Tips And Guide For Debt And Loan Management

A Chapter 13 is used only in very specific, limited circumstances. It is most often used to save a house from foreclosure. If you are behind on your mortgage (called in arrears), you cannot wipe out that debt in a Chapter 7 bankruptcy. Chapter 7 bankruptcies only wipe out unsecured debt (or secured debt for which you want to give back the collateral). The arrears on your house are secured. If you want to deal with these debts in bankruptcy and still keep your house, the only way is to catch up your payments through a Chapter 13 repayment plan.
A Chapter 13 bankruptcy is basically a repayment plan that lasts from three to five years, depending upon the circumstances. The debtor promises to pay a certain amount of money each month to the Chapter 13 trustee, who, in turn, pays back the debtor’s creditors. Typically, secured debtors are repaid 100 percent, and unsecured creditors get pennies on the dollar.
For example, Susan is four months behind on her mortgage, for a total of $3,600. If she wants to keep her house, she could file Chapter 13 and propose to pay that amount back over a three-year period. Her payments would be $100 per month ($3,600 divided by 36 months of repayment). This payment would be on top of her normal ongoing monthly mortgage payments. You can see why fewer people file Chapter 13. Paying this extra payment every month (which can run anywhere from $100 to $1,000 depending upon the circumstances) on top of all other payments is very difficult. The other time a Chapter 13 is normally used is when a debtor has property that he would lose to the bankruptcy trustee if he were to file Chapter 7. This property is called nonexempt assets.
Each state has a different set of rules, called exemptions, which are used to determine how much property a debtor can keep in a Chapter 7 bankruptcy. Essentially, exemption means protection. If you are able to exempt property, that means you are able to protect it and keep it.
Although the exemption rules are generous, they are not limitless. If the value of your property is more than the exemption rules of your state allow, and you filed a Chapter 7, the trustee in your case would take and sell whatever property you own that is over the limit.
For example, if you live in California and own a home free and clear worth $100,000, and you filed Chapter 7 for some reason, you would lose your home to the Chapter 7 trustee. Here’s why: California limits Chapter 7 debtors to a total of $50,000 in home equity.
A paid-off $100,000 home is $50,000 over the limit. The bankruptcy code permits a Chapter 7 trustee to seize and sell any asset over the exemption limit and use the excess money to repay your creditors. Chapter 13 is used to avoid that possibility. Chapter 13 lets you keep all your assets, no matter how much over the exemption limit you are. Finally, a Chapter 13 can be very effective if you have tax debts or child support arrears you need to handle. Again, most people have a lot of credit card debt and other unsecured debt. If that is your situation, Chapter 7 is surely the best way to go.

You want to (and most likely will) file a Chapter 7 bankruptcy. First of all, it is quick; a Chapter 7 normally takes about four months from start to finish. Also, a Chapter 7 bankruptcy costs less than a Chapter 13. (See Chapter 19, “How a Chapter 7 Case Proceeds,” for information about costs.) Best of all, it solves the problem; debtors normally pay nothing back to their creditors.
The reason that a Chapter 7 bankruptcy makes sense for most people is that they have a lot of unsecured debt, usually credit card debt. Whereas a Chapter 13 forces you to repay some of this money over a period of several years, a Chapter 7 completely wipes out the debt without forcing you to pay another penny once the case is filed. Chapter 7 is also attractive because most states allow most debtors to keep all of their property. This chance to discharge all debts and keep all property is what makes Chapter 7 so attractive. Combined with its relatively short duration, a Chapter 7 is usually preferable to a Chapter 13.

Once you have decided that bankruptcy is a viable option, the next thing to consider is what type of bankruptcy you will file. There are four types of bankruptcies individuals may consider: Chapter 7, Chapter 11, Chapter 12, and Chapter 13 (these are chapters of the United States Bankruptcy Code).
Two kinds of bankruptcies probably won’t apply to you. Chapter 11 is used by large businesses that want to reorganize their debts and is sometimes used by people with at least six zeroes’ worth of debt. It is inapplicable to almost all consumer debtors. Chapter 12 is a type of bankruptcy specifically designed to help family farmers. It, too, is fairly rare.
Chapter 7 is the most common bankruptcy used by consumers and is usually the best choice. Like Chapter 11, Chapter 13 is also a type of reorganization, but it is intended for consumer use. In a small number of cases, using Chapter 13 makes sense. Almost all consumers or small businesses will file either a Chapter 7 or a Chapter 13 bankruptcy.

Of course, filing bankruptcy has its downsides, including the following:

• The effect on your credit report. Most items remain on your credit report for seven years. A Chapter 7 bankruptcy stays on for 10 years.
• The effect on future credit. Filing for bankruptcy does not mean that you will never get credit again. What it does mean is that the credit you do get will be more expensive. For example, although you might be able to get a car loan at 10 percent interest today, that same loan will cost around 20 percent after you file. Although people routinely get home loans about two years after their discharge, they will definitely pay higher interest and have to deal with more points. Credit cards will be secured rather than unsecured for a few years. However—this may shock you—within three years after a bankruptcy, most people have A-1 credit again.
• Loss of property. In a few cases, a person may lose some of his property to the bankruptcy trustee. This loss occurs only when the person either files a bankruptcy without assistance of an attorney, has a bad attorney, or owns too much property.
• Stigma. Although there used to be a great stigma attached to filing bankruptcy, that is far less true today. With so many people doing it, and so many notable businesses and celebrities doing it (Burt Reynolds, MC Hammer, and Kim Basinger), for good or ill, there is not much of a social stigma left. You especially want to make sure that you will be able to protect all your assets when you file. Each state has different laws and limits regarding the amount of property a debtor can keep when he files bankruptcy. Some states are generous, and some states are stingy. Speak with a bankruptcy attorney in your state before filing to figure out your property situation.

Although there are certainly some negative aspects to filing bankruptcy, the truth is, for those who are seriously contemplating it, the benefits of bankruptcy usually outweigh the burdens.

The discharge occurs at the end of your case and states that your debts have been wiped out (discharged) and your liability for those debts has been forgiven (there’s that word again). You could owe $60,000 to six different credit cards, and the entire debt will be forgiven at the conclusion of your case. Suppose you pay $800 a month in credit card bills. The filing of the bankruptcy means that you need never pay that money to your creditors again. The opportunity to get rid of $800 a month in payments produces a lot of disposable income. The last benefit of bankruptcy is peace of mind. Few things in life cause more marital strife and personal stress than money problems. Bankruptcy, with its chance to start anew, get creditors off your back, wipe out debts, and create disposable income, will help you to get along better with your mate and sleep better at night. Although many people think of bankruptcy as a horrible last resort, many people have the exact opposite experience. Take our friend John, who we mentioned previously, for example. Through bankruptcy, he was able to wipe out all his credit card debt. After that, he got a job at another BMW dealership, and he eventually remarried. Bankruptcy was the tool that gave him the chance to start over, both financially and emotionally.

Right now you are probably feeling very defensive. Creditors are probably calling you at all hours of the day and night. You may be getting threatening letters, possibly even lawsuits and threats of foreclosure. What to do? Bankruptcy to the rescue! The moment you file your bankruptcy, the bankruptcy court issues an order called an automatic stay. This is the first step in your redemption. The stay is a federal court order that puts you back in the driver’s seat and puts your creditors on the defensive. (Doesn’t that sound nice?) The stay is automatic because it occurs in every bankruptcy case that is filed. It is called a stay because it forces everything to stay put. The stay immediately puts a halt to all collection activities. It stops lawsuits. It stops wage garnishments. It stops all phone calls and letters. It stops auto repossessions. Your house could be on the block, ready to be sold by your bank at a foreclosure sale tomorrow, and if you file bankruptcy today, the sale will be stopped. No matter what action a collector is about to take against you, you hold the ultimate trump card: bankruptcy and the automatic stay.
Although the stay is a fantastic tool for all debtors, sometimes it can be lifted. If that happens, then the creditor who gets it lifted can proceed with collecting the money you owe. Relief from stay is a rare occurrence. You will know if it happening to you if you get something in the mail called a relief from stay motion. If it does happen, the stay is only lifted for that one creditor who filed the motion; it remains in effect for everyone else.
The automatic stay normally remains in effect for the duration of the bankruptcy, usually about four months for a Chapter 7. For most people then, the filing of the case and the issuance of the automatic stay means that they will never have to deal with their creditors again. The stay stops all communication during the bankruptcy, and the conclusion of the case wipes out the debts altogether.

Of course, you would rather pay your debts if you could. But if you are reading this, then maybe you cannot. Although it is certainly understandable that you might feel bad for your creditors, it also might be helpful to know that most of them will be just fine.
Do you think that the people who service your Visa account go home and worry at night about the fact that if you pay the minimum on your card you will owe more next month due to penalties and interest? Of course not. Furthermore, these companies are in the business of making money and have made a fortune off of you already. They will get by just fine without your $119 payment every month. That is one of the costs of capitalism. Do not fret. Your creditors will survive.
Know this, too: Bankruptcy is a legal right that has
been part of civilized societies for thousands of years. You may notice that corporations file for bankruptcy protection all the time. Like you, sometimes they need help. Even the Bible says that creditors should forgive debts every seven years. So if you are feeling ashamed and despondent over your need to file bankruptcy, get over it. You are in good company. Of course, you should learn your lessons and not get in this pickle again. But both bankruptcy and this country are about second chances. If you need to, take yours.

You have valiantly tried to do everything in your power to fix your money problems. You are determined to handle money differently in the future, but nothing you do now can seem to get you out of the huge hole you have put yourself in. There comes a point for some people where they just want to raise the white flag over their money ship, give up, and start over. They do not want explain their situation to even one more unsympathetic creditor. They do not want to even answer their phone at all. Their ship is sinking.
One of Steve’s clients, John, had a successful career as a BMW salesman and made a fine living. Then his wife left him one day, and he grew despondent. A short time later, he was fired. He lived off of his credit cards for a few months, sure that he would be able to get a new job and repay the debt in no time.
His depression was getting worse, so he finally decided to ride his bike across the country as a kick-start for a new life. The night before he was to leave on his adventure of renewal, he tripped over his bike and shattered his leg. John was in the hospital for two weeks and in rehab for three months. By the time he was finally able to get a job and go back to work, he had been unemployed for almost eight months. His credit card debt had gone from a manageable $35,000 to an unmanageable $60,000. What was he to do?
His massive debt was enough to put him over the edge. John never thought he was the type to file for bankruptcy, but he had few options left. No amount of fancy letter writing or negotiating would ever get him off the hook. Eventually, his creditors would sue him and win. This is called getting a judgment against a defendant. For many people, the threat of a lawsuit or a wage garnishment is what finally forces them to seriously consider bankruptcy. But far less desperate circumstances can also hasten a bankruptcy. You merely have to be at a place where you feel you need a new financial beginning and see no other viable solution.
The bankruptcy code does not ask why a person is in debt. Losing a job is equal to getting divorced is equal to binge-shopping is equal to illness is equal to poor money skills. You could owe your creditors $10,000 or $100,000—it does not matter. The decision to file bankruptcy is strictly a personal decision based upon individual circumstances.
In the right circumstances, bankruptcy can be a safe harbor in the financial storm. It is a place that can stop all creditor harassment, allow for a new beginning, and forgive your debts.
Forgiveness, doesn’t that have a nice ring to it? Almost all of the law is about the opposite of forgiveness, namely retribution. Lawsuits are all about retribution. The entire criminal justice system is about retribution. The truly amazing thing about bankruptcy laws in this country is that they are founded upon the idea that sometimes, just sometimes, people need a break. Bankruptcy is about forgiving your debts, forgiving your mistakes, and letting you start over, at least financially. Take a deep breath. That last option is not so horrible.