After bankruptcy, most debtors wish they had filed sooner. They realize that many of the myths about bankruptcy caused them to avoid it for too long. As a result, they lost precious time. If they had understood how false these myths were, they could have solved their financial problems much sooner.

The following five myths wreak havoc on the public’s understanding of bankruptcy:

Debtors Always Lose Their Homes in Athens Bankruptcy

When done correctly, filing for bankruptcy does not mean you must give up your principal residence. In fact, some debtors file bankruptcy specifically to avoid losing their homes. For this reason, if you face foreclosure, consult a bankruptcy attorney to discuss how filing bankruptcy can help you keep your house.

It’s important to note that bankruptcy laws distinguish between a principal residence, investment property, and second homes. In Chapter 7, debtors may keep principal residences but may lose investment properties and second homes. On the other hand, a Chapter 13 repayment plan may allow you to keep all real estate, provided the court approves your petition and you fulfill your repayment obligations.

The Key Decision: Chapter 13 or Chapter 7

If you own real estate and need to file bankruptcy, choosing between a Chapter 13 and Chapter 7 is a key decision. Which serves your best interests depends on whether you own one or multiple properties and how much equity you have in your principal residence.

For instance, if your only real estate holding is your principal residence and you have no equity or a relatively small amount, then filing a Chapter 7 makes sense. Georgia law allows you to file a Chapter 7, wipe out many types of unsecured debt, and keep your home.

On the other hand, if the value of your home exceeds the equity limit, you must sell the home to repay creditors. In that case, you have to decide if the benefits of filing a Chapter 7 outweigh the loss of your house. Often, the answer is no, in which case Chapter 13 makes more sense.

Known as the “home saver” bankruptcy, Chapter 13 allows you to keep your home even when the equity is substantial. However, Chapter 13 does not allow you to discharge debts. Instead, you create a debt repayment plan and submit it to the court.

If the court approves the plan, you pay the bills included in the bankruptcy through the court. The plan allows you to pay a reduced monthly amount that fits into your budget.

Chapter 13 may also help if you own second and investment properties.

Filing an Emergency Petition to Halt Foreclosure

If you are close to losing your home in foreclosure, filing bankruptcy halts the process, giving you a chance to save your home before the sheriff comes to evict you. Both Chapter 7 and Chapter 13 petitions require courts to issue an automatic stay, which temporarily halts all collection actions, including foreclosures and evictions. You may then be able to retain ownership permanently through either chapter, depending on your circumstances.

If you face imminent foreclosure, contact a bankruptcy attorney for a home-saving consultation.

You Will Lose Your Vehicle in Athens Bankruptcy

As with a primary residence, bankruptcy usually helps people keep their vehicles rather than forcing them to go carless. As with a home, Chapter 7 allows you to keep your vehicle up to the equity limit. However, if you have an expensive vehicle that you own outright or are close to paying off, you may be forced to sell it to repay creditors.

However, Chapter 13 may allow you to keep even a paid-off luxury vehicle, provided the court approves your debt repayment plan and you fulfill your payment obligations.

But you do not have to keep your vehicle in a Chapter 7 bankruptcy. You have the option to surrender the vehicle to the lender and walk away from the loan. This makes sense for debtors who are substantially upside down in their vehicle loans and need to find a cheaper form of transportation. You can generally obtain a loan for a new car during or shortly after filing bankruptcy, although the interest rate will be high and your purchasing power limited.

You do not have to surrender the vehicle when you file a Chapter 7. The automatic stay forces the pause of all collections activity, including auto repossessions. You can continue using your vehicle for the time that the bankruptcy case remains open, typically for 4 to 6 months. Once you receive your Chapter 7 discharge, the lender has the right to repossess the vehicle. Generally, you can arrange for them to pick up the vehicle at no cost to you.

If you wish to keep your vehicle, you must reaffirm the auto loan debt. A reaffirmation allows you to keep secured property provided you agree to continue paying the loan under the current terms. Whether this makes sense depends on the cost of keeping your current vehicle compared to the cost of obtaining a new one or going without a vehicle.

If you plan to reaffirm a debt, you’ll need to keep current on the loan, even while the bankruptcy temporarily halts collections. Once the bankruptcy case concludes, you must pay the full past-due amount or the lender can repossess the car, leaving you without the vehicle while still owing the debt.

You Will Lose Your Retirement Savings in Athens

In bankruptcy, all Employee Retirement Security Act complaint plans are protected from creditors. This is one of the principal advantages of saving for retirement using one of these vehicles. The last thing you want is to spend years saving for your retirement only to have a job loss, disability, or other financial hardship wipe out all those years of savings.

You need not worry about your retirement savings when you file a Chapter 7 or Chapter 13 bankruptcy. If you face a financial catastrophe and are considering withdrawing funds from a retirement plan, it’s important to take a decision as to whether bankruptcy would leave you better off. For anyone with substantial assets in a 401(k) or IRA that is in danger of losing them, bankruptcy can save their retirement.

Bankruptcy Ruins Your Credit

For a short time, yes. Immediately after filing a Chapter 7 bankruptcy, your credit score sinks like a stone. Why? Because when you have an open Chapter 7 bankruptcy case, you can place any new debts into it. For this reason, only subprime lenders are willing to take this risk. You are cut off from obtaining many types of mainstream credit.

For example, many apartment rental companies require your Chapter 7 bankruptcy to be discharged before commencing a lease because you could place the lease into the bankruptcy case, preventing them from collecting rent.

However, once your bankruptcy is discharged, your credit score rockets back up, often to a higher score than prior to the bankruptcy. Why? Because before filing, you likely had a high amount of outstanding debt, collection accounts, repossessions, evictions, foreclosures, and other bad stuff. Bankruptcy wipes away all of those negatives, giving you a fresh start. Because all those too-heavy debts are gone, you are now a better credit risk than before you filed.

Chapter 13 filings also impact your score. It may fall temporarily, but as you get credit for on-time payments through the court-approved plan, your score rises, eventually eclipsing what it was when you filed, provided you stick to the agreement. You can obtain new credit while your repayment plan is in effect, though this may require specialized lenders and court approval.

 

You Will Never Be Able to Buy a House After Bankruptcy in Athens

Bankruptcies do not stay on your record forever. After 10 years, they disappear from your credit report. However, you need not wait that long to buy a house. You can obtain a mortgage under some programs just two years after a Chapter 7 bankruptcy.

After a bankruptcy, lenders require “seasoning” before approving a mortgage. Seasoning is the time you have been rebuilding your credit after the bankruptcy case ended. Once you have enough seasoning for the program, you receive approval provided you meet other qualifications, albeit you may have a higher interest rate.

For instance, Federal Housing Administration– and Veterans Administration mortgages require just two years of seasoning after Chapter 7 and one year after Chapter 13. United States Department of Agriculture mortgages require three years of seasoning after Chapter 7 and one year after Chapter 13.

Conventional loans, which must conform to the standards of Fannie Mae and Freddie Mac, require four years of seasoning after bankruptcy (two years with extenuating circumstances).

Bankruptcy won’t prevent you from obtaining a non-qualified mortgage at any time. But these loans are unsuitably risky for most people. Lenders offer them because the buyer has a very large equity share or down payment.

As a result, in case of default, the lender can repossess the property and sell it at a profit, making these loans dangerous for the borrower. Also, they charge astronomical interest and fees and often have a balloon payment due after a few years, leaving you in danger of foreclosure if you cannot sell, refinance, or pay off the loan in full at the end of the term.

Consult a Bankruptcy Lawyer Before Deciding the Best Course of Action

Putting off filing for bankruptcy is the number one regret of most people who file. Rather than being an albatross around their necks, they find that the bankruptcy removed the albatross of unserviceable debt and allowed them a fresh start. Never believe the myths about bankruptcy. If your debt is causing you hardship and distress, contact Morgan and Morgan for a bankruptcy case evaluation.

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