More and more families are resorting to using credit cards to make ends meet. Pressed by debt in a sluggish economy and exorbitant gas prices, they are juggling rent or mortgage with groceries and the cost of heating and cooling their homes. The prospect of selling their homes to alleviate the burden of debt is not realistic when home sales are in a free fall and refinancing is not an option. Foreclosure is forcing families to walk away from their homes. The combination of these and other things which may occur such as an unexpected medical emergency are causing many to consider bankruptcy as an option to escape from the stress. However, bankruptcy doesn't always offer financial freedom and comes with its own pitfalls.
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Any bankruptcy is usually included on a credit report for ten years. After filing bankruptcy, you may not be able to finance the purchase of a home until two years after discharge. Also, if able to get financing on something such as a car, there could be a penalty of a higher interest rates. Car insurance could be higher. These are just a few negative effects of bankruptcy. Yet, on the positive side, after a debtor, the person filing bankruptcy, has been discharged from bankruptcy a creditor may be favorable about a loan because prior debt has been erased and payments can be easier to make. The mistake many make is to give in to those pre-approved credit card offers. Since credit card debt may be part of what caused the bankruptcy in the first place, it is inadvisable to give in to the "pre-screened" or "pre-approved" offers otherwise you will find yourself back in the place where you were when you filed bankruptcy.
Suppose however that you have decided to file bankruptcy. The average person is concerned mostly with either a Chapter 7 or a Chapter 13 bankruptcy. In either case, a trustee will be appointed to manage any assets you may have, including your home. A Chapter 7 is called a "straight" or "liquidation" bankruptcy. Chapter 7 will cancel most debt including credit card debt and loans for things such as cars and homes. Any taxes you may owe will not be cancelled. Nonetheless, realize that the car and the house are security on their respective loans and they must be surrendered to the lender unless you negotiate an agreement to continue paying for them. Furthermore, in a Chapter 7 bankruptcy, the trustee presiding over your case can take any property owned that is not exempt. Exempt property is that which is protected by law from the trustee or creditors. Exemptions are determined by several factors which should be discussed with an attorney. The trustee may sell a home, if it is not exempt, when there is enough equity to pay creditors. If the balance remaining on your car loan is less than the value, the trustee may sell your car to pay your debts.
Chapter 13 is sometimes referred to as "debtor's court". This type of bankruptcy is a "debt adjustment". Chapter 13 allows the debtor to keep everything owned and the debt will be reorganized into a single monthly payment which may continue for 3-5 years. Payments are only as much as the debtor (you) can afford and can be raised higher or lowered depending on property that is kept by the debtor (i.e. a car). When the payments are completed, debt which has not been paid is discharged.
There are general requirements which must be met before filing either a Chapter 7 or Chapter 13 bankruptcy. The debtor(s) must complete credit briefing or financial counseling with an approved agency. There is also a residency requirement of six months in the state in which the bankruptcy is filed prior to the date of filing. In Chapter 13, the debtor must have sufficient income not only to make plan payments but also to meet monthly living expenses.
Even though you may be filing for bankruptcy, continue to make payments on the car or the home if you plan to keep them so you will not be behind. Consider reducing the amount of your income tax refunds as these can be taken by the trustee in a Chapter 7 bankruptcy. Never put your property in someone else's name with the intention of keeping it. That is considered a fraudulent conveyance.
Finally, hire an attorney who specializes in bankruptcy law. Bankruptcy law is federal code applicable to all states, nevertheless, local laws and practices may affect a bankruptcy case.
After being discharged from your bankruptcy avoid getting back into the situation again. You cannot file bankruptcy again for eight years but as stated above, it will be reported on your credit report for ten years. Make a budget which does not include giving in to the lure of the credit card sales pitches. Keep track of all money you spend to get an idea of where there may be leaks in your finances. Have your name removed from the prescreened and pre-approved mailing list so you will not be tempted to give in to the offers.
If you are considering bankruptcy, educate yourself about the benefits and the drawbacks so you will know what to expect. Take a look at the required forms for filing bankruptcy. These are free to download at uscourts.gov/bkforms/index.html
No representations are made that this article is either intended to qualify as legal advice or as statement of law. The writer's intention is to suggest areas which should be discussed with an attorney or other professional who is familiar with the Federal Bankruptcy Code.
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