Bankruptcy not a casual move

Published: Thursday, January 27, 2005 at 6:01 a.m.
Last Modified: Thursday, January 27, 2005 at 1:10 a.m.
Many Americans are swamped by debt, but more than a million of them this year likely will conclude that their bills are beyond their control.
They will seek a fresh start through bankruptcy court. Here, creditors are kept at bay. Debt collectors are silenced. And potentially most of a filer's IOUs can be vanquished.
Nearly 1.62 million personal bankruptcies were filed in the year ended in September, a 2.6 percent drop from the year before, according to the most recent figures. The dip is likely only temporary and the result of low interest rates that have allowed homeowners to pull money out of their house by refinancing a mortgage, bankruptcy experts say.
''There is an event in their life that is outside their control that tipped the scale against them. Often it's the loss of a job or a serious illness forced them or a loved one to be unable to work,'' said Howard M. Ehrenberg, a bankruptcy attorney and Chapter 7 trustee in Los Angeles.
Filing for bankruptcy protection, of course, isn't a debtor's only solution, or for that matter, the first step to take when bills get overwhelming. A bankruptcy will be posted on your credit report for years, and you'll end up paying higher interests rates when credit is extended to you. Prospective employers, too, sometimes review job candidates' credit reports and may frown on a bankruptcy.
Here are some steps to avoid filing, and what you can expect if you do file: ''The first thing you should do is stop charging, so you don't go any further in debt,'' said John Ventura, a bankruptcy lawyer in Brownsville, Texas, and author of ''The Bankruptcy Kit.''
Next, take an assessment of income, living expenses and debt, and how much money you realistically can put toward bills each month, perhaps getting an extra jobs to pay bills faster, Ventura said.
Contact creditors if financial difficulties will cause you to get behind in payments. They don't want you filing for bankruptcy and often are willing to work out a repayment plan with you, experts said.
If you need help with budgeting or dealing with creditors, consider visiting a nonprofit consumer credit counseling agency, Ventura said.
Choose a credit counselor with care. Hundreds have sprung up in the past decade, particularly over the Internet, and sometimes charge hefty fees. Good agencies usually will charge no more than a small fee, spend time with you assessing your finances and emphasize budgeting and education, experts said.
Check consumer complaints about an agency through the Better Business Bureau or your state consumer protection office.
Typically, credit counseling agencies find that one-third of clients can resolve their financial problems with budgeting guidance, said Linus Campbell, director of education for the Consumer Credit Counseling Service of Maryland and Delaware. Another one-third usually end up in a debt management plan, where the counseling agency works with creditors to set up a repayment schedule, he said.
The rest have such serious problems that bankruptcy may be the solution, Campbell said.
How do you know if you're in this last category?
''If you reach a point where creditors threaten to take something away from you, threaten you with foreclosure on your home or repossession or garnishment of your wages,'' Ventura said.
Once you file for bankruptcy, the court stops creditors from taking action against you, Ventura said.
Not all debt can be erased through bankruptcy. For instance, you can't get rid of alimony, child support and most taxes. There's also a high hurdle to overcome to wipe out federal student loans, so these usually must be repaid.
A bankruptcy attorney will do an analysis to determine whether you should file under Chapter 7 or Chapter 13 of the bankruptcy code, Ventura said.
A Chapter 7 is a liquidation. This type of filing can wipe out most of your debt and can be done once every six years. A Chapter 7 stays on your credit record for 10 years.
Under Chapter 7, you're allowed to keep certain assets, usually clothes, furniture and appliances, and the rest are sold with the proceeds going to creditors. State law usually determines what assets you can keep. For example, a 200-acre ranch in Texas is protected from creditors as well as a $300,000 home in Massachusetts. Marylanders, on the other hand, can exclude $2,500 of home equity.
Under Chapter 13, you repay all or a portion of your debts over three to five years, depending on how much the court determines you can afford to pay. You're allowed to keep your property, including assets that you couldn't retain under Chapter 7. A Chapter 13 remains on your credit report for 7 years.
''Most of the time, people file a Chapter 13 because they own a home and don't want to lose it,'' Ehrenberg said. Or, they have excess income, but need their payments restructured so they can more easily manage them, he said.
(The credit-card industry for years has been pushing for legislation that would make it harder for debtors to file under Chapter 7 and shift more filers into Chapter 13. With Republicans recently gaining more seats in Congress, bankruptcy experts say such legislation stands a better chance of passing this year.) Expect to answer lots of questions about your finances if you file.
''Obtaining a discharge is a tremendous benefit,'' Ehrenberg said. ''You have to be honest.''
Some don'ts before filing: -- Don't go on a spending spree in the weeks before filing figuring those bills will be discharged. Spend more than $1,100 on luxury items with a single creditor within 60 days before filing and you will have to repay that, Ventura said. The same goes for credit-card cash advances.
-- Don't give a creditor a postdated check. A bounced check could lead to criminal charges, and bankruptcy won't protect you from prosecution, Ventura said.
-- Don't transfer property to relatives thinking that will keep assets out of the hands of creditors. Any transfers within a year before filing will be viewed as fraudulent by the court, Ventura said.

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