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Oregon Bankruptcy Blog

Chapter 7 & Chapter 13 Bankruptcy Information

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This may be the most common question I am asked by potential clients who are considering filing a bankruptcy case.  The answer I give usually surprises them and may surprise you as well.  

If you file a bankruptcy case, the bankruptcy case WILL be reported on your credit report for up to 10 years.  This DOES NOT mean that it will ruin your credit for 10 years.   In fact, it may help to improve your credit more quickly than you might expect.

You have to think about credit as your ability to borrow money.  If your credit report shows that you have a large amount of debt but have a good payment history, you may not be able to borrow money.  This is because potential creditors can see that you have more debt than you can afford to pay.  In other words, you have a high debt-to-asset or debt-to-income ratio.  After you receive a discharge in bankruptcy, your debt-to-asset or debt-to-income ratio should improve.  Many people find that they have an easier time obtaining mortgage and vehicle loans after filing bankruptcy because creditors can see that this ratio has improved.  They suddenly have less debt than they had before the bankruptcy case was filed, but their income and assets remain the same.  Imagine that you are a creditor considering loaning money to two individuals.  Both make $30,000 per year.  One person owes $20,000 to creditors and the other owes $0.  You as the creditor are aware that the person with no debt received a bankruptcy discharge but you also know that this person cannot file another bankruptcy case and receive a discharge for at least 4 years (the timing depends on which chapter of bankruptcy was filed previously and what chapter is being considered currently.  See www.willamettevalleybankruptcy.com/faq for more details).  You are probably more likely to loan money to the person who has no debt than to the person that you imagine is struggling to pay $20,000 in debt on a $30,000 income.  In fact, you as the creditor would probably be concerned that the person with $20,000 in debt will borrow from you, find that this additional debt puts them over the edge, and will file a bankruptcy case.  When you think about credit and debt from a creditor's perspective, it is a little easier to understand why bankruptcy will not necessarily make it more difficult for you to obtain credit for long even though the bankruptcy will continue to be reported on your credit report.  This example illustrates the "fresh start" that many people refer to when they talk about filing a bankruptcy case.  

It is important to understand that I am guaranteeing that you will be able to obtain a mortgage or a low interest credit card with high credit limit immediately after filing bankruptcy.  Your financial recovery depends on you making sound financial decisions after filing the bankruptcy case.  Taking advantage of your fresh start involves building credit after bankruptcy, but doing so carefully.  Obtaining a secured loan such as vehicle loans and paying off this loan is a good place to start.  At first, you may only be offered credit at high interest rates.  As you rebuild your credit, you should receive offers for much lower interest loans.  

The impact that a bankruptcy will have on your credit score depends in part on what your credit score was pre-bankruptcy.  If your credit score was high before filing a bankruptcy case, the filing of the bankruptcy case will likely reduce your credit score.  What is important to remember, however, is that if you have more debt than you can afford to pay and begin to default on your payments, it is likely that your credit score will drop as a result.  If your credit score was low prior to filing a bankruptcy case, the bankruptcy will have less of an effect on your credit score.  It will be better for your credit score if you simply pay off all of your debt.  However, if you are considering filing bankruptcy, it is unlikely that this is an option for you.  If you spend years trying to pay off debt, slowly default on your debts, and then find that you have to file a bankruptcy case because you are unable to pay the debt due to mounting interest you may damage your credit as much or more than you will if you file a bankruptcy case as soon as you can see that you will not be able to completely pay off the debt. Filing a bankruptcy case sooner than later will allow you to start rebuilding your credit sooner than later.
Facing foreclosure is a very scary reality for many Oregonians.  While there are many government programs that may help, bankruptcy can be used as a means of delaying a foreclosure or stopping it completely.  When a Chapter 7 or Chapter 13 bankruptcy case is filed, the "automatic stay" goes into effect.  This "stays" (or stops temporarily) any collection action by a creditor, including foreclosure.  A creditor in a bankruptcy case can file a motion with the Bankruptcy Court to lift the automatic stay, which allows the creditor to move forward with the foreclosure process.  This is what sometimes happens in Chapter 7 bankruptcy cases or in Chapter 13 cases where the Chapter 13 plan does not propose to "cure" or catch up the back mortgage payments, or "arrears."  In these cases, the bankruptcy really just delays the foreclosure process.  However, in many cases, the debtor in bankruptcy is given new opportunities to work with the mortgage company to restructure the loan outside of bankruptcy.  Filing a bankruptcy case can delay a foreclosure by months or even years in some cases.  

Many people facing foreclosure use Chapter 13 bankruptcy cases to stop the foreclosure and to catch up the missed mortgage payments. This is done by proposing a repayment plan, called a "Chapter 13 Plan" to repay the back mortgage payments over a 3 to 5 year period. The debtor in the bankruptcy case must also resume regular mortgage payments at this point.  Chapter 13 cases that propose to catch up back mortgage payments are very useful for individuals who suffered job loss or some other sort of financial set back but who are now back on their feet and able to make ongoing payments but unable to make up all of the payments that were missed.  You should consult a bankruptcy attorney regarding your specific situation before deciding to file a bankruptcy case to stop a foreclosure.  Chapter 13 bankruptcy cases are particularly complicated, so you will probably need to hire a bankruptcy attorney if you plan to file a Chapter 13 case.  Many bankruptcy attorneys offer free consultations to discuss both Chapter 7 and Chapter 13 options.
A wage garnishment is often the last straw that forces people to consider filing bankruptcy.  In Oregon, judgment creditors can garnish up to 25% of net (or take-home) wages.  Once a garnishment starts, it continues to run for 90 days unless satisfied (or paid).  After 90 days, the garnishment can continue if renewed every 90 days until it is satisfied.  Filing a Chapter 7 or Chapter 13 bankruptcy case will not only stop the garnishment from continuing and prevent other judgment creditors from stepping in and garnishing wages, it may also give the debtor who files the bankruptcy case the opportunity to recover the money already seized by the creditor.  

Payments to creditors through wage garnishment are considered recoverable preference payments under section 547 of the Bankruptcy Code if the amount garnished exceeds $600 and the funds were seized within the 90 days prior to the filing of the bankruptcy case.   If the federal exemptions are properly applied by the debtor, payments to creditors under the garnishment can be exempted under sections 522(g) - (h) of the Bankruptcy Code.  The asset must be disclosed on Schedule B of the petition and claimed as exempt on Schedule C of the petition.  Under 9th Circuit case law, payments made to collection agents or agencies may be recovered directly from such agents or agencies.

When I meet a client whose wages are being garnished, I try to file the client's case as quickly as possible.  In these situations, I do not typically require that the full attorney fee be paid prior to filing the bankruptcy case.   This allows my clients to file cases and start the garnishment recovery process more quickly.  Because wage garnishment recovery is not covered under my Chapter 7 or Chapter 13 attorney fee agreements, I offer a contingency fee arrangement to recover the funds from the creditor.  This means that if I am unable to recover the garnished funds, I do not collect a fee from my client. 

Before Oregon allowed debtors in bankruptcy to apply federal bankruptcy exemption laws, bankruptcy attorneys typically suggested that debtors file tax returns and receive tax refunds before filing bankruptcy.  This was because there was no way to protect non-EIC (Earned Income Credit) tax refunds over $400 ($800 in joint cases) from liquidation by bankruptcy trustees.  Now that debtors have the option of selecting federal bankruptcy exemptions, debtors in bankruptcy have other options available.

If my clients choose to receive and spend tax refunds prior to filing a bankruptcy case, it is very important that they remember to track how refunds are spent.  The trustees in Eugene, Oregon often request documentation that shows how the refunds were spent at the 341 hearing.  If debtors can provide an explanation regarding how they spent refunds and receipts for these expenditures, the 341 hearing typically goes very smoothly. However, not every client can wait to file bankruptcy until they receive and spend income tax refunds.

If my client has enough "wildcard" exemption available, I often advise that it is possible file the tax return, receive the refund, and deposit the refund in a bank account so that the funds can be used for expenses that arise after the bankruptcy.  Making this decision involves "exemption planning" and should be discussed with an attorney.

If my client decides to file a bankruptcy case before filing a tax return and receiving the tax refund, I advised my client to wait to deposit refund checks and use the funds until the trustee assigned to the case authorizes the debtor to do so.  Trustees in different districts employ different approaches when it comes to debtors using exempt property during a bankruptcy case.  In Eugene, Oregon, where I practice, when clients choose this option, I contact the trustee and ask the trustee to abandon the exempted tax refund so that my clients can use the funds. 

It is very helpful to debtors to have so many options available.  Because many people do not have money available to file bankruptcy until they receive income tax refunds, they need to use at least a portion of their tax refunds to pay attorney fees and court fees.  With the choice of Oregon and federal exemption laws, debtors are no longer forced to spend all of this precious resource more quickly than they otherwise might.