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Post-Holiday Financial Blues: How Chapter 7 or 13 Bankruptcy Will Help

August 11, 2014

Alex Moretsky

Holiday time brings enormous pressure to join in the collective spirit of gift giving and indulgences. If your financial situation was already precarious this festive spending might put your monetary resources over the edge. Bankruptcy might very well be your best option. I am not advising you to purchase a 65” HDTV or top-of-the-line washer/dryer on credit with the intent of filing for bankruptcy. But if circumstances are such that you have been fighting to stay afloat for some time then the pressures of the holiday season might be the proverbial straw that breaks your financial back. Bankruptcy can help by greatly reducing or even eliminating unsecured debts such as:

  1. Revolving credit cards bills
  2. Medical bills
  3. Past due utility bills
  4. Past due rent
  5. Unsecured personal loans
  6. Debts in collection
  7. Other “open account” debt

Discharging the above debts can help you to keep your home by freeing up funds you used for your unsecured debts and shifting them toward your mortgage. Even if you should decide to “walk away” from the home, Chapter 7 delays the foreclosure for a period of time allowing you time to get all your affairs in order while saving money.

The laws of most states allow homeowners to protect a certain amount of equity they have in their homes from creditors. This is known as the Homestead Exemption. First, you must determine how much non-exempt equity you have because this could trigger a sale of the home. Using a formula that starts with the marketplace value of the home, you subtract certain variables such as trustee commissions, the amount still owed on the mortgage and other non-mortgage liens. If the number is negative or less than a certain value – the value may differ from state to state – your house is not at risk of being sold to pay off creditors. And even if the number exceeds the cutoff, you may file a chapter 13 bankruptcy to keep your home.

Many people finding themselves in financial straits are tempted to use their retirement savings to pay off creditors. Besides getting broadsided with a tax penalty, something to keep in mind is that qualified retirement savings are never part of a bankruptcy estate. They are completely exempt and therefore safe. You should not use those funds to pay down debt. The debt will be discharged through bankruptcy. And your retirement savings will be there, intact, for your retirement.

While you might feel overwhelmed by your financial situation, bankruptcy can provide a relief for you and your family that will put you on surer financial footing in the future and allow you to start the New Year with a clean slate.