7thirteen Day is Not Cancelled!

Photo by Abby Kihano, Pexels.com

While 7thirteen day may or may not be a holiday that I invented, taking a day to appreciate consumer bankruptcy laws in the United States is a pretty good idea.  It’s no less valid than “Barbershop Music Appreciation Day” and “National French Fries Day,” both celebrated on the same day.  In fact, you can easily celebrate all three holidays at the same time, which would surely also qualify as participating in the day’s fourth holiday: “Embrace Your Geekness Day.”

Simply put, bankruptcy is a financial safety net that allows individuals to protect property while dealing with their debts with dignity.  Bankruptcy is a federal law, authorized in the U.S. Constitution.  It’s there because the framers wanted citizens to be protected from the debtors’ prisons that existed in England at that time.  Our bankruptcy system is not perfect, and can be devilishly complicated, but it’s a right worth celebrating, even more so in view of the COVID-19 epidemic and the financial hardships many are now facing.  

In honor of the day, here’s a list aimed at debunking some of the most persistent rumors about bankruptcy:

• “If you’re still paying on your car, you’ll lose it if you file a Chapter 7 case.”  False.  If your vehicle serves as collateral for a loan you will need to formally declare your intention about the vehicle when you file a Chapter 7 case.  You can give it back (surrender) or pay the debt or the value of the car, whichever is less, in a lump sum (redeem) or you can agree to continue to make payments and be liable for non-payment (reaffirm).  So if you want to keep your car, Chapter 7 lets you redeem or reaffirm the vehicle.  For obvious practical reasons, most people opt to reaffirm.  The lender will send a reaffirmation agreement, which you will need to sign within a certain deadline.  Reaffirmation agreements allow you to keep your car, and the relationship with the lender will not be affected by your bankruptcy case.  It’s often tempting or even compelling to enter into these agreements when your ride to work is on the line, but a reaffirmation agreement might not always be in your best interest if the amount owed is far greater than the value of the vehicle, or if your vehicle is not reliable.  Reaffirming the debt means you will continue to be liable for any missed payments, or for any remaining balance due if the car is later repossessed and sold at auction. 

• “Bankruptcy cases can get ‘rejected’ by your creditors, or by a Trustee.”  False.  Bankruptcy cases cannot be “rejected,” but they can be dismissed, and Chapter 13 plans can be denied.  But only a Judge can make that decision, and only for good cause, after a careful legal process is followed.  Creditors and Trustees can ask the Court to dismiss a case or deny confirmation of a Chapter 13 plan, but the final decision rests with a Bankruptcy Judge. 

• “You can pick and choose what’s ‘in the bankruptcy’.” False, when you put it that way.  “I didn’t file bankruptcy on that!” is the response usually offered to explain why a person did not list assets or debts in the bankruptcy petition and schedules.  The bankruptcy system requires complete and accurate disclosure of everything you own and every debt you have.  How those items are ultimately treated varies, but leaving information “out of the bankruptcy” is not an option.  Much of the confusion comes from the complexity of things like reaffirmation agreements on cars (see above) and the different treatment of creditors in a Chapter 13 plan.  For example, if you need to file a Chapter 13 case to deal with tax, medical and credit card debt, and you are also making car payments, your Chapter 13 plan might provide for continued direct payment of the long-term car debt.  In that example, the bankruptcy is not really about the car payment, but the existence of the debt and its treatment needs to be disclosed, even if it isn’t going to be changed by the bankruptcy case. 

• “You can’t file bankruptcy if you owe child support.”  Not true.  This is similar to the mistaken belief that creditors can decide to “reject” a bankruptcy case.  If you owe child support – considered a “domestic support obligation” in bankruptcy lingo – those amounts cannot be discharged in a bankruptcy case.  It’s worth pausing here a minute to consider the place bankruptcy has in our society.  There is a pecking order, and the right to be free of debt is not superior to certain obligations: Taxes, domestic support, student loans and criminal restitution, to name the most common.  So it’s true that filing a bankruptcy case will not wipe out your obligation to pay child support, but that fact does not prevent you from filing bankruptcy to deal with other types of debt. 

• “You can’t file Chapter 7 if you have a job.”  Hilariously false, and yet the rumors persist.  This misunderstanding is probably tied in with the fact that it is sometimes possible to make too much money to qualify for a Chapter 7 discharge.  The analysis, often referred to as the “means test,” is complicated and depends on the state where you reside and the number of people in your household. 

• “You can’t file Chapter 13 if you are not employed.” Not true.  Chapter 13 does require you to have “regular income.”  A 9-to-5, 40-hour-per-week job is the stereotypical example of “regular income,” but it’s just one possibility.  “Income” includes sources other than employment, such as retirement, Social Security or disability payments.  Although Social Security benefits and VA disability payments are protected from your creditors, you can elect to use this income to fund your Chapter 13 plan.

• “The Trustee will sell your house if you file Chapter 7.”  Sometimes true.  Trustees can sell property to pay “unsecured” creditors (creditors who do not have collateral).  It’s important to be aware of your home’s current market value before filing a Chapter 7 case.  Do you have equity in the property (that is, would you be able to sell the property for significantly more than you owe on it)?  If you do not have equity in your home, a Trustee is not likely to be interested in trying to sell it.  A Trustee won’t sell your home if the only purpose would be to pay some of the debt to the mortgage company.  Protecting your home is often the most important goal in bankruptcy, so review all information with an attorney before making a decision, but don’t automatically assume that a Chapter 7 case would not be possible. 

• “It’s a good idea to try to pay down your credit cards as much as you can before filing bankruptcy.”  Not really.  If you are financially able to pay all of your bills as they come due, then of course you should do that.  But if you are not able to meet financial obligations, paying as much as you can toward your credit cards will not accomplish much if bankruptcy is inevitable, and it can lead to complications when you do file a case.  It’s understandable that some people might view such an effort as making a show of good faith.  An important concept in the bankruptcy system is to ensure every creditor is treated fairly.  Paying down certain credit cards, for example, can result in a “preference” where the payments to the creditor gave it better treatment in comparison to others who were not paid.  A bankruptcy trustee might try to recover large payments made in the runup to a bankruptcy case so that the money can be more fairly distributed.  In any event, the money you paid to those creditors won’t come back to you. 

• “You have to turn over all of the money in your bank accounts when you file Chapter 7.”  Nope.  Each state has laws that allow you to claim certain property “exempt,” and that property can include cash.  The amounts differ from state to state, of course.  You should be aware of the exemptions that apply before filing your case, but you will not be required to begin your bankruptcy “fresh start” in a penniless state.  However, give some thought to how you bank if you have a personal loan or credit card with a bank where you have large balances or have your paychecks automatically deposited.  The bank may close your account after you file bankruptcy, and some (credit unions in particular) may treat the money in your account as additional collateral for a loan.    

• “You don’t need to make Chapter 13 payments until your plan is approved.”  False, and terrible advice!  Before your Chapter 13 plan can be approved, you must show that your case is “feasible,” that is, that you will be able to make payments.  The best way to prove that is to begin making the proposed plan payments on time.  That usually means the first payment is due within 30 days of the date you filed the case, and every month after that.  The most common reason why bankruptcy plans are not approved, and cases dismissed, stem from the failure to make payments.  Thus, waiting several months to make a payment “to see if the plan is approved first” is one of the most nonsensical bankruptcy rumors. 

• “If you file bankruptcy you’ll never have good credit.” C’mon man!  It’s true that a bankruptcy filing will appear on your credit report for a number of years, and your credit score may suffer at first.  Constantly monitoring credit scores has become a sort of hobby for many people (thanks, Credit Karma!).  The way credit scores are calculated involves a myriad of data run through a secret algorithm.  And consider that the credit score is just a piece of data provided to potential lenders.  In that way, it’s no different from a weather forecast.  When meteorologists predict rain, person A might react to the news by staying home, but person B might pack an umbrella and go to the park.  Different people react differently to the same data.  Yes, some potential lenders may refuse to extend credit when a borrower has filed bankruptcy.  Other lenders may consider the fact that the borrower took steps to deal with his or her debt in a responsible way; and a bankruptcy discharge often means fewer debts to contend with, an appealing fact to some potential lenders.  It’s not unusual to see credit scores rebounding quickly after entry of a bankruptcy discharge.  It is likely just as damaging to your credit to continue to struggle for years with more bills than you can pay, with the delinquent and missed payments reflected on your credit report. 

Here is the takeaway from this list of falsehoods and confusion: If you are experiencing financial difficultly you should speak to a knowledgeable bankruptcy attorney.  Don’t make an assumption based on a general statement, or on a badly founded rumor about what bankruptcy can and can’t do for you.  You should also keep in mind that every case is different.  Just because something did or didn’t happen in someone else’s bankruptcy case, don’t automatically assume that your case would have the same outcome.  You owe it to yourself to contact an experienced professional…just remember to turn down the barbershop music before you call. 

Have fun, be safe, and spend wisely!

The 7thirteen is a blog written by Jeff Narmore, focusing on consumer bankruptcy issues.  Visit my website at narmorelawoffice.com.

Narmore Law Office LLC is a debt relief agency and helps people file for relief under the Bankruptcy Code.