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Hi there, Michael Bovee with Consumer Recovery Network, and
I'm back with a video in our pros and cons series, and
today we'll talk about bankruptcy.
Now, I'm going to include chapter 7 and chapter 13, which
are the two most common types of consumer personal bankruptcies.
So first off, let me explain a little bit of
the difference between the two for most of us.
That's going to be the fact that chapter seven
legally discharges your debt, wipes it out, okay?
There's very little return to creditors in that situation.
You have to qualify for
a Chapter 7 and there's a means test for that, and
it's state-specific and then it, the size of your household and
all that, can go into that factoring.
And then, there's also exempt assets that are state-specific,
things that you can keep without having to be concerned about
liquidating, okay?
So if you qualified for a 7, it's gonna be, for
the vast majority of us, better than the 13.
A 13 is where, you're basically in a forced repayment plan,
they can go either 3 or 5 years, the massive majority of them
will go the 5 year plan, and a trustee is overseeing,
basically, every aspect of your financial life.
So let's go into the pros.
First of all, in a chapter seven, like I said,
it eliminates debts, they're gone, legally gone.
And then, chapter seven is also pretty quick.
As far as all of the different mainstream debt relief options
go, your average bankruptcy is going to see a discharge from
filing to it's over in 90 days, or a little bit more.
So that's quick compared to trying to settle debts over
whatever period of time, months or years usually, and, or,
consolidating your debt and
repaying that over whatever period of time that takes.
I mentioned this,
another pro is legal protection, you get that from the courts.
So let's say that you are being sued, or
you were sued in a judgment against you and
now you're worried about your wages being garnished,
as soon as you file bankruptcy, all that leaves.
So, the legal protection from the court is very meaningful
in a lot of situations.
You can stop a repossession of a vehicle.
You can stop a foreclosure and get time to work things out.
So its very important, that legal protection, huge pro.
Ok, in a Chapter 13,
there's often enough gonna be a saving element.
Okay, so in chapter seven you discharge, you wipeout the debt,
a lot of the times with paying zero on the balances owed.
Whereas, in a 13, you're repaying some and
sometimes all of the debt, but a lot of the times,
you're actually able to save half.
So, if your income is X and steady, and
your expenses are this, and there's only so
much left over to work with at the end of that equation,
then that's all creditors get.
The trustee takes that money,
whatever your payment is to the trustee each month and
splits it up equally amongst your creditors.
And if you're on a five year plan, whatever you pay back over
that five years is what you pay back and the rest doesn't get
paid, and that's also legally wiped out in a bankruptcy.
So there is a pro to Chapter 13, in that savings element, but
be careful because of one of the cons.
Now let's jump into those.
Okay, first off, with bankruptcy, it's the credit hit.
It's not the nightmare that it's made out to be
by a lot of folks, but it's very real, your credit is damaged.
In a chapter 13, you can forget about any new financing options
for the most part while you're enrolled in your 13 plan,
for that full five years typically.
And Chapter 7, it's gonna stay on your credit report for
ten years.
Chapter 13 stays on for seven years, Chapter 7 for ten.
In that ten years, though, you will have access to
financing to buy a home after two years.
You will have access to financing
to buy a car right after the Chapter 7, really, but
better rates come a little bit after that, after a year or so.
You'll have pre-approved credit cards in the mail within
months of filing.
So it's not like it's a death knell to your credit, but
it's big enough to be a pause for whatever
your financial goals are in the next two to three years usually.
I ask people during a consult what they're looking at,
what their needs are, and school loans, don't forget about those,
your own or ones you might co-sign for,
those are impacted for a few years, too.
Okay, so this is one of the cons of Chapter 13, they go three or
five years.
They're inflexible, meaning, that it's a set payment that you
make to the trustee, and if you do not make that payment,
you lose the benefit of the plan that you went through all of
this trouble to go and create, and
you lose the court's protection, which I said earlier this is of
major import when you're not paying creditors that could sue,
and you need protection from that sometimes.
So chapter 13s, traditionally, for as long as they've been
around, only about a third of filers actually complete them.
And one of the number one reasons for that,
and obviously life happens and
further deterioration of circumstances,
medical, job loss, and things you have to bail on your 13,
but without flexibility to adjust those payments,
life could be a flat tire or a hot water tank.
Unexpected things can happen and
you'll have to pull out of the 13.
So that's one of the worst cons of chapter 13,
it has no application to chapter 7.
Okay, the pro of credit reporting and stuff,
this is like it's a con, but it's also a pro,
because you can have access to a mortgage,
FHA underwriting in two years after a Chapter 7 bankruptcy.
But certain goals have to be realized later.
If you had them you were, no, I needed to refi my home
to get a lower interest rate on my mortgage, and
you were thinking you were gonna do that in about a year or
18 months, no, you can't.
If you were gonna go back to school and
get your masters or go back to school for
whatever reason, sorry, not for a few years.
Or cosign for your 17 year old and you file chapter 7, and
they finish their junior year, and then their senior year,
and then you're, oops, can't do a parental PLUS loan.
So it can delay some of the life goals that you have.
Okay, so the biggest con in a chapter 7 is the forced
liquidation of certain assets.
This will not apply to everybody.
There are certain things that are protected like your
retirement accounts, your 401K, IRAs,
things like that can't be touched usually.
But there are things that can be touched.
And again, going to the state specific kind of thing where
perhaps your mortgage, let's say you have a $500,000 valued home,
and you owe 250,000 on it, and you live in California, you're
over the allowable exemption to keep that home in a chapter 7.
In other words, a bankruptcy trustee can force to liquidate
certain assets, homes, being probably the most common,
why people avoided chapter 7 because they like the home,
they don't wanna move, they have the equity,
they don't wanna touch it.
There's forced liquidation of an extra car or
personal items, heirlooms, things like that.
That matters, to a lot of us.
So, it's definitely a con, in chapter seven.
If you don't have to worry about that, that's great.
If you do have to worry about it, watch our pros and
con video of debt settlement, or
any of the debt settlement videos on our YouTube channel,
and learn more about how that might be an alternative for you,
to chapter 7 or chapter 13.
Okay, so chapter seven, I mentioned this,
you have to qualify.
And there is another con, is that if you make too
much money, if you're household, and you have to consider your
whole household, maybe if you're filing even separately of your
spouse which is possible by the way,
your spouse's income still goes into this equation.
So let's say it's a family of four, husband,
wife, two kids, normal size household.
And you make $82,000 a year, but
your state's means testing to be able to qualify for discharge in
a Chapter 7, says you can't make more than $62,000.
So you're way over the cap and that means you can't qualify.
So that's a con.
That wasn't even a reality until 2005, when some
bankruptcy law changes happened to instigate that means testing
that's again state specific, so you can look that up.
Or you know what,
post what state you live in in the comments below and I'll tell
you what you're up against as far as your exemptions and
the means testing.
Make sure and include how many people live in your household.
Probably another con for a lot of folks is that
bankruptcy is a matter of public record.
So, you are going to have that in the public record
pretty much forever.
It stays on your credit report for what I told you earlier,
different times for 7 and 13,
but it's always in the public record.
And kind of along those lines is the fact that if you're ever
asked if you filed a bankruptcy, if so, when?
As an adult, you fill those forms out all the time.
Up to now, you've always just checked off no or
N/A doesn't apply, right?
Well this time you're gonna be checking off yes and
what year, this year, okay, so you write down the year.
And just depending on who you are,
that may be an issue, it personally wouldn't bother me.
Okay, so
I have a post up about how to find a bankruptcy attorney.
I have kind of a unique perspective after years and
years of consulting with people, getting off the phone with them,
telling them to go talk to a bankruptcy attorney,
getting feedback about that.
So click the link above me that leads you to an article that I
wrote about looking for a bankruptcy attorney,
things to look for, and
thinks to look out for, cuz not all attorneys are created equal.
Thanks for tuning into our pros and cons series on bankruptcy,
see you on the next video.
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