American households face a tsunami of debt. Prior to the pandemic, credit card balances were already at record levels, as were auto loans. Just 12 years after the housing crisis, mortgage debt has eclipsed pre-recession levels. Then the pandemic arrived.
Though the long-term economic impact from the coronavirus remains a matter of speculation, the fact it has left millions of households in very deep debt is clear. While the stimulus helps in the short run, many households may still be left with unsustainable loads of debt.
For some, bankruptcy offers the most efficient method for getting the debt monkey off their backs.
Chapter 13 bankruptcy, known as the “home saver” bankruptcy, allows petitioners to restructure their debts. For those without significant assets, Chapter 7 may be the best option because it allows for a fresh start.
Are you wondering if bankruptcy could be the right option for you? Below we discuss how Chapter 13 and Chapter 7 bankruptcies work and under what conditions they are advisable.
Chapter 13 bankruptcies involve no property surrenders, which makes them appropriate for households with significant assets that are having trouble meeting their monthly debt obligations. For example, an insolvent household with $100,000 in home equity and $25,000 in taxable securities would probably want to file a Chapter 13. In a Chapter 7, the court can seize the securities and order the family home sold, with the proceeds going to the creditors.
Once either type of bankruptcy is filed, an automatic stay goes into effect. The automatic stay forbids creditors from engaging in any collection activity. The automatic stay is particularly important if creditors are attempting to seize valuable property, such as a home, vehicle or bank account. If a home is in foreclosure or the repo man is searching for a vehicle, the automatic stay freezes these activities, allowing the petitioner to keep the property. Often, when a foreclosure case is near completion, lawyers must file emergency bankruptcy petitions to save their clients’ homes.
When a Chapter 13 case gets to court, lawyers for the bankrupt will propose a modified payment plan for all their client’s debts. The purpose of the plan is to compress the insolvent household’s bills into a structure that fits current income. Plans last up to five years. Once the plan is completed, any remaining debt is wiped out.
Qualifying for a Chapter 13 bankruptcy requires a steady income to support the payment plan. It’s a long-term commitment but usually worthwhile for households with significant assets. If the court refuses to approve a plan, a Chapter 13 can be converted to a Chapter 7.
Chapter 7 bankruptcies are known as liquidations. The basic concept is that the court sells all of the debtor’s property and transfers the proceeds to the creditors. Once that process is completed, the debtor is absolved of all other eligible debt and the case is discharged.
Thankfully for debtors, the law protects certain assets from the creditors in a Chapter 7 case, including the following:
Tax Advantaged Retirement Accounts
401(k), IRA and other tax advantaged plans are fully exempt from liquidation.
The bankruptcy code allows debtors to keep vehicles they owe money on, but the debtor must reaffirm the debt and remains responsible for the loan after the court discharges the case. If there is no money owed on a vehicle, debtors can keep it only if the value is below a certain level, which varies by jurisdiction.
In many jurisdictions, Chapter 7 debtors can keep their homes, provided the equity is below a certain level.
Certain types of property, such as furniture or jewelry, can also be kept, provided the value is below a certain level.
Unfortunately for many debtors, the law disallows certain types of debt from being discharged in a Chapter 7, including the following:
- Student loans
- Child support
- Debt obtained through fraud
- Certain fines
When asset values are below the levels that trigger seizures, insolvent households usually choose Chapter 7 because it is faster and gives them a clean slate.
With so many American households in debt, bankruptcies are inevitable. Because of the economic disruptions of the pandemic, many indebted households are becoming insolvent. While stimulus may help, the debt mountain is getting very high, which will leave some households with little choice but to file bankruptcy. Through a Chapter 13 or Chapter 7, these households can vastly improve their financial situations.
Hines Law is a full-service personal bankruptcy firm serving the residents of Massachusetts for twenty years. If you are struggling financially and overwhelmed with debt, personal bankruptcy may be an option for you. Call our bankruptcy firm today and speak with an experienced attorney about your debt relief options – Free!