To Anyone Feeling Overwhelmed with Debt:
As a bankruptcy attorney, my office deals with people who are going through stressful moments in their lives. Every day we help educate people on filing bankruptcy and debt issues. Hardest part about talking with individuals about debt relief options is combating the significant misconceptions about debt issues and bankruptcy. If we are able to explain the correct information, we can help individuals truly understand the legal process and get a fresh start. But, it is not always easy because many sources promote bankruptcy as the worst option out there and that bankruptcy means you are a failure; these ideas are completely false and do not reflect the actual concept of bankruptcy.
I get asked all the time, is bankruptcy the right option for me? Should I file? I almost always respond that I can’t make that decision; it is a financial decision only you can make. On occasion, when it is the only reasonable option available to achieve their goal (like stopping a foreclosure or garnishment), I let them know it is likely your best option here. Sometimes, I can say — especially when the debt level is very low — I cannot recommend bankruptcy. Often with low debt, the bankruptcy fee could be better put to use to settle debts, make a few payments, or just use the money to live. But, often, the answer is that bankruptcy is a good option, but you need to figure out if it is the right option for you.
I think many people worry that when you talk to a bankruptcy attorney they are only going to steer you down the path of bankruptcy; this may be true for some lawyers, but not our office. Our office is the first to advise if bankruptcy will not help, make your situation worse, or be an ineffective use of your money. We take our ethical obligations to advise our clients about all their option very seriously; we want to make sure you are making the right choice for your specific situation.
For many, whether bankruptcy is a right option comes to whether they can accept bankruptcy as a financial choice and not a reflection of his/her personal situation.
Bankruptcy myths and misconceptions
More often than not, individuals who are great candidates to file for bankruptcy have preconceived ideas about bankruptcy (which are all too often negative and incorrect). Sometimes, the myths can make people wait to consider their options. Waiting can sometimes be the right decision, sometimes filing sooner means you are getting a fresh start sooner, it really depends. Too often, I hear people say:
1. Your credit will be ruined after filing bankruptcy.
2. You should only file if I have a lot of debt; filing for only $20,000.00 isn’t worth it.
3. I will lose everything, if I file.
4. I can’t have any assets if I want to qualify for bankruptcy.
5. I have a security clearance; I can’t file.
All those reasons for not considering bankruptcy are incorrect. Bankruptcy is a legal and financial option to help individuals and/or businesses manage their debts. Addressing each of those concerns:
Credit after bankruptcy
Six months to a year after bankruptcy discharge, most debtors’ have between a 600 and 650 credit score; some of my clients have even seen higher. This increase in credit is usually without too much effort. If you take good steps toward improving your credit and using credit responsibly, it can be even better.
Additionally, you will be receiving offers for credit (i.e. credit cards and car loans) immediately after filing Chapter 7 or shortly after any discharge. After bankruptcy, most people have no debts (or a limited number of debts) and there is a restriction on when the debtor may file bankruptcy again. After a Chapter 7, a debtor cannot file a Chapter 7 for at least 8 years. This makes you a better credit risk than someone with a similar credit score.
Many people are skeptical when I tell them that filing bankruptcy may help their credit or help them work toward home ownership sooner, but it is true. People facing many delinquencies on their credit before filing bankruptcy will often see improvement and many people can qualify for a mortgage between two to three years after a Chapter 7 discharge (or even one year into a Chapter 13 plan).
How much debt should you have before considering filing bankruptcy?
There is no legal amount minimum debt necessary to file bankruptcy. We usually recommend at least $15,000.00 before you start considering bankruptcy as an option. But, the amount of debt usually depends on your income. If, after reviewing your finances, you do not believe you can pay the debt back within 4 to 5 years, then bankruptcy is definitely an option to consider. A Chapter 7 would let you wipe most debt away and Chapter 13 lets you restructure the debt and often allows a payment based on your monthly disposable income.
But really, when it comes to the analysis about how much debt you should have to file bankruptcy, it is very case specific. Someone who has $20,000.00 in debt and makes $30,000.00 a year is likely going to have a difference perceptive and need to file bankruptcy and some with with $40,000.00 in debt and making $250,000.00 per year. Even someone with $40,000.00 in debt and a $250,000.00 in income may need to file bankruptcy, if they are supporting a large family with many medical issues. It all depends.
Bankruptcy is a legal and financial decision; it is not an ethical or moral one. Congress included bankruptcy as an option to deal with debt. They understand people need help dealing with debt. It also isn’t a kiss of death like many people believe it is; your credit will improve and you are allowed to keep certain things.
What can I keep in bankruptcy?
You can keep various things in bankruptcy. In a Chapter 13, you almost always keep everything you want to keep. In a Chapter 7, you are not completely without assets. There are certain bankruptcy exemptions (or protections) that apply to anyone filing for bankruptcy. Your exemptions vary depending on what state and federal laws apply to your circumstances. Most individuals are allowed to keep some cash, up to a certain value of a car, retirement plans, a base amount of household goods, and various other things. The government understands you should be a zero when you have your fresh start, but they do not want you to keep more than a fair share of assets.
Do I have too many assets to file bankruptcy?
Your assets are not part of the analysis of determining if you qualify for bankruptcy; the court is considering your debts and incomes. Assets are a consideration in determining what you could lose in a Chapter 7 or how many needs to be paid out in a Chapter 13. Sometimes it is surprise what can be protected in a bankruptcy. For example, I have some clients who are able to protect $200,000.00 worth of equity in their home and others who cannot even protect $7,000.00 worth of equity. Assets vary dramatically from individual to individual; an experienced attorney can advise you on what could be at risk in your particular situation.
Security Clearance in Bankruptcy
Being in northern Virginia, we regularly have individuals who file bankruptcy with security clearances. Filing for bankruptcy relief will not automatically prohibit you from obtaining a security clearance. But whether you have a history of financial irresponsibility will be considered during the evaluation process. If the debt was incurred due to a situation outside of the control of the debtor, such as divorce, illness, loss of job, etc., the concern of losing your security clearance is often a lot lower. The evaluation heavily concerns whether it is likely you will be in debt again.
Bankruptcy is a legal way to apply for debt relief. Handling your debt through a bankruptcy is a better option than just having outstanding debt. With substantial debt, the government can be concerned about the potential for being compromised or bribed. A bankruptcy means your debt has been discharged in a Chapter 7 and/or you have a reasonable repayment plan in a Chapter 13. In fact, getting rid of debt in a bankruptcy could increase your chances of approval. Filing shows that you are taking proper steps toward correcting your financial situation.
Options to manage debts
The most important thing I tell my clients is that they should understand all options available to them. Bankruptcy is just one financial tool out of many that you can use when having financial problems. Only when you understand all of your options can you make the best decision for your situation. Other options we often at least want our clients to understand include: debt negotiation, debt consolidation, and waiting. Each option can have pros and cons, but will vary due to the specifics of a person’s situation.
Timing is also important when considering your financial issues. Some people come to talk about a bankruptcy months before filing. Others file within two days of filing. If you understand the pros and cons of a bankruptcy well before you file, you could make decision about when to file that is best for you. If you wait until the last minute to consider bankruptcy, for example when a foreclosure is schedule or a garnishment is pending, you have a limited timeline and may have not been able to full review any pros and cons. For example, we do not usually recommend filing bankruptcy within 90 days of any cash advance due to the fact a creditor can object to that debt being discharged.
We offer a free consultation to potential clients for many reasons; we want clients to understand the process, and to see if the client is comfortable with our office. Bankruptcy is a personal process; you must disclose a lot of personal and financial information. If you are not comfortable, you may leave some important information out. We tell our clients you need to be comfortable with us; clients need to be completely candid with your bankruptcy attorney. Many problems can be prevented during a bankruptcy with complete and exact information. Fixing problems after the fact can be difficult, especially when due to lack of information.
You are not alone
Since the economic downturn of 2007, millions of individuals have filed bankruptcy. Now with the looming recession in 2023 (with increased costs of living, high inflation and stagnant wages), we are seeing the beginning of more individuals struggling to make ends meet and needing help with their debt. Some people have had to file bankruptcy twice in the last 10 years because of many factors, like difficultly finding work even after a bankruptcy, negative equity in real estate, and much more. Bankruptcy is one of many debt relief options; even if you do not need bankruptcy, you may find relief using other options, such as debt negotiation or settlement.
Bankruptcy is a financial tool; Congress included bankruptcy in the laws because the government understands that people can need help with their debts. To make the best decision for any situation, you should educate yourself on all available options. Bankruptcy is one option to help manage one’s finances, it may be or may not be the best option for you, but you owe it to yourself to at least understand the option.
If you want to talk about available options to deal with your debt in northern Virginia or DC, set up an appointment with our office. We want to help you understand your options and get on the right track.
Attorney Ashley F. Morgan is a Virginia licensed attorney. She has been helping clients deal with debts for most of her career; she enjoys being a bankruptcy lawyer and helping her clients. It is important for her that her clients are making the best decision for their circumstances.