Matthew Cherney: These sort of student loan payments are just becoming very unmanageable. So, the signs of a recession are becoming more and more apparent, not necessarily tied to housing but more towards things like vehicle loans, student loans, etc.
Neil Howe: When somebody does get into trouble, what kind of options are available for them?
Matthew Cherney: I meet with clients all the time, potential clients or just individuals who might be looking for some sort of solution to deal with their debt. That could be the possibility of trying to negotiate lower payments or negotiate settlements on a particular debt.
Bankruptcy, while an option, isn’t always someone’s first option. A lot of times the first thing a potential client and I speak about is the fact that no one wants to find themselves here in my office and having the conversations that we ultimately have. A lot of people might feel embarrassed or they’re already dealing with anxiety and stress and perhaps shame.
We sit and we have an open conversation about what options might be available to them and if they’re not in a financial position to negotiate any sort of payment or settlement, we can always look at bankruptcy options, be that a chapter 7 or chapter 13. That is some sort of reorganization mandated by the court that allows individuals to either eliminate their debt in full or perhaps reorganize their debt, which is putting together a plan that allows an individual to pay back their debt or a portion thereof in a more economically viable way that suits their budget. Something that’s not just based upon the debt itself but based on their ability to pay.
Neil Howe: Break down chapter 7 and the chapter 13 bankruptcy because I know a lot of people just need clarification on why you would use either one.
Matthew Cherney: Chapter 7 is going to be designed for individuals who do not have the financial means to pay back their debt. That’s referred to as the complete bankruptcy. If someone’s doing their own research on bankruptcy or learning a little bit about bankruptcy, the first thing that they see is the idea of chapter 7.
Chapter 7 is there to deal with things like unsecured debt. Unsecured debt could be credit cards, medical bills or personal unsecured loans where they haven’t pledged anything as collateral for the loan. What we’re illustrating in chapter 7 is that one cannot reasonably pay back their debt within a period of time however nominal that payment will be.
Chapter 13 is designed for individuals who may not qualify for chapter 7. That could be either based upon that fact they filled a chapter 7 within the last eight years or perhaps they make too much money to do a chapter 7 because there are income criteria for chapter 7. Chapter 13 is designed for those individuals who may be trying to protect an asset like a vehicle that they may have fallen behind on that’s in danger of being repossessed or to prevent home foreclosure. They may have fallen behind on their mortgage payments and chapter 13 allows them to consolidate all of their debt and propose to pay it back to their creditors in some form over a period of anywhere from three to five years.
Neil Howe: What does this do to the credit? Is that a big fear that holds people back?
Matthew Cherney: Certainly one’s credit score is of concern and a lot of times when we sit and we have a discussion about what option’s going to suit the individual best, one thing they ask is, “Well, what’s it going to do to my credit?”
My response to that, while not dodging the question, is often times, “What does your credit look like right now?” If I’m meeting with someone, chances are their credit might not necessarily be in the best state of repair.
If the credit is not necessarily in the best state of repair currently, then the less effect the bankruptcy is going to have on that individual’s credit.
Now, I do have folks who are trying to simply be preemptive. They say, “I’ve been making my minimum payments on my car. I’ve never missed a payment. I’ve never missed a payment to anybody but for reasons x, y, and z, I see that at some point, that’s no longer going to be the case.”
Those individuals often have pretty good credit scores. The only thing that might be affecting their credit score is their debt to income ratio. They’re paying out a lot of debt, maybe just barely and relative to their income which could be affecting their credit score, but otherwise, they’ve maintained payments all along. The effect on those folks’ credit is going to be a little bit larger because we’ll presume that their credit score is higher. The higher your credit score, the more effect the bankruptcy is going to have on it but, I really try to convey to folks, especially those who really need the relief is we’ve got to shift our thinking here and shift our focus from what is the effect going to be on my credit to how do I start over? How do I get into a better financial situation? How do I change my focus and shift it from, what’s my credit score going to be…to how do I get out of this debt?
If we can shift the focus to that, people say, “Well, okay. I can put the thoughts about what the effect’s going to be on the back burner and just look forward rather than look behind.”
Neil Howe: Other than the credit issue, what are some other fears clients have?
Matthew Cherney: A lot of it has to do with rehabilitating. Where am I going to be a month after bankruptcy? A year after bankruptcy? What is my credit going to look like and what are ways that I can rehabilitate my credit?