Demystifying Five Myths About Filing Bankruptcy In Massachusetts
1. I will lose everything I have including my car and house.
In most Chapter 7 cases, qualifying people filing bankruptcy (debtors) can keep their homes, their cars, their furniture, their “stuff”, their IRA(s) and pensions and many other items. Many times as long as a debtor is current with their mortgage payments, he or she can file a Chapter 7 bankruptcy petition, discharge most if not all of their unsecured debt and keep his or her home. As long as you’re current with your car payments, most times the finance company will let you keep your car. They don’t want to have to repossess your car if you’re current. They don’t want your car back; they prefer to have their loan repaid with interest.
There are terms in the Bankruptcy Code referred to as “exemptions” or “exempt property”. These are terms given to property that is not to be liquidated and that the debtor is allowed to keep. There are two sets of exemptions: Federal and State. These exemptions cover most personal property such as cars, furniture, jewelry as well as interest in homes and pensions. Some Federal exemptions are more generous that some Massachusetts exemptions with respect to certain property. For instance, there is a Federal exemption known as a “Wild Card” that can exempt an interest of $11,950.00 in any property. This exemption would benefit a debtor who has some money in the bank or another asset that would fall within this “Wild Card” exemption. However, Massachusetts has a less generous “Wild Card” exemption but a more generous Homestead exemption in a home. This exemption protects up to the sum of $500,000.00 in equity in a home versus its Federal exemption counterpart in the sum of $21,625.00 per person for equity in home. A debtor with a lot of equity in his or her home would want to take advantage of the more generous Massachusetts state exemption in such a bankruptcy filing.
Perhaps one of the most important roles that the Attorney can provide to the client is what is known as “exemption planning” or pre-bankruptcy planning. This would be designed to ensure the maximum protection to the debtor to keep as much of their property as possible in a bankruptcy filing. It is strongly discouraged for a debtor to represent himself or herself in a bankruptcy filing because of these complicated rules. The debtor risks losing certain property if not properly exempted or if not properly treated prior to filing bankruptcy.
FILING BANKRUPTCY IS NOT JUST FILLING OUT FORMS!
2. I am embarrassed about filing bankruptcy, everyone will know that I filed and I don’t want to be considered a deadbeat.
You would be surprised by the number of people who have filed bankruptcy. Even powerful financial persons have filed bankruptcy and on more than one occasion. People do not make the decision to file bankruptcy lightly. Many “life” events are the reasons for filing such as loss of job, reduced income, divorce, illness, increase in expenses etc. Some people may have “lived outside of their means” but they faithfully paid their credit card bills every month for years and all of a sudden, their income was reduced or a credit card company unilaterally changed the terms of a credit card account. Someone may have been paying 12% interest and then the credit card terms changed and the interest jumped to 22%. This obviously changed what the debtor could afford to pay monthly. Some people tried to work with the credit card companies but the companies did not want to “work” with the people. Then the card holder could no longer afford to make the minimum payments, especially when their food bills, gas bills, oil bills and other daily living expenses have increased dramatically.
When people cannot pay their credit card bills, they are besieged with daily telephone calls from 1-800 numbers and receive dunning collection notices. These collection efforts can be accusatory in nature. Clients have told me of situations where their family and neighbors are called. Client’s employers can be called if not properly notified to discontinue such contact. Clients face the real possibility of having a portion of their paychecks attached, their bank accounts frozen and their motor vehicles seized. These collection efforts can cause great anxiety to a person and actually affect one’s health. Filing bankruptcy can improve one’s health by eliminating the constant stress caused by these situations. The calls and notices stop and a normal routine returns to one’s household.
As far as your family, friends, neighbors, co-workers, and other acquaintances knowing that you filed bankruptcy, it is very rare that the general public would be notified of someone’s bankruptcy filing. There is usually never a notice posted in a local newspaper and someone would have to be on a particular database or physically go to the U.S. Bankruptcy Court to check the public filings. Usually the only persons or entities that receive a written notice of someone’s bankruptcy filing would be the creditor.
Once you get over the moral feelings of embarrassment or self-perceived failure, you will be able to move forward in your life with a fresh start. No one wants to go through this process again if they can avoid it. You will take pride in re-establishing your financial position after bankruptcy.
3. If you’re married, you must file a joint petition.
You do not need to file a joint petition but there may or may not be many reasons that a joint petition would benefit you. First of all, by filing jointly, you have one legal fee and one filing fee. Secondly, you may benefit by filing jointly because you can double your exemptions. For instance, the Federal exemption for a motor vehicle is $3,450.00 per person. Assume you own one vehicle outright that is worth $6,500.00 and you have a second vehicle that has a car loan of $5,000.00 and the vehicle is only worth $5,000.00. You have no equity in that second vehicle but the first vehicle that you own is worth more than what is covered by the individual motor vehicle exemption. By filing jointly, you can double your motor vehicle exemption and protect your car. Finally, if most of your debt is joint, you must file jointly because if only one party files, the other will still be responsible for the debt.
If there is a situation, where a married couple’s finances have mostly been separate and all the debt is only in one person’s name, then you can decide to file a single petition and the other party will not have a bankruptcy filing. Some people wish to do this to have their spouse retain “good credit”.
4. I’ll never get credit again and this will be on my credit report and affect my score.
The fact is that you will get credit again! You can re-establish credit by obtaining a secured credit card and using it and paying it every month. I have clients that have obtained pre-approved credit cards right after their filing. I have had clients obtain mortgages after a period of time following a bankruptcy. You become a good risk for the credit card companies because you cannot file a Chapter 7 bankruptcy proceeding for 8 years. Therefore, the credit card companies will be receiving payments on new debt with interest for a very long time.
5. I need to wipe out all my debts but I may want to exclude some creditors and pay them back.
Most unsecured debt (credit card debt, unsecured personal loans or lines of credit, medical bills etc) is dischargeable in bankruptcy. Certain old tax debt may also be dischargeable. However, certain debts such as child support, alimony, student loans, current tax debt or other recent tax obligations, fines and restitution in criminal cases and debts obtained because of fraud are usually not dischargeable.
While a certain debt may not be dischargeable in a Chapter 7 bankruptcy filing, it could be paid off over time such as a 3 year or 5 year period in a Chapter 13 proceeding. For instance, assume that you’re current with your mortgage but you owe $10,000.00 for real estate taxes and you haven’t been able to catch up. You could file a Chapter 13 proceeding and pay the arrears over a 3 year or 5 year plan while you stay current with your present mortgage and tax obligations.
You cannot pick and choose your creditors. Even if you keep one credit card out of your bankruptcy because you have little to no balance, the creditor could at some point in the future unilaterally terminate your credit privileges because of your bankruptcy. But again, you will be receiving new credit card applications for new credit in your bid to re-establish your credit.
If you want to voluntarily pay back a creditor after bankruptcy when you get back on your feet, you certainly can do so.
BANKRUPTCY NO LONGER HAS THE STIGMA OF YEARS PAST
People are in dire straits. We have one of the worst economies in decades and the near future is not looking anymore promising. It could take years for the economy to bounce back and in the meantime, people are suffering. While people may have felt a stigma in years past because of a bankruptcy, the reality today is that there are many people availing themselves of this process in order to address and improve their financial situation.