When Is It Time To Consider Bankruptcy?

Since the economic downturn began in 2008, bankruptcy filings have been on the rise overall across the nation. According to Scott Goldstein, an attorney in private practice in Lake Hiawatha, while the trend has been increasing, lately there has been a slight decline. He said this may be due to the fact that at this point, many people who would like to file for bankruptcy just can’t afford to do so.

Goldstein, a graduate of Duke University Law School, practiced commercial litigation starting in 2004. Last year, he established his own practice focusing on bankruptcy, because he wanted to use his legal education doing work that brought him more personal fulfillment.

“When I was working in commercial litigation, I worked for a large company representing people who have a lot of money and wanted to make more," said Goldstein. "This wasn’t why I went to law school.

“When you are handling a bankruptcy for someone, you are taking someone who is in the worst possible financial situation and giving them hope and a way out of the crushing burden many people are carrying right now,” he explained.

Goldstein points out that bankruptcy is not a cure-all, but sometimes it is the only reasonable option.

When should someone explore the option of bankruptcy?

“When someone finds that they are not able to pay basic bills like rent, mortgage payments, electric and heat and can't handle other essential costs such as food and medicine because they are paying credit card bills, that is generally a good indicator that it’s time to consider bankruptcy,” said Goldstein.  

Sifting through the types of bankruptcies available can make many people’s heads begin to swirl, but Goldstein said a mere two options make the most sense for most people: Chapter 7 and Chapter 13.

Chapter 7 is generally the more suitable route for a person who has, for instance, a lot of credit card debt, but does not have a lot of assets.

For example, if someone has $25,000 in credit card debt, but rents or owns a home with very little equity and doesn’t own any other property that could be liquidated to pay creditors, Chapter 7 might be the most suitable route to bankruptcy.

Also, with Chapter 7, there are some exceptions to what creditors can go after. For instance, an individual could keep up to $11,525 worth of household goods and furnishings, clothing, wedding bands, and a certain amount of personal electronics such as a computer.

Also, in a Chapter 7 bankruptcy, income from unemployment, disability and Social Security is protected.

It’s important to remember that for this type of bankruptcy, there are income requirements to be met. An individual must show that he or she is earning less than the median income in the state—for an individual, that's approximately $59,000 annually; it's $101,000 for a family of four. Expenses such as housing, food, medicine and other essentials can be deducted from the annual income in order to meet the requirements, said Goldstein.

The other option is Chapter 13 bankruptcy, which is generally more suitable for someone who is a home or landowner with significant equity in the properties, owns other valuable assets and has an income to support a reasonable repayment plan, according to Goldstein.

If someone has $50,000 in credit card debt, for instance, but owns land or a house with significant equity and has an income that could support a repayment plan over the course of three to five years, then Chapter 13 may be the route to investigate.

With Chapter 13, there is a limit to the amount of debt someone can have—this form of bankruptcy primarily is geared toward restructuring debt and setting up a payment plan.

The limit is approximately $1,081,000 for secured debt such as property and homes, and $360,475 for unsecured debt such as credit cards, and the limits apply to Chapter 13 bankruptcies anywhere in the nation, according to Goldstein.

“One positive aspect of Chapter 13 is the ability to strip away the lien against a second mortgage,” said Goldstein.

For instance if someone owns a home that is currently worth $200,000 but was previously worth $400,000, if the owner has a primary mortgage of $300,000 and a second mortgage of $100,000, the lien on the house from the second mortgage can be stripped away because there is no real value left in the house to secure it, according to Goldstein.

He said at that point, the second mortgage is considered unsecured debt. Additionally, he said that in most cases, when someone enters into a Chapter 13 bankruptcy, while there is an agreement to repay what is owed, the amount to be paid back is often a fraction of the original debt.

Student loans are a different situation. These, Goldstein said, are more difficult to get rid of than a bad tattoo.

“It’s nearly impossible to discharge a student loan. One must demonstrate extremely compelling financial hardship,” said Goldstein.

“Bankruptcy is not about ‘I don’t want to.’ It’s about ‘I can’t,’” he said.

For more information about bankruptcy in New Jersey,  visit: http://www.njb.uscourts.gov/. Learn more about Scott Goldstein at his website: http://www.sgoldsteinlaw.com/