What happens with a bankruptcy?

June 28, 2012 9:39 AM

I am thinking I might need to file bankruptcy, but have very basic questions. Help would be appreciated.

I live in Kentucky. I have a really good job making decent money. My wife and I (we have kids) own our home, with a mortgage. We have about 20% equity in the home. We also have about $40,000 in credit card and consumer debt.

It happened gradually, which I guess is how it always does, but it's now at the point where even though I make decent money, we're struggling to make minimum payments. So the thought of bankruptcy has crossed my mind.

As I understand it, there's the kind of bankruptcy where the slate is wiped clean, and then there's the type where you pay the money back, just on your terms. I'm interested in the latter. I absolutely, positively will not do anything that could remotely lead to us losing our house, or my career.

So please, in very basic terms, lay out to me the types of bankruptcy, and what are the possible repercussions for either. Thank you in advance.

posted by anonymous to Law & Government (15 answers total)

Check out Bankruptcy Basics, from the U.S. Bankruptcy Court. Read up on that, particularly Chapter 7 and Chapter 13, and you'll be good.

there's the kind of bankruptcy where the slate is wiped clean

This is "Chapter 7" bankruptcy, i.e., they take all your non-exempt assets--your primary residence is generally exempt--and sell them off to pay your creditors. Anything that doesn't get paid gets discharged, generally speaking. If you don't have any assets, you just get a discharge. You need to meet eligibility criteria, and they've been tightened recently, but it's still doable and a definite option.

then there's the type where you pay the money back, just on your terms

This is "Chapter 13" bankruptcy, i.e., an "Individual Debt Adjustment." Here you come up with a three-to-five year plan to pay off your debts on a plan you can afford. If you stick with the plan, you generally get a discharge of remaining debts at the end of it.

For more than that, you need to talk to an attorney. This is going to cost you money. Fortunately, you can afford it! Seriously, you can. Just stop paying your credit card bills. Then use that money to pay your bankruptcy lawyer. You're going to nuke your credit with bankruptcy, so a late payment isn't even going to matter. Bankruptcy will generally run you $500-1000, plus filing fees, but if you've got $40,000 in credit card debt, even minimum payments should get you there in a month or two.

As to which attorney to use? For individuals, one bankruptcy attorney is almost as good as another. We're not talking some complex corporate deal here. Check the phone book. Maybe go with someone who's been doing this for more than a few years, but other than that, it shouldn't matter too much.
posted by valkyryn at 9:58 AM on June 28, 2012 [3 favorites]

Firstly, there's no way a bankruptcy could affect your career. Even if you hold a security clearance, where your employer could be concerned about debt, filing will improve your financial situation and people with clearances are often told by their employers to file to remove this pressure.

As far as keeping your house that may be possible under either a Chapter 7 or Chapter 13 filing. Under 13 you pay back the debt on a reorganized schedule while with 7 you generally do not. Only a competent bk attorney in KY will be able to tell you which is better for you.

The American Board of Certification can point you to some lawyers that you should call.

On preview everything valkyryn said is correct, except the part about one lawyer being as good as another. Bk is a booming business right now with the shitty economy and lost of people are putting out shingles when they don't actually know how the game works. I'd just make sure I had a lawyer with experience and who isn't juggling 500 cases at a time.
posted by Aizkolari at 10:03 AM on June 28, 2012

Chapter 7 bankruptcies are the kind where you have the slate wiped clean. These are available to any person or business.

Chapter 13 bankruptcies are the kind where you make scheduled payments on the debts for between 3 and 5 years and then, at the end of that period the remaining debts are wiped clean. These are only available to actual live human beings.

Chapter 11 bankruptcies are the conceptually similar to chapter 13 bankruptcies but also available to business and companies. They are also much more expensive, technical, and cumbersome. Put them out of your mind.

How a bankruptcy, any bankruptcy, is that all your assets are put in a big pool and handed over to a trustee. The trustee then divides all your assets between you and your creditors. The money they give back to you are called "exempt" assets. All the rest of the assets are sold off and divided among your creditors.

The question is which assets are exempt and these are decided by state law and the states vary widely. A quick look at a handbook makes it look like $5000 of your home is an exempt, but that sale proceeds are exempt. I do not understand what that means. Kentucky law obviously has some weird way of handling property that differs considerably from how it's handled in my state. So lawyer up.

Anyway, that's the overview, but advising you on how managing your assets and preparing them by transferring one asset into a different type so that you get the best outcome is one of the things a bankruptcy attorney will help you with.
posted by bswinburn at 10:05 AM on June 28, 2012

bswinburn, Chapter 7's are means tested now (see under Eligibility), so they are not in fact available to "any person or business."
posted by Aizkolari at 10:07 AM on June 28, 2012

I am not your lawyer. I am not your lawyer. I am not your lawyer. I am not your lawyer.

You're asking about a Chapter 13 plan. One thing to keep in mind is that the vast majority of 13's fail—some estimates I've seen put it over 90%. You'll want a lawyer who can explain to you why those who fail, fail, and how you can actually achieve your goals in a 13—is that's really what you actually want. (You might be better served with a Chapter 7. )

I do not recommend picking a lawyer out of the phone book. Not all lawyers are created equal—find someone with a god reputation who can match up your goals with a plan and equip you with the information you need to make a good decision.
posted by mikewas at 10:10 AM on June 28, 2012

That's correct, Aizkolari, I was being sloppy in my language choice.

What I meant was that the Chapter 7's are something that any entity, defined as a living person, corporation, LLC, partnership, association, or other type of business entity can do, in contrast to Chapter 13 bankruptcies which are only available to actual living human beings. An LLC or Corporation can't do a chapter 13. Availability, in my mind, did not mean eligible.

I apologize for any confusion.
posted by bswinburn at 10:13 AM on June 28, 2012

Firstly, there's no way a bankruptcy could affect your career.

If you are a Certified Financial Planner you can (not WILL, but could) lose your CFP designation. I don't know about other industries, but bankruptcy is definitely looked at askance in the financial one.
posted by small_ruminant at 10:54 AM on June 28, 2012

For individuals, one bankruptcy attorney is almost as good as another. We're not talking some complex corporate deal here. Check the phone book. Maybe go with someone who's been doing this for more than a few years, but other than that, it shouldn't matter too much.

Probably true almost all the time, but a close friend of mine, who chose a local attorney from the yellow pages, ended up with one of the exceptions. Long story short, she found herself alone in court one day (the attorney didn't show) and learned that virtually none of the necessary paperwork had been filed. A sympathetic judge suggested that she "consult another attorney", who eventually straightened out what had become a big mess.

Her advice on the subject: learn the basics regarding the procedure--including how to deal with your mortgage holder during the process--so you can recognize when things are not moving along as they should.
posted by she's not there at 10:59 AM on June 28, 2012

I have a really good job making decent money. My wife and I (we have kids) own our home, with a mortgage. We have about 20% equity in the home. We also have about $40,000 in credit card and consumer debt.

This does not look like a pattern of inevitable bankruptcy to me, and my concern is that you're asking about the bankruptcy option because it's the only option you know of.

and then there's the type where you pay the money back, just on your terms.

A debt management plan setup and negotiated for you by a credit counseling service can give you exactly this without crushing your FICO score. Normally what happens is that they negotiate with all of your creditors, consolidate your debt, and the interest rate vastly lowers. You make one payment against the total debt each month, and it is much lower than it would be without the negotiated rates. There are voluntary and non-profit credit consumer credit counseling services in the US that have been recommended on MeFi before and you do need to use a reputable one.

Bankruptcy has drawbacks that can be serious in serious circumstances. No access to credit and potentially no ability to secure rental housing or a car loan is fine if things remain stable but can kick off a catastrophic poverty spiral if, for example, one spouse dies.
posted by DarlingBri at 11:02 AM on June 28, 2012 [1 favorite]

Bankruptcy can affect your career. An increasing number of employers do a credit check, and all things being equal, if you have a bankruptcy and the other person doesn't, she gets the job. This might be illegal, but that has nothing to do with whether or not it happens.

It doesn't sound like your debt load is impossible. Does your wife work? If she doesn't, is she able? Seconding what @DarlingBri said as well.

There are different debt payment strategies. Some people advocate paying the highest interest debt first, while others say you should pay off the debt with the lowest dollar value, to rid yourself of that payment first. Since you're cash poor, do you have a smaller amount of debt you can knock off first to eliminate one payment?

Are some of your debts federal student loans? There are income based and forgiveness programs that the feds will work with you on doing.

You might also consider using your home equity to pay off your consumer debt. Your consumer debt payments would likely drop significantly, as would your interest rates. The major problem here is if you ran up more debt after using your home equity, you'd be screwing yourself, so consider your car situation, etc. before going down this road.
posted by cnc at 11:20 AM on June 28, 2012

Adding - I don't mean to imply that a bankruptcy will get you fired, but it can affect your ability to get hired.
posted by cnc at 11:21 AM on June 28, 2012

If you are near the Federal Courthouse where the bankruptcy court is housed, go there and ask for self-help resources. The self-help resources will answer a lot of your questions. You can also start with the Bankruptcy Courtwebsite.

If you choose to file bankruptcy, there may be resources at the courthouse to help you. If there are not resources to help you file without an attorney, there will be lists of legal aid agencies, sliding scale fee attorneys and recommended attorneys, as well as a list of attorneys barred from filing in the BK court. The Northern District of Illinois (where I did some BK work) has an actual help desk, but the impression I got from the Kentucky District website was that they did not.
posted by crush-onastick at 12:57 PM on June 28, 2012

Find a bankruptcy lawyer who has been in practice for several years. Beyond indicating they are competent, a lot of time they have professional relationships with the trustees and other working in bankruptcy courts. Not to accomplish anything shady, mind you, but if there's a bump or complication having an existing, cordial working relationship with the people involved can make a real difference.
posted by katemcd at 2:05 PM on June 28, 2012

You can find more information from people at creditboards, but you do have to be registered to look at the bankruptcy forum.
posted by dilettante at 2:38 PM on June 28, 2012

I used to work in bankruptcy for a mortgage company, which I guess makes me kind of slimy. I do know this though- generally speaking, if you are current on your mortgage you want to file a chapter 7 bankruptcy, because that will discharge your unsecured debt. If you are behind on your mortgage and don't want to lose your house, you want to file a chapter 13, which will reorganize your debt and give you a few years to get your mortgage back on track.

From my personal experience, I can echo what mikewas said. Almost everyone on a chapter 13 bankruptcy fails. Of course this isn't legal advice, I'm not a lawyer, and it has probably been a decade since I had that slimy job, so contact a lawyer and see what happens.
posted by Literaryhero at 3:35 AM on June 29, 2012