The biggest myth about bankruptcy is that people who choose to file are irresponsible people who run up their debts and plan to get a free ride. The truth is that most people who choose to file for bankruptcy have struggled for a long time and don’t know where to turn. They don’t just decide to file bankruptcy out of the blue. Most people got into this situation due to circumstances out of their control or went through a vicious divorce, lost their job, went out on disability or had a loved one go on disability due to serious medical problems. People are so scared of bankruptcy. The biggest issue is that it definitely affects one’s credit.
A Chapter 7 bankruptcy can stay on your credit report for up to ten years while a discharged Chapter 13 can stay on your credit report for up to seven years. Also, a bankruptcy can drop your credit score and make it harder to qualify for an auto loan, mortgage or credit card. However, if you are constantly missing payments, dealing with lawsuits, judgments and collectors, that can also affect your credit score.
Besides the severe credit implications, a bankruptcy can affect co-signor’s credit since once you file a bankruptcy you have a legal obligation to disclose all your assets and debts. Thus, if you are a co-signor for a relative, who is current with car payments which you co-signed, you must disclose that debt and you have an obligation to disclose the name and address of the co-signer.
However, the co-signor who has excellent credit should be able to resolve this with the credit bureaus since this was required as a matter of law and they were never delinquent. However, all clients have to understand this other negative implication of filing for bankruptcy.
Another potential negative of a bankruptcy is that it can affect employment. Certain employers will not hire people with a bankruptcy on their credit. However, if you do nothing and have creditors get a judgment against you and begin garnishing your wages then that may not look well with an employer who is worried about your credit.
Finally, some insurance companies will discriminate against you if you have poor credit. But missed payments, collections, judgments and lawsuits can have as bad effect as a bankruptcy depending on the circumstances.
Now that we have seen how bankruptcy affects your credit, we must also see different scenarios where bankruptcy can help you.
John Doe was diagnosed with a serious illness and incurred substantial out of pocket medical expenses. As a result of his medical issues, he missed several mortgage payments because of the time he missed from work and the out of pocket expenses that he had to incur.
Besides falling behind on his mortgage, John also ran up credit card bills. For months John tried to get a loan modification but was unsuccessful and now the mortgage company is in the process of scheduling a sheriff sale. Also the credit card company obtained a judgment against John and is ready to now garnish his wages.
In this situation, should John really worry about the credit implications of filing a bankruptcy when his home is at risk and a creditor is trying to garnish his wages which is the whole basis of his income? The bankruptcy code’s whole purpose is to help honest people, who due to circumstances outside of their control, got into financial problems. Once the bankruptcy is filed, it creates an automatic stay under section 362 of the bankruptcy code. This immediately stops the foreclosure action and the potential garnishment of Mr. Doe’s wages.
On the other hand, Mr. Doe can continue to pursue the loan modification while his home is getting deeper into foreclosure without filing for bankruptcy. We have seen people who have literally called our office a day before the sheriff sale because the loan modification or refinancing fell apart and they have no other alternative. It is extremely dangerous to let the credit implications affect your choice of filing bankruptcy when your property is literally at stake.
It is extremely dangerous to wait until the last minute to file for bankruptcy. Even though you have the credit implications, there are legal issues that can certainly affect your situation. In the Third circuit, where I practice, if you file a bankruptcy petition after the sheriff sale occurs, during the 10 day redemption period, you only have 60 days to refinance under section 108 (b) of the bankruptcy code.
We represented a couple that was going through extreme depression and ignored all correspondence and missed the date of the sheriff sale. It is extremely difficult to get any lending institution to refinance someone who is in foreclosure and especially after a sheriff sale has occurred. Therefore, you have to make a decision to move forward with the bankruptcy and to get the stay in place as soon as possible or you will miss the boat and not be able to save your home.
When people are in financial crisis, there are several scammers who will make several promises and charge substantial sums of money. The most important thing to realize about the bankruptcy filing is that is creates an automatic stay. With all the other ads and promises all over TV and radio, none of those ads can promise a stay which is required by the law under 11 USC 362 (A) of the bankruptcy code.
Another problem with delaying filing bankruptcy revolves around people in foreclosure. When you fall behind on your mortgage, it is the natural approach to assume that you will get caught up. However, as you either avoid the problem or think it is going to go away or pursue a loan modification for months, you are getting deeper into debt.
Once you are in a situation where you have to file a Chapter 13 to stop the foreclosure, your trustee payment will increase substantially if you owe more mortgage arrears and are curing the arrears over the life of the Chapter 13 plan. Trustee payments are based on numerous factors such as mortgage arrears, non-exempt equity and disposable income. However, if you have no issue with non-exempt equity or disposable income, letting the mortgage arrears accumulate can truly make a Chapter 13 plan not feasible.
For example, if you have substantial credit card debt and are only a few months behind on your mortgage, you will have a much more feasible plan that you can afford, than if you wait to file right before sheriff’s sale where the mortgage arrears have run up into the thousands plus you have to pay foreclosure fees and attorney fees on top of that. So when you are in a situation where property is at stake, it is the author’s opinion that delaying a Chapter 13 filing can have a serious detrimental effect regardless of the credit implications, since so much is at stake.
Another very important consideration involves automobiles. In light of a recent ruling in the Third Circuit regarding getting back a vehicle that has been repossessed, if you are behind on your auto payments you cannot delay since if your vehicle is repossessed it is no longer automatic that you will get the vehicle back right away. The Third Circuit ruled that in order to get a vehicle back that has been repossessed you have to file an adversary proceeding which is very costly and takes substantial amount of time, so a debtor may be without a vehicle for a long time before they are able to get it back. Thus, delay may seriously hurt debtors whose credit is already shot from the repossession and late payments.
When a person chooses to file bankruptcy it is because their property is at risk of being lost. If you delay, you risk losing your home, vehicle or having your wages garnished, which gives notice to your employer that you are in dire financial straits, which can have a much more serious impact affecting your credit than having a bankruptcy on your record. Another route that many people go is to try to make settlements with their creditors. For example if you owe Discover $10,000 and they are willing to accept $5,000 people don’t realize that the $5,000 money you saved is considered “income” by the Internal Revenue Service and you will get a 1099 from the IRS for taxable income.
Also, many clients borrow from their retirement plans and then have massive loan payments for years, plus a pension loan also generates a 1099 from the Internal Revenue Service. Thus, when you take out a pension loan, you get hit twice. You have to pay back the loan plus you have tax liability. Also, be aware of debt settlement companies since when you are not paying back all your debt that also has credit ramifications.
The decision to file bankruptcy is not easy. Clients think very hard about the decision and some people actually think a couple of years before making a final decision. However, the bankruptcy code is the only vehicle with an automatic stay. Also, as previously discussed, if you delay based on the technicalities of law, especially in the Third Circuit, there is a major risk that you may not be able to save your property.
Everyone’s circumstances are different so the final decision is up to you.
Steven N. Taieb, Esquire is board certified in consumer bankruptcy law by the American Board of Certification which is accredited by the American Bar Association.
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