What you need to know before you file for bankruptcy.
If you're on the brink of drawing down your retirement savings to pay your credit card bills, New Hampshire attorneys have a nearly unanimous word of advice for you:
"Don't," says Sandra Kuhn of Family Legal in Concord.
"Don't," says Scott LaPointe of Brown & LaPointe in Epping.
"Don't," says attorney Stanley Robinson of Tilton.
"Don't," that is, until you talk to a lawyer about the option that no one likes to discuss but more and more people need to consider - bankruptcy.
It's no secret that the lingering toll of the "great recession" is driving more and more Granite Staters to the brink of financial ruin. What's less known is the relief that the law can provide, and the advantages - and limitations - of the "fresh start" that bankruptcy affords.
"Around here, home building was a major employer, but now general contractors and roofers and plumbers and electricians are not getting any work because home building is tied to the economy," says Stanley Robinson. "Blue collar people are in the same situation because they bought a house when they were getting a lot of overtime and now they're not even getting 40 hours."
But even though incomes are down, adjustable loans may be ticking up, and modifications are hard to get - particularly if your income has fallen. "So as a stopgap, people used their credit cards thinking that things would bounce back, and they didn't," Robinson adds. "And now with the credit card debt on top of the rest, things are spinning out of control."
That leads people to look at their savings, if there's any left. Most often that means using retirement savings to pay their monthly bills - especially when total debts are far greater than savings. And that's a huge mistake since bankruptcy law often protects retirement savings from liquidation to pay creditors.
"A sad thing for me is seeing people who have struggled and exhausted their retirement savings just to keep up and end up having to file bankruptcy anyway," says Scott LaPoint. "One of the most important things that people need to know is classic "fresh start" program - at least, that's what people call it. "Through a Chapter 7 a person can get rid of credit card debts, medical bills and unsecured debt," says Sandra Kuhn. "Many times they can keep their house, certain assets and retirement plans."
In fact, the list of items that New Hampshire law exempts from the bankruptcy process is, well, anachronistic. Each party to a bankruptcy can protect up to $100,000 of equity in their principle home, meaning a total of $200,000 for a husband and wife. They can also protect:
Household furniture up to $3,500
One automobile up to $4,000
One pew in a place of worship
Bibles, school books and library to $800
A yoke of oxen, six sheep and one pig ...
... in addition to qualified retirement plans, wages, child support and life insurance payable "to a married woman" or a third party.
Assets that are not exempted are sold off to pay back creditors. They get what they get from the process and the filer is absolved from further responsibility for the obligations, hence the notion of a "fresh start."
But it's not quite that simple. Student loans, for example, are not absolved in bankruptcy. Neither are criminal fines and penalties, alimony, child support and some other obligations. Also remaining are "voluntary liens," meaning secured debts such as mortgages or car loans.
That's why the question of equity in a home becomes important. For a married couple the bankruptcy court will not take their home if it is valued at less than $200,000 - but if they have a mortgage, the lien holder still could. The same applies to the car exemption. Because of that, a Chapter 7 bankruptcy isn't the avenue of choice for someone facing foreclosure.
"If people have fallen behind on their loan but can still make the monthly payments, they can file for a Chapter 13 bankruptcy and pay the arrears over 36 to 60 months," explains LaPointe. "Under a Chapter 13 plan, so long as they keep up with current payments, they keep their house."
The difference between Chapter 7 and Chapter 13 is basically (but not exclusively) this: under Chapter 7 a court sells off your assets, other than those that are exempted by law from the taking, then distributes the proceeds among your creditors. Everyone takes a loss, but at least you're free of collections and lawsuits for most of your debts.
Under Chapter 13 the court endorses a repayment plan that lets you catch up with outstanding debts. The obligations don't go away, but actions like foreclosure and possibly car repossessions are stopped while you satisfy the plan.
Which way to go is frequently not the filer's choice. As a general rule, if your income is higher than the state median, you're not eligible for Chapter 7, only Chapter 13. But there are many variables in that calculation, including just what counts as income, so it's best to let an expert help you figure it out.
In the best case a Chapter 13 filing sets you upon a path that leads back to financial health, where "health" is defined as being current with your obligations, although not necessarily free of them. Whether that's a "fresh start" depends on each filer's expectations.
"I don't think anyone expects they are going to receive anything other than a discharge of debts that are dischargable, or that the 'fresh start' means anything more than no more collector calls and lawsuits," LaPointe says. "This is not a panacea to put them back on the path of economic health unless their income can sustain the payment of all these debts."
Following a Chapter 7, attorneys say, filers may find themselves absolved of most debts and still in their homes, but not entirely unscarred: bankruptcies linger on credit reports for at least seven years, potentially making any "fresh start" harder to achieve.
"None of us has a crystal ball, so it's only speculation to say that in the future, a lender might treat someone differently when they had to file bankruptcy during an economic collapse rather than in good times," LaPoint says. "So they have to assume it will be on their record for a long time."
But even with all the downsides, bankruptcy can still remain the best option - if not the only option - for many New Hampshire residents, especially as the recession drags on and jobs are slow in returning.
"It's going to be scary in the winter," Kuhn says. "A lot of people are suffering and losing their homes. But they shouldn't go to their 401Ks. It's not the best strategy to liquidate your retirement and still not solve the problem." NH