Bankruptcy Education

Avoid Bankruptcy

If you are considering filing bankruptcy to get out of debt (including credit card debt), you should contact a lawyer to find out whether bankruptcy is a good option for you and your family. You should also take every precaution to learn all the negative consequences which flow from filing bankruptcy. Bankruptcy can result in relief from certain types of debt, depending on the creditor, the nature of the obligation, the date the obligation was incurred, and many other factors. However, filing bankruptcy comes with serious and long lasting financial and emotional consequences, not to mention the social stigma that follows you for years to come.

The financial impact is severe; a bankruptcy will stay on your credit report for 7-10 years. Every time you apply for credit to buy a house, a car, insurance, or virtually anything requiring a credit check or financing, you will be impacted.

Additionally, most people do not realize that bankruptcy can stay on their public court records for over 10 years. If you apply for a job, a loan, an apartment, or even insurance your bankruptcy filing is easily verified, even though it no longer appears on your credit report.

Bankruptcy can require you to appear in court before a judge or a trustee to disclose anything and everything about your finances, income, or assets under penalty of perjury. Filing for bankruptcy is a serious decision with serious consequences. If you are considering bankruptcy, you should contact a lawyer to discuss all the consequences.

What You Should Know About Bankruptcy

Chapter 7 Bankruptcy

In a Chapter 7 bankruptcy, a consumer is freed of their unsecured debt obligations (credit cards, medical bills, repossessions), but in exchange they are ordered to turn over certain property and assets to the courts to be sold to pay off creditors using the proceeds. For consumers without any income, this may be a viable debt relief solution. Since the credit implications can be severe, however, this option is considered a last resort for most consumers.

Chapter 13 Bankruptcy

In a Chapter 13 bankruptcy, a consumer is put on a payment plan in which all of their disposable income is turned over to the courts for 5 years (or until the debt is paid back in full, whichever is first). For consumers who have fallen behind on their secured debts (automobile loans, mortgage loans), this may be an appropriate debt relief solution. For consumers with credit card debt, this option makes very little sense. After all, there are numerous debt relief options available that will not only affect your credit less negatively, but you will also pay far less to the creditor.

The New Bankruptcy Law

Now that the new bankruptcy law is in effect, which were lobbied and put into place by various organizations representing creditors, it’s landscape has changed for those who are considering bankruptcy. Some filers with higher incomes won't be allowed to use Chapter 7, but will instead have to repay at least some of their debt under Chapter 13. All debtors will have to get credit counseling or settlement before they can file a bankruptcy case -- and additional counseling on budgeting and debt management before their debts can be wiped out. And, because the law imposes new requirements on lawyers, it may be more difficult and more expensive to find an attorney to represent you in a bankruptcy case.

Important Changes to Bankruptcy Law

Restricted Eligibility for Chapter 7

Under the old rules, most filers could choose the type of bankruptcy that seemed best for them. Most consumer chose Chapter 7 (liquidation) over Chapter 13 (repayment). The new law will prohibit some filers with higher incomes from using Chapter 7.

How High is Your Income?

Under the new rules, the first step in figuring out whether you can file for Chapter 7 is to measure your "current monthly income" against the median income for a household of your size in your state. If your income is less than or equal to the median, you can file for Chapter 7. If it is more than the median, however, you must pass "the means test" -- another requirement of the new law -- in order to file for Chapter 7.

Avoid Bankruptcy if You Make More than the Average Person in your State

You make more than the average person in your state. If this is the case, then it’s possible that you’ll be forced into a Chapter 13 bankruptcy plan. In a Chapter 13 bankruptcy, the court orders that you pay all your disposable income to a court appointed trustee, who in turn disburses payments to your creditors. Keep in mind that the court determines your disposable income by national and county statistics on average necessary expenses, not what you’re paying. So just because you’re paying a lot for a car doesn’t mean the court will approve it. There are numerous cases when a judge ordered families to stop sending their children to private schools so they can have more money to pay back their creditors. Moreover, if you miss even one payment, the court may consider you to be in contempt and force you to pay the full debt amount back. Chapter 13 bankruptcy is so stringent that only about one third of all cases are ever completed. Check out the census bureau for more information about your state’s median income, and remember, if you make more than the average person in your state, you should consider avoiding bankruptcy.

The Means Test

The purpose of the means test is to figure out whether you have enough disposable income, after subtracting certain allowed expenses and required debt payments, to make payments on a Chapter 13 plan. To find out whether you pass the means test, you subtract certain allowed expenses and debt payments from your current monthly income. If the income that's left over after these calculations is below a certain amount, you can file for Chapter 7.

Avoid Bankruptcy If You Have Assets

If you own a home or car, then it’s possible that the bankruptcy court will force you to sell them to generate sufficient cash to pay back your creditors. Chances are if have a good chunk of change invested (unless it’s in a tax-exempt account like an IRA) then you’ll also be forced to liquidate it. If you have a second home or another vehicle (assuming you own both completely), then you’re really out of luck. Fortunately, there are some safeguards to protect consumers from bankruptcy. In Illinois, for example, every resident is entitled to at least $7,500 of the value of their home, $1200 of the value of their vehicle, and $2,000 for anything that they want (known as the wildcard exemption). Also, these values double if you’re married (assuming the property is in both of your names).

Avoid Bankruptcy If Your Creditors Can Prove You Committed Fraud

If your creditors can prove that you were fraudulent and never had any intention of paying them back, then you should avoid bankruptcy. Chances are you’ll end up with a bankruptcy filing on your credit report, and you will still owe the debt.

For the majority of us it means that unless a) you don’t have a lot of equity in any of your property, b) you don’t have any investments like stocks, real estate, etc., c) you don’t care about having to sell anything mentioned in points a and b, d) you don’t care about having to give up your disposable for 5 years in a Chapter 13, and/or e) you don’t mind having your credit severely impacted for 7 to 10 years, then you may want to avoid bankruptcy.

Disclaimer: please consult an attorney for legal advice regarding your individual situation. This does not constitute legal advice, implied or expressed.

Bankruptcy Alternatives

Bankruptcy is a way to potentially get out of your debts. Unfortunately, it leaves a long lasting scar, and comes at a high price - financially, emotionally and socially. It can be a long and painful process and the repercussions can last for over a decade. The financial impact is severe; a bankruptcy will stay on your credit report for 10 years. Every time you apply for credit, whether it is a home, a car, a lease, or insurance, you could be impacted. The long-term effect of higher interest rates can greatly outweigh the shorter-term impact of filing bankruptcy. Additionally, most people do not realize that bankruptcy can stay on their court records for up to 20 years - which means it can follow someone for the rest of his/her life. If you apply for a job, a loan, rent an apartment, or even apply for insurance, your bankruptcy filing could be easily uncovered. What's more, with the new bankruptcy reform bill, it has become much more difficult to declare Chapter 7 bankruptcy. If you are seriously considering bankruptcy, you should think about contacting a lawyer to discuss this option.

Advantages and disadvantages of Bankruptcy

Chapter 7

In a Chapter 7 bankruptcy, you ask the court to erase your debts completely. In exchange you must turn over all your non-exempt property (or its equivalent in cash) to a court-appointed trustee, who in turn sells your property to pay back your unsecured creditors.

Advantages:

• All collections activities must cease once upon filing
• If your wages are being garnished, bankruptcy can stop it
• If you have no assets (or exempt property), then you don’t have to pay anything to become debt free
• Can remove some liens from your property
• Provides debtor with a fresh start

Disadvantages:

• Extremely intrusive and unpleasant experience---the bankruptcy trustee must approve almost every financial transaction you make while the case is open, which can be several months
• Impacts your credit for up to 10 years, stays on court records for 20 years
• Private employers have the right to refuse employment to anyone who has ever filed bankruptcy
• Emotionally depressing, sense of guilt and failure associated with bankruptcy (this shouldn’t be the case, especially since most bankruptcies are the result of unexpected financial hardship, not month long shopping sprees)
• In October of 2005, congress changed the bankruptcy laws, making fewer consumers eligible for Chapter 7
• Believe it or not, in cases where a person has assets that can be liquidated by the bankruptcy trustee, some consumers can save more money by enrolling in BlueChip Debt Relief "Fresh Start Debt Relief" program
• Despite popular belief, you cannot get rid of student loans or back taxes in a Chapter 7 bankruptcy (unless you meet very specific requirements)

Chapter 13

In a Chapter 13 bankruptcy, you set up a court approved plan to repay your debts. Under the plan, the court determines your monthly disposable income, which you must pledge to a court appointed trustee, who in turn distributes it to your creditors for up to 5 years.

Advantages:

• If you’ve fallen behind on car, mortgage payments, taxes, and student loans you can pay back those missed payments throughout the plan
• Like a Chapter 7, all collections activities must cease after you file a Chapter 13 bankruptcy
• One simple monthly payment

Disadvantages:

• Impacts your credit for 7 years, stays in court records for 20 years
• It’s still considered a bankruptcy by future employers, lenders, ect.
• Required to pay back a good portion of your debt plus interest and the trustee’s monthly fee, which often times makes it more expensive than BlueChip Debt Relief "Fresh Start Debt Relief" program
• What the court deems "disposable income" can be very strict. If you pay more on your rent or mortgage than the average person in your county, you could be trouble. (Ironically, this is the solution that the courts push on higher income individuals)
• Paying all of your disposable income for 5 years can be extremely difficult----roughly 50% of all Chapter 13 bankruptcies are never completed

At BlueChip Debt Relief, we believe bankruptcy should only be considered as a last resort. To potentially avoid bankruptcy, call us toll free at (888) 9 DEBT RELIEF (888-933-2873) to find out if you qualify for our "Fresh Start Debt Relief" program and exactly what your monthly payments will be. One of our professionals will review your financial situation and determine a solution that will fit into your budget and help you avoid bankruptcy.

Debt Settlement as a Bankruptcy Alternative

This is the bankruptcy alternative offered by BlueChip Debt Relief. In our debt settlement, expert negotiators work with creditors to lower the amount that a client owes. This is an appropriate debt relief option for consumers who are overwhelmed with their minimum payments or who have already fallen behind. Our bankruptcy alternative also works well for consumers who do not own a home, lack the equity or credit necessary to be able to refinance or get a second mortgage. It is the fastest and cheapest way to become debt free besides bankruptcy.

Credit Counseling as a Bankruptcy Alternative

This type of bankruptcy alternative involves working with creditors to lower interest charges. The average client of a credit counseling program is able to be debt free in as little as 5 years. Credit counseling programs are mostly funded by your creditors, however, and they receive a percentage of your monthly payment to fund their operations. Therefore, they have a large incentive to charge you as much as possible, and many consumers do not get adequate financial relief and end up having to file bankruptcy anyway.