Most people know someone who is going through or has experienced financial difficulties. The loss of a job, unexpected expenses such as catastrophic medical issues, or other personal situations can affect the ability to pay bills in a timely manner, if at all, and can lead to thoughts of filing for bankruptcy. But bankruptcy is more than overdue bills. It is not an easy decision and many factors must be taken into account. To say it’s complicated is an understatement. It is technical and emotional for the debtor and the creditors, because the goods and services are provided with the legitimate expectation of being paid for.
Below is some information to consider related to bankruptcy. The decision is unique to each situation and requires more resources than can be provided here. Research bankruptcy, access credit counseling, or contact an attorney for additional information.
how it started
Dating back hundreds of years, there are references to debt cancellation, as well as punitive approaches to those who could not pay their debts. Most of the authority rested with the creditors to provide for debt reduction; the debtors could not bring the action. In early American history, there were “debtors’ prisons.” The US Bankruptcy Act of 1841 and the Bankruptcy Act of 1867 were both in response to the financial crisis.
The modern view of debt and bankruptcy has changed, along with a fundamental shift in the creditor-debtor relationship. The way business is handled has also changed. It is likely that our grandparents did not have multiple credit cards. The financial services sector has grown, with individual purchases accounting for about 70% of the US economy. Without credit, many purchases would not be made.
• Meet with a counselor from a non-profit credit counseling agency. See website: www.justice.gov/ust/credit-counseling-by-state/New-Mexico for contact information. Free services may provide you with options.
• Try to negotiate a payment plan with creditors.
• Review your income and expenses for a budget. Can you supplement your income to pay your debts? Can you cut expenses?
The 2 main types
The CARES Act includes a number of changes to bankruptcy laws aimed at making the process more accessible to businesses and people economically disadvantaged by the COVID-19 pandemic.
Chapter 7: This is the most common option and is designed for people who really can’t afford to pay their bills. To qualify, you must earn less than the median income of a family your size in your state. A “means test” may be an option with the court. The trustee in bankruptcy oversees the liquidation of assets to pay creditors. Most debts are discharged under Chapter 7. To qualify, the debtor must not have had a Chapter 7 in the past eight years. A credit counselor is required.
Chapter 13: It’s called “employee bankruptcy” because it requires you to have a stable source of income and unsecured debt – credit cards, medical bills, personal loans, etc. – under $418,275 and secured debts – house, car, property, etc. — less than $1,257,850, as of February 2019. The Chapter 13 reorganization requires debtors to repay all or part of their debts within three to five years. Payments go through a trustee in bankruptcy. A credit counselor is required.
What is eligible?
Non-eligible debts: Child support, alimony, certain taxes, government debt, drunk driving injury debts and court fines/penalties.
Eligible debts: Credit card debt, medical bills, personal loans, lawsuit judgments and obligations arising from leases or contracts. In addition, Chapter 13 includes divorce debts and debts for retirement plan loans.
Consequences of filing
• May hurt your credit score (although your credit score is probably low).
• Stays on your credit rating for 7-10 years.
• Damage your ability to obtain future loans.
• Holds loan co-signers accountable under Chapter 7. Under Chapter 13, protections include the co-signer if payments are made as outlined in the Chapter 13 agreement.
• Forms part of the public record.
• May require your home to be surrendered under Chapter 7.
• Stops foreclosure proceedings under Chapter 13. Other assets can be used to pay creditors.
The process is complicated and one mistake could have a major impact on your return. Determine if hiring a bankruptcy attorney is the best solution for your situation.
Sources: American Bankruptcy Institution: abi.org, debt.org and investopedia.com.