What Are the Reasons to File Bankruptcy?
Below are some of the common reasons why someone would file for a Chapter 7 bankruptcy
Most people have a pretty clear idea why they might not want to file bankruptcy: they’ve heard that their credit will be destroyed for life, that they will be fired from the job, that they won’t be able to obtain new employment, that they will never be able to finance a car or a new home again, that their reputations will be ruined … however, this isn't the case at all.
Bankruptcy is indeed sometimes a “last ditch resort,” the final option for people who are experiencing increasingly unmanageable debt difficulties. Sometimes, however, people can wait too long and try too hard to “avoid” bankruptcy. If you are depleting a retirement account to make ends meet or using one card to pay another, bankruptcy is likely something that you should take into consideration.
From a practical standpoint, however, why file bankruptcy?
A Chapter 7 bankruptcy filing is an excellent quick, guaranteed way to stop the ongoing or imminent garnishment of your wages, bank accounts, or State of Michigan tax return. The moment you file a bankruptcy petition, a “master injunction” under Federal law called the Automatic Stay Against Collections is enforced against all of your creditors, preventing them from taking any action constituting the collection of a debt, or even from failing to stop ongoing actions constituting the collection of a debt.
This includes prosecution of lawsuits and the garnishment of wages, bank accounts, or State of Michigan tax refunds that can result as a creditor’s means of collecting on a collection lawsuit judgment.
Not only will the filing of a bankruptcy petition stop an ongoing or threatened garnishment—and close down the state court collection lawsuit originating the garnishment—a bankruptcy filing will also require the return of funds garnished prior to the filing of the bankruptcy. If $600 or more of funds have been garnished from your wages, bank account, or tax return in the 90 days prior to the date you file your bankruptcy petition, the creditor must return those funds.
The Hilla Law Firm has successfully retrieved such garnished funds time and time again and aggressively pursues the rare creditor who fails to comply with the demand for the return of garnished funds, including obtaining monetary sanctions for you from non-compliant creditors.
Collection lawsuits and collection harassment can be an aggravating and even maddening fact of life once debt reaches an unmanageable level. A Chapter 7 bankruptcy filing is a guaranteed means of stopping both an ongoing or imminent collection or other lawsuit and to stop telephone and other collector harassment.
The moment you file a bankruptcy petition, a “master injunction” under Federal law called the Automatic Stay Against Collections is enforced against all of your creditors, preventing them from taking any action constituting the collection of a debt, or even from failing to stop ongoing actions constituting the collection of a debt, including collection lawsuits, phone-calls, letters, garnishment, repossession of vehicles, foreclosures, and more.
A bankruptcy filing will require the local district court to close any ongoing collection lawsuit down entirely the moment it is notified of the bankruptcy filing. A collector who calls you, or mails you a letter after you file a bankruptcy is in violation of the automatic stay and liable for sanctions and other damages.
The Hilla Law Firm is experienced in getting collection lawsuits closed and in pursuing creditors who attempt to collect from you or who harass you after a bankruptcy filing. Attorney John Hilla recently obtained a judgment in Bankruptcy Court for $5,000 against a creditor who, once notified of a Chapter 7 filing, failed to stop a collector’s process server from interrupting a client’s child’s birthday party.
We work hard and aggressively to stop collection lawsuits and harassment down the moment you retain us, even before you file your actual petition.
It may be true that a Chapter 7 bankruptcy will not improve your credit—or it may be less true than you might think.
While it is true that a bankruptcy filing, such as a Chapter 7 bankruptcy, will remain listed in the “Public Records” section of your credit report for 10 years from the date of the filing of the bankruptcy, it may be that there are some not-as-well-publicized up-sides to the filing of a bankruptcy petition when it comes to your credit.
First, it is important to differentiate between your credit report and your credit score.
The bankruptcy will be listed on your credit-report, available to view by anyone reviewing your report in the consideration of whether to open a line of credit for you after your bankruptcy discharge. This is a black mark on your credit report, no doubt about it.
However, a bankruptcy filing can have an unintended beneficial impact on your credit report as well. If your credit is already suffering due to prior judgments, garnishments, lawsuits, short sale, foreclosure, missed installment payments, or other negative reporting incidents, the filing of a bankruptcy may not have much impact, to begin with. You have already taken the damage you are going to take, and a bankruptcy filing is only going to be good for you at this point.
If your credit report is continuing to reflect ongoing financial hardship, the filing of a bankruptcy that discharges your debt and, thereby, dramatically improves your debt-to-income ratio is actually going to help your credit report. It will draw a line through your credit timeline: on one side of it, you had too much debt, too many missed or late payments, too many problems, and were a bad credit risk; on the other side of it, you had no or little debt and only have ongoing positive reporting, no more negative reporting.
You have “stopped the bleeding” with your bankruptcy, in other words, and you can, after your bankruptcy, begin to rebuild your credit with positive reporting from that point forward.
Your FICO score, or credit score, is the 3-digit numerical representation of your creditworthiness that many lenders consider first and foremost when deciding to open a line of credit for you. Anything above a 700 is considered to be a fairly positive FICO score. If you have too much debt relative to your income and too many maxed-out credit lines, you are likely to have a much lower FICO score.
Although the exact formula behind the FICO score is a trade secret by the Fair Isaac Corporation that developed it, it’s pretty clear that the FICO score relies primarily on 2 considerations: debt-to-income ratio and available credit.
If a bankruptcy does nothing else, it improves your debt-to-income ratio. Before the bankruptcy, you had a lot of debt. After the bankruptcy, you had little or no debt. This will positively affect your FICO score.
If you play your cards right after your bankruptcy, cautiously but carefully utilizing new credit, never missing a payment, and not maxing out new credit cards, you will very likely see a jump in your FICO score after the initial dip your bankruptcy will likely cause it anywhere from 30-70 points or more in your FICO score in the 15 months or so following your discharge.
You can reject a lease or contract with a Chapter 7 bankruptcy. That is, in addition to discharging debt and surrendering underwater real estate, a bankruptcy provides another important mechanism: the ability to choose to assume or reject a lease or an executory contract. This applies to an apartment or home rental leases, automobile leases, cell-phone contracts, personal service contracts, and any other kind of lease or contract that you can think of.
Thus, if you are stuck with a cell-phone contract with a hefty fee for breaking it, or, more commonly, an auto lease in which you are already near the termination date of the lease and you know that you will be over the allowed mileage with heavy fees to result, you can reject the lease in your bankruptcy and treat the other party to the contract as an unsecured creditor.
Discharge the debt entirely, that is. The other party to the contract, whether it is Ford Motor Credit, a landlord, or Verizon Cellular, will be unable to pursue you for collection on the penalties imposed in their contract.
Of course, if it is a contract for an occupation of premises such as a rental lease or for use of property such as an auto lease, you will have to vacate the premises or surrender the property in questions.
The interplay between a past, ongoing, or future divorce and a Chapter 7 bankruptcy is one of the most complex considerations to explore with us when you decide to move forward with The Hilla Law Firm in a bankruptcy filing.
A common provision in divorce judgments is a provision determining which party to the divorce must deal with which of the debts that arose from the marriage. Credit cards in the names of both divorcing partners are often decreed to be “joint marital debt” in the divorce judgment, which may award responsibility for the payment of the debt to one or other of the separating spouses. Such debt, once cemented in the divorce judgment, is usually not dischargeable at all in a Chapter 7 bankruptcy.
Nevertheless, a to-be-divorced spouse may elect to file a bankruptcy before the divorce is completed in order to take this issue off the table in the divorce—and to ensure the debt’s discharge ability in bankruptcy. Occasionally, divorcing spouses agree that a pre-divorce bankruptcy is in their best interest, though it is often not possible for the same attorney to represent them both.
However, a pre-divorce bankruptcy may also be dangerous depending on the intended distribution of assets, income, retirement accounts, and other joint marital asset property. In such cases, it may be better to wait and consider a bankruptcy after the divorce, once it is clear who is getting what property and how much support income or support payment responsibility. If you have already been through a divorce, we will need to examine your judgment of divorce at your initial consultation in order to determine whether there is an issue with the discharge ability of any possible marital debt.
Divorce and bankruptcy can be mutually useful and accommodating processes under the right circumstances and depending upon your goals for each.
Contrary to popular belief, tax debt is dischargeable in a Chapter 7 bankruptcy, although only a very specific set of circumstances. If you have deficient IRS or State of Michigan—or other state—personal income tax owing and you are unable to repay it with your current income, a Chapter 7 bankruptcy may be well worth considering.
The Hilla Law Firm are experienced with determining whether your tax debt is indeed dischargeable in bankruptcy and is experienced in communicating with the IRS and the State of Michigan Department of Treasury in order to make this determination.
Repossession or seizure of a car or other personal property is one of the most common creditor collection methods. It is possible to recover a vehicle or other property that has been repossessed or seized prior with the filing of a Chapter 7 bankruptcy, though it is important to keep in mind the difference between a “repossessed” vehicle and a “seized” vehicle when looking at the benefits.
A repossessed vehicle is a vehicle with a lien on it for which you are making secured debt installment payments. The vehicle loan lender is a partial owner of the vehicle along with you, listed as a secured interest on the vehicle’s title. The vehicle is essentially the collateral for the loan the lender made you in order to buy the vehicle. If you default on the payments, under every contractual purchase agreement for a vehicle loan, the lender retains the right to repossess the vehicle.
A seized vehicle is a vehicle which is seized by some third-party creditor who has obtained a collections lawsuit judgment against you in satisfaction or partial satisfaction of the judgment (depending upon what the vehicle is worth relative to the amount of the judgment). This is a car you own in full, with no other secured lien interest. Seizure of vehicles is a common method of collecting on a lawsuit judgment.
The moment you file a bankruptcy petition, a “master injunction” under Federal law called the Automatic Stay Against Collections is enforced against all of your creditors, preventing them from taking any action constituting the collection of a debt, or even from failing to stop ongoing actions constituting the collection of a debt.
A bankruptcy filing will require the local district court to close any ongoing collection lawsuit down entirely the moment it is notified of the bankruptcy filing. The filing of a bankruptcy petition triggers an obligation under the automatic stay for the automatic return of seized or repossessed property. Failure for a creditor to do so can result in monetary sanctions being awarded to the filing debtor by the Bankruptcy Court. The Hilla Law Firm is experienced in pursuing non-complying creditors for sanctions and other damages.
However, what happens to the vehicle or other property once it is returned depends greatly upon whether the car was repossessed pursuant to a secured creditor interest or simply seized. If the vehicle was simply seized, that’s it. The car is yours again, and the debt owed to the seizing creditor will be simply discharged.
If the vehicle was repossessed for deficient loan installment payments, however, the vehicle or other property will only be yours to keep if you can quickly make yourself current on the deficient payments.
Depending upon the original purchase date of the car, the mileage on the vehicle, and the fair market value of the vehicle, you may also be eligible to “cram down” your payments in the bankruptcy so that you pay in full only the fair market value of the vehicle and pay in part and discharge in full any unpaid balance of the excess debt owed.
If you have had a vehicle repossessed or seized, it is vital to contact us immediately. After a repossessed or seized vehicle is sold, a bankruptcy will still discharge the underlying debt owed for the vehicle or for which the vehicle was seized—but it will not be possible to get the vehicle back after it is sold.
Bankruptcy is a legal, Constitutional, and moral process dating back through the US Constitution to the English Magna Carta, and further back to the Book of Deuteronomy, which decreed that debts should be forgiven every 7 years. The U.S. legal system provides the option of bankruptcy to you because you are more beneficial to our political and economic system if you have excess income with which to purchase goods and services than if you are sending every penny you earn to make enormous minimum credit card payments. As a country, we want you to feed and clothe and educate your children first and foremost—and that should be your priority as well, above and beyond the honorable obligation you may feel to “make good on your debts.”
If you are a Michigan resident considering suffering from any of the hardships listed here, contact us to schedule a free, initial consultation. Don’t wait until you’ve already lost your home or drained your 401(k) to have a conversation about whether a Chapter 7 bankruptcy may be right for you.