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Salem MA Bankruptcy Law Blog

The consequences of personal bankruptcy may be exaggerated

Massachusetts residents who are struggling with overwhelming debt often put off filing for bankruptcy because they worry that a Chapter 7 or Chapter 13 petition will ruin their credit and make future borrowing difficult or impossible. However, a report recently released by the online financial exchange Lending Tree suggests that these fears may be exaggerated. Researchers discovered that 43 percent of Americans who file a bankruptcy have credit scores of 640 or higher just a year later, and this figure rises to 65 percent after three years.

The Lending Tree report also reveals that a previous bankruptcy may not have much of an influence on auto loan rates. While individuals who take out a $15,000 car loan within a year of filing for bankruptcy pay about $2,171 more in finance charges, these additional costs drop by almost two-thirds to $799 within two years.

Americans grappling with over $1 trillion in credit card debt

Credit card account holders in Massachusetts generally fall into two categories. The first type charges many transactions to build up points and rewards and pays off the balance every month. The second type cannot pay off the balance every month and accrues interest charges on their revolving debt balances.

According to data from Experian, 43 percent of card holders have revolving debt. Experian reported that on average people carrying balances owed interest payments of approximately $1,000 every month. These high balances have pushed the total amount of credit card debt in the country over the $1 trillion mark. The average balance owed on credit cards stands at $6,354 as of 2017.

Bankruptcy may be the best option for many

The weight of overwhelming debt is a heavy burden for many people across Massachusetts. Bankruptcy may offer a way out, but many are concerned about the stigma and financial consequences that come with a bankruptcy filing. Despite that, bankruptcy is the best option for many.

According to the U.S. Trustees Program, approximately 733,000 business and people are expected to file for bankruptcy in 2018. That number is up from 2017 but far below the peak of 1.5 filings in 2010. The high number of filings is due to the massive personal debt the American people face. By the end of 2017, Americans held over $13 trillion dollars in debt. According to the Federal Reserve, $8.8 of that included mortgages while the rest was on student loans, car loans, and credit card debt.

How tax liabilities are treated in bankruptcy

Massachusetts debtors may gain some relief from their debts through the bankruptcy process. However, there are some types of debts such as tax liabilities that may be mostly nondischargeable. While tax liabilities might be discharged in some situations, the ability to do so is limited.

In general, tax debts must date to a return that was due at least three years before the bankruptcy petition was filed. The tax return with which the debt is associated must have been filed at least two years prior to the bankruptcy petition. The debt must have been assessed against the debtor at least 240 days before the filing of the petition.

The cost of carrying a credit card debt balance

The average household in Massachusetts and throughout America has a credit card balance of $6,081. It is not uncommon for credit card balance holders to carry that debt for many years, which can lead to thousands of dollars in accrued interest.

Someone who made just the minimum payment on a $6,081 balance with an interest rate of 14.99 percent would pay $4,063.89 in accrued interest. However, by paying $100 more than the minimum payment each month, that person would accrue just $1,409.26 in interest. By making the minimum payment each month, an individual would take 169 months to pay off that debt. Paying $100 more than the minimum each month would allow a debtor to pay that balance off in just 41 months. Eliminating the need to pay interest on credit card debt can actually produce a better return on a person's money compared to most investments.

The impact of credit cards on young people

A NBC News/GenForward survey found that only 22 percent of millennials are not carrying debt. The survey found that 11 percent have more than $100,000 while roughly 25 percent of those between the age of 18 to 34 have more than $30,000 in debt. This has caused young people in Massachusetts and elsewhere to save less, which could leave them vulnerable to a financial emergency.

The survey found that only 30 percent of people in this age group have $1,000 in a savings account. Only 1 percent has $100,000 in savings while 24 percent said that they had no savings at all. In addition to student loans, many millennials are trying to pay down credit card balances. Of those who took part in the survey, 46 percent said that they had credit card debt while 36 percent said that they had student loan debt.

Financial recovery is possible after bankruptcy

Many people in Massachusetts may be struggling with overwhelming debt and looking for relief from their situation. However, concerns over the effects of personal bankruptcy on one's creditworthiness in the future may hold people back from taking the next step, despite the debt relief potential offered by a bankruptcy filing. There are ways that people going through bankruptcy can plan ahead to help ensure the success of their filing.

For many across the United States, personal bankruptcy is far from uncommon. In fact, over 700,000 people filed for bankruptcy in 2017. According to federal law, a bankruptcy filing can remain on a person's credit report for up to 10 years, depending on the type of filing that a person makes. However, the full impact of bankruptcy on a person's credit does not need to linger for the entire period. In one study by LendingTree, analysts found that 65 percent of people who filed for bankruptcy had already achieved a credit score of at least 640 only two years after their initial filing.

The bankruptcy experience

People living in Massachusetts who are struggling with debt often seek solutions to their overwhelming financial situations. One option is filing for bankruptcy although many people may be unfamiliar with how this process works.

The two most common forms of consumer bankruptcy are Chapter 7 and Chapter 13. In a Chapter 7 bankruptcy, a trustee liquidates a debtor's non-exempt assets if any exist. The proceeds from the liquidation are then distributed to the debtor's creditors. After this, all eligible debt is then discharged by the bankruptcy court.

The truth about bankruptcy and credit

Massachusetts residents can use the bankruptcy process to find debt relief and get a fresh financial start. However, they should be aware of exactly how bankruptcy can affect their credit.

Even if someone has a good payment history before filing for bankruptcy, their credit score will still be impacted. The amount of time the bankruptcy has been on one's credit report will also affect the score.

Credit card debt on the rise again

In 2017, folks in Massachusetts and throughout the country added $92.2 billion in credit card debt, which was the most since 2007. That pushed the overall credit card debt in the United States to over $1 trillion, according to the Federal Reserve. In the final quarter of 2017, the average American household owed $8,600, which was up 6 percent from the same time period in 2016.

Over the final quarter of 2017, Americans added $67.6 billion in credit card debt, which was a 16 percent increase from the fourth quarter of 2016. It was also the largest increase in a single quarter since 1986. One explanation for this surge is that banks are lending to people who don't have great credit scores. Another explanation is that credit cards are being used to pay medical debts.