Thursday, December 30, 2010

Effect of filing bankruptcy

Contrary to popular belief, filing for bankruptcy is not credit suicide. The fact that many people who file for bankruptcy already have less than perfect credit generally leads to an increase in their credit score after they file for bankruptcy. For years, creditors and collection agencies, who abhor bankruptcy, spread the idea that bankruptcy is the end all of your credit life. Working in the industry, I've seen people's lives improve drastically after bankruptcy.

For people with unmanageable amount of debt, there are several reasons why filing for bankruptcy is a good thing.

First, it provides a definite time line for relief. Credit card companies make money on the minimum payments and late charges that people can only afford to pay; we all know that by paying only the minimum payments, it could take 30+ years to pay off a small debt. You basically enslave yourself with debt for 30+ years. Bankruptcy can break this ball and chain and allow you to actually work toward a better future.

Second, you can only benefit from a Chapter 7 bankruptcy once every 8 years. This means that after you've filed, you are considered lower risk customer to creditors. In fact, people report receiving a crazy amount of credit card offers within months of filing for bankruptcy. Although getting back into debt is an easy way to build up credit, it's also a debt trap. In 2005, Congress reformed the Bankruptcy Code. One of the many changes include mandatory credit counseling and financial management classes before someone can file for bankruptcy. It was designed to curb the number habitually filers. It's too early to see if credit counseling is working since people who filed after 2005 aren't eligible to file again until after 2013 (since one can only file a Chapter 7 once every 8 years).

Third, credit reporting bureaus generally suppress reportings after a bankruptcy case is filed. This means that your credit score can only go up after a bankruptcy--so long as you act responsible with future credit. From experience, credit scores are usually around the mid-600s one year after filing. The ideal score would be around 700 and higher. 800 or higher is considered supreme, but even those with "perfect credit" don't have scores in the 800s. *Note: Nobody starts at 800, you have to earn it over a long period of time and credit.* Bankruptcy is only a one time hit on your credit report. Everything you do after that can substantially improve your credit.

Fourth, the Fair Credit Report Act requires credit bureaus to remove a "bankruptcy" mark after 10 years. This means that after 10 years, the only way anybody would know that you have filed for bankruptcy is if you tell them or they search bankruptcy court records. Even so, after 10 years, if someone can't obtain credit, it's probably not because of the bankruptcy.

People fear bankruptcy for the wrong reason. It is not a credit suicide. It is, at worst, a temporary obstacle to getting back into debt, and at best, fresh start at life with a clean slate and no stress.

Happy new year everyone!

Thursday, December 23, 2010

How does it all just go away?

A client asked me this the other day. It didn't occur to me until the client kept repeating the question that bankruptcy is something both scary and almost unbelieavable. Why would anyone EVER let someone borrow money if there is a possibility that the debt may NEVER be paid back under the law? The answer is simple--Capitalism is all about risk. The government encourages banks to lend money and allow them to make a profit by betting on their customer's future. It also encourages people to take risk, big risks, to better our society. And when one fails, the government provides a mean to hit the 'reset' button and start over. Indeed, we almost lost GM if it wasn't for this policy.

When it seems like life is impossible to go on and debt is keeping life from progressing, bankruptcy may be the relief valve that one needs. Bankruptcy law allows a judge to order a discharge of any debt. A discharge is an injunction, or restraining order, against creditors. It is an order to cease ALL collection action against the debtor and it last forever. Some debts are not dischargeable, such as child support, certain tax debt, and government fines, but a majority of all debts are indeed dischargeable. And just like that, debts simply just go away.

Merry Christmas!

Saturday, December 11, 2010

Reasons why people get into debt

With the holiday coming around, we all have a lot to be thankful for. It's a season where shopping, eating, and family are celebrated among love ones. Not surprisingly, my office usually slows down around this time of year because people are trying to stay positive and cheerful.

Reading some of the comments from my previous posts, there might have been some misunderstanding because I feel like I might have inadvertently misled some readers into thinking that debt issues/problems only occur to people who are irresponsible with their money or overspend. While there is some truth to that belief, the number one reason why people file bankruptcy in the United States is for medical reasons. This shouldn't come as a surprise since the U.S. still has a long way to go on health care policies.

Unless employed with a financially-sound company that subsidizes health insurance, health insurance is prohibitively expensive to many people who have to buy their own. Those with health insurance through their employer typically pay $40 per pay check toward health insurance; the employer pays the other $300-400. This causes a problem to those who are either unemployed or work for a company that can't afford health insurance for its employees. These folks can't afford to pay for health insurance. One bad health incident can lead to a life-time worth of debt.

The number two cause of debt issues is change in circumstances. Divorce, unemployment, market changes, etc. can transform someone who was making six-figure income into someone who depends on public assistance to pay rent in a matter of months. It is natural for humans to be financially optimistic about ones future. People borrow money to survive until the worse is over... unfortunately, creditors can't wait.

As you can see, the top two reasons that people go into debt have nothing to do with being irresponsible with money or living beyond one's means. Life is full of surprises, some will leave you debt!

Happy holiday everyone!

Sunday, December 5, 2010

What happens when you don't pay your bills...

Every day in the office, I get calls from frantic people who wonder why their pay checks are being garnished. A wage garnishment is an order from the court (called a 'writ') that orders the employer to withhold a portion of the employee's paycheck. The employer is then ordered to send that withholding to the creditor. In Washington state and many other states, creditors are allowed to garnish up to 25% of the debtor's net pay (after taxes). To someone who makes $45,000/year (gross pay), it could mean $800/month is garnished.

How does this happen?

The collection process is pretty standard. When you stop making payments toward your debt:
  1. You'll get calls and letters from the bank telling you that you're delinquent.
  2. After 2-3 months without success, the debt is sold to a collection agency (aka "third-party creditor").
  3. Depending on how aggressive the collection agency is, the debt can either be sold to another collection agency or simply assigned to a local attorney to enforce the contract.
  4. If the attorney takes the case, he/she will file a lawsuit against the debtor.
  5. In most cases, the debtor has no legal grounds to fight the lawsuit. If so, the court will grant a judgment against the debtor.
  6. The creditor then takes the judgment and ask the court for a 'writ of garnishment'. The writ is served to the employer and garnishment begins.
  7. The creditor may also ask the court for a 'writ to levy' (or 'writ of attachment'), these terms varies depending on the state. This writ essentially allows the creditor to seize assets to satisfy the debt. To a certain extent, creditors can levy automobiles, jewelry, cash, gold, etc. In Washington, creditors can clean out a debtor's bank account, as long as the creditor leaves the debtor with at least $200.
How do you stop a garnishment?

This is a tough question to answer. A writ of garnishment/levy/attachment are all considered valid court orders. They are issued by a state court, and therefore, can only be defeated by a federal court order. A Bankruptcy filing automatically triggers a federal court order to stop collecting debt. 11 USC § 362(a). People cringe when I tell them that their only option is a bankruptcy, but this is the only means to force a stop to garnishment (without fighting the creditor). I do understand that it has to do with self-pride and despair. Because of that, I approach each case with delicately and with compassion. I do understand that nobody wants to file bankruptcy, even if it means a brighter future. I'm not excited when I tell people that bankruptcy is their only option. But I do remind them that I understand their situation and that it's a personal choice; I'm there to help.

Arrow Law Group, PLLC | 1904 3rd Ave, Suite 930, Seattle, WA 98101 |