Bankruptcy is a legal proceeding in which a person who cannot pay his or her bills can get a fresh financial start. The right to file for bankruptcy is provided by federal law, and all bankruptcy cases are handled in federal court. Filing bankruptcy immediately stops all of your creditors from seeking to collect debts from you, at least until your debts are sorted out according to the law.
- Eliminate the legal obligation to pay most or all of your debts. This is called a ‘‘discharge’’ of debts. It is designed to give you a fresh financial start.
- Stop foreclosure on your house or mobile home and allow you an opportunity to catch up on missed payments.(Bankruptcy does not, however, automatically eliminate mortgages and other liens on your property without payment.)
- Prevent repossession of a car or other property, or force the creditor to return property even after it has been repossessed.
- Stop wage garnishment, debt collection harassment, and similar creditor actions to collect a debt.
- Restore or prevent termination of utility service.
- Allow you to challenge the claims of creditors who have committed fraud or who are otherwise trying to collect more than you really owe.
Bankruptcy may be your best option.
bankruptcy (Title 11 of the United States Bankruptcy Code
) is commonly known to bankruptcy lawyers and others as a liquidating bankruptcy, personal bankruptcy, or just plain "bankruptcy." It is also referred to as consumer or personal bankruptcy, although businesses can also file under Chapter 7. For cases filed after October 17, 2005, eligibility to file Chapter 7 is to be determined by a means test
if your annual income exceeds the median income for your geographic area as determined by the IRS. Under any Chapter, you are required to list all of your assets and all of your debts on your petition.
An asset is anything you own or may have a right to own at some future date (for example, if you are in someone's will). Some (and in many cases, all) of your assets will be exempt. Basically, you can exempt any items normally used for your support and maintenance, such as clothing, furniture, household goods, and so forth. After you file your case, a Trustee is appointed. He (or she) will liquidate (sell) all of your non-exempt assets and pay your creditors according to the priority afforded to them by the Bankruptcy Code. You may voluntarily repay any debt upon agreement with the creditor. Whether this is ever advisable is questionable and is an issue to be discussed with your bankruptcy lawyer.
Should you file a Chapter 7 Bankruptcy?
The goal of most any personal bankruptcy is to discharge or bankrupt your existing debts and allow you a "fresh start" on your finances. In other words, once your discharge is granted, you no longer need to repay the debts that were incurred before you filed your bankruptcy. Your creditors are entitled to share in the proceeds obtained from the liquidation of your non-exempt assets. Under Chapter 7, the amount your creditors will get is fixed by the value of your non-exempt assets.
Technically, the word "bankrupt" is not the correct terminology when referring to getting rid of debts, but most people use that phrase. "I want to bankrupt my credit cards or bankrupt my student loan debts". The correct legal term is "discharge". You discharge your obligation to pay on debts.
Certain debts are non-dischargeable in a Chapter 7 Bankruptcy. Examples of these are alimony and child support obligations, taxes less than three (3) years old, student loans (with the sole exception listed below), and any debts procured by fraud (fraud debts may be dischargeable in a Chapter 13), incurring debt without a reasonably certain ability to repay the debt, and so forth.
Assuming you need to file a bankruptcy, the only way to determine which Chapter to file under is to first compare your options under the other available Chapters. Generally, Chapter 7 Bankruptcy is the cheapest, quickest and least burdensome of the three major Chapters (the others being 11 and 13) of bankruptcy law. Costs and fees vary depending on the number of creditors you have, complexity of your case, and other factors.
If you are an individual, and meet the requirements, Chapter 7 Bankruptcy allows you to discharge most or all of your debts. It allows you to do this regardless of how many assets you have or how much your creditors ultimately receive. It basically allows you to walk away from your debts and start over.
Corporations do not receive discharges of debts, but there still may be some benefit to allowing a trustee to liquidate the assets.
What are some of the disadvantages?
You are only able to receive a discharge after eight (8) years have passed since the commencement of the last case in which you received a discharge, although you can file another Chapter 13 case sooner. Thus, you should not file a bankruptcy if you need the option of doing it again in the next eight years.
If you are a corporation, you must stop operating your business immediately upon filing the Chapter 7 Bankruptcy petition. Only under extraordinary circumstances will the Trustee operate a business.
Payments made to or on behalf of any relatives within twelve (12) months prior to filing your bankruptcy case are recoverable by the Trustee in your case. That's right. If you repaid money during that period to your brother, or made payments on a credit card that your mother let you use, they will have to pay back that money to your Trustee who will then distribute it equally to all your creditors. This is one of the biggest mistakes people make, often innocently because they don't know they will be filing a bankruptcy, but that's the law. It's designed to prevent debtors from preferring one creditor over another. The same is true for non-relatives, although the lookback period for them (such as credit cards, etc.) is only ninety (90) days and most people don't really care if their Trustee sues the credit card company to recover the money.
What about your credit?
The bankruptcy will appear on your credit report for up to ten (10) years after you file. Other accurate negative reports on your credit must be removed after seven (7) years (like late payments on credit cards, foreclosures, etc). However, according to my former clients, this is usually not as big a problem as most people think. Credit lending agencies know you won't be able to file another Chapter 7 bankruptcy for at least 8 years, and therefore, they don't have that risk to bear. You will not get as high a credit limit as you once had, or be able to borrow a large sum of money, but getting some credit (such as a secured credit card) shouldn't be that difficult, and you can rebuild your credit over time (generally two years). What you will likely face is higher interest rates, required higher down payments, more points, etc. Some people do have difficulty rebuilding their credit, but it is usually due to other factors besides bankruptcy, such as their employment record, other credit problems, etc. In any event, I can provide you with excellent materials for helping you rebuild your credit should you so desire.
A word about credit cards and cash advances
Any debt aggregating more than $1,150.00 from any single creditor for non-essential,"luxury" goods, or cash advances totaling over $1,150.00 on a credit card, incurred or taken within 60 days prior to filing the bankruptcy, are presumed to be nondischargeable. The obvious reason for this is to discourage would-be debtors from "running up" their credit charges, then filing bankruptcy. To be safe, do not use your credit cards for anything other than food, clothing and other essentials during this two month period (actually, it's best not to use them at all). It may also be considered grounds for objecting to your discharge if you have taken cash advances on one credit card to pay the minimum balances on the others, or if you transfer balances from one card to another shortly before filing bankruptcy. You should consult with your bankruptcy lawyer about your personal situation. This particular provision is just a presumption of nondischargeability. It does not mean that if you wait more than 60 days you are magically free from nondischargeability issues; nor does it mean that if you file the bankruptcy within the 60 days that you won't be able to discharge that debt. What it basically does is shift the burden of proving that the debt should or shouldn't be discharged onto the debtor during that 60-day period (rather than on the creditor where it would otherwise be).
What debts can be discharged?
Many debts are dischargeable in a Chapter 7 Bankruptcy case, with several notable exceptions. Your bankruptcy lawyer can tell you which of your debts can be discharged.
Discharging taxes and removing tax liens
Certain types of tax obligations, such as income taxes, may be discharged under specific circumstances. Many required factors must be met before any tax can be discharged under Chapter 7 Bankruptcy or Chapter 13 Bankruptcy. In Chapter 7 Bankruptcy, the minimum requirements for discharging federal or state income taxes are: (1) it has been over 3 years since the returns were last DUE (including extensions), (2) the returns were timely filed or it has been at least 2 years since the returns were filed, (3) there was no fraud involved or attempts to evade the tax, AND, (4) the taxes were not assessed within the last 240 days.
If it has been over 3 years since your returns were last due and they have not been assessed in the last 240 days, BUT you have not yet filed the returns or there was some kind of fraud involved in filing them, then they may be dischargeable in a Chapter 13 Bankruptcy. Again, discharging taxes is an extremely complicated area, and you should definitely consult with a knowledgeable bankruptcy lawyer before deciding whether to file based on dischargeability of your taxes and before you take any further steps with your taxes (such as filing past due returns). Sometimes filing a late return can work against you as far as being able to discharge those taxes in a Chapter 13 Bankruptcy, so definitely speak to a bankruptcy lawyer before doing anything.
Tax Liens that have attached to property will survive a bankruptcy. What does that mean? It means that the lien will stay against your property regardless of your discharge of the underlying debt. So, when you ultimately sell that property, if there is extra money available, the lien will be paid first from those proceeds unless you have the lien removed.
Discharging fraud judgements or debts where fraud may have been involved
Debts that you incurred which were the result of an intentional or even negligent misrepresentation on your part are not dischargeable in a Chapter 7. Examples of these might be if you misstated your income on a credit card application, made false statements in order to induce someone to give you a loan, ran up your credit card debt shortly prior to filing bankruptcy, used your credit card or obtained a loan without any intent to repay it, or if someone has obtained a court judgment against you based on fraud. However, the news isn't all bad. These types of debts may be discharged in a Chapter 13.
Can you be fired or denied employment because of a bankruptcy?
No. While an employer can usually find some reason to fire anyone, they cannot use bankruptcy as a basis for doing so. Again, this is set forth in Section 525 of the Bankruptcy Code.
Retirement accounts and pension plans
Whether or not you can exempt amounts held in a retirment account depends on numerous factors. According to the United States Supreme Court, if your retirement plan is ERISA approved, meaning that it contains a trust "anti-alienation" provision making it impossible to transfer or withdraw the funds prematurely, it is automatically exempt. Individual Retirement Accounts may be exempted only up to the amount reasonably necessary for the debtor's support and maintenance, taking into account all other anticipated and existing sources of income and expenses. Obviously, exempting retirement funds is very tricky and requires the expertise of an experienced bankruptcy lawyer.
So Why Do You Need A Bankruptcy Lawyer?
Some paralegal services charge a minimal fee to prepare and file the necessary paperwork to file a bankruptcy. While in some cases this may not be a major problem, it has been my personal experience that the risk is simply not worth it.
We are a debt relief agency. We help people file for bankruptcy relief under the bankruptcy code.
is a section of the Bankruptcy Code, which helps qualified individuals, or small proprietary business owners (NOT a corporation or partnership), who desire to repay their creditors but are in financial difficulty. Among other things, it offers great opportunities to pay off past due mortgage or car payments over 36-60 months, giving you time to catch up while retaining your property. It is often referred to as a "mini Chapter 11" because you usually repay something to your creditors and you retain your property and make payments under a Plan.
To be clear: Chapter 13 bankruptcy is a debt repayment plan for individuals, but often times the repayment can be anywhere from zero to 100% of your unsecured debt.
Chapter 13 Bankruptcy vs. Chapter 7 Bankruptcy - One purpose of a chapter 13 Bankruptcy, as opposed to a chapter 7 Bankruptcy, is to enable a debtor to retain certain assets (for example, your home) that might otherwise be liquidated by a chapter 7 Bankruptcy Trustee. It also provides an alternative to Chapter 7 Bankruptcy when you have too much "disposable income" (your net monthly income exceeds your net monthly expenses by too much) and usually yields much lower monthly payments than you were previously paying and (here's the real benefit), after 36 months, you are done! Your debts are gone.
The goal of most any personal bankruptcy is to discharge your existing debts by repaying all or a portion of your debts, and allow you a *fresh start* on your finances. In other words, once your discharge is granted, you no longer need to repay the debts that were incurred before you filed your bankruptcy.
Assuming you need to file a bankruptcy, the only way to determine which Chapter to file under is to first compare your options under the other available Chapters and be sure you have consulted with an experienced bankruptcy lawyer to properly analyze your options.
Who may file Chapter 13 Bankruptcy?
Only an individual with regular income who owes, on the date you file the petition, less than $307,675 in unsecured debt and $922,975 in secured debts. The debts used to calculate these limits must also be noncontingent and liquidated, meaning that they must be for a certain, fixed amount (or easily determinable amount) and not subject to any conditions or bona fide disputes. If they are legitimately disputed or not liquidated, then those amounts may not be factored into the debt limit calculations.
For cases filed after October 17, 2005, you may be required to do a Chapter 13 Bankruptcy if your annual income exceeds the median income for the region where you are filing and if the "means test" shows you have more than $100-$167 per month to pay to your creditors. Also at that time, your allowable monthly expenses will primarily be whatever is allowed under local IRS guidelines.
What are the benefits of Chapter 13 Bankruptcy?
Bankruptcy protects individuals from the collection efforts of creditors; permits individuals to keep their real estate and personal property; and provides individuals the opportunity to repay their debts through reduced payments.
You may be able to discharge debts in a Chapter 13 that would be nondischargeable under other chapters, for example, fraud judgments and certain tax obligations.
You may be able to get rid of junior liens on your real property. If the fair market value of your property is less than the total amount owed to the 1st mortgage, then you can eliminate the security interest to any junior lienholders and treat them as general unsecured creditors in your plan (thereby being able to possibly pay them less than 100%).
Certain tax repayments can be made easier by virtue of elimination of interest payments.
How does Chapter 13 Bankruptcy work and how long does it last?
First of all, you must have "regular income". Meaning, you must have some source of income that is regular, or at least can be averaged regularly on an annual basis, for example.
You are usually required to pay all of your disposable income to the Trustee (through your Plan) for 36 months (see below). Your disposable income is defined as: income received by you that is not reasonably necessary for the maintenance and support of you or your dependents. The key word in the definition is "reasonably". For example, if you are used to spending $2,000 a month on a car, you would not be allowed that much of an expense for that since that is not considered "reasonable". This is calculated by taking your monthly income and subtracting your reasonable monthly expenses.
Typically, the Plan payments last for 36 months, unless additional time is requested, but in no event will they last more than 60 months. Therefore, if your payment analysis shows, for example, that you can afford to pay $200.00 per month (above and beyond your normal living expenses), you would pay that each month to the Chapter 13 Bankruptcy Trustee, who would disperse it pro rata among your creditors. At the end of 36 months, you are discharged from all dischargeable unsecured debts, regardless of how much your creditors have received.
In addition to your plan payments, you must stay current with any ongoing obligations you have to secured creditors, such as on your mortgage. Chapter 13
Bankruptcy (or any chapter of bankruptcy for that matter) only affects debts that you owe on or before you filed the bankruptcy. Therefore, on your mortgages and other secured debts, your monthly Plan payment goes to pay any arrearages (past due amounts) that existed on the date you file and you can repay that arrearage over the life of the Plan; but, you must stay current from the filing date forward with any mortgage payments, etc.
Secured debts (your mortgages) must be repaid in full, but Chapter 13 Bankruptcy enables you to cure the defaults (reinstate the loans) over 36 months (or up to 60 months with creditor consent and court approval). You also have the ability to eliminate junior liens from your real property under certain circumstances and restructure mortgage and certain other payments.
Another thing to bear in mind is that approval of ANY Chapter 13 Bankruptcy Plan of repayment requires a determination by the court that the case is filed and the plan proposed in Good Faith.
How much will I have to pay each month?
The size of your monthly plan payments is determined by the amount you can afford to pay after paying necessary living expenses (including insurance, mortgage payments, etc.). You must prove your income to the Trustee. Usually this is done with paycheck stubs. In the case of a business, you would need to average out your income and expenses for the last 6-12 months. When calculating monthly expenses you should include everything you pay money for such as food, clothing, utilities, auto maintenance, etc. You cannot include payments on unsecured debts, since those will be discharged in the bankruptcy. Also, deductions from your payroll for retirement accounts are considered voluntary and, therefore, will be added back in to your total income. Assessing the amount you will pay in a Chapter 13 Bankruptcy is very tricky and is one of the reasons you need an experienced bankruptcy lawyer.
Another "catch" is that you must pay out at least as much in the Chapter 13 Plan as your creditors would have gotten if you filed a Chapter 7 Bankruptcy. Therefore, if you have a lot of non-exempt assets, you would need to account for this in your plan. Depending on what your disposable income is (see above), you may have to sell some of your non-exempt assets to fund your Chapter 13 plan. If this is the case, you might just as well file a Chapter 7 Bankruptcy, but not necessarily.
If you miss any payments at all that are due under your Plan, your case will be dismissed by the Court.
You cannot borrow money (incur new debt) exceeding approximately $250.00 during the pendency of your case (usually 3 years), without first obtaining court approval. This can be somewhat of a problem if, for example, your car lease expires and you need to get a new car during this period.
Although everyone’s situation varies, it may take as little as 24 months to re-establish your credit after filing bankruptcy.
However, you must be prepared to establish new lines of credit and pay timely. For most post bankruptcy filers, simply applying for secured credit cards and using them and paying them timely (no late payments!) will put them on track toward a good credit score within the 24 month period.
When considering whether to exercise your option to file under the U.S. Bankruptcy Code, assuming you qualify, consider the amount of debt you are carrying. For example, if you are carrying upwards of $30,000 of unsecured debt with only $200 dollars of disposable income to make monthly payments on said debt, it would take you 12.5 years to pay off the debt, assuming no interest and no settlement. Filing for bankruptcy would allow you to shed the debt and rebuild your credit over 24 months. The math is not too complicated here.
Bankruptcy may be your best option.
Under Section 506 of theUnited States Bankruptcy Code
, a Chapter 13 debtor may make a motion before the respective bankruptcy court to avoid the 2nd mortgage and reclassify it from secured to unsecured so long as the 2nd mortgage, in light of the current property value, is fully unsecured.
For example, imagine property owner has an existing 1st mortgage with a principal balance of $500,000 and a 2nd mortgage with a principal balance of $100,000. Imagine too that given market conditions, the property is now valued at $450,000. Under this example, the 1st mortgage is secured up to $450,000 and unsecured in the amount of $50,000. As for the 2nd mortgage, there is absolutely nothing left. The 2nd mortgage is indeed fully unsecured. Hence, the 2nd mortgage can be avoided under a Chapter 13 bankruptcy.
No doubt, given the collapse of the housing market, this provision of the bankruptcy code has proven to be a powerful tool in the hands of consumer bankruptcy attorneys in their effort to obtain financial relief for consumer debtors.
Bankruptcy may be your best option.
is known as ‘‘straight’’ bankruptcy or ‘‘liquidation.’’ It requires an individual to give up property which is not ‘‘exempt’’ under the law, so the property can be sold to pay creditors. Generally, those who file chapter 7 keep all of their property except property which is very valuable or which is subject to a lien which they can not avoid or afford to pay.
is known as ‘‘reorganization,’’ is used by businesses and a few individuals whose debts are very large.
is reserved for family farmers and fishermen.
is a type of ‘‘reorganization’’ used by individuals to pay all or a portion of their debts over a period of years using their current income. Most people filing bankruptcy will want to file under either Chapter 7 or Chapter 13. Either type of case may be filed individually or by a married couple filing jointly.
Chapter 7 (Straight Bankruptcy):
In a bankruptcy case under Chapter 7, you file a petition asking the court to discharge your debts. The basic idea in a Chapter 7 bankruptcy is to wipe out (discharge) your debts in exchange for your giving up property, except for ‘‘exempt’’property which the law allows you to keep. In most cases, all of your property will be exempt. But property which is not exempt is sold, with the money distributed to creditors.
If you want to keep property like a home or a car and are behind on the mortgage or car loan payments, a Chapter 7 case probably will not be the right choice for you. That is because Chapter 7 bankruptcy does not eliminate the right of mortgage holders or car loan creditors to take your property to cover your debt. If your income is above the median family income in your state, you may have to file a chapter 13 case.
Chapter 13 (Reorganization):
In a Chapter 13 case you file a ‘‘plan’’ showing how you will pay off some of your past-due and current debts over three to five years. The most important thing about a Chapter 13 case is that it will allow you to keep valuable property— especially your home and car—which might otherwise be lost, if you can make the payments which the bankruptcy law requires to be made to your creditors. In most cases, these payments will be at least as much as your regular monthly payments on your mortgage or car loan, with some extra payment to get caught up on the amount you have fallen behind.
You should consider filing a chapter 13 plan if you:
- Own your home and are in danger of losing it because of money problems
- Are behind on debt payments, but can catch up if given some time
- Have valuable property which is not exempt, but you can afford to pay creditors from your income over time
You will need to have enough income during your Chapter 13 case to pay for your necessities and to keep up with the required payments as they come due.
Bankruptcy may be your best option.
In most cases you will not lose your home or car during your bankruptcy case as long as your equity in the property is fully exempt. Even if your property is not fully exempt, you will be able to keep it, if you pay its non-exempt value to creditors in Chapter 13. However, some of your creditors may have a ‘‘security interest’’ in your home, automobile, or other personal property. This means that you gave that creditor a mortgage on the home or put your other property up as collateral for the debt. Bankruptcy does not make these security interests go away. If you don’t make your payments on that debt, the creditor may be able to take and sell the home or the property, during or after the bankruptcy case.
In a Chapter 13 case, you may be able to keep certain secured property by paying the creditor the value of the property rather than the full amount owed on the debt. Or you can use chapter 13 to catch up on back payments and get current on the loan.
There are also several ways that you can keep collateral or mortgaged property after you file a Chapter 7 bankruptcy. You can agree to keep making your payments on the debt until it is paid in full. Or you can pay the creditor the amount that the property you want to keep is worth.
In some cases involving fraud or other improper conduct by the creditor, you may be able to challenge the debt. If you put up your household goods as collateral for a loan (other than a loan to purchase the goods), you can usually keep your property without making any more payments on that debt.
Bankruptcy may be your best option.
Yes and No. The term ‘‘secured debt’’ applies when you give the lender a mortgage, deed of trust, or lien on property as collateral for a loan. The most common types of secured debts are home mortgages and car loans. The treatment of secured debts after bankruptcy can be confusing. Bankruptcy cancels your personal legal obligation to pay a debt, even a secured debt. This means the secured creditor can’t sue you after a bankruptcy to collect the money you owe. But, and this is a big ‘‘but,’’ the creditor can still take back their collateral if you don’t pay the debt. For example, if you are behind on a car loan or home mortgage, the creditor can ask the bankruptcy court for permission to repossess your car or foreclose on your home. Or the creditor can just wait until your bankruptcy is over and then do so. Although a secured creditor can’t sue you if you don’t pay, that creditor can usually take back the collateral. For this reason, if you want to keep property that is collateral for a secured debt, you will need to catch up on the payments and continue to make them during and after bankruptcy, keep any required insurance, and you may have to reaffirm the loan.
Bankruptcy may be your best option.
In most cases, student loans cannot be forgiven by a bankruptcy. Almost all student loans are federal debts. The only way to have a federal student loan forgiven is if you are permanently disabled. Otherwise, the loan must be repaid.
In almost all cases, you have to fill out the FAFSA or Free Application for Federal Student Aid. A federal student loan cannot be included in a Chapter 7 or a Chapter 13 bankruptcy. If you are making payments toward your federal student loans and you are filing Chapter 13 bankruptcy, the amount that you are repaying is taken into consideration in figuring your payment that you will make to the trustee.
If you are permanently disabled and getting Social Security Disability, you can ask the lender for the paperwork to complete to have your student loans forgiven. This means, because you are disabled, you do not have to repay your loans. The paperwork must be completed and approved by the lender.
It is often the case that your student loans can be placed in deferment so that you do not have to make your payments while you are having financial difficulty. You can also request forbearance due to financial hardship. Ask your lender which you may qualify for. If you are eligible for a forbearance or deferment, the lender can send you the paperwork to sign.
Your bankruptcy attorney should be informed that you have student loans, despite not being able to include them in the bankruptcy. They are a part of your financial situation and your attorney may need to report them during the bankruptcy process. The court does look at your entire financial scenario when they are approving your case.
If you are filing for a Chapter 13 bankruptcy, you will be repaying part of your debt to the trustee of the court. The amount that you pay monthly is determined by your income, your secured debts and your financial obligations. If you have a delinquent student loan, you will need to work out payment arrangements with the lender before your bankruptcy is filed so that you can report the payments to your attorney. Otherwise, you may end up paying a higher amount than if it were calculated at the time that your trustee payment is determined.
Bankruptcy may be your best option.
In a Chapter 13
bankruptcy, the taxes will be calculated in the trustee payment. You will pay on your bankruptcy for the time specified by the court. This is normally five years. At the end of the bankruptcy, you will no longer owe on the debt. Therefore, if you have taxes owed for several years and you file bankruptcy, you will no longer owe the taxes once your case is discharged.
In some cases, you may be able to have your tax debt reduced. You would need to talk with a tax consultant in order to do this. Check first with your bankruptcy attorney to find out what you will need to do. Your attorney may tell you who to contact at the local tax office.
There are different rules governing the issue of tax debt relief in different states. You may owe for taxes for your state or to the Internal Revenue Service. If you have received a letter from either your state revenue department or the IRS, take that with you to your attorney. Your attorney should explain the process to you and advise you as to what you must do to have the debt taken care of.
In most all cases, there is a way to either include a portion of the tax in the bankruptcy or have a portion of the debt forgiven. Do try to work this out prior to your bankruptcy court date. This is often a difficult process that involves several people. Paperwork has to be filed and documentation must be completed to resolve the debt. Give yourself time to complete each process. It will be well worth the time involved to resolve the debt.
Bankruptcy may be your best option.
Should I consider a debt settlement program?
Dangers of debt counseling
Be a savvy consumer of debt counseling or debt management programs. It is an unfortunate truth that not everyone offering to help you get control of your finances has your best interests (as opposed to their own) at heart.
Approach debt consolidation loans with skepticism
While a loan to consolidate all of your debt into a single obligation is appealing and may have a lower interest rate than credit card interest rates, make sure that you can really
repay that amount.
Understand clearly the term, interest rate, and fees associated with the loan. It may be that even lowering the interest rate does not make your present debts manageable; it just postpones the day of reckoning.
Find out whether the loan will pay off over the life of the loan, or whether you will owe a "balloon" payment at the end. For most borrowers, balloon payments are just an invitation to another loan, and you never get free of this debt!
Home equity loans may put your home in jeopardy
If you can't pay your present unsecureddebts, all your creditor can do is sue you and try to collect any judgment it gets. If you can't pay your home equity loan, you may lose your house in foreclosure.
Most states provide an exemption that protects a given amount of equity in your home and puts that equity beyond the reach of your creditors. If you voluntarily pledge that equity to a home equity lender, the exemption no longer protects the pledged portion of your home's value.
Understand the program
If you participate in a program where a service negotiates with your creditors or makes payments on your debts for you, understand whether the service promises to lower the total you owe or the interest rate you pay, or just promises to lower the payments you make every month, without significantly changing your obligation.
Know what happens if a creditor won't negotiate
The debt settlement model in which you set aside money with a third party who will attempt to negotiate a reduced payoff seldom solves the entire problem. Creditors seldom accommodate such approaches which is why the debt settlement company pays themselves first. In our opinion, the plan is bound to fail.
Make sure the program deals with all your debt
Some debt counselors confine themselves to dealing with your unsecured commercial creditors, excluding your obligations for non dischargeable child support, unpaid taxes, or the crushing car loan. In effect, they ignore the debts that are most important, while channeling your money to creditors whose claims could be discharged in bankruptcy.
There are several debt management programs with modest cost to you, the client. Approach fee-based services with caution and make sure that the service is worth what it costs. Many debt counseling programs advertising themselves as "non profits" may be fronts for profit making entities more interested in their own pocketbook than yours Chapter 13 is a more reliable alternative.
Beware of tax consequences
The IRS treats debts that are forgiven or reduced, outside of bankruptcy, as taxable income. That means that if your creditor agrees to settle the debt for 50% of what you owe, the other 50% will be reported to the IRS as income, just as if they had written you a check for that amount! Under some circumstances, you can avoid cancellation of debt income, but it raises a complicating factor when you compromise debts outside of bankruptcy.
Make sure that you don't worsen your situation by enlisting others to help with debt management. While it is comforting to have an ally in your struggle to pay your bills, make sure that their help is really helpful.
Remember that Chapter 13 is a repayment plan in which you propose the percentage that you can repay creditors and upon confirmation, the court makes it binding on creditors.
Consider this scenario:
Crystal has $12,000 in credit card debt, and ABC Debt Settlement Company advertised that they can settle credit card debts for 50 cents on the dollar. We’ve all heard the ads “Do you have more than $10,000 in credit card debts? Banks got their bailout, now it’s time for yours.”
When Crystal contacts ABC about the program, ABC advises her to stop paying her debts in order to show the credit card companies whose boss. ABC has her sign a $515 a month electronic funds transfer from her bank account. This money will be put into an account to use to settle with her credit cards, but guess what? ABC has no agreements to settle anything with anyone. But they keep collecting the $515 a month.
Crystal starts getting tons of hate mail and calls from collectors but ABC just tells her to sit tight. "Can’t she see how desperate the banks are getting now?" She goes to get an auto loan, and is shocked to hear that her credit is completely trashed. Eventually she gets sued, but ABC says “don’t worry, there is no need to go to court. Once the suing company gets a judgment against you, they’ll be even more desperate to settle with you.” Then her wages get garnished and she finally, after paying $6,180 over a whole year, calls and asks to cancel the program and recover what is in the account. No debt has been settled yet.
How much does she get? Let’s see, that’s $6, 180 she has paid, less the $349 set up fee, less a $24.95 a month administrative fee for 24 months, or $598.80, but all charged up front in advance, a $19.95 monthly maintenance fee for each of the 12 months or $239.40, less a $249 termination fee, and we are at $1,436.20 left in the account. However, the company then claims that because Crystal chickened out and did not stick to the program, not ABC’s problem or fault, ABC is still entitled to its agreed-upon 20% fee on the total debt to be settled (which is now $18,000 due to all the late fees, etc.), so that fee is $4,500. Here you go Crystal, here is what you get back….$243.80..after paying $6,180.
Far fetched? I wish.
Legal? If so, why on earth?
Bankruptcy may be your best option.
The New York State Homestead exemption is in place to protect equity in Real property, including co-op, condo, or mobile home, to $150,000 for the counties of Kings, New York, Queens, Bronx, Richmond, Nassau, Suffolk, Rockland, Westchester, and Putnam; $125,000 for the counties of Dutchess, Albany, Columbia, Orange, Saratoga, and Ulster; $75,000 for the remaining counties in the state. (husband & wife may double)
New York law allows you to use the exemptions found in the U.S. bankruptcy code (11 U.S.C. § 522(d)
) or the exemptions provided under New York law. However, you cannot mix and match exemptions from the federal bankruptcy code and state law. You must choose one system or the other.
However, if you use the state law exemptions, there are a few U.S. 'non-bankruptcy' exemptions (that is, exemptions that exist outside of federal bankruptcy code) that you can use in addition to your state law exemptions. The four most significant non-bankruptcy exemptions are for:
- Wages (a general cap on what percentage of your wages can be garnished)
- Social Security benefits
- Civil Service benefits, and
- Veterans Benefits
Other non-bankruptcy exemptions mostly deal with various benefits to government and military personnel, with a few odd laws regarding specially regulated labor markets such as railroad workers, merchant sailors, and longshoremen.
NOTE: Federal Exemption amounts listed below reflect the April 1, 2010 adjustment for inflation every three years, and therefore do not match the figures shown in the federal exemption statutes. Click here for the April 1, 2010 inflation adjustments to Federal bankruptcy exemption amounts, published in the Federal Register
Can you double exemptions for joint filers? (General principles)
If you are married and filing together, you and your spouse must use the same law; one cannot use federal law while the other uses state law. However, the exemption law chosen applies separately to each spouse. Thus, it is generally possible to double the amount of state law exemptions, Cheeseman v. Nachman, 656 F.2d 60 (4th Cir. 1981)
(married couple filing a joint petition was entitled to double the Virginia homestead exemption), unless state law (e.g. California) specifically prohibits a couple from doubling certain exemptions. See First National Bank v. Norris, 701 F.2d 902 (11th Cir. 1984)
(Alabama); Granger v. Watson, 754 F.2d 1490 (9th Cir. 1985)