Many seniors feel overwhelmed with their
financial situation. It could be credit card debt or piled up medical bills. No
matter the source, you are not alone.
In fact, these are the top two reasons
people consider filing bankruptcy. Here is what you need to know about
bankruptcy to decide whether it’s right for you.
State and Federal Exemptions
Protect Your Property in Bankruptcy
There is a misconception that when you
file bankruptcy, your property is seized and sold for the benefit of your
creditors. This is only partially true.
Federal and state “exemptions” apply
in certain dollar amounts, which increase regularly, to keep your property out
of the “bankruptcy estate” and out of the reach of the Trustee.
Exemptions protect a certain amount of
equity in your home and double that amount if you are married filing jointly
and own the home together. Exemptions also protect your car and personal property
up to a certain amount.
Depending on the state in which you
live, some property is not part of the bankruptcy estate at all, such as your
pension. It is rare that the Trustee seizes property because debtors and their
attorneys can plan ahead to avoid that.
Clearing Credit Card and Medical Debt
If your income qualifies you
to file chapter 7, you can have credit card and medical debt discharged in 4-6
months.
Chapter 7 bankruptcy is a process by
which you disclose your income, expenses, assets, and debt, and your unsecured
debt is “discharged,” meaning, you are no longer personally responsible for
repaying it.
In order to file bankruptcy under
Chapter 7, you must pass the “means test,” which calculates income and certain
expenses, and you must earn under a certain amount in order to pass.
It is common for those who are retired
to be able to pass the means test easily. However, if you earn too much to
qualify to file Chapter 7, you can file Chapter 13.
Pay a Fraction with Chapter 13
If you file Chapter 13, you may be
allowed to pay only a small portion of your debt. So what is Chapter 13?
Chapter 13 is a partial repayment plan
over three or five years tailored for people who earn too much to qualify to
file under Chapter 7. If you are still working yet collecting Social Security, that
may be you.
Chapter 13 is also for those with a
steady income, whether working or collecting Social Security and/or a pension,
who have fallen behind on their mortgage, car loan or lease, or child support
or spousal support because they can catch up on those arrears through their
plan.
How does it work? The amount you must
repay is divided over 36 or 60 months, a small Trustee administration fee is
added, and you pay that amount to the Trustee each month for the duration of
your plan. The Trustee then pays your creditors.
Often those filing Chapter 13 pay none
of their unsecured debt because they are paying attorney’s fees or mortgage or
car loan arrears through their plan, and that’s all they can afford. Chapter 13
bankruptcy allows that.
Cram Down Your Car or Strip Off a
Second Mortgage with Chapter 13
You can employ a powerful and useful
aspect of Chapter 13 if your secured debt exceeds the current market value of
the collateral. This is often the case especially for seniors who have owned
their house quite a long time but refinanced or took out a second mortgage when
the property was worth more than it is now.
Let’s say you bought a new car two or
three years ago. If your car is worth less than the amount you owe on your car
loan, you can “cram down” that car loan to retail value and pay it off in your
Chapter 13 plan.
In figures, if your car is worth
$6,000 but you owe $8,600 on the loan. Your attorney will help you file a plan
that includes a monthly payment to your car lender of $100 a month plus
interest over your five-year plan. When you complete your plan, you own the car
free and clear and have saved $2600!
If your home is worth less than your
first mortgage, and you also have a second mortgage, you can “strip off” that
second mortgage as unsecured and have it discharged. This is done frequently in
a down housing market.
To illustrate, let’s say that a few
years ago your home was worth $295,000, and you took out a second mortgage to
do some repairs and renovations.
Now your home is worth $240,000, and
you owe $252,000 on the first mortgage and $18,000 on the second mortgage. You
can file a Chapter 13 bankruptcy case and strip off that $18,000 as unsecured.
Chapter 13 is also useful if you own
property worth more than applicable exemptions, such as if you have paid your
mortgage off and own your home. Your attorney will help you calculate the
amount your creditors would have received had the Trustee seized your home and
sold it, and you can repay just that amount through your Chapter 13 plan.
Some Debt Is Not Dischargeable in
Bankruptcy
You should know that certain types of
taxes, back-owed alimony or child support, government fines, and fees are not
dischargeable in bankruptcy. Student loan debt is rarely dischargeable and only
in cases of extreme hardship.
It is natural to want to help family,
but, for the above reason, those aged 60 and over should use caution about
co-signing student loans for children or other young family members.
If the student defaults, you will be
liable for repaying that debt and there is simply no way out of it. Many
seniors have gotten into financial trouble over someone else’s student loan.
Use caution too in co-signing
mortgages or car loans or leases – if you file bankruptcy, that makes your
co-signer solely responsible for paying that debt, and they are then at risk of
losing their home or car. If the co-signer files bankruptcy, you are then
solely responsible for paying that debt.
Whenever making financial decisions,
it’s always wise to think through the repercussions.
What do you know about bankruptcy?
What questions might you have? Please share in the comments below.
