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If You File a Chapter 7 Bankruptcy with an Attorney You are Nearly Ten Times More Likely to Reach Your Goal of Writing Off Your Debts

Here’s some hard evidence on why it’s dangerous to file bankruptcy without an attorney.

 

As a bankruptcy attorney, I get many phone calls from people who have tried to file a bankruptcy by themselves and have gotten into trouble, sometimes serious trouble. I also run into similar horror stories about what happens when people file without an attorney when I attend “meetings of creditors”—the usually straightforward, usually short meeting with the bankruptcy trustee that everyone filing bankruptcy must attend. I’ve run into countless example of how dangerous it is to file bankruptcy without an attorney.

But I HAVE wondered whether anybody has actually investigated this question. Now somebody has, and we have some pretty solid evidence to back up what I have been witnessing anecdotally.

“The Do-It-Yourself Mirage: Complexity in the Bankruptcy System”

That is the title to a chapter in a book about bankruptcy called Broke: How Debt Bankrupts the Middle Class. This book is a series of articles about many important current issues in the field, with this one chapter focusing on cases filed by debtors not represented by attorneys (“pro se” filers).

The author of this chapter, Asst. Professor Angela K. Littwin of the University of Texas School of Law, analyzed data from the Consumer Bankruptcy Project, “the leading [ongoing] national study of consumer bankruptcy for nearly 30 years.” Her finding: “pro se filers were significantly more likely to have their cases dismissed than their represented counterparts.”

Very interestingly, she also learned from the data that

consumers with more education were significantly more likely than others to try filing for bankruptcy on their own, but that their education didn’t appear to help them navigate the process. Pro se debtors with college degrees fared no better than those who had never set foot inside a college classroom.

She concluded that after bankruptcy law was significantly amended back in 2005 in an effort to discourage as many people from filing, “bankruptcy has become so complex that even the most potentially sophisticated consumers are unable to file correctly.”

Ten Times More Likely to Get a Discharge of Your Debts

In a closely related study, Prof. Littwin stated that “17.6 percent of unrepresented [Chapter 7 “straight bankruptcy”] debtors had their cases dismissed or converted” into 3-to-5-year Chapter 13 “adjustment of debts” cases.  “In contrast, only 1.9 percent of debtors with lawyers met this fate.”  Even after controlling for other factors such as “education, race and ethnicity, income, age, homeownership, prior bankruptcy, whether the debtor had any nonminimal unencumbered assets at the time of the filing,” “represented debtors were almost ten times more likely to receive a discharge than their pro se counterparts.”

Prof. Littwin concluded that “filing pro se dramatically escalates the chance that a Chapter 7 bankruptcy will not provide a person with debt relief.”

 

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Are You Eligible to File a Chapter 7 Bankruptcy Case? How About a Chapter 13 One?

Eligibility depends on 1) the kind of debtor, 2) the kinds and amounts of debts, 3) the amount of income and 4) of expenses.

 

1) The Kind of Debtor

If you are a human person, you may be eligible for either a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts” case. You and your spouse may also be eligible to file one or the other of these together in a joint case.

However, if you are the owner or part-owner of a business partnership, corporation, limited liability company or other similar business entity, that business entity could not file its own Chapter 13 case. But it could file a Chapter 7 one. Regardless what your business entity itself could file, you could individually file either a Chapter 7 or 13 case, to address your own personal liabilities (beyond whatever liability for which the business itself would be responsible).

2) The Kinds and Amounts of Debts

If your debts are “primarily consumer debts” (more than 50% by dollar amount), then to be able to file a successful Chapter 7 case you have to pass the “means test.” That’s a test related to your income and expenses (discussed more below.)  If 50% or more of your debts are not consumer debts, than you can skip the “means test.”

Chapter 7 does not limit the amount of debt you can have to be eligible to file a case. However, you cannot file a Chapter 13 case if your debts exceed the maximums of $383,175 in unsecured debts and $1,149,525 in secured debts (or if you do file a case it will very likely be “dismissed” (thrown  out)).

3) Amount of Income

You can quickly and easily satisfy the “means test” and be eligible for a Chapter 7 case if your income is no more than the regularly adjusted and published “median income” for your family size and state.

To be eligible for Chapter 13 you must have “regular income.” That is defined not very helpfully as income “sufficiently stable and regular” to enable you to “make payments under a [Chapter 13] plan.”

Also for Chapter 13, if your income is less than the “median income” for your family size and state of residence, then the plan generally must last a minimum of three years (but in many situations it can last longer, especially if you need it to, but for no longer than five years). If your income is at or above the applicable “median income” amount, the plan must almost always last five years.

4) The Amount of Expenses

In Chapter 7, if your income is NOT less than “median income” for your family size and state of residence, then you may still pass the “means test” and be eligible for filing a Chapter 7 case IF, after accounting for all your allowed expenses, you don’t have enough money left over to pay a meaningful amount to your creditors.

In Chapter 13, a similar accounting of your allowed expenses determines the amount of your “disposable income,” the amount you must pay into your plan each month.

Summary

Once you recognize that you need relief from your creditors, choosing between Chapter 7 and 13 is often not difficult. But because there are many, many differences between them, the choice can sometimes turn into a delicate balancing act between the advantages and disadvantages of those two options. That’s why when you have your initial meeting with your bankruptcy attorney, it’s smart to be aware of and communicate your goals, but also be open-minded about how best to accomplish them.

 

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Keeping a Vehicle with a Debt under Chapter 7 “Straight Bankruptcy”

If you owe a debt on a vehicle, Chapter 7 gives you a narrow choice: keep it and pay on the contract, or surrender it and owe nothing.

 

The Bankruptcy Trustee Only Cares about Equity Beyond Any Exemption

In a Chapter 7 case you have two people besides you who could be interested in your vehicle. The bankruptcy trustee could care about any equity you have in the vehicle (the value over the amount you owe on it), but only if that amount is more than what would be protected under the vehicle exemption. There is seldom too much equity if you owe on a vehicle, but check with your attorney to make sure this is not an issue in your case.

Surrendering a Vehicle to the Lender

You may not want to keep your vehicle because you simply cannot afford to keep making the payments or doing so is just not worthwhile considering your alternatives. Or you may be a couple payments behind, and filed your Chapter 7 case quickly to stop your vehicle from being repossessed, but now realize that hanging on to the vehicle is not feasible for you.

You likely know that if you just surrendered your vehicle without a bankruptcy, you’ll very likely owe and be sued for the “deficiency balance” (the amount you would owe after your vehicle is sold, its sale price is credited to your account, and all the repo and other costs are added). That deficiency balance is often much higher than you expect. The Chapter 7 bankruptcy will almost always write off that deficiency balance. Indeed, that is a common purpose for filing bankruptcy.

Keeping Your Vehicle

 If you want to keep your vehicle, generally you must be either current on your loan or able to get current within about 30 to 60 days after filing the Chapter 7 case. You will almost for sure be required to sign a reaffirmation agreement, which legally excludes the vehicle loan from the discharge (the legal write-off) of the rest of your debts. You have to sign that reaffirmation agreement and have it filed at the bankruptcy court within a short period of time—usually within 60 days after your bankruptcy hearing, meaning you have to be current usually a few weeks before that. Then you have to stay current if you want to keep the car, just as if you had not filed a bankruptcy. And also just as if you had not filed bankruptcy, if that vehicle later gets repossessed or surrendered, there is a good chance that you would owe a deficiency balance. So talk to your attorney and think carefully about the risks before reaffirming your vehicle loan.

The Lack of Other Alternative Usually

Almost always—especially with conventional, national vehicle loan creditors—you are stuck with the terms of your original loan contract if you want to keep your vehicle. You can’t reduce the balance of the loan, the interest rate, or the monthly payment. If you’re behind, almost always you must pay the arrearage and be current within a month or two. There can be exceptions, especially with local finance companies and such who would rather minimize their losses by being flexible. So be sure to ask your attorney whether your vehicle creditor has such as history. And if you do need more flexibility—if you must keep your vehicle, and owe more than it is worth, and you can’t afford the payments—ask about Chapter 13 as a possible better solution.

Conclusion

Usually “straight bankruptcy”—Chapter 7—is the best way to go if your vehicle situation is pretty straightforward: you either want to surrender a vehicle, or else you want to hang onto it and are current or can get current within a month or two of your bankruptcy filing.

 

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