Bankruptcy Questions: What do you need to know?

How do I file for bankruptcy?

Bankruptcy facts, not the stuff people say about it, might help people who are struggling financially, and wondering “How can I get myself out of this hole and be able to reclaim my life?” Let’s talk about bankruptcy in a way that’s a little less scary than most people might expect and how we’re able to do that in a way that’s going to be efficient and helpful for you.

A lot of people have a little bit of guilt and shame in regards to being in that situation and are concerned about the ethical consequences or whether or not, you know, it’s the right thing to file for bankruptcy. When I see credit card companies sending out statements to people, “Oh, get this credit card, we can help you. wouldn’t this be nice to have this great credit card? In the old days, they would tell you what the credit rating or the interest rate was, but you had to look way into the fine print to find out that the interest rate was like 24, 25. I’ve even seen 35%. The one I’m telling you about now had pictures of ice cream cones and happy people. And I opened it up and it did not even have the interest rate in it.

So when credit card companies do that sort of marketing, I don’t feel badly about doing a bankruptcy.

There are seven major world religions. All seven of them mentioned the concept of bankruptcy in their in their biblical verses. For example, in Christianity, if you go into your Bible, Deuteronomy 15 verse one and two say that the Lord shall forgive all debt within every seven years. And the reason that that’s really interesting, not only that all major world religions mention bankruptcy, but also before 2005, if you did a Chapter seven bankruptcy, you had to wait seven years to do another Chapter seven bankruptcy. Now in 2005, Congress substantially changed the bankruptcy law. Now you have to wait for eight years.

Is there a certain amount that you need to be in debt before you’re able to file for bankruptcy with respect to a Chapter seven bankruptcy?

No, there is no limit. I mean, obviously, you’ve got to consider the consequences of a Chapter seven. And so you’re not going to file a Chapter seven if you only go $25 or $100. So that’s more of a personal decision. And on a Chapter seven, there’s no real ceiling, although if you have tons and tons and tons of debt, a bankruptcy trustee is going to look at it.

What kind of different chapters are there and how do these different chapters impact the individuals that are filing for them?

There are several different chapters. We read in the newspaper about all of these big box stores that go under and they file a bankruptcy. And a bankruptcy like that is called a Chapter 11. That’s not what we’re going to focus on today. We’re going to focus more on what we call consumer bankruptcies. Consumer bankruptcies for individuals.

A Chapter seven is generally what we call a straight bankruptcy.

We call it that way because generally it’s over within about four months. You file the bankruptcy and 30 days later, you go to see a trustee who ask you questions about your situation. And then after a 60 day waiting period, depending if there are other issues that come up, two things happen. You get a discharge and the case closes out. That’s a Chapter seven.

A Chapter 13 is the other consumer bankruptcy.

And it’s a little bit more complicated. What a Chapter 13 does is it gives you that same discharge of your debts. So it discharges those debts that you have for the most part, but it takes three or five years. You have to have a 3 to 5 year payment plan in order to get that discharge. So you might ask, why would anybody do a chapter 13? People think about a payment plan if they have, for example, an asset they want to hold on to, for example, a house or sometimes a car. But a typical scenario with a Chapter 13 is people have a house with a huge mortgage. People buy these huge McMansions, and it relies upon two incomes. This is just one scenario. They rely on two incomes. Well, one person loses their job. Now they’re struggling. They might be getting behind in the mortgage. They’ve got this big, huge mortgage payment to make every month and they can’t do it. Well, one of them might get their job back, but now they’ve fallen into arrears on their mortgage. So they’re behind on the mortgage and they don’t know what to do. And they go to foreclosure.

The Chapter 13 will stop that foreclosure notice.

Can I keep my car? Well, the question is, do you want to keep your car? You have three options. With the car you can redeem, reaffirm or surrender. What does that mean? The first option, which is a reaffirmation, allows you to keep the car as long as it’s a good running car, as long as you have a reasonably decent payment, and as long as you don’t have too much equity in that car. So the average person might have a car these days that’s worth $20,000. They have a car loan, that’s $19,000. So if they sold the car, they only have $1,000 of what we call equity in the car. Now you need an exemption. Complicated question you asked, but as long as you have an exemption and in most states you’re going to have an exemption that covers $10,000, you’re okay.

Now, if you have a Lamborghini or a car that’s worth $200,000 and you don’t have a loan on it, no, you’re not going to keep that car. So the answer to your question depends on how much equity you have in that car and what the local exemption is on that car. The other options include redemption and surrender. If you have an old car that doesn’t run, you want to get rid of it. So in a chapter seven, you can do that. You can actually fill out the papers in the bankruptcy petition, check the correct boxes, talk to the lender and get rid of it.

Is that is there a benefit for filing for bankruptcy, over doing something like credit counseling or credit consolidation?

Usually people have already tried the credit counseling in the debt consolidation. And they have a lot of ads on TV, I get direct mail, consolidate your credit and it sounds like a great idea. You can put all of your credit cards together into one and it sounds great, right? Well, here’s what happens. Nine times out of ten or even more, these debt consolidation companies will take a monthly fee from you. And so you’re going to have to pay, but not always. Some of them work without a fee, but most of them work with a monthly fee and you pay them well, let’s say you have six credit cards.

They will work with the ones that make the most noise, the ones that are calling you on the phone every day, you know, maybe Visa, maybe MasterCard, maybe that card you got from the big box store and ran it up, that’ll end up with a very aggressive debt collector. And so what will happen is they’ll deal with that person and they might deal with three of your debts. And as you pay monthly thinking that you’re consolidating your debt, they’ll pay the three noisy ones. Well, two years ago by like this. Meanwhile, this company is pocketing your money. Then you come to find out that they’ve only dealt with some of your credit cards and not all of your credit cards. And that scenario, as unbelievable as that might sound, it happens all the time. So debt consolidation, generally speaking, not always, but in my experience, it’s turned out to be a very negative experience.

Is it possible to make too much money to be able to file for bankruptcy?

There’s a thing called a means test. And in other words, if you make too much money, you are unable to file a Chapter seven bankruptcy. This came out of some revisions to the bankruptcy law in 2005.

The numbers change all the time. So the most recent chart that I have in front of me tells me that, oh, it varies by the number of people in your household. So let’s take a look at New Hampshire. If you are a family of two in New Hampshire and if you filed during this period of time and again, these numbers change all the time. But right now, if you’re a household of two and you make more than $90,000 in New Hampshire, you fail the means test. You can’t do a Chapter seven. You’ve got to do a chapter 13 or not file at all. Now, just to illustrate how these numbers change from state to state, in Massachusetts, the number is $93,000. So the mean income level in Massachusetts is 93,000. Just by way of contrast, one of the highest means test household income numbers in the whole country is in the District of Columbia, where a household of two can make up to $135,000 and still do a Chapter seven. On the other hand, the other end of the scale in Arkansas, if you make only $59,000, you qualify. But over $59,000 in Arkansas, you can’t file a bankruptcy. Don’t rely on those numbers because they do change. They change every more or less six months based on the numbers that are put out by the U.S. Census Bureau.

So are people able to file for bankruptcy themselves or do people need to speak to an attorney in order to file for bankruptcy?

Well, people can file themselves, but I don’t recommend it. And it’s not just because I am an attorney, it’s because it’s pretty complicated. You know, there are a lot of attorneys that don’t even think about the possibility of considering getting into bankruptcy because it does have a lot of ups and downs. The bankruptcy petition itself involves a number of statements and schedules and affidavits, and you’re required to file it electronically and you’ve got to file a declaration.

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Lainey