Bankruptcy can be a Breather for Foreclosure Victims
With so many foreclosures engulfing Americans the name of bankruptcy is no longer associated with social stigma – rather bankruptcy can be a breather for foreclosure victims. However new restrictions have been placed on it since October 2005 preventing one from filing bankruptcy hastily. The borrower has to undergo credit counseling from certified persons and only after having obtained a certificate to that effect can bankruptcy be opted for.
There are two kinds of bankruptcies for individuals – Chapter 7 and Chapter 13. In Chapter 7 the property of the debtor undergoes absolute liquidation to clear the unsecured loans. In Chapter 13 bankruptcy, a payment schedule is chalked out to clear some or part of the dues.
Chapter 7 can be filed if the borrower’s earnings are less than the state’s median income. This will shelter some assets like cars required to go to place or work, tools used for livelihood and perhaps even the house. It all depends on state laws. All the other assets have to be sold and with the proceeds the debts paid. If the total realized from the sale is less than the due amount then the balance dues get cancelled.
If the income of the borrower is more than the state’s median and one can pay back a minimum of $100 per month (calculations are made by the Internal Revenue System rules and not on personal budget accounting) then one has to file Chapter 13. This will allow the borrower three to five years to clear dues.
Under Chapter 13 one can retain more property but the plan is difficult to execute. According to the American Bar Association out of 3 households, 2 who file Chapter 13 never manage to complete the schedule. Failure will lead to liquidation of everything.
Generally those with few assets, modest or no income and piles of loans, opt for Chapter 7. If one can erase good amount of debt and also be able to run the mortgage payment then there is a slim chance of saving the house.
Chapter 7 is the best alternative for the borrower who is prepared to thrown in the towel on the house – especially if there is the possibility of the lender hitting out with deficiency judgment relating to the difference between the sale price of the house and the loan due.
Under Chapter 13 so long as the borrower keeps to the repayment schedule the lender cannot harass him or her. A point to remember is that bankruptcy destroys credit ratings.
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