Federal bankruptcy protection can be a very valuable tool.  Unfortunately many misinformed consumers choose bankruptcy for the wrong reasons.  There are many other tools to consider before making a decision to damage your credit for TEN YEARS.  Your credit is now used by prospective employers, insurance companies and of course all lenders.  In fact I have seen many employment applications that ask if you have ever filed for bankruptcy.  In my profession, it is the kiss of death.  For example every insurance company I represent has conducted a background check on me and they will find the bankruptcy whether it is disclosed or not.  Fortunately I have never considered filing bankruptcy.

So what is bankruptcy?

There are basically two types of bankruptcy, liquidation (chapter 7) and reorganization (chapter 13).  In liquidation your non exempt assets are used (if any) to pay off any secured creditors and then unsecured creditors.  Reorganization allows you to seek court protection to halt collection activity and attempt to create a payment plan.  Not all debts are discharge-able like some student loans, recent income taxes, child support and secured property.  You can stop creditor harassment and stall foreclosure but you will eventually have to pay for secured property, perhaps under different terms.  See nolo.com  for more details.  Filing bankruptcy when you have little or no assets that are non-exempt will ruin your credit for ten years when you don’t have to.  There is very little an unsecured creditor can do to you.

So what is the big lie? 

Many consumers file bankruptcy to get rid of credit card debt, medical bills and end the annoying letters and phone calls  In most cases if you can’t pay your credit cards you can’t pay a judgment either.  Creditors know this and are reluctant to throw good money after bad by paying a load of legal fees.

WARNING 

Even though it is highly unlikely, unsecured creditors can sue you.  They have four years from the date of default to do so.  After four years they are barred from bringing suit.  Even if you get sued, the creditor must produce every bit of paper to prove what you owe – another huge hassle.  If you get sued, be sure to file an answer or they will get a default judgement which is hard to overcome.

It has been my observation that people who want to file bankruptcy simply want the debts to go away and avoid the letters, threats and phone calls.  Here is the good news:  Federal law strictly guards what creditors can and can not do.  For example, they can’t call you at work, at home after certain hours and most off all you can demand that they have no contact with you by sending them a “Cease and Desist” letter.  If a creditor or collection agency harasses you or continues to contact you after sending them a cease and desist letter they are liable to you in the amount of $500 per violation.

In summary, if you have little non-exempt assets (life insurance is exempt, your home is exempt, IRA’s and retirement plans are exempt and a certain amount of personal property which varies by state) bankruptcy could be a huge mistake.  You can stop creditors from contacting you and there is not much they can do.  This is not an article about how to avoid paying your bills.  That is a moral decision you must make.  However you need the facts.  A bankruptcy lawyer has an incentive to convince you to file bankruptcy – and perhaps you should.  Lastly money in a checking account in your name is fair game.  A judgment creditor can force you to disclose all of your accounts.  However they can’t stop you from changing banks after you make this disclosure.  For more information or a legal referral in your state (highly discounted) please contact me at 512-464-1110 or david@pcfo.net