READJUSTING DEBT AND WRITING CONTRACTS

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In most cases, in order to keep a house, the mortgage must be current. If payments are not current, the mortgage holder may apply for permission to begin a foreclosure based on the debtor's failure to pay currently. So if faced with the choice of paying a mortgage payment or paying other creditors, the debtor would make sure that the mortgage is paid.

Three Chapters

Many of us have heard about different "chapters" in bankruptcy, including Chapter 7, Chapter 11, and Chapter 13. So far we've been discussing Chapter 7, also referred to as a "straight" bankruptcy. A Chapter 13 is a "workout" for individuals. A Chapter 11 is a "workout" for corporations or individuals with large debts.

A workout differs from a straight bankruptcy by allowing a debtor to make payments over time. This is particularly useful if a debtor is behind on a mortgage or equipment loan and wants to keep the property or equipment. A workout allows a debtor to make current payments and catch up on the back payments over a period of time, usually three to five years. If the workout provisions are deemed fair by the court, the creditors may be forced to accept the plan, even if they don't agree with all of its terms. The ability to propose a workout is a powerful tool to help a debtor keep his or her house.

Like a repossession or foreclosure, the filing of a bankruptcy is shown on a debtor's credit report. So why would anyone choose bankruptcy over foreclosure or repossession? The difference is this: there can be no more lawsuits or late charges on old debts after the date of the bankruptcy filing. After a foreclosure, the creditor may obtain a judgment against the debtor, which can be effective against the debtor for a long period of time. A bankruptcy filing after the foreclosure or repossession, cuts off the ability of the creditor to take assets for such an extended period of time.

What About My Credit?

Will a person who files for bankruptcy ever again be able to get a credit card or mortgage? The answer here is surprisingly, and overwhelmingly, yes! Consider this: The day before filing for bankruptcy, the debtor has huge debts piled up, has no ability to make monthly payments, and has the ability to file bankruptcy and get the debts discharged. A creditor views this situation as an unreasonable risk.

On the other hand, the day after the discharge is granted, the debtor has no debt (it has all been discharged), has the ability to make current payments on new debt (if he has a job), and usually cannot file bankruptcy for another six years (thus allowing new creditors at least six years to seek satisfaction of new debts). In other words, the debtor is much more "credit worthy" the day after declaring than he was the day before. Part of the idea behind the fresh start is to wipe clean the debtor's credit report. The big myth is that we all have ratings and that they're just like a school report card. Individuals do not have a credit rating. What they have is a "credit history."

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