Financial Troubles? When to File Bankruptcy | Jeffrey B. Kelly

Financial Troubles? When to File Bankruptcy

Bankruptcy filing rates are down overall, but four Georgia counties are among the top ten in the nation in terms of consumer bankruptcy filings.

With 1,096 bankruptcy filings per 100,000 people, Clayton County (Jonesboro) is second only to Shelby County in Tennessee. The recession hit folks in Clayton County hard, as unemployment peaked at 13.5 percent in 2010 and remained above 10 percent for several years. Making matters worse, a large grocery store chain recently left the area and took a number of jobs with it. Three other Georgia counties – Henry County (861 per 100,000), Newton County (850), and Douglas County (754) – also made the top ten. Altogether, eight of the top ten were in the Deep South.

On the flip side, five of the bottom ten counties were in Texas, with Ector County (Odessa) leading the way with a national-low 34 filings per 100,000 residents.

When to File Bankruptcy

Although bankruptcy filing rates are down overall, the reason is not because Americans have more money and therefore less debt. In fact, the opposite is true. According to a recent survey from the Federal Reserve, 46 percent of Americans said they did not have enough cash to cover a $400 emergency expense, and they would borrow from friends or relatives, put it on a credit card, or not pay it at all. At the same time, people are feeling less hopeful about their economic futures. Participation in the labor market is at a 40-year low, meaning that many people have simply given up trying to find work. In short, many working families have no emergency money and are too afraid to borrow.

Because of the narrow financial margin, many people are at risk for serious financial problems, because even a short-term income disruption can trigger a devastating snowball effect. While not all financial problems merit a bankruptcy filing, it is important to know the warning signs of severe financial distress.

As a very general rule of thumb, people who have more than $5,000 in unsecured debt should consider bankruptcy. That amount varies considerably based on income, family size, and other variables. “Unsecured debt” is mostly credit card bills, medical bills, and payday loans. If the amount is lower, most consumers can negotiate with lenders to reduce the interest rate or pay off the debt over time. If the amount is higher, for many people there is no realistic way to pay it off in a reasonable amount of time, and ignoring the problem simply makes it worse.

A second rule of thumb is that people who are more than two months behind on secured debt should consider bankruptcy. This is particularly true if, as in most cases, the installment payments are several hundred dollars a month. A lender is often willing to take one late payment and add it to the back of the note or allow partial payments to catch up, but a two-month delinquency nearly always triggers adverse action.

Adverse actions are not limited to pre-foreclosure, because there are also the endless collection calls, threatened vehicle repossession, acceleration notices, and the list goes on. Many credit card companies are also quick to file lawsuits on charged-off accounts.

A third rule of thumb is that if you get a threatening letter in the mail today, call a bankruptcy lawyer tomorrow, because the situation will only go downhill otherwise.

Types of Bankruptcy

The financial crisis, or crises, that bring people into the office often dictate the type of bankruptcy that is best to file.

Chapter 7 is sometimes called “liquidation,” although that term is not really accurate for reasons that are discussed below. Most people who either have large amounts of unsecured debt or cannot afford to bring their secured debt current should consider Chapter 7. While it is true that all non-exempt property is liquidated (sold) to pay creditors, most people do not have non-exempt property. In most cases, houses, vehicles, retirement accounts, and personal property are all exempt. Non-exempt property includes cash, vacation homes, and boats.

Chapter 7 wipes away most all unsecured debts, except for government-related debts like student loans and child support and a few other items. The other major advantage is that Chapter 7 cases are generally closed within a few months, so debtors quickly get a fresh start.

Everyone qualifies for the “wage earner” plan, which is Chapter 13. Whereas a Chapter 7 Trustee basically checks the paperwork and ensures that there are no red flags, a Chapter 13 Trustee essentially puts debtors on an allowance for either three or five years. After paying rent, food, and other living expenses, any leftover monthly income goes to repay creditors. Delinquent secured debts must be paid in full in the three or five years. After the bankruptcy period, any remaining unsecured debts are discharged.

During Chapter 13, and Chapter 7 as well, there is typically an automatic stay. So, creditors may not take any adverse action against debtors unless they receive special permission from the presiding judge. In other words, the debtors and Trustee set the parameters for the repayment plan, as opposed to the take-it-or-leave-it “repayment plans” that most lenders offer outside bankruptcy.

In most cases, bankruptcy allows you to keep what matters most and obtain a financial fresh start. For a free consultation with an experienced bankruptcy attorney, contact the Law Office of Jeff Kelly. We routinely handle cases in the Seventh Judicial District and nearby jurisdictions.