Topic 7
Bankruptcy
Questions to Think About:
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When should a client file for bankruptcy?
What is the counselor’s role in the process?
Learning Objectives:
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Differentiate between types of bankruptcies
Clearly understand pros and cons of client filing for bankruptcy
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How-To Help Clients Lower Their Debt
Guide for Counselors: Action Steps in Practice
Be Realistic! This is where a counselor is most helpful.
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Determine how much is owed
 Balance on each debt
 Minimum payments
 Interest rates

Prepare a realistic budget
 Insert minimum required payments
 Review & Prioritize – Pay minimum on lower rate debts and apply more to higher
rates
NOTE: Make sure that
 Review all expenses for savings to create extra cash flow

Look for opportunities to transfer balances to lower rate credit card
 Beware of promotional periods and rates after promotion
period ends

Negotiate minimum payments of debt to manageable amounts
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Debt Consolidation – Combine all debt & pay over a fixed term – lower monthly payments &
interest rates
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Settling the Debt – Creditor accepts reduced lump-sum to settle debt

Sell unneeded items or assets (if any)
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Consider additional employment (if possible)
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Counselors may be able to re-negotiate their already agreed upon payment plan – but it’s
VERY DIFFICULT!
client does not end up
paying more by transferring
than by just paying off
original credit card.
NOTE: By having clients go through these steps themselves, you’re allowing them to face
the problem. But as a counselor, you still want to see documentation to ensure that they’re
doing everything correctly.
If applicable, may also be important to meet with both spouses separately to ensure that one
is not hiding debt or assets from the other.
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Insolvent – Liabilities exceed your assets, in accounting
Bankruptcy – Legal condition of being insolvent. Must be
declared by a Federal Bankruptcy Court
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NOTE: You can file Chapter 13
for restructuring secured debt.
Both Chapter 7 and Chapter 13
can be filed simultaneously.
Other “Non-Dischargeable” Debt
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Debts not listed on bankruptcy papers, unless creditor learns of your
bankruptcy case
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Debts for personal injury or death due to DUI
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Fine & penalties imposed for violation of law & criminal restitution
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Certain income tax debts
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Debts may survive because of fraud, such as lying on a credit
application or passing off borrowed property as your own to use as
collateral for a loan
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Who is Eligible to File Chapter 7?
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Cannot file if received discharge under Chapter 13 in the last 6 years
or under Chapter 7 within 8 years
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If based on average income, expenses, and debt burden, you could
feasibly complete a Chapter 13 repayment plan
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Issue
Chapter 7
Chapter 13
Foreclosure
Delay for short time
If a bankruptcy case is started, the entire
state court foreclosure action is “stayed” –
stopped, suspended, unless the lender goes
into bankruptcy court and obtains an order
granting relief from the stay. So, because the
entire state court case would be stayed by
the bankruptcy filing, the settlement
conference process also would be stayed.
Bankruptcy court would develop a plan but it
would not include principal forbearance or
reduction, so payments would most likely
increase a good deal. In general, bankruptcy
is not always a good option for those IN
foreclosure and especially those in the
process of applying for a modification or
other workouts. Chapter 7 is a better option
once a workout has been agreed upon.
Credit Score
Damages credit and remains
on credit report for 10 years.
However, credit begins to
recover in about 2 years.
Damages credit and remains on credit report
for 10 years, however, because of attempt to
repay over the period of the plan, credit
score may not suffer as much as under
Chapter 7
Debt exceed the value of No cram down – property
Property Securing Debt
disposed of at the liquidation
price. Secured debt is not
included in Chapter 7.
"Cram down" provisions allow court to reduce
a debt to the replacement value of the
property securing it, and then pay off that
debt through your plan.
• Does not apply to car debt of car
purchased car during the 30-month
period before bankruptcy filing, or to
secured debt on other personal
property purchased within one year
preceding your bankruptcy filing.
• Cram down is allowed on mortgages
on second homes.
Student Loan
Cannot be discharged
Same as for Chapter 7
Cannot be discharged
Unless can prove “undue”
Includes loans issued or
hardship
insured by government, or
• Poverty
non-profit, or private
• Persistence of
commercial lender that meet
hardship
the definition of a “qualified
• Good faith effort to
education loan” and does
repay debt
make some provision for
extension or deferral during
economic difficulty or while
attending school
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BANKRUPTCY REQUIREMENTS

Complete credit counseling with an agency approved by the United States Trustee.
(For a list Trustee's website, http://www.usdoj.gov/ust)

Automatic Stay – Filing puts into effect an "Order for Relief“ immediately stops most
creditors from trying to collect temporarily, creditors cannot legally grab ("garnish")
your wages, empty your bank account, go after your car, house, or other property, or
cut off your utility service or welfare benefits.
Credit Counseling Requirement
Before filing for bankruptcy must consult nonprofit credit counseling agency

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Approved by US Trustee’s office
Within 180 days before filing for bankruptcy
Counseling agency may charge a “reasonable” fee – defined as $0 to $50
Bankruptcy Court Controls Financial Affairs

Filing bankruptcy places property owned and debt owed in the hands of the court.
Debtor cannot:
1. Sell or give away property you own, or pay off your pre-filing debt, without
the court's consent
2. With a few exceptions, can do what you wish with property acquired and
income earned post-bankruptcy filing

Appoints Bankruptcy Trustee
1. Court-appointed person is to see that your creditors are paid as much as
possible on what you owe them. And the more assets the trustee recovers
for creditors, the more the trustee is paid.
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THE BANKRUPTCY DISCHARGE
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All debt cleared at discharge by the court with some exceptions, i.e. child support,
etc.
No longer legally owe creditors for discharged debts
Must advise court if receive (or become eligible to receive) inheritance, insurance
proceeds, or proceeds from a divorce settlement within 180 days of the date you
originally filed bankruptcy papers
Cannot file for Chapter 7 bankruptcy again for another eight years from the date of
current filing
WHAT IS EXEMPT PROPERTY?
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State law determines which properties are exempt in bankruptcy, and in what
amounts
These items cannot be seized by creditors or by the bankruptcy trustee
Typically, the following items are exempt:
o Homestead exemption – in WA. up to $125,000 in equity.
o When you file bankruptcy in Washington you may also use certain federal
exemptions or your Washington exemptions. To learn more, go to
www.washington-bankruptcy.com/exemptions.html
Exempt Property
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Part of the equity in motor vehicles (the amount varies from state to state)
Reasonably necessary clothing (no fur coats), household goods and furnishings,
household appliances
Jewelry, to a few hundred dollars
Personal effects
Life insurance (cash or loan value or proceeds), (the amount varies from state to
state)
Part of the equity in a residence (the amount varies from state to state)
Pensions
Public benefits
Tools of a trade or profession, to a certain value, and unpaid but earned wages
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© January 23, 2013
Cities for Financial Empowerment Fund
All rights reserved.
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