The Advantages: Short Term
When a client takes their first steps towards filing bankruptcy, there’s often a sense of relief. The debts that have been weighing them down and giving them many restless nights can be eased, if not completely eliminated. The feeling of getting a fresh start in their financial life is both uplifting and very powerful for clients, as if the hurdle they’ve dreaded for months (if not years) wasn’t as tall as they’d been led to believe. It’s a chance for them to get back on their feet and plan for their financial future.
The Automatic Stay
When a bankruptcy petition is filed, an “Automatic Stay” goes into effect. This stay puts a stop to creditors collecting on dischargeable debts for a limited time while the bankruptcy is pending. All creditors will be informed of the bankruptcy (and the following Meeting of Creditors) and, if they contest the discharge of their debt, can attend the Meeting of Creditors and be allowed to speak their case. Often, creditors decide not to attend these meetings and allow the debt to be discharged.
Sometimes, a creditor will call after the bankruptcy is filed. This is usually because the call center for the creditor has not yet received notice of the bankruptcy. If this happens, a client need only provide the caller with their bankruptcy case number and filing date. If a creditor continues to pursue a debt or otherwise harass a debtor while the automatic stay is in effect, that creditor may be subject to legal action for violating the automatic stay.
Judgments Will Be Frozen and Wage Garnishments Will Be Halted (In Most Cases)
In order to garnish a debtor’s wages, a creditor must first obtain a judgment against the debt, then obtain a court order to secure their garnishment. A function of the automatic stay is to halt these activities in their tracks. Even if a garnishment is already in place, an automatic stay will keep the creditor from collecting from the debtor’s paycheck, allowing them to keep more of their money while their bankruptcy is being handled through the court.
The automatic stay does not apply to all types of garnishments. Domestic support obligations, such as alimony or child support, certain types of tax debt, and other non-dischargeable debts can still be garnished, even with a bankruptcy case pending.
Evictions, Foreclosures, Tax Sales of Your Home, And Car Repossessions Will Be Halted
The automatic stay will also block all collection attempts from mortgage lenders, landlords, and title creditors and will bring these activities to a temporary halt. This often gives the client a chance to breathe while their case is being processed. In some instances, the erasure of debt from a Chapter 7 bankruptcy allows the client to correct their financial deficiencies with mortgage or car payments, allowing them to stay in their homes and keep their vehicles.
Utility Companies Will Keep Their Services Running
The automatic stay also applies to electricity, gas, water, and other utility companies with which a client may have debts. Filing for bankruptcy allows a client to keep the lights on and the water running while the stay is in effect.
Driver’s Licenses Can Be Recovered
If a driver’s license was suspended because a client had debts related to parking tickets or driving without insurance, a Chapter 7 bankruptcy might be the first step in having those debts removed and the driver’s license reinstated.
Most Debts Will Be Eliminated
The elimination of debt is the primary purpose for going through the bankruptcy process. A Chapter 7 bankruptcy can erase most (but not all) types of consumer debt, from credit cards and medical bills to past due utility bills and bank loans. Bankruptcy can even eliminate some types of personal tax debt. These debts can have a crushing effect on a client’s life, weighing them down with constant anxiety and dread. Once they receive their discharge, clients can finally get their feet back under them and build their financial lives anew.
The Disadvantages: Short Term
Credit Cards Will Be Cancelled
Even if a client wishes to keep a certain credit card and wants to continue making payments towards that debt, the credit card company will be notified of the bankruptcy and will likely cancel the card. Any recurring payments should be moved and purchases should be halted so the credit card company doesn’t claim that the bankruptcy is fraudulent.
Banks Can “Setoff” Funds from Checking and Savings Accounts to Pay Loans
If a client has a loan or a credit card with their banking institution, then the bank can take money directly from a client’s accounts and use it to pay the debt. Because of the automatic stay, the bank would need to petition the Bankruptcy Court to obtain relief from the automatic stay to do this. To avoid this, many clients have changed banking accounts or had to withdraw their money before filing bankruptcy.
Property Could Be Forfeited
In most cases, Nevada residents filing for bankruptcy have the benefit of exempting their property. Married couples filing jointly have even more exemptions than single filers. However, if a piece of property does not fall under one of these exemptions, then it becomes part of the bankruptcy estate when the petition is filed. After that, the trustee decides whether the property can be sold to satisfy a portion of the Debtor’s debt.
Tax Refunds May Be Denied
If a client is expecting a large tax refund, the Bankruptcy Trustee may include that as part of the bankruptcy estate and distribute the refund to the client’s creditors instead.
Co-Signers Can Be Liable for Any Debts Erased
If a co-signer is kept unaware of their friend or family member’s bankruptcy, the news of being suddenly liable for a debt can come as a shock. This can strain relationships in even the best of times, and may affect the co-signer’s credit report and keep them from buying a house or car. It is important that any co-signers be kept apprised of the client’s bankruptcy process and that arrangements are made to lessen the impact they may experience.
Debts Repaid to Family Members Can Be Seized by The Bankruptcy Trustee
If a client paid back a debt or transferred property to an “insider” (a family member, a business partner, the client’s corporation, or their friends or affiliates) within the last year of filing for bankruptcy, that insider can be sued to recover that money or property. The recovered money (or funds from the sale of property) would then be redistributed to the client’s creditors. While every case is different, in instances where a debt like this has been repaid, it might be in the client’s favor to wait to file bankruptcy.
The Disadvantages: Long Term
Credit Reports and Credit Score Will Be Affected
When a bankruptcy is first filed, a client’s credit score is likely to be lowered as a result. This score will stay low for some time. If a client’s debt history had resulted in an already-low credit score, the change will not be as much. A higher credit score will fall further after a bankruptcy. The good news is that, once the score has fallen, it will rebuild over time. Many credit scores recover significantly within the first year after filing bankruptcy.
The credit report will keep record of the bankruptcy for much longer. A Chapter 7 bankruptcy will stay on a client’s credit report for up to ten years. A Chapter 13 bankruptcy, by comparison, is only on a debtor’s credit report for seven years. During that time, anyone who accesses a debtor’s credit report will see the bankruptcy and the debts that were discharged. This can result in higher insurance premiums, higher APR rates, unfavorable options for mortgages or rentals, and can impact employment searches.
Some Debts Will Still Need to Be Repaid
It’s important to note that a Chapter 7 bankruptcy won’t erase all types of debt. Student loan debt (unless the client can prove the debt is an undue hardship), domestic support obligations, certain types of tax debt, and certain other judgments or debts won’t be discharged after a bankruptcy case. Proving that a student loan causes an undue hardship is often difficult and requires a separate lawsuit to be filed, one which the client may not have awarded in their favor. However, the erasure of a client’s dischargeable debts often allows that client the funds to being paying the non-dischargeable obligations.
Clients Are Unable to File Bankruptcy Again If More Severe Circumstances Arise
If a client files a Chapter 7 bankruptcy, they are not allowed to file a Chapter 7 bankruptcy again for eight years. If the client wished to file a Chapter 13 bankruptcy after their Chapter 7, they’d have to wait four years after the Chapter 7 petition was filed. This means that, if a client finds themselves in debt again, they won’t have the relief of bankruptcy until those time limits expire.
If a client knows more debts are on the horizon, like medical bills for an ongoing treatment, it may be more beneficial for them to wait to file bankruptcy
The Advantages: Long Term
Creditors Will Lend Credit to Former Debtors
Creditors know that, after a debtor has filed bankruptcy, they are unable to file bankruptcy again for several years. This makes the former debtor less of a credit risk. While creditors will initially withdraw from anyone who has recently filed bankruptcy, they will soon start offering car loans and credit cards again, often at a higher APR rate than previously available. There are also lenders who specialize in giving credit to former debtors, knowing they’ll earn much more in interest than they would from a non-debtor (and knowing the debtor has fewer debts weighing them down). As time passes after the initial filing date, more and more creditors will feel comfortable lending to a former debtor, especially as their credit score continues to climb, and the credit rates will return to normal.
A Higher Credit Score
While there in often an initial dip in a client’s credit score after filing, in the long term, a bankruptcy can improve a client’s credit score. Filing a Chapter 7 bankruptcy erases much of the debt that had lowered a client’s score in the first place, giving them a fresh place to start rebuilding. Within a year, if the client keeps up with any reaffirmed or non-discharged debts, their credit score should start to climb back to good credit levels. A client can also seek to improve their score with low-money loans and secured credit cards that are maintained and paid on time.
A Chance at Long Term Financial Security
Bankruptcy, while a major step in any person’s life, can also be seen as one of many tools in a client’s “financial health” toolbox. If used properly, and alongside many other tools acquired in a client’s financial education classes, bankruptcy can help a client build a new life.
For additional information on determining whether you qualify for a Chapter 7 bankruptcy, please contact the bankruptcy attorneys at Luh & Associates. We look forward to answering your questions!