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Is Bankruptcy for You?
By W. Stephen Graves, Juris Doctor
Attorney at Law
This article is about deciding whether you need to file bankruptcy, and what to expect if you do have to take that step. Bankruptcy is no laughing matter. It should always be thought of as a last resort, for practical reasons as well as because your conscience tells you it is right to pay your debts.
First, you should bear in mind that bankruptcy erases only debts – it does not erase criminal offenses such as writing bad checks. Still, while you should make every reasonable effort to pay your debts, bankruptcy is sometimes necessary and the law will not hold your filing against you. Neither should you hold it against yourself.
Second, restoring your good credit after a bankruptcy is a long uphill struggle. It is so much of a struggle, in fact, that if your credit rating was the only issue, you might prefer to wait a few years for negative entries to simply “fall off” your credit report. A bankruptcy stays on your credit report for up to ten years, while the maximum time ordinary delinquencies are reported is seven years. Further, without bankruptcy or court judgments in your record, many creditors rely most heavily on your record of payment over the most recent two or three years when deciding whether to grant you credit.
For most people who have reached the point of considering bankruptcy, however, the idea of keeping a good credit rating is like a bad joke. Worry about collection actions, harassing phone calls and making ends meet rightly overrides concerns about an already-ruined credit file. Besides, easy credit is often to blame for getting us into trouble in the first place.
When you consult a lawyer at last, you will learn that for consumer debtors bankruptcy takes two basic forms: forced consolidation with possible reduction of debts under Chapter 13 of the Bankruptcy Code, and straight liquidation under Chapter 7. The choice between Chapter 13 and Chapter 7 will depend on your individual circumstances.
Chapter 7 relief is classic bankruptcy or liquidation. Under Chapter 7 you will repudiate or discharge all of your debts (except debts that are non-dischargeable such as child support), and give up all of your property (except property that is exempted to you such as your retirement program) to your creditors. You then have the chance to reaffirm debts against property you want or need to keep, such as your car, and you walk away with a fresh start. When you speak with a lawyer in detail you will learn about some debts that are flatly non-dischargeable and some that are dischargeable only if they are of a minimum age or constitute “hardship.” You will also learn that most debtors who are on the verge of bankruptcy already have little or nothing left above their exemptions, so they can keep most or all of their property.
Chapter 13 relief is often referred to as a “wage-earner plan.” It is available to individuals with regular income, because it requires periodic payments to creditors to satisfy part or all of their claims. To simplify, under Chapter 13 all of your unsecured debts are combined for purposes of payment in installments stretching over three to five years. You and your lawyer will propose a plan to pay a percentage of your total debt, up to 100%, depending on your projected income and presumed expenses, over the term of your plan. You can include arrearages on your home mortgage or car payment in the plan. Since secured creditors have special entitlements to payment anyway, routinely you will propose to pay your regular home mortgage payment outside the plan. You may also propose to keep your regular car payment outside the plan.
In the past, the choice to file under Chapter 13 and make payments rather than receive full and immediate relief under Chapter 7 was usually based on whether the debtor (1) had non-exempt property which would be lost to creditors in Chapter 7 proceedings or (2) owed arrears on one or more debts against property the debtor wanted to keep, such as a home or car, and could keep the property only by forcing the creditor(s) to accept payment of the arrears over time. Now, since the law changed in October 2005, any debtor with income in excess of certain predetermined guidelines is required to proceed under Chapter 13 unless special circumstances can be shown. The 2005 changes also require debtors to undergo credit counseling before they are allowed to file for relief under the Bankruptcy Code.
If you think you may need bankruptcy relief, call us. Doing nothing to deal with overwhelming debt can be a big mistake. Call us at (210) 738-3230 in San Antonio or (888) 360-6162 outside the 210 area code. Your first consultation is free, and we welcome your calls. At Graves Law Firm you will speak and meet with a lawyer, not a paralegal.