A CONSUMER'S GUIDE TO BANKRUPTCY
Although bankruptcy is not a magical cure, it is an important alternative for a range of financial problems. Bankruptcy may provide immediate protection, particularly for individuals facing foreclosure or repossession of property. (It should be noted that delay in those circumstances may undermine a consumer's ability to protect property for the long term.) Even those who are not in short term danger of repossession or foreclosure may often decide upon bankruptcy simply for the relief of having debts lifted in order to get a fresh financial start.
Many consumers who file bankruptcy petitions have researched and considered the step carefully. Others lack basic knowledge of what bankruptcy can accomplish, or are hampered by misinformation, fearing that bankruptcy might cause them to lose all of their property, or that it might prohibit them from ever acquiring property or credit again. Because such misinformation is common, and because bankruptcy is a complex and serious undertaking, those counseling families in financial distress must have a thorough knowledge of how bankruptcy works, and what it can and cannot do.
What Bankruptcy Can Do
Bankruptcy may make it possible for financially distressed families to:
- Discharge liability for most or all of their debts and get a fresh start. When the debt is discharged, the debtor has no further legal obligation to pay the debt.
- Stop foreclosure on their house or mobile home and allow families an opportunity to catch up on missed payments. In certain limited situations, families can even recover their house or mobile home after it has been sold at foreclosure.
- Prevent repossession of a car or other property, or force the creditor to return property even after it has been repossessed.
- Stop wage garnishment, debt collection harassment, and the like, and give families some breathing room. Restore or prevent termination of utility service.
- Lower the monthly payments on debts including secured debts such as car loans.
- Allow debtors an opportunity to challenge the claims of certain creditors who have committed fraud or who are otherwise seeking to collect more than they are legally entitled to. Bankruptcy, however, cannot cure every financial problem, nor is it an appropriate step for every individual. In bankruptcy, it is usually not possible to:
- Eliminate certain rights of "secured" creditors. A "secured" creditor has taken the consumer's property as collateral for the loan. Common examples are car loans and home mortgages. Although a debtor can force secured creditors to take payments over time in the bankruptcy process, a debtor generally cannot keep the collateral unless the debtor continues to pay the debt.
- Discharge types of debts singled out by the federal bankruptcy statute for special treatment, such as child support, alimony, some student loans, court restitution orders, criminal fines, and some taxes.
- Protect all cosigners on their debts. When a relative or friend has co-signed a loan, and the consumer discharges the loan in bankruptcy, the cosigner may still have an obligation to repay all or part of the loan.
- Discharge debts that are incurred after bankruptcy has been filed.
A decision to file for bankruptcy should be made only after determining that bankruptcy is, in fact, the best vehicle for dealing with the problems at hand.
The Two Types of Bankruptcy
The bankruptcy law generally provides for two types of cases. These are generically known as liquidation and reorganization.
Liquidation (Under Chapter 7)
A liquidation case usually takes place under Chapter 7 of the bankruptcy law. In a liquidating case, the debtor's assets are examined by a court appointed trustee to determine if anything is available to be sold for the benefit of creditors. Certain property cannot under the law, be sold, and instead is kept by the debtor despite the bankruptcy. This property is called "exempt".
The trustee may sell only property which is either not exempt at all or which has value which exceeds the exemption limits. In most consumer bankruptcies, virtually all, if not all, of a debtor's assets are exempt; therefore, little or none of the consumer's property is taken away and sold.
Exemption laws vary from state to state and may be fairly complicated. It is impossible to assist a consumer in making a final choice about bankruptcy without understanding the exemption laws for your particular state.
It is also important to understand that in deciding what can be sold, the trustee will only look to the debtor's equity in property. If a debtor owes money on a mortgage or other lien on a home, that mortgage or lien reduces the debtor's equity in the home. The trustee will not sell property if the debtor's equity in the property is fully exempt.
For example, if the applicable state exemption for the consumer's home is $50,000, the home's value is $150,000, and the consumer has a $100,000 mortgage, all of the consumer's $50,000 equity in the home is exempt. The trustee will not sell the home in a Chapter 7 liquidation.
At the end of a liquidation case, a debtor can obtain a discharge of most unsecured debts. This means that the debtor no longer has a legal obligation to pay those debts. Generally, the discharge will include credit card debts, medical bills, utility arrearages, and the like. Other unsecured debts, such as student loans, tax debts and public benefits overpayments, may also be dischargeable, depending on the circumstances.
It should be understood at the outset, however, that liquidation cases rarely can help with secured debts, because the liens of secured creditors generally pass through a liquidation case unaffected. That is, bankruptcy discharges most personal debts, but does not eliminate the right of a secured creditor to recover its collateral if a debt is not repaid.
This means that a liquidation case will not affect, for example, the rights of a mortgage holder or car loan creditor to foreclose or repossess collateral. Although some delay in the foreclosure or repossession may result from the liquidation case, the bankruptcy will not provide long term relief.
Reorganization (Under Chapter 13)
Reorganization cases work very differently form liquidations. In a reorganization case, the debtor puts forward a plan, according to the rules set out in he bankruptcy law, to repay creditors over time, usually from future income. Most consumer reorganizations take place under Chapter 13 of the bankruptcy law. However, some debtors with large amounts of debt may be required to (or prefer) to proceed under Chapter 11. Family farmers can also proceed under Chapter 12.
In certain circumstances, there is an advantage to the debtor of filing a reorganization case rather than a liquidation. Most importantly, in a reorganization case, the debtor is allowed to get caught up on mortgages or car loans over a period of time.
For example, most credit agreements allow a creditor to call the whole loan in where the consumer misses a payment or two. Although a creditor may let the consumer work out an agreement to catch up over time on back payments, the creditor usually is not legally required to do so.
Where a creditor is uncooperative, a bankruptcy reorganization may be the only way to use the law to force the creditor to accept such back payments over time. Reorganization cases allow debtors to put forward plans to pay off or cure the default rather than surrender property.
Additionally, reorganizations allow a debtor to deep both exempt property (which would be protected in a liquidation) and non-exempt property (which would be sold in a liquidation). The debtor can keep the non-exempt property by paying its value to creditors under a court approved plan, usually over a period from three to five years.
The heart of any reorganization is the debtor's bankruptcy plan. This is a simple document outlining tot he bankruptcy court how the consumer proposes to make payments to various creditors while the plan is in effect. The law places certain limits on what a debtor may do under a plan.
Nevertheless, there are substantial opportunities for reorganizing the consumer's debt payments and protecting the consumer's property from creditors, including mortgage and other lien holders, as long as appropriate payments are made. The reorganization option is thus particularly useful for someone who has fallen behind on a mortgage or car loan due to temporary financial hardship and is now able to begin making payments again .
A Chapter 13 bankruptcy plan generally requires monthly payments to the bankruptcy trustee over a period of three years. However, plans can go for as long as five years with court approval. In most jurisdictions, bankruptcy courts will routinely approve requests by the debtor to have the monthly payments to the trustee paid automatically by wage deduction.
Once the debtor's payments are completed under the plan, the debtor is entitled to a discharge just as in a Chapter 7 bankruptcy. The discharge available is slightly broader than a discharge under Chapter 7 and may cover more debts. If the debtor has caught up on any mortgage or other secured loan, the loan will be reinstated and the debtor must be treated as if the debtor never fell behind.
It is important for consumers to be aware that reorganization cases can often be quite complicated. Working out the most advantageous possible bankruptcy plan is frequently difficult. Where bankruptcy appears to be an option, encourage consumers facing foreclosure on a home or repossession of a car, to consult with an attorney specializing in bankruptcy as quickly as possible. Delay may result in the foreclosure or repossession proceeding tot he point where bankruptcy can no longer help.
The Purposes of Bankruptcy
Bankruptcy achieves two purposes; it establishes equity among creditors and it provides debtors with a fresh start. Equity among creditors is achieved by fair distribution of the consumer's nonexempt property according to established rules guaranteeing identical treatment to similarly situated creditors.
Bankruptcy's fresh start allows individuals who have become mired in debt to free themselves and engage in newly productive lives, unimpaired by past financial problems. bankruptcy avoids the kind of permanent discouragement that can prevent people from ever reestablishing themselves as hard-working members of society. In the working of the United states Supreme Court, bankruptcy is meant to provide "a new opportunity in life, unhampered by the pressure and discouragement of pre-existing debt".
Advantages of Bankruptcy
One of the most advantageous and straightforward aspects of a bankruptcy filing is that the submission tot he bankruptcy court of the consumer's bankruptcy petition automatically, without any further legal proceedings, stops most creditor actions against the consumer and the consumer's property.
The consumer's mere request for bankruptcy protection automatically forces an abrupt halt to repossessions, garnishments, attachments, utility shut-offs, foreclosures, evictions and debt collection harassment. Beyond all this, the automatic stay offers debtors a breathing spell, providing them with time to sort things out and to solve problems.
Creditors cannot take any further action against the consumer or the consumer's property until the creditors obtain permission from the bankruptcy court. Sometimes creditors will seek such permission immediately, and sometimes they will never seek permission.
Note that even when they do, such permission is rarely, if ever, granted to unsecured creditors. While it is common for secured creditors to get relief from the stay in a Chapter 7 case to continue foreclosure or repossession (because the lien will pass through the case unaffected), secured creditors rarely get relief in a Chapter 13 case as long as plan payments are being made.
While the stay is automatic, creditors may not hear about the bankruptcy filing for some time. If it is important to the consumer to stop a creditor's actions, the consumer should inform the creditor of the bankruptcy filing as soon as it is filed. If the creditor acts against the consumer despite the automatic stay, the creditor can be held in contempt of court and may have to pay the consumer money damages and attorney's fees. The action taken in violation of the stay is then also reversible.
Discharge of Most Debts
The principal goal of most bankruptcies is quite simple. It is to achieve a total discharge, absolving the debtor from most unsecured debts. The discharge is the traditional goal of most individuals who file bankruptcy. Bankruptcy is a relatively easy way, though not the only way, to permanently end creditor harassment, and the hardship, anxiety and stress associated with debt overload.
As discussed above, the liens of secured debts are not are not terminated by bankruptcy unless those debts are paid off. However, if the debtor gets a discharge, al that survives the bankruptcy is the creditor's right to foreclose or seize the property. A secured creditor has not right following bankruptcy to seek a deficiency judgment or to harass the debtor to pay.
Protection Against Wage Garnishment and Enforcement of Judgment Liens
Bankruptcy prevents any garnishment of wages or other income after a petition is filed. Thus bankruptcy can restore a debtor to full use of income and may also be a useful strategy for consumers whose employees' frown on wage garnishments. Even recoupment by federal and state agencies of Social Security or of other public benefit overpayments can be prevented by a timely bankruptcy petition, so long as the receipt of the overpayment was not deliberate.
Bankruptcy is also an effective tool to deal with money judgments against the debtor. If the judgment does not create a lien against any property under state law, that creditor is unsecured and the debt may be discharged as if no judgment ever existed. Even if the judgment does create a lien, the debtor may request the bankruptcy court that the lien be lifted if it affects otherwise exempt property. State exemption laws specify hew much of a consumer's property is exempt from seizure by unsecured creditors even after they obtain a court judgment. Consumers can utilize these state exemption laws to also protect the same property in a bankruptcy proceeding.
Added Flexibility in Dealing with Secured Creditors
Bankruptcy can also be advantageous in dealing with secured creditors, that is lenders who have collateral for their loans. Consumers in bankruptcy will generally have to make payments on their mortgages, car loan, and other secured debts if they want to keep the home, car, or other collateral. But, bankruptcy does provide added flexibility in dealing with these secured creditors.
First of all, bankruptcy can totally eliminate certain secured creditors' right to seize collateral by "avoiding" the creditor's lien. One narrow but still important situation where liens can be avoided involves liens on household goods taken where the loan is not used to purchase those goods. To the extent that house hold goods are exempt-and most families' household goods will be completely exempt-such a creditor's ability to seize that collateral is forever eliminated by a bankruptcy filing.
Bankruptcy also allows consumers to deep collateral by redeeming it, that is essentially paying the creditor not the amount of the loan, but the value of the collateral. For example, if a car is only worth $1,000, even though the car loan is $3,000, the consumer could keep the car by marshalling together various exempt assets and paying the creditor only the $1, 000.
The greatest flexibility in dealing with secured creditors is available when a Chapter 13 bankruptcy is filed. For example, if the consumer is 6 months delinquent on a mortgage filing the bankruptcy will stop the threatened foreclosure and allow the consumer to gradually catch up on the back payments, perhaps over as long a period as several years. A Chapter 13 filing may also allow the consumer to restructure a loan schedule to stretch out or lower monthly payments.
Utility Terminations
A bankruptcy filing will not only stop a threatened utility termination, but will automatically and immediately restore terminated utility service, at least for twenty days. To keep utility service beyond twenty days after the bankruptcy filing, the consumer need only provide a security deposit or other security for future payments and keep current on the new utility charges. To keep service, the consumer need not pay bills incurred before the bankruptcy was filed.
Driver Licenses
A driver's license can be critical to a consumer in keeping a job or in finding a new job. In some states, a driver's license is subject to revocation because the consumer has not paid off a court judgment stemming from an automobile accident. In that situation, bankruptcy is sometimes the only possible way for a debtor to keep or regain the license. Normally, bankruptcy can be used to discharge the obligation to pay the court judgment, and the consume then has a right to regain or retain the driver's license.
Possible Disadvantages of Bankruptcy
Loss of Property
Consumers often believe that a bankruptcy filing will result in the loss of all or most of their possessions. This is not true. All consumers will get to keep some of their possessions and whether they get to keep all their possessions will depend for any particular family on a number of factors. These factors include whether the consumer files a Chapter 7 or 13 bankruptcy, whether certain debts are secured or unsecured, and how much of a family's property is exempt.
For most consumer debtors, the practical answer is that the family will keep all or virtually all their property in a bankruptcy, except property which is subject to a lien which the consumer cannot afford to pay. In fact, bankruptcy should be seen for most consumers as a method of preventing loss of property rather than causing it.
As discussed above, in a Chapter 7 bankruptcy, all of a consumer's equity in his or her property is divided into tow groups-exempt and nonexempt. State law or in some cases the federal bankruptcy statute will specify which property is exempt. Usually at least a certain amount of equity in the consumer's home, car, household goods and tools will be exempt. In some cases, even if some property is not fully exempt, the trustee will not choose to sell it because the amount received from the sale would not justify the costs of sale.
In valuing property for the purposes of bankruptcy, the trustee will not consider the property's original cost, but rather what the property could be sold for at the time of filing. It is often useful to imagine a hypothetical yard sale to try to estimate what particular items would bring. Remember also that state exemptions vary widely from state to state. It is important to check what exemptions are available in the jurisdiction in which the debtor lives.
If a consumer has significant nonexempt assets, a Chapter 13 bankruptcy often presents a viable alternative through which debtors can retain all of their possessions. In a Chapter 13 bankruptcy, consumers keep all their possessions and instead make payments over time on their debts from future income pursuant to a plan approved by the bankruptcy court.
The Effect of Bankruptcy on a Debtor's Credit Record
By federal law, a bankruptcy can remain part of a debtor's credit history for ten years. The effect of a bankruptcy on the consumer's credit record is unpredictable, but of understandable concern.
For many debtors, this concern can be easily alleviated. If long term credit problems already appear on an individual's credit worse. In fact, there is some evidence that the bankruptcy will make it easier to obtain future credit, because new creditors will see that old obligations have been discharged and that they will therefore be first in line. Moreover once a discharge is received, many new creditors recognize that the debtor cannot then receive a new Chapter 7 discharge for the next six years.
For other debtors who do not yet have problem credit, the question is more difficult. Research on the effects of bankruptcy on credit and reputation is inconclusive. It seems fair to say that most credit decisions depend upon the bias of individual creditors and that most creditors look more to a potential customer's income and income stability than to anything else. some creditors demand collateral as security, ask for a cosigner, or want to know why bankruptcy was filed. Other creditors, such as local retailers, do not check credit reports or inquire about bankruptcy on credit applications.
Debtors should remember that they always have the option after the bankruptcy of voluntarily paying certain creditors, such a preferred doctors or hospitals, with whom they wish to maintain lines of credit. The consumer can just make voluntary payments without formally reaffirming the obligation.
The Effect of Bankruptcy on a Debtor's Reputation in the Community
Creditors might continue to extend credit despite a prior bankruptcy, but what about friends, neighbors, and coworkers? What happens to an individual's reputation? Most people find their reputations suffer no perceptible harm. However, in a small town, where debts are owed to local people, the stigma of bankruptcy cannot be entirely discounted. Embarrassment and damage to reputation must be personally evaluated and weighed against bankruptcy's potential advantages. Consumers may want to pay selected debts, just as they may want to pay favored creditors. Voluntary payment of discharged debts is specifically authorized by the Bankruptcy Code.
Feelings of Moral Obligation
Occasionally, a debtor's feelings of moral obligation mitigate against bankruptcy. It is not easy for conscientious individuals suddenly to discharge values that have guided them since childhood. For them, the stigma against bankruptcy remains strong. They may think of bankruptcy as a sort of public declaration that they do not intend to pay their debts; this kind of declaration is difficult to accept, especially if they have insisted to creditors that they sincerely intend to make good on their obligations.
Consumers who object to bankruptcy on moral grounds should be reminded to consider certain factors. Bankruptcy is their right under the United States Constitution, intended to provide a fresh start for individuals in precisely their situation. big corporations like W. T. Grant, TWO, Pan Am, A. H. Robbins, and Penn Central, and famous people like Jerry Lewis, John Connelly, Mickey Rooney, Craig Morton, and Les Crane have not hesitated to utilize this right.
Creditors know that a small portion of the people to whom they extend credit will forced to go bankrupt; therefore they protect themselves by charging enough interest an overhead to cover these losses. The so-called stigma of bankruptcy is largely the creation of creditors who have every reason to make it appear unattractive. Bankruptcies are not generally announced in newspapers, although they are a matter of public record.
Most importantly, whatever its negative condonations, bankruptcy should be considered in relation to the hardships it can avoid. Debtors who remain reluctant to file bankruptcy must picture for themselves the results of doing nothing. During hard times, bankruptcy may be the only way to provide a family with food, clothing, and shelter. Debtors often decide that their moral obligation to provide for their children and loved ones outweighs any obligation to pay creditors.
Debtors who continue to object to bankruptcy on moral grounds will want to explore alternatives. Are there other ways to defend against the largest and most troublesome of their debts? What would be the consequences of waiting before filing a bankruptcy petition?
If bankruptcy is indeed the last resort, they should be reminded that filing for bankruptcy does not prevent them from voluntarily paying their debts at a later time if they wish. This fact should reassure those who cannot come to terms with the idea of turning their backs on their creditors forever.
Potential Discrimination After Bankruptcy
The federal bankruptcy law offers consumers filing bankruptcy some protection against later discrimination by creditors and others. Government agencies, such as housing authorities, cannot deny benefits because of previously discharged debts.
Similarly, utilities cannot deny service because of a bankruptcy, although a utility company can require a deposit to cover charges incurred after the bankruptcy is filed. No private employer can discriminate against employees or terminate employment on the basis of bankruptcy.
Consumers are fully protected by law from any such discrimination and can enforce their rights in court, if necessary. However, the bankruptcy law does not prevent discrimination by others, including private creditors deciding whether to grant new loans, and does not prevent discrimination by others, including private creditors deciding whether to grant new loans, and does not prevent discrimination bases upon future financial responsibility or capability.
Cost of Filing a Bankruptcy Petition
There may be costs associated with hiring an attorney to handle the bankruptcy. Hiring an attorney and the advisability of alternatives are discussed later in this Chapter. In addition to an attorney's fee, a bankruptcy petition requires a $120 filing fee. This filing fee cannot be waived, but can be paid in installments. In a Chapter 13 reorganization case, the trustee is usually entitled to a commission of about ten percent of the payments made though the plan. These payments must be included in with the amount that the debtor pays the trustee under a plan.
In addition, utility companies may be entitled to collect a security deposit following a bankruptcy (usually equal to approximately twice the average monthly bill) just as if the debtor were a new customer. Some, but not all utility companies take advantage of this right. In most localities, the debtor can request up to 60 days to make this payment.
When Bankruptcy May Be the Wrong Solution
For some individuals bankruptcy is simply the wrong solution. These individuals usually find them selves in one of these four situations:
1. They have only a few debts and strong defenses for each. Instead of filing for bankruptcy, the consumer can simply raise these defenses vigorously. Usually the disputes can be settled out of court in a way acceptable to the consumer. (Consumers can also raise all their claims and defenses in the bankruptcy court.)
2. The debts at issue are secured by the consumer's property--such as home mortgages or car loans--and the consumer does not have sufficient income to keep up payments and also catch up on past due amounts, even with all of the help bankruptcy provides. That is, bankruptcy may not be able to help those who solely want to keep their property, but where the long term expense of doing so exceeds their long term incomes.
3. The consumer has significant assets that cannot be exempted, and does not want to lose these assets. (Note that a Chapter 13 filing may still be appropriate.)
4. Because of a prior bankruptcy, the consumer cannot receive a discharge in a Chapter 7 bankruptcy. However, in most cases a Chapter 13 petition can still be filed.
Occasionally, the protection bankruptcy offers is already available through other laws. Where state exemption laws are generous, many consumers will be totally judgment-proof already at the time they seek bankruptcy advice. Legally, creditors can do virtually nothing to harm them. Because there may not be a compelling urgency for these individuals to file for bankruptcy, if often makes sense not to file immediately. If those debtors wait, additional debts may arise which can also be included and discharged in the bankruptcy case.
Choosing the Type of Bankruptcy
Related to the question of whether to file a bankruptcy petition is the question of which type of bankruptcy to choose, a Chapter 7 liquidation case or a Chapter 14 debt adjustment (reorganization). Another issue is whether both spouses or only one should file. The final decision on these questions must await consultation with t he attorney handling the bankruptcy, but it is helpful to understand the options n explaining what bankruptcy is likely to mean to a particular family.
Considerations Favoring Chapter 7
A straight Chapter 7 bankruptcy is the simpler bankruptcy choice, particularly for low-income debtors. It is certainly appropriate when the bankruptcy filing will discharge most debts and not result in the loss of any property.
Generally, Chapter 7 is the best option when three factors are present:
- All or nearly all of the debtor's property is exempt;
- The debts which are causing problems for the debtor are unsecured; and
- The debts which are causing problems for the debtor are dischargeable under Chapter 7.
In some cases even if consumers would lose certain property in a Chapter 7 because the property is not exempt, consumers may be able, before filing for bankruptcy, to convert this property to other property that is exempt from seizure. This is called exemption planning and is legitimate in most cases, just as tax planning is an appropriate course for wealthier families.
Some view Chapter 7 as appropriate only where a consumer's debts are all unsecured, with Chapter 13 being the appropriate choice if there are secured debts. But even where there are secured debts, a Chapter 13 filing may not be necessary. This is particularly the case if the consumer is current on the mortgage, car loan or other secured debt payments. (A Chapter 13 filing is generally preferable where the consumer is delinquent on a secured debt and wants to cure this default over time.) If the consumer can keep current on secured debt payments, the consumer can keep the home or other collateral, if it is exempt, even while going through a Chapter 7 bankruptcy.
Where Chapter 7 is the best choice, the big advantage is that the process is simple and quick. Basically, once the papers are filed, unless unusual issues are raised, the debtor will receive a discharge within six months. (A more complete timeline for both Chapter 7 and Chapter 13 cases is included below.)
Considerations Favoring Chapter 13
Probably the most common reason for filing a Chapter 13 petition is that one or more secured creditors cannot be dealt with satisfactorily in any other way. Few legal steps create opportunities to deal with foreclosures and repossessions as quickly and effectively as a Chapter 13 petition and plan. The plan can lower monthly payments and even reduce the balance due on car loans and mortgages.
Another reason to file a Chapter 13 bankruptcy is to protect non-exempt assets, which>would be liquidated in a Chapter 7 case. However, the current value of the non-exempt property usually has to be paid to unsecured creditors over the course of the plan.
Other important reasons favoring a Chapter 13 filing include:
- Debts that are not dischargeable in Chapter 7 can be discharged in Chapter 13, including some taxes, debts incurred through false financial statements, false pretenses or fraud, willful and malicious torts, and breach of fiduciary duties, as well as debts for which a previous bankruptcy discharge was denied or waived. Even for non-dischargeable, priority debts such as taxes, a Chapter 13 plan allows debtors to stretch out payments over a longer period than would otherwise be possible, and to avoid severe interest and penalties.
- In a Chapter 13 case, it is less likely that objections such as fraudulent transfer, concealment of property, or inability to explain loss of assets, will be raised. However, a court may consider such behavior to be violative of the Bankruptcy Code's "good faith" requirement.
- A Chapter 13 case helps consumers who want to pay their debts, but who need the protection of the bankruptcy court and who can profit from the discipline of a Chapter 13 plan.
- Chapter 13 usually eliminates any further finance charges and late charges for debts that have no collateral.
- Some experts consider a Chapter 13 filing, compared to a Chapter 7 filing, to be less harmful to the consumer's credit rating and reputation.
- For debtors who have obtained a Chapter 7 discharge within the previous six years, a Chapter 7 filing is not available, leaving only the option of a Chapter 13 filing.
It should also be noted that he choice of one form of bankruptcy over another is not irrevocable. It is easy for a debtor to convert at least once from Chapter 7 to Chapter 13 or vice versa.
Should Both Spouses File?
In cases where both a husband and wife are living together, it is-usually preferable for both to file bankruptcy jointly. The filing fee is the same whether one or both file, and filing provides both with the advantages of a bankruptcy discharge.
Most couples are jointly responsible for their debts; therefore a spouse who does not file remains liable as a codebtor, and can continue to be pursued by creditors. (However if one spouse files under Chapter 13, the other spouse obtains some protection at least to the extent that the plan provides for joint debts).
Thee is, of course, not requirement hat married people file together. Therefore, if one spouse wants to file and the other does not, or if the spouses are estranged, there is nothing to prevent a married individual from filing alone. However, the consequences of not filing jointly should be considered carefully.
Anticipation of Further Debt
If a debtor is not facing immediate loss of property to creditor action and anticipates further unavoidable liabilities, such as new medical, utility or unpaid rent bills, a bankruptcy filing should be delayed until after these debts occur. That way the consumer gains maximum benefit from the discharge.
Debts incurred after the bankruptcy filing are not discharged in that bankruptcy case--the consumer will have to wait another six years before filing another Chapter 7 bankruptcy and obtaining another Chapter 7 discharge for debts incurred after the firs bankruptcy was filed. The consumer can file a Chapter 13 case with no waiting period after the Chapter 7 discharge, as long as bad faith is not involved.
While consumers may wish to delay a Chapter 7 filing until additional debts are incurred, this must be distinguished form another type of behavior, that of obtaining goods or services while having not intention of paying for them. In a Chapter 7 bankruptcy, debts incurred in this way can be declared nondischargeable.
Fortunately, the line between these two kinds of debt is not as difficult to draw as it might seem at first. Most courts have found non-dischargeable only the most obvious examples of debts incurred without intent to pay, such as pre-bankruptcy vacation trips and credit card shopping-spree debts. Expenses for medical bills and other essentials are rarely challenged.
Exemption Planning
Most debtors can take a number of steps to improve their legal position prior to filing; these steps come under the general rubric of exemption planning. Basically, exemption planning means arranging one's affairs so that a maximum amount of property can be claimed under exemption provisions, and a minimum amount is lost to creditors. It is similar to making arrangements to take maximum advantage of tax laws, and, if done reasonably, is perfectly legal.
Of course, debtors cannot simply give away nonexempt property or sell it at nominal cost. Any transfer of property within a year of filing must be disclosed. Fraudulent transfers of property can be recovered and may be grounds for denying a discharge.
Anticipation of Future Property
Sometimes an individual expects a significant upturn in his or her financial picture in the future through inheritance, a divorce settlement, or a life insurance payment. It makes sense to obtain a fresh start in bankruptcy before, rather after the family receives this future property.
Filing bankruptcy after receipt of this property may just result in payment of this property to creditors. Discharging debts through bankruptcy and then receiving the property means the family can keep the property.
If a family anticipates receiving significant assets in the future, several rules should be kept in mind. Certain types of property received within 180 days of filing bankruptcy are treated as if the property was received before the bankruptcy. These types of property include inheritance, bequests, divorce decrees, spousal property settlement, and life insurance proceeds.
Moreover, any property or earnings received while the consumer is paying out a Chapter 13 bankruptcy plan (which usually takes 3 to 5 years) is considered included in the bankruptcy process. Finally, property not actually received until after the filing may still be part of the bankruptcy if the property was earned, awarded or vested before the bankruptcy filing. This might include settlements on insurance or accident claims, tax refunds, or benefit payments.
