To some people, bankruptcy seems like a magic wand. Abracadabra and all of your credit card debt, medical debt, signature loans, and other unsecured debt are magically wiped out. In addition, all of the nasty collection calls and lawsuit threats come to a screeching halt.
Some people will claim that they heard about a friend of a friend who had a nasty debt monster who tormented their life until the knight in shining armor (the bankruptcy attorney) filed the case and destroyed the monster. Then, everyone lived happily ever after. I wish every client that walked into my office could have such a happy ending.
I have to admit, bankruptcy sometimes seems a bit magical. However, anyone thinking about filing bankruptcy must understand that there are limits to the magical power of the bankruptcy wand.
Limits on the Magic
Some people earn too much money to get any relief in bankruptcy. The means test is a product of politics and not logic. As a consequence, some people are prevented from being able to eliminate debt because of their specific means test results.
Student Loans
Another limitation of the magical powers of the bankruptcy wand is student loans. They cannot be eliminated in bankruptcy as a general rule. This limitation of the magical wand disappoints the largest number of people. The mountainous student loan debt that most recent college graduates is unbearable. This economy is so bad that even students who have made great grades are unable to find a job that will put them in a position to pay back the student loan debt. Until Congress decides to change the law, the student loan debt monster will continue to rampage.
Future House Payments
Another limitation on the magic wand is future mortgage payments on a house. Whether you file Chapter 13 or Chapter 7, you must continue to pay all of your future mortgage payments on your house. Also, neither Chapter 13 or Chapter 7 will lower any future mortgage payment. The only way that a future mortgage payment can be lowered in through either a refinance or a loan modification.
If you would like to know how Chapter 13 or Chapter 7 would impact your financial situation you must meet with a bankruptcy attorney so that the specific facts of your situation can be reviewed. Whatever happened in the friend of the friend’s case has no bearing on what will happen in yours.
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3. How much does it cost to file?