In the current economic climate, people who may never have considered bankruptcy as an option may find it a difficult, but necessary next step.
It's no longer something that happens when you've "failed" or simply overspent. A recent New York Times article reports bankruptcy filings increased 34% from October 2007 to October 2008. Families considered solidly middle-class are now seeking Chapter 13 bankruptcy protection to ensure they do not lose their homes and other assets when financial woes impact the household.
What is Chapter 13 bankruptcy?
Chapter 13 allows consumers to arrange repayment plans that will protect their assets in a way that Chapter 7 bankruptcy does not. Also known as Individual Debt Adjustment, Chapter 13 lets an individual with regular income keep property and pay debts back, usually over three to five years. During this time the individual is protected from creditors, who can't start or continue collection efforts on past due bills. In contrast, consumers generally lose most assets with a Chapter 7 bankruptcy, other than those considered exempt—a definition which varies from state-to-state, and is often based upon income.
For consumers who wish to protect the equity in their homes or cars with a loan or lease balance, Chapter 13 bankruptcy is a good option. But, it comes with a cost, as creditors and insurance companies may not offer their most favorable rates in the future.
Will my car insurance rates go up if I file for bankruptcy protection?
The short answer is—it's likely, but how much depends on your credit rating before the bankruptcy. If you have insurance and continue making your payments, you're less likely to see a rate increase at renewal, but some companies will check your credit once a year. A lower credit rating may lead to a rate increase.
Any type of bankruptcy filing will hurt your credit rating and will remain on your record for up to 10 years. During that time, car insurance companies that use credit as part of their risk assessment may increase your rate or may decline to offer you the lowest rates available. If you're shopping for a new policy post-bankruptcy, you may find that some companies will not offer you a quote, if bankruptcy is used as a risk factor.
Is this fair? Well, using credit history as one factor in insurance pricing is a lot like looking at an individual's driving history: a large number of accidents or violations means that driver may not be responsible and presents a greater risk to the company. A bankruptcy is a bit like a financial accident or violation. It strongly indicates, in much the same way as a traffic violation, that the individual had some difficulty with their finances—and some insurance companies have determined that insurance risk increases as financial stability decreases.
Some practical issues
If you're currently paying for your auto insurance using a credit card or checking account that may be restricted or closed by a bankruptcy filing, you may need to call your insurance company to change your method of payment. Remember, if you change from automatic withdrawal to direct billing, there may be additional installment or service fees, and you may risk late payment fees in some states, if a payment is late. But, the important thing is to keep your policy active, as a lapse in coverage could result in even higher rates when you re-start your coverage.
There is a significant difference between the two kinds of bankruptcy. We believe that insurance companies can and should evaluate their risk criteria based on insurance risk scores and determine ways to help consumers retain their insurance coverage. But, we hope that companies will evaluate Chapter 13 bankruptcy filings more favorably than other types of bankruptcies—and not penalize consumers who take the important step of choosing to repay their debts.
If you've been in good standing with your company in the past, making payments on time, your company should have no reason to believe that your current financial situation will impact your ability to continue to pay your premium. It's very important to communicate with your company. Ultimately, they are going to be looking at your situation as a whole—not just your financial risk, but your driving record.
All being well, and if your claims and driving history is still good, your auto insurance company shouldn't have any reason to cancel your policy. Your financial situation is only part of your risk factor, after all.
Do you have any questions or comments? Please let us know.
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