Last week I touched on the details of an Order of Relief and Automatic Stay as they related to freezing the foreclosure process during a bankruptcy. This week I’d like to touch on an issue that affects nearly everyone considering filing for bankruptcy protection; creditor harassment.

Perhaps the most uncomfortable aspect of overwhelming debt is the harassing phone calls and threatening letters that accompany late payments and overdue balances. Collection agencies are relentless and it’s highly unlikely they will listen to or care about your unique financial situation. Because these collectors are compensated by commission, meaning they keep a predetermined percentage of the amount collected they have zero incentive to work with the debtor or to ensure that the debt they are attempting to collect is valid. Repetitive calls from aggressive collectors can be extremely stressful and overwhelming during times of severe financial burden. Not to mention many of the activities conducted by some collections agents are downright illegal.

If you are considering filing for bankruptcy you’ve probably already encountered your fair share of unscrupulous debt collectors. The constant harassment and threats may have even contributed to your decision to file bankruptcy. The bad news is, as the old cliché goes, it gets worse before it gets better.

Once collection agents catch wind of your intention to file bankruptcy the harassing calls and letters will intensify. Their goal is to get you to pay some, if not all, of the collection amount before you are able to file your bankruptcy. A person in the process of preparing a bankruptcy can expect collection companies to use just about every trick up their sleeve to get you to pay. Some of their threats and tactics are even illegal but many collections companies persist on the assumption that you, the debtor, won’t have the time or financial resources to challenge their actions in court. However, there are a few things you can do to stop creditor harassment prior to filing.

Know Your Rights

The Fair Debt Collection Practices Act (FDCPA) protects consumers against unfair collections practices. Under the FDCPA you have the right demand collectors stop calling you by writing what’s called a “cease communication” letter. A cease communication letter will tell the creditor you are no longer willing to discuss the debt with them and under the FDCPA they are no longer legally allowed to contact you except to inform you of actions they are taking to collect the debt or to cease collecting the debt. However, they can not contact you daily to threaten or harass you into paying them money. The letter must in written form, must be dated and it is a good idea to mail it certified to ensure confirmation of delivery.

Some unethical or just unconcerned collection agents might still attempt to contact you after receiving a “cease communications” letter. If the collections attempts persist, you have the right to demand the creditor validates the debt. The FDCPA provides that no debt is automatically considered valid, and therefore gives the consumer the right to obtain proof of said debt and dispute the amount, etc.  If a debtor disputes a collection attempt and requests validation the creditor has five days after the initial conversation to send a letter to the debtor with the amount of the debt; the name of the creditor; and a statement that provides the consumer 30 days to dispute the debt before it will be considered valid. If the debtor disputes the debt or amount within the 30 day period the collector is then obligated to obtain verification of the debt. If the creditor refuses and persists in collection attempts the consumer has a right to sue and/or the debt could be excused by a court.

Collections Attempts After Filing Bankruptcy

Once you have filed for Chapter 7 or Chapter 13 bankruptcy protection collection activity should stop. The Automatic Stay provides that all collections activity cease while your case is in bankruptcy. This includes phone calls, letters, lawsuits, and wage garnishments. Occasionally a stray collections agent will call attempting to collect on a debt. You simply need to inform them you have filed for bankruptcy protection, provide them with your case number and attorney’s contact information and hang up the phone. You do not need to answer any collection agent’s questions or discuss the debt with any person other than your attorney.

A recent news article in the Arizona Republic paints a grim outlook for those facing foreclosure in the coming months. While the article doesn’t deal directly with bankruptcy law it does deal with some of the major contributing factors considered when determining whether or not bankruptcy is a viable option. The article discusses how foreclosures in the Phoenix area dropped to a new 32 month low in November, but warns homeowners that the relief to the plummeting housing market is only temporary as experts attribute the new lows to foreclosure moratoriums put in place by the valleys biggest lenders led by Bank of America.

Bank of America pushed back over two months worth of foreclosures to revise internal policy and counter claims involving “robo-signing” of thousands of mortgage documents without first reviewing them. The article goes on to point out that starting in early 2011 Bank of America will have 2 months and over 8,000 foreclosures to catch up on in Phoenix alone. The ultimate message if you are sitting on the verge of foreclosure; be prepared for paperwork early next year. If you didn’t have a chance to read it you can catch the article here.

The question poised by many homeowners staring at foreclosure is; which is the better option, foreclosure or bankruptcy?  Here are so facts to consider:

Bankruptcy Can Halt the Foreclosure Process

For many homeowners facing foreclosure bankruptcy can help. When your bankruptcy attorney files for bankruptcy, whether it’s Chapter 7 or Chapter 13, the court will automatically issue an Order for Relief including an Automatic Stay. The Automatic Stay provides immediate relief for debtors by requiring creditors to immediately cease all collection activities while the bankruptcy is pending. This includes any attempts to foreclose on a house and evict the tenant.

The Automatic Stay stalls the foreclosure process and typically buys individuals three to four months to catch up on missed payments and reorganize their finances. However, Order of Relief doesn’t permanently put a stop to the foreclosure. Home lenders can ask the court for to lift the stay during the bankruptcy process, especially if the homeowner had been served with foreclosure paperwork prior to the bankruptcy filing date. Your bankruptcy attorney is the best source for information on whether or not your bank is likely to seek a lift on the Automatic Stay.

Bankruptcy Can Keep You in Your Home

Not all forms of bankruptcy can offer complete protection from foreclosure. For example, Chapter 7 protection can delay foreclosure, but inevitably results in the liquidation of most all assets. As a result those filing a Chapter 7 bankruptcy almost always lose their home.

Chapter 13 is more effective at helping borrowers keep their homes. Through Chapter 13 lenders are able to make payment plans to repay the arrearage on their mortgage. There are financial qualifications to ensure you are able to make suitable payments for both your current mortgage as well as the outstanding amounts, but assuming you are able to make all the necessary payments you will avoid foreclosure.

Chapter 13 can also provide relief by potentially eliminating second and third mortgages. Home values have fallen to record lows, and many home owners in the Phoenix area now owe more on their original mortgages than the value of their homes. When the first mortgage is secured by the entire value of a home, there may no longer be equity to secure the later mortgages which may change the status of second or third mortgages to unsecured debt. In Chapter 13 bankruptcy unsecured debt takes last priority and often times does not have to be repaid at all.

Bankruptcy May Lessen the Impact on Your Credit

It’s important to acknowledge that both foreclosure and bankruptcy have adverse impact on your credit standing. However, bankruptcy can be the better option for rebuilding credit. First, bankruptcy discharges most all debt while foreclosure does nothing to reduce credit card, auto loan, or other forms of debt which may have contributed to the overall financial crisis one may be experiencing. By filing bankruptcy you are able to start rebuilding healthy credit quicker. Additionally many banks and mortgage lenders look particularly unenthusiastically upon foreclosures and may be more understanding of a bankruptcy when considering an application for a home loan. Even if you are faced with no alternative to losing your home bankruptcy may be the more effective route.

There are many factors I haven’t presented here which need to be considered when looking at bankruptcy versus foreclosure. Among them are the value and equity of the home, the ability to make timely payments and more. If you are facing possible foreclosure and want to learn if bankruptcy could be a more suitable option for you, the first thing you should do is schedule a consultation with a bankruptcy attorney to review the individual merits of your case. Each bankruptcy is unique and working with an experienced bankruptcy attorney who understands the laws surrounding bankruptcy is pivotal to getting back in control of your financial future.

The timing of the date for filing bankruptcy is important.  You have a small exemption of $150 per debtor for money in your bank account on the date that your bankruptcy is filed.  There is no exemption for cash on hand.  If, on the date your bankruptcy case is filed, you are holding a pay check that was not deposited or any other payment instruments such as cashier’s checks or money orders, the trustee could require that you turn them over to pay something to your creditors.  The trustee is entitled to take any sum over $150 in your bank account for the benefit of your creditors.  The trustee will require that you provide them with a copy of your bank account which shows the sum in your account on the date your bankruptcy was filed.  If possible, you should bring that bank statement with you to the Meeting of Creditors (Sec. 341 hearing) which is usually scheduled approximately 35-45 days after your case is filed.  This is only possible if your bank has issued a bank statement prior to your hearing date prior to your hearing date.

Part of the process of preparing for filing bankruptcy includes monitoring your bank account so that the amount in your account ON THE DATE YOUR BANKRUPTCY CASE WAS FILED will not exceed the amount which is exempt under the law ($150 per debtor if you are using Arizona exemptions).  The following steps should be taken to help you avoid losing money that could have been used to pay your bills:

• Stop using checks to pay bills at least 2 weeks prior to filing bankruptcy.  Remember you have no control over when the payee will cash or deposit your check and if the check has not cleared your bank, the bank will report exactly what was still in your bank account.  It is not wise to simply write checks which are sent out to various payees because the checks may take from several days to several weeks to clear the bank.  Until the checks are actually paid by your bank, that balance is still counted as being available to you in your bank account.  Thus if you were to file bankruptcy at a time during which you have several outstanding checks, the trustee will be entitled to take that amount over $150.  Then when the outstanding checks are presented to your bank, you will have overdraft fees or bounced checks.
• Purchase money orders or cashier’s checks to pay your regular bills or buy groceries, gasoline etc.  This will result in an immediate debit to your account and also provides a convenient receipt.  However, don’t hold the money orders or cashier’s checks; send them out via mail before the date your bankruptcy case is filed.  If you still hold them, it may be possible for you to get cash by seeking a refund from the issuer.  There is no exemption for cash on hand when filing bankruptcy.
• If you use debit cards to pay for anything, the money will come out of your account more quickly than when paying with a paper check; however, it doesn’t happen instantly so be careful to monitor your account during the last few days before filing bankruptcy.
• Schedule the date for filing the bankruptcy case on a date just prior to your next pay day so that your pay check is not deposited just before your bankruptcy case is filed.
• If a large deposit has been made to your account shortly before filing your bankruptcy, the trustee may ask you to document how that money was spent.  You may be asked to provide receipts for the items you purchased or even a list of what you purchased.
• You can monitor your account and purchase money orders or get cashier’s checks for the bills you have to pay and send out those money orders and cashier’s checks prior to the date your bankruptcy is filed.

There were 1,596,355 bankruptcy filings in the Unites States in fiscal year 2010.  Bankruptcy filings have risen almost 14 percent from last October 31st 2009 to September 30th 2010. Maricopa has an increasing rate also.  Seven of every thousand people in Maricopa County filed bankruptcy last year.

Deciding to file for bankruptcy is a major decision that an individual faces.  A hasty decision is never a good idea.  It is usually always a good idea to talk with an attorney so that the individual contemplating bankruptcy has a better understanding of the process, regardless of whether or not that person decides to actually hire the attorney.  You can learn more about all the people involved in a bankruptcy.

The first question that individuals usually ask is how can I afford an attorney if I am filing for bankruptcy?  According to http://www.bankrate.com/brm/news/debt/20070615_bankruptcy_cost_lawyer_a1.asp, there are five ways one can reduce the cost of a bankruptcy attorney.  First, a debtor should add attorney payments to the bankruptcy case.  Debtors can stop making payments on certain debts, such as credit cards, in order to pay for a bankruptcy lawyer.  Second, look for reduced fees and pro bono attorneys.  Many attorneys have free consultations.  Third, limit the scope of the legal representation.  Limited scope of legal representation allows an individual to go to an attorney and have the attorney represent you on only part of your case.  Fourth, another possible route is free legal help.  An individual should ask if their local Bankruptcy Court has a pro se desk.  Finally, there are other resources out there that can be used to help an individual through the bankruptcy process.

The second most frequently asked question is how much do attorneys charge to file a bankruptcy?  According to http://www.ehow.com/about_5318883_much-do-attorneys-charge-bankruptcy.html, each attorney has a different way of charging for a bankruptcy.  Some will charge by the hour and some will charge a flat fee.  However, some will ask for a retainer with the rest of the payment to follow.  In addition to attorney charges, additional fees come about in a bankruptcy that you need to be aware of when choosing a bankruptcy lawyer.

According to http://www.bankruptcylawnetwork.com/2007/06/29/how-do-i-pay-my-bankruptcy-attorney/, most bankruptcy attorneys will offer the option of paying fees in installments, and in many cases an attorney can advise the prospective client how to restructure debt payments in anticipation of bankruptcy in order to free up enough money to pay the fees.  The best tip is to look for a bankruptcy lawyer who offers a free or low cost initial consultation, and get the attorney’s advice.

 Bankruptcy is one of the most difficult decisions an individual ever has to make.  Before making a decision on whether or not to file for bankruptcy, an individual should talk to an attorney and explain his or her situation.  According to http://www.daveramsey.com/article/the-truth-about-bankruptcy/ <http://mail.ssrl.com/exchweb/bin/redir.asp?URL=http://www.daveramsey.com/article/the-truth-about-bankruptcy/> , bankruptcy is not something that he would recommend any more than he would recommend a divorce.  Few people who have been through bankruptcy would report that it is a painless wiping-clean of the slate, after which they just start fresh.  Bankruptcy is listed as one of the top five life-altering negative events that a person can go through along with divorce, severe illness, disability, and loss of a loved one.  Bankruptcy leaves deep wounds both to one’s credit report and to one’s psyche. 

            According to http://www.debtconsolidationcare.com/avoid-bankruptcy.html <http://mail.ssrl.com/exchweb/bin/redir.asp?URL=http://www.debtconsolidationcare.com/avoid-bankruptcy.html> , there are seven reasons to avoid bankruptcy.  One, an individual’s credit is badly hit if that person files for bankruptcy.  Two, an individual may lose their property.  Three, not all of an individual’s debts can be eliminated.  Four, creditors and lenders of an individual may repossess property.  Five, bankruptcy has an adverse effect on an individual’s other finances such as buying a house, renting a home, or buying a car.  Six, an individual may not qualify for a secured loan for at least 2-4 years.  Finally, not all retirement plans are protected, if an individual files for bankruptcy. 

            Remember, there are a lot of benefits to filing bankruptcy, if a person has no other option.  However, a person who is contemplating filing for bankruptcy has to consider the negative effects of filing for bankruptcy. 

            According to http://www.financial-edu.com/why-should-you-avoid-bankruptcy.php <http://mail.ssrl.com/exchweb/bin/redir.asp?URL=http://www.financial-edu.com/why-should-you-avoid-bankruptcy.php> , there are four good ways to avoid bankruptcy.  One way to avoid bankruptcy is to do debt consolidation.  Another way to avoid bankruptcy is through individual voluntary arrangements which enable an individual to reach a compromise with their creditors and avoid the consequences of bankruptcy.  Third, an individual could use counseling services from many free organizations for effective debt management.  Finally, an individual has the option to sell off everything, including their valuable assets, to pay off their various debts.

Just like individual debtors, a corporation can file for bankruptcy as well.  Just like an individual, a corporation must weigh the pros and cons of filing bankruptcy.  According to http://www.ehow.com/way_5717286_procedures-corporation-filing-bankruptcy.html, filing for bankruptcy on behalf of a corporation is different from filing as an individual, even though a corporation is treated as a separate legal entity under corporate law.  The financial and tax consequences of bankruptcy for a corporation can be complex and hard to predict.  Before a bankruptcy application is finalized, these consequences need to be taken into account.  

There are two main forms of corporate bankruptcy.  There is a Chapter 7 bankruptcy where a trustee is appointed by the court to supervise corporate assets, liquidate the assets, and distribute money to the corporate creditors.  In a Chapter 11 bankruptcy, the corporation submits a plan for reorganization of its operations.  According to http://www.corporationbankruptcy.net/, many businesses choose a Chapter 7 corporation bankruptcy when they will shut down the business or “go out of business” and liquidate all their assets.  One result of a Chapter 7 corporate bankruptcy is the loss of jobs for the company’s employees.  Sometimes a company makes this choice based on hardship within the company; other times the company’s creditors make the choice to file a Chapter 7 corporate bankruptcy. 

What happens to the stocks of a corporation, if the corporation files for bankruptcy?  According to http://www.sec.gov/investor/pubs/bankrupt.htm, a company’s securities may continue to trade even after the company has filed for bankruptcy under Chapter 11.  In most instances, companies that file under Chapter 11 of the Bankruptcy Code are generally unable to meet the listing standards to continue to trade on NASDAQ or the New York Stock Exchange.  However, there is no federal law that prohibits trading of securities of companies in bankruptcy.  Regardless, investors should be cautious because buying stock in companies that have filed a Chapter 11 bankruptcy can be risky.

Deciding whether or not to file bankruptcy is a huge decision as well as a very personal decision.  There are no set rules that say when an individual should file bankruptcy.  However, there are many different sources out there that can offer advice as to when it might be appropriate for an individual to file for bankruptcy.

According to http://www.bankrate.com/finance/money-guides/get-the-facts-on-bankruptcy.aspx, there are a number of things to consider if you are facing bankruptcy.  First, the debtor should see if they can solve their financial problems without bankruptcy.  Second, a debtor should not file until they have fixed the problem that has gotten them into their current financial situation.  For example, if a debtor is not going to have a clean slate 6 months from now then the debtor will just have a new set of bills and no bankruptcy options.  Third, a debtor should be aware of the ways to reduce the cost of filing for bankruptcy.  There are ways to cut the filing fees for bankruptcy.  Finally a debtor should know that bankruptcy doesn’t necessarily mean having to give up their car.  A debtor may be able to reaffirm their loan and keep their car.

According to http://consumer.abi.org/consumers/should-i-file-for-bankruptcy , some people find it helpful to file a bankruptcy case when they cannot pay their bills and they do not anticipate having the ability to pay their bills in the near future.  People also file because their financial situation is causing them emotional distress or depression, or because they would like to free themselves of debt now, if legally allowed, and have their income and assets to themselves in the future.

Finally, an individual should try to exhaust all other options before filing for bankruptcy.  According to http://money.usnews.com/money/personal-finance/articles/2009/04/21/should-you-file-for-bankruptcy.html, before an individual files for bankruptcy, they should consider whether or not they can work out their financial problems without filing for bankruptcy.  If an individual is unable to, then bankruptcy might be their best option.

Bankruptcy is a huge decision for a person in debt.  The question becomes for that person, when does filing for bankruptcy make sense?  According to http://www.investopedia.com/articles/pf/08/bankruptcy-filing.asp#12870097117542&close <http://mail.ssrl.com/exchweb/bin/redir.asp?URL=http://www.investopedia.com/articles/pf/08/bankruptcy-filing.asp%2312870097117542%26close> , there are a few circumstances in which filing for bankruptcy can be beneficial.  The first is if the debtor has already tried to negotiate with their creditor.  If a debtor has tried to negotiate with a creditor and they have not been successful, then a debtor might have no choice but to file for bankruptcy.  Second, if their liabilities exceed their assets, a debtor may have no choice.  The major reason that debtors file bankruptcy is because they cannot pay their debts.  The third reason that filing might be right is if a debtor is trying to keep their IRAs.  The federal bankruptcy laws shield a debtor’s retirement accounts.  A debtor might want to consider filing bankruptcy to protect these accounts.

Deciding whether to file bankruptcy or not is a personal decision.  According to http://consumer.abi.org/consumers/should-i-file-for-bankruptcy <http://mail.ssrl.com/exchweb/bin/redir.asp?URL=http://consumer.abi.org/consumers/should-i-file-for-bankruptcy> , some people find it helpful to file a bankruptcy case when they cannot pay their bills and they do not anticipate having the ability to pay their bills in the near future.  Other people file because their financial situation is causing them emotional distress or depression, or because they would like to free themselves of debt now, if legally allowed, and have their income and assets to themselves in the future.  Some people may find that bankruptcy is worth it even if they do lose some of their assets.

There are no set rules as to when a debtor should file for bankruptcy.  It is a personal decision and only the debtor truly knows if bankruptcy is right for them.  According to http://www.bankruptcyhq.com/bankruptcy-should-i-file <http://mail.ssrl.com/exchweb/bin/redir.asp?URL=http://www.bankruptcyhq.com/bankruptcy-should-i-file> , studies suggest that bankruptcy may be right for a debtor in any of the following scenarios: the debtor has a large number of dependents, the debtor is older in age, the debtor has a large amount of dischargeable debt, or the debtor has a small amount of savings and assets. These are all important things to consider in deciding whether to file for bankruptcy, but each debtor must weigh the pros and cons based on their individual circumstances.

Considering Bankruptcy?

Before a debtor decides whether to file a Chapter 13 or Chapter 7 bankruptcy, the debtor should consider some basic options outside of the bankruptcy system.  Sometimes bankruptcy is the only sensible remedy for some debtors because of their debt problems.  However, an alternative course of action makes better sense for others.  According to http://www.moranlaw.net/consider.htm, to explore non-bankruptcy alternatives, a debtor should create a budget for their realistic, monthly expenditures for current living. 

            The first alternative is to do nothing.  For some people who are deeply in debt, the best alternative is to do nothing.  A debtor cannot be thrown into jail for not paying their debts, with the exception of child support, and your creditors cannot collect money from you if you don’t have money. 

            According to http://www.careonecredit.com/knowledge/alternatives-to-bankruptcy.aspx, to see if your creditors can help you, give them a call and explain that you are having trouble with your finances.  If a debtor explains that they are considering bankruptcy, the creditor may be willing to give the debtor an alternative payment plan to help them get through the difficult time.  Except for a few creditors, creditors must sue a debtor in court and get a money judgment before they can go after the debtor’s income and property.  However, an exception to this general rule is that a creditor can take collateral when a debtor defaults on a debt that is secured by that collateral. 

            According to http://www.bankruptcyinformation.com/bankruptcy-alternatives.htm, rather than file bankruptcy, a debtor may consider settling their unsecured debt at a reduced amount.  It is unlikely that an individual could do this independently but there are companies that will help a person negotiate with their creditors.  Also, attorneys may help a debtor negotiate with creditors. 

            If a debtor is contemplating whether bankruptcy is right for them, they should contact a bankruptcy attorney to get further advice.