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Divorce and bankruptcy: which should come first?
Going through divorce and bankruptcy separately is stressful even in the most amicable situations.
Dealing with both at once exacerbates the strain on you personally and financially. Here is some information to help you decide which proceeding should take precedence.
When should you file for bankruptcy before divorce?
One major benefit to filing for bankruptcy before filing for divorce is the possibility of canceling joint debts. When filing as a married couple, you should first understand how changes in your circumstances impact your ability to pay creditors.
A marital home in Maryland holds title as tenancy by the entirety which protects the equity in the home from most creditors in a bankruptcy proceeding. However, if a court grants a divorce decree, the title of the property becomes tenants in common, severing the protection of home equity. Another benefit to filing for bankruptcy before divorce is that remaining married can streamline the divorce process, decreasing legal fees and time commitment for each spouse.
How may a federal tax lien affect my property in bankruptcy?
When the IRS places a tax lien against your property, a bankruptcy may not remove or discharge it. As reported by Credit.com, tax debts have a 10-year statute of limitations from the date of assessment. The IRS may collect the amount that you owe until the SOL expires or you sell your home.
Bankruptcy, however, may offer a "pause" on the 10-year timeframe. After submitting your petition, the court issues an automatic stay. Creditors may no longer pursue you for debt. The IRS may also stop collecting a debt from you until after your bankruptcy case closes.
When may I need to sell my home during bankruptcy?
In some cases, a Chapter 7 bankruptcy may require petitioners to sell their homes. If your property's equity does not exceed $25,150, you may keep it under Maryland's homestead exemption statute.
To find your home's equity value, subtract the amount you owe for its mortgage from its current market value. If your home's equity exceeds the state's $25,150 allowance, the bankruptcy court may require you to sell it. Proceeds of a sale first go toward paying off your outstanding tax debts.
What are secured credit cards?
As part of filing bankruptcy, you must repair your financial health. Have you heard about secured credit cards and how they may help rebuild your credit?
NerdWallet explains how secured credit cards work. Learn about all your options for forming a new relationship with money.
The basics
Before receiving a secured credit card, you must make a deposit to reduce the credit card issuer's risk. If you fall behind on paying your bill, the card issuer may take your deposit.
With a secured credit card, your deposit determines your credit limit. For example, if you deposit $1,000, you have a $1,000 credit limit. Over time and with enough responsible use, you build your credit profile. Depending on the credit card company, you could upgrade to an unsecured credit card.
The similarities between an unsecured credit card
Secured credit cards share many of the same features as traditional unsecured cards. For instance, you may use a secured card wherever you would use an unsecured card, and you pay interest on purchases made with a secured card.
How may a Chapter 7 bankruptcy help me keep my home in Maryland?
Between 2020 and 2022, you may have qualified to place your mortgage in forbearance. After a pause in loan obligations, however, you may still find yourself unable to meet your expenses when your mortgage payments resume.
The Ascent reports that only half of the about 8 million borrowers in forbearance have caught up on their mortgage payments. About 264,000 homeowners have fallen behind on their loans even with up to 18-months of forbearance. Reportedly, 38,000 lenders started the foreclosure process to retake properties.
Borrowers may have options as mortgage payments resume
If you lost your job or experienced an income reduction, you may have options that allow you to remain in your home. As noted by Bankrate.com, some mortgage service providers offer a loan modification or forbearance extension.
By changing your payment's due date, you may have the ability to catch up on past-due payments. Your loan servicer could also offer to extend the length of the forbearance. At the end of the extension, however, your servicer may add a charge to your loan payments. If you still find it difficult to meet your monthly obligations, you could consider filing for bankruptcy.
Working with the IRS after bankruptcy
You may file for bankruptcy because you cannot pay your federal taxes. There are several things that you should understand when you choose this route.
When you file for bankruptcy, you usually compile a list of your creditors. The Internal Revenue Service says that you should indicate that the IRS is one of your creditors. This allows a representative from a bankruptcy court to get in touch with this department. If you want to ensure that the IRS understands your situation, you can always reach out. A representative can look up your bankruptcy case number and verify that the department has your details.
What happens to taxes during bankruptcy?
You typically have to file your taxes each year while the bankruptcy is ongoing. Sometimes, you may require an extension. You have to request and receive an extension before you file taxes after the deadline.
Additionally, you still may owe taxes each year. Although you filed for bankruptcy, you have to pay your current taxes. If you do not, a bankruptcy court may dismiss the case. You could also risk dismissal if you do not file your tax returns.
Tips to help secure a car loan after bankruptcy
Going through bankruptcy may make it harder for lenders to give you a loan, but it is far from impossible. Lenders are indeed on the lookout for red flags that signal somebody is a financial risk. Still, if you want to buy a new car after your bankruptcy, you may find a lender willing to take a chance on you.
If you plan on getting a new car following your bankruptcy, think about how you might secure a car loan. Credit Karma describes some steps that may help you find the right lender as well as avoid a loan with unfavorable terms.
Take time to rebuild your credit
If time is not of the essence, you could spend time rebuilding your credit so that you may find a loan with a low-interest rate. Consider requesting a copy of your credit report so you can check your credit score following your bankruptcy. From there, you could explore options that may help you raise your credit score, like getting a secured credit card or becoming an authorized user on a relative's credit card.
How may a sole proprietor file for personal bankruptcy?
Maryland small business owners operating as sole proprietorships may file for personal bankruptcy. If your business faces overwhelming financial hardships, you may file a petition for a Chapter 7 bankruptcy, as noted by Business.com.
If you applied for credit cards or consumer loans to fund your startup, you may have personal liability for your business debts. Creditors may file a judgment for unpaid balances against you directly if your business did not produce the income you anticipated.
When may a business owner file for Chapter 7?
Because a Chapter 7 bankruptcy may affect a filer's credit for up to 10 years, many business owners attempt to resolve their debts on their own. After contacting your creditors and explaining your circumstances, some may agree to work out a payment arrangement so that you could catch up.
If you own your home, you may refinance a mortgage or request forbearance, as described by the Consumer Finance Protection Bureau. If these options do not prove fruitful, you may consider filing for Chapter 7 bankruptcy.
Why is 30% so important to your credit score?
If you want to purchase a new home, car or any other expensive item, you have a couple of options: You can either pay cash or secure a loan. Still, most Americans do not have even three months of their salaries in savings.
When you apply for a loan, the financial institution is likely to look at your credit score. While most credit scores fluctuate frequently, paying close attention to yours may help you gauge your borrowing ability. When it comes to your credit score, 30% is important for two reasons.
Your credit utilization ratio
Most credit bureaus use credit utilization ratios when calculating credit scores. In fact, you can expect your credit utilization ratio to account for roughly 30% of your credit score.
Your credit utilization ratio is simply the amount of credit you are currently using relative to how much you have available. For example, if you have $1,000 in available credit and are using $500, your credit utilization ratio is 50%.
How could bankruptcy affect my outstanding tax debts?
Bankruptcy rarely discharges an individual's unpaid tax obligations. If you can prove an unusual financial hardship, however, the court may consider discharging certain tax debts.
As noted by Credit Karma, taxes more than three years old could have a chance of ending up discharged in limited situations. A bankruptcy trustee may review and consider those tax debts more than three years past due as of the most recent April 15 payment date.
When might the U.S. bankruptcy code discharge tax debts?
The trustee assigned to your bankruptcy case might recommend amnesty for some tax debts. To qualify, the debt must reflect amounts owed on tax returns filed at least two years before your bankruptcy. Late filings, a failure to file or audits could lengthen the time until tax debts become eligible for discharge.
Overall, the court will generally not consider pardoning tax debts associated with any years you did not file an income tax return. You may order receipts of your IRS account to provide documentation of your latest filings and taxes paid.
Medical debt the most common reason for bankruptcy
There is a stigma about filing for bankruptcy that may prevent some people from seeking the relief they need. There is a persistent perception that people bring bankruptcy on themselves by living beyond their means.
This is much less common than many people assume. According to CNBC, excess spending is only a factor in 44.4% of all bankruptcy filings. The most commonly cited reason for a bankruptcy filing, at 66.5%, is medical expenses. Because more than one factor may have contributed to bankruptcy, the percentages add up to more than 100%.
Why do medical expenses result in bankruptcy filings?
Even people who have health insurance may be susceptible to bankruptcy due to medical expenses. The reason is that most insurance policies do not provide sufficient coverage for all of the expenses related to a serious illness or injury. The Affordable Care Act made insurance more accessible to people who were not otherwise able to afford it, but it did not raise coverage limits. Nevertheless, even insurance policies that people receive from their employers do not provide sufficient coverage in most cases. Patients and their families are then responsible for paying the remaining bills out of pocket.
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