Alternatives to Bankruptcy

There is just no easy way to get out of debt; you have to face up to the consequences. A bankruptcy is not always the answer, as the effects are long lasting. There are four ways to handle debts that are out of control, listed in best to worst in regards to the effect it will have on your credit:

If your credit isn't in terrible shape, can you reduce your other expenses, even if it means making hard choices or just change your lifestyle to fit your income? Some ways to do this:

Selling the second car
Pulling equity out of your home
Applying for a non-secured signature loan
Loan from a relative
Selling your home and paying off your debts with the proceeds and then renting
Cashing out your 401K/retirement benefits
Selling family heir looms/jewelry/guns

If your credit is already gone or one of the above isn't an option, go through Consumer Credit Counseling Services (CCCS). Check your yellow pages for the local number. In this way you're paying off your debts as if you were in a Chapter 13 BK, but you don't file a BK.
If CCCS won't take you, you may want to consider bankruptcy. Doing a Ch 13 takes longer, but your credit is in a little better standing than if you do a Ch 7. In the Ch 13 they give you up to 5 years to pay off your debts. The disadvantage is that you're in BK for up to 5 years plus your credit report shows your BK for 7 more years after you have finished paying off your debts.
If you are so far in debt that you can never repay it, then the best solution may be a Chapter 7 BK. A Ch 7 is the least desirable credit-wise, but you are typically out of BK in 6 months and you don't have to repay any debt. The disadvantage is that this shows on your credit report for 10 years from the date of filing your BK, and creditors are starting to tighten their credit requirements, and you may have a tough time getting future financing.

There is no magic solution. Don't believe anyone who tells you otherwise.Chapter 7 Bankruptcy

Chapter 7 bankruptcy is a liquidation proceeding. The debtor turns over all non-exempt property to the bankruptcy trustee, who then converts it to cash for distribution to the creditors. The debtor receives a discharge of all dischargeable debts.

To file a Chapter 7 bankruptcy:

You must reside or have a domicile, a place of business, or property in the United States or a municipality.
You must not have been granted a Chapter 7 discharge within the last 6 years or completed a Chapter 13 plan.
You must not have had a bankruptcy filing dismissed for cause within the last 180 days.
It must not be a "substantial abuse" of Chapter 7 to grant the debtor relief. Generally speaking, if after you pay the monthly expenses for necessities there is not enough money to pay the remaining monthly debts, then granting a discharge would not be an abuse of Chapter 7.
It would not be fundamentally unfair to grant the debtor relief under Chapter 7.

The most common reasons for consumer bankruptcy are:

Unemployment
Large medical expenses
Seriously over extended credit
Marital problems
Large unexpected expenses

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Bankruptcy and Bills

The underlying policy of bankruptcy law is that the honest debtor who is in debt beyond his/her ability to repay the debt should be given a fresh start through the discharge of debts in a bankruptcy proceeding.

Not all debts are dischargeable. Generally speaking, the following debts will not be discharged:

Taxes.
Spousal and Child Support.
Debts arising out of willful or malicious misconduct.
Liability from driving while intoxicated.
Debts from a prior bankruptcy.
Student loans.
Criminal fines and penalties.

Those debts which are secured will be discharged, however, expect the creditor to take the necessary legal steps to take back the property. In most cases if the debtor's equity interest in the property is exempt, the debtor may retain the property by redemption or reaffirmation.

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Bankruptcy and Bill Collectors

One of the major benefits of filing for protection under Chapter 7 is that many creditor actions are stayed. This means that debt collection efforts and foreclosure is halted.

Once a creditor or bill collector becomes aware that you have filed for bankruptcy protection, he/she must stop all efforts to collect the debt. After your bankruptcy is filed, the court mails a notice to all the creditors listed in your schedules. This usually takes a couple of weeks. If this is not soon enough, then you should have your representative inform the creditor immediately. If a creditor continues to use collection tactics once informed of the bankruptcy they might be liable for court sanctions and attorney fees for this conduct.

After your bankruptcy is filed, the court mails a notice to all the creditors listed in your schedules. This usually takes a couple of weeks. If this is not soon enough, then you should have your representative inform the creditors immediately. Your attorney deals with your creditors. It may be the only time you ever have the luxury of saying "you'll have to talk to my lawyer"

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Your Personal Property

Once the bankruptcy is filed, all the property of the debtor at the time of the filing and certain other property to be received in the future becomes the property of the bankruptcy estate. This means that the bankruptcy trustee will take control of this property for purposes of satisfying the creditors. HOWEVER, there is certain property that is either excluded or exempt and the debtor will be able to keep it. Property or asset exemption is determined based upon your situation, income and the laws of your state. The best way to determine which property to keep requires a detailed analysis of your situation. You need a good lawyer.

As for real property in many states, dependent upon which exemption scheme is selected and your circumstances, you may exempt up to $100,000 in equity. When calculating your equity you should use a value that is based upon a forced liquidation as opposed to the best selling conditions to arrive at a value for your home. Once you determine this value, subtract the amount owed plus selling and transfer costs from the value to calculate the equity. As for personal property, in California, you are permitted exemptions for a variety of personal property. This includes, automobiles, household furnishings and personal effects, jewelry, tools of the trade, retirement plans, immature life insurance, personal injury awards, earnings, animals and some other miscellaneous property. The value of each exemption and which exemptions can be used are determined by the statutory exemption scheme is selected. (State laws vary)

Your House and Car

Depending upon which exemption scheme is selected and your circumstances, you may exempt up to $100,000 in equity. When calculating your equity you should use a value that is based upon a forced liquidation as opposed to the best selling conditions to arrive at a value for your home. Once you know the value, subtract the amount owed plus selling and transfer costs from the value to calculate the equity. In the depressed California market, liquidated properties are often valued less than what we like to think the property is worth.

Depending upon which exemption scheme is selected, you make keep your car if your equity is equal to or less than the allowed exemption. Generally speaking, depending upon the exemption scheme selected, you may exempt as little as $1200 or as much as $9100. When calculating your equity you should use the Kelly Blue Book or a comparable guide. Once you know the value, then subtract the amount owed from the value to calculate the equity.

Generally, most courts understand that you need a car to work to get back on your feet. Apply rules of common sense here: If you own vintage cars that are free and clear and worth thousands of dollars, you are probably not going to be able to keep them. If, on the other hand, you have a car worth $10,000 and you owe $8000 on it, you will most likely keep it. Again, the need to talk to a good lawyer should be evident. Most leased vehicles have no equity and therefore are entirely exempt. If you owe money on your car or it is leased you must still make the payments. In those instances you will have to redeem or reaffirm the property to keep it. However, in some circumstance your representative can re-negotiate the loan or the lease to get a more favorable deal for you.

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About The Bankruptcy Process

· Under bankruptcy law, certain luxury purchases over $1000 within 60 days of the bankruptcy filing are presumed non-dischargeable.

· Under bankruptcy law, cash advances aggregating $1000 within 60 days of the bankruptcy filing are presumed non-dischargeable.

· Debts involving materially false financial statements are non-dischargeable under certain circumstances.

If you file the bankruptcy yourself, you must fill out the forms. There are several forms. There could be between 30 and 60 pages in your petition, schedule and other papers filed at the time of your bankruptcy. You must follow the local and federal bankruptcy court rules in completing the forms. Preparing these forms requires an understanding of both bankruptcy law and local state law in order to enter the information correctly and accurately. The forms have to be typed and a certain number of copies must be included with the filing. Today, most attorneys use a computer system to prepare these forms because of their complexity and voluminous nature.

About 30 to 40 days after you file the bankruptcy you will have to attend a hearing presided over by the bankruptcy trustee. This hearing is called the First Meeting of Creditors. At this hearing the trustee will ask questions under oath regarding the content of your bankruptcy papers, assets, debts and other matters. After the trustee is done, your creditors will be permitted to question you. Do not worry, your attorney will be there to represent you and your attorney will help you prepare for the hearing. Sometimes, after your hearing is over, various creditors will approach you to discuss the status of secured property or your desire to retain a credit card. Your attorney will negotiate with them, with your knowledge and approval.

After this hearing you will normally not need to return to court. However, if a creditor files a motion or an adversary action, most likely you will have to return to court. This is the exception and only your attorney can determine if this is likely to happen.

Under normal circumstances, the bankruptcy court will automatically issue the discharge 60 to 75 days after the First Meeting of Creditors.

You can reestablish credit though and be back in "A" credit two years after the discharge of Bankruptcy. The bankruptcy is a judgment and will be listed for a period of up to 10 years after the discharge. You must wait 6 years to file again or if your bankruptcy was dismissed you must usually wait for 180 days to refile.

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Bankruptcy Questions and Answers

I am a co-signer for a debt, how does bankruptcy affect my obligation?Can I keep my credit cards after bankruptcy?Will I lose my job?
No. Bankruptcy laws prohibit discrimination based upon a debtor filing for protection under the bankruptcy laws.

Can I go to jail if I file bankruptcy?
No. There are no debtor's prisons in the United States.

Will my employer find out about my bankruptcy?
Under normal circumstances, unless your employer is a creditor, your employer will not know.

Will bankruptcy stop a wage attachment?
Yes.

Will bankruptcy stop a judgment?
Yes. Most civil judgments are stopped by bankruptcy.

Will a bankruptcy remove a lien?
Under some circumstances once the bankruptcy proceedings have started, special motion can be filed to remove certain liens. It will take a bankruptcy court order to remove them. This is a complicated area of the bankruptcy law and an attorney should be consulted.

Will bankruptcy stop an eviction action?
Perhaps. However, this will only delay the inevitable. The owner is entitled to possession of his property and at best you will be able to remain in the property until you have received your discharge from bankruptcy or the landlord obtains an order from the bankruptcy court. I must caution you that if the only reason you filed the bankruptcy is to stop an eviction then this might be considered an abuse of Chapter 7. If the bankruptcy court finds that this is true then the court can immediately dismiss the bankruptcy and impose other legal and monetary sanctions on you.

Will bankruptcy stop a foreclosure?
Yes. However, a home is an asset usually secured by a deed of trust. The mortgage company is entitled apply to the court for relief from the automatic stay, the order preventing creditor action by virtue of the bankruptcy. Depending upon several factors, you may be able to prolong a foreclosure until you have received your discharge from bankruptcy. Usually, to keep a home that is in foreclosure you will have to make a deal with the note holder.

I am divorced, will bankruptcy wipeout my obligation to pay community debts?
In general, you will be discharged from all dischargeable community debts. However, you should discuss this with your family law attorney to understand the other implications of the filing of a bankruptcy during the pending of a dissolution action (divorce case). Also, remember that if you are discharged from community debts, your spouse is responsible for the entire balance owing on the debt. Put another way, they shift the responsibility on to you.

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How to Avoid Foreclosure

When you miss your mortgage payments, foreclosure may occur. This is the legal means that your mortgage company can use to repossess (take over) your home. When this happens, you must move out of your house. If your property is worth less than the total amount you owe on your mortgage loan, your mortgage company or HUD could seek a deficiency judgment. If that happens, you not only lose your home, you also would owe your mortgage company or HUD an additional debt. Foreclosure or a deficiency judgment could seriously affect your ability to qualify for credit in the future. So you should avoid it if all possible!

DO NOT IGNORE THE LETTERS FROM YOUR MORTGAGE COMPANY. If you are having problems making your payments, contact your mortgage company immediately. Explain your situation. Be prepared to provide them with financial information, such as your monthly income and expenses. Without this information, they may not be able to help. Stay in your home for now. You may not qualify for assistance if you abandon your property.

Some of your options include the following:

Special Forbearance. Your mortgage company may be able to arrange a repayment plan based on your financial situation. Your mortgage company may even provide for a temporary reduction or suspension of your payments. You may qualify for this if you have recently lost your job or your source of income or if you had an unexpected increase in living expenses. You must furnish information to your mortgage company to show that you would be able to meet the requirements of the new payment plan.
Mortgage Modification. You may be able to refinance the debt and/or extend the term of your mortgage loan. This may help you catch up by reducing the monthly payments to a more affordable level. You may qualify if you have recovered from a financial problem but your net income is less than it was before the default (failure to pay).
Partial Claim. Your mortgage company may be able to work with you to obtain an interest-free loan from HUD to bring your mortgage current. You may qualify if:

your loan is at least 4 months delinquent but no more than 12 months delinquent;
your mortgage is not in foreclosure; and
you are able to begin making full mortgage payments.

When your mortgage company files a Partial Claim, HUD will pay your mortgage company the amount necessary to bring your mortgage current. You must execute a Promissory Note, and a Lien will be placed on your property until the Promissory Note is paid in full. The Promissory Note is interest-free and will be due if you sell or leave your property, or when your mortgage matures.

Pre-foreclosure sale. This will allow you to sell your property and pay off your mortgage loan to avoid foreclosure and damage to your credit rating. You may qualify if:

the "as is" appraised value is at least 70% of the amount you owe and the sales price is 95% of the appraised value;
the loan is at least 2 months delinquent prior to the pre- foreclosure sale closing date; and
you are able to sell your house within 3 to 5 months (depending on what your mortgage company agrees to).

An additional benefit to this option is the assistance you will receive with the Seller-paid closing costs.

Deed-in-lieu of foreclosure. As a last resort, you may be able to voluntarily "give back" your property to the mortgage company. This won't save your house, but it will help your chances of getting another mortgage loan in the future. You can qualify if:

you are in default and don't qualify for any of the other options;
your attempts at selling the house before foreclosure were unsuccessful; and
you don't have another mortgage in default.

A housing counseling agency can help you determine which, if any, of these options may meet your needs. You should also discuss the situation with your mortgage company.

One last thing, beware of scams! Solutions that sound too simple or too good to be true usually are. If you're selling your home without professional guidance, beware of buyers who try to rush you through the process. Unfortunately, there are people who may try to take advantage of your financial difficulty. Be especially alert to the following:

Equity skimming. In this type of scam, a "buyer" approaches you, offering to get you out of financial trouble by promising to pay off your mortgage or give you a sum of money when the property is sold. The "buyer" may suggest that you move out quickly and deed the property to him or her. The "buyer" then collects rent for a time, does not make any mortgage payments, and allows the mortgage company to foreclose. Remember that signing over your deed to someone else does not necessarily relieve you of your obligation on your loan.
Phony counseling agencies. Some groups that call themselves "counseling agencies" may approach you and offer to perform certain services for a fee. These could well be services you could do for yourself, for free, such as negotiating a new payment plan with your mortgage company, or pursuing a pre-foreclosure sale. If you have any doubt about paying for such services call HUD-approved housing counseling agency. Do this before you pay anyone or sign anything.

Here are several precautions that should help you avoid being "taken" by scam artist:

Don't sign any papers you don't fully understand.
Make sure you get all "promises" in writing.
Beware of any loan assumption where you are not formally released from liability for your mortgage debt and contracts of sale.
Check with a lawyer or your mortgage company before entering into any deal involving your home.
If you're selling the house yourself to avoid foreclosure, check to see if there are any complaints against the prospective buyer. You can contact your state's Attorney General, the State Real Estate Commission, or the local District Attorney's Consumer Fraud Unit for this type of information.

Disclaimer:
This information deals with Chapter 7 consumer bankruptcy. Each state has its own bankruptcy laws, so you need to check with your state for details. Information dealing with Chapter 13 bankruptcy and consumer debt restructuring is not discussed in the above Consumer Information. The information contained in the following Consumer Information is provided for general information purposes only and is not intended to be a legal opinion nor legal advice nor is it intended to be a complete discussion of all the issues related to the area of Chapter 7 consumer bankruptcy. Every individual's factual situation is different and you should seek independent legal advice regarding specific information.

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