A Green Bay Attorney Who Knows the Truth About Bankruptcy
If you are facing serious financial distress, do not let myths, concerns and questions prevent you from getting the fresh start you need. Contact an attorney who is dedicated to finding a debt relief solution that works for you. Call me, Holbus, at 920-264-9725 or contact me online to request a free consultation.
Putting Bankruptcy Myths to Rest
At the Holbus Law Office, I understand that people struggling with debt are not "bad" or irresponsible. I'm here to put this stigma, along with the following myths, to rest:
- If I file for bankruptcy, I will lose my [fill in the blank].
- I don't want to file for bankruptcy because [fill in the blank] will find out!
- I don't want to file for bankruptcy because it will damage my credit and I have great credit now.
- I can file for bankruptcy without an attorney.
- I received notice of foreclosure. It's too late to save my home. I might as well give up and find somewhere to rent.
- I will lose my tax refund.
- I don't have enough debt to file bankruptcy.
- I make too much money to qualify for bankruptcy.
- Debts I list on my bankruptcy schedules will be discharged. OR Debts I do not list on my bankruptcy schedules will not be discharged. OR I can pick and choose which debts to include.
- I will never have another credit card again! I don't want or need to rebuild my credit.
Myth: If I file for bankruptcy, I will lose my [fill in the blank].
Fact: People are afraid that they will lose something - whether it's their home, their car, or their tax refund. That's simply not true. The purpose of bankruptcy is not to strip you of all your worldly possessions and leave you out on the streets with the shirt on your back. Nor does bankruptcy mean a free-for-all for your creditors to come into your home and seize anything of value.
Nevertheless, in a small percentage of cases, people do lose something in bankruptcy, and that's how these rumors get started. People think that because they know it happened in one case, it therefore happens in all cases. While this is false, it is fair to ask - when does someone risk losing something in bankruptcy?
There are only two ways you can lose property in bankruptcy.
First, is through foreclosure / repossession. Bankruptcy eliminates debt, but it does not eliminate liens. Therefore, secured creditors with liens on stuff you own can still exercise their rights to recover their collateral of their debt is not paid. Therefore, if you are delinquent on your mortgage or car payment and file for bankruptcy, your mortgage lender or auto finance company can still take possession of your house or car.
Of course, the same is true, even if you don't file for bankruptcy. The role bankruptcy plays in the foreclosure and repossession process is twofold. One, bankruptcy could trigger these proceedings if the lender hadn't started them yet. In my experience, lenders don't start foreclosure or repossession proceedings until the customer is - on average - two months delinquent on their bill. So, I caution my clients who are even only one month behind on their secured debt payments to catch-up before filing for bankruptcy. Two, the bankruptcy does temporarily stall foreclosure and repossession by way of the automatic stay. Before the creditor can proceed with taking their collateral, they must either file a motion with the court to be excepted from the stay, or they must wait for the bankruptcy case to be discharged and closed.
The second way to lose property is by having property that exceeds your allowed exemptions. While you are not expected to be left out on the streets wearing a barrel, you're not allowed to sit on the proverbial gold mine while your creditors get the shaft, either. Therefore, each debtor in bankruptcy is entitled to "exemptions" which protect equity in assets from trustee seizure. If your assets fit within your allowed exemptions, you keep everything, your creditors get nothing, and your case is referred to as a "no asset case". If the equity in some of your assets exceeds your allowed exemptions, exposed assets could be seized by the trustee and sold for the benefit of unsecured creditors - referred to as an "asset case".
The exemptions you get to choose from vary, depending on which state you file in. Some states are more generous than others. Wisconsin residents may choose between state exemptions and federal exemptions - both sets of which are fairly generous. Consequently, very few debtors filing in Wisconsin have asset cases, and those that do usually do not have very much non-exempt property. Some other states have more favorable exemptions, and others have less favorable exemptions - leading to lower and higher rates of asset cases, respectively.
Some people have heard a myth that they can protect a certain "x" dollar amount of property because someone quoted to them a particular exemption. What's important to understand is that the federal exemptions, and each state set of exemptions, contain several different types of exemptions for different types of property. For example, when using federal exemptions, you have an exemption to protect real estate, another exemption for vehicles, another for household items, another for retirement accounts... Well, I could go on and on - there are literally several dozen exemptions. Some of these have dollar limits. Others, like the ones for retirement accounts, have no dollar limit. Most can only be used for specific types of property. Others, like the "wildcard" exemption, can be used on any asset that doesn't have its own specific exemption (like cash, bank account balances, tax refunds) and assets that are not completely protected by their own exemption (a vehicle with $4k in equity would need a combination of the motor vehicle exemption and a little wildcard exemption to top it off).
If I haven't yet driven home the idea that whether you lose property is fact-specific and varies on a case-by-case basis, then let me point out that everything I've just said assumes you are filing for Chapter 7 Bankruptcy.Even if your attorney determines that you might lose an asset due to non-exempt equity, or to foreclosure / repossession, you may be able to avoid losing anything by filing for Chapter 13 Bankruptcy. As I like to say, Chapter 13 Bankruptcy can fix any problem that pops up in Chapter 7 Bankruptcy.
In Chapter 13, you can cure arrears on a secured loan over the life of the plan. So for example, say that you are six months behind on your mortgage payments and facing imminent foreclosure. You can file Chapter 13 before the foreclosure process is complete, and propose to pay the arrears over the life of the plan. The bankruptcy filing stops the foreclosure process, and if you complete the Chapter 13 plan successfully, your mortgage will have been brought current by the time you exit.
Similarly, Chapter 13 can alleviate the problem of non-exempt equity. Let's say you have $5k in exposed equity. In Chapter 7, the trustee can seize the asset, sell it, pay you the amount you were able to exempt, and use the remaining $5k to pay to unsecured creditors. In Chapter 13, you pay the trustee (spread out over the life of a 3-5 year plan) an amount identical to what the trustee would have gotten in Chapter 7. The creditors are made as whole as they would have been in Chapter 7, and in exchange, you keep all of your property.
Of course, Chapter 13 only works if you can afford to do whatever you're trying to accomplish. For example, low income debtors who are 8-12 months behind on their mortgage might not be able to afford the necessary plan payment - even over a 5 year plan - to bring the mortgage current. It's a way to say that bankruptcy is not for everyone, and what happens in your case is extremely fact-specific to your particular circumstances.
Myth: I don't want to file for bankruptcy because [fill in the blank] will find out!
Fact: Most people find bankruptcy to be a humiliating experience, and are afraid that anyone and everyone - from friends and family to neighbors and coworkers - will find out their secret.
First of all, I think the stigma is unnecessarily exaggerated. FILING FOR BANKRUPTCY DOES NOT MAKE YOU A BAD PERSON! Many people find themselves in bankruptcy through no fault of their own - from disastrous medical events, being laid off in the bad economy, or a vehicle needing expensive repairs. Even those who find themselves in bankruptcy - at least partially on their own accord - shouldn't feel overly guilty. This country has never emphasized financial education in its schools, so very few of us know how to read a contract, or fully appreciate the effect of interest and loan terms on debt. People make mistakes, and those mistakes needn't destroy you for life. The trick is to learn from them so you don't repeat the same mistakes. Bankruptcy gives you that fresh start.
The fact of the matter is that a LOT of people file for bankruptcy. Undoubtedly (and statistically), you are acquainted with several people who have filed for bankruptcy. You might just not be aware that they filed for bankruptcy. In the state of Wisconsin, I would estimate that between 25 and 35,000 people file for bankruptcy each year.
So who will find out? For the most part - those who will find out will be (a) your creditors - the bankruptcy court has to send out notice to all of your creditors, and (b) anyone who pulls your credit report for the next 10 years. It is uncommon for anyone else to find out you filed for bankruptcy. Yes, bankruptcy is a matter of public record. Wisconsin residents may be familiar with Wisconsin Circuit Court Access (CCAP), which is a free, publicly accessible, searchable database of all state court cases. The good news is that bankruptcy cannot be found on CCAP. Why? Because CCAP is a database of state court cases. Bankruptcy is a federal court case.
The federal courts have an analog to CCAP called PACER, but unlike CCAP, you must have a paid login to access it. For the most part, the only people with access to PACER are legal and financial professionals who need to access these sorts of records.
Newspapers and tabloids often feature news about bankruptcy for celebrities and airlines. However, they do not publish notices of bankruptcy for ordinary individuals. That's because (a) publication by newspaper is not valid form of notice in bankruptcy procedure and (b) there are simply too many bankruptcy cases to fit in an ordinary publication. I am aware that back in the day, bankruptcy cases used to be published in the newspaper, and I cannot categorically deny that there isn't some backward newspaper in some corner of the country that still does this. However, I am unaware of any newspaper in the state of Wisconsin that does this.
Your friends, family, and neighbors are very unlikely to discover your bankruptcy unless you tell them, or unless you owe them money. Remember, there's a very good chance several people you know filed for bankruptcy, but you don't know that they filed.
Employers are slightly more likely to find out you filed for bankruptcy. This is true of anyone who files Chapter 13 bankruptcy and has a payroll deduction order for the plan payments (most trustees are flexible and will allow you to make direct payments if this is a concern, so long as you remain current on your plan payment commitments). Employers would also find out if you are currently having your wages garnished, and your attorney needs to notify your payroll department of the bankruptcy to terminate the garnishment. Most people feel that the wage garnishment dulls the humiliation factor of bankruptcy.
Myth: I don't want to file for bankruptcy because it will damage my credit and I have great credit now.
Fact: This myth is composed of about one teaspoon of fact and two cups of fiction. The teaspoon of fact is that yes, your credit will take a hit after you file for bankruptcy.
The first cup of fiction is believing that you have great credit right now. If a person's finances have become so distraught that the person has made an appointment with me to discuss bankruptcy, their credit is usually worse than they think it is. Most people think that their credit rating is based solely on their payment history, and because they are current on all of their bills, they must have excellent credit.In fact, credit scores are based on several items - only one of which is payment history. The algorithms for determining credit score are a tightly guarded trade secret held by the credit bureaus, so there are only a few people in the world who know with certainty what affects credit and by how much. What we know, however, is that your credit score is impacted by: payment history, debt to income ratio, types of debts, number of open accounts open, available / unused credit, residential and employment stability, and much more...
No matter what sort of bankruptcy you're filing under, bankruptcy is generally a debt to income ratio problem. Even millionaires can file for bankruptcy. The issue isn't how much money you make, but whether that income is sufficient to pay back your debt as it becomes contractually due.
The second cup of fiction is that your credit is ruined forever. While it is true that the bankruptcy remains on your credit for up to ten years, your credit score can be rehabilitated. Think of bankruptcy as resetting you to when you turned 18 and had no credit. You start over from scratch.
If you're lucky, you will have debts that survive bankruptcy, like a mortgage, car loan, or student loans. These debts already exist, so you don't have to reapply for them. You can continue making payments on these debts and use them to re-establish your credit worthiness. Filing Chapter 13 can also help rebuild credit a little faster than it would in Chapter 7, because you're paying back some of your debt, plus the regular plan payments and payments from the trustee help. If you file under Chapter 7 and don't have any surviving debts, small secured loans (furniture and appliance loans) are a great way to get back on your feet.
When done correctly, most people have substantially better credit scores about 12 months after filing bankruptcy than they did going in.
Also bear in mind that your bankruptcy will - in some respects - make you less of a credit risk. People filing for Chapter 7 Bankruptcy can't get another Chapter 7 discharge for 8 years. New creditors know that one way or another, they're going to get paid for the foreseeable future. Also, with all of your unsecured debt now eliminated, you now have a better debt to income ratio, and presumably, an increased ability to pay back new debt.
Myth: I can file for bankruptcy without an attorney.
Fact: This myth is actually true. Whether it is prudent is a whole other can of tuna.
Although the bankruptcy courts require corporate debtors to be represented by an attorney, individuals are permitted to file bankruptcy without an attorney, or pro se, But is this wise?
Most of the bankruptcy schedules are actually pretty straight forward. List everything you own on Schedules A & B. List all of your debts on Schedules D-H. Write up your budget on Schedules I & J. Follow the instructions and answer the questions on your Statement of Financial Affairs.
The tough parts, however, are Schedule C (your exemptions) and Form B22 (the Means Test).
Schedule C requires intimate knowledge about how to qualify to use one set of exemptions over the other, knowing the available exemption statutes and their ever-changing dollar limits (which are not always current in the statutory publications), and the best way to arrange exemptions to maximize their benefit and stretch. All of this, to say nothing of the scores of litigation involving proper use of exemptions, community property laws, and other related topics. Sometimes, navigating Schedule C is tricky, even with an attorney. Doing so without an attorney puts you in increased danger of losing assets to trustee liquidation.
Similarly, the Means Test is a complex form intended to standardize and compute disposable income. Most of the available deductions are buried in IRS tables. Again, there is a large amount of litigation and case law that impacts allowable deductions on the Means Test that can test even the most seasoned bankruptcy attorneys, let alone someone with no legal training.
Bankruptcy is a very nuanced field or law. It's not even wise for licensed attorneys to merely "dabble" in it from time to time. Your best bet is to have an attorney who routinely practices bankruptcy and constantly stays on top of changes in the laws and trends in their interpretation.
Not to mention, you will make your judge and trustee happier if you are represented by counsel. Court dockets are clogged with pro se debtors whose cases are under special review because they failed to file important documents, complete credit counseling, and meet other very important deadlines.
Even in the simplest of bankruptcy cases, there is a lot of knowledge necessary to file the bankruptcy properly. It's a lot to learn for one-time use. Bankruptcy attorneys may make the process seem easy, but those of us who do dozens of cases each month use our years of experience to put procedures and policies in place to make the process as seamless as possible. Our practices are built on years and years of trial and error, and a lot of sweat.
Myth: I received notice of foreclosure. It's too late to save my home. I might as well give up and find somewhere to rent.
Fact: This one varies considerably from state to state. In Wisconsin, receiving a summons and complaint for foreclosure is just the first step in a considerably long process.
There are a few ways to stop foreclosure. One is to pay the reinstatement amount (bring the account current). This is the simplest way, but it involves paying late fees, penalties, interest, and attorney fees associated with the foreclosure. And 9 times out of 10, whatever caused the initial default will also prevent you from affording this option.
Refinance and loan modification are also options. Refinancing is tough - even in optimal housing market conditions - because obtaining a new mortgage with mortgage defaults on your credit report is a challenge. Loan modification requires finding a reputable company to modify through, which is next to impossible (read here).
Or you can cure your arrears at no additional interest through a Chapter 13. Case law has established that in Wisconsin, you can stop foreclosure so long as Chapter 13 is filed before the Confirmation of Sale. However, best practice is to file your Chapter 13 before the Sheriff's Sale.
Procedurally in Wisconsin, a mortgage lender typically files a foreclosure lawsuit after two missed mortgage payments. Depending on the court's docket load, a hearing is usually scheduled between 6-8 weeks later. At that hearing, a judgment of foreclosure is usually entered unless there is a bona fide dispute. From the date the foreclosure judgment is entered, the homeowner has a minimum 6 month redemption period. The redemption period can be lengthened to 12 months if the mortgage lender is seeking a deficiency judgment, or shortened to 3 months if the property is abandoned. (These time frames are generally halved if the property is not the debtor's primary residence.) Sometime after the redemption period ends, there will be a Sheriff's Sale. About 2 weeks after the Sheriff's Sale is the Confirmation of Sale.
So a judgment of foreclosure does not instantly spell doom. You have upwards of 6-8 months to get a case filed and save your house.
However, you should consult with an attorney immediately once you have learned of foreclosure. You don't want to have to rush your attorney to do a sloppy filing. You have 6 months minimum, there's no reason to walk into an attorney's office at the 11th hour.
Myth: I will lose my tax refund.
Fact: In Chapter 7, a tax refund is what we call a "contingent asset" which means that it is an asset that you are currently entitled to, but will not receive until some future date. Once a tax refund is received, it is converted to a cash asset. So you will want to list and exempt the next tax refund you expect to receive after the date your case is filed. In other words, if you file April 1, 2012, have received your 2011 tax refund 2 weeks earlier, you will want to estimate and list your expected 2012 refund (which you wouldn't get until early 2013). You also must list any tax refunds for prior years that you haven't received yet.
Most debtors can exempt their tax refund. Tax refunds might not be exempt if it is a large refund and the debtor already has a lot of other assets that are exhausting available exemptions.
In Wisconsin, the only exemption available for tax refunds is the federal wildcard exemption. Debtors who elect to use state exemptions for any reason (usually to protect equity in real estate in excess of $40k) cannot exempt their tax refund.
In Chapter 13, tax refunds are perceived as future disposable income. In the Eastern District of Wisconsin, the convention is that some debtors must pay in half of their refund, others may keep their refunds.
Above median debtors are entitled to keep their refunds because their tax deduction is computed on the line 30 of the Means Test based on actual tax liability. It is presumed that the debtor must adjust their tax withholdings to effectively make their tax refund zero in order to afford the plan payment as required under the Means Test.
Below median debtors never make it to line 30 of the Means Test, so their tax deduction is based on their budget schedules, which is based on tax withholdings. Since a person can over-withhold, the trustee gets half of the refund, if any.
Why only half? If the debtor gets to keep half, it provides more incentive for the debtor to maximize their refunds on their tax returns, so both the debtor and unsecured creditors get the biggest slice of the pie as possible.
Above median debtors can be required to submit 1/2 of their tax refunds, too. This happens anytime the tax liability on the Means Test is calculated by some other method than the standard formula, or if the debtor does a post-confirmation amendment of the plan (because post-confirmation amendments no longer rely on the Means Test, but on the budget).
Myth: I don't have enough debt to file bankruptcy.
Fact: There is no legal requirement or minimum amount of debt necessary to file for bankruptcy. There may be more pragmatic concerns, such as whether you have enough debt to make filing bankruptcy worthwhile. I generally try to discourage people from filing for bankruptcy with less than $6k in unsecured debt because the cost to benefit ratio becomes small, though I've had clients insist on filing bankruptcy over less than $4k in debt. Usually, there is some other factor motivating bankruptcy, not just the amount of debt. Most people have somewhere between $20k to $80 in unsecured debt.
You can have too much debt. Chapter 13 has limitations on how much debt you can have. If your debt exceeds those amounts, and do not qualify for a Chapter 7 Bankruptcy, you could be stuck with the much dreaded Chapter 11 bankruptcy (which is usually for corporations, but individuals sometimes file Chapter 11, too). Fortunately, very few people have so much debt that they are faced with this scenario.
Myth: I make too much money to qualify for bankruptcy.
Fact: Although it is possible to earn too much money to qualify for Chapter 7 Bankruptcy, there is no income limit on Chapter 13 Bankruptcy. Even millionaires and billionaires can file for bankruptcy. It's not about the money you make. It's all about your debt to income ratio. A person making $40k per year in income and no debt could be doing better than someone making $400k per year if the latter person has a bucket load of debt.
Several weeks ago, I saw an advertisement for some reality show - I believe it was Braxton Family Values, where one girl commented on another girl's house and pool "Is this what it means to be bankrupt?" I thought the ad was amusing.
Bankruptcy is a very nuanced field of law. I don't mean to give anyone the impression that if they file for bankruptcy, that they too could wind up in a Beverly Hills mansion with an olympic size swimming pool. But the notion that "bankruptcy is for poor people" is incredibly short-sighted and ignorant.
They say a rising tide raises all ships. But if a tide falls low enough, it can sink all ships, too. During a good economy, most bankruptcy debtors tend to be low income individuals. But in a rough economy, like we are experiencing now, the socioeconomic make-up of the average debtor has become far more affluent. In short, people we used to consider wealthy and beyond bankrupt, they too are faced with mounting debt that their income falls short of being able to pay.
Myth: Debts I list on my bankruptcy schedules will be discharged. OR Debts I do not list on my bankruptcy schedules will not be discharged. OR I can pick and choose which debts to include.
Fact: A lot of confusion arises because most people think that "listing" a debt is synonymous with "filing against" or "discharging" a debt, which is inaccurate. Unfortunately, too many people do not disclose all of their debts as they should, and this causes big problems down the road. Listing a debt on your bankruptcy schedules is NOT synonymous with having the debt discharged. Whether a debt is discharged depends on the nature of the debt, not whether it was listed and disclosed.
A non-dischargeable debt (such as a student loan or tax debt) is what it is. You could file bankruptcy over and over again, and list your student loans on your bankruptcy petition each and every time. Unless you can demonstrate the nearly impossible standard of undue hardship, those student loans are not going away.
And a dischargeable debt (such as a credit card or medical bill) is what it is. So many clients want to keep a particular store credit card, a credit card for making fuel purchases, or they don't want to file against their favorite doctor. But the bankruptcy is universal, and all unsecured debts are discharged, whether they were listed on schedules or not.
Stated another way, the Chapter 7 discharge is "good against the world," including unscheduled creditors. The discharge is said to be good against the world in the sense that it applies to all unscheduled debts except those that are expressly made nondischargeable by § 523. In re Guseck, 310 B.R. 400, 402 (Bankr. E.D. Wis. 2004)
Nor does listing your home mortgage and auto loan mean that you are going to lose your house or car. Most people get to pick and choose which secured debts they will reaffirm or surrender. Listing secured creditors on your bankruptcy schedules is not itself an affirmation of intent.
So if a debt will be discharged whether or not it is listed on schedules, or if a debt is non-dischargeable whether or not it is listed on schedules, then why is it is so important to list creditors on schedules?
No matter who the creditor is - a non-dischargeable student loan, a dischargeable credit card, or a home mortgage you intend to reaffirm - they are all legally affected by your bankruptcy filing. Your bankruptcy case automatically endows you and all of your creditors with certain rights and responsibilities.
Disclosing all debts is a matter of proper notice and due process rights. Each of your creditors is entitled to be made aware of your bankruptcy so that they can conform their behavior accordingly. If their debt is dischargeable, they may be entitled to object to discharge if they can prove fraud. Though student loans won't be discharged, your lender is still required to not make collection attempts while the bankruptcy is pending. And though you intend to reaffirm your home mortgage, the debt is technically dischargeable, so your lender needs to execute a reaffirmation agreement.
And if your case is an "Asset Chapter 7" (non-exempt property available to the trustee to be sold for the benefit of unsecured creditors) or a Chapter 13 (which includes monthly plan payments to be redistributed among creditors), then all of your creditors have a right to know about the bankruptcy so they can file claims.
Sure, there are other reasons to list all creditors. (1) So you get the full force and benefit of your automatic stay and discharge injunction protections. (2) Because your debt to income ratio, who your creditors are, and how much your creditors are owed (regardless of class) may very well have a material impact on your case and how it is administered. (3) Because keeping unsecured debts "out of bankruptcy" usually means you're still making payments to them, which would suggest that you have been making preferential payments.
But at the end of the day, it is primarily a due process issue. Each and every one of your creditors, regardless of your intent to pay and regardless of dischargeability, will be affected by your bankruptcy case and have a right to know that you filed for bankruptcy.
Myth: I will never have another credit card again! I don't want or need to rebuild my credit.
Fact: Your credit does more for you than allow you to incur debt. Although rebuilding credit for that purpose is enough of a reason if you ever hope to buy a home or new car. But let's pretend for a moment that you are willing to live in an apartment for the rest of your life and buy beaters with cash, just to avoid going into debt again. Your credit score is used by more than just lenders, such as prospective employers, insurance underwriters, and prospective landlords.
In a nutshell, you need to be concerned with your credit score (and more importantly, rebuilding your credit score), because it will impact many areas of your life.
Credit cards might not be the best way to rebuild credit, but it is faulty logic to believe that credit cards are - in and of themselves - bad. They are not. Credit cards can be very useful tools, if used properly.
The problem is that too many people use credit cards and loans as a means of supplementing their income. For example, Bob earns $2k per month, spends $3k/mo, and supplements his income by taking out $1k loans each month. Bob is living beyond his means. The proper way for Bob to handle his finances is to either scale back his expenses, find ways to increase his income, or a combination of both.
Credit cards are best used as a means of a temporary advance. Bob spends $2k/mo, and Bob earns $2k/mo, but Bob doesn't have $2k right this second. He needs to make a purchase, and will have the money to cover the purchase on a later date. He puts the purchase on a credit card, and promptly squares his bill when the statement comes in.
Of course, budgeting (leaning how to scale back expenses as necessary) and determining what expenses are necessities and what expenses are optional is a whole other topic. As an experienced bankruptcy attorney, I can help make suggestions for improvements to your budget so that you only have to go through bankruptcy once, and can avoid having to do it again in the future.
Contact a Wisconsin lawyer who is dedicated to making bankruptcy work for you. Call my law office at 920-264-9725 or complete the online form.
