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Russell G. Small

Bridgeport Law Blog

What to understand before filing for bankruptcy

Debtors who are thinking about bankruptcy will generally choose between filing for Chapter 7 or Chapter 13 protection. Connecticut residents who want to pursue a Chapter 7 case will need to take a means test to verify that they cannot repay their debts. If an applicant passes a means test, assets will be liquidated with any money raised going to repay creditors.

It's important to note that some debts such as student loans or back child support cannot be erased through bankruptcy. It's also worth noting that a Chapter 7 bankruptcy remains on a credit report for up to 10 years. A Chapter 13 case only stays on a credit report for seven years. In a Chapter 13 proceeding, debts are repaid over three or five years. Debtors are allowed to retain property such as a home or car during the repayment period.

Understanding Chapter 7 and Chapter 13 bankruptcy

When people in Connecticut are dealing with piles of unpayable bills or aggressive collection calls, they may be looking for a solution that allows them to obtain some debt relief. Bankruptcy can provide people with a new start that enables them to escape a mountain of debt. There are some credit consequences, but many people who turn to bankruptcy have already suffered serious hits to their credit. However, there are different types of personal bankruptcy. Each may be appropriate for people in different situations.

Chapter 7 bankruptcy is perhaps the best-known type of personal bankruptcy. Known as a liquidation bankruptcy, a filer's unsecured debts are eliminated and assets sold off to pay a portion of the creditors. The process lasts around three to six months before the bankruptcy is completed. However, only people who make an amount of money equal to or less than the median income in their state are eligible for Chapter 7 bankruptcy. People with high-paying jobs and large debts may find that this option is not available to them. Others may want to retain certain types of property, such as a family home, that would be sold off. Chapter 13 bankruptcy may be an option for both.

Credit card debt can be costly

For many people in Connecticut, it is very difficult to pay off their credit card bills on a monthly basis. With high interest rates, people may find that their balances continue to rise. This can be especially true for people who have suffered a financial change since they first began to accumulate credit card debt.

According to economists, 82% of credit card balances are not paid off every month, and most of them turn into long-term debt. Of these, around 70% of credit card bills stick around for at least a year, and 55% linger on for at least two years.

Debtors have options in responding to collections actions

The Consumer Financial Protection Bureau reports that more than 70 million people nationwide have at one time or another had to deal with debt collectors. Around one-quarter of people said they felt threatened by the collection agency during their interactions. In such situations, it can seem like the creditors have all the power, but there are things people in Connecticut can do to respond to debt collection actions.

One of the first things is to respond. If the debtor fails to respond, the collections agency may be able to get a default judgment, which may allow them to garnish the person's wages or reach into bank accounts to secure funds. When filing a response, called an answer, it is important not to admit liability for the debt. The answer should be filed with the appropriate clerk of court. It is a good idea to get a stamped copy of the answer from the clerk and send the copy to the debt collector.

Survey looks at attitudes toward credit card debt

Some Connecticut consumers may be among the more than 20% who say they do not know whether or not they have credit card debt. An online survey of over 1,000 consumers by U.S. News & World Report also found that almost one-quarter of respondents had over $10,000 in credit card debt. Another quarter said they kept a revolving balance of around $2,000.

The survey also found that 30% of people said they did not know their interest rate, and 16% said they had a balance, but they did not know what it was. Although half of respondents said that making payments did not cause them difficulties and 60% said they carried no credit card debt, 15% said their balances were increasing and that they struggled as a result. Furthermore, 13% said they struggled to make ends meet, and 14% said they had some difficulty with their bills.

Cautious millennials are now accumulating more debt

Once known for their cautiousness with being burdened by financial obligations, millennials and their younger Gen Z counterparts in Connecticut and elsewhere in the U.S. are accumulating more debt. Some of this debt is student loan debt, which can be a "good" kind of debt since interest rates are usually low. It's the rise in credit card debt among younger generations that's especially worrisome.

A large chunk of credit card balances with 90-day or more delinquencies are owed by Americans between the ages of 18 and 29, the highest this figure has been in almost a decade. One of the reasons for the spike in millennial debt is the appeal of extravagant signup offers, some of which include perks such as travel credits. Interest rates, some of which can be as high as 25%, are also on the rise.

Dealing with overwhelming medical debt

Many Connecticut residents are struggling with high levels of medical debt. It may seem nearly impossible to pay off expensive health care bills. In fact, around 30% of all Americans have over $500 in unpaid medical debt. Medical debt, like other kinds of debt, can have an effect on one's credit score. This means that unpaid medical bills can also lead to challenges when buying car insurance, renting an apartment or seeking a loan.

Of course, medical debt does not need to be reported to a credit bureau. In general, health care providers do not directly report unpaid balances. However, they do sell unpaid debt to collectors, and those agencies regularly report to the credit agencies. If one's medical balances are low, they may not be reflected on a credit report because the most common model does not include amounts under $100. There are various ways people can help to prevent medical debt from being an even greater burden than it already is. They may need to actively engage with or lobby an insurance company to have their bills paid, or they may be able to work out a payment plan with the health care provider.

Lawmakers work to help student loan borrowers

Many different types of debts can be discharged in a bankruptcy. However, student loan borrowers in Connecticut may not be able to get their debts cancelled through this process. That is because lawmakers in previous decades felt that students would try to get out of paying their loans by discharging them after graduation. To get a student loan erased in bankruptcy, a borrower needs to show that he or she cannot keep paying because of an undue hardship.

Unfortunately, there is no standard definition for what an undue hardship is. This can make it difficult for borrowers and advisers alike to predict how a case may unfold. If the Student Borrower Bankruptcy Relief Act of 2019 passes, it would be easier for student loan debtors to erase their balances. It has bipartisan support and has been praised by numerous groups including Americans for Financial Reform.

Planning for credit recovery after bankruptcy

Many Connecticut consumers know that a bankruptcy stays on a filer's credit report for a long period of time. This is one reason why even people with overwhelming debt continue to resist filing. They are concerned that they will never be able to access credit again and that their credit reports will lead to disaster. Of course, one of the problems is that most people who file for bankruptcy already have significantly damaged credit. They may show very high utilization of existing credit lines, late payments, unpaid bills, or even judgments.

In many cases, people who file for bankruptcy are already ineligible for most new credit lines due to their poor credit rating. Therefore, they may find that in some cases the bankruptcy even improves their credit score, given that it discharges some existing debt. A Chapter 7 bankruptcy lasts on a credit report for 10 years, while a Chapter 13 bankruptcy, which includes restructuring and a payment plan, lasts on a credit report for seven years.

Consumer credit moderates

Many people living in Connecticut rely to some degree on credit. Of course, this is isn't unusual as Americans typically maintain a high level of credit card debt. As of February 2019, the amount of revolving credit debt in the United States was $35.4 billion, according to the Federal Reserve. Overall, the increase in consumer credit overall was less than expected.

While credit can be useful for many consumers, it also has its drawbacks. People use credit to afford large purchases and manage unexpected expenses. In addition, people who travel often rely on credit cards as opposed to carrying large amounts of cash. However, too much debt can lead to financial problems. In some cases, consumers are unable to manage even minimum payments on what they owe. Late fees and interest can make it almost impossible to pay off these debts.

How can we help?

Financial Freedom Is Just A Call Away

When you are overwhelmed by debt, we can help you explore your options and find relief. Should you choose to file for bankruptcy, calls from creditors and debt collectors come to a stop almost immediately, allowing you to get back to living your life.

Call us today at 800-261-3275 or contact us online to schedule a consultation. Our firm offers evening and weekend appointments and home visits. Credit cards and payment plans are accepted. Se habla Español.

We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.

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