Sometimes life gets in the way of your finances. It could be due to illness, divorce, or poor credit management. Regardless of the reason, many find themselves in over their heads financially with no hope of ever coming out of debt.
If you’ve decided to file for bankruptcy to get debt relief and get back on track financially, there are things to consider before you file. Things like:
- moving your money to another bank account
- putting a stop to automatic payments (including bill-pay)
- being up-to-date on utility payments
- determining whether the money in your account(s) is protected from seizure
- ensuring you have a workable post-bankruptcy household budget
By taking the time to pre-plan before filing for bankruptcy, you can save yourself unnecessary stress and some very nasty surprises.
How Chapter 7 Bankruptcy Works
Chapter 7 bankruptcy wipes out qualifying unsecured debts, such as credit cards and medical bills. It works well for low-income filers who have little or no assets.
Debtors don’t lose everything in this chapter. They can keep the property they need to maintain a household and job, called exempt property. Nonexempt property that you can’t protect with an exemption gets sold and the sales proceeds are distributed to creditors.
In many cases, creditors don’t receive anything because the debtors don’t have any nonexempt property to sell—but that’s not always the case. The average Chapter 7 case takes approximately three to four months to complete.
How Chapter 13 Bankruptcy Works
If you are filing a Chapter 13 and you’re unemployed, you’ll likely have a difficult time getting your case approved (confirmed). Why? Chapter 13 allows a debtor to repay creditors over time and it takes income to do so.
Here’s how it works…
In a Chapter 13 bankruptcy, a debtor pays back all or a portion of debts through a three- to five-year repayment plan—a benefit that isn’t available in Chapter 7 bankruptcy. For instance, a debtor can catch up on mortgage arrears, get rid of a second mortgage, cram down car loans, or pay back non-dischargeable debts such as domestic support or certain taxes through the repayment plan. Because it’s set up for monthly plan payments, Chapter 13 works well for debtors with regular income.
What is Chapter 20 Bankruptcy and When Is It Helpful?
Chapter 20 bankruptcy generally refers to a situation where a Chapter 13 is filed right after your Chapter 7 is completed. Some courts even allow the Chapter 13 to be filed after the Chapter 7 discharge is granted but before the case is closed. When you file a Chapter 13 after a Chapter 7 without waiting four years, you cannot receive a discharge in the Chapter 13 but there are other benefits that might fit your situation.
You need the extra time but have too much debt. If you need the extra time to bring a mortgage or car loan out of arrears, but your overall debt exceeds the debt limits under Chapter 13, filing a Chapter 7 first might help. By filing the Chapter 7, you can reduce your overall debt. Then, with your debt load reduced, you may be able to qualify for Chapter 13.
Although you won’t be able to get a second discharge in the Chapter 13, the second bankruptcy filing will give you extra time to cure the arrearage on your mortgage or car loan or to pay down debts that were not eligible for discharge under the Chapter 7, such as tax debt.
You need to have more money available to apply to an arrearage or non-dischargeable debt. By filing a Chapter 7 first, you may be able to reduce your unsecured debt so that more of your income is available to pay the arrearage or non-dischargeable debt. This can allow you to:
- reduce the length of your Chapter 13 plan period
- cure a higher arrearage amount, or
- pay larger tax debts through the plan
What Happens When You File
Immediately after filing for bankruptcy, an ‘automatic stay’ goes into effect. This is done to stop creditors from pursuing collection activities against you. But in some cases the stay will not prevent certain creditors from taking money by offset. This is when money is taken from an account to cover debt owed to another.
Then there’s the ‘set off’ that banks employ in order to settle debt.
What Is A Set Off?
Imagine this. You have a checking and savings account in a bank that also is the issuer of your credit card and car loan. When you file for bankruptcy, even though the bank can’t ask for additional payments for the car loan or credit card debt. It CAN use what’s left in your checking and savings account on the date you filed for bankruptcy to pay down the debts you owe them. This is a set off.
If you need the money in your checking and savings for emergencies or other anticipated expenses, it is best to close those accounts and move the funds to another bank or credit union. But this can be a bit of a slippery slope.
In most states, the cash in your accounts may not be protected. Usually if it came from exempt sources such as recent wage or funds from public benefits then, yes. But if you have credit card debt and/or other loans outstanding, your bank (trustee) may be able to freeze your accounts when you file for bankruptcy.
You will need to do your research for your state to determine if the money in your checking or savings account is protected from seizure (such as Texas bankruptcy or Federal exemptions allowable). Here is a list of what to look for:
- Cash on hand
- Child support & alimony
- Public benefits (Social Security, Disability payments & Unemployment benefits
- Wrongful death & personal injury
- Crime victim compensation
- Other miscellaneous
Then There’s The Utility Company
When you file for bankruptcy, security deposits held by the power company, phone company or gas company can be subject to set off seizure if you owe them money at the time you file for bankruptcy.
In the case of the power company, if you are behind in your payments when you file for bankruptcy the company can legally seize your deposit money to cover the debt. It can also require that you replenish the account with a new deposit. This is why it is so important that you evaluate your situation before you file so that you’re not adding unnecessary pain to an already painful financial situation.
The Automatic Payment Red Flag
Automatic payments will not automatically stop once you file for bankruptcy. Although creditors are supposed to stop the drafts, sometimes they don’t and/or there may be a lag in time before they are stopped.
So be pro-active and stop this yourself. But know the difference between automatic debit payments and bill-pay. With auto pay you give a creditor permission to withdraw payments due from your bank account. With bill pay you are authorizing the bank to make payments to the company.
Remember, you have the legal right to stop most pre-authorized and unauthorized deductions. Make sure you contact your bank in writing or call them to request a ‘stop’ at least 3 business days before the scheduled debit will occur. If the request is made orally, the bank may ask you to confirm it in writing within 14 business days of your call. A certified, return receipt letter is a good way to document this request.
If you notice an unauthorized debit on your bank statement, you have 60 days to notify the bank of the error.
If you get hit with late fees from the bank because they were late, be sure to read the fine print on your deposit agreement so see who is liable for late fees.
As you can see, there is a lot to consider before you file for Chapter 7 or Chapter 13 Bankruptcy. In either scenario, it is important to plan ahead. The Davis Law Firm is here to answer your questions and help you through this somewhat intimidating process.