Bankruptcy is a scary word. Nobody considers themselves the type of person who will have to file for bankruptcy, and it’s something that many people don’t even consider until it’s one of their last options. In my twenty years of practicing bankruptcy law, however, I’ve seen it help thousands of people get back on track financially. When people are considering bankruptcy or struggling with debt, the first step I recommend is to breathe and relax. Bankruptcy is not the end of the world. After that, I highly recommend talking with a bankruptcy attorney – it usually doesn’t cost anything and can help you prepare your strategy before taking any actions. No matter what you do though, it’s important to consider the following:
1. Know Your Assets
Bankruptcy can force the sale of assets you own without your permission. Before considering bankruptcy as a solution you better know the risks of filing. Your home can in some instances be sold. There are laws commonly referred to as ‘homestead’ laws that protect an amount of equity from the reach of your creditors. If you have too much equity you can still file bankruptcy to save your home but it is likely a Chapter 13 repayment plan. I frequently get asked – ‘Can they take my car I need that for work?’ The answer in some cases is YES. Bankruptcy allows you to protect equity in a vehicle as well but that protection is limited. As a general rule, you can shield only about $3,500 of equity in one car. Note that this refers to equity not value. If you have a car worth $10,000 with no loan against it then this car is likely at risk in bankruptcy. If you have a car worth $25,000 but you owe $24,000 on a loan against it – then the car is not at risk in bankruptcy. There are asset protection strategies in bankruptcy that a skilled, experienced lawyer can implement – See Point Number 7 below.
2. What is Your Income?
The bankruptcy system is designed to provide relief to people who cannot pay their debts and maintain a minimal standard of living. For most people this is not an issue and a Chapter 7 bankruptcy can solve their problems. However, some people have high income and still struggle under debt. There is a bankruptcy solution for them too but it frequently involves a chapter 13 repayment plan. If your income is at or near the state median income for your family size, then you may need to explore chapter 13 as a solution. You can find the median income data here.
3. Avoid Transferring Money
The bankruptcy process is administered by a Trustee. This Trustee is given strong legal powers to administer the case including the ability to undo a transfer of your property to a third party. For example, if you pay a substantial amount of money to one creditor within a couple months prior to a bankruptcy filing, the Trustee may be able to get that money back from the creditor. So, if you owe VISA $5,000 and you owe your credit union $5,000 you generally do NOT want to pay off the credit union and then file bankruptcy against VISA. This gets even worse if the transfer is between you and your friends and family. The Trustee can go back up to one year to undo those transfers and can actually file a lawsuit against the person who received your property. Are there defenses and strategies to minimize these risks? Absolutely. That’s why it’s so important to talk to an attorney before filing.
4. Understand Your Debt
The goal of almost every bankruptcy filing is to obtain a ‘discharge’ of your debt. The bankruptcy discharge is the legal term which prevents a creditor from collecting debt from you. But not all debts are discharged in bankruptcy. Generally speaking, student loan debts, restitution debts, governmental obligations and most recent tax debts are not discharged in bankruptcy. There are other exceptions as well. Some creditors may have the right to sue you in bankruptcy court seeking a determination that the debt owed to them will not go away. Unfortunately, the Discharge Order issued by the bankruptcy court does NOT list which debts are discharged and which debts survive. A good bankruptcy lawyer will review your fact pattern to assess your risks and defend a lawsuit brought against you – again, another reason why talking to an attorney beforehand is so critical.
5. Review Your Co-Signers
As stated above, bankruptcy results in a discharge of debt that prevents a creditor from collecting money from YOU. Bankruptcy does not ELIMINATE the underlying debt. Think of the discharge order as a shield between you and a creditor. This is a very important distinction. If you have a co-signer on your debt, then the creditor will be able to go after the co-signer even if you obtained a bankruptcy discharge. The shield protects you but does not protect the co-signer. Chapter 13 bankruptcy does protect a co-signer while the case is open and some people elect to file chapter 13 for this very purpose.
6. Consider Alternatives to Bankruptcy
Bankruptcy is one solution to a debt problem but sometimes it is not the best solution. If you owe one creditor then it may be possible to negotiate a settlement of the debt. If you are on a fixed income and have no assets then you may be ‘judgment proof’ and a good lawyer can use consumer protection strategies to keep your creditors off your back. Maybe you have defenses to collection of the debt and should consider defending a collection lawsuit. Perhaps you owe taxes but the taxing agency can be convinced the tax is uncollectable. Sometimes there is no choice and a bankruptcy should be filed, but you should educate yourself on alternatives so that you know bankruptcy is the best solution.
7. Hire the Right Attorney
Some people file bankruptcy on their own or with the help of a Paralegal. You need to know that it is against the law for a Paralegal to give you legal advice – only an attorney licensed by the State can give legal advice. Most attorneys who practice bankruptcy will give you a free consultation of some sort. Go interview the attorney and make sure you are comfortable with them as a person and confident that they know what they are doing. How many bankruptcy cases has your attorney filed in their career? Do you want to be the first patient of a new heart surgeon or would you rather be the 1000th patient? Many believe that bankruptcy is a simple process but like anything the devil is in the details and there are varying degrees of ‘success’. Some bankruptcy attorneys have gone through the difficult process to become Nationally Certified as Bankruptcy Specialists – visit www.abcworld.org to see if the attorney you are meeting with has this prestigious certification.
Regardless of how much debt you’re facing or how close you are to filing for bankruptcy, talking to an attorney is rarely a bad idea. Many of my clients have come into my office burdened with loads of stress. After talking it out and putting together a plan, however, they usually leave feeling a lot more confident on how to deal with their issues.
Michael D. O’Brien is the Managing Partner of Michael D. O’Brien & Associates, P.C. and also supervises the Bankruptcy Practice Group. An Oregon native, Mike graduated from Wilson High School and the University of Oregon where he earned a Bachelor of Science Degree with a major in History. In 1994, Mike earned his Juris Doctor from University of Wisconsin Law School.