Federal bankruptcy protection is a highly valuable tool. Unfortunately, many misinformed consumers wrongfully choose bankruptcy, though there are many alternative tools to consider before making the decision to damage your credit for TEN YEARS. Possibly penalizing your opportunities in the future with prospective employers, insurance companies and of course all lenders. Many employment applications ask if you have ever filed for bankruptcy. In my profession, it is the kiss of death. Every insurance company that I represent has conducted a background check on me, and they will find history of any bankruptcy (whether it is disclosed or not). Fortunately, I have never been in a position to need to consider filing bankruptcy.
So what is bankruptcy?
There are two types of bankruptcy, liquidation (chapter 7) and reorganization (chapter 13). In liquidation your nonexempt assets are used (if any) to pay off any secured creditors and then unsecured creditors. On the other hand, reorganization allows you to seek court protection to halt collection activity, which in turn can possibly aid the ability to create a payment plan. Not all debts are discharge-able like some student loans, recent income taxes, child support and secured property. You can stop creditor harassment and stall foreclosure, but there will be an eventual need to pay for secured property, perhaps under different terms. See nolo.com for more details. Filing bankruptcy when you have little or no assets that are non-exempt will ruin your credit unnecessarily for ten years. There is very little an unsecured creditor can do to you.
So, what is the big lie?
Many consumers file bankruptcy to get rid of credit card debt, medical bills, and end the annoying letters and phone calls. In most cases if you cannot pay your credit cards, you will not be able to pay a judgment either. Creditors know this and are reluctant to risk throwing good money after bad by paying a load of legal fees.
WARNING
Even though it is highly unlikely in most cases, unsecured creditors can sue you. They have four years from the date of default to take said action. After four years they are barred from suing. Even if you get sued, the creditor must produce every bit of paper to prove what you owe – another huge hassle. If a suit is brough against you, you must be certain to file an answer or the courts may issue a default judgement, which is hard to overcome.
It has been my experience that people seeking to file bankruptcy simply want to avoid the debts, letters, threats, and phone calls. Here is the good news: Federal law strictly guards what creditors can and cannot do. For example, they can’t call you at work, at home after certain hours and most off all you can demand that they have no contact with you by sending them a “Cease and Desist” letter. If a creditor or collection agency harasses you or continues to contact you after you have sent them a “Cease and Desist” letter, they are liable to you in the amount of $500 per violation.
To summarize, if you have little non-exempt assets (life insurance is exempt, your home is exempt, IRA’s and retirement plans are exempt and a certain amount of personal property which varies by state), bankruptcy could be a huge mistake. You can stop creditors from contacting you and there is not much they can do. Also, money in a checking account in your name is fair game. A judgment creditor can force you to disclose all your accounts. However, they cannot stop you from changing banks after you make this disclosure. Though this is not an article about how to avoid paying your bills, bankruptcy is a decision you must make, but you must have all the facts to make the correct choice. A bankruptcy lawyer does have an incentive to convince you to file bankruptcy – and perhaps you should. For more information or a highly discounted legal referral in your state please contact me at 512-464-1110 or david@pcfo.net