Approximately 8,000 people file bankruptcy every day within the U.S. Most are trying to obtain financial relief from outstanding debts, while others are seeking protection to stop foreclosure. Many people falsely believe that bankruptcy will be the end-all to financial problems, but the truth of the matter is bankruptcy can actually create additional financial burdens.
In order to file bankruptcy, individuals must first locate a bankruptcy lawyer. Debtors must adhere to guidelines outlined in the Bankruptcy Abuse Prevention and Consumer Protection Act. BAPCPA requires debtors to repay a portion of their debts by establishing Chapter 13 payments.
The amount of debt to be repaid is calculated once debtors undergo the ‘means’ test. This financial tool measures debtors’ income against their states’ median income level. If debtors earn less than median income levels they may be allowed to file for bankruptcy protection under Chapter 7.
Often referred to as ‘fresh start’ bankruptcy, Chapter 7 allows debtors to liquidate assets to pay off outstanding debt. Any remaining balances are discharged. Although debtors incur damage to their credit score, Chapter 7 lets petitioners walk away from outstanding debts and provides the opportunity to start anew.
BAPCPA guidelines require debtors to obtain credit counseling through an agency approved by the U.S. Trustee. Oftentimes, debtors can resolve debt problems through credit counseling. BAPCPA allows debtors to enter into credit counseling up to six months prior to filing for bankruptcy protection.
Individuals considering filing bankruptcy should obtain credit counseling from an approved agency. If they later decide to submit a bankruptcy petition they will have met the counseling requirements of the new bankruptcy laws.
When debtors are required to file protection under Chapter 13 bankruptcy they must submit their proposed payment plan to the bankruptcy judge for approval. Once the judge approves the plan, debtors begin submitting payments to the U.S. Trustee who in turn distributes payments to creditors.
Chapter 13 payments are in addition to normal monthly expenses and can place a heavy burden on debtors. When individuals are financially incapable of fulfilling Chapter 13 requirements, creditors have the right to petition the court seeking dismissal. When this occurs, debtors fail out of bankruptcy and no longer have protection against creditor claims.
Failing out of bankruptcy is the worst case scenario for individuals who filed bankruptcy to stop foreclosure. Mortgage lenders can commence with foreclosure action starting at the point where they left off prior to the bankruptcy petition. For example, if a debtor filed bankruptcy 10 days prior to having their home repossessed and later fails out of bankruptcy, the bank can foreclose on their property within 10 days.
Individuals facing foreclosure should contact their servicing lender as soon as they discover they are unable to pay home mortgage payments. Banks can offer home-saving strategies which can prevent debtors from having to file bankruptcy. When mortgagors cannot afford to stay in their home, lenders can engage in real estate short sale or deed in lieu of foreclosure.
Prior to filing personal bankruptcy, debtors should seek out alternative solutions that can offer the same results without the ramifications to their credit score. These can include: credit counseling, debt consolidation, or debt settlement.
When bankruptcy is the only option, debtors should work with a qualified bankruptcy lawyer to ensure they follow BAPCPA protocol. Bankruptcy attorneys can be located through referrals, telephone directories, or through the American Bar Association website at ABAnet.org.