Eight Things You’ll Want to Know About Bankruptcy

Updated 5/28/10
Gerri Detweiler

If you are struggling with debt, or know someone who is, here are some bankruptcy basics you’ll want to understand.

#1: Bankruptcy offers a fresh start for many people with overwhelming debts. Each year, hundreds of thousands of hardworking Americans seek relief from their debts through bankruptcy. Bankrupt debtors come from all walks of life, and an increasing number are women and older Americans. Their financial troubles often develop during difficult times in their lives such as a major illness, divorce or a stretch of unemployment, for example. In fact, Harvard Law Professor Elizabeth Warren warns in her book, The Two Income Trap, that having children is the best predictor that a woman will file bankruptcy. The housing market and predatory loans are also contributing to many cases today.

#2: Not all debts can be wiped out in bankruptcy. Some debts you may not be able to discharge (erase) in bankruptcy include: most student loans; debts incurred because of fraud; most tax debts; child support payments; damages for drunk driving injuries; and criminal or civil restitutions and fines. You will also have to continue to pay your mortgage and auto loan(s) if you want to keep your home and vehicle(s) though you may be able to work out a schedule to catch up on past due payments. Even if you have debts that can’t be discharged, however, filing for bankruptcy may still help you by erasing other debts so you will have breathing room to repay the ones you must.

#3: You must get credit counseling first. Before you can file for bankruptcy, you must received counseling from an approved nonprofit budget and credit counseling agency. If you are having financial difficulties, it’s a good idea to talk with a credit counseling agency sooner rather than later. Your counselor may be able to offer solutions that allow you to avoid filing. If you do decide to go forward with bankruptcy, you will have the “Certificate of Compliance” that must be included with your paperwork. Visit newdebtsite for information on an approved credit counseling services for union members.

#4: Bankruptcy isn’t just an easy way out of a financial mess. Many people have the impression that bankruptcy is simple, quick and painless. While some cases are easier to complete than others, all require a lot of paperwork. You must provide a significant amount of documentation of your income, expenses and assets, and it must be accurate and complete. If it is not correct, or if you and your attorney miss significant deadlines, your case may be dismissed and you will again be on the hook for those debts. That is one reason why “do it yourself” forms are not a good idea, and why you should avoid firms that offer bankruptcy preparation help for a very low fee but cannot help you navigate the complicated rules.

#5: Both spouses do not have to file for bankruptcy. If you and your spouse have separate debts, one of you may be able to file separately. But any joint debts you have will become the responsibility of the spouse who doesn’t file, unless they are included in a Chapter 13 plan. Keep in mind that since each person has his or her own credit files, your spouse’s bankruptcy should not appear on your credit report if you did not file. A bankruptcy attorney can help you decide whether it makes sense for you to file separately or together.

#6: You won’t lose everything you own. Certain property is “exempt” – or off limits to creditors -- and the list of exemptions varies from state to state. For example, in some states, like Florida and Texas, you can keep your entire homesteaded property (the home you live in) as long as you have owned it at least two and a half years before filing. Other states, like Delaware, offer no homestead protection.

In addition, state exemptions typically include basic household furnishings, a vehicle (up to a certain dollar amount), some jewelry (including wedding rings), and a “Wild Card” amount that can be applied to anything you own. No matter where you live, the money you have in your pension plan or tax exempt retirement plan is usually safe from creditors, along with up to $1 million in an IRA or Roth IRA.

If you have assets you don’t want to lose, you may want to file Chapter 13. If you file Chapter 7 you may be able to “reaffirm” a debt and pay it back outside of bankruptcy, or you may be able to keep the asset by paying the value of the property to the lender who owns the collateral. Your bankruptcy attorney will help you find out which option will work best for you.

#7: You can rebuild your credit after bankruptcy. The fact that you filed for bankruptcy can remain on your credit reports for ten years from the date you file, even if you decide not to go through with it. Credit reporting agencies will remove Chapter 13 bankruptcies seven years from the date of filing, though, to give consumers some “credit” so to speak for paying back some of their debts. While bankruptcy will hurt your credit significantly, by the time you reach the point where you have to file, your credit reports may already be damaged by late payments and collection accounts.

As soon as your bankruptcy is discharged (completed) you will likely start receiving offers for credit. By managing credit carefully you will be able to boost your credit scores. One good way to strategy is to get a secured credit card, which is easy to qualify for because you place a security deposit in a bank account as collateral in case you default. The consumer-friendly UnionPlus Secured Credit card is available to union members.

#8: It pays to stop thinking of bankruptcy as your last resort. While you should consider all your options to avoid bankruptcy, if you treat it as your last resort you may wait too long to get advice from a bankruptcy attorney and that can lead to costly mistakes warns John Ventura, author of The Bankruptcy Handbook (Kaplan Publishing, 2007). Many people put off talking to an attorney and, in the meantime, make poor financial decisions such as using cash advances to pay bills, transferring credit card balances from one account to another, or raiding retirement funds or home equity to pay credit card debts.

Worried about your debts? Reach out to someone you can trust. Confidential, free help is available through a variety of Union Plus program at UnionPlus.org.

If you are considering bankruptcy, speak with an experienced lawyer who specializes in bankruptcy to navigate the federal laws, state laws and tax consequences. Visit Union Plus Legal Service or call 1-888-993-8886 (9 am - 7 pm ET, M-F) to find a lawyer in your area.