What experts say to do before, during and after filing for bankruptcy
Personal bankruptcy filings have fallen dramatically since the start of the coronavirus pandemic, but with rising interest rates and declining government assistance, the number of filings will likely increase this year, experts say.
“I’ve had more calls in the past few weeks than in the previous six months,” said Charles Juntikka, a New York-based attorney who specializes in bankruptcy law.
Bankruptcy attorney David Leibowitz, principal of Chicago-based Lakelaw, said his firm had “already seen filings in the Chicago area increase by about 25% in the past two months.”
The variety of government stimulus programs, improved tax credits, and protections against evictions and loan foreclosures put in place over the past two years have reduced the number of bankruptcy filings.
However, community lockdowns and general Covid unrest may also be a factor, suggests Juntikka. “It’s hard for people to deal with the fact that they have to file,” he said. “It takes emotional energy, and they feel guilty about it.
“For every person I help, there are four or five who are miserable.”
Bankruptcy may seem like rock bottom for cash-strapped Americans, but it’s also a fresh start and an opportunity to climb out of a hole that only seems to be getting deeper for many.
It’s not an easy process. A bankruptcy filing stays on your credit history for 10 years and makes it difficult to get a loan or mortgage.
“If you can pay off your debts outside of bankruptcy, you should,” said Leibowitz, former chair of the American Bankruptcy Institute’s Consumer Bankruptcy Committee. “However, if your wages are garnished, your car has been impounded and you are being hounded by collection agencies, bankruptcy may be imperative.”
If you have decided that bankruptcy is your best option, your first decision is to hire an attorney to help you through the process. You can file in court yourself, but the cost of mistakes is high.
Under which chapter of the code should you file? What forms do you need to complete? What mistakes should you avoid? Bankruptcy law is complex and although you can save money by filing for yourself, you could lose a lot more in the end.
“People don’t do their own dental work,” Juntikka said. “You must consult a lawyer.”
The bankruptcy process involves a series of steps and procedures that must be followed. The type of bankruptcy filing you choose will depend on your situation.
Chapter 7 bankruptcy filings, which represent a significant majority of personal filings, can ultimately discharge most, but not all, personal debt. Alimony, tax debts and student loans are among the liabilities that can remain for the petitioners. Most of your assets are subject to seizure and sale, although there are some exemptions, such as retirement account balances.
To qualify for Chapter 7, you must pass a resource test. Essentially, your income must be below the median income of the state where you are filing. Otherwise, you must file under Chapter 13 of the code.
In this situation, some unsecured debt can be forgiven and you can keep some personal property, but this essentially creates a debt repayment plan, usually over a five-year period.
Here are the individual steps you need to follow when filing for bankruptcy:
- Gather the documents you’ll need, including tax returns, pay stubs, bank, brokerage, and retirement account statements, appraisals of real estate and other assets you own, vehicle registrations, and everything other document relating to debts you owe or assets you own.
- All bankruptcy filers must complete a credit counseling course before and after filing. Fees are usually less than $50 and may be waived if you are unable to afford them.
- Complete and print the appropriate bankruptcy forms, get your filing fee ($338 for a Chapter 7 filing in federal court), file the forms in court, and send the necessary paperwork to your appointed bankruptcy trustee.
- Attend the meeting — probably online — of your creditors with your trustee. It takes place approximately one month after the submission of your file.
All of these steps are essential, and having a lawyer can help you avoid making mistakes.
The biggest mistake people make in bankruptcy filings is trying to game the system. All of your assets can be seized in a bankruptcy and failure to disclose them can result in criminal charges
Just ask tennis player Boris Becker, who is currently facing a prison sentence in the UK for concealing assets. Do not transfer assets to family or friends before filing your return. It will be recovered.
Do not maximize your credit resources before filing your file. The court will not look favorably on him. Never use funds from retirement accounts to pay off your debts.
“Truth and transparency are essential to the bankruptcy process,” Leibowitz said. “Honest debtors get a fresh start, while dishonest ones can potentially go to jail.”
Filing for bankruptcy may seem like the ultimate failure, but there is life after bankruptcy. Leibowitz advises her clients to take the following steps to get their lives back in order:
- Set a budget you can stick to.
- Open a savings account and save a month’s worth of income to provide a financial cushion for unexpected expenses.
- Get a secure credit card and use it only for expenses you can pay off at the end of the month.
- Pay your rent and bills on time.
- Regularly check your credit report to make sure that no debts released in the event of bankruptcy remain unpaid on your profile.
If you follow a disciplined plan, you can quickly improve your credit profile and even qualify for a Federal Housing Administration mortgage in as little as three years.
“There’s such a stigma associated with bankruptcy,” Leibowitz said. “But the idea of rehabilitation and forgiveness is embedded in our constitution.
“Bankruptcy can give people a second chance.”