In today’s world, even people who manage their money carefully can end up in serious financial distress. Some of the most common causes are medical debt, sudden unemployment and divorce. These life-changing events can put an individual or family in a situation where they cannot pay their bills.
“Being in debt can be extremely stressful and when you find yourself in a situation through no fault of your own, it becomes overwhelming,” said Christopher J. Grover, attorney, Jeffrey Freedman Attorneys, PLLC. “It is best to recognize the problem as soon as possible, and seek out information to come to a favorable conclusion.”
Filing for bankruptcy protection is often a viable solution, however, the general public has a lot of misconceptions about bankruptcy.
“It’s not something that we take lightly, but Chapter 7 bankruptcy can give an individual the fresh start they desperately need,” Grover said.
One of the biggest myths is that the individual has to give up everything they own in a bankruptcy. Certain assets, however, are exempt from turnover in a bankruptcy — particularly equity in a home.
“In a Chapter 7 bankruptcy, a trustee is appointed to review the value of your assets, sell any assets that are not exempt, and pay your creditors with the money from the sale. In turn, the remainder of your debts will be discharged,” Grover said. “For secured assets like homes and cars, the trustee is only interested in equity. Equity is the difference between the value of the asset and the loan.
“Even if you do have equity in your home, there are homestead exemptions provided by both the federal government and the state of New York to protect it. The homestead exemption is per person so when a couple owns a house together the exemption doubles. In New York state, up to $82,775 is protected. Most people in Western New York who file are able to stay in their homes.”
Only 30 to 35 percent of cases present an issue with nonexempt assets (boat, classic car, etc.) that the debtor may want to keep. If this is the case, the attorney may suggest a Chapter 13 bankruptcy, where unsecured creditors receive payments for the value of the nonexempt property.
While certain types of property can be exempted, cash — such as a large tax return cannot.
“It is a complex process, so it’s important to contact us early, as soon as you recognize you have a debt problem you can’t solve on your own,” Grover said.
Bankruptcy filings can stay on your credit report for up to 10 years, and many debtors think that if they file bankruptcy they will not be able to get credit again until the bankruptcy has been removed from the report. In fact, according to a study by the Federal Reserve Bank, 90 percent of debtors are able to get credit within 18 months of filing.
You can also take steps to rebuild your credit that will help you re-establish your viability sooner. You may pay a higher interest rate than someone with a better credit history for awhile, so it’s best to keep your borrowing to a minimum. The website jeffreyfreedman.com offers a free book, “Personal Bankruptcy: A Guide to Controlling Runaway Debt” that explains how to rebuild credit.
“There are a few debts that cannot be eliminated by filing Chapter 7 such as alimony payments, child support, certain types of tax debt and student loans,” Grover said. “You may also need to change your spending habits to make sure you don’t end up in the same situation again. But for most people who are over their heads in debt for whatever reason, filing a Chapter 7 bankruptcy can be a great relief and a chance to start over.”