"I just lost my job (had a bad accident, got a divorce, etc.) and now I can't pay my bills, now what?"
Actually, there are quite a few things you can do to help yourself. The first thing you should consider doing is borrowing money from somewhere. If you have equity in your house, you may be able to borrow money from a bank or loan company using the equity you have in your house. If you do not have a house, do you have a car, appliances or other expensive property (stereo, camera, boat) that you do not owe money on? If so, you may be able to borrow money using that personal property as collateral. If you owe money on your car, appliances and other personal property (in fact, that is why you can't pay your bills...) then you should consider borrowing from friends or family.
The next thing you should consider is getting in contact with all of your creditors, explain your problem and make an agreement to make small monthly payments until you can get back on your feet and begin making regular payments, again. As fearful as you might be about making such a phone call, you might find yourself pleasantly surprised when your creditor agrees to accept a payment that you can handle for the next three, four, five or six months. You should be aware, however, that unless you and the creditor agree otherwise, your account will continue to accrue interest on the full amount of your debt. Also, beware of creditors that ask you for a "post-dated" check or checks. In reality, the creditor can put those checks into your account any time he or she wishes. It can cause you a lot of problems with your bank accounts with fees for bouncing checks or checks that have to go through your account more than once. If you already have money problems, the last thing you need is trouble with your bank account, too.
If you just don't feel comfortable with making those phone calls yourself, you can hire someone else to make them. There are credit counseling centers in every big city and many smaller towns. Some are run by not-for-profit organizations which will charge you little or no fee. Others will charge you a portion of all of the money you owe to your various creditors (for example, you pay the credit counseling $200.00 a month to divide among your creditors: they take $25.00 per month and send your creditors their portion of the rest of the money, $175.00). Some will simply have a set fee for negotiating a set amount that you will pay over time, with no more interest. Some credit counselors may be able to negotiate a reduced, but "lump sum" payment for you. For example, if you owe Joe's Car Repair Shop $452.00 for repairs on your car, your counselor may be able to negotiate a one time payment of $300.00, if you can pay by the end of the week or month. Why would Joe do that? Because your $300.00 in "long green" by the end of the week is better than waiting for six months to have you fall behind on your $80.00 a month payment--then he doesn't get his money, period. With credit counselors, you must be aware of the fact that these sorts of arrangements normally only work with loan company debt, credit card and other debt that is not "secured" (a car, house or stereo is secured debt--your creditor can take back the property, if you don't pay for it as you promised to). This will also not cover debts you made to go to college, university, trade school or the like--student loans are not normally handled by credit counselor plans. So, in order for a credit counselor's plan to work, most of your debt should be unsecured and NOT student loans.
Okay, you've tried every thing else and gone to your rich uncle one last time and you still can't pay your monthly bills...what now? It is time to visit a lawyer. A lawyer can do the same things that a credit counselor does: he or she can contact your creditors and try and make arrangements to make small payments per month until you can begin to make full payments again. He or she can also arrange for a smaller lump-sum payment on a debt instead of monthly payments on a larger sum. A lawyer can also help you to file for bankruptcy. Bankruptcy is a serious undertaking and should be considered a LAST RESORT and not a way of defrauding creditors if you can make payments on your debt.
"What is a bankruptcy?"
Congress conceived of bankruptcy as a fresh start for people who are so far in debt that there is virtually no way for them to pay their bills and still live their lives. This is a remedy for people who are making decisions between eating and paying for utilities--or taking a sick baby to the doctor and paying rent. If you do not have enough money to pay for the basics because of high debt and angry bill collectors, then you should probably file bankruptcy and get that fresh start. For "ordinary folks" there are two different sorts of bankruptcy, Chapter 7 and Chapter 13.
"What is a Chapter 7 bankruptcy?"
A Chapter 7 bankruptcy is a total liquidation of certain types of debt. In other words, it wipes out certain types of debt completely: you are no longer legally obligated to pay that debt. What debts will be legally "erased"? Unsecured debt of most sorts is completely liquidated. If you have credit card debt on a Visa, MasterCard, Discover or American Express (to name a few), you will not be required to pay the debt. If you borrowed money from family or friends, you will not legally be required to repay that debt (although to keep the peace in the family, you may be MORALLY required to pay the debt). As far as house loans, auto loans, large appliance and furniture loans, etc., if you choose, you may give back the house, car, appliance, furniture or other security and not have to pay for the property. If you wish to keep the property (or if the property was a gift to someone else and you don't have it anymore), you will have to pay your creditors at least the current value of the property, (for example you owe $11,000 on your car, but the blue book value of your car is only $3,200.00--you must agree to pay at least the value of the car, and interest, to keep the car). Other creditors may make a deal regarding a lump sum payment on, for example, a vacuum cleaner on which you owe $400, you pay, perhaps, $150.00 in a lump sum and the vacuum is yours to keep. Once again, school loans are a special case in a bankruptcy: President Clinton signed a law in October of 1998 that makes it very difficult to discharge student loans. There are some special circumstances under rules of hardship discharge where the loan is dischargeable and you should ask your lawyer about whether or not you have any student loans like this. Back child support or alimony/maintenance can't be wiped out or discharged in a bankruptcy action. There are also special rules regarding the possible discharge of your local, state and federal tax obligations.
Chapter 7 bankruptcy is not for everyone. If you have a lot of secure debt (car, house, stereo equipment, large appliances, etc.) or, if you have done a bankruptcy within the last six years, you might choose to file a Chapter 13.
"What is a Chapter 13?"
A Chapter 13 is also known as a debt consolidation or reorganization plan. The Federal Court supervises the repayment of your creditors: in fact, the Federal Court has appointed a "trustee" to pay your creditors with the monthly payment you will send to him or her. While you are making Chapter 13 payments, you will also be responsible to make payment on your normal living expenses such as rent or mortgage, utilities, food, clothing, tuition, etc. Please do not think that by filing a Chapter 13, your mortgage payment will be lowered. You are required to keep the payment of your normal living expenses totally current while making your trustee payment. In very rare situations, you may be able to pay your current mortgage inside a Chapter 13 plan. If you are interested in getting more information about that, bring that question to the lawyers you talk to in your first appointment. Frankly, your other creditors will HATE the idea and may object to your plan if you intend to pay your current mortgage inside your plan.
In a Chapter 13, you may pay back student loans, mortgage arrears, child support/maintenance arrears, secure debt and unsecured debt over a period of three to five years. A percentage of your monthly payment will also pay the trustee his or her allowable fees. In some districts, you may pay as little as 1 or 2% of your unsecured debt and all monies owed your secure creditors ABOVE the current value of the secured property. However, some districts are stricter than others and will require a MUCH higher percentage of your unsecured debt to be paid--as much as 50 to 70% of the debt as a minimum. Depending on your personal situation, you may choose to or be required to pay 100% of your debt in equal payments over a three to five year period. You need to check with a lawyer in your district to get the information for your local district. In all districts, you must pay the full current value of your secured debt, but interest and penalties may be paid at a lower percentage if your situation warrants it and your local district allows. Once again, if you have questions about taxes, you need to speak with a lawyer about the rules and regulations of paying off those taxes inside a bankruptcy.
"Can't I do this on my own, do I really need a lawyer?"
Yes, you need a lawyer. Some people may tell you that all you need are the correct forms and your stack of bills to file a Chapter 7 bankruptcy. It simply isn't true. There are rules that you need to know and procedures that need to be followed. Doing your own Chapter 7 bankruptcy is like pulling your own tooth. You COULD do it without any problem but if there are complications, you are in trouble. Your case could get dismissed if you don't follow the rules. That dismissed case will stay on your credit record for as long as a discharged bankruptcy--depending on where you live, seven to ten years. So you may never get a discharge of all of the debt you listed on your petition if you don't follow correct procedures and STILL have it show up on your record. Not worth it, eh?
Trying to do your own Chapter 13 is like performing your own cancer surgery. Not even the most bold of surgeons do surgery on themselves and you can't do your own Chapter 13. In fact, you may find some lawyers who don't do Chapter 13! My advice is to find a lawyer who is comfortable with both Chapter 7 and Chapter 13 to do your bankruptcy. He or she will know what is best for you and, if problems arise in your case, will know whether or not to "convert" your case from a Chapter 7 to a Chapter 13 or vice versa.
"What do I need to bring with me to the lawyer?"
You should bring a list of all of the creditors that you owe money to: credit card debt, mortgage, utilities, loan company, rich Uncle Richard, and the car loan. What the list should have is the name of the creditor, the address of the creditor, your account number and the approximate amount that you owe to that creditor. No, don't bring all of your bills and expect the lawyer to sort through them. You need to do a little homework before hand, and this is it... Next, sit down and make yourself a realistic budget--how much for food, clothes, magazines, books, telephone, the roof over your head, car payment, tuition for the kids, or whatever you pay every single month. If you have a checking account and pay your bills with checks, it would help to go through your checks for the last six months to a year and average out those monthly expenditures. If you are working, bring along some check stubs from your job. If you aren't working but receive some monthly payments from the government or a pension, bring along some stubs from those payments. You also need to bring along the title of any car, truck, boat, snow mobile or jet ski that you are still making payments on. If it is financed, we need to see the title! Bring in a photocopy for the lawyer to keep with your file.
"What will happen at the lawyer's office?"
At your appointment, you will probably be asked to fill out an information sheet. This is where your "homework" comes in to play. The work sheet will ask you some basic information and then ask for a list of all the people/businesses you owe money to, what your income is (from all sources) and for a rough estimate of your monthly budget. In some offices, you will first see a paralegal or other intake person who will go over your information sheet. The lawyer should see you at this appointment but may not want to see you until the next appointment, after you have decided to hire him or her. The paralegal may be able to answer your questions but I suggest that you make a list of the questions you want answered by the lawyer. When you meet with him or her, make sure that you are introduced to others in the office that you may have to work with (an associate attorney who goes to the first meeting of creditors--we'll talk about that shortly) during your process. Most likely, no one will yell at you for getting in to such a big money mess--though I have a friend who has been doing bankruptcies for nearly twenty years and she says that some clients want to be yelled at and want to be told that they are in BIG TROUBLE and so she yells at them.
"How much will I pay for a bankruptcy?"
Like so many other things your fee depends on so many different things. Once the lawyer has a chance to look at your entire picture, he or she will make a decision on your fee. In our office, decisions are made taking many things in to consideration: marital status and number of people in your family, number of creditors, how many secured creditors you have, your income and budget and your ability to pay. You will be charged a flat fee presuming that it will cover certain services. If other services are needed, we will discuss fees for those services and sign another contract for those services. What you should be aware of is that all fees charged by lawyers are reviewed by the judge in charge of your case. If the judge, who usually has an upper limit in his or her mind, decides the amount your lawyer is too high, the lawyer will not get that amount of money--even if you have signed a contract to pay that amount, unless there is a hearing. At the hearing the lawyer will have a chance to make a case for the amount of money he or she has charged if the judge says it is too much. You will be notified of that hearing and you may attend the hearing, but if you have no problem with the amount of money your lawyer charges, you need not appear. The judge will decide if your case is so unusual as to require extra work or if it required the lawyer to utilize his or her expertise gained over many years of bankruptcy practice.
"I am broke, how can I pay for a bankruptcy!?"
Most of the time, your lawyer will advise you to immediately stop making any payments to creditors other than your utilities, rent or mortgage and other NORMAL living expenses. If you are no longer making any sort of payments on credit cards or loan payments, you can usually afford to pay a lawyer within two to four weeks. If you are not working or getting any sort of pension, unemployment or other monthly payment, you are going to have to consider trying to borrow the fee from family or friends. Remember, once your bankruptcy is filed you are protected by the federal court and your creditors are stayed from collecting from you or filing suit, getting a judgment on you and putting a "brick" on your income, from any source.
Sometimes getting the fee together is a big problem. If you are working, the lawyer may agree to have you execute a wage assignment on your job--then your employer will pay your lawyer without your ever having seen the money or, more importantly, without your ever having your hands on the money. If you are doing a Chapter 13 bankruptcy where you are making monthly payments, you may be able to make payments to your lawyer through your monthly payments to the trustee--and only make a small "up front" payment to the lawyer.
"How do I find a lawyer to do my bankruptcy?"
In some areas, all you need to do is look in the "lawyer advertising" part of your newspaper. There you will find a lot of lawyers advertising their services: in one Midwestern daily newspaper, I counted 45 lawyer ads and more than half (26 out of 45), advertised bankruptcy. I would choose a couple of those ads and make an appointment to see the lawyers, get the information that he or she has and go home and make a decision. (Don't forget to bring your own list of questions!) You can find the same sort of lawyer ads in the Yellow Pages, too. In a lot of areas, you may find lawyer advertising on television. You will find their ads on late at night and on weekends (the advertising is cheaper then but also, people in money trouble are likely to be watching television late at night--can't sleep)! In other areas, there aren't any kind of lawyer ads--it will be a little harder to find someone but the first thing you should do is call the bar association ask for some names of people who are available to do a bankruptcy. Once again, get a few names and make an appointment, get the information and make an informed decision, at home when you aren't being pressured by the lawyer or paralegal. Once again, you are looking for someone who does both Chapter 7 and Chapter 13 (someone who will NOT send you somewhere else--to start all over again--if you need to do a Chapter 13) and someone who will give you the answers to the questions you need to ask. If you know someone who has gone bankrupt, you should ask who he or she used and whether or not your friend was pleased with the lawyer's performance.
"Okay, I have found a lawyer that I have decided to hire, what should happen now?"
First, you should come to an agreement regarding the fees that the lawyer will charge. This should be reduced to a contract between you and the lawyer that states how much you will pay and what the lawyer will do for that fee. It should also state what will happen if things change--like you need your case converted from a Chapter 7 to a Chapter 13 or if one of your creditors contests the discharge of his or her debt stating that you have committed some sort of fraud. After you and the lawyer have gone over the contract and each of you has signed the contract, you have a lawyer! What happens next is that either the lawyer and you will go through all your most recent bills and collect the information that needs to go into the bankruptcy petition or you will be sent home to do the preliminary work on a worksheet--neither method is better than the other. In the long run, if you end up doing the preliminary work on a worksheet, it will probably cost you less. After the information is complete, the lawyer will draft a petition. Some lawyers have a secretary or a secretarial service that inputs all the information into a pre-printed petition. Other lawyers have bankruptcy software and either the lawyer or a support person will feed the information into the program which will produce the petition. After the petition is complete and your agreed pre-filing fee (and cost) is paid, the petition will be filed in the Federal Court.
Once the petition is filed with the Court, the court will send out notices to your creditors. The notice includes a part that states the date that you filed bankruptcy, your docket number and the "automatic stay". The automatic stay is a notice to your creditors that he or she may not contact you in order to collect the debt. In fact, once you file your case and your creditor has been notified of the filing of the case either by you or the court, any contact between the creditor and you is not permitted: it is contempt of court and may be punished by fine and other remedies. You should be telling your creditors the date that you filed your case, your docket number and the name and number of your attorney and THAT IS IT... Hang up. If they call again, do the same thing and inform them that they are in contempt of the court order. Inform your lawyer if any creditor continues to bother you.
A couple of weeks (or less, depending on where you live) later, you will receive notice of your first meeting of creditors. Despite the name "first meeting"--there are NOT a series of meetings. The first meeting is a time when you and your lawyer will meet with the trustee of your case. Any creditors who care to come are permitted to do so. At a Chapter 7 first meeting, the trustee will go through your petition and ask questions about whether or not your circumstances since the filing are changed (Did you win the lotto? Did a rich aunt die?) for the better or worse. The trustee may go over your monthly expenditures and your income to see whether or not you could afford to make some payment on your debt. The trustee will also make sure that you knew what was in the petition when you signed it and that you did, in fact, sign the petition. The trustee may also make sure that you understand that making a false petition is illegal and may subject you to a fine or imprisonment. At the end of the meeting, the trustee will let you know what he has found--that you have no assets to disburse (most of the time) and that you are dismissed. In a short time, usually between eight to ten weeks, you will have your "discharge" paper in your hand. It is very important that you keep that paper with all your other important papers. If a creditor decides to come after you for a debt that was discharged, you can use that paper to prove you are no longer responsible for that debt.
A Chapter 13 meeting is somewhat similar in that there will be a meeting with a trustee's representative or the trustee, him- or herself. The trustee will go through your petition to determine whether or not you can afford to make the monthly payments that you have promised to your creditors. The trustee will also make sure that you have made your first payment either before or at the first meeting. If you do not make that first payment, your plan is in real trouble of NEVER being confirmed and that means that you will be right back where you started--not a place you want to be. After the Chapter 13 meeting, there will be a "confirmation hearing". Most of the time, you will not be required to attend that hearing but in some jurisdictions, you must attend. Your lawyer will let you know if you have to attend. The confirmation hearing is in front of your judge. The judge will read your petition, your plan and your lawyer's application for fees. The judge will either confirm or deny the plan and may give your lawyer time to correct any problems with it. Once your plan is confirmed, your creditors will start getting monthly payments from the payment that you send to your trustee. Your secured creditors will be paid first, then any taxes, then unsecured debt--your jurisdiction may have slightly different rules, but you should ask your lawyer about that. Your creditors have ninety days from the date of your first meeting of creditors to make a claim on the money in your plan. The way it REALLY works though, is that your unsecured creditors only have the ninety days. Your secured creditors will be able to file their claim at any time. Ask your lawyer to talk to you about local rules regarding claims, if you are interested. After you have completed your plan, you will receive a discharge from the debts you filed in your petition and your creditors (with few exceptions--the IRS... always an interesting problem in any case) will not be able to collect from you. The trustees in some jurisdictions have plans whereby after you successfully complete your Chapter 13, cooperating creditors (i.e., Sears) will help to get you new credit. If you are interested in getting new credit, you should consult with your trustee or your attorney.
REMEMBER, BANKRUPTCY IS A SERIOUS MATTER. IT WILL BE ON YOUR RECORD FOR A LONG TIME (ask your lawyer about the rules in your jurisdiction) AND, DURING THAT TIME, MAKE IT DIFFICULT TO FOR YOU TO GET CREDIT TO BUY A CAR, HOUSE, GET AN APARTMENT OR OTHER THINGS. PLEASE, THINK A SECOND TIME.
Best of luck!
Victoria Hewelt Cazel has been practicing law for the better part of 23 years as a lawyer and an extra two years as a student attorney in her law school's legal clinic. The first decade of her practice she had a general practice with an emphasis in family law including dissolution of marriage, custody, visitation, child support enforcement, adoptions. Many of these folks have come back as repeat clients for wills, real estate closings, minor criminal problems and contracts. In her second decade, Victoria developed a particular interest in legal solutions to financial problems. Victoria has concentrated her practice in both Chapter 7 and 13 bankruptcies.
Victoria is available to practice in any and all of the areas of law listed above. If you have concerns in other areas, you may call for a referral at any time. Victoria will find a lawyer that you can trust.
Cazel Family Law Offices
For appointment and referrals:
(608) 246-9719
2719 E. Washington
Madison, WI 53704
Copyright 2002 by Victoria Hewelt Cazel, all rights reserved.
No reproductions in any form without the written approval of
Victoria Hewelt Cazel.