By Andrew Osterland, CNBC
Personal bankruptcy filings have fallen dramatically since the beginning of the coronavirus pandemic, but with interest rates rising and government relief waning, filing numbers will likely pick up through this year, say experts.
“I’ve had more calls in the last few weeks than the previous six months,” said Charles Juntikka, a New York-based lawyer who specializes in bankruptcy law.
Bankruptcy attorney David Leibowitz, head of Chicago-based Lakelaw, said his firm has “already seen filings in the Chicago area pick up by about 25% in the last two months.”
The variety of government stimulus programs, enhanced tax credits and protections against evictions and loan foreclosures put in place in the last two years have reduced the number of bankruptcy filings.
However, community lockdowns and general Covid malaise may also be a factor, Juntikka suggests. “It’s hard for people to face the fact that they need to file,” he said. “It takes emotional energy, and they feel guilty about it.
“For every person I help, there are four or five out there who are miserable.”
Bankruptcy may feel like rock bottom for financially strapped Americans, but it is also a new start and an opportunity to get out of hole that only seems to get deeper for many.
It isn’t an easy process. A bankruptcy filing remains on your credit history for 10 years and makes getting a loan or mortgage difficult.
“If you can pay off your debts outside bankruptcy, you should,” said Leibowitz, a past chairman of the consumer bankruptcy committee of the American Bankruptcy Institute. “However, if your wages are being garnished, your car has been seized and you’re being hounded by collection agencies, bankruptcy may be imperative.”
If you’ve decided bankruptcy is your best option, your first decision is whether to hire a lawyer to help you through the process. You can file with the courts on your own, but the cost of mistakes is high.
What chapter of the code should you file under? What forms do you need to complete? What mistakes must you avoid? Bankruptcy law is complex and while you may save money filing on your own, you could lose much more on the back end.
“People don’t do their own dental work,” Juntikka said. “You need to consult a lawyer.”
What to do
The bankruptcy process involves a series of steps and procedures that have to be followed. The kind of bankruptcy filing you choose will depend on your circumstances.
Chapter 7 bankruptcy filings, which account for a significant majority of personal filings, can ultimately discharge most, though not all, personal debts. Alimony, tax debts and student loans are among the liabilities that may remain for petitioners. Most of your property is subject to seizure and sale, although there are some exemptions, such as retirement account balances.
To qualify for Chapter 7, you have to pass a means test. Essentially, your income must be less than the median income of the state where you file. Otherwise, you have to file under Chapter 13 of the code.
In that situation, some unsecured debts may be forgiven and you may be able to keep some personal property, but it basically creates a debt repayment plan, typically over a five-year period.
Here are individual steps you need to take in a bankruptcy filing:
- Gather the documents you will need, including tax returns, pay stubs, bank, brokerage and retirement account statements, appraisals of real estate and other assets you own, vehicle registrations and any other documents pertaining to debts you owe or assets you own.
- All bankruptcy filers have to complete a credit counselling course both before and after filing. The fee is typically less than $50 and may be waived if you’re unable to pay it.
- Fill out and print the appropriate bankruptcy forms, get your filing fee ($338 for a Chapter 7 filing in federal court), file the forms in court and mail the necessary documents to your appointed bankruptcy trustee.
- Attend the meeting — likely online — of your creditors with your trustee. It takes place about a month after your case is filed.
All these steps are essential, and having an attorney can help ensure you don’t make mistakes.
What not to do
The biggest mistake people make in bankruptcy filings is trying to game the system. All your assets may be seized in a bankruptcy and failing to disclose all of them can result in criminal charges
Just ask tennis player Boris Becker, currently looking at jail time in the U.K. for hiding assets. Do not transfer property to family or friends before you file. It will be clawed back.
Honest debtors get a fresh start, while dishonest ones can potentially go to jail. – David Leibowitz
Also don’t max out your credit resources before you file. The court will not look kindly upon it. Never use funds from retirement accounts to pay off debt.
“Truth and transparency are critical to the bankruptcy process,” said Leibowitz. “Honest debtors get a fresh start, while dishonest ones can potentially go to jail.”
What to do post-bankruptcy
Declaring bankruptcy can feel like the ultimate failure, but there is life after bankruptcy. Leibowitz advises clients to take the following steps to get their lives back in order:
- Establish a budget you can stick to.
- Open a savings account and save a month’s worth of income to provide a financial cushion for unexpected expenses.
- Get a secured credit card and use it only for expenses you can pay off at the end of the month.
- Pay your rent and bills on time.
- Check your credit report regularly to make sure no debts discharged in bankruptcy remain outstanding on your profile.
If you follow a disciplined plan, you can quickly improve your credit profile and even be eligible for a Federal Housing Administration mortgage in as little as three years.
“There is such a stigma associated with bankruptcy,” Leibowitz said. “But the idea of rehabilitation and forgiveness is baked into our constitution.
“Bankruptcy can give people a second chance.”