There is a ripple effect on homeowners who struggle with debt even after losing their homes. Honest people who want to make good on their debts are increasingly overwhelmed and finding it impossible to rebuild their financial lives.
When Dennis and Judy decided to help out their son by buying a second condo home, they never expected that they were headed into the perfect storm – a chain of events that would lead them to try to give away their real estate investments, work multiple jobs, and declare personal bankruptcy.
Keeping up with the payments on two condos – even though those units had lost their value and were worth less than balance left on the mortgage -- meant that Dennis and Judy's credit was good enough to allow them to take out another mortgage and buy a home they thought they could afford. Once they successfully negotiated a short sale on the two condo units, they thought they would finally have financial stability.
But when the bank won’t take back the property they hold the mortgage on, and there’s no buyers in the market -- even for a short sale -- the futility of repaying all debt became stressful, and threatened to take a toll on Dennis and Judy’s relationships, family and health. When your liabilities are excessive, and your assets are minimal, if not gone, it is time to take a rational look at a very personal and, often emotional, decision: Should you declare personal bankruptcy?
Years ago, personal bankruptcy was considered by some to be a shameful last resort. In today’s economy, however, personal bankruptcy filings are no longer seen as a kiss of death to your credit. They have become an accepted last-ditch effort to organize your debt, and free you from years and years of making minimum payments that will never go away.
There are three types of bankruptcies:
- Chapter 7 is the most common type of individual bankruptcy or liquidation. In a Chapter 7 debts you owe are discharged. A trustee is appointed to oversee the process and ensure that certain assets are liquidated to repay debt and that others, such as vehicles and home (depending on the equity) are protected. Within 4-6 months, most of the debts are discharged, and the debtor can hit the reset button and begin rebuilding credit.
- Chapter 13 is another type of individual bankruptcy filing. If you have a regular income and make too much money to qualify for a Chapter 7 bankruptcy, a Chapter 13 will create a debt repayment plan for all, or a portion of your debts -- usually over 3 to 5 years. If your financial circumstances change over the term of the repayment, the bankruptcy can sometimes be dismissed, or converted into a Chapter 7. If your debt is too high you will not be able to file for a Chapter 13.
- Chapter 11 bankruptcy filings are used by large corporations to reorganize their debt while continuing to operate.
If you are considering bankruptcy the most important thing to do is to find a reputable lawyer to advise you. For instance, in a Chapter 7 bankruptcy filing, you must meet a “means test” which will look at your income and debt to determine your true need for relief. These guidelines vary from state to state. Martindale-Hubbell is an index of lawyers that is available online at martindale.com which you can use to search for a bankruptcy lawyer in your area. Search for lawyers rated “AV” which indicates that a lawyer’s peers rank him or her at the highest level of professional excellence.
The consequence of filing for personal bankruptcy is that it does stay on your credit report for many years. However, there is evidence that lenders are adjusting to this new landscape. With careful management of limited credit and prompt repayment of any new debt, it is possible to repair your FICO scores. Some lenders are even allowing mortgages to people who have claimed bankruptcy.
The economy has forced many of us to a place where we need to stand up and declare: “enough is enough.” If you have tried to meet your obligations, but have been battered by economic forces beyond your control, the decision to take action can be the beginning of a more stable financial future. If you qualify, filing for personal bankruptcy may be an effective way to restore optimism in your financial future and rebuild your dreams. For Dennis and Judy, the difficult decision to declare bankruptcy in order reorganize their finances and make an honest effort to repay overwhelming real estate debt worked out. They are happy in their new home and, as Judy says, can “see the light at the end of the tunnel.”