Introduction to Bankruptcy

Stop Collector Harassment

Many clients come to me in such distress from harassing phone calls and letters.  People tell me that they are afraid to pick up the phone or open their mail.  Lawless collectors call late at night, call at work, call neighbors--creating a sense of siege, helplessness, and despair.  In this hopeless state of mind ordinary people lose their instinct of self-preservation. 

 I hear the same stories again and again.  Clients tell me how in the whirlwind of collector harassment, feeling defeated and worn out, they gave up their bottom dollar.  Then, without the rainy weather fund, after the first unexpected expense, they got evicted, got fired from work, and started their downward spiral into homelessness.

The prudent thing would be to invest the rainy day fund in efforts to increase income or decrease  expenses, or just to keep it for unexpected expenses.  However, clients who experienced collector harassment say that at the time they could not think straight.  They gave the family's lifeline to this or that bank, leaving the family unprotected. 

In most cases, bankruptcy allows people to discharge majority of debts, and to pay off whatever cannot be discharged but only while paying for all of family living expenses (including food, housing, transportation and even healthcare), and all-the-while building up a rainy-day fund.  This lays a solid foundation for financial security and good credit.

 

The New (2005) Bankruptcy Law

In 2005, the credit card industry pushed for bankruptcy reform laws, which greatly changed the consumer bankruptcy law. In the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, stricter policies for filing for bankruptcy were implemented, including submitting to an income means test and a counseling requirement.  This tests are aimed at forcing high income debtors to pay their debts over a period of three to five years, rather than discharge them in a Chapter 7 bankruptcy.  The law for low and middle income debtors (below the median income in the particular state) has not changed much and remains the most generous in the world.
 

Nondischargeable debts

Debts Not Discharged in Bankruptcy:

  • Recent taxes owed to government agencies, such as the I.R.S., California, regional, etc.
  • Student loans (unless undue hardship can be proved),
  • Debts incurred after the bankruptcy is filed
  • Debts related to a divorce
  • Debts not listed or scheduled or which the debtor waived discharge
  • Debts for intentional injury by the debtor
 

What is Bankruptcy?

In 2008, over 45,000 businesses and 1 million consumers filed for bankruptcy.   Experts agree that year 2009 will see an even bigger rush to wipe out debt. 

Bankruptcy is a powerful and flexible tool for ordinary Americans who are facing excessive debt. 

The government is bailing out in cash big banks and corporations.  For ordinary people, bankruptcy is an individual financial bailout.  In bankruptcy,

  1. Debts will be completely forgiven or significantly reduced (chapter 7). 
  2. Alternatively, a fraction of the debts can be paid off over the course of five years (chapter 13). 
  3. In addition, bankruptcy can stop foreclosure, repossession or creditor harassment. 

Bankruptcy stabilizes your financial life and allows you to start saving for a rainy day.  A 2009 study from the Federal Reserve Bank of Boston (available here) showed that

  • Individuals who file for bankruptcy get credit very quickly after filing. 
  • Filers with bad credit immediately become more desirable to creditors and start receiving more credit offers than before filing.

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Bankruptcy Counseling

Since 2005, new rules require debtors to receive credit counseling withing 180 days before filing bankruptcy.  Then the counseling certificate must be filed in bankruptcy court along with the bankruptcy petition.  The debtor is required to receive this counseling from a nonprofit budget and credit counseling agency approved by the U.S. Bankruptcy Trustee (Bankruptcy Administrator in some parts of the country). 

These agencies are listed on the Trustee's website (point your browser to www.usdoj.gov/ust, then click "Credit Counseling and Debtor Education"). The cost of this counseling can vary from $100 to $20.  There is even one agency (http://www.consumerbankruptcycounseling.info/) that provides counseling over the web free of charge.  Counseling is available in person, by phone, or over the internet. The goal of pre-bankruptcy counseling is "outlining the opportunities for available credit counseling and assisting such individuals in performing a related budget analysis." 

A second, pre-discharge, bankruptcy counseling session is also required.

 
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Alik Segal

Bankruptcy Attorney

Alik Segal

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