Bankruptcy Basics
Bankruptcy is a new world for most people, full of unfamiliar terms and processes. If you’re thinking of filing bankruptcy, you will probably run across some of these terms.
A Chapter 7 bankruptcy is a basic case. The fees are due before filing, and you are generally discharging debts such as credit cards, medical bills, and personal loans. You continue to pay secured debts if you want to keep the property securing the loan. In some cases you will reaffirm debts and treat them as if no bankruptcy was filed against them.
A Chapter 7 bankruptcy will not correct or fix a default in payments if you are behind on a car or house loan. It can be very effective if planned out correctly. It will be very disappointing if it is done incorrectly as you could lose assets or worse. Please go to Bankruptcy University if you need more information or contact us and we will explain things in detail.
A Chapter 13 is often a more complex case. In this office the attorney fees are usually paid through the case (no attorney fees upfront) and you are making a payment into a bankruptcy trustee for anywhere from 36 to 60 months. You are usually filing this kind of case because you are trying to keep a car, a house, pay tax debt, or stop a student loan garnishment.
Sometimes you need relief and have a regular source of income but no upfront fees so you file a Chapter 13 and pay your attorney through the case. A Chapter 13 bankruptcy is generally more expensive than a Chapter 7 in terms of attorney fees but often far less expensive in terms of potential loss of assets and it is far more flexible and powerful.
A personal bankruptcy can stop a garnishment. A garnishment is a court order or administrative order that allows a creditor to seize money to pay a debt they are owed. They can garnish your wages or your bank account. Normally a garnishment requires a creditor to obtain a judgement against you in the state court or federal court and it must be served on your employer or your bank.
In a few cases the garnishment can be issued by a state agency like the state Department of Revenue or a federal agency like Department of Education without a judgement. A garnishment for student loans from the federal government is normally 15%.
A bank account garnishment on a state court judgement can take 100% of what is in your account up to what is owed. A bankruptcy can lift a creditor garnishment for medical bills, credit cards, personal loans, payday loans and other similar debts.
A bankruptcy can stop a repossession. When you fall behind on your car payments the lender has a right to repossess the automobile after giving proper notice. It does not matter if it is the original loan to purchase the car, a refinance, or a title loan.
If you file a bankruptcy, you can stop the lender from repossessing the vehicle and force them into a repayment plan. If they have already seized the vehicle and it has not been sold at auction yet you can force them to return the vehicle and put them in a repayment plan.
Because of the danger of losing the vehicle permanently, you must act quickly when you know there is a pending repossession or if the vehicle has already been seized. If a car is sold at auction we cannot get it back and outside of bankruptcy you will be responsible for the amount still owing on the loan after reducing for the auction sale price.
You can use a bankruptcy to stop a foreclosure and even catch up on all the missed payments. In order to save the home you must file the bankruptcy before the foreclosure sale occurs.
During the bankruptcy you will have to make the ongoing payments on the house through the Chapter 13 bankruptcy plan and you will have to make up the missed payments over a 3 to 5 year period of time.
A bankruptcy can stop a collections lawsuit. A lawsuit is a method used mostly by creditors to try and collect debts through the legal system. Most creditors will not file a lawsuit until you are several months behind on your debts. Often you receive a letter from an attorney 30 days before the lawsuit is filed.
A petition is filed in the state or federal court and you are normally given notice and an opportunity to respond. Many times people are sued and never get notice of the suit. Many lawsuits only require that the notice go to the last address you were at and that is received by someone living there.
Once a judgement is obtained the creditor can use it to force you to come to court to be questioned. It can also be used for garnishments. Most judgments for debts can be debt collection can be wipe out in a bankruptcy case.
A title loan is a secured loan against your vehicle. In many cases, the interest rates on title loans are near or above 300%. If you fall behind on a title loan the lender has a right to repossess your vehicle. A chapter 13 bankruptcy can force the lender to take a far lower interest rate and you still retain the vehicle. This will allow you to pay down on the loan rather than have the payments go to the interest.
A typical interest rate for chapter 13 bankruptcy cases on secured loans is 5%. If you want to keep your vehicle and lower the interest rate on the title loan please contact us immediately.
A tax refund in a bankruptcy is something that you and your attorney must discuss prior to filing. You need to know that the refund can be considered part of your bankruptcy case even if you have not received it yet. This includes your next year’s tax refund. In many cases you want to get your tax refund and spend it properly before filing the bankruptcy.
In some cases you need to wait for the refund so you can cover your fees in a Chapter 7 bankruptcy or so you can make sure you get the best use of the money rather than having to pay it over to the bankruptcy trustee. Your lawyer can help you determine how to spend your tax refund before filing. After you file a bankruptcy you will have to give an accounting of how you spent your tax refund. If you are considering a bankruptcy please contact us and we can help you plan things out.
Exemptions can help protect your homestead and your personal property from seizure in bankruptcy. Rules vary by location, but often many of your day to day personal belongings are protected by law.
Your attorney will go over your specific situation and how the laws in your area apply in your case. Again, rules vary location, so please contact us to review details of your specific situation.
If you have moved to the jurisdiction where you intend to file within the last few years, this may also affect which exemptions you are able to use. You should always contact us to go over your exemptions in bankruptcy if you have any questions at all.
A debt management plan is used to pay your creditors back over a period of years outside of Court oversight or protection. If you are interested in a debt management plan, there are several options through non-profit agencies. They will negotiate with your creditors to get the interest rates reduced on your debts and put them into a payment plan.
In most cases, your creditors can still make negative reports on your credit report, although some of them may agree to stop reporting. A debt management company will charge a monthly fee tacked onto the bill. You should do a budget to make sure you can afford the payment. A debt management plan is not controlled by the court, there is no judge, and your creditors do not have to agree to it.
A debt management plan will not include car loans, home loans, taxes and numerous other types of debt.
Unlike a debt management plan, you are not paying your creditors monthly in a debt settlement program. It is most commonly done with credit cards. You can of course negotiate a settlement on your debts without hiring anyone. Typically, a creditor wants a lump sum to pay off the settlement. When you hire someone to do it for you the company has you pay in money each month that they set aside to try and use to settle your debts. It can take years to build up enough funds for the company to settle even one debt.
When they have enough money they try to get the creditor to settle for something in the range of 50% of the amount owed. Debt settlement plans fail more often than they succeed because they are voluntary and not all of the your creditors will agree to settle.
In some cases if you settle some of your obligations and then are sued by one of the creditors you may find yourself forced into bankruptcy despite your best efforts even after spending a substantial amount of money on the settlement program. The forgiven debt amount may also be considered income for tax purposes resulting in a tax obligation to the IRS. Debt settlement does not work for ongoing car or home loans and most other secured debt or tax obligations.
Your attorney will be required to do mandatory fee disclosures to the court. The fees must be reasonable and the court can reduce them if they are not appropriate. There are two very different ways to pay fees in a bankruptcy case.
In Chapter 7 cases the attorney fees are paid before you file the case. In almost all Chapter 13 cases they are paid through the payments made into the bankruptcy plan. If you need a Chapter 7 bankruptcy and you qualify you will have to find a way to come up with the money before hand. A typical attorney fee in a Chapter 7 is around $1,500. There is also a filing fee of $338 that will be on top of the attorney fees. If you need a Chapter 13 bankruptcy the fees will typically be in the range of $2,800 all the way up to $4,500 but none of them will be due before filing.
