Our office constantly gets phone calls about families facing financial crises. The numbers are staggering -- 2 million homes projected to be in foreclosure; 2-3 million jobs lost; home values plummeting 13% in one month. How should families deal with the current crises?
1) Try and make a financial plan and prioritize your obligations -- food; shelter; court obligations and taxes have to be your first priority. Some debts -- luxury expenses (eating out; a new car) can be put off.
2) Negotiate with your creditors -- many credit cards will lower interest rates or skip payments if a person asks. Remember to pay down your higher interest loan first.
3) Always keep a cash cushion for unexpected events -- typically 3 to 6 months take home pay is recommended. Individuals are eight times more likely to become disabled than to die.
If all else fails, here are some important things to remember:
Foreclosure is a legal proceeding brought in state court where an individual falls behind in their mortgage. Typically a bank does this after 3 months of missed payments. In Illinois, individuals have rights to "reinstate" or "redeem" a mortgage under state law (in certain circumstances). A mortgage is the first debt which should be paid and if you fall behind contact your creditor (and an experienced attorney).
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is the most common. In 2005, 2 million people filed for bankruptcy. Unsecured debt -- credit cards; medical bills; judgments are discharged in this type of bankruptcy. Certain debts -- taxes; student loans; child support are not discharged.
What can you keep in a Chapter 7 bankruptcy?
Illinois allows individuals to keep certain "equity" or "exemptions" in bankruptcy. These are:
- $15,000 equity in a home
- $2400 equity in a motor vehicle
- $1500 equity in tools of the trade
- Unlimited amounts in retirement plans
- Unlimited amounts in life insurance cash values (so long as a dependent is the beneficiary.)
- $4000 equity in miscellaneous property -- furniture; or can be applied to excess value in a car.
These values are doubled for married couples filing joint bankruptcy.
Reaffirmations and Redemptions
If you file a Chapter 7 Bankruptcy and you have secured debt, (such as a car or a home), then usually the creditor will offer what is called a "Reaffirmation Agreement." That is an agreement between the creditor that is filed with the Bankruptcy Court. If you "Reaffirm" on a debt a debtor will be liable for that debt after the bankruptcy. Typically "Reaffirmation Agreements" are done with homes and automobiles. It should be noted that the terms might include a lower interest rate or even a lower payment.
A "Redemption" is where a debtor files a "Motion to Redeem" with the Bankruptcy Court -- typically on household goods that have a loan that has been made against the personal items. The debtor will offer to pay the "fair market value" of the collateral in return for keeping the goods.
Chapter 13 Bankruptcy
If you are behind on your mortgage and you don't have enough money to "catch up" the mortgage arrearage you can file a bankruptcy plan under "Chapter 13" or often called a "wage earner" plan. Many individuals owe more on vehicles than what they are worth -- or are sometimes paying exorbitant interest rates. A Chapter 13 plan can, in certain circumstances, allow the debtor to only pay what the car is worth (not the exaggerated price a dealer has sold it for). A Chapter 13 plan can also reduce the interest rate charged on the loan -- we have had individuals being charged 28% interest on a car loan and we have reduced the interest to 6%.
If like many people, you are having financial difficulties right now, the important thing to realize is that you are not alone and that there are answers. Prioritize your debts and figure out what exactly is your income. Consult with knowledgeable competent people -- tax accountants; financial planners and attorneys when you need advice. Many do not charge for initial consultations.
Our office is located at 625 South Second Street and we offer a free initial consultation. Our phone number is 217-793-6477
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