Six Surprising Facts Countering Client Reluctance to File for Bankruptcy
Even when bankruptcy is the right option, many consumers are reluctant to file based on misconceptions of the bankruptcy process. Here are six surprising facts about bankruptcy that may allay some of those fears
# 1: Bankruptcy Filers Typically Lose Little or None of Their Property
The belief that a bankruptcy filing results in the loss of most of a client's property is incorrect. Everyone who files for bankruptcy gets to keep some of their possessions, and the vast majority of people who file for Chapter 7 or 13 relief get to keep all of their property.
No matter the type of bankruptcy filed, unless property is collateral for a loan, a bankruptcy debtor gets to keep all property that is protected by state or federal exemption laws. Exemption laws typically protect clothes, appliances, furniture, jewelry, and often the family car and home. See other article in this website under the Bankruptcy Overview section entitled “Bankruptcy Exemptions”.
Exemption laws protect property that is valued at less than the exemption amount which is the equity a debtor is allowed to retain in the specified property specified by statute. What that property is worth is based not on how much the property costs, but rather on the amount that the property is worth in its present condition minus the amount owed on secured loans and liens on the property.
For example, consider an exemption law protecting only $4,450.00 equity a client has in a motor vehicle, and the client consumer's car is presently worth $7,000.00 with a $5,000.00 car loan balance. The consumer has $2,000.00 in equity in the car and thus the car is fully protected by the $4,450.00 automobile exemption. In the above example, the $5,000.00 car loan balance eventually still needs to be paid if the consumer wants to keep the car because the auto lender has a secured loan, but the car is fully protected against all other unsecured creditors as long as the debtor keeps up with his/her car payments.
The general rule of thumb is that, for most consumers filing bankruptcy relief, all their property is fully exempt, i.e. protected from being sold to a Chapter 7 Trustee for the benefit of creditors. See other article in this website under the Bankruptcy Overview section entitled “Bankruptcy Exemptions”.
Whether a client is able to keep non-exempt property, if any, also depends on the type of bankruptcy filed, a chapter 7 or chapter 13. In a chapter 7 case, a consumer keeps their exempt possessions, but non-exempt property, if any, may be sold by a Chapter 7 Trustee, with the money distributed to pay creditors. In a chapter 13 case, a consumer can keep property that is not fully exempt by paying the amount that is not exempt over time from future income under a chapter 13 Plan approved by the Bankruptcy Court. If a consumer has very valuable property, it might be sold in a chapter 7 bankruptcy but kept if the non-exempt amount is paid to creditors over a number of years in a chapter 13 plan.
#2: A Bankruptcy Filing May Actually Improve a Consumer's Creditworthiness
Most often, clients should not worry about bankruptcy making it harder for them to obtain credit. If they are delinquent on one or more debts, this negative information already appears on their credit record. A bankruptcy is unlikely to make their credit rating any worse over the long run; instead, it may make it easier to obtain future credit. See other article in the Bankruptcy Overview section of this website entitled “Rebuilding your Credit.”
New creditors will see that old obligations have been discharged in the bankruptcy and that the consumer has fewer other creditors competing with them for payment. Creditors also recognize that consumers cannot receive a second chapter 7 bankruptcy discharge for another 8 years. Within 30 days of receiving the Bankruptcy Court’s Discharge Order, the client’s credit files on file with the 3 National Credit Reporting Agencies, i.e. Experian, Equifax and Transunion, must list all the old outstanding debt balances as $0.00 for all debts discharged in bankruptcy. The fact that credit reports show that nothing is owed on these discharged debts serves to improves a consumer's credit score standing.
Clients credit reporting files will list the fact that they filed for bankruptcy protection and that certain debts at one time were delinquent, but creditors are most interested in what a consumer owes now on each debt. Accordingly, thirty days after a bankruptcy is complete, clients should check their said consumer's credit reports to make sure that all their general unsecured debts discharged in bankruptcy are listed as having $0.00 balances owed. Clients should file a dispute with the credit reporting agencies if any discharged debts continue to be listed as having balances owed.
A successful chapter 7 bankruptcy filing often helps to enhance the stability of a consumer's employment and income. Wage garnishments, continuous collection calls, car repossessions, utility disconnections, and other consequences of an unaffordable debt burden are eliminated, and this should help the consumer find and hold steady employment. Steady income is key to creditworthiness.
While a bankruptcy filing will make it more difficult for a consumer to obtain a new conventional mortgage to purchase a home at the prevailing best interest rates, most lenders will not hold the bankruptcy against the consumer if the consumer re-establishes a good credit reputation for 2 to 4 years after the bankruptcy is successfully completed. I.e. sometimes this can be done within 1 year of receiving the Bankruptcy Court’s Discharge Order
After bankruptcy, some new potential creditors and landlords may 1) ask for additional collateral/security to rent an apartment or grant credit to a discharged client, 2) ask for a co-signer to guarantee the discharged client’s new obligation and/or 3) want to know why bankruptcy was filed. Other creditors, such as some local retailers, may not even check the discharged client’s credit reports.
While Chapter 7 bankruptcy discharges stay on the said 3 national credit reporting agencies reports on file for the discharged debtor record for 10 years from the bankruptcy filing and Chapter 13 discharges stay on said credit reports for 7 years (most other debts are only reported for 7 years from their delinquency), for the reasons indicated above the vast majority of clients receiving the Bankruptcy Court’s Discharge Order have a significantly higher credit score with the 3 national credit reporting agencies within 30 days of receiving the Court’s Discharge Order than they did at the time their Bankruptcy petition was filed.
#3: The Bankruptcy Debtor Typically Need Not Go to Court
Unless something out of the ordinary occurs, bankruptcy filers do not have to go to the Bankruptcy Court. Filers must attend one meeting with the bankruptcy trustee (not with a judge), and those meetings are now held virtually via Zoom. Creditors are invited to that meeting but rarely attend. In the rare case that a consumer filer does receive a notice to go to Bankruptcy Court, it is usually not for a very serious issue that would jeopardize their right to have their dischargeable debts discharged.
Occasionally, in a chapter 13 case, a Court hearing will be scheduled regarding confirmation of their plan, but this is usually handled by the Bankruptcy attorney with the client being available by phone if needed.
#4: Bankruptcy Has Minimal Impact on Reputation in the Community
Most people find their reputations do not suffer from filing bankruptcy. Bankruptcies are not generally announced publicly, although they are a matter of public record. It is highly unlikely that friends and neighbors will know about a bankruptcy unless the consumer tells them.
However, especially in a small town, where debts are owed to local people, reputational issues connected with filing bankruptcy may arise. In such a situation, weigh possible embarrassment and damage to reputation against bankruptcy's potential advantages. One option, if possible, is to voluntarily pay selected debts prior to filing bankruptcy because debtors must list all of their credidtors in their bankruptcy petition.
# 5: Feelings of Moral Obligation Should Not Prevent Choosing the Best Option for the Family
Most people want to pay their debts and make every reasonable effort to do so if payment is possible. If bankruptcy is the right solution, the consumer should balance these feelings of obligation with the importance of protecting their family.
Bankruptcy is a legal right. The United States Constitution includes a provision concerning bankruptcy. Big corporations like Kmart, American Airlines, Chrysler, and Macy's — and famous people such as Toni Braxton, Tammy Wynette, Larry King, Mickey Rooney, Henry Ford, and Walt Disney— have all chosen to file bankruptcy at one time or another. Even the Bible provides for debt forgiveness:
At the end of every seven years thou shalt make a release. And this is the manner of the release: every creditor shall release that which he has lent unto his neighbor and his brother; because the Lord's release hath been proclaimed. (Deut. 15:1-2.)
Most important, during hard times, bankruptcy may be the only way for a consumer to be assured of being able to provide their family with food, clothing, and shelter. It may be that bankruptcy is the best or only realistic alternative.
# 6: Potential Discrimination After Bankruptcy
Federal bankruptcy law protects bankruptcy filers from being discriminated against because they have filed for bankruptcy. Government agencies, such as housing authorities and licensing departments, cannot deny benefits because of a previous bankruptcy, including debts discharged in bankruptcy that were owed to those agencies. Government agencies and private entities involved in student loan programs also cannot discriminate based upon a bankruptcy filing. See NCLC's Consumer Bankruptcy Law and Practice §
15.5.5 (https://library.ncic.org/book/consumer-bankruptcy-law-and-practice/15551-drivers-licenses)
Employers are not permitted to discriminate against consumers for filing bankruptcy. However, for some sensitive jobs which involve money or security, bankruptcy may be considered evidence of financial problems that could be detrimental to work. Bankruptcy law does not prevent discrimination by others, including private creditors, in deciding whether to grant new loans. See NCLC's Consumer Bankruptcy Law and Practice §
15.5.5 (https://library.ncic.org/book/consumer-bankruptcy-law-and-practice/15551-drivers-licenses).