When Is It Too Late for Bankruptcy to Help Me?

Bankruptcy is the most powerful tool available to anyone in Michigan seeking to escape unmanageable debt. However, there can be a point where bankruptcy protection is sought too late. Or, at least, there is a time when it is too late to obtain the full assistance available through Chapter 7 or Chapter 13 bankruptcy.

This Article will explain the timing considerations involved in a bankruptcy filing—and with certain types of debt or collection measures.

As with everything, timing is key.

First, however, we’ll explain a few basic concepts about the bankruptcy filing process.

 

A Brief Overview of the Bankruptcy Process

 

Bankruptcy is a Federal legal process designed by the US Congress to provide debt relief for “the honest but unfortunate debtor.” Because it is a Federal legal process, it “preempts,” or overrides, the state law-based default remedies memorialized in the various contracts, notes, mortgages, loan applications, hospital admission paperwork, and other “writings” that you have signed.

This “preemption” is what allows the discharge of that debt to work. Because the US Bankruptcy Code and the US Bankruptcy Court’s Order of Discharge says you don’t have to pay your debt any longer—you don’t. No matter what a contract says. Or even a Michigan state court money judgment order.

A successful Chapter 7 or Chapter 13 bankruptcy proceedings results in a discharge of the debt that you owed prior to the filing of the bankruptcy. While there are exceptions to the types of debts that can be discharged listed in the Bankruptcy Code, most debts are dischargeable.

A bankruptcy should very effectively provide you with a fresh financial start in life.

A creditor who violates the “discharge injunction” arising from the Order of Discharge is subject to sanctions and money judgments of its own.

Because it is designed to be a “once in a lifetime” process, you can only file bankruptcy so often. A Chapter 7 bankruptcy case can only be filed once every 8 years.

A Chapter 13 bankruptcy case can be filed more often and even without an entitlement to a discharge. However, you can receive a discharge from a Chapter 13 only if you have not filed a prior bankruptcy case and received a discharge within the past 4 years.

Chapter 7 vs. Chapter 13 Bankruptcy

 

So what is the difference between Chapter 7 and Chapter 13 bankruptcy?

 

Chapter 7 Bankruptcy, Briefly

 

Chapter 7 bankruptcy is roughly a 4-month process. It will discharge your debt without requiring that you repay any of it. It does not allow for the restructuring or reorganization of debt. Either you discharge it, or, if it is of the non-dischargeable type, you don’t.

Creditors can be repaid some of what you owe them through the Chapter 7 process by way of the seizure and liquidation of assets. Thus, it is vital that you consult a Michigan bankruptcy attorney before filing a Chapter 7 bankruptcy.

Most Chapter 7 debtors do not lose any property because the Bankruptcy Code allows a good amount of the normal stuff that normal people own to be “exempted” from the Bankruptcy Estate created upon filing.

Exempted property is protected from the power of the Chapter 7 Trustee assigned to the case to seize assets, sell it off, and distribute the sale proceeds to your creditors.

There are limits to these “exemptions,” however.

 

Chapter 13 Bankruptcy, Briefly

 

In Chapter 13 bankruptcy, no property is liquidated at all. This is because you do repay some of what you owe through the bankruptcy process.

Chapter 13 is a debt “reorganization” bankruptcy process. It lasts 3-5 years. During each month of that timeframe, you send a monthly “Chapter 13 plan payment” to the Chapter 13 Trustee assigned to your case. The Chapter 13 Trustee takes that payment and distributes it to your creditors in a priority order depending on what type of debt a creditor holds.

Secured debts, such as mortgages and car loans, are paid first. “Priority” unsecured debt—such as recent tax debt—is paid next. Then, contract and lease payments are made. Finally, non-priority unsecured debt such as credit card debt, medical debt, back rent, and others are paid last.

Low priority, unsecured creditors only receive whatever is left over after all of the higher priority creditors are paid. Whatever they receive is all that they get, with any unpaid balance still owed “on paper” then totally discharged.

Because Chapter 13 allows you to prioritize your debt payment in this way, it is the form of bankruptcy that will allow you to save a home from foreclosure, strip off under-secured second mortgages, and receive other nifty benefits.

 

When Is It Too Late for Bankruptcy?

 

Despite its benefits, there is a point where a bankruptcy filing will provide less than the full debt relief it might have.

That said, there is no “statute of limitations” on your ability to file bankruptcy. If your debt is 1 year old or 100 years old, a Chapter 7 or Chapter 13 bankruptcy will make it vanish. (Again, there are some types of debt that are excepted from discharge by the Bankruptcy Code. And, obviously, a 100-year old debt is not likely to be collectible for other reasons.)

However, there are points at which even a Chapter 7 or Chapter 13 bankruptcy cannot “un-ring the bell” in terms of specific debt collection activities.

 

1. Home Foreclosure

 

A Chapter 13 bankruptcy will allow you to save a home from foreclosure only for so long. Once the property is sold at a sheriff’s sale auction by the county, you can no longer stop the foreclosure with the bankruptcy filing. It will be too late to use the Chapter 13 payment plan to bring the mortgage current.

If you have received a letter from your mortgage servicer’s foreclosure  lawyer warning you of imminent foreclosure proceedings, you need to speak with a Michigan bankruptcy attorney immediately.

If you’ve received a 90-day notice with the date of scheduled foreclosure auction, the clock is truly ticking for your continued homeownership options.

 

2. Garnished Funds

 

If a creditor holding a money judgment against you has served you with a Notice of Intent to Garnish or has begun garnishing your paycheck, bank account, or Michigan state tax refund, time is also of the essence.

You will squash that money judgment and any ongoing garnishment with a bankruptcy filing at any time. The clock is not ticking for you there.

However, if you don’t want to lose money in the first place, a bankruptcy attorney should be consulted quickly.

Further, once you do file for bankruptcy (particularly) Chapter 7, creditors are required to return any funds garnished within the 90 days prior to the date of bankruptcy filing—so long as the funds can be exempted in your schedules along with other property.

But they aren’t going to do it unless demanded. Even then, many resist. You’ll need a good and aggressive bankruptcy lawyer to make this demand for you.

As to Michigan state tax refund garnishments, case-law has held that these garnishments constitute a “lien” on the refund if filed by the creditor with the Department of Treasury more than 90 days prior to filing. This means that the creditor won’t have to return any garnished funds even if collected within that 90-day pre-filing period.

Timing here is everything.

 

3. Eviction

 

Bankruptcy provides a very, very limited solution to a threatened eviction, period. It will discharge back rent owed to a landlord or former landlord, this is true.

However, if your  landlord has already obtained a judgment of possession for your rental premises, a bankruptcy filing will not only not halt your removal from the premises but the
“automatic stay” injunction that activates upon filing to prevent most collections activities will not apply at all to the eviction process.

Your landlord will not be able to demand payment from you any longer, once you file, but you will be required to vacate your premises unless you place a specific deposit covering back rent owed with the Bankruptcy Court Clerk along with the filing of your case.

Few can afford to do this if they haven’t been able to afford to pay the rent in the first place.

If a bankruptcy is filed prior to a Michigan State Court’s issuance of a possession order, the bankruptcy will very briefly stop an eviction with the Automatic Stay. But only until your landlord files a motion for relief from that stay with the Bankruptcy Court.

 

4. Vehicle Repossession

 

As with home foreclosure, a repossessed vehicle can only be remedied through bankruptcy if you file before it is sold at auction.

Once a repossessed vehicle is auctioned off, the only thing that bankruptcy will do for you is allow you to discharge any remaining “deficiency” debt related to the car loan.

A deficiency debt is the amount you may still owe on the original loan contract amount after the auction proceeds are deducted. (For example, if you owe $10,000 on your car loan, and then the car is repossessed and auctioned for $5,000, you will owe the remaining $5,000 as a deficiency judgment.)

If your car has been repossessed and you have received a notice with an auction sale date, you should consult a bankruptcy attorney very quickly.

 

5. Tax Liens

 

Tax liens may be unaffected by a bankruptcy filing. Depending upon the value of the property to which the tax lien attaches, Chapter 13 bankruptcy may offer a means a removal of the lien. Otherwise, even if the underlying tax debt is discharged in the bankruptcy, the tax lien itself is often unaffected.

This highly complex issue should be discussed with an experienced bankruptcy attorney.

For present purposes, the takeaway should be that it is better to file a bankruptcy case before the IRS or Michigan Treasury perfects any tax lien against your property.

If you have delinquent tax debt that you cannot afford to pay, a bankruptcy is best pursued before you acquire any resulting tax liens.

 

6. Chapter 7 Asset Protection (Increases in Property Value)

 

You may be perfectly eligible to file a Chapter 7 bankruptcy in terms of your income and its effect upon the results of the “Means Test” (see below). But is it a good idea?

As noted above, you can lose property in Chapter 7 bankruptcy if it is worth more than the dollar value cap on the statutory exemption that might be used to protect that property from the Chapter  7 Trustee’s liquidation process.

Sometimes, this is fine. Having your debt erased in exchange for the loss of some property you may no longer care much for (or which costs $X to maintain) may be a great trade-off.

Generally, however, most people prefer to avoid this possibility. Especially when the property in question is the house in which they live.

Your home may be worth a low amount today, but what about tomorrow? That comic book may be worth nothing today but what about next week, when it is developed into a major hit motion picture?

Whatever the case, the value of property (especially real estate) may change on a daily basis. If you wait to file for bankruptcy until the value of your property skyrockets, the bankruptcy process may end up a less than ideal solution for you.

 

7. Loss or Gain of Income (Chapter 7 Eligibility or Chapter 13 Affordability)

 

You can earn too much money to be allowed to file for Chapter 7 bankruptcy. That is, in order to file for Chapter 7, you must “pass” the so-called Means Test that determines whether or not this is the case.

The Means Test averages all of the income earned by every wage-earner in your household (whether a household member is jointly filing with you or not) over the 6 months prior to the date you file for bankruptcy. It uses that average to determine whether your household earns more than or less than the median income in your geographic area for a household of your size.

If you are above the average, Chapter 13 bankruptcy will be the only option available to you.

Thus, if you don’t earn much money now, or are unemployed with no specific job offer or prospect on the horizon, this might be a good opportunity to explore your Chapter 7 options.

However, if, next month, you receive a lucrative job offer, that ship will have sailed.

On the Chapter 13 side of things, the question will be one of affordability rather than eligibility.

Your monthly Chapter 13 plan payment is equivalent to your monthly household “net” income. That is, it is the amount left over on average when your necessary household expenses are deducted from your household take-home pay.

Today, that amount of money may be a few hundred bucks. While you must report any positive income increases and adjust your plan accordingly, it is certainly easier to have a plan approved when the math is simple.

 

When It Is Too Late for Bankruptcy: The Bottom Line

 

The bottom line is that the question of when to file for bankruptcy is among the most crucial questions that need to be answered when considering the option.

An experienced Michigan bankruptcy attorney can help you answer this question—and quickly.

Attorney Walter Metzen is a Board Certified Bankruptcy Expert who has successfully assisted thousands of Metro Detroit Chapter 7 and Chapter 13 bankruptcy clients for over 30 years.

If you are considering filing for bankruptcy, contact us now to schedule your free initial consultation.