SHOULD I FILE A CHAPTER 7 OR A CHAPTER 13?
The answer to this question depends on your specific circumstances. Usually, a Chapter 7 is preferable for those who are current on their secured debt payments (house, automobile, etc.), but have a lot of unsecured debts (credit card bills, medical bills, etc.). If you don’t have non-exempt assets, your income is low, and most of your debts are unsecured, then a Chapter 7 bankruptcy may be your best option.
A Chapter 13 bankruptcy if preferable for those that are behind in payments on secured debts (mortgage, automobile loans, etc) but have enough income to make the regular contractual monthly payments on these debts but would like an opportunity to pay the arrearage amounts off in a plan.
Another compelling reason to file a Chapter 13 is if you have debts that are non-dischargeable in a Chapter 7 (such as IRS taxes, student loans, and child support arrearages). This will compel the creditors into a repayment plan and require them to accept monthly payments in accordance with the Chapter 13 plan and avoid wage levies or seizure of your assets.
In addition, some people simply do not qualify to file for a Chapter 7 bankruptcy because they earn too much money. Finally, some people simply feel better about filing a Chapter 13 and pay back to their creditors what they can afford, even if it is not enough to pay all the creditors in full.
HOW CAN I SAVE MY HOME FROM FORECLOSURE?
When you get behind in your house payments, the mortgage company may put the loan in a default status and therefore will accelerate the debt and demand full balance on the note. There is no “magic number” that will automatically put your loan in a default status. It is my experience that most mortgage companies begin the foreclosure process once payments on the note become approximately three months overdue.
Once the loan is in default status, the creditor more than likely will refuse to take monthly payments and will begin the foreclosure process. If you are unable to refinance the loan or if the creditor refuses to reinstate the loan, you may need to file for protection in bankruptcy to stop the foreclosure sale. Under a Chapter 13 plan, you can make the regular monthly contractual payments on the house and be given a period of time to pay the arrearages in order to stop the foreclosure sale.
The foreclosure process in the State of Iowa takes approximately 6 – 12 months. However, this time period varies so it is extremely important that you obtain legal counsel to discuss your options once you are served a Petition of Foreclosure.
CAN I PROTECT MY CO-SIGNERS IF I FILE BANKRUPTCY?
If you file a Chapter 7 bankruptcy, the creditor is still able to proceed with collection efforts against your co-signer even if you receive a discharge on the debt in your bankruptcy case.
However, if you file a Chapter 13 bankruptcy, a co-signer is protected if the following criteria are met:
- The debt must be a consumer debt
- The debt cannot be incurred in the ordinary course of business
- The co-signer cannot benefit from the proceeds of the debt
- The debtor completes the Chapter 13 bankruptcy payment agreement
WHAT IS A REAFFIRMATION AGREEMENT
A reaffirmation agreement is a contract which is signed after the filing of a bankruptcy proceeding where the debtor agrees to pay a debt which is listed in the bankruptcy. These are typically signed only for secured debts and the most common situations where a debtor signs a reaffirmation agreement is in the case of a home mortgage loan, an automobile loan, or a loan for furniture. By signing a reaffirmation agreement, the debtor continues to be legally responsible for the debt after the bankruptcy.
HOW WILL A BANKRUPTCY FILING AFFECT MY CREDIT SCORE?
Many people who initially contemplate filing bankruptcy don’t have the greatest credit to begin with and they find that once their debt is discharged, their credit score starts to improve. However, it is important to understand that most types of bankruptcy filings will stay on your credit report for a period of at least ten years. During that period, it may negatively affect your credit. I suggest to my clients that it may be wise to obtain some type of credit card shortly after your bankruptcy case closes in order to rebuild their credit. Of course, this only works if you make your payments in a timely manner and pay the entire debt off each month so you don’t accrue interest.