I thought my mortgage and car payment was not part of the bankruptcy?!

I THOUGHT MY MORTGAGE AND CAR PAYMENT WAS NOT PART OF THE BANKRUPTCY?!

One of the most difficult and annoying things for people to understand when they file a chapter 7 bankruptcy case is that while they may be filing bankruptcy on the credit card debt, medical debt or some other personal loan, and not the mortgage or car loan, the bankruptcy law does not make that distinction. In other words, if you are filing a chapter 7 bankruptcy case your discharge will wipe out not just the credit card and medical debt, but also the mortgage and car loan. And that’s a good thing just so you know! When your case concludes virtually all of your debt on your credit report (exception being student loans) will state the words “included/discharged in bankruptcy” and will show a zero balance. That includes the mortgage and the car loan(s).

Does that mean that you can keep your house or car without paying the mortgage or making the car payments? No, of course not. Otherwise, I would be filing for bankruptcy myself tomorrow morning. If you want to keep your car or house you have to keep making the payments after bankruptcy. However, if for whatever reason you do not want to keep the house/car then at any time you can choose –so long as you do not sign a Reaffirmation Agreement- to stop paying for the house and/or car. At that point the bank can foreclose on the house or repossess the car, but they cannot come after you personally. This is an advantage that people outside of bankruptcy do not have. Another huge advantage is the fact that your $300,000 mortgage or $20,000 car loan is now being reported on your credit report as zero debt being owed. That does wonders for your debt to income ratio and ultimately your credit score. Nothing will make your credit score ascend faster than having 0 debt! That means you get to eat your cake and keep it too. As in, you get to keep the house or car even though the debt is not reported any longer on the credit report as would be the case had you not filed for bankruptcy.

As far as why the mortgage/car loan is showing “bankruptcy status” and why your statements are indicating zero owed the moment you file your bankruptcy case? The answer is as follows:  When you file your bankruptcy case all creditors are entitled to receive notice of your bankruptcy filing- whether you want to bankruptcy them or not, and whether you are behind or not on your payments is irrelevant.  Every bank that you owe money to is entitled to get notice of your filing. Moreover, in light of the automatic stay (the legal principle that states “I am in bankruptcy so do not even think about trying to collect money from me”) the creditors/banks send statements in such fashion and take the position that you “technically” do not owe them any money. Again, the reality is that if you want to keep the property you have to continue paying for it after you file your case. In this sense the bankruptcy has changed nothing. You pay you keep, you do not they take!

Do I have to include all my debts in bankruptcy?

Do you have to include your house in bankruptcy? How about your car, does the car loan have to be included in the bankruptcy? The answers are yes on both counts. The bankruptcy law, in this regard, is pretty straight forward. Any debt that you have on the day of the filing of your bankruptcy case must be included in your bankruptcy petition.

So, while you may want to bankrupt only your credit card debt and leave the house and car out of it, the bankruptcy law says otherwise; all debt must be listed.  BUT, just because you have to list the creditors that you do not want to bankrupt like your mortgage and car loan that should not cause you any alarm.  Putting aside the issue of Reaffirmation Agreements (to be discussed in different blog) and assuming that the car/home does not have a ton of equity that cannot be exempted as part of your bankruptcy case, then the fact that the mortgage/car loan were included will not have any negative consequence.  At the end of the day, as long as you continue to make your car/mortgage payments, then you will be able to retain your car/home. The filing of your bankruptcy case will not change that.

Same goes for student loans. While they are almost always non-dischargeable –meaning, you are stuck with them despite the bankruptcy filing- they still have to be listed in your bankruptcy case.

As for money owed to friends or family members, believe it or not, they are considered creditors just like everyone else and must be listed in your bankruptcy petition. If on the other hand, the money given to you by that person was considered by them to be a gift, then there is no loan, they are not a creditor, and they need not be listed.

Also keep in mind that just because you listed your cousin as a creditor because you owe him some money, does not mean that you cannot pay him back. After your bankruptcy case has concluded you are free to pay back any creditor you like, including your cousin.

You should NOT however try to pay back money owed to family members prior to the filing of your bankruptcy case!

Finally, bear in mind that at the meeting of creditors the trustee will ask you if you have listed all of your debts and all of your assets? By debts he means creditors. Can you lie to him at that point? Sure you can. Is it advisable? Absolutely not!  If you get caught in that lie then your bankruptcy case can get dismissed with prejudice and you are now stuck with all that debt. In addition, if the US Attorney’s Office has some free time on their hands, you may also be prosecuted for bankruptcy fraud.

The morale of the story: regardless of what type of debt it is or who it is owed to, each creditor is entitled to notice and must be listed in your bankruptcy petition.

Why People Declare Bankruptcy?

There are many misconceptions as to why people declare bankruptcy.  For starters, filing for bankruptcy is anything but an easy decision for folks. As just about any bankruptcy lawyer will tell you, the vast majority of people dread declaring bankruptcy. This is not a decision people choose to make, but rather one they have resigned themselves to make.  How do I know this to be true? Because my clients have repeatedly told me this. When they recount their stories and what has led them to their financial difficulties, I see the pain and shame in their faces and hear the heartbreak in their voices. Declaring bankruptcy is a very difficult decision to make for them.

Another misconception that you frequently encounter is that “these people are working the system,” as if they have planned their bankruptcy filing for months, if not years.  My clients have desperately tried everything in their power to avoid filing for bankruptcy. They have called their credit card companies to try to work out a payment plan, they have tried credit counseling with Money Management or some other company, they have cleaned out their retirement accounts, they have moved in with their parents or some other relative.  In short, my clients have done everything under the sun to avoid having to sit in my office chair and declare bankruptcy.

Finally, as for the assertion that “these people” simply do not know how to mange their money and live within their means, I can assure you, trips to Europe or shopping sprees is not what is leading the vast majority of my clients to file for bankruptcy. Yes, of course, there is always the “rotten apple,” the individual who takes advantage of the system, but for the other 90%, the following are the real reasons that push people into declaring bankruptcy.

Illness or disability – If you have managed to make it through your entire career without being seriously injured for a prolonged period of time or permanently disabled to the point that you can no longer perform most jobs, then consider yourself lucky.  By the time your Social Security disability income finally kicks in, you will be fortunate to receive half of your previous salary, making it nearly impossible to survive.

Unemployment –  Unless you have been living under a rock, you know that the unemployment rate is pretty darn high these days. Been out of work for 1.5 years like my father was a couple of decades ago, and well, it becomes pretty hard to pay your bills. And even then, people will usually avoid filing for bankruptcy, will rejoin the workforce and will try to climb out of the hole. Problem is, at some point, it becomes the point of no return.  It becomes nearly impossible to pay off $30,000 in credit card debt at 20% APR when all you are making is $60,000 per year.

Divorce – I would say that about one third of my clients have divorced within five years prior to arriving in my office or are in the midst of divorcing. The ramifications of divorce are not always instantly felt. However, the fact of the matter is, for most people (women in particular), the writing is already on the wall.  With no alimony, kids to raise, and a merely a decent pay check, these newly divorced folks become more and more dependent on credit cards, pay day loans, car title loans, and personal loans. Eventually, the music stops.

Failed businesses – Once the government contracts dry up or the economy slows down, the LLC or Corporation begins to fail. Unfortunately, some individuals go down with their sinking ship. Business owners have guaranteed personal loans or have used their personal credit cards in a desperate attempt to save their business.  As the business is no longer profitable and the debt begins to mount, creditors begin to pursue these folks personally and bankruptcy is typically the only way out.

Underemployment – People like to talk a lot about unemployment numbers, but I think the statistic that hides in the shadows and is often overlooked is the fact that millions of people in this country, particularly those living in more expensive parts of the country like Alexandria, VA and Fairfax, VA, simply do not earn enough money.  They can barely cover their bills, but when it comes to anything “extra,” like a trip to the dentist, the basement floods, or the car has to be taken to the mechanic for major repairs, there simply is not enough money in the bank.  That is when credit cards and personal loans become relied upon out of mere necessity.  This typically goes on for years as the individual faithfully pays at least the minimum balance each month.  Eventually, the amount of debt becomes insurmountable and the only way to escape is to file for bankruptcy.

We need to stop referring to people who have filed for bankruptcy as “deadbeats.”  It not only demonstrates insensitivity, but also a great deal of ignorance as to why people declare bankruptcy in the first place.  So, my advice is “judge not, lest you be judged.”

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Should I File for Bankruptcy?

So you are sitting there in front of your computer and doing a search online as you contemplate hiring a bankruptcy attorney. You have decided it is finally time for you to file for bankruptcy. Now it is just a matter of deciding which bankruptcy route to take and which lawyer to hire. You stumble onto my web site. You call and make an appointment and then walk into my Alexandria, VA office, present your financial situation, and then ask me, “Do I qualify for bankruptcy relief? Which bankruptcy option is best for me?” At that point, you may very hear me say, “Hey, slow down there cowboy (Well, I won’t actually say that out loud). Who says it is in your best interest to file for bankruptcy in the first place?”  The fact of the matter is that just because you have some debt that is troubling you and have the ability to file for bankruptcy does not mean you should.

A few months ago, a young doctor met with me for a bankruptcy consultation (yes, even doctors have to rely on bankruptcy sometimes, as do lawyers for that matter).  She had seen two other bankruptcy attorneys in the Alexandria, VA area and wanted to know if she could indeed qualify for a chapter 7 bankruptcy.  One attorney had said yes and the other had said no.  I was the deciding vote. The doctor went on to inform me that she had one primary large business debt that she could no longer afford and was now being threatened by a lawsuit. Other than this one business debt, she was current with all of her other creditors. What was my diagnosis? Well, the doctor could indeed file for a chapter 7 bankruptcy. But what did I tell her? I said, “Doctor, while I would love to take your money, the fact of the matter is you may not need to utilize bankruptcy at this point.”

Filing for bankruptcy is something that you do as a means of last resort.  Filing for bankruptcy is like using the nuclear option; when you use it, you want to be darn sure that this is the only and best option at your disposal.  I went on to explain to the doctor that she may be better off hiring an attorney that does primarily civil litigation and who might be able to negotiate a reasonable deal with her creditor if a lawsuit was indeed filed. I went on to state that in my professional opinion, if she could reach a reasonable deal with her creditor, using the threat of filing for bankruptcy as leverage in her negotiations, then it would be in her best interest to take the deal rather than file for bankruptcy. If, and only if, the creditor was not willing to work with her, then she could come back and hire me as her bankruptcy lawyer.

I told the doctor that coming to a bankruptcy attorney is like going to a surgeon and asking him/her to perform open heart surgery without even considering other forms of treatment such as medication, exercise, and diet. Sometimes open heart surgery is absolutely necessary and vital, but not always.  Just because you are over your head with financial troubles does not always mean that bankruptcy is your best option.  Sometimes there are other options that will better serve you. Sometimes, you need to stop and ask yourself, “Do I even need to file for bankruptcy in the first place?”  And if the answer to this question is an indeed and emphatic, “Yes!” then by all means, do schedule an appointment to come and see me for a free consultation. 🙂

When Should I See a Bankruptcy Lawyer?

Remember that old Master Card commercial? You know the one that went something like this: Your daughter’s dream wedding dress $3,000, securing the perfect venue for the wedding $5,000, feeding over 100 guests $10,000. Seeing your little baby girl walking down the aisle for the first time…priceless. Some things in life money just can’t buy, for everything else, there’s Master Card.

And how in the world does this relate to bankruptcy?

Well, here is my version of this commercial with a twist:

Being forced into filing a chapter 13 instead of a chapter 7 bankruptcy because Susan’s salary has increased from $60,000 to $70,000 after putting off filing for several years=$10,000 in unnecessary payments.

John’s decision to file for bankruptcy AFTER the foreclosure sale has occurred instead of before and depriving himself of this expense on the means test = an additional $15,000 in payments.

Joe’s decision to move out of the marital home after he and his wife have decided to file for divorce and thereafter deciding to file for bankruptcy necessitating a  chapter 13 bankruptcy filing due to his high earnings =$20,000 in wasted payments.

Seeing a bankruptcy lawyer well in advance, when you first detect trouble, so that you can formulate a plan and know your options, priceless!

We hear it all the time, life is all about timing, and when it comes to bankruptcy law, that is especially true. The timing of the bankruptcy filing can make a huge difference. In other words, procrastination, as usual, can lead to problems. So, whether you live in Alexandria, Virginia or some other part of the Commonwealth, go and see a bankruptcy attorney and get his/her advice.  Notice that I said go and see a bankruptcy attorney; you don’t necessarily have to hire them, just get yourself informed.

And in case you are wondering, the names I have used in this article are indeed fictitious, but the factual scenarios regrettably are not. Most bankruptcy lawyers offer a free initial consultation. Take advantage of that now, instead of later. At the very least arm yourself with information.