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Legal office answers common bankruptcy questions

  • Published
  • By 1st Lt. Christopher Porco
  • 375th Air Mobility Wing Legal Office
Scott Air Force Base, Ill. --  Many individuals and families find themselves struggling financially to make ends meet and have questions about bankruptcy and what their options are. This article provides a very brief overview of some of the more common questions people have.

I'm considering bankruptcy, but what are some alternatives I could try first?
If you are past due on payments, you are most likely receiving many phone calls on a regular basis from your creditors. Although you may want to avoid them altogether, this is not a wise long-term strategy. Try talking to your creditors to see if they will agree to some sort of alternative payment arrangement. Some credit card companies will accept substantially less (such as 20 percent of the full balance if paid within 30 days) or do a combination of things such as allow you to pay off your balance over a number of years and charge 0 percent interest but not allow additional charges to be made to your account. If you are having trouble making payments on your home, the lender may be willing to agree to a mortgage modification. The bottom line: it doesn't hurt to ask your creditors for an alternative payment arrangement. If your creditor does agree to any type of alternative payment arrangement, put it in writing. Also keep in mind that, depending on your situation, relief provided by the Servicemembers Civil Relief Act, or SCRA, may be helpful as well.

How is my credit score affected?
Filing bankruptcy will hurt your credit score in the short term. Your credit score is basically a snapshot in time of your ability to pay creditors. For many individuals that file bankruptcy, their credit scores have already taken a hit due to high balances, late payments, and various other reasons. By filing bankruptcy, these individuals eliminate most, if not all, of these problematic debts and can start the process of rebuilding their credit by making on-time payments to existing creditors such as student loans (student loans are not dischargeable in bankruptcy, absent extraordinary circumstances such as an individual being permanently disabled). Also, some credit card companies cater to individuals who recently filed bankruptcy and offer credit cards with low limits (often $500 or less) and high interest rates (such as 80 percent). These types of credit cards can be helpful to individuals to help them rebuild their credit IF they use them sparingly (such as to buy some inexpensive grocery items) and pay the balance in full each month.

What's the difference between Chapter 7 and Chapter 13 bankruptcy?
If an individual files for bankruptcy relief, they usually file a Chapter 7 bankruptcy or Chapter 13 bankruptcy. "Chapter" refers to the applicable chapter of the bankruptcy code. Both a Chapter 7 and Chapter 13 bankruptcy result in the discharge (forgiveness) of debt. Unlike a Chapter 7 bankruptcy, however, a Chapter 13 bankruptcy requires the person filing for bankruptcy relief (the "debtor") to pay disposable income to the bankruptcy trustee for a period of three or five years. Those payments are then disbursed to creditors according to a certain priority (for example, debts to the IRS are a given a higher priority than debts to credit card companies). Assuming the debtor has made all necessary payments to the bankruptcy trustee over the applicable three or five year period, all debts that would be discharged in a Chapter 7 bankruptcy are discharged in a Chapter 13 bankruptcy, even if that creditor did not receive any payment from the bankruptcy trustee. So why would anyone file a Chapter 13 bankruptcy if they have to make payments to the bankruptcy trustee when individuals filing Chapter 7 don't make payments to the bankruptcy trustee? There are many reasons. One of the most common reasons is when a debtor is ineligible to file a Chapter 7 bankruptcy because their household income exceeds statutory limits. Also, a Chapter 7 bankruptcy allows debtors to retain certain property but only up to certain amounts (called "exemptions" because they are exempt from being sold by the trustee). A debtor with more significant assets may file a Chapter 13 bankruptcy to not be concerned with the exemption limitations of a Chapter 7 bankruptcy. Also, a Chapter 13 bankruptcy allows debtors to pay the past due amounts for secured debts (e.g. mortgages and car payments) over the three or five year period and keep their property. In a Chapter 7 bankruptcy, these debtors would have to pay the creditor the past due amounts in full soon after filing bankruptcy, and if they do not the bank could foreclose on their home after filing the necessary motion with the court.

If I file bankruptcy, can I keep my home?
In many cases, yes. If you are current on your payments and continue to make payments on time, you can keep your home. If you are past due, however, the answer gets more complicated. If you are past due and you file a Chapter 7 bankruptcy, as mentioned above you will have to pay the bank the total amount past due within a month or so of filing. If you do not, the bank will file a motion with the court to allow them to foreclose on the property. If you are past due and file a Chapter 13 bankruptcy, however, the past due amount is paid via the payments in the Chapter 13 plan and the debtor is responsible for making future regular monthly payments on time.

I'm married. Does my spouse have to file bankruptcy too?
No, your spouse is not required to file bankruptcy. Keep in mind, however, that only the person filing bankruptcy will have their debts discharged (forgiven). So, for example, if a married couple jointly owes $10,000 on a credit card and the husband files bankruptcy, the wife is still liable for the entire $10,000.

If I file bankruptcy, will I lose my security clearance?
Many people falsely believe that filing bankruptcy automatically means they will lose their security clearance. Simply filing bankruptcy is not a per se reason to have your security clearance revoked. A more important issue is how your debts were incurred. For example, debts incurred from gambling or consistently living beyond your means are heavily frowned upon. Debts from circumstances outside your control, such as a job loss due to the economy, decreased household income because of a divorce, or large expenses for medical treatment are more easily mitigated. Also, having large debt obligations makes you seem less trustworthy in the eyes of the security clearance adjudicators because you are more susceptible to bribes.

Where can I go for more information?
For more information, the U.S. Courts' bankruptcy website has helpful information, including videos to educate consumers about the bankruptcy process: www.uscourts.gov/FederalCourts/Bankruptcy.aspx. You are also encouraged to seek free, confidential advice from the Scott Air Force Base legal office during legal assistance hours, which are Tuesday and Wednesday from 8:30-10 a.m. and Thursday from 1-2:30 p.m.