Top 5 Reasons People File for Bankruptcy
A person just doesn’t wake up one morning and say: “I think I will file bankruptcy today.” Instead, filing bankruptcy is a process that takes place over a long period of time that is often caused by unforeseen circumstances. The following are some of the top five (5) reasons why most people file bankruptcy:
1. Loss of Income or Employment
Loss of income either from a closed business owned by the debtor or loss of income due to unemployment is the number one reason most people file for bankruptcy. And with the rising unemployment rates, the number of bankruptcy filings increase.
2. Hospital and Medical Bills
Due to the lack of employer provided health insurance, and the high rate of unemployment; a large majority of people are either unable to afford health insurance or it is not offered at their place of employment. This means, if a child becomes sick, or a mother contracts the flu, or a husband has a heart attack; the cost of medical care can skyrocket to tens of thousands of dollars. Often, people are forced to file bankruptcy simply because of hospital and medical bills they cannot afford to pay.
3. To Save a Home from Foreclosure
Filing a bankruptcy petition will put a legal “stay” in place that temporarily stops the foreclosure process. During this time the debtors will either decide to keep their home or surrender and return it back to the mortgage company. The decision whether to keep or surrender a home will be dependent upon whether the debtors can afford to continue making the mortgage payment or not. However, if the debtors are behind in their mortgage payment, they will be required to pay all the past due arrearages if they file a Chapter 7; but in a Chapter 13, they can pay off the past due balance over a sixty (60) month, or five (5) year period.
Note: Due to the current drop in the mortgage market, bankruptcy courts now allow the second mortgage to be crammed down or eliminated if the home is underwater. By underwater, we refer to the fact that more money is owed on a home than what it is worth. For example; if a home is appraised at $100,000 but $100,000 is owed on the first mortgage and $50,000 is owed on the second mortgage, filing a Chapter 13 bankruptcy could eliminate the $50,000 second mortgage simply because there is no equity in the home.
4. To Save a Vehicle from Being Repossessed
In the same way that a bankruptcy petition places a legal “stay” in place to stop a foreclosure; the same happens with repossession. Again, the debtors will need to decide whether they can afford to continue making payments and keep the vehicle or whether to surrender it and return it to the creditor.
Note: When the bankruptcy law changed in 2005, the “910-Day Rule” was enacted. Essentially, if a debtor has paid on a vehicle for more than 910 days (about 2.5 years), they will be able to cram down the amount to be paid back at the current market value (obtained from Kelly Blue Book, NADA Guides or Edmunds.) For example, if a vehicle has a market value of $8,000 but the debtor owes $10,000 on the car, filing a Chapter 7 or Chapter 13 bankruptcy will allow them to only pay back $8,000; thus saving them $2,000 in this particular situation.
5. Stop Creditor Harassment
Many creditors and collectors take unethical approaches to collecting a debt. Some will even go so far as to demand the debtor cash in their 401K to pay an unsecured credit card debt. Collectors will persistently call the home and office of debtors (as well as neighbors) in an attempt to shame the debtor into paying them. Filing either a Chapter 7 or 13 bankruptcy will immediately halt all collection practices. This is because when the bankruptcy petition is filed, the court becomes the administrator over the estate of the debtor and the creditors must obtain permission from the federal bankruptcy court to collect, repossess or mortgage assets of the debtor.
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