Bankruptcy filings in December 2009 topped 110,000 for the tenth straight month, for a 32% increase over last December’s total. The high number of December filings suggests an unusual seasonal pattern. December filings typically are much lower than November filings, but this year they were almost identical (even considering the relative number of days). Still, the trend in bankruptcy filings in recent months suggests that we have passed the peak of filings related to the economic crisis, and thus that 2010 filings will be lower than 2009 filings. Rolling three-month data (Figure 1) account for the seasonality in filing trends, but illustrate the comparatively higher filing patterns for 2009. For comparison, foreclosure data over the last three years reveal no comparable peak (Figure 2, based on data from the Mortgage Bankers Association).

With the December filings, the total for 2009 is above 1.4 million, a 32% increase over filings for 2008. Indeed, 2009 filings were the highest in any year since the 2005 bankruptcy reform bill.

The increase includes a marked upturn in the last year in Chapter 7 (liquidation) filings, which have increased by more than 42% as compared to this time last year, where Chapter 13 (rehabilitation) filings have increased by only 12%. The steadily declining share of Chapter 13 filings (less than 30% of 2009 filings to date) contrasts with the strong push by Congress in its 2005 bankruptcy legislation to encourage bankrupts to choose Chapter 13 rather than Chapter 7.

Nationwide, 2009 filings amounted to more than 12,000 filings per million households – about 1 in every 80 households. As Map 1 shows, the high filing rates are concentrated in two clusters: the Southwest and the Southeast. Interestingly, as Map 2 shows, the concentration of foreclosure proceedings is much different, with the highest concentrations clustered in the northern Midwest.

The states with the highest household-adjusted bankruptcy filing rates are Nevada (two-and-half times the national average), followed by Tennessee, Georgia, Alabama, and Indiana (with household-adjusted filing rates more than one and a half times the national average). More than one out of every six bankruptcy filings this year has occurred in one of those States, even though those States include only one in twelve American households. The lowest filing rates were in Alaska (less than a third of the national average), followed by the District of Columbia, North Dakota, South Carolina, and South Dakota (all far less than half the national average).

The States with the biggest increase in filings over the previous year were Arizona (an 80% jump) followed by Nevada, California, Wyoming, and Utah (all with increases of 55-60%). Although 2009 filings were higher than 2008 filings in all States, several States have experienced comparatively modest increases. The lowest increases (all about 12-14%) are in Nebraska, Pennsylvania, Alaska, and Tennessee.

At the county level, the counties with the highest filing rates (adjusting for households located in the county) were concentrated in Georgia. Seven of the ten counties with the highest filing rates were in Georgia, with the highest rate in the county occurring in Shelby County, Tennessee (Memphis), with a filing rate almost three times the national average. The second and third highest filing rates were in two counties east of Atlanta (Newton and Barrow), both with filing rates more than two and a half-times the national average.

On a national basis, 28% of all filings to date were under Chapter 13, the procedure most directly related to home-mortgage distress. Again, there was a substantial variation among the States on the prevalence of bankrupts seeking Chapter 13 relief. The States with the highest share of Chapter 13 filings (50% or more in each case) were concentrated in the South: Louisiana, Alabama, South Carolina, Tennessee, and Texas. At the other end of the spectrum were States with relatively low Chapter 13 shares. (The three lowest were New Mexico, Iowa, and West Virginia, all with less than 10% of their filings under Chapter 13.

This analysis was performed on data collected by the National Bankruptcy Research Center (NBKRC) by NBKRC contributor Professor Ronald Mann of the Columbia Law School.

A Decade Of Personal Bankruptcies: 1999-2009
Consumer filings dropped sharply after Congress overhauled bankruptcy laws in 2005 but have been on the rise since 2006.

Source: National Bankruptcy Research Center Credit: NPR
Personal bankruptcies rose more than 30 percent last year, with more than 1.4 million protection filings. Many middle-class Americans sought relief after losing jobs, seeing their businesses fail or facing foreclosure.
In 2005, Congress overhauled the nation’s bankruptcy laws with the intention of limiting the ability of many individuals to get rid of their debt — especially through the use of Chapter 7 of the bankruptcy code. But in this faltering economy, the law’s impact has been limited.
In fact, far more people are now using Chapter 7 — in which assets are sold to pay off debts and what can’t be paid is absolved — instead of Chapter 13. In a Chapter 13 bankruptcy filing, an individual signs up for a time-limited repayment plan and, in return, gets to keep certain assets. Creditors often get more money in Chapter 13 filings.

Expedited Bankruptcy Filings Request

Consumer reporting companies sell the information in your report to creditors, insurers, employers, and other businesses that use it to evaluate your applications for credit, insurance, employment, or renting a home. The federal Fair Credit Reporting Act (FCRA) promotes the accuracy and privacy of information in the files of the nation’s consumer reporting companies.Some financial advisors and consumer advocates suggest that you review your credit report periodically. Why?

• Because the information it contains affects whether you can get a loan — and how much you will have to pay to borrow money.
• To make sure the information is accurate, complete, and up-to-date before you apply for a loan for a major purchase like a house or car, buy insurance, or apply for a job.
• To help guard against identity theft. That’s when someone uses your personal information — like your name, your Social Security number, or your credit card number — to commit fraud. Identity thieves may use your information to open a new credit card account in your name. Then, when they don’t pay the bills, the delinquent account is reported on your credit report. Inaccurate information like that could affect your ability to get credit, insurance, or even a job.

Getting Your Credit Report

An amendment to the FCRA requires each of the nationwide consumer reporting companies — Equifax, Experian, and TransUnion — to provide you with a free copy of your credit report, at your request, once every 12 months.

For details, see Your Access to Free Credit Reports at ftc.gov/credit.

How to Order Your Free Report

The three nationwide consumer reporting companies have set up one website, toll-free telephone number, and mailing address through which you can order your free annual report. To order, visit annualcreditreport.com, call 1-877-322-8228, or complete the Annual Credit Report Request Form and mail it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. You can use the form in this brochure, or you can print it from ftc.gov/credit. Do not contact the three nationwide consumer reporting companies individually. They are providing free annual credit reports only through annualcreditreport.com, 1-877-322-8228, and Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.

You may order your reports from each of the three nationwide consumer reporting companies at the same time, or you can order from only one or two. The law allows you to order one free copy from each of the nationwide consumer reporting companies every 12 months.

You need to provide your name, address, Social Security number, and date of birth. If you have moved in the last two years, you may have to provide your previous address. To maintain the security of your file, each nationwide consumer reporting company may ask you for some information that only you would know, like the amount of your monthly mortgage payment. Each company may ask you for different information because the information each has in your file may come from different sources.

Other situations where you might be eligible for a free report

Under federal law, you’re also entitled to a free report if a company takes adverse action against you, such as denying your application for credit, insurance, or employment, based on information in your report. You must ask for your report within 60 days of receiving notice of the action. The notice will give you the name, address, and phone number of the consumer reporting company.

You’re also entitled to one free report a year if you’re unemployed and plan to look for a job within 60 days; if you’re on welfare; or if your report is inaccurate because of fraud, including identity theft.

Otherwise, a consumer reporting company may charge you up to $10.50 for another copy of your report within a 12-month period. To buy a copy of your report, contact:

Experian-1-888-397-3742
www.experian.com

TransUnion-1-800-916-8800
www.transunion.com

Equifax-1-800-685-1111
www.equifax.com

Under state law, consumers in Colorado, Georgia, Maine, Maryland, Massachusetts, New Jersey, and Vermont already have free access to their credit reports.

For details, see Your Access to Free Credit Reports at ftc.gov/credit.

Correcting Errors

Under the FCRA, both the consumer reporting company and the information provider (that is, the person, company, or organization that provides information about you to a consumer reporting company) are responsible for correcting inaccurate or incomplete information in your report. To take advantage of all your rights under this law, contact the consumer reporting company and the information provider.

Step One

Tell the consumer reporting company, in writing, what information you think is inaccurate. Include copies (NOT originals) of documents that support your position. In addition to providing your complete name and address, your letter should clearly identify each item in your report you dispute, state the facts and explain why you dispute the information, and request that it be removed or corrected. You may want to enclose a copy of your report with the items in question circled. Your letter may look something like the one below. Send your letter by certified mail, “return receipt requested,” so you can document what the consumer reporting company received. Keep copies of your dispute letter and enclosures.

Consumer reporting companies must investigate the items in question — usually within 30 days — unless they consider your dispute frivolous. They also must forward all the relevant data you provide about the inaccuracy to the organization that provided the information. After the information provider receives notice of a dispute from the consumer reporting company, it must investigate, review the relevant information, and report the results back to the consumer reporting company. If the information provider finds the disputed information is inaccurate, it must notify all three nationwide consumer reporting companies so they can correct the information in your file.

When the investigation is complete, the consumer reporting company must give you the results in writing and a free copy of your report if the dispute results in a change. This free report does not count as your annual free report. If an item is changed or deleted, the consumer reporting company cannot put the disputed information back in your file unless the information provider verifies that it is accurate and complete. The consumer reporting company also must send you written notice that includes the name, address, and phone number of the information provider.

If you ask, the consumer reporting company must send notices of any corrections to anyone who received your report in the past six months. You can have a corrected copy of your report sent to anyone who received a copy during the past two years for employment purposes.

If an investigation doesn’t resolve your dispute with the consumer reporting company, you can ask that a statement of the dispute be included in your file and in future reports. You also can ask the consumer reporting company to provide your statement to anyone who received a copy of your report in the recent past. You can expect to pay a fee for this service.

Step Two

Tell the creditor or other information provider, in writing, that you dispute an item. Be sure to include copies (NOT originals) of documents that support your position. Many providers specify an address for disputes. If the provider reports the item to a consumer reporting company, it must include a notice of your dispute. And if you are correct — that is, if the information is found to be inaccurate — the information provider may not report it again.

Adding Accounts to Your File

Your credit file may not reflect all your credit accounts. Although most national department store and all-purpose bank credit card accounts will be included in your file, not all creditors supply information to consumer reporting companies: some local retailers, credit unions, travel, entertainment, and gasoline card companies are among the creditors that don’t.

If you’ve been told that you were denied credit because of an “insufficient credit file” or “no credit file” and you have accounts with creditors that don’t appear in your credit file, ask the consumer reporting companies to add this information to future reports. Although they are not required to do so, many consumer reporting companies will add verifiable accounts for a fee. However, understand that if these creditors do not report to the consumer reporting company on a regular basis, the added items will not be updated in your file.

When negative information in your report is accurate, only the passage of time can assure its removal. A consumer reporting company can report most accurate negative information for seven years and bankruptcy information for 10 years. Information about an unpaid judgment against you can be reported for seven years or until the statute of limitations runs out, whichever is longer. There is no time limit on reporting: information about criminal convictions; information reported in response to your application for a job that pays more than $75,000 a year; and information reported because you’ve applied for more than $150,000 worth of credit or life insurance. There is a standard method for calculating the seven-year reporting period. Generally, the period runs from the date that the event took place.

Sample Dispute Letter

Date
Your Name
Your Address, City, State, Zip Code

Complaint Department
Name of Company
Address
City, State, Zip Code

Dear Sir or Madam:

I am writing to dispute the following information in my file. I have circled the items I dispute on the attached copy of the report I received.

This item (identify item(s) disputed by name of source, such as creditors or tax court, and identify type of item, such as credit account, judgment, etc.) is (inaccurate or incomplete) because (describe what is inaccurate or incomplete and why). I am requesting that the item be removed (or request another specific change) to correct the information.

Enclosed are copies of (use this sentence if applicable and describe any enclosed documentation, such as payment records and court documents) supporting my position. Please reinvestigate this (these) matter(s) and (delete or correct) the disputed item(s) as soon as possible.

Sincerely,
Your name

Enclosures: (List what you are enclosing.)

Date Your Name Your Address, City, State, Zip Code Complaint Department Name of Company Address City, State, Zip Code Dear Sir or Madam: I am writing to dispute the following information in my file. I have circled the items I dispute on the attached copy of the report I received. This item (identify item(s) disputed by name of source, such as creditors or tax court, and identify type of item, such as credit account, judgment, etc.) is (inaccurate or incomplete) because (describe what is inaccurate or incomplete and why). I am requesting that the item be removed (or request another specific change) to correct the information. Enclosed are copies of (use this sentence if applicable and describe any enclosed documentation, such as payment records and court documents) supporting my position. Please reinvestigate this (these) matter(s) and (delete or correct) the disputed item(s) as soon as possible. Sincerely, Your name Enclosures: (List what you are enclosing.)

As we do so much work with people from other counties we commonly get asked who can file for bankruptcy.  This question was settled in the 2005 changes.  Any individual residing domiciled, or having property or a place of business in the United States may file a chapter 7 bankruptcy.  To be eligible, the individual must, with certain rare exceptions, have received a credit counseling briefing from an approved agency within the 180 days before filing the bankruptcy petition.  The individual need not be insolvent and no other test is required to have been met.  A person, whether a citizen of the United States or not , may file a bankruptcy case even if the person does not reside in the United States, as long as the person has assets in the United States.

A common concern of people who file bankruptcy is what questions will the trustee ask me at the 341 meeting of creditors.  Below we have provided the guidelines put out by the U.S. Trustee’s Office.  While some of the questions are required the majority are dictated by your circumstances.  The best thing to do is to discuss this with your lawyer and come early for your meeting and sit in and listen to the questions the trustee ask the other debtors.

 

APPENDIX A SECTION 341(a) MEETING OF CREDITORS

(Effective July 1, 2002; Updated March 1, 2006)

 

REQUIRED STATEMENTS/QUESTIONS1

1.   

State your name and current address for the record.

 

2.   

Please provide your picture ID and Social Security number card for review.

 

 

a.    If the documents are in agreement with the § 341(a) meeting notice, a suggested statement for the record is: 

“I have viewed the original State of ________ drivers license (or other type of original photo ID) and original Social Security card (or other original document used for proof) and they match the name and Social Security number on the § 341(a) meeting notice.”

b.    If the documents are not in agreement with the § 341(a) meeting notice, a suggested statement for the record is:

“I have viewed the original Social Security card (or other original document used for proof) and the number does not match the number on the § 341(a) meeting notice.  I have instructed the debtor (or debtor’s counsel) to submit to the court an amended verified statement by [date], with notice of the correct number to all creditors, the United States Trustee, and the trustee; and to file with the court a redacted copy of the notice, showing only the last four digits of the Social Security number, and a certificate of service.”

c.   

When the documents do not match the petition, the trustee shall attempt to ascertain why and shall report the matter to the United States Trustee.

 

d.   

If the debtor did not bring proof of identity and Social Security number, the trustee shall determine why.

 

 

3.    Did you sign the petition, schedules, statements, and related documents and is the signature your own?  Did you read the petition, schedules, statements, and related documents before you signed them?

1 These statements/questions are required.  The trustee shall ensure the debtor answers the substance of each of the questions on the record. The trustee may exercise discretion and judgment in varying the wording of the statements/questions, if the substance of the questions is covered. 

4.   

Are you personally familiar with the information contained in the petition, schedules, statements and related documents?  To the best of your knowledge, is the information contained in the petition, schedules, statements, and related documents true and correct? Are there any errors or omissions to bring to my attention at this time?

 

5.   

Are all of your assets identified on the schedules? Have you listed all of your creditors on the schedules?

 

6.   

Have you previously filed bankruptcy?  (If so, the trustee must obtain the case number and the discharge information to determine the debtor(s) discharge eligibility.)

 

7.   

What is the address of your current employer?

 

8.   

Is the copy of the tax return you provided a true copy of the most recent tax return you filed?

 

9.   

Do you have a domestic support obligation?  To whom?  Please provide to me the claimant’s address and telephone number, but do not state it on the record.

 

10.  

Have you read the Bankruptcy Information Sheet provided by the United States Trustee?

 

 

 

SAMPLE GENERAL QUESTIONS

(To be asked when deemed appropriate.)

1.   

Do you own or have any interest whatsoever in any real estate?

 

If owned: When did you purchase the property?  How much did the property cost?  What are the mortgages encumbering it?  What do you estimate the present value of the property to be? Is that the whole value or your share? How did you arrive at that value? If renting: Have you ever owned the property in which you live and/or is its owner in any way related to you?

 

2.   

Have you made any transfers of any property or given any property away within the last one year period (or such longer period as applicable under state law)? If yes: What did you transfer?  To whom was it transferred?  What did you receive in exchange?  What did you do with the funds?

 

3.   

Does anyone hold property belonging to you? If yes: Who holds the property and what is it?  What is its value?

 

4.   

Do you have a claim against anyone or any business? If there are large medical debts, are the medical bills from injury? Are you the plaintiff in any lawsuit? What is the status of each case and who is representing you?

 

5.   

Are you entitled to life insurance proceeds or an inheritance as a result of someone’s death? If yes: Please explain the details.

 

If you become a beneficiary of anyone’s estate within six months of the date your bankruptcy petition was filed, the trustee must be advised within ten days through your counsel of the nature and extent of the property you will receive. FRBP 1007(h)

 

6.   

Does anyone owe you money? If yes: Is the money collectible?  Why haven’t you collected it? Who owes the money and where are they?

 

7.   

Have you made any large payments, over $600, to anyone in the past year?

 

8.   

Were federal income tax returns filed on a timely basis?  When was the last return filed? Do you have copies of the federal income tax returns?  At the time of the filing of your petition, were you entitled to a tax refund from the federal or state government ? If yes: Inquire as to amounts.

 

9.   

Do you have a bank account, either checking or savings? If yes: In what banks and what were the balances as of the date you filed your petition?

 

10.  

When you filed your petition, did you have:

 

a.   

any cash on hand?

 

b.   

any U.S. Savings Bonds?

 

c.   

any other stocks or bonds?

 

d.   

any Certificates of Deposit?

 

e.   

a safe deposit box in your name or in anyone else’s name?

 

 

 

11.  

Do you own an automobile? If yes: What is the year, make, and value?  Do you owe any money on it? Is it insured?

 

12.  

Are you the owner of any cash value life insurance policies? If yes: State the name of the company, face amount of the policy, cash surrender value, if any, and the beneficiaries.

 

13.  

Do you have any winning lottery tickets?

 

14.  

Do you anticipate that you might realize any property, cash or otherwise, as a result of a divorce or separation proceeding?

 

15.  

Regarding any consumer debts secured by your property, have you filed the required Statement of Intention with respect to the exemption, retention, or surrender of that secured property?  Please provide a copy of the statement to the trustee.  Have you performed that intention?

 

16.  

Have you been engaged in any business during the last six years? If yes: Where and when?  What happened to the assets of the business?

 

 

In cases where debtors are engaged in business, the following questions should be considered:

1.   

Who was responsible for maintaining financial records?

 

2.   

Which of the following records were maintained?

 

a.   

Cash receipts journal

 

b.   

Cash disbursements journal

 

c.   

General journal

 

d.   

Accounts receivable ledger

 

e.   

Accounts payable ledger

 

f.   

Payroll ledger

 

g.   

Fixed asset ledger

 

h.   

Inventory ledger

 

i.   

General ledger

 

j.   

Balance sheet, income statement, and cash flow statements

 

 

 

3.   

Where are each of the foregoing records now located?

 

4.   

Who was responsible for preparing financial statements?

 

5.   

How often were financial statements prepared?

 

6.   

For what periods are financial statements available?

 

7.   

Where are such financial statements now located?

 

8.   

Was the business on a calendar year or a fiscal year?

 

9.   

Were federal income tax returns filed on a timely basis?  When was the last return filed?

 

10.  

Do you have copies of the federal income tax returns?  Who does have the copies?

 

11.  

What outside accountants were employed within the last three years?

 

12.  

Do you have copies of the reports of such accountants?  Who does have copies?

 

13.  

What bank accounts were maintained within the last three years?

 

14.  

Where are the bank statements and canceled checks now located?

 

15.  

What insurance policies were in effect within the last year?  What kind, and why?

 

16.  

From whom can copies of such insurance policies be obtained?

 

17.  

If the business is incorporated, where are the corporate minutes?

 

18.  

Is the debtor owed any outstanding accounts receivable?  From whom? Are they collectible?

 

19.  

Is there any inventory, property, or equipment remaining?

About Bankruptcy

            Bankruptcy is a choice that may help if you are facing serious financial problems.  You may be able to cancel your debts, stop collection calls, and get a fresh financial start.  Bankruptcy can help with some financial problems, but does not guarantee you will avoid financial problems in the future.  If you choose bankruptcy, you should take advantage of the fresh start it offers and then make careful decisions about future borrowing and credit, so you won’t ever need to file bankruptcy again!

How Long Will Bankruptcy Stay on My Credit Report?

The results of your bankruptcy case will be part of your credit record for ten (10) years.  The ten years are counted from the date you filed your bankruptcy.

          This does not mean you can’t get a house, a car, a loan, or a credit card for ten years.  In fact, you can probably get credit even before your bankruptcy is over!  The question is, how much interest and fees will you have to pay?  And, can you afford your monthly payments, so you don’t begin a new cycle of painful financial problems.

            Debts discharged in your bankruptcy should be listed on your credit report as having a zero balance, meaning you do not own anything on the debt.  Debts incorrectly reported as having a balance owed will negatively affect your credit score and make it more difficult to get credit.  You should check your credit report after your bankruptcy discharge and file a dispute with the credit reporting agency if this information is not correct.

 Which Debts Do I Still Owe After Bankruptcy? 

            When your bankruptcy is completed, many of your debts are “discharged.”  This means they are canceled and you are no longer legally obligated to pay them.

            However, certain types of debts are NOT discharged in bankruptcy.  The following debts are among the debts that generally may not be canceled by bankruptcy:

            * Alimony, maintenance, or support for a spouse or children.

             * Student loans.  Almost no student loans are canceled by bankruptcy.  But you can ask the court to discharge the loans if you can prove that paying them is an “undue hardship.”   Occasionally, student loans can be canceled for reasons not related to your bankruptcy when, for example, the school closed before you completed the program or if you have become disabled.   

            * Money borrowed by fraud or false pretenses.  A creditor may try to prove in court during your bankruptcy case that you lied or defrauded them, so that your debt cannot be discharged.  A few creditors (mainly credit card companies) accuse debtors of fraud even when they have done nothing wrong.  Their goal is to scare honest families so that they agree to reaffirm the debt.   You should never agree to reaffirm a debt if you have done nothing wrong.  If the company files a fraud case and you win, the court may order the company to pay your lawyer’s fees.

            * Most taxes.  The vast majority of tax debts can not be discharged.  However, this can be a complicated issue.  If you have tax debts you will need to discuss them with your lawyer.

            * Most criminal fines, penalties and restitution orders.  This exception includes even minor fines, including traffic tickets. 

            * Drunk driving injury claims.

Do I Still Owe Secured Debts (Mortgages, Car Loans) After Bankruptcy?

            Yes and No.  The term “secured debt” applies when you give the lender a mortgage, deed of trust, or lien on property as collateral for a loan.  The most common types of secured debts are home mortgages and car loans.  The treatment of secured debts after bankruptcy can be confusing.

            Bankruptcy cancels your personal legal obligation to pay a debt, even a secured debt.  This means the secured creditor can’t sue you after a bankruptcy to collect the money you owe.

            But, and this is a big “but,” the creditor can still take back their collateral if you don’t pay the debt.  For example, if you are behind on a car loan or home mortgage, the creditor can ask the bankruptcy court for permission to repossess your car or foreclose on your home.  Or the creditor can just wait until your bankruptcy is over and then do so.  Although a secured creditor can’t sue you if you don’t pay, that creditor can usually take back the collateral.

            For this reason, if you want to keep property that is collateral for a secured debt, you will need to catch up on the payments and continue to make them during and after bankruptcy, keep any required insurance, and you may have to reaffirm the loan. 

 What Is Reaffirmation?

            Although you filed bankruptcy to cancel your debts, you have the option to sign a written agreement to “reaffirm” a debt.  If you choose to reaffirm, you agree to be legally obligated to pay the debt despite bankruptcy.  If you reaffirm, the debt is not canceled by bankruptcy.  If you fall behind on a reaffirmed debt, you can get collection calls, be sued, and possibly have your pay attached or other property taken. 

            Reaffirming a debt is a serious matter.  You should never agree to a reaffirmation without a very good reason. 

Do I Have to Reaffirm Any Debts?

            No.  Reaffirmation is always optional.  It is not required by bankruptcy law or any other law.  If a creditor tries to pressure you to reaffirm, remember you can always say no.

Can I Change My Mind After I Reaffirm a Debt?

            Yes.  You can cancel any reaffirmation agreement for sixty days after it is filed with the court.  You can also cancel at any time before your discharge order.  To cancel a reaffirmation agreement, you must notify the creditor in writing.  You do not have to give a reason.  Once you have canceled, the creditor must return any payments you made on the agreement.

            Also, remember that a reaffirmation agreement has to be in writing, has to be signed by your lawyer or approved by the judge, and has to be made before your bankruptcy is over.  Any other reaffirmation agreement is not valid.

Do I Have to Reaffirm on the Same Terms?

            No.  A reaffirmation is a new contract between you and the lender.  You should try to get the creditor to agree to better terms such as a lower monthly payment or interest rate.  You can also try to negotiate a reduction in the amount you owe.  The lender may refuse but it is always worth a try.  The lender must give you disclosures on the reaffirmation agreement about the original credit terms, and any new terms you and the lender agree on must also be listed.

Should I Reaffirm?

            If you are thinking about reaffirming, the first question should always be whether you can afford the monthly payments.  Reaffirming any debt means that you are agreeing to make the payments every month, and to face the consequences if you don’t.  The reaffirmation agreement must include information about your income and expenses and your signed statement that you can afford the payments.

            If you have any doubts whether you can afford the payments, do not reaffirm.  Caution is always a good idea when you are giving up your right to have a debt canceled.

            Before reaffirming, always consider your other options.  For example, instead of reaffirming a car loan you can’t afford, can you get by with a less costly used car for a while? 

Do I Have Other Options for Secured Debts?

            You may be able to keep the collateral on a secured debt by paying the creditor in a lump sum the amount the item is worth rather than what you owe on the loan.  This is your right under the bankruptcy law to “redeem” the collateral.

            Redeeming collateral can save you hundreds of dollars.  Because furniture, appliances, and other household goods go down in value quickly once they are used, you may redeem them for less than their original cost or what you owe on the account. 

            You may have another option if the creditor did not loan you the money to buy the collateral, like when a creditor takes a lien on household goods you already have.  You may be able to ask the court to “avoid” this kind of lien.  This will make the debt unsecured. 

Do I Have to Reaffirm Car Loans, Home Mortgages? 

           If you are behind on a car loan or a home mortgage and you can afford to catch up, you can reaffirm and possibly keep your car or home.  If the lender agrees to give you the time you need to get caught up on a default, this may be a good reason to reaffirm.  But if you were having trouble staying current with your payments before bankruptcy and your situation has not improved, reaffirmation may be a mistake.  The collateral is likely to be repossessed or foreclosed anyway after bankruptcy, because your obligation to make payments continues.  If you have reaffirmed, you could then be required to pay the difference between what the collateral is sold for and what you owe. 

             If you are up to date on your loan, you may not need to reaffirm to keep your car or home.  Some lenders will let you keep your property without signing a reaffirmation as long as you continue to make your payments.  Sometimes lenders will do so if they think the bankruptcy court will not approve the reaffirmation agreement. 

And What About Credit Cards and Department Store Cards? 

            It is almost never a good idea to reaffirm a credit card.  Reaffirming means you will pay bills that your bankruptcy would normally wipe out.  That can be a very high price to pay for the convenience of a credit card.  Try paying cash.  Then in a few years, you can probably get a new credit card, that won’t come with a large unpaid balance! 

             If you do reaffirm, try to get something in return, like a lower balance, no interest on the balance, or a reasonable interest rate on any new credit.  Don’t be stuck paying 18/-/21% or higher!

             Some department store credit cards may be secured.  The things you buy with the credit card may be collateral.  The store might tell you that they will repossess what you bought, such as a TV, washer, or sofa, if you do not reaffirm the debt.  Most of the time, stores will not repossess used merchandise.  So, after a bankruptcy, it is much less likely that a department store would repossess “collateral” than a car lender. 

                       However, repossession is possible.  You have to decide how important the item is to you or your family.  If you can replace it cheaply or live without it, then you should not reaffirm.  You can still shop at the store by paying cash, and the store may offer you a new credit card even if you don’t reaffirm. (Just make sure that your old balance is not added into the new account.)

 For Example

                       Some offers to reaffirm may seem attractive at first.  Let’s say a department store lets you keep your credit card if you reaffirm $1000 out of the $2000 you owed before bankruptcy.  They say it will cost you only $25 per month and they will also give you a $500 line of credit for new purchases.  What they might not tell you is that they will give you a new credit card in a few months even if you do not reaffirm.  More importantly, though, you should understand that you are agreeing to repay $1000 plus interest that the law says you can have legally canceled.  That is a big price to pay for $500 in new credit.

Published September 30, 2009 in SMARTMONEY MAGAZINE by Elizabeth O’Brien (Author Archive)
Linda Frakes, an entrepreneur in Georgia, built a life around her six-figure income. But when her new business collided with the credit crunch, Frakes found herself facing a financial fate she never anticipated. “It’s a far way to fall,” she says. Meet the new face of bankruptcy. This nation’s worst downturn in 70 years pushed more formerly affluent people into bankruptcy than in previous recessions. Overall, personal bankruptcy filings were up 36.5 percent in the first half of 2009 from the same time a year ago, and experts predict the number of filings will keep rising even as the economy recovers.
Leslie Linfield, executive director of the Institute for Financial Literacy, calls it “a middle-class recession”: Last year the institute surveyed likely bankruptcy filers and found 8.1 percent made more than $60,000, up from 6.9 percent in 2007. Experts blame the increase on slumping real estate and job losses, which have cut deeply into professional positions. Claire Ann Resop, a bankruptcy attorney in Madison, Wis., sees a
lot of mortgage brokers and real estate developers: “They made a lot of money, and now they can’t.”
2. “When it comes to bankruptcy, one size doesn’t fit all.”
No type of bankruptcy will eliminate certain kinds of obligations, like child support, alimony and most student loans. But there are differences in the way debt gets handled in personal bankruptcy, often depending on which kind you file for, either Chapter 13 or Chapter 7. And each has pros and cons. Chapter 13 allows those with regular income to repay debts over three to five years. That drags things out a bit, but it stops the foreclosure process, meaning debtors behind on their mortgage can keep their house and catch up on payments over time. Those without regular income must file Chapter 7, which involves no payment plan—all eligible debt, such as credit card balances, gets wiped out. But it’s hardly a free pass. Most debtors find the process pretty traumatic, not to mention severely damaging to their credit score. And Chapter 7 doesn’t stop foreclosure, so banks can still take the homes of debtors behind on a mortgage.
How do you know which form is right for you? Bankruptcy law is complex, and certain provisions vary from state to state, so it’s often best for potential filers to consult an attorney before deciding.
3. “We don’t want your house if we can’t get good money for it.”
A common belief about bankruptcy is that it will leave you with nothing, living out of a cardboard box, says Cathleen Moran, a bankruptcy lawyer in Mountain View, Calif. But that’s not necessarily true, even in Chapter 7 cases. In theory, Chapter 7 involves liquidating most of a debtor’s assets to pay creditors, including the home. But in reality, homeowners who end up filing often don’t have enough equity in their home to benefit creditors, either because they’ve taken out a second mortgage, the home’s value has fallen or both. In such cases, the trustee handling the bankruptcy can decide not to liquidate the home, in which case the debtor gets to keep it.
Also, there’s something called the homestead exemption, which in most circumstances allows you to keep your primary residence if your equity in it is below a certain threshold. It can vary widely from state to state: from $30,000 for a married couple filing Chapter 7 in Illinois, for example, to $75,000 for the same in California. But since Chapter 7 doesn’t stop foreclosure—although it tends to delay it by a few months—those behind on their mortgage often can lose their home regardless.
4. “This could actually improve your credit score down the road.”
Yes, bankruptcy will pummel your credit score, says Barry Paperno, consumer-operations manager for FICO, the company that develops the credit scoring formula used by the three major credit bureaus. Yet bankruptcy can be less damaging in the long run than juggling late payments on credit cards for years in a bid to postpone the inevitable. Bankruptcy stays on your credit report for 10 years, but you can begin repairing it immediately, if gradually.
The fact is, most people go bankrupt with lousy credit. They’ll be able to return to (and maybe surpass) their prebankruptcy FICO score more quickly than the rare debtor with pristine credit who needs to file bankruptcy after, say, a serious illness—which could mean a credit score drop of 100 points or more, Paperno says. Since 35 percent of one’s credit score is based on payment history, the further consumers get from any missed payments, the more their score improves, he says.
How to quicken the recovery? Establish new credit as soon as possible, Paperno says, either through a new credit card or car loan, though bankruptcy filers will have to pay higher interest rates.
5. “Debt-settlement firms may do more harm than good.”
Debt-settlement firms offer to play hardball with creditors and whittle outstanding balances by up to 75 percent. They bill their services as an alternative to bankruptcy, but in many cases they can hurt more than they help. Debt-settlement firms are unregulated, for-profit entities that require regular payments before taking any action on a consumer’s behalf. This business model works squarely against the debtors’ interests, says Walter Benenati, a bankruptcy attorney in Orlando who worked briefly for a debt-settlement firm. “They’re getting fees every month, so they have no incentive to settle [with creditors] as fast as possible,” he says.
In fact, you don’t need a middleman to negotiate with creditors. But, says Mariana Bekker, director of media relations for the United States Organizations for Bankruptcy Alternatives, a debt-settlement trade organization, most debtors don’t have the “time, stamina or desire” to do it themselves. Either way, you’ll owe taxes on any amount saved on your debt. (That’s right: The IRS considers forgiven debt taxable income.)
Debt erased as part of bankruptcy, by contrast, isn’t taxed.
6. “Don’t settle with Mom first or fudge the condo in Boca.”
Many debtors naturally want to pay back friends and family before filing for bankruptcy. Yet that can be a big mistake. Any money repaid to “insiders”—including relatives, friends and acquaintances, or business partners—within a year of bankruptcy is recoverable by the trustee. If the recipient doesn’t voluntarily return it, the trustee has the power to sue. A more serious infraction involves trying to hide assets from the court. So don’t even think about giving your Harley to your brother—or selling it for cheap—to protect it from creditors. Bankruptcy filers must list everything they’ve sold, transferred or given away over the past two years. And nothing can be transferred, given away or sold for less than market value.
There are many ways bankruptcy fudgers get caught. Spurned lovers or creditors often turn them in, says bankruptcy attorney Resop. She also recalls a case in which a lawyer read in the paper that a bankruptcy filer he’d represented a few years back was selling property. Turns out the filer had hidden the house from the court. He lost his bankruptcy discharge, letting creditors come after him again. Liars can also wind up in jail for perjury.
7. “Better save up before you file.”
This spring, Angela Watson realized she was in over her head. The Web entrepreneur from Long Beach, Calif., had incurred more debt than expected launching her business and wanted to explore the possibility of bankruptcy.
Yet once she started pricing lawyers’ services, which averaged about $2,000, Watson realized she couldn’t afford to file Chapter 7. Lawyers suggested she borrow the money from family and friends. “I was so hurt by that,” says Watson, who hasn’t even told some of her loved ones about her situation. She’s hoping to file with the help of a legal-services nonprofit.
Lawyers in Chapter 7 cases generally request payment up front; otherwise, their fees would be discharged during the bankruptcy process along with other debt. (In Chapter 13, lawyers’ fees become part of the payment plan.) These fees range from about $500 to $3,000, depending on the state and the complexity of the case. Bankruptcy court also charges routine fees: $245 to file Chapter 7, plus a $39 administrative fee and a $15 trustee surcharge; $235 to file Chapter 13, plus a $39 administrative fee. Consumers seeking free advice can visit the American Bankruptcy Institute’s online pro bono resource locator at probono.abiworld.org.
8. “Just because your bills stop coming doesn’t mean you shouldn’t pay them.”
Not only does filing for bankruptcy stop collection calls, but most bills stop coming too. That’s because the courts immediately file an injunction that prohibits collection actions against the debtor or his property. But that doesn’t mean debtors are suddenly released from payment obligations for secured possessions they want to keep—that’s legal lingo for anything bought with collateral, like a car or house. During Chapter 7 proceedings, which usually last about four months, you must remember to pay for what you want to keep in the absence of a bill. (In Chapter 13, those bills are folded into the payment plan the court establishes.) Besides the house and car, secured possessions could also include an engagement ring or other jewelry.
Debtors must decide to “reaffirm”—that is, keep and stay current on—any secured debt before all other debts are eliminated in bankruptcy. To do that, in the absence of a bill, contact the party you send payment to. For example, those with Chase auto loans should call the company for logistical (not legal) guidance, says a Chase spokesperson.
9. “Timing is everything.”
When you owe more than you own, it’s time to consult a lawyer, Linfield says. But that doesn’t mean bankruptcy is necessarily the next step, attorneys say. It’s often best to wait until you think the worst is over, says David Leibowitz, a Chicago bankruptcy lawyer, because if you
file prematurely, you’ll likely incur more debt, which won’t be included in the bankruptcy discharge. For example, those facing hospitalization may want to postpone until that’s behind them. And for Chapter 7 filers who stand to lose their home, holding off on filing can maximize the time living in the residence without making mortgage payments. To do this, wait until the eve of foreclosure to file for bankruptcy, Moran says.
On the other hand, there are situations in which it’s best not to wait. Those with no hope of repaying debt often have little to gain by postponing. In such cases, it’s usually better to bite the bullet sooner rather than later.
10. “Bankruptcy doesn’t have to be the end of the world.”
There’s nothing easy about bankruptcy. It can be especially hard for middle-class filers who face a swift and unexpected slide down the socioeconomic ladder. And those who file for medical reasons suffer the double burden of health problems and financial distress. An important part of the coping process, mental-health professionals say, involves acknowledging the normal feelings of depression, fear and anger that often accompany bankruptcy.
But many people emerge from it stronger than they expected. It helps that bankruptcy has become more widespread these days, lessening its stigma. “Misery loves company,” says Richard Shadick, a psychologist and the director of a counseling center at Pace University in New York City. Before she filed, Frakes, the Georgia entrepreneur, dreaded the process and worried about how it would leave her. “I thought I’d be living in a double-wide,” she says. Instead, she parlayed her marketing skills into a deal on a new rental when she lost her home in Chapter 7. (She offered to market the subdivision in exchange for a lower rent.) She lost her old Chevy but got a bargain on a used Jaguar. More rewarding than these material comforts, Frakes says, was that she emerged from bankruptcy with her friends, her family and her faith intact. Indeed, support networks often make all the difference in helping people cope with bankruptcy, counselors say, so don’t be ashamed to reach out.