10 things you should know before filing bankruptcy - Money Management

Black Enterprise, March, 1997 by Kelly Beamon

2. FILING DOESN'T CLEAR

ALL YOUR DEBT

Under Chapter 7, you liquidate the unsecured debt you owe; in effect, it's a declaration that you have no plan to pay creditors back. Therefore, whatever you owe on credit cards and credit lines that the courts deem to be unsecured with no property attached to them will be swept away. However, student loans are priority debts and cannot be discharged if less than seven years old. In addition, secured debt on items that can be repossessed, such as a car or a washer-dryer set, are not covered and can be taken away.

Meanwhile, if you file under Chapter 13, you're proposing to pay back your debt over a 36-to-60-month period while retaining your property. "Typically, Chapter 13 payments can range anywhere from $250 to $500 a month, in addition to a filer's mortgage, car and other secured debt payments," says Jonnie Johnson-Parker, a Los Angeles real estate and bankruptcy attorney and chairperson of the Real Estate and Probate Law Section of the National Bar Association.

Once you file, you may think you can postpone mortgage payments for a later date. Think again. Thirty days from your filing date, you must recommence your mortgage payments. People are never aware that they will have to restart their mortgage payments, plus arrears, which includes payments you missed in the interim, any foreclosure costs and interests," explains Johnson-Parker.

Don't forget your lawyer has to be paid. For instance, Grundy's firm requires a client to pay a portion of their legal fees upfront in Chapter 13 cases. The rest is paid under the client's reorganization plan, with the court's approval, he explains. Conversely, when filing for Chapter 7, there's no payment plan because clients pay all fees upfront.

3. CHECK YOUR DEBT

THRESHOLD

You've got $9,000 in student loans and you're pounding the pavement looking for work. Your rent is overdue by a week or two and the stress has become unbearable. Even though things don't look good now, experts advise you to ride out the tough times as long as you can. This is especially true in the case of college students with little or no job prospects, who have recently taken to filing bankrupt once they graduate.

"These people are the last ones we want to file since they may be only $2,000 or $3,000 in debt, and their entire financial situation is likely to change for the better in a short period of time," says Grundy.

Experts suggest that $20,000 in debt is an acceptable benchmark for filing. Anyone with less debt should look for other ways to reduce their liabilities, suggests Johnson-Parker.

4. FILING DOESN'T MEAN

YOU'LL BE DECLARED

BANKRUPT

As bad as your budget may seem, remember this: not everyone who petitions the court is declared bankrupt. Unless you choose a great lawyer who counsels you beforehand, you may have no clue to the outcome of your filing until court papers and checks to your attorney have been processed. In fact, filing for bankruptcy will stay on your credit record even if it doesn't result in bankruptcy, warns Edward Sparkman, the Chapter 13 Standing Trustee for the Eastern District of Pennsylvania. And while it's illegal for employers who view your credit report to use your bankruptcy against you in a hiring decision, the fact is they still know it's there. You may never know why you were turned down.