A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.

Sir Winston Churchill

Is bankruptcy right for me II ?

Monday early afternoon , February 16, 2009.

In part I, I stressed the drawbacks of filing for bankruptcy, which mainly have to do with tarnishing your credit record, and hence the convenience to find workouts with your creditors.

If we step back for a moment, we have to understand that each individual’s situation is unique. And, I’m not just saying this for the sake of repeating the obvious, but, because it is at the core of this question. At least, I can see the following factors weighing heavily on this decision:

  • Your property value (and your spouse’s, if filing jointly).

    In both, chapters 7 and 13, the total value of your assets is the measure of what you will have to pay your creditors, minus your exemptions. In the former case through liquidation and in the latter, although you keep your property, it is nevertheless the stick that measures your debt responsibility.

    For example, if you have very little bankruptcy equity (none or even negative) on your real estate property a chapter 7 filing would discharge most, if not all, of your debt, both secured (your mortgage) and unsecured (credit card, medical bills, attorneys fees, personal loans…). Interestingly, if you can afford to pay the mortgage, you have the option to keep the house because you would be covered by homestead exemption limits.

  • Where you (and your spouse) have lived for the last 24 months.

    Bankruptcy exemption limits vary from state to state. Most states allow a homestead protection, to keep your personal effects, work tools to a certain limit, 75% of your wages, social security benefits, your pension, unemployment and welfare benefits, worker’s compensation and insurance benefits, —and if filing jointly, to duplicate the total value of your exemptions.

    If the total bankruptcy equity you have in your home is covered by, or less than, your homestead protection, the chapter 7 trustee will allow you to keep your house as long as you make your mortgage payments.

    The trustee has the power to revoke recent activity that is detrimental to your creditors, such as recent sales to relatives. But, buying a car which may have an umbrella under the exemption limits may rescue some idle funds in your savings account.

  • Your income (plus your spouse’s, if filing jointly).

    No more Chapter 7 for high income debtors. Bankruptcy law allows you to file under chapter 7 only if you meet the salary means test, or that your average monthly salary —for the last 6 months— is less than the median income for your state.

    If you’re suffering from a job layoff, waiting a few months may lower your monthly average enough to allow you to meet the means test requirements for a chapter 7 bankruptcy.

Bottom line, you’ll have to crunch some numbers to find out when to file and which filing will wipe off as much of the debts as possible while retaining title to most of your property.


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