In this installment, I am going to describe the visit to the attorney and talk about making the choice between Chapter 7 and Chapter 13 bankruptcy. If you are interested in the first part of this series, you can find it here. It is a description of how my wife and I worked ourselves into the position of needing to go bankrupt. Before I start, let me tell you all something I learned which everyone should know. Your 401K and other retirement accounts are exempt up to the first 1 million dollars. If you are in dire financial straights, do not raid these accounts to stay afloat. You will want that money later in life!
So, after coming to the painful realization that there were exactly zero options other than bankruptcy Liz and I had to start the process. If you are willing to go that route you can buy a book and file for bankruptcy on your own. If you have no money or assets then it is not very likely you will be on the hook for any kind of debt. However Dad was an attorney and if there is one thing an attorney is going to always tell you it is: if you are getting involved with the law, have an attorney.
The question then becomes where do you find one? We have a relationship with a labor law attorney (he sued the Workers Compensation insurance company for us when Liz was hurt at work), so Liz gave them a call. Their practice is strictly labor law, but they did have a recommendation.
After moping for about an hour we called and made an appointment. Even knowing that we had no other options there is this huge resistance that we both feel to doing this. I think that this is something we have been conditioned to, but there is this feeling that it is somehow cheating to declare bankruptcy. It completely ignores that fact that businesses do it all the time when it is to their financial benefit, but it is there and it is something we had to face down.
Any time you are in a new situation weird things come up as you try to judge the appropriate way to behave. I spent the morning before we went going back and forth wondering if I should wear a suit or not. I know, crazy, like the lawyer is going to care what I am wearing, or like we should be putting on front like we actually have more money than we do. All I can say in my defense is that Mom was a hell on wheels about proper dress when I was a kid, so maybe I was falling back on that early training. In the end I did not wear a suit, just a dress shirt and jeans.
We drove to downtown Denver to the lawyer’s office. Up to the fifth floor, then wondered around a little until we found their office suite. The office was very nice, a couple of leather couches, a big reception desk with primly dressed late middle-aged receptionist parked behind it. She ushered us into a conference room to wait. This law firm must do pretty well as the conference room held a twenty foot long cherry wood table surrounded with 12 Aeron chairs in the dark graphite color.
The receptionist asked if we would like anything to drink while we waited. I asked for a cup of coffee. She wanted to know how I take it and I said, “Oh, just black will be fine”. As she walked away Liz asked me why I didn’t use my old joke of “I like my coffee like I like my women, black and bitter” which made me laugh out loud. It is stunning how tense this whole thing made me. Was the lawyer going to look down his nose at the deadbeats who needed his help? I did not think that was going to be the case, but I was still worried about it. I should not have been.
The lawyer came in and introduced himself. He sat down and we got to it. The first thing that he did was to explain the difference between Chapter 7 and Chapter 13 bankruptcy. Chapter 7 is basically a forgiveness of debts, minus any assets. This does not mean that they are going to take everything you own and sell it, there are a lot of exemptions. For example, if you have a car (which we do) in Colorado there is a $5,000 per person exemption for the value of the car. So our 7 year old 100K mile Subaru is not going to be sized and sold to try to pay off our creditors.
The same goes for the house. As long as we can stay current with the payments we can keep it. If we fall behind, we will be foreclosed on, just like someone not in bankruptcy. There is a means test for Chapter 7 bankruptcy. If you currently make more less the median income of your state (you can find a table at this link) you are allowed to file Chapter 7.
If you do make more than the median there are further tests; Is the difference between your bills and your income more than $166.66 a month? If it is you will not be eligible for Chapter 7.
If you have an income that is $100 a month more than your bills and you can pay down at least 25% of your unsecured debt? If you do then you have to file Chapter 13.
Since we our income form unemployment is way below the median and we do not have enough to cover our bills on a monthly basis we are eligible for Chapter 7.
What Chapter 7 does is wipe away your unsecured debt. That is all your credit card debt. What it will not wipe away is your mortgage, any taxes you owe and your student loans. You can get out from under your student loans, but you have to show either fraud or that you can not use the education you paid for. Our attorney said that this is nearly impossible to achieve, but that we did not have grounds to try anyway.
The other option is Chapter 13. This is different than Chapter 7 in that is more of a repayment plan. You enter into an agreement with your creditors to pay as much as you can for 3 to 5 years and they agree to wipe away any remaining debt that is left over after that time.
In Chapter 13 allows some thing that Chapter 7 does not. First off, if you have a house with a second mortgage that is worth less than the current balance of the primary mortgage you can petition to have it declared an unsecured debt and it goes into the payment plan like the credit cards. You can also use Chapter 13 to make a payment plan with the government for your taxes. You are still on the hook, for your student loans though.
Chapter 13 is more expensive, as things like trying to get out from under your second mortgage will be contested by the bank and this will mean your lawyer will have to spend more hours on your case. You will also have to have an appraisal, which will run about $400. There is also the risk of not being able to meet your payment plan and having to eventually file Chapter 7, with the costs of doing that as well.
The lawyer went through a process of asking us about our income and assets. We basically answered no to all the questions having spent everything we have and not having bought any new cars, electronics in the last 4 years or even clothes in the last 15 months. For some strange reason he kept asking if we had any Arabian horses. I am sure this was a joke but we were so serious and focused we just kept answering no.
He laid out the costs for us. I sold cars for several years and there is this look that people get when they are mentally changing the amount of money they were going to offer. I saw a similar look before he told us that it would be $2,200 for us to file Chapter 7 with him and around $4,000 for Chapter 13. I don’t know what he usually charges but I am confident that he was giving us his rock-bottom price for doing the work.
This money has to be all paid in advance for the Chapter 7 (you can’t be piling up new debt while you are in the process) or ¾ of it for Chapter 13 (he would be part of the payment plan for the rest). It is not an inconsequential amount of money, but Liz’s brother had already agreed to loan us the money we need to go bankrupt.
He also explained that we would have to go through credit counseling and do this before we filed. He gave us a packet with all of the information we would need to provide him. One of the things everyone has to do is go through all of their possessions and estimate a value for them. In Colorado you have a $6,000 personal exemption for clothes and such.
I asked him what he thought we should do, in terms of 7 or 13? What would he tell us if we were his cousins in this situation. The first thing he said is that this will not be as bad as we think (easy for someone not admitting to being a dead-beat to say, but nice of him anyway). This was about a new start. It would be a big relief not to be crushed under this debt and the calls and letters would stop as soon as we filed. As for which way to go, 13 would let us get out of the $16,000 of our second mortgage, but given the job market it might just be postponing going into Chapter 7. He did not offer any specific advice one way or the other.
We thanked him for his time and told him we would be in touch (after all, short of giant bag of money falling from the sky we would be back to start the legal process). As we walked out Liz said “Well, we are probably not the worst bankruptcy in the world”. She is right, we are just the worst bankruptcy in our world.
So now we are looking at all the options. I don’t see a way that we could possibly afford Chapter 13 no matter what the payment plan really is. Even 25% of our unsecured debt (including the second mortgage) is $20,000. There is no chance we can pay that off in 60 months. Then there is the problem that we are both still without jobs. I am an optimist, hope got me in this position after all, but coming up on 8 month without a single job offer and a year for Liz we can’t be optimists about finding work. That plus the much higher costs and the question of even being able to get rid of the second mortgage all add up to too much risk. So we will file Chapter 7.
On the personal side, I’d like to talk about the strange split in reactions you get when you tell people you are going bankrupt. For the most part people say they are so sorry, kind of like you told them an Aunt died or you have a serious illness. There is a strange little club as people (often in sotto voce voices) tell you they have been there. I am really amazed at the number of people I know who have gone bankrupt and I never knew.
For the most part people are very supportive (and I thank all of the ones that have offered support since I started writing this), but the ones that are not more than make up for it. Maybe it is the guilt and shame I feel for screwing up my financial life so badly that makes their reactions sting so much. I don’t know. It is hard to say that I am blameless, since I made the choices that got me here. Sure there were events beyond my control, but my reactions to the were part of what lead me here.
Still there are those that look at me as a cheat, as a failure, as fool who could not manage his money and now has to rely on the forgiveness provided by the Courts to get out of debt I willingly took on. The fact that it will kill my credit for years, that it will raise my insurance rates, that it will complicate getting a new job does not seem enough punishment for these folks. I don’t know if they want to lord their superior money management skills over me or if they are just striking out to make themselves feel like they are not as close to my position as they really are. It is still pretty traumatizing.
We’ll stop here for this installment. I would like to say one thing though. If you think you are headed in this direction, don’t wait until things are completely unmanageable to start. It is going to cost some amount of money to file and it is going to take some time. If there is a lot more money going out than coming in, start this process now. It is a blow to your ego, but that will happen anyway if you wait. The thing is to get the new start as soon as you can. You are not alone, and no matter what the mean folks might say doing this does not make you a dead-beat or a loser. It is what it is.
The floor is yours.