The scare tactics creditors use to prevent consumers from filing bankruptcy can be frustrating for bankruptcy lawyers. After spending the past three decades as a bankruptcy lawyer, I know what those heavy financial burdens do to families. This week, I discuss a few of the Chapter 7 bankruptcy myths that should provide perspective for anyone considering this as an option.
Chapter 7 Bankruptcy Myth Number 1
“I’ll lose my house.”
That’s not true. The vast majority of my clients file for chapter 7 bankruptcy protection – and they keep their homes. We file a Chapter 7 bankruptcy to discharge credit cards, judgments, medical bills, pay day loans and other unsecured debts. If the client is current on the home loan payments and can afford to make the regular monthly payments, the client keeps making the monthly home payments and the home is retained as an exempt asset. However, if the client is behind on the home mortgage payments and needs to have the payments lowered in order to afford the monthly payments, we seek a home loan modification with the lender. Additionally, if the homeowner is behind on the home loan payments and the lender is pursing foreclosure, we file a Chapter 7 bankruptcy which stops the foreclosure, and then immediately pursue a home modification with the lender in order to stretch the missed payments over the life of the loan and lower the payments. The Home Affordable Modification Program (HAMP) was put into place by the federal government which helps us negotiate home loan modifications and allow our clients to remain in their homes with reduced monthly payments. In fact, my bankruptcy law firm has a nearly a 100 percent success rate in our efforts to save homes by filing Chapter 7 bankruptcy and seeking a home loan modification of our clients’ homes. This is a vastly superior way to retain a home than the option of a Chapter 13, which does not reduce the monthly payments and requires the clients to have their paychecks and income tax returns garnished for three to five years. If you need help saving your home, Chapter 7 is usually the best option to consider! If anyone tells you that homes in Texas can only be saved from foreclosure by filing a Chapter 13, come see my office for a free consultation!
Chapter 7 Bankruptcy Myth Number 2
“I’ll lose my car and then won’t be able to buy another one.”
Let’s think about this for a moment – If you are behind on your car loan and the lender is threatening repossession, you may believe that Chapter 13 is the only way to save your car. You might also think that your only other option is to trade in that car on a different, less expensive car.
However, you are probably “upside down” on that car. That means, that you owe more on the car than it it worth.
When our clients tell us that they have this problem, we advise Chapter 7. We file a Chapter 7 to stop the car foreclosure and get rid of virtually all of their other debts and “dings” on their credit reports.
We then have lenders who will finance them the purchase of a different car, new or used, after their Chapter 7 bankruptcy case if filed. They do not have to trade in the “negative equity” on their previous car to purchase a replacement car. The car is surrendered to the lender and that “negative equity” is discharged in the Chapter 7. They drive away in a new or used car either during the Chapter 7 or immediately after the Chapter 7 is discharged. Obtaining a replacement vehicle, either during the Chapter 7 bankruptcy or immediately after the Chapter 7 discharge, helps them tremendously on to the road to their fresh start.
The Chapter 7 option on vehicle replacement is a vastly superior option to retaining a car through a three to five year wage and income tax refund garnishment in a Chapter 13.
Chapter 7 Bankruptcy Myth Number 3
“A chapter 13 bankruptcy is better and is also cheaper than a chapter 7 bankruptcy.”
The attorneys fees that the lawyers charge to file a Chapter 13 are, on the average, at least $1,000.00 more than the attorneys fees charged in a Chapter 7. The Chapter 13 attorney may charge less of a “down payment”, but the balance of the fees are paid in the three to five year garnishment of your paycheck and income tax refunds. The Chapter 7 attorney is paid either in one payment, or over time before the case is filed. No garnishment.
Which bankruptcy is “better”? Chapter 7 only lasts about three months. Your receive a discharge after your three months and your wages and income tax refunds are never garnished by a Trustee to pay your creditors. Chapter 13 bankruptcies last three to five years, you are in an active bankruptcy case pending before a federal bankruptcy judge during that entire three to five year time period and your wages and income tax refunds are garnished and sent to the Chapter 13 Trustee, who retains a 10% commission on your garnished funds, and pays your creditors the balance.
Which do you think is “better”?
Chapter 7 Bankruptcy Myth Number 4
“If I can’t pay my bills, you can’t expect me to pay the fees and lawyer for a bankruptcy.”
If a client retains our firm for a Chapter 7 filing, we can place the client on a payment plan for the balance of our fees and expenses necessary in order to file the case. As the client is paying us on the payment plan, we can advise the client to stop paying certain unsecured creditors, use those funds to pay our firm, and we respond to creditor calls and letters so that the client is not scared or bothered by creditor harassment while our fees are being paid. This method also gives the client peace while the client gathers the documents necessary for us to file the bankruptcy case. Our clients unanimously tell us that this service is a great relief to them. Under the Fair Debt Collection Practices Act, once an individual has retained an attorney, all debt collectors must only contact the lawyer in an attempt to collect debt.