Bankruptcy Q&A

November 9, 2009

From The Colorado Springs Gazette:

Not everyone’s business is suffering in this economy.

As bankruptcies have surged in the past few years, a Colorado Springs attorney was forced to do something almost unheard of lately: He hired people to help keep up with business.

“It’s getting close to overwhelming, actually,” said John Turner, a local attorney specializing in bankruptcies.
It’s no wonder, considering that bankruptcies in Colorado Springs and southeastern Colorado have spiked 88 percent from 2007, according to statistics from the District of Colorado’s bankruptcy court.

While there’s always people who are forced to file bankruptcy for personal reasons such as divorce or medical bills, this additional increase seems to stem from the problems of the housing market, he said. Many of his clients have felt its effects, whether they were home-owners in over their heads or worked in the construction business and suddenly found themselves without anything to build.

“Bankruptcy is a lagging indicator,” Turner said. “The problems that led to bankruptcy arose a year ago. When they come here, it’s kind of the last resort.”

Turner answers some basic questions for people considering bankruptcy.

Question: Which is better, a Chapter 7 or Chapter 13 bankruptcy?

Answer: Most people file for Chapter 7 bankruptcy. This will discharge most debts when the process is complete. With a Chapter 13, debtors have a payment plan where they agree to pay off their debts over a period of time.
In 2005, new laws were put into place which restricted wealthier people from filing for Chapter 7, so that automatically excludes some people. If people are behind in their house payments and want to keep their home, a Chapter 13 can be a better option because it gives them a lot more time to catch up on their mortgage. In a Chapter 7, they would have to be current on their mortgage before they file to keep their home.

Question: When should people file for bankruptcy?

Answer: This is obviously different for everyone depending on their circumstances. In general, when people have to start using credit cards to pay everyday expenses like utilities or groceries, they might need to start thinking about filing.
In many cases, people wait longer than they need to. I’ve seen cases where people had already cashed out their retirement account or college funds for the kids. These two accounts would have been safe in the bankruptcy.

Question: What won’t be discharged in bankruptcy?

Answer: Spousal support, child support and most student loans won’t be discharged in a bankruptcy.

Question: Can bankruptcy stop a foreclosure?

Answer: Yes. As soon as you file for bankruptcy, an automatic stay is in place for your debts, which means you can’t be contacted by creditors.
However, this is only a temporary solution until your case is discharged. If you filed Chapter 7 you will have to be up-to-date on your payments when you file to keep your home.
This may mean that you will have to stop paying your other debts and get current on your house payment before you file for bankruptcy. If you file for Chapter 13, you will have three to five years to pay off any back payments you owe on the house. In both cases, you will have to keep up with the payments after you file to keep your home.

Question: How bad will bankruptcy hurt a credit score?

Answer: The reality is that whatever happens to people’s credit before they file is usually just as bad as any bankruptcy. Even though a Chapter 7 filing will stay on your credit report for 10 years, I’ve found that after three or four years it doesn’t have much of an impact.
Many people’s scores even go up slightly after they file because their debt load has decreased and lenders know they won’t be able to file again for a few years.
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