COVID-19 has resulted in many households facing economic damage that would have been inconceivable before the pandemic. Many lost their jobs and had to go on unemployment; however, often, even with enhanced benefits, unemployment compensation has not been enough to make ends meet. Things have gotten so tough for some folks that food lines have swelled around the country.
Personal bankruptcy may be an option for those struggling to afford their basic needs.
This level of economic struggle has not been seen since The Great Depression. Many Americans feel trapped by the situation, especially those who are carrying burdensome or unmanageable debts. This has some people wondering if they need to consider filing bankruptcy.
Relief programs may help some people avoid being forced to contemplate bankruptcy. In addition to the enhanced unemployment benefits, the moratorium on foreclosures and evictions are helping many people stay in their homes. However, as these programs expire, many households may still find themselves in an enormous amount of debt.
If you are concerned about debt that has spiraled out of control because of the pandemic, it is important to understand what bankruptcy is, how it works, what it can and cannot fix, and the effects of bankruptcy on your credit rating.
The Two Types of Bankruptcy: Chapter 7 and Chapter 13
Chapter 13 bankruptcy is a court-sponsored repayment plan. Rather than discharging debts, it allows debtors to restructure their payment arrangements to make them affordable. Chapter 13s are often used when a household suffers a drastic, long-term decrease in income. In these cases, the petitioner proposes a new payment plan for all his or her eligible debts. The plan must be affordable based on the new income level. If approved, the plan lasts between three- and five years.
Homeowners facing foreclosure often file a chapter 13 to save their homes. Once the bankruptcy is filed, the foreclosure process is automatically halted. Usually, the court will approve a plan where the debtor pays a monthly mortgage amount he or she can afford, saving the home from foreclosure.
Chapter 7 Bankruptcies
Chapter 7 is a liquidation bankruptcy. All eligible debts included in the bankruptcy petition are wiped out when the case is discharged. Upon filing bankruptcy, an automatic stay stops all collection activity, foreclosures, evictions, and auto repossessions. Upon the case’s discharge, the debtor is freed of all eligible obligations, unless he or she reaffirms a certain debt. Often, a debtor will reaffirm a vehicle loan because he or she wants to keep the vehicle.
Many assets cannot be kept in a chapter 7, so if you have significant unprotected assets, a chapter 13 may be a better choice. Protected assets cannot be seized in a Chapter 7. These include retirement savings, most household items up to a certain value, clothing, vehicles up to a certain value, and a small amount of cash.
Debts that can be wiped out in a Chapter 7 include the following:
- Credit cards
- Installment loans
- Personal loans
- Vehicle loans
- Medical bills
- Mortgage debt
- HOA assessments
- Some fines
- Some taxes
Debts ineligible for discharge in a Chapter 7 include the following:
- Student loans
- Child support
- Debts obtained through fraud
- Some fines
- Most taxes
In some cases, a home can be saved through a chapter 7. The law allows debtors to reaffirm a mortgage if they have a small amount of equity, thus saving the home and their equity. However, if you have a lot of equity, the court will force the home to be sold so that the proceeds can be divided amongst your creditors. If you are facing foreclosure, have substantial equity and want to keep your home, you will most likely need to file a Chapter 13.
The Effect of Bankruptcy on Your Credit
Immediately upon filing bankruptcy, your credit score will tumble. However, once the bankruptcy case ends, the score increases dramatically. Many people who file bankruptcy find that their credit scores are higher upon its discharge than when they filed. This occurs because so much debt has been wiped away.
Most consumers can obtain credit cards and vehicle loans soon after a chapter7 bankruptcy discharge, albeit at high interest rates. Over several years, if they maintain good credit, they become eligible for lower interest rates.
Some landlords require a certain amount of time pass after a chapter 7 to lease a rental unit.
Obtaining a conventional mortgage after a chapter 7 requires a 4-year waiting period; however, FHA-, VA-, and USDA- loans have shorter waiting periods.
Chapter 13 petitioners may be able to obtain a mortgage without a waiting period.
The COVID-19 pandemic has upended many peoples’ financial lives. Some may be left with more debt than they can handle, in which case bankruptcy may be a consideration. Those with significant assets, such as home equity, may consider a Chapter 13 repayment plan. Households with too much debt and no unprotected assets may find a Chapter 7 is the best way to get a fresh start.
If you are struggling to make ends meet and are overwhelmed with debt, personal bankruptcy may be an option and the bankruptcy attorneys at Hines Law in Massachusetts can help. We are a full-service personal bankruptcy firm specializing in Chapter 7 and Chapter 13 filings with over 20 years’ experience. Choosing the right debt relief solution, while safeguarding your interests is important and our bankruptcy firm will guide you every step of the way. Call today for a Free Consultation!