Bankruptcy

Why stay away from bankruptcy?

This document is for educational purposes only; it deals with the average consumer, and does not constitute legal advice. For advice on whether you should file bankruptcy please consult with an attorney. Although every effort has been made to see that the information here is correct, Debt Elimination of America, LLC does not guarantee the accuracy of anything contained here.

What is bankruptcy?

 In a Chapter 7 bankruptcy, the court orders a debtor to liquidate all of their non-exempt property and a trustee pays the creditors back with the proceeds from their sale. In many cases, your home, car, and other assets will be exempt from liquidation in a Chapter 7 bankruptcy, but this depends on your state.  In a Chapter 13 bankruptcy, the court orders a debtor to turn over all their disposable income for a period of three to five years.  Bankruptcy may be a suitable alternative for consumers who have limited income or are seeking debt relief for secured debts like mortgages and car loans, among other things. Since Debt Elimination of America, LLC is not a law firm, we are not qualified to give you legal advice about bankruptcy.

Considering Bankruptcy? You May Have to Pay the Debt Back Anyway

 The greatest fallacy about bankruptcy is that it is the debtor’s version of the “get out of jail free” card in Monopoly. While most consumers know that bankruptcy affects your credit for 7 to 10 years, very few know there is a possibility that you will have to pay back the debt anyway, even if you file a Chapter 7 “straight” bankruptcy. The formal definition of bankruptcy is “a proceeding in federal court in which an insolvent debtor’s assets are liquidated and the debtor is relieved of further liability.” On the other hand, the commonplace definition of bankruptcy is probably “the process of completely wiping out your debts for free.”  However, Webster defines bankruptcy as the state of or an instance of being bankrupt; complete failure or ruin.” In most cases, the latter definition may be appropriate, but in a small number of cases, it is possible that, even with bankruptcy, you will still have to pay back at least a portion of the debt.

 Below are some of the reasons you will get the severe credit impact for 7 to 10 years yet still have to repay the debt.

When Considering Bankruptcy Your Income Must Be Lower Than The Average Income in Your State.

If you make more than the average income in your state it is possible that you will be forced into a Chapter 13 bankruptcy “a repayment plan” (provided you do not pass the "means test"). In a Chapter 13 bankruptcy, the court orders that you pay all your disposable income to a court appointed trustee, who will disburse payments to your creditors. Note that disposable income is defined as income not reasonably necessary for the maintenance or the support of you and/or your dependents.  Keep in mind that disposable income is determined by the court by national and county statistics on average necessary expenses, not what you are paying. For instance, if you are paying high car payments it does not mean the court will approve it. Judges have actually ordered families to stop sending their children to private schools so they can have more money to pay back their creditors. Furthermore, if you miss even one payment, you may be considered to be in contempt by the courts and forced to pay the full debt amount back (even though by all accounts this is rare). Chapter 13 bankruptcy is so difficult that only about one third of all cases are ever completed.

When considering Bankruptcy you should also consider your assets

 Bankruptcy court will force you to sell your home or car if they have a lot of equity that is not exempt by your state. The proceeds will be used to pay back your creditors. If you have invested a good amount of money that is not held in an exempt account (this varies by state) you will very likely be forced to liquidate it. If by chance you outright own a second home or vehicle with equity in them you may find yourself again out of luck. You may want to contact a licensed attorney in your state to learn about your state’s exemptions and how they relate to your particular situation. To protect the consumer, each state does have safeguards from bankruptcy in place. The exemptions do vary from state to state so you may wish to consult with legal counsel regarding these safeguards.

When Considering Bankruptcy You should Check Your Intentions

If you do not intend to pay your creditors back do not, I repeat, do NOT file bankruptcy.  If your creditors can prove that you never had any intention of paying them back, then you may want to avoid bankruptcy. It is possible you may end up with a bankruptcy filing on your credit report, and you will still owe a debt.  Provided your bankruptcy judge agrees, your creditors can object to your filing.  If your bankruptcy judge does agree, your case can be dismissed.  It is not customary that bankruptcy cases are contested by creditors.  However it is a possibility and it can surely happen.  As with any other legal concern you would want to discus this with an attorney.  A bankruptcy attorney can help you to establish whether your particular creditors are among those who may try to prove you never intended to repay the debt.  A bankruptcy attorney will know the track record of different creditors who have had success in proving fraudulent filings. 

 (Disclaimer: please consult an attorney for legal advice regarding your individual situation. This does not constitute legal advice, implied or expressed).