Bankruptcy: A clean slate, but at what cost?
FARGO – For months, Amy Flaten cried any time she talked about bankruptcy.
In her late teens and early 20s, she’d racked up debt after her fiancé at the time had been injured and stopped working and started doing physical therapy. She was a full-time student and working full-time, but there wasn’t enough money.
“I used credit cards to keep us afloat until (the relationship) ended,” she says.
When she got married to someone else three years ago, she thought of the debt as her problem. She went to the Village Family Service Center for advice. She met with five bankruptcy attorneys before hiring one.
The attorney encouraged Flaten and her husband to file jointly. They filed for Chapter 7 bankruptcy last year, and it was discharged in February.
They still have student loan debt, but are not encumbered any more, she says.
The legal process was easier than the emotional one, says Flaten, now 28.
“Every time we met with the attorney I was a basket case,” she says. “She always said I did the bravest thing and looked for help instead of sitting and home and struggling.”
She describes the relief that came with the debts being erased was “bittersweet.”
“We never set out to not pay these people,” she says.
For some people, bankruptcy may be the least of all evils. It’s not an easy answer to financial problems, but sometimes the only one available.
Simply put, bankruptcy is a way to relieve yourself of debt, says Duane Emmel, a financial counselor with the Village.
He describes it as a last resort.
“It can help alleviate the debt or take care of it,” Emmel says. “At the same time, it’s going to be difficult for you as you move forward.”
Individuals can file for either Chapter 7 or Chapter 13 bankruptcy.
Bankruptcy law changes enacted in 2005 made it more difficult for people to qualify for a Chapter 7, which liquidates the filer’s assets and cancels the remaining debt. Now, only people whose income falls below the state median can file Chapter 7, and people can’t file for another Chapter 7 bankruptcy for 8 years.
Chapter 13 is a reorganization of debts. Filers are put on a repayment plan of up to 5 years, during which they submit extra disposable income to a trustee.
Laura Berger, a Fargo bankruptcy attorney, says bankruptcy is like a death. Everything goes into an estate, the exemptions are taken out and a trustee divvies it out.
“Then you’ve got this new life,” she says.
Berger says the people who come in her office often have lost a job, been sick, had a child, owned a failed business or divorced.
“What really makes you sad is when you see retired people come and they’ve used up everything,” she says.
Emmel says reports indicate about half of all bankruptcies are because of medical debt.
“Even though they come in with credit card debt, they’ve used the credit cards to pay the medical bills,” he says.
Judge Shon Hastings has been the bankruptcy judge based in Fargo for two years.
She says a common misconception is that everyone who files bankruptcy has made bad decisions or can’t manage money.
“What I see are a lot of people who are surviving cancer or accidents,” she says.
Hastings says the American dream of obtaining an education – and funding it through loans – has created situations where the pressure of those loans makes other debt too burdensome.
“I think you have to be a lot more mindful now about the money you borrow,” she says.
In North Dakota, 446 people filed for bankruptcy in the first half of 2013.
Dianne Schmitz, clerk of court, says filings have decreased over the past couple of years, at a higher rate than they’ve decreased nationally.
When and why
Filing bankruptcy provides immediate protection from creditors, stopping phone calls that can plague people in debt. It also stops garnishments, protecting the income debtors earn, Emmel says.
People often think they’ll lose all their property if they file bankruptcy, but many assets are exempted. Some secured debts can be separated, Emmel says.
Some debts cannot be relieved by bankruptcy. Child support, student loan and tax debt are extremely difficult, if not impossible, to discharge.
“Bankruptcy isn’t going to solve all the problems,” Emmel says. “It’s not an easy way out. It’s something that has to be thought through. You’ve reached a point where you’ve exhausted all your options.”
At that point, Emmel encourages clients to accept the decision. “Don’t keep dragging all the old luggage,” he says.
So when is bankruptcy a good idea? Berger lists these situations:
- You’re three to six payments behind on your home. (People who file bankruptcy typically keep their home.)
- You’ve started to dip into retirement savings to meet your bills. (Retirement funds are protected in a bankruptcy.)
- You’re facing vehicle repossession. (Cars are often also exempt in bankruptcy.)
- Your wages are being garnished.
Berger often discourages the young, single and childless from filing if they have $10,000 to $20,000 in debt.
“Paying that debt off or making an offer is a possibility,” she says. It’s better they not do that and “have a splotch against their life.”
Kip Kaler, a Chapter 7 trustee who also files cases for debtors and represents creditors from time to time, tells people to file bankruptcy if they can’t in reasonable expectation pay their debt.
Others may not be good candidates, such as people living on Social Security Disability who have no significant assets, he says.
“Before you file, a good attorney will tell you what the outcome is going to be,” he says.
Bankruptcy leaves a lasting imprint on the lives of those who file. It stays on a person’s credit report for up to 10 years.
It can be difficult to get a mortgage or car loan. Filers may start to receive offers for credit cards and other financing, but with unfavorable terms.
“You’ll be paying higher interest, but life is possible,” Berger says, noting that filers can start rebuilding their credit score sooner than they might think.
Effects go beyond credit scores. Berger says a bankruptcy filing can “come up and grab you in strange ways.” She had a client in the National Guard who lost a high-level security clearance after filing.
It also affects how other people think of you, Kaler says.
“Most of us of good conscience aren’t going to want to file,” he says. “It does reflect upon the person who filed.”
On the other side of every bankruptcy are the creditors, businesses or individuals who don’t get paid money they’re owed. Those costs get passed to the rest of us to some extent, Kaler says, whether through higher interest rates on credit cards or greater costs of goods.
While many people can explain away the bankruptcy, there’s a reason it stays on credit reports for a decade. “There ought to be a stigma,” he says.
Flaten hears the negative way people talk about those whose names are published in the newspaper or, as a payroll employee, about people whose wages are garnished, as hers had been before filing.
“It’s embarrassing in a lot of ways. You feel like you failed,” she says.
But Flaten says she can’t change what happened, so she wants to stop being embarrassed and move on.
“It’s not as black and white as people see it,” she says.
Automatic stay: An injunction that automatically stops lawsuits, foreclosures, garnishments and all collection activity against the debtor the moment a bankruptcy petition is filed.
Chapter 7: The chapter of the Bankruptcy Code providing for “liquidation” (i.e., the sale of a debtor's nonexempt property and the distribution of the proceeds to creditors).
Chapter 11: The chapter of the Bankruptcy Code providing (generally) for reorganization, usually involving a corporation or partnership.
Chapter 12: The chapter of the Bankruptcy Code providing for adjustment of debts of a "family farmer" or a "family fisherman.”
Chapter 13: The chapter of the Bankruptcy Code providing for adjustment of debts of an individual with regular income. (Chapter 13 allows a debtor to keep property and pay debts over time, usually three to five years.)
Discharge: A release of a debtor from personal liability for certain dischargeable debts.
Exemptions, exempt property: Certain property owned by an individual debtor that the Bankruptcy Code or applicable state law permits the debtor to keep from unsecured creditors. For example, in some states the debtor may be able to exempt all or a portion of the equity in the debtor's primary residence (homestead exemption).
Means test: Determine whether an individual debtor's Chapter 7 filing is presumed to be an abuse of the Bankruptcy Code requiring dismissal or conversion of the case (generally to Chapter 13).
Nondischargeable debt: A debt that cannot be eliminated in bankruptcy. Examples include a home mortgage, debts for alimony or child support and certain taxes.
341 meeting: The meeting of creditors required by section 341 of the Bankruptcy Code at which the debtor is questioned under oath by creditors, a trustee, examiner or the U.S. trustee about his/her financial affairs. Also called creditors' meeting.