Most have heard of the benefits of filing for chapter 13 bankruptcy and certainly there are many. This type of bankruptcy provides for a fresh financial start by allowing an opportunity to propose a “Plan”, to the court, of how debts will be repaid, while immediately stopping foreclosures, wage garnishments, pending suits, tax collection efforts, attachments, judicial sales and the like. But at what cost? Let’s be clear, bankruptcy is generally the road of last resort for a very good reason. While it’s highly effective and the final reward can be immeasurable, it’s no cake walk. In an effort to help you make a more informed decision, as to whether chapter 13 bankruptcy may be right for you, here’s my bakers dozen of bankruptcy facts that initially shocks my clients the most:
1. In a Chapter 13 case, once the court reviews all income and expenses, the proposed Plan payments will equal ALL remaining “disposable income”. This means that there will be little to no wiggle room for emergencies or unplanned expenses.
2. Disposable income will be determined by monthly expense guidelines, established by the IRS and the Department of Justice, based upon family size and actual need and not upon an individuals’ prior spending habits, wishes and/or desires.
3. While only one married person may file for bankruptcy, the income and expenses of the non-filing spouse will also be considered when determining disposable income. That disposable income will also be included in the Plan payment.
4. Plan payments must be made by payroll deduction.
5. Adjusted income tax exemptions, that increase bring home pay, will have to be readjusted to prevent any year end tax liability.
6. During the life of the Plan, ALL tax refunds must be turned over as additional payment toward the existing debt.
7. Most voluntary 401k and retirement employee contributions will more than likely have to stop. Yes, even though this may result in the loss of the employer’s additional contribution. This is based upon the theory that the debtor may not “pay” themselves while there is a struggle to repay their existing debt.
8. If Plan payments start out at $300.00 per month and during the life of the Plan, a $400.00 per month car, 401K loan or the like, is paid off, expect the Plan payment to increase to $700.00 for the remainder of the life of the Plan. The same will hold true when any other secured debt is paid off during the life of the Plan.
9. Keeping children in private school is not a top concern of the court and depending on the circumstances, the court may expect the payment of that tuition money as additional payment towards the existing debt. Yes, even though religion may call for the child to have a religious education and even though that’s where the child may have always attended school.
10. Secured debt needs to be paid for, redeemed, reaffirmed or surrendered. This includes, houses, cars and possibly some purchases made specifically with jewelry or big electronic store credit cards, even if the debtor no longer has the actual item.
11. Any future wish to refinance a home, borrow any additional money or purchase a new car will have to be approved by the court.
12. Filing for bankruptcy will be noted on credit reports for 10 years. Whether the case is successful and/or completed or not.
13. Spending habits will have to change. Regular restaurant visits, the purchasing of recreational beer, wine and cigarettes, the excessive maintenance of hair and nails and/or regularly engaging in shopping, travel and/or recreational gambling, will have to stop if the Plan is to be successful.
A number of potential clients, believe, despite the fact that they are facing financial ruin, have exhausted all their resources, are about to lose their home, are facing wage garnishment and lien attachments and are stressed to the max, that the court, in providing the relief they seek, is being overly invasive of their privacy and too controlling with their money and how they want to spend it. The fact is, that given the right analysis and setup, chapter 13 bankruptcy works, but it’s a tough road that requires change on the debtor’s part and compromise on the parts of both the debtor and the creditors.
In short, it’s a balancing act. While the bankruptcy court will provide immediate financial assistance and relief, they must also ensure that creditors are repaid, whatever they can be paid, based upon your initial promise to repay the debt and your current ability to repay the debt.
This list is not to scare anyone and certainly every case is different and needs to be handled as such. However, I truly believe in being truthful and honest about the process. If you’re going to file a bankruptcy case, don’t you want to know the rewards and the challenges so that you can make the best and most informed decision?
Many of these things are an issue, but they can be implemented with a lesser blow, when they are considered, discussed and handled correctly from the start. However, in order to find out, you’ll have to discuss your particular case with an experienced lawyer to see how any existing issue may be worked-out or negotiated in your favor. After such a consultation, you will be able to decide if the benefits of filing for bankruptcy outweigh the perceived negative points. So, if you need to consider filing for bankruptcy and are just not sure about exactly how it will affect you, call me. Why? Because you’ll deserve good counsel.
Want to know more information on bankruptcy? Read my prior blog posts, including “Baby Boomers Save Your Retirement Accounts – File for Bankruptcy Before You Go Broke”, posted on March 26, 2014, “What a Difference a Minute Makes”, posted on January 15, 2014, which discusses how quickly bankruptcy can stop a foreclosure, and finally, “It May Be Time to File for Bankruptcy When…..” posted on January 14, 2014. If you think you’re ready to file, visit my website at http://www.kelseylaw.net and download my questionnaire along with a list of all you need for your first consultation.
Thanks for reading. Please note that I am licensed to practice law in Maryland and the District of Columbia. Please feel free to learn more about my practice at www.kelseylaw.net and to seek legal advice when you feel it necessary.
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Categories: attachments, Attorney, Bankruptcy, bankruptcy court, Chapter 13, Chapter 7, Creditor, Debtor, Foreclosure, Fresh Shart, judgments, liens, Plan, plan payments, Reorganization, Reorganize, Repayment, Stress Relief, wage garnishment