Many people are currently seeking advice on debt management and filing for bankruptcy. Times are bad right now, and while there are signs that they are approaching the corner, if not quite turning it as yet, people are still having great difficulty in meeting their mortgage repayments, and paying off loans and other debts.
Although people have had difficulty paying their mortgages and other loans since time immemorial, the past couple of years have been worse than normal. In fact, it was started off by this very problem: those with sub prime mortgages finding themselves unable to maintain their payments, and banks, building societies and other mortgage lenders going bust because of it. This sparked off a recession that led to an unusual number of job losses at all levels of employment, and with an even greater strain on the mortgage lenders.
One of the problems facing ordinary people with debt problems is the complexity of current bankruptcy law, and being unsure as to what the consequences to them would be were they to apply for bankruptcy. The frequent law changes and ways of interpreting bankruptcy law have been confusing to ordinary people, and now there are even more changes being discussed that could very well change the current situation. Before considering these, let’s have a brief look ate what the law says now.
Many people look upon bankruptcy as being a means of debt management. Changes in the law to allow them to retain equity on their car and $2,500 in the bank have rendered it as a perceived means of solving debt problems, particularly since you can’t be fired by going bankrupt and can still keep earning a regular wage. There is perception, therefore, that you can have all your debts written off, yet still keep your car and your job with cash in the bank.
This is not quite the case, and some of your debts will not change. Thus, if you owe taxes, the past three years are not exempt, and have to be paid, although any unpaid income tax bills more than three years can be torn up and thrown away. Some taxes are not covered, such as student loans and liens, and also fiduciary taxes, alimony and child support. You can have credit card debts, fraudulent credit claims, utility termination and foreclosure removed.
But what about your home – that is what most people will be interested in. Debt management is all very well, but if bankruptcy means losing their home, many people will think twice about it. A lot depends on whether you are going bankrupt under Chapter 7 or Chapter 13.
What Chapter 7 basically states is that the equity of your home is not greater than the sum of secured loans on it, including your mortgage and any secured loans, and the cost of selling your home, then, if you maintain your mortgage and loan payments, your home will not be sold when are declared bankrupt and you can keep it. Such equity is termed ‘exempt’
The reason for this is that nobody gains by selling a property that would result in no money being available for creditors, other than those that are being paid regularly anyway. Hence there would be no benefit.
If, however, you do have equity over and above the loans secured on it, then your home is liable to be sold and you are advised to file under Chapter 13.
Chapter 13 involves debt management adjustment, or loan modification. It helps you to work out a repayment plan, so that you keep your house – but not any equity on it. If you sell, you lose your equity.
Chapter 13 allows to you cure any mortgage defaults, and can even write of some part of your debt, depending on your circumstances. There is no guarantee that you will be able to keep your property, but there is a far greater possibility if you file for bankruptcy under Chapter 13 than Chapter7.
It is also worth noting that you might have to undergo a means test to determine if you are qualified to file under Chapter 7. If your earnings are below the median for your state, then you will, but if not you may have to prove that you do not have the money to pay at least some of your debtors, and that you are truly in penury.
Anybody whose debts are so crushing that they are considering filing for bankruptcy as a means of debt management, or paying all their debts, should first consult an expert in this form of law. There is a significant difference between Chapters 7 and 13, and is critical that you use the one that is most appropriate for your circumstances. The wrong choice could be disastrous, and the right choice could give you a fresh start while keeping your own home.