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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 debtor’s 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.

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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.