Morse & Associates, LLC

Chapter 7 and Chapter 13 Bankruptcy Attorneys

Frequently Asked Bankruptcy Questions

Questions

1. Who Should File Bankruptcy?
2. Can I Keep My Home? My Car?
3. How Much Does Bankruptcy Cost?
4. Is There Life After Bankruptcy?
5. What Happens to Garnishments? Judgements?
6. What Can Be Done With An ARM?
7. What Property Can I Keep?
8. How Does Bankruptcy & Debt Consolidation Differ?
9. Do I Need An Attorney?
10. Should I File a Chapter 7 or Chapter 13?
11. What Can Be Done About Creditor Harrassment?
12. What Debts Cannot be Discharged by Bankruptcy?

Answers

1. Who Should File Bankruptcy?

   “Who should file bankruptcy” is not a difficult mathematical question. From a math perspective, it is simply looking at your debt load and income in order to realize the point at which present and reasonable future income will not surmount the current debt load, taking into account future penalties and interest payments.

   Many fear bankruptcy, believing that it will negatively impact their credit score. This is true. Regardless of which chapter of bankruptcy you file, it will negatively affect your credit score. For most people considering bankruptcy, this is a foregone conclusion. By the time they have placed serious consideration towards bankruptcy; the damage to their credit score has already been done. Future credit, which should be contemplated for such things as buying homes and vehicles, will be a product of both your credit score and your Debt to Income Ratio.

   Following a bankruptcy, most people find themselves with significantly less debt or no debt at all. Therefore, their Debt to Income Ratio is practically as good as it will ever be. If the proper steps and effort are taken to rebuild your credit score, then you may well save yourself literally years of struggle and strife with little results by simply filing a bankruptcy and beginning anew. For many, this ability to save time and/or resolve literally irresolvable debt in a timely manner is critical to their ability to save marriages, protect their families, get on with their lives, or to do what bankruptcies do best – to begin again!

2. Can I Keep My Home? My Car?

   In Bankruptcy, the question is not so much “Can I keep my home or car?” but rather “Should I keep my home or car?” In a Chapter 7 Bankruptcy (which is still the most commonly filed variety) your residence and car can be kept, as long as you are current on their payments, remain current on their payments, and in some cases, are willing to sign a reaffirmation agreement with the lender stating that you will remain current in the future.

   In a Chapter 13, you may keep both your home and car regardless of whether you are current on the payments. Your Chapter 13 will be written so as to pay the arrears (missed payments) on these secured debts, in full, over the life of the plan. Currently, and these numbers are subject to change, in a Chapter 7 a single filer is allowed to keep a financed vehicle, or a vehicle owned outright, provided that the equity (Value of vehicle minus loans against) does not exceed $6,000.00. In Chapter 13, the value of the vehicle is allowed to be greater; the amount over the exemption level is thus made up for through the plan payments.

   Currently in Colorado, we have seen an unprecedented number of bad mortgages, typically Adjustable Rate Mortgages (ARMs) in which many people have found their monthly mortgage payments increasing to insufferable rates as they adjust with interest rates. The sad truth to this Mortgage crisis is that these homes cannot be completely separated from their mortgages. In virtually every case, to get rid of the mortgages means to surrender the home securing it. Be it a vehicle or home; with any secured debt in a bankruptcy, you always have the option of surrendering the home or vehicle to get rid of the loan that it secures.

   For example, in a home valued at $200,000.00 with a mortgage of $210,000.00 that is going into foreclosure, you would expect to have a deficiency (amount still owed by the homeowner after the foreclosure sale) of approximately $35,000.00. Here is the math: Home Loan $200,000 Less $180,000 - Monies received at auction (80% of value) Plus $5,000 (cost of foreclosure and auction) Equals $35,000 - Deficiency on foreclosed home (former homeowner held personally liable)

   Thus, by surrendering the property, the homeowner is capable of avoiding a further debt of tens of thousands of dollars. Alternatively, some owners chose to file Chapter 13 bankruptcies to pay back the arrears on their homes, believing that they will be able to keep future payments current in hopes to sell their home at a later date – in better market conditions.

3. How Much Does Bankruptcy Cost?

   Since the Bankruptcy Law Reform of 2005, the price that attorneys have charged to file and facilitate bankruptcies has increased. Some price increases are the genuine result of additional hours that the New Law requires attorneys to work for each case they file. Some firms, it seems, have used the New Law as an excuse to inflate fees beyond what is required; or to place additional costs and services on their clients with little to no real gain in the final product of their representation.

   Most common examples include: firms charging extra for credit reports - when they can be gotten for free, due diligence packages - which provide little of what their name-sake implies, or different prices for joint vs individual filings, by type of debt, or by the amount of debt a filer has. If you see a price quote that includes any of these items, then please proceed with caution.

   Morse & Associates, LLC opened its doors on the first day of the New Law. The firm has been streamlined to file under the New Law at a reasonable rate. For a Chapter 7, the filing fee is $299 and a Chapter 13 requires a filing fee of $274. Filing fees are distinct and different from attorney fees. Morse & Associates, LLC uses a “flat fee” style of billing, which is the standard in bankruptcy law. Bankruptcies billed hourly should be approached with extreme caution as they usually result in a price several times higher than what is charged by a flat fee. Worse yet, in an hourly billing system, you may not find out just how expensive the representation will be until well into it – when replacing counsel can be very difficult and place your case at a disadvantage.

   Morse & Associates, LLC has two representations for Chapter 7 Bankruptcies. Attorney Assisted Chapter 7 and Full Representation Chapter 7. For details on these, see the sections of this web page dedicated to them. Assisted Chapter 7’s are $500 on a flat fee. Most Chapter 7 cases fall under Full Representation and can range significantly. Most can be done for $1250, though in some instance they can be $1500. Chapters 13s are longer and more complicated than Chapter 7s. You must speak with an attorney in order to get an accurate quote on a Chapter 13.

4. Is There Life After Bankruptcy?

   Many people wonder what will happen to their credit after bankruptcy – specifically, will they ever be able to obtain the credit necessary to accomplish their goals in life. Most decidedly the answer is yes! Many clients find that they are offered new credit even before their bankruptcy has closed. Your ability to obtain future credit is primarily based on two things. Your debt to income ration, what you make compared to how much debt you have, and your credit score.

   If you are contemplating bankruptcy, then your credit score, in most cases, has taken significant hits already. While you will take an additional hit on your credit score by filing a bankruptcy, you might well be taking your last credit score hit. Your debt to income position in most cases is utterly reversed by a bankruptcy. With the exception of a few types of debts that cannot be discharged, the vast majority of debts are discharged; thereby, greatly improving your debt to income relation.

   Of course, none of this will happen without your effort. Many people have found that by breaking out their monthly expenses into several smaller lines of credit (as oppose to one large line of credit,) and paying them off every month, they are able to improve their credit score significantly. For example, those who undertake the repair of their credit score with vigor, can usually buy a car within 6 months after their Chapter 7 discharge at a reasonable interest rate and can look to buy a home or other real estate by their second year after bankruptcy.

   Some may still wonder, “Why would anyone loan or extend credit to someone who has filed a bankruptcy?” The answer is quite simple. In most cases, you don’t owe anyone else, so your funds are much more available to pay for additional lines of credit in the future. Imagine what you could accomplish if the monthly payments that you make now went to something other than penalties and interest. Once you have conceived this, then you will begin to understand how lenders view individuals after a bankruptcy filing.

5. What Happens to Garnishments? Judgements?
   
   Garnishments

   When a bankruptcy is filed, regardless of the chapter, the courts impose an “Automatic Stay” Order. This Federal order makes it illegal for a creditor to proceed with any collection activities against the filer. If a garnishment is pending, then it cannot be enforced after filing. If the garnishment is already in effect, then it must cease as of the date of filing. Monies seized in error after the bankruptcy filing (therefore in violation of the automatic stay) must be returned to the debtor.

   Judgments

   Many feel that once a debt has been properly sued upon and a judgment against the debtor rendered that it is too far gone to be discharged through bankruptcy. This is simply one of the many pieces of incorrect public information surrounding bankruptcy law. Discharge ability (your ability to get rid of debt) has nothing to do with whether a debt has been reduced to a judgment. Discharge ability always goes to the original nature of the debt.

   A judgment is simply another means of collection. Be careful, while most all debts are capable of being sued upon, some are more likely to take this road with your debt than others. Most commonly you will see judgments rendered on medical and apartment debts. Once a judgment is entered against you, then a creditor can begin garnishing your wages and bank accounts. This means that they could seize up to 25% of your net pay check! Whenever possible, try to file in advance of this so that you do not lose monies that you may be able to save!

6. What Can Be Done With An ARM?

   ARMs (or Adjustable Rate Mortgages) have descended on Colorado in the last several years like a plague. The most common variety carried a 2 year period after finalization where the borrower would be heavily penalized for refinancing out of them. After the 2 year period was up, then the mortgage rate (interest rate paid on the monies borrowed) would increase. Many have found that their monthly mortgage payments increased by several hundred dollars, making them impossible to pay. Others found out, when they attempted to refinance out of these loans that their property was over valued and loaned against from the beginning and hence not eligible for a refinancing.

   Bankruptcy can provide relief from ARMs, but it comes at a cost and depends on how you find yourself situated. If you have simply missed a few payments, but can afford these increasing monthly mortgage payments, and wish to keep your home, then a Chapter 13 may be a solution. In a Chapter 13, you can repay the missed payments through the Chapter 13 Plan over a period of up to 5 years. If you cannot make these payments, and this is how most people in this crisis in Colorado have found themselves, then you can file a Chapter 7 (if you qualify) or a Chapter 13 and surrender the home back to the lender as full satisfaction for the debt – no deficiency judgment.

   A deficiency judgment is calculated as follows: Monies received from the sale of the home (usually 80% of actual value) less monies owed on the loan, plus attorney’s fees for the foreclosure. For example, you bought your home for $200,000. Two years latter, the mortgage payment began to adjust, increase by several hundred dollars and you were unable to pay. After you missed 3 months of payments the bank began foreclosure proceedings. You were served a summons for the foreclosure and went to the court date where they gave you a sale date for your home (when it is actually auctioned) for about 45 days after the hearing. At the sale, the house was bought for about 80% of its true value. So the $200,000 home was purchased for $160,000. Several weeks or months later, the bank then sent you a letter. It reads "Deficiency Judgment" at the top and had the following calculation below:

   Loan amount: $200,000
   Less Monies received from sale $160,000
   Plus attorney’s fees & Cost of Sale: $10,000
   Deficiency still owed: $50,000
   
   In this example, the former home owner is personally liable for the remaining $50,000. The lender can then sue on this amount, obtain a judgment, and garnish the borrower’s wages, bank account, or lien any other properties that the borrower is on title.

   In a bankruptcy, the borrower can simply surrender their interest in the home, and by doing so, force the lending bank to take back the property as full satisfaction of the debt – NO DEFICIENCY!

7. What Property Can I Keep?

   Every state has exemption limits. Exemption limits let you know how much of your property, by category, you can keep through your bankruptcy. Most clients do not lose any property or money in their bankruptcy. For a listing of exemptions, see the Exemptions section of this web page. If you have property that is not exempt, thus capable of being seized, then you can always file a Chapter 13 instead of a Chapter 7 and work the properties equity through the plan and thus retain it, or pay the amount of nonexempt equity back into a Chapter 7 Bankruptcy estate (buy the property back out of the estate) and thus retain it.

8. How Does Bankruptcy & Debt Consolidation Differ?

   Bankruptcy is a filing in Federal Court. Debt Consolidation does not take place in any court, rather it is then same negotiation that debtors can perform on their own, but through an intermediary, usually a company or law firm. Most Debt Consolidation companies or law firms will have those enrolled in their programs contribute a certain amount of money each month to an account. While this money is accumulating, the debts are not paid. Once the debts are not paid for 60 – 90 days, some creditors will negotiate, be this through a settlement offer or an installment plan. Be careful, most Debt Consolidation Companies will not acknowledge this, but many creditors do not take part in their programs or do not offer settlements or installment programs.

   In theory, once the saving account that the enrolled person pays into every month reaches a certain amount, the consolidation company will then begin paying out the settlements that they have been able to obtain. The problem with this approach is demonstrated by the following: If you have 10 credit cards and 2 of them do not take part in these programs, but 8 do, you could be worse off than before you started. The 2 remaining cards have not been paid for some time by this point (your credit is completely destroyed usually from this) and as a result their penalties and interest may well have put the 2 remaining cards’ balances above that of the original 10 cards.

   If your debt consolidation company cannot tell you up front that they can negotiate all of your debts, and then find another company. If they tell you that they can negotiate all of your debts, then double check their work. I have had many client who were once told this only to find out that they were told whatever they needed to be told to get them enrolled, only to find out later that their creditors have never take part in any type of debt consolidation program.

   Bankruptcy differs depending on the Chapter you file, but for this section we will discuss a Chapter 7 as it is the most common chapter to be filed. In a Chapter 7 bankruptcy, your attorney will tell you up front if you have any debts that are not capable of discharge. Most all debts are capable of discharge. The most notable ones that are not dischargeable are Taxes, in some instances, Government Debt (you cannot get rid of your parking tickets), Student Loans, and Child Support.

   Once your Chapter 7 bankruptcy is filed, there are no negotiations. If your debts are capable of discharge then they are simply discharged – no pay back. Many people want to pick and choose which debts they will discharge (wanting to pay some.) You simply cannot do this and for a very good reason. Bankruptcy law is founded on equality – every debtor will be treated equally and in kind. Also, it acknowledges that debt, especially these days, is like cancer. To solve the problem, you must remove it all. With modern collections’ aggressive tactics, penalties and interest rates, any debt that would be allowed to survive, would be very capable of landing the Debtor back in their same debt dilemma in a relatively short amount of time. The courts are interested in putting you back on your feet, towards a permanent solution, not providing a brief reprieve.

9. Do I Need An Attorney?

   Prior to the New Bankruptcy Law, which went into effect October 17, 2005, many Chapter 7 bankruptcies that were simple could be filed without an attorney. Under the new code, there is very little room for errors and the additional paperwork, both in terms of evidence and documents required for writing. I would recommend that anyone considering filing a bankruptcy seek counsel. You will often see bankruptcies advertised for very cheap rates. Be careful. Paying very high fees does not necessarily guarantee that you are getting a competent and experienced bankruptcy attorney, but paying the lowest bidder usually means that you aren’t getting the best representation that you could.

   Many of these “low cost filers” start cheap, but once you are locked in (you’ve paid enough of the fees that you can’t really leave to find someone else, they tend to begin adding on charges. Find an attorney that you get a good gut reaction from. If possible, use some one off of a referral. We’re very proud of the percentage of our firm’s business that is form referral. It also helps us stay in contact with our clients, to see where they are years after their filings. A Chapter 13 bankruptcy is more complicated than a Chapter 7. It should never be attempted by anyone other than an attorney very experienced specifically with Chapter 13 Bankruptcy Law.

10. Should I File a Chapter 7 or Chapter 13?

    Which Chapter of Bankruptcy you file depends heavily on your individual case. You must meet with an attorney (face-to-face) in order to make this determination. At a Consultation, you will go over your income for the “Means Test.” There are limits, based on the size of your household, on how much money you can make in the 6 months prior to filing your bankruptcy and qualify to file a Chapter 7. If your income is below these limits (they are generally not so high as to prevent the majority of persons from filing a Chapter 7) then a Chapter 7 is an option. Attention is then paid to assets, if they can be protected in a Chapter 7 then this is likely the chapter that would do you the most good in alleviating you from debt quickly and allowing you to get back on track with your life. If your income is over the limit imposed by the Means Test, then you will have to file a Chapter 13.

    Other instances where you might choose to file a Chapter 13 rather than a Chapter 7 would include, needing to make up missed payments on a home or car to keep the property, working out tax debt, or out of a desire to pay back as much of your debts as you are able to for your own personal reasons. The decision of which chapter to file under is highly individual and it cannot be stressed enough that to make the best decision (to accomplish what you need to regarding debt reduction/elimination and protect your assets) you will need to meet with an attorney who is well versed in the field of bankruptcy law.

11. What Can Be Done About Creditor Harrassment?

    Many people choose to file bankruptcy to end what can become a seemingly endless barrage of phone calls, letter, and lawsuits from creditors. There is nothing legally preventing creditors from calling you until your case is filed. There are limits on the collector conduct and for further information you should review the Fair Debt & Collection Practice Act. Until your case is filed different firms take different approaches to creditor harassment.

    Morse & Associates, LLC encourages their clients to have the creditors call the firm after the client has deposited the first $100 of their fees. The first $100 on deposit lets the firm know that the client is actually serious about filing their case and not using the firm’s good name to simply and fraudulently delay the collection process. When creditors call a law firm and the law firm represents that they have been retained for a bankruptcy filing, many creditors will cease the phone calls and collection activities against the client for several months.

    The reason for this is fairly simple. It costs the collection industry money to call and harass you. When these companies know that you have retained a law firm to file a bankruptcy, then they know that there is a very high likelihood that you will be discharging the debt that they are trying to collect on in the bankruptcy. For this reason, many creditors will cease their relentless calling for a few to several months. If enough time has passed since they were informed that you were filing a bankruptcy, and no bankruptcy has been filed, then they will assume that you were not serious in your attempt to file and will resume their collections.

    Once you have filed your bankruptcy, you are under the protection of the Automatic Stay Order. This is a Federal Order making it illegal for creditors to commit any collection activities against you. Collection activities for the purposes of this order include anything from a phone call to a foreclosure – it is fairly broad in its scope and protection.

    Some firms claim to file civil actions against creditors under the Fair Debt Collections & Practice Act. While this is a fine act that holds the collection industry accountable for their behavior, civil suits under this act, like most civil suits, have their recoveries seized by the bankruptcy estate. In most instances, when these claims are filed, the law firm will obtain a judgment or settlement form the collector, and the firm filing the action will receive payment, but the Debtor will not receive any monies.

    What monies the Debtor would have received will generally be seized by the bankruptcy court. The net result of these actions is often having the bankruptcy’s filing delayed so that the law firm can earn a few dollars, and the delay in filing leaves the Debtor further exposed to collection activities such as lawsuits and garnishments. Morse & Associates, LLC therefore, does not advocate these actions for persons seeking bankruptcy relief.

12. What Debts Cannot be Discharged by Bankruptcy?

    While the vast majority of debts can be discharged in bankruptcy, there are a few, which for public policy reasons are not discharge able. It is possible for some tax debt to be discharged, but this is highly dependent on the age of the tax debt and whether it was properly filed. If the taxes from which the debt arises were filed correctly and on time and are over 3 years old, then they are eligible for discharge. Other governmental debt is not eligible for discharge.