Inevitably, the letter complains that my client made numerous charges on the credit card within some period prior to the filing of the case, and insists that my client offer some money to settle the matter.

In my experience, 9 out of 10 of these demands are completely frivolous.

The only charges that are deemed non-dischargeable if made in close proximity to the filing of the case are cash advances and luxury purchases. Charges for living expenses and other necessities are allowed.

After receiving the letter, I always consult with the client to obtain the true facts about the charges. Then, I draft an aggressive response to the creditor’s attorneys.

I have found that after receiving my letter, the creditor will back down, and will rarely follow through on the threatened objection.

The creditor law firm is seeking a quick judgment against individuals who are not going to put up a fight. Once it is clear to the creditor that the client’s interests will be vigorously defended, the creditor is no longer interested in pursuing the matter.

Peter Berk

Fortunately, the answer is usually yes. This is because although the business may be successful in the sense that it is turning a profit, the liquidation value is usually zero. If the bankruptcy trustee cannot get any value for the business, the business will be retained by the client.

Ask yourself these questions: Could I sell my business? If I sold it, could I get enough money to pay off the creditors of the business and still have money leftover to put into my pocket?

If you answer no to these questions, then you will in all likelihood be able to retain your business in a Chapter 7 case. It is often the case that the business is financed with a working capital, SBA, or other loan which is secured by all of the business assets. Because the loan will need to be satisfied before the business can be sold, a sale will not possible.

Further, the equity of a small business a typically tied up in the owner. Without the expertise and experience of the owner, the value of the business is greatly diminished.

In most cases, the bankruptcy trustee will decide that selling the business is not possible, and will abandon the business back to the client.

Peter Berk

If you have given up collateral in exchange for a loan, you will probably be dealing with reaffirmation during your case. Creditors holding collateral, such as auto lenders, are called secured creditors.

When we file a Chapter 7 case, we are seeking a discharge order. The discharge order eliminates your personal liability to repay all of your debts (with very limited exceptions, such as student loans). The discharge order does not affect the collateral for the secured loan.

Reaffirmation is a method of excluding a debt from the discharge order. Now, why would you want to do something like that?

You might want to exclude a debt from your discharge when you are seeking to retain collateral, such as a vehicle. In some cases, reaffirmation may be the only way to hold on to the collateral.

Without a reaffirmation agreement, the secured creditor may have the legal right to take back or repossess its collateral, even if the loan payments are current.

When the loan terms are reasonable, and there is little doubt that the client will have the financial means to repay the loan in full, reaffirmation may be advisable. Making regular payments on a reaffirmed secured loan can help in reestablishing credit.

However, reaffirmation can be a serious risk, because the client’s liability for a reaffirmed loan survives the bankruptcy. If the client defaults on the loan after the bankruptcy, the consequences of reaffirmation are devastating. The secured creditor can repossess the collateral, sell the collateral at an auction, and sue the client for any deficiency (the remaining balance due on the loan after applying the sales proceeds).

Therefore, all Chapter 7 clients, but especially those with high interest secured loans, should think long and hard before signing the reaffirmation agreement.

Now, you are probably wondering: Is there any other option, other than reaffirmation, for keeping my car or other collateral? Fortunately, the answer is often yes. Secured creditors often want to use repossession as the last possible resort. Most likely, a creditor will not want to take the collateral when it is receiving regular payments, even when the underlying loan was discharged in the bankruptcy. Maintaining regular payments without signing the reaffirmation agreement will allow the client to later default on the loan, with the only consequence being the repossession of the collateral. The creditor will not be able to sue the client for money.

With some exceptions, maintaining regular payments on a secured loan, without signing the reaffirmation agreement, may be the best way to treat the loan in bankruptcy.

We want to make sure that you are aware of your options regarding reaffirmation. We will always discuss reaffirmation as part of the initial consultation. Please contact us for further information about this important issue.

Peter Berk

Please be wary of companies selling instant credit repair services. There is no magical way to rebuild credit. If you are told otherwise, you are likely dealing with a scam artist.

After receiving a discharge in bankruptcy, clients’ credit scores will improve over time, especially if no further derogatory information is reported to the credit bureaus. Maintaining regular payments on debt that survives the bankruptcy case can elevate the credit score. Secured credit cards also help, if clients pay off the full balance each month. Steady employment and living at the same address for extended time periods can benefit the credit score.

Lenders will take a more favorable view of a person who has discharged indebtedness in bankruptcy, as opposed to an individual who is burdened with insurmountable debt. Post-bankruptcy clients have greatly decreased their debt-to-income ratios, and therefore the prospective lender will not need to compete with other creditors to be repaid. The lender will also be aware that Chapter 7 bankruptcy can only be filed once every 8 years.

Mortgages can be obtained by clients after filing for bankruptcy. The minimum waiting period for an FHA loan is currently 2 years.

For further information about rebuilding credit after bankruptcy, please feel free to contact us directly.

Peter Berk