What Is Bankruptcy?

If you get too deep in debt, your income collapses, or you experience a major life crisis, you may need to consider bankruptcy.

It’s a difficult process, but it may be necessary if you see no way out of your current debt problems.

You’ll have credit issues to deal with after the fact. But it may be more important to get out from under the immediate crisis and work through the credit fallout later.

Table of Contents:

  • Most Common Types of Bankruptcy
  • Other Types of Bankruptcy
  • Should I File For Bankruptcy?
  • Are There Steps I Can Take Before Bankruptcy?
  • What To Know About Filing Bankruptcy
  • What Type of Bankruptcy is Best For Me?
  • How Long a Bankruptcy Stays on Your Credit Report
  • Removing a Bankruptcy from Your Credit Report
  • Credit Repair After Bankruptcy
  • Bankruptcy Explanation Letter

The Most Common Types of Bankruptcy

More than anything else, bankruptcy is intended to be a fresh start for consumers, small businesses, corporations, and even municipalities. Sometimes a fresh start is exactly what you need.

There are three primary types of bankruptcy that apply to individuals.

Each type of consumer bankruptcy is structured differently and has its own nuances. Let’s discuss all three.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is sometimes referred to as total bankruptcy.

That’s because all your debts are legally eliminated through the bankruptcy proceedings.

In most cases, you’ll work with a bankruptcy attorney who will file the necessary paperwork with the bankruptcy court.

After several months, the discharge will be issued.

As soon as you file for a Chapter 7 bankruptcy process, the law will impose an automatic stay, preventing most of your creditors from taking further collection action.

This means they won’t be able to put a lien on your house, seize your bank account, or garnish your wages.

If that sounds too simple, it’s because it is.

Chapter 7 bankruptcy is also called liquidation bankruptcy because the court-appointed trustee can seize your assets to use as a partial repayment to your creditors.

So while you may get out of debt in just a few months, you may still lose substantial assets in the process.

However, each state lets you protect a certain dollar value in specific assets from bankruptcy liquidation. Your exemptions and their dollar amounts depend on the bankruptcy laws of your state.

For example, California lets its citizens retain up to $75,000 in owner-occupied real estate equity if you’re single and up to $150,000 for families.

The exemptions tend to be higher if you’re a senior citizen or disabled. You can also exempt automobile equity up to $1,900, and up to $2,000 in bank deposits from Social Security.

Other states, like New York, let you choose federal exemptions if you prefer, though you could also choose the state exemptions if they better suit your needs.

Typically, employer-sponsored retirement plans are typically exempt, and most states also shield individual retirement accounts (IRAs) as well.

Any amounts you have in excess of state (or federal) exemption limits can be seized by the bankruptcy court and used to pay your debtors. Non-exempt assets often include second homes, investment properties, and taxable investment accounts, among other assets.

Filing for Chapter 7 Bankruptcy

Filing fees for Chapter 7 bankruptcy protection can range from a few hundred to a few thousand dollars, depending on the complexity of your case. You’ll not be able to discharge these fees in the bankruptcy.

There are limitations to Chapter 7 bankruptcy.

For example, you won’t be able to file if you previously filed for bankruptcy within the past six to eight years. Your eligibility will also be based on your ability to repay.

If you have sufficient income left over after paying your necessary living expenses, and it’s considered enough to pay off a large amount of your debt, you may be required to file Chapter 13 bankruptcy instead.

You should also be aware that bankruptcy does not discharge all debts.

Obligations such as child support, tax debts, and student loans cannot be discharged in bankruptcy unless the bankruptcy court determines there are extenuating circumstances.

Also, if a creditor can show you took a loan based on fraudulent information, it may be excluded from the discharge.

Not everyone can qualify for Chapter 7 bankruptcy.

United States courts will administer the Chapter 7 means test to see whether you could repay your debts by restructuring them instead of dissolving them.

The means test compares your income to the median income over the past six months prior to bankruptcy filing. If you earned less than the median income during that period, you can file Chapter 7 bankruptcy in federal court.

Chapter 11 Bankruptcy

Chapter 11 bankruptcy is commonly referred to as reorganization bankruptcy in U.S. courts.

That’s because it allows for the reorganization of the debtor’s business and financial affairs, including debts and assets. It’s typically filed by corporations looking for protection from creditors, and to give them time to restructure their debts.

It’s more similar to Chapter 13 because it doesn’t discharge the debtor’s obligations; it simply gives them time to improve their situation.

Because filing bankruptcy through Chapter 11 is more complicated than filing personal bankruptcy, it’s much more expensive to bring about.

Chapter 11 allows the business to continue operating during bankruptcy proceedings. Many large companies have used this form of bankruptcy to reorganize their debts and survive the bankruptcy intact.

To begin the process, the business will propose a reorganization plan. It may include reducing business operations and expenses, as well as renegotiating certain debts.

The business may even obtain an entirely new financing arrangement as part of the bankruptcy plan. They can also propose liquidating certain assets for payment of obligations. If the creditors are unsatisfied with that plan, they can offer an alternative plan.

In most cases, Chapter 11 is filed by corporations, partnerships, and limited liability companies. However. it is available for personal bankruptcy for those who have an excessive amount of debt or don’t qualify for either Chapter 7 or 13.

Like I said above, the business can keep operating during bankruptcy. However, bankruptcy cases involving fraud, other criminal activity, or gross incompetence may prompt a court to appoint a bankruptcy trustee to run the business during the proceedings.

If that happens, the business will not be able to make certain decisions without court approval. This may include the sale of assets, entering in new business arrangements, or terminating existing ones.

Chapter 13 Bankruptcy

Chapter 13 is a form of consumer bankruptcy that involves a repayment plan. The plan will be based on your income still available after paying the necessary living expenses.

The term of the repayment is normally between three years and five years, though it’s possible to pay it off in less time.

The main advantage of Chapter 13 bankruptcy is that you will not be forced into the liquidation of your assets. Chapter 13 is typically available only if you have a regular income, such as a steady salary.

There are also limits on the amount of debt you can owe to qualify. For example, if it’s clear you won’t be able to pay off a significant amount of debt within the five-year term, based on the income you have available, you’ll most likely be put into Chapter 7.

Chapter 13 bankruptcy does impose a hierarchy on debts. Certain debts referred to as priority claims, must be fully included in the payment plan. These include child support, alimony, and most tax debts.

Secured debts, like a mortgage or car loan, will need to be included if you want to keep those assets.

Unsecured debt will be paid out of what remains after the payment portion for priority debts and secured debts are covered.

These include credit cards, medical debts, and other unsecured obligations. It isn’t even necessary that you’ll be able to pay off the entire unsecured balances, or even any at all.

Though you’ll be able to protect most of your assets from the liquidation using Chapter 13, it will generally require several years of making monthly payments.

And as long as you’re in the payment plan, it will be more difficult to secure new credit going forward.

Other Different Types of Bankruptcy

While Chapter 7 and Chapter 13 are the most common types of bankruptcy in the United States, there are many types of bankruptcy that can apply to a variety of scenarios.

We’ve already discussed Chapter 11 above, but here are some other important but lesser-known forms of bankruptcy code:

Chapter 9

Chapter 9 bankruptcy applies to cities or towns. This type of bankruptcy protects municipalities from creditors while a city develops a plan to deal with its debt.

A city may file for Chapter 9 if an industry closes and people leave to find work in other cities. The most well-known example of a city filing for Chapter 9 is Detroit, which is the largest city to ever file for Chapter 9 bankruptcy.

More recently, Fairfield, Ala., filed for bankruptcy protection under federal law after a Walmart distribution center closed.

Other cities and counties have lost revenue during the Covid-19 pandemic and have been considering Chapter 9 bankruptcy proceedings.

Chapter 12

Chapter 12 bankruptcy allows family farmers to propose a plan to repay all or part of their existing debts. This form of bankruptcy is very similar to Chapter 11 because the farmer is allowed to remain operational while making payments to lower debt.

Because of the seasonal nature of these professions, allowances are made for when a person can make payments on their debt. However, all payments must be completed within five years of filing.

There are restrictions for who can qualify for Chapter 12 based on annual salary as a farmer. Your debt cannot exceed $4.03 million for farmers or $1.87 million for fishermen.

Chapter 15

Chapter 15 bankruptcy is a fairly obscure form of bankruptcy that involves debtors with debts in the United States and abroad. It is a way for foreign creditors to gain access to the US Bankruptcy Courts and sue their debtor for repayment.

These cases typically start as insolvency cases in foreign countries and make their way back to the United States court system.

This is a fairly recent addition to the bankruptcy code. It was added as a part of the Bankruptcy Abuse Prevention and Consumer Protection Act in 2005.

Should I File for Bankruptcy?

Filing bankruptcy is often treated as a last resort when it comes to handling overwhelming debt.

Below are some examples of circumstances in which filing for bankruptcy may be necessary.

You’ve Been Unemployed For Some Time

Just losing your job is not a reason to file for bankruptcy. However, if you have been unemployed for an extended period of time and have no prospects for a regular income in the near future, it may be time to consider filing Chapter 7.

Your Home is Nearing Foreclosure

Filing for bankruptcy can issue a stay on any collections or foreclosure activity which means that creditors cannot continue to harass you for bill payment or repossess your home.

However, bankruptcy cannot prevent creditors from repossessing the property if there is a lien agreement already in place.

A lien states that a creditor can repossess the property if you fail to make payments on time. Consult a professional if you are unsure if a creditor has a lien on your home or car.

You Have Substantial Unpaid Medical Bills

One of the most common reasons that people file for bankruptcy is overwhelming medical bills.

Filing for Chapter 7 or Chapter 13 can help alleviate debt from unpaid medical bills.

You Have Pending Lawsuits for Unpaid Debt

When creditors aren’t getting paid even after consulting a collection agency, they may turn to lawsuits.

Bankruptcy will stop creditors from continuing collections activities, but it will not help with any court fees.

It is best to file for bankruptcy before creditors pursue court action to avoid accumulating any legal costs.

Your Wages Are Being Garnished

Wage garnishment is usually the result of a creditor successfully suing you for payment. Filing for bankruptcy will stop all your wages from being garnished and can even help you to get some of your garnished wages back.

You’re 90 Days Overdue On All Your Debts

There are certain conditions that determine your eligibility to file for bankruptcy. Most courts will require that you be at least 90 days overdue on all your debts in order to file for Chapter 7 and Chapter 13.

Otherwise, your circumstance may not be seen as dire enough to file bankruptcy.

Are There Steps I Can Take Before Filing Bankruptcy?

It can be difficult to determine if bankruptcy is your best option. Based on some of the situations listed above, you may decide your situation is not severe enough to warrant bankruptcy.

Even if you think your finances are too overwhelming to ever gain control, there are certain steps you can take to help regain control of your circumstances.

Negotiate With Creditors

When you file for bankruptcy, any debt that remains unpaid after filing is dismissed by the court.

Creditors would rather negotiate with you than have the debt discharged. Try negotiating with your creditors to set up a reasonable payment plan based on your income and assets.

Credit Counseling

If you cannot successfully negotiate with your creditors, you may seek the assistance of a consumer credit counselor.

Credit counseling involves a consumer credit counselor negotiating lower interest rates and monthly payments with creditors.

Typically, a judge will require you to attend credit counseling for a certain period of time before filing for bankruptcy.

If you feel like your finances are headed in that direction, it is definitely worth a shot.

What Should I Know About Filing Bankruptcy?

Once you decide it is time to file for bankruptcy, it is important to file properly and be cognizant of the consequences.

Below are some filing bankruptcy basics.

Hire an Attorney

An attorney can help you navigate the bankruptcy process. Bankruptcy laws are complicated, and you’ll need a professional to represent you.

Attorney fees typically cost anywhere from $2,000 to $4,000. This may seem expensive, but it is better than accumulating penalties and fees by filing incorrectly.

Plus, your bankruptcy lawyer can save you a ton of money by helping you protect assets that are not non-exempt property.

Bankruptcy Will Affect Your Credit

Bankruptcy filings stay on your credit report for seven to ten years.

Your score can be affected anywhere from 50 to 200 points, depending on how high your credit score already is.

This will impact your ability to qualify for certain loans and low-interest rates far into the future. I’ll share some strategies for recovering and compensating for this problem below.

Get a Free Copy of Your Credit Report

It Will Become Public Record

While bankruptcy affects your credit for only a certain period of time, it will remain on your public record indefinitely.

Future lenders will know if you have declared bankruptcy in the past and can make decisions based on this.

However, employers cannot terminate you based on your bankruptcy status.

There Is a Fee of About $300

With attorney fees and property liquidation, this fee may feel like salt in the wound.

However, the fee can be waived if your household income is less than 150 percent of the poverty lines.

What Type of Bankruptcy Is Best For Me?

If you are dealing with personal debt, Chapter 7 or Chapter 13 are likely your best options.

These are the most common filings for credit card debt, medical bills, personal loans, or periods of unemployment.

You should consider filing Chapter 7 if you are unable to make monthly payments and have few assets that could be subject to liquidation.

Chapter 13 restructuring is ideal if your debt does not exceed the limit set by the court and you have a consistent income.

Before filing for bankruptcy, consult a professional who is familiar with the bankruptcy code.

An attorney, for example, can help you identify which type of bankruptcy best fits your financial circumstance.

How Long Does a Bankruptcy Stay on Your Credit Report?

According to myFICO.com, a bankruptcy will remain on your credit report for seven years after the completion of Chapter 13, and for 10 years after the completion of Chapter 7.

That may seem like a long time, but the impact of the entry on your credit report will decline over time. Certainly, the greatest negative impact will be within the first two years.

But after that, your credit score should begin to improve – as long as you begin taking new credit and making your payments on time.

As each year passes, your credit score should improve a little bit more – even though the bankruptcy is still showing on the report.

For example, the negative impact will be less five years after discharge than it will be after two years. When it comes to bankruptcy and your credit report, patience truly is a virtue.

You could help yourself with a secured credit card during this time. It’ll prove you can make regular payments without a lender putting any money on the line for you.

Just be aware some creditors have a “no bankruptcy” policy. Even if your bankruptcy was discharged several years ago, and your credit score has improved significantly, they may still decline your application.

Wherever possible, you should determine if a lender has this policy before making an application.

Removing a Bankruptcy From Your Credit Report

Since a bankruptcy appears on your credit report as a public record (from the court), the only way to remove the bankruptcy from your credit report is to wait until the necessary seven or 10 years have passed.

If you’re approached by a credit repair company that claims they can remove it from your report, it’s a bogus company.

The only time a bankruptcy entry can be removed from your credit report is if it appears in error.

That’s a possibility if you have a common name, like John Smith, or if someone in your family with the same name filed for bankruptcy.

If that happens, you’ll need to contact each of the three credit repositories – Experian, TransUnion, and Equifax – and dispute the entry.

They’re required by law to investigate your claim and will remove the entry if more specific information, like your Social Security number, doesn’t match with the actual bankruptcy case.

Credit Repair After Bankruptcy

So much of the benefit of bankruptcy depends on what you do to repair your credit after bankruptcy. You’ll need to begin gradually rebuilding your credit, but be careful.

There are lenders who specifically target people coming out of bankruptcy. They do this because they know that such people are anxious to begin rebuilding their credit.

But also because they know once you file for bankruptcy, you won’t be able to do it for several more years. That will prevent you from discharging a loan from that creditor for many more years.

The problem is that many of these companies are predatory. They’ll charge very high-interest rates, high fees, or a combination of both.

While you may be anxious to begin rebuilding your credit, these lenders are mostly interested in exploiting your situation for high income. Don’t fall for it, there are better ways.

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Secured Credit Cards and Credit Builder Loans to the Rescue

In most cases, the best ways are to open either a secured credit card or what’s known as a credit builder loan.

There are specialized credit card lenders, as well as a very few banks and credit unions, that offer secured credit cards.

In most cases, you’ll need to open a savings account, and the amount of your credit line will be equal to the balance in the account. For example, with a $500 savings account, you’ll be issued a credit card with a $500 credit line.

There are a few specialized lenders that will even approve a credit card with a small credit line with a deposit that’s less than the credit line.

For example, you may be issued a credit limit of $200 for a deposit of $50 or $100. The downside of this type of card is that the credit limits are low, generally no more than $300. They also charge high annual fees, ranging between $75 and $100.

In either case, you’ll be issued a credit card that works like any other when you shop online or with a retailer. Your payments will be reported to all three credit bureaus, giving you an opportunity to build new, good credit.

This will be important to offset the bankruptcy entry on your report. The more good credit you have, the higher your credit score will go.

Credit Builder Loans

A credit builder loan can be even more effective than secured credit cards, particularly if you have no money. They’re offered by many banks and credit unions – in fact, they’re becoming steadily more common across the industry.

Basically, you apply for a loan, say $1,000. Even though you have a very low credit score as a result of the bankruptcy, the bank approves the loan.

But instead of giving you the funds, they’re deposited into a savings account. The monthly payments are then automatically withdrawn from the savings account to pay the loan, guaranteeing on-time repayment. Loan terms are usually between 12 and 18 months.

Once the credit builder loan is paid, not only will you have a perfect payment history on the loan, but you’ll also have a paid-off loan post-bankruptcy. That’s one of the strongest credit entries you can have on a credit report. And all of that will be reported to the three credit bureaus.

If you can get two or three of these loans in place as soon as possible after your bankruptcy discharge, you’ll be able to rebuild your credit score pretty quickly.

Best of all, the whole process will take place out of sight. Since the bank will be making automatic withdrawals from the savings account to pay the loan, you won’t have to worry. In most cases, the most it’ll cost you is maybe $50 or $100 for the interest on the loan.

Bankruptcy Explanation Letter

Should you file for bankruptcy, you’ll need to have a bankruptcy explanation letter prepared as soon as possible.

Anytime you apply for credit – or even for a job or an apartment – you’ll need to be ready to submit that letter.

A good bankruptcy explanation letter will explain the reasons why you filed for bankruptcy.

Your challenge will be to make it clear the bankruptcy resulted from a one-time event, such as a job loss, business failure, divorce, or health-related issue.

The letter will also need to convince the reader you’ve overcome the problem and will be highly unlikely to be in a similar credit position in the future.

For example, if the coronavirus pandemic wrecked your small business, you can cite this factor.

With a convincing bankruptcy explanation letter and two or three good credit references on your credit report, you should begin making steady progress in rebuilding your credit going forward.

How To Remove A Bankruptcy From Your Credit Report

A bankruptcy will be automatically deleted from your credit report in either 7 or 10 years from the bankruptcy filing date, depending on what chapter you file.

A Chapter 7 bankruptcy will be deleted in 10 years because, in this case, none of the debt is repaid. A Chapter 13 bankruptcy is cleared in 7 years since the debt is partially repaid.

Removing a bankruptcy from your credit report early can be a very difficult process (as you can imagine), but it is possible to do if you follow the steps I’ve outlined in this article.

Please keep in mind that this may or may not work. Your individual situation will ultimately determine if it’s possible to get a bankruptcy removed from your credit report.

Another thing I want to suggest before we get started is that you sign up for a credit monitoring service if you don’t have one already. You’ll need to monitor your credit reports closely while you’re going through these steps, so it’s pretty much a must have.

How Can I Remove A Bankruptcy From My Credit Report Early?

Here are 5 steps to remove a bankruptcy from your credit report:

  1. Check Your Credit Report For Bankruptcy Errors
  2. Dispute Inaccurate Bankruptcy Entries with a Credit Dispute Letter
  3. Send A Procedural Request Letter to The Credit Bureaus
  4. Ask The Courts How The Bankruptcy Was Verified
  5. Have a Professional Remove The Bankruptcy

1. Check Your Credit Report For Bankruptcy Errors

In this step, you’ll need a copy of all 3 of your credit reports.

This is where having a credit monitoring service comes in handy. TransUnion is the best credit monitoring service in my opinion, plus you get a free credit score.

The first thing you’ll want to do is look over the bankruptcy entry on your credit reports very closely for any errors.

2. Dispute Inaccurate Bankruptcy Entries With A Credit Dispute Letter

With a Credit Dispute Letter, what you’re looking for is anything that’s inaccurate. If you find inaccuracies, then promptly dispute the bankruptcy entry with the credit bureaus.

The best case scenario is that they’ll be unable to verify the bankruptcy and remove it from your credit report. This is unlikely if it’s a recent bankruptcy. The older the bankruptcy, the better chances you have of getting it removed from your credit report this way.

Nonetheless, if it happens, then great, you can skip the other steps. If the bankruptcy is verified by the credit bureaus continue to the next step.

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3. Send A Procedural Request Letter To The Credit Bureaus

If the bankruptcy is verified by the credit bureaus, you will next need to send them a procedural request letter asking them who they verified the bankruptcy with.

More than likely the credit bureaus will respond and claim that they verified it with the courts.

This is more than likely not true because in most cases it’s my understanding that the courts do not verify bankruptcies for the credit bureaus.

4. Ask The Courts How The Bankruptcy Was Verified

Next, as you might have guessed, you will need to contact the courts that were specified by the credit bureaus.

Ask them how they went about verifying the bankruptcy. They will probably say they didn’t verify anything. Ask for that statement in writing.

After you receive the letter, mail it to the credit bureaus and demand that they immediately remove the bankruptcy as they knowingly provided false information and therefore are in violation of the Fair Credit Reporting Act. If all goes well, the bankruptcy will be removed.

Again, this process can be extremely difficult and time consuming, and there is no guarantee that it will even work. Nonetheless, it might be worth a try if you’re up for it.

5. Have A Professional Remove The Bankruptcy

If you’re the type of person who would rather have a professional handle the ins and outs of your credit repair process, I suggest you check out Lexington Law Credit Repair.

Ask Lex Law for Help

How To Rebuild Credit After Bankruptcy

Our cultural DNA demands we never give up on repaying our debt.

So filing for bankruptcy — asking someone else for help with our debt — can feel like the end of a long road of personal finance failures.

But there’s another way to look at bankruptcy: as a fresh start, as the first step on a new road to financial independence.

If you’ve reached a junction in your financial life and you’re considering bankruptcy, be sure to plan ahead so you can start rebuilding your credit after bankruptcy.

Rebuilding Credit After Bankruptcy

Sure, you’ll be relieved to be out of debt when your bankruptcy process is complete, but you’ll have to deal with a new challenge: credit repair.

Chapter 7 Bankruptcy will be part of your credit history for 10 years; Chapter 13 Bankruptcy stays on your credit report for seven years.

Lenders will see the bankruptcy in your credit profile and immediately decline your application for car loans, mortgage loans, and personal loans.

Your financial life will be harder: With bad credit, you’d need to pay cash upfront for large purchases. Public utilities would require an upfront security deposit; you’d probably need a pre-paid cellphone plan.

You could get some credit if a family member agrees to serve as a co-signer. Even then, some lenders don’t allow co-signers.

Steps To Rebuild Credit After Bankruptcy

With a bankruptcy filing in your credit history, lenders won’t trust you.

So can you do anything to help your personal finances after bankruptcy? Do you just have to wait for the bankruptcy filing to age off your credit report?

Yes, you can start rebuilding good credit even within the shadow of a bankruptcy discharge.

You likely won’t see immediate results in your credit score, but you’ll still be paving the road to a brighter future by taking these steps.

  • Step 1: Check Your Credit Report for Accuracy
  • Step 2: Create a Sustainable Budget
  • Step 3: Apply for Special Types of Credit

When the bankruptcy does age off, you’ll be set up for success.

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Step 1: Check Your Credit Report for Accuracy

First things first: Make sure the old debts on your credit report are built into your bankruptcy discharge and not listed as current debt.

If the old debt continues to be listed as current, it’ll keep haunting you, extending your period of bad credit and undermining the fresh start your bankruptcy should provide.

Wait 30 days after your bankruptcy discharge and then get a free credit report from each of the three credit bureaus, Experian, Equifax, and TransUnion.

You can get a free copy of each bureau’s report from annualcreditreport.com. (Typically you’d get one free copy a year but through April of 2021 you can get a free credit report each week.)

If you see old, discharged debt listed as current debt, start sending dispute letters right away. You shouldn’t have any problem getting this inaccurate information removed.

As you know, your bankruptcy won’t discharge all your debt. Student loan accounts, for example, will remain active. Be sure to keep these accounts up to date by making timely payments.

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Step 2: Create a Sustainable Budget

In Step 1 you confirmed your bankruptcy filing is doing its job by hitting the reset button on your old debt. Next, it’s time to focus on building a sustainable personal finance life so you’ll be all set once your credit report is free of bankruptcy filings.

Yes, unexpected problems will arise to wreck our best financial plans, but that’s actually a good reason to develop better budgeting habits. That way you’ll be better prepared when the unexpected happens again.

So make a realistic budget — one you can actually live by. Leave some room for real life expenses like eating out once in a while. Budgeting works best when you follow your spending plan week after week and month after month.

You should start a savings account and set up automatic deposits every time you get paid. High yield savings accounts pay higher interest rates than the savings accounts at local bank and credit union branches.

Try to save up enough money to pay for three months worth of living expenses.

Having less access to available credit — especially credit card accounts — can work in your favor during this rebuilding phase of your financial life.

Step 3: Apply for Special Types of Credit

Once you’re comfortable with your budget and prove to yourself you can live within a spending plan, it is time to start rebuilding your credit life again.

You can’t improve your credit score without having active credit accounts. But you can’t open credit accounts without a serviceable credit score.

So how do you solve this Catch-22? Should you wait until the bankruptcy filing ages off your credit report?

You don’t have to. You can find special credit accounts to jump-start the process:

  • Secured Credit Cards: A special credit card account that you back yourself.
  • Credit builder loans: A special kind of loan that you use only to build your credit.
  • Loans with a co-signer: A family member or friend can back you up so you can open a new line of credit or credit card account.
  • Becoming an authorized user: You can use someone else’s credit account to improve your repayment history a little.

Here’s some more information about these special accounts:

SECURED CREDIT CARDS

When you get a secured credit card, you’re the lender and the borrower. You have to deposit a lump sum, such as $500, into the credit card account. Then you can use the card as you would an unsecured card.

You’ll have a low credit limit, high fees, and no borrowing power. But you’ll also get a chance to make on-time payments to a credit card company on a regular basis. Payment history is a huge chunk — about 35 percent — of your FICO score.

You’ll have to pay an annual fee, but it’ll be worth it when the credit reporting agencies see your good financial decisions.

I suggest setting up automatic payments so you don’t forget to make the monthly payment. MIssing payments would undermine the entire point of a secured credit card.

CREDIT BUILDER LOANS

A lot of banks and credit unions offer credit builder loans. You “borrow” an amount that goes directly into a savings account.

You never access the money, but you’ll be making timely payments. In fact, the bank will set up automatic payments so you’ll never make a late payment. The payments will come from the savings account.

Over time this kind of loan can build up your credit history because the credit reporting agencies will see your consistent monthly payments.

LOANS OR CREDIT CARDS WITH A CO-SIGNER

You can build a more stable credit history by asking a family member to co-sign on a car loan or a credit card account. Your credit report will reflect this new credit account which can help your score.

The family member or friend who co-signs will be taking a chance on you. He or she would be responsible for your credit card balances if you defaulted.

So be sure to make regular, on-time payments on this new credit card or loan. Better yet: Pay off the balance every month.

The major credit bureaus will see your improving repayment history and low credit utilization ratio, and you’ll be further along the road to good credit.

BECOMING AN AUTHORIZED USER ON SOMEONE’S ACCOUNT

As an authorized user on someone else’s credit card account, you could possibly help your credit score a little — but not as much as you could with an account of your own.

Not all creditors report the activity of authorized users of accounts. So don’t count on this strategy by itself.

Monitoring Your Credit Score after Bankruptcy

It’s easy enough to forget about your credit score after a bankruptcy, but it’s essential to monitor your credit score during this time.

Fortunately, it’s easier than ever to monitor your score. You can use a free credit monitoring service like Credit Sesame or Credit Karma.

These apps will show you credit card offers, that’s how they make money. But you don’t have to respond to them; in fact, you likely wouldn’t be approved for a new credit account anyway if you’ve just filed bankruptcy.

These apps won’t show your official FICO score, but you can use them to see trends. If your credit score drops significantly, get a copy of your free credit report at annualcreditreport.com to see what’s going on.

Credit Report Basics: How to Build a Better Score

Sooner or later your Chapter 7 or Chapter 13 Bankruptcy will be a distant memory.

When that happens, your credit score will bounce back, especially if you’ve laid a solid foundation in the years after filing bankruptcy.

To achieve a good or excellent credit score, pay attention to:

  • Payment History: Using your secured credit card or credit-builder loan to establish a consistent repayment history is the single most important thing you can do to breathe new life into your credit score.
  • Credit Utilization Ratio: Keeping your credit balances paid off — or at least paid down to 30 percent of your available credit — will help your credit score recover more quickly. It’s OK if it takes you a while to open enough accounts to achieve a good credit utilization ratio.
  • Length of Credit History: The fresh start bankruptcy offers means the average age of your credit accounts will be shorter than before. But starting some new accounts now will help you have a longer credit history when your bankruptcy ages off.
  • Mix of Credit Accounts: Once again, your bankruptcy will mess with your mix of credit accounts, but by opening a secured credit card and a credit builder loan, you’ll be on your way to a better variety of credit accounts.
  • New Credit Checks: Unless you know you’ll be approved for a loan or credit card account, don’t apply. Too many hard credit checks in a year can hold you back.

Bankruptcy Could Be the Opportunity You Need

Nobody wants to go through a bankruptcy process. You’ll have to hire an attorney, pay fees, and endure seven to 10 years of having the filing on your credit history.

But if you have no other choice — if there’s no way you can get your debts under control and still provide your basic needs — you should see bankruptcy as an opportunity for a fresh start.

Take advantage of your fresh start by developing better habits and putting together the elements of a good credit score over the next few years.

When you come out from under the cloud of bankruptcy, you’ll not only get approved for new credit but you can get loans with the best interest rates and lowest fees.

Related Articles:

  • What is Bankruptcy?
  • How To Remove Bankruptcy From Your Credit Report
  • Bankruptcy Explanation Letter

How to Write a Bankruptcy Explanation Letter

More than three-quarters of a million people file for bankruptcy each year in the US.

And since bankruptcy can stay on your credit report for up to 10 years, that means there are at least 7.5 million people showing one each time their credit is pulled.

A reader asked this important question:

”I’m trying to prequalify for a home mortgage loan. I filed a Chapter 7 bankruptcy back in 2001. The underwriter wants a letter to explain the bankruptcy, what is the best way to write it? Some say to write hardship due to job loss, but will this help or hurt my circumstance? What exactly are they looking for?”

First, let me say the reader’s question is strange on two counts:

  1. Chapter 7 bankruptcy automatically is deleted from your credit report 10 years after the filing date. Chapter 13 bankruptcy is deleted seven years after the filing date. A bankruptcy from 2001 shouldn’t even appear on your credit report. If it does, the reader needs to contact the credit bureaus to have it removed.
  2. The “waiting period” requirement for both conventional and FHA mortgages is just two years. Once two years have passed, you’ll be eligible to apply. However, the mortgage lender can still request a letter of explanation for any derogatory information appearing on your credit report, regardless of the date. But with those two points in mind, let me address the reader’s primary question, which is how to write a bankruptcy explanation letter.

Table of Contents:

  • Writing a Bankruptcy Explanation Letter
  • Your Credit Since Bankruptcy
  • Sample Bankruptcy Explanation Letter
  • Supporting Documents

Writing a Bankruptcy Explanation Letter

When you write a bankruptcy explanation letter, it must address two critical lender concerns:

#1 The Cause of the Bankruptcy

The bankruptcy was caused by extenuating circumstances. These are hardships that are beyond your control. Examples include a job loss followed by an extended period of unemployment, a business failure, a divorce, a period of disability, or a critical illness of yourself or a family member. There are others, but those are the most common.

The reader should absolutely state his job loss as the reason for the bankruptcy. It will also help to provide any supporting documentation to prove his point.

The worst explanation is that you got too deep in debt, couldn’t pay your bills, and resorted to bankruptcy to get yourself out of trouble. No matter how you see this explanation, the lender will interpret it as your bankruptcy resulting from financial irresponsibility.

#2 The Remedy to Your Problem

The cause of the bankruptcy has been remedied and is behind you. You must make the case that whatever caused your bankruptcy is in the past. If you went through a major medical event, you’ll need to state that you’ve returned to health. If it was due to a failed business, you’ll need to establish that you’ve developed a new, more stable income source.

Both these points will need to be clearly addressed in your bankruptcy explanation letter.

Your Credit Since the Bankruptcy Will Either Support Your Claim – or Deny It

This is another critical point. Even if your bankruptcy explanation letter makes clear that the cause was an extenuating circumstance, and that it’s in your past, the state of your credit since the bankruptcy will provide the proof.

If you filed for bankruptcy in the recent past (or even the distant past), and your credit has been clean since, the lender is much more likely to look upon your application favorably.

But if you have a steady pattern of late payments and collections since the discharge, your credit report will invalidate your bankruptcy explanation letter.

Also, be aware that your overall financial situation will weigh heavily in the lender’s decision.

For example, if your bankruptcy was due to income instability, your income documentation – pay stubs, W-2s, tax returns, etc. – will need to reflect a stable earnings pattern since the bankruptcy.

And one of the best pieces of evidence of recovery from a bankruptcy is a healthy bank account balance. It indicates you’ve mastered the art of living beneath your means, and there’s extra room in your budget to accommodate the new loan payment.

Put another way, while your well-written bankruptcy explanation letter will certainly help your loan application, the substance of your financial profile will be at least as important.

Sample Bankruptcy Explanation Letter

Below is a sample bankruptcy explanation letter, and it’s designed only to be a basic template.

You’ll need to modify it to fit whatever your bankruptcy situation was.

Susan S. Smith
100 Main Street
Mayberry, NC 27998

January 1, 2020

Jane Jones
ABC Mortgage Company
200 Elm Street
Mount Pilot, NC 27999

RE: Explanation for 2015 Chapter 7 bankruptcy filing

Dear Ms. Jones:

Please accept this letter as an explanation for my Chapter 7 bankruptcy filing in 2015. Late in 2014, my elderly mother contracted pneumonia. After being hospitalized for more than two weeks, she was confined to bed rest for several weeks more. However, her situation remained precarious for several months.

Enclosed is a copy of my mom’s hospital discharge papers, showing both the diagnosis and the ongoing care requirements.

Since my mom lives alone, and can’t afford a caretaker, I was forced to step into that role. As a result, I was forced to reduce my workload from full-time to part-time, and even missed many workdays in the process. This reduced employment status lasted from December 2014 through June 2015. During that time, my income fell by more than 70%.

Enclosed are copies of my year-to-date paystubs for June 30, 2014 and June 30, 2015. You’ll see that my income through the middle of 2015 was well below the same point in 2014. Even when I returned to full-time work status in the middle of 2015, I continued to miss a substantial amount of time and income in the continued sporadic care of my mom.

I began to fall behind on my bills, and even to rely increasingly on credit cards to pay for basic living expenses. In addition, I personally paid many of my mom’s ongoing care bills, as her financial resources are very limited. I was forced to file Chapter 7 bankruptcy in August, 2015, as I had fallen many thousand dollars in debt that I couldn’t possibly repay.

Mom made a full recovery late in 2015, and has been living independently since. This has enabled me to resume my full-time income. Since the discharge of my bankruptcy, I’ve rebuilt my credit, and even my savings. I ask that you consider my loan application favorably, in light of the extenuating circumstances that led me to filing for bankruptcy.

If more information is required please contact me at (227)555-1234, or by email at susanss1979@gmail.com.

Sincerely,

[Your signature]

Susan S. Smith

Enclosures: Paystubs, medical records

This letter is fairly long, and definitely detailed – both are important. You’ll need to supply as much information as is necessary to state your case.

Providing a summary letter, like one or two brief paragraphs, may not get the job done and may even invite requests for additional information.

Adding Supporting Documentation Will Strengthen Your Case

Notice in the letter above we’ve referenced two pieces of supporting documentation, pay stubs, and medical records. You can make your bankruptcy explanation letter even more credible by including supporting documentation.

For example, if the reason for your bankruptcy was medical, include copies of any records that will substantiate the episode. If it was due to divorce, supply a copy of the divorce decree.

Always realize that the lender isn’t looking for ways to decline your loan application. Instead, he or she is looking for you to supply proof that will justify approving your loan.

Writing a good bankruptcy explanation letter, and providing supporting documentation, will make it easier for the lender to approve your application. Approach it like your approval depends on it – because it just might.

Can Bankruptcy Stop an Eviction in New York?

Here in New York City it’s a lot more common to rent a place than it is to own a place. With soaring rental costs and landlords who will take any opportunity to raise rents, it’s little wonder that the threat of eviction is one of the major reasons why people begin exploring the remedy of bankruptcy.

As with many things pertaining to the law, timing will have a big impact on whether bankruptcy can help you meet your objectives.

The New York Eviction Process – Nonpayment or Lease Violation

The first step is the 14-Day Notice. This is a demand for payment of past due rent. The notice should state that you have 14 days to either pay the rent or move out of the unit. It should also warn you that if you don’t, you’ll have to move out and the landlord will begin eviction procedures against you. 

If the landlord is evicting you for a violated lease clause, they must give you a 10-day notice to fix the problem or face eviction. For example, if you smuggled a pet into your pet-free apartment you would be able to stop the eviction by getting rid of the pet and demonstrating your compliance to your landlord’s satisfaction, so long as you did so within the ten-day cure period.

The landlord must then file a petition with the court. You’ll be assigned a hearing date. At the hearing date, the judge will determine whether or not to issue a Judgement of Possession.

Filing bankruptcy at any point during the process prior to the issue of a Judgement of Possession will allow the automatic stay to protect you from further action, at least in the short term.

After the Judgement you may still have the ability to stay in your home if you can “cure the default.” This means you’d have to come up with the amount of rent that will be owed to your landlord within 30 days of filing. This will be held by the bankruptcy court. You’ll then have 30 more days to repay all past-due rent. 

New York Eviction Process – Illegal Drug Use or Property Endangerment

You cannot stop this kind of eviction with a bankruptcy. The way the landlord files this eviction paperwork will even be different from the way they’d file a nonpayment or lease violation paperwork.

If you know you’re being evicted under these circumstances, your first step is going to be finding a safe place to stay, and then proceeding with getting your life back together from there.

Warning: The Lifted Stay

Landlords may petition the bankruptcy court to lift the automatic stay, especially if they are being “unduly harmed” by the stay. For example, if the landlord doesn’t get paid for months and you continue to occupy the unit, then they are likely to have a winning case for being allowed to proceed with an eviction.

If you’re not going to pay the landlord anything at all then bankruptcy is only going to buy you a little bit of time.

Most people in this situation will want to file Chapter 13 bankruptcy. This will allow you to start paying your rent on time from the date of filing forward. The past-due rent will get wrapped up in the Chapter 13 payment like any other unsecured debt, and the remainder will be discharged. In some cases you may be able to safely file Chapter 7 without worrying about losing your apartment.

Next Steps

You will need careful legal guidance to successfully navigate the threat of eviction and the bankruptcy solutions that might help you. Contact our office for a free consultation as soon as you know you’re in trouble. Together we’ll ascertain whether bankruptcy is right for you, and determine the next, strategic steps that will help you.

See also:

7 Mistakes to Avoid When Filing for Bankruptcy

Why You Should Not File Your NYC Bankruptcy Pro Se

What You Should Know About Being Sued for Debts in New York

Got the Black Friday Bankruptcy Blues?

Thanksgiving Day is coming up soon, and that means black Friday is just around the corner. The holiday will kick off a storm of spending. The average American spends $920 on holiday gifts every year.

This time of year can be rough for people who are experiencing financial problems. There’s a web of expectations and obligations to navigate. Everyone wants to keep up appearances.

What should you know if you’re considering bankruptcy? Should you hold off until after the holidays?

Here’s what you need to know.

If you know need to file bankruptcy, slow down on the holiday gift-giving spree.

In fact, slow down on the holiday gift-giving spree if you even think you might file bankruptcy. Spending $920 on holiday gifts could create trouble, especially if you use credit cards to do it.

If you make credit purchases that exceed $650 within 90 days of your bankruptcy, then those purchases will come under scrutiny. If the court determines these were “luxury” purchases then they will presume you’ve committed fraud: that is, you used the credit and had no intention of paying it back.

Credit card companies often scrutinize your purchase history when you file bankruptcy to determine whether they want to raise a formal complaint to the court. If they successfully argue that you made luxury purchases, then that debt won’t be discharged.

That 90 day period offers a presumption of fraud, but if you make big purchases 120 days before bankruptcy the creditor can still raise the question of whether you ever had any intention of repaying them.

Don’t think you can get around the problem by taking out a cash advance either. Any cash advance larger than $950 made within 70 days of your bankruptcy will automatically trigger the presumption of fraud.

If you’re involved in a Chapter 13 bankruptcy, you may need to adjust the way you do the holidays.

Good news first: trustees don’t scrutinize every purchase you make when you’re on a Chapter 13 plan.

Bad news: the plan is structured to pour all of your disposable income into debt payments. You probably won’t have $920 to spend on gifts. You might not even have $92. 

Next year you might be a little more prepared. Buying Christmas gifts throughout the year can make the entire process less burdensome. But this year? Even your small recreation budget might not cover the Christmases you’re used to. 

This year, you might suggest the whole family draw names out of a hat to determine which single person they’ll be giving gifts to. Or you might bake cookies and give them out in inexpensive cookie tins (you can usually find them at dollar stores this time of year). If you’re crafty, handcrafted gifts may be the way to go.

No matter what you go with, setting up Christmas traditions that don’t revolve around excessive consumption will help. The holiday season may even end up being a lot more rewarding.

The trustee can’t take your Christmas gifts.

Many people have the opposite problem: they’re not worried about what they can spend so much as they’re afraid the trustee will play Grinch and take all of their Christmas gifts. Worse, they fear the trustee will take all their kid’s Christmas gifts. 

You will have to report any major gift given during a Chapter 13 bankruptcy, and large cash gifts could cause you to fail the Chapter 7 means test. But while you might want to steer your family away from large cash gifts or huge, elaborate gifts like new cars, motorcycles, jet skis, or boats, most of your gifts should be safe.

In a Chapter 7 your major assets get sold to pay for debts, but clothing, household goods, and toys are all safe.

Do what’s right for your household, at any time of year.

This might not be the ideal time, but if your finances are out of control bankruptcy might be the only solution. Don’t avoid a fresh start just because you’re wondering what your family members might think.

Instead, take an honest look at your situation and ask yourself whether things are likely to get worse. If the answer is yes, you’re welcome to contact our office for a free consultation at any time. 

See also:

6 Actions to Avoid Prior to a New York Bankruptcy

What You Need to Know About Entertainment Spending in Chapter 13 Bankruptcy

7 Great Questions to Ask During Your Free Consultation

How to Handle a Debt Collection Call

It’s natural to get stressed out during a debt collection call. Debt collectors are in fact trained to ramp up that stress.

It’s important to realize you have the power in this situation. The Fair Debt Collections Practices Act protects you. 

Take these steps to ensure you get the full extent of that protection.

#1) Get some vital information.

There are an awful lot of debt collection scams out there. There are also some borderline scammers collecting on “zombie debts,” which are debts that are so old they’ve passed the statute of limitations, or which you’ve already paid on, but so long ago you might reasonably have trouble remembering that you did.

To combat this, always get the name and address of the original creditors, the date of your last payment, and the amount you paid. Compare this information to your own records. If it doesn’t match up, it’s probably safe to ignore the debt collector.

#2) Ask them to verify the debt via the mail.

If you’ve never talked to this debt collector before then you can ask them to verify the debt via snail mail. Usually, they’ll send a letter before they start calling. This letter will give you 30 days to dispute the debt.

Often, if you do, they’ll come back and reaffirm it, but this can be a useful tool for buying some time. It’s also another safeguard against scammers.

#3) Ask them to contact you by mail, and only by mail.

Contrary to popular belief, you do not have to put up with dozens of phone calls. If you tell debt collectors they may contact you only by snail mail the FDCPA demands that they honor that.

You may have to send them this demand in writing. Do so via certified mail, return receipt requested.

#4) Avoid giving them too much information and ammunition.

There are some pieces of information you should never give a debt collector. This includes information on your employment, income, or assets.

You can be assured they will use this information to harass you at work. They may even use it to launch a lawsuit against you. 

If you set up a payment arrangement, be sure you honor it. This will, by necessity, involve giving collectors some of your financial information. If you don’t honor it, they will use it against you. 

#5) Consider bankruptcy.

If you have many debt collectors calling you and can’t seem to get ahead, it may be time to consider bankruptcy. Most people who are receiving debt collection calls are unlikely to get on firm financial footing without some sort of help. 

Unless your brush with a collection agency is a one off, it’s at least time to consider meeting with a bankruptcy attorney, who can both help you determine if this action is right for you while helping you defend yourself against creditors.

See also:

5 Signs You Should Be Thinking About Filing for Bankruptcy

Don’t Pay Debt Collectors: Here’s 4 Reasons Why

Does it Make Sense to “Settle” A Debt?

6 Actions to Avoid Prior to a New York Bankruptcy

Timing matters to the successful execution of a bankruptcy. The things you do directly prior to your bankruptcy can make a big difference to your outcome.

A good bankruptcy attorney will ask if you’ve engaged in any of these activities prior to filing. If you have, you might need to wait a few months to avoid any problems. If you want to file bankruptcy but see that you’ve already performed any of the actions on this list you should ask your attorney for guidance.

#1) Making big financial decisions.

Don’t cash out your retirement fund, not even to pay debt. Avoid selling your house, or buying one. You should even avoid luxury purchases, as purchases over 

If you know you’re going to file for bankruptcy the only payments you should make are the ones that take care of your basic bills. This includes your rent or mortgage, your grocery bill, your utility bills, and your transportation bills. 

If you take out more than $1000 in cash advances from a single creditor 70 days prior to your bankruptcy or use credit cards to purchase luxury items worth  more than $725 90 days prior to bankruptcy then the court makes a presumption of fraud. That is, they assume you took out that money or ran up those debts with no intention of ever paying back the money. At best, those debts will not be dischargeable. 

#2) Acquiring new debts.

Don’t open new accounts or run all your credit cards up to the limit. Doing so makes it look like you’re trying to commit bankruptcy fraud. Essentially it looks as though you are using the process to benefit from your credit lines knowing you’re going to try to wipe away those debts.

The type of debt doesn’t matter here. It even includes debts owed to family members, or friends.

#3) Transferring property.

Bankruptcy law already allows you to keep most of the property you’re worried about. You can either take advantage of exemptions or you can take advantage of Chapter 13 bankruptcy.

So there’s absolutely no need to panic, or to attempt to safeguard that property by putting it into your Mom’s name. This includes “selling” the property with the understanding that you’ll buy it back when all the nasty court proceedings are over with.

The court takes a dim view of any attempts at any kind of dishonesty.

#4) Transferring balances.

Transferring balances may make it seem like you’re not doing anything other than moving a bunch of money around. Unfortunately, it can give the impression you’re favoring creditors by taking a whole bunch of debt from one and shifting it onto another.

This won’t stop your bankruptcy case, but it may prolong it. The trustee will try to decide whether to “claw back” those funds so they can distribute them according to your bankruptcy plan. 

#5) Negotiating with creditors.

Don’t try to settle debts prior to bankruptcy, and don’t try to set up payment plans. Any attempt to do so will, again, give the court the impression you’re favoring some creditors at the expense of others.

Besides, by the time you know you’re going to file bankruptcy you’re really only throwing good money after bad by giving your creditors another cent.

#6) Marrying, divorcing, or separating.

Divorce and separation are complex legal matters which include the division of assets and debts. It’s hard to be embroiled in a bankruptcy and a divorce at the same time. It’s better to decide which case comes first before moving on to the next one.

There’s no legal reason why you can’t get married and file bankruptcy at the same time, but it may not do your marriage any favors.

Bankruptcy is a complex matter. Get help today.

Very few people are successful when they try to file bankruptcy on their own. Get the expert help and advice you need to succeed.

Contact us for a free consultation today.

See also:

Don’t Pay Collectors: Here’s 4 Reasons Why

Does It Make Sense to “Settle” a Debt?

7 Great Questions to Ask During Your Free Consultation

In the News: Financial Protections for Veterans, Reservists

If you’re a veteran or Reservist living in New York you’ll want to know about some financial protections that have been put into place for you this year. These may impact whether you file for bankruptcy, and how you do so.

There are three items of interest.

Relief for Student Loans

For decades, disabled veterans have been eligible to use the Permanent Disability Discharge Program to eliminate student debt. Unfortunately, the process in the past was labyrinthine, requiring coordination between the Department of Veteran’s Affairs and the Department of Education which did not always go smoothly.

A recent memo from the Trump Administration has corrected this practice, streamlining the application process. The administration has also added tax relief: forgiven loans won’t incur federal taxes. They’ve encouraged the states to follow suit.

Relief for Reservists

In 2008 the National Guard and Reservists Debt Relief Act ensured reservist’s means would be calculated based on their civilian salaries, not their active duty salaries, which are often higher. The law would have expired this year without intervention.

This law has now been extended, and will remain in place for the next four years.

The HAVEN Act

The Honoring American Veterans in Extreme Need Act of 2019 protects Department of Defense disability payments during bankruptcy actions. This income will no longer be considered “disposable income” and will not be vulnerable to creditors. 

This helps in two ways.

First, it gives disabled veterans a higher chance of passing the Chapter 7 means test, as disability payments will be completely excluded from the test.

Second, in Chapter 13 cases it will reduce the effective monthly income for the veteran’s household. This means lower, more manageable payments while the borrower pays off the Chapter 13 plan. 

The act protects permanent and temporary disability pay, disability severance pay, combat-related special compensation, survivor benefit plans, survivor allowances, compensation set aside for assistance with the activities of daily living, VA disability, VA dependency and indemnity compensation, and VA Veteran’s pensions.

Need help or advice?

Do these changes make it more feasible for you to get a financial fresh start? If you’d like to see how bankruptcy can impact your personal financial situation, give our office a call. You can take advantage of our free consultation and get all of your individual, unique questions answered.

See also:

7 Mistakes to Avoid When Filing for Bankruptcy

Is There New Hope for Student Borrowers in NYC?

Why You Should Not File Your NYC Bankruptcy Pro Se

Do Both Spouses Have to File Bankruptcy in New York?

Bankruptcy is all about strategy. And sometimes the biggest strategic decisions are the ones that people don’t think much about.

For example, there are three ways for you and your spouse to handle a bankruptcy.

  1. You could file together.
  2. You could file separate bankruptcy cases.
  3. One spouse files while the other spouse doesn’t.

In New York, there are reasons why it might be a good idea for one spouse to stay out of the bankruptcy entirely.

Much will depend on who owns the debt. New York is not a community property state. This means you don’t automatically assume a debt just because your spouse took it out unless you chose to cosign it.

So if most of the unsecured debt is in your name it might make sense to file alone.

If you also have secured debts in your name much will depend on the type of bankruptcy you plan to file. If you plan to file Chapter 7 then you’d lose those secured debts. It might make sense for both of you to file so that you can put as much money as possible into starting over.

If you plan on filing a Chapter 13 then it might depend on how the Chapter 13 plan will impact your household finances. If you hold most of the debt then your household budget may be able to absorb continuing to pay on your spouse’s debts while paying your Chapter 13 plan.

If you don’t, then filing for bankruptcy won’t bring your home very much relief. Filing when it doesn’t do very much good isn’t usually helpful.

What if you both filed separately?

If that’s the case, then both of you could file a different bankruptcy Chapter. For example, if your mortgage is in your name then you could file Chapter 13 to preserve the home while allowing your spouse to file Chapter 7 in order to completely wipe out all of your spouse’s unsecured debt.

This would make sense if your spouse can pass the bankruptcy means test (which will still include your income regardless of filing status) and may be the most advantageous way to keep your Chapter 13 payments as low as possible.

This issue is a great example of why it’s a good idea to work with a lawyer when filing your bankruptcy case. You need someone who can run the numbers and who knows how the law will impact your family in certain scenarios.

Got questions? Contact our office today for a free consultation.

See also:

What Happens to My Co-Signers if I File Bankruptcy?

7 Great Questions to Ask During Your Free Consultation

How Can NYC Bankruptcy Lead to a Stronger Financial Future?