The bankruptcy code allows for only once spouse to file for bankruptcy. However, at times, it may be wise for both spouses to file to ensure that your assets are completely protected and to make sure that as much debt is wiped out so you can create your fresh financial start for your family.
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Person Filing Surrenders Property
First of all, keep in mind in order to file a Chapter 7 bankruptcy you must be current on everything unless you are willing to surrender the property. Let’s consider the following example: you owe on a debt such as a car loan, but are behind on the payments. You come in for a free consultation, learn that you may be eligible to file a Chapter 7 bankruptcy, and decide you are going to surrender the property to the creditor since you are behind on payments. However, someone has cosigned on the debt with you, and you are wondering what that is going to mean for the other person. He or she (the cosigner) would still be responsible for the full amount that is owed to the creditor. The creditor will typically sell the property an auction and the cosigner will be responsible for the deficiency balance.
If the debt is an unsecured debt (no property as collateral) then the creditor can go after the cosigner for the full amount owed on the debt.
Person Filing Keeps Making Payments
Person Filing Surrenders Property
If you are filing Chapter 13 bankruptcy and have decided to surrender property, the cosigner will be affected in regards to the debt. Typically speaking, the creditor will still seek the amount owed from the cosigner and hold them responsible for the debt amount after it has been sold at an auction. It’s up to the person filing whether or not to let the cosigner know that they are going to be surrendering the property. However, it’s important to know the cosigner will be responsible for paying back the deficiency balance on the debt.
Person Filing Does Not Surrender Property
In a Chapter 13 bankruptcy, if the person keeps making payments on the property and decides not to surrender it, the cosigner will not be affected most of the time. Chapter 13 bankruptcy is a repayment plan but as long as the person filing is making payments on the debt, the cosigner should not be impacted. However, there have been rare situations where we have seen someone who has cosigned on a debt with a person who filed a Chapter 13 bankruptcy and on the cosigner’s credit it shows they are one month behind on payments despite the fact that it is being paid within the Chapter 13 bankruptcy plan. Since the Chapter 13 bankruptcy Trustee does not make the full payment each month (they typically pay 1/60th of the amount owed over the course of 60 months) the creditor may report that the cosigner is behind a portion of a payment. This doesn’t happen often but we have seen it before so we wanted to be sure to make you aware of it.
Bankruptcy usually includes all debts that are accumulated before the bankruptcy petition is filed with the court. If there are new debts that are incurred after you file for a Chapter 7 bankruptcy or a Chapter 13 bankruptcy, these are known as post-petition debts and cannot be included in your current bankruptcy.
However, if you were to file another bankruptcy later, the new debts could be included in that petition. There are ways that you can amend your petition to add a creditor after the petition has been filed, but you must be able to prove that this debt was accumulated before the petition was filed.
While in a Chapter 13 bankruptcy, you must get permission from the court in order to incur new debt. This is done through a Motion to Incur Debt. You would need to file the motion to incur debt for anything from obtaining a new credit card to buying a new house. Say you were to get a new credit card while in a Chapter 13 and not tell the Trustee about it. The bankruptcy Trustee could find out and you obtaining debt without the court’s permission could cause problems. This could even possibly cause your bankruptcy to be dismissed! If your bankruptcy is kicked out or dismissed you would be responsible for that new debt as well for the debt that was originally included in the bankruptcy. So, be smart and make sure to ask your attorney what you need to do if you believe you left someone off of your bankruptcy.
The bottom line is you typically will not be able to include post-petition debts (debts incurred after your bankruptcy has been filed) in your bankruptcy.
If you lose your job while in an active Chapter 7 bankruptcy or Chapter 13 bankruptcy, it may impact bankruptcy filing. If you are able to obtain unemployment benefits, you may be able to continue to meet your financial obligations. However, the impact of the loss of employment on each type of bankruptcy will vary.
If you are in a Chapter 7 bankruptcy, the loss of a job may impact your ability to pay for a home, an automobile, or other assets. If you are concerned about your ability to continue to pay these debts, you should speak with your attorney about options available to you including surrendering or giving up the assets in your bankruptcy. The last thing you want to happen after completing a Chapter 7 bankruptcy is to have a repossession of an auto or the foreclosure of your home listed on your credit. Often, the auto finance company and the mortgage company will look for you to pay any deficiency balance, the difference between what you owe on the asset and what they sell it for at auction, after the sale of the auto or home. Again, the purpose of the Chapter 7 was to eliminate your debts and give you a fresh start, so a foreclosure or repossession and a deficiency balance is the last thing you need.
If you are in a Chapter 13 bankruptcy, the loss of a job will most likely impact your ability to make payments to the Chapter 13 Trustee. As a result, you should contact your attorney to see if a modification of the Chapter 13 is possible. In some cases, the amount paid to unsecured creditors, including credit cards, medical bills, personal loans, etc., can be reduced. However, this is not always possible. In that case, you may need to consider whether it is in your best interest to surrender or give up an asset in the Chapter 13 bankruptcy. For example, some clients choose to surrender a car in their bankruptcy in order to afford the Chapter 13 payments and retain their home. In other cases, the Chapter 13, regardless of the modifications, is no longer feasible. In that situation, you should speak with your attorney to determine if converting to a Chapter 7 bankruptcy is an option for you. By converting to a Chapter 7 bankruptcy, you would be able to eliminate your responsibility for the majority of your debts. Again, you should speak with your attorney to determine the best option for your situation.
We understand that sometimes after filing bankruptcy different situations come up that may cause you to fall behind on your mortgage payment. It’s important to realize there are a number of consequences that come from falling behind on your bankruptcy. We will look at them depending on which type of bankruptcy you file, a Chapter 7 bankruptcy or a Chapter 13 bankruptcy.
Chapter 7 Bankruptcy:
In a Chapter 7 bankruptcy, one must be current on their mortgage payment at the time of filing and throughout the duration of the bankruptcy in order to keep the house. If you were to fall behind on your mortgage payments there would be two important time periods to consider. In other words, you need to know where you stand in the bankruptcy.
Before the Final Decree (End of Bankruptcy):
If you fall behind on your payment before the bank has received the final decree, the mortgage company could potentially take legal action. The mortgage company may choose to file a Motion for Relief from Automatic Stay. In other words, they would be asking the court for permission to begin foreclosure proceedings on the home. The Motion for Relief from Automatic Stay will likely be granted to the mortgage company unless you are able to bring the payments current by the hearing date.
After the Final Decree (End of Bankruptcy):
If you fall behind on your payment after the Final Decree, then it’s the same as if you haven’t filed bankruptcy. The mortgage company no longer has to ask for permission from the court to begin foreclosure since your bankruptcy is over once the Final Decree is entered. Therefore, the mortgage company would decide when they wanted to begin foreclosure proceedings on the home.
Prevention:
Be aware of when your mortgage payments are due each month and make a valuable effort to make sure they get to your mortgage company on time. It is common in Chapter 7 bankruptcy for the mortgage company to stop sending statements and/or to stop automatic drafts. You should keep an eye on your automatic drafts to be sure your payments are being made on time. Be sure you pay the mortgage payment on time every month, even if you do not receive a bill or a statement.
Chapter 13 Bankruptcy:
What’s important to consider in a Chapter 13 is at what point in the bankruptcy you have fallen behind on your payment.
Not Behind at the Time of Filing Bankruptcy
If you are not behind at the time your Chapter 13 bankruptcy is filed, the mortgage payment will not be included in your monthly payment to the Trustee. This is considered “paying outside of the plan” since it will continue to be paid as a separate payment. You will continue to make a separate payment to the mortgage company only if you are current at the time of filing and throughout the duration of the bankruptcy.
Behind at the Time of Filing Bankruptcy
One reason why people choose to file a Chapter 13 bankruptcy is because they are behind on their mortgage payments and need to get caught up. If you are behind on your mortgage payment at the time of filing, it will be included in your Chapter 13 monthly payment to the bankruptcy Trustee.
Not Behind at the Time of Filing But Later Fall Behind
If you are not behind on your mortgage payment at the time of filing but then fall behind during the bankruptcy, your Chapter 13 monthly payment will increase. The mortgage company is a secured debt and must receive a monthly payment. Therefore if you fall behind it then needs to be included in your Chapter 13 monthly payments. Your monthly payment to the Trustee will increase, because the mortgage company is one of the first creditors to receive payment. The Chapter 13 office will request that the mortgage company be added to your monthly payment, which will increase as a result.
Prevention:
If you are making your mortgage payments “outside of the plan,” or in other words, making separate payments to the mortgage company, be aware of when they are due and be sure the mortgage company receives your payments on time. As we discussed in the Chapter 7 section, it is common for billing statements and/or automatic drafts to be stopped during bankruptcy, so be sure you pay the mortgage payments on time, regardless of whether you receive statements.
Your mortgage company has most likely refused your payment because the mortgage company has received notice of the automatic stay that goes into effect as soon as your bankruptcy is filed. They are probably concerned that they will be in violation of this “stay” if they agree to accept a mortgage payment. A lot of the time this can be cleared up with a simple phone call. If they send the payment back, try sending it again certified mail and keep copies of your receipts. This will help prove that you have been trying to make the payments if needed.
You can always contact you bankruptcy attorney’s office. Usually they will contact the mortgage company for you and make it so that they will begin to accept your payments again. Most importantly, if the mortgage company does not accept your payment, do not go and spend that money! You will eventually pay that mortgage payment and the fact that they did not accept it when you tried to make the payment is not a sufficient excuse to no longer have the payment. Put the money that would be going to the mortgage company in your bank account and leave it there until you have cleared up the misunderstanding with the mortgage company.
Generally, a Chapter 13 bankruptcy is a reorganization plan bankruptcy, or a legal way to pay back a portion or all of the debts that you owe. In Chapter 13 bankruptcy, you are usually able to keep your house and/or car. The most common reason for filing a Chapter 13 bankruptcy is to allow you to catch up on your house and/or car payments and stop a foreclosure or repossession. In a Chapter 13 bankruptcy, your secured debts including what you are behind on your house, your mortgage payment(s) and what is owed on your car, and a portion of your unsecured debts including credit cards and medical bills will be repaid over a 3 to 5 year time period.
Chapter 7 bankruptcy will likely make your credit score drop initially. After an initial drop we have seen our clients steadily rebuild their credit scores to the level, or better, of many of their friends or family members. Bankruptcy allows you to wipe out your debt so you can start fresh and have a legitimate opportunity to have your fresh financial start. Most people find it incredibly difficult, if not impossible, to improve their credit when they have large amounts of debt. Chapter 7 bankruptcy will wipe out the majority of this debt and allow you to reestablish your credit worthiness.
Contrary to what you may hear from some people, there is either little or no difference to your credit score based upon you filing a Chapter 7 bankruptcy or a Chapter 13 bankruptcy. You should first understand the difference between your credit score and your ability to obtain credit. Often, these words are used interchangeably and confusion can occur. Your credit score is the number the credit reporting agencies assign to your credit. It is based on your history of making payments on your debts. Your ability to obtain credit is based on your ability to make payments in the future and is determined by your income and your debts. If your debts exceed your ability to make payments, you may be unable to obtain credit even if you have consistently paid your debts on a timely basis. In other words, you may have a good credit score yet be unable to purchase a car because you have too much debt. Filing Chapter 13 bankruptcy will most likely reduce your credit score in the short-term. However, filing bankruptcy also eliminates many of your debts and may improve your ability to obtain credit in the future.
As you know, you must take a financial management course and file the certification with the bankruptcy court to receive a discharge in your bankruptcy. We recommend you take the financial management course as soon as you receive your case number but before your creditors meeting. If you are married, each person must take the course separately, and you and your spouse will receive two different control numbers. Most of our clients take the course online at Hummingbird Credit Counseling. This is important. If you have any questions regarding when to take the financial management course, please contact our office. If you have questions regarding the actual course on the Hummingbird Credit Counseling website, please contact Hummingbird at the phone number listed on their website.
