Bankruptcy: Not as Bad as You Think

August 2, 2016

The first impression of Bankruptcy that most people have usually involves a man wearing a barrel held up by suspenders where the government has taken everything he had. While depressing and sort of comical, it is not a true depiction of bankruptcy. Bankruptcy is more correctly called “Bankruptcy Protection” because the purpose is to protect you from creditors. It is there to provide you with a fresh start. Debts get discharged, and creditors are stopped from trying to collect from you by something called a stay. Even still, people have reasonable fears of Bankruptcy. I'll try to discuss a few.


Your debts get discharged!


Discharge means that your debts are wiped out and once you receive your discharge, you no longer have to pay any of the discharged debts. What’s so bad about that? Credit card debt, loans, mortgages, if they are discharged, they are gone. There are some debts that cannot be discharged or are very difficult to do so, however. Student loans and taxes are the most common that do not get discharged. Even still, student loans might be discharged in some very specific, rare, situations, and some old tax debts can be discharged. You should contact a bankruptcy attorney to see what can be done.


You don’t have to lose your stuff!


First it depends on which type of bankruptcy you are filing, and before deciding to file, you should consult a bankruptcy attorney to analyze your factual situation and advise you as to what is best.


For a consumer there are two main chapters of bankruptcy and which chapter you file impacts your assets differently. If you are filing Chapter 13, often called a "wage earner's plan," you do not lose any assets: your house, your car, and other "stuff" are not part of it, and instead your disposable income is calculated. It requires payments and lasts for either 3 or 5 years. At the end of the time, delinquent debts are paid up, and the debtor is paid up to date. Think of it as a big modification for all your debts at once, and many of the debts can be crammed down to allow for very reduced or even eliminated debt.


Where you can lose assets is in Chapter 7, often called "liquidation." That is what most people think of when they think of bankruptcy. Unlike Chapter 13, in a 7 your assets are collected, liquidated and then divided up among creditors. The majority of these bankruptcy cases are, however, "no-asset cases." No-asset means that the person has nothing that the trustee can take, meaning no assets are available for the bankruptcy. This does not mean that the debtor “has no stuff,” but instead means that they used built-in bankruptcy exemptions and other avenues or agreements to protect what stuff they had from being included in the bankruptcy. In many of these cases, no assets are lost,. There are ways to protect some, if not all of a debtor's assets, but it may require advanced planning. Chapter 7 cases are quick, taking around 4 months to complete and get a discharge.


Your credit will not be destroyed!


The fear is that your credit score will be irreparably damaged, but that is not the case.  It is true that credit is impacted negatively, but it is short term. Bankruptcy is a fresh start and so the focus should be on the future. After filing the debtor usually has no credit history, which negatively affects consumer credit, but if the debtor creates a new, positive credit history after the bankruptcy, low credit scores will likely go up long term.

It is worth noting that there are laws to prevent government entities and private businesses from discrimination based on a filing of bankruptcy. You cannot lose your job for filing.


Why you need a bankruptcy attorney.


Even though bankruptcy is supposed to be simple enough for anyone to file themselves, we advise against flying solo. As you can imagine, it is not an easy thing to do alone, in fact many attorneys avoid this field of law due to its complexity. There are many steps along the way that are potential pitfalls without the right guidance. Not only are there multiple chapters of bankruptcy to choose from, but there are different sets of exemptions, and even the decision to file bankruptcy altogether may not be advisable depending on your specific situation. You run the risk of losing assets you might not need to lose, and you should find a lawyer that practices bankruptcy.


Call us at (203) 254-1387, or email us HERE to schedule a free consultation.

Any questions or comments, please leave a comment below!



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