Stigma

Is There Still A Stigma Associated With Bankruptcy?

More than anything, the credit reporting agencies are showing a lot more respect. I like to share with my clients that I filed my own bankruptcy in 2001. I was in a transition period and I needed to get out of $52,000 in debt. My credit score was at a 670 and I went down to a 570. We do not see that happen to anybody anymore. Actually 670 is kind of a sweet spot, anywhere between 600 and 700 is a sweet spot where if you file a bankruptcy, you are going to have a heavier hit than someone who is above a 700 at the time that they file, or below a 600 at the time that they file. We had somebody a month ago who filed and they were at a 530. After they filed, they went to a 540. We saw someone last year go from a 668 to a 663, and they bought a house three months after they filed!

Credit reporting agencies are now seeing some benefits to filing bankruptcy. They are recognizing that it wipes out debt, and that it sets the person back on the path to good credit. So they are going to score them based on their credit worthiness. I always tell people, “After you file bankruptcy, you owe no one.” When you go to buy a car, you simply say to the lender, “Look, I don’t owe anybody. The only one I want to owe is you. I don’t see why you wouldn’t lend me the money. I have a job, and by the way, I can’t file Chapter 7 for another eight years. I’m only asking for a 5-year loan, and if I ever fall behind, you can simply come and pick up the car like you could to anyone else. So, why not loan to me?” You have to have a sales pitch. If somebody is prejudiced against bankruptcy, you simply turn and go to the next lender and try to find someone who is not prejudiced, who accepts your sales pitch that you are a better credit risk than somebody who has a whole bunch of debt.

We are also finding that it is more acceptable in the public market now that there is a guy running for President, whose name is Donald Duck. He filed four times and he is probably going to file his fifth bankruptcy while he is running for President! I do not see any problem with it. It is a perfectly acceptable means of handling your debt. Ask him. It is “An intelligent business decision at the time when your finances are in disarray.” I originally wrote that saying back in 1992 and I still use it. I see that people in the marketplace see filing as a benefit. I always tell people that Abraham Lincoln did it twice, that Walt Disney, and Henry Ford did it too. If Donald Trump can do it, you can do it too. So it is just an available means of handling the problem, and yes, it is more acceptable after all.

Is It Easier To File For A Chapter 7 As Opposed To A Chapter 13?

It depends. For me, they are both simple, but every day we see more complicated cases!

We are amazed at how many people really do not qualify for a Chapter 7. We had a guy yesterday who was a household size of one and he showed me his last six months of income. By the way, the Means Test is adjudged by your last six months of income prior to your filing month. So if you file in July, which this guy is going to do, then they do not care how much money he makes in July. They care about June, May, April, March, February, and January – six months of income. Again, they do not care about December, just those six months. If you calculate this guy’s income, he passes the Means Test. He is under median. That is under $55,055, based on a six months period. But his tax return for 2015 shows he made $185,000! So how does that work? Well, he must have had a reduction in income. Will he have a future increase? Maybe he is simply purposely been making less money so that he would pass the Means Test. Probably not. But, that kind of thing might get caught by a trustee. I might be willing to file the case as a Chapter 7, but he may need to be a Chapter 13. This particular guy has a secondary problem, and that is that he owns his house with his non-filing wife. In Virginia, we have a thing called Tenancy by the Entirety, where if the person and spouse own a property with equity and only one of them is filing, then the only creditors that have to be paid are joint creditors. He and his wife have no joint creditors so his (her) house would be protected.

So, sometimes Chapter 7 is very easy to file for and qualify for. However, a Chapter 13 is so often beneficial, and we talked a little bit about credit reporting agencies. Credit reporting agencies do give you a bit of a benefit for filing Chapter 13, because just to put it in personal terms, you can tell your creditors, “Hey, you are saying I filed bankruptcy, but I paid my creditors! I filed Chapter 13, not Chapter 7.”

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