The idea of declaring bankruptcy strikes most people as one of the most stressful and terrifying decisions they can make regarding their financial future. While it isn’t pleasant, the suffering you’ve endured to get to this point far outweighs anything you’ll experience after filing for bankruptcy. Often, people have a distorted image in their minds of what bankruptcy entails that is far worse than reality. Below are some answers to common questions people have for us regarding bankruptcy that should put your mind at ease.
1. What is the different between Chapter 7 and Chapter 13? Which one is right for me?
- Chapter 7 is the most frequently used. It wipes out unsecured debt like credit cards and medical debts. But there are some catches: if you earn too much (more than the average for families your size in New York) or have a big asset the trustee can sell for creditors, you may have to file a “safer” Chapter like Chapter 13. Chapter 7 won’t stop a foreclosure or car repossession. So it’s cheap and fast and simple, but it has limitations.
- Chapter 13 is used when you have a regular source of income that allows you to create a plan to pay off your creditors over 5 years. Sometimes, if you have too much money to file Chapter 7, Chapter 13 can be a safe harbor provided you pay some ten percent to unsecured creditors like credit card balances.
- One of the reasons we advise people thinking of declaring bankruptcy to seek legal advice is because no 2 financial situations are exactly the same. An experienced attorney will help you decide which Chapter is appropriate for you to make filing as painless as possible.
2. How does declaring bankruptcy make my life better?
- In most Chapter 7 cases, all the credit card debt (called unsecured debt because the debts are not secured by collateral) is discharged (wiped out).
- Bankruptcy also ends creditor harassment. Once the petition for bankruptcy has been filed, creditors must cease badgering the debtor for payment. Lawsuits including foreclosures are usually stopped in their tracks.
- A fresh start without threats of lawsuits and wage garnishments. The purpose of bankruptcy is to obtain a discharge or “wiping out” of past indebtedness. This usually is formally issued by the court within two to three months. Some debt however, such as certain taxes, mortgage rights, and student loans, may not be discharged.
3. Are there any disadvantages to declaring bankruptcy?
- The largest setback for most people is the effect declaring bankruptcy has on their credit report. A Chapter 7 bankruptcy remains on your credit report for 10 years, while a Chapter 13 remains on your credit report for up to 7 years. But today on average every household files once in a lifetime, so a credit report with a bankruptcy is not that unusual. The score is the thing. So, you should, with good credit behavior, be back from 400s to the high 600s in 2 years, sometimes even low 700s.
- People usually overestimate the value of their possessions in the eyes of creditors, and New York State protects many personal possessions from being sold regardless of their value. However, certain high-end luxury items such as diamond jewelry, jet skis, etc. may have to be sold to help pay creditors. But the image of creditors sweeping through your house and leaving it bare only happens in the movies.
4. Can I keep my home?
In most cases, YES. The trustee of your bankruptcy estate has to decide whether to sell your assets. By the time the trustee has sold your house and paid off the mortgage, paid the commissions, selling costs and your exemptions, there is usually nothing left. So, in most cases, the trustee abandons the house to you provided you agree to keep current with the mortgage payments. The homestead option protects $50,000 of the equity in your home, or $100,000 if both spouses own the house. If you have substantially more equity in your home, you’ll need to consider Chapter 13.
5. Can I keep my car?
In most cases, YES. As with the house, the trustee will only sell your car if this results in money for creditors. The exemption for cars in New York is $2,400 per person. If you have a late model Mercedes Benz for which you paid cash, the trustee will have to sell it for the creditors. Under recent law you may have to consider reaffirming the car loan.
6. Will they come in and take my possessions?
In most cases, NO. Personal possessions such as clothing, appliances and furniture are the least economically valuable parts of the bankruptcy estate. Again, New York Law protects you with exemptions on most personal property. But, if you have five race horses, expensive jewelry or Chippendale furniture, you can be sure that the trustee will want to sell these assets for your unpaid creditors.
7. Will I lose my bank account, cash or investments?
Up to $11,000 in general assets is protected by an exemption if you do not use the homestead exemption. This allowance, to the extent used, is deducted from your personal possession allowance. Pensions, IRA’s, Annuities, 401(k)’s, insurance etc. are usually 100% protected.
8. Who will know I've filed for bankruptcy? Will my employer be notified? My neighbors? My bowling team?
The only people the court notifies of your status are your creditors. Your petition will be a matter of public record, but unless you’re planning a run for public office, nobody is going to go digging through the records to out you.
9. Will having my bankruptcy on my credit report ruin my life?
Hardly. While we cannot guarantee how any one creditor will behave, the Federal National Mortgage Association will underwrite home loans if you can show 36 months of consistent payments after bankruptcy. And car loans are surprisingly easy: the lender knows you cannot refile for bankruptcy for 8 years, and that you have substantially reduced your debt load. Again, advice from an experienced attorney can give you a better idea of how bankruptcy will affect your day-to-day life.
10. What actions take place when I file? Do I have to appear before a judge?
The typical process for a Chapter 7 case is as follows:
First, of course, come in to the office and speak with an attorney in a free consultation. After going over the particulars of your situation, the attorney will determine which chapter you should file.
File the petition. This is a lengthy document which includes much information about your creditors and possessions.
A hearing 20 to 30 days later. No judge is present. You will appear in a meeting to answer questions with the bankruptcy trustee (typically an attorney) presiding. Your lawyer will be with you and creditors have the right to be present.
After your hearing, you enter a waiting period before your discharge is processed. During this time, any unfinished business relating to your hearing is completed, and you also must complete the second portion of the credit counseling requirement, and file any reaffirmation agreements for secured loans you wish to continue paying.
The Discharge is 60 to 90 days later. If you filed Chapter 7, then all dischargeable debts are wiped out. If you filed Chapter 13, they are wiped out subject to your fulfillment of a repayment plan.
11. How much does it cost?
Court filing fees, which increase occasionally, were at the time of publishing:
$335.00 for Chapter 7
$310.00 for Chapter 13
Attorney fees in this geographic region (assuming an experienced competent law office) range:
From $1,500 to $2,000 for non-business Chapter 7.
From $2,000 to $5,000 for business Chapter 7.
$2,900 to $7,000 for Chapter 13 reorganization (depending on extra lien stripping,etc.).
$15,000 to $30,000 for Chapter 11 (business).
12. Can anything go wrong?
Yes, and this is why it is important that you work with an experienced bankruptcy attorney. You will be granted a discharge unless there is abuse. Sometimes “abuse” consists of a continuing lavish lifestyle. Another problem is that you transferred cash or assets to a “preferred” person, or you loaded up your credit cards before filing. Although uncommon, these are complicated issues and you should talk to an experienced attorney about it. Your attorney will also advise you on protecting against unnecessary loss of assets in bankruptcy.
If you are not truthful about your assets and liabilities, the entire bankruptcy can be set aside and you may even be charged with a crime, perhaps even serving jail time.