Is Bankruptcy For Me and Is There Life After Bankruptcy?
By Attorney Nemia L. SchulteQUESTION: I stay up late at nights wondering whether or not to file for bankruptcy. I especially think about it when I am overwhelmed with the thought of repaying my debts. However, I am afraid to pursue it because I am afraid of the great unknown - what is bankruptcy and how can it help me? Also, is there life after bankruptcy?
ANSWER: Bankruptcy is a legal process to help the honest debtor get a fresh start in life. There are generally two "chapters" of the Bankruptcy Code that are available to the common folk -- Chapter 7 and Chapter 13.
In very simplified terms, Chapter 7 bankruptcy is a liquidation proceeding that lasts approximately four months. The debtor may keep his "exempt" property, i.e., his home, most of his regular household goods and furnishings, his clothes, his car (up to $1,000 of equity), most retirement pension plans, and his future income. The Trustee may liquidate all of a debtor's "non-exempt" assets, i.e., everything else, to cash in order to pay off claims by unsecured creditors. Generally, the type of person who files for Chapter 7 bankruptcy is someone who is trying to wipe out a lot of unsecured debts (e.g., credit cards bills, medical bills, personal injury liabilities, judgments, etc.) and who has little, if any, non-exempt assets.
Chapter 13 bankruptcy, on the other hand, is a reorganization proceeding that lasts approximately 3 to 5 years. The debtor must submit a "Plan" on how he proposes to pay off his creditors during this time period. The debtor may keep both exempt and nonexempt assets. However, if the debtor has a lot of nonexempt assets, he must take the value of the nonexempt assets and pay that amount to his creditors during the period of the Plan. One of the most common reasons why a Chapter 13 bankruptcy is preferable over a Chapter 7 bankruptcy is to save a home during default or to stop a foreclosure proceeding. Under a Chapter 13, the debtor would have 3 to 5 years to pay back the deficiency amount while maintaining the regular mortgage payment.
In either case, a filing under a Chapter 7 or Chapter 13 stops harassing phone calls, demand letters, lawsuits, foreclosure proceedings, wage garnishments, or any other action viewed as a step in the collection of a debt.
Many of us wonder what life would be like after a bankruptcy filing. We wonder whether we will ever be able to have credit again. Although a bankruptcy filing stays on a credit report for 10 years, most people do not realize that a derogatory mark on your credit report (such as over 30 days late on a payment, a "charge off", a repossession or foreclosure) stays on a credit report 7 years from the date it was last reported. Accordingly, if a creditor continues to report (or update) the derogatory mark prior to the expiration of every 7-year period, then conceivably, such derogatory mark will remain on the credit report much longer than the 10-year bankruptcy report.
Believe or not, credit companies are much more eager to extend credit to you after you file for bankruptcy. There are several reasons for this. First, your income-to-debt ratio has now decreased significantly after the bankruptcy filing. Since all or most of your debts are discharged ("wiped out"), you now have a lot more disposable income to spend on other luxurious items, the very type of items for which you usually need a credit card. Accordingly, since you essentially now are debt-free, there is not a lot of competition on how you will spend your disposable income.
Second, since you cannot file for bankruptcy again for another six years from the date of your filing, the creditor has you by the hook for that time period. In other words, if you did not file for bankruptcy previously, a creditor would worry that after it extends you credit, you would "max out" on that credit and then file for bankruptcy several months later, leaving the creditor out in the cold.
Finally, since you did file for bankruptcy, a creditor will have an incentive to charge you with a very high interest rate (and maybe even an annual fee) because, after all, you did file for bankruptcy.
Generally, after the filing for bankruptcy, it is essential that you re-establish your credit. And the primary way to do this is to obtain a credit card. However, I suggest that you get a credit card with no annual fees (there is so much competition out there among banks that one will surely offer a credit card without an annual fee). I also suggest that you go ahead and obtain one even if it has a high interest rate. The reason for this is that you should use your credit card for those items that you know you will have no problems paying off each month (for example, your grocery bill or gas for your car). (It is important that you use the credit card at least once a month or even every other month; otherwise, the credit card company may terminate your account for inactivity). In this case, it would not matter what the interest rate is since you will pay off the balance each month.
Within six to seven months after using this card and paying off the balance in a timely fashion, you will be offered other credit cards with lower interest rates. When that happens, you should close the account with the high interest rate and accept the card with the low interest rate. You then continue to use your new card in the same manner in which you used the higher-interest rate card, until eventually, you receive another credit card with a very competitive interest rate.
By this time, a year or more has passed and you have now re-established your credit. It is important that you re-establish your credit because you want to show to your future "important" creditors (such as your mortgage company or automobile finance company) that you now have solid credit after the filing of your bankruptcy.
If you think bankruptcy may be for you, or you just want to know more about it, you should consult a bankruptcy attorney. This way, the next time you ask yourself whether or nor you should file, you will know the answer.
Attorney Nemia L. Schulte practices in Pompano Beach, Fla. Visit her Web site at 123Law.com.