On this episode Barry is interviewed by Marshall Saunders, the producer at Minnesota Podcasting. The topic of the show is Bankruptcy, which can be a difficult topic to discuss. Barry describes in detail the differences in types of bankruptcy, why you should file, what you should do and know before you file and so forth.
Barry Rosenzweig has been an attorney for over 25 years and is nationally known as a visionary in his profession. Barry Rosenzweig can be reached at (952) 920-1001 in Minnesota and (480) 227-2203 in Arizona. He can also be reach by email at [email protected] or online at www.barrylaw.com.
On today's show, we're going to talk about what can sometimes be considered a difficult subject. Bankruptcy.
Welcome to the Barrylaw legal podcast. Barry Rosenzweig has been an attorney for over 25 years and is nationally known as a visionary in his profession. In each episode, attorney Barry Rosenzweig, interviews, lawyers, real estate agents, lenders, and other professionals that bring popular legal related topics into focus for his listeners. So, get ready for an educational and exciting episode. Now here's your host, Barry Rosenzweig.
Barry Rosenzweig: Hello everybody welcomes to the show. With me in the studio today is the producer here at Minnesota podcasting, Marshall Saunders.
Marshall Saunders: Hi Barry. Thanks a lot for having me on the show today.
Barry Rosenzweig: Thanks for being here.
Marshall Saunders: You know what, I'm going to switch things up today. Usually you are the interviewer and you are asking a bunch of really good and salient questions. I'm going to try to take the mantle from you and try to ask some good and salient questions of you on a particular subject. Does that work for you?
Barry Rosenzweig: Yeah, that sounds like a good idea for today.
Marshall Saunders: Okay, we'll see right. Now, Barry, I know that you work in a number of different areas of law, but the one I'd like to ask about today is bankruptcy and it's kind of a tough subject sometimes for people to ask about and sometimes very personal and it goes with, there's a certain level of societal shame that might come along with the word bankruptcy and what bankruptcy is all about. So, I'd like to be able to ask you some questions that maybe are on the mind of some of the listeners, if that's all right with you.
Barry Rosenzweig: That sounds great.
Marshall Saunders: First of all, and let's start real simple. What is bankruptcy? I mean, what does it mean? What is the concept of bankruptcy?
Barry Rosenzweig: Well, first of all, I think the word bankruptcy really scares people, the word itself. And quite frankly, it's a process that is first of all out designated as allowable in the us constitution. I don't think most people are aware of that. Okay. It used to be where if you didn't have the ability to pay your debts, they basically put you in bankruptcy jail.
Marshall Saunders: That is prison, right?
Barry Rosenzweig: Yes. Okay. That's no longer the case. Bankruptcy is designed for people who have got into a bad situation due to mismanagement of debt, medical bills, divorce, just unable to get in a situation to bring themselves above water. They may have been unemployed, but it allows you to make a fresh start. The government allows you to enter into a bankruptcy and file bankruptcy to get a fresh start.
Marshall Saunders: So, I hear all these numbers, chapter 7, chapter 11, chapter 13. What does that mean? What are the differences between those numbers?
Barry Rosenzweig: Chapter 7 and chapter 13 are for individuals and chapter 11 is really designed for a corporation, not necessarily a small corporation, but particularly a large corporation, a very large corporation. Really It has to do with multimillion dollar companies, public companies, 7 and 13 are designed for individuals, even if they own a small business and a 7 is called the liquidation, which is liquidating your assets to pay off your debts. However, in reality, you are not liquidating your assets, but that's what it's called. A 13 is where it's similar to a loan consolidation where you don't have the ability to file a 7 because there are certain qualifications to do file a seven. You are pushed into a 13 and what happens is they put all your debts together and you then have the ability to pay it off based upon your ability to pay it off over a period of time. At the end of the bankruptcy, very few people pay them all off and the rest of it is discharged or, you know, dissipated. So, you don't have to pay them anymore.
Marshall Saunders: Now. I hear the word debt protection, which form of bankruptcy is covered on your debt protection, what does that mean?
Barry Rosenzweig: Well, all of them protect you against creditors. So if you're being sued, if you have a judgment against you, if you have credit card companies calling you, once you file bankruptcy, those creditors are prohibited from contacting you or collecting any money from you at all.
Marshall Saunders: Does a person go into bankruptcy before they're late on payments? I mean, do they just kind of look at their spreadsheet and go, I just can't afford this. I got to file bankruptcy. Or they're usually not paying their bills, not paying their bills. Creditors are coming after them. Something like that.
Barry Rosenzweig: Most of the time, people don't want to face reality and they wait and sometimes they wait too long and money's taken from them or they're being garnished from their wages or they lose their job and there are lawsuits against them. That's when they wake up. A lot of times, people look at their situation, they want to get ahead of it, knowing that certain things are going to happen to them, and they want to get out from under it. So, the majority of the time people come in later than they should. However, they shouldn't be afraid to come in and consult with an attorney to find out what their situation is. And when would be the best time to file bankruptcy, even if that's potentially an option for them, there are other options that prevent people from having to do it. Not everybody's going to want to file bankruptcy after they meet with a bankruptcy attorney.
Marshall Saunders: We hear in the news a lot about the monstrous level of growing student debt, but I heard isn't student debt something that you can't get discharged in a bankruptcy?
Barry Rosenzweig: Currently that's true. However, there is an exception. Some students and individuals who have taken out student loans that are government backed or government guaranteed. Those are not dischargeable. If they've taken out a private student loan through a bank or some sort of lender, those typically would be dischargeable because they're just like any other debt. However, most people have student loans have the government backed loans that are not dischargeable, and those can be dealt with separately by either getting a forbearance, which puts off the loan for a while and the payments, or they can work out small payments to keep them afloat in the meantime.
Marshall Saunders: What's the difference between a bankruptcy attorney and a debt settlement company and a debt reduction lawyer are those different things, or can one person be all those things?
Barry Rosenzweig: It's a really good question. I get that a lot. A debt reduction company or a consolidation company, typically are national companies, people contact them. They tell them they can negotiate their debt down. They can get small payments for them. Unfortunately, a lot of those people that go through those end up coming to me and saying, I'm in this program, it's not working. What are my options? And the reason they don't work is they basically tell the individual to stop making their payments so that they end up in arears of what they owe and then it reflects poorly on them. And it makes them look in a dire situation. And then the debt consolidation company or the debt reduction company will contact the lenders or the creditors and say, you know, they can't make the payments. Can you lower this down? And unfortunately, the people don't have the money to pay the discounted amount and the small amount they'd have to pay, doesn't really catch up with what they owe. Most of those fall apart. So, they end up coming to me. I explain to them, and they almost all drop out. One thing people don't always understand that if you are given a break on your debt, in other words, you owe 4,500 to Macy's and they say to you, you know what, if you pay us $2,500, we'll settle it in full. The difference of what you owed and the difference of what they settled for is taxable because of relief of debt. And I don't think most people realize that they may end up with getting a 1099 of which they have to pay tax on. And that's a big surprise. Whereas if you file bankruptcy, that is not the case.
Marshall Saunders: Oh, interesting. Okay, because it's discharged.
Barry Rosenzweig: Discharge in the bankruptcy court overrides the IRS ruling and there's no IRS ruling that says you have to pay tax on that discharge debt.
Marshall Saunders: That's good to know, you know I think the biggest fear a lot of people have is if I file bankruptcy, I'm going to lose my home. I'm going to lose my car. I'm going to lose all the things that I want and have, is that true? Are there some items that are exempt on both the federal and state level or what are the exemptions?
Barry Rosenzweig: Most people, as long as they can afford to make their house payment, their car payment, which for most people is the most important thing to do will not lose those items. They do it if they keep making the payments on those, all other items they have. There are certain thresholds of things you can keep, they let you keep a certain equity or a certain portion of the value of your car. You can keep a certain value or a portion of the equity you have in your house, all your household goods. You can keep, it's very rare that you have to give up assets. If you have a fair amount of cash in the bank or investments, portion of that is also protectable. I think most people think they lose everything, and you do not.
Marshall Saunders: So, do I have to give up all my credit cards when I file bankruptcy?
Barry Rosenzweig: You typically will lose all the credit cards, the use of them. But there are alternatives to help with that. One of the alternatives is to get a prepaid credit card. So, if he can take some money and put it in to a prepaid credit card, you can still use that credit card to build up some of your credit and have the use of it. Because there are many times that people really have to have some kind of a credit card in order to do certain things. For example, rent a car. Once you file bankruptcy. I think most people are surprised too, that all of a sudden, they start getting credit card applications in the mail saying they're approved. Now that's not an accident. The reason being is, is that all of a sudden, all their debt that they did have is gone. Now they have the ability to make payments again, because they're out of the majority of their debt. They also have the income if you're working, have the income to make those payments. So, they do take a chance on those people. Now the interest may be a little higher than they want. But it's something that can help people out. I think you have to be very careful about it because if they don't want to get back in the same situation they are.
Marshall Saunders: Well, dovetailing straight out of that. What does bankruptcy do to your credit rating as far as getting other loans, other, you know, kind of lower rate interest credit cards, something like that. What happens to your credit in bankruptcy?
Barry Rosenzweig: Well, the first thing people have to realize is if they're in that situation, their credit is already tanked.
Marshall Saunders: They haven't been making payments.
Barry Rosenzweig: Correct. Yeah. So, they're in a bad situation already. So, it's not like bankruptcy is going to make it worse at that point. In fact, most of the time bankruptcy will start help them reestablish their credit. They no longer have debts. Their credit score is kind of locked at that point at what it is. And they have every ability to start doing things to make their credit better. And there are a lot of easy ways to do that. It takes a lot of discipline. One example is if they do get a small limit of credit on a credit card, that they are very disciplined and use it. And at the end of the month, pay it off. And if they continue to do that, and there are some other methods and some other things they can do to reestablish their credit, I think they'd be surprised in a few years’ things will get better. Now, the fact that there's a bankruptcy on the credit report, the people have to realize that building up your credit score and having a better credit score is probably more important than worrying about the bankruptcy on their credit report. Lenders are in the business of lending money. So, if they don't have people lend money to, they don't make money. So, they're looking at all different levels of credit for people, whether they have high credit, low credit file bankruptcy, they do that in order to make money. So, they will be approached. They just have to be very careful about how they handle it after the case.
Marshall Saunders: Let's talk about co-signers for a second. First of all, how do you define co-signer? What do you mean?
Barry Rosenzweig: True co- signers where they sign jointly on the debt? Whether it be a car, a house, credit card, whatever it may be. I think a lot of people have the misunderstanding that people who have the ability to sign on a credit card, personal has a credit card, gives somebody else the ability to sign on it and use it is not a code debtor. Many times, they're not, but I think people are mistaken that the application, when it was filled out, makes both people responsible. So, if one individual files for bankruptcy and the other person doesn't, the person that filed bankruptcy is no longer obligated on that debt. However, the co-signer is obligated on the full amount of the debt, not just half. So, the person filing has to realize that and realize it will have an effect on the cosigner.
Marshall Saunders: So, either both of them file bankruptcy or it just shifts that obligation from one to the other.
Barry Rosenzweig: That is correct. And a lot of times both people do. Particularly a husband and wife do that. For obvious reasons, they're probably both in the same situation. There are many times where one spouse is in debt and the other spouse has no debt. So, there's no reason for the spouse to do it.
Marshall Saunders: What if there was community property, but after someone is divorced and one of those people filed bankruptcy, but it's community property. How did that work?
Barry Rosenzweig: Well first of all in Minnesota, there is no such thing as community property.
Marshall Saunders: Gotcha. That's all dispersed at the divorce decree, right?
Barry Rosenzweig: In the divorce itself, typically it's determined who is responsible for which debt. And that can be a little bit difficult because that's a responsibility of each party to adhere to the divorce decree and the lenders and the creditors really have nothing to do with that or care about it. So, if one parties designated to pay all the debt, even though they're not on the credit card, that doesn't necessarily mean that the creditors have to follow through with it. They still follow through with who they feel is responsible and who hasn't, hasn't filed bankruptcy.
Marshall Saunders: What about IRS stack taxes? Are those wiped out by bankruptcy or do they continue on?
Barry Rosenzweig: Well, the IRS debts as a general rule are not dischargeable. There are certain rules that are very, very specific and calculated depending on when you filed your taxes. And if they're filed on time and how long ago it is that you've incurred those taxes, to answer you is generally no, but there are some very specific situations where you can get rid of it.
Marshall Saunders: This is sounding very, very complicated. And so, it's obvious that I would probably, if I found myself in this position need to get some legal help. Do bankruptcy attorneys cost a lot of money? What should I do if I really don't have the cash to afford an attorney, but I need one?
Barry Rosenzweig: People wonder that all the time, except the people I meet with. They don't typically, aren't concerned about that initially when they come in, okay. They don't know how they are going to do it, or if they're going to do it, people have to realize that bankruptcy is not designed for people only who are destitute. No, it's designed for really anybody who is having problems paying their debts. Almost everybody that I meet with has a residents that are renting. They own a house or living with a friend or relative. They have a car; they have a job. The problem is they don't have enough income to pay their debts. Or the amounts they have to pay their debts will not pay off their debts for 30 years, 20 years, whatever it is. Cause they're making the minimum payment, or they haven't been making payments that are being sued. It's not like people don't have money. It's just, they don't have enough money to do with it, what they need to do. So, when people come in, there's a number of ways to do this. They can pay upfront and the fees are actually quite affordable. I like most attorneys in this area charge a flat fee. So, they know right up front the cost and there's really no hidden cost going forward. And they really know what to do. A lot of my clients will have the money available. Or they split it up into payments to me. Now I can't file their case until they're paid in full, but I work on their case while they're paying me. Other times, they'll get a gift from a family member. They typically don't want to make it a, you know, borrow the money from them because that becomes a debt. Although it's not. A real problem, there's ways to resolve that. Sometimes they take money out of their 401k. There's many, many ways they do it. So, considering the cost and the value they get out of it, it's typically not a big issue for most people.
Marshall Saunders: You know, a lot of people, you know, this carries some amount of shame or just embarrassment. And one of their biggest worries is how this is going to reflect to their employer. Through bankruptcy do you get your wages garnished? Do they, are the garnishments that come about and then your employer finds out about it and then you have to deal with that. How do garnishments work?
Barry Rosenzweig: Well, a garnishment happens when somebody is not paying their debts and goes to a collection agency. It then goes to a law firm. The law firm actually sues the debtor. At that point, the attorney can get a judgment against the debtor. The judgment is then used to either take money out of their bank account or garnish their wages. If somebody catches this before it gets to that point, there won't be any garnishment. If they are garnished, it does go to the employer. The employer has to withhold a certain amount of money. They don't take all their check there's rules on how much they can take. Although whatever they take is still harmful to the person because they're struggling already. Really the only person who knows about it from a medium to large size company is the human resources department. And it's not really that uncommon. It doesn't necessarily reflect real poorly, but people don't like other people to know about it. So regardless of who finds out or not, it just makes them a little bit antsy. As far as the bankruptcy itself, which has a tie into this, and people get embarrassed like who's going to know about it. Is it published in the paper? I always ask them, have you ever seen anybody, a neighbor friend that you've known filed bankruptcy without them telling you? And here's the answer almost a hundred percent time is no. Now, can somebody find out if they have, they can, it's not that easy to do. They have to go to the courthouse, look up the information. So, it typically is a very, somewhat quiet, unknown thing they're doing. So, most people are not going to find out.
Marshall Saunders: Sure. And what about, I’ve always heard this security clearances, like if you work for the government, can bankruptcy affect your security clearance?
Barry Rosenzweig: That's really up to the department and the agency themselves. Sometimes they look at that as more of a financial situation. In other words, even if they had bad credit or they weren't making their payments. Typically, government agencies look negatively upon that because they're are somewhat, you know, with good cause worried about selling things, selling secrets, selling information.
Marshall Saunders: This person might be desperate for money, so therefore they're more vulnerable.
Barry Rosenzweig: One side note is employers can't directly fire or not hire somebody for filing bankruptcy. Now, as we all know, there are some very, you know, various ways. But it's just so people know they can't, and I have not really seen a situation or heard of a situation where that's occurred. Now I'm sure that does happen, but rarely does that happen for somebody. Cause it is again, more common than most people think.
Marshall Saunders: What's the timeline of all this, from beginning to end, you know, kind of coming in and seeing you for the first time, creating a list of assets, all that sort of stuff until it's finally discharged and everything's done. What are you talking about as far as timeline?
Barry Rosenzweig: Well, the timeline is, you know, obviously they meet with me first. Once they come in and once, they hire me, I give them a packet of information. It's a questionnaire and have a checklist. Once I get that back, it's all entered. It's all compiled to create what's called the bankruptcy petition, which is actually the documents that are filed. It's about 40 to 50 pages long, once it's all entered and completed, the individuals come in, they've already reviewed it because I’ve emailed them to mail it to them. They review it and make sure it's all right. So, they come in and sign it. Now that can happen really anytime within a week, if they're very diligent about getting me everything or it could take a few months. Now it's really up to the client to get me the information as fast as possible. As soon as I get it, it's about a week or two that we can file. Now, once I have everything and they come in to sign off and I file it. At that point, it's like a brick wall that creditors cannot call. They cannot write, they cannot do anything. They're just stopped dead in their tracks. After filing it within a few days, I get notified of a hearing date, which is typically about 30 days later. After that hearing, which I’ll explain in a little bit about 60 days later, we get a discharge, unless there are things that come up between the hearing date and the discharge date. Typically, there are not, or if they are there just follow up documents, they need to verify certain things. I want to talk a little bit about the hearing date. Cause I think people get very, very nervous and scared about it. And quite frankly, it's not a real scary process at all. First of all, we don't meet with a judge. We meet with an attorney who's, what's called a trustee for the bankruptcy court. In essence he or she represents the creditors. So, when we go to that hearing, it's not even in the courtroom, but it is in the federal courthouse. And there's a number of other people there for the same reason. You're called up. You're sworn in, you're asked questions by the trustee, basically verifying all the information that you, maybe a few other questions to expound a little bit more on what you've entered. It almost inevitably only takes 10 to 15 minutes. So that's the hearing date. It's also called the 341 meeting. It's called the trustees meeting. So, from start a filing to the hearing dates, 30 days from the hearing date to discharge is 60 days. So, you're looking at about start to finish 90 days.
Marshall Saunders: Is it possible to shield some of the creditors that I want to take care of? Do I pay them off? Get them fully paid off before I file bankruptcy? Or is that not allowed?
Barry Rosenzweig: It's probably a good idea not to do that because a, in almost always, you will not get that money back. You're better off not doing it and with the right advice and with the right timing, because you will actually save that money and be able to probably keep it. And you also can't do, what's called a preference and people always have the idea like I'm going to put my car into my brother-in-law's name or I'm going to pay off my sister, who I owe money to, those aren't allowed. Those are called insider transactions. And those will become very problematic. So, what's the best way to do it is leave them as creditors, put them in the bankruptcy petition. And there's nothing that prohibits you from paying them after the bankruptcy paying them back. So, if you want to have good faith with them, you tell them here's what I'm going to do. However, after the fact I will pay it back. Now, they don't have to pay them back and nothing that they can do about it, but they can pay them back without being penalized in any way.
Marshall Saunders: Gotcha. What are the biggest reasons that you see for people filing bankruptcy?
Barry Rosenzweig: So, some of the top ones are divorce. People paid a lot of fees and whether attorney's fees or child support or spousal maintenance, or they've divided their assets up and have less. So that's a big one. Another big one is medical bills. And I think that's in the news a lot. There's a lot of medical bankruptcies and all be an insurance is supposed to be more affordable for people. The deductibles are high. Some people still can't afford insurance, lots of things aren't covered. So, they rack up medical debts for family members or themselves. So those are the big ones. And then of course there's use of credit cards that was abusive and they shouldn't have been using them. And lot of times just losing a job, they lose their job, can't get a new one. And there's an interim period where they can't make their payments. And quite frankly, the creditors don't really care. I mean, they have to collect their money.
Marshall Saunders: How do I determine whether bankruptcy is right for me? What do I do? Sit down, fill out a worksheet. Think about amount of debt. What determines whether bankruptcy is the right choice for me?
Barry Rosenzweig: I think it's always important to meet with a bankruptcy attorney. Bankruptcy attorneys, such as myself, will sit down for free, take as much time as necessary to talk about the situation and determine if it really is right for the person or not. Many, many times, I turn clients away and say, you're not in a position to file. It will not work for you. Either you make too much money, or you have too many assets or we can't protect things. And there's really no reason for you to do it. Give them some alternatives, negotiating with their creditors. A lot of people just don't even want to take their money that they have and pay off their debts. They just want to get rid of the debts. So, if somebody has, you know, $50,000 saved and they owe 25,000, they just would say, Hey, is there a way I can file bankruptcy and get rid of my debt and keep my money? Well, in some situations, depending on what their value of their assets are and their debts they can. But if somebody is in that particular situation, it's unlikely, they'll be able to. When I meet with people, I don't make them bring a bunch of things in. I just want to sit down, talk it through with them and basically get a good understanding, kind of give them an idea whether it'd be right for them. And almost always, I can tell them just from that meeting, whether it's something they should move forward with or not, there are a couple of things that people have to do as well. They do have to take a counseling course online prior to filing. And they do have to take one after the case has been filed. They are not difficult courses. They are very short courses, and this is just something that's required by the bankruptcy court. And people have to realize those are quite different than a debt reduction plan or that sort of thing. One other thing I think people have to really realize is they should not be embarrassed to come in and meet with an attorney. First of all, everything's confidential. There are no judgements made. It's not, there's nothing that attorney like myself has ever not heard before because I’ve heard it all. I also know that when people are done with the whole process, there's such a weight off their back, that they feel they can really move forward with their lives and not worry about phone calls and going to the mailbox for letters. And worrying about if their employer going to find out. So, all those things go away.
Marshall Saunders: It's been a very interesting show.
Barry Rosenzweig: I appreciate you asking me the questions and talking to me and I really enjoyed my session today.
Marshall Saunders: I look forward to talking to you again.
Barry Rosenzweig: Thanks Marshall.
Marshall Saunders: And if you want to follow Barry, you can subscribe to whatever service you're listening to this on. Of course, subscribe, and you can get regular updates on programming.
This has been the Barrylaw legal podcast. Tune in again as Barry interviews, lawyers, real estate agents, lenders, and other professionals that bring popular legal related topics into focus for his listeners. Barry Rosenzweig can be reached at (952) 920-1001 in Minnesota and (480) 227-2203 in Arizona. He can also be reached by email at [email protected] or online at www.barrylaw.com.