Bankruptcy – A Frank Discussion

Few people who have successfully declared bankruptcy will tell you the process is an effortless discharge of debts followed thereafter by a fresh and new life.  To some, bankruptcy is an embarrassing admission of fault, defeat, or insufficiency.  Still others consider it a terrible chapter of their life and one of the top five life-altering negative events one can endure, along with divorce, severe illness, disability, and the loss of a loved one.

Nevertheless, apparently not all Americans are discouraged from filing bankruptcy.  According to the United States Department of Justice, the number of Americans filing bankruptcy has grown from approximately 110,000 annual filings in 1960, to over 1 million in 2013.  Although Third Branch News, an online publication put forth by our United States Courts, reports that those 2013 bankruptcy filings were down 12 percent from fiscal year 2012, that percentage becomes more alarming when you realize the total number of working adults hovers around 152 million annually.  Moreover, before you dance in the streets and applaud our recent reduction in filings, note that between 2009 and 2013, nearly 6.6 million non-business bankruptcy filings occurred in this country.

The Pros of Filing:  By filing, it stops all collection actions by creditors including foreclosures, repossessions, and garnishments.  By filing, you can begin to rebuild your credit.  Credit card companies love recent bankruptcy clients because they make for the safest card applicants.  You are precluded from filing again for many years so whatever you charge will likely stick this time.  Finally, it may prevent multiple lawsuits against you to collect debts thereby preventing your name from being published in court records or newspapers.

The Cons of Filing:  According to recent research by the National Bureau of Economic Research, the average cost to file for Chapter 7 bankruptcy protection is more than $1,500.  Those fees can include $300 to file, fees for mandatory pre-bankruptcy credit counseling and a pre-discharge debtor education course.  Because of those costs, approximately 200,000 consumers will use their tax refunds to pay for bankruptcy this year.  By filing bankruptcy, you generally lose all your credit cards (unless they are paid off before filing) and you may lose some of your luxury possessions such as extra vehicles, motorcycles, trailers, four-wheelers, second homes, timeshares, etc.  A bankruptcy makes it more difficult to obtain a traditional mortgage and the filing of bankruptcy remains on your credit report for 10 years, making it more difficult to purchase items such as insurance and luxury items at competitive rates.  To some, a bankruptcy makes obtaining employment more difficult.  Finally, it is certain that your name will appear in court records and newspapers if you file.

Not all debts are automatically discharged in bankruptcy.  Student loans and taxes are often excluded from debt relief.  The United States Bankruptcy Code, specifically section 523(a)(8), spells out that student loans are exempted from forgiveness unless it poses an “undue hardship” to the party filing.  The Brunner standard sets forth a list of three circumstances that must be demonstrated to qualify for student loan discharge:  (1) if the loans are repaid, it will make you unable to maintain a minimal standard of living for you and your family; (2) your financial circumstance is likely to continue through the remainder of your loan repayment term; and (3) you have made good faith efforts to repay your student loans.

To obtain student loan forgiveness, you must take extra steps.  Your bankruptcy attorney must file an adversary proceeding, a separate lawsuit associated with the bankruptcy.  The process is akin to suing the student loan creditor to obtain relief from some or all of your debt.  You are strongly encouraged to hire legal counsel to address this debt topic.  According to a Harvard law school study, most successful parties who discharged some or all of their student loans were unemployed; had a medical hardship or was in a lower income bracket the year before filing.  According to that same study, 70,000 people each year discharge some of all of their student loans in bankruptcy equating to approximately 40% of those who request some relief from student loans.

In summary, bankruptcy is a life-altering event and should be carefully considered before filing.  Because the costs are high, it would be prudent to consult with an experienced attorney to discuss debt consolidation and debt defense first.  Such a counseling session may lead to legal services that will allow you to avoid filing bankruptcy altogether.  If your decision to file bankruptcy is concrete, an experience attorney should be consulted in all cases and most importantly if your goal is to discharge student loans or tax liabilities.