Posted by Ryan Blay on April 17th, 2013 in Bankruptcy, Bankruptcy Information, Bankruptcy procedures, Chapter 13, Chapter 7, Debt Settlement, Exemptions, Illinois, Wisconsin
As an attorney who’s been practicing in consumer bankruptcy for five years now (in Illinois and Wisconsin), it’s heartbreaking and frustrating to see the huge amount of lies and misinformation about bankruptcy.
Some of these mistakes come from gossip or bad experiences in bankruptcy (including lying, bad attorneys, or other frustrations). Others come from rumors spread by the financial services industry to try to keep people out of bankruptcy (even though lenders can write off the uncollectable debt and take a tax break for it). Even worse are errors from hacks – er, attorneys/writers – who blatantly skew statistics and facts about bankruptcy filings for their own purposes. We can assure you that while nothing is ever certain with the law, the overwhelming majority of bankruptcies are successful, peaceful, and bring financial relief to our clients.
Here are some common statements about bankruptcy and the truth.
Statement 1: Why not just settle debt? It’ll be better for your credit report and you won’t have to pay a lawyer to settle debts for 40-50 cents on the dollar.
Answer: If your sole major debt is a $4,000 credit card and you can afford to pay a lump sum of $2,000, a credit card company may take it and waive the rest. To do so, you’ll have to show you have a serious hardship (not just because you don’t feel like paying) and submit financial records to prove it. You’ll also have to come up with a lump sum or a few significant payments, not a long term payment plan. Unless you’re insolvent, you’ll have to pay tax on the forgiven debt. But in the situation above, that’s fine because bankruptcy’s costs for a lawyer and the filing fees would make a bankruptcy unnecessary. Where bankruptcy absolutely becomes necessary is if you are in the same financial situation but have $50,000 worth of credit card debt and medical bills.
Even if you get every card or hospital to settle for 10 cents on the dollar (an unrealistic goal for most clients), and even if you can avoid the tax on the 1099 for the forgiven debt, that’s still at least 2-3 times what you’d pay for a bankruptcy to discharge the debt altogether. With so much debt, settlement is not only unrealistic, but it costs significantly more than a bankruptcy filing. For an attorney not to disclose that is tantamount to malpractice.
2. You cannot discharge student loans in bankruptcy.
Answer: This is another major misstatement, largely perpetrated by student loan lenders. In order to discharge student loans, there is a very high standard (possibly relaxed by a recent decision in the 7th Circuit Court of Appeals for Illinois/Indiana/Wisconsin) where you have to demonstrate a good faith attempt to make payments and a serious reason why it’s impossible to pay anything back. Essentially the situation is for people who are unable to earn a significant income, will likely never have the means to do so, leaving the possibility of repayment fruitless. That’s a high standard for sure, but it’s by no means impossible. (Think a 60 year old disabled person with only $700 per month in social security/disability coming in, with expenses of $1000 per month and $60,000 of outstanding student loans). With or without an attorney, people have successfully discharged significant private and government-backed student loan debt.
3. I want to file bankruptcy, but if I do, I’ll lose my (car, boat, beagles, RV, bank account, retirement accounts, etc.)
This aggravates me this most because it assumes that the point of bankruptcy is to take everything from the debtor. The exact opposite is true: an honest but unfortunate debtor gets a fresh start (in Chapter 7, or a repayment plan in Chapter 13) in exchange for listing, valuing and exempting assets. Every state has a scheme of exemptions (with some, like Wisconsin, allowing federal exemptions, while others, like Illinois, do not). The easiest way to find out what you can maintain: Talk to a competent bankruptcy lawyer. Call us at Lakelaw or e-mail us. Even if we don’t practice in your jurisdiction, we can refer you to a qualified consumer attorney in another area. You’ll be surprised, but typically 90% of Chapter 7 cases or so are no-asset 7 cases where the filing debtor turns over nothing.
The moral of this story: Speak with an attorney and learn the truth before believing what people write and say to scare people away from bankruptcy. It may not be for everyone, but for most debtors, it’s a huge relief and worthwhile decision.