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Bankruptcy And Loan Modification: Options That Work For Debt Restructuring

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By: Gemma Reyes
on 25th May,2016

Nothing feels quite as bad as declaring bankruptcy. This varies significantly from their parents who were avid savers, not spenders.
Bankruptcy And Loan Modification: Options That Work For Debt Restructuring

Nothing feels quite as bad as declaring bankruptcy. There is a great deal of emotion that is connected to our ability to manage our money, and getting into debt doesn't feel good for anyone. It is a stressful, highly criticized part of regular life as people try to leverage life circumstances and needs with a fixed income.

What are your presumptions about people who reach the point where they are considering bankruptcy? Do you conjure images of very young and irresponsible individuals who have chalked up credit cards travelling the world, buying nice clothing or cars and living beyond their means? If that is your impression of the average bankruptcy scenario, you aren't alone. There is a great deal of societal prejudice that blames the debtor for some kind of intentional mistake.

How Do Some People Get So In Debt?

What if we told you that more than 50% of the Baby Boomer generation are declaring bankruptcy? That begins to shatter some of the misconceptions about personal finance management. The most affluent and largest demographic group the world has seen is entering retirement with so much debt, that many of them can simply not afford to retire at all. This varies significantly from their parents who were avid savers, not spenders.

What if we told you that many people who declare bankruptcy (or consider it as a last alternative) have been coping with major life circumstances that have forced them to manage expenses beyond their means (instead of living vicariously beyond their means with entertainment, food or travel). Serious critical illness and disabilities can quickly take a financially solvent home and turn it upside down when it comes to money management. So too can the care of family members who are sick or convalescing. Now you have a more accurate picture of the average debt burdened individual who seeks legal advice regarding bankruptcy, and since adversity can happen to anyone, these people need support and guidance to help get them back on their feet financially.

Fortunately there are a number of options before bankruptcy that are available to do just that.

>How Common Are Debt Problems? You Are Not Alone

According to the Administrative Office of the US Courts, there were 1,132,772 personal bankruptcies filed from 2009 to March of 2013. And since small businesses and the individuals that own them are not immune to running into debt problems, there were an additional 37, 552 business bankruptcies filed in that period as well.

While consumers and economists are encouraged by the slowly declining number of bankruptcies what it really reflects is that there are more options for people to seek assistance. There are a number of different programs to help individuals seek partial or full repayment with terms that make it possible to maintain their integrity with creditors while continue to pay for essential needs. When asked most people would prefer to make good on their debt, they simply lack the tools to do so and the guidance to evaluate other opportunities. We are going to discuss some of those alternate routes to help individuals get back on solid ground, and a healthier economic future.

What Chapter Do You Fall Under?

Most individuals fall under two categories when they require debt administration or bankruptcy. Chapter 7 filings refer to individuals who lack the minimum income required to repay their debt. When a Chapter 7 is filed, there is a trustee assigned who evaluates all the assets that the individual owns. The trustee can seize anything from vehicles to electronics, computers, designer accessories, art or any objects that have a specific value for immediate sale. Before the bankruptcy the funds that are raised through the sale of property are provided to the creditors, and the balance of the amount is included in the Chapter 7 bankruptcy file.

Losing property can be a bit of a blow to the ego, but the majority of individuals seeking to file Chapter 7 bankruptcy have already exhausted any sources of income including the selling of their own property privately to raise funds. Chapter 7 claimants rarely have much property to lose, but it partially satisfies the need for creditors to know that best efforts were made to repay the debt before filing personal (or business) bankruptcy. Those filing Chapter 7 must also submit to a means test which evaluates their income versus cost of living to confirm their inability to repay creditors.

A Chapter 13 filing involves striking an integrity plan with the assistance of a counselor or a non-profit agency to repay the full amount of the debt to your creditors. In a Chapter 13 claim, the individual will qualify for a repayment of the amount over a three to five year period which is determined by net income verification. This is by far the better plan if you are a debtor who has cosigners which may be family or friends, as cosigners can be protected under Chapter 13 (which would prevent taking a penalty on their own personal credit rating). To claim Chapter 13, a debtor must owe less than $1,081,400 in secured debt and less than $360,475 in unsecured debt.

What is Loan Modification?

Foreclosures are bad for everyone. First, they are bad for the family who loses the equity that they have built in their home and their primary residence. If a household is already going through the burden of debt, the loss of the home can be emotionally catastrophic. Second, foreclosures are bad for the economy impacting the real estate market, communities and of course lenders.

The practice of loan modification has been around since the Great Depression in the United States and it is a measure designed to avert foreclosures by giving those in debt more options. The Streamlined Modification Program (SMP) was developed based on a 38% of gross household income as affordable payment rate for mortgages. The Federal Housing Finance Agency is an excellent resource for programs, options and methods to help you avoid foreclosure. Retaining a lawyer who is fluent in bankruptcy law can also help to navigate your debt through a variety of options that will turn your prospects into the possibility of starting fresh with solid finances in the future.

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