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Bankruptcy is a legal proceeding in which a person who can not 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 lease until your debts are sorted out according to the law.
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.
What Bankruptcy Can Not Do
Bankruptcy can not, 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 their lien on property as collateral for a loan. Common examples are co loans and home mortgages. However, you can force secured creditors to take delinquent payments over time in the bankruptcy.
What Does It Cost to File for Bankruptcy?
It now costs $299 to file for bankruptcy under chapter 7 and $247 to file for Bankruptcy under chapter 13, whether for one person or a married couple. Attorney fess range from $900 to $1,200 for chapter 7 and the fees are higher for a chapter 13.
What Must I Do Before Filing Bankruptcy?
You must received 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 between $30-$50 for the pre-filing counseling. However, the law requires approved agencies to provide bankruptcy counseling and the necessary certificates without considering an individuals 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.
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, glitches in the repayment schedule adds exorbitant fess 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 can not 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 IRA’s.
In Michigan, you are allowed to use the federal bankruptcy exemptions, they include:
- $20,200 in equity in your home;
- $3,225 in equity in your car;
- $575 per item in any household goods up to a total of $10,775;
- $2,025 in thing you need for your job (tools, books, etc);
- $1075 in any property, plus part of the unused exemption in your home up to $10,125;
- Your rights to receive certain benefits such as social security, unemployment compensation, veteran’s benefits, public assistance, and pensions — regardless of the amount.
The amounts of the exemptions are doubled when a married couple files together. You also have the right to use Michigan exemptions which may be more generous than the federal exemptions for those married debtors with substantial real estate holdings.
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 then what you paid or what it would cost to buy a replacement.
You also only need to look at your equity in property. This means that you count your exemptions against the full value minus any money that you woe 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 exemption.
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 debt if you are behind. In 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.
Can I Own Anything After Bankruptcy?
Yes! Many people believe they can not 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 an inheritance, a property settlement, or life insurance benefits within 180 days after filing for bankruptcy, that money o 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 alimony;
- most fines and penalties owed to government agencies;
- most taxes and debts (within two years of filing) incurred to pay taxes can not be discharged;
- student loans unless you can prove to the court that repaying them will be an “undue hardship;”
- debts not listed on your bankruptcy petition;
- loans you got by knowingly giving false information to a creditor, who reasonably relied on it in making you the 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. The meeting is in Bay City and normally takes approximately 5 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 can not 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?
There is no clear answer to this question. Unfortunately, if you are behind on your bills, your credit may already be bad. Bankruptcy will certainly not make things any worse.
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” credit will be very hesitant to loan you money for fear of predatory conduct of those 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.
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.
What Else Should I Know?
Utility services–Public utilities, such as the electric company, can not 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 can not 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, bankruptcy will allow you to get your license back.
Co-Signers–If someone has con-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 12, you may be able to protect co-signers, depending upon the terms of your chapter 12 plan.