And the only remedies being discussed seem to offer no real, concrete help for you, the consumer stuck in the middle of this mess.

I’ve seen a substantial increase in calls to my office seeking bankruptcy consultations in the last three or four weeks. I don’t know about Dana’s experience, but since she’s been noticeably quieter on the bankruptcy law list to which we both belong, I’m guessing her experience has been similar to mine. Solos don’t have the luxury of pawning off work to their associates! When business picks up, our hours at home simply decrease. (Or in my case - my hours at home, in another part of the house from where the fun stuff usually happens, since my office is in my home.)

It struck me that this is a really good time to write about who is most helped by bankruptcy - and perhaps even more importantly, who is not.

I can conclude then that a lot of consumers are contemplating a solution they’ve perhaps never considered before, or are finally acting on an option that, for whatever reason, they had not previously acted upon: bankruptcy. It struck me that this is a really good time to write about who is most helped by bankruptcy - and perhaps even more importantly, who is not.

Who Should Consider Filing For Bankruptcy?

It might sound strange but there’s no test for going into bankruptcy, as a general prerequisite. You don’t have to have a certain amount of debts (though having more than a specified amount of secured or unsecured debt might keep you out of Chapter 13). You don’t have to make less than a certain amount of money. Heck, you don’t even have to be behind in your payments to your creditors.

Bankruptcy is not a “flow chart” kind of choice. You can’t just tick off a few boxes on a questionnaire and scan the answer key for the right interpretation. It’s a personal choice, to be sure, and it’s one that must rest on several factors:

1. Are you in economic distress — i.e., you’re having trouble making your minimum payments to the credit card companies, you’re barely making ends meet and keeping the essentials (food, clothing, shelter), you’re robbing Peter to pay Paul, etc. ?
2. Do you live paycheck to paycheck, and just one moderate health problem away from crisis?
3. Are you facing a significant judgment for some personal injury that was not willfully caused or occasioned by drunk driving, and your assets are at risk?
4. Are you judgment proof? In other words, do you have no assets at all that can be seized and sold to pay back your financial obligations? If so, you may not need to file for bankruptcy. (On the other hand, judgments stick around for awhile - the exact amount of time varies by state - and so even if things are bad now, but might improve in the future, you could be facing seizure of those future assets. A lawyer can help you suss this one out.)
5. Are you being harassed by creditors and collection agencies? Bankruptcy can stop that. Of course, so can a well-timed FDCPA or state-law-based lawsuit. But if it’s a rampant issue, and you are also in economic distress (i.e., can’t pay your bills, even the minimum due, when due), bankruptcy might be better option.
6. Last, but by no means least, are you facing foreclosure? Chapter 13 is a very effective way to stop a foreclosure, allow the homeowner to restructure other debts, and pay off the mortgage arrears over time.

Who Won’t Be Helped By Bankruptcy?

In a nutshell, bankruptcy won’t put more income in your life. If your problem is really one of not making enough money to support the lifestyle you lead, then bankruptcy isn’t going to help with that. You’ll have to either ratchet down your spending (lower grocery bills, move to cheaper housing, sell new cars in exchange for cheaper used vehicles or public transportation); increase your income (second job, new job, overtime, whatever); or both.

Bankruptcy also won’t help if your primary problem is a non-dischargeable debt. What’s non-dischargeable is prescribed by the bankruptcy laws - specifically, section 523 of Title 11.

Here’s a quick and non-exhaustive list:

• Recent taxes and government penalties
• Child support
• Criminal fines or restitution ordered by a court
• Personal injury awards where the debtor was intoxicated at the time of the incident
• Debts that weren’t listed in the bankruptcy filing (or “scheduled”)
• Student loans (unless repayment would constitute a substantial and undue hardship - note that this is a very hard “test” to pass and so the vast majority of student loans are nondischargeable)
• Debts that were part of a prior bankruptcy case but where debtor did not get a discharge

(Note that this is for Chapter 7. In Chapter 13, debtors get a slightly broader discharge. However, the biggies - child support, student loans - are still nondischargeable.)

Answering the Question for Yourself

It’s not an easy decision to make. Trust me. I DO know.  You have to bring all of yourself to the table on this issue: your emotions, your rational mind, your upbringing, your religious/spiritual beliefs, your values and morals.

I recommend you take a reasoned and balanced approach:

1. Do your research. Find out all you can about bankruptcy - especially as it really is in your state. (For more on bankruptcy in South Carolina, see “What to Expect in an SC Consumer Bankruptcy Case.”)
2. But do it on reputable sites. There is a great deal of inaccurate, old, or just flat-out wrong-headed information floating around out there on the web. Stick with attorney-written sites, and preferably ones written by attorneys who practice in this field regularly in your state of residence. Another excellent source for general bankruptcy information is the SC Bankruptcy Court website.
3. Think about the future. Try to envision how you’ll feel once the case is over, and try to envision the same time frame (about 6-12 months out) if you don’t file. How will you feel about yourself and your choice in each scenario - filing, and not-filing?
4. Shop around for the right lawyer for you, but consider making your final decision on something other than price. It’s tempting, in a financial crisis, to go with whoever’s cheapest. But consider another approach: interview the lawyers. Why not? They’ll be working for YOU. Shouldn’t you be as careful choosing a lawyer as you’d be selecting an employee to care for your kids? Make sure it’s a good “fit” - that you understanding and approve of their general approach, that you know who you’ll be dealing with (hint: it’s not always the lawyer who speaks with you), and that you feel positive about working with these people. Above all, don’t settle for someone who makes you feel less than good about yourself, or from whom you sense judgment and disapproval.

Finally, a word about morality: anyone who says it isn’t a moral decision is kidding themselves - of course it is. You do have to make the decision that’s right for you and your family.

But consider this: is it more moral to continue to fight losing battles, to put your family’s assets and futures at risk, to subject yourself to debilitating, crippling stress, all in order to pay off old debts, or to admit that you tried, that it didn’t work, and that you need a fresh start, and thereby be able to devote your time and energy to more positive actions?

I can’t answer that for you - but you can. Take your time, make the right decision for you and your family, and then, once you’ve done that, have faith in the decision you make.

Table of contents for Back to Basics: Bankruptcy

1. Back to Basics: What This Series Is All About
2. Back to Basics: What Is Bankruptcy?
3. Back to Basics: BAPCPA and a Brave New World for Bankruptcy Lawyers
4. Back to Basics: What Happens to My Credit in Bankruptcy?

This is another post in our ongoing series “Back to Basics: Bankruptcy.” This post examines credit issues in the context of bankruptcy.

I hear many objections to bankruptcy from people who really ought to be considering it as an option, but by far one of the most frequently cited objections is this: “I don’t want my credit to be ruined.”

Let’s look at the facts, and try to separate them from the myths:

• Myth: Filing bankruptcy means I’ll never get credit again.

Fact: An entire subspecialty of the credit industry exists solely to extend credit to bankruptcy debtors. In fact, even for non-subprime lenders you may be a more attractive credit risk after filing bankruptcy (especially Chapter 7, which is a quicker process than Chapter 13 plans)

• Myth: My credit will take a huge hit if I file.

Fact: Credit scores do generally take an initial hit upon filing. However, an interesting thing then happens: typically, within a year, filers find that their credit scores have actually risen. (See this report from SmartMoney, “Declaring Bankruptcy Can Improve Your Credit Score.”)

• Myth: Negotiating with my creditors will be better for my credit than filing bankruptcy.

Fact: This one’s a bit more complex to address. Generally speaking, folks who should be considering filing for bankruptcy have a skewed sense of the real state of their credit — typically overstating their credit score as much as 100 points. (Obviously, this is only true for folks who haven’t checked their actual scores — and those in distress who have checked their scores are generally very surprised.) The real hit to credit, then, could well be “continuing to do what hasn’t been working” — i.e., delaying the inevitable.

Bottom line: By all means negotiate with your creditors if you haven’t already, and if you have sufficient income to sustain some sort of payment plan. Then, if it doesn’t work, don’t hesitate to take the next step.

Table of contents for Back to Basics: Bankruptcy

1. Back to Basics: What This Series Is All About
2. Back to Basics: What Is Bankruptcy?
3. Back to Basics: BAPCPA and a Brave New World for Bankruptcy Lawyers
4. Back to Basics: What Happens to My Credit in Bankruptcy?

This is the second post in a series called “Back to Basics” in which we’re going to examine both bankruptcy and consumer law from the point of view of the consumer who is looking for a basic understanding of these subjects. Today’s post: BAPCPA — the 2005 Act that changed the landscape of bankruptcy in significant ways.

BACPA In Broad Strokes

The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act brought howls of protest from the consumer bankruptcy bar. Lawyers who represented individuals in bankruptcy saw overwhelming flaws in the legislation from a technical perspective, and what they viewed as an unfair and unwarranted attack on consumers in the new law, which had been written in large part by the pro-creditor lobby.

Among the many problems with the new law pointed out by the consumer bankruptcy lawyers:

• The “Debt Relief Agency” provisions: these provisions apparently sought to regulate speech and conduct of attorneys who provided bankruptcy assistance to clients in what most of us see as an unconstitutional attempt to restrict the advice we can give our clients. The provisions are broad, vague, and confusing, and at least a few judges have expressed the opinion that the provisions don’t apply to lawyers, while others say that they do. This confusion is a hallmark of the judicial and attorney response to the Act.
• The means test: this new addition to the bankruptcy laws provides a first-ever entry bar to Chapter 7. Debtors had to prove that their income was below the median income for a similar household size in their state, or otherwise prove that their entry into Chapter 7 was not an “abuse” of the code’s provisions. This is done through a complicated means test purportedly designed to see if the debtor can afford to repay his or her debts.
• Massive paperwork requirements: the documentation requirements of both attorneys and debtors increased considerably with the new act, increasing exponentially the amount of time it took to conduct a case, and thus increasing the costs for debtors.

The Creditor Response

Some creditors and collection agencies deplorably took advantage of the new law to deceive consumers with coercive demands for payment. Many lawyers reported to professional organizations and bar associations that their clients were receiving dunning calls from collectors who insisted “bankruptcy was repealed” and “if you file for bankruptcy, you’re committing a crime and we’ll make sure you get prosecuted.”

This had the perhaps unintended consequence, however, of galvanizing the debtor bar, who in large numbers took to the editorial pages and blogs on the web in an attempt to educate consumers about how their rights had — and had not — been impacted by the new law.

The Bottom Line

Bankruptcy is, in fact, more complex and in some cases a lot more expensive than it used to be. This much is unquestionably true.

But bankruptcy was not repealed; it was not criminalized; and it did not provide that homeowners could not file for bankruptcy protection — all claims made by some collectors to individual debtors in the days following its passage and enactment.

Most consumers will find that they do have a choice still — Chapter 7 or Chapter 13. While many consumers will be pushed into Chapter 13, those debtors will in fact still have some discretion and freedom in creating their payment plans to submit for approval by the court. With the assistance of a skilled attorney, these debtors should still find considerable relief.

Table of contents for Back to Basics: Bankruptcy

1. Back to Basics: What This Series Is All About
2. Back to Basics: What Is Bankruptcy?
3. Back to Basics: BAPCPA and a Brave New World for Bankruptcy Lawyers
4. Back to Basics: What Happens to My Credit in Bankruptcy?

This is the inaugural post in a new series called “Back to Basics” in which we’re going to examine both bankruptcy and consumer law from the point of view of the consumer who is looking for a basic understanding of these subjects. Today’s post: What Is Bankruptcy?

Origins of Bankruptcy Law

Bankruptcy law is federal law; it’s codified (or collected) in Title 11 of the United States Code. However, many issues of state law also affect the conduct of a bankruptcy case.

This complexity is one of the reasons that it’s not advisable to try to conduct a bankruptcy case without the benefit of an attorney.

What Is Bankruptcy?

Simply put, bankruptcy is a label that we apply to any case filed under Title 11 of the US Code, in which the debtor (the person filing the case, usually) seeks to have his or her debts discharged.

This can happen under any one of several chapters. Future posts will explore these chapters in greater detail, but here’s a brief rundown:

• Chapter 7 is a liquidation model of bankruptcy, in which nonexempt property belonging to the debtor can be taken by the trustee and sold in order to pay unsecured and secured creditors.
• Chapter 11 is a reorganization model, in which the debtor proposes a payment plan to repay his or her creditors, in whole or in part (usually in part, sometimes for pennies on the dollar, but dependent on the debtor’s financial situation).
  In Chapter 11, the debtor is typically a business, although some individuals with a great deal of debt that exceeds the limits placed on Chapter 13 cases, can also file under this chapter.
• Chapter 12 is a special chapter just for family fishermen and farmers. It’s a relatively new addition to bankruptcy law, and is a reorganization model just like Chapters 11 and 13.
• Chapter 13 is a reorganization plan for individual debtors. Like Chapter 11 and 12, it’s for debtors with regular income, and provides for repayment plans ranging from 3 to 5 years, depending on certain criteria.

Where Did Bankruptcy Originate?

Some form of bankruptcy has existed in Western culture since Roman Empire days. However, our modern system of bankruptcy has its roots in English statutory law from the 16th century on.

In the United States, the framers of our US Constitution sought to unify a patchwork of debtor/creditor statutes that had resulted in a crazy quilt that made little sense. So, in Article I, Section 8 of the Constitution, Congress was granted the authority to create “uniform Laws on the subject of bankruptcies throughout the United States.”

However, just because you can do something, doesn’t mean you will do it, right?

Congress made three attempts to create a bankruptcy scheme for the new nation; each time, within 1 to 3 years, the attempts were repealed.

Finally, in the late 19th century, one last attempt “stuck” and the Bankruptcy Act of 1898 was passed. It remained on the books for 80 years with certain changes and modifications over the years.

Modern bankruptcy has its roots in the first major revisions to the bankruptcy scheme — 1978’s Bankruptcy Reform Act. The ‘78 Act provided Chapters 11 and 13 (although versions of these chapters existed previously), and empowered bankruptcy judges. Jurisdiction became a major stumbling point, however; a resolution was attempted with a group of 1984 amendments.

The credit lobby was pretty livid by this time at what they perceived as a pro-debtor law. They began working on Congress almost immediately, and their efforts finally resulted in the laughably titled “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005″ — a law that deserves its own post, so we’ll stop there for this post and pick up with the 2005 law in the next post.

Table of contents for Back to Basics: Bankruptcy

1. Back to Basics: What This Series Is All About
2. Back to Basics: What Is Bankruptcy?
3. Back to Basics: BAPCPA and a Brave New World for Bankruptcy Lawyers
4. Back to Basics: What Happens to My Credit in Bankruptcy?

We’ve been focusing on news-based entries here at the South Carolina Bankruptcy & Consumer Law Blog lately, so I thought it was time to get “back to basics.” Thus, we’re starting this series of posts to do just that — present the basics of bankruptcy and consumer law.

First up, this week, we’re going to talk about bankruptcy. I hope to cover the following subjects in a user-friendly, easy-to-read manner:

• Who can file for bankruptcy
• The differences between Chapter 7 and Chapter 13
• What happens in a bankruptcy case in South Carolina, from beginning to end
• What kinds of debts can be discharged — and what kinds of debts can’t
• What the discharge really means for you as the person filing
• How bankruptcy can be used to restructure your debts
• And more

If you have any specific questions about bankruptcy you’d like me to answer, please let me know in the comments below! I’ll do my best to incorporate them into future posts in this series.