Bankruptcy

Personal bankruptcy generally is considered the debt management option of last resort because the results are long-lasting and far reaching. People who follow the bankruptcy rules receive a discharge — a court order that says they don’t have to repay certain debts. However, bankruptcy information (both the date of your filing and the later date of discharge) stay on your credit report for 10 years, and can make it difficult to obtain credit, buy a home, get life insurance, or sometimes get a job. Still, bankruptcy is a legal procedure that offers a fresh start for people who have gotten into financial difficulty and can’t satisfy their debts.
There are two primary types of personal bankruptcy: Chapter 13 and Chapter 7. Each must be filed in federal bankruptcy court. As of April 2006, the filing fees run about $274 for Chapter 13 and $299 for Chapter 7. Attorney fees are additional and can vary.
Effective October 2005, Congress made sweeping changes to the bankruptcy laws. The net effect of these changes is to give consumers more incentive to seek bankruptcy relief under Chapter 13 rather than Chapter 7. Chapter 13 allows people with a steady income to keep property, like a mortgaged house or a car, that they might otherwise lose through the bankruptcy process. In Chapter 13, the court approves a repayment plan that allows you to use your future income to pay off your debts during a three-to-five-year period, rather than surrender any property. After you have made all the payments under the plan, you receive a discharge of your debts.
Chapter 7 is known as straight bankruptcy, and involves liquidation of all assets that are not exempt. Exempt property may include automobiles, work-related tools, and basic household furnishings. Some of your property may be sold by a court-appointed official — a trustee — or turned over to your creditors. The new bankruptcy laws have changed the time period during which you can receive a discharge through Chapter 7. You now must wait 8 years after receiving a discharge in Chapter 7 before you can file again under that chapter. The Chapter 13 waiting period is much shorter and can be as little as two years between filings.
Both types of bankruptcy may get rid of unsecured debts and stop foreclosures, repossessions, garnishments and utility shut-offs, and debt collection activities. Both also provide exemptions that allow people to keep certain assets, although exemption amounts vary by state. Note that personal bankruptcy usually does not erase child support, alimony, fines, taxes, and some student loan obligations. And, unless you have an acceptable plan to catch up on your debt under Chapter 13, bankruptcy usually does not allow you to keep property when your creditor has an unpaid mortgage or security lien on it.
Another major change to the bankruptcy laws involves certain hurdles that a consumer must clear before even filing for bankruptcy, no matter what the chapter. You must get credit counseling from a government-approved organization within six months before you file for any bankruptcy relief. You can find a state-by-state list of government-approved organizations at www.usdoj.gov/ust. That is the website of the U.S. Trustee Program, the organization within the U.S. Department of Justice that supervises bankruptcy cases and trustees. Also, before you file a Chapter 7 bankruptcy case, you must satisfy a “means test.” This test requires you to confirm that your income does not exceed a certain amount. The amount varies by state and is publicized by the U.S. Trustee Program at www.usdoj.gov/ust.
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Five Most Common Questions

WILL MY CREDITORS STOP HARASSING ME?
Yes, they will! By law, all actions against a debtor must cease once bankruptcy documents are filed. Creditors cannot initiate or continue any lawsuits, wage garnishees, or even telephone calls demanding payments. Secured creditors such as banks holding, for example, a lien on a car, will get the stay lifted if you cannot make payments.
WILL MY SPOUSE BE AFFECTED?
Your wife or husband will not be affected by your bankruptcy if they are not responsible (did not sign an agreement or contract) for any of your debt. If they have a supplemental credit card they are probably responsible for that debt.
However, In community property states, either spouse can contract for a debt without the other spouse's signature on anything, and still obligate the marital community. There are a few exceptions to that rule, such as the purchase or sale of real estate; those few exceptions do require both spouses’ signatures on contracts. But the day to day debts, such as credit cards, do NOT require both spouses to have signed.
Your bankruptcy lawyer will be able to guide you in this regard.
WHO WILL KNOW?
Chapter 7 filings are public records. However, under normal circumstances, no one will know you filed for Chapter 7. The Credit Bureaus will record your filing and it will remain on your credit record for 10 years.
WILL I EVER GET CREDIT AGAIN?
Yes! A number of banks now offer "secured" credit cards where a debtor puts up a certain amount of money (as little as $200) in an account at the bank to guarantee payment. Usually the credit limit is equal to the security given and is increased as the debtor proves his or her ability to pay the debt.
Two years after a discharge, debtors are eligible for mortgage loans on terms as good as those of others, with the same financial profile, who have not filed Chapter 7. The size of your down payment and the stability of your income will be much more important than the fact you filed chapter 7 in the past.
The fact you filed Chapter 7 or 13 stays on your credit report for 10 years. It becomes less significant the further in the past the filing is. The truth is, that you are probably a better credit risk after bankruptcy than before.
WHAT DOES IT COST?
It costs about $ 300 to file a Chapter 7 bankruptcy. A bankruptcy lawyer's fees vary but should be in the range of $ 1,000 to $ 2,000 . Many bankruptcy lawyers will give you a free initial consultation. You can keep the fees down by being well organized and well prepared. You may also be able to keep the fees down by not requiring the lawyer to attend the meeting of creditors with you. Check this with your lawyer. In some states such as Massachusetts, attorneys must attend the Section 341 meeting with the debtors otherwise attorneys are deemed to have NOT represented the debtors. (The 341 Meeting).
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Living with Bankruptcy

When you file for bankruptcy with a credit/debt help agency, you will be asked a variety of important questions regarding your financial situation; specifically, on what your current budget looks like. Reputable agencies such as debthelper.com do this in order to A) Determine whether or not you actually do need to file for bankruptcy, and B) To figure out what your current financial priorities are and whether or not you will need to change them in order to get yourself out of debt.


Many areas that debt help agencies will advise you to focus and spend your money on should be common sense. Living necessities such as food, a place to live, electricity and water bills (basic utilities), and serviceable clothing should receive the greatest amount of attention. Other things such as owning a phone and making medical appointments are also stressed to varying degrees; if you need a phone for your job or a car for work, a debt help agency will give you advice on making a space for them in your budget.


These basic living expenses need to be considered by any person who is beginning the process of declaring bankruptcy, by anyone in debt, and by people who want to avoid being in debt. When you reach a debt settlement agreement and draw up a payment plan, it is necessary to know what your living expenses are. Most credit agencies will only ask you for a general estimate, but it is good to know what you will need to budget and keep making payments on in order to survive and/or work. Also, your lawyer and debt help agency will provide you with support and advice on the subject – it is their job to do so.



The following is a list of IRS approved living expenses taken from shepleylaw.com:

• "Electricity


• Trash


• Sew/Water/Septic


• Gas (Home)/Oil


• Phone


• Cell


• Internet


• Food/Groceries


• [Basic]Cable


• Dining Out [on rare occasions]


• Work/School Lunch


• Entertainment


• Clothing


• Health Insurance


• Doctors Co-Pay


• Medications


• Medical Equipment


• Dental Insurance


• Dental Co-Pay


• Veterinary


• Clubs, Sports & Hobbies


• Life Insurance


• Car Insurance


• Gasoline


• Auto Expenses


• Taxi/Parking/Public/Transportation Contribution


• Child Support


• Child Care


• Tuition/School Fees


• Business Expenses/Union Dues


• Beauty/Barber/Nails/Dry Cleaning


• Other (Holidays, Birthday, Cigarettes, etc.)"

While some of the items on this list (such as Beauty and Entertainment) should be done only very rarely, the list should give you a good idea of the areas where you should be spending your budgeted money. Living in debt is hard, frustrating, and difficult but it does not have to be the end. Draw up a list, get something done, and talk to a debt help professional. You might have more resources at your disposal than you thought.

Linked Sites:



Shepleylaw.com post on approved living expenses for people in bankruptcy: Linked Site



2009 IRS Medical and Dental Expenses PDF



2009 IRS Moving Expenses PDF



EBPA post on IRS Eligible Expenses PDF

Bankruptcy Law: What You Need To Know

Until just a few years ago, filing for bankruptcy was fairly easy. Not anymore. When Congress changed the nation’s bankruptcy laws in 2005, many debtors found the new “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,” to be more hindrance than help in overcoming past mistakes and starting anew.


The new law is stricter, featuring more requirements than ever before. It is important for anyone considering filing bankruptcy to understand the following:

Credit Counseling:
It doesn’t matter whether you file for Chapter 7 bankruptcy that discharges your debt or Chapter 13 bankruptcy which enters you into a repayment plan with creditors, anyone filing bankruptcy is required by law to attend credit counseling by a court-approved counseling service.

Chapter 7 Filings:
Under the new law, it is no longer your right to be allowed to file Chapter 7 bankruptcy. If, after proving your income the court determines that you make more than the medium income within your state, you may be required to file Chapter 13 bankruptcy instead and enter into a repayment schedule to pay back all (or most) of your creditors.

Chapter 13:
It is not uncommon to find your repayment schedule a bit more than you can financially handle under a Chapter 13 filing. The amounts you must repay each month are calculated according to specialized guidelines that take into account your income in the last year (not what you make now), and your assets.

Residency:
While everyone must obey federal bankruptcy laws, some states offer their own, more lenient exemptions. The new federal law, however, requires residents to live in a specific state for a specified amount of time (usually at least two years) in order to qualify for any state-exemptions.

Allowable Expenses:
In the past, those  filing bankruptcy could virtually erase their debt and start new in seven years, while continuing to live the lifestyle they’d grown accustomed to. That’s no longer the case.

Under new federal bankruptcy laws, the IRS determines your monthly budget, and what you should be able to repay. Most are forbidden from having cell phone expenses as well as cable TV, high-speed Internet access, movies, meals out with the family, and anything else beyond the minimum allowable expenses as determined by the IRS and the courts.

Bankruptcy isn’t what it used to be, thanks to millions of Americans who abused the system in the past. Once reserved for people in dire financial situations to help them free themselves from excess debt and start fresh, today’s bankruptcy laws are designed t punish those who have been financially irresponsible and force them to pay back most or all of the debt they’ve accumulated. While filing for bankruptcy may have once seemed like a good way out of a bad situation, many consumers are now opting to try and fix their financial woes themselves in lieu of letting the government fix it for them.

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