First: Bankruptcy Will Stay On Your Credit Report For 7 To 10 Years
Bankruptcy is not the end of the world. Life goes on, and you get a fresh start on your financial situation. However, be aware that a bankruptcy will remain on your credit report for some years. A Chapter 7 bankruptcy will stay on your report for 10 years, while a Chapter 13 (if dismissed) will fall off your report after 7 years. This could make it difficult, but by no means impossible, to obtain credit, land a job, or secure an apartment.
Second: Chapter 7 Discharges Nearly All Your Debts
Chapter 7 bankruptcy means that all of your debts (with some exceptions, like student loans) are discharged, or forgiven. You get to start over with a clean slate. But that also means giving up your home and losing all your equity. Chapter 7 releases you from your obligation to repay, but the bank still retains their lien (ownership) of your home. All of your non-exempt assets will be liquidated to pay off your creditors. A business filing Chapter 7 would have to close its doors.
Third: Chapter 13 Re-Organizes Your Debt Over Time
With Chapter 13 bankruptcy, however, individuals can re-organize their debts and spread them out over three to five years. This includes working out new terms with your mortgage lender. You’ll need to keep up on the new payments, but you’ll get to keep your home. Chapter 11 re-organization is similar to Chapter 13, but is for businesses. Another advantage of Chapter 13 bankruptcy comes into play if you also have a second or third mortgage or a home equity line of credit (HELOC) – see “lien stripping” below.
Fourth: You Can Keep Your Home
If you’re already behind on your mortgage payments, your lender is unlikely to work with you to renegotiate the terms. When the bank begins foreclosure proceedings, they will want the entire mortgage amount, and if you can’t pay it, you will lose your home. However, filing bankruptcy before the foreclosure sale of your home triggers an “automatic stay,” which prevents creditors from taking collection action against you, including foreclosure.
Because so many homes have recently lost upwards of half their value in the recession, Chapter 13 bankruptcy has become an important tool for debtors. It allows for something called “lien stripping.” If your home’s appraised value is, say, $150,000, and your first mortgage’s owed balance amounts to more than $150,000 (commonly called being upside-down or under water), then your second and third mortgages or HELOC are unsecured by any actual real estate value. Because they can be considered unsecured debt, a Chapter 13 plan can strip them off using the bankruptcy code’s sections 1322(b)(2) and 506(a).
Fifth: Having Good Records Helps Smooth The Process
If you have kept financial records like bank statements, debt statements, income taxes, and dividend disclosures, you are already ahead of the game. You’ll be required to provide copies of these types of records when filing for bankruptcy. If you’ve not kept meticulous records, DON’T WORRY. All the necessary information can be tracked down, but it will just take a little more time. Sirody and Associates will help by tracking down businesses that have purchased your debt. If this information has been gathered before the filing, the bankruptcy can go through without any further complications.
Disclaimer: This is not meant to serve as legal advice. You must consult a lawyer for proper legal advice.
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