Mortgage underwriters talk a lot about debt-to-income ratio, and as a rule of thumb, a 43 percent DTI ratio is the ceiling for mortgage qualification purposes. The thinking is that people who owe more money than that cannot afford to pay it back, and therefore they are very poor credit risks.
So, according to current government statistics, if your family pays more than $1,600 in debts each month, and that includes mortgage notes and other secured debts, it will be difficult or impossible to repay these obligations in full without outside assistance. Unfortunately, that category includes most all middle-income families in Illinois and Indiana; fortunately, relief is available.
Although they operate a little differently, both Chapter 7 and Chapter 13 eliminate unsecured debts, including:
- – Credit Cards: Families who have credit card debt owe an average of $16,000 on credit cards alone, which is almost more than most incomes can accommodate.
- – Medical Bills: One in five families have unpaid medical bills, and as for the percentage of people who are at-risk for default, the number is even higher.
- – Signature Loans: Although the moneylenders would like people to think differently, payday loans fall into this category. Auto title cash loans are usually secured.
Immediately upon filing, bankruptcy’s automatic stay forbids moneylenders from pursuing foreclosure, lawsuits, wage garnishment, and all other forms of adverse action, at least in most cases. A Chapter 7 discharges (forgives) debts in about four to six months, and a Chapter 13 discharges debts at the end of the three or five-year repayment period.
Bankruptcy judges can extinguish debts but not the collateral consequences of debts, meaning that income tax liens, blacklists, and other items usually survive bankruptcy.
Most people sincerely want to repay their debts to the greatest extend possible, either because of a moral obligation or because they want to retain the secured property, and Chapter 13 is tailor-made for these families.
Rather than throwing money at secured debt delinquency, Chapter 13 debtors consolidate all these accounts into one monthly payment based on their incomes, and moneylenders basically cannot object, as long as the judge considers the repayment plan to be reasonable. Moreover, if there is a legitimate dispute as to the amount owed, judges usually refer the matter to mediation, where the moneylender must negotiate in good faith to reach a mutually-satisfactory agreement. Even if there is no dispute, an experienced lawyer can sometimes independently negotiate with the moneylender and obtain more favorable repayment terms.
What Stays Behind
Child support delinquency, past-due alimony, and other DSOs (domestic support obligations) are typically not dischargeable in bankruptcy, even though they are technically unsecured debts. The same thing applies to some criminal fines. Student loans are dischargeable if the debtor establishes an undue hardship, and income taxes (but not income tax liens) are dischargeable if the tax is at least three years overdue, the return has been on file for at least two years, and the taxing authority hasn’t assessed the debt in the last 240 days (nine months).
Go With Experienced Lawyers
Bankruptcy is the best way to help people eliminate and manage det. For a free consultation with an experienced bankruptcy lawyer in Chicago, contact the Bentz Holguin Law Firm, LLC. We routinely handle cases in Indiana and Illinois.