The first blog in a four part series about filing for a Chapter 7 or 13 bankruptcy.
By Sara E. Cook
Often when a large corporation files for bankruptcy, you will hear that it is the right business decision, it gives them a chance to right size, change direction, get rid of unprofitable businesses and on and on. There is no stigma, it is just another business decision, and often heralded as the right one. Individuals, however, often see an individual bankruptcy as a sign of their failure or inadequacy. They avoid even entertaining the idea for fear of the stigma, the perceived shame and guilt for not paying bills. But the very same conditions that afflict large corporations, afflict individuals and families trying to survive in a world of low pay, pandemic, high child care costs, medical bills, furloughs and on and on. For all the same reasons bankruptcy makes sense for a big business, it may make sense for an individual or family and it should not be a shameful or guilt filled decision.
Looking back through history at least four presidents have filed for bankruptcy: Thomas Jefferson, Abraham Lincoln, Ulysses S. Grant and Donald Trump (for businesses). So too, have many celebrities filed for bankruptcy: Oscar Wilde, Larry King, Cyndi Lauper, Mark Twain, Henry Heinz (ketchup), Jerry Lee Lewis, Willie Nelson, and F. Lee Bailey to name a few. People find themselves in circumstances that spin out of control and bankruptcy is one possible source of relief. In other instances it may not meet the financial needs of the individual or family. But the analysis should be an objective, financial one, not an emotional one shrouded in guilt or shame.
When credit is extended to someone, both sides take risks. The debtor is assuming the risk that the need supporting the credit is going to be met – for instance that the car will not fail, that the value of the property will continue to support the mortgage, that the short term loan can be repaid in the short term. The creditor is assuming the risk that the financial condition of the debtor will remain constant, jobs will be retained, pay will not go down, and the debtor will not have unexpected circumstances that make payment unlikely. But life is not perfect and when circumstances interfere, job loss, medical problems or divorce the most common, adjustments are often needed.
In order to decide if bankruptcy is the answer, you must understand the bankruptcy process and then do a thorough financial analysis of the problem from a bankruptcy perspective to see if it can help you. You generally need to consult with an attorney to do this analysis.
The bankruptcy process in a Chapter 7 provides a liquidation of assets to pay creditors and a discharge (erasing of debts) of many debts. In a Chapter 13, a payment plan is established to pay off past due balances on secured debt such as mortgages, car loans, or taxes. You also may pay off and discharge unsecured debts like credit cards or medical bills. Under both Chapters, creditors will not be allowed to sue you, contact you or seek repayment of their debt from you without bankruptcy court permission while the bankruptcy is pending. If the Court grants you a discharge of debt at the end of the bankruptcy, they generally can never seek to be repaid after your case is over. This is called the debtor’s “fresh start.”
Your income and expenses will determine if you are eligible for either chapter. They will be input into what is called the “means” test. The means test determines if you can just be rid of your debts under a Chapter 7, or if you will be required to repay some portion of your debts over 3-5 years. If your debts are related to a failing business, the means test may not apply, but relief can still be obtained.
Once you consider if you qualify for a Chapter 7 or Chapter 13, there are related considerations. First, will the bankruptcy accomplish what you need? For instance, if you can only afford your home if you get rid of credit card debt, then the bankruptcy needs to discharge the credit card debt, not just postpone its payment. You need to find out from your lawyer or a credit counselor what are realistic objectives, and does bankruptcy meet them.
If Bankruptcy makes sense, you need to make sure you are ready to submit your finances to scrutiny by a court and its appointed Trustee.
- Your finances will be carefully reviewed by the Trustee in bankruptcy. For instance, you must have filed your last 2-3 years of tax returns for the trustee to review. You may have outstanding tax bills that can be helped by a bankruptcy, but the related federal and state returns have to have been filed. Until they are filed, the bankruptcy will not proceed.
- The Trustee will look at your expenses to make sure they are not too high for the expense category, such as discretionary expenses like gifts to charity, cable bills, and entertainment.
- A Trustee will look at payments you have made and make sure that no one creditor has been favored over another.
- The Trustee will want proof of income. You need to have the ability to prove your income, in other words if you are paid all in cash, you have to be able to show bank deposits as a means of proving what is paid.
Bankruptcy needs to be filed at the best possible time.
- If you are being sued and cannot afford a lawyer to defend the lawsuit, you may need to file bankruptcy right away.
- On the other hand, if you have debts that are owed to relatives, and you have paid those debts but not credit cards, then you may not want to file now, or you may need to get the payment back.
- If you have notice that your job will be ending or your pay reduced, you may want to wait until that happens.
- You need to prepare to stop purchasing anything that is not part of your “needs” or “maintenance” of your property. When you incur a debt you must have a good faith intent to repay. If you know you are about to file bankruptcy your good faith can be challenged and you might not be able to discharge the debt. If you have made large discretionary purchases you may want to delay filing so that these will not impede your ability to obtain a discharge of the debt.
- You cannot use your credit cards freely once you are aware that you will file bankruptcy.
- If you have made large discretionary purchases you may want to delay filing so that these will not impede your ability to obtain debt forgiveness.
All of these issues should be discussed with an attorney to determine if, or when, a bankruptcy is a good idea and will meet your objectives.
At McKenna Storer we offer up to a free hour consultation, currently by Zoom or telephone, to go over the issues that face you so you can make an informed decision about bankruptcy or alternative strategies. After the initial consultation, if a bankruptcy is decided upon, a comprehensive package of worksheets will be given to you to complete and to begin the process. An initial pre-bankruptcy meeting, again by Zoom, follows to go over and sign the retention agreement, the mechanism for payment of fees and the information for the preparation of bankruptcy schedules. The time line and projected time frame from start to finish will be outlined for you, and you will be on your way to relief from debt. A second pre-filing meeting will confirm the bankruptcy filing information and signing of the petition for bankruptcy. Please contact us at 312.558.3900 for a consultation to see if bankruptcy is right for you.