If you’re a debtor thinking about – or have already declared – bankruptcy, it may be time to do a little more homework about the bankruptcy process. Unfortunately, many potential or actual debtors have assumptions about bankruptcy that are wrong – even if they make sense. The most successful individuals and families confront their misconceptions about bankruptcy and learn how to work well within existing law.
Question No. 1: Do you have to be insolvent to declare bankruptcy? Actually, no. Insolvency is an important term in bankruptcy. However, it’s not really a bankruptcy law term. It’s an accountant’s word to describe when an individual or business’ liabilities exceed its assets. That is, you owe more than you own.
Many debtors are insolvent, or “under water,” for several months before they declare bankruptcy. Likewise, some debtors declare bankruptcy even though they aren’t insolvent. A strategic default in residential real estate, for instance, doesn’t rely upon a debtor’s overall balance sheet. Rather, the valuation at issue is simply whether the value of a home’s debt exceeds its actual value. If the answer is yes, a strategic default or Chapter 7 bankruptcy may significantly reduce a debtor’s overall debt load.
Question No. 2: Bankruptcy easily discharges all debts, right? Not really. Taxes are virtually impossible to shed. Student loans are very rarely discharged. And secured loans often can only be discharged if the debtor relinquishes the asset, such as a home or car, which securitizes the loan.
On the other hand, unsecured debt, such as credit cards, is more easily discharged. Moreover, many debtors realize that the unsecured debt is really their problem. Long-term secured debt like student loans or home loans tend to have low interest rates and, therefore, relatively small monthly payments. Credit cards, by contrast, have higher interest rates and relatively higher monthly payments. By doing the math, some debtors realize that it’s the short-term, high-interest credit that is what really has them in a bind.
If you’re looking hard at bankruptcy as a solution to your financial difficulties, it may be time to talk to the professionals at Fears Nachawati. The attorneys at our firm have helped hard-working people for years. Find out how we can help you by calling us today.