Bankruptcy Reality Check: "Too Broke to File for Bankruptcy"

At almost every initial free consultation bankruptcy meeting, with a prospective client, the question arises, “if I’m broke, how am I supposed to pay for the bankruptcy”?

Many consumers worry about paying for bankruptcy, thinking they may never be able to afford it. If you are thinking of resolving your debts by filing bankruptcy, time may be on your side. You may be able to stop making payments on some, or maybe even all of your current debt. Freeing up of that income may then be used to pay your bankruptcy fees. In fact, many people pay for bankruptcy by doing just that.  Every situation is different, so you need the advice of an experienced Utah bankruptcy attorney to determine which creditors you may stop paying, and when.

Borrowing from a credit card or any other institutional lender, is not an option that an attorney can recommend as a solution for paying your bankruptcy fees. Generally, a decision to take money out of retirement accounts (whether IRA or 401k), may not be a wise choice. To file bankruptcy and pay in this manner could be a last resort, realizing that it may have unintended tax or retirement consequences.

Getting help from your family members, however, may be appropriate, as long as you are honest about why you need the money. Only you can determine whether your relationship is strong enough, but if you have sympathetic family members or close friends, then this may be a good option for you.

The easiest time of year and one of the easiest ways to pay for bankruptcy is with your tax refund. This is especially true if you are accustomed to using your tax refund to catch up on all the bills that have gotten behind over the past year. If you are living in that kind of yearly pattern, you probably need to consider bankruptcy.

Speak with an experienced Utah bankruptcy attorney about your individual financial situation. You may find that you can use your tax refund or other potential options along with the advice of an experienced bankruptcy attorney to get a fresh start.

What is a Chapter 13 Bankruptcy?

A Chapter 13 bankruptcy is filed by individuals who are either capable of paying back a portion of his or her debt or need to file it to protect assets that cannot be protected in a Chapter 7.  It can also be filed when a debtor is behind on mortgage payments and is  about to lose their home.

Chapter 13 Bankruptcy is a “reorganization” bankruptcy.  It is basically a court-supervised debt repayment plan.  Chapter 13 Bankruptcy allows you to restructure your debts into a payment plan that you can afford.  Also, in a Chapter 13 Bankruptcy, there is no mandatory liquidation of your assets, which means you usually keep all of your property.

First your Petition is filed, most actions by your creditors are blocked or suspended by the “Automatic Stay.”  The Automatic Stay prohibits your creditors from collecting on most types of debts.  While in a Chapter 13, the debtor is protected by the Bankruptcy Court from collection actions. The law prohibits creditors from taking actions to collect debt without the Court’s permission. This include repossessing cars and foreclosing on real estate. For this reason, a Chapter 13 is an attractive option that can help save your assets.  

Utah Bankruptcy Do's and Dont's

Bankruptcy Do's:

• Do be open and honest with your attorney — We handle all personal information matters with confidentiality and privacy. Be sure to tell us everything so we can file your bankruptcy petition accurately.
• Do continue making payments on property you wish to keep — If you are in default, your creditors can repossess the vehicle or begin foreclosure on your home. We can help even up to the last moment, but it is best to avoid it altogether.
• Do consider adjusting your tax withholding status — The goal is to get close to no refund. If you get a refund, it is considered an asset in Chapter 7 or could affect your Chapter 13 plan.

Bankruptcy Don'ts:

• Don't use your credit cards — Once you decide to file bankruptcy, do not incur additional debt that you cannot pay. In some cases, that debt may not be discharged. You should not use your credit cards within 90 days of filing.
• Don't hide your property — Even though you may fear losing your property, transferring it to another person may be seen as fraudulent.
• Don't pay off personal loans — If you owe money to family members, now is not the time to repay them. Let the bankruptcy court determine the priority of your creditors and handle it through the proper channels.
• Don't spend your retirement money — You have worked hard and do not want to lose the nest egg you have saved for retirement. By taking an early withdrawal from those accounts, however, you face penalties and taxes. It is not worth it. In fact, retirement accounts are often exempt in bankruptcy.

Learn About Your Options Today During A Free Consultation! Call us at 801-478-6823 or 801-614-8066.

Utah Bankruptcy Exemptions

When you file Chapter 7 bankruptcy, the bankruptcy code states that certain assets that belong to the debtor become part of the bankruptcy estate. A trustee is appointed to sell these assets and that the proceeds are to be distributed to the creditors as a partial compensation for their loss. However, bankruptcy code allows certain Federal or State exemptions so that individuals who file bankruptcy are usually able to keep most or all of their property.

Utah allows individuals to exempt all or part of various forms of property including equity in a home and car, insurance benefits, pension benefits, and household personal property. Utah Exemption statutes were last updated in May of 2013, and provide specific detail and dollar amounts for each available exemption.

Myth #3 Filing bankruptcy will hurt your credit for 10 years.

Myth #3: Filing bankruptcy will hurt your credit for 10 years.


Myth, not true. Bankruptcy may appear on your credit report for 10 years, however it does not effect your credit for that length of time.  There is a common misconception that bankruptcy permanently ruins your credit and there is no coming back after filing.  Bankruptcy helps people resolve financial problems. Many clients are able to obtain secured credit and begin to rebuild their credit within months of their debt being discharge. It is possible to see a huge improvement in your credit score in as little as two years. As long as you regularly pay your bills, then you will see your score improve.

If you have financial problems it is best to deal with them, and not ignore them until your wages begin to be garnished or you are served. Bankruptcy may be one way to do that. Seek advice from a qualified lawyer to find out about your options.

Myth #2 If you have been SUED by a creditor it is TOO LATE to file for bankruptcy.

Myth #2: If you have been SUED by a creditor it is TOO LATE to file for bankruptcy.

Truth: Bankruptcy can stop a wage garnishment, foreclosure, sheriff sale and/or lawsuit through the Automatic Stay under section 362 of the Bankruptcy Code .  This Section of the Bankruptcy Code states all creditors of a debtor to cease collection activities. There is little exception to this section of law.  In most cases it stops a lawsuit or judgment collection in its tracks.

Myths

Bankruptcy is a form of debt relief which helps debtors through the legal process to wipe out their debts through Chapter 7 Bankruptcy or consolidate and repay them through Chapter 13 Bankruptcy.  Here you can find out what is actual myths vs. what are actual facts:

Myth #1: Debtors will lose everything they have by filing for bankruptcy

This is a MYTH. While it may seem that when your file for bankruptcy you may lose everything such as your home, car, personal belongings, and retirement this can most certainly be a large concern for those who are dealing with mounting debt.  You may not know this but, a vast majority of bankruptcy filers don’t lose anything! Moreover, there are types of bankruptcy which can protect your possessions. For instance, you can file Chapter 13 bankruptcy to help save your house from foreclosure while  you catch up on back payments.  In a Chapter 7 Bankruptcy you are able keep your house and cars by reaffirming  the debt.   A reaffirmation is when a new contract is signed between you and your lender that reaffirms the debt and personal liability you have for the obligation.  Thus, you being able to keep your possession.

One myth debunked more to come.......

Filing Chapter 7, and Tax Returns

Did you know that it’s best to wait to file Chapter 7 bankruptcy until you file your taxes?   We tell our clients to file your tax refund, and spend it on necessary expenses.  Why is this a good idea?  Depending upon when you file, the bankruptcy trustee is going to take some or all of your tax refund to pay your creditors.  Spending your tax return before filing Chapter 7 bankruptcy is recommended, However remember that you need to be cautious as to where your tax refund is spent.  So where do you spend your tax refund?  Your tax refund should be spent on necessary expenses prior to filing.  Necessary items may include groceries, utility bills, mortgage or rent, and bankruptcy attorneys’ fees.  Stay tuned more to come….