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The Hidden Costs to Trying to Avoid Bankruptcy

As a Constitutional right, bankruptcy has been part of our nation’s financial system from its inception. Businesses regularly use the bankruptcy process as a strategy to move forward, but individuals often are reluctant to avail themselves of bankruptcy. Dealing with debt is an exhausting distraction that can be managed by bankruptcy, yet the stigma attached to it prevents people from taking advantage of the opportunity to wipe the slate. Instead, they pursue alternatives – anything to avoid the dreaded bankruptcy. However, people living in a difficult financial situation should be aware of some of the challenges they might encounter if they go to great lengths to avoid bankruptcy.

Why do people avoid bankruptcy in the first place?

The two most common reasons for avoiding bankruptcy are shame and concern for credit. However, shame can come to a debtor who doesn’t pursue bankruptcy. When the debts pile up, foreclosure, repossession, and garnishment are among the collection strategies used by creditors, all of which are potentially embarrassing and lead to public exposure of financial woes. There is little doubt that credit can be impacted by bankruptcy. In reality, many individuals and couples contemplating a mountain of debt already have factors that likely had or will eventually have a negative impact on their credit. In addition, you can’t start to rehabilitate your credit until you have brought all your debts current. Bankruptcy starts the clock over and lets the debtor start the process of rebuilding credit.

Creditors come at you from all sides.

Individuals and couples in dire financial straits rarely have only one creditor. Utilities, credit cards, mortgage holders or landlords, auto finance, and so many other possible creditors all expect monthly payments. Once one bill falls behind, the rest tend to follow. As a result, the calls from the creditors, or from collections agencies, can multiply quickly. It can be overwhelming to deal with so many demands, and often the most insistent creditor is the least important. A bankruptcy case consolidates all these matters into one, streamlined procedure, and it puts an end to the creditor calls and institutes a fair process for resolving all debt issues. Whether it’s a Chapter 7 or Chapter 13 process, the bankruptcy case will let a debtor work on the big picture instead of being hounded.

Negotiating and resolving credit issues can get expensive.

Every creditor wants their entire debt paid off in full. If payment is late, there may also be additional late charges and interest. If they have elected to pursue legal remedies, they may be entitled to attorney fees. At times, creditors try to resolve the individual debts through negotiation, or work with an agency that can consolidate some but not all the outstanding debt. The time and effort can be enormous. Each creditor is motivated to get as much as possible, and they are not interested in helping debtors to address any other outstanding debts.

Depending on the kind of debt, creditors can force legal proceedings or alternative dispute resolution remedies, all of which present either a risk if undertaken alone, or a cost if entered into with counsel. For example, an eviction process will be before one Judge and a collection case before another, and neither judge will be considering all the other debt – only the specific issue at hand.

In a bankruptcy proceeding, all creditors are subject to the same rules, which are determined by law, making the process much more streamlined and efficient. A Chapter 7 can get wrapped up in a matter of weeks, and a Chapter 13 will set out clear guidelines for the debtor, and, instead of a chorus of creditors, a judge will decide whether the plan is acceptable.

Tapping emergency funds to make payments is risky and expensive.

When faced with a mounting pile of debt, the wish can be to pay it all off by obtaining a loan or finding some other source of funds. Commercial loans are not easy to come by when a person is under water with debt, and the terms will definitely include high interest. Borrowing money from friends or family may not be at as high an interest rate, but the cost for failing to pay could be the loss of the relationship. Some people are tempted to borrow against or cash in their retirement savings. This comes with high interest rates, or tax consequences, steep penalties, the loss of long-term security, and creditors can’t generally get at retirement funds. Depending on the amount of debt at issue, these solutions can result in a worse outcome than the original debt.

When debt has become a problem, it can be hard to figure out how to get out from under it. Before dismissing bankruptcy as an alternative, confer with an experienced bankruptcy law attorney who can help you to strategize the best course forward. Barkley & Kennedy Chartered has been advising Maryland debtors both in and out of bankruptcy for decades. Contact us for a consultation about your situation today.

DISCLAIMER. The material contained on this Website is not offered, nor should it be construed, as legal advice. The material on our Website has been prepared and published for informational purposes only. You should not act or rely upon information contained in these materials without specifically seeking professional legal advice.

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Understanding Bankruptcy in Maryland

Many Maryland residents are struggling with the economic fallout from the COVID-19 pandemic, and bankruptcy is a possible solution. Conferring with an attorney (one correctly identified as a debt relief agency) is the best way to decide whether bankruptcy is right for you. Here is some basic information about bankruptcy law in Maryland.

What is Bankruptcy?

Bankruptcy is a debt relief process available to individuals and businesses through a set of Federal laws and regulations. Overseen by a Federal court, debtors file a petition for relief accompanied by detailed information about debts, assets, and income. This triggers a very important protection called an “automatic stay” that prevents creditors from taking any action against the debtor. Depending on the type of bankruptcy petition, the filing starts a specific sequence of events and activities designed to address most of the debt owed by the debtor at the time of filing. While the Bankruptcy Court has ultimate authority over a bankruptcy, usually all of the work done to assess the debtor’s situation and deal with the creditors is done by a designated trustee. The trustee takes charge of some of the debtor’s assets called the “bankruptcy estate”. However, the Bankruptcy Code exempts certain assets that the debtor will be allowed to retain.

What Types of Debts Are Affected By Bankruptcies?

The ultimate outcome of a bankruptcy filing is relief from debt and personal liability, called a “discharge.” Not all debt is dischargeable. Among other exceptions from discharge are child support, alimony, some income tax, and most student loans. This means that the debtor will continue to owe on these debts. On the other hand, debts such as credit card bills, medical expenses, and the remaining balances on foreclosure and car repossession can be discharged. Specific creditors who have rights against a debtor’s property (i.e. mortgage lenders and car loan lenders) continue to have those rights, so even if the unpaid balance is discharged, these creditors can foreclose or repossess the property if the debt is not paid.

Types of Bankruptcy in Maryland

There are several types of bankruptcies authorized for use in Maryland by the United States Bankruptcy Code, but for the purposes of this discussion, we will provide details on those that usually are considered as options for individuals and small businesses.

Chapter 7 Bankruptcy

The first, and most frequently utilized type of bankruptcy, is a Chapter 7 bankruptcy, also referred to as “liquidation bankruptcy.” The use of exemptions to protect assets from being liquidated as part of a Chapter 7 frequently makes the process a quick and painless experience for many individuals. Except in unusual circumstances, following the exemptions, there are no assets left to pay unsecured creditors in a Chapter 7. Chapter 7 is not available to all individuals or married couples – a party has to satisfy a “means test” based on certain categories of income.

The Chapter 7 process is fairly simple. Usually, the only time a debtor needs to appear is for a brief meeting with the trustee, in the presence of your attorney. The meeting for debtors who file in Montgomery County is normally in Greenbelt, and the meeting for debtors who file in Frederick County is in Hagerstown. During COVID-19, these meetings are being held by video teleconference. Most consumer Chapter 7 bankruptcies result in the issuance of the Order of Discharge about 3 ½ months after the filing.

Chapter 13 Bankruptcy

A Chapter 13 bankruptcy requires a debtor to offer a plan to make payments to creditors over the course of 36-60 months before being granted a discharge. That plan needs to be confirmed by the Bankruptcy Court, and it is subject to the objections of creditors. Individuals frequently utilize the Chapter 13 bankruptcy to become current on mortgage obligations to prevent a foreclosure. They also select this type if they have assets that they wish to retain that would be at risk of liquidation under a Chapter 7, or they cannot qualify for a Chapter 7 under the means test. Essentially, Chapter 13 debtors can “buy back” their assets by making payments to creditors. The confirmation process of a proposed Chapter 13 plan is not a simple process. It requires the careful management of an experienced and qualified attorney.

There are other forms of bankruptcy and additional options for debtors to deal with creditors outside of the bankruptcy process. Because of the rules about exemptions, the “means test” and the requirements for a confirmable Chapter 13 plan, bankruptcy should be approached strategically with the assistance of knowledgeable counsel. Barkley & Kennedy has offices in Rockville and Frederick. We are experienced debt relief counsel, and we can advise you on the best approach to managing your specific situation. Contact us for a no-charge 30 minute consultation.

DISCLAIMER. The material contained on this Website is not offered, nor should it be construed, as legal advice. The material on our Website has been prepared and published for informational purposes only. You should not act or rely upon information contained in these materials without specifically seeking professional legal advice.

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Bankruptcy and Divorce in Maryland

Family financial strife clearly impacts marital harmony, and loss of family harmony can have implications for the family finances. Couples fight about money, and unhappiness can lead to spending money to fill a void. When a marriage is nearing its end, debt of either or both spouses can also have reached a tipping point where protective legal measures are necessary. But which comes first? Divorce law and bankruptcy law both impact the personal and marital assets, debts and finances of a couple, and the interrelationship can be complex and confusing. Here are a few important points to consider.

Timing Between Divorce and Bankruptcy is Situation Specific

There is no one rule for which to file first – divorce or bankruptcy. Instead, there are a variety of considerations. For example, who is filing? Is it one spouse, both spouses as a couple or both spouses for separate debt? The cost of a bankruptcy can be lowered if a couple agrees to wait to divorce until they have filed a joint bankruptcy petition and resolved their collective debt together. However, if one of the spouses qualifies for full discharge under Chapter 7, and the other spouse does not because of the “means test”, then it might make sense to wait until after the divorce or the parties are separated to file a petition in bankruptcy. On the other hand, the joint titling of assets as husband and wife may allow for dramatically greater protection of assets when only one spouse files bankruptcy while married. As a result, substantial equity in a jointly owned home may be protected if only one spouse files for bankruptcy before the divorce decree is entered.

Another consideration is urgency. Are there creditors pursuing collections efforts including legal action or foreclosure? They may not be willing to wait until a divorce is finalized, and an immediate bankruptcy petition will trigger an automatic stay on all the creditor’s actions. This will help protect both separate and jointly owned assets. On the other hand, existing debt can reduce alimony obligations, so it may make sense for a spouse to hold off until the divorce has been finalized before getting the debt discharged.

The goal in deciding the sequence should be the preservation of as many assets as possible, so careful review of assets and debts needs to happen before deciding. Understanding the rules in both bankruptcy and family court with respect to ownership interests and allocation of assets and liabilities will help guide the decision.

Bankruptcy Won’t Discharge Support Obligations

Once a divorce decree is entered, awarding support for children and/or alimony for the other spouse, bankruptcy cannot be used to get out from under these obligations. As creditors of the debtor, spouses, and children get preferential treatment in bankruptcy. In fact, while other creditors may have to wait until the bankruptcy process is complete to figure out if and when they might get paid, spouses can go ahead with some aspects of divorce proceedings in state family court, although the treatment of the automatic stay of bankruptcy varies from county to county in Maryland.

The Role of the Former Spouse in a Bankruptcy

If a couple has divorced, there is a high likelihood of acrimony between them if the divorce was a prolonged, stressful process. This may lead a former spouse to intervene in a debtor’s bankruptcy to speak to the debtor’s character, their possible wrongdoing, or identify assets and obligations that the debtor has failed to report. This impulse is not necessarily a good idea. As we noted above, the debtor’s support obligations cannot be discharged in bankruptcy, any move to increase the debtor’s debts, minimize their assets or possibly prevent the resolution of the bankruptcy through a discharge or a plan will only interfere with the debtor’s ability to meet their support obligations.

However, the non-filing former spouse should still be alert. While support obligations are not dischargeable in bankruptcy, property claims, such as a monetary award can be discharged in Chapter 13 bankruptcies, but not in Chapter 7 bankruptcies. Additionally, if a couple had a joint credit card and either spouse files bankruptcy,  the non-filing spouse may find themselves pursued by the credit card company notwithstanding a divorce agreement to the contrary.  So, a former spouse should be attentive to the proceedings of an ex filing a petition for bankruptcy, particularly given the fact that deadlines for creditors to assert their rights come to pass quickly.

Debt and family strife are both enormously stressful situations. Resolving these issues through the mechanisms of divorce and bankruptcy can be the right course of action. However, given the complexity of both areas of law, it is important to understand how your particular circumstances can impact the outcome of the proceedings. Contact Barkley & Kennedy for a consultation on your best course of action.

DISCLAIMER. The material contained on this Website is not offered, nor should it be construed, as legal advice. The material on our Website has been prepared and published for informational purposes only. You should not act or rely upon information contained in these materials without specifically seeking professional legal advice.

bankruptcy petition

Advantages to Working With a Bankruptcy Attorney

Filing a petition for bankruptcy triggers a highly regulated legal and administrative process. If you have reached a point in your life where your debts are causing you to consider filing, you may be hesitant to incur an additional expense in the form of attorney fees. While it is possible to file a petition on your own, there are many reasons to consider working with an experienced bankruptcy attorney. First and foremost, the statistics are clear that individuals filing on their own behalf are much less likely to succeed than those who work with counsel. Here are some additional advantages.

  1. Assessing Whether You Really Need to File

While it addresses a serious problem, bankruptcy is an extreme solution. When debts have piled up, and it seems like there are no other options, consultation with an experienced attorney can help assess the situation. There are debt relief strategies that might be a better alternative, particularly if you have valuable assets, like your home, that might be in jeopardy in a bankruptcy. An attorney can review the big picture and advise on the best path forward. Then counsel can help implement a debt restructuring plan short of bankruptcy or proceed with bankruptcy. Conferring with an attorney about managing debts can help protect assets.

  1. Which Type of Bankruptcy?

Individual debtors can choose between two types of bankruptcy petitions: Chapter 7 and Chapter 13. Chapter 7 is a liquidation of non-exempt assets that wipes out pre-petition debts and typically takes three to four months. Chapter 13 is a restructuring of debts that allows the debtor to keep assets but requires a plan that can take three to five years to achieve the resolution of pre-petition debts. Not only are there specific rules about which Chapter is available to a debtor, there are important distinctions between the two that bear careful consideration before filing. In evaluating the assets and debts, there are issues of asset exemptions, unavoidable debts, timing, income, and other complexities that make it confusing to determine which way to go. Before proceeding with a bankruptcy, a meeting with an attorney can help sort out which Chapter is appropriate.

  1. Protecting Assets

The goal of bankruptcy is to wipe the debtor’s slate clean of certain debts. But to do this, all of a debtor’s assets are scrutinized to determine whether they have to be liquidated to pay something to creditors. Even in a Chapter 13, this presents a potential loss of something of value to the debtor. There are specific exemptions, strategic approaches, and acceptable plans that a bankruptcy attorney can help the petitioner identify and use to protect assets. For example, an attorney can help a debtor find alternatives to borrowing from a retirement account to pay debts when these accounts would be exempt in bankruptcy.

  1. Acting as an Advocate

The administration of a bankruptcy case seems relatively straightforward. A petitioner has to submit specific information, meet certain deadlines, and, depending on the Chapter, proceed with required meetings and hearings. Negotiating these aspects can be done on one’s own, but having counsel can smooth the way. In particular, an experienced bankruptcy attorney will have established working relationships with the United States Trustee assigned to the bankruptcy case and help avoid conflicts on this basis. Also, even though creditors are required to cease all collection efforts once a debtor has filed a petition for bankruptcy, this does not prevent them from objecting to the debtor’s plan, even going so far as to institute an adversary proceeding to interrupt the process. Having an advocate who understands bankruptcy laws and regulations can shield a debtor from these unexpected events.

Bankruptcy exists to help debtors get a clean start. To be its most effective, the process requires careful thought and planning. Working with an experienced attorney is an excellent investment in managing these difficult circumstances. To learn more, contact Barkley & Kennedy for a consultation today.

DISCLAIMER. The material contained on this Website is not offered, nor should it be construed, as legal advice. The material on our Website has been prepared and published for informational purposes only. You should not act or rely upon information contained in these materials without specifically seeking professional legal advice.

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Women, Bankruptcy & Divorce

Bankruptcy can add an extra layer of challenge to anyone’s life. It’s particularly hard for a divorced woman relying on domestic support obligations. Women, especially women going through a life-changing event such as a divorce, can be hit hard. Some might be facing a substantially reduced income while trying to care for children, find employment or set up a new household. Read more

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Bankruptcy 101

Bankruptcy is a process to relieve and resolve personal and business debt. Two of the most commonly used types of bankruptcies under the U.S. Bankruptcy Code are Chapters 7 and 13. We’ll explain the differences between the two, and answer some of the common questions we hear.

What is the difference between Chapter 7 and Chapter 13 Bankruptcies?

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How to File Bankruptcy in Maryland

What is Bankruptcy?

Bankruptcy is a debt relief process. Bankruptcy in Maryland follows state code requiring lawyers providing bankruptcy advice to identify themselves as “debt relief agencies.” It is important to note that bankruptcy is not the only process to assist individuals and businesses in the management of difficult financial situations. However, the options outside of bankruptcy are best considered after understanding the impact that a bankruptcy would have on an individual, a married couple or a business’s financial issues. Read more