LEGAL MATTERS: Think Twice Before Filing Bankruptcy
Wednesday, May 02, 2012
According to the non-partisan American Bankruptcy Institute, 4,787 Rhode Islanders filed for bankruptcy last year. That number is slightly down from the year before, but slightly more than 2000 more than in 2007.
Bankruptcy: the right answer?
For some, bankruptcy is the right answer, but it should usually be the last resort. One reason is that it stays on credit reports for 10 years; another is that once a debtor receives a discharge, the debtor may not file again for 8 years.
Before filing, debtors may first want to workout a payoff plan with creditors. Debtors can try this on their own, but should be aware that when the bills are large it usually takes an attorney and the threat of bankruptcy for the creditor to come to the table.
Debt settlement services: buyer beware
Some debtors seek help through debt settlement services. When these companies are involved, debtors pay the company a gross amount, the company takes a fee off the top and the remaining amount is parceled out to the creditors. Debtors should investigate and choose these services carefully. While there are some legitimate debt counseling and settlement services that do provide valuable assistance, there are others that have actually engaged in conduct that has worsened the debtor’s situation. For example, one company was sued by the State of New York which alleged the company settled debts for less than 2,000 of the 18,000 customers from which they had collected fees. New York sued another company after close to 2,000 signed up, only 64 completed the program and 27 ended up paying more than they originally owed because of the company’s fees.
Many attorneys are willing to negotiate debt workouts for their clients. For example, a debtor’s attorney may enter into an agreement with a creditor to halt the accrual of interest and negotiate a monthly payment plan. Sometimes, the creditor will want the debtor to pay off a percentage of the debt up front. The attorney may charge a flat rate or hourly fee for their service.
Frequently, bankruptcy comes to the mind of debtors who have been sued by a creditor. The mere filing of a lawsuit should not spur a debtor to immediately file for bankruptcy. Lawsuits can be defended, compromised and/or settled. Even in the case of a judgment, the judge will hear evidence from the debtor about his or her financial circumstances before ordering payments. In this circumstance, again, the services of an attorney are advisable.
Chapter 7 or 13?
When bankruptcy is the chosen option, debtors whose debt is mostly consumer debt will file a bankruptcy petition under Chapters 7 or 13 of the bankruptcy code. If, after taking a means test, it is determined that the debtor cannot pay back his or her creditors, the debtor will file under Chapter 7. If, however, the debtor makes enough to pay back his or her creditors, the debtor will file under Chapter 13 and a repayment plan will be established.
Whether a debtor files under Chapter 7 or 13 the debtor must be ready to provide the Trustee – the person who oversees the filing in the early stages-- with three years of tax returns and six months of paycheck stubs. Debtors should also pull their credit reports to help ensure that every creditor is listed in the filing.
Once the petition is filed, the automatic stay kicks in and creditors are no longer permitted to contact debtors. This can bring some much needed peace to debtors who have often been hounded by phone calls and mail.
Although the bankruptcy laws have been tightened over the last decade, most debtors are able to keep the majority of their assets under federal or state exemptions.
Rhode Island bankruptcy exemptions
In Rhode Island, debtors can choose to exempt up to $300,000 in equity a debtor has in his or her primary residence. Rhode Island law also allows debtors to keep up to $9,600 in furniture, $2,000 in jewelry and a single car worth $12,000. There are numerous other exemptions that allow debtors to keep such things as trade tools, certain retirement plans and other assets. There is also a $5,000 wildcard exemption that can be used to exempt other assets or to augment one of the other exemptions.
The trustee will look for substantial non-exempt items to liquidate and pay off creditors.
How much debt will be repaid and how much will be discharged will depend on the facts of the case. Creditors that loaned money to purchase a particular item and have a security interest, lien or mortgage in the typical loan for a car or home can be still discharged. If a debtor wants to keep that item, he or she will have to reaffirm the loan. If not reaffirmed the creditor has the right to repossess the item. If, however, that item is reaffirmed, the debtor will still have to pay that bill.
There are exceptions to discharge, among them: child support, liability to another party caused by the debtor’s intentional act; taxes less than three years old; fines from state, municipal or federal governments; and fraudulent transactions to name a few.
Student loan debt: bad news
For debtors saddled with student loans, the news is not good. Formerly dischargeable, student loans are now only dischargeable in Chapter 7 if a debtor can prove undue hardship. Although the devil is in the details on these cases, the typical case would be a debtor who suffers a serious injury and is unable to work or a debtor who works in a very low-wage job where the pay is not likely to change. If the debtor is in a Chapter 13, he or she can usually reduce the monthly payments on the loan.
One word of warning – some debtors attempt to sidestep the law and hide assets from the court. Under the law, any asset transferred within 90 days of bankruptcy can be pulled back into the estate. If the transfer was made within one year to an insider, such as a family member, the asset can be pulled back in to bankruptcy estate and liquidated to pay off creditors.
Only a debtor who has carefully considered all of the options can determine whether filing for bankruptcy is the best course of action.
The foregoing is offered for informational purposes only and is not legal advice nor does it create an attorney-client relationship.
Susan G. Pegden is a litigation associate with the Law Firm of Hamel, Waxler, Allen & Collins in Providence. She is admitted to practice in Rhode Island and Massachusetts and is a member of the Board of Governors of the Rhode Island Association of Justice (RIAJ).
Sean P. Feeney is a partner with the Law Firm of Hamel, Waxler, Allen & Collins. He is admitted to practice in Rhode Island, Illinois and Wisconsin. Mr. Feeney is a former special counsel to the City of Providence, military prosecutor with the United States Marine Corps and Special Assistant United States Attorney for the Central District of California.
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