The “B” Word – Bankruptcy

Bankruptcy sounds scary, but when all else fails, filing bankruptcy will allow you to keep your house.  Briefly, there are two primary types of bankruptcy, Chapter 7 and Chapter 13.  Before we discuss whether you should consider filing for bankruptcy, let’s examine the different types of bankruptcy.

Chapter 7 – Discharge of Debt
Chapter 7 is the most popular option, because it completely discharges all your debt.  All of your assets are liquidated and split evenly between your creditors, except for a LONG list of “excluded assets” which include most of the stuff you really want to keep anyway - namely your house, cars, home furnishings, personal effects, etc.  You’ll have to work something out with your lender for your house, because unlike Chapter 13, there is no trustee to collect your money and pay them off.  But if you don’t have to pay credit card payments or medical bills etc, you may have some money you can redirect to your mortgage payment. Generally speaking, Chapter 7 is probably not going to work for you if you need to stop the foreclosure but do not have the money to pay your mortgage company to bring the loan current.
Be aware that the laws changed in 2005 to make it more difficult to file Chapter 7; there is now a means test, and you will have to prove that you cannot afford to file Chapter 13 and pay back some of your debt. If you succeed in qualifying for Chapter 7, your debts will be discharged in 4-6 months, but the bankruptcy will be on your credit report for ten years.

Chapter 13 - Reorganization
Chapter 13 is commonly called “reorganization”.  You have to come up with a plan to reorganize your finances.  A trustee takes monthly payments from you over the course of 3-5 years and pays your creditors off.  There are three types of debt that fall under your Chapter 13 plan:
1) Secured payments, including back payments, interest, and penalties on your mortgage, car payments, etc.
2) Preferred payments, including unpaid taxes, your bankruptcy attorneys fees (if he’ll let you pay it out)
3) Unsecured payments, including everything else, most notably credit cards and medical bills.

Here is a grossly oversimplified way of how this works.  P = I - E
• P = Your payment amount
• I = ALL of your income.
• E = ALL of your expenses for everything - house payment, food, clothes, gas, reasonable entertainment, etc.

You pay the trustee each month, and they in turn pay all your creditors.  Secured and preferred creditors get paid 100% of what they are owed.  After that, whatever is left over is divided up and paid to your unsecured payments.  Thus, your credit cards / medical bills etc. may only get paid 5% of what they are owed.  The amount they get can range from 0% - 100%, depending on your budget.  The challenge is to make the bankruptcy plan work, and that is why you need an attorney. It is in everyone’s interest to ensure that your Chapter 13 plan to succeed – you, your lenders, your attorney, and the trustee. That is why it is very important to work out a plan and payment amount that you can afford.
Once you’ve completed at least 3 years of payments (and as many as 5 years), and paid off your plan, your bankruptcy is “discharged” and your credit starts to improve!  Chapter 13 bankruptcy remains on your credit report for seven years from the date of filing.

Is Bankruptcy Right For You?
Now that you understand bankruptcy, you must decide if it is the right option for you.  Are you overwhelmed with lots of debt beyond your house payment, with no change in income on the horizon? Bankruptcy can be a fresh start and a huge relief, if you’re willing to take the hit on your credit report. However, if you are in that much debt and behind on payments, your credit is probably in bad shape already.  Your credit will be affected for seven years or more, but if you DON’T file, you may still be in the same financial position seven years from now anyway. Many people get in over their heads and need a fresh start.  That is why the bankruptcy laws were created to begin with.
If you are a relative or caretaker of an elderly relative who is in danger of losing their house, bankruptcy may be an excellent choice.  The homeowner will likely not need any credit in the twilight years of their life, and bankruptcy will let them keep their home.  Just remember, you’ll have to help them with the process, as there is a credit class you have to take over the phone etc.
If finding another place to live is not an option for you, and you need to put a roof over your family’s head, then bankruptcy may be just what you need.  On the other hand, if you are single or married without kids, and you can move into an apartment, maybe you’ll choose to get rid of the house and get back on your feet.
You should not consider bankruptcy unless you have first considered options like Credit Counseling and Debt Negotiation. These are covered extensively in my Credit Repair Boot Camp that you received as a bonus with this course – read it for more details on these programs. However, since you are in foreclosure, bankruptcy may be your only option to save your house.  As soon as you file, the foreclosure process is halted.  In other words, it’s the last resort – but it is an option.

Credit Considerations
Many people are concerned about how bankruptcy will affect your credit report. Based on the previous paragraph, you might be thinking that you will not be able to get a loan or credit card for many years.  Forget the hype – let’s look at the facts.  At the point where your case is discharged, you will have very little debt other than a mortgage payment. Creditors know this, and they also know that while you have a poor history, that you are probably eager to improve your credit. Plus, in this day and age of credit card companies chomping at the bit to loan money, you’ll be shocked at how many credit offers you get.  Here is a New York Times Article that documents that very phenomenon.
The choice is a personal one – should I declare bankruptcy or not?  Ultimately, YOU (and your significant other, if any) have to make the choice.

Get Some Good Advice
If you’re considering bankruptcy, you should make an appointment for a free initial consultation with your local branch of the Consumer Credit Counseling Service. Take all your bills with you and present your entire financial situation to them, and ask if bankruptcy is a good option for you. Be sure to bring all the documents regarding your foreclosure. It could be that while credit counseling would have been a good option for you a few months ago, now that foreclosure is looming you will need to file bankruptcy to keep the house.
If you do decide to file, you must find a good local attorney that specializes in bankruptcy. When you call, tell them you are considering filing bankruptcy and would like to get a consultation (hopefully a free one).  A local attorney can fill you in on the laws in your state and give you information on the costs and paperwork involved. If you don’t feel comfortable with the first attorney you see, call another one – you need to feel comfortable with the person you are working with.
I strongly recommend that you do NOT try to file the papers for bankruptcy yourself.  Like any other legal matter, it is complex and should be handled by a reputable, local attorney.  You will be required to go to at least one court proceeding, and you’ll be very glad to have your attorney there doing the talking for you.
This is another area to beware of potential scam artists! I would be wary of using anyone who has aggressively solicited you via mail or phone – firms that can do that have big marketing budgets AND client lists – you might get lost in the shuffle. If their goal from the outset is to get you to file bankruptcy, how can you be sure they’ll advise you honestly if there is a better option?  Instead, pull out the yellow pages and try to find a smaller practice in your local area.  I have heard horror stories from people who used big city practices that may have hundreds of cases going at once.  In a situation like this you really want to be able to get somebody on the phone that is familiar with your case. 

Don’t Wait!
One final word on Bankruptcy – don’t wait until the last minute.  In many states, the new laws require you to complete a credit counseling course 7-8 days BEFORE filing your case with the court.  Whereas before you could file your case the morning of the Sheriff’s sale and save your house, now you MUST begin the process more than a week before the sale. Please – check with your attorney on this to avoid an untimely surprise.