Sometimes life simply dishes out some bad luck. A bad car accident. A serious illness. Bankruptcy turns these lemons of life into lemonade.
Here’s how bankruptcy can help in these two scenarios.
Bad Car Accident
On Friday the 13th you got into a two-vehicle accident. The evidence shows that it was your fault. You got pretty seriously injured, as did your passenger and the other driver. You don’t have nearly enough insurance coverage for all the claims being thrown at you.
The medical bills and lost wages of the other driver and your passenger add up to tens of thousands of dollars over your coverage limits.
The two vehicles also took out a traffic light and then crashed into a roadside business. The resulting damages amounted to tens of thousands of dollars more of uncovered liability.
You couldn’t work for two months because of your injuries, and that lost income was only partially compensated. So you fell behind on your credit card payments and other debts.
You had health insurance beyond what the auto insurance paid of your own medical bills. But it’s not the greatest insurance so you owe many thousands of dollars in deductibles.
The Chapter 7 Solution
So… with the help of your bankruptcy lawyer you file a Chapter 7 “straight bankruptcy” case.
The accident was caused by your negligence, from your lack of care. Plus you are not being accused of driving under the influence. As long as these are true, all the claims against you arising out of the accident would be “discharged.” They would be legally written off. If everything goes as it should, within about 4 months of filing the Chapter 7 case you would not owe anything to anybody related to the accident.
You’d have a fresh financial start. Your bad luck would have turned into good.
Out of the blue on Friday the 13th you have a heart attack. You survive but it keeps you in the hospital for a week and off work for three months. You had been living on the financial edge already before. But now you owe a new big bunch of medical bills and are seriously behind on other debts.
So you absolutely have to change your lifestyle. You’d been working way too hard and too many hours, and have to cut way back. So your income has gone way down.
You’re now a couple months behind on both your truck loan and your home mortgage. You are being sued by a collection agency for a bunch of the medical bills.
The Chapter 13 Solution
So… you meet with a bankruptcy lawyer and file a Chapter 13 “adjustment of debts” case. That immediately stops the lawsuit on the medical debts, as well as any pending repossession of your truck or foreclosure of your home.
Your lawyer bases your Chapter 13 monthly plan payment on what you can afford to pay to all of your creditors, beyond your regular mortgage payments. It’s not much, but enough to accomplish what it needs to do:
- Over a 3-year period you use that money to catch up on our missed mortgage payments.
- Your plan payments also fund a “cramdown” on your truck loan, reducing the monthly payment and the total you pay until the truck is yours free and clear.
- Your mortgage lender and truck lender must accept the payments once the bankruptcy court approves the plan. You must also comply with its terms to get its benefits.
- Your plan pays all the rest of your debts a few pennies on the dollar during the 3-year period.
At the end of the payment plan to the extent that any of your debts have not paid the remaining amounts are discharged. You’d be caught up on your mortgage, own your truck free and clear, and be debt-free except for the mortgage. Throughout the process you’d have a lot less stress on your heart. Your bad luck would have been turned into good.