The Ultimate Guide to Personal Bankruptcy In America

There have been approximately 750,000 filings for personal bankruptcy in recent years. So, we walk you through the basics with no judgment.

This is one of the paradoxes of the pandemic economic system: People aren’t filing bankruptcy as they used to due to government intervention to stop debt collection and evictions. But, unfortunately, the support will eventually end.

Economists and others predict that bankruptcy filings will rise in 2021, with millions of unemployed and government assistance being rescinded in political chaos. This is often due to factors beyond the control of individuals.

In the best-case scenario, bankruptcy protection will wipe out most of your unsecured debt, such as credit card balances and medical bills. In addition, a plan may be set up that allows you to catch up on any missed payments over three to five years.

This topic is often one that people find embarrassing, insecure, anxious, or guiltiest about. But, it’s business, just like any other financial transaction. 

Why it Matters

Do you need to file bankruptcy? These are some things you should consider:

Benefit:

• Filing bankruptcy can give you breathing space that allows you to get back on track financially. In addition, it can stop foreclosure proceedings and stop debt collectors’ calling.
• You can declare bankruptcy to eliminate unsecured debts such as credit card debt and personal loans.
  Filing can prevent your utilities from being turned off. If your utilities were turned off due to nonpayment, you could help get your service back.

Harm:

• A court-appointed trustee can be appointed to sell assets above a certain amount to pay creditors in one type of bankruptcy. This could include a boat, collectibles or a second vehicle. This could lead to the loss of your primary residence, although that is not always the case.
• Bankruptcy filings remain on your credit records for seven to ten years. This will make it more difficult to obtain loans or credit cards and more likely to be more expensive.
• Bankruptcies can be seen by anyone who has a look.
• Some debts cannot be erased. People who think they can avoid paying child support, alimony, and certain taxes will be disappointed. It is also difficult to forgive student loan debt.

When is it best to file for bankruptcy?

Consumer bankruptcy lawyers advise that you wait until you are certain you won’t accumulate more debt. Then, only the debt that you have incurred up to the date you file bankruptcy is considered. 

Henry Sommer, a Pennsylvania consumer bankruptcy attorney, stated that some unemployed people file for bankruptcy as soon as they get a job and when their debts have reached a peak.

Can anyone file for bankruptcy?

No. You may have too many incomes. You may feel stretched. However, your numbers might not be in line enough to qualify you for bankruptcy. You must clear at least one of the following bars to filing Chapter 7, the most popular type of bankruptcy. Your income must not exceed or equal the median income in your state for your household size.

You can also do a second calculation, which looks at your income over the past six months to determine how much money is left to pay your debts. Again, chapter 7 is possible for those who earn too much. Social Security checks and payments made under the CARES Act or other stimulus payments do not count towards your income.

Here’s what to do if you choose to file for bankruptcy.

What are the differences in the chapters?

Chapter 7 bankruptcy is for those with overwhelming debts. A bankruptcy filing can result in assets exceeding a specific amount per category (jewelry or burial plots are just two examples), and the assets could be sold to repay creditors. After that, all unsecured debts, including credit card debt and medical bills, are wiped out. You can then start over.

Chapter 13 cases can be three to five-year repayment plans. These plans are designed for those behind on their mortgage or car payments but have sufficient disposable income to make ends meet if they can restructure their debts. 

Secured debt such as a mortgage must always be paid in full. Unsecured debt, like credit card debt, can be reduced to a percentage based on your income, assets, and expenses. The remaining unsecured debt that is eligible for forgiveness will be wiped out once the installments are over.

Do I have to sell my house?

Texas homeowners can exempt a maximum amount of their primary residence from tax, provided they do not have any restrictions on acreage or residency. It depends on whether you are doing a Chapter 7 bankruptcy or Chapter 13 bankruptcy, how much equity your home has (your home’s value less your balance on your mortgage and your home equity line-of-credit) and if you have enough disposable income to pay your mortgage payments.

If you are current with your mortgage payments and have little equity in your home, you can keep it. However, if your home equity is greater than the amount allowed by a state (the homestead exemption), your home could be sold to gain access to that equity and pay creditors. Chapter 13 cases are filed by people who own equity in their homes and want to retain it.

What amount of equity can I keep in my home?

It is different for each state, and in New York, it is different for each county. There is no exemption for a homestead in New Jersey or Pennsylvania, so Chapter 7 filers must use the federal exemption. This is $25,150 for an individual or $50,300 if you are married filing jointly.

North Carolina’s exemption is $35,000 per person (or $70,000 for a couple filing jointly) for people under 65. Manhattan is $170.825, or $341.650 for married couples filing taxes jointly.

Which household property can I keep?

You should keep a lot of your everyday items safe. However, the amount you can keep in “exempt” property, such as clothing, furniture, appliances, and jewelry, is limited to a specific dollar amount. This varies from one state to the next. 

For example, in North Carolina, the motor vehicle exemption is $3,500 while $20,000. In Kansas, however, it is $20,000. A “wildcard exemption” is an amount that you can use to increase the value of any asset that you wish to keep in certain states.

Are there any good alternatives?

Negotiate first with creditors if you are having trouble paying your debts. Lenders might modify your loan to make it easier to repay. However, consumer advocates caution against debt settlement firms. 

However, consolidating debts at lower interest rates is possible. Although it is possible to borrow against your 401(k), consumer bankruptcy attorneys warn that it is almost always a bad idea to dip into retirement savings.

While parts of the CARES Act protected evictions and foreclosures, it is possible that this protection will not last. Therefore, you should check out the programs offered by your state and the federal government to give you some protection or enough time to catch up on payments.

What are the most common mistakes made when filing for bankruptcy?

When these accounts are protected from creditors, people drowning in debt might take out loans to pay off retirement savings or drain 401(k), IRAs, or both. Sommer, a consumer bankruptcy attorney, says that he helps people pay certain debts that can be erased in bankruptcy. However, he also advises them not to pay any debts that cannot be forgiven in bankruptcy.

Bankruptcy judges and creditors do not want to see anyone go on a spending spree during the months leading up to filing bankruptcy. The bankruptcy trustee might try to recover money someone has transferred to creditors or paid back family members in the months before filing.

What can go wrong with bankruptcy?

You could be charged with criminal offenses if you fail to disclose all your assets. In addition, if you stop making your installment payments in Chapter 13, the automatic stay that stopped creditors from collecting debts is lifted. Instead, creditors can garnish your wages, take over your home, or repossess your property.

A 2019 Bankruptcy Abuse Prevention and Consumer Protection Act report found that “39% of Chapter 13 cases reported that they had filed for bankruptcy protection during the previous eight years, the same percentage as in 2018.”

 

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