With unemployment still hovering at nearly 9.5 percent and continuously rising foreclosure filings, many people, once apprehensive of the consequences to their credit, property, and ability to obtain loans in the future, are now considering bankruptcy. In the past, filing for bankruptcy was considered taboo or a reflection of one’s character. But, today, many people overburdened with debt are seeing bankruptcy as a reasonable solution that could really help them.Credit card debt and medical bills are the most common reasons people file for bankruptcy protection. People living on fixed incomes who have lost their pensions or who find their homes “underwater” – worth less than what is owed – often have excessive credit card debt that can be discharged in a bankruptcy as unsecured debt. Medical bills often fit into this category as well and are usually dischargeable. Bankruptcy also allows a debtor to protect most, if not all, of his or her personal property. The home is exempt in varying amounts according to the state where the residence is located. Some states exempt a home’s equity up to $500,000. However, other real estate, such as a vacation home, is not exempt. The bankruptcy trustee will seize the property to be sold, and its proceeds will be distributed to the debtor’s creditors in order of priority. Debtors with second homes should carefully consider this before filing.
Filing a Chapter 7 bankruptcy will not save a home from foreclosure, but any deficiency judgment will not be assessed against the homeowner. A Chapter 13 filing, however, which is a reorganization of debt and requires paying back creditors at a reduced rate over a three-to-five-year period, can halt foreclosure proceedings and allow a debtor to make-up delinquent mortgage payments, but current mortgage payments must still be timely paid.
Bankruptcy was created to give people a fresh start. Although bankruptcy can remain on an individual’s credit report for up to 10 years, it is not the deathblow that some fear. Many experts say that consumers can still obtain home loans two to three years after filing.
Retirement accounts, Social Security, and pensions are also exempt up to about $1.1 million.
While a debtor must meet a means test to qualify for a Chapter 7 bankruptcy, most people with excessive debt and who are unemployed or underemployed would probably be eligible. Otherwise, a Chapter 13 filing is their other option.
Contacting an experienced bankruptcy attorney to learn more about the different Chapters and options is recommended.