Before filing bankruptcy, a person must first obtain a certificate from an approved non-profit, credit counseling agency stating that he or she obtained “pre-bankruptcy counseling.” Pre-bankruptcy counseling usually takes several hours and can be taken by telephone or online or in person. The credit counseling agency will review your financial situation, will perform a budget analysis, and will discuss with you alternatives to bankruptcy. When you are done, the agency will issue you a certificate stating that you completed the required counseling. You need that certificate in order to file bankruptcy.

Do Nothing

If all of your assets are exempt, that is, if they cannot be taken by your creditors legally, then there is virtually nothing they can do to harm you financially. This is true frequently for people who live on social security or who are self employed because they cannot be garnished. If the creditors can sue you, but they cannot take anything you own, there is no financial necessity to file bankruptcy.

Many people, however, though not in danger of sustaining an immediate tangible financial loss, value the peace of mind that comes with a bankruptcy discharge. Whether they arise from the hope of increasing income or simply from the anxiety of constantly being harassed to pay what is owed, these feelings should not be discounted. Many people file bankruptcy to get a fresh start even if they are not in immediate danger of having their wages garnished or their property taken.

Negotiating with Creditors on Your Own

You can attempt to negotiate repayment plans that you can afford with your creditors, offer lump sums in settlement, or get a second job to increase income and pay your debts as they come due. If you’re struggling with significant credit card debt, and can’t work out a repayment plan with your creditors on your own, consider contacting a debt relief service like credit counseling. Depending on the type of service, you might get advice on how to deal with your mounting bills or create a plan for repaying your creditors.

Debt Management Plans

If your financial problems stem from too much credit card debts or your inability to repay these debts, you can consider enrolling in a debt management plan (DMP). In a DMP, you deposit money each month with the credit counseling organization. It uses your deposits to pay your unsecured debts, like your credit card bills, student loans, and medical bills, according to a payment schedule the counselor develops with you and your creditors. Your creditors may agree to lower your interest rates or waive certain fees. But it’s a good idea to check with all your creditors to be sure they offer the concessions that a credit counseling organization describes to you. A successful DMP requires you to make regular, timely payments; it could take 48 months or more to complete your DMP. Ask the credit counselor to estimate how long it will take for you to complete the plan. You may have to agree not to apply for — or use — any additional credit while you’re participating in the plan.

DMPs are not for everyone. They only address credit card debt and do not address other unsecured debts like medical bills or payday lenders who do not participate in the plans. Don’t sign up for one of these plans unless and until a certified credit counselor has spent time thoroughly reviewing your financial situation, and has offered you customized advice on managing your money. Even if a DMP is appropriate for you, a reputable credit counseling organization still can help you create a budget and teach you money management skills.

Debt Settlement Programs

Debt settlement programs typically are offered by for-profit companies, and involve them negotiating with your creditors to allow you to pay a “settlement” to resolve your debt — a lump sum that is less than the full amount that you owe. To make that lump sum payment, the program asks that you set aside a specific amount of money every month in savings. Debt settlement companies usually ask that you transfer this amount every month into an escrow-like account to accumulate enough savings to pay off any settlement that is eventually reached. Further, these programs often encourage or instruct their clients to stop making any monthly payments to their creditors.

Although a debt settlement company may be able to settle one or more of your debts, there are risks associated with these programs to consider before enrolling:

1. These programs often require that you deposit money in a special savings account for 36 months or more before all your debts will be settled. Many people have trouble making these payments long enough to get all (or even some) of their debts settled, and end up dropping out the programs as a result. Before you sign up for a debt settlement program, review your budget carefully to make sure you are financially capable of setting aside the required monthly amounts for the full length of the program.
2. Your creditors have no obligation to agree to negotiate a settlement of the amount you owe. So there is a possibility that your debt settlement company will not be able to settle some of your debts — even if you set aside the monthly amounts required by the program. Also, debt settlement companies often try to negotiate smaller debts first, leaving interest and fees on large debts to continue to mount.
3. Because debt settlement programs often ask or encourage you to stop sending payments directly to your creditors, they may have a negative impact on your credit report and other serious consequences. For example, your debts may continue to accrue late fees and penalties that can put you further in the hole. You also may get calls from your creditors or debt collectors requesting repayment. You could even be sued for repayment. In some instances, when creditors win a lawsuit, they have the right to garnish your wages or put a lien on your home.
4. 
   
   
   Debt Consolidation
   You may be able to lower your cost of credit by consolidating your debt through a second mortgage or a home equity line of credit. But these loans require you to put up your home as collateral. If you can’t make the payments — or if your payments are late — you could lose your home.
   What’s more, consolidation loans have costs. In addition to interest, you may have to pay “points,” with one point equal to one percent of the amount you borrow. Still, these loans may provide certain tax advantages that are not available with other kinds of credit.
   
   
   Loan Modifications
   Homeowners facing a major financial hardship that could lead to foreclosure can work with their lender to get a loan modification, sometimes called a mortgage modification, restructuring or workout plan, that will change the terms of the mortgage loan so they can afford the payments payment. The mortgage company can extend the length of the loan, lower the interest rate, or even forgive some of the principal. Unfortunately, there is no recourse to challenge the mortgage company’s denial of a modification. You must be careful that the lender is not proceeding with the foreclosure sale of the home at the same time that it is processing the loan modification application. Once the home is sold at auction, you no longer own it. Other alternatives are to short sale your home, whereby you negotiate a deal with the lender to allow you to sell the home for less than what you owe, transferring the property back to the lender by a deed in lieu of foreclosure, or finding a tenant who can pay rent that will allow you to pay the mortgage.
   
   
   Reverse Mortgage
   If you’re 62 or older – and looking for money to pay off your credit card debt or to pay for healthcare expenses – you may consider a reverse mortgage. It’s a product that allows you to convert part of the equity in your home into cash without having to sell your home or pay additional monthly bills.
   
   In a “regular” mortgage, you make monthly payments to the lender. In a “reverse” mortgage, you receive money from the lender, and generally don’t have to pay it back for as long as you live in your home. The loan is repaid when you die, sell your home, or when your home is no longer your primary residence. The proceeds of a reverse mortgage generally are tax-free, and many reverse mortgages have no income restrictions
   
   
   If you’re considering a reverse mortgage, be aware that:
1. Lenders generally charge an origination fee, a mortgage insurance premium (for federally- insured HECMs), and other closing costs for a reverse mortgage. Lenders also may charge servicing fees during the term of the mortgage. The lender sometimes sets these fees and costs, although origination fees for HECM reverse mortgages currently are dictated by law. Your upfront costs can be lowered if you borrow a smaller amount through a reverse mortgage product called a “HECM Saver.”
2. The amount you owe on a reverse mortgage grows over time. Interest is charged on the outstanding balance and added to the amount you owe each month. That means your total debt increases as the loan funds are advanced to you and interest on the loan accrues.
3. Although some reverse mortgages have fixed rates, most have variable rates that are tied to a financial index: they are likely to change with market conditions.
4. Reverse mortgages can use up all or some of the equity in your home, and leave fewer assets for you and your heirs. Most reverse mortgages have a “nonrecourse” clause, which prevents you or your estate from owing more than the value of your home when the loan becomes due and the home is sold. However, if you or your heirs want to retain ownership of the home, you usually must repay the loan in full – even if the loan balance is greater than the value of the home.
5. Because you retain title to your home, you are responsible for property taxes, insurance, utilities, fuel, maintenance, and other expenses. If you don’t pay property taxes, carry homeowner’s insurance, or maintain the condition of your home, your loan may become due and payable.
6. Interest on reverse mortgages is not deductible on income tax returns until the loan is paid off in part or whole.

In a chapter 7 bankruptcy, you eliminate (“discharge”) your debts, such as credit cards, personal loans, installment loans, payday loans, and medical bills, in exchange for which the bankruptcy trustee who administers your case has the right to sell your non-exempt property and distribute the proceeds among your creditors. For the overwhelming majority of people who file bankruptcy all of their property is exempt and cannot be touched. They get rid of their debts but get to keep what they own.
There are of course exceptions to these general rules. Some people who file bankruptcy do own non- exempt assets, which the bankruptcy trustee will liquidate for the benefit of your creditors. Moreover, bankruptcy will not eliminate child support or alimony, some income taxes and property taxes, and student loans in most cases. Debts that were incurred through fraud, such as by submitting a willfully false loan application, can be excepted from discharge.

During the bankruptcy, you have the benefit of the automatic stay, which means that all collection activity against you must cease. No one can write to you, call you, sue you or garnish you. No one can foreclose your home or repossess your car, without first getting permission from the bankruptcy court, which is only granted in carefully delineated circumstances.

Anyone filing a bankruptcy petition must appear at a bankruptcy meeting, where the bankruptcy trustee will ask them what are usually routine questions about their paperwork and finances. Creditors are allowed to appear and ask questions although in practice they rarely do so. Usually, about 60 days after the creditor’s meeting the debtor will receive a discharge order eliminating their debts. The whole process from start to finish takes 90-120 days.

In a chapter 13, individuals who have regular income make payments to the bankruptcy trustee over a three to five year period. Generally, the payment you make is calculated by taking your actual take-home income and subtracting your actual living expenses. This disposable income is paid monthly over the three to five years. After all payments have been made, the remaining balances owed on your unsecured debts are discharged.
If your family income is above the median family income for the same size family in the state, there are special rules that can compel you to pay more than would other debtors. Above median debtors have to make payments for the maximum five year period before getting a discharge. In addition, they are subject to a means test, which means that rather than allowing you to claim your actual living expenses, you would only be able to subtract what the government claims are reasonable expenses. The net effect is that above-median income filers usually have to pay more monthly than below-median income filers.

Certain debts known as priority debts have to be paid in full in chapter 13. These debts include back child support, income taxes for the past three years, or property taxes due over the past year. Sometimes income taxes are better addressed outside of the bankruptcy through making an offer in compromise directly to the IRS, which unlike the bankruptcy court, can forgive some or all of the priority taxes.

As in chapter 7, chapter 13 filers must appear at a bankruptcy meeting to answer questions about their paperwork and their finances. In addition, chapter 13 filers submit a reorganization plan that describes what they are going to pay and how their priority and secured creditors are going to be treated during the bankruptcy. The reorganization plan must be approved or confirmed by the court. Usually Chapter 13 cases last 3 to 5 years, and at the end of the case, the debtor receives her discharge.

Most people file chapter 7, because they have no non-exempt assets that the bankruptcy court can take and because they cannot afford to make payments on their debt. In certain circumstances chapter 13 is the only choice. Some people make too much money to file a chapter 7. Usually these are people whose family income is above the median income in the state. Families whose income is above the median are and subject to a means test. This is a government formula that determines whether a person is deemed legally to be “abusing” chapter 7 because the government asserts that they can afford to make a chapter 13 payment or need to make lifestyle changes in order to be able to afford a chapter 13 payment.

Other people file chapter 13 in order to keep an asset like a house that they would lose if they filed chapter 7. Chapter 13 allows people with a steady income to keep property, like a mortgaged house or a car, that they might otherwise lose through the bankruptcy process. In Chapter 13, the court approves a repayment plan that allows you to use your future income to pay off your debts for three to five years, rather than to surrender any property. After you make all the payments under the plan, you receive a discharge of your debts.

In a chapter 7 bankruptcy, neither your creditors nor the bankruptcy trustee who administers your estate can sell your exempt property. So what property is exempt? If you live in Virginia, then the most common exempt property is as follows:
$6000 in equity in one or more motor vehicles (eg. If your car is worth $20,000 and you owe $15,000 on it, you would claim a $5000 exemption)
$5000 in household goods and furnishings
$5000 in family heirlooms
$3000 in firearms
$1000 in clothing
$10,000 in any tangible property, including motor vehicles, used in a business
Social security
Retirement accounts that are exempt from taxation (egs. IRA’s, 401K’s) in any amount
Property owned as tenants by the entirety as husband and wife when there are no joint, unsecured Debts
Personal injury claims and awards
$5000 “wildcard” homestead exemption that can be claimed on any other property ($10,000 if age 65 or older)
An additional $500.00 “wildcard” that can be claimed on any other property for each dependent living in your household.

If you rent your home:
In a chapter 7 bankruptcy you get to keep what you pay for. If you rent your house, then you can keep your home as long as you keep paying rent. You have two options in bankruptcy: you can assume the lease, or reject the lease. If you assume the lease, then you keep following the lease just as though you never filed the bankruptcy. You keep paying rent and must catch up on any past due rent, usually within a couple of months of filing. If you reject the lease, you walk away owing nothing but you will have to move out. If you do not move out within 60 days, not only will the landlord be able to get permission from the bankruptcy court to evict you (this is called “getting relief from the automatic stay”), and you might be responsible for rent for the months you stay after the 60 day period expires.


If you own your home:
If you own your house, there are two factors that affect whether you can keep your home in a chapter 7. The first factor is the amount of equity, if any, in the property. In a chapter 7 bankruptcy, the general rule is you can keep your home it is underwater or has little or no equity, and if you keep paying the mortgage. Remember that the basic premise of chapter 7 is that in return for discharging (wiping out) your debts, the bankruptcy trustee can sell your non-exempt assets for the benefit of your creditors In Virginia, unlike other states, a home is not automatically exempt just because it is your home. Therefore, special care must be taken to determine whether a debtor would keep his home in a chapter 7 bankruptcy.
The key is to determine whether the chapter 7 trustee would make money from the sale of your home that she can use to pay to your creditors. If you own your home free and clear, you would definitely lose it in a chapter 7. However, if there is little or no equity, you can keep your house. With little or no equity, the bankruptcy trustee will not touch the house, because he would obtain little or no money for your creditors if he sold it. So for example if your house is worth $200,000 and you owe $220,000 on the mortgage, there is no equity and you can keep the home. In contrast, if your home is worth $200,000, and you only owe $120,000, then their trustee knows he could net about $40,000 after costs of the sale from selling your home to an investor. In this example, she might sell the home to distribute the $40,000 to your creditors.
If there is equity in the home but keeping your home is a priority, then you can consider filing a chapter 13 bankruptcy in order to pay out the equity over a three to five year period. For example, if there is $30,000 in equity, after estimated costs of sale, in your home, and the trustee intends to sell it, you can file a chapter 13 bankruptcy and pay the $30,000 to the bankruptcy court over 5 years, at $500.00 per month. To do so, you must be able to afford to make the $500.00 a month payment in addition to resuming your monthly mortgage payments. This is beyond the reach of many if not most debtors.


If you own your home jointly as husband and wife:< p>
The exception to the rule that you lose your house if there is equity, is where the house is titled in the name of husband and wife, with right of survivorship (called ownership as tenants by the entirety or joint tenants with the right of survivorship). If the home is owned as husband and wife with the right of survivorship, then the house can only be taken if there are joint debts, ie. debts in the name of husband and wife. If all the debts are owed by one spouse or the other, and no debts are owed by both, then the house is exempt.

The second factor in determining whether you can keep your home in a chapter 7 bankruptcy you are behind on your mortgage payments. In chapter 7 bankruptcy, you get to keep what you pay for. If you are behind in your mortgage and do not catch up within one or two months, the mortgage company is entitled to get permission from the bankruptcy court to foreclose (getting “relief from the automatic stay”). In chapter 7, your personal responsibility for the mortgage is discharged (wiped out), but the mortgage company’s lien on your house remains. So the mortgage company can get relief from the automatic stay and foreclose when you are behind in the mortgage. For some people in this situation, however, a chapter 13 bankruptcy may provide a mechanism to save their home.

If you are behind in your mortgage payments, a chapter 13 bankruptcy allows you to pay your mortgage arrearages over a period of three to five years in installments. You can get time to catch up on the mortgage. For people who have been unemployed, ill, injured or even imprudent, chapter 13 can allow you to avoid foreclosure and save your home.

There are conditions, however. First, you have to be able to afford to resume making your monthly mortgage payment(s) plus paying 1/36th to 1/60th of the arrearage each month. In bankruptcy, you get to keep what you pay for. You cannot keep the home and not pay the mortgage over the long haul. And this brings up an important point: the bankruptcy court does not have the authority to lower your mortgage payment, it cannot make your mortgage more affordable. If your problem is that you cannot afford your mortgage payment, filing bankruptcy is not going to let you keep your home; it is only going to buy you some time to move.

But there is an exception and it’s an important one. If you have a junior (ie. second mortgage), and if there is no equity in the second mortgage, then in a chapter 13 mortgage you can literally remove the second mortgage (“strip” the mortgage) off the property. For example, if your home is worth $200,000 and you owe $220,000 on your first mortgage and $30,000 on your second mortgage, then the second mortgage has no equity. Under these circumstances, the bankruptcy court can strip the second mortgage off the property and treat it as an unsecured debt like a credit card. If you make all your payments to the bankruptcy court over the three to five year period, the mortgage is discharged and simply ceases to exist.

If you own a car or cars outright and the value of that car or cars is below the allowable exemptions available to you under the law, then yes, you can keep your car or cars. There are certain limited situations where the Trustee may request you pay a portion of the value of an unprotected car and he will transfer those funds to creditors so that they receive some repayment in exchange for allowing you to keep the asset.

If you own a car or cars that are financed with a creditor, then you may only keep that car or cars if you agree to repay the debt owed on it or them. Repaying that debt may require you to sign an agreement with the lender that will make that debt survive the bankruptcy (meaning if you later are unable to pay that debt, you may be subject to collection efforts including repossession, lawsuits, judgments, garnishments, and phone calls). In some circumstances, you might be able to redeem the car by paying a lump sum settlement that is less than the amount owed in exchange for the title. Keep in mind that as set forth above if there is equity in the vehicle or vehicles that cannot be protected using an allowable exemption, then the Trustee may force a sale of the car or may ask you to pay a portion of the value of the car. To avoid this sale, or if you are behind on your car payments, you may be able to file a chapter 13 bankruptcy.

There are several options that can help you save your car in chapter 13 if you are behind in payments. The first option allows you to resume making your regular monthly car payments and in addition allows you to pay your car payment arrearages in installments over a period of time. Secondly, sometimes you can actually lower your car payment. In chapter 13 you can restructure the car loan over 3 to 5 years installments at low-interest rates. Finally, if you bought the car more than 910 days before you filed the bankruptcy, and the value of the car is less than what you owe on the car, the bankruptcy court can actually lower the amount you owe (“cram down”) to what the car is worth.