Expert: Terry Leeders - 6/4/2007

Question
Hello. My wife and I recently purchased a home (Dec. 06) and we can no longer afford the mortgage. Although we are only behind on one payment (this past month's), we are behind on everything else: many credit cards (we have approx. $100k in debt in these alone), student loans, car payments, and home owner's association fees. We sought the advice of a credit counselor and on their DMP, the monthly payment would also be more than we could afford and that would be after we made several major changes to our budget. As a result, we are seriously considering bankruptcy. In the case of the house, we just want out of it. We would (sadly) surrender it in bankruptcy and go back to renting.

The thing is, we are good people who have just made a series of poor decisions and we need a fresh start. We actually make a decent living but cannot keep up with our debt and cannot afford the mortgage. We have two young children and want to secure a future for all of us with financial stability. Again, we are not looking to use bankruptcy as a form of "birth control" if you will, but rather as a way of getting a fresh start and learning a valuable lesson on how to budget in the future and staying within that budget in order to stay out of debt for the rest of our lives.

My questions are: What Chapter of bankruptcy do we sound eligible for?

If/when we surrender the property, how long until we have before we need to vacate the property?

Is it wise to secure a rental prior to the bankruptcy filing?

Thank you in advance for any and all insight.

Sincerely,
Roy

Answer
Hi Roy.  The 2 chapters for consumers are ch7 and ch13.  Chapter 7 is a liquidation, where you can surrender the home and eliminate the debt. If you wanted to keep your car you would need to continue making payments.  The student loans would not be discharged, just the consumer debt.  If you make pretty good money, and can afford to pay back a portion of the debt, you might not be able to satisfy the means test (basically a detailed budgetary test) and thus would need to look to Chapter 13.  

With Chapter 13 you can consolidate your debt.  It pays back normally from 10% to 100% of the debt, depending on the type of debt and your budget.  With chapter 13 you can also use it to keep your home and help you get current on the loan.

With either case, you would have until the home forecloses before you would need to leave.  In Illinois, that is about 6-9 months after the foreclosure is filed in most cases.  Knowing what your expenses are is always beneficial to a chapter 13 to lock in the payment.

You should definitely talk to an experienced bankruptcy attorney to help you decide which chapter is going to help you out the most.  (You can contact me if you reside in Illinois ) Thanks, and best of luck.
Terry Leeders
Chicago Bankruptcy Network