Personal debt is like a bicycle going downhill without brakes. If you try to stop it in the beginning, you can slow down the bicycle with your feet and get it to stop. But once it gets moving too fast, the only potential outcome is a crash, which is going to injure you. Bankruptcy avoids the crash.
Bankruptcy is like the runaway truck ramp. The truck’s going downhill, and the driver discovers its brakes aren’t working. The truck ramp comes into view, paved with decomposing granite, and going up a hill, it allows the truck to slow down and stop without injuring the driver or third parties.
What bankruptcy does is it provides a way for people like Emily to get out of that credit card debt and allow them to avoid the crash and start fresh. Without bankruptcy, if you’re dealing with credit card debt, it can take years and years to deal with it and it’ll be very expensive.
Americans and Debt
The kinds of debt Americans have now are credit cards, personal loans, business loans, medical debts, past due rent, and taxes. All of these kinds of debt are dischargeable under bankruptcy code.
If the individual has the means to make a settlement offer, they can also be settled outside of bankruptcy. Americans also have student loan debt as well as back income taxes incurred in the past three years, which are not dischargeable under bankruptcy code.
How Serious Should My Debt Be Before Seriously Considering a Bankruptcy?
It depends on the individual situation.
Let’s use another scenario as an example, consider “Terry”. He lived on a fixed income through social security[1], plus earnings from a part-time job. He also did not have any assets that could be sold to settle his credit card debt.
He made $30,000 a year and was $10,000 in debt – then, he was T-boned by another driver while working, which prevented him from working the part-time job and was replaced with worker’s compensation which was insufficient to meet his needs and continue to pay his debts.
Depending on how many creditors were part of the $10,000 debt, bankruptcy may be the easiest option for him. Terry had only one creditor so he followed our advice to call his creditor and offer the company $2,000 saying, “This is what I have to pay a bankruptcy attorney. But I’d prefer to pay you rather than filing for bankruptcy.”
The company didn’t take it, so Terry hired us and filed for bankruptcy. This meant that the creditor didn’t get anything. If the company had said yes, that would have been wonderful. He would have saved himself from having to hire a bankruptcy lawyer and filing a bankruptcy . . . and of course, Terry had the $2,000 to pay them.
Bankruptcy is a business decision. If Terry had instead made $150,000 and owed $150,000 in debt, we would have discussed his income and his expenses to see if he qualified to file. But Terry, even at this higher level of income, should have considered bankruptcy due to the amount of the debt and how hard it would be for him to settle it or to pay it back over time.
Everyone’s situation is different. The important thing to ask is, “Should I file for bankruptcy? And how would it benefit me?”
As I mentioned before, I’m an expert at assessing whether you qualify and which bankruptcy you qualify to file. Call me, John Lehr, Bankruptcy Law Attorney, to schedule an initial consultation to ask that question: (516) 550-5467.
Chapter 7 Bankruptcy: A Liquidation
A Chapter 7 bankruptcy is the most common type of bankruptcy for American consumers. It is commonly referred to as a liquidation. When this tye of case is filed, a trustee is appointed, and it’s their job to sell everything that the individual who files for bankruptcy owns, (that is, everything that is not exempt under state or federal laws). The proceeds are then used to pay unsecured creditors a portion of their debts.
There are different laws that protect certain assets within the bankruptcy code and within New York State’s debtor and creditor laws. A large majority of cases that are filed under Chapter 7 are referred to as “no-asset cases”, meaning that the debtor has no assets for the trustee to liquidate for the benefit of creditors. The creditors receive nothing in those cases.
In Austin’s example mentioned above, if he had transferred assets to a loved one before filing for bankruptcy or had repaid a family member, a certain creditor, etc. Those funds he or assets transferred might be subject to recovery – depending on the time period applicable under the bankruptcy code.
(I later discuss this under “what you should not do”.)
In Terry’s example, lets say he was able to file a personal injury lawsuit for the damage done by the driver that T-boned his car and the lawsuit resulted in a settlement, which would be partially or fully covered by the bankruptcy exemptions depending on the amount of the settlement.
But if his recovery from the personal injury settlement exceeded his exemptions, the trustee could use the portion above the exemptions to repay Terry’s creditors.
If Emily, Austin, or Terry had owned property that was outside of the exemptions that are provided for, that property would be sold and the money used to repay creditors.
But in each of these situations, it was wise of them to speak with a bankruptcy attorney who let them know whether they qualified to file, which bankruptcy chapter they qualified for, what that bankruptcy meant, what property was outside of the exemptions, and what were their risks.
Like you, Emily, Austin, and Terry considered whether it was worth it to file for bankruptcy and also considered whether it would make sense to settle the trustee’s claims (Chapter 7) rather than having property sold – because property does not always have to be sold.
In a Chapter 7 bankruptcy, when you have non-exempt property, you can make the trustee an offer and agree on terms to settle the claim or the liquidation. Outside of that, Chapter 7 bankruptcy results in a discharge that gets rid of all of your debts except for student loans, taxes that were incurred within the last three years, and other very specific types of debt that apply to a very small number of cases.
For more information on Bankruptcy Law in New York, a free initial consultation is your next best step. Get the information and legal answers you are seeking by calling (516) 550-5467.
[1] Social security income can’t be touched by creditors. Terry could have ignored his debt, but he wanted to take care of his credit and filed for bankruptcy.