Bankruptcy
I'm posting this as an FYI for interested parties. It's from a woman at the Illinois Coalition Against Domestic Violence (ICADV)--from the Economic Empowerment Program Director.
Bankruptcy
Many people see bankruptcy as a way to start over financially. Debt feels unmanageable and they believe that by declaring bankruptcy all of that debt will be wiped clean and they can begin anew. This idea of a “fresh start” can be especially appealing for survivors of domestic violence. However, in the last few years, the bankruptcy laws have changed and it is much more difficult to be granted Chapter 7 (“fresh start”) Bankruptcy. Likewise, filing can be expensive and there is the continued added cost of having a bankruptcy on your credit report for up to 10 years, which could make it more difficult to get access to good credit and interest rates.
While bankruptcy could be the best answer for some, it should be considered very carefully. If anyone is considering bankruptcy, she first needs to consult an attorney. Below is some very basic information about bankruptcy.
Bankruptcy: the Basics
The Bankruptcy Abuse Prevention & Consumer Protection Act of 2005 changed many of the laws about filing bankruptcy, making it more difficult to obtain Chapter 7 Bankruptcy, which allows for one’s debts to be cleared. If someone wishes to file for Chapter 7, she must now pass a Means Test to determine if she is eligible (if she is not, she may be required to file Chapter 13 Bankruptcy, which reorganizes her debt into a payment plan instead of erasing the debt). If most of her debt is consumer debt (i.e. credit cards), rather than business debt, the court may dismiss her claim.
The new law also requires applicants receive mandatory financial education in the six months before filing for bankruptcy. She must meet with an approved credit counselor (at a qualified not for profit agency) for at least a 90 minute session, as well as attend a money management/budgeting class. The person filing for bankruptcy must pay for these classes herself. However, the classes can be taken over the phone, in person, or over the internet.
Means Test - Which Type of Bankruptcy Do You Qualify for?
The means test has two parts.
1. First, the court will look at her income, calculate her living expenses, and determine if she can pay 25% of her “unsecured debt” (i.e. credit cards).
2. Second, her income will be compared with the median state income (this is about $72,000 for a family of four in Illinois).
If her income is greater than the median state income, she cannot file for Chapter 7. If her income is less than the state median, but the court determines that she can pay 25% of her unsecured debt (after deducting living expenses), she may have to file Chapter 13 instead.
Chapter 7 - Liquidation
Here is some basic information about how Chapter 7 works.
• First, all non-exempt property is surrendered to and liquidated (sold) by a trustee (she would have to pay a trustee appointed by the court)
o Property classified as non-exempt, will not be sold to pay debts. It is thought that the person needs these items to live. This includes: clothes, household goods, older car (but a newer car could be sold off to pay debts).
• Second, the cash from the sale of these items distributed to creditors.
• Third, any remaining debts are liquidated; meaning that they are cleared.
• Student loans, spousal support, child support and some taxes are not included in bankruptcy. She will still have to pay these debts as they were originally agreed.
• The right of secured creditors to their collateral continues even if debt is discharged, meaning that those creditors can still claim your car, house, ect.
• Chapter 7 relief is only available every 8 years and stays on your credit report for up to 10 years.
Chapter 13 - Reorganization Bankruptcy
Chapter 13 is a bit simpler, but does not discharge the debt. Instead, it helps her create a payment plan to reduce the debt owed. In Chapter 13, the original debtor retains ownership of her assets. Nothing is sold off to pay creditors. Instead, a portion of her future income over the next three to five years will be devoted to paying her debts. The amount she pays per month and the number of years she must pay will vary depending on the value of her property, her income and her expenses.
Bankruptcy - the Costs
The cost of filing bankruptcy will vary depending on the type of bankruptcy she is filing for and how much she has to pay her attorney. Payment is typically due at time of filing; permission may be given to pay in installments. The Courts may waive this fee if her income is at or below 150% of the poverty line. Here are examples of what it may cost.
Chapter 7
$200 (case filing fee)
$39 (misc. admin fee)
$15 (trustee charge)
$245 + attorney fees
Chapter 13
$150 (case filing fee)
$39 (misc. admin fee)
$189 + attorney fee
She must also keep in mind that there is an added cost of decreased access to resources. The bankruptcy could result in higher interest rates on loans and credit cards, being denied access to some forms of credit, or having to pay more fees.
Planning for Bankruptcy
Anyone planning for bankruptcy should create a plan to help herself through the process. Again, she should consult a lawyer before making any final decisions. She may also need to look at saving up a little money for the filing fees and the attorney fees.
Safety Considerations
She should be helped to consider whether there are safety concerns if she files for bankruptcy. What will her partner or former partner do if he or she learns that she has filed for bankruptcy? She will need to ask herself these questions before filing; she may also want to create a safety plan for herself.
Strategize with women to obtain a secure credit card
Most likely, all of her credit cards will be included in her bankruptcy filing. She may want to obtain a secured credit card before filing for bankruptcy. While the limit on this card is only as high as the amount of money she puts down as a deposit, the card will continue to be a positive item on her credit report as long it remains in good standing.
Look at woman’s long term goals - how will having a bankruptcy on her credit report impact her goals?
A Bankruptcy stays on her credit report for ten years and will affect her access to credit during that time. What are her goals for the next ten years and beyond? Talk with her about how bankruptcy may affect those goals.
Consult with attorneys in your area
Is there an attorney in your area that would be willing to answer some questions program advocates have? It could be good to have a legal ally as you help women think about bankruptcy.
LEARN MORE
This is only a basic description of Chapter 7 and Chapter 13 bankruptcy. For more details and more information, see the following resources.
National Consumer Law Center, (2006). Guide to Consumer Rights for Domestic Violence Survivors; “Chapter 8: Bankruptcy Basics”, pages 57-70. (Each ICADV member program has 2 copies of this book).
Sahadi, J. (2005). The new bankruptcy law and you. CNN Money. http://money.cnn.com/2005/10/17/pf/debt/bankruptcy_law
www.bankruptcyaction.com
www.totalbankruptcy.com (law updates)
www.uscourts.gov
Bankruptcy
Many people see bankruptcy as a way to start over financially. Debt feels unmanageable and they believe that by declaring bankruptcy all of that debt will be wiped clean and they can begin anew. This idea of a “fresh start” can be especially appealing for survivors of domestic violence. However, in the last few years, the bankruptcy laws have changed and it is much more difficult to be granted Chapter 7 (“fresh start”) Bankruptcy. Likewise, filing can be expensive and there is the continued added cost of having a bankruptcy on your credit report for up to 10 years, which could make it more difficult to get access to good credit and interest rates.
While bankruptcy could be the best answer for some, it should be considered very carefully. If anyone is considering bankruptcy, she first needs to consult an attorney. Below is some very basic information about bankruptcy.
Bankruptcy: the Basics
The Bankruptcy Abuse Prevention & Consumer Protection Act of 2005 changed many of the laws about filing bankruptcy, making it more difficult to obtain Chapter 7 Bankruptcy, which allows for one’s debts to be cleared. If someone wishes to file for Chapter 7, she must now pass a Means Test to determine if she is eligible (if she is not, she may be required to file Chapter 13 Bankruptcy, which reorganizes her debt into a payment plan instead of erasing the debt). If most of her debt is consumer debt (i.e. credit cards), rather than business debt, the court may dismiss her claim.
The new law also requires applicants receive mandatory financial education in the six months before filing for bankruptcy. She must meet with an approved credit counselor (at a qualified not for profit agency) for at least a 90 minute session, as well as attend a money management/budgeting class. The person filing for bankruptcy must pay for these classes herself. However, the classes can be taken over the phone, in person, or over the internet.
Means Test - Which Type of Bankruptcy Do You Qualify for?
The means test has two parts.
1. First, the court will look at her income, calculate her living expenses, and determine if she can pay 25% of her “unsecured debt” (i.e. credit cards).
2. Second, her income will be compared with the median state income (this is about $72,000 for a family of four in Illinois).
If her income is greater than the median state income, she cannot file for Chapter 7. If her income is less than the state median, but the court determines that she can pay 25% of her unsecured debt (after deducting living expenses), she may have to file Chapter 13 instead.
Chapter 7 - Liquidation
Here is some basic information about how Chapter 7 works.
• First, all non-exempt property is surrendered to and liquidated (sold) by a trustee (she would have to pay a trustee appointed by the court)
o Property classified as non-exempt, will not be sold to pay debts. It is thought that the person needs these items to live. This includes: clothes, household goods, older car (but a newer car could be sold off to pay debts).
• Second, the cash from the sale of these items distributed to creditors.
• Third, any remaining debts are liquidated; meaning that they are cleared.
• Student loans, spousal support, child support and some taxes are not included in bankruptcy. She will still have to pay these debts as they were originally agreed.
• The right of secured creditors to their collateral continues even if debt is discharged, meaning that those creditors can still claim your car, house, ect.
• Chapter 7 relief is only available every 8 years and stays on your credit report for up to 10 years.
Chapter 13 - Reorganization Bankruptcy
Chapter 13 is a bit simpler, but does not discharge the debt. Instead, it helps her create a payment plan to reduce the debt owed. In Chapter 13, the original debtor retains ownership of her assets. Nothing is sold off to pay creditors. Instead, a portion of her future income over the next three to five years will be devoted to paying her debts. The amount she pays per month and the number of years she must pay will vary depending on the value of her property, her income and her expenses.
Bankruptcy - the Costs
The cost of filing bankruptcy will vary depending on the type of bankruptcy she is filing for and how much she has to pay her attorney. Payment is typically due at time of filing; permission may be given to pay in installments. The Courts may waive this fee if her income is at or below 150% of the poverty line. Here are examples of what it may cost.
Chapter 7
$200 (case filing fee)
$39 (misc. admin fee)
$15 (trustee charge)
$245 + attorney fees
Chapter 13
$150 (case filing fee)
$39 (misc. admin fee)
$189 + attorney fee
She must also keep in mind that there is an added cost of decreased access to resources. The bankruptcy could result in higher interest rates on loans and credit cards, being denied access to some forms of credit, or having to pay more fees.
Planning for Bankruptcy
Anyone planning for bankruptcy should create a plan to help herself through the process. Again, she should consult a lawyer before making any final decisions. She may also need to look at saving up a little money for the filing fees and the attorney fees.
Safety Considerations
She should be helped to consider whether there are safety concerns if she files for bankruptcy. What will her partner or former partner do if he or she learns that she has filed for bankruptcy? She will need to ask herself these questions before filing; she may also want to create a safety plan for herself.
Strategize with women to obtain a secure credit card
Most likely, all of her credit cards will be included in her bankruptcy filing. She may want to obtain a secured credit card before filing for bankruptcy. While the limit on this card is only as high as the amount of money she puts down as a deposit, the card will continue to be a positive item on her credit report as long it remains in good standing.
Look at woman’s long term goals - how will having a bankruptcy on her credit report impact her goals?
A Bankruptcy stays on her credit report for ten years and will affect her access to credit during that time. What are her goals for the next ten years and beyond? Talk with her about how bankruptcy may affect those goals.
Consult with attorneys in your area
Is there an attorney in your area that would be willing to answer some questions program advocates have? It could be good to have a legal ally as you help women think about bankruptcy.
LEARN MORE
This is only a basic description of Chapter 7 and Chapter 13 bankruptcy. For more details and more information, see the following resources.
National Consumer Law Center, (2006). Guide to Consumer Rights for Domestic Violence Survivors; “Chapter 8: Bankruptcy Basics”, pages 57-70. (Each ICADV member program has 2 copies of this book).
Sahadi, J. (2005). The new bankruptcy law and you. CNN Money. http://money.cnn.com/2005/10/17/pf/debt/bankruptcy_law
www.bankruptcyaction.com
www.totalbankruptcy.com (law updates)
www.uscourts.gov