Bankruptcy Frequently Asked Questions By Alabama Consumers
Bankruptcy Frequently Asked Questions By Alabama Consumers
I’m having some money troubles and I’ve heard about bankruptcy but I don’t quite understand what it is. Can you tell me what exactly bankruptcy is?
Bankruptcy is an option if you are having money problems. It is not the only option, but it is a legitimate option. Basically, filing for bankruptcy is where you ask the Federal court in Birmingham, Alabama, to look at your financial situation and to give you relief, or breathing room, from your creditors.
NOTE: There are almost always better options than bankruptcy. If you have been sued, you can fight back against the collection suit or even if an original creditor sues you.
But since you are here, I know you have questions about bankruptcy so I do want to answer those. Occasionally bankruptcy is helpful — just make sure it is your last resort, not your first….
How does bankruptcy give me relief from my creditors?
First, filing for bankruptcy normally stops all collection activity against you. This includes credit card companies, car finance companies, mortgage companies, collection agencies, etc. This is known as the “automatic stay.”
Second, depending on the type of bankruptcy that you file, your debts may either be completely “discharged,” or wiped out, or you may be give 36 to 60 months (3-5 years) to pay off these debts.
Explain more to me about this “automatic stay.”
The automatic stay is a law, or an order, where the bankruptcy judge (a federal judge) says to all of your creditors, “Stop collection activities. No more calls. No more letters. No more lawsuits. Just stop. Let me see what is going on here and then I’ll tell you when, and if, you can start collecting on your debt.”
Why does the judge do this?
The bankruptcy judge (and we have three in Birmingham — Judges Bennett, Cohen, and Mitchell) need to make sure that the laws are followed and the creditors are treated in the right manner. The judges don’t want one creditor to be given special treatment that it is not entitled to as that hurt the other creditors. The judges also want you, as the consumer or what some people call the “debtor,” to be treated fairly also.
What do you mean about one creditor having special treatment?
If the bankruptcy judges allowed a mad rush of creditors calling you, writing you, trying to repossess your cars, suing you, etc. then whoever could apply the most pressure to you would get your money. This would reward the most aggressive and abusive collectors and creditors.
How does that hurt other creditors?
Let’s say that you only have $3000 to pay off creditors but you owe $30,000. It may be that each creditor should get 10 cents on the dollar. So if Bank of America is owed $3000, they might get $300. But let’s say that Bank of America has hired a large collection agency — maybe IC Systems out of Minnesota — and IC Systems harasses you and forces you to pay all $3000 to it.
That leaves the other creditors out in the cold. They get nothing.
So next time the other creditors would say “OK, this is how the deal works. Let’s be super aggressive so that collection agency doesn’t get our money. We want to get 100 cents on the dollar.”
So, the solution is to have everything stop, or be “stayed,” and let the bankruptcy court decide what each creditor should get. It may be 100 percent of what is owed. It may be zero. Or it may be somewhere in-between. But this is a decision the court should make, not the creditors and collectors in some mad scramble to force you to pay them.
You mentioned that the judges want for people like me, consumers, to be treated fairly. How does the automatic stay do that?
It keeps you from living in the “Wild, Wild, West.” You are already getting lots of calls and letters and perhaps lawsuits. If it was not for the automatic stay, then the collection efforts would increase as all the creditors and collectors would be in a mad scramble to get to your money.
The automatic stay makes sure that everything is done in an orderly manner and that the process is fair for everyone, including you and the creditors.
What if the automatic stay is put into place and I still have creditors or collectors calling me or collecting against me? Am I out of luck or can I fight back?
We normally want to give the creditor or collector a warning – you tell the creditor or collector you filed for bankruptcy in Birmingham federal court and that gives them all the information they need, although if you have the case number you can give that to them as well.
This warning helps the legitimate companies to fix a problem. And for the ones that want to break the law? It gives them more rope to hang themselves ….
If after the warning, the illegal collection activity continues (and sometimes even the first time if you are dealing with a company that repeatedly does this) then you have the right to sue the company in bankruptcy court for what is known as a “stay violation.”
That just means that the order, the stay, has been violated.
The collector or creditor will then need to explain to the judge why they thought it was a good idea to intentionally break the law. The judge will then explain what the price the collector or creditor must pay for thumbing its nose at the bankruptcy judge.
I understand the automatic stay now. Let’s go back to the different types of bankruptcy that I can file in Birmingham, Alabama, Federal court. What are these?
For our purposes, there are really two types of bankruptcy that you can file. Chapter Seven (7) and Chapter Thirteen (13).
What is a Chapter 7 bankruptcy?
This is where you ask the court, through a person known as a “trustee,” to gather up your assets and your liabilities and see if the creditors can be paid back.
What are assets?
Assets are things that we own. Our house. Our cars. Cash in the bank. Clothes. Furniture. Potential lawsuits that we either hae filed or can file. Etc.
OK, what are liabilities?
Liabilities are things that we owe. Medical bills. Credit card bills. Car loans. Mortgage loans.
So, something could be an asset and a liability at the same time?
For example, if you own a Honda Pilot, it is an asset. But you also owe the ever popular and friendly company known as Santander $10,000 on it. So you have a liability also. (Kidding on Santander — a particularly abusive company in my opinion who we repeatedly sue for violating the law).
I get what assets and liabilities are — how does that work out in a chapter 7?
For most people, they don’t have enough assets over their “exemptions” and so nothing is taken by the court and given to the creditors. This is known as a “no asset case.”
Exemptions basically are assets you are allowed to keep. You can keep a certain amount for your car or your home or for clothes, household items, etc.
If you have assets that are more than the exemptions (a fully paid for brand new Mercedes, etc) then the court may take those assets and sell them to give money to the creditors.
But most people who file a chapter seven bankruptcy have a “no asset” case and nothing is sold for the creditors.
So what is the bottom line result in a “no asset” chapter 7 case?
Bottom line is your debt (with limited exceptions) will be wiped out or “discharged” so that you do not owe it anymore.
What does that mean that my debts are discharged in a chapter 7 case?
It means that the creditor can never try to collect the debt from you. It can’t call you. It can’t write demanding payment. It cannot put a balance owed on your credit report. Because you don’t owe the debt to the creditor anymore.
If the creditor sells the debt to someone else, they can’t collect against you either. We strongly suspect some of the bigger debt buyers/collectors such as Portfolio Recovery are or have been buying discharged debt to illegally collect it from consumers.
The solution is to sue these creditors and collectors when they collect discharged debt. The only thing they understand is paying out money. They don’t care about obeying the law. They do care about losing money.
Will I be able to keep my car or my house?
Usually you can, if you want to. Unless the trustee (who works for the court) wants to sell the property because it is worth more than the exemption amount, you normally can keep the property.
If you owe money on the car or the house, you sometimes will be given the opportunity to re-affirm, or agree again to the debt. You have to agree and the creditor has to agree for you to do this and certain things have to be done in court.
But if all of that happens then you will keep the car or house and continue to make payments under the “re-affirmed” loan agreement.
Things can get a little complicated if you either don’t want to or the creditor does not want for you to reaffirm the debt. Sometimes you can still stay in your house or the car and you simply make payments but this is something we would need to discuss with you in detail. There are advantages and disadvantages to not re-affirming a debt, particularly on your home and car. You need to understand these carefully so you can make the right decision for you.
OK, I understand about a chapter 7 case. What is a chapter 13 case?
A chapter 13 bankruptcy is sometimes called “debtors court” because you pay money into court for 36-60 months. That money is then paid to the various creditors and collectors by the court.
At the end of the 36-60 months your chapter 13 case will be over.
When would a chapter 13 be a good idea rather than a chapter 7?
Normally, we don’t think chapter 13s are good for consumers but there are times that they are. If you are trying to stop a foreclosure and do not want to go any other route (see our Foreclosure section of this website), then a chapter 13 may do the trick.
If you have too much equity in your house (hard to imagine these days but possible), then it may be that you should file a chapter 13 instead of a chapter 7 so you don’t lose your house.
We have an article on why we don’t normally recommend a chapter 13 but just to summarize — you are paying your debts and staying in bankruptcy for up to 5 years. Most people don’t successfully complete a chapter 13 so they don’t get the real benefit of it — but they get the negative of filing for bankruptcy. No discharge (like in a chapter 7) but they take the hit on their credit report for filing (even unsuccessfully) a bankruptcy.
But it never hurts to see if it might be the right option for you.
How does the process of considering bankruptcy work? In other words, what do I need to do next to see if this is a good option for me?
You will make an appointment with a bankruptcy lawyer to go over your options. This includes whether it even makes sense for you to file for any type of bankruptcy or if you have other options that might be better.
What could be a better option than filing for bankruptcy?
Well, let’s look at why you are considering bankruptcy.
Is it because you are facing foreclosure? You are trying to save your home? Keep your children in the same school district. Not turn their lives (and your life) upside down?
If the mortgage company is illegally threatening foreclosure, then it may be a better option to sue the mortgage company. We have filed many lawsuits against mortgage companies. You can read about this option in our Foreclosures portion of this website.
Are you considering bankruptcy because of debt collectors who are suing you or harassing you?
A large part of our business is suing abusive debt collectors. Everything from smaller cases that often settle quickly to the cases that are tried in federal court. We have represented people against debt collectors who originally went to bankruptcy lawyers to file bankruptcy but the bankruptcy lawyers recognized that the clients needed to sue debt collectors, not file bankruptcy.
We have also represented Alabama consumers who considered bankruptcy when they were sued by debt collectors (debt buyers) and we were able to successfully defend them (and sometimes sue the collectors for breaking the law) instead of filing bankruptcy.
Or maybe you are a victim of identity theft. If the debt is not yours, because it was a result of identity theft, then why file bankruptcy? Identity theft should not be on your credit report and should not result in collection calls to you. We have helped folks who thought bankruptcy was the solution to identity theft — instead, often the solution is to dispute the bogus accounts and if the situation is not resolved, then sue the companies who are reporting bogus, identity theft, accounts on your credit reports.
Sometimes bankruptcy is the perfect and best option. Other times, there are better solutions. It is kind of like this — sometimes amputation is the best option. But if a doctor can go in and fix the problem without amputation, that is something to consider.
So, consider your options to see if bankruptcy is your best option or not.
I would like to sit down with a bankruptcy lawyer and review my options. What do I need to do before the meeting?
A great start is to gather up all of your financial information. What do you owe? Who do you owe? How much money you made last year (tax returns) and what are you making this year (pay stubs for this year going back at least 3 months). Gather all of your collection letters and past due notices and even the bills that you are not behind on — all of this can help your bankruptcy lawyer see what your financial situation is and what your options are.
What does it matter what I make? Why is that important?
Your income is important because if you make too much money, you might not qualify for a chapter seven bankruptcy. Or if you cannot afford the monthly payments in a chapter thirteen bankruptcy, filing bankruptcy might not be an option.
On the income issue, is this the “means test” that I have heard about that makes it hard to file a chapter 7 bankruptcy?
Here’s the deal. If your income is below a certain level (based upon your family/household size) then there is not a problem normally. If it is too high, then you have to go through the “means test” which is basically a new provision to determine if you should be required to file a chapter 13 bankruptcy instead of a chapter 7.
How many meetings with a lawyer will I need to have if I want to file a chapter 7 bankruptcy?
Usually two or three. We want to meet with you to figure out what appears to be the best option and to give you information.
Then we will need to prepare the petition (what starts the bankruptcy case) and have you fill out some required paperwork. You also have to take a required credit counseling class in order to file a chapter 7 bankruptcy in Birmingham (or anywhere else).
Safest bet is that you will be meeting with the lawyer (us or whoever you hire) about three times. We realize some firms have you meet with paralegals and perhaps a quick meeting with the lawyer but that is not how we do things. We want to understand why you are thinking about filing for bankruptcy and make sure you understand the advantages and disadvantages of filing.
I want to meet with you to see what my options are – what do I do next?
We will be happy to meet with you for a free consultation. Gather up your information as described above and call us at 205-879-2447 or you can fill out our general contact form.
Thanks for reading this and let me know if you have any questions!