A New Chapter: Starting Over With Bankruptcy

13 years ago I claimed bankruptcy and the process was easier than my imagination made it out to be. In my imagination I saw myself and my lawyer on one side of the huge courtroom and the mean, impatient credit card lawyers queuing up to give the judge a reason why I should not be allowed bankruptcy. It didn't go like that at all, but the process of chapter 7 was a learning experience.

With the laws that took effect in 2005, they do make it slightly harder and more paperwork is done to essentially find out if you are worthy of the big dinging a bankruptcy would do to your life and finances. What used to be an easy way to file chapter 7 bankruptcy, now is much harder for those who have debts of $50,000 or even $100,000.

In 2005 changes were made to the bankruptcy law and now certain things have to be met, such as a Means Test. The test is supposed to stop those who have too much money for filing for a  chapter 7.
You have to answer "NO" to the following questions
1. Is the family earning above the average income for their state? Look up your state
2. If you answer yes to the above, but you can answer "NO" to having excess monthly income of more than $166.66/month to pay $10,000 of debt over 5 years and you do not have excess income of greater than $100/month to pay over the next 60 months at least 25% of your unsecured debt - Then you can file chapter 7 bankruptcy.

But if you answered "YES" to either of these, above the state average income, excess of 166.66 over 5 years, excess 100.00 to pay over 60 months at least 25% of unsecured debt - then you have to file a chapter 13 and set up payment arrangements.

One of the tests that is used to determine how much excess monthly income you have is the following formula:

Income - Living Expenses = Money to be Applied Towards Debts

And that is the exact same formula you can determine if you can pay down your own debt without having to pay a lawyer to find out for you. But how a lawyer determines what is income and what is living expenses is the complicated part. As of this law, the IRS determines that based on your previous tax return and they decide what is reasonable.

Ok, so you are still going through with the bankruptcy. According to the 2005 law, every person has to go through credit counseling within 6 months before filing bankruptcy and you have to pick from one of the approved counselors for your state. And you have to have your certification before the bankruptcy can be discharged.

Vehicles - The old law said that you only had to pay the value of the car in a certain time to keep the car. The new law says that you have to pay the entire loan off to keep the car. The timetable on payoff is usually 3 years. So if you bought a $4,000 car from a car dealer when you had poor credit and the life of the loan is $15,000, then that is how much you have to pay out with this new law.

Homes - If the property was acquired in the last 1215 days (3.3 years) then their is an equity exemption of up to $125,000. Unless you live in Kansas, Texas, Florida, Iowa, and South Dakota, then you have unlimited exemptions and can keep your 2 million dollar home with $1 million dollars of equity built up in it.

Charity- Up to 15% of your income can be used toward charity and is considered a loophole for some to move from a chapter 13 to a chapter 7 bankruptcy.

Let's say you don't qualify for bankruptcy at all...
1. Use equity in your home to pay debts
2. Use cash savings
3. Use Retirement or 401k

If you can't use any of the above means to pay off your debts when you don't qualify for bankruptcy then your next step would be
Stop paying your credit cards and create your own "bankruptcy". If you do this on your own and don't pay your cards, you are doing so without the hassle of the court system, but also without the protection of the court system.

The Pros and Cons of the two bankruptcies:

With a Bankruptcy Chapter 7:
* You don't have to make payments on your credit cards.
* All of your debts are wiped out, your creditors will not be contacting you.
* Your credit is really ruined for 10 years. You will have a tough time getting an unsecured credit card. It's tough to get a bankruptcy off your credit report.

Not Paying Your Credit Cards
* You don't have to make payments on your credit cards.
* All of your debts are not wiped out, your creditors will hounding you.
* Your credit is ruined for 7 years. Late payments and any corresponding collections only stay on for 7 years from the date of first delinquency. You will have a tough time getting any credit for a while.
* It's possible to fix your credit before the 7 year reporting time is up.

While I don't advocate not paying bills, in rare situations I could see that being justified. But I wouldn't ever consider it worth the phone calls at all hours or the possibility of lawsuits. And if you decide to stop paying your bills:
1. Make sure you set aside the money in a bank account that you would normally pay on bills to cover settlements with collections agencies.
2. Also keep all written correspondence with credit card companies and collection agencies. 3. If you get any mail from a collection agency, make sure you write a debt validation letter.
4. When you do settle a debt, try to settle for 10-25 cents on the dollar - get it all in writing!

There you have it, bankruptcy laid out a bit more clearer if you are thinking of starting over, though you may want to take steps to just avoid bankruptcy all together if you can turn back now.