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This is a common tactic used by creditors. They basically tell you that regardless of your bankruptcy filing, the collection agency can still come after you for your credit card debt (or medical bills, or payday loan, or whatever).

This is not true (but then, most creditors aren’t really interested in telling you anything true about bankruptcy; their only goal is get as much money out of you as they can). When you file a bankruptcy (either a Chapter 7 or Chapter 13), there is legal device that is immediately put into place called the ‘Automatic Stay’. The automatic stay stops all the bad stuff that is currently happening to you (like harassing phone calls, garnishments, repossession, foreclosures, lawsuits, etc). Think of it as a protective shield that the federal courts put around you. It prevents your creditors from coming after you anymore.

Regardless of which type of bankruptcy you file, the end result is almost always the same: your debts are discharged (in other words, wiped out). It’s true that there are a few cases where someone has to file a Chapter 13 and pay back some of their debts. But for the vast majority of cases, the unsecured debt (like credit cards) is knocked out.

Most people I meet with come in saying that they want to file a Chapter 7 bankruptcy. This is because Chapter 7 bankruptcies are much shorter than Chapter 13 bankruptcies, averaging about four months before the debtor receives his or her discharge. Chapter 13 bankruptcies last from three to five years and require monthly plan payments to a bankruptcy Trustee. So why would anyone want to file a Chapter 13 bankruptcy? Below are the top five reasons to choose Chapter 13 bankruptcy.

Cram Down
In some cases, a vehicle or other secured loan can be reduced to the value of the collateral. This means that if the loan qualifies, the debtor can pay reduced fees and interest. The catch here is that the vehicle had to be purchased more than 910 days prior to the filing of the bankruptcy case in order to qualify, and you have to actually finish the case and receive a discharge in order for the cram down to be effective.

Protect Non-exempt Property from Liquidation
Sometimes debtors own property with equity that cannot be protected with the available exemptions. For example, let’s say debtor owns a car worth $10,000.00 with no lien. Let’s say that the debtor has a vehicle exemption he can apply towards that equity in the amount of $3,000.00. This leaves $7,000.00 of unprotected equity. In a Chapter 7 bankruptcy, the Trustee would ask the debtor to pay the $7,000.00 in order to retain the car, or in the alternative, would sell the vehicle to obtain money to pay creditors. In Chapter 13 bankruptcy, the debtor is allowed to retain the vehicle, but will pay that $7,000.00 to general unsecured creditors over a period of three to five years.

This is easily the biggest misperception about bankruptcy that I hear from people. The idea that if you file a bankruptcy (either a Chapter 7 or Chapter 13), your ability to regain or reestablish credit is completely gone.

Undoubtedly, this misperception stems from all the misinformation that creditors give out. When a collection agency or a creditor calls you in the middle of the day (or early in the morning, late afternoon, just after dinner, a little bit before you put the kids to bed; I’m sure many of you have noticed that they never stop calling), and you tell them that you are contemplating bankruptcy, the creditor will start telling you every horror story that they can think of in an attempt to discourage you from filing. That you’ll lose your car, that you’ll lose your job, and the biggest zinger of all: that if you file for bankruptcy, you’ll never have a decent credit score for the rest of your life.

That last zinger (“that you’ll never have a decent credit score for the rest of your life”) is by far the biggest concern for most of the people I see. And it makes sense. I mean, if you are going to file a bankruptcy (either a Chapter 7 or Chapter 13), what good is it going to do if you can’t at some point get a decent credit rating?

The simple answer is no. But it never fails to amaze me how often I receive questions like this from people. The amount of misinformation that people receive is astonishing.

And if you think about it, it makes sense that there’s so much confusion. When you begin to go into debt (whether its in the form of credit cards, medical bills, paydays loans, overdraft fees on a bank account, or whatever), and you are on a limited budget, its easy to fall behind on payments to your creditors. The next thing you know, collection agencies are calling you day and night. At this point, people start to panic, lose sleep, and begin to feel their stress levels go through the roof. When you are in this state of mind, when it feels like the world is falling apart and you are losing control, you get scared. Your creditors know this. In fact, they are counting on this very thing happening.

Why? Because if you are already in this state of fear and panic (about your finances, your ability to pay for basic utilities, or making sure you have food on the table), then all the creditor has to do is feed into that fear and panic by making you believe that if you don’t pay on your credit card, your life will be even worse.

Coming to terms with the fact that you need to file for bankruptcy is very difficult for many individuals. Sometimes the emotions surrounding such a decision can make it difficult to accurately assess your financial situation. If you have already tried to fix your financial situation by reducing spending, attempting to increase income and selling assets, then it is time to consider a bankruptcy filing.

Most people consider filing bankruptcy to be their last option. However, it is more accurate to say that bankruptcy is your last good option. Bankruptcy attorneys regularly meet with individuals who have made some very bad decisions trying to avoid a bankruptcy filing. These decisions just make their problems worse. Such decisions include:

• Liquidating retirement accounts to pay bills.
• Borrowing money from payday loan companies.
• Borrowing money from family members or friends.
• Taking cash advances from credit cards.
• Writing bad checks.
• Selling assets that are protected from creditors.
• Engaging in fraudulent or otherwise illegal activity.

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A co-signer is someone who has guaranteed a debt on your behalf. This means that if you fail to pay the debt the co-signer is personally responsible. In bankruptcy, co-signers are referred to as co-debtors. Many of my clients have reservations about filing for bankruptcy because they do not want to negatively affect their co-signers.

There is a way to file for bankruptcy without negatively affecting co-debtors. A Chapter 13 bankruptcy has a feature known as the “Co-Debtor Automatic Stay.” This powerful tool was designed to protect bankruptcy filers by preventing creditors from taking collection action against any individual who is obligated on a consumer debt owed by the debtor (See 11 U.S.C. 1301). According to 11 U.S.C. 101(8) a consumer debt is a debt “incurred by an individual primarily for a personal, family, or household purpose.”

While the stay protects the co-debtor during the bankruptcy, it does not discharge the co-debtor’s liability to pay the debt. It will, however, prevent collection action by the creditor against the co-debtor such as obtaining a judgment, lien perfection, or reporting negative information to the credit bureaus during the pendency of the case.

Unfortunately, there are exceptions to the protection of the co-debtor stay. The stay does not prohibit collection of debts incurred in the ordinary course of business. Additionally, since tax debts are generally not considered consumer debts, the tax authorities can continue their collection efforts while the bankruptcy is pending. Further, the co-debtor stay does not apply to Chapter 7 bankruptcy cases. This means that if the debtor converts the Chapter 13 to a Chapter 7 the stay will terminate.

Finally, the co-debtor stay can be modified by the Bankruptcy Court upon request of the creditor. A creditor can file a motion with the Court asking for the stay to be “lifted”, meaning that the creditor would then have permission to begin collection action against the co-debtor. These types of motions are generally successful when the co-debtor is the one who actually received the benefit of the debt (e.g. you co-signed a car loan for your friend and she actually drives the car), if the debtor’s Chapter 13 plan does not provide for payment of the debt, or if the creditor can prove its interest would be irreparably harmed by the continuation of the stay.

A knowing violation of the stay is illegal and is punishable by court imposed sanctions, and any action taken by the creditor in violation of the stay is void. Any such violation should be reported to the debtor’s attorney immediately so that the appropriate motions can be filed with the Bankruptcy Court.

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My clients are always very concerned about how filing for bankruptcy is going to affect their credit. While it is true that bankruptcy will negatively impact your credit, and that it can appear on your credit report for up to ten years, chances are if you are filing for bankruptcy relief your credit was not all that great to begin with. Late or missed payments, high credit card balances, and a high debt to income ratio all work to destroy your credit score.

Instead of dwelling on the negative consequences of filing for bankruptcy, try to focus on the benefits. Yes, there are benefits to filing a bankruptcy. For starters, receiving a bankruptcy discharge can actually improve your credit over time. A bankruptcy discharge wipes out your debt, thereby extinguishing your liability. Eliminating most, if not all, of your debt improves your debt to income ratio. Additionally, it prevents creditors from reporting delinquency to the credit bureaus.

So what can you do to make the most of your fresh start and rebuild your credit?

One way a savvy creditor can make sure they get paid is to file a wage garnishment. A wage garnishment is a tactic commonly used by creditors where they take a portion of your check. Wage garnishment laws vary from state to state. Missouri wage garnishment laws state that creditors can take up to 25 percent of your paycheck or up to 10 percent if you qualify as head of household.

Creditors love to use garnishment as a scare tactic, and often tell people who are behind in payments that they will put a garnishment on their check. However, creditors have to follow certain legal procedures before they will be allowed to garnish your wages. If you fall behind in payments, the creditor may file a law suit against you to collect the debt, and obtain a judgment against you for the amount you owe. Once the creditor has received a judgment, they can then file paperwork with the court to have your wages garnished.

Garnishments do have time limits, and in Missouri most last about 180 days. However, creditors can continue to renew their garnishments until the debt has been paid in full. Unfortunately, this means your check could be garnished for an indefinite period of time. Garnishments are not only embarrassing, but can make it difficult, if not impossible, to cover your living expenses, which just pushes you further into debt. Fortunately, there is a way to stop the garnishment for good.

Filing a Chapter 7 bankruptcy will stop wage garnishments and wipe out debt. Chapter 7 bankruptcy can also stop repossession, as well as foreclosure, and can keep creditors from making further attempts to collect their debts.

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Everyone who files for bankruptcy has to attend a Meeting of Creditors. This meeting is also commonly referred to as the 341 meeting, because the requirement to attend this meeting arises from Section 341(a) of the United States Bankruptcy Code. The hearing will take place approximately 30 days after the case is filed. Though it is referred to as the Meeting of Creditors, creditors rarely actually appear. However, if creditors do appear they are allowed to ask you questions.

Most 341 meetings last approximately 5 minutes and consist of the Trustee asking a series of standard questions to make sure that your paperwork is accurate and that you have disclosed all of your assets.

An experienced bankruptcy attorney can guide you through the entire process.

People who file bankruptcy can’t get credit for 10 years.
This is completely false. A bankruptcy filing will show up on your credit report for 7 to 10 years, but it will not prevent you from obtaining credit. In fact, you will very likely start receiving credit solicitations in the mail as soon as your case is discharged. The interest rate and other terms will not be as favorable as what is offered to those with perfect credit, but the offers will still make their way to your mailbox. Obtaining credit and making timely monthly payments is the best way to rebuild your credit score after a bankruptcy filing.

If I file bankruptcy I will lose some or all of my property.
This is not the case for the vast majority of filers. When filing for bankruptcy, you are allowed to protect certain types of property with exemptions. For example, in the state of Missouri, a debtor is allowed to have up to $15,000.00 of equity in their home and $3000.00 of equity in their vehicle. Exemptions protect equity in assets and prevents the Trustee from liquidating the property. An experienced bankruptcy attorney will be able to advise you regarding this issue prior to your case being filed. However, in a majority of Chapter 7 cases, debtors do not have assets valued in excess of their available exemptions and are able to keep all of their property.

My creditors can still harass me, even after filing for bankruptcy.
This is incorrect. Bankruptcy law provides for ‘automatic stay’ protection, which means that as soon as the case is filed creditors must cease any attempt to collect their debt. If a creditor does not follow the rules, the debtor may have a cause of action against the creditor for ‘punitive damages,’ whereby a bankruptcy judge could actually punish a creditor with fines and penalties for not following the procedures set out in the bankruptcy code.