When you’re struggling with significant amounts of debt, declaring bankruptcy can give you the debt relief needed to regain financial solvency. It is, however, a step that can have a significant impact on your credit score and, depending on which chapter you file, require you to surrender assets or commit to a long-term debt repayment plan.
5 Questions for Your Bankruptcy Attorney
Here are 5 questions you should ask yourself before meeting with a bankruptcy attorney. The answers can make it easier to decide on the best resolution for your financial struggles.
1. Is filing for bankruptcy the most beneficial option for you?
This is one of the most important questions. When you’re stressed by mounting bills and demanding calls from creditors and debt collectors, bankruptcy may offer a much-needed escape route.. Your bankruptcy attorney should be able to facilitate that.
While filing has resulted in relief for thousands of Americans, bankruptcy has some cons that should be considered:
- Your filing will appear on your credit report for 10 years
- Bankruptcy becomes part of the public record
- Not all debts are dischargeable (although the amount you repay can be reduced)
- Before filing for bankruptcy, an applicant is required to attend a counseling session with a Department of Justice U.S. Trustee program approved credit counseling credit counseling organization.
Your bankruptcy attorney will help you understand the advantages and disadvantages before you make a decision.
2. What chapter should you file?
Chapter 7 and Chapter 13 are the most common types of bankruptcy for individuals, but they are not created equal.
Chapter 7 is often referred to as a “liquidation” bankruptcy because the court-appointed bankruptcy trustee can take nonexempt assets to pay creditors.
It’s the most commonly filed chapter because this bankruptcy process is quicker, with discharge coming in a matter of months instead of years. However, to qualify for Chapter 7, the debtor must pass a standard called the means test.
If you don’t pass the means test, then Chapter 13 bankruptcy is probably your next option.
Chapter 13 is called the “wage earners” bankruptcy because it allows debtors with a good job and reliable income to repay some of their debts over a three to five-year period, depending on how much they make per month.
3. Can you pass the Chapter 7 means test?
To be allowed to file for Chapter 7, you must pass the means test, which looks at your income and monthly expenses to determine whether you have enough disposable income to repay at least some of your debts. The test compares your income to the state median amount for a household the same size as yours to determine if you can repay some or all of your debts. If you earn more, you will probably have to file Chapter 13 instead.
4. Which of your assets are exempt?
Many people shy away from filing for bankruptcy because they mistakenly believe that they will “lose everything.” While assets, such as non-residential property, boats, RVs, and bank accounts, can be seized if you file Chapter 7, this doesn’t happen very often. Most filers manage to protect their cherished possessions with available state or federal exemptions. Your bankruptcy attorney can provide some necessary guidance in this area. If you do stand to lose more than you feel comfortable with, Chapter 13 will be the better option.
5. Can you afford a Chapter 13 repayment plan?
When you file for Chapter 13, you keep your assets in exchange for agreeing to pay some or all of your debts using a court-approved repayment plan. While this is an ideal option for those who have property they don’t want to lose to Chapter 7 liquidation, you need to be confident that you can comply with the repayment arrangement for at least three years.
If you’re satisfied with the answers to these questions, and decided to go ahead with a bankruptcy, take a little time first to understand its limits. Bankruptcy will not completely clear the slate, and you need to have realistic expectations of the outcome to decide if you still want to go ahead.
5 Things Bankruptcy Cannot Do
When you’re overwhelmed by bills you can’t pay, bankruptcy can give you a fresh start by eliminating most debt (Chapter 7) or condensing it into an affordable repayment plan (Chapter 13). Once you receive your discharge, you’re free to start over.
Before you file, it is important to examine what types of debt you owe, as some obligations are not dischargeable in a Chapter 7 bankruptcy. Others could theoretically be discharged, but only if exceptional circumstances apply. Similarly, some collection actions may be allowed to continue after the automatic stay lifts. To provide you with realistic expectations of what bankruptcy can do for you, below is an overview of five outcomes that bankruptcy cannot achieve.
1. Prevent Lenders from Seizing Collateral for Secured Debt
Secured debt (unlike unsecured debt such as most credit card debt) is backed by collateral, such as a mortgage or auto loan. If you default, the lender can seize the asset, sell it, and use the proceeds to cover the debt. If you file for Chapter 7, you are protected from your obligation to pay a secured debt, but the lender can still seize the asset unless you reaffirm the debt with them.
2. Eliminate Child and Spousal Support Arrears
According to United States bankruptcy laws, domestic obligations like child and spousal support are nondischargeable. If you’re in arrears, you can include them in a Chapter 13 repayment plan, allowing you to catch up while you continue to make regular payments. If you file for Chapter 7, eliminating dischargeable debt can leave you with the extra income needed to become current with your court-ordered obligations.
3. Discharge Debt Incurred Through Fraud
Debts incurred and accumulated through fraud will not be discharged when you file for bankruptcy.
For example, if you maxed out your credit cards on nonessential items prior to filing, your creditors can object to your discharge by filing an adversary proceeding.
4. Eliminate Student Loans (In Most Cases)
Federal and private student loans can only be discharged in a Chapter 7 filing in exceptional circumstances. You have to be able to demonstrate that paying them would cause you undue hardship, which is not an easy standard to meet. In Oklahoma, the principal test for hardship is the Brunner Test, which uses three factors to determine whether you should be allowed to discharge some or all of your loan balance.
- Taking your current income and expenses into account, you would not be able to repay your loans AND maintain a minimal standard of living for yourself and your family.
- Your financial circumstances are unlikely to improve for most of the repayment period.
- You did your best to repay the loans.
5. Eliminate Most Tax Debt
Tax debt is similar to student loans in that it isn’t easy to discharge, but not impossible either. Only income tax debt that is at least three years old may be discharged. Additionally:
- You must not have committed fraud or tried to evade paying taxes.
- You must have filed a return for the tax debt at least two years before the date of your bankruptcy petition. If your return was late, the tax you owe cannot generally be discharged.
- You must have passed the 240-day rule, meaning that the debt was assessed by the IRS at least 240 days before you filed your petition (or has yet to be assessed).
Contact an Oklahoma Bankruptcy Attorney
If the bulk of your debt falls into one or more of the categories above, you might be better off addressing them in a Chapter 13 repayment plan. Consulting with a bankruptcy attorney will help you make the right decision for your individual debt scenario.
At the Law Offices of B. David Sisson, we will help you eliminate or restructure your debt so that you can put your current financial turmoil behind you and get a fresh start.
If some of your debts present special challenges, Attorney Sisson will advise you on the best way to address them, so that they don’t remain a cloud over your financial future. To schedule a consultation today, please contact us.