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5 Questions You Must Ask Before Filing Chapter 7 or Chapter 13 Bankruptcy

Lynnette Khalfani-Cox, The Money Coach by Lynnette Khalfani-Cox, The Money Coach
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A number of celebrities have made headlines in recent months for having enormous debts and tax problems or because they’ve filed for bankruptcy protection. Actor Eddie Murphy’s ex-wife, Nicole, reportedly owes millions of dollars, including five IRS tax liens of just under $850,000.

Singer Toni Braxton recently went bankrupt for the second time, with debts between $10 million and $50 million. And rapper Xzibit – who is said to owe nearly $1 million to the IRS – also headed into bankruptcy court in December 2010, after two previous attempts to wipe out his debts failed.

But celebrities with huge financial woes aren’t the only ones going broke. More than 1.53 million Americans filed for bankruptcy protection in 2010, a 9% increase over 2009 levels, according to the American Bankruptcy Institute. With credit card debt and unemployment running high, experts predict that consumer bankruptcies will continue to rise in 2011 – following a trend that’s been growing since 2005.

If you or someone you know is contemplating bankruptcy, here are five important questions you must ask before heading into court to seek financial relief:

1. How much will it cost me?

Most people who file bankruptcy use a lawyer, and doing so isn’t cheap. Expect to pay anywhere from $1,500 to as much as $4,000, depending on the complexity of your case, where you live and the experience of the attorney you choose.

2. What type of bankruptcy should I file?

The form of bankruptcy you file plays a role in your costs and the overall process. Chapter 7, also called a “straight bankruptcy” or a “liquidation,” is the most common form of personal bankruptcy. To file Chapter 7, you must meet an income test and a means test imposed by the court. A Chapter 13 bankruptcy is known as a “wage earner’s plan.” You have to have a job and you must show the court that you will be able to repay at least some of your debts over a period of three to five years. Those who want to save their home from foreclosure should file Chapter 13, not Chapter 7.

3. Which of my debts will be discharged – and which will remain?

Too many people go into bankruptcy thinking that it will automatically “wipe the slate clean” and eliminate all their financial obligations. But that’s not true. If you file for Chapter 7 bankruptcy, you can get your credit card debt, medical bills and various unsecured debts and consumer loans wiped out. However, other serious bills will remain – even after a bankruptcy case. Among the debts that generally can’t be wiped out in bankruptcy are: student loans, child support payments and federal taxes.

4. What happens if I apply for bankruptcy but the judge rejects it? 

Sometimes people petition the court for bankruptcy but find that their case gets denied or rejected for some reason by a judge. That’s what happened – not once, but two times – to Xzibit, the rapper and former host of the canceled MTV show ‘Pimp My Ride.’

There are numerous reasons a bankruptcy might be denied. Your paperwork might be incomplete, incorrect or in some way out of compliance with court rules. Also, your bankruptcy petition can be rejected if it’s deemed as abusive or fraudulent – perhaps because you went out ran up a bunch of debts with the intention of getting them wiped out in bankruptcy (that’s defrauding your creditors). Lastly, if you’ve neglected to disclose all assets (whether intentionally or accidentally), the courts might deny your bankruptcy request.

When a rejection happens, you can try to fix the problem by addressing the root cause of the denial. If a denial was issued due to flawed paperwork, and you handled your own bankruptcy paperwork, the best solution is to get a lawyer involved to correct the outstanding issues and make sure your paperwork is letter-perfect. If fraud is alleged, you’ll have some -must-ask-before-filing-chapter-7-or-chapter-13-bankruptcy explaining to do to the courts (and your creditors). And if your bankruptcy was denied because you’ve omitted assets, go back and re-file a petition with the correct information.

The lesson here is two-fold: only supply honest, complete and accurate information to the court. Also, get everything done right the first time to avoid extra costs, hassles, time delays and a possible rejection of your bankruptcy petition.

5. What will my financial afterlife be like? 

If you’re contemplating bankruptcy, it’s only natural that you would be concerned about your financial afterlife. Some people mistakenly think that if they file bankruptcy they will forever be treated like a pariah by banks, employers and various creditors. Fortunately, that’s not the case.

While it’s true that a bankruptcy filing stays on your credit reports for 10 years, where it will be listed as a public record, it’s also true that you can successfully rebound from bankruptcy in about two or three years – as long as you handle your finances responsibly following the bankruptcy. That’s why many people who file for bankruptcy protection are able to get credit cards, mortgages and other loans just two years or so after their bankruptcy. In fact, you can still be in a Chapter 13 bankruptcy, and get a government-insured FHA loan.

Therefore, if your economic circumstances truly call for bankruptcy, don’t needlessly fret over your prospects for landing jobs, re-establishing credit or getting loans in the future.

As I explain in my book, Perfect Credit, bankruptcy should only be initiated as a last-ditch option, when all other alternatives have been exhausted. And when it’s necessary, the decision to file for bankruptcy protection often feels like a personal, emotional or moral decision to an individual. Yet it is important to also view the choice as both a legal and a business decision.

After all, bankruptcy proceedings are administered only via court process and are governed by a slew of laws. Additionally, anyone seriously contemplating bankruptcy would be wise to take into consideration the very real economic ramifications as well as the credit implications of bankruptcy.

The good news is that even your worst credit problems – including bankruptcy – probably won’t haunt you as long as you might have feared.

Tags: Chapter 13Chapter 7
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About

Lynnette Khalfani-Cox, The Money Coach®, is a personal finance expert, speaker, and author of 15 money-management books, including the New York Times bestseller Zero Debt: The Ultimate Guide to Financial Freedom.

Lynnette has been seen on more than 1,000 TV segments nationwide, including television appearances on Oprah, Dr. Phil, The Dr. Oz Show, The Steve Harvey Show, Good Morning America, The TODAY Show and many more.

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