LIFE AFTER BANKRUPTCY
What to expect after your Bankruptcy?
We have found that credit scores routinely will increase as much as fifty points after the bankruptcy has been filed since all or most debts have been eliminated and your debt to income ration has been substantially decreased. Still, in order to improve your credit, there are a number of things that you can do:
- Learn to pay your bills on time
- Try to use only a small amount of the credit that you have available
- Make sure that you do not apply for too much credit at the same time
- Regularly check your credit report, this is free if you go to the government mandated website, www.annualcreditreport.com
- Make sure that all debts that were listed in bankruptcy are listed as “included in bankruptcy” on your credit report. You may find that there are other errors on your credit report and now is a good time to repair those.
For myself, as a young practicing attorney, I noticed that a judgment was recorded against me when in fact I was merely the attorney representing the defendant. After a fair amount of effort, I was able to correct my report. Without fixing that error, I could not even qualify to get a cell phone.
The first credit card that you will be able to get will likely be a “secured credit card” wherein you deposit money into a bank account and are given a credit card to use to make purchases. This is similar to a debit card.
When you get your secured credit card, you may only have limits of $200.00 to $500.00 depending upon how much you deposit in order to get the card. Make sure that you do not use all of the available credit that you have since maxing out your credit card will hurt your final credit score. Try not to charge more than 30% of your credit limit and it will be even better if you were to fully pay off the balance every month.
When you apply for your secured credit card, make sure that there is no application fee and only a reasonable annual fee. Make certain that your secured credit card will convert to an unsecured card after 12 to 18 months of you making your regular and timely payments. And finally, what good is a good credit score if they don’t report it to the three major bureaus? So make sure that Equifax, TransUnion and Experian will be notified of your timely payments.
Don’t forget that student loan obligations are almost never dischargeable in bankruptcy. Since you are no longer making credit card payments on your discharged credit card debts, you may want to make larger payments to your student loans so that you can pay them off sooner. Because the loan payments are being made timely, you will improve your credit score that much quicker.
Before the banking crisis of 2008, we could confidently advise people that they could obtain residential home mortgages for 8% right after their discharge in bankruptcy and after two years would qualify for a FHA loan. While banking policies are still being developed, it is safe to say that 2 or 3 years of good credit history after your discharge in bankruptcy will allow you to get a low-interest rate residential home loan.
Bottom line, after your debts are discharged in bankruptcy and after you have established a pattern of timely payments on those debts that were not discharged in bankruptcy, your fresh start will come quicker than what you might otherwise have believed.
YOU ARE NOT ALONE
You need not feel embarrassed regarding bankruptcy. It is not a loophole in the law but, instead, is a Constitutional right created in 1776 to help people make a new financial start for themselves. Be grateful that you live in a free nation that makes a second chance possible. People as diverse as Thomas Jefferson (our third president), Abraham Lincoln (our sixteenth president) Walt Disney, P.T. Barnum (circus owner), Dorothy Hamill (professional ice skater), Milton Hershey (chocolatier), Rembrandt, John Bobbitt, Samuel Clemens (Mark Twain), Francis D. Nixon (brother to Richard Nixon), King Phillip II (King of Spain 1556-1598), Buckminster Fuller, John Audubon (naturalist), Jerry Lee Lewis (entertainer), Larry King (radio personality), Melba Moore (actress), Wayne Newton (entertainer), Barry Manilow (entertainer), Burt Reynolds (actor), and Toni Braxton (singer) have all been bankrupt.
DEBTS THAT MAY NOT BE DISCHARGED
You should understand that there are some debts which are not dischargeable in bankruptcy: these include, but are not limited to, alimony, child support, debts relating to alimony, certain taxes, debts arising out of a fraudulent transaction, and student loans that do not represent an undue hardship.
There are two principal ways to file personal bankruptcy. The first and most common one is called "Straight Bankruptcy" or "Chapter 7". Under this type of bankruptcy almost all debts are wiped out completely. You will be allowed to keep your home in which you live so long as the acreage upon which it sits does not exceed ½ acre in a city or 160 acres in an unincorporated area. Naturally, you would need to keep paying your mortgage. Of course, there are exceptions to everything and your circumstances may differ.
In order to use the liberal exemptions of the State of Florida, you must have lived here for at least the 730 day period (approximately 2 years) before we file your petition. If you have moved to Florida within the 730 day period then your exemptions will be limited to those of the state where you lived for the greater part of the last 180 day period (approximately 6 months) before the 730 day period.
If you have moved to Florida within the last 1215 days (approximately 3 years, 4 months) then the equity (the value of your home after deduction of all mortgages and equity loans) will be limited to $125,000.00 (possibly per debtor).
In addition, there may be other reasons why your protected homestead would be limited to $125,000.00 of equity and these could include: conviction of a felony for a previous abuse of the bankruptcy law, violation of security law or a criminal act or intentional act causing serious personal injuries or death to someone else in the five year period before you filed for bankruptcy. In addition, if within the last ten years you made a fraudulent conversion of an asset to avoid losing it in bankruptcy, your homestead may be denied.
The new bankruptcy law requires the use of “means testing”. This is a determination to be made by us and then reviewed by the U.S. Trustee’s Office as to whether you have the ability or the “means” to pay some of your bills back. “Means testing” applies if you are primarily a consumer debtor. However, if the bulk of your debts are from business debts, then “means testing” may not apply.
Many people will be exempt from “means testing” if their income for the last six month period falls below the median income for a person in Palm Beach County. The median income will vary from time to time. It is currently approximately $40,898.00 per year for an individual and approximately $51,945.00 for a family of two. As the number of your dependents increases, the income limits likewise increases.
If your income is currently above the median we will have to determine if, after payment of all secured debt (automobile loans, home mortgages, boat loans, etc.), child support, and living expenses as limited by the Internal Revenue Service, your remaining income is greater than 25% of your debts divided by 60 (the number of months in your five year repayment plan), or the sum of $100.00 to $166.00 per month. Of course, this is a very complex and time consuming process. The test is to see whether you can pay between $100.00 and $166.00 per month towards your credit card debt. If you can, then we would have to file your bankruptcy under Chapter 13 of the Bankruptcy Code which would require a 5 year partial repayment plan. After the plan is completed, the remainder of your debts would be eliminated.
One of the other changes of the bankruptcy law is that you will be required to undergo mandatory consumer credit counseling which can be done over the internet, by telephone or in live classes. This requires approximately 1 hour of your time and generally costs $50.00. After we have filed your case you will have to undergo additional credit counseling within 45 days of your Meeting of Creditors which will take two hours and the fee will also be $50.00.
PERSONAL PROPERTY ALLOWED
If you own a home and claim it as your homestead, you will be allowed to keep $1,000.00 of personal property (furniture, money, stocks, household goods, jewelry, etc.) and $1,000.00 of value in a motor vehicle. In addition, if you do not own a home, and do not claim a homestead, you will be allowed to keep $5,000.00 of personal property. For example, a husband and wife, together, could be able to keep $2,000.00 of personal property, $2,000.00 of motor vehicles, and an additional $10,000.00 of personal property if they do not claim their home exempt. These prices may not seem like very much to you but the amounts listed are liquidation, auction or “garage sale” prices.
The other (less common) way for a consumer to file for bankruptcy would be by filing a Chapter 13 petition in bankruptcy. This is a personal re-organization plan for bankruptcy. Under Chapter 13 you will have to pay back a portion of your debts over the next three to five years. The advantage to this method is that you will be able to keep all of your personal property even if it exceeds the sum of $1,000.00.
The portion of your debts that you will be paying back over the next three years may be as low as 10% of the amount owed. If you choose this way to file bankruptcy, you will have to make regular monthly payments to the trustee. While it may seem advantageous to be able to keep all of your property, you would still have to pay to the trustee the present value of that property over the next three to five years so there is no net gain to filing under Chapter 13.
The vast majority of the cases filed in our district are Chapter 7 cases. People that file Chapter 13 primarily do so to save their homes from foreclosure. In this instance you would be able to catch up all of your mortgage arrearages over the full length of your reorganization plan which would effectively stop a mortgage foreclosure. In addition, you could eliminate some second mortgages on your home.
Bankruptcy will remain on your credit report for ten years from the date of filing bankruptcy. However, you should understand that a bad credit rating, without the filing of a petition in bankruptcy, would remain on your record for seven years.
There may be hearings involved under either Chapter 7 or Chapter 13. Under Chapter 7, a meeting of creditors is held between 20 to 40 days after your case is filed. At that time, your creditors will have a chance to meet and ask you questions. As a practical matter, the creditors usually never appear and, instead, a trustee will ask you questions for approximately five minutes regarding your bankruptcy schedules.
Under Chapter 13, there are two court appearances. The first is the meeting of creditors, similar to the one outlined above. The second hearing is the confirmation hearing. However you will seldom have to appear for your confirmation hearing. At the confirmation hearing the judge will either approve or deny your reorganization plan.
If you choose to file Chapter 13, then Mr. Young will explain these details to you. It is most important that you be prompt at all court appearances. The location for all meetings of creditors is the Flagler Waterview Building, 1515 North Flagler Drive, 8th Floor, West Palm Beach. The location for any court hearings is currently the same.