Consumer Bankruptcy Generally

Did the recent change in bankruptcy law abolish bankruptcy for the average person? Can he or she still file a bankruptcy if necessary? The answer is yes. Bankruptcy is still a viable option for the consumer as well as the business owner. If a person owes consumer debts such as credit card debts that are simply too large to pay within a reasonable time, then bankruptcy is an option and the debts can be removed (without tax) in a bankruptcy.  

But can one remove debt through bankruptcy and at the same time retain assets, such as a home or car? The answer to that question depends on the state law that is applicable when the bankruptcy is filed.  Can one move from one state to another to take advantage of different bankruptcy laws? Yes, but there are time limits.

Although the Bankruptcy Reform Legislation limited access to the Chapter 7 discharge and changed a lot for the lawyers, it left many consumers untouched.  Generally speaking, the size of the family, the type of monthly bills and the income during the 6 months prior to filing determine whether a consumer can qualify for the Chapter 7 discharge of debt. The 6 month provision makes it very clear that precisely when one files a bankruptcy is extremely important.

How does a person know if bankruptcy is right for him or her? Well, clearly, bankruptcy is not right for everyone. Bankruptcy is something to be avoided, not embraced. But for those who have need of it, bankruptcy is indeed powerful and it is the only way to completely remove debt with the certainty of not having to pay taxes on the debt that was removed.  To determine if bankruptcy is appropriate, one should ask "How long would it take to pay back my debts?" One rule of thumb is that if will take more than 3- 5 years, with interest, then bankruptcy should be considered.  The next question to ask is "What would I lose if I file a bankruptcy now?"  The answer to that question is contained in the state law that would apply to the bankruptcy.  So a bankruptcy can result in the loss of assets?  Yes, it certainly can.

One of the uncharted dangers in the bankruptcy arena is that the window of opportunity to obtain a Chapter 7 discharge may close without notice.  This often happens when someone is on the edge of qualifying for a Chapter 7 discharge and cashes in an IRA and thereby increases his income over the limit. Or perhaps one avoids bankruptcy long enough to find a job that pays too much to qualify for a Chapter 7, but at the same time pays too little to pay both living expenses and all the debts.

But isn’t bankruptcy just a way to take advantage of the people who loaned me money?  Not really, because banks and credit card lenders provided for potential bankruptcy losses long before they loaned the money.  But what if the lenders are family members?  The bankruptcy debtor is perfectly free to pay back family members or anyone else after the bankruptcy is finished.

It has been our experience that the primary force that pushes people into bankruptcy is the interest rate on credit cards. If you are reading this because you are interested in your bankruptcy options, then you have probably already experienced what it is like to receive notice from a credit card company that your interest rate has now been elevated to 35% or perhaps 40% or more because you were late on a payment, perhaps the payment on another credit card.

Most people want to pay their credit cards, but the credit card companies make it impossible for them to do so. For instance, when a credit card company notifies you that your interest rate is now 35%, they are telling you that the amount of interest alone that you are going to be paying will exceed the amount of the principal in less than 3 years.

For instance, how long will it take you to pay off a $20,000 credit card debt at 35% interest? The payments for this debt are $710 per month for 5 years. At the end of that time, the debtor will have paid $42,540 to the credit card company. Now most people do not borrow $20,000 on a credit card at one time. Most people borrow and pay some back over time. If this has happened over the course of perhaps 4 years, then it is likely that the amount actually borrowed is around $12,000. The rest is interest - interest on principal and interest on interest. So, at that point at which the payments begin, debtor is paying $42,540 to pay off what was originally a $12,000 debt. For many people, this means the difference between foreclosure and no foreclosure or medical care and no medical care. If the credit card debt is now $40,000 then the monthly payment is $1420 per month and after 5 years the debtor has paid the credit card company $85,200, or $45,200 in interest. So, the credit card company is saying, “We know you only borrowed $12,000, but we want you to pay us back $42,540 over 5 years. Why? Because it was in the contract that you never read.

In determining if one can pay back this debt, consider an alternative, such as a legitimate credit consolidation organization. They can sometimes obtain lower interest rates. But if you can pay it back within a time frame that is reasonable for you, then you should not consider a bankruptcy. But if you can’t, and because you can’t you consider bankruptcy,
then decide beforehand to make the best of it. Get everything out of it that you can. Use it to establish a life that is completely debt free.

Using federal law to live debt free, Bankruptcy is a one-time remedy that should be utilized for the sole purpose of establishing, with the help of federal law, a life that is completely free of debt. The establishment of an enduring life-style free of debt and free from the stress that debt causes should be the goal of the consumer debtor. To use the power of the Federal Bankruptcy Law to rearrange one’s life so as to have more than the necessary funds to pay each month’s bills when they become due: this is the highest goal for the Chapter 7 debtor. And it can be done.

It can be done by utilizing the law to eliminate extraneous and unnecessary debts, by shedding unnecessary luxuries and their monthly payments and by establishing a budget that reflects the reality of life rather than the illusory wealth created by easy credit. So, bankruptcy is the end of something old and the beginning of something new. In order to plan on how one might live after bankruptcy, the debtor should first make a firm decision
to contract himself, that is, to make himself financially
smaller until his expenditures are less than his income. Bankruptcy law facilitates this and, with a Chapter 7, it can bring it about in a matter of weeks.

For instance, consider first the car payments, the mortgage and other secured payments. Car payments can be lessened by surrendering the expensive car in the bankruptcy and purchasing a cheaper car. Because a bankruptcy has been filed, it is a bankruptcy, the car lender cannot sue the debtor for the unpaid car note. The same is true for a mortgage. There is another alternative for a car or for furniture or other tangible personal property secured by a consumer loan. The debtor can opt to pay the creditor the amount of the lien in cash. So, if the debtor owes $1200 for a refrigerator, but the refrigerator is worth only $500, he can pay the lender $500 and keep the refrigerator.

The same is true for cars. So, it is in this way that a debtor may shed himself of expensive items that do not fit into a credit-cardless budget. This is called “contracting” or just getting smaller financially until the debtor fits his actual income. If the debtor can obtain a Chapter 7 discharge, then in addition to the shedding of expensive items, he can also discharge all of his credit card debt as well as all other unsecured debt (other than alimony, child support, student loans and some taxes). Without the credit card debt, life becomes much easier and with the combination of contracting and the discharge of other debt, many people can live on what they make. In a Chapter 7, this can occur in a matter of weeks. But in a Chapter 13 this process takes 5 years.
It is for this reason that many people wish to obtain a Chapter 7 discharge. Because this means freedom now.

Who can get a Chapter 7 discharge? What are the limits to the new law? Who can get a Chapter 7 discharge and who can’t. The new law contains two thresholds. The first is an earning threshold and the second is a complicated test. If a debtor earns less than the amount of the earning threshold, then he can get his Chapter 7 discharge without further consideration of his income and budget.

But if the debtor earns more than these amounts, he may still be able to obtain a Chapter 7 discharge if he can pass the second threshold, which is the means test itself. The means test is a calculation based upon income, mortgage payments, car payments, medical expenses, certain other expenses, tax debt, the size of the family and the county where the debtor lives. When these are all calculated in the means test, the result tells whether the candidate who has a majority of consumer debt is eligible for a Chapter 7 discharge of debt. If the candidate has a majority of non-consumer debt, then he is exempt from the means test. The means test applies only consumer debtors, not business debtors.

If the debtor is not eligible for a Chapter 7 discharge of debt, then the only alternative will be either a Chapter 1111 or a Chapter 13 bankruptcy. Both of these bankruptcies require repayments. Only Chapter 7 does not require a repayment and only Chapter 7 eliminates debt in three months. It is for this reason that the credit card companies “invested” millions of dollars to cause Congress (both parties) to limit Chapter 7. Determining whether a debtor can pass the means test is a complicated and sometimes time consuming procedure. It is often complicated by changes in income, purchases and sales of assets and extraordinary expenses. The candidate whose income exceeds the income threshold may have a very complicated case.

What do you lose in a Bankruptcy?

Different states have different laws relating to what you keep and what you lose in a bankruptcy. In Texas
a debtor cannot lose any of the following to an unsecured creditor, such as a credit card company, either in or out of a bankruptcy:
• Your homestead (no limit)
• Your insurance policy or your annuity (no limit)
• Your retirement (no limit)
• Your car and personal belongings ($30,000 per person - $60,000 per married couple)
• Your current wages (not yet received) or social security
that is owed to you (there is no wage garnishment
in Texas)
• Your commissions (up to $7500 per person)

These are called the Texas exemptions and they protect the property listed above from seizure by any unsecured creditor who sues you. Compared to practically all other states, the Texas exemptions are a really good reason to live in Texas. So, if you are a Texas resident, when you receive that notice that your interest rate has been elevated to 35% and you know that you can never pay it, remember that no matter what they do to you, they can’t take what is listed above if you are a Texan and your assets are in Texas.

Assuming that you have acquired those assets within certain bankurptcy time limits and in accordance with other bankruptcy laws, you can keep all of those assets through a bankruptcy.
Why File a Bankruptcy when your Property is Protected?

Considering the exemptions in Texas, why would one want to file a bankruptcy? If you can pay your debts off, you should not file a bankruptcy. But if you have a debt burden that is intolerable, you should conside filing. So why file? The answer is to rid yourself of debt, protect yourself from lawsuits, protect yourself from seizures of your bank account and other non-exempt property, insulate yourself from creditor calls and demands, ensure that your future will be free from vulnerability to seizures and to obtain a fresh start free of debt.

Another reason is the new bankruptcy law: you may not be able to file in the future. Another reason is that the laws that protect your homestead and personal property are applicable in a Texas bankruptcy. This means that you keep them.

The Ethics of Bankruptcy

Is a bankruptcy an ethical thing? What about for the Christian or the conservative Jewish man or woman who seeks to follow scripture? Is it proper?

As far as the bankruptcy law itself is concerned, the new law has already defined what is ethical and what is not ethical. So, if a debtor can get a discharge, according to the law it is ethical by definition.

But what about the bible? Is it a sin not to pay a debt? Or, more accurately, is it a sin not to pay a debt that one cannot pay? Or perhaps, is it a sin not to pay back $42,540 on a $20,000 debt? Indeed, if a sin has been committed here, one must ask who committed it - the borrower who cannot pay it or the lender who has raised the interest rate to 35%? What does scripture say?

In fact, in Deuteronomy 15 we find the earliest recorded bankruptcy discharge in the history of mankind. It is called the year of release. This law provided that at the end of every 7 years, every debt will be released and not collected! See origin of bankruptcy.html

So, as far as scripture is concerned, God never intended debts to last more than 7 years. And if a debt was incurred just before the 7th year, it survived only until the 7th year and then it was automatically discharged. In fact, Deuteronomy 15 instructs the creditor to lend to the needy borrower even if the year of release is at hand. So, the burden of scripture is precisely the opposite of what most people believe. In terms of the bible, it is the creditor who sins, not the debtor, if the creditor refuses to lend to the needy because he knows he will not be paid back. Exactly the opposite is happening today.

Charles Chesnutt