1. “Personal bankruptcy’s not just for the poor.”Meet the new face of bankruptcy. This nation’s worst downturn in 70 years pushed more formerly affluent people into bankruptcy than in previous recessions. Overall, bankruptcy filings have been declining since 2010 except for those with income over $60,000 per year which has doubled in the last 5 years. Experts blame the increase on slumping real estate and job losses, which have cut deeply into professional positions.
2. “When it comes to bankruptcy, one size doesn’t fit all.”
No type of bankruptcy will eliminate certain kinds of obligations, like child support, alimony and most student loans. But there are differences in the way debt gets handled in personal bankruptcy, often depending on which kind you file for, either Chapter 13 or Chapter 7. And each has pros and cons. Chapter 13 allows those with regular income to repay debts over three to five years. That drags things out a bit, but it stops the foreclosure process, meaning debtors behind on their mortgage can keep their house and catch up on payments over time. Those without regular income must file Chapter 7, which involves no payment plan—all eligible debt, such as credit card balances, gets wiped out. But it’s hardly a free pass. Chapter 7 doesn’t stop foreclosure, so banks can still take the homes of debtors behind on a mortgage. How do you know which form is right for you? Bankruptcy law is complex, and certain provisions vary from state to state, so it’s important to consult with an experienced bankruptcy attorney.
3. “No one wants your house if they can’t get good money for it.”
A common belief about bankruptcy is that it will leave you with nothing, living out of a cardboard box. But that’s not true, even in Chapter 7 cases. In theory, Chapter 7 involves liquidating a debtor’s non-exempt assets to pay creditors. But in reality, homeowners who end up filing usually don’t have enough equity in their home to benefit creditors, either because they’ve taken out a second mortgage, the home’s value has fallen or both. In such cases, the trustee handling the bankruptcy can decide not to liquidate the home, in which case the debtor gets to keep it. Also, there’s something called the homestead exemption, which in most circumstances allows you to keep your primary residence if your equity in it is below a certain threshold. It can vary widely from state to state. In Washington it’s $125,000. So, unless the value of your home is greater than $125,000 more than the total of your mortgages, you will not lose your house. But since Chapter 7 doesn’t stop foreclosure—although it tends to delay it by a few months—those behind on their mortgage often can lose their home regardless. The bottom line is that in most cases, you can keep your house, but you must make the payments.
4. “This could actually improve your credit score down the road.”
Yes, bankruptcy will pummel your credit score, says Barry Paperno, consumer-operations manager for FICO, the company that develops the credit scoring formula used by the three major credit bureaus. Yet bankruptcy can be less damaging in the long run than juggling late payments on credit cards for years in a bid to postpone the inevitable. Bankruptcy stays on your credit report for 10 years, but you can begin repairing it immediately, if gradually. The fact is, most people go bankrupt with lousy credit. They’ll be able to return to (and maybe surpass) their pre-bankruptcy FICO score more quickly than the rare debtor with pristine credit who needs to file bankruptcy after, say, a serious illness—which could mean a credit score drop of 150 points or more. Since 35 percent of one’s credit score is based on payment history, the further consumers get from any missed payments, the more their score improves. How to quicken the recovery? Establish new credit as soon as possible, either through a new credit cards or car loan. Keep in mind that bankruptcy filers will have to pay higher interest rates.
5. “Debt-settlement firms may do more harm than good.”
Debt-settlement firms offer to play hardball with creditors and whittle outstanding balances by up to 75 percent. They bill their services as an alternative to bankruptcy, but in many cases they can hurt more than they help. Debt-settlement firms are unregulated, for-profit entities that require regular payments before taking any action on a consumer’s behalf. This business model works squarely against the debtors’ interests. They get fees every month, so they have no incentive to settle with creditors as fast as possible In fact, you don’t need a middleman to negotiate with creditors. But, most debtors don’t have the “time, stamina or desire” to do it themselves. Either way, you’ll owe taxes on any amount saved on your debt. (That’s right: The IRS considers forgiven debt taxable income.) Debt erased as part of bankruptcy, by contrast, isn’t taxed
6. “Don’t settle with Mom first or fudge the condo in Boca.”
Many debtors naturally want to pay back friends and family before filing for bankruptcy. Yet that can be a big mistake. Any money repaid to “insiders”—including relatives, friends and acquaintances, or business partners—within a year of bankruptcy is recoverable by the trustee. If the recipient doesn’t voluntarily return it, the trustee has the power to sue. A more serious infraction involves trying to hide assets from the court. So don’t even think about giving your Harley to your brother—or selling it for cheap—to protect it from creditors. Bankruptcy filers must list everything they’ve sold, transferred or given away over the past two years. And nothing can be transferred, given away or sold for less than market value. I recall a case where the debtor failed to disclose an inheritance. The Trustee discovered the omission through probate court records. As a result of the deception, the debtor lost the inheritance (much of which he could have exempted had it been disclosed), and was denied a discharge, allowing creditors to come after him again. Finally, he was investigated by the United States Trustee for perjury and bankruptcy fraud. Fortunately for him, he was not indicted.
7. “Better save up before you file.”
Lawyers in Chapter 7 cases generally request payment up front; otherwise, their fees would be discharged during the bankruptcy process along with other debt. (In Chapter 13, lawyers’ fees become part of the payment plan.) These fees average $1,500, depending on the complexity of the case. The Bankruptcy Court also charges filing fees of $306 for a Chapter 7 and $281 to file a chapter 13.
8. “Just because your bills stop coming doesn’t mean you shouldn’t pay them”
Not only does filing for bankruptcy stop collection calls, but most bills stop coming too. That’s because an “automatic stay” prohibits collection actions against the debtor or his property. But that doesn’t mean debtors are suddenly released from payment obligations for secured possessions they want to keep—that’s legal lingo for anything bought with collateral, like a car or house. During Chapter 7 proceedings, which usually last about four months, you must remember to pay for what you want to keep in the absence of a bill. (In Chapter 13, those bills are folded into the payment plan the court establishes.) Besides the house and car, secured possessions could also include an engagement ring or other jewelry. Your bankruptcy attorney will explain your options, and assist you with the requirements for a reaffirmation (continue to pay installments) or redemption (pay the creditor in cash for the value of the collateral), but if you want to keep secured items you must pay for them.
9. “Timing is everything.”
When you owe more than you own, or you can’t pay your bills when they become due, it’s time to consult a lawyer. But that doesn’t mean bankruptcy is necessarily the next step. It’s often best to wait until you think the worst is over, because if you file prematurely, you’ll likely incur more debt, which won’t be included in the bankruptcy discharge. For example, those facing hospitalization may want to postpone until that’s behind them. And for Chapter 7 filers who stand to lose their home, holding off on filing can maximize the time living in the residence without making mortgage payments. To do this, wait until the eve of foreclosure to file for bankruptcy. On the other hand, there are situations, like garnishments or pending lawsuits, in which it’s best not to wait. Those with no hope of repaying debt often have little to gain by postponing. In such cases, it’s usually better to bite the bullet sooner rather than later.
10. “Bankruptcy doesn’t have to be the end of the world.”
There's nothing easy about bankruptcy. It can be especially hard for middle-class filers who face a swift and unexpected slide down the socioeconomic ladder. And those who file for medical reasons suffer the double burden of health problems and financial distress. But many people emerge from it stronger than they expected. It helps that bankruptcy has become more widespread these days, lessening its stigma.
Today's guest blog is courtesy of McFerran & Burns, PS. For more information, please visit their website at www.mbs-law.com or their Seattle office at 1833 N 105th St, Suite 101.
Happy Investing!
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