Experts Answer your Bankruptcy Questions

The Dow may be over 10,000, but unease about the economy persists as unemployment hovers over 10%. To help ease some of your concerns, WalletPop is ready to answer your personal finance questions. Here's this month's sample:


Question: My wife and I are in debt that I no longer can tolerate. I am retired and have burned through my 401(k) and my annuity to pay the $6,000 a month in mostly credit cards and home mortgages.

What are my options? I don't think we qualify for Chapter 7 bankruptcy. What about Chapter 13, and what does that entail?? Do I need an attorney? How do I keep creditors from calling me day and night?

--Gary Anders

Answer from James Caher, co-author of Personal Bankruptcy Laws for Dummies

"Bankruptcy is definitely something you should look into, since it looks like you're sinking fast and probably wasting your retirement paying debts that you might be able to eliminate in bankruptcy. But there are many, many things to consider.

"I suspect that you may very well qualify for Chapter 7 (the one that does not involve a repayment plan of any kind), since you are living on retirement income. But this depends on whether your income exceeds the median income for your state, which is probably around $4,300/month before taxes. Social Security income does not count. Even if your income exceeds the median, you may qualify for Chapter 7, but you would have to pass the Means Test.

"You might not want to file a Chapter 7 if the equity in your home exceeds the allowable exemption in your state. For example, assume that your home is worth $200,000 with mortgages totaling $150,000, leaving $50,000 in equity (the difference between the value of the property and the mortgages). If your state allows a homestead exemption of $50,000 or more, you won't lose your home in a Chapter 7 -- provided you keep up with your mortgage payments.

But if your state allows, say, $15,000 for a homestead exemption, a Chapter 7 trustee could sell your home, pay off the mortgages, pay you $15,000 and pay the rest to creditors.

Chapter 13 is different. Property is not liquidated. Instead, folks pay what they can afford for the next 3-5 years, and remaining balances are wiped out. If you are behind on your mortgage, you can use Chapter 13 to catch up on back payments by stretching them out over 3-5 years while continuing to make regular payments going forward. Yes, you should consult with an experienced bankruptcy lawyer for advice tailored to your particular situation, but you can get a very good idea about your options from our book, Personal Bankruptcy Laws for Dummies.

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