Bankruptcy: Should you file for Chapter 7 (Personal Bankruptcy)? What are the risks and possible consequences? Dr. Joyce Starr. Show Date: February 3, 2001.
Many of our readers/listeners asked for more information on Chapter 7 (see our posts below on credit repair + auto refinancing after bankruptcy). I interviewed a number of attorneys, and here’s what I learned. The first question you should ask yourself (if your attorney fails to do so): Do the sums involved justify the pain?
Filing for Chapter 7 means that all personal property is part of the bankruptcy proceedings, including your jewelry, computer, furniture and even your bed! The court has the right to take control over and sell your belongings, with limited exemptions. You must list every single item. This also includes copyrights and intellectual property rights. If you’re an author (and while it rarely happens) even your copyrighted books could be seized by the court in order to pay off your debt, (goodbye income stream).
The total exemption on all personal property is $1000. As one attorney stated, “The court can come in, take everything and sell it. While they seldom do so, the debtor shouldn’t take the chance on being the test case. Every item must be listed for the courts; you cannot lie or try to hide a single asset, including the television. While assets can be valued at 10 cents on the dollar, they still have the right to take everything, minus the $1000 exemption.” Even if you own your car, the court theoretically has the right to seize it.
The courts can also examine attempts to hide assets, such as putting your car in another name. For example, let’s say you owe money on your car, but pay it off and transfer the title to another family member before filing for Chapter 7. Though unlikely, the court can still seize the car and sell it to pay off your creditors.
Another scenario: Including your auto loan in your bankruptcy filing.
Let’s assume that your car has a book value of $8k, but you owe still $3k. The court seizes your car, sells it (in which case you lost $5k in equity ) but allows you a $1000 exemption. In other words, you lost your car, lost the $5k equity in your car, now have $1000 in cash but no car. You must rebuild your credit in order to purchase a car and start the cycle all over again.
Mortgages & Credit Cards
Chapter 7 attorneys may refuse to negotiate with the bank over your mortgage. Apart from renegotiating your mortgage, the primary way to get the bank to lower the rate is to default, which will then hurt your credit. Bankruptcy attorneys are often unwilling to negotiate with credit card companies. Unfortunately, the primary way to convince credit card companies to reduce debt is also to default, in which case they may settle for roughly 50-70 percent – conditional on paying in one or two lump sums (money you don’t have).
However, this varies state by state. In Indiana, we’ve been told, several attorneys will negotiate mortgages while also providing a services considered “above and beyond” the scope of a bankruptcy filing.
You must also pay income tax on the difference between what you owe and the settlement amount. Your credit will be ruined, and you will be out of pocket for the expense of paying it off.
If you have a mortgage, your home may or may not be protected in a Chapter 7 filing. You will be required to “affirm” your intention to pay your mortgage. Depending on the laws of your state, the bank that holds the mortgage could reject your petition – and now you’ve lost your home as well.
During the bankruptcy proceedings, you must maintain other payments due.
For example, if you fail to pay your condo fees/assessments, the condo will foreclose even faster than the bank. because (in their view) they have an obligation to protect the other owners. Plus, you will have to pay both fines and escalating attorneys fees.
This is a major crisis across the country, where people are losing their homes over failure to pay even small sums to their homeowners associations, which then turns catastrophic over escalating attorney letters and related fees. The owner might owe $500, can’t pay on time, gets a letter from the attorney, now owes the $500 plus late payment + $1500 charged by the Association attorney, then for the next letter (next fee and so on). North Carolina is holding hearings over the crisis of so many condo/HOA owners losing their homes over failure to pay what were initially nominal fees (including assessments).
1. Bankruptcy exemptions vary state by state – some are so generous as to be ludicrous, while others are highly restrictive to discourage people from filing.
2. It’s an extremely knowledge-intensive subject and nearly impossible for the lone individual to keep up-to-date with state code. Seek the advice of an experienced attorney. Most bankruptcy attorneys will offer a free consultation, if only by phone. There are no short-cuts! Find a good attorney.
Chapter 7 is not a home free card.
Now let’s say that you filed for Chapter 7 and lost or sold your home. Where do you live? Many condos and apartment houses will deny renters with bad credit and those who have been through recent bankruptcy or Chapter 7. Condos, in particular, want proof that a renter’s financials are strong.
One condo president told me that she prevented several individuals from renting on this basis. Therefore, hopes of quickly renting another condo unit is not a pretty picture. And don’t even think about failing to pay your property taxes. In principle, if you fail to pay, the “bad guys” can take ownership of your home just by paying your back taxes. Yes, they will incur your mortgage debt, but may have the resources and experience to work the system much better than you.
Filing for Chapter 7 has obvious benefits as well. One woman with great credit charged up $40k on her cards in order to pay for vital dental work that she could not afford and was not covered by her health insurance. She waited 3 months following the dental work and then filed for Chapter 7. The court was lenient and did not seize her property or car. She no longer has the credit card debt and has a mouth full of shiny new teeth.
The question is: How will Chapter 7 take a bite out of your life?
(We are not attorneys and do not provide legal advice.)