Bankruptcy remains a consumers’ best device for eliminating burdensome debt and getting a fresh start. The television is filled with credit counseling or debt management firms making claims that they are the best means to get back to financial stability but these debtor organizations fall short of helping consumers in an effective way. Most consumers find they are further in debt after using these debt management services, and left to file bankruptcy with even more debt after paying hundreds or thousands, with no reduction in their debt.
There have been many news reports suggesting that changes to the bankruptcy law passed by Congress in 2005 prevent many individuals from filing bankruptcy. It is true that these changes have made the process more complicated. But the basic right to file bankruptcy and most of the benefits of bankruptcy remain the same for most individuals.
What Is Bankruptcy?
Bankruptcy is a legal proceeding in which a person who cannot pay his or her bills can get a fresh financial start. The right to file for bankruptcy is provided by federal law, and all bankruptcy cases are handled in federal court. Filing bankruptcy immediately stops all of your creditors from seeking to collect debts from you, at least until your debts are sorted.
What Can Bankruptcy Do for Me?
Bankruptcy may make it possible for you to:
- Eliminate the legal obligation to pay most or all of your debts. This is called a “discharge” of debts. It is designed to give you a fresh financial start.
- Stop foreclosure on your house or mobile home and allow you an opportunity to catch up on missed payments. (Bankruptcy does not, however, automatically eliminate mortgages and other liens on your property without payment.)
- Prevent repossession of a car or other property, or force the creditor to return property even after it has been repossessed.
- Stop wage garnishment, debt collection harassment, and similar creditor actions to collect a debt.
- Restore or prevent termination of utility service.
- Allow you to challenge the claims of creditors who have committed fraud or who are otherwise trying to collect more than you really owe.
- Discharge IRS and State income tax debt that are more than 3 years old.
What Bankruptcy Can Not Do
Bankruptcy cannot, however, cure every financial problem. Nor is it the right step for every individual.
In bankruptcy, it is usually not possible to:
- Eliminate certain rights of “secured” creditors if it has taken a mortgage or other lien on property as collateral for a loan. Common examples are car loans and home mortgages. However, you can force secured creditors to take delinquent payments over time in the bankruptcy process and bankruptcy can eliminate your obligation to pay any additional money on the debt if you decide to give back the property. But you generally cannot keep secured property unless you continue to pay the debt.
- Discharge types of debts singled out by the bankruptcy law for special treatment, such as child support, alimony, most student loans, court restitution orders, certain criminal fines, and most taxes.
- Protect cosigners on your jointly owned debts. When a relative or friend has co signed a loan, and the consumer discharges the loan in bankruptcy, the cosigner may still have to repay all or part of the loan.
- Discharge debts that arise after bankruptcy has been filed.
What Different Types of Bankruptcy Cases Should I Consider
There are four types of bankruptcy cases provided under the law:
- Chapter 7 is known as “straight” bankruptcy or” liquidation” It requires an individual to give up property which is not “exempt” under the law, so the property can be sold to pay creditors.
- Chapter 11, known as “reorganization,” is used by business and a few individuals whose debts are very large.
- Chapter 12 is reserved for family farmers and fisherman.
- Chapter 13 is a type of “reorganization,” used by individuals to pay all or a portion of their debts over a period of years using their current income.
Most people filing bankruptcy will want to file under either chapter 7 or chapter 13. Either type of case may be filed individually or by a married couple filing jointly.
Chapter 7 (Straight Bankruptcy)
In a bankruptcy case under chapter 7, you file a petition asking the court to discharge your debts. The basic idea in a chapter 7 bankruptcy is to wipe out (discharge) your debts in exchange for your giving up property, except for “exempt” property which the law allows you to keep. In most cases, all of your property will be exempt. But property which is not exempt is sold, with the money distributed to creditors.
If you want to keep property like a home or a car and are behind on the mortgage or car loan payments, a chapter 7 case probably will not be the right choice for you. That is because chapter 7 bankruptcy does not eliminate the right of mortgage holders or car loan creditors to take your property to cover your delinquent debt. If your income is above the median family income in your state, you may have to file a chapter 13 cases (the Michigan median family income for a family of 4 in 2020 is approximately $91,986.00.
Higher-income consumers must fill out “means test” forms requiring detailed information about their income and expenses.
If the forms show, based on standards in the law, that they have a certain amount left over that could be paid to unsecured creditors, the bankruptcy court may decide that they cannot file a chapter 7 case, unless there are special extenuating circumstances.
Chapter 13 (Reorganization)
In a chapter 13 case you file a “plan” showing how you will pay off some of your past-due and current debts over three to five years. The most important thing about a chapter 13 case is that it will allow you to keep valuable property–especially your home and car– which might otherwise be lost, if you can make the payments which the bankruptcy law requires to be made to your creditors. In most cases, these payments will be at least as much as your regular monthly payments on your mortgage or car loan, with some extra payment to get caught up on the amount you should consider filing a chapter 13 plan if you:
- own your home and are in danger of losing it because of money problems
- are behind on debt payments, but can catch up if given some time
- have valuable property which is not exempt, but you can afford to pay creditors from your income over time.
- strip away liens on the property that causes the home to be under water (negative equity).Thus, discharge a second or third mortgage from the property.
- You will need to have enough income in chapter 13 to pay for your necessities and to keep up with the required payments as they come due.
What Does It Cost to File for Bankruptcy?
It now costs $335 to file for bankruptcy under chapter 7 and $310 to file for bankruptcy under chapter 13, whether for one person or a married couple. Attorney fees range from $1,500 to $1,700 for chapter 7 and the fees are higher for a chapter 13.
What Must I Do Before Filing Bankruptcy?
You must receive budget and credit counseling from an approved credit counseling agency within 180 days before your bankruptcy case is filed. The agency will review possible options available to you in credit counseling and assist you in reviewing your budget. Different agencies provide the counseling in-person, by telephone, or over the Internet. If you decide to file bankruptcy, you must have a certificate from the agency showing that you received the counseling before your bankruptcy case was filed.
Most approved agencies charge about $30-$50 for the pre-filing counseling. However, the law requires approved agencies to provide bankruptcy counseling and the necessary certificates without considering an individual’s ability to pay. If you cannot afford the fee, you should ask the agency to provide the counseling free of charge or at a reduced fee. Our office has a list of competent pre-filing counselors that range about $ 8.95 to $ 15.00.
Some of the approved agencies offer debt management plans (also called DMPs). This is a plan to repay some or all of your debts in which you send the counseling agency a monthly payment that it then distributes to your creditors. Debt management plans are rarely helpful for consumers. For most, they are a terrible idea. The problem is that many counseling agencies will pressure you into a debt management plan as a way of avoiding bankruptcy whether it makes sense for you or not. Importantly, glitch in the repayment schedule adds exorbitant fees and reinstating debt forgiven under the plan. It is important to keep in mind these important points:
- Bankruptcy is not necessarily to be avoided at all costs. In many cases, bankruptcy may actually be the best choice for you;
- If you sign up for a debt management plan that you can’t afford, you may end up in bankruptcy anyway (and a copy of the plan must also be filed in your bankruptcy case)
- There are approved agencies for bankruptcy counseling that do not offer debt management plans.
It is a good idea for you to meet with Rory Dixon Mortimer before you receive the required credit counseling. Unlike a credit counselor, who cannot give legal advice, Mr. Mortimer can provide counseling on whether bankruptcy is your best option.
What Property Can I Keep?
In a chapter 7 case, you can keep all property which the law says is “exempt” from the claims of creditors. In some states, you are given a choice when you file bankruptcy between using either the state exemptions or using the federal bankruptcy exemptions. You may use a special federal bankruptcy exemption that protects retirement funds in pension plans and IRAs.
In Michigan, you are allowed to use the federal bankruptcy exemptions, they include:
- $25,150 in equity in your home
- $4,000 in equity in your car
- $625 per item in any household goods up to a total of $13,400;
- $2,750 in things you need for your job (tools, books, etc.)
- $1,325 in any property, plus part of the unused exemption in your home, up to $12,575
- Your right to receive certain benefits such as social security, unemployment compensation, veteran’s benefits, public assistance, and pensions– regardless of the amount.
- Pension, profit sharing and retirements plans, including IRA’s are fully exempt from creditor claims.
The amounts of the exemptions are doubled when a married couple files together. You also have the right to use the Michigan exemptions which may be more generous than the federal exemptions for those married debtors with substantial real estate holdings. Thus, real estate owned by married couples may be totally exempt from all of the claims, no matter how large, owed by a married person separately.
Michigan also allows its own exemptions in lieu of the federal exemptions above. The state allows: $ 38,225 for the home and $ 57,350 for disabled persons or filers over 65, and if the real estate is owned by both spouses all equity is exempt, except against the joint debts of the spouses. The motor vehicle is $ 3,525 and tools of the trade are $ 2.550. Michigan also allows its own exemptions in lieu of the federal exemptions above. There are many other assets subject to exemption, such as household goods, social security, workers compensation, and retirement and IRA monies.
In determining whether property is exempt, you must keep a few things in mind. The value of property is not the amount you paid for it, but what it is worth when your bankruptcy case is filed. Especially for furniture and cars, this may be a lot less than what you paid or what it would cost to buy a replacement.
You also need to look at your equity in property. This means that you count your exemptions against what you owe on mortgages or liens. For example, if you own a $50,000 house with a $40,000 mortgage, you have only $10,000 in equity. You can fully protect the $50,000 home with a $10,000 residential exemption. Keep in mind, a married couple may have equity of $ 50,300.00 in their home under the Federal exemptions, up to $ 57,350 in the Michigan exemptions (over 65 or disabled), and total exemption on debt only owned by one spouse.
While your exemptions allow you to keep property even in a Chapter 7 case, your exemptions do not affect the right of a mortgage holder or car loan creditor to take the property to cover the defaulted debt. In a chapter 13 case, you can keep all of your property if your plan meets the requirements of the bankruptcy law. In most cases you will have to pay the mortgages or liens as you would if you didn’t file the bankruptcy.
What Will Happen to My Home and Car If I File Bankruptcy?
In most cases you will not lose your home or car during your bankruptcy case as long as your equity in the property is fully exempt. Even if your property is not fully exempt, you will be able to keep it, if you pay its non-exempt value to creditors in a chapter 13.
However, some of your creditors may have a “security interest” in your home, automobile or other personal property. This means that you gave that creditor a mortgage on the home or put your other property up as collateral for the debt. Bankruptcy does not make these security interests go away. If you don’t make your payments on that debt, the creditor may be able to take and sell the home or the property, during or after the bankruptcy case. Married owned real estate has powerful protections from the creditors of only one of the spouses. You may be able to keep the marital home with even hundreds or thousands of debt owed to unsecured creditors by only one spouse.
In a chapter 13 case, you may be able to keep certain secured property by paying the value of the property rather than the full amount owed on the debt. Or you can use chapter 13 to catch up on back payments and get current on the loan.
There are also several ways that you can keep collateral or mortgaged property after you file a chapter 7 bankruptcy. You can agree to keep making your payments on the debt until it is paid in full. Or you can pay the creditor the amount that the property you want to keep is worth. In some cases involving fraud or other improper conduct by the creditor, you may be able to challenge the debt. If you give the finance company collateral over your household goods for a loan (other than a loan to purchase the goods), you can strip the lien and keep your property without making any more payments on that debt.
Can I Own Anything After Bankruptcy?
Yes! Many people believe they cannot own anything for a period of time after filing for bankruptcy. This is not true. You can keep your exempt property and anything you obtain after the bankruptcy is filed. However, if you receive and inheritance, or property settlement, or life insurance benefits within 18 days after filing for bankruptcy, that money or property may have to be paid to your creditors if the property or money is not exempt.
Will Bankruptcy Wipe Out All My Debts?
Yes, with some exceptions. Bankruptcy will not normally wipe out:
- Money owed for child support or
- Most fines and penalties owed to
- Most taxes and debts (within two years of filing) incurred to pay taxes which cannot be discharged
- Student loans unless you can prove to the court that repaying them will be an
- Debts not listed on your bankruptcy
- Loans you got by knowingly giving false information to a creditor, who reasonably relied on it in making you the loan;
Debts resulting from “willful and malicious” harm
- Mortgages and other liens which are not paid in the bankruptcy case (but
bankruptcy will wipe out your obligation
to pay any additional money if the
property is sold by the creditor)
Will I Have to Go to Court?
In most bankruptcy cases, you only have to go to a proceeding called the “meeting of creditors” to meet with the bankruptcy trustee and any creditor who chooses to come (rarely does a creditor appear).Most of the time, this meeting will be a short and simple procedure where you are asked a few questions about your bankruptcy forms and your financial situation. This meeting is held in Bay City for the eastern side of the state and in Traverse City for the western side of the state and normally takes approximately 5-10 minutes. Occasionally, if complications arise, or if you choose to dispute a debt, you may have to appear before a judge at a hearing. If you need to go to court, you will receive notice of the court date and time from the court and/or from your attorney.
What Else Must I Do to Complete My Case?
After your case is filed, you must complete an approved course in personal finances. This course will take approximately one hour to complete. Many of the course providers give you a choice to take the course over the Internet usually by watching a video, or over the telephone. We can give you a list of organizations that provide approved courses, or you can check the website for the United States Trustee office at www.usdoj.gov/ust/. If you cannot afford the fee, you should ask the agency to provide the course free of charge or at a reduced fee. In a chapter 7 case, you should sign up for the course soon after your case is filed. If you file a chapter 13 case, you should ask your attorney when you should take the course.
Will Bankruptcy Affect My Credit?
For most people, their credit score improves with filing bankruptcy. Unfortunately, if you are behind on your bills, your credit may already be bad. Bankruptcy will certainly not make things any worse. Typically, after filing Chapter 7, the debtor’s score goes up 50 to 100 points .Normally, in one year you are able to buy homes and vehicles at competitive interest rates.
The fact that you’ve filed a bankruptcy can appear on your credit record for ten years from the date your case was filed. But because bankruptcy wipes out your old debts, you are likely to be in a better position to pay your current bills, and you will be better able to get new credit.
Once you have a lot of delinquent debts “new” creditors will be very hesitant to loan you money for fear of predatory conduct of your delinquent creditors. The new creditors are unlikely to give you financing when old creditors can garnish wages or execute on your property because that predatory action prevents or impedes your ability to pay your new lenders. Once you have excessive debt, the only way to get loans at fair and competitive interests rates is to file bankruptcy.
If you decide to file bankruptcy, remember that debts discharged in your bankruptcy should be listed on your report as having a zero balance, meaning you do not owe anything on the debt. Debts incorrectly reported as having a balance owed will negatively affect your credit score and make it more difficult or costly to get credit. You should check your credit report after your bankruptcy discharge and file a dispute with credit reporting agencies if this information is not correct. At Mortimer Law Firm, we check your credit reports after 120 days from your discharge date to ensure that your credit report is accurate.
What Else Should I Know?
Utility services–Public utilities, such as the electric company, cannot refuse or cut off service because you have filed for bankruptcy. However, the utility can require a deposit for future service and you do have to pay bills which arise after bankruptcy is filed.
Discrimination—An employer or government agency cannot discriminate against you because you have filed for bankruptcy. Government agencies and private entities involved in student loan programs also cannot discriminate against you based on a bankruptcy filing.
Driver’s license–If you lost your license solely because you couldn’t pay court-ordered damages caused in an accident, unpaid fines and license obligations, bankruptcy will allow you to get your license back without having to pay delinquent charges.
Co-signers–If someone has co-signed a loan with you and you file for bankruptcy, the co-signer may have to pay your debt unless you reaffirm the debt – agree to pay the debt in full. If you file a chapter 13, you may be able to protect co-signers, depending upon the terms of your chapter 13 plan.