Common Questions about Bankruptcy in Massachusetts
Quick and In Depth
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What is Bankruptcy and Can it Help Me?
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What is
Chapter 7 Bankruptcy?
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What
is Chapter 13 Bankruptcy?
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How Much does Bankruptcy Cost?
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What is
the "Automatic Stay"?
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What are the Massachusetts
Exemptions?
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What are the Advantages of
Bankruptcy?
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What are the Disadvantages
of Bankruptcy?
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Will Bankruptcy Destroy my Credit?
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Where is the Bankruptcy Court and will I have to go?
Quick Answer:
Bankruptcy is a federal law that gives people who qualify a fresh start free of debt.
If you need serious debt relief and can live with less-than-perfect credit for a
while, bankruptcy may help you a great deal. Here's a rundown of the
chapters of bankruptcy that individuals and small businesses file.
Chapter 7: A full released from all dischargeable debts. It typically lasts
three months.
Chapter 13: A partial debt re-payment. It lasts three to five years and
after that the remaining debt balances are discharged.
Chapter 12: Debt reorganization for family farmers and fishermen.
Chapter 11: Debt Reorganization for businesses and individuals who exceed the
Chapter 13 debt limits.
In Depth:
The
history of bankruptcy in the United States has been complicated. Even
though the Congressional right to establish uniform laws on bankruptcy exists in the
Constitution, it took more than 100 years for bankruptcy laws to become somewhat
stable in this country. The bankruptcy laws have always been a battle
front between interest groups, principally between banking groups (and
now credit card companies) and consumer and progressive groups.
Bankruptcy law is designed to do two things. First, bankruptcy
forms part of this nation's social safety net by preventing people
from being forced into virtual slavery to repay debts--although some would argue
that this is what is happening now with student loans, which
are not typically dischargeable in bankruptcy. Second, the bankruptcy laws
are meant to encourage the entrepreneurial risk taking needed by the U.S. economy for growth.
One-third of businesses fail within the first two years of their existence
(*). To encourage a certain amount of risk taking in business,
there must be a path to financial redemption.
But why do people file bankruptcy? In our experience, these are some common scenarios:
- Attempting to keep debts current but are
borrowing money from one card to pay other ("robbing Peter to pay Paul").
Most people realize quickly that
this can't last.
- Trying to keep debts current by
using savings, but seeing the day when your savings will run out (don't
wait until it does).
- Trying to keep debts current but
your are going without the essentials of life to do so (you do not need to do
this).
- Defaulting on credit card debts and
dealing with debt collectors who are not willing to help and are rude
and harassing.
- Defaulting on credit card debt and
getting sued.
- Having looked into credit counseling, you found that they demanded a payment you could not afford or, worse,
tried to scam you.
- Loosing a job or being subject to a substantial reduction in
income.
- Incurring medical debt
because of illness or an accident.
- Falling behind on house or car
payments and facing foreclosure or car repossession.
- Owning a business that is in danger of failing.
Bankruptcy sounds scary, and it is not something to take lightly, but it's truly not
as scary or life-ending as it sounds. Where you fit in the bankruptcy
process depends primarily on your debts, assets, income, and expenses.
It's generally easy to get a hold of us, and we would be happy to speak with you about your
options.
Quick Answer:
If you make under a certain amount, based on your family size, you can file Chapter 7.
This is the type of bankruptcy wipes out all your debts except student loans, recent taxes, and a few other
unusual types of debts.
In Depth:
The goal of a Chapter 7 bankruptcy is to wipe
out ("discharge") your debts. However, in exchange for having your debts
discharged,
you must give up all your property to your creditors. Wait, what? It's not quite as
bad as it sounds. The vast majority of people have such minimal property that
they can keep it all in Chapter 7.
The reason for this is exemptions, which I address more fully
below.
A person must only give up
their "non-exempt" property, and in most cases all property
they own is exempt. This leads to what is called a "no-asset" Chapter 7 case.
There are always some assets in a "no-asset" case, like a house, car, 401(k), IRA, household
items, etc.,
but all of these assets can be exempt, which means you keep them.
However, not all cases are no-asset cases. If you have non-exempt property and
want to file bankruptcy you must give some of it up to the bankruptcy trustee or file Chapter 13. No
one ever looses any property in Chapter 13 because it's not a liquidation chapter.
The good news is that, assuming you have a capable bankruptcy
lawyer, you will find out what property is exempt
before your case is filed. It's worthwhile to use an experienced lawyer who didn't rush into this practice area
due to the bad economy; it won't cost you any more!
Income also affects your eligibility for Chapter 7. If you make more than the median income based
on your household size, you will have to contend with something called a "means test."
This test helps determine if you can receive a Chapter 7 discharge or would be better suited
to be in a Chapter 13. Even if you fail the means test, special circumstances
will still sometimes allow you to be eligible for Chapter 7.
As I said, the means test only applies to people who have
family income greater than the median income.
In Massachusetts, here's the median income by family size (for cases filed after May 1, 2012):
- Family of one: $55,185
- Family of two: $66,200
- Family of three: $82,873
- Family of four: $102,194
- Add $7,500 for each additional family member.
However, even those who are below the median income must contend with a "totality of the circumstances"
test. This test is comes from
Section 707(b)(3) of
the Bankruptcy Code. It is more vague than the means test, but its essentially
point is that if you have
the ability to fund a reasonable Chapter 13 repayment plan out of your income,
you must do so. This little, common-sense nugget is at the heart of the bankruptcy
system: if you can afford to pay none of your debts, you pay none of
your debts, but if you can afford to pay some of your debts, you pay some of your
debts. The totality of the circumstances test is rarely invoked, but it's
important to know about. The leading Massachusetts case on the test can be
found
here.More Chapter 7 details are available
here.
Quick Answer:
In Chapter 13, you make a monthly payment to the bankruptcy trustee based on your income for 36 to 60 months (three to five years). At the
end of this time, your unpaid balances are discharged. It can also help
you cure mortgage arrears.
In Depth:
Chapter 13 allows you to create a plan that you pay into on a
monthly basis. Initially, Chapter 13 may sound a lot less attractive than
Chapter 7: it requires that you pay money whereas Chapter
7 doesn't. While it's true that Chapter 7
is sometimes better, Chapter 13 has it's advantages.
Some of them are:
- It can be used to defend against mortgage foreclosure by allowing you to satisfy unpaid mortgage bills (or
even tax bills)
over time. If your lender is
demanding that you pay in one lump sum in order to stop foreclosure, this is an
invaluable tool.
- Chapter 13 stays on your credit report for three fewer years than Chapter 7 does (seven
years instead of ten). This seems like a small difference to some people
and a big one to others. It's up to you and what your plans are.
- There is no reaffirmation in Chapter 13. This avoids a sometimes
sticky situation related to car loans in Chapter 7. If this is on your
mind, you might want to have a look at the
keeping your car in bankruptcy
page on this site.
- No one ever looses property in a Chapter 13. It is not a "liquidation" chapter, it is a "reorganization"
chapter. What this means is that even if you have non-exempt property,
you will not loose it in Chapter 13. It affects something called the
"best interest" test, but that's usually not a problem for most people.
- Chapter 13 payments are often quite low, allowing a debtor to pay pennies
on the dollar to unsecured creditors and receive a discharge of the balances.
There's more you can read about Chapter 13 Bankruptcy
and about
choosing between Chapter 7 and Chapter 13 Bankruptcy.
Quick Answer:
We charge $1,500 plus court costs for most consumer cases.
In Depth:
You can visit our Bankruptcy Fees Page
to learn more.
The automatic stay is one of the most important provisions of the Bankruptcy
Code. Once you file a bankruptcy, the automatic stay stops all
collection efforts and proceedings against you, all harassment, lawsuits, and
any foreclosure proceedings. It gives you breathing room to deal with your
financial affairs without interference from your creditors.
Quick Answer:
Exemptions are laws that allow you to keep property in Chapter
7 bankruptcy. In Massachusetts, we can choose one of two sets of exemptions, the Massachusetts
exemptions and federal exemptions.
Essentially, they are two different lists of property you can keep in Chapter 7.
In Depth:
As part of a
bankruptcy filing you must choose between (1) the federal bankruptcy exemptions and
(2) the exemptions under Massachusetts and federal non-bankruptcy law. This
is a key decision that you and your bankruptcy attorney will make together that
will depends on the nature and value of your
property.
If the Massachusetts exemptions are chosen, it is usually because of the homestead
exemption, which is very important for
people with home equity. Filing a declaration of homestead in the
proper manner and at the right registry of deeds will exempt up to $500,000
of your equity in your primary
residence, even if the filing occurs just prior to your bankruptcy filing.
There are some new rules that limit the amount of the homestead in bankruptcy to $146,450 (adjusted
April 1, 2010 from $136,875) if the
property was acquired within 1215 days of a bankruptcy petition date.
This so-called "1215 day rule" does not apply if you bought a new home in the same state and rolled
over your equity from your old home into your new home.
For cases filed since March 16, 2011 homeowners choosing the state exemptions get an automatic $125,000 of
homestead protection in Massachusetts for their primary residence even without filing a homestead
for the full $500,000.
There are a number of other exemptions under
Massachusetts law and federal non-bankruptcy law. Some examples include:
401(k)s, certain retirement
accounts and death benefits,
social security benefits, veterans'
benefits, unemployment and workers' compensation benefits, and certain personal
property and pensions.
In January 2011, Massachusetts modernized our personal property exemptions.
These went into effect on April 7, 2011. As I wrote above, we will still have a choice
here between the federal and state exemptions.
The 2011 law just makes the state exemptions more generous for people if they
choose them. A table of the old versus
new personal property exemptions is right here:
| Property | Current | New | | Money for utilities | $75 | $500 | | Furniture | $3000 | $15,000 | | Books | $200 | $500 | | Tools | $500 | $5000 | | Stock in trade | $500 | $5000 | | Provisions for family | $300 | $600 | | Fishing equipment | $500 | $1500 | | Sewing machine | $200 | $300 | | One computer & one TV | none | no stated dollar limit | | Rent money | $200 | $2500 | | Cash or savings (execution) | $125 | $2500 on any day | | Wages (execution) | $125 | greater of 85% of gross wages or 50 times min. wage per week | | Automobile | $700 | $7500 wholesale, $15000 for disabled or elderly | | Personal property | none | $1000 to $6000 | | Jewelry | none | $ 2500 | | Wages (trustee process) | $125 | greater of 85% of gross wages or 50 times min. wage per week | | Bank account (trustee process) | $125 | $2500 |
Quick Answer:
A discharge of debts and a fresh start.
In Depth:
As the quick answer suggests, the main advantage of bankruptcy is obvious. When it comes
right down to it,
bankruptcy is sometimes the only thing that can provide significant relief from
overwhelming debt. Discharging or substantially reducing credit card and
other debt usually leads to a dramatically improved quality of life.
Bankruptcy is also sometimes is also the only way to save your home from foreclosure
or prevent the tax authorities or a creditor from taking action against you.
To obtain these advantages, however, you shouldn't procrastinate. Significant
harm, like the filing of a tax lien, a foreclosure sale or wage garnishment, can come from waiting
too long.
Quick Answer:
Your credit is hurt, and you may be required to give up property in a
Chapter 7.
In Depth:
As I stated above most people do not lose
any property in Chapter 7, and even those who would can opt instead for Chapter 13
and keep
all of their property.
However, bankruptcy does have a long-lasting impact on your credit.
A Chapter 7 bankruptcy will stay on your credit
report for 10 years, and a Chapter 13 will remain on your credit report for
seven years. The clock starts on these time periods once the case is
filed, not once the case is concluded or discharged. The net credit damage from bankruptcy is sometimes exaggerated, and
I discuss this issue in the next section.
There are additional downsides to bankruptcy. Of course, there is the
cost of the process (which you can read about here). There is also the fact that you will have to appear in court with us. This is
not as painful as it sounds, and is relatively quick, but people can get justifiably nervous about it.
Bankruptcy will also not help with certain debts like student loans. However,
contrary to what some people believe, filing bankruptcy will not stop you from getting student loans
in the
future that are guaranteed by the government (such as the Stafford, Perkins,
and PLUS loans that most students get).
Section 525(c) of
the Bankruptcy Code prevents denial of government-backed student loans based on
bankruptcy.
Bankruptcy is often the cheapest and best solution to debt problems.
However, that is not always the case. There are non-bankruptcy alternatives, and
you can get the honest scoop about them
here, and we'll help you weigh them
if you decide to get in touch with us.
Quick Answer:
Bankruptcy will place a negative entry on your credit report for
seven to 10 years, depending on the chapter. Contrary to what some believe, this
will not completely destroy
your credit during this period. You can re-build and establish
good credit even during the time that the bankruptcy is on your credit report.
In Depth:
Bankruptcy does have a long-lasting impact of your credit.
A Chapter 7 bankruptcy will stay on your credit
report for 10 years, and a Chapter 13 will remain on your credit report for
seven years. The clock starts on these time periods once the case is
filed, not after the case is concluded or discharged.
However, this needs to be analyzed realistically.
Many people already have severely damaged credit before
they file bankruptcy. Any missed debt payments, law suits,
foreclosures, etc. will themselves stay on your credit report for seven years
from the date of occurrence. So, it's important to deal with the question
honestly. What will the net result of a bankruptcy filing really be on my
credit? It will have a negative impact, but people routinely rebuild credit quickly after bankruptcy.
The presence of a bankruptcy on a credit report is just one factor making up
your credit score. It is a significant factor, but it can be outweighed by
other positive data.
Rebuilding credit after bankruptcy is essentially a two-step process.
First, you look at your report a couple of months after your bankruptcy case is
closed. Are balances being reported that have been discharged? If
so, sending a dispute notice to the credit reporting agencies, which you can
read a bit more about here, will get
these listed as "included in bankruptcy" with a zero balance.
Second, you will want to obtain a low-limit or secured credit card and start
borrowing again. Pay on time and as agreed and the credit card issuer will
report this positive activity to the credit reporting agencies. Your
credit score will begin to rise.
One thing I should note is that there is some very misleading information out
there about the ability to completely remove a bankruptcy from your credit report
during the seven to ten year period after the case. For example, one book author (Clayborne,
Mark. Hidden Credit Repair Secrets: That Fix Your Credit in 30 Days) states you
can dispute a bankruptcy and that the court clerks may not be able to find your
records because they might be at off-site storage location and, consequently, they will be unable to
confirm that you have filed bankruptcy. This is untrue. All bankruptcy records
for the past several years are available to court clerks through the PACER
computer system.
So, you can't have it all, but you can improve your debt to income ratio by
discharging debt and establish a track record of timely payments after
bankruptcy. Many with severely-damaged credit report improved credit a
short time after bankruptcy.
Quick Answer:
Yes, at least once. And it depends where you live.
In Depth:
After the court receives a Chapter 7 or 13 bankruptcy filing, it schedules a
meeting of your creditors. In the vast majority of cases no creditors
attend the meeting and it is just you, your bankruptcy attorney, and the
bankruptcy trustee for about a ten minute meeting. The meeting of creditors is
also called the "section 341" meeting because it's required by Section 341 of
the Bankruptcy Code.
There are two bankruptcy court divisions in Massachusetts, one in Boston and one in Worcester (although 341 meetings are also held in Brockton, Springfield, and Pittsfield).
Where you are assigned is based on your city of town of
residence. A complete list (for Eastern Mass.) can be viewed
here.
| Boston: |
Worcester: |
United States Bankruptcy Court
John. W. McCormack Post Office and Court House
5 Post Office Square, Suite 1150
Boston, MA 02109-3945 |
United States Bankruptcy Court
Donahue Federal Building
595 Main Street, Room 211
Worcester, MA 01608-2076 |
| 
Chapter 7
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Nicholas Ortiz on MoneyMatters Radio
