Consumer Bankruptcy 101

Bankruptcy can be a means for a fresh start.  We go through financial hurdles, whether it stems from job loss, foreclosure, divorce, injury, or illness.  Sometimes, this accumulation of debt can leave you in a precarious position.  If you are considering filing for bankruptcy, you should learn everything you can about the process before filing and speak to experienced bankruptcy attorneys who can help guide you through the process.

Types of Bankruptcy:

Chapter 7 Bankruptcy:

A Chapter 7 bankruptcy is a liquidation and eliminates your dischargeable debts.  Certain debts like personal loans, credit cards, and medical bills can be completely discharged in a Chapter 7 bankruptcy and therefore you will no longer be liable for them.  In a Chapter 7 bankruptcy, you will be assigned a bankruptcy trustee, who will oversee your case.

To qualify for a Chapter 7 bankruptcy, you must pass the means test.  The test only applies to higher income consumers which means that if your income is below the New York median for your household size, then you are exempt from the test and may file Chapter 7.

If your income is higher than the New York median, then you will need to complete the detailed means test calculation to determine if you can pay back a portion of your unsecured debt through a Chapter 13 or be able to stay in a Chapter 7.

The state median changes often so it is important to seek the advice of experienced bankruptcy attorneys, such as Clair Gjertsen & Weathers PLLC.

You may be exempt from having to take the means test if you are a disabled veteran and incurred your debt primarily during active duty or performing a homeland defense activity.

Chapter 13 Bankruptcy:

A Chapter 13 bankruptcy is a reorganization of your debt, which allows you to enter into a repayment plan in which you pay all or a fraction of your debts during a three to five-year period.  In a Chapter 13, you propose a debt repayment plan based on your disposable income.  This plan requires court approval and will keep your creditors at bay as long as you continue making payments.

How do I determine which Chapter to file?  Chapter 7 or Chapter 13?

For consumers, if you are behind on your mortgage payments and want to keep your home, either in New York or Connecticut, your only choice is a Chapter 13.  A Chapter 13 bankruptcy allows you to make up overdue payments over time.  In general, if you have property not covered by either Federal or State exemptions that you want to keep, a Chapter 13 may be a better option.  Other factors in deciding between a Chapter 7 or Chapter 13 are your income and whether you have the kind of debt that is non-dischargeable.

For the vast majority of consumers who simply want to eliminate their heavy debt burden without paying it back, Chapter 7 is the best choice.  

What Will I Lose if I file Bankruptcy?

Depending upon the value of your property, bankruptcy exemptions are available to help protect your property.  When you file for bankruptcy, you relinquish ownership of your property to the bankruptcy court and it becomes part of what’s known as the bankruptcy “estate.”  Bankruptcy law allows you to “exempt”, or take out of the bankruptcy estate, the things you need to maintain a home and job, such as household furnishings, clothing, and vehicle.

Knowing the exemptions are crucial since you do not want to lose your home or personal property because you failed to include the correct exemptions. 

Debts that Cannot be Forgiven:

Not all debt is dischargeable in a bankruptcy filing and therefore, will remain with you even after your case is finalized or discharged.  This includes:

  • Taxes from the last 3 years
  • Alimony, child support, divorce settlements
  • Personal injury debts occurred as a result of driving under the influence of drugs or alcohol
  • Government fines, penalties and restitution
  • Court fines and penalties
  • Most student loan debt
  • Debts not listed in your bankruptcy petition

Debts that Sometimes Can be Forgiven:

Tax Debt: Back taxes owed from income tax returns that were filed when due but have not been paid can be eliminated if they’re older than 3 years.

Student Loan Debt: Under the Bankruptcy Code, student loans are not dischargeable in bankruptcy.  However, if the filer can show that they’ve experienced undue hardship unless the student loans are discharged, it is possible.  

Debts that Can be Forgiven:

The types of debt Chapter 7 Bankruptcy discharges are:

  • Credit Card Debt
  • Medical Bills
  • Personal loans and other unsecured debt
  • Unpaid utilities
  • Unpaid common charges
  • Phone bills
  • Personal liability on secured debts, like cars loans 
  • Deficiency balances after a repossession or foreclosure
  • Judgments from unpaid credit card debt, medical bills or other unsecured debt

Does a Bankruptcy affect by 401(k)?

In most cases, you can protect your retirement accounts, including a 401(k) and other qualified accounts (i.e., profit-sharing and money purchase plans, IRAs, and defined-benefit plans), from creditors in a bankruptcy filing.  Federal law protects these accounts from creditors and the bankruptcy trustee.  However, if you cash in your 401(k) and move those funds into another account, you lose this protection.

Is Filing Bankruptcy Bad?  Can it Be Good?

Bankruptcy is not inherently bad or good.  However, there are pros and cons of a bankruptcy filing.  A bankruptcy filing will stay on your credit report for 7-10 years and could affect your ability to open new credit card accounts and obtain a mortgage during and immediately after the bankruptcy filing.  However, a bankruptcy filing will immediately stop all collection calls, lawsuits, and wage garnishments.  A bankruptcy filing could offer you a fresh start to move forward without debt.

Can I Restore my Credit after Bankruptcy? 

Despite the bankruptcy filing staying on your credit report, generally, a bankruptcy filing can help your credit score start to rebound faster.  This might seem counter-intuitive, but most people struggle so long with their debt that by the time they file for bankruptcy their credit is already damaged.  Once the bankruptcy is filed, creditors can no longer report negatively on your credit report each month and if the debt is discharged through the bankruptcy, credit scores can start to go up.

“Within a year, you’re way better off,” says Jaromir Nosal, assistant professor of economics at Boston College, who co-authored a study for the Federal Reserve Bank of New York about the effects of bankruptcy. “It’s a pretty rapid rate of recovery.”

How to File a Bankruptcy in New York

Prior to filing either a Chapter 7 or Chapter 13 bankruptcy, you must take an approved credit counseling course within 180 days before your bankruptcy case is filed.  After taking this course, you will receive a certificate of completion, which will need to be uploaded with your bankruptcy petition.

Your bankruptcy petition will include information related to your assets, expenses, income and debts.  This information, as well as proof of your income and assets will be reviewed in your bankruptcy filing.  Given the complexities of a bankruptcy filing and the constantly changing rules and laws, it is important to speak to an attorney about your options in order to protect your assets.  

How to Find the Right Bankruptcy Attorney in New York

If you are being harassed by debt collectors and cannot seem to get out from under your monthly debt obligations, a bankruptcy filing could be the best option for you.  A bankruptcy filing can be overwhelming, stressful, and complex.  CGW has been helping people through bankruptcy for the last 40-years.  We offer free initial consultations to see if bankruptcy is the best fit and, if so, what type of bankruptcy would best fit your needs.  Please give us a call at 914.472.6202.

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