Top 10 Reasons to File for Bankruptcy

There are many good reasons to file for Chapter 7, Chapter 11 or Chapter 13 bankruptcy. At Parker & Associates in Winchester, Massachusetts, and on Cape Cod, we have identified a few that many believe are the top 10. The reasons include:

REASON #1

The #1 reason for choosing to file any bankruptcy — Chapter 7, Chapter 13 or Chapter 11 — is to obtain the automatic stay! Filing for protection under any chapter, barring a few prominent exceptions, immediately halts all ongoing legal and collection actions against the debtor automatically, including telephone calls from collectors, lawsuits, foreclosures and wage garnishments (THERE ARE EXCEPTIONS — so consult your attorney). more...

You may be able to save your home from foreclosure by filing a bankruptcy. Through a bankruptcy filing, you may be able to cure your mortgage arrears or obtain a loan modification. Bankruptcy can help you retain your home or business property.

If an individual is behind on his or her mortgage payments and facing a foreclosure, filing a Chapter 13 or 11 to obtain the automatic stay may allow the individual to cure the defaults through a restructuring of the debt. Options include paying the mortgage arrears as part of a Chapter 13 wage-earner plan, or restructuring through a Chapter 11 plan or the loan modification process. There are a number of possible solutions available under the Bankruptcy Code, which provides the tools to prevent the loss of the property and bringing the loan current. A repayment plan can be structured through both Chapter 13 and Chapter 11 so that the past-due amounts are cured while making regular monthly mortgage payments. Individuals who use the Bankruptcy Code for this purpose may be protected from foreclosure while they cure the amounts that they are behind and so long as they maintain current payments and do not fall behind on their mortgages after the bankruptcy filing. Filing a bankruptcy can stop a foreclosure sale and gives an individual the opportunity to save his or her home or property.

REASON #2

The #2 reason for choosing to file for bankruptcy is to get a fresh start with your finances. more...

You get a fresh start.

The #2 reason for choosing to file for bankruptcy is to regain full control of your finances and get the fresh start that you are seeking.

Individuals can obtain a fresh start through the filing of a bankruptcy under Chapter 7, 13 or 11 of the Bankruptcy Code. The requirements for each chapter can differ and are based on many factors. Parker & Associates can help you find the correct solution for obtaining debt relief and a fresh start.

Chapter 7 bankruptcy can help you get a fresh start. Chapter 7 is intended to provide an individual who has suffered from unfortunate circumstances to discharge their debts. Chapter 7 can wipe your financial slate clean. After a Chapter 7 discharge, you will not be required to pay unsecured debts, like credit cards, that were included in your bankruptcy discharge. Secured debts may require continued payment in order to avoid the loss of the property. Talk to your attorney about which debts or bills you may want to pay even if they are discharged. One type of secured debt that can be handled in Chapter 7 is a mortgage or home loan where the payments are current but there are other financial obligations. In this instance, if you want to keep your home, this may be possible. Though the loan will be discharged, the home or property can typically be retained so long as the mortgage continues to be paid. In other instances, if you want to surrender the home or property and be relieved of the payment of the mortgage, a Chapter 7 may relieve you of any deficiency claims. There are many other types of debts that can be discharged in bankruptcy, including credit card bills, medical bills and vendor debts.

REASON #3

The #3 reason for choosing to file for bankruptcy is that in Massachusetts, even if you seek and obtain a discharge of your debt and a fresh start under Chapter 7, the laws allow you to retain certain essential property as it is exempt and protected from the claims of creditors. This usually includes your home, car, household goods and retirement savings. You may also choose to obtain protection from creditors and be able to retain essential and "non-exempt" property by filing a Chapter 13 or Chapter 11. This allows an individual the option of keeping property, which might otherwise be sold or liquidated in a Chapter 7 proceeding by proposing a repayment plan, which provides for the payment to creditors in an amount that is not less than the creditors would have received in a Chapter 7. more...

In a Chapter 7, an individual's non-exempt property can be sold by the Chapter 7 trustee to pay the claims of creditors. However, a Chapter 13 is different. A Chapter 13 allows an individual to keep non-exempt property, which would otherwise be sold or liquidated in a Chapter 7 and instead, allows the individual to pay his or her creditors the value of the property through the Chapter 13 trustee, over a three- to five-year time period. This typically means that you pay money in an amount that equals or exceeds the value of the property you wish to retain.

This allows an individual to retain the property and is an important consideration for many people facing financial difficulties but who wish to keep the assets that have equity or sentimental value, including a second car, a boat, family jewelry or heirlooms, and other assets which they may have accumulated over the years. Chapter 13 debtors can expect to keep most, if not all, of their property by taking advantage of the laws exempting essential property and then proposing a repayment plan for the balance.

Chapter 11 can be used by high-income and high-debt individuals or is used by businesses seeking to reorganize. A Chapter 11 combines many elements of a Chapter 13 by allowing an individual or a business to offer a plan of reorganization to the creditors, which provides for the restructuring of debts through a payment plan. Chapter 11 is intended to provide a remedy for a troubled business or individual and contemplates the continued operation of the business while providing time to work toward a successful restructuring and a clean balance sheet.

REASON #4

The #4 reason for choosing to file for bankruptcy is that you may be able to "cram down" certain debts through a Chapter 13 or Chapter 11. more...

The #4 reason for choosing to file for bankruptcy is the ability to obtain protection while restructuring certain debts. Often in a Chapter 13 or a Chapter 11 bankruptcy, it may be possible to "cram down" certain secured debts.

Using a cram down procedure may enable an individual to lower the amount that must be paid to satisfy some debts, which are secured by assets such as a car or furniture. In some instances an individual may use the "cram down" to modify mortgages, which secure obligations on real estate (but excluding certain mortgages on primary homes). Cram down is used to modify obligations to reflect the value of the assets.

Chapter 13 and Chapter 11 bankruptcy plans may enable the amount owed or the interest rate being charged to be lowered on certain debts that are "secured obligations" through a process called "cram down." Secured debts are obligations where the lender has a security interest in property (collateral), like a mortgage on real estate or a lien on a car. Without a bankruptcy filing, if in default with payments of secured debt obligations, the creditor may seek to repossess the item or foreclose the real estate. In a Chapter 13 or Chapter 11, you have the option of deciding whether to return (surrender) the property (such as a car, furniture or house) or seek to cram down the debt to the value of the property (NOTE that the cram down option is not available for your house except under very limited circumstances).

When you finance a car or furniture, you typically make a number of monthly payments to repay the loan. In most cases, the value of the item you are financing decreases faster than the balance of the loan that is being repaid. For example, a car purchased two years ago is now worth less than the amount still owed on the loan even though every payment has been paid. This is sometimes referred to as the debt being "upside down." A year or two after you make a purchase of an item, its value is often less than the remaining balance owed on the loan. Debts like these can sometimes be "crammed down" in bankruptcy by paying the amount, which equals the reduced value of the property (usually your car or furniture) in full plus interest with the remaining balance of that obligation paid as little as a penny for every dollar owed. However, THERE ARE MULTIPLE EXCEPTIONS so check with your lawyer to determine if you can reduce the interest or principal amount that you have to pay on a secured loan. Many people have car or furniture loans where they agreed to pay 15-30 percent interest, and sometimes even more. In a bankruptcy reorganization through Chapter 13 or Chapter 11, you may be able to reduce not only your principal but your interest rate as well.

REASON #5

The #5 reason for choosing to file for bankruptcy is that judicial liens can often be avoided and real estate (property) can be sold free and clear of liens and encumbrances while preserving the homestead protections. more...

The #5 reason for choosing to file for bankruptcy is that judicial liens that impair exemptions can be stripped off of real estate or personal property and the property or real estate may be retained free of liens. In the alternative, property can be sold free of liens and encumbrances and allow you to preserve the protections offered by state or federal exemption statutes, including the homestead exemption and various personal property exemptions.

In the current real estate market where in many instances values are less than the amounts owed to the mortgage companies or in cases where there have been judicial liens attached to your real estate, you may be able to sell your real estate free and clear of liens and in some instances, avoid liens that affect the protections afforded by the homestead rights either under Massachusetts General Laws* or by federal statute. (* Assumes Massachusetts jurisdiction.)

Filing for bankruptcy is a way to control the sale of your real estate and to protect what homestead rights you have in your home (primary residence) at the time of filing, free from the liens, claims and encumbrances of creditors. Any claims would be paid from unexempt proceeds of the sale. The Bankruptcy Code provides the debtor with the right to sell property in a manner and at a time, which can generate the highest value. This is a great benefit. For instance, when a secured lender or the Chapter 7 trustee seeks to liquidate property, potential buyers may not be inclined to make their best offer as it is seen as a forced liquidation, or there may be liens that impair your homestead rights. Obtaining the best price for property is essential for your financial rehabilitation and many instances, a bankruptcy filing may be the best mechanism to achieve this goal.

REASON #6

The #6 reason for choosing to file for bankruptcy reorganization under Chapter 13 or Chapter 11 is that some claims may be treated differently than others. You may be able to obtain a discharge of most kinds of unsecured debt while repaying amounts that cannot be discharged, such as most taxes or domestic support obligations, through a Chapter 13 or Chapter 11 plan. The payment of "priority claims" can be restructured in a Chapter 13 or a Chapter 11 and can be paid over a period of up to five years. more...

Chapter 13 and Chapter 11 should be considered if you have debts such as taxes or domestic support obligations (e.g., alimony or child support), as those debts can be separately classified if paid through a plan. A Chapter 13 or Chapter 11 plan allows the debts to be paid in an orderly manner over an extended period of time and completion of the plan can still result in a fresh start for the debtor. Take note that a Chapter 7, while capable of discharging many debts, often cannot resolve tax liabilities or domestic support obligations. If these debts are owed, one must take great care and consideration when determining which type of bankruptcy to file. A bankruptcy lawyer with experience in Chapter 7, Chapter 13 and Chapter 11 is the best choice when considering a bankruptcy filing.

REASON #7

The #7 reason for choosing to file a bankruptcy under the provisions of Chapter 13 or Chapter 11 is the ability to continue operating your business (including as a sole proprietor, a corporation or limited liability company ["LLC"]) while restructuring your debt. A successful bankruptcy restructuring can allow a company to reorganize and remain in business through proposing an extended repayment plan to creditors. more...

If you operate a business as a sole proprietorship, a Chapter 13 or Chapter 11 filing permits you to continue to run the business while you reorganize. If your business is a corporation or LLC, there are a number of considerations as to what filing might be the best solution. An experienced bankruptcy lawyer with experience in Chapter 7, Chapter 13 and Chapter 11 is the best choice when considering any bankruptcy filing.

Filing for bankruptcy protection can allow a business to reorganize while it continues to operate. It is important that you take steps to understand why the business performed poorly so that it can be restructured and made successful after completion of the reorganization. You should work with your bankruptcy counsel and use the tools provided and protections offered under Chapter 13 or Chapter 11 to help the business recover and operate at a profit, free from crushing debt.

REASON #8

The #8 reason for choosing to file a bankruptcy is the existence of the "co-debtor stay," which in most instances is available in a Chapter 13 with regard to certain consumer debts. The co-debtor stay may protect your co-signers from having to file bankruptcy themselves or from having to pay the co-signed obligations while you reorganize. Obligations that are affected by the co-debtor stay can be paid in Chapter 13 by proposing a repayment plan. more...

This protection prevents a creditor from pursuing a co-debtor on a consumer debt during the pending chapter 13. There is no equivalent provision in Chapter 11 or Chapter 7. In a Chapter 13 bankruptcy, you may be able to stop your creditors from trying to collect from your children, parents, spouse or other loved ones who co-signed a debt for you, while you restructure your obligations and get back on your feet.

REASON #9

The #9 reason for choosing to file for bankruptcy is that you may not have to pay back anything to general unsecured creditors. more...

The #9 reason for choosing to file for bankruptcy is that you may not have to pay back anything to general unsecured creditors and can still gain a fresh start, free of those financial worries.

The amount you have to repay to your unsecured creditors is dictated by the Bankruptcy Code and the means test, which was adopted in 2005. In a Chapter 7, debtors almost always owe nothing to unsecured creditors (e.g., most credit cards, medical bills, etc.); those debts are wiped clean upon entry of the discharge. In a Chapter 13, the amount repaid to unsecured creditors can be as little as 0 percent and can be up to 100 percent, depending on your household income and expenses. In order to obtain the maximum benefit of a bankruptcy filing, it is essential to use experienced bankruptcy counsel.

REASON #10

The #10 reason for choosing to file for bankruptcy is that future (re)financing of a home and opportunities for future credit may be brighter. more...

The #10 reason for choosing to file for bankruptcy is to gain a clean slate so that future (re)financing of a home and opportunities for future credit may be brighter.

In the current economic climate, finding financing at all may be difficult even for people with excellent credit. A debtor may find that it will be easier and quicker to finance a home purchase or to refinance a mortgage obligation after having received a bankruptcy discharge and been relieved of crushing debt rather than struggling for years with late payments, settlements and ongoing negative credit score ratings. The future is brighter and options are broader for a debtor who has filed any type of bankruptcy and then rebuilt their credit rating by remaining current with payments after the bankruptcy filing.

In past years, some lenders were willing to extend financing to provide home purchase money at competitive rates if a debtor had been in Chapter 13 and made every payment under the plan to the trustee in full and on time for a 12-month period, or if a debtor had filed Chapter 7 more than two years prior.

These days, it is virtually impossible to predict what standards a lender will require before a borrower can qualify for financing but a strong payment record after bankruptcy can be a positive indicator. Some debtors have found that lenders are more willing to provide other types of financing (such as motor vehicle and credit card offers) much more quickly after a bankruptcy discharge. Most lenders are unwilling to consider such financing while a debtor is in an open bankruptcy and focus their attention on when a debtor receives his or her discharge.

Contact an experienced bankruptcy attorney to assist you in understanding these issues when considering whether to file bankruptcy and under what chapter. At Parker & Associates, we have over 30 years of experience handling bankruptcy matters, working with individuals and businesses to help them decide whether to file for bankruptcy protection, what chapter to file under, and how to best obtain a fresh start. We know how to help you get free of your debt, so that you can start planning for your future and stop paying for your past.

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