What Type Of Bankruptcy Do I Qualify For?
When a client comes to Roemerman Law, we evaluate their situation and advise them as to which type of bankruptcy best protects their interests and assets.
The most common kinds of bankruptcy in New York State are Chapter 7 bankruptcy and Chapter 13 bankruptcy.
Chapter 7 Bankruptcy
Chapter 7 wipes out the debt, which may in rare cases involve the sale of some assets. Certain assets, however, may be exempt, such as some real estate assets, tools of trade, etc. The Bankruptcy Code and an experienced lawyer can help you limit the assets that can be sold, or liquidated, to distribute to your creditors.
Chapter 7 often works well for people with very little income. These people find themselves with almost no income, high debt, and very few assets. Instead of sinking further into debt, Chapter 7 bankruptcy can help them restart their lives.
Chapter 13 Bankruptcy
Chapter 13 is a legal framework for individuals to rearrange their finances if they have fallen behind with regards to specific payments. The debt is reorganized, not discharged, although some unsecured debts may be wiped out. Chapter 13 helps people with mortgage arrears, car payments left unpaid, and other types of debt that need to be “caught up.” Under Chapter 13, most people don’t have to sell assets like their properties or belongings.
Chapter 13 is usually chosen by people who have certain assets, like a house and don’t want to lose them. Chapter 13 requires people to have a steady income. This should be high enough to cover the monthly payments of the arrears and the current mortgage payments and living expenses.
Which Kind of Bankruptcy Is Right for You?
When determining which kind of bankruptcy is right for you, we examine a series of factors, including the following:
- Who can file? While both individuals and business entities may file for Chapter 7, Chapter 13 is only available to individuals. Chapter 11 bankruptcy is also available to both individuals and businesses, but individual Chapter 11 filings are rare.
- Debt level: Qualifying for Chapter 13 bankruptcy depends on how high your debt is. Individuals filing for Chapter 13 must have no more than $419,275 of unsecured debt or $1,257,850 of secured debt (as of 2021).
- Means test: Qualifying for Chapter 7 bankruptcy requires you to have low enough disposable income as determined by the means test.
- How long does it take to receive a discharge? With Chapter 13, you only receive a discharge upon completion of all plan payments. This usually takes three to five years. With Chapter 7, you may typically receive a discharge after four to six months.
- What happens to your property? With Chapter 13, debtors keep all property they choose to keep. However, they must pay unsecured creditors an amount equal to the value of non-exempt assets. With Chapter 7 bankruptcy, the trustee may, in rare cases, sell their non-exempt property to pay creditors.
- Lien stripping: Chapter 13 allows the removal of unsecured junior liens from your property through lien stripping, as long as certain requirements are satisfied. Chapter 7 bankruptcy does not.
- Loan cramdown: Chapter 13 allows the reduction of the principal loan balance on secured debts through what is referred to as a loan “cramdown,” meaning you “cram it down your creditor’s throat,” as long as certain requirements are satisfied. The term may not be nice, but the ability to utilize it in Chapter 13, at least for our clients, is definitely nice. Chapter 7 does not allow debtors to use a cramdown, since they are not making payments on the debt.
- Creditworthiness: Your credit report will state for 10 years that you completed a Chapter 7 bankruptcy. The respective amount of time for Chapter 13 is 7 years. That said, this is merely how long the report shows that you filed for bankruptcy. Many people obtain credit immediately after a bankruptcy or even while the bankruptcy proceeding is still in court. The idea that bankruptcy “ruins your credit” forever or even for the short-term, is just false. Some people’s scores even improve after the bankruptcy discharge, largely due to ridding themselves of large amounts of debt on their credit cards or in collections.
- Benefits: Chapter 13 allows debtors to keep their property and catch up on missed mortgage, car, and non-dischargeable priority debt payments, such as taxes. Chapter 7 bankruptcy allows debtors to quickly discharge most debts and get a fresh start.
- Drawbacks: Chapter 7 does not provide a way to catch up on missed payments to avoid foreclosure or repossession. Also, the trustee can sell non-exempt property. With Chapter 13, you must make monthly payments to the trustee for three to five years and may have to pay back a portion of general unsecured debts, meaning the debtor filing a Chapter 13 will always pay back at least as much as they would have if they filed a Chapter 7, making Chapter 13 more expensive.
What Happens When You Declare Bankruptcy In NY?
Regardless of the Chapter under which individuals file for bankruptcy, they are given one of the strongest protections they can get: the automatic stay.
The automatic stay stops debt collectors from calling or harassing filers. It also stops foreclosure and eviction proceedings from moving forward, thus providing individuals with a huge sense of relief. Crucially, the automatic stay is initiated as soon as the filer submits their bankruptcy petition to the court. Click here for more information.
Can I Qualify For A Mortgage After Bankruptcy?
Once you have been discharged from bankruptcy, there is no waiting-time requirement before applying for a mortgage—with the exception of a mortgage loan backed by the US Department of Agriculture (“USDA”), used in rural areas where a waiting period of 3 years must be observed.
What type of mortgage you may qualify for, and when, depends on a number of factors, including:
- How long ago was your bankruptcy discharged?
- What is your current credit rating?
- How large is your down payment?
- What is your TDS (Total Debt to Service) ratio? This is the ratio between the amount of debt you are servicing and your total income. For example, using $3,000 of your $10,000 of available credit would be a 30% ratio, as would $300/$1,000 or $30,000/$100,000. This is used to determine how likely you are to “put it on the card,” so to speak.
- What is your LTV (Loan To Value) ratio? This is the ratio between the amount you are borrowing compared to the value of the property. If your ratio is greater than 80% (say $450,000 borrowed on a $500,000 property = 95%), you will also be required to take out private mortgage insurance, or “PMI.”
Based on these factors, you may qualify for a traditional or prime-insured mortgage, a subprime mortgage, or a private mortgage. The first offers you the best terms while the latter the worst.
Can I Qualify For An Auto Loan After Bankruptcy?
Certain kinds of loans require a waiting period of 4 years after you have been discharged from bankruptcy. However, there is no legal waiting-time requirement to apply for most loans. This includes personal loans and car loans.
Regardless of legal requirements, lenders will still ask for your financial information and credit reports. They will learn about your credit history and bankruptcy, as well as your current debts and assets and whether you are employed. Therefore, to maximize your chances of a successful car loan application, you may want to spend some time repairing your credit.
However, you may qualify for a loan from a private lender right after your discharge from bankruptcy, and with little or no re-established credit. Some lenders consider a person who has previously been bankrupt as a good candidate for a loan for a number of reasons:
- The person applying may be in a better position to repay the loan as they have a low debt load post-bankruptcy.
- People who have gone through bankruptcy are often more financially responsible when repaying their debts.
- The lender can charge higher interest on the loan.
- The person applying for credit is not eligible to wipe out the obligation in bankruptcy for several years, due to their recent bankruptcy filing, making them less risky than someone who is still eligible to file for bankruptcy.
Do You Have To Go To Court To File Bankruptcy?
A bankruptcy filing in New York City starts with the filing of a bankruptcy in either the Southern District or Eastern District of New York federal bankruptcy courts, depending on the borough in which the business is located. The bankruptcy forms list all of the filer’s debts, assets, and financial information. Depending on the Chapter they are filing under and other considerations, filers may also have to attend a court hearing.
Having an experienced bankruptcy attorney help you throughout the filing process will drastically increase your chances of a successful filing. Click here to learn about the costs to hire a bankruptcy attorney.
Our legal team here at Roemerman Law will help you make the most of the bankruptcy tools available to you. Contact us Today for a free consultation.