Will You Have to Pay Back the Debt Anyway
Below is a MRR and PLR article in category Finance -> subcategory Other.
Will You Have to Repay Your Debt After Filing for Bankruptcy?
Summary:
A common misconception is that bankruptcy acts as a "get out of jail free" card for debtors. However, even if you file for Chapter 7 bankruptcy, you may still need to repay some of your debt.The Reality of Bankruptcy
Many people mistakenly believe that bankruptcy completely wipes out debts without any repercussions. While it can provide relief, it also severely impacts your credit for 7 to 10 years, and in some cases, you might still have to repay a portion of the debt.
When You Might Still Owe Debt
Here are some situations where you might face the downsides of bankruptcy without full relief from debt:
1. High Income: If your income is above the state average, you might be required to file for Chapter 13 bankruptcy. This involves a court-mandated plan where all your disposable income is directed to a trustee, who then distributes it to your creditors. The court defines disposable income based on average expenses, not personal spending habits. For example, families may be ordered to cut costs, such as private school tuition, to increase payments to creditors.
Illinois Median Income by Household Size:
- 1-person: $41,650
- 2-person: $52,891
- 3-person: $62,176
- 4-person: $72,368
2. Ownership of Assets: If you own a home or car, the court may require you to sell them to pay creditors. Investments, unless held in tax-exempt accounts like IRAs, could also be liquidated. However, there are protections in place. In Illinois, exemptions include $7,500 of home equity, $1,200 of vehicle value, and a $2,000 wildcard exemption, which doubles if you're married and the property is jointly owned.
Example:
- If your home is worth $250,000, with a $200,000 mortgage, you would pay the mortgage with sale proceeds, keep $15,000 through exemptions, and use the remaining $35,000 to pay other creditors.
- If the house is worth $215,000, you wouldn't be forced to sell, as proceeds would cover the mortgage and exemptions with nothing left for creditors.
3. Fraudulent Intent: If creditors prove that you obtained credit fraudulently with no intention of repaying, bankruptcy might not discharge your obligations.
In summary, bankruptcy may not be the best option if you have equity in assets, investments, or if you're unwilling to commit disposable income under a Chapter 13 plan. Consider exploring alternatives like debt negotiation or settlement to address financial challenges.
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