Navigating the Impact of Filing Bankruptcy

If you can afford to pay off debt and file for bankruptcy instead, perhaps you’ve made a poor decision. Similarly, someone filing for bankruptcy with bad intentions or to defraud creditors is behaving poorly and cheating the system. Filing for bankruptcy has a bad reputation in many circles due to the fact that it damages your credit and involves discharging debts that will likely never be repaid. Chapter 7 bankruptcy isn’t great for your credit score and will appear as a public record for 10 years after filing. However, most consumers who file for bankruptcy have already had their credit damaged by a series of late payments. Whether your bankruptcy filing can be labeled as bad is really a function of whether you intend to defraud the system or whether you have a moral obligation to pay debts that you plan to discharge in bankruptcy. There are many types of debts that are eliminated by filing for bankruptcy. If you file for bankruptcy, both the credit card debt as well as the debt to your brother will be eliminated. Filing bankruptcy to discharge credit card debt at 29% interest would not be considered bad by most people.

On the other hand, some would argue that discharging a $10,000 debt to your brother might not be the right thing to do. Even if you fall into this camp, it is important to understand that there is nothing that prevents you from voluntarily paying back the debt after filing for bankruptcy. You could file bankruptcy, discharge your credit card debt and then once you have an opportunity to rebuild, write your brother a check for what you owe. This does not in any way violate the bankruptcy laws. For this reason, whether bankruptcy can be construed as bad is really a function of context.
Advantages and Disadvantages of Filing for Bankruptcy
Many who qualify for bankruptcy never avail themselves of its potential benefits. While it is true that a bankruptcy filing can affect a person’s finances for years to come, for many people, filing is the best option. However, every person’s financial circumstances are unique to his or her situation. Deciding if, when and how to file for bankruptcy is a very complicated process and the consequences of filing when you shouldn’t can be considerable. It is important to consult with a skilled bankruptcy attorney to determine whether bankruptcy is your best option.
Advantages of filing for bankruptcy include:
1. An automatic stay against creditors: Once you file, the court automatically issues this stay against any and all debt collection activity. It does not actually cancel your debt, but it suspends any debt collection proceedings until your bankruptcy case is complete or the stay is lifted. This means no more:
• Calls or letters from debt collectors
• Lawsuits on the debts
• Wage garnishments
• Home mortgage foreclosure
• Property repossession

If a creditor tries to collect a debt from you after the court grants your automatic stay, your attorney can bring a contempt of court action against them. This means the court can make them stop their collection attempts, fine them and/or make them pay you damages. An automatic stay does not have the power to stop the following:
• Criminal proceedings
• Government tax audits
• The establishing, modifying or collecting of child support or alimony
• Establishment of paternity
• Co-debtors or co-signers
• If you have already filed for bankruptcy once within the past year, you can petition the court for an extension of the first automatic stay.
• However, if you have filed two or more times during the past year, your automatic stay won’t go into effect without an explicit order from the court.
2. Dischargeable debts: You may be able to discharge, or cancel, your responsibility to repay these debts. A dischargeable debt is one that can be eliminated by bankruptcy. These typically include credit card debt, medical and utility bills, and personal loans.
3. Bankruptcy exemptions might allow you to maintain ownership of your property after bankruptcy. If you can “exempt” an asset, this means you don’t have to worry about it being seized in the bankruptcy. These exemptions play an important role in both Chapter 7 and 13 bankruptcies. Some exemptions protect up to a certain dollar amount of an asset; sometimes the exemption covers the entire value of an asset. Some exemptions apply to certain types of assets, like a motor vehicle or wedding ring, while others can be applied towards any property you own.
4. Credit Score: Although worries about a tanked credit ranking delay many in filing for bankruptcy, and a bankruptcy filing remains on your record for 7-10 years, many debtors actually start improving their credit scores after they file for bankruptcy. Once a person’s dischargeable debts are cancelled, this allows them to move forward with a clean slate and begin rebuilding their credit.
However, filing for bankruptcy at the wrong time or filing when you shouldn’t can make a bad financial situation worse. Filing too early can sometimes mean that a person loses property he or she would otherwise have been able to keep, or that they have to file a different type of bankruptcy that is not in their best interests (i.e., having to file a Chapter 13 instead of Chapter 7). Regardless, even when bankruptcy is a person’s best option, filing also has real, lasting effects on a person’s finances that should be considered before filing.

The potential disadvantages of bankruptcy include:
1. Loss of credit cards: Many credit card companies automatically cancel any cards you hold when you file. You will probably receive numerous offers to apply for “unsecured” credit cards after filing. These can help you rebuild your credit, but usually require annual fees and high interest rates.
2. Immediate impact on your credit score: Chapter 7 bankruptcy stays on a person’s credit report of 10 years in Utah, while a Chapter 13 remains for seven (7) years.
3. Difficultly obtaining a mortgage or loan: A bankruptcy filing can make it difficult to get another loan or mortgage for many years.
4. Loss of property and real estate: Sometimes not all personal property and real estate will fit under an exemption. This means the bankruptcy court could seize some of your property and sell it to pay your creditors.
5. Denial of tax refunds: State, local and federal tax refunds can be denied because of bankruptcy.
6. Job and housing stigma: Some potential employers and landlords ask questions about any recently-filed bankruptcies and this can negatively affect your chances for both.
7. Non-Dischargeable debts: There are certain kinds of debt that cannot be discharged by bankruptcy. Non-dischargeable debts typically include alimony and child support, student loans, criminal restitution and fines, and any debts acquired through fraud.

Decide If Bankruptcy Is Right for You
• Chapter 7: a bankruptcy where many, if not all, of your debts are canceled outright in a short three- to six-month process.
• Chapter 13: a bankruptcy where you use your income to make payments on your debts over the next three to five years.
You may be prevented from filing for Chapter 7 bankruptcy if you have enough income to repay your debts in a Chapter 13 plan. Or you may not qualify for Chapter 13 bankruptcy if your debts are too high or your income too low. Some debts, like child support obligations, cannot be wiped out in bankruptcy. Bankruptcy won’t relieve you of your obligation to pay your mortgage, but it might make your mortgage easier to pay by getting rid of other debts. If you have substantial equity in your home, you might lose it if you file for Chapter 7, depending on how generous the exemptions laws are that are available to you. If you file for Chapter 13, you can keep your home and pay off any mortgage arrears through your repayment plan. How much property you get to keep depends whether you’ve pledged the property as collateral for a debt, and on the “exemption” laws that are available in your state. If you file for Chapter 7, you might lose your car if you have substantial equity that isn’t protected by your state’s exemption laws. Bankruptcy is good at wiping out most credit card debt and unsecured loans, unless you spent extravagantly or lied on your credit application. See Credit Card Debt in Chapter 7 Bankruptcy for more information. In most states, you will not lose pensions, retirement accounts, or life insurance in bankruptcy. If you have a pension, a 401(k), an IRA, or life insurance, find out what’s protected in your state. Bankruptcy can be intrusive, you have to disclose every last detail of your finances to the court, and other people may find out about your bankruptcy. In a Chapter 7 bankruptcy, you can have property taken away, or, under a Chapter 13 plan, you might spend three to five years having to ask permission to spend your own money.

Chapter 7 bankruptcy, also known as “straight bankruptcy,” is what most people probably think of when they’re considering filing for bankruptcy. Under this type of bankruptcy, you’ll be required to allow a federal court trustee to supervise the sale of any assets that aren’t exempt (cars, work-related tools and basic household furnishings may be exempt). Money from the sale goes toward paying your creditors. The balance of what you owe is eliminated after the bankruptcy is discharged. Chapter 7 bankruptcy can’t get you out of certain kinds of debts. You’ll still have to pay court-ordered alimony and child support, taxes, and student loans. The consequences of a Chapter 7 bankruptcy are significant: you will likely lose property, and the negative bankruptcy information will remain on your credit report for ten years after the filing date. Should you get into debt again, you won’t be able to file again for bankruptcy under this chapter for eight years.
Chapter 13 bankruptcy works slightly differently, allowing you to keep your property in exchange for partially or completely repaying your debt. The bankruptcy court and your attorney will negotiate a three- to five-year repayment plan. Depending on what’s negotiated, you may agree to repay all or part of your debt during that time period. When you’ve completed the agreed repayment plan, your debt is discharged, even if you only repaid part of the amount you originally owed. While any type of bankruptcy negatively affects your credit, a Chapter 13 may be a more favorable option. Because you repay some (or all) of your debt, you may be able to retain some assets. What’s more, a Chapter 13 bankruptcy will cycle off your credit report after seven years, and you could file again under this chapter in as little as two years.
Consequences of Bankruptcy
Perhaps the most well-known consequence of bankruptcy is the loss of property. As previously noted, both types of bankruptcy proceedings can require you to give up possessions for sale in order to repay creditors. Under certain circumstances, bankruptcy can mean losing real estate, vehicles, jewelry, antique furnishings and other types of possessions. Your bankruptcy can also affect others financially. For example, if your parents co-signed an auto loan for you, they could still be held responsible for at least some of that debt if you file for bankruptcy. Finally, bankruptcy damages your credit. Bankruptcies are considered negative information on your credit report, and can affect how future lenders view you. Seeing a bankruptcy on your credit file may prompt creditors to decline extending you credit or to offer you higher interest rates and less favorable terms if they do decide to give you credit. Depending on the type of bankruptcy you file, the negative information can appear on your credit report for up to a decade. Discharged accounts will have their status updated to reflect that they’ve been discharged, and this information will also appear on your credit report. Negative information on a credit report is a factor that can harm your credit score.
Bankruptcy Terms to Know
Throughout bankruptcy proceedings, you’ll likely come across some legal terms particular to bankruptcy proceedings that you’ll need to know. Here are some of the most common and important ones:
• Bankruptcy trustee: This is the person or corporation, appointed by the bankruptcy court, to act on behalf of the creditors. He or she reviews the debtor’s petition, liquidates property under Chapter 7 filings, and distributes the proceeds to creditors. In Chapter 13 filings, the trustee also oversees the debtor’s repayment plan, receives payments from the debtor and disburses the money to creditors.
• Credit counseling: Before you’ll be allowed to file for bankruptcy, you’ll need to meet either individually or in a group with a nonprofit budget and credit counseling agency. Once you’ve filed, you’ll also be required to complete a course in personal financial management before the bankruptcy can be discharged. Under certain circumstances, both requirements could be waived.
• Discharged bankruptcy: When bankruptcy proceedings are complete, the bankruptcy is considered “discharged.” Under Chapter 7, this occurs after your assets have been sold and creditors paid. Under Chapter 13, it occurs when you’ve completed your repayment plan.
• Exempt property: Although both types of bankruptcy may require you to sell assets to help repay creditors, some types of property may be exempt from sale. State law determines what a debtor may be allowed to keep, but generally items like work tools, a personal vehicle or equity in a primary residence may be exempted.
• Lien: A legal action that allows a creditor to take, hold and sell a debtor’s real estate for security or repayment of a debt.
• Liquidation: The sale of a debtor’s non-exempt property. The sale turns assets into “liquid” form cash which is then disbursed to creditors.
• Means test: The Bankruptcy Code requires people who want to file Chapter 7 bankruptcy to demonstrate that they do not have the means to repay their debts. The requirement is intended to curtail abuse of the bankruptcy code. The test takes into account information such as income, assets, expenses and unsecured debt. If a debtor fails to pass the means test, their Chapter 7 bankruptcy may either be dismissed or converted into a Chapter 13 proceeding.
• Reaffirmed account: Under Chapter 7 bankruptcy, you may agree to continue paying a debt that could be discharged in the proceedings. Reaffirming the account and your commitment to pay the debt is usually done to allow a debtor to keep a piece of collateral, such as a car, that would otherwise be seized as part of the bankruptcy proceedings.
• Secured debt: Debt backed by reclaimable property. For example, your mortgage is backed by your home, and for an auto loan, the vehicle itself is the collateral. Creditors of secured debt have the right to seize the collateral if you default on the loan.
• Unsecured debt: A debt for which the creditor holds no tangible collateral, such as credit cards.
While bankruptcy can eliminate a lot of debt, it can’t wipe the slate completely clean if you have certain types of unforgivable debt. Types of debt that bankruptcy can’t eliminate include:
• Most student loan debt (although some members of Congress are working to change this).
• Court-ordered alimony.
• Court-ordered child support.
• Reaffirmed debt.
• A federal tax lien for taxes owed to the U.S. government.
• Government fines or penalties.
• Court fines and penalties.