The Bankruptcy Option
As an Alabama consumer lawyer I see more and more clients who are “over-extended” and having tough times economically. Deciding whether or not to file bankruptcy is one of the most difficult decisions a person can make. However, bankruptcy no longer carries the stigma it once did. This is especially true during these particularly dire economic times. Many of the country's largest and most prestigious institutions, like Lehman Brothers, have fallen on hard times and sought relief in bankruptcy.
If you’re trying to hold onto a house then you might want to consider filing a petition under Chapter 13. If you want to discharge all your debts and get a fresh start then you may wish to consider filing a petition under Chapter 7.
There are pros and cons to filing bankruptcy. The pros include:
• It can wipe out or “discharge” all or some of your debts;
• It can give you a chance to “catch your breath” by temporarily prohibiting creditors from foreclosing or repossessing your home or car;
• It can temporarily prohibit wage garnishment or disconnection of utilities;
• It will stop harassing creditor phone calls and letters;
The cons include:
• It puts a blemish on your credit report that will remain there for 10 years;
• Can be a source of embarrassment and may be seen by potential employers, insurance companies and such.
Exemptions are laws that exempt, protect or withhold a certain amount of property from creditors. These exemptions are applied in bankruptcy cases. Under Alabama law a person filing bankruptcy is entitled to exempt up to $5,000 in real property (house or mobile home) from creditors. The $5,000 real property exemption is doubled for husband and wife. Therefore, a couple filing bankruptcy in Alabama may exempt $10,000 in home equity from their creditors. If they have more than $10,000 in equity in their home then they will have to file a Chapter 13 and pay some or all of their unsecured creditors.
For example, if Mr. and Mrs. Smith’s home is worth $100,000 and their mortgage has an outstanding balance of $80,000, then they have $20,000 in equity in their home. The first $10,000 in equity is exempt. The remaining $10,000 will have to be paid to their creditors over the course of their bankruptcy. Most bankruptcies have a term of 60 months. Therefore, they will have to pay their creditors $167 per month. And they get to keep their home.
However, nowadays, with the mortgage crisis and the high foreclosure rate, most homeowners are not worried about the amount of their equity. Many, as I have reported numerous times, are upside-down in their mortgages and owe more than the value of their home. Recently, my office has seen a new attitude from some mortgage lenders which are now willing to negotiate new mortgage terms in some cases.
Additionally, the personal property exemption in Alabama is $1,500 per person. Like the real property exemption, it is doubled for a couple. Personal property, like furniture, is valued at the amount one would realize at a garage sale. Therefore, few couples have trouble staying under the $3,000 limit.
Finally, some items like a car that is being financed may be “reaffirmed.” Reaffirmation means that you agree to pay off a particular debt according to the terms of the contract and that the debt will not be discharged in bankruptcy. Reaffirmation is an option; but one that should be utilized sparingly.
For example, many times a car is worth much less than is owed on it and if the lender will not negotiate the car note then it might be better to let the car go and obtain another vehicle at a more sensible price. The lender has an incentive to renegotiate because it will only get the fair market value (or less) for the repossessed car and the balance will be discharged in consumer’s bankruptcy. Smart lenders understand this and will frequently redo the terms of a car note.
Ultimately, you must weigh the advantages and disadvantages of bankruptcy and make a choice. For many people who face real problems that bankruptcy can eliminate, bankruptcy may have a positive effect on their lives. For others with few debts, filing for bankruptcy may be premature when it is possible to negotiate a debt settlement plan with creditors.
The determination of whether to file for bankruptcy or not must be made on a case by case basis, and a lawyer experienced in bankruptcy law can help you assess your options.
