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Chapter 7 Bankruptcy Filing in Rhode Island: How Long Will It Take?

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Chapter 7 Bankruptcy filings take how long to complete in Rhode Island?

Let’s pretend you filed a Rhode Island Chapter 7 bankruptcy case today. If you did, your case would come to an end in about 90 days. What happens during that time?

Let’s examine a typical Chapter 7 filing in RI:

  1. You complete your first education course on-line, or over the phone. It takes about 60 minutes and is easy.
  2. Your bankruptcy lawyer obtains a bankruptcy-specific version of your credit report.
  3. Your 50 page bankruptcy petition is filed electronically with the RI Bankruptcy Court in Providence.
  4. A Chapter 7 trustee (another lawyer) is assigned to review your petition.
  5. Your attorney sends your tax returns and pays advice information to the court/ trustee.
  6. The Bankruptcy Court Noticing Center contacts each creditor listed in your petition.
  7. You complete your second debtor education course which takes 2-3 hours.  Also very easy.
  8. Once your course is completed, your attorney files a certificate of completion with the court.
  9. A 341 meeting of creditors is scheduled 30-35 days into the process.  Hearings take place in Providence.
  10. You attend the meeting of creditors to answer common questions from the assigned trustee.
  11. If your property is exempt (protected), the trustee files paperwork with the court saying you have been examined and there is no property to distribute to creditors.
  12. If you have assets that are unprotected, the trustee will collect the property for later distribution to creditors.
  13. Around day 90, your dischargeable debts are wiped out and your case is over (if no creditor has contested your case.)

It’s easier to understand the Chapter 7 bankruptcy timeline if you divide it in thirds. If you filed your case today, you would have to attend a creditors meeting in 30 days.  Then, if no creditor contests your case and your trustee doesn’t need to distribute any assets, your case is over 60 days after the hearing.

I realize it is stressful to think about filing for bankruptcy.  If handled correctly, however, there is nothing to worry about.  I have represented more than 3,000 clients over the past 21 years.  If you can answer my questions honestly and completely before the bankruptcy petition is filed, you will be amazed how fast and straightforward bankruptcy can be.  I have never filed a bankruptcy petition that was not approved by the court.

A 341 meeting of creditors typically lasts 5 minutes or less.  It is not a court room.  There is no judge, jury, or really anything you would associate with “court”.  Honest debtors are literally out the door in a matter of minutes.

Debt Settlement Plans: Part II

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You’ve tried calling each credit card company to work out a debt settlement plan, but they aren’t interested.  Interest rates have only skyrocketed in the past year.  The bills keep coming and you are drowning in debt.

What if your “minimum payments” on credit cards add up to $ 1,000 a month?  Few debtors can honestly afford repaying such a high amount without using other cards for their daily living expenses.  It becomes a game of robbing Peter to pay Paul.

It would seem like a miracle for a “credit counseling” company to get your payments down to $750 per month by decreasing your interest rates.  Who wouldn’t want to save $ 250 a month?  Although saving $250 per month may sound good at first, here is the bigger question.  Do you honestly even have the $ 750 available?

If you can only afford $300 a month, a plan that requires you to pay $750 per month will not do you much good. You are still in debt. For this reason, “credit counseling” companies and “debt management” companies focus exclusively on the amount of savings they offer, rather than whether you can actually afford your payments.  Many clients who ended up filing bankruptcy in Rhode Island wasted thousands of dollars on unrealistic repayment plans first.

Added to the misleading nature of “debt management” company claims are hidden fees and fraud. Consumer Reports claims that

” Many [“debt management” companies] advise rolling high-interest debt into a second mortgage. But by using your house as collateral for what was unsecured debt, you risk losing your home. Some firms can persuade creditors to cut your debt. But if you miss payments they can later back out of the deal and demand full payment, potentially landing you in bankruptcy court after you’ve already paid a large portion of your debt.”  Consumer Reports online report, June 2005.

Filing Chapter 7 bankruptcy offers a straightforward, honest, effective alternative to the misinformation propagated by “debt management” and “credit counseling” companies. Federal bankruptcy laws were created by Congress for the purpose of helping hardworking citizens pay off their debts.  Unlike DMPs, bankruptcy actually reduces both interest and debt. In fact, bankruptcy is the only way to completely eliminate a debt.

Bottom line: Before you look into signing up for an unrealistic debt management plan, consider consulting a qualified Rhode Island bankruptcy lawyer.

Rhode Island Bankruptcy Law: Myths vs Reality

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Who files bankruptcy in Rhode Island and why ?

Recent studies show that since 2008 the number of bankruptcies filed by those making more than $60,000 per year has increased by 6.9%. With filings up 36.5% from what they were this time last year, many blogs and commentators are labeling America’s current economic condition a recession for the middle class.  I can say that this is true for Rhode Island as well.

Many myths surround bankruptcy. One of these myths is that filing Chapter 7 is just an “escape route” for the financially irresponsible. Another is that filing Chapter 7 is only what truly poor people do.  These bankruptcy myths  , however, are easily refuted.

In fact, the economic recession has hit the Rhode Island real estate profession particularly hard. Today, more and more real estate developers and real estate agents are filing for bankruptcy protection due to the collapse of the housing bubble in the Ocean State.

Rhode Islanders have two basic bankruptcy options

Different kinds of bankruptcy exist for specific situations. For instance, Chapter 7 bankruptcy is usually filed by unemployed workers, or those whose income dropped due to loss of overtime.  Chapter 7 filers must show that their gross income during the prior 6 months is lower than the median income of other similar sized Rhode Island households. Although a Chapter 7 bankruptcy erases most debts, it limits the amount of property a debtor is entitled to keep.

Because the RI and Federal exemption laws protect a vast array of property, very few Chapter 7 debtors lose any property in the process.  Put your fears to rest by contacting a qualified Rhode Island attorney.  He will explain what property can be protected and what cannot.  In most cases, you will lose nothing.

If you have alot of property, and are unable to protect all of it in a Chapter 7 filing, a Rhode Island Chapter 13 bankruptcy allows you to pay equity above available exemptions to unsecured creditors. That way, you can keep your property if you can afford to do so. Chapter 13 creates a three to five-year payment plan for people who still earn a living (or have some regular source of income.) The payment plan consists mostly of secured debts such as car and mortgage payments. Also, unlike a Chapter 7 bankruptcy which requires up-front payment for attorney fees, Chapter 13 attorney fees can be part of the payment plan.

Debt-Settlement Scams and Tax Consequences

A word of warning to those considering debt-settlement firms instead of filing for bankruptcy: don’t. Although many debt-settlement companies pose as credit-saving alternatives to bankruptcy, most end up doing more harm to your credit than filing for bankruptcy would. This is because creditors will continue to report your missed payments to credit bureaus—even if you are in a “debt-settlement” program.

Also, settling debt for less than the full amount owed will trigger a 1099 statement reported to the IRS.  In other words, you are walking into a tax liability.  Interestingly, bankruptcy has shown to improve most client’s credit scores.  It does so by stopping negative reporting and immediately improving your debt to income ratio.

Another problem with debt settlement firms is that they are subject to very little regulation. Debt settlement firms demand payment up front before all debts are settled. This means they have little incentive to settle a debt completely after they have already been paid. In short, “debt settlement” is far from guaranteed. Compare this with bankruptcy, an organized legal process with pre-defined results.

Timing is key when considering filing bankruptcy in Rhode Island. You must be careful to not file bankruptcy too early or wait too long. Instead, start by calculating your debts and estimating what it would take to pay it off on your own. If the amount is too large, or would require you to sacrifice your family’s basic needs to make a dent in your debt load, then consult an experienced consumer bankruptcy attorney.

If you have missed even one mortgage payment, car payment, or credit card bill, you need advice now.  You don’t need to wait for your car to get repossessed or your mortgage to get foreclosed. Use your head, remain calm, and remember that bankruptcy is powerful and can restore order to a financial mess.

Stopping Wage Attachment: Rhode Island Bankruptcy Law

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Wage Attachment doesn’t happen over night.  It is, however, one of the most powerful actions a creditor can take to force repayment of a debt.  Other than foreclosure, it is the ultimate “wake-up call” that causes a debtor to explore relief under Rhode Island bankruptcy law.  Fortunately, filing a Chapter 7 bankruptcy will stop a wage attachment.
Debt collection usually escalates.  A creditor may start with a simple collection letter.  But if collection letters won’t work, the next tool is the telephone.  The debtor’s phone will ring morning, noon and night in an effort to coerce repayment.

(As a reminder, you can make the phone stop ringing if you understand the protections available under the Fair Debt Collection Practices Act (FDCPA).  Keep a pen and paper near the phone.  Then write down the name and phone number of each caller after making it clear that you are not to be contacted by telephone anymore.  You should remind the caller that under the FDCPA they will be in violation of Federal law if they continue calling you and that you will take legal action.  While this may quiet your phone, a determined creditor still has one more option left.)
If no progress is made using collection letters and harrassing phone calls, a creditor will ultimately take legal action with the goal of obtaining a wage garnishment or attachment.Keep in mind that a creditor cannot garnish or attach wages without a legal judgment on the underlying debt. In other words, a creditor must first serve the debtor with a court summons and a complaint alledging that money is owed. If the debtor fails to answer the complaint in writing in the time allowed, he will lose by default and the creditor will receive a judgment. Now what?

With judgment in hand, a creditor can petition the court for a wage attachment. Once again, the debtor must be served with a Notice to Attach Wages and be given opportunity to object to the wage garnishment. In Rhode Island, wages cannot be attached if the debtor proves receipt of Social Security benefits or State assistance in the prior 12 months.

If no proper objection is given, the court will order garnishment not to exceed 25% of the employee’s disposable earnings. Once the employer receives a court-order to garnish wages, the only way to stop garnishment is to file bankruptcy.

Filing for bankruptcy will stop all collection activities including wage attachments. Under Rhode Island Bankruptcy law, if the employer is notified of the bankruptcy filing before remitting the garnishment to the creditor, he must refund the money to the employee.

RI Bankruptcy Law: Discharge vs Debt Cancellation

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RI Bankruptcy law is complex.  If you are drowning in bills, make sure you understand the difference between cancellation vs discharge in bankruptcy.  If you make the wrong decision, you may end up with a large income tax obligation.

First, what is debt cancellation?  Debt cancellation is when a a creditor loses hope of ever getting paid.  For business reasons, they decide to stop chasing you.  They may decide to sell your account to a collection company for a few pennies on the dollar, but they are essentially “writing you off.”

For the debtor who has been pursued for collection, a creditor’s decision to cancel the obligation may sound like good news.  What’s not to like about a quiet telephone and no harassing bill collectors?

Here is the bad news.  When a creditor cancels your obligation, they often file a Form 1099-C (Cancellation of Debt) with the IRS.  The canceled amount is then treated as regular income.  In other words, you are about to get hit with a big tax obligation.

This is the last thing a person struggling with bills ever thinks about when calling a debt settlement company.  “You mean to say, I can settle my credit card bills and still end up owing the IRS?”  Yes!  It reminds me of the  famous movie line, “just when I thought I was out, they pull me back in.”

Imagine successfully negotiating the cancelation of $ 50,000 of debt.  If you are in the 25% income tax bracket, you could end up owing $ 12,500 in income tax.  Not good.

A bankruptcy discharge under RI Bankruptcy Law, however, is much more powerful.  According to the United States bankruptcy code, discharged debts are NOT the same as canceled debts.  A discharged debt is not treated at taxable income.  Very good.

But what happens if a creditor files a Form 1099-C on a debtor who has filed for RI bankruptcy relief?  While this should be confirmed with your CPA, the solution is found in IRS Form 982.  This form should negate the usual effect of a 1099-C.  In other words, Form 982 allows a debtor who has filed for bankruptcy relief, to exclude from gross income the debt discharged in bankruptcy.  It will not be treated as taxable income.

As you consider how best to solve your present financial dilemma, be very skeptical of any debt settlement company promising to make your creditors “an offer they can’t refuse.”  In many cases, you will be walking yourself into an income tax nightmare.  Don’t pay anyone to help settle your debt without first understanding the protections available under RI Bankruptcy law.  Bankruptcy law is just more powerful.

(As a footnote, the Mortgage Debt Relief Forgiveness Act of 2007 may absolve a homeowner from paying income tax on canceled mortgage debt if it is on their primary residence.  While this law won’t prevent a bank from suing you for default,  it will make the canceled mortgage debt a non-taxable event.)

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