How Bankruptcy Really Works

Video Transcribed for the Deaf:

Bankruptcy is expensive AF. For many consumers bankruptcy is out of reach entirely. The idea that they would ever be able to come up with the money in order to pay for a lawyer either for chapter 7 or for chapter 13 is not a realistic possibility. Commercials like this one are aimed at the financially perilous looking for a way out. But with the evolution of bankruptcy law, how much of a new beginning does bankruptcy actually give people? I had to file bankruptcy twice. I was like, “I have to file bankruptcy all my bankruptcy! Who does that?” So I just felt like a failure. Hey fam, I’m Imaeyen. And this Sunday we’re exploring the complicated history of personal bankruptcy law and how it affects how lawyers get paid. That’s about as painful as a bankrupt gets. Pat Sajak is wrong. Bankruptcy can and often does get much worse. On “Wheel of Fortune” bankruptcy is just a part of the puzzles game of chance. In reality, bankruptcy is a tool for survival for those who owe debt and are unable to repay it. And the IRL Wheel of Fortune can cause bankruptcy with something as mundane as unpaid parking tickets.

I felt like I was stuck between a rock and a hard place. Whenever you have to do something that drastic is with filing bankruptcy, I just felt like, “Why me? Why am I in this situation?” It makes you feel like you’re not good enough. Rachael White was a full-time dental assistant getting only part-time hours when she filed for bankruptcy in 2016. The mother of two now-teenage boys was making only $12 an hour, and she’d accumulated about $1,500 in parking penalties since 2015 — penalties she didn’t even know she was getting.

They won’t have the signs where you can, where you can see them visually, you know, throughout the street. So I would park and I wouldn’t see any signs necessarily, and I would end up getting a ticket. The citations were being sent to an address where her car was registered, but where she no longer lived. White thought bankruptcy was her best option to stay afloat — and keep her car which she used for freelance gigs like driving for uber. When I initially filed bankruptcy, I had like tunnel vision. The only thing that I was concerned about is keeping what I had. I didn’t really have the means to just go get another car at that time, and I was just honestly I was drowning. I was just trying to stay afloat.

White knew where she’d go to get help. Debtstoppers. DebtStoppers. You know that song just kept running over and over and over again in my head. She’d heard commercials for a self-described debt relief agency based in Chicago called DebtStoppers. She’d heard their radio ads and seen their television pitches like this one: DebtStoppers is one of the nation’s leading bankruptcy law firms. We’ve helped thousands of families stop foreclosure, repossession, and wage garnishment. An initial $350 filing fee got DebtStoppers to work with White. They found her counsel, and she had to pay a separate fee to that lawyer. Her bankruptcy case made her one of the thousands in the U.S. who’ve gone through the process of looking to discharge debt — aka be released a personal liability of debt to creditors. In 2016, more than three-quarters of a million people filed for bankruptcy. That’s the equivalent of about 28 percent of Chicago’s population. That stat includes all bankruptcy filings like Chapter 7 ,11, 12, and 13. Bankruptcy law expert Megan McDermott says there are only two options available to someone overwhelmed by consumer debt.

You either file for Chapter 7 or Chapter 13. So there are a couple of important differences. Chapter 7 is a relatively quick inexpensive and streamlined proceeding to a discharge. Usually from start to finish, a Chapter 7 bankruptcy typically takes at most six months, assuming it’s a relatively straightforward case. Chapter 13 is more, a more expensive and more time-consuming process. The debtor is basically pledging to pay a certain portion of their future wages over a three-to-five year period in order to pay off their existing creditors. The difference is important because the type of bankruptcy you choose matters. And Congress has had a big impact on which is most accessible to you. Bankruptcy law’s very long history in the U.S. began when the flag only had 45 stars. The first bankruptcy law became permanent in 1898. That national Bankruptcy Act was the basis of the law for the next 40 years.

It was amended during the next several decades, including important changes during the period that gave us disco dancing like this… In 1978 when the code was enacted, I think it did a fabulous job of providing two very good options for consumers in different situations. But since then, Congress and the courts have really scaled back the protections that are available to ordinary consumers. And I think it is fair to say that it does not provide the same relief that it did 40 years ago. Let’s use student loans as an example. Before 1978 you could discharge all student loans through bankruptcy. After that year, you couldn’t eliminate government student loans. Then in 2005, new regulations meant you also couldn’t get rid of private student debt via bankruptcy — which is why some of you know Sallie Mae so well.

Congress tried to move more people away from Chapter 7– where all the eligible debt is discharged — to Chapter 13 — where you’re on a years-long payment plan. The progression has impacted some of the most financially vulnerable people. Those protections are not available potentially to the people who need them the most, which is low in very low income debtors.

Congress basically made certain types of debtors ineligible for the quick and easy relief under Chapter 7, and also took out some protections that made it easy for low-income individuals to file for Chapter 7 bankruptcy. Legal changes haven’t only affected debtors like White, who filed for Chapter 13 bankruptcy a second time in October 2017, because she couldn’t afford to keep up with the payment plan. Bankruptcy lawyers incentives have changed significantly since 1978. Basically when Congress initially created the code, they put a provision in place that debtors attorneys would be able to collect. But in 1994, Congress removed that explicit language. Sometimes attorneys have added language to bankruptcy plans that says they must be paid before any outstanding debt. So basically you could be paying a bankruptcy plan for years that really only pays off your attorney, your court costs, and yet almost none of the original debt that forced you into bankruptcy in the first place, like in this very real-life example. A man owed about $5,000 to the city of Chicago in parking tickets, and he filed for bankruptcy and he proposed a plan in which he would pay $4,300 over the course of three years.

And $4,000 of those dollars were going to pay his lawyer, and the remaining balance went to pay administrative expenses. And so you see these situations where the the client is going into Chapter 13, and the only one benefitting from this extra time in an obviously extrajudicial effort as well is the lawyer. Critics are weary lawyers may steer clients to the much more expensive, and lengthy, Chapter 13 process, even when Chapter 7 is in their best interest. But others say, what the lawyers are really doing when they pay themselves first, is making sure their clients have representation for the duration of their bankruptcy plan — having a lawyer on retainer. White says she only remembers being responsible for DebtStoppers and her lawyers upfront fees during her first bankruptcy. And she’s unsure if her payment plan included payouts to her attorneys. We called DebtStoppers a few times to talk about their payment process, but they didn’t return our phone calls.

When White filed a second time, she got new representation and gave up the car she tried so desperately to hold on to during her first bankruptcy. To be in a situation where a parking ticket, or a moving violation dictates your livelihood, is mind blowing. I sit back and think I’m losing everything over parking tickets. These days White relies on public transportation to get around. The bankruptcy process isn’t one White wants to go through again.

But the woman juggling multiple part-time jobs is not sure she’ll be able to avoid it. Despite those odds, she’s still hopeful about her financial future. My life is not going to be dictated by debt and bankruptcies and I’m just ready to move forward and just keep living. Work it! .

As found on Youtube