Being Honest in Bankruptcy

It’s really not hard to do the most important thing to have a successful bankruptcy case—be honest with your lawyer and throughout your case. 

 

The U.S. Supreme Court described the purpose of consumer bankruptcy way back in 1934 as follows:

… it gives to the honest but unfortunate debtor…  a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.

Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934). This case involved a loan of $300 made near the beginning of the Great Depression. Hunt, the debtor, had signed an assignment of future wages for payment of the debt to the Local Loan Company. The Supreme Court held that this assignment became invalid when the debt was discharged in bankruptcy. The Court rejected state laws to the contrary. It said:

The new opportunity in life and the clear field for future effort… would be of little value to the wage earner if he were obliged to face the necessity of devoting the whole or a considerable portion of his earnings for an indefinite time in the future to the payment of indebtedness incurred prior to his bankruptcy.

292 U.S. 234, 245. So, if you are an “honest but unfortunate debtor,” the very powerful tools of bankruptcy are available to you.

Receiving that “New Opportunity in Life”

In most consumer bankruptcy cases, the person filing the case gets a discharge of his or her debts. “Discharge” is the permanent legal write-off of debts. The law says that all debts get discharged, except those that fit specific exceptions.

The U.S. Bankruptcy Code says that in a Chapter 7 “straight bankruptcy” case the bankruptcy “court shall grant the debtor a discharge,” with only certain narrow exceptions. (See 11 U.S.C. Section 727(a).)

It’s very much the same in a Chapter 13 “adjustment of debts” case. The “court shall grant the debtor a discharge of all debts,” again with only certain narrow exceptions. (See Section 1328(a) of the Bankruptcy Code.)

As long as those exceptions don’t apply to your debts, they will get discharged in bankruptcy. As long as you discharge enough debts, you’ll have that new financial opportunity in life.

Exceptions to Getting a Discharge

There are two sets of exceptions to discharging your debts. There are those that determine whether you can discharge:

  1. certain specific debts, and
  2. any of your debts.

1. Non-Dischargeable Debts

You’ve more likely heard about the first set, the specific kinds of debts that can’t be discharged. These include certain taxes, criminal fines, and student loans. These various kinds of debts bankruptcy does not discharge for many reasons. These reasons fall into 3 groups. Bankruptcy does not discharge:

  • one group of debts ever, under any circumstances, such as unpaid child support (Section 523(a)(5) and Section 101(14A));
  • another group under certain conditions, such as income taxes (Section 523(a)(1)); or
  • a final group if a creditor objects AND successfully proves certain facts, such as debts incurred through misrepresentation or fraud by the debtor (Section 523(a)(2)).

2. NO Debts Discharged

The second, less familiar set of exceptions is actually more dangerous. That’s because these doesn’t affect just a specific debt or two. Rather this set of exceptions affects your ability to receive a discharge of ANY of your debts whatsoever. (Section 727(a)(2)-(7))

You cannot be dishonest in the midst of your bankruptcy proceeding itself. If you are you may lose the ability to discharge any of your debts. This goes back to the “honest but unfortunate” phrase in the Supreme Court case quoted above. In order to receive the benefits of bankruptcy, you must be honest in how you proceed through it.

The following kinds of dishonesty could result in not being able to discharge your debts:

  • Hiding or destroying assets during the year before filing bankruptcy
  • Hiding or destroying assets after the bankruptcy case is filed
  • Hiding, destroying, falsifying, or failing to keep records about your financial condition
  • Failing to satisfactorily explain a loss of assets before the filing of bankruptcy
  • Making a false oath

Conclusion

Most of the time, you’ll be able to discharge all the debts you expect to discharge. Furthermore, your right to an overall discharge of debts will very likely not be challenged. But if you have ANY reason for doubt about these, be sure to tell your bankruptcy lawyer. And do so right away, preferably early in your first meeting.

 

Get a New Financial Start with this New Year

Get a new financial start for 2018. Stop creditor pressures immediately, write off all or most debts, and responsibly deal with the rest.

 

An Overall New Financial Start

Get a new start by discharging (permanently, legally writing off) all or most of your debts. If you have mostly consumer or small business debts you have two main choices about how to make this happen.

A New Start with Chapter 7

With Chapter 7 “straight bankruptcy” you get a new start very fast. As soon as your case is filed most of your creditors can’t collect their debts against you. They can’t go after your money or your property. Then usually about 3-4 months later the bankruptcy court enters an order discharging your debts. As quick as that you become debt-free. The only exceptions would possibly be debts you want to keep and special debts you can’t discharge. Debts you might want to keep could include a vehicle loan or home mortgage. Debts you can’t discharge include recent income taxes, unpaid child and spousal support, and criminal fines.

Imagine if you filed a Chapter 7 case this month. Immediately your creditors could no longer chase you or anything of yours. All or most of your debts would forever be gone by April or May. The remaining critical debt or two you’d be able to handle sensibly. That quickly you’d have a new financial start.

A New Start with Chapter 13

With Chapter 13 “adjustment of debts” the new start is more nuanced, but sometimes much better.

Just as with Chapter 7 your creditors can’t take any action to collect their debts as of the moment you file your case. But under Chapter 13 that protection from creditors lasts not just a few months but for years. The final discharge of debts happens much later but in the meantime you can get many benefits unavailable under Chapter 7. You can deal in creative ways with special debts. You often have much more flexibility with secured debts like home mortgages and car loans. Same thing with income taxes and child support arrearages, among others, that can’t be discharged. Plus you get protection from collection actions against any co-signers that you don’t get under Chapter 7.

You finish your Chapter 13 payment plan in usually 3 to 5 years. Whatever debts you have not paid off get discharged. You are debt-free with limited exceptions like a home mortgage you want to still pay.

Under Chapter 13 you get immediate relief and a new start through a reasonable payment plan based on your budget. Then when that plan is done it’s followed by a full new start with (virtually) no remaining debts.

So, if you filed a Chapter 13 case this month, immediately your creditors could not chase you or any co-signers. You’d enter into a doable payment plan to handle your special debts in ways much better than Chapter 7. And when that plan is paid off you’ll have a full new financial start.

 

Crucial Facts about Co-Signed Debts in Bankruptcy

Bankruptcy protects you from your co-signed creditor and also from your co-signer. Be sure to cover any legal obligation to your co-signer. 

Protecting Only Yourself

Assume that you and your co-signer are both legally liable on a debt to a creditor. And you can’t afford to pay the debt.

Let’s focus today on protecting yourself. If you can’t pay the debt, you have to consider two separate obligations—to the creditor itself, and to the other signer.

Your Obligation to the Creditor

The obligation to the creditor is based on your promise to pay the debt. This obligation can most likely be discharged (legally written off) in a bankruptcy case. The creditor could object to the discharge based on your alleged fraud or misrepresentation, or sometimes on other exceptions. But those objections or exceptions don’t apply to most debts.

Your Probable Obligation to Your Co-Signor

Usually you have a distinct legal obligation to the other person legally liable on the debt. What exactly that obligation is depends on the circumstances.

Assume the other person co-signed to enable you to get credit. Then there could be a stated understanding that, if the co-signer ever had to pay the debt, you’d have to pay back the co-signer. You may have effectively promised to pay back the co-signer if necessary. That obligation to repay may not be stated but just presumed by both people.

Or it’s possible that the stated or presumed understanding was that you wouldn’t have to re-pay your co-signer. The co-signer could have said “I’ll co-sign and if you can’t pay the debt I’ll take care of it without you having to pay me back.” Maybe not likely but it’s possible.

But now assume instead you co-signed to help the other person, and you got no benefit from the credit acquired. Then you may have no legal obligation to the other person.

So again you may or may not have a legal obligation to the co-signer.

Being Practical

There’s a good chance the creditor is going to pursue whoever is legally liable to it. That would usually be both you and the other signer. So you need to protect yourself both from the creditor itself and from any potential liability to the co-signer. A bankruptcy would likely discharge both obligations, protecting you from both.

So when you file bankruptcy, it’s critical to list both the creditor and your co-signer on your schedule of creditors. Otherwise you could remain liable to your co-signer after your bankruptcy case is finished.

Can Your Co-Signer Object?

Just like the creditor, your co-signer could try to object to the discharge of your obligation to him or her. But such an objection would have to be based on your fraud, misrepresentation, or similar bad behavior in the incurring of the debt. As stated above, these objections are rare. The co-signer would have to show that you somehow fooled him or her into being the co-signer. For example, if you had assured her that your credit was good when it wasn’t, or that your income was much more than it really was, those could be valid grounds for objecting to the discharge of your obligation to the co-signer.

Although relatively rare, these objections tend to be raised out of anger by people with personal connections to you. Former friends, ex-spouses, ex-business partners may react out of spite and anger because they have a personal axe to grind. Plus they may have compromising information (or think they do) providing grounds for objection more than conventional creditors would.

If you suspect that a co-signer may react this way, explain the situation thoroughly to your bankruptcy lawyer. He or she can access the situation, give you appropriate advice, and take any appropriate action to minimize your risks. 

 

Bankruptcy Is a Moral Choice

Yes, you do have a moral obligation to pay your debts. But you may actually have HIGHER moral obligation to file bankruptcy instead.

 

The Moral Side of Bankruptcy

Is it the right thing to do? Is bankruptcy the morally right thing for you to do?

This is not usually talked about, maybe especially with your bankruptcy lawyer. But it’s likely looming big in your mind as you wrestle with what you should do.

The important choices in life are often moral choices. We choose between doing what’s right and doing what’s wrong.

You could just disregard that moral step. You could just decide on what at first glance seems to make the most sense, what seems to solve your immediate problems the best, or the quickest.

But then you’re more likely to have made a poor decision. Or at least an incomplete one. You’ll feel good about the decision only after you believe in your head and in your heart that it really is the right step to take.

How to Make a Good Moral Decision 


1. Understand your past: what got you to this point of your finances?

 You made a bunch of legal commitments to pay your debts. You did this when you signed the original creditor agreements and at each credit advance or credit card charge. What has changed so that you are having trouble now meeting those honest intentions to pay? What is making you seriously consider breaking those commitments permanently?  

2. Understand your present: what are the costs and benefits of now trying to meet those financial commitments?

The moral benefit is that you would be keeping your promises to pay your debts. It’s easy to fixate on this and feel guilty about breaking these honest promises. But how about the real costs if you kept struggling to meet them? Consider your physical health, and your emotional health as you deal with the constant stress. Consider the debts’ effect on your marriage and family relationships, on the friends you don’t have time for. What financial and emotional responsibilities do you have to spouse, children, parents, siblings that just can’t handle? What other responsibilities do you have to your neighborhood, your church, and your other communities that you currently aren’t meeting? You clearly have moral obligations not just to your creditors. You have honorable and worthy obligations to all of these others, including to yourself.

3. You CAN make a good decision: you now have the opportunity to choose and act wisely.

Face your situation honestly. Don’t hide from the truth, even if it means accepting that you’ve made mistakes. You’re human. You’re not supposed to be or act perfectly, and most likely you have made some mistakes. Own them. But don’t beat yourself up about them or dwell on them. Focus on the future. Focus on hoping for and acting on a good future. Resolve to take the energy that it takes to make better decisions every day going forward. Don’t settle for the status quo. Don’t let yourself stay stuck. Doing nothing is a decision by default, which is almost never the right decision.  

4. Get good advice: you can only make good decisions if you know your legal and practical options.

You can’t make morally good choices about how to attack your debts without knowing your legal alternatives for doing so.  You can’t know whether the best way to deal with your creditors if you don’t know those legal options. For example, you can’t know whether a Chapter 13 payment plan fits your set of life obligation better than a Chapter 7 “straight bankruptcy” if you don’t know all the effects of these two options on your debts and on your other life obligations

5.  Weigh your legal options: consider effects on your creditors, yourself, your spouse, your family, and anyone else involved. 

Get help from the right people and resources. Do whatever you know helps YOU make a good decision. Think about what you need to do, who you need to talk with, to decide well. When you talk with a bankruptcy lawyer recognize that he or she is your legal advisor. Because your lawyer is not your moral advisor, he or she will respect that the final decisions about what to do are up to you. But your lawyer has counseled many people dealing with these kinds of decisions, so you can ask tough personal questions. Make this decision your best, well-informed, first next step into a much better future.

 

Your Options Instead of Bankruptcy

Can you solve your debt problems by settling, consolidating, or just not paying the debts? What are the advantages/disadvantages of each?    


You deserve knowing all their options, including ones other than bankruptcy. Today we look at three of them.

1. Settling Your Debts

Debt settlement may be an option is the right circumstances.

If you don’t pay an ordinary debt timely, at some point the creditor sells the debt to a debt collector. Generally, the further the debt is in default the less likely it can get collected. That means the creditor will have to sell the debt at steeper and steeper discounts. And in turn that means that either the original creditor or the collector should be more willing to settle the debt with you for substantially less than you owe.

You will more likely be able to settle a debt at a deeper discount:

  • as the debt gets older. That’s especially true as the debt approaches its statute of limitations, the legal deadline for collection.
  • if you’re “judgment-proof. The creditor determines that you don’t have any assets or income that could be tapped for future garnishment or seizure.
  • if the debt could be totally written off in bankruptcy, and there are signs you’re thinking about filing.
  • when the debt is sold to a collection agency. This is especially true when a debt is sold a second or third time.

The advantage of settling your debts is to avoid filing bankruptcy.

Here are some disadvantages:

  • You have to have available cash to make lump-sum offers to the creditors. If you have to borrow that cash from friends or relatives, you could just be digging yourself deeper into debt.
  • Interest, late fees, and attorney fees and other costs can greatly increase the balance on a debt. So even if you settle a debt at a steep discount the amount you pay may still be high.
  • Creditors’ written-off portions of debt may be considered “income” for tax purposes, resulting in you owing unexpected income taxes.
  • Hiring a debt negotiation company to attempt this settlement work is usually not a wise use of your money. Instead get some unbiased advice from a reputable attorney about the feasibility of negotiating with your creditors. Attorneys have a legal and ethical obligation to serve you and only you.

2. Consolidating Your Debts

The benefit of consolidating your higher-interest unsecured debt into another loan with a lower interest rate and maybe a longer term of payments is that it might lower your monthly payment(s) just enough so that you can keep current. This may particularly make sense with specialized types of debt like student loans or higher-rate mortgages or vehicle loans.

But there are serious potential disadvantages:

  • Avoid turning unsecured debts into a secured one, such as paying off credit card debt with a home equity line of credit. This changes debts that can be easily written off in bankruptcy into debts that likely can’t. This exposes your home or other collateral and limits your options. 
  • The truth is that paying down unsecured debts often leads to those sources of credit being run up again.  Cash gets tight again, and you’re just left deeper in debt.

3. Not Paying Your Debts

If you are “judgment-proof” one option may be to simply not pay your debts. “Judgment-proof” does not mean that a creditor can’t sue and get a judgment against you. If you just don’t pay your debts you can and likely will be sued by a number of creditors.  Instead the term means that your creditor cannot legally reach any of your income or assets to satisfy the judgment.  That’s because your income is so low and your assets so modest that they fit within legal “exemptions.” Your income and assets are all protected from collection.

For some people, this can be a sensible short-term, and sometimes even long-term, tactic.

The disadvantages:

  • Even if you really are “judgment-proof,” as mentioned very likely some creditors will still sue you. They are counting on getting the money out of you at some point. So you have to deal with the lawsuits and the anxiety they cause. You have to find out whether you may be exposed in any way. You need to be prepared to be sued and know how to react each time it happens.
  • Being “judgment-proof” at one point does not mean that you will be forever. Your circumstances could change. The relevant laws could change, leaving you at risk. Hiring an attorney each time to determine if any of your income or assets was in jeopardy could get expensive.

Conclusion

Here are two things to keep in mind as you weigh these three alternatives to bankruptcy.

First, again, when you get advice from lawyer, that person has a legal and ethical duty to you alone. He or she will advise you but not tell you what to do. In presenting your options and their advantages and disadvantages, he or she can and sometime will make strong recommendations. Your lawyer will help you chart the best course of action based on your goals. But your lawyer will not “make you” file bankruptcy or choose any particular Chapter of bankruptcy. You meet with an attorney so that you can make a well-informed decision, to do whatever’s the best for you.

In contrast, people who work for a debt consolidation or debt settlement business are often paid to sell you whatever service they are offering. 

Second, common sense says that you ought to get information and advice about your alternatives sooner rather than later. Otherwise it could cost you in countless ways. Your choices could be more limited. They could be more expensive. You could have wasted a lot of money before you made the right choice. And sometimes delay means not being able to fulfill your goals as well as you otherwise could.

The sooner you get good advice, the more it can help you.

 

How Do You Decide Whether to File Bankruptcy?

To make this decision well, accept that you need help, become well-informed about your options, then with good counsel make the best choice. 

 

Accepting Reality

How can you make a good decision about something as personal and complicated as whether to file bankruptcy?

First, understand your options. This is mostly a task in which you use the rational part of your brain. You’re gathering information about your situation, thinking about problems that you’d like to solve, and then getting professional advice about your realistic options for solving those problems.

Second, weigh those options. You’re still using your rational brain, but now also adding intangible considerations like your gut feelings.  Think broadly—consider your diverse needs and the needs of those for whom you are responsible. Listen to the opinions of competent people you trust, those who really have your best interests in mind. Then balance all that to make your best choice.

Before Starting, Accept the Hard but Freeing Reality

We human beings don’t like to admit we need help.

But consider the reality of this by honestly answering these questions:

  • Do you basically survive paycheck to paycheck?
  • Do you borrow from one debt to pay another?
  • Do you occasionally or even regularly use credit cards to pay for necessary living expenses for lack of cash or money in your checking account?
  • Are you spending a major portion of your paycheck on debt payments? Do you know how much each month you spend on them?
  • Do you put anything regularly into savings? Are you making progress on your savings goals?
  • Are you putting enough money away for your retirement? Have you taken money out of retirement funds to get by?  
  • Have you needed to ask for financial help from family or friends?
  • Do you qualify for credit without a co-signer?
  • Do you ever buy things without telling your spouse or family?
  • Are you often overdue on your debt payments?
  • Have you used pawn shops, or sold jewelry or other valuables to come up with money for living expenses or to pay creditors?
  • Do you consistently pay only the minimum amounts on your credit cards, and hate to see how many years it’ll take to pay them off at your present rate?
  • Are you vague in your own mind about your total debt?
  • Have you lately gone through the embarrassment of having your credit card declined?
  • Have you been bouncing checks?
  • Are you receiving past-due bills, and are creditors calling?
  • Have you been denied new credit, or had your credit limit reduced?
  • Are you financially getting ahead or keep falling behind?
  • And if you are falling behind, is there a realistic reason for that to significantly change for the better soon?

Getting Help

Do your answers to these questions lead you to believe that you need to improve your life?

Once you dedicate yourself to changing your life for the better, you need a clear view of your options. Once you understand your options objectively you can make the very personal and nuanced decision that is right for you.

To understand your objective options and then wisely choose among them, you need the help of an experienced bankruptcy lawyer. There are two big reasons for this:

1. The law in this area is truly complicated. It is full of misconceptions, rules that seem to go against common sense, confusing blending of federal and state laws, differences between states and regions and even judges, and abrupt and unexpected shifts. Even when something seems straightforward, there can be crucial hidden considerations that could make a big difference. An experienced bankruptcy lawyer has spent years dealing day to day with all this. He or she knows all the layers of the relevant laws to be apply them to your situation and advise you accurately.

2. No matter how comparatively straightforward or complex your situation, it is unique because you are unique. A good bankruptcy lawyer will not just list your legal options, or tell you which to pick. You will understand your options as very personally applied to your unique situation. Your lawyer will make recommendations to you based on a thorough understanding of both the law AND your circumstances.

Conclusion

Start by confronting and accepting the reality that something needs to change. Then meet with a knowledgeable and compassionate lawyer so that you can rationally understand your options. Only then can you weigh those options through your own life experience and make a smart and wise decision. 

 

What IS Bankruptcy?

When you file a bankruptcy case, what exactly allows you to legally stop paying creditors? What do they get in return?

 

Bankruptcy Is Simply a Legal Option

Filing bankruptcy is one legal option to consider if you are having serious financial problems. It may or may not solve your financial problems. The advantages may not outweigh the detriments in your situation. But it’s worth finding out either way.

Do you have reasons why bankruptcy is not right for you? Common sense says that you should find out whether those reasons are actually valid. Do your reasons and concerns actually apply to your situation? Does the law provide sensible and worthwhile ways around them?

Bankruptcy law can get quite complicated, so there are countless misconceptions and half-truths about it. You owe it to yourself to know the truth, so that you can make an informed decision.

Is It a Moral Tool?

Only AFTER you understand the different ways bankruptcy could actually work in your situation would you be able to make a wise moral choice. A moral choice involves a weighing of all your different responsibilities.

This goes well beyond considering only your obligations to your creditors, which is only as far as many people go.  How about your legitimate responsibilities to your spouse, to your family, and to yourself? This includes your emotional and physical health. How about even your responsibilities to society? You can hardly contribute much when overburdened by debt.

You can’t weigh those different responsibilities in a vacuum. You can’t decide whether to use the legal tool of bankruptcy until you understand how that tool would apply to you.

Bankruptcy Is Etched into the Law of the Land

The U.S. Constitution, from its beginning, explicitly authorized bankruptcy. (See Article 1, Section 8, clause 4 of the Constitution.) The idea of bankruptcy was from the very beginning and ever since then consistent with our national character. It is part of an attitude that encourages innovation and taking personal risks. This national character sees the wisdom in forgiving honest financial failure and providing a fresh start. It leads to the recognition that people who are impossibly burdened by debt will not be as economically productive. More broadly, they will be less humanly productive, hopeful, motivated, uplifting members of society. Appropriately used, bankruptcy is good for the economy. It’s good for America.

Bankruptcy Appropriately Used

How is bankruptcy appropriately used? In the ways laid out by Congress in the Bankruptcy Code. Among other things the Code describes the three major consumer and small business options—Chapters 7, 11, and 13. It lays out the choices within those Chapters in dealing with your creditors.

What the Creditors Get in Return

With the Constitution and the Bankruptcy Code giving you the right to not pay your creditors, what do they get in return?

Bankruptcy law balances your rights and that of your creditors. In the next few blog posts we’ll explain some of the ways the law does this balancing.

Your Personal, Informed Choice

Filing bankruptcy is a deeply personal choice. So it’s important to find out how bankruptcy would or would not help you. Then you’ll be prepared to decide whether to use the options the nation’s founders and Congress have provided for you. 

 

Changing Your Mind after Filing Bankruptcy

Why would you change your mind after filing bankruptcy? Can you switch “Chapters” or even get out of bankruptcy altogether?  

 

After starting your bankruptcy case your circumstances could suddenly change. So you may no longer want to be in the bankruptcy case that you’re in.

Getting out of bankruptcy altogether—dismissing your case—is quite easy in a Chapter 13 “adjustment of debts” case. It’s harder with a Chapter 7 “straight bankruptcy” case.

Changing from one Chapter to the other—converting the case—is usually allowed either way: Chapter 7 to 13 and Chapter 13 to 7.

We start today with some reasons why you might want to dismiss or convert. Then in the next two blog posts we’ll talk about how it’s done first under Chapter 7 and then under Chapter 13.  

Why This is Worth Thinking About

Reasons why this conversation is worthwhile:

• Before deciding to file a bankruptcy case it’s smart to know whether you would be able to dismiss or convert your case if something happened to change your mind.

• You’ll better informed and thus likely be more careful when you file a bankruptcy case if you think in advance about situations which might induce you to want to get out of it.

• If your circumstances do change after your case is filed, you’ll understand your options better.

Why Dismiss or Convert?

What kinds of situations would lead to a person to want to get out of a bankruptcy case after filing one?

The situations tend to be different under Chapter 7 vs. Chapter 13. These differences reflect two very practical differences in these two legal options: their length and their likelihood of successful completion:

• most Chapter 7 cases last no more than about 4 months, compared to three to five years for a successful Chapter 13 case; and

• most Chapter 7 cases are completed successfully (at least those where the debtors are represented by an attorney), while a significant portion of Chapter 13 cases are not.

Situations for Dismissing or Converting Under Chapter 7

Under Chapter 7 there’s simply less that can go wrong and a lot less time for your circumstances to change.

The focus is on your assets and debts at the fixed moment in time when your case is filed. So if a careful analysis of your financial situation at that time shows that your case qualifies for Chapter 7, not much should change that.

Here are some unusual situations that can nevertheless arise making you wish you could get out of your Chapter 7 case (and sometimes instead convert to a Chapter 13 case):

• You were unaware at the time your case was filed that you have a legal right to a valuable asset. For example, you might not know that for estate planning purposes your parents’ had earlier secretly deeded their vacation home to you and your siblings.

• Assets are largely fixed as of the date of filing, but under Section 541(a)(5) of the Bankruptcy Code if somebody dies within 180 days of the filing of your case  leaving you as the beneficiary of an inheritance or a life insurance policy, that asset becomes legally accessible to pay your creditors.

• If right after filing your case you have an accident and incur new large medical bills, those new debts cannot be included and discharged (legally written off) in your case since that debt did not exist when your case was filed.

Situations for Dismissing or Converting Under Chapter 13

Under a Chapter 13 “adjustment of debts” bankruptcy there’s a lot going on and usually a lot more that can go wrong than in a Chapter 7 case. The focus is on your financial life not at a fixed moment in time but rather throughout the years of your case.

Your Chapter 13 payment plan specifies out how much and when the various creditors will be paid (if at all). Although often creditors don’t object to the terms of the plan they certainly can, sometimes in unexpected ways. So your proposed plan sometimes has to be changed more than you intended before it’s approved by the bankruptcy judge.

Then you have to comply with the terms of the plan, over the course of the following three to five years. This gives a lot of time for your circumstances to change. Your Chapter 13 plan usually assumes that your income and expenses will stay the same, or else sometimes tries to predict how they will change into the future. Either way, those assumptions come with risk.

Chapter 13 plans can be amended mid-stream. But sometimes the change in your circumstances is so significant that you need to get out of your Chapter 13 case (and sometimes instead convert to a Chapter 7 case). Here are some examples: 

• Your plan is designed around your desire to save your home, but a year or so later you find a job that requires you to move, taking away the primary purpose of your case.

• You file a joint Chapter 13 case with your spouse, but a couple years later you get divorced, totally changing your financial life.

• Or you get married, again greatly changing your financial life.

• Your income gets significantly reduced long-term, so much so that even amending your Chapter 13 plan is not feasible, making you no longer eligible for Chapter 13.

• Or your income gets significantly increased a year into your case; so much so that you become obligated to amend your plan to pay most or all of your debt.

As mentioned above, the next two blogs will be about how to get out of Chapter 7 and then Chapter 13, in situations like these examples.

 

What Could Complicate Your Otherwise Simple Bankruptcy Case?

What about your financial life could result in a not so simple bankruptcy case?

 

Bankruptcy can be very flexible. If your finances are complicated, bankruptcy likely has a decent way to deal with all the messes. My new clients are almost always amazed and relieved how well a bankruptcy game plan can solve all their financial problems. As in life, sometimes there are trade-offs and important choices to be made. But usually, whether your life is straightforward or complex, bankruptcy can adjust.

To demonstrate this in a practical way, here are some differences between a simple and not so simple bankruptcy case.

1. No non-exempt assets vs. owning non-exempt assets:  In the vast majority of Chapter 7 and Chapter 13 cases, you get to keep everything that you own. But even if you do own assets that are not protected (“non-exempt”), there are usually decent ways of holding on to them even within Chapter 7, and if necessary by filing a Chapter 13 to do so.

2. Under median income vs. over median income:  If your income is below a certain amount for your state and family size, you have the freedom to file either Chapter 7 or 13. But even if you are above that amount, you still may be able to file under either Chapter, depending on a series of other calculations. Again, Chapter 13 is there if necessary, and sometimes that may be the better choice anyway.

3. Not behind on real estate mortgage vs. you are behind:  If you don’t have a home mortgage or are current on it, that makes for a simpler case. But bankruptcy has many ways to help you save your house. Sometimes that can be done through Chapter 7, although Chapter 13 has a whole chest full of good tools if Chapter 7 doesn’t help you enough.

4. No debts with collateral vs. have such debts:  The utterly simplest cases have no secured debts, that is, those with collateral that the creditor has rights to. But most people have some secured debt. Both Chapter 7 and 13 have various ways to help you with these debts, whether you want to surrender the collateral or instead need to keep it.

5. No income tax debt/student loans/child or spousal support arrearage vs. have these debts:  Bankruptcy treats certain special kinds of debts in ways that are more favorable for those creditors, so life is easier in bankruptcy if you don’t have any of them. But if you do, you might be surprised how sometimes you have more power over these otherwise favored creditors than you think. You can write off or at least reduce some taxes in either Chapter 7 or 13, stop collections for back support through Chapter 13, and in certain circumstances gain some temporary or permanent advantages over student loans.

6. No challenge expected by a creditor to the discharge of its debt vs. expecting a challenge:  In most cases, no creditors raise challenges to your ability to write off their debts. Even when they threaten to do so, they often don’t within the short timeframe they must do so. But if a creditor does raise a challenge, bankruptcy procedures can resolve these kinds of disputes relatively efficiently.

7. No debts from a business vs. have such debts:  Although there is nothing about business debts that necessarily makes for a more complex case, that still tends to happen. These cases often have more unprotected assets, more troublesome kinds of debts, and often larger amounts of debts for creditors to get excited about. However, bankruptcy has ways to deal with all of this.

8. Don’t operate an ongoing business vs. do operate one:  A dead business is usually easier to deal with in a bankruptcy than a live one. Although you can continue operating a business while going through bankruptcy, that can be difficult to do under Chapter 7, and very likely will add some complications to a Chapter 13 case.

9. Lived in your present state for the last 2 years v. lived there less than 2 years:  For you to use the asset protections—exemptions—which are available to debtors filing bankruptcy in the state in which you are now living, you must have lived there for at least 2 years. Otherwise you must usually use the exemptions available to residents of the state where you lived previously. That can complicate your case because of a potential dispute with the trustee about which state’s exemptions actually apply, and then possibly disputes about how to apply an unfamiliar state’s exemptions.

10. Never filed bankruptcy vs. filed prior bankruptcy:  Actually, if you filed a prior bankruptcy, or even more than one, it may well make no difference whatsoever. But depending on the exact timing, a prior bankruptcy filing can not only limit which Chapter you can file under, it can even sometimes affect how much protection you get from your creditors under your new case.

We’ll dig into some of these differences in upcoming blogs. In the meantime remember that even though your financial life may seem messy in a bunch of ways, there’s a good chance that bankruptcy can clean it up and tie up those loose ends. It’s called a fresh start.

 

Don’t People Have a Moral Obligation to Pay Their Debts?

Yes, paying your debts is often the right thing to do. But sometimes you have a higher moral obligation to release yourself from those debts.

 

The Immediate Benefits of Bankruptcy

Is the decision whether or not to file bankruptcy simply a weighing of its financial costs and benefits? How about if you go beyond just the immediate dollars and cents and include less tangible but still very important factors like the impact on your credit record short-term (possibly hurt it) and long-term (probably improve it)? These questions focus on what’s in your best interest.

That’s fine. You need to find out what’s best for you financially and in other respects that serve your self-interest. It’s why, for example, corporations of all sizes file strategic bankruptcies because their smart and well-advised managers figure out that bankruptcy is the best way to reduce their debt and streamline their operations. That way the business has the best chance of surviving and hopefully thriving into the future.

And that’s a good thing, right?

The Human Dimension

But you are more than a business or corporation. For you the human costs and benefits have to be weighed as well. 

That includes things like the detriments and benefits to your emotional and even physical health. The impact of crushing debt on your relationships, with your children, with your spouse and others close to you. And the decision includes morality as well.

The Moral Element

Why morality? Because as human beings we have a need to do what is right. Not necessarily just what is right for you, but also what is right for those around you. What is right for your place in the world.  

We humans are moral creatures. Our most important choices often include choosing between doing what’s right and doing what’s wrong. To strip this out of our decision about whether or not to file bankruptcy is to dehumanize us. We need to engage in the moral component of this choice in order to make a deeply good and satisfying decision. Otherwise we’ll likely feel unsettled afterward, no matter what choice we make.

How to Make a Good Moral Decision  

1. Accept—own–the choices that you made so far, whether they were good or bad, sensible or short-sighted, intentional or forced—and the circumstances that got you where you are now.

Accept that you have used credit and made purchases which each included at the time a legal commitment to pay those debts. But also consider how much choice you had at the time about those uses of credit/purchases. Consider whether in hindsight you could have or would have done differently. What has changed so that you are now not able to keep those commitments?

2. Consider both the moral costs and benefits of continuing to try to meet those financial commitments.

The main moral benefit would be in keeping the promises you had made to pay those debts. That commitment to pay may be more or less strong depending on the circumstances, especially on how much choice you had at the time (an impulse purchase beyond your means vs. a necessary medical procedure), and what you could or could not realistically anticipate in the future (such as a sudden job loss or illness).

The costs of keeping prior commitments include the potential detriments to your emotional health and even to your physical health from the stress and anxiety. There may also be health effects from the need to work more hours or multiple jobs to try to make enough to pay your bills.

What’s the potential detriment to your marriage and family relationships, and to your relationship with your kid(s)? This includes not just the impact of your stress on these relationships, but also the impact on your ability to meet your financial responsibilities to them. Plus the effect of your debt on your ability to spend the time that these loving relationships require.

Ask yourself: do you have a realistic chance of successfully paying off your debts, and even if so, what would be the likely human costs to do so? And if you really don’t have a realistic chance of succeeding, is it time to stop fighting so that you are not just hurting yourself and those you love as you delay the inevitable, out of embarrassment, pride, or misplaced fear?

3. Recognize that you now, today, have both the opportunity and obligation to make a good decision about whether to continue trying to meet those commitments.

The past and its decisions are in the past. You can now make a decision to do the right thing for yourself and your loved ones.

Recognize that to just go along with the status quo without facing the situation honestly and bravely is to make a decision by default, a decision that likely not your morally best decision.

4. Get advice so that you know your legal options.

You might not think you have a moral obligation specifically to get good advice. But think about it: you can’t make a morally good choice about how to deal with your debts without knowing your legal alternatives about those debts. You cannot know whether there are more morally acceptable ways to deal with your creditors—such as to file a Chapter 13 payment plan instead of a “straight” Chapter 7—if you don’t know your legal options. When you understand the structure within which your choices have to be made, that often helps make the moral choices clearer.

5. Look at each of your legal options, and weigh them in light of your different moral obligations—to each of your creditors, to yourself, your spouse, your family, and anyone else affected. 

On one hand, this is an entirely personal decision. You need to look yourself in the mirror and be satisfied that you are doing the right thing. But as with any important decision, you can and most of the time should get help from the right people and resources. Also, consider talking to your closest friend, a family member, a church or spiritual mentor or leader, your accountant. Consider writing in a journal, or praying or meditating about it–doing whatever you think may help you make a good decision.

And although your bankruptcy attorney is primarily just your legal advisor, who will respect that the final decisions are up to you, because he or she has counseled many, many people wrestling with these kinds of decisions he or she may be able to help you with the human element of your decision.

Conclusion:

Henry David Thoreau said that the “price of anything is the amount of life you exchange for it.” What is “the amount of life” you are paying for letting yourself continue to be saddled with debt? What crucial parts of being human are you giving up while you avoid figuring out what to do?

It’s time for you to make a good and wise decision. Go get the legal advice so you can do so.