Q I am in a desperate financial situation. My hours at work have been reduced and I might lose my job. The value of my house has gone underwater. My family has been living off  credit card borrowing, but I don’t know how much longer we can continue. Does it make sense to file for bankruptcy?

A From a legal standpoint, the simple answer is yes.

U.S. bankruptcy laws allow you to file bankruptcy and start over with a clean slate.  For the average consumer, there are two options—Chapter 7 and Chapter 13. They are named after the titles which discusses bankruptcy in the Bankruptcy Code. Chapter 7 allows for full liquidation, which can essentially wipe off all your debt. In this type of bankruptcy, there is an income requirement to qualify, but no limitation on the amount of debt, secured or unsecured.

If you don’t qualify under this bankruptcy because you make too much money, but have justifiable qualifying expenses like car payments, mortgage payments, household expenses etc., and if your mortgage/secure debt is under a certain dollar limit, you can qualify for Chapter 13.

Chapter 13 is also known as a Reorganization Plan. It allows you to come up with a 5-year plan to pay off certain debts and keep your house as well. You can also keep your house under Chapter 7 but it requires the lender to agree or offer loan modification.

Filing for bankruptcy allows one to start over and get rid of most consumer debts (credit card bills, medical bills etc.). You can also choose to acknowledge a debt and intend to pay it without including it in the bankruptcy, e.g., a loan from a family member.

Certain debts such as student loans, tax liens, alimony payments, cannot be excused, though. So, if your liabilities are in that area, then bankruptcy is not a good option.

I suggest bankruptcy to anybody who finds him or herself in a bad financial situation caused by external or economic factors such as loss of value in the house, loss of income, or bad business and financial decisions.
Given the social stigma of bankruptcy in Asian culture, and the deep desire for moral and financial responsibility, filing for bankruptcy can be a difficult decision to take. It definitely requires a balancing of personal feelings with financial reality.

Stress caused by financial problems runs deep. It can affect the entire set of your personal and business relationships. I would definitely advise you to deal with the situation swiftly and expeditiously.

Madan Ahluwalia has been helping homeowners with loan modifications and issues related to predatory lending and foreclosures. He can be reached at 650-331-1968 or visit www.takeourhelp.com

 

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