bankruptcy blog
Chapter 7 Bankruptcy: Five Common Misconceptions
1. Chapter 7 bankruptcy will ruin my credit for 7 years
It is true that the bankruptcy is reported for up to 7 years after you file your bankruptcy. However, it does not negatively affect you for that long. At the end of your Chapter 7 bankruptcy, you will be debt free (with some exceptions like student loans), which positively impacts your credit. I’ve had clients finance car and home purchases without issue after their bankruptcy cases.
2. I’m going to lose my house and car
This almost never occurs . In Nebraska, you can protect and keep your home as long as you are current on payments when you file and your home has $60,000 or less in equity.
As for your car, you can retain and keep it, if you’re current on payments and your vehicle has less than $10,000 in equity. This is because in Nebraska, you can use the vehicle exemption, which is $5,000, and the wild card exemption, which is $5,000, to protect one vehicle. For a couple filing the Chapter 7 bankruptcy jointly, those amounts can be doubled.
3. Filing bankruptcy is only for people that are behind on making payments
You don’t have to be behind to file bankruptcy. Actually, the best time to look into whether to file is prior to or soon after defaulting on payments.
Example: Your monthly minimum payments are $1,000. You were able to keep up with the payments until your former girlfriend decided she was going to move out. With less income coming into your household, you won’t be able to make next month’s credit card payments.
4. I make too much money to file Chapter 7 bankruptcy
The bankruptcy law includes something called the Means Test, which takes an average of your monthly income for the last six (6) months from all sources (excluding Social Security income), annualizes it (multiplies by 12), and compares it to the median income for your household size. If you’re below the median, you are good to go with a Chapter 7 bankruptcy. If you are above median, you usually are not. However, the Means Test has a 2nd step if you’re above median income that takes into account qualified and allowed expenses (i.e. child support payments, taxes, child care, etc.). Sometimes you may still qualify for a Chapter 7 bankruptcy after this 2nd step even though initially your income was “too high”.
5. If I file, my spouse has to file bankruptcy with me
You are allowed to file a bankruptcy without your spouse. Sometimes this makes a lot of sense. Two common scenarios are when your debt was incurred prior to marriage or you have business-related debt that is only in your name. If you are married and decide to file Chapter 7 bankruptcy without your spouse, you may still have to provide your spouse’s income and assets. However, your spouse’s identifying information, such as Social Security number and name do not have to be disclosed.
There is a lot of misinformation and fear on the internet regarding Chapter 7 bankruptcy, much of which is false and keeps people from using a viable solution to address their debts and move forward.
Learn more about Chapter 7 bankruptcy.
Bankruptcy as a Financial Planning Tool
You want to save more for retirement. You want to save for your kid’s college. You want to plan for your financial future and set financial goals. Standing in the way is your debt. You can’t seem to get ahead or make a dent on the amount of debt you have. It is the ever growing gobstopper. Each month your debt seems to mount even though you never miss a payment. You are current on everything. However, that $50,000 credit card debt is now sitting at $75,000. Everything is maxed out.
As is human nature, we have two immediate responses fight or flight. For the fighters out there, you start searching for ways to solve this problem head on. You start looking at what you have that you could turn into cash to throw at the debt. Maybe it is your retirement account or the equity you have in your house. Maybe it is your mother’s wedding ring. Whatever it is, you’re willing to part with it to deal with the debt problem that you are faced with. That may be a shortsighted response.
A much overlooked financial planning tool is a personal bankruptcy. A bankruptcy is an opportunity for a fresh start, a new financial beginning. It allows you to address your debt and move forward with setting and achieving your financial goals. You no longer feel stuck.
Example 1: John is 50 years old, married, and the guardian of his two minor grandchildren, ages two and five. He qualifies for a Chapter 7 bankruptcy. He has $50,000 in credit card debt and is current on making the payments. However, he has now maxed out all of the cards and is stuck. He and his wife have a goal to start saving something for their grandkids college, but can’t because of their debt. He has $50,000 in a retirement account that he is thinking of withdrawing to pay down his debt. If he does this, he will have $0 saved for retirement and will have to pay taxes on the amount withdrawn. Alternatively, he could file a Chapter 7 bankruptcy and be debt free in as little as 3-4 months. At the same time, he could keep his retirement account in place because it is exempt (protected). The money he was spending making minimum monthly payments on credit cards can now be used to save for his grandchildren’s college.
Example 2: John has $250,000 in his retirement account and a house with $60,000 of equity. He has $100,000 in credit card debt and does not qualify for Chapter 7 bankruptcy because his income is too high. Rather, he qualifies to file a Chapter 13 bankruptcy, which involves a five (5) year repayment plan where he will pay some or all of his debt back. The amount paid on debt depends on John’s income and the value of his assets. At the end of the plan, he will be debt free. John gets to keep all of his assets, including his retirement account and his house, which will most likely continue to accrue value.
If you or someone you know is in financial distress because of debt, bankruptcy should be considered as a viable solution. Liquidating an asset may ultimately do more harm than good. A bankruptcy may allow you to move forward with setting and achieving your financial goals.
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It’s A Family Affair: Multi-generational Financial Distress
At the bankruptcy court hearing called the First Meeting of Creditors, the Trustee, an attorney assigned to oversee your bankruptcy case, will typically ask whether you expect to receive an inheritance in the next six months. Almost every person responds with a laugh followed by a brief “no” or “I hope not.”
Most people find it incredulous or hard to believe that they’d be the recipient of any inheritance. An many hope that no one that they are close to passes away anytime soon.
In that first response there is an anecdotal message, a common story that many bankruptcy filers do not have family with any wealth to transfer upon death. We have the baby boomers that have to take care of parents who are outliving their retirement savings and children who are saddled with student loan debt. Millennials will be first generation to do financially worse than their parents. Americans do not save enough money, which will create a bit of a crisis as more baby-boomers retire. This is all happening even though unemployment is low and the economy is doing pretty well.
On several occasions, I have represented different generations of the same family who have had to file bankruptcy to resolve debt-driven financial distress when the collection funds and resources run out. When a significant life event occurs, most of us turn towards our main support system, our families. As previously stated, many Americans have little to no money in savings. What they do have can be gone in an instant helping out a son, daughter, mother, father, etc.
For example: Son and daughter-in-law fall behind on their mortgage, owing $5,000 in arrears, and face a pending foreclosure. Parents agree to use all their money in savings to bring the mortgage current and save the home from foreclosure. In the meantime, the parents turn to credit cards to pay unexpected expenses. The son and daughter-in-law fall behind on the mortgage payments again because the underlying cause of financial distress is still lingering.
It is possible that the son and daughter-in-law could have sought another alternative such as a loan modification or a Chapter 13 bankruptcy where a mortgage can be brought current through a plan that lasts 3-5 years. The parents could have then instead used the money in savings to cover the unexpected expenses or to pay the Chapter 13 bankruptcy filing fee of $310. For most of us, we want to help our family avoid disaster. However, there may be ways to provide support that you are not aware of.
The Financial Struggles of Aging
Living on a fixed income is difficult for many older Americans. Over the course of time, there has been a shift to individuals bearing a higher burden of financial risks. Gone are pensions. Health insurance is more of the burden on the insured than before. Savings are usually not sizable enough to cover an unexpected or unplanned expense. Social Security benefits, if taken early, come with a cost as the monthly benefit is permanently reduced.
As a result, the rate of individuals over the age of 65 that are filing for bankruptcy has tripled as compared to 1991. Despite a lifetime of hard work, many face the uncomfortable reality of mounting debt.
It could be that a spouse fell ill or passed away, leaving behind insurmountable medical bills and funeral costs. It could be that you had to retire early because of an injury, a child or grandchild moves in with you, or you could simply miss one car payment. Any small thing that snowballs.
Bankruptcy may be the best way to address the debt. Instead of feeling pressure to liquidate assets, a bankruptcy may allow you to achieve the end goal of being debt free and retaining all of your property.
In some situations, a bankruptcy is not necessary to protect assets but to provide peace of mind. The phone calls stop. The collection letters cease. The fear eliminated. Bankruptcy can provide many emotional and mental benefits beyond dollars and cents. After a bankruptcy, you can focus more on your well-being than on how you are going to continue to pay debt. Bankruptcy can be a liberating experience.
I have seen many clients try to outwork the debt. They attempt to find solutions because they were brought up that “you pay your debts.” However, That can be like running on a track and each step you take requires that you run another lap. A bankruptcy allows you to step off the track. There can be a fear that people will assume you have given up or avoided your responsibility to pay for your debt. Alternatively, you are showing that you are brave to take that uncomfortable step towards a fresh start. Peace of mind awaits.
Bankruptcy Is More Common Than You Think
Filing for bankruptcy is not something that most people want to do. However, it may provide the best, most straightforward solution to dealing with overwhelming debt. Many people struggle for months and even years before they decide to take the first step to a fresh start by setting up a free bankruptcy consultation.
During the contemplation phase, a person can experience a myriad of emotions: shame, guilt, frustration, or sadness. It is hard to admit to yourself and others that you may need help. I have seen people make the decision to liquidate a retirement account in an attempt to resolve the situation only to be left with a tax bill from the IRS. I call this replacing the monkey on your back with a baby gorilla: both are a burden to carry. Seeking support from a bankruptcy attorney can protect the retirement account and eliminate the debt.
Figuring this all out on your own can be both overwhelming and isolating. I am here to tell you that you are not alone (https://www.marketplace.org/2017/07/25/economy/americans-emergency-savings-wealth). While confiding with a trusted family-member, co-worker, or friend, you may be surprised that others have experienced similar situations. Having that shared experience will empower you to take steps to address the issues and move toward solutions.
In many consultations, the person I am meeting with will divulge that they finally decided to come in because someone provided them with the support to make the decision. It is also common that the person shares that he or she should have made the decision long ago. You don’t have to go this path alone. Life can change in big ways in a moment. Letting in support allows you to get outside of your own head when making a decision. You may be thinking your way in a circle trying to figure out how to pay off your debt when a simple and straightforward solution like a bankruptcy is readily available.
Letting in support can be hard. But it doesn’t have to be. Here are a few simple tips to get started:
- Write down who you would trust to share your financial struggles with.
- Write down your goals, e.g., financial stability, spend more time with my children instead of figuring out how to pay debt.
- Let in support for taking meaningful action, e.g., scheduling a free bankruptcy consultation.
- Be open to questioning your most closely held beliefs, opinions, and assumptions, e.g., “I have to do this alone. I will never get out of this.”
Step by Step: Chapter 7 Bankruptcy in 7 Clear Steps
Dealing with debt can be overwhelming. Your path to a fresh financial start doesn’t have to be. The Chapter 7 bankruptcy process can be broken down into 7 clear steps.
- Meet with an experienced bankruptcy attorney. During a free initial consultation, a bankruptcy attorney will listen to and analyze your situation to determine whether or not a bankruptcy is a viable solution for you to deal with your debt.
- Pay a set fee for your Chapter 7 bankruptcy. For most Chapter 7 bankruptcy cases, you will pay a set fee to your attorney, which is due in full prior to the case being prepared and filed. This is in contrast to a retainer that your attorney bills against for time spent at an hourly rate.
- Provide your attorney with documents. In your Chapter 7 bankruptcy paperwork, you are required to list all that you own, all the creditors you owe, and your monthly household income and expenses. As such, your bankruptcy attorney will request documentation and information relevant to drafting the paperwork such as:
- Tax Returns. Your last two (2) years State and Federal returns. If you have any tax returns that have not been filed as required, you must file them with the proper taxing authority prior to your bankruptcy being drafted and filed.
- Income Information. Your last six (6) months of income, which are typically paystubs.
- A List of assets. You will complete a handout with an inventory of your assets, including house, cars, household goods, electronics, etc. For many items you will use garage sale or Craigslist values.
- A List of household expenses. You will provide an itemized list of household expenses, including mortgage/rent, utilities, food, clothing, insurance, etc. In preparing this information, it will be helpful to review bank statements for at least the last six months.
- A List of Creditors. You will receive a copy of a comprehensive bankruptcy-based credit report. If a creditor is not included, you must provide us with a list of creditors, including account number and creditor’s address. Medical debts and pay day loans are common examples of debts that may not show up on your credit report.
- Complete a Short Credit Counseling Course. You must complete a credit counseling course prior to filing. The course can be completed online and takes about one hour. The course completion certificate is only valid for 180 days, so you need to make sure you don’t complete the course until you are close to filing your case.
- Review and sign your Chapter 7 bankruptcy paperwork. Your bankruptcy attorney will meet with you to review the bankruptcy paperwork to ensure that it accurate and complete. Your bankruptcy attorney will then file your case with the bankruptcy court. Once filed, your creditors cannot start or continue any efforts to collect a debt. This includes phone calls, letters, emails, filing lawsuits, and continuing garnishments.
- Attend one bankruptcy court hearing. About 4-5 weeks after you file your Chapter 7 bankruptcy, you will attend a bankruptcy court hearing with your bankruptcy attorney called a First Meeting of Creditors. You should not fret too much because creditors rarely show up to the meeting. Also, the name implies that there is a second meeting, which is misleading because this is the only time you will have to go to court. At that meeting, you testify under oath in front of a Trustee (who is not a judge), that the information contained in your bankruptcy paperwork is true and accurate. You usually spend less than 10 minutes answering the Trustee’s questions.
- Debts Are No Longer Owed. Typically, 60 days after the court hearing the bankruptcy court enters the discharge order, eliminating your legal obligation on your debt. The discharge does not apply to student loans, child support, and most tax debt. Because of your Chapter 7 bankruptcy, you are freed from past debt and can enjoy your fresh financial start.