What Can Go Wrong In Bankruptcy
Before filing a bankruptcy or choosing which bankruptcy to file, the Debtor should consider the consequences that may follow the filing. The following are the most common issues to consider.
1. Loss of assets you wanted to keep-Too Much Equity
When a Debtor files for Chapter 7 bankruptcy, a Chapter 7 Trustee investigates to determine if there are any assets that can be liquidated to pay unsecured creditors. State law allows certain exemptions that can be applied to property that allows the Debtor to keep the property to the extent the equity is exempt. For example, in Georgia a married couple can exempt up to $20,000.00 in equity in their home. A problem can arise when a Debtor chooses to file for Chapter 7 Bankruptcy under the assumption that there is less than $20,000.00 in equity in their home, only to find that the Trustee contends that the home is worth much more and seeks to sell the home. If the Trustee is successful in selling the home, the Debtors will get their $20,000.00 exemption amount but they will be without the home they intended to keep. This can be avoided by filing a Chapter 13 instead of Chapter 7 if there is a risk of losing the home.
Another common loss of property occurs when a Debtor purchases property prior to filing for bankruptcy and the creditor fails to perfect their lien timely. In those instances, the Trustee is able to strip the lien and sell the asset. An example of this is when a vehicle is purchased prior to bankruptcy filing, but the lien is not perfected within 30 days of the purchase and the bankruptcy is filed within 90 days of the perfecting of the lien. It is possible in that circumstance that the Debtor can obtain financing from another source and purchase the vehicle from the Trustee, but it is not always possible to obtain the financing. Again, this can be avoided by waiting sufficient time after perfection or by filing a Chapter 13 bankruptcy.
2. Loss of Discharge of Debts-Bad Faith Filing
It is possible for a Debtor to file a bankruptcy but have the Bankruptcy Court deny the discharge of the debts because the Debtor failed to disclose all of its assets or otherwise mislead or defrauded the Court. In those instances, the Debtor may not only lose its discharge, but could be banned from using the Bankruptcy Court in the future. Debtors should not fool themselves into thinking they can be dishonest in filing a bankruptcy and no one will know. If a Debtor cannot live with the loss of assets or other consequences of filing a bankruptcy, the Debtor should not file for Bankruptcy protection.
3. Loss of Privacy-Annual and Random Audits of personal records to justify the facts disclosed in the Petition and Schedules.
In filing a bankruptcy, the Debtor is required to disclose fully all of its assets, debts, income, expenses and financial affairs. All of the petitions and schedules filed by a Debtor are subject to review by the United States Trustee’s Office and the Panel Trustee and the Trustee can request proof of the information disclosed. Accordingly, only those Debtors who are truly in need of filing should do so. Debtors should not file incorrect information thinking that no one will ever know. The consequences can be too severe.
4. Bankruptcy Fraud and Crimes including Fraud and Perjury
As discussed above, perpetrating fraud upon the Bankruptcy Court can result in a loss of discharge and banning from access to the Court. However, the Debtor must be aware that it can also be charged criminally for committing fraud and perjury crimes. The Debtor is required to sign under penalty of perjury that the information contained in the petition and schedules is true and correct. Furthermore, the Debtor will be subjected to questioning under oath at the creditor’s meeting. For this reason, a Debtor should not file for bankruptcy protection if it cannot be truthful and honest to the best of its knowledge and belief.
5. Co Debtors
- The filing of a bankruptcy will definitely be a negative mark on the Debtor’s credit report and will be there for up to ten years. However, in many instances, the Debtor already has such a poor credit rating that the negative hit of the bankruptcy is irrelevant for all practical purposes. In some circumstances, the Debtor may be better off with the bankruptcy because the debt to earnings ratio is better after the discharge (i.e., the total amount of the debt owed by the Debtor has been reduced and the Debtor is better able to repay new credit).
- A Debtor needs to be aware that once the bankruptcy case is filed, its credit report does not change except to add the bankruptcy. In other words, if the Debtor had a poor credit history prior to filing, that poor credit history will still exist. If the Debtor had a good credit history prior to filing, that good credit history will still exist. However, the negative hit of the bankruptcy filing will now exist on the credit report.
- The most common effect of having the bankruptcy on your credit report is the inability to obtain credit or the higher interest rate that may be required to obtain credit. Typically, the speed at which a bankruptcy Debtor is able to improve its credit rating depends upon how much income is earned after the filing of the bankruptcy. In other words, if the Debtor continues to make $1,000.00 per month after filing, the Debtor may not be able to obtain any credit. On the other hand, if the Debtor lands a high paying job after filing and is making $6,000.00 per month. The Debtor may be able to restore its credit relatively quickly.