THE PROS AND CONS OF BANKRUPTCY

Although the economy has been showing signs of recovery, many people are still struggling with debt, even if they have recently started a new job. Foreclosures are still proceeding at alarming rates, and poverty levels are at historic highs. There remains millions of people with no health insurance and facing thousands of dollars in medical expenses they have no hope of every repaying.
Bankruptcy is an option for individuals struggling with crushing debt, but many people fear the perceived stigma of bankruptcy and its consequences for their assets and their future ability to obtain credit or to buy a new home.

There are many misconceptions about bankruptcy. Although a bankruptcy will appear on a consumer’s credit reports for up to 10 years, many people find that lenders and banks are willing to give home loans just a few years after discharge if the individuals have been proactive in restoring their credit.

Bankruptcy- What Property is Lost?
In most cases, no property is lost in a bankruptcy. There are listed exemptions in varying amounts, depending on which state you live in, that clearly state how much equity in certain property or assets are protected. For example, a home’s equity is protected up to certain limit, but most states exempt well over a hundred thousand dollars. Your furniture, clothing, retirement plans, pensions, bank accounts, and one automobile are exempt up to a certain amount, but most debtors are able to exempt these assets. If you have a car loan, you can continue paying on it.

If you have real estate that is not your primary residence, it is not exempt and will be sold by the trustee. People with vacation homes should carefully consider this before filing, or should explore a Chapter 13 filing with a bankruptcy attorney.

Bankruptcy and Foreclosures
A Chapter 7 filing will only delay any foreclosure proceedings, although it may give time for a homeowner to sell the home or try to modify the home loan. A filing automatically stays the proceedings, although the lender will file a motion to lift the stay. In a Chapter 13, the homeowner must demonstrate that he or she can continue to make current mortgage payments while making up the arrearages over the life of the repayment plan, which can be up to 60 months.

A Chapter 7 will discharge any amounts still owing on the mortgage. If the homeowner chooses a Chapter 13, any second or subsequent mortgages will likely be discharged, or no further payments on those mortgages need be paid at the end of the repayment plan.

Bankruptcy and Other Considerations
Most reasons for filing for bankruptcy are to discharge credit card balances and medical bills. Many retirees on fixed incomes or those who have lost their retirement plans to fraud or municipal bankruptcy rely on credit cards and accumulate massive debt. The average credit card balance for people over 65 exceeds $10,000 and is unlikely to ever be paid off.

Most credit card balances and medical bills are unsecured debt and will be discharged in a Chapter 7 filing. Although all debtors must pass a “means test” before filing a Chapter 7, which is based on the mean income for a particular jurisdiction, most fixed income debtors or those on unemployment or who are underemployed will qualify.

Debtors with vacation homes or other real estate or who have good jobs with considerable salaries should consult with a bankruptcy attorney, since their real estate holdings are at risk of being lost in a bankruptcy, although a Chapter 13 enables them to retain the property so long as they meet the monthly payments. Other debt resolution plans may be more appropriate for these debtors.

For More Information on Chapter 7, please click here