Overwhelming Debt? Find Out Why You Should Talk To Bankruptcy Lawyers To See If Bankruptcy Can Offer You A Fresh Start

Bankruptcy can allow you to get a fresh start by eliminating all or most of your outstanding debts. However, Bankruptcy is not for every debtor, and you should only file bankruptcy after careful deliberation.

Chapter 7 and Chapter 13 Bankruptcy

Bankruptcy May Provide You The Debt Relief You Need

This article will describe the two most common forms of consumer bankruptcies, Chapter 7 (“7”) and Chapter 13 (“13”)  bankruptcy, and also examine why you would choose either chapter.  Also, I will go into the main reasons, (based upon hundreds of consultations that I  have done) on why bankruptcy could be a good option and when you should not file for bankruptcy.

Chapter 7 and Chapter 13 Bankruptcy

The vast majority of consumer debtors file either a Chapter 7 (“7”) or a Chapter 13 (“13”) bankruptcy.   The 7 is the most commonly filed bankruptcy, and almost all debtors, who qualify, will file the 7.  The 7 has an income requirement where if you make too much money (based upon where you live and how many live with you), you will not be eligible to file this Chapter. The 13 is most likely filed by those who aren’t eligible for Chapter 7  This article will now go more in-depth on the differences between  7 and  13.

 1. Why Chapter 7 

Most debtors prefer the 7 as, for most debtors, it only takes three months for you to receive a discharge. (When you are granted a discharge you will not have to pay back dischargeable debts)  On the other hand, a 13, though, requires you to make payments to a trustee for three to five years. To file a 7, you will have to first pass the “Means test.” 

The Means states that if your income is above a certain amount (amount varies between state and the number of people in your household), you are not eligible for the 7. Additionally, even if you do pass the means test, if you have high disposable income, you still may not qualify for the 7.

Chapter 7 and Credit Scores-Upon filing for a 7 your credit score take an immediate hit. For each debtor, I order a three credit bureau, credit check. The credit check will give an estimate of how much your credit score will improve after a year.  The vast majority of debtor’s credit score will impove signicantly after a year.   The reason for this is that part of your credit score is outstanding debt and once your debt is discharged, your credit score will eventually increas.

Why Would You Not File A Chapter 7?

The following are the main reasons why you would not file a 7:

  • Filed A 7 Within Eight Years– You can only file a 7 once every eight years, and if you want some debt relief, you will be forced to file the 13.
  • You don’t Pass The Means Test–  This the number one reason why you would file a 13.  If you make too much money for the Means Test, your only other chance of being able to file the 7 would be if you have extraordinary expenses, which leave you with little disposable income.
  • Stop A Foreclosure Sale– A 7 is not designed to save your house from foreclosure as it does not allow you to get caught up on past-due payments.  As a result,  the 13 may be a viable option if you want to save a house from a foreclosure sale.
  • Stop Your Car From Being Repossessed– I would rarely recommend this; however, a 7 cannot save a car from repossession.
  • You Have Luxuries That You Want To Keep– The 7 is also known as a liquidation because the trustee, who handles your case, is required to sell all non-exempt property and distribute the proceeds of the sale to your creditors.  A bankruptcy exemption allows you to keep the basics. (I.E., Car, furniture, retirement, etc.)  The basics vary from state to state, and some states have very low exemptions. For example, Michigan only allows you to keep 3.5k in equity in your car.  So, you could not file a chapter 7 bankruptcy if you wanted to keep your $40,000 sports car.  A 13 though, under some circumstances, may allow you to keep your $40,000 sports car.
  • You Don’t Have Enough Debt– Technically, you can file a chapter 7 with $5 in debt.  However, to avoid the hit on your credit report, if you can pay your debt back in a reasonable period, without undue hardship, you should not file a 7.
  • Your Expenses Are Too Low-If you have too much disposable income, no matter how little money you make, you won’t be eligible for the 7.

Car Loans, Homes, and Bankruptcy-Assuming you have a decent-paying, steady job,  at least in Nevada, you will be able to get a car after and even during your bankruptcy.  The reason is that you are considered a reasonable risk because you are unable to file bankruptcy for another eight years. So, auto dealerships know that they can sue you if you default on payments, and you will be unable to file for bankruptcy.   As for getting a mortgage, under normal circumstances, it will generally take two to four years before you can get a mortgage.

2.  Why Chapter 13?

A 13 requires you to make payments, for three to five years, to a bankruptcy trustee who then distributes those payments to your Creditors.  Under most situations, your debt is discharged, after the three to five years of payments are made. The discharge even occurs if you don’t pay all of your outstanding debt back.  Therefore, with a 13, you can potentially pay as little as 10% of your debt back. The payments that you will make are based upon your income minus justified expenses.

Justified expenses are what the IRS deems as reasonable. These expenses are based upon the number of people in the household of the and the cost of living were the bankruptcy filer(s) live.  I.E. Your justified expenses will be higher in San Francisco, California, than Grand Forks, North Dakota. 

The main reasons you would file Chapter 13 are the following:

  • You Filed A Chapter 7 The Past Eight Years-A 7 can only be filed once every eight years.  So, under those circumstances, a 13 is your only option for debt relief under the bankruptcy code.
  • You Didn’t Pass The Mean Test– If you make too much money to pass the Means Test, the 13 is the only option, via bankruptcy, for debt relief.
  • Stop A Foreclosure or Repossession– A 13 can potentially help you get caught up on past-due payments on a mortgage or automobile.    A 13 will only work to allow you to get caught up if you can pay off the past due amount and your current mortgage payment. For example, if you are $30,000 behind on your mortgage payment, you will at least have to pay $500 per month plus the price of your mortgage. If you are unable to afford that payment, you will not be able to file a 13.

 Top 15 Reasons For Filing For Bankruptcy

I have been a bankruptcy attorney in Las Vegas since 2009, and I have consulted and filed bankruptcies for dozens of debtors. The majority of my clients are middle class, debtors, that have fallen on hard times. Below are the main reasons that I have seen why debtors are forced to file for bankruptcy, and I will also briefly address how you can avoid filing for bankruptcy. The below list is based on my own professional experience while consulting with hundreds of debtors in financial trouble. Also, as I stated, I primarily work with working-class debtors. So, my experiences are different from a bankruptcy attorney who works primarily with professionals or businesses. However, during my hundreds of consultations, I heard countless debtors tell me why they were thinking about filing bankruptcy. As a result, I am confident that the above list is accurate. 

Savings-This may come off as condescending, and I realize it is not possible for many people who are living paycheck to paycheck. But, the best way to   avoid bankruptcy, under most circumstances,  is by saving  at least 10% of your wages per Paycheck. As a result, you can use your savings to pay for any added emergency expenses or loss of your job.  If you are unable to save at least 10% of every Paycheck; try to save as much as you are able. Also, to see if you can save more money, by examining  your spending habits, and to see if you can cut back on some of your discretionary expenses.

  • Your Debt Is Too High- First of all, it should go without saying that if you can “reasonably” avoid bankruptcy, you should not file bankruptcy.  However, it would likely be better to file bankruptcy if the amount of debt that you have can’t be repaid within a reasonable period. Part your bankruptcy score based upon how much debt you have, and the percentage of credit that you are using. Therefore, when you can only afford to make minimum payments, it will take a while for your credit score to improve as you could mostly be only paying the interest on your credit cards and loans. When you file for bankruptcy, your credit score will go down. However, within a year (assuming you are on time with your on payments to creditors), your score will improve. As a result, your credit score could be repaired quicker by filing bankruptcy (as you are eliminating your debt) than if you were to spend years paying back your creditors.
  • Payday Loans– With Payday loans, you can pay a fee of up to $30 or more per $100 borrowed, where you pay them back on your next payday. This fee can amount to an interest rated on that loan of 400% or more. If the client can pay this loan off on his next payday, this loan is not necessarily that bad. However, if you are only paying the minimum amount, you may soon find that your debt will spiral rapidly. Debtors tend to end up getting in insurmountable financial trouble when they end up taking multiple loans from different Payday loan lenders. The debtors do this to pay off their original Payday loans, which often result in a “Payday Loan Trap.” which in turn forces a debtor to file bankruptcy.  
  • Youthful Indiscretion– Credit cards and credit card management is usually not taught to debtors. Therefore, young debtors often get into financial problems with credit as they don’t fully realize the ramifications of getting credit cards and having to pay the debt back.
  • Car Repossession– Repossessed vehicles are sold at auction, and after the sale, you will be held liable for the difference of what you owe on your car loan minus what the loan holder receives at auction for your car. Additionally, you will have to pay back any attorney/collection fees that happened because of the sale. Bankruptcy is then used to discharge the debts caused by a repossession. 
  • Your Paycheck’s Garnished– A wage garnishment occurs when you lose a lawsuit, which results in a judgment against you. The Creditor will then file papers with your work, which (In Nevada) your employer will take up to 25% per paycheck. After 90 days (assuming the debt was not paid off), the Creditor is required to renew the garnishment until the judgment is fully paid. However, If there are multiple judgments against a single debtor, the creditors will have to wait until 90 days have passed.  
  • Too Big Of A Car Note-Many debtors take out car loans that are too expensive for their budget, and a change of circumstances (like a demotion of being fired) may make the debtors car payment too much for them to handle. As a result of this high car payment, the debtor will have little room to move if they suffer financial hardship. 
  • Co-Signing-Co-signing a loan results in you being liable for a loan if the original loan holder doesn’t make any payments. Consumers who have poor credit will often need a co-signer. A co-signer usually occurs in car loans. However, co-signers are also sometimes seen with school loans. In my consultations, I have seen multiple co-signers being forced into bankruptcy after the original signer is unable or unwilling to make payments. Therefore, my advice is that you should never co-sign for anyone.  
  • High-Interest Auto Loans– The car that the debtor purchases, not taking into account the interest, maybe reasonably priced. However, because of poor credit or inexperience, the Creditor may be forced to get a loan with over 20% interest or more.
  • Medical Bills-Surprisingly, I don’t often see medical bills as the sole reason for people filing bankruptcy. However, if you don’t have insurance (and sometimes even if you do have insurance), one trip to the emergency room could mean bankruptcy.
  • Disability– You will only receive a small portion of your original working Paycheck if you are forced to take social security disability. Also, if you have substantial savings, you may not even be able to get disability payments. So, your savings may already have been decimated when you have rewarded your SSI disability payments. Assuming they have savings, bankruptcy, caused because of disability, likely can only be avoided by asset protection trusts or other types of financial planning. 
  • Save Your House From Foreclosure-You may be forced to file a chapter 13 to stop or delay a foreclosure.
  • Death Of A Spouse-This most often occurs with elderly who are living on a fixed income, and then go from two income sources to one when their spouse dies. Ample retirement savings, life insurance, and living below your means, can only potentially prevent the above from occurring. 
  • Loss of Job Or Loss Of Income-Most times, you will not know when you are going to be fired. First of all, unemployment compensation, at least in Nevada, tops out at around $1,400. Therefore, for most people, unemployment compensation is not enough for most debtors to pay all their expenses. Consequently, you need to start saving ASAP and get at least three months of paychecks saved. (You should save at least 10% of your paycheck.)
  • Divorce-Based upon my experience, this is one of the biggest reasons for filing bankruptcy. Also, even more so than medical bills (you can get medical insurance), a bankruptcy because of divorce is tough to prevent. This is especially true in community property states, which, upon divorce, each spouse is liable for 50% of the debt that happened by both partners during the marriage. Therefore, as a result, if you are divorced, you could suddenly be held liable for thousands of dollars of debt.
  • Gambling– Living in Las Vegas, I don’t see as many bankruptcies, from gambling, as I would have thought initially. However, I have seen the damaging effects that have occurred because of gambling addiction.   The only way to prevent this is to not gamble if you have a problem.  However, if your gambling results in you having to file bankruptcy, be sure to keep a copy of players’ cards and records of your gambling for the bankruptcy trustee.  

Fun Fact:Nevada law states that, without a potential criminal prosecution, you can’t discharge casino credit or markers with bankruptcy.


When You Should Think Twice About Filing For Bankruptcy

Under most circumstances, bankruptcy should not be filed under these following circumstances:

  • Too Little Debt:  I mentioned this earlier; but, this point needs to be emphasized as you can only file bankruptcy once every eight years.  So, bankruptcy should not be filed for a small amount of debt.   I learned these lessons after one of my first clients had a massive heart attack the day after he filed for bankruptcy, and no insurance.  As a result, because his heart attack happened after he filed, he was liable for the costly medical bills.  Luckily, I was able to have his case dismissed, and he was able to file at a later date.  There is not a rule on what the minimum amount of debt you should have before you file bankruptcy.

Relatively Small Dollar Payday Loans– Even if you have a relatively small amount of debt, bankruptcy may be advisable if your debt consists of high-interest payday loans.  In some cases, Payday Loans have interest rates close to even 1,000% or more.  Therefore, it can take a very long time to pay off a high interest payday loand and you could be better off filing for banruptcy than waiting to pay off the loan. 

  • Non-Dischargeable Debts– Not all debt is dischargeable in bankruptcy.   Therefore, if most of your debt is non-dischargeable, it may not be wise for you to file bankruptcy.  The most common types of non-dischargeable debts are school loans, criminal restitution, governmental penalties (traffic tickets, fines, etc.),  and sometimes taxes. (Taxes, under certain circumstances, can be discharged via bankruptcy.)
  • Employment– A bankruptcy filing can disqualify you from certain jobs.  The most common example of this would be US military jobs and other jobs that require a security clearance.  As a result, if you have a security clearance or are in the military only file bankruptcy after consulting with your employer.

Recommendations

Bankruptcy is not the first choice, and it is not the last choice. However, filing for bankruptcy may be the best way for you to escape crippling debt and get a “fresh start.”  So, if your debt is spiraling out of control,  you may want to consider filing for bankruptcy. Also, I would highly recommend that you consult with a bankruptcy attorney before you do file and retain an experienced bankruptcy attorney who will give you all of your options.