By Dennis Plank, Attorney
Consumers in Lancaster County and beyond are taking on more and more debt these days, much of it in credit cards and student loans. Outstanding U.S. consumer debt has surpassed $4 trillion, with total credit card debt at an all-time high of $1 trillion.
For some, debt is necessary but manageable. For others, it can snowball until it is out of control. Sometimes, it’s due to poor spending habits and financial decisions. Other times, circumstances such as job loss or illness make it difficult to stay financially afloat.
When people start feeling overwhelmed by debt, despite their best efforts to improve their financial situation, it’s smart to take action. If you know someone struggling with debt, contacting the Law Offices of Going and Plank in downtown Lancaster is the first step to initiating debt relief options. The sooner the person in debt is willing to act, the easier it will be to manage debt more effectively.
While some may think of bankruptcy as a sign of failure, it can actually be a wise decision that provides a fresh financial start. An experienced bankruptcy attorney can review the situation and help them decide on the best debt relief option. Here are some signs to watch for when considering bankruptcy:
Debt Collectors Are Calling or Threatening to Sue
Once bankruptcy is filed, a bankruptcy lawyer will activate an automatic “stay,” which stops collections and prohibits creditors from pursuing any collection activity, including telephone calls, attachments and the filing of lawsuits against their client. Contact Going and Plank to find out more about how we stop harassment from creditors.
In Danger of Losing the Home
Filing for Chapter 13 bankruptcy may be a good option if the person is in danger of losing their home to foreclosure because it allows filers to make up late payments through a court-approved repayment plan. However, if saving the home is the only reason for filing for bankruptcy, that person may have other options, such as negotiating directly with their lender for a repayment plan or modified loan terms. Contact us to find how out we help clients assess the suitability of bankruptcy vs. renegotiating loans.
Using Loans to Pay Bills
Borrowing to pay off debts is rarely a good idea since it involves incurring more debt. Although getting a lower-interest personal loan to pay off all higher-interest debts may seem like a money-saving idea, it’s not always that simple. Additional fees and higher monthly payments add to the debt load, often increasing the overall debt. For people with lower credit scores, these types of loan may need to be tied to collateral, such as a car, which could be confiscated if they can’t keep up with payments.
Liquidating Retirement Assets to Pay Debts
Retirement assets are intended to provide security for the future. When people use those assets to pay debts now, they are setting themselves up for financial hardship down the road. Filing for bankruptcy can protect retirement accounts from creditors. Additionally, for people who are withdrawing retirement funds before age 59.5, they not only face a hefty penalty, but they also have to pay income taxes – leaving themselves with just one more debt they are unable to pay off.
When considering bankruptcy, there are two options: Chapter 7 and Chapter 13. People who want to evaluate the appropriateness of each type of bankruptcy should contact Going and Plank before making decisions.
What is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy allows the forgiveness of debt without repayment, offering the possibility of substantial debt relief. To qualify for Chapter 7, the applicant must take a means test to determine if their income is less than the median income in Pennsylvania or if they have enough disposable income to pay back all or at least part of their debt. If their income is too high, they will not qualify for Chapter 7.
Under Chapter 7 bankruptcy, they can eliminate the most unsecured debt that is not tied to an asset, such as a home. Unsecured debt includes things like credit card debt, medical bills, personal loans, and unpaid utility bills. Filing for Chapter 7 bankruptcy may require the applicant to liquidate nonexempt assets such as property, investments, artwork or jewelry to pay off creditors. Pennsylvania allows applicants to choose whether to use the state or federal exemption system. Federal exemptions typically allow people to keep their primary vehicle and some of the equity in their home. Because state law and federal law often differ on which assets are considered nonexempt, an experienced bankruptcy attorney usually helps applicants decide whether to file state or federal bankruptcy, and help inventory the assets they will need to liquidate, and which they can keep
What is Chapter 13 Bankruptcy?
While Chapter 7 bankruptcy focuses on debt forgiveness, Chapter 13 bankruptcy focuses on debt repayment. For people who have fallen behind on a secured debt, such as a mortgage or car loan, Chapter 13 bankruptcy can renegotiate and reorganize the debt and permit people to file a three- to five-year plan for repayment. While Chapter 13 bankruptcy does not forgive the unsecured debt, it prioritizes debt and designs a repayment plan based on the applicant’s income. That means that people may end up paying back only a percentage of their unsecured debt.
Under Chapter 13 bankruptcy, filers can also save their home and other possessions, while stopping foreclosure, creditor harassment, and lawsuits.
What’s the Difference Between Chapter 7 or Chapter 13?
Deciding which bankruptcy filing to pursue depends on many factors, such as the type of debt incurred, income, and the importance of certain nonexempt property.
For instance, Chapter 7 might not be right for people who are primarily behind on your mortgage or car loan, or other debt that can’t be discharged under Chapter 7, such as tax obligations, child support, and student loans.
For people who have property or other nonexempt assets that they want to keep, Chapter 13 bankruptcy may be a better choice. Also, since Chapter 13 bankruptcy requires at least partial repayment of debts, it will not stay on a credit report as long as Chapter 7 bankruptcy.
Sometimes, the filer can’t choose between the two types of bankruptcy. If income isn’t low enough, or the courts determine the filer has enough disposable income to help pay off debts, then they won’t be considered a candidate for Chapter 7 bankruptcy, and Chapter 13 bankruptcy may be the only option.
An experienced bankruptcy attorney helps people review the advantages and disadvantages of filing for bankruptcy. Contact Going and Plank today if you know someone who is ready for a free consultation to find out if bankruptcy is right for them.