The number of Americans filing for personal bankruptcy is up by 17% in 2010 and rose by nearly a third in 2009, a surge largely driven by foreclosures, credit card abuse, and job losses. Overall, personal bankruptcy filings hit 1.41 million last year, up 32% from 2008, according to the National Bankruptcy Research Center. Chapter 7 filings were up more than 42% as of November 2009, compared with the same period a year earlier. November is the most recent month with analyzed data available. Chapter 13 filings rose by 12% and made up less than a third of 2009 filings as of November. The Chapter 7 increases in filings are especially significant because a “means” test was introduced in 2005 in order to force people toward a Chapter 13 so they would still have to pay back a portion of their debts. Instead, the worst US recession in four decades is testing the effectiveness of the “means” test laws.
The housing crisis, credit card debt, and high unemployment rate in this recession have prompted more people to file for bankruptcy who never have considered the possibility than ever before. More middle-class Americans, people with high incomes, and people with higher education levels have resorted to bankruptcy filings. Bankruptcies are happening to famous people, rich people, poor people, infamous people, and people all between because bankruptcy is no respecter of persons or standings in society. Bankruptcy can happen to anyone at anytime. It can happen to you.
One of the major causes for the bankruptcy filing increases, as listed by the statistics, is foreclosures on mortgages. In response to being foreclosed on, many homeowners are opting for a short sale to accommodate their lenders. Under this option, the homeowner sells their home at market value but for less than what they own on the home, as long as the lender agrees with the price. This option often allows the lender to get more for the home than if it were to auction off in a foreclosure, and it offers the homeowner forgiveness for the remainder of the loan not paid. A new advantage for the option came recently when the Obama Administration was successful in getting Congress to drop the tax implications on the money that was being forgiven by the mortgage companies. The federal government formerly looked at the savings as income to the homeowner which had to pay income taxes on it.
The drawbacks to the short sale are the possibility the home will not sell and that the mortgage company will not agree to the price even if the homeowner gets a contract for sale on the home. The advantages of a short sale are that you get out from under the heavy burden of your mortgage payments, you do not have to pay back the difference in what is owed and the home sold for, you do not have to pay income taxes on the difference, and a foreclosure will not go on your credit report.
A short sale, if you have no other debts outstanding you cannot pay down in five years, is really what you might try if you are facing the prospects of foreclosure and bankruptcy.
Becoming bankrupt is a black and white experience much more than it is a gray one. As a general rule of thumb, you are legally financially bankrupt if your current sustainable income will not pay all of your living expenses, pay interest on outstanding loans, and reduce some of your principal on those loans while paying on them for five years. Five years is the maximum legal number of years a United States Bankruptcy Court allows an individual to work their way out of bankruptcy protection. So, if you are truly bankrupt, there is the possibility under certain circumstances a short sale may not be possible because other creditors can force you into filing for bankruptcy.
Bankruptcy laws are complicated, and common sense indicates you will need a bankruptcy lawyer in order to properly understand how these complex laws may apply in your situation. If you determine you are in need of relief from the stress associated with debt, contact us today. We will help you find a bankruptcy attorney in your area that will help you with any questions you may have on bankruptcy law.
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