Filing bankruptcy is one of the most critical personal finance decisions that one can make when faced with pressing financial obligations. Simply put, bankruptcy is the federal legal process that relieves a consumer or business owner (“the debtor”) of their financial obligations to creditors when the debtor is unable to repay outstanding debts. The goal of filing bankruptcy is for the debtor to receive a discharge, or legal protection, from creditor collection actions in exchange for the debtor disclosing all of their assets to their creditors under court supervision.
Bankruptcy law addresses which of the debtor’s assets can be used to satisfy outstanding obligations, and which assets are exempt or protected from creditors.
Navigating the bankruptcy process is not for the faint of heart, and it is wise to consult with attorneys that specialize in bankruptcy to determine if such drastic financial action is necessary. That said, here are 5 things that even some experienced bankruptcy attorneys fail to tell their clients about bankruptcy until it is too late:
1. Federal protection from creditors is not guaranteed. Debtors do not have an automatic right to a bankruptcy discharge. Securing a discharge from the court takes effort. It requires a debtor’s full and truthful disclosure of their assets and obligations. Full disclosure involves providing a host of financial documentation that supports the debtors inability to repay obligations. Intentional failure to disclose assets can be grounds for the court denying a discharge, and even worse, exposes a debtor to criminal prosecution.
2. The bankruptcy process can be adversarial. When appropriate, a creditor’s attorney will challenge assets that a debtor lists as exempt from creditors. Proceedings to determine a debtor’s right to keep an asset adds to the costs of filing bankruptcy. Proceedings that challenge the integrity of the bankruptcy filing adds substantial costs to process.
3. Things revert back to the beginning if a debtor fails to receive a discharge. Filing bankruptcy automatically halts any further collection efforts against a debtor while the debtor is seeking a discharge. Known as the “automatic stay”, it can exist over several years, while a debtor is paying back a portion of their obligation. Regardless of where the debtor is in the process, if the debtor’s bankruptcy is dismissed, all of their previous credit obligations are revived and can include such things as creditor late fees, penalties, and past due interest. Additionally, creditor attorney fees for defending against the bankruptcy can be added. These fees can be very expensive and depending upon how many credit accounts one has, these fees can add substantially to previous balances.
4. You may not be able to voluntarily withdraw your bankruptcy filing. Consumer bankruptcies can either be filed under Chapter 7 bankruptcy which liquidates the debtors assets, or a Chapter 13, where the debtor repays of a portion of debt back to creditors over time. Each type merits its own discussion too involved to cover here. Suffice to say, if a debtor is unsuccessful in obtaining a discharge under one program, they may file under the other program. Depending how a debtor files, they may not voluntarily withdraw their filing without the Courts permission. So if the debtor’s circumstances change for whatever reason during the bankruptcy process, the Court can retain jurisdiction over the debtors assets (“the estate”) even if the debtor wishes to stop the process.
5. A debtor’s financial activities are under scrutiny long before fling a bankruptcy and long after receiving a discharge. The bankruptcy court employs a large pool of attorneys and financial analyst who scrutinize a debtor’s financial representations to ensure that the debtor is not hiding assets from creditors. Among other things, financial analysts are looking for a debtor’s unauthorized transfer of property in contemplation of filing a bankruptcy or a later disposition of property that the debtor should have declared as an asset. Bankruptcy law was designed to protect honest people from financial ruin using a legal forum that makes every effort to fairly treat debtors and creditors alike based upon a debtor’s full disclosure of assets and a creditor’s “clean hands”. Intentional efforts by a debtor to deceive creditors and the Court is cause for being denied a discharge, revocation of a discharge (even long after receiving one), civil action or criminal prosecution.
Filing a bankruptcy requires financial planning, legal strategy and considerations far less obvious than “how it will affect one’s credit.” Before filing a bankruptcy, consult with several licensed legal professionals that specialize in bankruptcy law, avoid listening to outside chatter that does not pertain to your own circumstances, and regardless of the financial pressure, pay for experience.