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What you should know
about bankruptcy

What is bankruptcy?

Bankruptcy is a legal process arising from federal laws, the purpose of which is to provide individuals and businesses protection from their creditors.  The goal is to give people a fresh start.   In some cases that means eliminating the legal obligation to pay off debts entirely.  In other cases, it may mean an opportunity to get current on mortgages and car loans or to reduce the amount owed on a debt.

Will filing bankruptcy stop creditors from calling me?

Yes, filing bankruptcy immediately stops most creditors from seeking to collect debts, at least until it is determined what will happen to those debts through the bankruptcy process.

Even before you file for bankruptcy, federal law requires collection agencies to stop their collection efforts after they receive a written request to stop.  One of the services of our office provides is to prepare and send such letters to credit agencies on behalf of our clients.

Is bankruptcy right for me?

While bankruptcy may be your best option, it may not be appropriate for some people.  Let one of our bankruptcy attorneys evaluate your case and help you to decide if bankruptcy is a good solution to your debt problems.  You should not think of bankruptcy as a last option, to be avoided at all costs.  In fact, it may be the best choice for you.

There are, of course, some things that bankruptcy cannot do.  For example, while bankruptcy may force a secured creditor to take payments over time, if you keep the secured asset (e.g., car, house, etc.) you still have to pay for it.  Also, some types of debt receive special treatment and are usually not dischargeable, such as child support, alimony, most student loans, most taxes, criminal fines, and restitution orders.

Can I still file for bankruptcy?  I heard the rules changed a few years ago.

In 2005, Congress made changes to the bankruptcy laws that make the process more complicated.  The goal of the changes were to stop wealthy individuals from abusing the protection afforded by bankruptcy.  However, most people still have the basic right to file bankruptcy and to obtain the benefits of bankruptcy.

What about those credit repair services?

Although some consumers suffering a financial crisis may be helped by credit counseling, unfortunately there are many people who are out to rip you off by offering credit counseling and credit repair services.  Be very careful to avoid scams and costly debt consolidation plans, as most of these will only make your debt situation worse.  Even a good agency will not be able to help you much if you are already too deep in financial trouble.

But I heard that I have to go through credit counseling before I can file bankruptcy.  Is this true?

Although it is true that you are required to go through credit counseling before you can file for bankruptcy, this is to consider your options first.   You are not required to sign up for a debt management plan with a credit counselor, and in fact it may be a terrible idea for you to do so.  And, just because an agency is approved credit counselor, this does not mean that they are a good credit counselor.  Some agencies are legitimate, but many are not.

Many credit counselors may offer you a debt management plan ("DMP").  The way a DMP works is that you send money to the counseling agency each month, and then they distribute it to your creditors.  You pay them for this service.  While this may be helpful to some, it is a bad idea for others.  Credit counselors  may try to pressure you into signing up for a debt management plan even when it doesn't make sense for you.  You should not consider a DMP if making the monthly payment will mean that you cannot pay for your rent or mortgage, utilities, food, prescriptions and other necessities. 

There are approved agencies that meet the legal requirements for bankruptcy counseling that do not offer debt management plans.  Remember, if you sign up for a debt management plan that you can't afford, you may end up in bankruptcy anyway. 

Is a consolidation loan or a reverse mortgage a viable alternative for me?

It's usually a very bad idea to mortgage your home in order to pay off credit cards or other unsecured debts.  This is because if you continue to have financial problems, you risk losing your home.  If you are having difficulty making your current mortgage payment and the new mortgage will provide a lower payment and better terms, then it may make sense under those circumstances.

A reverse mortgage allows older homeowners to borrow on the equity in their homes.  It is not the same as a traditional mortgage, and the amount of money you owe increases over time.  Reverse mortgage options can be confusing, and numerous considerations must be given.  Before applying for a reverse mortgage, talk to an impartial housing counselor.

I'm confused about all these "chapters".  What type of bankruptcy should I file?

While there are several chapters of the bankruptcy code under an individual may file, most people will file under Chapter 7 (so-called "liquidation") or Chapter 13 (commonly referred to as "reorganization").  Chapter 11 can be filed by both individuals and businesses, but they are more complicated.  Other chapters apply for individuals with family farmers, family fishermen, and property in other countries.  Our office can help you determine whether you can file under Chapter 7 or Chapter 13.  If you need to file under a different Chapter, we will gladly refer you to an attorney who handles those.

How much does it cost to file bankruptcy?

In addition to attorneys' fees, you will need to pay for the court filing fee.  In 2009, the filing fee under Chapter 7 is $299, and under Chapter 13 it is $274.  You may be able to pay this installments, and in some circumstances a Chapter 7 filing fee may be waived.

Also, you will need to pay for both the pre-filing credit counseling, which usually costs around $35 - $50, and a post-filing course in personal finances which varies in price.

For further information about bankruptcy options, please call our office to set up a consultation.  Each case is personally handled by one of our attorneys.