The Truth About No Money Down Chapter 7 Bankruptcy-Is it right for me?

The Truth About No Money Down Chapter 7 Bankruptcy-Is it right for me?

You may have seen ads offering “No Money Down” bankruptcy and been wondering how it works.  Before you decide to file a no money down bankruptcy, you should know how it works, what the pros and cons are, and get tips on how to make the best decision for you and your family.

Normally, you need to pay your attorney before you file bankruptcy. If you owe your attorney money when your case is filed, they become a creditor just like all your other creditors.  Your debt to your attorney gets wiped out just like your credit cards!

This creates a problem, because many people need to file for bankruptcy protection immediately, but don’t have a large sum of money to hire an attorney.  They either file pro se (on their own) and try to figure out the system or wait to file and suffer from creditor harassment until they can pay a lawyer.

Recently, some attorneys started offering “No Money Down” or “$0.00 Down” Chapter 7 bankruptcy.  But no money down does not mean “No Money Ever” or that your case will be handled for free.  Obviously, no business can give their product away and still stay in business.  What this means is a new way of handling your case so it can be filed without a lot of money up front, but the attorney can still get paid.

This is how it works:

You and the attorney agree to split (the fancy name for this is bifurcate) the case into two parts, before and after filing.  The attorney agrees to handle the “before” part for free and files a “bare bones” case on your behalf.  A “bare bones” case contains little information but is enough to start the case and create the “automatic stay”.  The stay is what stops creditors from garnishing your paycheck, repossessing your car or continuing other collection activities.

Once the case is filed, you can either re-hire the attorney or proceed on your own.  If you re-hire the attorney, a payment plan is set up, usually with automated bank payments, and the rest of the paperwork needed to proceed with your case is filed with the court.

But you are under no obligation to re-fire the attorney.  The attorney, however, probably has some obligation to represent you. You may decide you want to proceed on your own but this may lead to an awkward conversation with the attorney.  If you don’t want to re-hire the attorney, they may try to withdraw from your case.

You probably will want to re-hire the attorney.  Most attorneys want to help you and will do a good job and you want the help, so there is no reason not to re-hire them.  But legally, you are under no obligation to do so.

Once you re-hire the attorney, the case proceeds pretty much like any other case.  You will go to a Meeting of Creditors and usually get your discharge in about 90 days. The only difference is, you will have a new obligation to pay.

Here’s what you need to think about:

How much will this cost me?

When you file a “No Money Down” bankruptcy, you will be paying more than if you paid for the case up front. In some cases, it will cost you 2 to 3 times as much. Ask the attorney how much it will cost if you pay up front versus how much the payment plan will be.  It may be worth trying to come up with the money.

Who will I be paying?

In some cases, the attorney you meet with may “factor” or sell the right to collect payments from you to a third party.  For example, you may agree to pay $2500.00 to the attorney for representing you.  You then agree to a payment plan of  $250.00 per month for 10 months.  The attorney may sell his right to collect those payments to a factoring company for $1800.00 in a lump sum. The advantage to the attorney is that they get the money up front.  The advantage to you is you are paying the attorney over time.  The disadvantage to you is you are paying the difference.  The attorney has basically agreed to handle your case for $1800.00, so any money above that is going to the third party. And being paid by you!

Do I qualify?

In order to get a no money down bankruptcy, you will need to have steady income. Since you are basically getting a loan, you need to have the ability to make regular payments. If you are unemployed, it is unlikely you will be able to convince an attorney to file a no money down case.  If your spouse or other relative has income, you may be able to get a guarantor for your fees.(see below)

Will this help my credit?

In some cases, your payments on the fees may be reported to the credit bureaus.  The effect of making 6-12 months of on time payments on your credit report may be minimal.  if you want to rebuild our credit, you may want to buy a car instead.

What if I can’t pay?

Because this is a debt you have incurred AFTER filing, it is not wiped out by your bankruptcy.  The third party may try to collect from you and use all the tactics you were trying to avoid by filing in the first place. They may call you, take money from your bank account or even sue you to collect the debt.

Alternatives to a No Money Down Bankruptcy:

Get a guarantor.

In some cases, your payments on the fees may be reported to the credit bureaus.  The effect of making 6-12 months of on time payments on your credit report may be minimal. If you want to rebuild our credit, you may want to buy a car instead.

Sell something

Now may be a good time to have a garage sale and get rid of all the old stuff you have lying around.  If you have any old jewelry, it may have value as scrap metal.

File chapter 13

If you have certain types of debts, it may be better to file Chapter 13.  If you have tax debt, EZ Pass fines, CCU debts or parking tickets, Chapter 7 may not help you. These debts are generally not wiped out in a Chapter 7. If you are behind on your house or car payments,

Stop paying other creditors

If you are in a debt consolidation plan, you may be making payments on debts that can be wiped out. Or you may be making minimum payments on credit cards without making a dent on the amount owed.  If so, by stopping these payments, you can put money towards filing bankruptcy and making a fresh start.

Tips for deciding if No Money Down bankruptcy is right for you.

Is there an emergency?

If you have an immediate need for bankruptcy protection, then a no money down filing may make sense.  If you are being garnished, or facing a gas or electric turn off, you can’t wait to file.

How much more will it cost me?

You should ask the attorney how much it would cost if you pay up front versus paying through a plan.

Who will I be paying?

In some cases you may be paying a third party whom you have never met.  You should ask if you will be paying the attorney directly or if you will be dealing with some other party