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Understanding Bankruptcy

January 25, 2014 | By | No Comments

If you’ve ever been shoulder-deep in debt you may have pondered the thought of filing bankruptcy. Sure, the idea of being debt-free sounds marvelous, but in reality filing bankruptcy isn’t a bed of roses. Before you actually consider making the move, take the time to learn what filing bankruptcy entails and whether it’s the right option for you.

What is bankruptcy?

Bankruptcy laws are a system of federal laws that relieves indebted people or entities of the debt they are unable to pay back. The idea is to give these bodies a fresh financial start, without pressure from creditors or debt collectors trying to collect prior debts.

What are the types of bankruptcies for people?

Often times bankruptcy can be split into two categories — reorganization and liquidation.

Chapter 7 bankruptcy, which falls into the liquidation category, requires the bankruptcy trustee to obtain and sell all of your non-exempt property to pay off creditors.

Chapter 13 bankruptcy, which is under the reorganization category, adjusts your debt using a monthly payment plan. This option allows you to hold on to your assets, but requires you to make monthly payments toward your debt, with the goal of paying it off in 3-5 years.

What are the benefits of filing bankruptcy?

The initial perks of filing bankruptcy are that it’s an immediate relief from debt collectors. Once you file, you’re on “automatic stay” which notifies your creditors of your status and prohibits them from contacting you. It also prohibits lawsuits from being filed against you and stops other court-sanctioned forms of collection, such as wage garnishment.

What are the negatives of filing bankruptcy?

Don’t be fooled by the dream of living a debt-free life, bankruptcy also has serious disadvantages. Bankruptcy doesn’t usually discharge debts from student loans, taxes, mortgages, child support, or alimony. In addition, there is a possibility that even your non-exempt assets could be liquidated.

Proclaiming bankruptcy can also wreck whatever credit score you have. Once you file bankruptcy it is shown on your credit report for up to 10 years. Regardless of whether you ever go into debt again, having bankruptcy on your credit report can affect more than your ability to take out a loan, it can lead to higher insurance rates, increased security deposits and — in the worst case scenario — destroy your chances of getting a good job.  Even if someone does loan you money with the knowledge that you have filed for bankruptcy, it is likely the loan will be at a very high interest rate.

Bankruptcy laws are very specialized and unique.  There are many issues which can affect whether filing for bankruptcy protection is the best option for you, or whether you even qualify.  It is impossible to discuss all of those variations here.  As always, you should consult with an experienced attorney before making such an important decision.

Marriage and Debt

December 26, 2013 | By | No Comments

Wedding Photos

Two things you should know before tying the knot

As unromantic as it sounds, marriage is a contract. While many couples enter into a marriage with existing personal debt, others experience debt issues during the course of their marriage. While there are ways to avoid inheriting your spouse’s debt, you could be held accountable in the future. If you’re in debt or are preparing to marry an indebted person, here are two things you should know before you tie the knot:

The difference between Common Law and Community Property States:
Whether you take on your spouse’s debt is determined by which state you live in. Nine states have “community property” laws, which holds a couple jointly responsible for debt incurred by either party during the marriage. However, community property law does provide you with the option to sign an agreement with your spouse stating that your debts are treated separately. Community property states include California, Nevada, Washington, Idaho, Louisiana, Arizona, New Mexico, Wisconsin, and Texas. The rest of the states are  “common law” states. Common law states only hold the person whose name is tied to the debt liable. You are not liable for your spouse’s debt. Neither law holds you liable for debt incurred by your spouse before marriage.  However, regardless of whether you live in a community property or common law state, you could still be held responsible for your spouse’s debt if it is considered a “necessity” – for example, medical expenses, mortgage payments and food bills.  Because there are so many variations in these laws from one state to another, it is important to consult with a lawyer who practices law in the state where you live for concrete answers.

Signing on to indebted accounts
Regardless of whether you live in a community property or common law state, opening a joint account with your spouse makes you liable for that debt. This holds true if you sign on to your spouse’s personal account as a joint holder, and the account goes into default. If you and your spouse refinance your pre-wedding debt together under joint names, you are also responsible for the debt incurred.

Photo By: Scott Shaefer