Are you considering bankruptcy and wondering if bankruptcy is right for you? Let’s examine a recent example of someone who needed to file for bankruptcy.

A Bankruptcy Example

The couple lived in Minneapolis, Minnesota. The husband and wife both worked near Minneapolis. They always paid their bills on time. They had children in elementary school. They always had enough money, even though it was often tight. Around 2004, they decided to buy a second home in northeast Minneapolis, which they would rent out. They hope that this Minneapolis investment property would increase in value, just as real estate in Minneapolis and Minnesota had for decades.

It was a little more challenging getting tenants than they expected, but they were able to make about $1000 the first year. Shortly thereafter, the Minneapolis real estate market fell out. The Minneapolis investment property was purchased with an adjustable rate mortgage, which meant that the interest rate on the mortgage could substantially increase. That is exactly what happened.

The couple found themselves paying an additional $700 a month in interest, which they couldn’t afford. They couldn’t sell the property because it was now worth $50,000 less than when they had bought it. They were faced with three options: First, they could continue to pay $700 a month. Second, they could sell the home and pay $50,000, but they didn’t have $50,000. Third, they could meet with a Minnesota bankruptcy attorney and discuss their options.

By the time they met with the Minnesota bankruptcy attorney, they were substantially behind on their credit card payments, had defaulted by not making all the payments on the Minneapolis investment property, and were quickly getting into serious financial trouble.

The Minnesota bankruptcy attorney explained to them that they have two options since the other options would only push them further into financial trouble. First, they could attempt to negotiate down their debts so that they would not have to file for bankruptcy. Second, they could file for bankruptcy.

Get it in writing

Often creditors (people to whom you owe money) are willing to reduce the amount you must pay in exchange for immediate payment. This is called a Workout. A Workout is the negotiation of a debt reduction without filing for bankruptcy. The important thing to remember in a Workout and that you must get a full written Settlement and Release all of the remaining debt. You can’t count on someone’s word over the telephone. You can’t just write “payment in full” on a payment. The creditor must sign a full Settlement and Release, which provides, in part, that you are released from any debt or obligation to pay the remaining portion.

Consider Your Options

Some people feel comfortable handling a workout on their own without the assistance of a Minnesota bankruptcy attorney. They are willing to spend the time to learn how to do it, negotiate their own settlement, and prepare the legal document with the Settlement and Release. Usually, an attorney is the preferred option. Not only will an attorney make sure it’s done right, the attorney may also be able to negotiate a lower settlement because the creditor knows filing bankruptcy is a viable threat.

Generally, filing for bankruptcy in the federal bankruptcy court does require the assistance of a Minnesota bankruptcy attorney. A Minnesota bankruptcy attorney will meet with you, analyze the debts you owe and the assets you own, prepare the bankruptcy filing, and represent you in the bankruptcy court.

As you can see, one of the primary reasons that people file for bankruptcy is an unexpected event—like the downturn in the real estate market—that causes a financial crisis. Many good people find themselves in a situation that is going to get worse very quickly, and rather than drive up more and more debts, they decide to act quickly and salvage their situation.