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What happens after Bankruptcy? Does it take ten years to reestablish credit?

Most people who file bankruptcy are worried about what comes next. They've heard rumors like, "You can't get credit for ten years after you file bankruptcy."
Here's what you can realistically expect after your bankruptcy discharge:

Creditors will likely flood you with offers of low-balance credit cards to help you "rebuild" your credit after bankruptcy. Choose your new credit accounts with care. There are reputable lenders who will give you a chance to re-establish credit after bankruptcy.

After bankruptcy, you won't immediately be able to qualify for most conventional mortgages, car loans and the like. For most people who file bankruptcy and then pay their bills on time, however, those loans will be within reach two to three years after discharge.

FAQ & Myths

What Property is protected in a Chapter 7 Filing?

The answer to that question depends on individual circumstances, but usually includes the following:

  • Primary residence
  • Primary automobiles
  • Clothing, apparel, shoes
  • Household goods, television, computer
  • Cell Phones
  • All pension and retirement income.

 
The following types of debt that cannot be discharged in a Chapter 7 filing:

1)   Student Loans (absent difficult proof of hardship)
2)   Child Support
3)   State and Federal Back Taxes (Generally)
4)   Criminal Fines

Do I have to appear in Court?

Yes. Usually between 20 and 40 days after you file your petition, the trustee will hold the "first meeting of creditors" (also called a "341" meeting). THE DEBTOR’S APPEARANCE AT THE MEETING IS MANDATORY. The trustee can ask you questions under oath about your property and debts.  
Generally, the only responsibilities you have with respect to the bankruptcy after the 341 meeting is to cooperate with the trustee in providing any requested information.

Can I pick and choose creditors to declare in my Bankruptcy Petition?

No.  All creditors must be disclosed in both a Chapter 7 and Chapter 13 Proceeding.  If the Debtor is not aware of all of their debts, please notify the attorney at your initial consultation.  With proper authorization, we can arrange to have a credit report prepared at cost.

Should I continue to make my car payments?  What’s “debt reaffirmation”?

Yes. If you choose to continue the lease/financing, you must continue to make regular payments (in some cases to a specified bankruptcy division).
It is also common for creditors to contact you regarding "reaffirmation" of debts. “Reaffirmation” is an agreement between you and a creditor that you will remain liable on a debt and will pay the remaining portion of the amount owed in order to keep certain property, such as an automobile, even though the debt could be discharged.

Under the old bankruptcy law, you could continue to make your car payments as per your loan agreement. When the loan was fully paid, title to the car would be transferred to you. If you defaulted on the loan after discharge, the creditor could repossess the car, but the repossession deficiency amount that you owed would still be wiped out and you would owe nothing. Under the new law, you have to reaffirm your car loan within 45 days after the "341 meeting." You no longer have the option of continuing your car payments without reaffirming the loan. Once the loan is reaffirmed, if you default on your payments and the car is repossessed, you are liable for the repossession deficiency.

You also have the option to redeem the car within 45 days of the "341 meeting." This means that you have to pay the entire balance due within that time. Because most debtors do not have that kind of money, this option is rarely used.

If you decide to reaffirm a debt, you are required under the Bankruptcy Code to file an agreement with the court. The agreement must disclose that you were advised of the amount of the debt you are reaffirming and how it was calculated and that you are aware that the debt will not be discharged. You must indicate your income and expenses so that the court can see that there is sufficient money to pay the reaffirmed debt. Unless you are represented by an attorney, the court must approve the agreement. A hearing will be held if the court disapproves. If an attorney represents you, he or she must certify in writing that they advised you of the legal consequences of the agreement, that you were fully informed and entered into the agreement voluntarily, and that the reaffirmation will not create an undue hardship on you and your family.

Unsecured creditors may offer deals for new credit based on reaffirming the existing balance on your credit card.

Will I ever qualify for secured credit or for a Mortgage?

Yes!  A number of banks now offer "secured" credit cards where a debtor  puts up a certain amount of money (as little as $200) in an account at the bank to guarantee payment.  Usually the credit limit is equal to the security given and is increased as the debtor proves his or her ability to pay the debt.  Two years after a bankruptcy discharge, debtors are eligible for mortgage loans on terms as good as those of others, with the same financial profile, who have not filed bankruptcy.  The size of your down payment and the stability of your income will be much more important than the fact you filed bankruptcy in the past. The fact you filed bankruptcy stays on your credit report for 10 years.  It becomes less significant the further you are removed from the bankruptcy. 

Will my spouse be affected?

Your wife or husband will not be affected by your bankruptcy if they are not responsible (did not sign an agreement or contract) for any of your debt. If they have a supplemental credit card they are probably responsible for that debt. Day to day debts, such as credit cards, do NOT require both spouses to have signed.

If you are married and filing without your spouse, proof of his or her income will be required by the Court.  He or she, however, will not have to appear at the Meeting of Creditors unless required by the Trustee.

Bankruptcy will not affect the credit of your spouse.  Any joint debts however, will not be completely discharged.  They will become the responsibility of your spouse.

Who will know?

Bankruptcy filings are public records.  However, under normal circumstances, no one will know you went bankrupt. The Credit Bureaus will record your bankruptcy and it will remain on your credit report for 10 years. 

Should I continue to pay my credit card bills?

This decision should not be made until consulting with an attorney.  No credit cards should neither be used nor paid within 90 days of filing for Bankruptcy protection.  In the event of either, the Court may demand “recapture” payments for the amounts used or paid. There should be no cash advances taken for one year prior to filing for Bankruptcy protection.

If I use a credit counselor, will I get a better rating than if I declare Bankruptcy?

No, you will not. It will cost you less money and you will rebuild your credit rating faster if you file Chapter 7 or Chapter 13. Be cautious if you are considering using a credit counselor. Please note that many credit counseling companies are not regulated and implement unethical business practices.  The IRS has filed a number of lawsuits against "non-profit" credit counseling groups following the recent widespread abuse.

Can my boss fire me for filing Bankruptcy?

No. U.S.C. § 525, prohibits any employer from discriminating against you because you filed bankruptcy.

How much should it cost to hire an attorney to file bankruptcy?

The filing fee charged by the Bankruptcy Court is currently $299 for a chapter 7 case and $274 for a chapter 13 case (as of 1/1/07). The fee for the mandatory pre-bankruptcy Credit Counseling program from a provider approved by the U.S. Trustee is approximately $50. The fee for the mandatory post-bankruptcy Financial Management program from a provider approved by the U.S. Trustee is also approximately $50.
The fee to hire Martin & Loiacono to represent you varies depending on which chapter of bankruptcy you are filing (chapter 7 or chapter 13), how many creditors you have, your property situation and how much complexity will be involved in claiming your exemptions and completing your property schedules. Once we have this information we can quote you a binding flat fee. If you hire us, a written retainer will specify our total fee and itemize all costs associated with your case.
Our fee may be paid in installments, but in a chapter 7 case it must (by law) be paid in full before we file your bankruptcy petition with the Bankruptcy Court. In a chapter 13 case we may agree to receive some part of our fee through your chapter 13 plan, depending on the circumstances of the case.
By law attorneys are required to disclose the fee they charge to represent debtors in chapter 7 and chapter 13 bankruptcy cases on disclosure forms filed in each debtor's bankruptcy case. We regularly review these filings in the Southern District of New York Bankruptcy Court (which includes New York County and Bronx County) and the Eastern District of New York Bankruptcy Court (which includes Kings County, Queens County, and Richmond County). We set our fees to be competitive with those of other experienced local bankruptcy attorneys.

Why do I need an attorney to file bankruptcy? Can I Just Hire a Paralegal or a Form Preparation Service (Such as We The People)?

There are a number of paralegal services that claim to assist people with bankruptcy filing. They are not lawyers and not knowledgeable about bankruptcy law. By law they are not allowed to provide any legal advice. Such groups are only permitted to fill out the numerous forms and schedules required to be filed with the Bankruptcy Court based on information you provide. Basically, they are just expensive "typing services" that can't advise you whether or not to file bankruptcy, what chapter of bankruptcy to file if you decide to file bankruptcy, or how to fill out the forms and schedules needed in your bankruptcy case. The United States Trustee, (including the Southern District of New York) have filed lawsuits against paralegal services prohibiting them from engaging in the unauthorized practice of law. See, Martini, as the United States Trustee v. We the People Forms and Service Centers USA, Inc., et al. (U.S. Bankruptcy Court S.D.N.Y., Adv. Pro. # 05-01434, and Stipulated Final Judgment entered). Many debtors have had poor results from using paralegal services for bankruptcy filings, such as having their cases dismissed or losing homes that could have been saved had the debtor hired a competent bankruptcy attorney.  A dismissal of such a filing in many cases will preclude you from filing for Bankruptcy protection for up to eight years.

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