In February consumer debt was about 4 trillion bucks. Can someone explain to me why a family that has a credit card and student loan debt in excess of 50K, a mortgage and two late model cars wouldn’t be better off filing bankruptcy? What’s the downside, lower credit rating for X years? Doesn’t seem so bad to in exchange for removing / reducing debt.
I think there’s still a huge social stigma to it. That isn’t helped by the fact that credit checks are used widely; a declaration of bankruptcy could make it harder to get housing, find a job, or even volunteer. Many people don’t know about credit counselling or getting help in the bankruptcy process so that they don’t get fleeced by creditors. They just keep paying or holding off payments because they don’t know about alternatives.
In February consumer debt was about 4 trillion bucks. Can someone explain to me why a family that has a credit card and student loan debt in excess of 50K, a mortgage and two late model cars wouldn’t be better off filing bankruptcy? What’s the downside, lower credit rating for X years? Doesn’t seem so bad to in exchange for removing / reducing debt.
I don’t believe it gets rid of your student loan debt. House gets foreclosed on and the cars repossessed. Then your credit is hit so you can’t get new housing or cars. What benefit are you seeing?
Nothing to add, the important one is employment. I am basically just a building and facilities guy, even though I have no impact on banking, member relations privacy etc I still had to get a credit check when working for a bank.
Maurice
In February consumer debt was about 4 trillion bucks. Can someone explain to me why a family that has a credit card and student loan debt in excess of 50K, a mortgage and two late model cars wouldn’t be better off filing bankruptcy? What’s the downside, lower credit rating for X years? Doesn’t seem so bad to in exchange for removing / reducing debt.
I don’t believe it gets rid of your student loan debt. House gets foreclosed on and the cars repossessed. Then your credit is hit so you can’t get new housing or cars. What benefit are you seeing?
Student loans are exempt from bankruptcy UNLESS they can be proven to be an undue hardship.
Chapter 7 - your losing the house, all your credit cars are gone, your cars are probably gone too.
- first cars are exempt up to a certain dollar amount
- Some for your property equity is exempt
Chapter 13 - you restructure your debt and keep everything. It’s usually called bankruptcy for home owners, because your mortgage stays around.
You won’t be getting a mortgage for 2 years. It falls off after 7. You can get almost all types of other consumer debt almost right away though - but you aren’t getting a $50k car or even a $1000 credit card.
In February consumer debt was about 4 trillion bucks. Can someone explain to me why a family that has a credit card and student loan debt in excess of 50K, a mortgage and two late model cars wouldn’t be better off filing bankruptcy? What’s the downside, lower credit rating for X years? Doesn’t seem so bad to in exchange for removing / reducing debt.
I’m not qualified to help.
I have no CC debt.
I have no student loans.
I have no mortgage.
I do have late model cars but they aren’t financed.
I think a better Q is “why do people get themselves into so much debt?” in the first place.
What others have said, you lose your house and cars(maybe keep one car) and you still have the student loan debt.
What you though wasn’t a bad exchange, is actually about the worst one you could make. As long as you can make payments on all that stuff and only owe 50k, you are in pretty good shape…Chapter 7 is the opposite of what you would want to do…
In February consumer debt was about 4 trillion bucks. Can someone explain to me why a family that has a credit card and student loan debt in excess of 50K, a mortgage and two late model cars wouldn’t be better off filing bankruptcy? What’s the downside, lower credit rating for X years? Doesn’t seem so bad to in exchange for removing / reducing debt.
I don’t believe it gets rid of your student loan debt. House gets foreclosed on and the cars repossessed. Then your credit is hit so you can’t get new housing or cars. What benefit are you seeing?
I sit on an HOA board with a woman who’s a personal bankruptcy attorney. She says it’s amazing how often clients come in unaware of the fact that people actually have to forfeit assets. Her rule of thumb is that if someone pulls up to her office in a Mercedes or BMW they will start crying when they’re told about the car.
I think a better Q is “why do people get themselves into so much debt?” in the first place.
Why are you victim shaming?
In February consumer debt was about 4 trillion bucks. Can someone explain to me why a family that has a credit card and student loan debt in excess of 50K, a mortgage and two late model cars wouldn’t be better off filing bankruptcy? What’s the downside, lower credit rating for X years? Doesn’t seem so bad to in exchange for removing / reducing debt.
I don’t believe it gets rid of your student loan debt. House gets foreclosed on and the cars repossessed. Then your credit is hit so you can’t get new housing or cars. What benefit are you seeing?
I sit on an HOA board with a woman who’s a personal bankruptcy attorney. She says it’s amazing how often clients come in unaware of the fact that people actually have to forfeit assets. Her rule of thumb is that if someone pulls up to her office in a Mercedes or BMW they will start crying when they’re told about the car.
If I remember correctly, most of these bankruptcy laws changed in 2005. Before that, it was a hardship but not as bad as today. Once you’re in trouble today, unless you’re hiding money, it’s going to be a long and difficult road out.
I was wondering the other day if you get an average new SUV say a Pilot on a 72 month loan, at what point is the loan not underwater? It’s got to year 4 or into 5. So there’s a few years where you are paying, the car is underwater and you don’t have a warrantee so repairs are on you. Seems risky for walk aways.
Lot of iffy information being tossed around in here.
Depends how much equity people have in their houses and cars. And what kind and how new the cars are. And what state you are in. And how much they make. And whether or not you end up in 7 or 13.
Most states have a pretty healthy homestead exemption, as well as exemptions in cars and personal property. And some states (FL, think OJ) have complete exemptions.
In 7, if you have a mortgage there is a very good chance you aren’t losing your house. If your car is older, there is a very good chance you aren’t losing it as is the case if it is almost new. After the exemptions there is no equity there for the trustee to seize.
And lenders will almost always reaffirm those loans. They always have the ability to foreclose or repossess if you fail to pay.
And in 13 you aren’t losing much at all as long as you still have the ability to pay.
And a lot of people are MORE able to get loans, limits on how soon you can file and you don’t have the enormous debt load.
The biggest change in recent years was to force you into 13 instead of 7. If you can’t pass the means test you get forced into 13, which can take 3 to 5 years to come out of if you succeed in your plan (and you probably won’t).
There are a lot of people that would be much better off filing. But the banks and lenders try very hard to make you feel that you have a moral obligation to them. While they will tell you that their obligation to you is purely business. So people think they are bad people if they file when in fact they are just making a business decision based on the contract they signed.
To address the last point
I’ve an example of an individual who underwent a Massive trauma. In relative terms for someone living a reasonably normal life it was significant: their room mates, two brothers, went out for drinks one night and they died in a housefire
This sent the individual off the rails. The results of which come to light several months later when they rock up at their parents house to explain their apartment had been repossessed and they’d not paid their mortgage in months.
Filing was the obvious option bar the fact that they worked at the big 4 in tax and that would have stopped progress to chartered status.
The route out was an IVA. Individual voluntarily arrangement negotiated by a third party with all creditors on their behalf. Some debt was written down, but much was paid off over a large number of years.
Everyone learnt a lesson and whilst filing would have been the easiest course of action. I think in this specific instance it wasn’t the correct course.
Lot of iffy information being tossed around in here.
Depends how much equity people have in their houses and cars. And what kind and how new the cars are. And what state you are in. And how much they make. And whether or not you end up in 7 or 13.
Most states have a pretty healthy homestead exemption, as well as exemptions in cars and personal property. And some states (FL, think OJ) have complete exemptions.
In 7, if you have a mortgage there is a very good chance you aren’t losing your house. If your car is older, there is a very good chance you aren’t losing it as is the case if it is almost new. After the exemptions there is no equity there for the trustee to seize.
And lenders will almost always reaffirm those loans. They always have the ability to foreclose or repossess if you fail to pay.
And in 13 you aren’t losing much at all as long as you still have the ability to pay.
And a lot of people are MORE able to get loans, limits on how soon you can file and you don’t have the enormous debt load.
The biggest change in recent years was to force you into 13 instead of 7. If you can’t pass the means test you get forced into 13, which can take 3 to 5 years to come out of if you succeed in your plan (and you probably won’t).
There are a lot of people that would be much better off filing. But the banks and lenders try very hard to make you feel that you have a moral obligation to them. While they will tell you that their obligation to you is purely business. So people think they are bad people if they file when in fact they are just making a business decision based on the contract they signed.
To further JPO’s good points; ignore the social stigma of BK (it doesn’t exist). Look at it as another purely business transaction. A few points, and I do subprime for a living so this is very familiar territory for me:
- A Ch13 is the kiss-of-death if you want new credit. MOST of them fail & convert to a 7. And then you have a double-BK on your record. IF you are current on your house, and IF you don’t have too much equity in your house, a 7 is a MUCH better solution.
- Student Loan debt: cannot be wiped out, unless you can convince the trustee that it is an undue hardship, OR (and this is becoming somewhat common) that the value obtained vs the debt incurred wasn’t “fair”. In other words, if you racked up $20k in Trump U debt, that will get wiped, but that $200k going to Medical School…that isn’t going away.
- Cars: the day after filing for a CH7 I will happily finance you in almost any car you want. As will about 10 other lenders, some of whom are publicly traded. Ch13 is too much of a headache & crooked trustee’s = very few lenders want to deal with the grief. Yes, on a Ch7 car loan you’ll now pay between 12-18% (or more depending on state/car/your previous automotive pay history). BUT if you have maxed out credit cards/installment debt, you are paying 9-14% now anyway if you are under a 620 FICO/Vantage.
- Credit Cards: you’ll have 3-5 credit card offers the day after you file. Some from the same banks you just took down.
- Installment loans: this is where you’ll pay the piper in interest. But same as an auto loan if your FICO sucks you are paying 20% ++. This is due to the online lenders who are getting absolutely killed with their CC consolidation loans that then go BK 60 days later, especially if stacked.
A “regular” BK is about $1500 + court costs/online. So $2k. You’ll then have 2-5 years of higher interest CC/Installment payments IF you carry a balance (which you shouldn’t b/c you just wiped out all your debt). You won’t get a mortgage for at least 3-5 years, and that will be at subprime (mortg) rates & you’ll need 20% down. But that saves you PTI and you’ll be able to refi after 1 year at most banks. So assume that wiping out $50-100k in debt = $2-10k in costs + extra interest over the next 5 years…few stocks return that ROI…
In my experience people are creatures of habit, and a regular CC-addicted consumer with the 2 cars will almost always fail again. Medical debt is a bit different–the one offs are the ones that seem to recover quickly.
I’m not qualified to help.
I have no CC debt.
I have no student loans.
I have no mortgage.
I do have late model cars but they aren’t financed.
I think a better Q is “why do people get themselves into so much debt?” in the first place.
Why do you hate America?
I was wondering the other day if you get an average new SUV say a Pilot on a 72 month loan, at what point is the loan not underwater? It’s got to year 4 or into 5. So there’s a few years where you are paying, the car is underwater and you don’t have a warrantee so repairs are on you. Seems risky for walk aways.
You would be surprised. I have a lease on a Pilot right now. Figured I would roll the dice and buy it at the end of the lease if I was out of wack on mileage. 25k miles on it already in only 10 months and I asked for a trade in value the other day when getting an oil change. It was break even with the lease payoff.
If you do a chapter 7, can you keep a newer car (2-3 years old) if you agree to keep making the payments to the current lender on that one thing, or do you automatically default on all of your loans?
If you do a chapter 7, can you keep a newer car (2-3 years old) if you agree to keep making the payments to the current lender on that one thing, or do you automatically default on all of your loans?
Depending on your state, and if it’s your only car, yes.
If you do a chapter 7, can you keep a newer car (2-3 years old) if you agree to keep making the payments to the current lender on that one thing, or do you automatically default on all of your loans?
Yes. You will file a reaffirmation with your lender. There is a chance that the trustee may block it, if you have significant equity, but there are plenty of varying definitions of ACV (actual cash value) and Black Book Average Wholesale or MMR (Manheim Market Report) values are usually $2-5k under NADA/KBB “values”. And most trustees are not in the auction/wholesale business.
If you are a chronic delinquent payer or general PITA to the lien holder on your car (for example no insurance), than they may not let you re-affirm. Most do, as the majority of repossessions are $5-8k loss for the banks and with a BK = no chance of recovery.
I’ve got one now that came out of a CH7 in 2016. Bought a $30k truck with $8k down this spring. Put 25k miles on it in 3 months, blew up the engine & walked away from it at the mechanics. $8k to fix/recover it. Which we will, and the we’ll sell it at auction & sue the customer for the deficiency. Given his 20 year job with pension benefits he is going to be paying for that truck regardless. Some people just don’t learn.