By Ginger B. Kelly, Esq. Posted: May 16, 2017
In 2013 there were over a million bankruptcy filings. In 2014, there were slightly less than a million. Based on these filing numbers, something like 1 out of every 200 adults in the US file for bankruptcy (uscourts.gov). That’s a lot of people turning to bankruptcy. Based on these figures, it appears as if bankruptcy seems like an easy way out, or is it? Let’s consider a few things before making this assumption, like the implications of a filing and how bankruptcy compares to other debt relief options.
Is Bankruptcy Really the Easy Way Out?
Basically, a typical Chapter 7 bankruptcy (total liquidation) filing involves three basic steps.
#1. Paperwork: To begin any bankruptcy case, a series of forms outlining your debts, assets, income, expenses, and related information need to be filed. This is not like your ordinary tax return. There are multiple papers that need to be filed. It’s a ton of paperwork.
#2. Trustee Meeting: After the petition, the schedules and all the paperwork has been filed, a court hearing date for a 341 Trustee Meeting will be scheduled. The Trustee Meeting (also known as the Meeting of the Creditors), the bankruptcy trustee will ask you many questions. In Massachusetts, you will be given notice that the meeting is recorded. Most of the questions confirm the information in your paperwork. The Trustee may ask you about how your debts and assets will be handled. For most Chapter 7 filers, the Trustee Meeting goes rather quickly, about 15 minutes or so.
#3. Discharge – After the Trustee Meeting, assuming nothing goes wrong, there are no issues or complications, most of your debts will be discharged. A few debts that will not be discharged are Student Loans, some IRS Tax Debt and a few other things. Now the person filing Chapter 7 can begin their fresh start.
Those three steps are an over-simplification of the process. There is a lot more to it. Many other important legal considerations must be dealt with, in a typical Chapter 7 bankruptcy case. This is why most people consult with a lawyer before beginning or considering any Chapter 7 or Chapter 13 bankruptcy case.
Even when the case is closed, there’s a lot to consider. Credit card debts, medical debts, payday loans and most other unsecured debts, are gone, but other debts like student loans may not ever go away. Secured debts, like car loans and home mortgages can also go away. But if a person whats to keep their home or car or both, they will need to reaffirm those debts and continue making those payments. Sometimes, a reaffirmation hearing is required.
So why is Bankruptcy complicated?
Primarily, there are two big potential problems, maybe more.
#1. Valuable property at Risk. Because a bankruptcy trustee will evaluate both debts and assets, to determine if some debt could be repaid by liquidating (selling) your assets, a filer runs the risk of losing some important assets.
For most people, the two primary things they don’t want to lose are automobiles and real estate. These two assets are the easiest to sell. If the value of a filer’s home or car (or both) is much greater than the loan you used to buy it, that property could potentially be sold to repay creditors.
For more on how this works, and on the exemption laws that protect your property in bankruptcy, see this article, Should I Choose Massachusetts or Federal Bankruptcy Exemptions.
#2. Effect on credit scores. The other issues most people worry about when it comes to filing for bankruptcy is how this affects credit scores. Everyone knows any bankruptcy will have a serious impact on a FICO score for several years. The degree of impact depends upon how good or bad a filer’s credit is the day they file their petition. The better the credit the more significant the drop will be. If a filer’s credit was shot to begin with, or on the low side, (which is true for most people who file for bankruptcy), the effect will be significant, but less than a filer with good credit.
To sum it all up, when a person files for bankruptcy, they can expect that obtaining loans right away won’t be so easy. Often, credit cards and even car loans are available, but typically at very high rates of interest. However, when a filer sticks to a reasonable budget, and pays their bills on time, they will be off to a fresh start and better credit over time.
Alternatives to Bankruptcy.
It’s been said that bankruptcy is sort of the “ultimate weapon” of debt relief. But this means that bankruptcy should only be used when other options fail. A discharge of debt via bankruptcy is only available once every seven or more years; bankruptcy is not something a person should try first. Some people work with credit management companies to reduce debt, but I do not recommend this in most cases. Others try asking family for help or they find another source of income, like a second job. Adjusting one’s budget is always a good plan. Do this before considering filing for bankruptcy.
For those who have tried every option and have no realistic alternatives, then it’s time to schedule a consultation with a bankruptcy lawyer. Your first consultation should not cost a dime and it’s a good time to find out if bankruptcy will work in your situation. When you meet with your lawyer, be sure to ask a few important questions.
- Based on my income and job situation, do I qualify for bankruptcy?
- Can I get rid of all my debts in bankruptcy?
- Is property I own (bring a list of a few big items) unprotected or at risk?
A quick consultation with a good lawyer will help you understand a few things bankruptcy can do to help and what the risks would likely be or whether or not there are better options.
The Law Office of Ginger B. Kelly is now accepting new clients. Call and schedule your first appointment. We are a small law office offering your first confidential consultation, absolutely free of charge.
ABOUT ME: Attorney Kelly is an attorney in good standing, licensed to practice in both the Federal District and State Courts of Massachusetts and Rhode Island. Her law practice is focused on consumer debt, finance, bankruptcy and District Court matters. Attorney Kelly is experienced in both criminal and civil trial work. On a personal note, Attorney Kelly enjoys writing and other things, like conservation and agriculture.
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Copyright © 2017, by Ginger B. Kelly, Esq., all rights reserved.