Probably the biggest misconception people have is that they won’t have a life after bankruptcy, but our clients actually end up being remarkably happy and prosperous after going through the process and getting rid of the debt, so they can then embark on a new business or financial plan.
The second biggest misconception is that they will lose everything, whereas the retirement accounts and some equity in a house can all be protected or considered exempted assets in the bankruptcy, which means they won’t necessarily lose everything. Our goal is to make it so that our client does not lose anything and we almost always are able to achieve that result.
Bankruptcy is something people should certainly avoid if they reasonably can, but it can be the best move if it makes sense economically. After a careful analysis with a couple of advisors, if it makes sense, they should do it and not look back.
Often, a person’s credit is better after the bankruptcy because it shows discharged debt as opposed to it showing all the past-due debts before the bankruptcy.
One other way they may find out is if there was a wage garnishment, in which case they will have to notify their employer to stop the garnishment anymore.
The success rate is far less than with a lawyer, in part because there is a kind of hierarchy. You can try and do it yourself, or hire a paralegal or you can hire a lawyer who just started, but the best choice is to hire an attorney who has made this their career and who has years of experience, and who may even be a trustee.
I make the analogy that it’s like driving a car; if you drive too fast, you accept the greater risk of an accident, and if you buy a lot of stuff on credit, you accept a lot of financial risk you have a greater chance of getting into an accident or needing to file for bankruptcy. Of course, just as a lot of slow drivers who get into accidents, many people who are very conservative financially still need to file bankruptcy.
People should be careful when negotiating debts because there could be tax implications. According to the government, if someone owed $8,000 and they settled it for $5,000, they received $3,000 in benefit, which is called “forgiveness of indebtedness” and the creditor will have to send that person a 1099C for that $3,000, which they will have to include on their tax return.
Sometimes the person won’t have to pay tax on it, especially if they’re insolvent, because there are ways for an accountant to can minimize the effect on the tax return. Anyone with any concerns about this issue should take with their accountant.
Current bankruptcy law also requires that before someone comes out of bankruptcy, they have to take a financial management class, which is similar to a traffic school. I think this has great value for people, just as going to traffic school has great value to people, because even if they know most of it already, they would usually walk away feeling like they actually learned a couple of things.
Most bankruptcy attorneys take payments on their fees but hold off on filing the case until they had been paid in full, since if the client owed them money when they filed, they would not have to pay the balance after the filing. Any attorney of any quality will insist on payment in full before the case is filed.
Chapter 13 is called a wage earner’s plan or adjustment of debts, which means a debtor will propose a repayment of debt, either in full or in part, over a period of 3-5 years and they will have to make monthly payments for that long.
We want to emphasize the trustee experience and the experience of being devoted to our practice for so many years, as well as our success rate and our emphasis on helping people after they have gone through the bankruptcy, because I think it’s important that they don’t end up back in the same boat. For that reason, I give every client a CD, “10 ways to prosper and avoid bankruptcy in the future.”
Bankruptcy judges oversee the trustees and make all of the legal decisions in a case.
A third reason to file under Chapter 13 is if they’re afraid of losing an asset in a Chapter 7, because we can allow them to keep that asset by repaying the value of that asset into the bankruptcy over the 3-5 year period. Another reason comes if they had a huge moral compunction about wanting to repay and delay their fresh start. I’m not sure this reason makes legal sense, but if someone is driven by that moral compunction, I’m completely fine with that.
About 15-20 years ago, Congress had a sense that people with the ability to repay something were filing Chapter 7, rather than Chapter 13. Obviously, if a person could make all their debt go away in a 4 month proceeding, why would they want to repay over a 3-5 year period of time in a Chapter 13? When Congress finally understood this, they looked for ways to “encourage” people to file Chapter 13 and make payments over time. They came up with a “means test”, which looks at the person’s income and expenses. Someone who doesn’t pass the means test won’t be allowed to file a Chapter 7; they will make them convert to a Chapter 13 plan or dismiss the case.
Chapter 13 is great to repay delinquent mortgage payments back over time, pay delinquent taxes back over time or for people with higher incomes. However, without one of these issues, and all other things being equal, a person is usually better to file a Chapter 7 and start fresh sooner.
California has certain defined amounts, while some states like Nevada have $540,000 as its homestead exemption amount, whereas Tennessee has a $14-15,000 exemption amount; it does vary greatly from state to state.
They further said that, if someone wants bigger homestead, like in Texas and Florida, they would have to be there for about 3-and-a-half years, instead of just two years, to make it difficult for people to shop for homesteads.
Which set of exemptions and which state’s exemptions someone is entitled to has become a very complicated analysis because there is a lot more to it, although this is a highlight.