It’s true that bankruptcy can give you a fresh start – and in some situations, bankruptcy is the best option. But there are a lot of things to consider before you make the decision, so ask yourself these questions before you file

1. Have I exhausted all other options?

There are a lot of things you can do to avoid bankruptcy. Make sure you consider these steps:

• Contact your lenders to see if they can work out a payment plan. Most lenders would much rather do this than have to forgive your debt completely when you file for bankruptcy.
• Sell some of your assets. You may be surprised at how much cash you can raise to pay off your debts.
• Eliminate all unnecessary expenses. Take a good, hard look at your spending. Are you spending a lot of money eating out? Do you really need that large cable tv package? Put together a budget and stick with it. Anything you don’t absolutely need may have to be cut — at least temporarily — so you can put more money toward your debt.
• Sign up for credit counseling. Before you file for any kind of bankruptcy, you have to undergo counseling from a government-approved agency. It must include a two-hour financial management course. All of this has to be completed no more than 180 days before your bankruptcy discharge.^. It’s a worthwhile process; sometimes credit counseling services can help people avoid bankruptcy altogether.

2. Do I have enough debt to justify bankruptcy?

The fallout from bankruptcy can last for years. That’s why it should be your last resort. There’s no minimum amount of debt you must have to file — what justifies bankruptcy for one person might be manageable debt for someone else.

This is why it’s vital you work with a credit counselor to see what other options you have — they can help you decide if bankruptcy is the only option left.

3. Do I have debt that bankruptcy won’t eliminate?

Bankruptcy doesn’t wipe out all kinds of debt. Some examples that can’t be eliminated by filing for bankruptcy include:

• Secured debt like car loans or a mortgage. These may be exempt from your filing depending on the type of bankruptcy you file and the terms of your mortgage agreement.
• Student loans, whether from the government, private lenders of individual universities. (There are a few exceptions to this if you can prove to the court you’ve made an effort, but the payments will cause you “undue hardship.”)
• Alimony and child support or any other legal obligations to make payments due to a divorce or civil case.
• Property liens, including on your home mortgage.

What types of debt can be eliminated by bankruptcy? Big categories include credit card debt, medical bills, business debts, personal loans and utility debt.

4. Do I make too much money to file for bankruptcy?

Your income plays a factor in what type of bankruptcy you can file for. If you want to file for Chapter 7 bankruptcy, for example, your monthly income must be less than your state’s median income. This is referred to as “passing the means test.” Check the Department of Justice website for your state’s median income.

If your income is more than the median income, you may qualify for Chapter 13. The means test for bankruptcy can be complicated and varies by state, so you’ll want to consult with a bankruptcy lawyer.

5. Am I being hounded by bill collectors?

The stress of major debt — and the incessant requests of debt collectors — can be unmanageable for many people. Once you file for either Chapter 7 or Chapter 13 bankruptcy, bill collectors have to stop contacting you. This by itself can do a lot to reduce your stress.

6. Have I talked through my options with a professional?

Bankruptcy is complicated and a major decision that can have wide-reaching effects on your life. Be sure to talk through everything with Firebaugh & Andrews for a free Consultation 734-722-2999.

The post 6 Questions to Ask Before You File for Bankruptcy first appeared on Michigan Bankruptcy Facts 734-722-2999.

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But neither the collection moratoria nor unemployment insurance will last forever, and they are likely to lapse as Covid-19 wanes. That’s when the bill will come due.

Collection moratoria merely stop collection actions; they do not cancel debts. Unemployment insurance typically replaces only a fraction of consumers’ income, so bills mount up when a consumer is out of a job. When the moratoria lapse, consumers will still owe months of back rent or mortgage payments, not to mention interest and late fees that have been accruing. 

Those debts will not go away as the economy picks up. Many families were just getting by before Covid. They have no financial safety net, and little if any ability to catch up on overdue bills from their future earnings. And for some families, there will not only be the usual bills, but also crushing medical bills related to Covid. 

The scope of the problem is hard to quantify, but there is no question that it is enormous. When collection moratoria end, there will be a tsunami of foreclosures, evictions, and collection actions. 

Bankruptcy has long been the economy’s safety valve for financial distress. When consumers get overloaded with debt, bankruptcy gives them the possibility of a fresh start and serves as a type of social insurance by spreading losses among creditors. Unfortunately, however, the bankruptcy system poses too many obstacles to consumers getting the immediate relief they need. 

The scope of the problem is hard to quantify, but there is no question that it is enormous. When collection moratoria end, there will be a tsunami of foreclosures, evictions, and collection actions. 

Under current bankruptcy law a consumer can choose between filing for chapter 7 bankruptcy or chapter 13 bankruptcy. In chapter 7, the consumer surrenders her assets (other than certain minimal necessities), but retains all future income, and gets an immediate “discharge” of her debts. 

In chapter 13, the consumer retains her assets, but commits to a repayment plan under which creditors get all of her disposable income for the next three to five years. In chapter 13, the consumer only gets a discharge upon completion of the repayment plan, something most debtors fail to achieve. These consumers who fail to complete their plans have lived under onerous conditions during the duration of the plan, with little to show for it. 

Higher income consumers are required to file for chapter 13, but many lower income consumers do so to out of necessity: there is no provision for payment of the consumer’s lawyer in chapter 7, so unless the debtor can “save up to file for bankruptcy,” the only choice to pay the lawyer is as part of a chapter 13 repayment plan, and chapter 13 attorneys’ fees are more than double that of chapter 7. In other words, because consumer bankrupts are broke, they are forced to file for a type of bankruptcy that is too complex and expensive for their needs and often fails to provide them with any actual debt relief. 

Paying for a lawyer is just the beginning, however. Current bankruptcy law is obsessed with catching the conniving debtor who is using bankruptcy to get out of debts that he can afford to pay. Yet, this sort of abuse is rare as bankruptcy is not a free ride.

Honest and unfortunate debtors—like Americans whose financial lives have been destroyed by Covid — have to file reams of unnecessary paperwork even it is apparent their bankruptcy cases are meritorious. These requirements drive up the cost of filing for bankruptcy and function as trips and traps that can prevent even deserving debtors from getting the relief they need.  

What’s more, even when consumers are able to get their debts discharged in bankruptcy, there are exceptions to the discharge. Most notably, student loan debt is generally nondischargeable. Additionally, if a debtor wants to keep his home or car in bankruptcy, the debtor must pay off the loan according to its original terms. It’s of no matter that the car or house might be worth only a fraction of the amount owed on the loan. 

Nor do renters fare any better. If a renter wants to stay in her lease, bankruptcy law requires that she immediately catch up on all back rent. This is a hopeless proposition for most debtors; if the debtor had the money, she would not be behind on the rent in the first place. 

New legislation can reform the system

Recently introduced legislation cosponsored by Sen. Elizabeth Warren, D-Mass. — the country’s leading consumer bankruptcy law expert in her former job as a law professor — would correct these shortcomings with a wholesale reform of the consumer bankruptcy system.

I was happy to advise and help with the bill as it was drafted because the reform is so needed. The proposed legislation would give consumers the tools to address all of their financial obligations — mortgages, car loans, student loans, medical debt, and more. It would enable renters to stay in their leases without catching up on months of back rent. And it would make it possible for consumers to actually afford to file for bankruptcy. 

Collection moratoria have bought Congress some time to act before the debt collection tsunami strikes. Congress should take action to reform consumer bankruptcy law so that it can operate as an effective safety valve for consumers’ economic fallout from Covid.            

The post Op-ed: Reform our bankruptcy laws before a tsunami of Covid debt comes due first appeared on Michigan Bankruptcy Facts 734-722-2999.

The post Op-ed: Reform our bankruptcy laws before a tsunami of Covid debt comes due appeared first on Michigan Bankruptcy Facts 734-722-2999.