Most people know someone who is going through, or has had, difficult financial times. Loss of a job, unexpected expenses such as catastrophic medical problems, or other personal situations can affect the ability to pay bills on time, or not at all, and may give rise to thoughts of filing for bankruptcy. But bankruptcy is about more than overdue bills. It is not an easy decision and there are many factors to consider. To say that it is complicated is an understatement. It is technical and emotional for the debtor and the creditors, since the goods and services are provided with the just expectation of being paid.
Below is 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 a credit counselor, or contact an attorney for additional information.
How it began
For hundreds of years, there have been references to debt forgiveness, as well as punitive approaches for those who could not pay their debts. Most of the authority was with creditors to provide for debt reduction; the debtors could not initiate 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 change in the creditor-debtor relationship. The way business transactions are conducted has also evolved. Our grandparents probably didn’t have multiple credit cards. The financial services industry has grown, with individual purchases powering roughly 70% of the US economy. Without credit, many purchases would not be made.
• Meet with a counselor from a nonprofit credit counseling agency. View website: www.justice.gov/ust/credit-counseling-by-state/New-Mexico for contact information. Free services can provide you with options.
• Try to negotiate a payment plan with creditors.
• Review your income and expenses to get a budget. Can you supplement your income to pay debts? Can expenses be reduced?
The 2 main types
The CARES Act includes a series of changes to bankruptcy laws designed to make the process more available to businesses and individuals economically disadvantaged by the COVID-19 pandemic.
Chapter 7: This is the most common option and is designed for people who really can’t pay their bills. To qualify, you must earn less than the median income for a family of your size in your state. A “means test” may be an option with the court. Bankruptcy trustee 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 last eight years. Credit counseling required.
Chapter 13: This is known as “wage earner bankruptcy” because it requires you to have a steady source of income and unsecured debts (credit cards, medical bills, personal loans, etc.) of less than $418,275 and secured debts (home, car, property , etc. — less than $1,257,850, as of February 2019. Chapter 13 reorganization requires debtors to pay all or part of their debts within three to five years. Payments go through a bankruptcy trustee. requires credit counseling.
Debts that do not qualify: Child support, alimony, some taxes, debts to the government, personal injury debts caused by drunk driving, and court fines/penalties.
Debts that do qualify: Credit card debt, medical bills, personal loans, court judgments and obligations arising from leases or contracts. In addition, Chapter 13 includes divorce debt and retirement plan loan debt.
Consequences of the presentation
• It can hurt your credit score (although your credit score is likely to be low).
• Stays in your credit rating for 7 to 10 years.
• It harms your ability to obtain future loans.
• Holds loan cosigners accountable under Chapter 7. Under Chapter 13, protections include the cosigner if payments are made as identified in the Chapter 13 agreement.
• Becomes part of the public record.
• You can require your home to be surrendered under Chapter 7.
• Stops foreclosure proceedings under Chapter 13. Other assets can be taken to pay creditors.
The process is complicated and one mistake could have a huge impact on your presentation. Consider whether hiring a bankruptcy attorney is best for your situation.