Top Ten Questions about Filing Bankruptcy in Massachusetts
(updated July 2010)
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IS THERE A WAY OUT FOR ME?
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What is
bankruptcy?
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What is
Chapter 7 bankruptcy?
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What
is Chapter 13 bankruptcy?
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What is
the "automatic stay"?
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What are the Massachusetts
exemptions?
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What are the advantages of
bankruptcy?
-
What are the disadvantages
of bankruptcy?
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Where is the Bankruptcy Court in Massachusetts and will I have to go?
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How do I find out how much bankruptcy
will cost me?
1.
IS THERE A WAY OUT FOR ME?
Yes! Yes, there is. All things considered, bankruptcy is pretty generous and helpful for people who are
really struggling with debt. It can be a true path to financial freedom.
However, bankruptcy is scary (at least it sounds that way) and most people have very little idea
about what it’s all about. I will try to explain on this page about the process
and the pros and cons, but the bottom line is this: People in debt trouble can get relief by
making the debts go away or shrinking them to a level that they can more easily handle.
The Bankruptcy Abuse Prevention and Consumer
Protection Act ("BAPCPA") went into effect on October
17, 2005. This is the new bankruptcy law you may have heard about
(though it's becoming a stretch to call it "new"). The bottom line
is this: BAPCPA introduced several changes for people seeking
debt relief under the Bankruptcy Code such as:
- A new means test for some individuals filing
Chapter 7.
- New document requirements.
- Some dischargeability provisions
-- such as the dischargeability of some taxes in Chapter 13.
- Increases in the length of some Chapter 13
plans.
- Mandatory credit counseling and debtor education required to
obtain a discharge.
But the good news is that bankruptcy is still
around and here to stay. Honest people who need help can get lasting and
sometimes dramatic relief in the bankruptcy system. They can even rebuild credit and obtain a new degree of financial freedom. However, there
is a
bunch of misinformation out there. More good
news: even though the nuts and bolts of bankruptcy are complicated, the
basic idea is simple--simple enough for anyone to understand and make up
their own mind about. Read #2 directly below for more
about this.
2. What is Bankruptcy?
Bankruptcy
is intended to give people a fresh start free of debt. In bankruptcy a person
either gets released from
their dischargeable debts (Chapter 7) or is allowed to reduce their debts to a manageable level and maintain a payment plan (Chapter 13).
Although bankruptcy certainly helps some people out of bad situations, the bankruptcy laws
are not
simply charity. They are meant to encourage entrepreneurial risk taking and
the freedom that the U.S. economy depends on for growth.
Why do people file bankruptcy in Massachusetts? In my
experience as a bankruptcy lawyer, these are some common scenarios:
- You are trying to keep debts current but are
borrowing money from one card to pay other (robbing Peter to pay Paul).
This is a house of cards (excuse the pun) and most people realize quickly that
it can not last.
- You are trying to keep debts current by
using your savings but can see the day when your savings will run out (don't
wait until it does).
- You are trying to keep debts current but
your are going without the essentials of life to do so (you do not need to do
this).
- You have defaulted on credit card debt and
are dealing with debt collectors who are not willing to help you and are rude
and harassing.
- You have defaulted on credit card debt and
are being sued or already have civil judgments against you.
- You have looked into credit counseling and
found that they demanded a payment you could not afford or, worse, you have been essentially scammed out of
money.
- You have lost a job or had a reduction in
income.
- You have incurred substantial medical debt
because of illness or an accident.
- You have fallen behind on house or car
payments and are facing foreclosure or car repossession.
- You had a business that failed or is failing.
People often feel embarrassed and feel like there
is no hope when they find themselves in situations like these.
They may know that bankruptcy exists but are scared by it.
Bankruptcy is not something to take lightly, but it is not as scary as you might
think. You owe it to yourself to at least know your options. Bankruptcy
sometimes is the best way out of a bad situation and on to a better future.
Qualifying involves analyzing your income and assets.
We do this for free (unless you have complex business issues, then we charge a small
consultation fee). We can tell you
where you stand.
3.
What is Chapter 7 Bankruptcy?
The goal of a Chapter 7 bankruptcy is to wipe
out ("discharge") your debts. In exchange for having your debts erased,
you must give up all your property to your creditors. This
sounds rather harsh, but the reality is not as bad as it sounds. You need only give up
your "non-exempt" property, which for most people, once the proper exemptions are
applied, amounts to nothing at all. In many cases, much or all of your property
may be exempt. You will have a chance to determine what property is exempt with your bankruptcy lawyer prior to filing your bankruptcy
petition.
Income also affects your eligibility for Chapter 7. If you make more than the median income based
on household size, you will have to contend with something called the "means test."
This test helps determine if you can receive a Chapter 7 discharge or would be better suited
to be in a Chapter 13 bankruptcy. Even if you fail the means test, special circumstances
can still make some people eligibility for a Chapter 7 discharge.
The means test only applies to people who have
family income greater than the median income.
In Massachusetts, the median income by family size (for cases filed after March 15, 2010):
- Family of one: $53,315
- Family of two: $69,204
- Family of three: $82,297
- Family of four: $99,293
- Add $7,500 for each additional family member
(for cases filed after April 1, 2010).
However, even if the means test is inapplicable to you because your family makes
less than the median, a "totality of the circumstances" abuse test still
applies. This test is more vague but essentially means that if you have
the ability to fund a reasonable Chapter 13 repayment plan out of your income
you should do so. This common-sense nugget at the heart of the bankruptcy
system states that if you can afford to pay none of your debts, you pay none of
your debts, if you can afford to pay some of your debts, you pay some of your
debts.
4. What is Chapter 13 Bankruptcy?
Bankruptcy under Chapter 13 allows you to create a plan which you will pay into on a
regular basis. Initially, a Chapter 13 bankruptcy sounds less attractive than
a Chapter 7 filing: Chapter 13 requires you to pay money into a plan whereas a Chapter
7 just wipes out your dischargeable debts. In some cases a Chapter 7
filing will be more advantageous. However, Chapter 13 has many benefits.
Some are:
- It can be used to defend against foreclosure, allowing you to satisfy unpaid mortgage bills (or tax bills)
over time when your lender is
demanding that you pay in one lump sum in order to stop foreclosure.
- The cost to file Chapter 13 is often lower than Chapter
7, especially under the new bankruptcy law. People often want to file a
bankruptcy case quickly; Chapter 13 can often be the way to do this.
- Chapter 13 bankruptcy stays on your credit report for three fewer years than Chapter 7 does (seven
instead of ten).
- There is no reaffirmation in Chapter 13.
This avoids a sometimes sticky situation related to car loans in Chapter 7;
you do not need to potentially undergo a cumbersome reaffirmation process to
keep cars for which you have a loan in Chapter 13.
- No one ever looses property in a Chapter 13. It is not a "liquidation" chapter, it is a "reorganization"
chapter.
- Chapter 13 payments are often quite low,
allowing a debtor to pay pennies on the dollar to unsecured creditors.
There is more you can read about Chapter 13 Bankruptcy
and about
choosing between Chapter 7 and Chapter 13 Bankruptcy.
5. What is the
"automatic stay"?
The automatic stay is one of the most important aspects of the bankruptcy
process. Once you file a bankruptcy petition, the automatic stay stops all
collection efforts and proceedings against you, all harassment, lawsuits, and
any foreclosure proceedings. It gives you breathing room to deal with your
financial affairs without interference from your creditors.
When clients retain us we work with them to immediately reduce or eliminate debt
collection calls by providing them with a special phone number to give out to
callers even before their case is filed. Ask us about this
important benefit.
6.
What are the Massachusetts exemptions?
First, it is important to note that as part of a
bankruptcy filing you must choose between the federal bankruptcy exemptions and
the exemptions arising under Massachusetts and federal non-bankruptcy laws. This
is a key decision that you and your bankruptcy attorney will make which depends on the nature and value of your
property.
If the Massachusetts and federal non-bankruptcy
choice is made, the most important exemption for homeowners is the homestead
exemption. Filing of a declaration of homestead in the
proper manner and at the right registry of deeds will exempt up to $500,000
of your equity in your primary
residence, even if the filing occurs just prior to your bankruptcy filing.
There are new provisions limiting the state homestead to $136,875 (adjusted
April 1, 2007 from $125,000) if the
property was bought or otherwise acquired within 1215 days of the petition date.
There is an important exception to the 1215 day rule in circumstances in which
you buy a home in the same state and roll your equity into your new home.
There are various other exemptions under
Massachusetts law and federal non-bankruptcy laws. Some examples include:
401(k)s, certain retirement
accounts and death benefits,
social security benefits, veterans'
benefits, unemployment and workers' compensation benefits, and certain personal
property and pensions.
7.
What are the advantages of Bankruptcy?
The advantages to a bankruptcy filing can be
significant. Often it is the only thing that can save your home or can forestall
the tax authorities from taking action against you. Bankruptcy also helps people
who just can't make ends meet because of a lost job, mounting medical expenses, or
for other reasons. Erasing or substantially reducing debt such as credit card can dramatically improve your finances and quality of life.
8.
What are the disadvantages of Bankruptcy?
The fact that you declared bankruptcy will
appear on your credit report. Bankruptcy will stay on your credit
report for up to 10 years from the date of filing, but given current credit
reporting standards, a Chapter 13 will only remain on your credit report for
seven years.
Keep in mind that many people already have severely damaged credit before
they file for bankruptcy. Many people report that they are surprised by the easy
availability of credit after bankruptcy. We will work with clients after bankruptcy to ensure that their
credit reports are accurate. The result is often an improved credit score which
facilitates access to credit on favorable terms after bankruptcy.
Read more about this new service here.
Note: Filing bankruptcy will not stop you from getting student loans in the
future that are guaranteed by the government (such as the Stafford, Perkins, and
PLUS loans that most students get).
9.
Where is the Bankruptcy Court in
Massachusetts and will I have to go?
Yes, at least once. After the court receives a
Chapter 7 or 13 bankruptcy filing, it schedules a meeting of your creditors.
In the vast majority of cases no creditors attend the meeting and it is just
you, your bankruptcy attorney, and the bankruptcy trustee for about a ten minute meeting. This is called the section 341 meeting.
There are two bankruptcy courts departments in
Massachusetts, one in Boston and one in Worcester (although 341 meetings are also held in Brockton, Springfield, and Pittsfield).
Note that at this time we only handle cases for people who live in or own property in
Suffolk, Middlesex, Norfolk, Essex, Worcester, Plymouth, Bristol, Barnstable, Nantucket,
Dukes counties. Where you are assigned is based on your city of town of
residence. A complete list (for Eastern Mass.) can be viewed
here.
| Boston: |
Worcester: |
United States Bankruptcy Court
John. W. McCormack Post Office and Court House
5 Post Office Square, Suite 1150
Boston, MA 02109-3945 |
United States Bankruptcy Court
Donahue Federal Building
595 Main Street, Room 211
Worcester, MA 01608-2076 |
10.
How do I find out how much bankruptcy
will cost me?
We are bankruptcy specialists and can handle cases
affordably due to our experience. Contact us and we will discuss your
options with you. We will also give you clear and honest information about
all of the costs of the process. Our goal is to make bankruptcy affordable for
the average person. To that end, we offer payment plans and free consultations.
One of the special thing we do is this: if you are on a payment plan with us,
we give you a number to give to creditors and debt collectors who call before
your case is filed. This allows you to reduce the "heat" and get a little
peace while going through the pre-filing bankruptcy process. Payment plans
are optional, but some people really benefit from them.
There is a little bit more about the cost of
bankruptcy here.
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