Too much debt? How to make a smart decision about filing for bankruptcy – Mother Jones


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This narrative originally appeared on ProPublica.

The two main bankruptcy options available to people incurring consumer debt are Chapter 7 or Chapter 13. The options differ significantly in how they work and the relief they provide. Below are the basic attributes for each chapter, along with stats taken from ProPublicaAnalysis of bankruptcy filings from 2008 to 2015 to show which types of debtors choose each chapter and how successful they are in having their debts erased or discharged. This guide is part of ProPublicathe bankruptcy serieswho takes a critical and careful look at the system and its shortcomings.

Chapter 7 is a form of liquidation, i.e. the debtor’s assets are distributed among the creditors. However, 95% of cases involve debtors who have no assets above the legal threshold, which is set by state law, and therefore have nothing to give up. The median Chapter 7 case takes three and a half months from filing to discharge. About 96% of debtors who file under Chapter 7 receive a discharge of their debts.

When a debt is discharged, it is no longer legally due. Unsecured debts (eg credit cards, medical bills, etc.) are generally dischargeable with some important exceptions like student loans. Secured debts (eg, mortgage, auto loan) are treated differently in a Chapter 7: Generally, a debtor can either waive the secured asset or keep it by continuing to make payments.

Chapter 13 is a form of repayment plan. The debtor’s obligations are combined into one regular payment (although some outstanding obligations like utility bills can be paid outside the plan) calibrated to the debtor’s income. A Chapter 13 plan often involves paying off some unsecured debt.

A Chapter 13 plan can last anywhere from three to five years, but most plans are five-year plans. In cases filed between 2008 and 2010, approximately 41% of debtors who filed under Chapter 13 received a discharge of their debts. Another 10% first filed under Chapter 13, but later converted to Chapter 7 and received a discharge that way.

Why would anyone choose one or the other?

Generally speaking, the main benefit offered by Chapter 7 is quasi-guaranteed debt relief. Chapter 13 primarily offers benefits related to secured debt. For example, Chapter 13 stops foreclosure proceedings so that debtors who have fallen behind on their mortgages can catch up over time without risking losing their homes.

Also, if someone has filed for bankruptcy in the past few years and managed to pay off their debts, they might be forced to choose Chapter 13, as Chapter 7 contains stricter filing rules. . After receiving a Chapter 7 discharge, for example, debtors are barred for eight years from receiving another discharge, but they would only have to wait four years to file a Chapter 13 petition. there is no such time limit if the debtor’s previous case has been dismissed.

What is the effect of the deposit on a person’s credit score?

Bankruptcy is a negative credit event, but the effect is not the same for everyone.

Initially, Chapter 7 and Chapter 13 have the same effect on a credit score, which decreases over time. The main difference is that the flag of a Chapter 13 bankruptcy is removed from the debtor’s credit history seven years after filing, while a Chapter 7 bankruptcy remains there for 10 years.

Since people who file for bankruptcy have typically fallen behind on a number of debts, the typical bankruptcy filer has a credit score between 525 and 575, which is lower than about 80% of the population with a score. . It’s such a low score that when a person files for bankruptcy, their credit score tends to go up the following year. Indeed, the negative mark of a bankruptcy is offset by the positive effect of debt relief.

How much does a lawyer cost ?

A comprehensive study of attorney fees estimated the average price for a Chapter 7 in 2009 at around $1,000 and a Chapter 13 at around $2,600. These averages would likely be at least 25% higher if measured today, and fees vary by judicial district. For example, in Memphis, typical Chapter 13 attorney fees are now $3,800.

Chapter 7 attorney fees are usually due in full before filing, although there are places (again, it depends on where you live) where attorneys will offer a payment plan. In a Chapter 13, a portion of the fee is usually paid upfront, with the rest paid through the plan. In some parts of the country, especially in the south, attorneys will start a Chapter 13 case for very little – often $0 – paid upfront. This can be a problem when debtors choose Chapter 13 simply because they cannot afford Chapter 7. Low-income debtors (with an annual household income below about $35,000) are at particular risk of failing to complete Chapter 13 plans and having their cases rejected.

What happens if someone’s case is dismissed without discharge?

Almost all Chapter 7 cases end in a discharge, so this is primarily a concern for Chapter 13 filers.

Low-income debtors are less likely to obtain a Chapter 13 discharge. Besides, black debtors are more likely than white debtors to choose Chapter 13but they are less likely to reach the landfillas we show in this story.

When Chapter 13 cases are dismissed, bankruptcy protection is removed. Since the payments debtors made during the plan were generally less than they were contractually owed, they will likely find themselves further behind on their debts.

How does having a lawyer affect someone’s chances?

Debtors who are represented by lawyers tend to fare much better than those who are not.

Only about 8% of debtors who filed under Chapter 7 from 2008 to 2015 did so without the assistance of an attorney. About 72% of these cases resulted in debt cancellation. In comparison, debtors who were represented by lawyers received discharges 98% of the time.

About 9% of debtors who filed under Chapter 13 from 2008 to 2015 did so without the assistance of an attorney. It is very rare for such cases to reach the landfill. Only about 4 percent of Chapter 13 pro se cases filed from 2008 to 2010 ended in discharges.

How many people choose each chapter? What is the typical financial profile of filers?

Nationally, about 71% of consumer filings went through Chapter 7 in the years following the Great Recession (2009-2011), but Chapter 7 filings have declined in recent years (2013-2015 ), when they accounted for 66% of deposits. The median Chapter 7 debtor from 2008 to 2015 had an annual income of about $35,000.

This large regional difference reflects a difference in the type of debtors who use Chapter 13. Outside of the South, Chapter 13 is heavily used by middle-income homeowners, while in the South, many more low-income debtors (with income similar to Chapter 7 debtors) are filing for Chapter 13, and many don’t even own a home. In the South, Chapter 13 is much more popular, partly because of lower initial attorney fees. In nine states (Alabama, Arkansas, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee and Texas), at least half of consumer filings fall under Chapter 13. Click here to see a map showing the percentage of Chapter 13 filings in each county nationwide.

What happens to people in financial difficulty who do not declare bankruptcy?

There are many reasons, some good, some bad, not to declare bankruptcy. But ProPublica I would like your help in answering this question. Have you considered filing for bankruptcy at any time in the past 10 years? Do you know anyone else who has done it or is doing it? To fill this survey and say ProPublica about your experience. ProPublica would like to hear from as many people as possible in the coming months to inform their reports on how the system is working or not. Please share.

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