Filing for Bankruptcy

  • September 25, 2020
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Filing for Bankruptcy

Filing for bankruptcy is a heavy decision. Before we get into what type of bankruptcy is the right one, what’s chapter 13 or chapter 7 bankruptcy and other technical questions, I’ll talk about some of the more common fears and misconceptions about bankruptcy. After having consulted thousands of clients facing hard financial situations, here are some of the common questions and concerns about filing for bankruptcy.

Will bankruptcy ruin my credit forever?

That’s simply false. Bankruptcy will impact your credit. It will also discharge a lot of debt that is reported on your credit report. It will probably have a short-term negative impact but starting out fresh and rebuilding credit can have a long-term net positive impact. My suggestion is that you don’t focus on your credit score, because, in all likelihood, that is not the main issue right now. Look at your entire financial pictures without over-focusing on your credit score. You will see that if you look at your entire financial situation objectively, the importance you put on temporary changes in your credit score becomes less important.

Doesn’t filing for bankruptcy feel like admitting failure?

Only those who try fail. Congratulate yourself for trying and realize that the only people who don’t fail never try in a first place. Sure, you may have made some mistakes along the way, but who goes through life without error? It’s important to learn from mistakes. Take note and move on. Look at Bankruptcy as a tool you can use to move on, to have a fresh start, to reorganize your life and finances, and not as punishment. Bankruptcy is not intended as punishment. To the contrary, it’s a debt relief tool provided by your government.

Bankruptcy feels illegal

The opposite is true. Bankruptcy is Federal Law designed to protect you against creditors. You are not breaking the law. You are using the law.

Could I lose everything in Bankruptcy?

Losing everything in bankruptcy is most often not the case. Every state and the Federal Law allows for things you can keep. These are called exemption laws. With proper legal representation, you are not likely to lose your assets. Now you may want to get rid of vehicle that is upside down and not owe any money on it, that’s also possible in bankruptcy. These are complex and fact-specific. A competent bankruptcy attorney will guide you.

Only if I try a bit harder, I can avoid Bankruptcy

Yes, possibly and I want you to try. Try but also to be realistic. Having consulted thousands of clients, I can’t count the number of times my clients told me that “I should have done this sooner. If I had done this sooner, I would have saved so much money”. Here is an article I have written to show you how you can avoid filing for bankruptcy.

If you are facing financial challenges, the best you can do is to resolve those challenges in the best way you can. Your credit score can be rebuilt. Mistakes can be remedied. A good bankruptcy attorney will help you protect your assets and property. This is the ultimate question that distills down whether you should or should not file for bankruptcy:
With your income, can you pay your bills and realistically repay your debt? If you can, then go for it. If you can’t, speak to a bankruptcy attorney.

How to avoid bankruptcy

You may find it strange getting advice from a bankruptcy attorney on how to avoid filing for bankruptcy. It may feel strange at the first glance, but let me give you some tips that I hope will show my sincerity. These tips come from thousands of life stories I heard over the years assisting my clients. These bankruptcy-avoiding tips are distilled from real-life clients who came to me concerned about their finances.

I’d like to call the first tip to decide if you can avoid bankruptcy as the “Ultimate question” to answer if you are trying to decide if you can avoid bankruptcy.

It all boils down to this: “Can you pay all your debt back in a way your creditors will lawfully accept without extreme hardship on you and your family?”

In answering this question consider all your debt. We tend to focus on the creditors who scream the loudest. Maybe you are being harassed by a specific creditor, or one of them filed a lawsuit against you and got your attention. This does not mean that your other creditors won’t do the same in the future. Look at all your creditors, the quiet ones, the ones you have not heard from in a while, the ones you are current on, your back taxes on installment plan, or unfiled taxes that are likely to result in liability, everyone. Don’t leave any creditors out when you are assessing if you can avoid filing for bankruptcy.

Don’t leave out co-signed debt. If you signed as a co-singer, co-debtor on a loan document, you are most likely liable for all that debt and that creditor can come after you for the entire balance owed. So you if co-signed for someone’s auto loan, or your kids student loans, consider that debt as your debt as well. I can’t count how many bankruptcies I filed for people who were sued because they had cosigned on a debt for the family and friends.

Next consider if you can pay the debt back. You may be behind on your payments or may not be able to pay the full-balance owed. Often creditors are willing to workout a payment plan with you. They may even be willing to accept a smaller amount as payment in full. Find out if you can settle or workout a payment plan you afford to pay while considering all your debt. Look at my article on how to settle your debt. It can take one hostile creditor unwilling to negotiate to mess up your calculations. Again, do this with all your creditors, and consider al your debt.

Look at your income. Is your income enough to pay your debt back according to the best plan you could workout with all your creditors? What if you took a part-time job? Weekend job? Would you be able to pay everything off? How much pressure can you and your family bear? Consider these questions.

If you can pay off your debt without serious hardship, then you probably can avoid bankruptcy. If you can’t then I suggest that you consult with a bankruptcy attorney just to see what other options you may have. The sooner you do this, the faster you can get the situation resolved.

Use this checklist to help you gather all your debt.

  • Unsecured Debt: Credit Cards, unsecured loans (loans you did not pledge anything as collateral), unpaid bills (Old utilities bill, old cell phone bills…), medical bills, auto repossessions, payday loans.
  • Secured Debt: Mortgages, Home equity lines of credit, auto loans, any loan you pledged something as collateral, back HOA dues, furniture loans
  • Taxes: Back income tax, property tax, any other tax you owe, Child Support, alimony, spousal support

Look at all your debt. Look at you mortgages, car notes, back taxes, credit cards, medical bills, loans, student loans and so on and see if you can pay them back if you put all your effort into it. Do you make enough money to do it? If you make enough, then

How to deal with debt collectors.

Debt Relief and Bankruptcy

Credit Cards, Medical Bills, unpaid bills, auto deficiencies, some taxes, and other debt can generally be discharged in bankruptcy. Not every type of debt can be discharged in bankruptcy, but bankruptcy is a powerful tool to get out of debt.

Generally, unsecured debt can be discharged in bankruptcy. In a Chapter 7 Bankruptcy, you can discharge your unsecured debt (debts I listed above), but in a Chapter 7 Bankruptcy you are responsible to make payments you make to your secured creditors directly. The same debt can also be mostly discharged in a Chapter 13 bankruptcy while you also consolidate your secured debt into one payment.

I often see my clients under the impression that in a Chapter 7 bankruptcy all debt is discharged and in a Chapter 13 bankruptcy all debt is paid back. This is simply not accurate. For example, if you decide to keep your car and reaffirm on the associated car loan, you will be responsible to make that car payment even after bankruptcy. See my article on Debt Reaffirmation. This means that the reaffirmed car loan debt survives bankruptcy. Now, if your car loan is part of your Chapter 13 Bankruptcy Plan, that debt will be paid off when you complete your Chapter 13 Bankruptcy.

One of the main reasons to consider bankruptcy is its ability to eliminate debt. While you may not be able to discharge all your debt, bankruptcy laws are designed to help borrowers get debt relief.

Foreclosures stopped

If you are facing the foreclosure of your property you should know that bankruptcy stops foreclosures.

How does bankruptcy stop the foreclosure of my property?

It does it because the law says so. Let me elaborate, there is a section of bankruptcy law called the automatic stay. Like the name suggests, it’s automatic, meaning it comes into effect as soon as bankruptcy is filed. There are limited exceptions to this but generally speaking, it automatically stays or stops collection efforts that are being conducted against you. For example, you may be facing a lawsuit by a creditor, or your mortgage company may have filed to foreclose on your property. Once you file for bankruptcy, the automatic stay of the bankruptcy code kicks in stopping garnishments and foreclosures.

In case of foreclosures, bankruptcy must be filed before the sale date. This means that you must have a valid bankruptcy case number showing that you have a pending case before the bankruptcy court.

Does bankruptcy stop foreclosure after sale date?

The short answer is no. For the automatic stay of the bankruptcy code to kick in, the case has to be filed before sale date. Otherwise, there is no automatic stay in place to prevent the foreclosure sale to be stopped.

In cases where the sale mistakenly occurs after the bankruptcy case is filed, those sales tend to be view void “ab initio” which basically means that the sale was never valid in the first place. There limited exceptions to this rule and every jurisdiction is different, but generally speaking, property foreclosure cannot happen without the bankruptcy court’s permission once the case is filed.

Can Foreclosure sale stop once it starts?

It depends what you mean by “once it starts”. If the property is sold or the sale is cried, then it’s typically too late to file for bankruptcy to get the sale stopped.
To be sure, you want to make certain that the sale happened. Just because the sale was scheduled to happen, does not mean that it happened. Sometimes the foreclosing law firms or the mortgage companies pull a property off their foreclosure list in the last minute. So check to be sure the foreclosure sale actually happened.

If the foreclosure sale was postponed, then you still can file bankruptcy to get it stopped and I will go over how you can use Chapter 7 and Chapter 13 of the Bankruptcy Code to stop foreclosure of your property. But before I get there, you may be wondering if bankruptcy makes sense for you even after foreclosure.

Does filing for bankruptcy makes sense after foreclosure?

The short answer is it may. Let me explain. As a bankruptcy lawyer with years of experience, I’ve noticed that my clients tend to focus on the creditor that is grabbing their attention. For example, a creditor may file a lawsuit or initiate the foreclosure process. These actions get attention. In reality, in a proper bankruptcy consultation, the attorney will look at your entire financial situation. The ultimate goal is put you in a much better financial situation. This means that a good bankruptcy consultation will consider all your debt and not just the foreclosure. He or she will also consider all your assets, your sources of income and your current financial situation. It may make sense for you to seek bankruptcy relief even if the property you are trying to protect is already sold. For example, you may have a lot debt or you may have had a sharp reduction in income. There may also be the case that the mortgage company could come after you for any deficiency that resulted from the foreclosure sale. Every jurisdiction is different.

Will Chapter 7 bankruptcy Stop foreclosure?

Yes. It stops foreclosure to the extent that you are entitled to the automatic stay. If this is your first time filing, it’s safe to say that filing for a chapter 7 bankruptcy will stop the foreclosure of your property. But that does not mean that you can keep your property in the long run.

Chapter 7 bankruptcy is called the Liquidation Bankruptcy. In this context it means that you can’t force your mortgage company to let you keep your property. If they are not agreeable to you keeping your property, then they can’t be forced into it. They can ask the bankruptcy court to re-foreclose and, absent an objection from the chapter 7 trustee that is appointed to your case, the court is very likely to allow them to foreclose.

Generally speaking Chapter 7 bankruptcy can buy you some time but it is generally not a long-term solution to you keeping your property.

Will Chapter 13 bankruptcy stop foreclosure?

Yes, unless you have filed more than one bankruptcy within the past year. If you have filed for bankruptcy within the past year, it’s a good idea to consult with a good bankruptcy attorney.
Unlike Chapter 7, Chapter 13 bankruptcy is designed for you to keep your property in foreclosure. It is the most powerful tool I am aware of to get all your financial affairs including bringing current your missed mortgage payments.

Your property is protected from foreclosure in a chapter 13 bankruptcy. You can also pay your back-mortgage payments in monthly installments. Check out my article on Chapter 13 bankruptcy, as it goes into detail as to all the ways Chapter 13 can help.

In short, so long as you are following the rules of Chapter 13 bankruptcy, your property will be protected.

Some jurisdictions also allow for loan modifications inside a Chapter 13 bankruptcy. For example, in the Western District of Texas Federal District that covers Austin, TX and the surrounding counties, it’s now possible to modify the terms of a home mortgage inside of a chapter 13 bankruptcy. This is not uncommon and many bankruptcy courts across the country have adopted similar procedures for modifying home loans inside of a chapter 13 bankruptcy. I practice in Houston and Austin, so here is some info specific to these two areas.

Tax Debt help

Often people don’t realize that some tax debt can be discharged in bankruptcy. Professionals call this type of debt as stale debt. There are many factors involved in determining if your tax debt can be discharged in bankruptcy. Generally speaking taxes owed on timely filed tax returns that more than three years old can be discharged in bankruptcy. In layman’s terms, taxes can be “included” in bankruptcy meaning that they can be discharged. In reality all taxes are included in bankruptcy in the sense that are disclosed and properly listed in the bankruptcy petition. That’s the law.
Just keep in mind that it’s genuinely complicated to determine whether taxes can be discharged in bankruptcy. An expert bankruptcy attorney can figure it out. If you live in Texas, give us a call.

What if my back taxes are not dischargeable in Bankruptcy?

Even though some back income tax debt is dischargeable in bankruptcy, there are circumstances when back taxes are not dischargeable in bankruptcy. Even in these situations, a Chapter 13 bankruptcy can be helpful. In a Chapter 13 bankruptcy you can pay back your back taxes without incurring additional penalties and interest. You can stretch your repayment to 5 years of no interest or penalty. This in itself is very helpful, but it can be combined with wiping out debt as well. Let me explain.
Often part of tax debt is dischargeable and another portion of it is not. In these scenarios, a properly drafted chapter 13 plan can wipe out most if not all of the tax debt that is dischargeable and pay back the portion that is not dischargeable without incurring penalties or interest. This is a powerful relief that is often overlooked.

Why is such powerful tax help overlooked?

Generally speaking attorneys that file bankruptcies may not be aware of tax discharge in bankruptcy. The reverse is probably more true. Tax actioners and tax attorneys are often not aware of bankruptcy rules that allow for tax discharge. Tax and Bankruptcy are both highly specialized and niche areas of law and finding law practices that have expertise in both areas may not be all that affordable for most.

If you owe back taxes, it is good to explore non-bankruptcy tax relief options. Be wary of companies that make promises that sound too good to be true. As a general rule, I recommend getting your advice from reputable and competent attorneys. It is also a good idea to consult with a good bankruptcy attorney. You may have better options that you thought you did.

Chapter 7 Bankruptcy 44k

  • What is Chapter 7 Bankruptcy? 4600
  • What do you lose when you file Chapter 7 Bankruptcy? 600
  • How much debt do you have to have to file Chapter 7 Bankruptcy? 700

By now, you have probably read that your property will be sold off if you file for a Chapter 7. That nonsense! The truth is that in the overwhelming majority of bankruptcy cases, nothing is sold or auctioned off. So how could so many websites be wrong? Probably because content that ranks high on google search results is written not by lawyers but by writers who know very little about bankruptcy and whose primary goal is to rank high on google searches.

The truth is that most chapter 7 cases are called “no asset” cases. In these cases, there is no property of the filer that is subject to liquidation. In other words not all property owned by the filer is fair game to be sold off.

How can you determine what property you can keep in a chapter 7 bankruptcy?

Federal Law and every state allow you to keep your property up to a certain value. In other words, up to a certain value, your property is exempted. The laws that allow you to keep your assets are called exemption laws. You can read about exemption laws in more detail here.

When you meet with an attorney that knows what they are doing, they are going to ask you about assets and properties you own. They are going to compare the value of what you own against what you can keep using exemption laws you are entitled to use. If not all your property is exempted, they will tell you that up front. This way, you can decide if you want to file knowing the risks involved. If your property is exempted, then Chapter 7 bankruptcy will not liquidate your assets that are protected (exempted).

What if not all your assets are protected/exempted?

Depending on the free and clear value of what you own, some of it may not protected/exempted. If that’s the case, you still can protect your assets by filing a Chapter 13 bankruptcy. I discuss this in more detail in the Chapter 13 bankruptcy section.

Can I keep things I am financing in a Chapter 7 Bankruptcy?

It depends. Chapter 7 bankruptcy does not force specific terms on creditors that have a lien on your property. For example, if you have a car loan and you want to keep your car, you can declare your intention to keep the car and keep on paying for the note. But if the car company wants to get the car back, then you can’t force them not to. Generally speaking, car financing companies don’t want your car, they want your payments, but if you are behind on your payment or if you have had a bad payment history, then they may not want you to keep your auto. In my experience, most of the car companies are willing to work with bankruptcy filers but that’s not always the case and you need to be aware of this risk.

If your auto finance company is willing to work with you in a chapter 7 bankruptcy, then they will do so by signing a reaffirmation agreement. I have an article dedicated to reaffirmation agreements you can read.

In essence, in a reaffirmation agreement, you agree to keep on paying for the auto you are financing according to the terms outlined in the reaffirmation agreement and the auto finance company agrees that you can keep your vehicle.

Chapter 13 Bankruptcy 34k

What is Chapter 13 Bankruptcy?

If you elsewhere that a Chapter 13 Bankruptcy is a repayment plan, that is not the entire picture. In most Chapter 13 bankruptcy plans, you pay for debt you can’t wipe out in any bankruptcy. For example an auto loan for an auto that you are keeping has to be paid , period. You pay it directly in a Chapter 7 case. You can also pay it in Chapter 13 plan payment, but credit card debt does not have to necessarily be paid in full in a Chapter 13 Bankruptcy.

What qualifies you for Chapter 13 Bankruptcy

Chapter 13 eligibility

Chapter 13 Bankruptcy is reserved for natural persons. This means that corporations, and LLCs cannot benefit from a Chapter 13 bankruptcy. This does not mean that someone who owns a business, a corporation, or a LLC cannot benefit from a Chapter 13 bankruptcy. In these types of situations all these business entities are treated as assets that are owned by the filer of bankruptcy. In fact, Chapter 13 bankruptcy is a powerful tool to help small business owners who tend to personally guarantee their loans. As you can probably imagine, this is a complicated topic. If you are business owner facing financial difficulty, you should consult with an attorney specializing in this area of law.

There are also debt limits for a Chapter 13 Bankruptcy. These amounts are $419,275 in unsecured debt and $1,257,850 in secured debt (2020). These Chapter 13 debt limits are changed every year by the Congress. If you owe more than these debt limits, then you still can restructure your debt through a Chapter 11 Bankruptcy.
In theory, there are no limits to the number of Chapter 13 bankruptcies you can file. In reality, you have to act in good faith when filing for any kind of bankruptcy. Good faith has a broad and abstract meaning, but essentially you can’t be abusive of the system.

Chapter 13 qualifications

Assuming that you are eligible to file for a chapter 13 bankruptcy, your financial situation is considered within the rules of a Chapter 13 bankruptcy. You and your bankruptcy attorney have to come up with a plan that the bankruptcy trustee will not object to and that the bankruptcy court will accept. For example, if you don’t make enough money to pay your credit cards, then that’s generally fine. You can discharge credit card debt in a Chapter 13 bankruptcy, but if you want to keep a vehicle that is unaffordable, then that can cause an issue with your Chapter 13 bankruptcy case.

Benefits of Bankruptcy Chapter 13

Chapter 13 bankruptcy is a restructuring type of bankruptcy. Here is a list of some of the outcomes you can achieve in a Chapter 13 case:

  • a. Discharge unsecured debt. You may be saying to yourself “What? I thought Chapter 13 bankruptcy was a repayment plan. How could it wipe out debt?” That is correct but it’s not the whole story. It is possible to wipe out most if not all of your unsecured debt in a Chapter 13 bankruptcy. There are many factors that go into determining how much debt you can wipe out in a Chapter 13, but generally speaking, it’s very possible to wipe out unsecured debt.
  • b. Lower your auto loan interest rate. If you have a low-interest car note, then you may not be able to lower it even more. However, if your car loan is in the double digits, it can be lowered.
  • c. Lower the balanced owed on a vehicle. If you owe more than your car is worth, it’s possible to lower the balance you owe down to the value of your vehicle. This is called a cram down and it’s possible to do if you have owned your vehicle for more than two and half years.
  • d. Get a Loan modifications. This is not the case in all jurisdictions, but the Bankruptcy Court here in Austin recently created a loan modification program for Chapter 13 bankruptcy filers. The mortgage companies are not obligated to grant modifications, but it’s still nice to have a dedicated portal to communicate with them and have the resulting modifications approved by a federal judge.
  • e. Resolve your back tax problems. Chapter 13 is not a magic wand, but it can wipe out taxes that are classified as unsecured debt. It also structures a payment plan for back taxes that you must pay. Often income tax does not accrue penalties or interest while you are in a Chapter 13 case.
  • f. Bring Mortgage payments current. If you not current on your mortgage payments, you can pay the arrears through a Chapter 13 case while your home remains protected from foreclosure.

Helpful articles you may want to consider

List coming soon…

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