How Bankruptcy Works, Part Two
Wed, Jul 27, 2011
Yesterday we went over some of the basics of filing for bankruptcy protection. Today I’ll continue where I left off, starting with your court date.
Going to Court
Our 341 hearing (the name for the court appearance for bankruptcy) was one of the scariest moments of my life. I had read all kinds of stories online, and my lawyer even gave me a list of all the questions I’d have to answer, but I was convinced it couldn’t be that easy. I just knew someone would say, “Sorry, you don’t qualify for bankruptcy,” or “Why should we approve you when you spent $3000 at Best Buy?” Absolute terror.
The point of the hearing is to give your creditors a chance to dispute the inclusion of the debt you owe them in your bankruptcy. Basically, they can send a lawyer to argue that you should be forced to pay them back. Luckily this almost never happens - those companies have tons of customers, and they don’t have time to fight over a few thousand dollars when they make billions. Plus they’ll just write off the loss on their taxes anyway.
The good news is that you aren’t in a courtroom and there isn’t even a judge. There’s just a table with a bored bankruptcy lawyer (called a trustee) who would rather be at the dentist than sitting in a room listening to broke people. I had to wait for a long time, but I was only in front of the trustee for about 2 minutes. I had to give my name, address, etc., then he asked if we were agreeing to file for Chapter 7 bankruptcy protection, if we understood that it would ruin our credit, if our attorney had explained alternative options, just basic stuff. Then we were done.
It’s important to bring a photo ID to your 341 meeting. My ex-husband left his at home, despite 1000 reminders from our attorney and the paralegal, and the trustee almost rescheduled our hearing because of it. DON’T FORGET IT!!!!
The Waiting Game
Once you’ve made it through the 341 hearing, you have to wait 60 days for the bankruptcy to be discharged. I swear, it was the longest two months of my life. This is also a great time to save some money - you aren’t paying toward debt, you can’t borrow any money without special permission from the court, and you’re sitting around waiting. Before you get used to the extra money, set some aside for an emergency fund, something you’ve probably never had before if your bankruptcy came from overspending. After the 60 days, you’ll get a letter declaring you officially bankrupt, meaning your debts are erased and you can move on with your life. Hooray!
So it’s over now. Can I apply for new credit?
Yeah, that’s the attitude I had, too, and you see where it got me. You can apply for credit again after your bankruptcy is discharged. However, your credit score is going to be about 20 so I wouldn’t advise it. I was approved for a few credit cards (with interest rates in the 20-40% range) and even a car (18%), but it didn’t help me rebuild credit as much as I thought it might. Honestly, that new credit just helped me throw money down the toilet and get back into debt.
Remember yesterday when I told you not to stop paying on your debts in order to pay your attorney? This is why. Every item on your credit report will now state “Included in bankruptcy.” That automatically makes it a negative entry. If you stopped paying on your debts before you filed, your late payment history will also show on your credit report. Essentially, you’ll get dinged twice for each account. I found this out the hard way. So yeah, if you can borrow that money from someone, even if you really really don’t want to, you’ll be better off when everything is finished. Your credit score will still suck, but at least it won’t suck as much.
When will my credit score improve?
It’s been 4 1/2 years since my bankruptcy was discharged, and my credit still sucks despite making 100% of payments on time. I’ve had five credit cards, two car loans, and one personal loan, all of which were paid back as agreed. Starting in 2013, some of the negative accounts included in my bankruptcy will drop off, so I hope my score will go up then. I’m stuck with the bankruptcy listed on my report until 2015, though, so I’m not very optimistic.
The most important thing you can do after bankruptcy is get your credit report and keep checking it. You can get them for free (actually free) once per year by visiting annualcreditreport.com - if you get a report from one of the three credit bureaus every 4 months, you can keep up with your credit report all year long.
Basically, you want to look for things that may not be reported correctly. Any accounts included in the bankruptcy should show a zero balance - if they don’t, dispute the items on your credit report. Anything you kept, like a mortgage or car loan, should NOT say “included in bankruptcy.” (By the way, you can’t get rid of student loans through bankruptcy, so unfortunately you’re still stuck with those.) Make sure that the included accounts ONLY say “included in bankruptcy” in the comments - there shouldn’t be anything like “charge-off” or “placed in collections” under any of those entries.
I actually had one of my student loans reporting “included in bankruptcy.” So I called, and they said they had to leave it that way because “You DID file, didn’t you?” So I told them if it was included in bankruptcy, that meant I didn’t have to pay anymore. I swear, my credit report was updated within a few days. You have to keep up with this stuff - no one is going to do it for you.
What else do I need to know?
I feel like these posts have provided quite a bit of information for anyone considering bankruptcy. However, every situation is different and it’s impossible to cover every scenario. If you want more information, consult an attorney. If you aren’t ready for that step yet, visit the BK Forums. Those forums saved my life when I was looking for help with my situation - there are some EXTREMELY knowledgeable people there.
Bankruptcy is NOT an easy solution to your debt problems. If you file, you need to be absolutely certain that there is no other way to improve your financial situation. You can’t file again for at least 7 years, so if you’re going to ruin your credit, make it count. (I know, no one wants to think they would have to file again, but you’d be surprised how many people do it.) If your financial problems were caused by a temporary situation, try to wait it out a little longer. Consider a debt consolidation or debt management program - just make sure it’s a reputable agency first. Look at your spending and decide whether there’s anything you can cut.
Bankruptcy doesn’t have to ruin your life. However, it’s far easier to make changes to your spending and saving habits NOW than to go through the hassle of bankruptcy later. If you find yourself facing bankruptcy, I hope you’ll take the time to make the necessary changes and avoid ending up right back where you started.
Bravo on your "part 2"..that pretty much sums up my experience
Here it is! Great job. Excellent discussion on the 341 meeting. It is
terrifying for a lot of people because they think they're going to get
grilled for hours by Visa. (As a side note, there was time not so long ago when Sears would often show up when people had charge cards with the company.) Usually, like in your case, it's a non-event.
I'm curious (since I'm a lawyer). Besides prepping you with questions, did your attorney do anything particularly good before the meeting to calm your nerves or say anything? Did she/he say anything particularly interesting in the meeting?
By the way, just as another little clarification, I totally understand what a relief it is to get a discharge. But an interesting little fact is that you're actually in better hands (most of the time) after you file, but before the discharge because you're being heavily protected by the bankruptcy court!
Anyway, another great post. And much needed. So much bankruptcy stuff out there in the blogosphere is so boring!
Well, I wasn't going to say anything because I really liked my attorney for the most part, but he didn't even come with us to court. His daughter (also a lawyer) showed up, which was a little weird and off-putting. She took us into the hearing room several cases ahead of ours so we could hear the questions everyone else had to answer - extremely helpful since I was having a heart attack sitting out in the hall.
I think the most helpful thing any attorney can do, bankruptcy or otherwise, is value all of his/her clients. Return phone calls every now and then instead of having the paralegal do it. Review the file before I walk in so you don't spend ten minutes remembering what I'm there for. Same things are important in my field (therapy) - people want to feel valued and important enough for you to remember them.
Anyway, I am grateful again that you came back to read and share your thoughts. I'm generally not cool enough for attorneys to stop by, unless they're telling me to take down a post or something.
Wow, what a powerful story. Thanks for sharing it — it takes courage to share a story like this! I can't believe your student loan lenders tried to put the "included in bankruptcy" sticker onto your student loan — and bravo to you for catching it and dealing with it!
On student loans in bankruptcy, I heard a story last year that was ridiculous but funny. Someone said they read a story on a message board about a man who wanted to declare bankruptcy and include his student loans, so he took out private loans, paid off his student loans with that money, and then included the private loans in his bankruptcy. Obviously, I'm not advocating skirting around the rules by doing this, but I thought it was interesting if that could be done.
Or, if you have the credit available on credit cards, pay off the student loans using the credit card and then file.
Such a common theme that bankrupters are so intensely worried about rebuilding their credit score and getting new credit. Which they generally abuse as soon as possible. The revised bankruptcy system requires you to attend (even if by phone) credit and financial counseling. Most don't listen, even put the phone on the counter.
What you have to do, of course, is learn to live within your means. Then you won't need credit. Spend less than you earn, and build savings with what's left over. I know, because I did this 21 years ago, and my FICO score is now 825 and I'm worth north of a half million. And I have no debt!
Thanks for the bankruptcy info. I had a credit score of 825 about 2 years ago when I could no longer pay on mortgages that I bought when the real esate market in florida was way overpriced Actually two of them were bought in 2002 BEFORE the market crashed but their value in 2011 when I short them was less than they were in 2002 when I bought them. Mind you this means that I paid for those 2 for almost 9 years. I of curse thought it was a sound investment versus the stock market or any get rich scheme. By the way ,I worked like a dog on the properties on holidays on weekends etc. I am almost 58 I have worked and saved my whole life and spent my retirment money on waterfront homes hoping to keep them for 5-7 years for the historic 3% gains in appreciation. I've heard people say anyone that bought real estate got in trouble becasue of greed and I am infuritaed. I worked since I was 10 years old saving for my life and retirement and now I am looking at bankruptcy and dying without any money. Where is the justice for me in this?