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Financial Empowerment Center
Counselor Training Curriculum
Topic 7: Bankruptcy
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Guide for Counselors: Action Steps in Practice
Be realistic! This is where a counselor is most helpful.
Determine how much is owed
Balance on each debt
Minimum payments
Interest rates
Prepare a realistic budget.
Insert minimum required payments
Review and prioritize – Pay minimum on lower rate debts
and apply more to higher rates
Review all expenses for savings to create extra cash flow
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Guide for Counselors: Action Steps in Practice
•
Look for opportunities to transfer balances to lower rate
Beware of promotional periods and rates after promotion
•
Negotiate minimum payments to manageable amounts
•
Debt Consolidation – combine all debt and pay over a fixed
term – lower monthly payments and interest rates
•
Debt Settlement – creditor accepts reduced lump-sum to
settle debt
•
Sell unneeded items or assets (if any)
•
Consider additional employment
•
Counselors may be able to re-negotiate the plan – but it’s
VERY DIFFICULT!
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If All Else Fails: Counselor’s Role
When all options have been carefully evaluated and
considered for realistic pursuit or have been pursued and
failed, clients may seriously consider bankruptcy.
Counselors:
• Should not dissuade debtor from filing for bankruptcy
• Should be sure debtor understands pros and cons of
bankruptcy
• Should advise debtor to seek reputable legal assistance
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Seeking Help
CREDIT COUNSELORS
• National Foundation for Credit Counseling
• Association of Independent Consumer Credit Counseling Agencies
BANKRUPTCY
• Bankruptcy cases are filed through the federal court system, not through
the state
• Additional information on Consumer Debt is available at
WashingtonLawHelp.org.
• Referral to a lawyer or a legal service program, call CLEAR (888) 201-1014.
• Victims of domestic violence, may obtain assistance from the Domestic
Violence Hotline (800) 562-6025.
• Each county may have a courthouse facilitator who cannot provide legal
advice, but who can offer limited assistance in completing necessary
paperwork.
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Seeking Help
• Washington Western Bankruptcy Court - www.wawb.uscourts.gov/
The U.S. Bankruptcy Court Western District of Washington has
offices in Seattle and Tacoma. The district serves the region south of
the Canadian border and north of the Columbia River between the
Cascade Mountain range and the Pacific Ocean.
 Seattle Courthouse
700 Stewart St., #6301
Seattle, WA 98101
(206) 370-5200
• Washington Western Bankruptcy Court Forms www.uscourts.gov/FormsAndFees/Forms/BankruptcyForms.aspx
• Bankruptcy Basics Video
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Seeking Help
Credit Counselors
• National Foundation for Credit Counseling
• Association of Independent Consumer Credit Counseling
Agencies
On-line Resources
• www.washingtonlawhelp.org/search?q=bankruptcy
• www.uscourts.gov/FederalCourts/Bankruptcy.aspx
• www.wawb.uscourts.gov/
• Bankruptcy Basics Video
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Personal Bankruptcy
What is Bankruptcy?
Legal declaration by a Federal Court that debtor is
insolvent, i.e. debts exceed assets, and the debtor
is unable to pay under the current circumstances.
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Filing for Bankruptcy
What Can Bankruptcy Do?
• Clear credit card debt and other unsecured debts
• If you file for Chapter 13 rather than Chapter 7, you
may have to pay back some portion of your
unsecured debts. However, any unsecured debts
that remain once your repayment plan is complete
will be discharged.
• Stop creditor harassment and collection activities
• Eliminate certain kinds of liens (but not others)
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What Bankruptcy Will
Do
• Prevent a secured creditor from repossessing property
• Eliminate child support and alimony obligations
• Wipe out student loans, except in very limited
circumstances
• Eliminate most tax debts
• Eliminate other non-dischargeable debts
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Other “Non-Dischargeable” Debt
• Debts not listed on bankruptcy papers, unless
creditor learns of your bankruptcy case
• Debts for personal injury or death due to DUI
• Fine and penalties imposed for violation of law and
criminal restitution
• Certain income tax debts
• 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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Is Bankruptcy the Right Choice?
Pros:
• May allow debtor to start over completely
• May allow debtor to stop collection actions to pay off debt
in a structured manner
• May allow debtor to protect certain assets from creditors
Cons:
• Affects ability to get future credit
• Stays on credit report for ten years
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Are There Alternatives to Bankruptcy?
• Beware of scams that promise to let you walk off
with little or no payment
• Do nothing – are you judgment proof?
• Negotiate with creditors
• Participation in a credit or debt counseling agency's
debt management program
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Chapter 7 Liquidation
• Cancels debts: bankruptcy court liquidates or sells
property for the benefit of creditors
• Process: four to six months, costs a few hundred
dollars in filing and administrative fees
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Who is Eligible to File Chapter 7?
• Cannot file if received discharge under Chapter 13 in
the last 6 years or under Chapter 7 within 8 years
• If based on average income, expenses, and debt
burden, you could feasibly complete a Chapter 13
repayment plan
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Chapter 13
• Debtor proposes a voluntary plan to pay his creditors
over a 3-to 5-year period
• Usually has a regular income
• Debtor usually keeps all or substantial part of property
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Chapters 7 and 13 Compared
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.
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Chapters 7 and 13 Compared
Issue
Chapter 7
Chapter 13
Credit Score
Damages credit and remains on
Damages credit and
remains on credit report credit report for 10 years, however,
because of attempt to repay over
for 10 years
the period of the plan, credit score
may not suffer as much as under
Chapter 7
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Chapters 7 and 13 Compared
Issue
Chapter 7
Chapter 13
Debt exceed the value
of Property Securing
Debt
No cram down –
property disposed of at
the liquidation price.
Secured debt is not
"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.
included in Chapter 7.
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Chapters 7 and 13 Compared
Issue
Chapter 7
Chapter 13
Student Loan
Includes loans issued or
insured by government,
or non-profit, or private
commercial lender that
meet the definition of a
“qualified education loan”
and does make some
provision for extension or
deferral during economic
difficulty or while
attending school
Cannot be discharged
Cannot be discharged
Unless can prove “undue” Same as for Chapter 7
hardship
• Poverty
• Persistence of hardship
• Good faith effort to
repay debt
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Bankruptcy Requirements
• Complete credit counseling with an agency approved
by the United States Trustee. (For a list Trustee's
website, 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.
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Credit Counseling Requirement
Before filing for bankruptcy must consult nonprofit
credit counseling agency
• 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.
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Bankruptcy Requirements
Bankruptcy Court Controls Financial Affairs
• Filing bankruptcy places property owned and debt owed in
the hands of the court. Debtor cannot:
1.
2.
Sell or give away property you own, or pay off your
pre-filing debt, without the court's consent.
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
• All debt cleared at discharge by the court with some
exceptions, e.g. child support.
• 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.
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What Is Exempt Property?
• 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:
 Homestead exemption – in WA., up to $125,000 in equity.
 When you file bankruptcy in Washington you may also use
certain federal exemptions or your Washington
exemptions. To learn more, go to www.washingtonbankruptcy.com/exemptions.html
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Exempt Property
• 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
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Exempt Property
• 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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Lasting Thoughts
• As a counselor, be realistic! Help assess client’s financial
burdens and different options before filing for bankruptcy.
• Bankruptcy may allow debtor to get rid of collectors and
start over, but it will also affect future credit choices as well
as stay on credit report for 10 years.
• Remember that bankruptcy does not wipe all debt.
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