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Michael D. Hart, P.C.
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Roanoke Virginia Bankruptcy Law Blog

How a bankruptcy impacts a debtor

Those in Virginia who are thinking about filing for bankruptcy should know that the process can do significant damage to a credit score. However, it is possible to minimize the damage over the long-term. By taking out a secured credit card or a credit builder loan, a debtor could start to establish a timely payment history.

The public record of a Chapter 7 bankruptcy will last for 10 years. However, all other bankruptcy references will remain on a credit report for only seven years. Once that time has elapsed, the bankruptcy won't be seen by anyone doing a credit check. After the seven years, a person's credit score may improve significantly. With some planning and discipline, however, it is possible to get a good credit score within four or five years.

Credit card debt is becoming a national problem again

Credit card debt declined significantly during the Great Recession but that trend appears to be over. According to data recently compiled by WalletHub, Virginia families now have as much debt as they did prior to the recession. This means more people might be struggling to pay their bills. There are a couple of reasons why credit card debt is so high.

Lenders have started to extend credit to people with lower credit scores once again. Because these consumers are at a higher risk of default, delinquency rates rose half of a percentage point between 2016 and 2017. Consumers who cannot pay their credit card bills might be more likely to file for Chapter 13 bankruptcy relief now. The credit card delinquency rate was 15 percent during the peak of the recession. By the end of 2017, it had risen to 7.5 percent.

Fed chairman discusses student loans and bankruptcy

Virginia residents who have student loan debt are generally unable to discharge those obligations in bankruptcy. While there is a provision for discharging these types of debts if they cause "undue hardship", this is a term that has never been clearly defined, and courts have traditionally set a very high standard for what it constitutes.

On March 1, the new Federal Reserve chairman, Jerome Powell, spoke to the Senate Committee on Banking, Housing, and Urban Affairs about the possibility of making student loans dischargeable in bankruptcy. Sen. Brian Schatz asked Powell whether student loan debt, which is carried by 40 million people and has reached $1.4 trillion, negatively affects the economy.

Keeping or buying a vehicle and Chapter 13 bankruptcy

Chapter 13 bankruptcy is a legal process in which debtors use their disposable income to pay off their debts. Virginia debtors who are in some stage of the Chapter 13 bankruptcy process may find that it is possible to purchase a new vehicle or keep the one that they have already purchased; however, the process they use may vary.

Chapter 13 filers could be able to maintain possession of their vehicle except in certain circumstances. Car payments that are extremely high might prompt the court to prohibit the payments from being included in the calculation for disposable income. Debtors who are upside down on their loan may use a cram-down loan, which allows the amount of the loan to be reduced to the amount the vehicle is worth in cash. However, in order to be eligible, the debtor would have had to purchase the vehicle at least two and a half years before filing for bankruptcy.

What to know about bankruptcy

There were 844,495 bankruptcy cases filed in 2015 in Virginia and throughout the country, and 97 percent of those cases were filed by individuals. Those individuals had a median income of $34,392 and median expenses of $30,972 when they filed. In the past, those who filed for bankruptcy may have been seen as people who were irresponsible with their money. However, the system exists to allow people to take risks in a capitalist society.

In most cases, those who file for bankruptcy have no legitimate means to pay their debts. In 2016, 95.5 percent of the nearly 500,000 Chapter 7 bankruptcy cases that were filed resulted in debtors having their debts discharged. Chapter 7 cases require individuals to liquidate non-exempt property and use the funds raised to pay off creditors. Of bankruptcy cases filed in 2015, 63 percent were Chapter 7 filings.

Not all credit card debt is created equal

Federal Reserve data indicates that credit card debt in the United States passed the $1 trillion mark in 2017. This may have implications for the financial health of Virginia residents and others. A study by CreditCards.com sought to rank the 25 most populous cities by the average amount of credit card debt residents held. Washington, D.C., had the most debt with the average person having a balance of $7,442.

However, the amount of debt a person has doesn't necessarily determine their ability to pay it off. For instance, while Washington, D.C., residents had the highest debt, they also had the highest median income. Therefore, they likely felt the burden of their debt the least. According to the survey, residents of San Antonio, Texas, actually had the highest debt burden. It would take a person living there 22 months to pay off their debt if they put 15 percent of their gross monthly income toward that balance.

Building good credit after bankruptcy

Virginia consumers who have ever filed for bankruptcy or are considering it might assume that it ruins their chances of ever having good credit again. But in actual fact, there is a time limit for bankruptcy to remain on a person's credit report, and when it is removed, rebuilding credit to the good score range is quite possible. Not all negative information remains on a credit report for the same amount of time. Late payments remain for seven years, as does Chapter 13 bankruptcy. But Chapter 7 bankruptcy remains for 10 years.

When bankruptcy first appears on someone's credit report, it can knock about 200 points off the credit score. But when the bankruptcy is finally removed, the credit score does not immediately jump back up. It could take people a few years of work at building their credit to see a significant improvement.

Why filing for bankruptcy makes financial sense for some

Financial burdens arise for various reasons in life. Despite the story that led you to consider bankruptcy, seeking solutions to an unmanageable money trap is commendable. Not everyone has the courage to face a financial disaster that is directly attached to your wellbeing. Examining legal options to alleviate the burden of lenders owed often signifies maturity in handling future financial responsibilities.

Bankruptcy could improve credit scores

Pros and cons of using a loan to pay off debt

Virginia residents and others who have debt are likely to be paying off car loans, student loans and credit card balances. They may also be paying down home mortgages. The typical American household that does carry debt averages $131,431 owed to creditors. Some believe that taking out a 401(k) loan is the best way to take care of those and other debts.

Before taking any steps, the person should consider the interest rates on their debts. Generally speaking, the interest rate on a credit card is higher than that of a mortgage. The interest rate on a 401(k) loan is the prime rate plus 1 percent. If the interest rate on the 401(k) loan is less than the interest rate on the existing debt, the loan may be a viable way to get out of debt.

What trustees do in a bankruptcy

The role of a trustee in bankruptcy varies depending on whether the person has filed for a Chapter 7 or a Chapter 13 bankruptcy. In either case, when a Virginia consumer decides to file for bankruptcy, it is necessary to complete a document that lists assets, debts, property and expenses. A trustee may ask for additional information such as pay stubs.

In a Chapter 7 bankruptcy, the trustee reviews the assets to see which are exempt and which are nonexempt and thus subject to liquidation. People are allowed to keep some property in a Chapter 7 bankruptcy, and in some cases, all the property owned by a person might be exempt. This is known as a "no asset case".


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