Bankruptcy comes in different flavors. There is Chapter 7. There is Chapter 13. Bankruptcy can stop a foreclosure. It can stop a Garnishment. It can even save your vehicle for repossession. Bankruptcy may or may not be a long term solution to problems, but it at least give us a chance to breathe before tackling our problems.
When discussing bankruptcy, first we want to answer 3 questions:
What is Bankruptcy? What Chapter should I file? How can I stop (insert bad thing) from happening to me?
What is Bankruptcy?
If you’re on this website, you already know more than most people about Bankruptcy. That is, you know it can be A solution to some of your problems. So, what else is it? Bankruptcy refers to the set of laws found in Title 11 of the US Code. It is a law, authorized by the Constitution, passed by Congress and Signed by the President. Bankruptcy laws are administered by the Courts and monitored by the Department of Justice (via the Office of the United States Trustee).
Ok, why do we have Bankruptcy Laws? Bankruptcy as a tradition dates back to pre-Biblical days. The Book of Deuteronomy contains an admonition for creditors to forgive their debtors every 7 years. Still, we ask why? As a society, we try to encourage entrepreneurship. We want people to take risks, to spend money, to invest. Sometimes these risks do not succeed so an escape hatch is needed. Bankruptcy is a structured way to resolve debt and restore capital to productivity instead of continuing to pay for failed ventures. This is most often seen in business cases, but it applies to your personal life as well.
When you spend money, when you take on debt you are investing in yourself. If you’re taking on large amounts of debt to pay for flat screen tv’s or XBoxes then those investments may not have a high rate of return. But when you invest in a car note to more reliably get you to work it’s no different than a business investing debt in a new piece of equipment. Without getting into a lengthy discussion on macro-economic topics and the soundness of our current economic system, we can at least agree that our nation economy revolves around consumer and business spending. Much of that spending is fueled by debt.
What Chapter Should I file? Chapter 7? Or Chapter 11? Maybe Chapter 13?
Now, what Chapter of Bankruptcy should you file. To answer this we must first know a few things. What do the different Chapters do? What do I need done? Not every Chapter is useful for every situation. For instance, if you need to catch up on your mortgage over 3-5 years, you would not want to use Chapter 7.
So, let’s get to it.
What is Chapter 7 Bankruptcy
Sometimes called a Liquidation. Chapter 7 allows you to wipe out debt in exchange for liquidating “non-essential” assets. The definition of “essential” assets varies from State to State. The Law allows each State to decide what is essential. The overwhelming majority of people have no property liquidated. Timing is often very important. Chapter 7 does a great job of getting rid of loan and credit card
debt, but does little for some other situations. For instance, Chapter 7 is not a good long term solution to saving a house from foreclosure. Chapter 7 can only temporarily prevent a repossession and recovering a car that has already been repossessed is more difficult in a Chapter 7 than in a Chapter 13.
What is Chapter 13 Bankruptcy
Chapter 13 is often called a Reorganization of Debt. It allows a Debtor to reorganize their debts. You can change the terms of car loans, credit cards, personal loans, student loans, etc. Chapter 13 allows you to lower interest rates on some car notes, reduce principal balances on cars owned for a minimum of 910 days (roughly 2 and 1/2 years). Next, you can use Chapter 13 to remove completely unsecured junior mortgages.
Some wrongly believe that Chapter 13 means you have to repay your debts. This is untrue. In fact the discharge in a Chapter 13 case is more “powerful” than the Discharge in a Chapter 7 case. Some debts that would not be discharged in a Chapter 7 could be discharged (wiped out) in a Chapter 13.
As you’ll see in the next section Chapter 13 gives you the best chance to not only Stop Foreclosure but also to help Debtors once again became current.
Receiving notice of foreclosure is one of the most frightening things that can happen to a homeowner. Notice of Foreclosure gets mailed, served and sometimes even taped to the front door. The foreclosure process in Maryland can last as little as 2 months. I have personally seen a foreclosure that has lasted more than 7 years, even without bankruptcy assistance. The average foreclosure in Maryland is probably closer to 75-90 days from filing to sale. This is actually a fairly long time and in most cases enough time to do what needs to be done to resolve the matter for the homeowner.
Absent paying the entire past due balance and attorney’s fees, Chapter 13 Bankruptcy may be the best bet to resolve a foreclosure. It is not, however, a cure all. If the homeowner cannot afford payments on the property there is very little that can be done. Chapter 13 is not a ticket to a free house.
Vehicle repossession has a rippling effect for an already struggling household. Being as little as a week or two late on a car loan can lead to a repossession. Granted 2 weeks for repossession is generally reserved for subprime lender/dealers such as JD Power or CNAC, but legally any default on a car loan makes a car eligible for repossession. So, suddenly an already struggling debtor has no means of transportation after repossession, making getting to a job more difficult. You can follow the breadcrumbs from there.
After a repossession it’s very hard to get your car back by filing a Chapter 7 Bankruptcy. Chapter 13 gives you a better chance to recover your car after repossession.