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Surviving Debt: Introduction

Federal law provides people with debt problems the right to file bankruptcy. Bankruptcy can be the right choice if you have no better way to deal with your debts. While you should consider other options first, do not wait until the last minute to think about bankruptcy. Important rights may be lost by delaying.

Surviving Debt: Understanding the Difference Between a Chapter 7 and a Chapter 13 Bankruptcy

Your rights are very different depending on whether you file a chapter 7 or a chapter 13 bankruptcy. In a chapter 7 bankruptcy (called a “liquidation”), you eliminate most of your debts, but may lose your property other than “exempt” property—that is, property the law says creditors cannot reach unless they take that property as collateral. For many families, most of their property is exempt. In a chapter 13 case (called a “reorganization”), you keep all your property, and pay a portion or all of your debts in installments over a period of three to five years.

Surviving Debt: How a Bankruptcy Can Help You

An Immediate Stop of Foreclosures, Evictions, Repossessions, Utility Shut-Offs, Garnishments, and Other Creditor Actions. Your bankruptcy filing will automatically and immediately, without any further legal proceedings, stop most creditor actions against you and your property—at least temporarily.

Surviving Debt: The Best Time to File for Bankruptcy

It is often stated that bankruptcy is a “last resort” for financially troubled consumers. This is not really true. In some cases, legal rights can be lost by delaying a bankruptcy. Be especially careful to get early advice about bankruptcy if you are concerned about saving your home or your car or protecting your bank account or wages from seizure.

Surviving Debt: The Cost of Filing Bankruptcy

Unfortunately, it is expensive to file for bankruptcy. Bankruptcy is a legal proceeding with complicated rules and paperwork. You may want to get professional legal help, especially if you hope to use bankruptcy to prevent foreclosure or repossession. Most bankruptcy attorneys provide a free consultation to help you decide whether bankruptcy is the right choice. If the attorney takes the case, the attorney will expect to be paid, unless they work for a nonprofit legal services office or are doing the bankruptcy on a pro bono basis.

Surviving Debt: Correcting Common Misconceptions About Bankruptcy

When You File Bankruptcy, You Will Typically Lose Little or None of Your Property. People are wrong to believe that a bankruptcy filing results in the loss of most of their property. Everyone who files for bankruptcy gets to keep some of their possessions, and most people get to keep all of them.

No matter the type of bankruptcy you file, unless property is collateral for a loan, you get to keep all your property that is protected by “exemption” laws. Exemption laws typically protect clothes, appliances, furniture, jewelry, and often your car and home.

Surviving Debt: Additional Resources

NCLC’s Consumer Bankruptcy Law and Practice is a two-volume legal treatise covering all aspects of consumer bankruptcies, with sample forms and other resources. NCLC’s Bankruptcy Basics is a step-by-step guide for pro bono attorneys, general practitioners, and legal services offices new to bankruptcy. Both the two-volume treatise and Bankruptcy Basics are available at www.nclc.org/bookstore.

Surviving Debt: Civil Court Judgment Debt—What It Is and What It Means

Civil court judgment debt is debt that a court has ruled that you owe. The creditor has sued you and the judge has ruled in the creditor’s favor. If you do not respond to the lawsuit, the creditor wins by default, which is the same as the judge ruling for the creditor. Once the judge has ruled that you owe a certain amount, that amount is the judgment debt.

Surviving Debt: Garnishment of Your Wages

When there is a court judgment against you, the creditor has the right to “garnish” your wages. This means that the creditor can get a court order requiring your employer to deduct a portion of your wages from your paycheck and send it to the court to be applied to the judgment debt. With the exception of a student loan debt or a debt owed to the government, garnishment can take place only after the creditor obtains a court judgment against you.

Surviving Debt: Government Benefits Completely Protected from Garnishment

Many types of federal and state benefits are completely protected from garnishment. Examples are Social Security, Supplemental Security Income (SSI), and Department of Veterans Affairs (VA) benefits (except to pay certain child support obligations). These benefits are protected no matter how much you receive. States also usually exempt TANF (Temporary Assistance for Needy Families) and unemployment compensation benefits from garnishment as well. But once you put these benefits into your bank account, different rules may apply.

Surviving Debt: Freezes and Seizures of Your Bank Account

A creditor can get a court order seizing money from any of your bank accounts to repay a judgment debt. Certain federal benefits, such as Social Security, SSI, and VA benefits, that are deposited in your bank account are protected (with exceptions for child support and debts owed to the federal government).

Surviving Debt: Protecting Your Car and Personal Possessions from Seizure

In theory, after a creditor gets a court judgment, it can ask a sheriff to seize your car, household goods, or other personal property and then sell the property to repay the debt. This is often called “judgment execution.” In practice, most states limit this kind of seizure so much that a creditor has no financial incentive to have this property seized and sold. You have more to fear from wage garnishment or seizure of your bank account than from loss of personal property.

Surviving Debt: Protecting Your Home from Seizure

Your home is at risk of foreclosure if you do not keep up on mortgage payments. Your home is also at risk of being sold if you owe a judgment debt, but that risk is much smaller. When a creditor obtains a court judgment on a debt, even just credit card or medical debt, the creditor can then put a lien on your home for the amount of the debt. With a lien in place, the creditor can then force a sale of your home or the creditor can simply hold onto its lien and wait for you to sell the home before trying to collect on the lien.

Surviving Debt: The Debtor’s Examination and Debtor’s Prisons

There are no debtor’s prisons in the United States, but you can still be imprisoned if you do not show up for a debtor’s examination. After obtaining a court judgment, a creditor can ask a judge to order you to appear in court or in the office of the creditor’s attorney to answer questions about your income and assets to help the creditor find income or property that the creditor may seize. In some states this procedure is called a debtor’s examination, but the procedure goes by other names in other states. Some creditors routinely request a debtor’s examination. Others never do.

Surviving Debt: Exemption Planning

If you have property that can be seized to pay a judgment debt, consider “exemption planning” that maximizes the protection of your state’s exemption laws by converting property that can be seized (for example, cash) into property that cannot be seized (for example, household goods or your home).

Surviving Debt: Workout Agreements to Protect Wages and Property

If your wages, bank account, personal property, or home are at risk from judgment debt, you can approach the creditor or whoever is collecting the debt about a “workout” agreement, even after a court judgment is entered against you. Offer to pay all or a portion of the amount due, over a period of months or even years. The amount you offer to pay should be directly related to what the collector can seize. Do not offer to pay $3,000 over 12 months when the only items the creditor could seize have a market value of $500.

Surviving Debt: Introduction

Below are “quick money” strategies that you should avoid at all costs. An entire industry of unscrupulous businesses exists to pressure you into making costly mistakes. These businesses know that people in financial distress often make desperate or poorly informed choices. They also know that people who feel that their 07options are limited are likely to be willing to overpay for credit and other services.

Surviving Debt: The Basics

Why Keep Track. When facing financial problems, keep track of your income, expenses, and debt on a monthly basis. This has a lot of value. It gives you a realistic view of where you stand and how much you can allocate to debt payments. When you know that, you can decide which debt payments you can afford to make and which you cannot. Then refer to Chapter 1 to see which debts to pay first.

Surviving Debt: Keeping Track of Income

Your income listing should include all sources of income for a given month for each family member. List the amount separately for each source of income and then total them all up.

For employment income, use take-home pay and not gross pay. If you do not work on salary, list your earnings in the last month and also list under your expenses any self-employment and federal and state taxes you should pay on that income. If your income is higher or lower than usual that month, make a note of that.

Surviving Debt: Keeping Track of Expenses

The Expense Listing. Your expenses should separately list each category of your monthly expenses, such as food, housing, utilities, clothing, transportation, and medical costs. Some ideas for categories are listed below and on the sample form, but use whatever categories work for you. For example, it might be easiest for you to break down expenses by the type of store you go to, rather than the exact nature of the goods purchased there, such as “purchases at Walmart.”