Erasing the Stigma of Bankruptcy

Nobody wants to come to Jamie Buechler’s office. As a bankruptcy attorney, she understands. But she also hopes that changes.

“A lot of people have a moral compunction against bankruptcy,” she says. “It’s the way they were raised. They think they have a moral obligation to repay the debt. I don’t see it that way.”

Over the years, Denver’s Buechler Law Office has helped hundreds of clients regain control of their finances through Chapter 7 and Chapter 13 bankruptcies. She has seen the difference it makes in the lives of her clients, and she hopes Coloradans can move past the stigma and focus on the benefits.

However, bankruptcy isn’t the right path for everyone, Buechler adds. It depends in large part on what kind of debt someone has, their assets, job prospects and more. 

“When these people come to me at the worst time in their lives, they are looking for a path forward,” Buechler says. “They don’t see any light at the end of the tunnel. The ‘B’ word is the last word they want to hear, but a bankruptcy may be the best path forward for them.”

The Difference Between 7 and 13

The two most common filings are Chapter 7 and Chapter 13. When people file for a Chapter 7 bankruptcy, some of their nonexempt assets—such as a second home and luxury vehicles—are sold to pay back creditors. In Chapter 13, the debt is restructured so that people can pay back some of their debt over a three- to five-year period.

Chapter 7 bankruptcies account for nearly 70% of bankruptcy cases, and are a relatively fast process, typically taking about 90 days.

“You can get rid of most of your debt and recover from filing fairly quickly,” Buechler says. Many of Buechler’s clients have fallen into credit card debt from medical expenses, which can be discharged in a Chapter 7. Student loans, however, cannot be. 

A Chapter 13 reorganization gives people time to get caught up on a mortgage, child-support payments, or back taxes that are less than three years overdue, for example. The timeframe for a repayment plan depends on the client’s level of income. Filing a Chapter 13 can delay contempt proceedings relating to child support, or even a foreclosure. 

Getting Credit Again

When someone files for bankruptcy, it doesn’t mean they can’t get credit. 

“Most of my clients report back to me that, by the end of that process, they are starting to get new offers for credit,” she says. “The bankruptcy can stay on someone’s record up to 10 years, but because they’ve been relieved of a significant amount of debt and they can’t file for another eight years, they become a better credit risk.”

Also, within two years after bankruptcy, filers can qualify for a regular mortgage, and the same can be said for car loans, Buechler adds. Of course, there are exceptions to those cases and the interest rates may be above average.

What About Debt Consolidation?

By the time prospective clients come to Buechler, many have either used or considered a debt consolidation service. But often, she says, that’s not the best path.

“Those places negotiate with each of your creditors to see if they’ll take a lump-sum settlement. If any one of them does not, you’re back to square one,” she says. “[If they do,] that requires you, as a consumer, to fulfill that contract. If you breach that contract, they’re going to come after you.”

That could mean wage garnishment, among other things. “That’s a huge downside to not filing bankruptcy,” Buechler says. 

Another factor to consider is that any forgiven credit card debts are taxed. So if someone has a $10,000 debt written off by a creditor, for example, they’ll get a 1099 in the mail as that $10,000 is considered taxable income. 

Bankruptcy for Seniors

Many clients Buechler has seen recently have been at or approaching retirement age. They have debts so high that they believe they must keep working to fund those payments.

“That makes absolutely no sense whatsoever,” Buechler says. “They should be enjoying their retirement.”

Assets in a 401k or pension account cannot be garnished during a bankruptcy process, Buechler stresses. However, once someone takes a distribution and the money hits their account, creditors can come after those funds. 

“You don’t have to use those assets to repay debts,” she says. “Unfortunately, when they come to me, oftentimes they’ve taken some distributions out of their 401k and they’re paying penalties on that, or they’ve taken loans out to pay down all this debt. They’ve used an exempt asset and given it to creditors, when they could have filed for bankruptcy and gotten rid of that debt.”