Bankruptcy

Bankruptcies are at a record high. More and more individuals are being forced into bankruptcy while trying to recover from poor economic conditions: businesses closings, job lay-offs, illnesses, hospitalizations, divorces, etc.

Credit card debt in the United States is at an all-time high. With the problems now facing many individuals, bankruptcy seems to be their only answer. Pressure from creditors is unbearable.

The bill collectors’ constant calls and letters demanding money that you don’t have is causing you stress, anxiety, marital problems, and sleepless nights. You are afraid to answer your telephone when it rings, wondering if it is another bill collector.

Bankruptcy was not a word in your vocabulary, but now it seems to be your only answer. You need to learn what your options are.

There are three different types of bankruptcy. A Chapter 7 liquidation and a Chapter 13 reorganization are personal bankruptcies. A Chapter 11 bankruptcy is a business reorganization similar to a Chapter 13. A person must file a Chapter 11 reorganization if his or her debt is higher than the maximum debt for a Chapter 13.

Chapter 7 and Chapter 13 are the types of bankruptcies usually filed by individuals. A Chapter 7 — known as a straight bankruptcy — usually will wipe out most of your debts. A Chapter 13 allows you to structure a plan to repay your creditors through the court.

Consult a reputable accountant or bankruptcy attorney about what options you have available to you.

John Ventura’s book, The Bankruptcy Kit is a good resource to learn what your legal rights are in filing a bankruptcy and what you can expect during the process.

JIM AND MARION ’S STORY

Jim called our office twice, stressing it was urgent that I call him back. He had to decide that week whether or not to file for bankruptcy.

Jim and his wife Marion pastored a small church. Jim’s income was $500 per week. Marion had had a good job, but was recently laid off. They lived rent-free in the parsonage, but they had $30,000 in credit card and installment debt. Their car had been repossessed, so they borrowed money to have the loan reinstated to get the car back. Arguments and strife over finances was leading to a possible break up of their marriage. It had been more than six months since any credit card payments had been made.

The only payments that were being made were for a car loan, car insurance, and medical insurance. Jim’s income alone left a $200 per month shortfall on their expenses.

After discussing their situation, I knew that because of Jim’s position with his church, a bankruptcy could be the wrong choice for them.

I explained to them that there was a possibility that their car would have to be returned to the loan company if they proceeded with the bankruptcy. I suggested that they eliminate the car payment by selling the car and use whatever cash they got to pay cash for another car. The insurance premiums could be reduced by raising the deductibles.

Most of the credit card companies had charged off their accounts or they were placed with collection agencies. Even those letters and telephone calls were slowly fading away.

I asked Jim and Marion why they were considering filing for a bankruptcy now. Marion said, “I can’t handle the Continuous letters and telephone calls. We have changed our telephone number twice and now have our mail sent to another address. I feel like I’m hiding out.”

Other than discharging the credit card debts, I saw no benefit to the bankruptcy because their financial situation would remain the same. Because of Jim’s job, it would be better to negotiate a future settlement with the creditors when they had more money.

I suggested that Marion and Jim both get part-time jobs to supplement their income during the interim. It was a test of endurance to withstand the telephone calls and letters from the creditors. The telephone calls and letters would slowly come to a halt which would bring relief. Jim and Marion had no assets that the creditors could collect on so the chances of lawsuits were small.

Bankruptcy is not for everyone. Filing for a bankruptcy could definitely damage certain careers. Weigh all the options before filing for a bankruptcy because it is a public record. Negotiating with creditors becomes easier the longer the debt has gone unpaid.

DON’T BELIEVE EVERYTHING YOU HEAR

Q. I heard if I file a bankruptcy that I can easily get new credit. Is this true?

Not exactly. We have heard this too; however, all our clients who have filed bankruptcy have had a difficult time reestablishing themselves.

When you are getting ready to meet with the trustee at the bankruptcy court for your final discharge, occasionally some of your creditors will show up to offer you special deals if you pay them off. Many of them will offer to reinstate your line of credit if you pay them off rather than have the account discharged where they will receive nothing. Most people can not take them up on their offer and the account is then discharged.

KEN AND MARCIE’S STORY

I had been on Michael Reagan’s radio talk show discussing issues on credit Ken called me the next day at my office He explained that he was $60,000 in debt and wanted my opinion if he should file for a bankruptcy or get a second trust deed on his home. Ken was a sales person and had just changed jobs He had a good income and some equity in his home I told Ken that I felt we should try to get a second loan on his home to pay the debt off, but first he would have to complete a loan application. Once I received his loan application, I had a credit report run. Ken and Marcie’s credit was perfect. Every creditor reported an excellent credit rating; however, something didn’t look right. I totaled the balances and I discovered that Ken anti Marcie’s debts came to $160,000. This didn’t include their mortgage. I was stunned. I couldn’t under stand how Ken and Marcie didn’t know that they owed that much.

Unfortunately, I was the one who had to make the telephone call to inform Ken and Marcie that they were $160,000 in debt. As the telephone rang I took a deep breath and said, “Ken you are not $60,000 in debt, but you owe $160,000 between your credit card bills and vehicles.” There was a long silence on the other end of the telephone. Softly, Ken said, “I guess things can get away from you without you ever realizing it ‘His next question was “What should we do’?”

Ken and Marcie were a catastrophe ready to happen. All the warning signs were there of a financial crash

I reviewed his loan application, got a value on his property, and played with the figures to try and get a second trust deed—even a 125 percent loan against the house—but his debt ratios were still too high to qualify.

With such a high debt and not being able to get Ken and Marcie a loan, I suggested they consult a bankruptcy attorney. There didn’t appear to be any way out for them.

WHAT CREDIT TO SAVE

Q. It looks as though my husband and I will need to file for bankruptcy. Is there any way to save our credit rating?

The best suggestion I could give you would be to keep one or two of your credit cards current at all times. Before you file for your bankruptcy, try to pay the cards off. Put them in a safe deposit box or drawer so you won’t use them. If you have two credit cards through the same company, either pay them off or have them both discharged. If you pay one card off and have the other credit card discharged through the bankruptcy, the chances are that the credit card company will cancel the other card. Try to keep the cards with the lowest fees and interest rates.

When you make the list of all your outstanding creditors, you would not have to list the cards that are paid off. After your bankruptcy has been discharged by the court, you now have one or two accounts that are in good standing. When you are trying to reestablish yourself in the credit world, this will look good on your credit report. Any future credit will depend on your payment history since your bankruptcy.

SINGLE MOTHER

Q. I am a single mother with two children and a $15,000 credit card debt. I have fallen behind in my payments and am one month behind in my mortgage payment. Should I file for a bankruptcy?

Before rushing into filing for a bankruptcy, you need to analyze your total situation.

Get a copy of your credit report from all three of the major credit re porting agencies—Experian, Trans Union, and Equifax. Analyze each of the entries and see what the creditors are reporting. Have they charged off the accounts as bad debts, or have they placed the accounts into a collection status? What you’re trying to determine is what damage has the creditors done on your credit report. If the damage is severe, a bankruptcy will only add one more derogatory statement which will haunt you for the next ten years.

If your credit report is damaged, then ride the storm. Set priorities as to what you are going to pay. No matter how loud the creditors are yelling your first priority is to survive. Your house payment should always be paid first. Then your utilities, food, and automobile. These are essential to your survival. Whatever you have left can go to the creditors. Remember your credit report is already ruined.

A bankruptcy should only be considered if you stand to lose your home (which would only slow the process), or your debt is more than $20,000 and there is no possible way to pay the debt back in the future.

Your debt may seem high, but to take a drastic step and file for bankruptcy will only quiet the creditors. The end result will cause a worse credit rating. Eventually the creditors will quit harassing you. It is a test of endurance on your part. Hang in there and try to bring your house payment Current.

TAX LIENS DISCHARGED

Q. Five years ago our business went bad. We have tax liens that amount to more than $100,000, two judgments totaling $140,000, and $60,000 in credit card debt. Can we file for a bankruptcy and get the tax liens discharged?

Tax liens usually are not dischargeable in a bankruptcy. If the tax liens are more than four-and-one they may be dischargeable under certain circumstances.

Whenever anyone has a problem with back taxes and are contemplating a bankruptcy, it is best to see an attorney or accountant who specializes in tax law to advise you.

Under most circumstances, judgments and unsecured credit card debt are dischargeable through a bankruptcy. With debts that are so high, unless your income increases high enough to pay these debts off, a bankruptcy would be your only sense of relief and a new start.

IF I CHANGE MY MIND

Q. Can I change my mind after I file for a Chapter 7 bankruptcy? What will happen?

Yes, you can change your mind and have the case dismissed; however, once the bankruptcy is filed it becomes a public notice which is picked up by the credit reporting agencies and becomes a part of your credit history. You would want to make sure that the credit report shows the bankruptcy dismissed. The bankruptcy filing and dismissal would show up on your credit report every time a credit report is run. The entry would remain on your credit report for up to ten years from the date it was filed. You could add a letter of explanation on your credit report explaining the situation.

Another thing you could do would be to explain your situation to a new prospective credit grantor prior to completing an application. If it views the entry as negative and will decline your credit application, don’t authorize a credit report to be run on you. The rejected inquiry will hurt your chances with another creditor.

CHAPTER 13 OR 7?

Q. I have credit card debt of more than $60,000. I was on disability and my income dropped. I am back on the job and my income is picking up; however, I have fallen three months behind in making my payments. I want to be able to pay these bills off, but I’m having a hard time catching up. Is there a way to reduce my payments?

Being $60,000 in credit card debt will take you over 20 years to pay back by making minimum payments. The fact that you are already be hind in making your payments will make it more difficult to bring the accounts current.

A Chapter 13 bankruptcy is known as a wage earner program. It allows you to set the payments that you can afford. It must be approved by the trustee of the court. Once the payments are set, you would continue to make the payments to the trustee for three to five years, depending on the program the trustee approves.

At the end of the three to five year period when your final payment is made, any remaining balances that you have will be discharged. No further payments will be required and the debts will be considered paid in full.

If you elect to file for a Chapter 7 bankruptcy, the unsecured debts, if approved by the trustee may be discharged. Any items that secured debts would have to be surrendered or special arrangements made by the court for repayment.

REAFFIRMATION

Q. I am considering filing for a bankruptcy. Can I keep any of my credit cards and not have to give them up?

If you owe balances on any credit cards or any outstanding balances on any debt that you owe, you must declare it in your bankruptcy petition. If you have a zero balance on any credit cards or lines of credit, you do not have to declare it.

If you file for a bankruptcy, some of the creditors may ask you to re affirm your debt with them. A reaffirmation means that the creditor will close the old account and open a new account transferring your balance to the new account. You would then make payments on the account.

By doing a reaffirmation on a credit card, the creditor will usually allow you to use the line of credit that you established. Prior to doing a reaffirmation, get the creditor to give you a statement in writing listing the terms, interest, fees, and credit limit. Never be late in making your payments on any accounts you have reaffirmed. If you fall delinquent in any of your payments after your bankruptcy and it is reported on your credit report it will hurt your chances of reestablishing new credit.

Next: Your Financial Future: Getting Out of Debt