COSTS OF A CHAPTER 7 BANKRUPTCY There

are Direct Costs AND Indirect Costs

There are various direct costs and indirect costs of a Chapter 7 bankruptcy. This is one of the biggest surprises for people looking at bankruptcy as a means of handling their debt problems. These are things we cover in a free Debt Consultation. Call us at 210-930-7000 to schedule your appointment.

The direct costs of a Chapter 7 bankruptcy are the sum of the Attorneys Fee, Filing Fee, Credit Report fee, Credit Briefing fee, and the Financial Management Course fee. But, that’s not the end of the story because everyone’s situation is different. There are indirect costs of a Chapter 7 bankruptcy that you may face, depending on your circumstances. However, the easiest way to handle those indirect costs may be to file a Chapter 13 bankruptcy instead.

Here are some of the indirect costs you may face in a Chapter 7 bankruptcy:

MISSED HOUSE PAYMENTS or MISSED CAR PAYMENTS that you need to pay before filing a Chapter 7 bankruptcy. In general, if you want to keep your possessions, you must continue to pay for them. If you file a Chapter 7 at a time that you are behind on your house payment or car payment, then you will increase the amount of money it will take to get you current with your mortgage company or your car lender. As an example, let’s suppose that you are behind on your house payment to the point that you owe your mortgage company $1,000 to get current. If you file a Chapter 7 when you are behind on your mortgage company, then your mortgage company will then give the file to their attorney, who will file a motion in court that would allow them to contact you directly about the missed house payment(s). The mortgage company would make you pay for their attorneys fees in addition to the $1,000 that you are behind on the mortgage payment. Add the mortgage company’s attorneys fee of $1,500 to the $1,000 that you are behind on your mortgage, then you would owe $2,500. The same would happen with your car creditor if you are behind on your car payment at the time that you file a Chapter 7 bankruptcy. Those are indirect costs of a Chapter 7 bankruptcy that clients are unaware of until we go over their situation in a free Debt Consultation. To avoid this situation, you simply get current on your payments to your mortgage company and your car lender. Say that you are behind with your mortgage company $1,000 and you are behind on your car payment $850. You would have to pay out $1,850 to those creditors before you file Chapter 7, in addition to the direct costs of the attorneys fee, filing fee, credit report fee, credit briefing fee and financial management fee.

Here’s an actual example: I filed a Chapter 7 bankruptcy for a client, who then referred his co-worker to me to handle his debt problem. The co-worker was surprised that a Chapter 7 bankruptcy was not going to be the best thing for him. Each of them had roughly the same income, but the first client was current on his house payment and his car payment. The second client, who had several missed house payments and several car payments, needed a Chapter 13 bankruptcy. The second client was surprised to learn how bankruptcy applied to his situation.

THE DREADED CROSS-COLLATERAL PROVISION. Let’s suppose that you have a vehicle financed at a credit union or bank, and then you go back to the credit union or bank to get a credit card, or a line of credit, or a signature loan. They are usually very willing to do that because they are holding the title to your vehicle. Let’s suppose you pay off that vehicle, and you still have a balance on loan or account at the credit union or bank. What you will find out is that, most often, the credit union or bank will not release the title to your vehicle until after you have paid off all other loans to the credit union or bank. Why? Because the security agreement you signed has a provision that reads like this: “This security agreement that you are providing this financial institution is to secure this loan and any other amounts you now owe or will owe this financial institution.”

Here’s the dilemma in a Chapter 7 bankruptcy: If you file a Chapter 7 and you have a vehicle loan and other loans at the same credit union or bank, you find that you have to pay all loans that you have at that credit union or bank if you ever want to get the title to your vehicle. For instance, let’s suppose you owe $10,000 to the credit union on your vehicle, and that you also owe the credit union another $4,000 on a credit card and another $3,000 on a signature loan. You won’t get the title to your vehicle from the credit union until you pay off the $17,000 that you owe the credit union. (This situation gets even more interesting if you also co-signed a loan for someone at the credit union!) Let’s suppose that the vehicle is worth $10,000. If that’s the case, then you will be paying $7,000 more for the vehicle than it is worth if they want to keep that vehicle. This is one of the hidden costs of a Chapter 7 bankruptcy.

A Solution In A Chapter 7: There is a solution to this problem in Chapter 7 cases, but this requires cash. In the example above, the vehicle was worth $10,000. In that scenario, you could file a “Motion To Redeem,” which would allow you to purchase the vehicle for the value of the vehicle, which is worth $10,000. This would require that you pay the credit union $10,000 right away for the vehicle. The difficulty here is that most people in a bankruptcy case are not going to have enough cash to pay off their vehicle in a single payment.

Another Solution: File a Chapter 13 and “Cram Down”: Let’s stay with the same example: you owe $10,000 for a vehicle, but you also owe the credit union another $7,000 in other loans. In a Chapter 13 case, you can solve the “cross-collateral” problem by using the “cram-down” provision in the Bankruptcy Code. This allows you to provide full payment only to the extent the vehicle has value. In our example, the vehicle is worth only $10,000, so we only have to provide full payment for the $10,000. The remaining $7,000 is just treated like an unsecured debt and is dischargeable in bankruptcy. This is how a Chapter 13 can save you money over a Chapter 7.

TOO MANY RECENT CHARGES, BALANCE TRANSFERS AND CASH ADVANCES ON YOUR CREDIT CARDS. This is where many people get surprised. No one wants to file bankruptcy, but sometimes it is necessary because no other option has worked for them. As a result, many people that I see have made recent charges, balance transfers and cash advances on their credit cards before coming to see me for help. They were doing everything they could to keep their head above water. Typically, something happened, like a drop in income, that forced them to use their credit cards to stay afloat. The problem you face in a Chapter 7 bankruptcy is that the credit card company may be able to force you to keep the recent credit card charges, balance transfers and cash advances, if they can show that you made the charges, balance transfers and cash advances at a time that you could not afford to repay the debt. To be safe, I recommend that clients make sure that there has been no substantial credit card use in the previous 24 months. If you have substantial credit card charges recently AND you are stuck with that debt, then that is another INDIRECT cost of a Chapter 7 bankruptcy. A way to avoid that problem is to file a Chapter 13 bankruptcy, and you can do that with a monthly payment as low as $125 per month. (Call 210-930-7000 for a free Debt Consultation and we’ll show you how bankruptcy would apply to your situation.)

NON-EXEMPT PROPERTY. Non-exempt property is something that you own that you cannot protect and keep after the bankruptcy is over. Everyone’s situation is different, so it is impossible to give you one example that apples to everyone. But here is one that is easy to understand: Most people can protect their cash in a bankruptcy, but suppose someone has $1,000 more in cash than we can protect in their Chapter 7 bankruptcy case. If that person goes forward with the filing of the Chapter 7, then he would lose the $1,000 to the Chapter 7 trustee, who will then pay that to creditors. That is another INDIRECT cost of a Chapter 7 bankruptcy, and it is one that could be avoided by filing a Chapter 13 bankruptcy. You can file a Chapter 13 bankruptcy with a monthly payment as low as $125 per month. (Call 210-930-7000 for a free Debt Consultation and we’ll show you how bankruptcy would apply to your situation.)

Summary:

When I review someone’s situation, I always show how a Chapter 7 would work for them as well as how a Chapter 13 would work for them. The differences are amazing when the client is facing some of the INDIRECT costs that I’ve described above. Remember, price does NOT equal cost. If you are facing these indirect costs, you will quickly learn that the price of a Chapter 7 does not equal all the costs you will face in a Chapter 7.

LEARN ALL YOUR OPTIONS!

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