Many People Have The Wrong Idea About Bankruptcy.

If you are planning to file bankruptcy, many people will give you the wrong idea about bankruptcy. Those people think that bankruptcy is some kind of punishment because you cannot pay your bills. That's completely wrong.

The Purpose of Bankruptcy is to Help You.

The purpose of  bankruptcy is to provide a fresh start to honest debtors. As long as you did not lie on your credit applications or hide valuable property, the bankruptcy court will help you get a fresh start in life.

"A new opportunity in life and a clear field for future effort"--That's what the Supreme Court says. 

The new law, which took affect in October 2005, made the paper work a whole lot harder, but with careful planning, people who really can't afford to keep paying their debts can usually establish eligibility.  For most people, bankruptcy still works.

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What were the Changes in the New Law?

The new bankruptcy law sets a new test for eligibility to file Chapter 7 bankruptcy.  Instead of looking at your budget to see if you can afford to pay, the court now looks at an average budget to see if you should be able to afford to pay.   

For the first two years under the new law, this average budget took into account the high cost of living in high cost of living areas like Northern Virginia.  In January 2008 most of the cost of living calculations got thrown out.  Fortunately, we now have two years experience with the new law, and we're developing ways to present your case that should still get most people who need bankruptcy approved.  

So, the New Law Isn't So Bad?

Actually, it's terrible.  The new law makes it much harder for many people to get rid of their time shares.  The new law makes it almost impossible to get rid of debts you promised to pay in a divorce or separation.  The new law is much tougher--it was already tough--on people who owe old taxes.  The new law now says you cannot get rid of non-government student loans, which will open up a whole new field for bogus schools offering bogus student loans.

For everybody, the paperwork is a lot harder.  You'll need to find six months of pay stubs and last year's tax returns.  You'll need to pay for and attend a credit counseling briefing and a budget class.  (You can do these classes on the internet; we suggest Hummingbird at www.hbcce.org.)  You have to come to your hearing with your drivers license or other picture ID and your social security card.   You have to show the court your bank statements.   The purpose of these paperwork requirements to to throw you out of bankruptcy, so your creditors can keep chasing you.

The rigid paperwork means rigid deadlines.  When you meet with your lawyer, we'll work out a schedule of paperwork and deadlines.  It will be much harder if those deadlines slip.  If you get behind, your work will have to be redone and that will cause a start over fee.  For most people, the keeping to the paperwork deadlines will be one of the toughest parts of the new law.  Missing an appointment can easily mean losing your eligibility. 

What is the new law "Means Test?"  Under the new law, you are automatically eligible to wipe out your debts with a Chapter 7 bankruptcy if you are below the average income for your family size in Virginia.  Effective October 2007, the averages for Virginia are:

                      One person  $44,780   Two person  $59,423   

                      Three person $66,252   Four person $75,140

                      Five person   $82,040   Six persons   $88,940

If your income, based on the last six months, is below those numbers, you have automatic eligibility to wipe out your debts with Chapter 7.   If you are over those numbers by a little, you can still usually get approved.  Over by a lot may mean you are forced into a Chapter 13 payment plan, unless we can show an unusual factor, like an on-going medical situation.  As we have more and more experience, we are getting a better idea of what unusual factors work.

You'll also notice that these numbers are not too hard on single people and two person families.  They get a whole lot harder as the family size goes up.  So a family of six is allowed almost exactly double what a single person;  and while it may not be six times as expensive to have four kids as it is to have none, it's a lot more than twice as expensive.  We do everything we can do to try to help families with lots of kids.

Does the Bankruptcy Court Take My Property?

If you have something valuable that the court can sell and get more than about $5000.00 for, the court will sell it to help pay off your debts. About one person out of a hundred has the bankruptcy court sell something they own. Here's what each person is allowed to keep under Virginia law from the court.

• Your clothes-- worth up to $1000.00 at thrift store prices.
• Your household goods-- up to $5000.00 at thrift store prices.
• Your car-- worth up to $2000.00 more than you owe on it.
• Cash-- or whatever else you want, up to $5000.00
• Your wedding or engagement ring--regardless of what it's worth
• Your 401(k), IRA or retirement--regardless of how much

Recently real estate values have been falling here, which is a help in some ways.  Virginia allows single people to file Chapter 7 and keep your house only if you have very little equity.   Virginia does provide much better protection for married couples who own a house.   The sooner you come to see us the more strategies we can try.

What's The Worst Thing That Usually Happens?

For the first two years after bankruptcy, you will have terrible credit. If you have to get a car, please try to pay cash for a late 1990's car rather than buy from a car dealer.  Every month that you put off buying a car, you save yourself $300 on what the cost of financing your next car will be.  After two years of rebuilding credit, you can get a car at around 13%; after three years around 8%.  That 8% will save you $10,000 in finance costs compared to what you would pay if you go out and get a car right after the bankruptcy.  

Filing for Chapter 7 Bankruptcy is better for your credit than getting help from credit counseling. Bankruptcy is better for your credit than sending late or partial payments.

What About My Security Clearance?

 I've done bankruptcies for hundreds of people who have security clearances.   Some of them were told by their security people that they would lose their clearance unless they filed bankruptcy.  Having trouble paying your debts can be automatic grounds for losing your clearance--because the government does not want you desperate for money and selling things that don't belong to you.

I have known only five people who lost their clearance after filing bankruptcy.  Two of those had been ignoring their bills and dragging around bad credit for years without doing anything about it.  At their review, the government said they were just too stupid to be trusted.  (Bankruptcy by itself cannot be used to deny a security clearance; but it can be used against you in  combination with other problems.)  Of the other three, one worked at perhaps the most secure location in government.  The other two I can't explain.

I have seen three people who did not have clearances and who were denied interim clearances when they applied because of the bankruptcy.  I fought one of those to the Fourth Circuit, but lost.

As a general rule, people who already have a clearance and who aren't in trouble for anything else do not lose their clearances because of bankruptcy.   People who are applying for a clearance for the first time should do everything possible to keep everything current until the clearance is approved. 

What About...?

Filing for Bankruptcy will not hurt your immigration status. You can still get a green card-- you can still become a citizen, exactly the same as before.

Filing for Chapter 7 Bankruptcy does not mean you will be garnished-- it makes it illegal for your credit cards and medical bills to garnish you.

Really?

We have already helped six hundred people under the new law.   Bankruptcy is all we do.  For more information, you can email me:  robertweed@robertweed.com.