The New Year, a Fresh Start!
Jan. 1, 2016
You know bankruptcy gives you an overall fresh financial start. But it can provide special fresh starts you may not know about.
The Overall Financial Fresh Start
You get a new financial life by legally writing off (“discharging”) debts so that you are out from under them and never have to pay them again. With consumer and small business debts you have two main choices about how this happens.
The Chapter 7 Fresh Start
With a Chapter 7 “straight bankruptcy” the discharge of debts happens very fast. The moment your case is filed the creditors can’t take any more action to collect their debts against you, your money, or your property. Then usually about 100 days later the bankruptcy court enters an order discharging your debts. You are debt-free, other than possibly debts you want to keep such as a vehicle loan, and certain debts you can’t discharge like recent income taxes or back child support.
So, if you filed a Chapter 7 case in early January, right away your creditors could no longer chase you, and your debts would effectively be gone by early spring. That would be the best spring of a long time.
The Chapter 13 Fresh Start
With a Chapter 13 “adjustment of debts” the discharge of debts happens much later, although you get numerous benefits in the meantime that Chapter 7 doesn’t provide. (More about those below.) The same as with Chapter 7, the moment your case is filed the creditors can’t take any more action to collect their debts. But under Chapter 13 that protection lasts not just a few months but for years. This enables you to deal in creative ways with special debts like home mortgages and car loans, income taxes and child support arrearages, among others. A similar protection from collection action also extends to any co-signers you may have.
At the completion of the Chapter 13 payment plan of usually 3 to 5 years, whatever debts that have not been paid are discharged (with limited exceptions like a home mortgage you want to still owe). So under Chapter 13 you get immediate relief and a partial fresh start in the form of a payment plan based on your budget, and when that plan has run its course it’s followed by a full fresh start with (virtually) no remaining debts.
So, if you filed a Chapter 13 case in early January, right away your creditors could not chase you or any co-signers, you’d enter into a reasonable payment plan to deal with your special debts in ways better than Chapter 7 can, and when that plan is paid off you’d have a full fresh start.
The Special Fresh Starts
Beyond these broad ways that Chapter 7 and Chapter 13 give you a new start, they each provide special tools for giving you new starts within different specific components of your financial life. We will dig into these in the next several blog posts and introduce a few of them here:
A fresh start with vehicle loans through “reaffirmation” and “redemption” under Chapter 7, or through “cramdown” under Chapter 13.
With a reaffirmation you agree to keep the vehicle and remain liable on the vehicle loan, legally excluding it from the blanket order discharging your other debts.
With redemption you keep the vehicle by paying the creditor its fair market value (not what you owe), perhaps through a new redemption loan.
With cramdown, you re-write the loan based on the fair market value of the vehicle, usually with lower monthly payments and interest rate, often saving thousands of dollars.
A fresh start with a home mortgage by catching up the arrearage through a “forbearance agreement” under Chapter 7, or through the court-approved payment plan under Chapter 13.
With a “forbearance agreement” the mortgage lender voluntarily agrees to not foreclose as long as you catch up the mortgage through a schedule of extra payments, usually restricted to as much arrearage as you can catch up on within a year or so.
With a Chapter 13 payment plan you are usually given as much as 3 to 5 years to catch up, with a lot more flexibility to pay other important creditors at the same time or even ahead of the mortgage arrearage.
A fresh start with personal property collateral through “reaffirmation” or simply not paying under Chapter 7, or through “cramdown” and second mortgage “stripping” under Chapter 13.
With personal property reaffirmation you either agree to pay the full amount of the debt or sometimes only a portion of it in return for keeping the collateral you want.
Under some circumstances, with relatively modest value collateral, you may not have to pay anything to keep it.
With Chapter 13 cramdown, you pay over time for the right to keep the collateral, based on the fair market value of the collateral.
With a second (or third) mortgage strip, you can stop paying the monthly second (or third) mortgage monthly payment and discharge much (or even all) of the balance owed on the mortgage, making paying for the first mortgage that much more feasible.
A fresh start for your home’s title, by “voiding” judgment liens under either Chapter 7 or 13, and by catching up on unpaid property taxes, clearing income tax and homeowner association liens from the title under Chapter 13.
A fresh start with any child and spousal support arrearage by stopping your ex-spouse’s or the support enforcement authority’s aggressive collection efforts and paying off the arrearage based on your budget’s capacity to do so over time, only under Chapter 13.
A fresh start with unpaid income taxes by discharging older taxes through Chapter 7 or by a combination of discharging the older taxes and paying off the newer taxes through Chapter 13.
A fresh start keeping everything you own free and clear, either by exempting everything through Chapter 7 or by protecting anything that isn’t exempt through Chapter 13.
Your Most Important New Year’s Resolution
As frustrating as it may be sometimes, so much of the rest of our lives turn on our financial well-being.
Our emotional state is tied closely to the amount of stress we deal with daily, and financial problems often give us near-constant stress.
Our health is often affected. First, it’s directly affected by the stress, likely more than we realize. Second, common sense—backed up by research—says that the inability to pay for preventative and other healthcare, including appropriate dental care, degrades people’s health, and indeed shortens life expectancies. And third, working extra jobs and worrying about finances cuts into sleep, and makes it difficult to eat healthy and get good exercise.
Our relationships are almost always detrimentally affected by our finances. It’s one of the very top reasons for divorces. It affects our ability to meet our responsibilities to our children. It’s hard to maintain friendships much less be a fully engaged member of society when you are struggling to take care of yourself financially.
Our self-esteem is inevitably adversely affected. Even if we have a perfectly healthy perspective on money, it is very difficult to escape feeling like a failure when constantly reminded that you aren’t able to provide what you and your family need.
So make and keep the most important New Year’s resolution of all: see a bankruptcy lawyer during the first few days of 2016. Start the ball rolling towards getting the fresh start that you truly need.