Bankruptcy is a means of discharging the obligation to pay some or all of your debts. Bankruptcy is not a modern concept. The Law in the Old Testament of the Bible provides that at the end of every seven years every creditor shall release his debtors. (Deuteronomy 15: 1-2). More than 200 years ago the Constitution gave to Congress the right to make laws concerning bankruptcy.

Bankruptcy is intended to help honest debtors get a fresh start, but there is no hard and fast rule on who will benefit the most from filing for bankruptcy. These are some of the warning signs that I look for when advising a potential client that it may be time to file for bankruptcy:

1. Struggling to make rent or mortgage payments. When someone is faced with mounting bills, some debtors will play Credit Card Shuffle, randomly choosing which minimum payment to make based on how nasty the collection call will be. Some debtors will even pay credit card bills before paying their rent or mortgage rather than face those harassing collection calls. This is simply wrong. Food and shelter should take priority over credit card debt.


2. Stress. Are you losing sleep or constantly arguing with your spouse because of your debt problems? Money problems are a leading cause of divorce. Bankruptcy is not a cure all, but it can help remove your financial problems as a source of difficulties and stress in your marriage.


3. Health. Far too many clients lose sleep and suffer stress-related health problems because of their financial struggles. A willingness to work multiple jobs or crazy overtime hours may be a sign of good character, but it can lead to burnout, exhaustion and anxiety.


4. Changes in your normal behavior. Are you considering doing something illegal to fix your debt problems or something that could put your health or the health of your family at risk? Have you taken up gambling or drinking? Are you doing things that are “out of character” for you? These may be signs of desperation and it may be time to see an attorney.


5. The Balance Transfer Shuffle. Are you constantly applying for new credit cards to take advantage of low balance transfer rates? This may be a sign that you are in over your head in debt.

You may have heard that bankruptcy is no longer an option. This is NOT TRUE. It is more complicated than it used to be, but a fresh start is still available to most debtors.

Bankruptcy discharges liability for most or all debts and provides a fresh start. When the debt is discharged, the debtor has no further legal obligation to pay the debt.

It is usually not possible to:

1. Eliminate certain rights of secured creditors. Although a debtor can force secured creditors to take payments over time in the bankruptcy process, a debtor generally cannot keep the collateral unless the debtor continues to pay the debt.
2. Discharge types of debts singled out by the federal bankruptcy statutes for special treatment, such as child support, alimony, student loans, certain court ordered payments, criminal fines, and some taxes.
3. Protect all cosigners on their debts. If relative or friend co signed a loan which the debtor discharged in bankruptcy, the cosigner may still be obligated to repay that part of the loan not paid during the bankruptcy case.
4. Discharge debts incurred after bankruptcy has been filed.

Most consumers use Chapter 7 or Chapter 13 of the U.S. Bankruptcy Code. Petitions under Chapter 11 are usually reorganizations of businesses. Farmers may file under Chapter 12.

Chapter 7 is sometimes called “straight bankruptcy.” In Chapter 7, all unsecured debts (debts for which there is no collateral that could be repossessed) are discharged. Debts secured by collateral are treated differently, depending on the kind of property and the debtor’s intentions concerning the property.

In Chapter 13 bankruptcies, the debtor makes a plan to repay debts over a period of three to five years. Unsecured debts may be paid at a percentage of the debt owed. There are several ways of treating the payment of secured debts in a Chapter 13 plan.

The bankruptcy petition forms ask for income of any kind received by the debtor’s household during the six months before filing bankruptcy. This amount is divided by six to obtain an average monthly income and then multiplied by twelve to determine the gross annual income. If the gross income is less than the median income for the size of your household in your state, you are presumed to be eligible for a Chapter 7. If the gross income is greater than the median income, a means test of your expenses is used to determine whether you can file Chapter 7.

If your income is greater than the amount allowed for a Chapter 7, if your mortgage lender is about to foreclose, if you have debts assigned to you in a divorce, or if you have filed a Chapter 7 bankruptcy within the last 8 years, a petition is filed under Chapter 13.

In a Chapter 7 bankruptcy, a Trustee is appointed by the court to represent the interests of the creditors. It is the Trustee’s job to determine whether you have any assets that may be used to pay the creditors. Each state has laws listing assets which are exempt from taking by a creditor. The laws vary from state to state. Most bankruptcy debtors have only exempt property and are able to keep most or all of their property. If you cannot afford to make the payments on a secured debt, bankruptcy lets you return the collateral without having to repay the debt.

In a Chapter 13 bankruptcy, the bankruptcy trustee has a different job. The Chapter 13 Trustee receives your Chapter 13 plan payments and distributes them among your creditors. Chapter 13 debtors may usually keep even non-exempt assets while making their plan payments.

Some legal issues require a hearing before the bankruptcy judge, but most debtors do not appear before the judge. The debtor usually makes one appearance before the bankruptcy trustee. The debtor must present a photo ID and proof of social security number. In a Chapter 7 bankruptcy, the trustee will ask questions designed to find out whether the debtor has assets the trustee can take to pay the creditors. In a Chapter 13 bankruptcy, the trustee will ask questions to make sure that the debtor understands and can pay the Chapter 13 plan.

In a Chapter 7 bankruptcy, discharge is granted after 90 days from filing. If the trustee has received some assets, the bankruptcy will be closed after the assets have been sold and the creditors paid. In a Chapter 13 bankruptcy, the discharge is granted when the terms of the Chapter 13 plan have been fulfilled.

Bankruptcy may remain on your credit record for 10 years after filing. Creditors don’t seem to distinguish between Chapter 7 and Chapter 13 filings in determining credit scores. However, many debtors already have low scores when they file. Sometimes bankruptcy improves your chance of obtaining credit because you don’t have to pay all the old debt. Lenders also know that you can’t file another Chapter 7 bankruptcy for eight years.

Bankruptcy petitions may be filed without an attorney. Many debtors did so before the amendments to the bankruptcy law took effect in October 2005. Filing a bankruptcy has become more complicated and the unrepresented debtor may risk losing assets that could have been saved with the advice of a good bankruptcy attorney.

Penny Souhrada has been practicing law since 1994 and bankruptcy law since 1998. She is a member of the National Association of Consumer Bankruptcy Attorneys (NACBA), the only organization dedicated to providing legal services to consumer debtors. She has attended over 150 hours of continuing education to learn how to deal with the new amendments to the bankruptcy law. It is her goal to make the bankruptcy process as painless as possible for you.

We are a debt relief agency. We help people file for relief under the U.S. Bankruptcy Code.
This website contains general information only. This is not legal advice and it is NO substitute for a consultation with a lawyer!
No attorney-client relationship is formed until you come and see me, in person.

This site was designed by MLM – E-mail for website help to: michelle.moeller@mchsi.com