Should I file for Bankruptcy?

The question of whether you should file for bankruptcy depends on your specific finances.   Because a Bankruptcy will have a bad affect on your credit, it should be discussed with your attorney and an approved credit counselor.

As a rule a personal Bankruptcy is your last resort.   If you have tried all other steps and can see no way out of the debt you're in, then you should seriously consider filing a personal Bankruptcy.

Through a personal Bankruptcy you may be able to get a "clean slate," where most of your debts are wiped out.   A personal Bankruptcy will not wipe out child support payments, most past due taxes, student loans or judgments arising from fraudulent or criminal activity.

Understanding Personal Bankruptcy:

There are two types of bankruptcies most often used by individuals and couples.   These are referred to as "Chapter 7" and "Chapter 13" bankruptcies.   Statistically most individuals file for Chapter 7 Bankruptcy especially when they do not have assets such as a house.   Generally the only way to keep your house through a Bankruptcy would be to file for Chapter 13.

In a Chapter 7, often called a "liquidation" bankruptcy, all of your assets, other than exempt assets, are collected by a trustee and sold.   Whatever money there is from the sale of the assets is used to pay your creditors.   Secured creditors, such as a bank holding a mortgage, are paid first and unsecured creditors are paid last if there is any money at all to pay them.   At the end of a liquidation bankruptcy you may be given a "Discharge in Bankruptcy," which wipes out most of your debts.   Certain debts cannot be wiped out in a bankruptcy and you will be responsible for them even after you receive a Discharge in Bankruptcy.

A Chapter 7 Bankruptcy is usually best for people who have a lot of credit card, consumer and personal debt with little assets.   If you do not own a home (house, condo or co-op), boat or expensive car, then Chapter 7 is likely to be your best choice.   In a Chapter 13, often called a "wage earner" bankruptcy, on the other hand, you will be required to make payments every two weeks or every month for a period of either 3 or 5 years.   At the end of your plan you may be entitled to a "Discharge in Bankruptcy" after all payments are made.   The discharge for a Chapter 13 Bankruptcy wipes out more types of debt than a Chapter 7 Bankruptcy.   For example, while it will neither wipe out support or alimony payments, a Chapter 13 discharge can wipe out property settlements that were part of a separation agreement or divorce.

If you own a home and want to keep it, Chapter 13 Bankruptcy is likely to be your only choice.   In order to keep your house during a Chapter 13 Bankruptcy, you will need to make all current mortgage/tax payments and make all payments under your plan.

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Alternatives to Bankruptcy:

Debt Counseling:

If your financial condition is the result of high credit card debt or other personal debt, filing for bankruptcy will only give you temporary relief.   Studies show that persons who file for bankruptcy due to high credit card debt will eventually end up in the same position after their bankruptcy because they will follow the same spending habits.   To break this cycle, it is a good idea to get "debt counseling" whether you file for bankruptcy or not.

Since 2005 you are required to attend a credit counseling session with an approved credit counselor before you can file for bankruptcy anyway.   These credit counselors must be approved by the Federal Bankruptcy Court and are different than the credit counselors or budget planners which are approved by New York State Banking Department.   The following is a list of approved counselors for the Southern District of New York (the District which covers the Bronx).   This consultation must take place within 6 months before you file for bankruptcy.   The cost of the counseling is normally about $50. If you cannot afford to pay that amount, you can apply for a waiver of the fee.

An approved Credit Counselor may be able to help you set up a budget where you can both get out of your current debt and keep from getting back into debt in the future.  Be very wary, however, of businesses which make big promises but are not on either the Bankruptcy Court approved list or New York State Banking Department licensed list.   Before hiring any company not on one of these approved lists check out the Budget Planners section of the BronxLawGuide.

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Debt Consolidation:

The term "debt consolidation" is too often used by dishonest companies as a way to separate you from your money.     A Debt consolidation "loan" means getting a single larger loan that you use to pay off all of your other debts.   Ideally the larger loan has a lower interest rate than the smaller debts, such as credit cards, thus making it easier for you to pay off your debt.  A debt consolidation loan can be secured by a mortgage on the equity in your house or as a lien against other assets, such as a car, stocks or even your pension.   In order for a debt consolidation loan to truly work, you need to change your spending habits and ideally to get rid of the credit cards themselves.

For a debt consolidation loan, you don't actually need any outside company's help.   If you have equity in your home, you can go to a normal mortgage company or bank.   If you have a pension plan which allows you to borrow money, you can contact the plan themselves.   This type of loan usually has very low interest and as you pay it back most of the interest goes back into your pension itself.   If there is to be a negotiation with your credit card companies or other debtors, you can do that yourself.   If you don't feel comfortable doing it yourself, again consult approved debt counselors.   Other companies may offer you greate results, but unfortunately some later discover they were ripped off.

If you do an Internet search of "debt consolidation" you'll get more than 9 million results.   This is unfortunately one of those areas where there are lots of people and companies ready to take advantage of your situation.   Be very careful of any company that: For that reason it is highly recommended that you only deal with debt management companies that are approved by either the Bankruptcy Court approved list or New York State Banking Department.

If you are thinking about using any company that is not on one of those two lists, you should stick with truly "not-for-profit" companies or an attorney admitted to practice in the State of New York.  You can check to see whether a Corporation is a not for profit corporation in New York by checking the Secretary of State database.   In addition to the company itself being not-for-profit, stay away from companies that want you to sign agreements that use other companies unless they too are not-for-profit or approved by the Bankruptcy Court approved list or New York State Banking Department.

Working with an attorney admitted to practice in New York gives you the additional protections which attorneys are subject to.   You can check to see whether an attorney is admitted to practice in the State of New York by checking the NYS Unified Court System database.   If an attorney is going to hold money for you that is to be used to pay off your debts, that money MUST be placed in that attorney's escrow account.   The attorney is subject to strict discipline if the escrow money is not properly used and if an attorney misused escrow funds the client might be entitled to reimbursement from The Lawyers' Fund for Client Protection.

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Debt Negotiation:

The single biggest reason for someone to file for a bankruptcy is getting hit with a huge hospital bill not fully covered by insurance.   If this is the reason why you're considering bankruptcy, then first consider trying to negotiate some sort of deal with the hospital or medical provider.   See the section on fighting a hospital or medical bill.   If you explain to the hospital that absent an agreement you will litigate the matter, fight the charges and eventually file for bankruptcy, they are likely to get serious about negotiating your debt.   It's not unusual for them to take as little as 10% or 20% off the debt as their bills for uninsured patients are often very inflated.

Negotiating with credit card companies:   Most credit experts will tell you that for your credit card company to be willing to discuss settling your balance for less than you owe, it is best to not make payments for several months.   If the credit card company sees that you are able to make even minimum payments every month, they're going to be less willing to take less than you owe.

If you adopt this strategy, make sure that you place the money you would have paid in a separate account so that you have money available to try to settle the debt.   Many companies that offer this type of service to you will recommend that you pay that money to them.   Be very careful about entering into that type of an agreement with anyone other than an approved credit counselor, not-for-profit organization or at attorney licensed to practice in the State of New York.   If you make that agreement with an attorney, for example, and the attorney takes your money instead of using it to pay your credit cards, you may be entitled to get some or all of it back through the Lawyers' Client Security Fund.

If you want to negotiate directly with your credit card companies, follow the steps below. You may be surprised at how easy it is to get results.

  1. First when you call the credit card company ask to speak to a supervisor.   Tell the person that you're speaking with that you will not be able to make your payments and you'd like to see if some arrangement can be made before having to file bankruptcy.   The biggest threat to the credit card company is filing bankruptcy.   Bankruptcy will stop them from all collection activities and they will either get pennies on the dollar in a Chapter 7 bankruptcy or have to wait for as much as five years to get fully paid without interest in a Chapter 13 Bankruptcy.   In today's economic climate, any dollar that they can collect today is worth many times more than what they might collect in a few years.

  2. Don't be discouraged if the first few people you speak to say that there's nothing that can be done.   Constantly asked to speak to their supervisor explaining that your situation is desperate and that the only choice they are leaving you with is bankruptcy.

  3. If you still get no response from your phone calls, use the following xxxx sample letter and send a letter directly to the CEO of your credit card company.   You can locate the name and address of the CEO of most companies by searching for their stock information at Yahoo finance.   Enter the name of your credit card company from your statement and click on "get quotes."   From the company's page, click on "profile" on the left.   Look under "Key Executives" on the right side of the page for the "Chief Executive Officer" which is the CEO or the "Chief Operating Officer" which is the COO.   Do an Internet search of that person with the name of the company and you should be able to quickly find his/her address and fax number.   You can also call the company directly and ask for his/her address and fax number.

  4. In order to get a credit card company to waive any portion of your debt or to give you zero or low interest rates while you pay back your debt, you are going to have to give up the credit card itself.   If you have one credit card that has a small or no balance, try to keep that credit card just for emergencies.   Do not look at it as a way to get things that you want now and believe you will be able to pay for later.   Use it only in the event that you have no other choice.

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Benefits to Bankruptcy:

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How Bankruptcy will affect you?

There is no doubt that bankruptcy will have the worst possible effect on your credit rating.   Credit reporting companies are able to provide information about bankruptcy for as much as 7 to 10 years.   Of course, if you're contemplating bankruptcy, your credit may already be so bad that it would take that long to rebuild your credit anyway.   Having a bad credit rating doesn't necessarily mean you can't get any credit, but it will make it almost impossible for you to get low interest credit, mortgages and home equity loans for at least 7 and for as long as 10 years.

Depending on which form of bankruptcy you filed, you may lose property that you own.   For Chapter 7 Bankruptcy this can include a house over a value of X. any property other than property which is exempt.   For Chapter 13 Bankruptcy you may end up losing no property but will have to pay a payment plan over three or five years.

The credit cards and other credit accounts that you have and list as part of your bankruptcy will definitely be canceled and there will be no credit available to you on those accounts.   You can keep some credit card or credit account out of your bankruptcy so that you have credit available for emergency situations.   In addition you might be surprised to find that you can still get credit cards and other credit accounts and, in fact, will likely start receiving offers for such accounts soon after you file for bankruptcy.   The offers you will be get will be for subprime accounts where the amounts they will lend you are small and the interest rates will be much higher than on regular credit accounts.

You can only file for bankruptcy once every several years.   For Chapter 7 Bankruptcy it's once every X. years for Chapter 13 Bankruptcy it's once out of every Y. years.   If you withdraw your bankruptcy and file multiple bankruptcies (common for people facing foreclosure of their home), you will likely lose the protection of the automatic stay for filing a bankruptcy.

Bankruptcy proceedings are public records. That means that anyone who wanted to search bankruptcy records could find your bankruptcy information.   Unless you are a celebrity, however, it is rare that anybody will look to find bankruptcy information on you or publish bankruptcy information on you.   Persons doing credit checks or even background checks, however, can fairly easily find the bankruptcy information.

If you receive an inheritance during your bankruptcy, that inheritance must be included in your bankruptcy and can be used to pay your creditors.   The same is true of any lawsuits you have for accidents. In fact, if you have a lawsuit involving an accident, the trustee must be substituted for you as the party to the lawsuit and any proceeds can be used to pay off your creditors.

Any loans that are included in the bankruptcy which were guaranteed or have co-signers will not give any protection to the guarantor or co-signer.   So, for example, if your parents co-signed a car loan for you and you included it in the bankruptcy, your discharge in bankruptcy will not cover your parents.   They will continue to be fully obligated on the loan unless they too file for bankruptcy.

Emotional consequences:   For some people, the thought of filing for bankruptcy can bring intense emotional feelings of shame or failure.   The more you understand bankruptcy and the more you realize how common it is, especially in this historically bad economy, the more you will see that it is a necessary and helpful tool for you, your family and our society in general.

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Helpful resources

Federal Trade Commission