Bankruptcy – What You Need to Know

Bankruptcy is the legal process that seeks the best resolution for you and your creditors. It is often the last resort when the debt load cannot be paid off, under the current terms, and your creditors are more willing to help you find a way to pay down your debt than they are in forcing you into bankruptcy. Generally, I recommend bankruptcy only when all other debt consolidation plans have failed, and there are no other viable options.

Two Options

You have two options when entering bankruptcy. The first one is to ask for a payback plan created by the courts and the second is to create your own plan.

Under Chapter 7 bankruptcy, applicants ask the courts to create a workable plan to pay back their debts. All of your assets will be frozen and a court appointed trustee will analyze your assets, income, and debts, and then create the plan to distribute your assets to creditors as fairly as possible and in an orderly manner. Usually, you will be allowed to keep a certain amount of "exempt" assets in order to maintain a reasonable, modest lifestyle, and your income will be protected so that you can support your family.

Once your assets have been distributed, the balance of your debts may be forgiven with the exception of child support, alimony, and any criminal liability. So depending on your circumstances you could be debt-free, but you will have a severely damaged credit report and will find it difficult or even impossible to borrow money for any purchases. If you are eligible for a loan, the interest rates will be higher and the terms shorter, which in itself could make the loan cost prohibitive.

Creditors who have secured loans, which are loans specifically for pledged property like a car or a home, will be the first ones to be paid. Or they can repossess the property and sell it to satisfy your debt. Some protected items include your main car, tools of your trade, food, clothes, and family heirlooms. Luxury items, limited personal property, investments (with the exception of some types of retirement accounts), and cash are nonexempt items and can be used by the trustee to satisfy your debts.

You could be freed from some debts; these would include utility bills, back rent, personal loans, legal or accounting fees, and court judgments.

Under the application for Chapter 13 bankruptcy protection, you create your own payback plan. Chapter 13 is similar to Chapter 7, but gives you more flexibility to resolve your debts as you see fit. After filing, you present the court with your own plan to repay your creditors, usually within a three to five year time frame. Generally you must pledge all of your disposable income to the plan. Disposable income is what monies are left after reasonable living expenses are paid. If the court accepts your plan, then you make payments to the trustee who will monitor your situation and distribute the money to your creditors. At the end of the process, you will be allowed to keep your remaining property, and the balance of any debts will be discharged by the courts. If your plan is not accepted then you can submit another plan or file for Chapter 7.

The Process

The most important part of this process is to seek professional legal advice to assess all of your options. It is always better to attempt to settle with creditors and stay out of bankruptcy. Some people attempt to go through the bankruptcy process on their own, only to find out that there was a better way to handle their debt situation than the one they chose. Filing for bankruptcy has its costs. It is a stressful life event and you will need to learn new ways of managing your money. You will be asked to provide verification of income and property owned, debts, monthly living expenses, property you are claiming that may be exempt, and a listing of all of your creditors with account numbers and balances owed.

Once you have filed you will attend a "Creditors' Meeting." At this meeting your creditors can state their cases before the trustee, who will ultimately decide what will be done and who gets paid, the amount and when. Creditors at this point will accept what they can, figuring that something is better than nothing. Note: If you make large purchases or transfer property and/or assets prior to filing bankruptcy in order to intentionally conceal or move these items out of your possession, you could be held accountable for fraud if you are later found guilty of these acts.

A bankruptcy stays on your credit report for 10 years or longer. When you begin applying for credit again, some lenders, perhaps not all, will consider you a great credit risk. By using tools such as secured credit cards, prepaid phone cards, and debit cards you can gradually rebuild a positive credit report. Writing a letter and having it attached to your credit report explaining the circumstances of the bankruptcy will also be helpful.

The most important fact to understand in this process is to get an understanding of how you got where you are. You need a list of all of your assets, income, and expenses so you can understand how much money it takes to survive every month. No, this does not include cable TV or cell phones; it includes food, shelter, and essentials of life. If those expenses are greater than your income, then bankruptcy may be the only way to go.

Cindy Diccianni is a Registered Nurse, a Certified Senior Advisor (CSA), a Certified Long Term Consultant (CLTC), a Registered Investment Advisor and a Registered Representative with Leigh Baldwin & Company member NASD and SIPC. She is affiliated with Ortner, O'Brien & Ortner Advisory Group, Inc., Malvern PA. Her passion is assisting clients in creating financial freedom. You may contact her at Cindy@taxlegalfinancial.com.

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