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Bankruptcy: An Overview
Certain basic concepts apply under both Michigan Bankruptcy Chapter 7 and Chapter 13 Laws. The case is commenced by filing a petition with the bankruptcy court. The petition must list all of your assets, liabilities and other information required under the code. You cannot pick and choose which creditors to include on the petition, but that doesn’t mean you cannot keep your home or vehicle, as will be explained later. All creditors must be listed under Michigan Bankruptcy Laws. You may file as an individual or as husband and wife. Married couples do not have to file together if substantially all debts are solely in one spouse’s name.
Almost all consumer cases are filed voluntarily. A Chapter 7 bankruptcy is considered a “liquidation” bankruptcy under Michigan Bankrupcty Laws. A Chapter 13 bankruptcy is a “reorganization or repayment plans” in which the debtor (or husband and wife) make payments to a Chapter 13 Trustee for a 3 to 5 year time period under Michigan Bankruptcy Laws. Most Michigan Chapter 13 Bankruptcy cases I file are for debtors who are trying to prevent a foreclosure of their home or repossession of their vehicle. Some Michigan Chapter 13 Bankruptcy cases are filed because the debtor’s are not eligible to file a Chapter 7 either because they have filed a prior Chapter 7 bankruptcy in the previous six year or they have too many assets or make too much money or because they could pay their creditors a good percentage of what they owe with a Chapter 13 plan without too much of a burden on their way of life. Some clients will file a Chapter 13 repayment plan even if they qualify for a Chapter 7 just because they want to pay their creditors under Michigan Bankruptcy Laws. Both Chapter 7 and Chapter 13 bankruptcy will stop creditor action such as a foreclosure or sheriff’s sale, utility shut-off, vehicle repossession or wage garnishment under the Michigan Bankruptcy Laws.
The filing of the petition invokes what is known as the automatic stay. This means that creditors are immediately prevented from doing anything further to compel collection of a debt. The harassing calls, garnishments, law suits, foreclosures, repossessions or shutting off of utility services are all stopped a under Michigan Bankruptcy Law. The “stay” is designed to give you time to sort out your affairs free from the harassment of creditors.
In the petition, your debts are classified as either priority, secured or unsecured. Each is treated differently depending on which chapter is filed. Priority debts in consumer cases are usually limited to government tax liabilities and support obligations. Priority creditors have certain rights to payment over other creditors using Michigan Bankruptcy Laws.
Secured debts are backed by property known as collateral and typically consist of auto loans and mortgages. The creditor has a lien, or right to recover the property upon default. In most cases, liens attach to property by virtue of a written security agreement signed when the pledged property is purchased, or upon obtaining a loan.
Unsecured debts are almost everything else. They include credit cards, back utilities, medical bills, store charges and unsecured loans. Unsecured creditors do not have a lien or interest in your property. If you purchased certain property with a store charge or credit card, the seller cannot repossess that property on your default without a security agreement.
Determining Whether to File Bankruptcy with a Bankruptcy Lawyer
The process of deciding whether to file a bankruptcy with a bankruptcy lawyer proceeding often is very difficult indeed. Nobody wants to file bankruptcy with their attorney, whether it be under Chapter 7 or Chapter 13 of the Bankruptcy Code. Bankruptcy is meant for the honest debtor, someone who has explored all alternatives. A bankruptcy may have adverse credit effects and there can be other undesirable ramifications, consulting a bankruptcy attorney should always be your first step of action. You should file only after considering the various possible alternatives that your Michigan bankruptcy attorney can offer. If none of these alternatives is feasible or practical for you after speaking to your Michigan bankruptcy lawyer, then filing a Michigan bankruptcy petition may be the most responsible step to take.
The most common reasons for filing a Michigan bankruptcy include loss of employment, insufficient medical insurance, divorce, or a failed business venture. Most recently, Michigan bankruptcy filings have been surging as a result of the unprecedented availability of high interest credit cards, which inevitably lead to a greater number of defaults when combined with any of the above problems.
The inability to keep current with bills as they become due causes stress that affects marriages, jobs and almost every aspect of life. Anyone who has suffered from a barrage of hostile telephone calls from bill collectors knows that something has to give. The Michigan bankruptcy laws have been enacted to provide a safety valve that gives honest people a fresh start, and helps them regain normal lives.
Over a million people a year turn to Michigan bankruptcy for debt relief. Statistics show that the cross section of individuals and couples filing bankruptcy in Michigan mirror society as a whole by income, type of employment, home ownership and almost any other relevant category. In other words, anyone can find themselves in bankruptcy especially in Michigan.
Bankruptcy in Michigan is a Constitutional Right
The Michigan bankruptcy laws are there for a reason. On the whole, they benefit both the debtors and creditors. It is of course important to be responsible for the debts you incur, but filing a bankruptcy in Michigan IS an act of responsibility. It puts you in a position to move forward, to become productive once again, provides closure, and pays your creditors from your non-exempt assets (or by other means if the court so approves in a Chapter 13 or 11 context).
Alternatives to Bankruptcy in Michigan
Generally speaking, the chief alternatives to bankruptcy in Michigan are some form of negotiation and settlement with one or more of your creditors, perhaps by making payments through a nonprofit credit counseling service. Anytime you are dealing with alternatives to bankruptcy, be sure that you do not “put all your eggs in one basket.” In other words, do not let a foreclosure sale occur or allow a judgment to be entered against you without first finding out your options under Michigan bankruptcy laws.
Nearly all large companies such as credit card issuers have limited or no resources for dealing with individual borrowers. Many of my clients relate to me that they have called and written to their creditors to attempt to work out a method of paying their debts. Most often, these people find that no matter how good their reason for wanting to work out their debts, and no matter how hard they try to pay their creditors what they can afford, the creditors simply will not “work” with them. This is because these creditors are vast bureaucracies that have no method and no personnel to deal with people on an individual basis. There are some limited exceptions, however. If your situation is like one of the following, you may want to try to work the problem out without filing bankruptcy in Michigan:
- Deed in Lieu of foreclosure
If you have one mortgage on a home or other piece of real estate and you cannot sell the property and simply wish to relieve yourself of the mortgage obligation, it is possible that you can negotiate a “deed in lieu of foreclosure.” This is an agreement where you give the property to the creditor, who, in turn, releases you from the debt. This saves the mortgage company the cost of foreclosing against you and allows you to walk away from the debt without further responsibility. You can try to negotiate this on your own, or you can hire an attorney to do it for you. Generally, mortgage lenders will not agree to this arrangement unless there is some equity in the property or the property is at least worth the amount that is owed. The mortgage holder will not accept the property if there is any other debt on the property, such as a second mortgage or a judgment lien.
It is important to note automobile lenders most often will not release you from the debt upon surrender of the vehicle. You can expect that following the surrender, the vehicle lender will seek to collect the deficiency (the amount of the debt remaining after sale of the vehicle.) - Re-amortization of Past-Due Mortgage Balance
If there is a good reason why you fell behind in payments (such as temporary job loss, illness, or injury), a mortgage holder will sometimes consider adjusting the mortgage so that the past due amount is added in to the total and the term of payments is extended (maybe they will put the payments at the end of the loan). The creditor will generally consider this only where your debt-to-income ratio is acceptable and there is no other mortgage debt that is in arrears. - Negotiation of a Single Debt
If there is just one (or a few) old debts you are trying to “clean up” on your credit report, it is possible that the creditor or its collection agency will be willing to settle their debts with you for significantly less than the total amount that you owe. This is usually only true of older debts, which may have been bought from the original creditor by another company . Again, you can negotiate a settlement yourself, or hire an attorney to assist you and represent your interests. I usually don’t do this because I’ve found it to be of little help to my clients unless they can afford to pay the creditor right away with a lump sum of money such as after getting a tax refund. Bankruptcy is usually simpler, quicker, cheaper and easier on my clients mental health. - Credit Counseling Services
Credit Counseling services can sometimes help, although most of my clients who have tried have failed and eventually just filed Bankruptcy. There are a number of nonprofit credit counseling services available in the yellow pages under “credit counseling.” These services negotiate with your creditors to the extent that they are able. Generally, they can negotiate more favorable terms only with unsecured creditors (debts for which there is no collateral), such as credit card issuers. The credit counseling service attempts to get your unsecured creditors to settle for less than the full amount of the debt that you owe, and also tries to get the creditors to give you a lower interest rate. Some credit card companies will agree to these types of terms so long as they are getting their payments through the credit counseling service. However, other creditors are simply unwilling to work with credit counseling services, and the credit counseling service has no way in which to force the creditors to work with it. To be sure that you are selecting a reputable firm, be sure to ask whether or not you will be held responsible for late charges or other fees if the service does not make their monthly distributions on time. You can also ask for references from current or former clients. Unfortunately Credit Counseling Agencies have no real POWER to deal with your creditors. When you file a bankruptcy the ball goes into your court. - “Mortgage Assistance” Companies and other Scam Artists
Unfortunately, there are a growing number of companies that send advertisements to people with pending foreclosure actions. These “mortgage assistance” companies, who get your address from the court records, promise that they can stop your foreclosure and help you avoid a bankruptcy. Please be very careful of these companies. The vast majority of the time, these companies simply prey on people who are in a desperate situation, taking advantage of your desire to keep your home and “avoid bankruptcy.” Typically, the “mortgage assistance” company will require a payment (usually one or two month’s mortgage payments) and will promise to obtain another mortgage loan to pay off your existing loan or to negotiate with your mortgage company to stop the foreclosure. They will wait until just before (unfortunately sometimes AFTER) the foreclosure sale to tell you that they were not able to help you, and that you should see a bankruptcy attorney. At that point, sometimes it is too late. You will be referred to a lawyer who has a good “working relationship” with the company, to whom you will need to pay even more money.
If you choose to use one of these firms, be sure to ask for references of clients that for whom the company has been successful, and check these references. Also, do not put all of your hopes on this type of service until it is too late to file a bankruptcy that will stop the foreclosure. - “Do Nothing”
Your financial life may be so destitute that even if creditors got a judgment against you, it would be worthless. If you are older and receiving pension and/or social security and don’t own many assets, you may be “judgment proof”. You’ll probably still have to deal with creditor calls for awhile.
HOW BANKRUPTCY IN MICHIGAN AFFECTS YOUR CREDIT
When bankruptcy in Michigan is appropriate, it is usually not a question of maintaining good credit – your credit standing is probably already damaged. Judgments, delinquent payments, and credit counseling services are reported to the credit agencies for long periods of time like bankruptcy. Few lenders give credit under those circumstances anyway, and even if you satisfy a judgment it still is a part of your credit history.
The credit reporting bureaus report a Chapter 7 filing for a period of almost ten years. The credit bureaus report a Chapter 13 filing for almost seven years as long as you successfully complete the plan. If the plan is dismissed, then the Chapter 13 will be reported for ten years as well.
A fresh start allows you to re-establish your damaged credit. Aside from being reflected on your credit report, the MIchigan bankruptcy laws do not restrict you form obtaining credit after the case is completed. Keep in mind that whether you have good or bad credit is always a subjective decision in the eyes of a prospective creditor. Of course, you must be prepared to explain why it is necessary to file if a prospective creditor should inquire. Maintaining a good “track record” after filing will minimize the adverse impact of the financial troubles leading to the bankruptcy. With the right strategy, you can build good credit once again. Our office provides a booklet free of charge to each client explaining how to re-establish credit after bankruptcy.
There may be some “pre-filing” strategies to re-establish credit. A non-filing spouse’s credit report is not affected by the bankruptcy unless the spouse is a co-signer on any of the debts. If only one spouse files then the other may be able to maintain a good credit standing. Also, if there is a bank card or line of credit with a zero balance before filing, you may be able to use the card after filing, provided it is not revoked by the creditor.
Please do not hesitate to contact us for a consultation.