Hard and fast answers that are true in every situation can be difficult to come by in the law. Usually answers to questions depend heavily on the particular circumstances that you find yourself in. Still, we understand the value of being able to find some general guidance to run with. With that in mind, here are a few of the most common questions people ask us every day. If you want answers for your specific situation, Take the Next Step and call us.
General Questions
Bankruptcy is a federal court proceeding offered to residents of the United States who are unable to meet their financial obligations as they become due. The U.S. Bankruptcy Code is that part of the federal law that sets out the rules and procedures for filing a bankruptcy proceeding. The Bankruptcy Code is divided into different sections called chapters. While all of the chapters are still considered bankruptcy they each provide a different set of rules so as to permanently relieve you from your debt obligations.
The two most often used chapters to relieve debtors from consumer debts are Chapter 13 which allows you to repay a portion if not all of your debts over a period of three to five years, or Chapter 7, which provides for a liquidation of your debts.
As you might imagine, bankruptcy itself is always a bad mark on your credit report. But, frankly, by the time most people consider bankruptcy, their credit report and scores are usually already messed up, maxed out . . . or both! A bankruptcy can also impact credit scoring positively by improving your financial position, including your debt-to-income ratio. This is because when you receive a bankruptcy discharge you are no longer legally liable to pay for any discharged debts. A bankruptcy will stay on your credit report for seven to ten years and begins to reduce in its effect on scoring after three years.
Generally, no. In most cases you will not lose anything in the bankruptcy. You will be entitled to “exempt” or protect most if not all of your property and belongings under state or federal exemption laws. For example in Utah you can protect up to $30,000 of equity in your home ($60,000 if married and filing a joint case), $3,000 of equity in your car, $1,000 of property with sentimental value, $1,000 in household goods and furniture, and one (1) of each major appliance (washer, dryer, refrigerator, etc.). There are many other exemptions that apply to other types of property. We will perform a complete analysis of your property and exemptions so you will know if anything you own is at risk. In cases where you have significant non-exempt assets you may be able to use a chapter 13 to minimize or eliminate any risk of losing your property. If you have loans against your property such as a home or a car, you must continue paying these loans in order to keep the property.
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Bankruptcy Alternatives
I think the answer to this question is “it depends”. It depends on how much you owe, what type of debts you have, if you own exempt or non-exempt assets, how much money you earn, etc. When I meet with people considering bankruptcy, we always consider other options. In some cases bankruptcy is just not the right choice. You may:
1. Pay your debts under the contract terms.
2. Try to negotiate with your creditors to get more favorable payment terms.
3. Use a debt management plan through a reputable credit counselor.
4. Borrow money either to pay the debts in full or to try and settle the debt for a portion of the balance.
5. Do nothing.
Each of these options has its benefits and drawbacks:
If you have the ability to pay your debt, you might consider enrolling in a consumer credit counseling program. But, beware! Many consumer credit organizations are unreliable. The government is investigating many of these “non profit” companies that actually operate to benefit insiders and not clients. They will often pay themselves first, taking your money and not actually giving it to your creditors, resulting in significantly higher debt, garnishment and/or repossession risk.
Many people get a second home mortgage or refinance their home to pay off credit card or other debt. This might reduce monthly payments by allowing interest only payments or by stretching out the time for repayment. But, in doing so, you change dischargeable unsecured debt into secured debt. The lending industry understands this, and that is why they aggressively market second mortgages and refinancing to people with unmanageable debt. In today’s economy this could be a scary tactic especially if it means borrowing on an adjustable rate mortgage because your payments could continue to rise as interest rates go up. Eventually the payments could force you out of the home.
By doing nothing, you delay your financial recovery indefinitely. You would be unable to start saving for important purchases like a home, college expenses and retirement. Your wages might be garnished, your home could be foreclosed, or your car repossessed. Nobody wants to go through those experiences. Congress enacted the bankruptcy laws to help you escape this downward spiral and start fresh.
Chapter 7 FAQs
Chapter 7 cases provide relief in exchange for a your agreement to liquidate and pay creditors the value of your non-exempt property.
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Chapter 13 FAQs
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