What is bankruptcy?
Bankruptcy is the elimination or significant reduction in your debt.
WARNING! You should not believe even half of what you read on the Internet. Most of it is either not true or the way the law works in the real world is very different than the way it is presented on the internet.
For example, you will generally read that chapter 7 bankruptcy is some kind of a liquidation bankruptcy. The web is full of descriptions of chapter 7 that tell you that “your nonexempt property is sold for the benefit of creditors.”
You will read everywhere that in Chapter 7 you lose property.
But this is almost never true.
In Ohio there are exemption laws that protect most of the equity that most people have in their property. It is very rare, in actual practice, for anybody to have anything liquidated for the benefit of creditors. But, you’d never guess that from what you read.
Similarly, a chapter 13 reorganization plan seldom pays back all of your debt. In fact, most of the chapter 13 cases that I file pay hardly anything to the unsecured creditors. We mainly file Chapter 13 to keep our homes and pay off our cars. The credit cards, medical bills and other unsecured creditors get little or nothing – just like in a Chapter 7.
Bottom line Bankruptcy is for anyone who needs help with their finances. You shouldn’t be afraid that you will lose all your property, or have to pay back all your debts – it just doesn’t work that way.
Who can file?
Nearly anyone can file, however, there are limitations on re-filing. If you filed a bankruptcy within the last eight years, you may not be able to file a Chapter 7. And, if you filed a bankruptcy in the last four years, you may not be able to file a Chapter 13 get a discharge.
Do I get the pick which chapter I want to file?
Answer: not always.
Sometimes people make enough money to pay a significant portion of their debt, and when this is the case they probably won’t qualify to file Chapter 7. Those folks who are fortunate enough to have that much income will normally have to file a Chapter 13.
You will read on the Internet that if your income is above the median for your family size then you can’t file Chapter 7.
This is not true.
If your income is above the median, all this means is that you will have to fill out a means test to see if you are allowed to file Chapter 7. I file lots people who are over median in Chapter 7 cases.
However, just because you can file Chapter 7 doesn’t mean that chapter 7 is the best chapter for you to file. And this is where I see consumers, and even many attorneys screw up. You should always do a full analysis of the pros and cons of both chapter 7 and chapter 13, even if you are eligible for chapter 7. I frequently see clients who are eligible for chapter 7 but we file chapter 13 because we get a much better result in a chapter 13.
For example, you can’t “strip off” a second mortgage in a Chapter 7. But we can sometimes completely eliminate second mortgages with virtually no payment at all in a chapter 13. And in these cases we also don’t pay the other unsecured creditors, either.
It’s easy to make a very, very expensive mistake if you don’t know what you are doing! Sometimes filing a Chapter 7 will cost you tens of thousands of dollars (and you won’t even know it!).
Which is better, chapter 7 or Chapter 13?
It’s an impossible question to answer.
It’s like asking whether an apple is better than orange.
Many people believe that filing a chapter 7 is better than filing a chapter 13 because paying back nothing is better than paying back all your debt in a payment plan.
But, as noted above, many chapter 13 cases don’t pay anything to the unsecured creditors, just like you don’t pay anything to the unsecured creditors in a chapter 7.
Some people think the filing chapter 13 is better than chapter 7 because they believe that in a chapter 7 they will lose all their property.
But as noted above, most of the time in Chapter 7 nobody loses any property at all.
So, which is better? The answer is – whichever chapter gets you the best result.
Shouldn’t I try to do a debt management program before I resort to bankruptcy?
Many people think, and you will read frequently on the Internet, that bankruptcy is a “last resort.”
The unspoken assumption is that bankruptcy is somehow to be avoided at all costs, even if the cost to the family includes years of doing without things that they need and deserve. This is crazy. Why should you punish yourself and your family? Why should you not be able to do the all the basic and ordinary things that everyone else does? Why should you be an economic slave to the bills when there is a perfectly legal, acceptable alternative?
If you are having financial stress, why would you want to prolong the problem and live with an unrealistically restricted budget – just so you can pay back some of your debt – when there is a much better, perfectly legal alternative. (Answer: You shouldn’t!)
If you qualify for bankruptcy and you can rebuild your credit in a very short period of time, why shouldn’t you? It’s your financial future that should come first!
Who benefits from this sort of thinking? Who promotes these ideas?
Only your unsecured creditors. That’s who. You need to think about this.
You have an obligation to make the best decisions.
The right choices.
The ones that benefit you and your family, not the unsecured creditors.
Will bankruptcy ruin my credit?
While it is true that filing a bankruptcy will lower your credit score. But there are ways to recover your credit very quickly after filing a bankruptcy.
Because I am a certified credit counselor as well as a board-certified bankruptcy specialist, I have created a program that helps my clients recover their credit quickly. We often see scores in the 650 – 700 range within a year of their discharge in Chapter 7.
And, I help my clients who are in Chapter 13 rebuild their credit while they’re actually still in their chapter 13 plan.
The reason that most people think that bankruptcy ruins their credit is because bankruptcy attorneys are generally ignorant about what their clients need to do to rebuild their credit after bankruptcy. Their clients are not given any guidance, and so they don’t improve their credit. And everyone blames the bankruptcy. But it’s not the bankruptcy that is to blame. It’s the lack of a credit rebuild program that is preventing the rapid recovery of credit. And, I have proven this to be true thousands of time in my own bankruptcy practice, where my clients routinely recover credit quickly. They have a program to follow, and those who do follow it, recover their credit.
When the client’s case is over, most bankruptcy attorneys just close the file and leave their clients with a bankruptcy discharge, poor credit, and no plan to rebuild the credit. But if you know what you’re doing, you can rebuild your credit after bankruptcy very quickly. (Now, to be clear, credit rebuilding is NOT part of bankruptcy representation, and it is not something that bankruptcy attorneys usually agree to do in the first place – so it’s not like they are failing to do something that is expected of them. I just make it a practice to help my clients with more than the bankruptcy – this is above and beyond the bankruptcy representation.)
Will I ever be able to buy a car or house if I file bankruptcy?
Yes, of course! But how long it will take depends in large measure on what you do after your bankruptcy to rebuild your credit. As noted above, most folks are given no advice or guidance about how to rebuild their credit after the file bankruptcy. But, if you take the proper steps, have the proper guidance, and actively work to rebuild your credit, you can end up getting a car loan at a good interest rate only about a year after your chapter 7 discharge.
Most people are able, if they follow the steps required to rebuild their credit, to purchase real estate at a good interest rate only 2 to 3 years after their chapter 7 discharge. However, if there has been a foreclosure, most mortgage underwriters require a 3 years wait after the foreclosure.
Rick’s Summary and Comments:
I continue to be amazed at the misleading and flat-out incorrect information that I see all over the Internet. Even information on many attorney websites is incorrect and misleading. Many are filled with outdated boilerplate “legalese” that gives the ordinary reader the wrong impression.
I wonder how many people who really would benefit from bankruptcy, whose lives would be made much, much better, read this crap on the internet and conclude that they don’t want to pursue it. They are afraid to call and so they never get the true facts.
I am sure there are many people who are desperately in need of bankruptcy relief and will never get it, because of this. It’s sad.
How to Solve your Money Problems
It’s simple as 1 – 2 – 3.
If you have significant financial difficulty then you need to have a seasoned specialist, someone who knows all of the possible debt relief options to help you zero in on the one that’s best for you.
Once you have the best solution identified, you need expert help in putting the plan in place and following through.
Finally, after you have your debt under control, you need help rebuilding your credit.
If you do these things, you will:
- keep all of your property,
- pay as little of your debt back as is legally possible, and
- rebuild your credit a lot faster than you probably would’ve been able to if you were in a debt management program or tried to do some other, less effective program to deal with your debt.