Did you know most bankruptcy plans fail within the first year? This can lead to substantial financial fallout because not only do debtors lose protection of the court, they may also face wage garnishment from creditors or have valuable items (including their house) repossessed.
The primary reason most bankruptcy plans fail stems from new bankruptcy laws enacted through the Bankruptcy Abuse Prevention and Consumer Protection Act. BAPCPA requires debtors to develop Chapter 13 payment plans which often require debtors to contribute up to 60-percent of their disposable income for periods of 2 to 5 years.
BAPCPA uses the ‘means’ test to determine how much debt is to be repaid. This financial tool compares debtors earned income against their states’ median income level. Those earning equal to or greater than median levels are required to file for bankruptcy protection under Chapter 13. Those earning less may be allowed to file Chapter 7.
Prior to BAPCPA, most debtors petitioned the court for Chapter 7. This chapter is often referred to as ‘fresh start’ bankruptcy. Debtors are required to liquidate valuable assets through the bankruptcy Trustee. Remaining balances are written-off and debtors are released from debt obligations.
BAPCPA regulations are complex and require the services of a bankruptcy lawyer. Attorneys are required to verify all financial information provided by the debtor to ensure it is accurate and truthful, than submit a letter of certification stating the information has been verified.
The verification process requires attorneys to conduct additional research which adds additional costs for legal fees. Debtors are also responsible for filing fees, court costs, and credit counseling costs required under BAPCPA. In order for bankruptcy petitions to be approved, debtors must undergo credit counseling by an agency approved through the U.S. Trustee.
Once counseling is completed and Chapter 13 payment plan approved, debtors remit payments through the Trustee’s office. Creditor payments are recorded and distributed by the court until debt obligations are fulfilled. Debtors should maintain accurate reporting of payments submitted to the court and compare balances against statements provided by the court.
Individuals who file bankruptcy to stop foreclosure must do everything possible to comply with their payment plan. If debtors fail out of bankruptcy after mortgage debt has been reorganized, all efforts to save their house will be in vain.
Mortgage lenders can proceed with foreclosure action at the point they stopped prior to submission of the bankruptcy petition. If banks intended to foreclose on the home within 15 days, they can foreclose within 15 days after bankruptcy failure.
The decision to file bankruptcy should be carefully weighed. BAPCPA makes compliance difficult because of the financial constraints. Debtors are not allowed to incur new debt during the repayment phase without court approval.
Personal bankruptcy remains on credit reports for 7 to 10 years. Bankruptcy can cause substantial reduction to FICO scores and prevent debtors from qualifying for credit cards or secured loans for several years. Those who are able to qualify for credit will be subjected to high interest rates and limited lines of credit.
Debtors should take time to research bankruptcy alternatives before submitting a bankruptcy petition. Some of the more popular alternatives include: home equity loans, mortgage refinance, debt consolidation, debt settlement, and credit counseling.
When filing bankruptcy is the only option, be certain to discuss ways to reduce the amount of Chapter 13 payments with your lawyer. Not leaving sufficient financial breathing room in the payment plan is often the reason most bankruptcy plans fail.