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File for bankruptcy? It just depends

You never thought that this could happen. You've had a job since high school. You clip coupons when you can. Yeah, you missed a bill payment or two over the years and used the credit cards to splurge a little during the holiday season. But who hasn't? Now, you've lost your job or incurred unexpected medical bills. Maybe you ran up some gambling debts or recently got divorced. You're dodging calls from creditors, worrying that the electricity could be cut off any minute and wondering how you're ever going to pay off all the debt. You're not alone. More than 12,000 nonbusiness bankruptcies were filed in the U.S. Bankruptcy Court for the Middle District of Florida in the first quarter of the year. Staring at the possibility of bankruptcy can be depressing and stressful. But bankruptcy can wipe away some debt, buy you time to pay off remaining bills, and in some cases keep you in your home. On the other hand, it will also trash your credit rating and can force you to relinquish some valuable property. So what to do? We've created four financial scenarios and had bankruptcy experts weigh in. Keep in mind that everyone's case is different. There are few absolutes about when you should file for bankruptcy. Consult a debt counselor about your specific case.

A college grad, unemployed for almost a year, falls behind on his student loans, car loan and rent. One positive is that he hasn't burdened himself with credit card debt.

. Should he file for bankruptcy?

No.

Reasoning: There's not much that that person can do, said Clearwater bankruptcy lawyer Harvey J. Spinowitz. He can still be evicted if he was given the eviction notice before filing for bankruptcy. Even if he wasn't, his landlord could file a motion for relief to kick him out. His student loans — like child support obligations, criminal fines and many taxes — are not dischargeable, meaning bankruptcy will not release him from personal liability for that debt. If his car is repossessed, he will be liable for the difference between what he owes and what the car sells for at auction. It is unreasonable to expect to keep anything that you can't make the payments on, said credit counselor Bill Sheehan with DebtHelper.com.

Alternative Suggestion: Sheehan said the young man should call lenders to explain his situation and try to negotiate some kind of payment system. He should also consider cutting back on his expenses, said Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling. Use public transportation or move back home with parents for a while, Cunningham advised.

After six years of marriage, a couple divorce. The wife keeps the two children and the house. She falls behind on her mortgage and other bills. She is also shouldering a lot of credit card debt.

. Should she file for bankruptcy?

It depends.

Reasoning: If the credit card is a joint credit card in both of the former spouses' names, the ex-husband will also be responsible for that debt. If the wife does not have enough available cash to pay the debt, then the credit card companies will go after the husband, Spinowitz said. However, the ex-husband can sue the ex-wife in family court if in the divorce she was made responsible for the credit card debt. If the wife is solely responsible for the credit card, bankruptcy would help protect her because credit card debt is dischargeable. Bankruptcy will also temporarily protect her home from foreclosure, but if she is not able to make her house payments, she will eventually lose her house anyway.

Alternative Suggestion: She could try to persuade her bank to enter into a forbearance agreement, which would allow her to stop making mortgage payments for a few months until she was on stronger financial footing. She could also try a mortgage deferment agreement under which she would stop making payments and then pay a lump sum at the end of the deferral period, Sheehan said. She needs to speak to a certified housing and credit counselor to figure out her best move if she wants to protect her house, Cunningham said.

A couple is quickly reaching retirement age when the husband suffers a stroke. They have continued to pay their monthly bills and the mortgage on the home they have owned for more than a decade, but they have nothing left over to pay off the substantial medical bills.

. Should they file for bankruptcy?

Yes.

Reasoning: Bankruptcy can get rid of all of their medical debt. It's unsecured debt, meaning its not tied to any property and is dischargeable. If they are trying to avoid bankruptcy, health care providers are often willing to negotiate smaller payments as long as they receive some money each month, Sheehan said.

Between the high cost of prescriptions and the large losses on several investments, a retired couple has had to use more and more credit to pay bills.

. Should they file for bankruptcy?

Yes.

Reasoning: As explained in the earlier example, bankruptcy can wipe away this couple's debt for medical expenses. If remaining investments are in an IRA or 401(k), they are exempt from being seized as assets. Many pension plans are also protected. If they wanted to keep their house, Florida has a homestead act that will protect their home from being seized to pay off debts if they owned it for more than 1,215 days. If they have owned it for a shorter time, it is exempt up to $125,000 worth of equity in the home, Spinowitz said.

If their possessions — cars, artwork and boats, for instance — are worth more than a couple thousand dollars, they would have to surrender some of them or pay to keep them. They get $1,000 each for automobile exemptions and $1,000 each for personal property. For example, if they had a car that was worth $10,000, the car could be seized unless they paid the $8,000 difference to keep it.

Benefits of filing

for bankruptcy:

• Fresh start by releasing you from the obligation to repay certain debts.

• More time to pay back remaining debt.

• Halt of creditor harassment under bankruptcy protection.

• Automatic stay can temporarily save you and your property from being repossessed or foreclosed upon.

Negatives of filing

for bankruptcy:

• Worse credit score will haunt you for a decade.

• Property that is not exempt can be lost.

• Expensive attorney fees can cost you thousands of dollars.

Bankruptcy alternatives:

• Out-of-court settlement. Try to negotiate a reduced debt amount from your creditors. Stay away from debt-settlement companies.

• Debt counseling services. A free debt counseling service can help negotiate a debt management repayment arrangement. Search for one belonging to the National Association of Certified Credit Counselors and/or the Association of Independent Consumer Credit Counseling Agencies.

• Debt consolidation loans. There is not a lot of money out there to refinance debt if you don't have collateral, but this is still an option.

• Sale of assets or borrowing of assets. Drastic times calls for drastic measures, so sometimes it will be best to just sell some of your assets to pay off your debt.

File for bankruptcy? It just depends 07/11/09 [Last modified: Saturday, July 11, 2009 5:31am]

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