing for bankruptcy.
- Loans from a pension. Despite the automatic stay, money can 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 and proves that 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, and 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
Usually, a creditor can get around the automatic stay by asking the bankruptcy court to remove (“lift”) the stay, if it is not serving its intended purpose. For example, 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 go to court soon after you file for bankruptcy and ask for permission to proceed with the foreclosure — and that permission is likely to be granted.
Hiding property from a bankruptcy court could come back to haunt you.
Your bankruptcy papers are signed under penalty of perjury, so you are swearing that everything in them is true. One of the things you’re swearing to is that your forms are complete, because the forms ask you to list “all” property, income, and debts. Filing incomplete or inaccurate bankruptcy forms can lead to your case being dismissed — or worse, if the court thinks you omitted information or made false statements intentionally. The law is not supposed to punish those who make one or two 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. In this situation, you can indicate that the debt is “disputed.” If the debt is already the subject of a pending lawsuit, the debt can be listed as “contingent” — that is, it 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 — such as a relative or a 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 make sure that all of your creditors get their fair share of what you have, 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 May Have Coming to You When you list your property on the bankruptcy forms, 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: Jail time is not unusual for those who try to hide property from the court and get caught.
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 — that is, are creditors legally barred from taking your property or income even if you don’t file for Chapter 7 bankruptcy?
- 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 any income or property that your creditors can seize if they go to the trouble of obtaining a judgment. For instance, if all of your income comes from Social Security (which can’t be taken by creditors), and all of your property is exempt, there is nothing your creditors can take from you to satisfy their judgment. That makes you “judgment proof”.; While you may still wish to file for Chapter 7 bankruptcy to get a fresh start, nothing bad will happen to you if you don’t file, no matter how much you owe.
Will Chapter 7 Bankruptcy Discharge Enough of Your Debts?
Certain categories of debts cannot be discharged in Chapter 7 bankruptcy. It doesn’t make much sense to file for Chapter 7 bankruptcy if your primary goal is to eliminate these nondischargeable debts. The main nondischargeable debts are:
- back child support and alimony obligations
- 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 nondischargeable if the creditor objects to a discharge in the bankruptcy court. These debts include:
- debts incurred on the basis of fraud, such as lying on a credit application or writing a bad check
- debts from willful or malicious injury to another or another’s property
- debts from larceny (theft), breach of trust, or embezzlement, or
- debts arising out of a marital settlement agreement or divorce decree that aren’t otherwise automatically nondischargeable 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 bankruptcy and hope your creditors don’t object. Co debtors will still be on the hook. If you want to discharge debts for which you have a co-debtor (such as someone who cosigned a loan for you, or a business partner who is equally liable for the debt), 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 Chapter 7 bankruptcy may depend on what property of yours will be taken to pay your creditors (“nonexempt”; property) and what property you get to 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 Califonia State offers a $23,000 wildcard to individuals who do not have equity in a home. Typically the wildcard offers enough of an exemption to keep these items.
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. For more information, see What to Do If a Bill Collector Crosses the Line. Deciding Whether to File Chapter 7 Bankruptcy If you determine that you are judgment proof, that you’ll be stuck with significant debt following bankruptcy, or that you may have to give up too much property, Chapter 7 bankruptcy may not make sense for you. For a discussion of other options, including the possibility of doing nothing, continue to Chapter 13.
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, this can be particularly devastating because our housing and living expenses here historically demand a premium.
Continuously increasing use of credit eventually can become unmanageable and many people do not realize this until after the tipping point has happened. The resulting fines, interest rate hikes of missed payments can become a spiral that makes it impossible or impractical to repay debts.
A typical collection process begins with creditor phone calls and threatening letters (more recently also text messages and robocalls) eventually lawsuits, judgments, wage garnishments, bank levy, liens on debtor’s property. Often, debtors exhaust assets hoping to catch up. If this effort makes little sense because no real progress can be made, such steps deplete needed assets and can leave a debtor only worse off.
The crucial part of Bankruptcy alternatives like credit consolidation or debt settlement is that these smart options only if the budget used is realistic. The true cost of non-bankruptcy alternatives need to be calculated. These could potentially include income tax consequences on forgiven debt and other personal sacrifices.
If creditors cooperate and the financial setback was temporary, or the amounts owed manageable, debtor may be able to get back on track with some negotiations. But an unrealistic budget to fund a fantasy of a credit consolidation plan just means debtor will lose time, money, and end up worse off.