Despite proclamations that the recession is over and some real estate markets like New York and Washington D.C. are already on the mend, there are still plenty of financially struggling consumers trying to keep the roofs over their heads. That trend is fueling the large proportion of bankruptcies filed during 2010. According to American Bankruptcy Institute, during January through September more than 1.1 million filed for the legal protection, and many of them have done so, as it is a way to avoid losing their homes.
What is Bankruptcy?
Bankruptcy is a legal maneuver where a person files documents declaring their inability to pay its creditors and can help qualifying consumers keep their homes despite financial woes. Consumers must go through the court system to declare insolvency and once done, foreclosure proceedings must cease in order to allow time for individuals to reorganize their debt. The most common bankruptcy options for consumers are Chapter 13 and Chapter 7.
Chapter 13 Bankruptcy The financial reorganization associated with Chapter 13 bankruptcy is the most common option and experts advise that this variety is the best legal protection for the financially struggling homeowner. This legal move will require filers to follow rules and payment plans laid forth by their local bankruptcy court. Typically the court will mandate an income-based budget requiring monthly payments made to trustees for a period ranging between three to five years. The trustees will be in charge of paying off debt starting with secured loans (including home loans). Only after those obligations are met, money will be applied towards unsecured debt balance. Chapter 13 bankruptcy:- Does not completely wipe out debt.
- Court ordered fixed payment plans are mandatory.
- Liquidation of assets not necessary.
- Credit histories will be tarnished for 7 years
Chapter 7 bankruptcies is also known as personal bankruptcy and liquidation, and can help both individuals and corporations. This form of legal protection for individuals or businesses wipes out their obligations for unsecured loans. Once approved by the local court system, homeowners will no longer need to pay back the bills and those funds can then be used to directly pay off the mortgage. Chapter 7 bankruptcy:
- Can be filed every six years if needed.
- Does not apply to the balance of Internal Revenue Service debts or federal student loans.
- Will remain on a credit history for 10 years.
- Only applies to unsecured debt such as credit card bills and medical bills.
- Requires liquidation of most assets.
- Mortgage payments must be made as mortgages are secured loans and therefore exempt from the procedings.
- Foreclosure may be delayed, but if legal payment obligations are not, homes can enter stages of default.
Bankruptcy and Credit
For decades available credit has been crucial in stimulating the economy. Approximately 70 percent of the nation's economy is based on consumer spending and credit (either secured or unsecured), it is a major part of that equation. Consumers have been long advised to manage their credit responsibly for years, as it is that factor that can help lower interest rates for consumers. Additionally, some employers consider bad credit a viable reason for not extending job offers. Those who file for bankruptcy can expect their credit scores to drop by as much as 200 points. Additionally, the legal procedure will stick on your credit report for many years (the amount of time differs based on the type of bankruptcy filed).
When to File for Bankruptcy
Because of the detrimental effects of bankruptcy, consumers should only use the option as a last ditch effort. Consumers struggling to manage their mortgage payments need to try all available opportunities before going through the legal procedure. Other options include:
- Mortgage Refinancing: Mortgage rates are historically low and by opting to refinance consumers can reduce their monthly payments by hundreds of dollars. Over the lifetime of the loan, the savings could be in the tens of thousands of dollars range. Mortgage Marvel is the industries leader in providing mortgage rate information in real time and without requiring personal information.
- Government Mortgage Assistance: In response to the mortgage crisis that has swept the nation, the government has launched a slew of mortgage assistance programs under the Home Affordable Modification Program (HAMP).
- Short Sale: While this option will not keep the roof over your head, it will keep your credit intact and allow consumers to purchase more affordable housing options.
