The final option for many borrowers who find themselves unable to repay accumulated obligations,
bankruptcy protection will eliminate many debts (school loans, taxes, and others remain unaffected), but the negative repercussions can linger for years. Depending upon the state, bankruptcies can haunt credit reports for up to a decade and severely limit the opportunities available to those who file. For those suffering the most dire circumstances, bankruptcy can be a necessary safeguard, and, if all hope seems lost, it may be best to talk with an attorney about your situation.
Even within bankruptcy, there are different programs –
Chapters 7 and 13 of personal bankruptcy have their own advantages and drawbacks. Neither one, though, should ever be considered if another alternative seems possible. Changes In
Chapter 13 Bankruptcy Laws After filing for bankruptcy, a hearing will be scheduled with a judge to analyze the worthiness of the request. With Chapter 13 bankruptcies, those seeking protection were formerly required to give all income not expressly ear-marked as living expenses to a fund with which to repay debtors. After changes in regulations, those expenses are now determined by amounts set by the IRS should they earn more than their state's median income no matter specific exceptions. The disadvantages of this should be obvious – essentially, it forces the newly bankrupt to live under pre-set conditions entirely under the government's control – and, as things now stand, the filer's income will be solely determined by the six months prior to bankruptcy. Not only may expenses be far greater than what the IRS deems reasonable, but, after one period of long-awaited bonuses or above-average overtime, the government could mis-represent the filer's income well above actual earnings.
It's important to remember that even bankruptcies can fail. The arbitrary distinctions of current Chapter 13 law forces many of those filing to default upon so-called 'protection'. It's more important than ever to investigate all potential scenarios of bankruptcy and investigate every last alternative. Changes In Chapter 7 Bankruptcy Laws In Chapter 7 bankruptcies, those filing must list all household assets – whether vehicles, furniture, entertainment systems, even treasured family keepsakes – and guess their approximate value if auctioned. Since most used possessions have little worth when calculated in this way, the newly-bankrupt were allowed to maintain ownership under an exempt property statute through most of the country. This, as well, has changed with the new Chapter 7 bankruptcy laws. In order to elevate the value of these possessions, the monetary worth of personal property is now calculated with regard to replacement costs – the amount necessary to purchase something similar. Obviously, this greatly increases any object's value and, more importantly, the chances it would be seized by the courts for sale. Even those qualifying for Chapter 7 bankruptcy protection under current guidelines may find themselves unable to ever again pay the 'replacement costs' for their life's possessions.
Changes In Chapter 7 Eligibility In previous years, those filing for bankruptcy could choose between Chapter 7 and 13, and, since a successful Chapter 7 would eliminate all debts, most debtors would opt against the partial repayment program of Chapter 13. Under the new provisions, however, those earning incomes beyond the median of the debtor's state could be prevented from the Chapter 7 option. Now, those seeking to file Chapter 7 bankruptcy have to calculate their monthly family income against the current median for their state. Since this can vary widely, relief-seekers in relatively low-income states may find themselves unfairly classified. More troubling, the classifications are based solely upon the past six months of income previous to Chapter 7 bankruptcy declaration. Considering so much of the average American's earnings depends upon bonuses and seasonal overtime, this can grossly misstate actual income. For those filing bankruptcies because of sudden unemployment, the restrictions of the new law can clearly be far more ruinous.
Incomes at or below median may still take advantage of Chapter 7 bankruptcy protection as before, but higher incomes, no matter the individuals' actual situations, will be forced to pass what's known as a "means test" for Chapter 7 consideration. What Your Income "Means" The "means test" was designed to calculate whether debtors' incomes, apart from traditional living expenses and payment schedules for debts not covered through bankruptcy, could be repaid as part of the Chapter 13 program. To determine Chapter 7 qualifications, prospective filers should average their earnings from the past six months and deduct the pre-set expenses that the IRS deems necessary – which are far less than most debtors' true costs for food, gas, vehicle upkeep, clothing and day-to-day bills. The IRS' prescribed expenses vary from state to state, ignoring the substantial regional differences for cost of living within states, and those curious about Chapter 7 or 13 bankruptcies should contact local officials to check their state's specific requirements before venturing further. Once past income has been averaged and the Chapter 7 filer has learned the governmentally-adjusted expenses for his or her state, they should deduct the monthly outlay for priority debts (taxes, alimony or child support payments, etc) which, by law, would have to be repaid before any creditors. After that, deduct the payments for secured loans – house, car, anything that could be repossessed or foreclosed upon.
At the end of the calculations, should "disposable" income remain demonstrably less than one hundred dollars, the filer may qualify for a Chapter 7 bankruptcy. If income's greater than one hundred and sixty-six dollars, the courts would likely suggest a Chapter 13. For those whose incomes fall somewhere between $100 and $166.66, things get even more complicated. Is the remainder sufficient to fund more than one-fourth of existing debts neither unsecured nor deemed priority in the next five years? The debtor could, then, file for Chapter 7 bankruptcy – though, as should be clear, professional help remains a necessity to cleave through the thicket of new regulations whatever the costs. Changes To State Exemptions Along with the other changes to personal property exemption, those seeking Chapter 7 must now have maintained residency in their 'filing' state for two years to be considered eligible.
Previously, debtors only had to have lived in their state for three months, and, considering bankruptcies are often the result of a sudden change of events, this seems another unnecessarily punitive regulation. The difference between state laws regarding property can vary in the tens of thousands of dollars just for average consumers. Exemptions for automobiles, to take one example, can exponentially shift. For homestead laws, it's even worse – homeowners must have lived in their state for forty months in order to qualify for that exemption. Again, considering all of the changes that have been made, one must consult professionals before attempting bankruptcy. Changes In Bankruptcy Law And Bankruptcy Lawyers Considering the penalty for fraud, the ever-shifting statutes, and the difficult computations for ordinary debtors, the importance of bankruptcy lawyers for anyone thinking about a Chapter 7 or Chapter 13 cannot be over-estimated. However, changes within the law have only raised fees across the board for attorneys specializing in bankruptcy.
The sweeping changes within the laws have inevitably resulted in more hours spent by (and money spent on) bankruptcy lawyers upon casework. Under the new laws, attorneys will be held responsible to guarantee their clients' information – with greater responsibility and corresponding financial obligations. A worthwhile change, perhaps, but one that's already seen more and more lawyers move their focus away from bankruptcy. As regulations become increasingly complex, debtors more than ever require the services of bankruptcy lawyers before undergoing Chapter 7 or Chapter 13 proceedings, but the spiraling costs of initial consultations should make this the last resort.
The Easiest Alternative One could, of course, just wait. Something's bound to turn up around the corner. Inheritance from unknown relatives. Triumphant returns from forgotten investments - those baseball cards left 'round the basement, say. Debt consolidation's not much more than a continuation of that plan; whistling as compound interest builds. And Consumer Credit Counseling, often as not, might be playing for the other team. Bankruptcy, for the truly desperate, may help, but, considering the time and money spent to try and qualify (and the notion that, should those baseball cards spike in value, they may have already been auctioned by the government), most concerned debtors try any other possible alternative. There's no easy solution to debt settlement.
All situations are different, and no two borrowers are alike. The best path is to investigate every alternative and decide what's right for you. Our analysts, after only a brief survey, can help guide you to a clearer vision of debt restructuring or debt elimination. There's no easy solution, but the solutions do exist.
The decision to reach out for help with your debt is not one that's easy to make. You were raised to "do the right thing", but now it’s nearly unbearable. You struggle along while your creditors are turning up the heat. And now you’re at the point where the late fees, penalties and interest expense make it impossible to keep your head above water.
Ask yourself this. If you could eliminate your debt without permanently damaging your credit, why wouldn't you?
