Did you know most bankruptcy plans fail within less than a year? The most prevalent reason is because debtors cannot adhere to required Chapter 13 payments. Bankruptcy payment plans are usually in place for 2 or 3 years and are financially constrictive. One unexpected emergency can cause debtors to fail out of bankruptcy.
Another reason most bankruptcy plans fail stems from new bankruptcy laws which took effect in 2005. Known as the Bankruptcy Abuse Prevention and Consumer Protection Act, this law requires debtors to obtain debt relief under Chapter 13 unless debtors earn less than their states’ median income level.
BAPCPA requires debtors to repay a portion of outstanding debts by developing a payment plan. The amount of debt to be repaid is determined through the ‘means’ test. This financial tool is used to compare debtors’ income to state income levels. Those earning more than state levels must enter into Chapter 13, while those earning less may be eligible for Chapter 7.
BAPCPA rules and regulations are complex and require services of bankruptcy attorneys. Under the new bankruptcy laws, attorneys are required to certify that their client has presented truthful information and submit a letter stating clients are in need of financial relief through personal bankruptcy.
Due to the requirements, attorneys must conduct thorough research to ensure debtors’ finances have been accurately reported. If they do not verify reported income and expenses, and it is later discovered their client was not truthful, lawyers could place their self at risk for violating state laws. The additional research results in higher legal fees, which increases the overall cost of filing bankruptcy.
BAPCPA also requires debtors to obtain credit counseling through designated agencies. Bankruptcy petitions will not be approved until debtors present a certificate of completion to the judge.
Once Chapter 13 payment plans are approved, debtors must remit payments to the bankruptcy Trustee. The Trustee remits creditor payments until outstanding debts are paid in full. Petitioners should maintain accurate accounting records to ensure Chapter 13 payments are appropriately recorded.
When debtors file bankruptcy to stop foreclosure they must make every effort possible to adhere to the terms of Chapter 13 plans. When debtors engage in personal bankruptcy to reorganize mortgage debt and later fail out of bankruptcy, chances are high that mortgage lenders will commence with foreclosure action.
To make matters worse, banks are allowed to restart foreclosure proceedings where they left off prior to the bankruptcy petition. For example, if foreclosure was scheduled to occur within 15 days, banks can repossess the property within 15 days after bankruptcy has been dismissed.
Debtors should carefully weigh the decision to file bankruptcy. This debt-relief option not only destroys credit ratings, but can also prevent debtors from obtaining credit for years to come.
During the Chapter 13 payment plan, debtors are not allowed to incur any new debt. If debtors complete the payment plan, chances are it will take 2 to 3 years before they will qualify for any type of loan. Even if they can obtain approval, debtors are normally classified as high-risk borrowers and will pay considerably higher interest rates.
Personal bankruptcy can also affect other personal finance arenas. Insurance companies often base premiums on credit scores. The lower the score, the higher the insurance premium will be. Bankruptcy can also affect employment and housing opportunities if employers or landlords conduct credit checks.
Prior to hiring a bankruptcy lawyer, debtors should consider looking at bankruptcy alternatives which offer debt help without the severe consequences of bankruptcy. These might include credit counseling, debt consolidation, debt settlement, home equity loans, or mortgage refinance.
There are instances when bankruptcy is the best option. Debtors should discuss developing a Chapter 13 payment plan that leaves some financial cushion should emergencies arise. Lack of income and unexpected expenses are often the reason why most bankruptcy plans fail.
While most bankruptcy plans fail, within a matter of months, this doesn’t mean yours has to. Through careful financial planning, you can defeat debts and regain control of personal finance. Learn more about the advantages and disadvantages of personal bankruptcy from real estate investor, Simon Volkov at www.SimonVolkov.com.