by John Pace
Debt in America
If you’re struggling with debt, you’re not alone--but, you probably feel like you are. That sense of isolation and embarrassment can be an obstacle to finding the right solution. So, before we talk in detail about bankruptcy and other options for resolving your debt, let’s take a quick look at the reality of debt in Michigan and around the country.
U.S. Household Debt
As of mid-2021, U.S. households were carrying a total of $14.96 trillion in debt. That’s up about $691 billion compared with the same point in 2020. About 2.7% of that debt was in some stage of delinquency. That may sound like a small percentage, but it adds up to more than $400 billion in delinquent debt. Across the country, about 29% of households have debt in collections.
As large as these numbers sound, they are likely artificially low. That’s because Covid relief measures such as stimulus checks and enhanced unemployment, combined with suspension of student loan payments, mortgage forbearance programs and other measures temporarily eased the burden on many Americans. For instance, loans that are in forbearance won’t show up as delinquent. So, if you’re reading this further removed from the pandemic and those relief measures, the amount of delinquent debt in the U.S. is likely even higher.
Closer to home, the situation is even worse.
Debt in Michigan
In Saginaw County, 32% of households have at least one debt in collections. 16% have medical debt in collections, and 13% of student loan holders are in default. Keep that in mind every time you cringe when you see a past-due notice or a debt collector tries to shame you on the phone.
Overwhelming debt is a problem. Delinquent debt is a problem. But, the problem isn’t that you’re a bad person or part of a tiny, shameful minority who can’t keep up with their bills. It’s tough out there. And, the statistics say that about one in three of your neighbors has similar problems.
Types of Debt
Debt breaks out into two broad categories: unsecured and secured. It’s important to understand the differences, because the consequences of defaulting on debt are different depending on which type of debt it is. The two types of debt are also treated differently in bankruptcy. These differences will be discussed in more detail later in this book.
Unsecured Debt
Most consumer debt is unsecured, which simply means that there is no property serving as collateral for the debt. Some common types of unsecured debt include:
- Credit card debt
- Unpaid rent and utilities
- Medical bills
- Personal loans not secured by collateral
- Payday loans
Student loans are also typically unsecured, but are one of a handful of types of unsecured debt that is treated differently than others in both the collection process and in bankruptcy.
Secured Debt
Secured debt is debt that is guaranteed by collateral. If you fail to pay the secured debt as agreed, the lender can take the property that serves as security. The two most common types of secured debt are automobile loans and home loans. The possible consequences of defaulting on a secured automobile loan or mortgage loan are the same, though the process is different: the lender can take back the property and sell it to help cover your debt.
Other types of loans may be secured, as well. For example, a personal loan from your bank might be secured with a Certificate of Deposit you have with the bank. Or, you may have gone to a storefront loan shop and pledged your television and game system as collateral for a small personal loan.
Often, when a lender takes property that serves as collateral and sells it, the sale does not generate enough to pay back the loan in full, plus costs of the sale. When that happens, the lender may be able to pursue you for the remaining balance. The leftover debt is unsecured since the collateral is gone, but the lender may still pursue other collection actions.
The Consequences of Debt
Delinquent debt can have a variety of negative consequences, some you are likely aware of and others you may not have considered. There’s the hit your credit report and credit score will take, and costs and limitation of options that come with those changes. You may not be able to qualify for new credit, and may pay higher interest rates and fees when you do. Poor credit can even affect your ability to rent an apartment.
If the debt is secured, like a home loan or car loan, you could face foreclosure or repossession. Of course, the stress of worrying about losing your home or car, trying to decide who to pay and what to let slide, and the constant ringing of your phone can have a negative impact on your quality of life, sleep, and even health. In other words, delinquent debt can hurt you, even before you are sued.
Creditors, debt collectors and debt buyers file about five million debt collection lawsuits in the United States each year. A judgment in a debt collection suit can lead to wage garnishment, attachment of your bank account, and other collection actions. For someone already struggling financially, a wage garnishment order or the loss of funds in the bank can be the last straw.
Debt problems rarely disappear on their own, and they tend to get worse over time. So, if your financial situation has become unmanageable, it’s time to explore your options.
Common Debt Solutions
Unfortunately, the most common approach to dealing with unmanageable debt is not to deal with it. But, that’s almost never the right answer. Here are some of the options most commonly available to people struggling with debt.
Inaction
Most people who eventually file for bankruptcy have been struggling with debt for two to five years--some even longer. There are many reasons people are slow to find real debt solutions. Some of the most common include:
High pressure from creditors and debt collectors pushing them into putting out fires, making whatever payments they can squeeze out when the call or threatening notice arrives. Too often, this means people in debt never have the chance to step back and explore long-term solutions.
Being overly optimistic about catching up. Many people who live paycheck to paycheck or run behind are always looking ahead to some event that will allow them to catch up. The annual income tax refund is a common example. But, a one-time influx of cash is rarely a lasting fix. By the time that tax check, bonus, or other extra income arrives, there’s usually a long list of ways to spend it. And, if your monthly income doesn’t quite meet expenses, a one-time catch-up just re-starts the cycle of falling further and further behind.
Stress and anxiety surrounding debt can make it hard to methodically assess your options and make clear-headed decisions about how to move forward, and can leave you feeling hopeless and like there are no good options.
Guilt and embarrassment about debt can get in the way of seeking help. The fact that most people don’t talk about their debt, combined with the attitudes of many debt collectors and debt buyers, can make you feel self-conscious about debt and pessimistic about getting help. But, you know now that financial struggles are a reality for many Americans, and many of your Michigan neighbors.
Whatever the obstacle, the bottom line is the same: ignoring debt is not an effective strategy. For most people, the problem gets worse over time. Even if you eventually take action, waiting and hoping can mean:
- Hundreds or thousands of dollars wasted on interest and late fees
- Accounts you could have kept in good standing suffering as you try to stretch available funds
- Being forced into crisis mode by wage garnishment or threats of eviction, automobile repossession, or foreclosure
- Ever-increasing harm to your credit report and credit score
- Delay in beginning to save money or put your income toward your goals
- Unnecessary stress that can impact your health, your relationships, and even your job
In other words, it’s smart to explore your options as soon as you know you have a problem.
Negotiating with Creditors and Debt Collectors
Direct Negotiation
For many people, negotiation should be the first line of defense. This is especially true if your financial problems are temporary and might be resolved by some short-term relief. For example, if your hours have been temporarily cut at work and you can’t keep up your regular payments, but know that your income will be back to normal levels in two or three months, you may be able to solve your problem by arranging to skip a couple of payments or reduce the amount you pay each month.
Often, people under financial stress skip this step. It’s unpleasant to pick up the phone and talk to a creditor or debt collector, and many people assume they won’t get any relief, anyway. In fact, not all negotiations are successful. But, many creditors have forbearance programs, special circumstance programs, payment deferrals and other options that can help keep an account on track. It’s often to their advantage to work with you, because accounts that spiral out of control often don’t get paid at all.
Nobody likes to hear no, but the risk of a frustrating or disappointing conversation is a small price to pay for a potential solution. There’s little or no downside to trying, and you may be pleasantly surprised. Just make sure you have a clear idea of your financial situation before you start the conversation.
That means knowing what you can afford to pay right now and in the coming weeks, and knowing when you expect to be able to resume regular payments. It’s important to be realistic and not over promise just to keep the creditor at bay. And, you’ll want to assess all of your debts and living expenses before making a deal with one creditor or debt collector. Otherwise, solving your problem with one may create problems with another.
Debt Settlement Programs
A debt settlement company does the negotiation for you, and sometimes they make big promises. You may see advertising suggesting that a debt settlement company can help you settle your debt for a fraction of what you owe. Occasionally, that’s even true. But, debt settlement is riddled with pitfalls.
When you sign up for debt settlement, you start making regular payments into your settlement fund. Typically, the debt settlement company will tell you to stop making payment on your debts and save up for settlement offers instead. But, they don’t start negotiating with the creditor until there’s enough in the fund to cover a lump-sum settlement.
That can mean that months pass with the creditor receiving no payment from you, and no negotiation underway. During that time, the creditor is usually making negative reports to the three major credit reporting agencies--Experian, Equifax and TransUnion--every month. They’ll likely also continue to call and send collection letters, emails and texts. They may even sue you.
Then, there’s no guarantee that the creditor will make a deal. Some make the decision on a case-by-case basis or apply a formula. Others have a firm policy of not working with debt settlement companies, which means in some cases you might have better luck negotiating on your own than having a “professional” do it for you.
In short, any benefit you may get from debt settlement likely won’t kick in for months, and it can take two years or more to complete a program. During that time, you’re always vulnerable to collection action and negative credit reporting. And, of course, debt settlement companies don’t work for free. That means the money you’re setting aside to go to creditors isn’t all going to creditors--another reason you might have more success negotiating directly with creditors.
If you do decide to consider debt settlement, be very careful. Make sure you thoroughly research the provider. The Consumer Financial Protection Bureau (CFPB) has sued multiple debt settlement companies over issues such as charging illegal fees, failing to tell consumers they had a right to get back funds they deposited, and failing to disclose their own financial connections with services they recommended to their clients.
Debt Management Plans
A debt management program is similar to debt settlement in that the organization reaches out to creditors and negotiates on your behalf. But, the process differs in some important ways. First, debt management programs are typically run through non-profit credit counseling agencies, rather than as a money-making business.
You’ll typically continue to make monthly payments, rather than saving up money to make a lump sum settlement. Your credit counselor will try to negotiate with your creditors for more manageable payments, which may include lowering your interest rate.
You make one monthly payment for all the debts included in the plan, and the program distributes them to your creditors. As long as these payments are up to date, you won’t get collection calls and letters, see late fees piling up, or face other collection action. But, there are downsides and weaknesses.
Though the companies are typically not-for-profit organizations, debt management isn’t free. Participants usually pay a set-up fee and then a small monthly fee. And, not every creditor will agree to be included in a debt management plan, which means you may end up with left over debts that don’t roll into the plan. That can undermine the value of the single monthly payment.
One drawback for many people who enter into a debt settlement plan is a drop in their credit scores. Most credit card companies will close an account when the account holder enters into a debt management plan. That can impact some of the key factors that affect your credit score, including the average age of accounts and the outstanding balance as a fraction of available credit.
Of course, credit can be rebuilt over time. But, this aspect leaves many people in tough financial circumstances uneasy, since access to credit may be their only emergency fallback.
Tapping Existing Assets
Often, people who are struggling with debt don’t have a lot of assets. That can limit their options when a cash flow crisis arises. But, others have reserves built up. This is especially common when financial problems are triggered by a life-altering event, such as a long period of unemployment or a medical crisis.
If selling a boat you rarely use or a vacation home will solve all of your financial problems and put you back on solid footing, chances are the decision will be a relatively easy one. But, that’s not how it goes for most people. Instead, many people in tough financial circumstances are questioning whether to drain one or both of the assets that contribute most to a family’s financial security: equity in the family home and retirement accounts.
Retirement Accounts
Pulling money out of a retirement account to settle debts can be tempting. It’s just sitting there. Depending on where you are in your career, you may not need it for years. You may have what seems like a lot of money compared with what you need. And you have plenty of time to put it back, right?
Don’t be too quick to jump to this conclusion. There’s a lot to consider if you’re thinking about taking money out of your retirement account.
First, taking money out of a retirement account to pay debts may cost you more than you expect. You’ll have to pay taxes on the funds withdrawn and, if you’re under 59 ½, you can usually expect to pay a 10% early withdrawal penalty, too. And, reducing your balance will slow the growth of your retirement account. Depending on how much you take out and how old you are, the lost earnings on your account could be very significant by the time you retire.
Depending on your plan, you may be able to take a loan against the account. That will save you the taxes and penalty, but may cost you in other ways. For instance, some employers suspend matching contributions when there’s a loan against the policy.
There’s an even more significant reason for people in tough financial circumstances to protect their retirement accounts, though. Many types of retirement accounts are off limits to creditors. For many people, that makes it one of the few assets--or perhaps the only asset--that remains a safe fallback and investment for your future regardless of your financial situation.
Home Equity
If you’re considering a debt consolidation loan and your credit is already suffering or you’re stretched thin with debt service, you’ll likely be asked to put up collateral. Collateral is property of value that you offer as security for a loan. If you don’t pay as agreed, the lender can take the property to help pay off your debt. For many people in this position, the family home is the only significant asset, and so the only thing they have to offer as collateral.
But, a debt consolidation loan isn’t the only solution that can put your home at risk. Two other common ways to take equity back out of a home are:
- To refinance the house and take out cash. For example, if the home is worth $200,000 and the outstanding mortgage loan is $100,000, the homeowner might take out a refinancing loan for $125,000, paying off the original loan and keeping $25,000.
- Through a home equity loan, which is a new loan secured by the equity in the home, but separate from the original mortgage loan.
- Through a home equity line of credit (HELOC), which allows the homeowner to draw off a portion of the equity in the home by writing checks or making transfers from the line of credit.
Regardless of which approach you take, you’ll likely pay closing costs on the loan And, any amount you take out will reduce your equity in the home.
When you refinance and take cash out, your new mortgage loan is larger, which can mean higher monthly mortgage payments or a longer repayment period. Depending on standard rates when you obtained your original mortgage and when you refinance, as well as factors such as your credit score, you may end up paying a higher interest rate on the new loan. That means you’ll pay more in total across the life of the loan.
If you take a home equity loan or home equity line of credit, the situation can get even more complicated. The new loan or line of credit will be a separate payment, meaning that you’ll have to make your regular mortgage payment plus another. It’s easy to fall behind again, and if that happens, the problem is much bigger. That’s because the new debt is secured by your home. If you default, you could face foreclosure.
Bankruptcy
The U.S. Bankruptcy Code offers a variety of options for people and businesses in debt trouble. In the next section, we’ll take a deeper dive into the two types of bankruptcy most commonly used by individuals and married couples: Chapter 7 and Chapter 13.
Consumer Bankruptcy
Bankruptcy law was designed to help people and businesses get back on solid financial footing when they’re overwhelmed by debt. While the main benefit of personal bankruptcy is to the individual or couple who resolves debt and moves toward a more stable financial future, it’s not the only one. Though it may not be immediately obvious, bankruptcy helps the economy. People who are devoting all of their income to managing debt don’t participate in the economy in a positive way. That is, they don’t spend money in local businesses, buy homes and cars, and otherwise contribute to the growth of businesses and the creation of jobs.
A fresh start in bankruptcy frees up that income for the individual or couple to spend as they choose. While that should mean savings, planning for retirement, and other efforts to stabilize finances, it generally also means more opportunity to buy consumer goods, take vacations, eat out, purchase automobiles and homes, and stimulate the economy.
Chapter 7 and Chapter 13 bankruptcy offer two very different solutions for people in different circumstances. The best way to find out whether bankruptcy might be the right solution for you, and which type of bankruptcy would be the best fit, is to talk with a local consumer bankruptcy lawyer.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is the most popular type of bankruptcy. In 2020, 79.6% of all filings in the U.S. Bankruptcy Court for the Eastern District of Michigan were Chapter 7 filings. It’s no surprise that many people who qualify choose Chapter 7. Chapter 7 bankruptcy is a relatively quick and easy process: most cases are resolved in three to five months, compared with three to five years for a Chapter 13 case. And, Chapter 7 bankruptcy eliminates many unsecured debts outright, providing a quicker path to a debt-free life.
Here’s how it works.
The Chapter 7 Bankruptcy Process
The basic steps of the Chapter 7 bankruptcy process are laid out below. Occasionally, certain bankruptcy cases involve additional steps, such as the bankruptcy trustee asking for additional information or a creditor filing an objection. Some of these are discussed in more detail later in this section. However, your Chapter 7 bankruptcy lawyer is the best source of insight about any additional steps that may be required in your particular case and what you can expect.
Step One: Determine Eligibility
Not everyone qualifies for Chapter 7 bankruptcy. Some of the reasons a person might not be able to file Chapter 7 and receive a discharge include:
Timing: A person who has filed for Chapter 7 within the previous eight years and received a discharge isn’t eligible for another Chapter 7 discharge. If you received a prior discharge in Chapter 13, the waiting period to file a Chapter 7 case is six years.
You’ve Been Barred by the Court: Though it’s not common, a bankruptcy court can prohibit someone from filing another case for a time, even if a discharge wasn’t granted and that person would otherwise be eligible to file again. This typically happens when the case is dismissed due to fraud or refusal to follow court orders.
You Can’t Pass the Means Test: The Chapter 7 means test is designed to make sure people filing for Chapter 7 bankruptcy and discharging their debts aren’t abusing the process--that they really can’t afford to pay them. The analysis is a multi-step process. The first step--and the simplest--is to compare your income to the median income for a family the same size as yours in your state.
As of May, 2021, the relevant Michigan medians by household size are:
- One person: $53,815
- Two people: $67,015
- Three people: $80,465
- Four people: $99,179
For each additional person, the amount increases by $9,000.
However, these numbers are updated regularly, so it’s important to check the current medians when assessing your eligibility.
If your income is below the median, there’s no “presumption of abuse” and you can typically proceed with your Chapter 7 case. Most people considering Chapter 7 bankruptcy can stop here. If your income is above the median, though, you’ll have to go on to the next step. The remaining steps in the means test are a bit more complicated. A bankruptcy attorney can help you determine whether you are likely to be eligible.
For those with incomes above the median, the next step is to calculate how much disposable income you’ll have over the next five years. “Disposable income” is the income you have left after certain living expenses, such as rent, food, and transportation to work. But, not all expenses are included, and the allowed deduction for an expense may be different from the amount you’re actually spending.
If that left over income adds up to less than $8,175 over five years, there’s no presumption of abuse and you can file. (Note that this number will be updated on April 1, 2022.)
If the left over income adds up to more than $13,650 over five years (also scheduled to update on April 1, 2022), there is a presumption of abuse. However, you may still be able to file if there are special circumstances.
If your left over income across five years falls into the gray area between $8,175 and $13,650, there’s yet another step in the calculation. To complete this step, you’ll have to add up all of your non-priority unsecured debts. Most unsecured debts fall into this category, but a few have priority status, such as student loan debt and child support.
If your disposable income over five years is less than 25% of that total, there’s no presumption of abuse and you can file Chapter 7. But, if your left over income over five years is enough to pay at least 25% of your non-priority unsecured debts, the presumption of abuse arises. As in the previous step, you likely won’t be able to file Chapter 7. But, if you have special circumstances, you may still qualify.
If this all seems complicated and overwhelming, don’t worry. If your income is above the median and you have to go on to the more complex levels of the test, your bankruptcy attorney can crunch the numbers and tell you whether you’re likely to qualify for Chapter 7.
Step Two: Determine Whether Chapter 7 is Right for You
Chapter 7 bankruptcy can be a powerful tool for wiping the slate clean and building a stronger financial future. But, not everyone who qualifies for Chapter 7 chooses Chapter 7. There are two common reasons people who qualify for Chapter 7 choose other options, such as filing under Chapter 13.
The first is that some of their problems are with secured debts, and they want to keep the collateral. For example, if the bankruptcy filing is triggered by a mortgage foreclosure, Chapter 7 may delay the process, but it won’t provide a long-term solution. In a Chapter 13 plan, the past-due balance can often be rolled into the repayment plan, offering an opportunity to save the house.
The other is the need to protect non-exempt assets. In a Chapter 7 case, the bankruptcy trustee can take assets to put toward paying creditors. But, many types of property are exempt in bankruptcy, meaning that the trustee can’t take them. In Michigan, you can choose whether to apply state exemptions or federal exemptions. Your bankruptcy attorney can help you determine which set of exemptions best protects you, depending on the type of assets you own, their value, and your top priorities.
Most people who file for Chapter 7 bankruptcy don’t have any non-exempt assets and don’t lose any property. If you do have non-exempt assets that you want to keep, you may want to consider Chapter 13 bankruptcy.
Step Three: Credit Counseling
Before filing for Chapter 7 bankruptcy, an individual or couple must complete a credit counseling session with an approved agency. Congress added this requirement in 2005 to ensure that people filing bankruptcy had considered all of their options and were aware of both the pros and cons of bankruptcy. It quickly became apparent that by the time most people were considering bankruptcy and the credit counseling requirement kicked in, bankruptcy was the best answer for most. Several studies have concluded that the pre-bankruptcy credit counseling requirement isn’t beneficial to most filers. But, the law hasn’t changed. With very limited exceptions, a consumer bankruptcy case filed without a credit counseling certificate will be dismissed.
Fortunately, credit counseling is inexpensive and easy to access. Your bankruptcy attorney may have a recommendation for you, or you can find a list of approved credit counseling agencies on the Department of Justice (DOJ) website.
Step Four: Complete Your Petition and Schedules
This part is a big job, and it’s important to get it right. Not only are you signing these documents under penalty of perjury, but making mistakes or leaving things out could delay your bankruptcy case or mean that certain debts don’t get discharged. In some cases, it might even mean your case gets dismissed.
To complete these documents, you’ll need:
- A list of all your debts, including outstanding balances, account numbers, and mailing addresses for your creditors
- Income information
- A list of your assets, including values
- Detailed information about your living expenses
- If you’re married, your spouse’s income information--even if they aren’t filing
You’ll also need to answer other questions about your debts and income, such as whether any of the debts are in dispute, and whether you anticipate any significant changes in your income.
If you work with a bankruptcy attorney, the law firm will prepare these petitions and schedules for you, based on the information you provide. Then, you’ll review them carefully to ensure that they are complete and accurate before you sign them.
Step Five: File Your Petition and Schedules
Once you’ve reviewed and signed your documents, they must be filed with the bankruptcy court, along with your filing fee and the creditors’ matrix--a formatted mailing list the bankruptcy court clerk will use to send notice of the filing to your creditors.
In most cases, an “automatic stay” order is entered as soon as you file. This order offers powerful, immediate protection that is described further in the next section.
Step Six: Attend Your 341 Hearing
The 341 hearing, also known as the meeting of creditors, typically takes place a few weeks after you file. For most Chapter 7 filers, this is the only appearance required. And, it’s not even a court hearing. The bankruptcy trustee presides over the meeting, which may be held in a conference room at the courthouse, or even in an office or other offsite location.
Before the meeting, you’ll receive some additional instructions about what to bring to the meeting. If you’re represented by a bankruptcy attorney, the attorney can tell you in greater detail what to expect, including the questions the bankruptcy trustee is most likely to ask.
Many people are nervous about this meeting, but it’s typically a quick, smooth process. Creditors have the right to appear at the hearing and ask questions, but most do not. Most 341 meetings last less than 10 minutes. For most Chapter 7 filers, this is the only hearing and there are no actual court appearances.
At or after the meeting, the trustee may ask you for additional information or documentation. It’s important to provide this information as quickly as possible to keep your case on track.
Step Seven: Complete an Approved Financial Management Course
The credit counseling session has to be completed before the bankruptcy petition is filed, but the financial management course (also sometimes called “debtor education”) must be completed at some point after filing and before a discharge can be granted.
Like credit counseling, the debtor education course is relatively inexpensive and can typically be completed in two hours or less. The course is most often completed online. But, the purpose is quite a bit different. While credit counseling is intended to help ensure that bankruptcy is the right choice, the financial management course is designed to help bankruptcy filers make the most of the opportunities bankruptcy offers.
Step Eight: Wait
After the 341 meeting, creditors have an opportunity to file objections. The vast majority do not, especially if there are no assets available for distribution in the case. If the trustee requests additional information after the 341 meeting, the trustee objects to discharge, or a creditor objects, your bankruptcy attorney will explain your options and work with you to keep your bankruptcy case on track.
Step Nine: Receive Your Discharge
In most cases, the discharge order is entered about 60 days after the meeting of creditors. You are no longer legally responsible for debts that were discharged in the bankruptcy case. The order also prohibits creditors from trying to collect on those debts.
You’ll want to keep a copy of your discharge order on hand. If a creditor, debt collector or debt buyer contacts you about a debt that has been discharged, you may need to send them a copy of the order. If they persist in trying to collect after being notified that the debt was discharged in bankruptcy, they may be subject to sanctions in bankruptcy court. They may also be violating separate consumer financial protection statutes.
In most cases, the entire process takes just a few months. Most Chapter 7 filers shed most or all of their unsecured debts, including credit card debt, medical bills, past-due rent and utilities, payday loans and other unsecured personal loans and more.
The Chapter 13 Bankruptcy Process
The Chapter 13 bankruptcy process is very different from the Chapter 7 process, and the goals are somewhat different. But, some of the basic steps are the same. Like the Chapter 7 process, the Chapter 13 process may vary slightly depending on specific elements of your case. Here’s a step-by-step overview of the basics.
Step One: Determine Eligibility
Unlike Chapter 7 bankruptcy, Chapter 13 doesn’t require means testing. However, there are still some limitations. Some are similar to the limits associated with Chapter 7. For instance:
Timing: If you’ve received a discharge in a previous bankruptcy case, there is a waiting period before you can file another case and receive a discharge. However, the waiting period is shorter if the second or subsequent filing is a Chapter 13 case: two years after a prior Chapter 13 and four years after a prior Chapter 7.
There’s another, more important difference, too. The limitation isn’t on filing another case, but on filing another case and receiving a discharge. In a Chapter 7 case, that’s a deal breaker--the discharge is the reason people file for Chapter 7 bankruptcy. But, Chapter 13 works differently. Even if you’re not eligible for a discharge, it may still be beneficial to file. If you’re in debt trouble and think it’s too soon to file again, speak with a local bankruptcy attorney about whether filing a Chapter 13 case might benefit you, even if you don’t qualify for a discharge.
You’ve Been Barred by the Court: As with Chapter 7, a prior order from a bankruptcy court may prohibit a person from filing for a period of time. This is rare, but typically occurs if the prior bankruptcy case was dismissed for fraud or because the filer disobeyed the court’s orders.
There are also two requirements for Chapter 13 that don’t apply in Chapter 7:
Debt Limits: There’s no cap on the amount of debt you can include in a Chapter 7 case. But, Chapter 13 places limits on both unsecured and secured debts. As of this writing, the cap is $419,275 in unsecured debt and $1,257,850 in secured debt. The limits update every three years, and will next be adjusted on April 1, 2022.
Ability to Pay: The Chapter 7 means test is designed to make sure Chapter 7 filers honestly can’t afford to pay their debts. Though it may sound a little strange at first, in a Chapter 13 case the petitioner has to prove that they can. That’s because the Chapter 13 case revolves around a three to five year repayment plan. To get a plan approved, you must show that you can afford to make plan payments while also covering your living expenses.
Step Two: Determine Whether Chapter 13 is Right for You
There are two key considerations in choosing Chapter 13 bankruptcy. First, many people qualify for both Chapter 7 and Chapter 13 bankruptcy. In that situation, it’s important to carefully consider which type of bankruptcy better serves your purposes. For example, people with mostly unsecured debt typically choose Chapter 7 if it’s an option, since that debt can usually be quickly eliminated.
But, Chapter 13 can provide a solution for people looking to resolve secured debt. For example, rolling the past-due balance on a mortgage into a Chapter 13 repayment plan may allow a homeowner who has fallen behind to avoid foreclosure. Chapter 13 may also provide a way for people with non-exempt assets to keep those assets while regaining control of their debt. The best source of information about which type of bankruptcy might be best for you is an experienced Saginaw bankruptcy lawyer.
Step Three: Credit Counseling
The credit counseling requirement is the same for Chapter 13 as for Chapter 7. The credit counseling session must be conducted by an approved provider, and must be completed prior to filing. A certificate of completion is filed along with the bankruptcy petition. These sessions are typically inexpensive and can be completed online or over the phone.
With very limited exceptions, a bankruptcy case filed without a credit counseling certificate will be dismissed.
Step Four: Complete Your Petition, Schedules and Proposed Plan
The petition and schedules you’ll file in a Chapter 13 case are the same as those required for Chapter 7, and include information about your income, assets, assets you’re claiming as exempt, debts, living expenses, and others impacted by your debts, such as co-debtors.
But, Chapter 13 requires another piece: a proposed repayment plan that spans three to five years. Depending on your income and the amount and type of your debts, this plan may provide for full payment of your unsecured debts, or may allow for some unsecured debt to be discharged when you have successfully completed the plan. You’ll also have to decide whether to keep property that serves as collateral for secured debts or return it and treat the outstanding debt as unsecured. In some situations, you may be able to alter the terms of a contract, such as reducing the balance due on an automobile loan to the current value of the car or lowering the interest rate.
Creating a plan that is manageable with your budget, allows you to keep up payments while paying other expenses outside the plan, and is likely to be confirmed by the court can be complicated. This is one of the aspects of the bankruptcy process where you will most benefit from the assistance of a seasoned local bankruptcy lawyer.
Step Five: File Your Petition, Schedules and Proposed Plan
Once you’ve carefully reviewed and signed your documents, your attorney will file them with the bankruptcy court. Usually, you’ll file your proposed plan along with the petitions and schedules. However, you can file the proposed plan within 15 days of filing the petition.
As in a Chapter 7 case, an automatic stay takes effect in most cases as soon as the petition is filed.
Step Six: Start Making Plan Payments
Plan payments start about one month after you file, before your plan has been confirmed. So, when you file, make sure you are prepared to make that first payment under your proposed plan in about 30 days.
Step Seven: Attend Your 341 Hearing
You’ll have to appear (perhaps remotely) at a meeting of creditors, also sometimes called the 341 meeting or 341 hearing. Many people are uneasy about this meeting, but it’s typically very quick and easy. Your bankruptcy attorney can explain in detail what you can expect at this meeting.
The bankruptcy trustee will preside over the meeting, check your identification, and ask you a series of standard questions. Then, the trustee may ask additional questions if anything in your documents is unclear or additional information is needed. Creditors have a right to appear at this meeting and ask questions, but they usually don’t.
After this meeting, creditors have 21 days to file objections to plan confirmation.
Step Eight: Attend Your Confirmation Hearing
You may not personally have to attend your confirmation hearing. Your attorney may handle the hearing without you. At this hearing, the court will determine whether or not to confirm your plan. By this time, you will know whether any creditors have objected and will have had an opportunity to modify the plan if necessary. So, your bankruptcy attorney will generally have a good idea of what to expect at the hearing.
Step Nine: Complete an Approved Financial Management Course
At some point between filing and the conclusion of your case, you’ll have to complete an approved “debtor education” course. This course is intended to help you get back on your feet financially after bankruptcy. Since you can begin incorporating these strategies while you’re still making your plan payments, it’s a good idea to complete this course early in the process rather than waiting until you are near plan completion.
This course takes about two hours and can usually be completed online or by phone.
Step Ten: Make Plan Payments as Scheduled
Making plan payments on time is critical. You’ll typically make monthly payments for three to five years.
If something changes, like you lose your job or get a significant raise, notify your attorney and the bankruptcy trustee right away. Depending on the change, it may be necessary to modify your plan.
Step Eleven: Receive Your Discharge (Maybe)
When you’ve completed all plan payments and fulfilled any other requirements, the trustee will notify the court that your plan has been successfully completed. Depending on your plan, remaining unsecured debt may be discharged.
Immediate Relief in Bankruptcy
Many people who schedule a free bankruptcy consultation ask how long the bankruptcy process will take. It’s understandable that people who have been struggling financially are eager for a final resolution. But, for most, “when will this be over?” is the wrong question. That’s because of the automatic stay, which was mentioned briefly in the bankruptcy process section.
The automatic stay is a court order that tells creditors and debt collectors to stop collection action. This order is entered as soon as the bankruptcy petition is filed in most cases. That means:
- Creditors and debt collectors have to stop calling, emailing, sending collection notices, texting, and otherwise demanding payment.
- Automobile lenders can’t repossess the vehicle while the stay is in effect.
- Mortgage lenders can’t commence a foreclosure, nor move forward with a foreclosure that’s already in progress.
- Wage garnishments stop.
- Creditors and debt buyers can’t file collection lawsuits against you.
- Collection lawsuits that are already underway are frozen.
In other words, the relief from debt stress begins immediately after you file.
If a creditor or debt collector hasn’t yet received notice of the bankruptcy or has made a mistake in contacting you, you can simply tell them that you’ve filed for bankruptcy and provide some information about your case. If they are aware of the bankruptcy filing and persist in trying to collect from you anyway, they are in violation of the court order. That means they may be sanctioned by the bankruptcy court.
The automatic stay typically remains in effect until the case concludes. In a Chapter 7 case, that means until discharge. In a Chapter 13 case, the stay typically remains in effect for as long as plan payments are current and other requirements are fulfilled. That means the automatic stay will usually protect against collection action right up until the bankruptcy case is complete.
There are two exceptions. One is that in some repeat bankruptcy cases, the stay is entered only temporarily, or may not be entered automatically. If you’ve filed for bankruptcy before, talk with your attorney about how the automatic stay will apply in your case.
The other is that in certain circumstances, the creditor may be able to ask the court to lift the automatic stay and allow it to move forward with collection activity. This typically occurs when the debt in question won’t be resolved by the bankruptcy case. For example, mortgage lenders often file motions for relief from the automatic stay in Chapter 7 cases.
Assessing Whether Bankruptcy is Right for You
Many people who decide to file for bankruptcy have waited longer than they should have. If you’re in that position, don’t beat yourself up over it. It’s common to be overly optimistic about overcoming debt problems, or to be too overwhelmed by the steady stream of immediate problems to make longer-term plans. If you’ve let things spiral for too long, the best time to educate yourself and take control is now.
If you’re reading this earlier in the process, though, you can avoid a lot of stress, sleepless nights, distraction, and wasted money by assessing your options now.
Many people decide to explore solutions, including bankruptcy, when something urgent arises. Some of the most common examples include:
- The threat of automobile repossession
- A wage garnishment that breaks an already-tight budget
- An impending foreclosure sale
While bankruptcy can often help resolve those issues, they’re usually also a sign that your finances have been suffering for a while. To skip some of those wasted interest and late fee payments and start your journey to financial stability sooner, consider talking with a local bankruptcy attorney if:
- Making payment toward your debts consistently leaves you short at the end of the month
- You’re juggling payments and paying a lot of interest and late fees
- Your credit is suffering because of the amount of debt you’re carrying and a patchy payment history
- You’re making minimum payments month after month without seeing much change in your balance
- You’re considering drastic action like cashing in your retirement account or taking out a second mortgage to pay your debts
- You’re relying on credit cards to pay bills
- You’ve been through a disruptive event like a divorce or serious illness and have been running behind ever since
Of course, these are just examples of warning signs that it’s time to educate yourself about possible solutions. If financial stress is negatively impacting your life, it’s time to learn more about your options. If you’re afraid to pick up the phone or open the mail because you’re being bombarded by debt collectors, it’s time to educate yourself. If you can’t move forward with things that are important to you--like saving for a home or providing for your children the way you want to--because you’re putting all your money toward servicing debts, it’s time to take stock.
It’s natural to be uneasy about making significant financial changes. But, that shouldn’t hold you back. Assessing your options, choosing one, and moving forward is a step-by-step process. The first step is to learn more about your options. That’s where a free, no-obligation consultation with a local bankruptcy attorney can help.
Do You Need a Lawyer to File Bankruptcy?
The technical answer is “no.” People can and do file for bankruptcy on their own. But, there are some risks to filing without a lawyer, and some clear benefits to having a knowledgeable advocate on your side.
One of the busiest bankruptcy courts in the nation tracks information about bankruptcy cases filed without attorneys and reports on this data. According to the most recent report, 94.1% of those who were represented by an attorney in their Chapter 7 cases received a discharge. Just 55.6% of those who filed without help successfully completed their cases.
Many factors contribute to the lower success rate, such as:
- People filing without the guidance of an experienced bankruptcy attorney are more likely to file when they may not be qualified, or when the timing isn’t right. This often means a lot of wasted time and a wasted filing fee. In some cases, this type of mistake could cost you the opportunity to take alternative action that might have successfully averted wage garnishment, repossession, or another crisis.
- Bankruptcy paperwork is complicated. The fact that you can download forms online may be a bit misleading--the standard petition and schedules in a consumer bankruptcy case typically run well past 50 pages, and that doesn’t include a Chapter 13 plan or any type of supplemental pleadings. Some of these forms are complicated, and mistakes could delay your case, result in a debt not being discharged, or even end in dismissal of your case.
- People filing on their own are more likely to make simple but critical errors, like filing without a credit counseling certificate or failing to provide requested documentation. These errors can delay the process or even result in dismissal. In fact, in the study referenced above, 36% of Chapter 7 cases filed by people representing themselves without assistance were dismissed due to missing information or documents.
- People filing without advice from a knowledgeable attorney may file the wrong type of bankruptcy for their circumstances, meaning that they don’t get full value from the case or end up voluntarily dismissing to protect property or avoid other consequences.
You’ll also be called upon to make decisions that involve more than just plugging information into a form. For instance, if you have an automobile loan, you may have three options: to return the car and discharge the debt, to “redeem,” the car by paying its current market value in a lump sum, or by affirming your auto loan and continuing to make payments. Though most people’s first instinct is to affirm the loan because they need a car, it’s not always the best option, and defaulting to the easiest path may be expensive. An experienced bankruptcy lawyer can explain how each of the three options would play out in detail to make sure you’re making an informed decision that will help you rebuild your finances. That’s just one example of the choices you may have to make and the information you may need to make the most of your bankruptcy case.
The difference in results is even more dramatic for people filing Chapter 13. Chapter 13 filers who were represented by an attorney were more than 23 times as likely to have their plans confirmed by the bankruptcy court.
Bankruptcy is an investment in your future, and the opportunity to create a more stable financial foundation. Knowledgeable guidance can help ensure that you get the full benefit of the process, and that you know how to enforce your rights after discharge. An experienced attorney can also help you avoid missteps that could lead to dismissal, delay your case, or interfere with your discharge.
Note, though, that not every attorney is equally equipped to guide you through this process. Choosing the right attorney matters.
Choosing the Right Bankruptcy Lawyer for You
Some elements in choosing the right bankruptcy attorney will be personal, such as your level of comfort in talking with the attorney and trust in their knowledge. During your initial consultation, pay close attention to whether the attorney listens to your questions and responds in detail. Make sure you’re comfortable asking for clarification when necessary, and that the attorney takes the time to respond in a way that makes sense to you.
Other factors are important no matter who you are. For example:
Hire an Experienced Bankruptcy Attorney
Many people have never worked with an attorney before and so default to hiring the lawyer their neighbor used last year or browsing a directory and clicking through to the first person who offers the services they’re looking for. It can be hard to differentiate when you’re inexperienced with the legal process.
One of the key factors is ensuring that you’re working with an attorney who has a solid understanding of the type of case you’re pursuing. But, the person who did a great job with your neighbor’s real estate closing may not have the bankruptcy and debt resolution experience necessary to advise you on the best path forward for you, or to manage any unexpected complications that may arise during your case.
During your free consultation, ask specifically about the attorney’s experience with consumer bankruptcy and knowledge of other debt resolution options.
Avoid Cookie-Cutter Solutions
When you hear that a bankruptcy attorney or law firm has done thousands of consumer bankruptcy cases, it sounds like a good sign. And, it may be--that’s a lot of experience. But, it’s also important to ensure that you’re going to get personalized service. There’s no one right solution for people struggling with debt, and you’ll want an attorney who will listen to your story, assess your debts and assets, understand your priorities and advise you on the best way forward for you.
Most bankruptcy law firms offer free consultations, so if you aren’t comfortable with the first attorney you talk with or feel like you’re being steered into a one-size-fits-all solution, you're free to speak with another lawyer to see if you can find a better fit.
Credit and Finances after Bankruptcy
Bankruptcy offers an opportunity to rebuild your finances and establish better credit. Of course, it takes time to move past bankruptcy and the financial circumstances that led you to file. But, you may be pleasantly surprised by how much control you have over re-establishing credit and creating a more stable financial foundation.
Enforcing Your Discharge
One key step toward protecting yourself and your credit after bankruptcy is to make sure creditors and debt collectors are following the law. The bankruptcy discharge order prohibits them from attempting to collect from you, and from continuing to report a balance to the three major credit bureaus. In some cases, these actions also violate consumer protection laws such as the Fair Debt Collection Practices Act (FDCPA) and the Fair Credit Reporting Act (FCRA).
Still, collection attempts happen, and discharged debt does sometimes appear as an outstanding obligation on credit reports. Sometimes this is an honest mistake, and can be corrected by disputing a debt, contacting the creditor with your bankruptcy case information, or filing a dispute with the credit reporting agency.
Sometimes, though, it’s a pressure tactic. Even when you get the information successfully removed from your credit report or get one debt collector to abandon collection efforts, the debt may crop up again. For instance, a debt may be removed from your credit report and then re-reported later. Or, a creditor or debt buyer may sell debt that’s been discharged to another debt buyer, who may start up collection efforts again.
That’s why it’s important that you check your credit reports regularly after bankruptcy, and that you don’t ignore any collection notices you may receive. It’s well worth the small time investment staying on top of your credit and any stray notices takes to keep your credit score headed in the right direction and stop any dishonest debt collection efforts.
Credit after Bankruptcy
Many people fear that bankruptcy will ruin their credit. In fact, over time, bankruptcy can have a positive impact. While the bankruptcy itself is a negative entry on your credit report, it’s just one--and often replaces multiple delinquent accounts. A Chapter 7 bankruptcy can stay on your credit report for up to 10 years, and a Chapter 13 for up to seven. But, the entry will carry less weight as it gets older, especially if you’re building a positive credit history.
It’s natural to be uneasy about credit after falling deep into debt, and many people who file bankruptcy say they’ll never use credit again. While it’s important to be very careful in managing credit after bankruptcy, avoiding credit altogether can work against you.
First, if you want to purchase a home, car, or other big-ticket item on credit, you’ll need a positive credit history. Otherwise, you may be unable to secure a loan, or may end up paying a much higher interest rate than you would with a good credit history. Even if you don’t intend to finance anything, your credit history can impact other areas of your life. For example, you may have a difficult time renting an apartment with no current credit history, or be asked to make a large deposit.
In addition to monitoring your credit report and clearing any inaccuracies as discussed above, here are some tips for managing credit as you move forward:
- Start small, with a low-limit credit card or secured card. You don’t need a lot of available credit to establish a payment history, and a low-balance or secured card will be easier to get and less risky as you re-learn how to manage credit.
- Always make at least your minimum payment on time. Never missing a payment is one of the simplest things you can do to improve your credit score.
- Keep balances on your credit cards low. How much of your available credit you’re using has a big impact on your credit score. Less than 10% is ideal, and you should always aim for less than 30%.
- Be cautious in your applications. You’ll need to open new accounts, but new inquiries on your credit report (the hard pull that happens when you apply for credit) ding your credit score a bit, so don’t overdo it. And, do your research in advance so you’re only applying for credit when you’re likely to be approved.
- Use a mix of types of credit. For example, a credit card, an installment loan and an auto loan may boost your credit score more than three credit card accounts, even if your payments are timely in both scenarios.
It’s also important to start saving money. Even if the amount you can set aside each week or month is small, get started. Not having a buffer to cover emergencies is one of the most common reasons people end up relying on credit cards and seeing balances climb. Having emergency savings will help you avoid falling into the same trap again, which will help protect your credit report and credit score.
What’s Next?
If you’ve read this book, you probably have a good idea about whether it’s time for you to take action and which possible solutions you’re most interested in exploring. The best way to learn more about bankruptcy and how it might play out for you is to talk with an experienced bankruptcy lawyer.
Reinert & Reinert has been helping people in and around Saginaw resolve debt for decades. It’s all we do.
We know how debt problems impact your life and what holds people back from making changes and regaining control of their finances. We also understand that every person struggling with debt is different. We know how to use the powerful tools bankruptcy offers to achieve the best result for your situation, and we won’t make a recommendation until we’ve learned enough about your finances and your goals to offer personalized advice.
The consultation is free and there’s no obligation, so there’s no downside to learning more. Call 989-799-8860 to get started right now.
