Bankruptcy Topics

How does bankruptcy work?

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Bankruptcy is a legal process that allows people to get debt relief in a predictable and orderly way that is also fair to the person's creditors. Depending on how much income and assets a person has, he or she can file bankruptcy under Chapter 7 or Chapter 13 of the bankruptcy code. Either way, the goal is a bankruptcy discharge: a "fresh start" available for honest people who, for whatever reason, have fallen on hard times.

How much does bankruptcy cost?

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Different types of bankruptcy do different things, so the cost for each is different. 


For a Chapter 7 bankruptcy, the court filing fee is $335 and our attorney's fee is typically $850 for an individual, or $1,250 for a married couple filing jointly. Your attorney fee will need to be paid up front, before the petition is filed. You can pay this to us in installments over time, and when you have paid the fee in full, we will file for you. The court filing fee can be paid up front, in installments over 120 days, or can be waived if you cannot afford to pay the filing fee. For a filing fee waiver, your income needs to be less than 150% of the federal poverty guidelines. 


For a Chapter 13 bankruptcy, the court filing fee is $310 and our attorney's fee is typically $3,200 through confirmation of your Chapter 13 plan, regardless of whether you are filing as an individual or as a married couple filing jointly. Both the filing fee and the attorney fee can be paid in installments, payable under your Chapter 13 plan. 

What is Chapter 7 bankruptcy?

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Chapter 7 bankruptcy is a liquidation-style bankruptcy. In a Chapter 7, you can keep a certain amount of your property (known as "exempt" property), but if you have property above and beyond this level ("non-exempt" property), it will be sold off and the money used to pay your creditors. Most Chapter 7 cases are "no-asset" cases, meaning there is no non-exempt property to sell off for creditors. Chapter 7 cases were about 61% of the consumer bankruptcies filed in 2017. A Chapter 7 case is usually over within about 4 months of when it begins, and when the Chapter 7 case concludes you can get a discharge of most of your debts. People with higher levels of income or assets may be ineligible to file Chapter 7, and may have to file Chapter 13 instead. 

What is Chapter 13 bankruptcy?

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Chapter 13 bankruptcy is a debt repayment-plan style bankruptcy. In a Chapter 13, you propose a debt repayment plan to pay secured debts for property you want to keep, and some or all of your unsecured debts. You can keep your non-exempt property, provided you propose to pay its value to your unsecured creditors under your Chapter 13 plan. Your plan will need to pay your unsecured creditors at least as much as they would've received in a Chapter 7 liquidation, or the amount of your excess income above and beyond ordinary and necessary living expenses during the term of the plan, whichever is greater. Chapter 13 cases were about 38% of the consumer bankruptcies filed in 2017. A Chapter 13 plan usually takes about 3 to 5 years to complete. When your plan is complete, you can get a discharge of most of your debts. Chapter 13 is totally voluntary and is available to just about anyone with regular income. But individuals with very high levels of debt (more than $394,725 of unsecured debt or $1,184,200 of secured debt in 2018) may be ineligible for Chapter 13 and may have to file under Chapter 11 instead.

Will bankruptcy hurt my credit?

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Yes. A bankruptcy filing will knock down your credit score temporarily. If you are starting from a high 780 credit score, it can drop by about 240 points. If you are starting from a lower 680 credit score, it can drop by about 150 points. Generally, bankruptcy will drop your score into the 500's. But if you are considering bankruptcy, your score may already be low and the loss not that great. 


During bankruptcy, it will be difficult for you to get new credit. But after your bankruptcy discharge, you may be a better credit risk and may find it easier to get credit. For this reason, many people accept the tradeoff of damage to their credit score, so they can leave bankruptcy in better financial shape and rebuild their credit. This can allow you to pay less for loans and credit cards in the future through reduced interest rates, allowing bankruptcy to save you money in the long run. 

Bankruptcy FAQs

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Q: Can I keep my home in a Chapter 7 bankruptcy?


A: Yes, there are several ways you can keep your home in Chapter 7 bankruptcy. The first way is to use your exemptions to claim any equity you have in the home, and then retain and pay - as long as you continue making the payments, you can stay in the house; but if you stop making payments, your lender could foreclose. The second way is to reaffirm the debt, although typically we would not recommend this, since it means you would continue to remain personally liable on the debt - that defeats one of the main goals of bankruptcy which is to eliminate your personal liability on debts. Also, since you can already retain and pay on your principal residence, reaffirmation usually offers you no additional benefit. 


Q: Can I keep my car in a Chapter 7 bankruptcy?


A: Yes, you can keep your car in Chapter 7 bankruptcy. One way to do this is to reaffirm the debt - you agree to reaffirm your personal liability on the auto loan, and as long as you continue making the payment, you can keep the car. But if you stop making payments, your lender could repossess. Unlike your home, the option to retain and pay is not available for cars. If you do not reaffirm an auto loan in Chapter 7 bankruptcy and you stop making payments, then it is likely the lender will try to repossess.


Q: What is the automatic stay?


A: The automatic stay is a court order that is entered the minute you file a bankruptcy petition. The order forbids anyone from taking further action to collect your debts, except with permission of the bankruptcy court. The automatic stay is intended to put a "pause" on all collection efforts to allow you, the debtor, some breathing room to maintain the status quo and get back on your feet. Creditors who violate the automatic stay can be liable for contempt of court, including damages, costs, and attorney fees. 


Q: Does bankruptcy discharge all debts?


A: No. Bankruptcy can discharge most, but not all your debts. Almost all unsecured debts can be discharged, with exceptions. These exceptions include federal student loans, child support, alimony, criminal restitution, and some taxes, for example. Your secured debts (mortgages, car loans, etc.) can be discharged as to your personal liability, but the liens against the property securing these debts will continue unaffected by your bankruptcy. This means that if you don't pay the debt secured by the property, the lender won't be able to come after you personally for the debt after a bankruptcy discharge, but the lender can come after the property itself to satisfy the debt if you don't pay. Foreclosures and repossessions are called an "in-rem" proceedings, which means legal action taken against a thing, not a person. 


Q: Do I really need an attorney to file bankruptcy?


A: Strictly speaking, no. There is no requirement that you hire a bankruptcy attorney to get relief under the bankruptcy code. But bankruptcy law and procedure is complex, and the success rate for pro-se bankruptcy filers (people who file without an attorney) is much lower than for people who file with the help of an attorney.

More Bankruptcy Topics

What Does Unmanageable Debt Cost You?

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If you have a lot of debt and aren't able to make the payments, your credit score will suffer. For better or worse, your credit score impacts how much you pay on an everyday basis for things you need to live. For example:


You'll pay a higher interest rate on your loans, paying much more money over the life of the loan to buy the same thing that could've been bought with less money, if you had a lower credit score that qualified you for a lower interest rate. 


If you exceed your credit limit, or if you overdraw your deposit accounts, you will be charged over-limit and overdraft or NSF fees by your financial institution. These fees can be significant, sometimes $35 or more at a time, and they add up fast. 


You may pay higher insurance premiums for things such as auto insurance, home insurance, renter's insurance, or health insurance. 


You may lose out on some employment opportunities, if the employer considers credit history as a part of the job application process. 


In sum, if you continue to carry unmanageable debt without taking corrective action to get rid of the debt and rebuild your credit, you may get trapped in a vicious cycle where you have to pay more for a large number of things you need to live, and you may never be able to build up any savings or financial security.

Do You Need to Pay Someone for Credit Repair?

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Credit reporting, credit monitoring, and credit repair are big business in the U.S. today. But do you need to pay someone to help repair your credit? Not necessarily. Here are some quick tips for credit repair self-help:


1. Make loan payments on time, for as many accounts as you can, even if it's only for one account. Your payment history is the biggest factor that goes into your credit score.


2. Reduce your balances. To have good credit, your outstanding balances should be less than one-half of your available credit. You can begin reducing your balances by adding a small amount each month to your minimum payments. Although it may not seem like much, a little bit goes a long way when repeated over time, and even a small amount tacked on to your minimum payment each month will more quickly reduce your balances and improve your credit score. The amount of credit you owe is the second biggest factor that goes into your credit score. 


3. Use some credit. But don't use more than you need to live within your means. You can keep lines open to establish length of credit history, but you should close any lines of credit that charge an annual fee. The length of time your lines of credit have been open is the third biggest factor going into your credit score. 


4. Don't open unnecessary new accounts, for example those offered in exchange for a one-time in-store discount or reward points. Also, minimize the number of hard pulls on your credit, for example those that occur when applying for insurance, or auto or home loans. While it pays to shop around, the number of recent requests for new credit is the fourth biggest factor going into your credit report. 


5. Monitor your credit report annually or more often to make sure that there is no false/inaccurate information, or that there have not been any unauthorized accounts taken out in your name. You can subscribe to a credit monitoring service to help you with this, and you can subscribe to a service that locks your credit file from new accounts being opened without your permission.


6. If you find false, inaccurate, unauthorized, or fraudulent accounts on your credit report, file a dispute with the Credit Reporting Agency to have the information removed from your credit report. The Credit Reporting Agency is required to do an investigation and to remove any false or inaccurate information it finds. Even if the Credit Reporting Agency will not remove an item from your credit report, you can attach an explanatory statement to any item you dispute, and explain the circumstances surrounding a negative item. Although an explanatory statement will not improve your credit score, it can help you if a new lender reads your credit report, rather than relying solely on the credit score, because they may be able to approve you for an underwriting exception and grant you a loan that you might not otherwise qualify for.

How Is My Credit Score Calculated?

Image of a pie chart showing elements of a credit score: payment history, amounts owed, etc.

Your credit score is calculated using a number of factors that look at how you use credit. 


The first and most important factor is your payment history for lines of credit. Your credit score will look at how many accounts you are paying on time versus how many are paid late or not at all. For the accounts that are paid late, your credit score looks at how delinquent they are - for example, 30 days behind, 60 days behind, 90 days behind, or more. 


The second most important factor is the total amount of debt you owe. Your credit score looks at the amount of debt you owe in proportion to your total credit available (i.e. your credit limits). To have good credit, a person should be using less than half of their available credit. Some types of debt - for example student loans - are ignored by underwriters when calculating these ratios, but it varies by lender. 


The third most important factor is the length of your credit history. Just like having too much credit is a negative for your credit score, having too little credit can be too, because there is no record of debts and repayments that can be used to analyze your performance over time. Having only a handful of accounts that have been open for years is better than having lots of accounts that were recently opened. 


The fourth most important factor is the number of recent accounts opened and new hard pulls on your credit. A sudden uptick in requests for new credit, or a number of new hard pulls on your credit report can drag down your credit score. It's best to avoid opening new accounts unless they're really necessary, and to minimize the number of hard pulls on your credit report. 


Finally, the fifth important factor is the types of credit used. Certain debts, such as secured debts for important items like auto and home loans, may be weighted more heavily than unsecured retail and credit card debts. Also, because so many people have student loans, and student loans are (theoretically) associated with increased earning capacity, student loans are downplayed when calculating a credit score.  

What Does It Mean to Go Bankrupt?

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To go "bankrupt" is a loaded word in our society. But the simplest meaning is that a person cannot pay their debts as they become due. Bankruptcy law is a legal solution to the problem of insolvency, since it is difficult for people who are saddled with crippling debt to meaningfully participate in the economy. People who face insurmountable debts have less incentive to work, own property, and spend money in the economy, because their efforts would mostly serve to enrich their creditors and not improve the debtor's quality of life. Bankruptcy law is designed to clear away the hurdle of insurmountable debt so people can get back on their feet, help to provide a better quality of life for themselves and their families, and also help society by returning to full participation in the economy and as taxpayers. 


Background Concept: insolvency


If a person or business is solvent, then they have sufficient cash available to pay their debts as the debts become due. On the other hand, if a person is insolvent, then they do not have the cash needed to pay their debts on time. 


Insolvency can come about two ways. The first way is lack of income. A person's income stream may have been cut off, or their income has been reduced and is now less than their monthly expenses. Income loss is commonly associated with, for example, layoffs at work, accidents and injuries, hospitalizations or long-term illness of the employee or an employee's family member requiring FMLA leave, or needing to leave employment to take care of a special needs family member who requires round-the clock care. Income reduction is commonly associated with, for example, manufacturing slowdowns, loss of overtime hours at work, going from full-time to part-time at work, going on long-term disability, or retirement and relying on a fixed income. 


The second way a person can become insolvent is by having excessive debt in relation to liquid assets. A person may, over time, have built up a large amount of debt that greatly exceeds the value of their assets, or their assets are "illiquid" and cannot readily be converted into cash for paying debts. For example, this is what happened to many homeowners in Michigan after the 2008 subprime mortgage crisis. In Late 2008, real estate values began to plunge and left many homeowners "upside down" or "underwater" on their mortgages. Another way this commonly occurs is when people feel flush with cash in a good economy and accumulate high levels of debt because they feel good about the future (similar to what we are experiencing now in May 2019), but they have not planned for how to maintain payments on their debt when the economy and incomes turn south. When a person, despite having steady income, becomes "upside down" or "underwater" on their obligations, they are considered insolvent as well. 


Takeaway: bankruptcy is a legal solution for insolvency


Like it or not, insolvency is a feature, not a flaw, of our capitalist economy. Like any industrial or commercial process, our economy produces negative externalities, in terms of waste and inefficiency. Insolvency is one of those, and is intrinsic to human nature. We Americans, and humans in general, are generally positive about the future and we aren't great at forecasting calamities in the future. It would be nice if we could more accurately test the winds of economic change. Our Federal Reserve attempts to do this daily as its reason for being, with mixed results, but I digress... Well I suppose that's a topic for another post. 


Our way of life and our economy is designed to encourage people to take calculated risks, because over time we believe a risk-taking society produces the greatest social benefits for all. Not everyone gets dealt a winning hand though. Honest people nevertheless make mistakes and suffer financial hard times. The law acknowledges that people become insolvent even if it was partially caused by their own doings. In bankruptcy this is not held against a person unless their decisions were egregiously wasteful, reckless, fraudulent, or criminal. Accordingly, part of going bankrupt is to open up one's books to the public, in order to demonstrate an insolvent debtor's honesty and good faith. In exchange, society can grant those honest but unfortunate debtors a reprieve from their debts. And that, folks, is what it means to go bankrupt.

Q: Can I keep my home in a Chapter 7 bankruptcy?


A: Yes, there are several ways you can keep your home in Chapter 7 bankruptcy. The first way is to use your exemptions to claim any equity you have in the home, and then retain and pay - as long as you continue making the payments, you can stay in the house; but if you stop making payments, your lender could foreclose. The second way is to reaffirm the debt, although typically we would not recommend this, since it means you would continue to remain personally liable on the debt - that defeats one of the main goals of bankruptcy which is to eliminate your personal liability on debts. Also, since you can already retain and pay on your principal residence, reaffirmation usually offers you no additional benefit. 


Q: Can I keep my cars in a Chapter 7 bankruptcy?


A: Yes, you can keep your car(s) in Chapter 7 bankruptcy. The way to do this is to reaffirm the debt - you agree to reaffirm your personal liability on the auto loan, and as long as you continue making the payment, you can keep the car. But if you stop making payments, your lender could repossess. Unlike your home, the option to retain and pay is not available for cars. If you do not reaffirm an auto loan in Chapter 7 bankruptcy and you stop making payments, then it is likely the lender will try to repossess.


Q: What is the automatic stay?


A: The automatic stay is a court order that is entered the minute you file a bankruptcy petition. The order forbids anyone from taking further action to collect your debts, except with permission of the bankruptcy court. The automatic stay is intended to put a "pause" on all collection efforts to allow you, the debtor, some breathing room to maintain the status quo and get back on your feet. Creditors who violate the automatic stay can be liable for contempt of court, including damages, costs, and attorney fees. 


Q: Does bankruptcy discharge all debts?


A: No. Bankruptcy can discharge most, but not all your debts. Almost all unsecured debts can be discharged, with exceptions. These exceptions include federal student loans, child support, alimony, criminal restitution, and some taxes, for example. Your secured debts (mortgages, car loans, etc.) can be discharged as to your personal liability, but the liens against the property securing these debts will continue unaffected by your bankruptcy. This means that if you don't pay the debt secured by the property, the lender won't be able to come after you personally for the debt after a bankruptcy discharge, but the lender can come after the property itself to satisfy the debt if you don't pay. Foreclosures and repossessions are called an "in-rem" proceedings, which means legal action taken against a thing, not a person. 


Q: Do I really need an attorney to file bankruptcy?


A: Strictly speaking, no. There is no requirement that you hire a bankruptcy attorney to get relief under the bankruptcy code. But bankruptcy law and procedure is complex, and the success rate for pro-se bankruptcy filers (people who file without an attorney) is much lower than for people who file with the help of an attorney. For example, in 2017, 

Q: Can I keep my home in a Chapter 7 bankruptcy?


A: Yes, there are several ways you can keep your home in Chapter 7 bankruptcy. The first way is to use your exemptions to claim any equity you have in the home, and then retain and pay - as long as you continue making the payments, you can stay in the house; but if you stop making payments, your lender could foreclose. The second way is to reaffirm the debt, although typically we would not recommend this, since it means you would continue to remain personally liable on the debt - that defeats one of the main goals of bankruptcy which is to eliminate your personal liability on debts. Also, since you can already retain and pay on your principal residence, reaffirmation usually offers you no additional benefit. 


Q: Can I keep my cars in a Chapter 7 bankruptcy?


A: Yes, you can keep your car(s) in Chapter 7 bankruptcy. The way to do this is to reaffirm the debt - you agree to reaffirm your personal liability on the auto loan, and as long as you continue making the payment, you can keep the car. But if you stop making payments, your lender could repossess. Unlike your home, the option to retain and pay is not available for cars. If you do not reaffirm an auto loan in Chapter 7 bankruptcy and you stop making payments, then it is likely the lender will try to repossess.


Q: What is the automatic stay?


A: The automatic stay is a court order that is entered the minute you file a bankruptcy petition. The order forbids anyone from taking further action to collect your debts, except with permission of the bankruptcy court. The automatic stay is intended to put a "pause" on all collection efforts to allow you, the debtor, some breathing room to maintain the status quo and get back on your feet. Creditors who violate the automatic stay can be liable for contempt of court, including damages, costs, and attorney fees. 


Q: Does bankruptcy discharge all debts?


A: No. Bankruptcy can discharge most, but not all your debts. Almost all unsecured debts can be discharged, with exceptions. These exceptions include federal student loans, child support, alimony, criminal restitution, and some taxes, for example. Your secured debts (mortgages, car loans, etc.) can be discharged as to your personal liability, but the liens against the property securing these debts will continue unaffected by your bankruptcy. This means that if you don't pay the debt secured by the property, the lender won't be able to come after you personally for the debt after a bankruptcy discharge, but the lender can come after the property itself to satisfy the debt if you don't pay. Foreclosures and repossessions are called an "in-rem" proceedings, which means legal action taken against a thing, not a person. 


Q: Do I really need an attorney to file bankruptcy?


A: Strictly speaking, no. There is no requirement that you hire a bankruptcy attorney to get relief under the bankruptcy code. But bankruptcy law and procedure is complex, and the success rate for pro-se bankruptcy filers (people who file without an attorney) is much lower than for people who file with the help of an attorney. For example, in 2017,