Robert Osol, Esq
Consider this scenario:
John and Mary are a married couple with two young children, and they are deeply in debt. John was the breadwinner in the family. He had a good paying job until the company downsized and then he was without a job for eight months. John and Mary have a house that they bought in in 2006. It is now worth less than what they paid for it. They owe more on the first mortgage than what the house is worth. They also have a second mortgage on the house. John and Mary are behind 6 months on both mortgages and they owe a decent amount of credit card debt. The credit card companies have increased their interest rate to 29.9% because of the defaults and one of the companies is threatening to sue them. They have a car with a car loan on it. They owe more on the car than what it is worth. John recently got a new job, however, he is making less than he was at his old job. The mortgage companies are sending John and Mary letters and calling them and telling them that they have to bring the mortgages current immediately or they will foreclose. They won’t take partial payments; they want all of what they are owed. John has some money in a 401(k) from his prior job. He is contemplating liquidating the 401(k) to bring the mortgages current. He knows, though, that he will have a tax consequence for taking the money early. He will have to pay taxes on the money at the end of the year and a 10% penalty.
What should John and Mary do? Should they take the money from the 401(k) now to bring the mortgages current and worry about the taxes later? What about the credit cards? They don’t have enough money in the 401(k) to pay them off and they can’t afford to pay the monthly payments and the two mortgages because of John’s cut in pay. What about the car? They are paying a car loan for a car that is worth only about half of what they owe.
John and Mary aren’t sure what to do, so they decided to come to me for a FREE bankruptcy consultation.
John and Mary are surprised to learn that if they file a Chapter 13 bankruptcy they will get a much better result AND they will get to keep their retirement money for exactly that-retirement. If they file a Chapter 13 bankruptcy they can;
· Immediately stop all collection activity from all creditors.
· Spread the first mortgage arrears out over a period of time anywhere between three and five years.
· “Strip” the second mortgage. This means that the lien will be removed from the property and the creditor will be treated the same as all other unsecured creditors.
· Pay unsecured creditors as little as 0%.
· Refinance the car so that they are only paying the lender what the car is worth and the remaining balance owed will be treated the same as all other unsecured creditors.
John and Mary understand that it will take three to five years to complete their Bankruptcy “Plan” and that they will have a bankruptcy on their credit. They believe, though, that they will still come out ahead because they will be “cleaned up” once the bankruptcy is complete. They will be current on the first mortgage and they will no longer have a second mortgage or any unsecured debt. Also, once they finish their Plan they will be able to get a new car loan right away if they need to and a few years after that they will be able to refinance the mortgage if they want to. After they weighed the pros and cons, they determined that they will be back on track faster by filing a bankruptcy rather than taking their 401(k) money, paying taxes on the money, struggling to pay back their debt, and then trying to rebuild their credit.
Robert Osol, Esq
536 Main Street
Falmouth, MA 02540
Attorney Osol is a partner at Melia & Osol. He practices law focusing on creditor law, commercial claims, bankruptcy, real estate law, small business law and estates.
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