How Bankruptcy Can Protect You
Filing for bankruptcy is often thought of as a sign of failure. At best, it is seen as a last resort when faced with too many bills, collection letters, or lawsuits. However, bankruptcy offers filers many advantages that other options do not. Bankruptcy is governed by federal law that protects the debtor and limits the actions their creditors are permitted to take. This breathing room alone is sometimes worth the cost of filing.
There are as many reasons why people file for bankruptcy as there are people filing. Whether you are overwhelmed with credit card bills, dealing with a pending sheriff’s sale, or are years behind in your taxes, bankruptcy could provide a viable option to get back on your feet. Furthermore, there are many advantages in addition to merely discharging the debt.
Bankruptcy is generally misunderstood. Many people have misconceptions regarding the process, the advantages, and the disadvantages. At Young, Marr, Mallis & Associates, our experienced Philadelphia bankruptcy attorneys are committed to answering any questions potential filers might have and offering additional options that filers probably never considered. To discuss the pros and cons of filing for bankruptcy, call our law offices at (215) 701-6519.
Stop Creditors by Filing for Bankruptcy
Creditors have many tools at their disposal to collect on a debt. From harassing phones and letters to obtaining a judgment lien against your home, bank account, or personal property, the law permits creditors to aggressively pursue delinquent debtors. Filing for bankruptcy stops creditors in their tracks.
The moment your bankruptcy is filed with the court, an injunction goes into effect that severely restricts what creditors are allowed to do. Often referred to as an automatic stay, this injunction protects you from both the harassing conduct and legal remedies creditors employ. For example, once you file for bankruptcy, all phone calls, letters, emails, and other forms of communication from your creditors must cease. A violation of this injunction could result in court-imposed fines.
More importantly, bankruptcy will stop any pending legal actions and prohibit your creditors from filing new or additional lawsuits. Many bankruptcies in Pennsylvania and New Jersey are filed to stop a foreclosure or sheriff’s sale. For some homeowners, bankruptcy is the only way to save their family’s residence.
When a creditor obtains a judgment through the courts, it could place a lien on your bank account. When this occurs, access to your account will be frozen and your bank will have to turn over your savings to your creditor. Filing for bankruptcy not only stops this, but it will also unfreeze your account, so you once again have access to your money.
Eliminating Debt by Filing for Chapter 7
People in the Greater Philadelphia area and South Jersey file Chapter 7 more than any other type of bankruptcy. Through Chapter 7, an individual or couple could eliminate, or discharge, the majority of their unsecured debt, including credit cards, medical bills, personal loans, some tax obligations, certain utility bills, and other debts.
When someone has defaulted on multiple credit card bills and is receiving collection letters in the mail, filing for bankruptcy might be an easy decision. However, if you can only pay the minimum payment on several credit cards or are always transferring balances to stay ahead of your creditors, filing for bankruptcy should be on the table. If you are eligible, you could eliminate the debt within five to six months, putting yourself back on the road to financial stability.
Removing Judgment Liens
Creditors have rights. One of the most powerful tools an unsecured creditor has in Pennsylvania is filing a collection lawsuit. If successful, a creditor will obtain a judgment lien against a debtor’s real property. This means that your unsecured credit card debt is now secured by your home. A judgment lien will stay on your property until you pay it off or the property is sold – in which case it will be paid through the proceeds.
If you qualify for Chapter 7, you could “avoid” a judgment lien. When a judgment lien impairs an exemption, it could be converted to unsecured debt and discharged. A lien will impair an exemption if it cannot attach to the property because of the exemption. To illustrate this, imagine your home is worth $150,000. The fair market value is $160,000. When you file Chapter 7, you have a $25,150 exemption to protect your equity. Therefore, there is no equity for the lien to attach to without touching the funds that are protected by the exemption.
Our New Jersey bankruptcy attorneys will file a “motion to avoid the lien.” If there is no objection, the court will order that the lien is avoided. This means it becomes a dischargeable debt. Now, your property is free of any liens other than your mortgage.
Stopping Foreclosure by Filing Chapter 13
Stopping foreclosure is difficult. Once a homeowner starts missing mortgage payments, the default can quickly balloon into an unmanageable amount. When attorney fees and other penalties are added, curing the mortgage default becomes unfeasible.
After a foreclosure lawsuit is filed, the mortgage company will typically want the entire arrears to stop the process. If a homeowner is unable to cure the default, their home will be listed for sheriff’s sale. This is a nightmare many homeowners face. Fortunately, filing for bankruptcy provides homeowners with a manageable way to save their home.
So how does it work? First, you must file Chapter 13. While Chapter 7 will slow down the process, possibly stopping a sheriff’s sale, it only delays the inevitable. Chapter 7 does not give a homeowner the ability to pay back their mortgage arrears.
One of the significant differences between Chapter 7 and Chapter 13 is the Chapter 13 bankruptcy plan. Through their plan, a Chapter 13 debtor will reorganize their financial obligations, including their mortgage arrears.
The easiest way to think about is to look at bankruptcy as a way to force the mortgage company to accept a payment plan. You will have five years to pay back the money you are behind. As long as you can demonstrate that you can afford the payment, your mortgage lender must accept the terms. However, you will still have to pay your regular mortgage payment. For example, if your mortgage payment was $1,250 and you were $21,000 behind, you will have to pay $1,250 to your mortgage company and $350 through your Chapter 13 bankruptcy plan. Depending on your other debts, income, and assets, you might be able to discharge your unsecured debt in the process.
By Filing for Chapter 13, You Could Pay Your Debts Through a Court-Approved Payment Plan
If someone makes too much money to file for Chapter 7, a Chapter 13 bankruptcy is another possibility. You could try to negotiate payment plans with your creditors if you are unable to pay them all in full. When you do this, the creditor has all the advantages, including obtaining an enforceable court judgment against you. Furthermore, you will probably have to pay a considerable amount of the total back within a short period.
When you file for Chapter 13, you will pay your creditors through a court-approved bankruptcy plan. A bankruptcy filer will have to pay a monthly payment to a court-appointed trustee. These funds will be disbursed among your creditors that file valid claims in your case.
While this does not sound as good as eliminating your debt, there are advantages. First, the amount you are required to pay is not based on the debt you owe but on your ability to pay. Part of the bankruptcy paperwork that is filed in a case is the means test. The means test looks at your monthly household income and a number of allowable expenses and deductions to determine your “disposable monthly income.” This amount must be paid to your creditors. Our Springdale bankruptcy lawyers will calculate this amount before your case is filed, so you will know if filing for Chapter 13 is in your best interests.
To illustrate how Chapter 13 works, imagine you owe a total of $40,000 to five credit card companies. After the means test is completed, it is determined you have $200 of disposable monthly income available. Therefore, you would pay $200 a month to your creditors for 60 months, or a total of $12,000. The remaining $28,000 would be discharged.
The other advantage to paying creditors through bankruptcy is that there are no tax obligations on the discharged debt. When you negotiate a settlement with a creditor, any forgiven debt is considered income. Therefore, you could owe federal tax on any forgiven debt. When the debt is eliminated through bankruptcy, it is not considered income and not taxable.
Divorce and Bankruptcy
Some marriages unfortunately end. One of the primary reasons for a marital breakdown is financial problems. Sometimes, filing for bankruptcy before divorcing is a practical option. There are advantages to filing before you are officially no longer a couple.
Filling a joint bankruptcy is less expensive than filing two separate cases. You will save money on both attorney and filing fees. Married couples are not obligated to file a joint case. However, it makes financial sense in many cases.
Chapter 7 or Chapter 13
The type of filing will influence a couple’s decision. Filing Chapter 7 is designed to provide a fast financial fresh start. Being able to leave a marriage without any debt is an attractive proposition. Because it is a relatively quick process, taking only four or five months, a Chapter 7 case will usually not delay a divorce in any meaningful way.
By contrast, a Chapter 13 case will last anywhere between three and five years. If you are divorcing, the idea of being in a five-year bankruptcy case might not be that appealing. Generally, if Chapter 13 is necessary, our Allegheny County, PA bankruptcy lawyer will recommend filing separately.
Income Qualifications and Exemptions
Qualifying for Chapter 7 is not always easy. However, if one spouse makes significantly less than the other, it might be advantageous to file jointly. This way, by combining the income and household size, you are more likely to pass the means test together. This is especially the case if there are children involved.
Furthermore, your exemptions double when you file jointly. Depending on the equity in your home, this could be the difference between discharging debt by filing for Chapter 7 or paying your creditors in a Chapter 13 case.
Other Reasons Why You Should Consider Bankruptcy
Other benefits of bankruptcy are not commonly known. For example, if you have a second mortgage and your home is worth less than your first mortgage, you could eliminate the second mortgage. For homeowners who lost equity over the years or paid too much for their homes, this could be a financial lifesaver.
Cars often depreciate faster than any other asset. If you are paying off a car and owe more money than the vehicle is worth, you might be able to lower your payments through bankruptcy. This option is only available under specific circumstances, so it is important to review your situation with one of our Allentown bankruptcy attorneys.
If your driver’s license was suspended for not having insurance or because you owe money for delinquent tickets, filing for bankruptcy could offer a means to have your license reinstated.
Lenders are not required to go through the court system to repossess a vehicle when you have fallen behind on your monthly payments. Filing for bankruptcy will stop your car from being repossessed. If it was already taken, you might be able to have it returned if you file for bankruptcy fast enough.
Before 2008 and the real estate crash, many people took out second mortgages on their homes. This money was helpful to pay for their children’s education or make needed repairs. However, when property values decreased, many people found themselves with a home that was worth less than what they owed. If the numbers line up, you might be able to strip a second mortgage and discharge it as an unsecured debt. This is a complicated process and is only possible under specific circumstances when you file for Chapter 13. If your home is underwater, call our Pennsylvania bankruptcy attorney to determine if your second mortgage could be eliminated.
Advantages of Filing for Bankruptcy
There are many reasons why someone should consider filing for bankruptcy. If you are unsure, the first step is to call and speak with one of our knowledgeable Bethlehemem bankruptcy attorneys at Young, Marr, Mallis & Associates. Only by reviewing your particular situation in detail will you know if bankruptcy is your best option. Nonetheless, it is important to remember some of the many advantages of filing a Chapter 7 or Chapter 13 bankruptcy.
- All phone calls and bill collections immediately cease.
- Immediately stop interest charges on credit cards.
- Provides an orderly form of repayment on your debt.
- You may be able to reduce car payments and mortgage payments.
- May allow for reinstatement of a driver’s license if it was suspended because of an auto accident without insurance.
- Allows you to get rid of Judgments, bank garnishments, and wage attachments.
- Allows you to catch up on car and home payments.
- Allows you to stop utility shut-offs or regain utility service.
- Allows you to improve your credit scores while discharging delinquent credit.
- Allows you to become current on past due mortgage or car payments.
- Stops all foreclosure actions and tax sales while retaining your home and all other personal items.
- Allows peace of mind and the ability to get a fresh start!
Contact Our Experienced Bankruptcy Lawyers for a Free Consultation
The reasons why people file for bankruptcy could fill a book. Everyone’s situation is unique. Our Trenton, New Jersey bankruptcy attorneys at Young, Marr, Mallis & Associates will carefully review your situation and help you understand the benefits of filing. Call our law office at (215) 701-6519 to discuss your next steps.