How will I know when I need to file bankruptcy?You will be overwhelmed by debt and unable to reduce your debts at a reasonable pace. You may have lawsuits filed against you, and garnishments against your wages, tax refunds, and even bank accounts. Your assets may be threatened with seizure. You may have a lien against your house. Creditors will be calling regularly, and you will have not have the means to satisfy them. Here are three levels of financial stress at which you should at least be considering bankruptcy:
It is time to trim expenses, negotiate with creditors, and start thinking about bankruptcy if you:
- Only pay some bills each month and wait to pay others
- Receive calls from collection agencies
- Do not have health insurance
- Have little or no savings
- Have been out of work for a month or more
- Are behind two or more months on your payments for two or more debts
- Have lawsuits pending for unpaid accounts
- Owe taxes you cannot pay
- Have been out of work for three or more months
- Are using new credit cards to pay the minimums on old credit cards
- Have high medical bills not covered by insurance
- Wages have been garnished
- Bank account has been attached
- Home is set for a foreclosure sale
- Car has been or is about to be repossessed
- Unemployment benefits are ending
What common mistakes do debtors make before bankruptcy?
- Using money from your IRA or 401(k) to pay debts. Retirement savings are fully protected in bankruptcy. Don’t make early withdrawals, or borrow against your retirement plan.
- Paying unsecured debts like medical bills, credit cards, and personal loans instead of secured debts like mortgages and car loans. Secured creditors can take property from you without a court order, but unsecured creditors can only file lawsuits which will be stayed in bankruptcy. Keep your car loan current.
- Not understanding the concept of "setoff." A bank is allowed to apply the funds in your bank account against any unpaid loan from that same bank. As soon as you begin thinking about filing for bankruptcy, open an account where you have no debts and transfer your funds from the old bank or credit union to the new account.
- Borrowing against your home to pay off credit cards. Credit card debts can be discharged in bankruptcy; not paying your mortgage will cause you to lose your home. Don’t fall for the advertisements which suggest you consolidate your debts with a home equity loan.
- Not paying your income taxes. Recent tax bills are not dischargeable in bankruptcy, interest and penalties will rapidly increase your tax debt, and the IRS has extraordinary collection powers. Keep your taxes current by withholding the proper amount from your income.
How does bankruptcy work?After a bankruptcy, you are no longer required to pay any debts that are discharged. A discharge is a court order telling your unsecured creditors to stop trying to collect your debts. That means any actions your creditors have started or threatened to start must stop, including foreclosure, repossession, wage garnishment, and collection actions on credit cards and other personal loans. Your creditors can no longer call, send demand letters, file lawsuits, or seize assets.
Which debts are relieved by bankruptcy?Credit card debt, personal loans, legal judgments not based on fraud, medical bills, collection accounts, some tax debts, and deficiency balances are discharged in bankruptcy.
Which debts are not discharged in bankruptcy?The most common types of non-dischargeable debts are tax debts less than 3 years old, debts not disclosed in bankruptcy, child support, alimony, debts for willful or malicious injuries, court-imposed fines and restitution, student loans, personal injuries caused by driving while intoxicated, and 401(k) loans. A complete list may be found at non-dischargeable debts.
Can I lose my job because I file for bankruptcy?Neither government nor private employers may discriminate against you for discharging a debt in bankruptcy.
Which type of bankruptcy should I file?Most people file under Chapter 7 because it gives them a fresh start. Chapter 7 cases usually take less than 5 months from start to finish. When done, your discharged debts are permanently gone. About two-thirds of filers elect Chapter 7. The second most common form of bankruptcy filing is Chapter 13. Chapter 13 requires that you make payments towards your debts for the next 3-5 years. By filing under Chapter 13, you can stop home foreclosure proceedings. However, you still must timely make all mortgage payments that come due during your Chapter 13 plan. If your home has declined in value to the point where a second mortgage holder would receive nothing in foreclosure, you can use Chapter 13 to eliminate a second mortgage while keeping your home. Other times Chapter 13 is chosen is because you are in a high income bracket and fail the means test [BCP 410-420], have a lot of assets, or filed for Chapter 7 in the last 8 years. Your attorney can analyze your situation and make recommendations.
Is the credit counseling requirement difficult to fulfill?No, but it must be completed at least one day prior to filing or your case will be dismissed. If you are filing jointly with your spouse, you must both obtain a credit counseling certificate. The certificate is valid for six months. Most companies offer online courses which should only take your 1-2 hours to finish. Another credit counseling course must be completed within 60 days of your court hearing. It can also be completed online, and will take about 2 hours. It is best to take care of this second course soon after your bankruptcy filing.
What steps can I take to repair my credit rating after bankruptcy?You should have reasonably-good credit within two years, and maybe as soon as one year, if you follow these two recommendations:
- File bankruptcy while your credit is still good. Late pays and collection efforts damage your credit, especially if they occur over a lengthy period of time, so you are better off minimizing the late pays with a prompt bankruptcy filing.
- Post-bankruptcy, demonstrate that you can borrow and repay small sums. Showing that you can handle credit responsibly is key to improving your credit rating. Obtain a gas card, which is fairly easy to qualify for, and timely pay the monthly bill. Or obtain a secured credit card, which requires you to post a security deposit, and pay in full and on time the monthly charges. 12 months of timely payments will do wonders for your credit score.
- Keeping the same physical address and remaining at your job for multiple years will help.
- If you have a court judgments against you that has been paid off, it is up to you to make sure the court records reflect that fact. The holder of the judgment will not, and your credit rating will be affected. Obtain a letter or note from the creditor saying the judgment has been satisfied, and then get this information to the court that entered the judgment.