Deciding If Bankruptcy Is an Option for You

If you find your family "over-extended" and have tried financial counseling, budgeting and reduced payments and still cannot make headway on the debts, bankruptcy may become an option worth investigating.

When you've incurred more debt than you can reasonably repay, bankruptcy can offer debt relief. Filing for bankruptcy, however, brings long-term consequences for your credit rating. It also affects your creditors.

Bankruptcy Explained

Bankruptcy adjusts the relationship between you as a debtor and your creditors. Many of your debts will be forgiven. You are allowed to keep some property, known as exempt items. The rest of your property is sold and the money is used to pay off your debts. Your creditors may receive nothing, a small amount per dollar owed, or be paid off entirely. The proceedings take place in federal courts and are governed by federal law and each geographic bankruptcy districts' local rules.

Keep in mind bankruptcy is the "ultimate torpedo to your ship of credit." Bankruptcy may remain on your credit record for ten years. If you file bankruptcy you may not be able to obtain credit even for necessary purchases, such as a car. Once you have filed for bankruptcy, you are not able to file again for seven years.

Bankruptcy no longer carries as much social stigma as it once did. Yet, many families feel embarrassed and ashamed about declaring bankruptcy. They sense hostility from neighbors and business owners who accuse them of "walking away from their debts."

Deciding to Declare Bankruptcy

If you're considering bankruptcy, contact a lawyer experienced in bankruptcy proceedings. The lawyer can help you prepare necessary documents and file with the court. Discuss attorney and court fees at the first appointment because costs vary. Bankruptcy is not free or cheap.

As you consider bankruptcy, you will have a number of decisions to make. Assess your situation to decide if bankruptcy is the best solution to the debt problem. Then, decide which type of bankruptcy to file. Below are aspects to consider when planning debt restructuring, exemptions and tax implications:

• Before you decide to declare bankruptcy, examine how you might be able to pay off your debts. There may be debts you can negotiate. Other manual sections, "Talking With Creditors" and "Deciding Which Bills to Pay First," may be helpful.

• Exemptions require pre-planning. Consult a lawyer to help you choose your best options.

• The tax consequences of bankruptcy can vary dramatically, depending on the way the bankruptcy is structured. Planning before you file for bankruptcy, with a tax attorney or certified public accountant, may be money well spent.

There are four provisions in the bankruptcy laws. Chapter 7 is used most often by people who are unemployed or very deeply in debt to obtain a discharge of debt. Chapter 13 is used by people who have an income. Chapter 11 is for businesses filing for bankruptcy. A fourth provision, Chapter 12, was established for farm families to restructure debt.

Chapter 7 Bankruptcy

Chapter 7 is a "liquidation" of nonexempt assets to pay debt. It is also referred to as straight bankruptcy. Through a lawyer you petition the court to have yourself declared unable to pay your debts.

In filing Chapter 7 bankruptcy, most of your honestly incurred debts -- those not incurred by fraud or intentional harm to another person or property -- are canceled (discharged). You receive a fresh start without worrying about past creditors coming to you for payment. In exchange, you surrender all property not exempt under state or federal law to a trustee who will divide it among your creditors in proportion to what you owe.

As you consider Chapter 7 bankruptcy, take an inventory of your debts to determine which ones can be canceled (discharged).

Discharged Debts

After Chapter 7 bankruptcy, you would no longer owe money on:

• credit cards

• retail revolving charges, such as department store billings

• unsecured loans from banks, credit unions, savings and loans, or finance companies. An unsecured loan is one in which no item is pledged as collateral.

• outstanding hospital or physicians' bills

• outstanding utility bills

Non-Discharged Debts

These are not eliminated by Chapter 7 bankruptcy; you would still owe the following:

• state and federal taxes

• child support required by law

• spousal support (alimony) payments required by law

• government-backed college loans (only dischargeable in special circumstances)

• debts due to fraud

You will be allowed to keep some of your property after bankruptcy. If you and your spouse are both filing, each of you has a set of exemptions.

Chapter 13 Bankruptcy

Chapter 13 is called "Adjustment of Debts of an Individual with Regular Income." It's also known as the debtor-rehabilitation chapter. Under Chapter 13, the debtor who can make regular payments is given the opportunity to propose a realistic plan to pay their creditors over three to five years under the supervision of a trustee. A spouse without regular income may file jointly with an income-earning spouse.

If you file Chapter 13 bankruptcy, your income is used to pay part or all of the debts through a plan filed with the bankruptcy court. The restructured payment plan must be filed in "good faith" and designed so that creditors receive at least as much as they would have under Chapter 7 bankruptcy. Good faith means that unsecured creditors would receive at least 10% of their claim.

Filing Chapter 13 bankruptcy forces an automatic end to all your credit and contact with creditors. You are allowed to keep your property. If you decide to file Chapter 13 bankruptcy, you will submit all your disposable income (amount left after you pay your normal living expenses) to the trustee who pays your creditors according to the restructured payment plan.

Chapter 11 Bankruptcy

Chapter 11 was designed by Congress to allow businesses to reorganize their debts and pay what they can without folding. Unlike Chapter 7, there is usually no trustee involved in Chapter 11. It was originally designed for large corporate debtors, but is now available to partnerships, real estate developers and sole proprietors.

Working with creditors, a debtor works out a restructured payment plan from future earnings of the business. They approve a plan reorganizing any or all other business affairs.

Chapter 12 Bankruptcy

Chapter 12, established especially for farmers in 1986, combines some of the requirements of both Chapter 11 and Chapter 13. A farmer is eligible for Chapter 12 bankruptcy if the debts do not exceed $1,500,000. As with other types of bankruptcy, Chapter 12 keeps all creditors from taking action against you or your property. The farmer is allowed to file a plan for paying off some debts and discharging others. Creditors must receive as much as they would have under Chapter 7 bankruptcy.

Fees and Legal Help

A lawyer experienced in bankruptcy proceedings can give you valuable advice. If you already have a lawyer, ask about their experience and successes in bankruptcy cases. If it is not their area of expertise, ask for a referral. The State Bar of Texas Lawyer Referral Service, located in Austin, can refer you to lawyers in your area that handle bankruptcy cases. Call the 1-800-252-9690.

Calling several lawyers and interviewing them before making your choice may be to your family's advantage. Call ahead and see what they will charge for the initial appointment. (Some may offer a short interview at no charge.)

After you select a lawyer, be prepared to give all the relevant facts. Completely disclosing all our family assets, debts and other commitments is essential for a thorough evaluation.

Don't be afraid to discuss fees. Attorney fees are usually stated as an hourly charge. The lawyer cannot give you an exact figure but can estimate a cost range. Get information about fees in writing.

After discussing facts and fees, if you are uncomfortable or lack confidence in the lawyer, get a different lawyer. Continuing may only lead to more unhappiness and costs that could be avoided.

In addition to attorney fees, expect to pay bankruptcy filing fees:

• Chapter 7 or 13 - $150

• Chapter 12 - $200 plus

• Chapter 11 - $600

General Information

For general information on bankruptcy (NOT legal information), you can call one of the four district bankruptcy court clerks' offices in Texas or the area bankruptcy courts within your district. The Northern District court clerk office in Dallas phone number is (214) 753-2000 and area offices are located in Amarillo, Fort Worth and Lubbock. The Eastern District court clerk call be called at (903) 590-1212 in Tyler, with area offices in Beaumont and Plano. In the Southern District, call (713) 250-5115 to talk with a court clerk in Houston, or contact the area office in Corpus Christi. The Western District court clerk's phone number in San Antonio is (210) 472-6720, and area offices are located in Austin, El Paso and Waco. They will not provide legal information but can give general information about filing fees, forms, etc. For current addresses and phone numbers for U.S. Bankruptcy Courts in Texas accessible through the World Wide Webb, the address is http://www.texlaw.com/bar/redbk13.htm.

Conclusion

A person leaves bankruptcy debt free or with a significantly reduced debt. Bankruptcy is designed to give a debtor a fresh start, to change former spending habits and a chance to establish sound financial management. Remember, however, bankruptcy is a part of your credit record and will affect your future credit options.