The Senior Citizens Legal Advocacy Program B ANKRUPTCY The Legal Aid Society of Orange County, 2101 N. Tustin Ave., Santa Ana, CA 92705 www.lasoc.com; or to reach the Hotline, call (800) 834-5001 or (714) 571-5200 I might need to file bankruptcy— TOPICS COVERED IN THIS ARTICLE what do I need to know? Page Seniors have special concerns when considering bankruptcy. For example, seniors are often on 1 I might need to file bankruptcy—what do I need fixed incomes and can’t afford to make increased to know? monthly payments in order to repay debts over 2 What is bankruptcy? time. If they are pressured to enter into payment 2 When should I consider filing? plans in lieu of bankruptcy, it can lead to 2 What are my alternatives to filing? confusion or unsustainable promises. 3 What are the different types of bankruptcy to consider? For seniors with medical bills that will keep piling 4 Will I have to go to court? up, bankruptcy is only a limited option. 4 What does it cost to file bankruptcy? Bankruptcy may get rid of current bills and credit 4 Will Chapter 7 wipe out all my debts? card debts, but seniors might then be left with no 4 Will I get to keep any property? credit cards or money to live on with new and 5 When should I use Chapter 13 instead? continuing medical bills to pay. 6 Can I file without an attorney? How can I find an attorney? In addition, seniors may be more likely to have The Senior Citizens Legal Advocacy Program and the City of Mission Viejo moral objections to filing bankruptcy. This can add to the anxiety they feel when facing creditor The Senior Citizens Legal Advocacy Program collection demands. When seniors learn more about (SCLAP) is part of the Legal Aid Society of Orange the process and the benefits of bankruptcy, many of County (LASOC), a non-profit corporation funded these anxieties diminish. Seniors should also by public and private sources. consider that a bankruptcy means that most debts can no longer be legally enforced, but nothing will SCLAP provides services to Orange County residents age 60 and over and is funded in part prevent them from voluntarily repaying a debt later through the federal Older Americans Act, as if they so choose. allocated by the Orange County Board of Supervisors. Some seniors may find that because they have This fact sheet is part of a program funded by a limited assets and protected income (e.g., “exempt” grant from the City of Mission Viejo. Points of view Social Security or similar pension income), they opinions are entirely those of SCLAP. won’t need to file bankruptcy. For these seniors, Page 2 Bankruptcy In bankruptcy, debts will be sorted out according to type. Some debts can be “discharged” and a “Some seniors may find that debtor will be freed from the obligation to pay because they have limited assets them back. Some debts will still require payment and protected income… they despite a bankruptcy filing (e.g., certain tax debts, student loans or Social Security overpayments) won’t need to file bankruptcy.” and these debts are referred to as “nondischargeable”. letting creditors sue them and get judgments that When should I consider filing? are literally uncollectible may be a viable option to The decision to file bankruptcy depends on a consider. debtor’s particular circumstances such as the types of debt and the amount and type of property Some debts will have to be paid and kept owned. Before filing bankruptcy, a debtor will current—mortgages on real estate or secured debts have to complete credit counseling with a program such as car loans or loans on mobile homes—or approved by the U.S. Trustee (e.g., in Orange those assets will have to be forfeited. County, many people use Consumer Credit Nevertheless, there are “exemptions” available in Counseling Service of Orange County, a nonprofit bankruptcy that may allow debtors to keep much organization). of their property—including protection for a certain amount of “equity” in a home, mobile Credit counseling is required even if there is no home or car. chance of setting up a payment plan with your creditors. However, some credit counselors may Seniors should investigate bankruptcy as an option offer Debt Management Plans as a way of without losing sight of these and other special avoiding bankruptcy. This may be a viable concerns. In some cases bankruptcy can offer alternative for some people but often does not significant relief from pressing debts while work for seniors on fixed incomes. In addition, allowing seniors to keep most or all of their debtors will be required after filing bankruptcy to property. complete a personal financial management course before receiving a “discharge”. What is bankruptcy? Bankruptcy is a federal court proceeding that What are my alternatives to filing? immediately stops creditors from taking actions to It is a good idea to meet with an attorney to get collect debts. It gives debtors the time and the legal advice about whether bankruptcy is your best legal means to get a fresh financial start. option. Credit counselors cannot give you legal advice and your particular circumstances need to When a bankruptcy is filed it immediately stops all be considered by an attorney before you decide to debt collection activity such as foreclosures, file bankruptcy. repossessions, utility shut-offs, lawsuits, levies and wage garnishments. The bankruptcy court will Often an alternative to filing bankruptcy is some supervise which, if any, of these collection kind of repayment plan (Debt Management Plan) activities may continue. with your creditors and these plans are frequently Bankruptcy Page 3 suggested by credit counselors. You should get this advice from a lawyer, however, because credit “In many Chapter 7 cases, counselors often have a vested interest in getting you signed up for a repayment plan outside of debtors end up keeping all of bankruptcy. their property unless it secures a loan.... If your property secures Filing bankruptcy may not always solve the a loan that you can not afford to problems of older consumers. If you are on a fixed income and have medical bills that will keep pay, you will have to forfeit the accruing in the future, the debt will pile up again property….” and you won’t be able to file Chapter 7 again for 8 years. U.S. Trustee’s Program. They maintain a list on One option that older consumers should consider, their website of approved programs. One of these with advice from a lawyer, is to simply let your approved programs is the Consumer Credit creditors sue you. This sounds bad, but it could Counseling Service of Orange County (CCCS- suit your circumstances better than you think. OC). If you don’t own real property or other valuable A typical credit counseling session lasts about an personal property, it may be very difficult, if not hour or so and can be done in person, on the phone impossible, for a creditor to recover any money or online. These credit counselors charge a from you even if they get a judgment against you. modest fee for their services, but if you cannot Lawyers sometimes use the term “judgment proof” afford to pay you may request a fee waiver before to describe clients that may simply ignore lawsuits the counseling begins. and judgments. If you file bankruptcy you will also have to You could be judgment proof, especially if you complete a “debtor education course” before your own no significant property and your only source bankruptcy case can be completed. This course of income is “exempt” (protected from levy or may take a little longer (about two hours) and must garnishment) such as Social Security or some also be done by an “approved” counseling service. pension payments. It is very important to get legal advice about these issues so that you understand all of your rights and any alternatives to What are the different types of bankruptcy that you might have. bankruptcy to consider? Do I need credit counseling before I Most consumers file under either Chapter 7 or Chapter 13. file bankruptcy? Chapter 7 is commonly known as “liquidation” or Yes. If you plan to file bankruptcy, you must get “straight bankruptcy”. The primary benefit is a credit counseling from a government-approved “discharge” of your debts, although some limited organization within six months before your filing kinds of debts are not dischargeable (see below, date. When you file, you must include a certificate “Will Chapter 7 wipe out all my debts?”). Once of credit counseling completion. debts are discharged, the creditors who were owed the money are porhitied from suing or attempting This credit counseling must be done by counselors to collect the debts in the future. that are “approved” by the Department of Justice’s Page 4 Bankruptcy You will have to attend a “meeting of creditors” In Chapter 7, some of your property may be conducted by your bankruptcy Trustee. This is “exempt” and you will be allowed to keep it (see not a court hearing. Your creditors are notified below, “Will I get to keep any property?”). and allowed to attend if they choose. Typically, Property that is not “exempt” will be sold by a this meeting is short. You are placed under oath Trustee who “liquidates” the property to pay by the Trustee and asked a few simple form-like creditors. questions about your bankruptcy papers and your financial situation. In many Chapter 7 cases, debtors end up keeping all of their property unless it secures a loan In most Chapter 7 cases, you will only have to (mortgages or car loans are examples of “secured attend this “meeting of creditors” and you won’t loans”). If your property secures a loan that you need to go to court. If complications arise in your can not afford to pay, you will have to forfeit the case, you may have to appear before a judge in property and Chapter 7 will not change this court. If so, you will receive notice of the date outcome. and time of the hearing from the court or from your attorney. Chapter 13 is for consumers that can afford to establish a payment plan in order to pay some or What does it cost to file all of their debts over a period of years using their current income. bankruptcy? Chapter 13 is most often used by consumers that The court filing fee is $299 to file under Chapter own a home or other valuable property that they 7 and $274 to file under Chapter 13. This fee is wish to keep despite having money problems. If paid directly to the bankruptcy court and does not this applies to you, and if you have income from include any fees charged by your attorney. There which you can afford to make regular, scheduled is a procedure available that allows you to pay payments plus something extra to pay back this filing fee in installments. delinquencies over time, then Chapter 13 could be right for you. In some limited cases, the court has the power to waive this filing fee for a Chapter 7 in its entirety. Prior to actually filing a petition either under But to get such a waiver, you will first have to Chapter 7 or 13, you will have to complete a meet certain limited income requirements. The credit and budget counseling program that may filing fee for a Chapter 13 may not be waived, but help in determining whether you would qualify it can be paid in installments. for a payment plan under Chapter 13. Will Chapter 7 wipe out all my In 2005, the bankruptcy law was changed to debts? require a new “means test” that could force higher income seniors into Chapter 13. This test sets Chapter 7 will eliminate all your debts except standards meant to determine if individuals have a those that the law defines as “nondischargeable”. certain amount left over after paying all their Debts that are automatically considered monthly bills which could be paid to unsecured “nondischargeable” include child support, creditors over time. Despite this, most consumers alimony, fines, most income taxes, most student still qualify for Chapter 7. loan obligations and government benefit overpayments. Will I have to go to Court? Certain other debts may become Bankruptcy Page 5 “nondischargeable” if the individual creditors ask keep— the court for a “determination” that their particular debts should not be discharged. But ● $150,000 equity in your home if these types of debts are strictly limited by you are age 65 or older or mentally or physically definition. These include debts incurred by fraud disabled or if you are age 55 and have very or debts resulting from willful and malicious limited income. For most others the exemption is harm. $50,000 equity for an individual, $75,000 for a family. The “equity” protected as exempt refers In addition to “nondischargeable” debts, Chapter to the value over and above what is owed on the 7 will not provide significant protection from property in mortgages or other voluntary liens. “secured debts.” Chapter 7 will temporarily stop ● $2,550 equity in a motor vehicle a foreclosure on real estate or the repossession of (or the aggregate equity in more than one a car, but ultimately, you will have to continue vehicle). making payments on the underlying debts (the ● Ordinary and necessary household mortgage or the car loan) if you intend to keep the furnishings, appliances, wearing apparel, property. provisions and other personal effects. ● Health aids, prosthetic and In the case of “secured debts”, if you intend to orthopedic appliances. forfeit the secured property (i.e., let the creditor ● $6,750 in jewelry, heirlooms, and foreclose on it or repossess it), Chapter 7 does works of art. “discharge” or eliminate the debt. You will be ● $6,750 in tools and other items that freed from any future obligation to make you need for your work (or up to $12,150 for payments on the loan or the mortgage. items used by both spouses who do the same work). Will I get to keep any property? ● $2,700 each in a bank account in which your Social Security payments have been The bankruptcy laws generally allow you to keep directly deposited ($4,050 if the one payment is all property that is “exempt” under the law that directly deposited for the benefit of both spouses). applies in your state. You will need to get ● Life insurance policies with a cash specific legal advice about which “exemptions” value of up to $10,775 each. Married couples may apply to your property and in what amounts. The combine this exemption; it doesn't matter whether information provided below is limited in nature the policies belong to you, your spouse or both of and the legal rules that apply are complex and you. often subject to interpretation. ● Amounts held in most public and private retirement plans. As a general rule, most debtors find that they get to keep virtually all of their personal property The above list is not intended to be complete and (excluding very valuable items) and a home, is only provided for general information purposes. assuming there is not a great deal of “equity” in You will need to consult your lawyer to determine the home (see below). When you file bankruptcy, which exemptions may apply to your property exemptions must be specifically “claimed” and and under what circumstances. listed on a schedule that is filed with your petition. If California “exemptions” apply to you, then among other things you may be allowed to Page 6 Bankruptcy When should I use Chapter 13 The Legal Aid Society of Orange County instead? (LASOC) and the Senior Citizens Legal Advocacy Program (SCLAP) recommend that You may choose to file Chapter 13 if you have you contact the Legal Resolutions Center at 1- excess income over your reasonable expenses 714-571-5204 where you can get access to a and if you are willing to commit that excess State Bar Certified referral service that will direct income to repay some or all of your debts over a you to a lawyer. period of 3 to 5 years. A significant benefit to Chapter 13 is that it allows you to keep valuable LASOC also provides limited access to a self- property that is not “exempt”—like a home or help “Bankruptcy Clinic” that will assist some car with lots of equity—but you must be able to qualified debtors to prepare the forms and afford the payments required under a Chapter 13 documents necessary to file their own Chapter 7 plan. bankruptcy petitions “in pro per” (without legal representation). However, access to this Clinic is You might consider filing Chapter 13 if you have subject to strict limitations. Admittance to the regular income and you— Clinic is only possible in cases that present no complications and are considered “no asset ● own a home with equity but are in cases” (no real estate, no other significant assets, danger of losing it due to foreclosure. no unusual claims or problems). ● got behind on debt or credit card payments, but can catch up if given some time. To be considered for a spot in this Clinic, you ● have other valuable property that must contact our Hotline (1-800-834-5001 or 1- is not “exempt”, but you can afford to pay your 714-571-5200) to determine if you are eligible. creditors over time. If you are considering bankruptcy, you should make a list of all of your creditors and your debts A payment plan may be used to “cure” or pay prior to calling the hotline. Once you are back delinquencies on a home mortgage even if determined to be eligible to participate in the you are in foreclosure. However, under this type Clinic, you will be contacted and given an of plan, you must be able to pay all current appointment for the next available Clinic. mortgage payments (from the date of the bankruptcy petition) plus an additional amount to “cure” the defaulted payments over an allowed time period. Can I file without an attorney? How do I find an attorney? It is possible for some people to file bankruptcy without an attorney, but most people will need some legal assistance. The paper forms are complicated and you may lose valuable property rights or other rights if you don’t know the law.
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