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Mark McCown: Bankruptcy works in certain circumstances

Dear Lawyer Mark: I have a question about bankruptcy.

I got stuck with a mortgage payment that went way up last year and couldn’t pay my other bills.

Well, the bank took my house and sold it at the courthouse, and we rent now. The thing is, I put a bunch of medical bills and groceries, utilities and what-nots on my credit cards when I was paying my mortgage payment and so I can’t pay those no more.

My other problem is that my mom is dying and wants to give me her house, but the credit card companies told me they would take it if I don’t pay them and bankruptcy don’t matter.

The house ain’t worth much, but it looks like that and my old beat up car is all I’ll have, since the government wants to bail out everyone but me. Can I file bankruptcy and get rid of the credit cards? — WORRIED IN SOUTH POINT

Dear Worried: Whether bankruptcy will work for a person is entirely dependent upon that person’s unique set of circumstances.

There are several types of bankruptcy, but the most common one for individuals is called “Chapter 7.” The first thing that you need to know is that Chapter 7 generally gets rid of unsecured debts, like credit cards, and it sounds like the collection agent who spoke to you was not being truthful.

Debt for which you have given collateral, such as a mortgage on a house, or a title for a car loan, are called secured debts. With secured debts, you generally have three options: surrender, reaffirmation, or redemption. Surrender means giving the collateral to the creditor, and the debt is then forgiven.

Reaffirmation means you keep the collateral and agree to keep paying the debt under either the same terms as you were, or under new terms negotiated by your lawyer. Redemption means you pay the creditor a lump sum and keep the collateral.

Of course, you can’t keep a mansion and walk away from the debt (unless you got part of that bailout you were talking about), so the law says how much you can keep. These are called exemptions, and vary state to state. In 2008, Ohio greatly increased some of its exemptions. For example, you can now have equity, which is the amount something is worth minus what you owe on it, in the amount of $20,200 per individual in residential real estate. That means that a married couple could have $40,400 of equity in a house, and still save it in a bankruptcy. Previously, the maximum would have been $10,000 for a couple.

Likewise, a person can now have $3,335 of equity in a car, and $10,725 worth of furniture and appliances.

The most important part of the law is the fact that it is tied to the consumer price index. This means that the amount of exemptions will increase automatically every three years.

I highly recommend you speak to a bankruptcy lawyer about your individual case. Most don’t charge for an initial consultation, and he or she can better advise you according to your total financial situation.

It’s The Law is written by attorney Mark K. McCown in response to legal questions received by him. If you have a question, please forward it to Mark K. McCown, 311 Park Avenue, Ironton, Ohio 45638, or e-mail it to him at LawyerMark@yahoo.com. The right to condense and/or edit all questions is reserved.