Filing for bankruptcy is a complicated, emotional process. It takes more work and time than most people realize, but it can also be the right solution for significant debt issues. Consult with a bankruptcy attorney or educate yourself on your options, you may find that filing for bankruptcy could help you out of a difficult financial bind.
Most filers find that bankruptcy eases stress by stopping:
• Collections agency calls or harassment
• Debt lawsuits from creditors
• Wage garnishment (creditors taking money from your paycheck)
• Foreclosure (unless the property has already sold)
• Repossession of some property (in Chapter 13)
Bankruptcy will also:
• Get rid of many debts (in Chapter 7)
• Protect some property from being sold (depending on exemptions in your state)
• Put an end to growing debt and give you a fresh start to turn things around
The decision to file for bankruptcy is a serious one. There are several considerations worth examining closely before getting started:
• The impact on your future ability to access credit, lenders, or low interest rates
• The impact on your credit report
• Whether you could lose assets (if you file for Chapter 7)
• The differences in the time and expense associated with each form of bankruptcy
• Whether you are eligible for certain forms of bankruptcy
• Whether you can retain specific valuable assets from repossessions (many states have exemptions)
Considering other impacts can be critical in deciding whether to file for bankruptcy or which form is a better option. Some bankruptcies may:
• Fail to discharge credit card debts
• Impact your pension plans or other assets
• Create financial issues for co-signers
• Stop foreclosure
• Feel like a significant invasion of your personal privacy with the bankruptcy court and working with your bankruptcy trustee.
Any of these concerns may impact the desirability of the relief provided. However, none of these reasons are worse than staying in overwhelming debt or making your financial situation worse. Sometimes, you simply need debt help and cannot get there alone. Bankruptcy will give you a fresh start, and you can work towards the financial situation you want.
What Happens After a Chapter 7 Bankruptcy?
Those who pursue a Chapter 7 bankruptcy should be aware of some potential problems or concerns. Many forms of debt cannot be discharged under Chapter 7 bankruptcy, including:
• Government-funded student loans
• Some forms of tax debt
• Federal tax liens
• Child support
• Alimony or spousal support
• Debts for personal injury or death arising from a motor vehicle accident
• Fines and penalties for violating the law
• Certain tax-advantaged retirement plans
• Cooperative housing fees
Potential applicants for Chapter 7 bankruptcy should be aware that even private student loans are rarely discharged without a special showing of undue hardship. This can be hard to prove but can happen if you become permanently disabled and cannot work.
Solving Bankruptcy Problems
Following a bankruptcy, you may need to correct any inaccurate reports from former creditors. To do this, you will need to engage in a process with the credit bureau. This can entail contacting former creditors for verification of the satisfaction of debts. Even when these issues are resolved, those who have completed a bankruptcy can still expect to:
• Pay higher credit rates
• Have higher down payments
• Need to produce a co-signer when attempting to secure new credit
These complications are not the end of the world. They may require using a mortgage broker when seeking to purchase a house.
Reasons Why People Go Bankrupt
The bankruptcy statistics in America are alarming. The past few decades have seen a dramatic rise in the number of people who are unable to pay off their debts, and Congress has recently addressed the issue with legislation that makes it harder to qualify for this status.
Following is a list of the most common causes of bankruptcy in Utah today.
1. Medical Expenses
Rare or serious diseases or injuries can easily result in hundreds of thousands of dollars in medical bills—bills that can quickly wipe out savings and retirement accounts, college education funds, and home equity. Once these have been exhausted, bankruptcy may be the only shelter left, regardless of whether the patient or his or her family was able to apply health coverage to a portion of the bill or not.
2. Job Loss
Whether due to layoff, termination or resignation, the loss of income from a job can be equally devastating. Some are lucky enough to receive severance packages, but many find pink slips on their desks or lockers with little or no prior notice. Not having an emergency fund to draw from only worsens this situation, and using credit cards to pay bills can be disastrous. The loss of insurance coverage can also drain the job seeker’s already limited resources. Those who are unable to find similar gainful employment for an extended period of time may not be able to recover from the lack of income in time to keep the creditors at bay.
3. Poor or Excess Use of Credit
Some people simply can’t control their spending. Credit card bills, installment debt, car, and other loan payments can eventually spiral out of control until finally; the borrower is unable to make even the minimum payment on each type of debt. Having an emergency fund, medical insurance, and keeping your debt-to-credit ratio low are all ways to protect yourself from a future declaration of bankruptcy. If the borrower cannot access funds from friends or family or otherwise obtain a debt-consolidation loan, then bankruptcy is usually the inevitable alternative. Statistics indicate that most debt-consolidation plans fail for various reasons, and usually only delay filing of bankruptcy for most participants. Although home-equity loans can be a good remedy for unsecured debt in some cases, once it is exhausted, irresponsible borrowers can face foreclosure on their homes if they are unable to make this payment as well.
4. Divorce or Separation
Marital dissolutions create a tremendous financial strain on both partners in several ways. First come the legal fees, which can be astronomical in some cases, followed by a division of marital assets, decree of child support, and/or alimony, and finally the ongoing cost of keeping up two separate households after the split. The legal costs alone are enough to force some to file, while wage garnishments to cover back child support or alimony can strip others of the ability to pay the rest of their bills.7 Spouses who fail to pay the support dictated in the agreement often leave the other completely destitute.
5. Unexpected Expenses
Loss of property due to theft or casualty, such as earthquakes, floods or tornadoes for which the owner is not insured can force some into bankruptcy. Many homeowners are likely unaware that they must take out separate coverage to be covered from certain events such as earthquakes. Those who do not have coverage for this type of peril can face the loss of not only their homes but most or all of their possessions as well. Not only must they then pay to replace these items, but they must also find immediate food and shelter in the meantime. While uncommon, those who lose their wardrobes in such a catastrophe may not be able to dress appropriately for their work, which could cost them their jobs. You won’t necessarily lose your home in Chapter 7 bankruptcy especially if you don’t have much home equity and your mortgage is current. Whether you can keep your home after filing for Chapter 7 bankruptcy will depend on the following factors:
• whether your mortgage is current
• if you’ll be able to continue making the payments after bankruptcy
• how much equity you can protect with a homestead exemption, and
• the amount of equity in your home.
If you’re behind on your payment, in foreclosure, or have more equity than you can protect, you’ll have a better chance of keeping your home in Chapter 13 bankruptcy. Filers faced with those circumstances should learn more about choosing between Chapter 7 or Chapter 13 when keeping a home.
Your Home and the Chapter 7 Bankruptcy Trustee
Chapters 7 and 13 work very differently, so it’s important to understand what to expect—especially if you want to keep valuable property in Chapter 7. After filing for Chapter 7, your property will go into a bankruptcy estate held by the Chapter 7 bankruptcy trustee appointed to your case. However, you don’t lose everything because you can remove (exempt) property reasonably necessary to maintain a home and employment. The trustee will sell any remaining assets and distribute the sales proceeds to your creditors.
Here’s the tricky part—if you make a mistake, it’s unlikely that the bankruptcy judge will allow you to dismiss the case, and you could lose the house. So you must follow the rules carefully.
Are Your House Payments Current?
You’ll likely lose your home if you’re behind on the mortgage payment when you file for Chapter 7. Although the automatic stay will temporarily stop a foreclosure, the best thing you can hope for is delaying the process for a few months.
Chapter 7 bankruptcy doesn’t provide a way for you to catch up on the overdue payments. This presents a problem because a mortgage is a secured debt, and you can’t wipe out the lien in Chapter 7 bankruptcy. The lender can foreclose after the automatic stay lifts, and you’ll lose the house. The lender will either ask the court to lift the automatic stay to allow foreclosure proceedings to continue (which the court will likely grant if the trustee doesn’t plan to sell the home) or wait until the bankruptcy ends, proceed with foreclosure, and then sell the house at auction.
Chapter 13 bankruptcy can help. If you’re behind and want to keep your home, the better option is to file a Chapter 13 case. Unlike a Chapter 7 bankruptcy, it has a provision that allows you to catch up on mortgage arrearages over the course of a three- to five-year repayment plan. Also, if you have more equity than you can protect with a homestead exemption (more below), you can pay your creditors the value of the nonexempt equity in the plan, as well.
Can You Continue Making House Payments After Chapter 7 Bankruptcy?
It’s also important to be sure you can afford to continue paying the mortgage payment after a Chapter 7 bankruptcy. Losing the house after your case might put you in a worse financial position. Why? If the lender couldn’t sell the home for the amount you owe, you’d be stuck with a deficiency balance depending on the laws of the state you live in. You’d have to wait eight years to file a second Chapter 7 bankruptcy, leaving the lender plenty of time to collect a deficiency balance using collection methods such as garnishing your wages or levying on a bank account.
How Much Equity Is in Your Home?
If your mortgage payment is up-to-date, your next step will be determining how much equity exists. You’ll start by valuing your home. Then you’ll subtract any outstanding mortgage balance from the home value. The equity would be the amount you’d have in your pocket if you were to sell the house. If you don’t have any equity, you’re in good shape; trustees don’t sell houses without equity. Otherwise, you’ll need to be able to protect your equity with a bankruptcy exemption to avoid losing the home in Chapter 7 bankruptcy.
Can You Protect Your Home Equity With Bankruptcy Exemptions?
State exemption statutes list the property its residents can protect in bankruptcy. Some states allow residents to choose between either the state exemption list or the federal bankruptcy exemption scheme. Either way, almost all states allow residents to protect some home equity with a homestead exemption. You might be able to exempt even more with a wildcard exemption. If your exemptions adequately cover your equity, the trustee won’t sell your home in a Chapter 7 bankruptcy. However, if your exemptions protect only a portion of it, the trustee will sell the house, pay off the mortgage, give you the amount you’re entitled to exempt, and use the remainder of the sales proceeds to pay creditors. Keep in mind that the trustee will take into account the costs to sell the home. If, after deducting sales costs, the amount remaining isn’t enough to make a meaningful payment to creditors, the trustee will abandon the property (and you’ll get to keep it).
Indicators of When to File Bankruptcy
While there is no minimum debt to file bankruptcy, the amount of debt is certainly a vital thing to consider when filing. However, there are other indicators or factors that dictate on when you should file for bankruptcy and these include:
• Your ability to repay your debts outside of bankruptcy
• Your creditors’ willingness to work with you
• Your ability to discharge the types of debts that you have
• Other circumstances of your individual case
Free Initial Consultation with Lawyer
It’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. We want to help you!
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506
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