It’s easy.  The First Article of the US Constitution directs Congress to make Bankruptcy laws.  Bankruptcy serves a simple purpose – to give “Relief” to Debtors burdened with overwhelming debt.  It is also simple in concept but the process is fraught with many pitfalls.

I’ll never get credit again. NO!  Chapter 7 – 10 years / Chapter 13 -7 years on your Credit Report.  But, who’s the better credit risk: a former bankrupt with no debt who can’t file again for 8 years or someone with debt overload?  Remember also, lenders only earn if they lend.  Plenty of folks get mortgages, car loans and other credit well within these time frames after bankruptcy.  Credit can be frighteningly easy to obtain even after bankruptcy … and here you go again.

STOP!! – Ask the real question, WHY DO I NEED CREDIT?!  Adjust your credit-based lifestyle.  Budget! Pay cash. Credit cards spend too easily.  Start paying attention.

I’ll lose my car, my house … everything. NO!   Most folks see no impact on their basic assets.  NYS “Exemptions” protect Homesteads ($82,995), automobiles ($4,550), tools ($3,400), jewelry ($1,150), most household items ($11,375) and many other assets from the claims of creditors in bankruptcy.  Retirement accounts are also generally excepted from the Bankruptcy process.  [Federal exemptions are similar but some are very different: Homestead $22,975 but a “wildcard” exemption is available for more flexible use].  If you have “non-exempt” assets, the bankruptcy trustee will be pleased to entertain an offer to release his claim beyond these statutory exemptions. 

If I “bankrupt” my car loan or home mortgage I will lose them. NO!  The bank will welcome your continued payments of these secured loans.  Just keep current.  No problem.  Some banks will require “reaffirmation” which can also help restore your credit but that’s not always a good idea.  See our article on Reaffirmation.

I’ll save out one credit card for emergencies. NO!  All cards with a balance must be included in a bankruptcy.  But, before you go running off to pay that “special” card, why not use that money later to establish a secured credit card or access it in your bank account with your debit card?  You only have emergency financial needs because you aren’t paying attention.  “Emergencies” are a fact of financial life.  Budget!  Save!  Put that same “$1,000” in your own account for the next emergency – and leave it there.

“They” will come to my house. NO!  Though not impossible, in my 40+ years in practice, I have never seen nor heard of a trustee making a home visit. However, together, we will take a mental walk-through your home and make such a detailed disclosure– right down to the garden tools in the garage and the $12 in your pocket– that a trustee should be impressed that this would be a waste of time.

How will “they” ever find out?  Trustees will, however, “visit” your Facebook page, other Social Media, real estate photo listings, DMV sites, County Clerk’s records and elsewhere on the internet to see if anything shows that isn’t listed in your bankruptcy schedules. Your bankruptcy papers are a public record and anyone can look to see what you left out. The occasional “Ex“ might make a call to the trustee to disclose other omissions. Trustees do “have their ways.”

DON’T EVEN THINK ABOUT IT!  Bankruptcy Fraud is a Federal felony.  If you intentionally leave something out, you will go to jail.  Bankruptcy gives you tremendous benefit that only requires an honest disclosure.  Many people have served time in Federal prison for seemingly minor omissions.  This also risks the loss or denial of your bankruptcy discharge.

It was a gift so it doesn’t count. NO!  It doesn’t matter where your asset came from.  If you own it you must list it.

Quick!  Transfer the house (the boat, the stock, the ….) to your brother, your wife, your ….  NO!  Many think that a quick gift to a friend or relative solves the problem.  Your bankruptcy Trustee can reach back 6 years to undo “fraudulent conveyances” made without adequate consideration in exchange… and no, “One Dollar” doesn’t fix it.

We’ve seen many panicked Husbands “quitclaim” his share of the marital home to his wife thinking that this is necessary to protect it from creditors.  Now you’ve really done it!  The trustee can take your share of the home back from your wife and you have no “homestead” protection that would have otherwise protected it from your creditors.

Transfers within one year of the bankruptcy filing with fraudulent intent can also result in the loss of your bankruptcy discharge along with the asset.

The Judge ordered me to transfer it in the Divorce so that’s OK?   NOPE.  Transfers that seemed fair in a Divorce may not be fair to creditors.  Just because the Judge ordered that your husband get his equitable share of your assets in a divorce doesn’t protect them from your Bankruptcy trustee.  If debt is an issue in your divorce, best to have your matrimonial attorney consult with a bankruptcy attorney.

First pay back Mom, then file bankruptcy, but only if you can wait a year.  Giving more favorable treatment to some creditors is called a “preference.”  Payments on debts to family members within one year of a bankruptcy filing can be “avoided” by the trustee and Mom will be made to give it back for all creditors to share.  Payments to unrelated creditors are vulnerable for 90 days.

It’s embarrassing, but…  So are lawsuits, judgments, wage garnishees, seizure of assets and other collection process – perhaps more so.

Bankruptcy is privileged and confidential information. NOT!  Your bankruptcy is a public record and is freely accessible by anyone willing to pay $.08/page.

Keep paying until you file. NO!  Letting that credit card bill go delinquent that first time is often the most difficult step.  Many folks cannot fathom letting a bill go unpaid until their Bankruptcy is filed when they feel they now have permission.  For most, if a bankruptcy is warranted and inevitable, no point in paying further.  As Mom used to say, “If they are going to hang you for a sheep, you might as well act like a goat.”

Chapter 13 is a bad thing.  Absolutely not!  Chapter 13 is an excellent program, yet, once resigned to a bankruptcy, folks resist the concept of a five year payment plan instead of an immediate (100 day+/-) discharge in Chapter 7.  Chapter 13 is a powerful tool to stop a foreclosure and cure mortgage arrears over a five year Plan; to save a “non-exempt” asset from a Chapter 7 trustee by paying in its value during the Chapter 13 Plan or for those folks that have more income than their reasonable living expenses and can at least pay something to their creditors– even if they can’t pay in full.  Even in the last scenario, Chapter 13 helps you get control over the chaos of debt collection and fully resolve your debt with one payment to the Chapter 13 Trustee with each paycheck.  At the end of the five year plan, the balance of your debt is discharged, just like in Chapter 7.

“I’m not going to go bankrupt on that one.” NO!  All debts must be listed in a bankruptcy – no exceptions – Mom, Dad, best friend – all must be included.  You are free to pay them after the bankruptcy, nonetheless.  Best to give them some advance notice that they will receive a notice from the court.

Debt settlement is better for my credit. NO!  “Settlement for less than full payment” will be noted on any account you settle.  It is still a credit negative.  The cruelest cut is the 1099C that a creditor will send if you do not pay off the account in full.  Any discount greater than $600 requires the creditor to send the IRS a notice of “Cancelation of Indebtedness Income” which you must report on that year’s tax return.  You may not realize this as taxable income if you qualify for the “insolvency exception” which requires a separate tax schedule with your return if you still have more debt than assets after the settlement.  Ask your tax preparer about this.

Pay debt from my 401k. NO!  Retirement will be upon you before you know it.  These are sacred monies that you are going to need in the future.  IRA’s, 401k’s, 403b’s and other such tax deferred retirement accounts are generally not included as assets available to creditors in a bankruptcy.  We have seen many folks exhaust their retirement accounts and still end up filing bankruptcy as they did not address the underlying financial issues and ended up back in debt again– now with no retirement nest egg.

Have Mom and Dad get a HELOC to pay your debts. NO!  Family is there for emergencies.  Your irresponsible spending is not an emergency.  If you are still going to Mom and Dad, you have more growing up to do.  Worse yet, is where Mom and Dad don’t have the money either and go into debt to pay your debt!  Their home is likely their largest asset and may be a significant aspect of their retirement planning– and you just spent it.

Mom and Dad put the house in the kids’ names. NO!  When your folks put their house in your name for Medicaid planning, the house is now yours and subject to your creditors’ claims in your bankruptcy.  As our former Bankruptcy Judge once said to a Debtor appearing before him, “Your folks played the ‘Medicaid Game’… and lost!”  Giving it back does not put the toothpaste back in the tube– unless you can hold off for another 6 years before filing bankruptcy.

I’m current on my minimums so I’m good. NO! Simply keeping current on the minimum payments is the long way out.  You are still in debt.  Creditors compute their minimums differently. For a time, minimum payments didn’t even pay all the interest (!) but, the government put a stop to that.  Now the minimum must cover all the interest plus some principal but still, full payment will be many years away.  In the meantime, this debt will impair your credit score.

Making life decisions based upon the impact on your credit score. NO!  There are things more important in life than your credit score. Some even suggest that borrowing is a must to build their credit score.  Which, to you, is the more appealing life partner– someone with no debt and no credit history or a load of credit card debt with a high credit score?  Which one are you more likely to lend to?

The bottom line.  Never carry a balance!  Take a hard realistic look at your income and spending habits.  We use credit cards mindlessly.  They are too easy to spend.  BUDGET!!  Every purchase counts.  That daily $3.50 iced coffee is $75/month (without the tip)!

More importantly, that monthly interest payment is going right down the financial sewer.  Try a simple example: You have a $5,000 balance on your cards, 24% annual interest is 2%/month.  The math is easy $5,000 x 2% = $100/month that you are wasting because you took your eye off the ball.

A credit card balance carries a simple message – YOU ARE SPENDING MORE THAN YOU ARE EARNING!  Now your cash-flow is even more out of balance.

Paying debt with debt. NO!  Now that you been suckered into running a balance, how are you going to pay it?  This balance reflects that your expenses exceed your income. Are you going to cut back on expenses or take a part-time job?  Those are the only real alternatives– less expense/more income.  Or, are you going to just ignore your negative cash-flow and continue to mindlessly use your card (or cards!) and make it even worse.  Worse yet- cash advances?!

Many don’t recognize that even without cash advances, they are still paying debt with debt.  It usually looks like this:  Each month you sit down with the checkbook (or on-line account) and responsibly pay all your bills.  Then you head off to the grocery store and scan the credit card, despite the fact that the account has already been drained in the bill-paying session.  If you went to the grocery first, there wouldn’t be enough left to pay all the bills.

Who is responsible?  Credit card debt is the most insidious evil in our modern society – worse than drugs – it is in every household.  Folks think nothing of it but it carries physical stress that is the greatest engine for divorce, child and spousal abuse and death.  I have had three clients die– two heart attacks and a suicide (the wife of one of the heart attacks).  At the same time, credit cards are the most profitable aspect of banking.  Look at the interest rates!  If this was simply a loan at interest at these rates– you wouldn’t have to pay it in New York.  Your defense of “usury” (loans at interest greater than 16%) would defeat any effort at collection – interest or principal.  Yet the banks are permitted to promote this toxic bait freely to the unwary and unsophisticated populace.

So, who’s responsible?  You!  Take control of your daily spending.  The simple solution is to pay cash and when you use the card, never run a balance.  Cash is harder to spend.

The more responsible approach is to invest in a pencil and a single sheet of paper.  List out your monthly expenses (everything!) and run the total.  Now look at your paychecks.  Do the totals balance?  If not, what adjustments do you intend to make?  In hard financial times, reduce your spending.  Get rid of the cable TV, cell phones for everyone, youth sports (hockey!), fast food, cigarettes and simply spend less.

If you find a credit card balance at the end of the month, take a critical look at yourself.  You took the bait!  What a sucker… no, you aren’t?  Prove it.  So, do something about it.

Article written by: Christopher K. Werner, Esq.