Pros & Cons of Filing for Bankruptcy

Things are viewed as Black or White these days. It’s either left or right, good or bad, hot or cold … and so on. But that’s not how it should be.

Bankruptcy. Some people hear this word and immediately think it is bad. Yes, there are some negative aspects of it, but largely, the positives outweigh the negatives.

PROS

CONS

At the end of the day you need to decide what is best for you and your family. Ignore the stigma that is associated with filing for bankruptcy, because let’s face it, it is not nearly as bad as people think it is. Besides, only the people you want to know about your bankruptcy will be aware you even filed. Even though it is a “public record” the average person has no way of viewing said record.

With a Chapter 7 Bankruptcy, cases typically fall into one of two categories: Asset v. Non-Asset

An asset case is one in which the trustee finds that there are (1) unexempt assets, or (2) preferential or fraudulent transfers that can be undone. In there situations, there will be funds available to be distributed to the creditors.

With unexempt assets, typically the Debtor (person that filed for bankruptcy) will be able to choose between turning over the asset to the trustee, or paying the trustee an amount equivalent to it’s listed value. For more on what makes something unexempt, please view our bankruptcy exemption page.

With preferential or fraudulent transfers, typically the trustee will go after the person that received the property or funds, however, occasionally the Debtor will volunteer to pay the amount in order to protect the receiving party. This is common with family members or friends.

At the end of the day, what does this really mean for you? First off, if it is an “Asset” case then there is a chance that the Debtor or a family member will have to turn over property or money to the trustee. But secondly, if a case is ever an Asset case, then only those creditors that received a notice of the bankruptcy filing will receive a discharge.

So for example, let’s say that you owe money to ABC Phone company, but at the time of filing you forgot you owed them money so you never listed them as a creditor. If you are in a “Non-Asset” case, then at any point (whether your bankruptcy is open or closed) you can notify the phone company of your bankruptcy, and they have to forgive your debt. To the contrary, if you are in an “Asset” case, then you will need to amend your schedules and notify the phone company of your bankruptcy while your case is still open. If you fail to inform them until after your case is closed, then that debt survives your bankruptcy, and you will owe them that debt. See In re Madaj, 149 F.3d 467 (6th Cir. 1998).

Have any questions we can answer for you, or would you like to schedule a free consultation with one of our attorneys? Use our contact form below.

One of the most common questions we are asked is “How bad will this bankruptcy hurt our credit?!?”

And this question is valid. We leave in a society where virtually all home, car and even insurance decisions are affected by our credit score. So let’s unpack this question further.

I am not going to lie to you and say that a bankruptcy will not affect your credit score at all. Anyone that says that to you is lying. However, what I can say is that a bankruptcy is not a death sentence for your credit score. As with most things, time heals.

The first 1-3 months your credit score will drop. But that is when the rebound occurs. The further you move from your filing date, the less the bankruptcy will hurt your score. Surveying our previous clients, we find that those that came into our office with a score in the low 600’s, had their score rebound back into the 600’s approximately 12-18 months after filing. Those that came in with a credit score in the high 600’s had their score rebound back into the high 600’s approximately 18-24 months after filing.

What can you do to help your score rebound on the quicker side? Utilize credit responsibly. Get a secured credit card, and ONLY use that card for gasoline, and pay it off every month. Don’t use it for any other purposes, and never carry a balance at the end of the month.

What about getting a home loan? If you are looking to get a conventional mortgage, they will want you to be 24 months out of your bankruptcy and a credit score of 620 or higher.

What about a vehicle loan? Surprisingly, it will not be that difficult to get a vehicle loan. However, be prepared for a high interest rate the first year or two.

Something to keep in mind when looking into how a bankruptcy will impact your credit score, is that some creditors will actually view you to be MORE credit worthy after you file for bankruptcy. Why is this?

  1. They know your are now debt free, and you have more disposable income now to pay your debt, than you did prior to filing for bankruptcy
  2. They know that you cannot file a bankruptcy again for 8 years (if Ch 7 to Ch 7)

For creditors it is all about risk. The less of a risk that you are, the more likely they will want to loan you money.

When filing for Bankruptcy, you have to file the Means Test with the Court. This is a document that determines whether you qualify for a Chapter 7 Bankruptcy, or if you are filing a Chapter 13 Bankruptcy, whether you are in a 3 year or 5 year commitment.

For the Means Test, there is a chart that lists household sizes, and a corresponding dollar amount. And if your calculated annual income is under that dollar amount, you pass the means test. So the question becomes, “How many people are in my home?” This question is most common in situations where someone has joint custody of children, or when they are perhaps in college. Also, what if they are over 18 years old, or you have never claimed them on your taxes?

The Court takes a “heads on beds” approach. This means they follow the Census Bureau definition of household, which is “all the people who occupy a housing unit as their usual place of residence.” Since Congress never established an exact definition to help determine whether an individual qualifies, the real question becomes whether or not that individual relies on you for the majority of their support. So if you are talking about a college roommate, you will not be able to count them as a part of your household, for bankruptcy qualification purposes.

The law can be unclear, and nearly muddy at times. Do you have a question on whether someone should count as a household member? Reach out to us today at 616-920-0555, or use the Get Started Today contact form below.

A common question asked is whether or not a client needs to take a course before they can file for bankruptcy. The answer is yes.

However, and this is a big however, this course is not something that needs to be taken in person. All of our clients here at Russell, Tighe & Alexander take an online course, which they can take on their desktop, laptop, tablet or phone. This course takes about 60-75 minutes and if you are one of our clients, the cost is included in our fee of $999. Once you complete the course you will receive a certificate that is valid for 6 months.

Now what exactly does this course cover? The course teaches money management skills to help Debtors. It covers areas like budgeting, responsible use of credit, money management and dealing with financial emergencies. This course is very helpful for individuals that want to brush up on their financial literacy skills.

Now, we fully understand that not everyone that files for bankruptcy does so due to poor money management. We get it. Divorce, injury, illness, death, loss of employment, and sometimes bees (yes, we have seen it) can put situations out of your control, and give you no other choice out. Unfortunately, those individuals have to take the same course as well.

If you have any further questions on this course, or you want to speak with an experienced bankruptcy attorney, give us a call at (616) 920-0555, or use the form below.

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NFS is Living in the Home: Under this scenario, when the means test is completed, we must use both spouses’ income.  This doesn’t mean the NFS is actual a part of the case. We will not disclose to the court the NFS’s SSN or in most cases, even their name.  We simply have to disclose to the court what the income & expenses are for both.

NFS is NOT Living in the Home: Under this scenario, when completing the means test, we only include the your income. We will disclose to the court that you are married, but we will have to file a statement that your NFS is not living in the household with you.

To qualify for a Chapter 7 Bankruptcy, you must past the “means test.”

To determine whether one passes the means test, and therefore qualifies for a Chapter 7, their household income must first be calculated. To calculate, you must take the previous 6 full months household gross income, and divide by 6 to average. (Do I have to include my spouse’s income if they are not filing?) For example, if you were to file November 16th, you would add up your household’s income for May through October, then divide by 6. If you were to file December 2nd, you would add up your household’s income for June through November, then divide by 6.

** We are able to handle all cases remotely and telephonically, so even if you are home quarantined, we can still represent you fully throughout the bankruptcy process **This is some text!

In this most turbulent of times, we are here for you, even if you are unable to come to us.

If you are struggling because of COVID-19, or because of any other financial issue, please give us a call today at (616) 920-0555. We are here for you.

Offer In Compromise – Doubt as to Collectibility

There are three types of Offer In Compromise (OIC). The most commonly utilized OIC is the “Offer In Compromise, Doubt as to Collectibility,” or OIC-DATC. This OIC is geared towards those individuals who are unable to pay their current tax obligation and wish to settle for a payment that is less than the amount they actually owe.

For OIC-DATC, taxpayers will need to:
— File Offer in Compromise
— Attach financial statements
— Submit supporting documentation to prove the value of their assets, liabilities, and monthly income and living expenses.

Once submitted, the exact time it takes for the entire process varies from case to case, but we see on average it takes somewhere between  4 weeks to 8 months, all depending on who gets assigned as the examiner and the complexity of the situation.

Offer In Compromise – Effective Tax Administration

Offer In Compromise – Effective Tax Administration is reserved for taxpayers who can pay the tax they owe, but it would cause (1) undue economic hardship, or (2) there are other public policy or equity grounds

1) Undue economic hardship

Economic hardship is a consideration for clients who have the ability to pay their tax debt in full, but doing so would place them in severe economic hardship.

2) Public policy or equity grounds

Public policy and equity offers are for situations when “collection in full would undermine public confidence that the tax laws are being administered in a fair and equitable manner.

Offer In Compromise – Doubt as to Liability

The Pro is that this is more straightforward and less negotiation is needed.  The Con is that this is only available when the taxpayers can provide proof as to why the validity of the tax obligation should be questioned.

Give us a call at (616) 920-0555, or use the email form below, for information on our Offer In Compromise service.

Unfortunately no, criminal restitution cannot be discharged in bankruptcy. However, the automatic stay will prevent any creditor or court from forcing a payment while your bankruptcy is pending. This could last up to 5 years.

The Automatic Stay protects clients from any collection efforts, while his bankruptcy case is still pending. 11 U.S.C. § 362(a)(1) of the Bankruptcy Code protects the Debtor/Defendant from any attempt ‘to recover a claim against the debtor that arose before the commencement of the case under this title.”  11 U.S.C. § 362(b) then goes on to list any exceptions to this rule, none of which apply in the present circumstances.

The closest exception comes under 11 U.S.C. § 362(b)(1) which states the stay does not operate as a stay against “the commencement or continuation of a criminal action or proceeding.”  However, In re: Storozhenko, 458 BR 905 (ED Michigan), states “criminal restitution must be deemed to be relief that is civil in nature, not criminal, for the purpose of 11 U.S.C. § 362(b)(1) exception to the automatic stay.  In re: Storozhenko goes on to say “at most, the federal statute would, temporarily (i.e. only until the automatic stay terminates under 11U.S.C. §362(c)), prevent the state court from complying with the state statute that mandates restitution as a condition for probation.

Westlaw’s Keynote #3 for In re: Storozhenko goes on the summarize the case by saying “bankruptcy court’s action did not prevent state court from placing debtor on probation, assuming that state court had determined that probation was appropriate, but merely prevented it from ordering restitution payable to state court receiver as a condition for such probation while stay was in effect.”

This is true for whether a Chapter 7 or Chapter 13 bankruptcy is filed. However, by filing a Ch 13 bankruptcy, you are afforded more time to put together a plan to resolve the debt.

If you are struggling with a criminal restitution payment, and live in West Michigan, please give a call to discuss what we can do to help.