The Perils Of Filing Bankruptcy

Performance Property Real Estate Question

Q: Gerald, my ex-husband and I split up and I got the house but fell behind on mortgage payments because I only have one income instead of 2. The bank filed foreclosure against my home. An attorney told me I should file bankruptcy, what do you think? Cheryl, Tinton Falls, NJ

A: It is appropriate and beneficial in certain circumstances to file bankruptcy. For example if you have enormous medical bills or very high credit card debt, it may very well make sense to file chapter 7 to eliminate the debt and start over. However there are severe and long lasting consequences from filing bankruptcy that can last for a decade. After you file bankruptcy, it’s very difficult to get loans and even if you can you’ll likely have to pay very high interest rates. Also, bankruptcy is not free, you have to pay for it and it’s not guaranteed, you have to apply for bankruptcy. Bankruptcy should be a last resort, despite what bankruptcy attorneys may tell you–obviously bankruptcy attorneys have a vested interest in getting you to file bankruptcy. Personal bankruptcy basically falls into 2 categories–1) chapter 7 which attempts to wipe out debt and 2) chapter 13 which just allows you to reorganize debt. Chapter 7 sometimes makes sense depending on your situation because it may allow you to eliminate debt. Chapter 13 rarely makes sense because you still owe all the debt you had before plus now you have to pay the bankruptcy attorney also. The only situation where chapter 13 makes sense in my opinion is if you have a very temporary problem that goes away. People often use chapter 13 to temporarily forestall a foreclosure because all collection activities must stop during bankruptcy proceedings. However, the long term negative impact of filing Chapter 13 in most cases does not justify a couple of months delay that you may achieve if your bankruptcy application is approved. In your case, your problem is not short term–you need 2 incomes to maintain your home and you only have one, so you either need to increase your income (easier said than done), add another income somehow or sell your home and cut your losses. Thanks for your question, Cheryl.

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