b2ap3_thumbnail_shutterstock_98788745.jpgPeople who are looking to get out of debt may be unsure about their options for filing for bankruptcy, but by consulting with an attorney, they can determine the best methods for eliminating debts, reducing the amounts they owe, and avoiding issues such as foreclosure. Many people are unaware of the benefits they may be able to receive by filing for bankruptcy, which may include the reduction of the amounts they owe on certain loans. A bankruptcy lawyer can help determine whether techniques known as “cramdowns” or “lien stripping” may be used to address home mortgages, auto loans, or other debts.

Reducing and Reclassifying Debts During Chapter 13 Bankruptcy

The approach to different types of debts may differ depending on the type of bankruptcy a person pursues. While Chapter 7 bankruptcy will allow for the elimination of most debts, this could result in the loss of certain assets, including through the repossession of a vehicle or a home foreclosure. For those who are looking to maintain ownership of their assets, Chapter 13 bankruptcy may be the preferred option.

In a Chapter 13 case, a debtor will propose a repayment plan in which monthly payments will be made toward certain debts over several years. In addition to paying some of what is owed toward unsecured debts (such as credit cards or medical bills), missed payments toward secured debts (such as a home mortgage or auto loan) may be made up through the repayment plan. When creating a repayment plan, some secured debts may be reduced, or they may be reclassified as unsecured debts.

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b2ap3_thumbnail_united-states-bankruptcy-attorney.jpgIf you owe significant debts, creditor harassment can be a problem. Creditors may repeatedly call you or send notices through mail, email, or other methods, and they may threaten to take your property, file lawsuits, or even pursue criminal charges. As you determine your options for debt relief, it is important to understand your rights, the steps you can take to respond to communication from creditors, and how filing for bankruptcy may help your situation.

Your Rights Under the Fair Debt Collection Practices Act

The Fair Debt Collection Practices Act (FDCPA) is a federal law that limits the types of actions that creditors can take when collecting debts, and it also provides consumers with options for limiting contact with creditors and requiring them to stop certain actions. Under the FDCPA, creditors have restrictions on the types of communication that are allowed with debtors. They are generally prohibited from contacting you at unusual times, such as after 9:00 p.m., and they cannot attempt to contact you more than once per day. 

While creditors can contact you through multiple methods, such as calling you at work, they are required to stop doing so if requested. In fact, you can request that they cease all communication with you by submitting a written request. This will not stop them from taking actions to collect debts, such as by filing a lawsuit, but it can stop them from calling or otherwise contacting you while you determine how to address the debts that are owed. You can also request a validation of your debts, and in these cases, a creditor must send you a validation letter that states the name of the creditor, the amount owed, and information about disputing the debt.

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b2ap3_thumbnail_shutterstock_569245267.jpgNearly everyone has debts, and while some may be able to manage these issues successfully, others may have experienced significant financial difficulties that have affected their ability to repay what is owed while also addressing their ongoing living expenses. People in this situation may be regularly receiving calls or letters from creditors, and they may be worried that they could lose their home or other property, face lawsuits, or have their bank accounts seized or their wages garnished. Unfortunately, many people are hesitant to consider bankruptcy in these cases due to some common misconceptions about this form of debt relief. By understanding when bankruptcy may be used and the processes that are followed, a debtor can determine whether this option is right for them.

Busting Bankruptcy Myths

Some common misconceptions about bankruptcy include:

  • Myth: Bankruptcy is mostly used by people who have been irresponsible with money - There are a multitude of reasons why people experience overwhelming debt, and in many cases, these situations occur unexpectedly with little or no chance to prepare. In fact, the majority of bankruptcy cases involve medical debt. Even if a person has insurance, a serious illness or major injury can result in massive medical bills that a family may have no chance of paying. An unexpected layoff or other issues that affect a person’s income can also lead to significant financial difficulties, making it hard for a family to pay bills. Everyone has the right to file for bankruptcy and receive relief from their debts, and there should be no shame in seeking out help when a family struggles with financial problems.

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b2ap3_thumbnail_shutterstock_1415475047.jpgFinancial issues are one of the most common factors that can lead to divorce. In some cases, couples may encounter disagreements about how to handle money, or the stress of dealing with debts and expenses may be one of the reasons for the breakdown of a couple’s relationship. Even if financial problems are not the cause of a divorce, a couple may need to determine how to handle debts as they proceed with the process of ending their marriage. For couples or individual spouses who are considering bankruptcy, it is important to understand the role that this may play in the divorce process and how the end of their marriage will affect their ability to eliminate their debts.

Filing for Bankruptcy Before or After Divorce

Determining the right time to file for bankruptcy can sometimes be difficult. In some cases, a couple may want to deal with their debts and ensure that they will both be in a stable financial position as they move on following the end of their marriage. However, they will also want to make sure filing for bankruptcy will not affect their ability to complete their divorce (and vice versa). Understanding the correct timing of bankruptcy and divorce proceedings can help a couple ensure that they will be able to receive relief from their debts and terminate their marriage successfully.

In cases involving Chapter 7 bankruptcy, a couple may be able to complete this process prior to filing for divorce. A Chapter 7 case (also known as a “liquidation bankruptcy”) will allow certain types of debts to be discharged, and debtors may be required to turn over certain non-exempt assets that will be liquidated so that a portion of their debts may be repaid. This process will typically take no more than a few months, and it may allow a couple to eliminate their joint debts before they move forward with the divorce process. However, debtors must pass a means test before they can qualify for Chapter 7 bankruptcy, and if a couple’s combined income and assets exceed a certain amount, they may not be able to file for this type of bankruptcy together. In these cases, one or both parties may be able to qualify for Chapter 7 separately based on the resources available to them after their divorce.

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b2ap3_thumbnail_shutterstock_1018623748.jpgFor those who are looking to obtain relief from their debts, bankruptcy is often the best solution. In a consumer bankruptcy, a person or married couple will generally have two options: Chapter 7 or Chapter 13. While Chapter 7 may be the preferred choice in certain situations, since it will allow for unsecured debts to be eliminated, some debtors may not qualify for this type of bankruptcy, or they may wish to avoid the loss of certain types of property. If a person will be filing for Chapter 13 bankruptcy, they will need to understand how their income and expenses will affect their case.

Creating a Chapter 13 Repayment Plan

In a Chapter 13 bankruptcy, a debtor will propose a plan in which they will make payments to the trustee in their case, and the trustee will apply the amounts paid toward the debts that are owed. The debtor will not be required to turn over any of the assets they own, and if they continue making payments toward secured debts such as a home mortgage, they will be able to avoid the foreclosure of their home or the repossession of other property. If the debtor’s income is below the median income in their state, their repayment plan will last for three years; otherwise, the plan will last for five years.

A debtor will be required to pay all of their disposable income toward their Chapter 13 repayment plan. Disposable income is calculated by taking the income a person earns and subtracting applicable expenses. Income includes a person’s wages and any bonuses, tips, or commissions they earn, as well as interest, dividends, or royalties they earn; income from a business or rental property; payments received through a pension plan or retirement account; spousal maintenance/alimony payments; and unemployment benefits. However, income does not include child support payments, Social Security benefits, or payments received from the federal government related to the COVID-19 pandemic.

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