Bankruptcy: To File or Not To File

The book on bankruptcy has been re-written and the new legislation will go into effect in October. Beware…the picture may not look good.

Currently, more people file for Chapter 7 bankruptcy than for Chapter 13 bankruptcy. Under Chapter 7, your unsecured debts are forgiven; under Chapter 13, you promise to pay all or part of your debt off over 3 or 5 years. Under the new bankruptcy law, more people will be forced to file for Chapter 13 bankruptcy than before.

Today, if you file for Chapter 13, the courts calculate the length of your repayment schedule based on your actual income and living expenses. With the new law, the courts figure out what the basic living expenses are for your state or county, which may be lower than your actual expenses. Your repayment amount is based on that number, no matter how high your actual expenses are. Whether or not you have the money to repay your debts, the courts still require you to pay it.

That’s the time when you have to ask yourself if it makes sense to file at all. If you don’t, it means you’re still stuck with debt for as long as it takes you to pay it off.

The new bankruptcy law may cause the costs of filing to go up. Attorneys may increase their fees due to the additional workload and extra trips to court. The new law also requires that consumers go through mandatory credit counseling for 6 months before filing along with taking a financial management course, the expenses for which are the responsibility of the debtor.

Many homeowners are utilizing the equity in their home to pay down their debt. Bob Walters, Chief Economist at Quicken Loans, says “extracting equity from one’s home to eliminate debt makes sense economically. It is critical, however, that people not run the credit cards up after they’ve been paid off.”

Managing one’s liabilities (their debts) is as important as managing assets.

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