So what is the concept of bankruptcy? The bottom line is this: Most people with serious debt problems can make these problems go away if they go about it the right way. While bankruptcy is very generous and helpful for people who are struggling with debt, it’s not a free ride. Some of the downsides are discussed below, but for most people they are more scary than real.
The bottom line is that bankruptcy helps many people who simply cannot pay all their debts. Even though an aspect of it is negative, the reason for its enduring popularity is that almost everybody walks away with a net gain, financially and personally.
Bankruptcy is a federal law. It is intended to give people a fresh start free of debt. In bankruptcy, a person either gets released from their dischargeable debts (Chapter 7) or reduces their debts to a manageable level and maintains a payment plan for three to five years (Chapter 13). Although bankruptcy certainly helps people out of some jams, the bankruptcy laws are not merely charity. They are meant to encourage the entrepreneurial risk taking and the freedom that the U.S. economy depends on for growth. To encourage a certain amount of risk taking, there must be a path to financial redemption.
Why do people file bankruptcy? In our experience, these are some common scenarios:
- You are trying to keep debts current but are borrowing money from one card to pay other (robbing Peter to pay Paul). This is a house of cards (excuse the pun) and most people realize quickly that it can not last.
- You are trying to keep debts current by using your savings but can see the day when your savings will run out (don’t wait until it does).
- You are trying to keep debts current but you are going without the essentials of life to do so (you do not need to do this).
- You have defaulted on credit card debt and are dealing with debt collectors who are not willing to work with you and are rude and harassing.
- You have defaulted credit card debts and are being sued or already have civil judgments against you.
- You have looked into credit counseling and found that they demanded a payment you could not afford or, worse, you have been essentially scammed out of your money.
- You have lost a job or had a reduction in income.
- You have incurred substantial medical debt because of illness or an accident.
- You have fallen behind on house or car payments and facing foreclosure or car repossession.
- You had a business that failed or is failing.
Often, people feel embarrassed and like there’s no hope when they find themselves in situations like these. Do not despair! There is usually hope. Bankruptcy sounds scary, and it is not something to take lightly, but it is not as scary as you might think. You owe it to yourself to at least know your options. Where you find yourself years from now will be dictated by the decisions you make now.
Where you fit in the bankruptcy process depends primarily on your debts, assets, income, and expenses. We will tell you where you stand if you get in touch with us.
Chapter 7 wipes out most debts. The discharged debts include things like credit cards and medical bills. Whether you qualify is mainly based on your income. The Chapter 7 page has the details….
Chapter 13 is a partial repayment plan of your debts that, when completed, results in the balances of most debts being discharged. Chapter 13 can also help save peoples’ homes and deal effectively with tax problems. Visit the Chapter 13 page to get the details….
The “automatic stay” puts a stop to the feeding frenzy of calls and lawsuits upon the filing of the bankruptcy case. Once a bankruptcy is filed, everyone must stop collecting debts from you.
The automatic stay is one of the most important aspects of the bankruptcy process. Once you file a bankruptcy petition, 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.
When clients retain us we work with them to immediately reduce or eliminate debt collection calls by providing them with a special phone number to give out to callers even before their case is filed. Ask us about this important benefit. It is one of the things that makes our firm different than others.
First, 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. This is a very important exemption for homeowners with equity in their homes. 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 after March 16, 2011 homeowners will 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 laws. 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 the 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 better for consumers–while the federal exemptions will stay as they are. A table of the old versus new state personal property exemptions is right here:
The advantages of bankruptcy are usually obvious. When it comes down to it, bankruptcy is sometimes the only thing that can provide significant relief from burdensome debt. Discharging or substantially reducing credit card and other debt can radically improve your finances and quality of life. If you qualify (which you can find out by contacting us for a consultation), bankruptcy can provide tax-free, legal debt forgiveness and a fresh start.
Bankruptcy is also sometimes the only way to save your home from foreclosure or prevent the taxing authorities or a creditor from taking action against you. If this is your situation, you shouldn’t procrastinate: significant harm can come from waiting (like the filing of a tax lien or an encroaching foreclosure date.)
Some people worry a lot about credit when considering to file bankruptcy. This doesn’t make a lot of sense when credit is already severely damaged. In this situation, bankruptcy can be used to clear up credit balances, qualify for new loans, and re-build credit history by making timely payments.
You will have to appear in court with us. This is not as painful as it seems, but people still get justifiably nervous about it.
Bankruptcy will also not discharge 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). There are laws that prevent that.
We talk to Massachusetts consumers and small business owners every weekday about debt problems. Often bankruptcy is the cheapest and best solution to your debt problems.
Bankruptcy hurts your credit. Later, it gives you the ability to rebuild your credit by eliminating the debts causing you problems. It’s a little like quickly pulling off a Band-Aid. Bankruptcy is gone completely from your credit after enough time passes.
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 finished.
The reality is that many people already have severely damaged credit before they file for bankruptcy. Any missed debt payments, law suits, foreclosures, etc. will themselves stay on your credit report for seven years from the occurrence. So, it’s important to deal with the question honestly. Bankruptcy usually will have a negative impact on your credit, but usually not by much. The fear of credit damage is usually overstated and this fear causes paralysis in people. The truth is people routinely rebuild credit quickly after bankruptcy–even during the time periods when the bankruptcy still appears on their credit report. 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. We have heard from many, many former clients who say that they have been surprised by the easy availability of credit after bankruptcy.
Fees for Chapter 7 cases vary. We usually charge $1,500 for Chapter 13 cases. (More fees come out of your payment in Chapter 13, reducing your creditors’ percentage, not making you pay more).
Because we also have a debt litigation practice, we often obtain more money for clients than they pay us in fees. Ask us about this when you call.
Usually you only have to go once. We will go with you. 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). Note that at this time we only handle cases for people who live in or own property in Suffolk, Middlesex, Norfolk, Essex, Worcester, Plymouth, Bristol, Barnstable, Nantucket, Dukes counties. Where you are assigned is based on your city of town of residence.
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