The word bankruptcy often evokes a negative image in the minds of many people. People resist declaring bankruptcy because of the myth that people only declare bankruptcy because they’re deadbeats or have done something wrong. In my experience nothing is further from the truth.
The fact is that Bankruptcy is federal law designed to protect normal people. For most people the goal of bankruptcy is to provide a “fresh start” for the honest debtor. People commonly consider declaring Bankruptcy because of an uncontrollable event. Someone loses a job, their hours are reduced, they undergo some unforeseeable medical expense or get a divorce. When the expenses that result become more than a person can reasonably expect to repay, Bankruptcy saves normal people from losing everything and provides them with a fresh start.
There are four chapters of bankruptcy available to people, Chapters 7, 11, 12 and 13. My office focuses on Chapter 7 cases (Chapter 13 involves a repayment plan, most frequently to repair a defaulted home mortgage; Chapter 12 is limited to family farmers while Chapter 11 is a reorganization, most frequently of a business, but it can be used by people as well).
In order to decide if Bankruptcy is the right option, one first needs to understand the effects of Bankruptcy.
In order to understand the effects of Bankruptcy, one needs to understand that there are, effectively, 2 types of debt: unsecured and secured.
Unsecured Debt refers to any debt that is not secured (encumbered) by a piece of property (the property can be personal, like an automobile, or “real”, meaning land). The most common examples of unsecured debt are things like credit cards and medical bills. These are debts you have, but are guaranteed by your credit, not a specific piece of property.
Secured Debts are those debt that are secured (encumbered) by some personal or real property. The most common examples of a secured debt are a home mortgage (a document recorded with the clerk in the county where the house is located) or automobile financing (the lender actually holds the car title until the consumer makes all payments). Where a debt is secured and where the borrower fails to make payment, the property taken as security may be repossessed (in the case of an automobile) or foreclosed (in the case of a house).
Effects of Chapter 7 Bankruptcy.
In a Chapter 7 Bankruptcy the consumer's goal is to obtain a discharge of (most of) his or her unsecured debt. The discharge is a federal court order that prohibits any future collection of pre-bankruptcy debt from the consumer. The debt effectively vanishes, neither you nor anyone else (unless they co-signed your debt) will ever have to pay these debts. There are very limited exceptions to this, most notably the majority of student loans and most income taxes that were last due less than three years before the bankruptcy case was filed (however after the three year period, even honestly incurred income tax debt may be discharged). For the average consumer, all of your credit card debt and all your medical debt will vanish.
It's a little more complicated when talking about a secured debt. If you wish to keep the property secured by the debt, you have to continue paying that debt (the mortgage or car financing). So if you want to keep your home, you need to keep paying your mortgage.
While you need to keep paying secured debts to keep the corresponding property, a Chapter 7 WILL discharge any personal liability you have from the mortgage or car financing. Many people don't understand that when they walk away from a house or have a car repossessed, the debt may not be completely satisfied where the property sells for less than is owed. In such a case the lender may sue you for the remaining balance. Bankruptcy eliminates this possibility and ensures that if you lose a piece of property that you don't end of paying for that property after the lender took it back.
Will this cause me to lose my Home?
In the VAST majority of case the answer to this is NO. Most of the time people get to keep their home.
In order to understand why this is true, one must first understand the concept of equity. When you take a mortgage or mortgages on your home, there is a certain amount of your home that you actually don't own. Equity is the difference between the fair market value (the price for which a house would sell) and the amount owed on the mortgage(s), essentially it's the portion of the house you 'own'.
This is best understood by example. If your house will sell for $200,000, but you owe $210,000 in mortgages, you have no equity in your home because you owe $10k more than the home is worth. By contrast, if you have a home that will sell for $200,000 but you owe $150,000 on your home, you have $50,000 of equity in your home (my example is approximate because selling a house has expenses involve). In this case, the value of the property you own isn't actually $200,000, but rather $50,000 – the bank that issued your mortgage owns the rest.
In order for someone to lose their home in bankruptcy, one has to have more than $21,625 in equity (if single) or $43,250 (if married) (again, in actual practice, adjustments are made for the cost of sale as well, effectively increasing the forgoing numbers). The best way to determine if you have equity in your home is by calling a real estate broker and getting a comparative market analysis or a uniform appraisal of the property from a licensed appraiser (appraisals cost money). Don't assume you know the value of your home.
To review: For one to lose their home, the realistic selling price of the property would have to be sufficiently high to:
- pay off the mortgage or mortgages
- pay the brokers fee and other costs of sale
- pay you your equity in the home (up to $21,625 in equity (if single) or $43,250 (if married)
After ALL of those expenses there would have to be enough left to make a significant payment to your creditors.
Perhaps the only silver lining to the current economic crisis is that housing prices are so low, that most people don't lose their homes in bankruptcy.
Will Bankruptcy Save my Home?
Possibly. This really depends a number of factors including whether you are current on your mortgage or if you are behind, on how far behind you are. If the Bank is foreclosing, a Chapter 7 will not stop a foreclosure and you would be better off considering a Chapter 13 (another form of Bankruptcy for people who are either too rich or own too much property to qualify for or need a Chapter 7). If you are simply falling behind on your mortgage, a Chapter 7 may help, as it will eliminate some other bills which in turn may allow you to divert sufficient funds to your mortgage. Therefore while the aid is not direct, it can indirectly help you save your home.
On a side note: if you have been foreclosed upon or are about to be foreclosed upon, and you don't want to do a Chapter 13, a Chapter 7 still may be of aid. If you have negative equity in your home, meaning you owe more than the house is worth, the creditor might eventually sue you for the balance (although in NJ these "deficiency" lawsuits are relatively rare). However if a deficiency is initiated, your home is foreclosed AND the mortgage company sues you for the remainder of the money owing on the mortgage balance. While this seems, and is, grossly unfair, it's does occasionally happen with regard to houses; with regard to motor vehicles, after a car repossession you are almost certain to be sued for a deficiency since repossessed automobiles are sold at very low prices, about ½ their fair market value. In such a case a Chapter 7 can help, as the obligation upon which you are being sued is now a unsecured personal liability that can be discharged (eliminated) in a Chapter 7 Bankruptcy.
Many people facing financial difficulties think that only the poor can qualify for Bankruptcy. Due to this assumption, many people are scared to even inquire about a Bankruptcy for fear that they will be turned away or laughed out of a law office.
The truth is that one doesn't have to be poor to qualify for Bankruptcy. A determination if one qualifies for Bankruptcy is not a simple calculation. It depends on many factors: income, household size, and monthly expenses. Don't make assumptions, contact Kyle L. Mastro - Attorney at Law for a free consultation and find out if you qualify for Bankruptcy.
Will your credit score be harmed? Yes.
Will the harm be permanent? No.
Events don't stay on your credit score forever. This includes bankruptcy. If you anticipate longer term expenses, such as you eventually want to purchase a home, that dream doesn't die by declaring bankruptcy. It may cause you to delay those plans, but those dreams aren't dead.
You have to make the decision for yourself. Is the desire to save your credit worth the harassment from and payments to, debt collectors? Can you realistically make these payments? Because if you can't your credit score will be significantly harmed anyway.
Don't assume you can't qualify or will lose your home. CALL (908) 240 7961 to schedule a FREE, CONFIDENTIAL CONSULTATION.
Kyle L. Mastro - Attorney at Law is proud to be qualify as a Debt Relief Agency under Chapter 11 of the United States Code.