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Bankruptcy Basics – Get Informed, Know your Options

While in the past, bankruptcy has come with a negative connotation, it can be a very positive debt solution for individuals who are having financial difficulty. However, many people struggling with debt don’t know that they have very affordable options available for a fresh start. In many cases information about debt relief options is available with no cash required upfront.

If you are in a financially stressful situation, here are some facts about bankruptcy that may shed some light on how you can find debt relief, begin rebuilding your credit, and obtain a fresh start utilizing the Federal Bankruptcy code.

What’s The Difference Between Chapter 7 and Chapter 13?

While both Chapter 7 and Chapter 13 discharge substantial amounts of debt for the vast majority of filers, they do so in different ways. The biggest and most immediate difference is that CH13 has options to file and seek debt relief for little or no cash needed upfront.

Chapter 7  - Liquidation or Straight Bankruptcy

Chapter 7 bankruptcy is structured to eliminate general unsecured debt. Once Chapter 7 bankruptcy is granted to an individual, the debt no longer has to be repaid. The following types of debts can be discharged in a CH7 bankruptcy:

  • Credit card balances
  • Payday Loans
  • Medical bills
  • Back Utility bills
  • Personal loans
  • Broken cell phone contracts
  • Prior car repossessions
  • Debts owed to prior landlords
  • Broken cable or internet contracts
  • Overdrawn Bank Accounts

Benefits of Chapter 7

You can stop stressful collection actions through Chapter 7 bankruptcy in the following scenarios:

  • Garnishment - If you have been threatened with garnishment, Chapter 7 can stop garnishments from most creditors. However, child support/alimony garnishments cannot be stayed under bankruptcy law.
  • Foreclosure - Filing for Chapter 7 bankruptcy can stop foreclosure proceedings for a few months. Nevertheless, if you are concerned about losing your home, Chapter 13 may be a better option for you.
  • Credit card debt - Chapter 7 can eliminate credit card debt. Yet, there are some non-dischargeable situations. For example, any luxury goods or services that were purchased within 90 days of filing for bankruptcy would not be discharged.
  • Car Repossessions -  Chapter 7 can stop a pending repossession and can get a vehicle returned that has already been repossessed within 10 days of the repo date.
  • Pay Day Loans – If payday loan lenders are raiding your bank account a CH7 bankruptcy can provide relief and discharge those debts so you can maintain your normal monthly obligations like rent, utilities etc.
  • Stop stressful collections activities

Chapter 13 – A Wage Earners Plan or Debt Reorganization

Chapter 13 is designed to accommodate debtors who have assets that they need in order to maintain their household. CH13 can assist filers in keeping their home, cars, pay off tax debts or defer student loan payments. Chapter 13 may be the right choice in the following situations:

  • Foreclosures - Whether you qualify for Chapter 7 or not, Chapter 13 is generally the best option if you are behind on your mortgage payments but desire to keep your home.
  • Vehicle repossession - If you are facing repossession of your vehicle, Chapter 13 can return the vehicle back to you before the lender sells your vehicle (as long as you file within 10 days of the repossession) and it can help you get caught up on your payments.
  • Taxes Debts - While bankruptcy can help discharge some tax debt, this is a tricky area, and an experienced bankruptcy attorney can tailor a plan to discharge some of your tax debt and create an affordable plan to pay off those that are not dischargeable over time.
  • Unsecured debt – For the vast majority of filers, unsecured debt can be discharged in both Chapter 7 and Chapter 13 bankruptcies.
  • Student Loans – Student loans are generally not dischargeable in CH7 or CH13 bankruptcy, but they may be placed on hold while you address your other debts. Once a filer has discharged their general unsecured debt and paid off their non-dischargeable debts, most filers have room in their budget to address their student loan debt.

Benefits of Chapter 13

Chapter 13 can relieve the following debt situations:

  • Obtain debt and stress relief with little or no cash upfront for W-2 employed filers
  • Keep your home, car(s) or other property
  • Catch up on mortgage and car payments
  • Stop garnishments
  • Stop repossessions
  • Take care of tax obligations
  • Hold off student loan creditors
  • Discharge the same debts that are dischargeable in CH7.
  • Stop stressful collections activities

Both Chapter 7 and Chapter 13 can stop harassing phone calls from creditors, so you can relax while your bankruptcy attorney guides you through the process of getting back to financial health. Note — to qualify for Chapter 7, individuals must go through an economic analysis called the “means test.” To find out if you are eligible for Chapter 7 or how a Chapter 13 might assist you, consult an experienced bankruptcy attorney.

Stopping Garnishment

There are two types of garnishment — wage garnishment and bank account garnishment. Here are the differences:

  • Wage Garnishment: A portion of your earned wages are removed to satisfy the amount owed to a creditor. In the state of KS and MO, there is a cap —  an employer may not hold back more than 25 percent of your gross income.
  • Bank Account Garnishment: A creditor can remove all funds in your checking account multiple times until the debt is paid in full.

By law, a creditor must win a judgment and a writ of garnishment before any funds can be removed from your paycheck or checking account. If you are being threatened with garnishment to satisfy a debt, it’s essential to contact a bankruptcy attorney as soon as possible so it can be stopped.

What is NOT Dischargeable in Bankruptcy?

When you file for bankruptcy, and “automatic stay” stops creditors from contacting you to collect any debt. Although an automatic stay stops most creditors from proceeding with collection activities, the following are exceptions:

  • Child Support - Child support is considered a “priority debt,” and you must continue to make all child support payments during bankruptcy.
  • Alimony - While alimony, sometimes called maintenance, cannot be discharged, there are some instances in which alimony could be changed. Alimony is a very tricky area and consulting a bankruptcy attorney can examine your specific situation to come up with the best solution.
  • Fines/Penalties from Breaking the Law - If you have traffic tickets, toll tickets, criminal fines or any other government-related fines or penalties, they cannot be discharged in bankruptcy.
  • Most Tax Debts - While some tax debts can be eliminated, not all are eligible. For example, payroll taxes and tax fraud penalties must be repaid. Taxes and bankruptcy are a complicated duo, so it’s best to consult an attorney if you are faced with mounting tax debts.
  • Student Loans – Public or Private
  • Secured Debts on assets that you want or need to keep.

What Is the Means Test?

The “means test’ is an evaluation of your current financial state and if you have enough disposable income to repay your debts. Below is a snapshot of how it is used to make this determination:

  • Median Income in Your State: First you’ll need to know what the median income is in your state. If your current income is less than the median, then you are probably eligible to file for Chapter 7 bankruptcy.
  • Household Income: If your household income exceeds the state median, the means test will calculate your disposable income and if it is enough to pay off all or part of your unsecured debts.
  • Consumer Debt vs. Business Debt: The means test only applies to consumer debt. Business debt is not eligible under Chapter 7 bankruptcy.

Whether or not you pass the means test, it’s important to speak to an experienced bankruptcy attorney for two reasons:

  1. An experienced attorney knows how to navigate every detail of the means test, and may find things you have missed that could very well make you eligible for Chapter 7.
  2. Passing the means test does not necessarily mean that Chapter 7 is the right choice for your current financial situation and your attorney can help you make the right decision.

How Do I Get Started?

The very first step is to educate yourself. There are many misconceptions about bankruptcy and keeping yourself informed of all bankruptcy options can help you make the best decision possible. Staying in the know can also help you communicate effectively with your bankruptcy attorney.

If you have been faced with an overwhelming amount of debt, bankruptcy may be the best option for you. No matter how dire your financial situation, Moore & Associates, LLC can help. Contact us at (913) 225-8330 for a free initial consultation today. Together we can discuss your concerns and guide you in the right direction, so you make the right choice in resolving your debt.

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