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Bankruptcy can help in a myriad of ways. One, it’s going to eliminate a serious amount of stress in your life. No one likes to see a pile of debt that they cannot pay and wonder how they are going to pay it. Second and maybe the most obvious reason is it’s going to eliminate all your debt whether in a complete fresh start bankruptcy in a Chapter 7 bankruptcy during a four-month period. Or in a 3 to 5 year repayment plan through a Chapter 13 bankruptcy. You will be debt free at the end of your bankruptcy.
Also, it’s going to allow you to catch up on your home. If you have fallen behind on several mortgage payments due to an illness or a job loss, but you are now back to work and you can catch up by paying the mortgage plus a little extra every month. You are going to be able to protect your assets and keep your house which you have worked so hard to save.
Bankruptcy will also help you if you owe payments to the government. What of the main reasons people file Chapter 13 bankruptcy is for parking tickets. People get seriously far behind on parking tickets, has several tickets and they often get their license suspended or a boot put on their car or their car towed and a Chapter 13 bankruptcy can allow you to force the government into a repayment plan to where you can get your car back right away; get the boot off your car.
Well, there are any myriad of reasons why an individual might file bankruptcy. The first is they just have fallen too far behind whether because of illness or a job loss or just feeling overwhelmed and they need a fresh start. They will often take advantage of a Chapter 7 bankruptcy. Chapter 7 bankruptcy is going to improve your life in a lot of ways. One way is it’s going to eliminate a lot of stress. We all know how hard it is to deal with debt that you just don’t know how you’re going to pay back. Dealing with constant creditor calls, constant harassment from creditors, constant letters and a constant feeling of swimming around in a circle and never really getting anywhere.
Other reasons that people file Chapter 7 bankruptcy are to save assets and protect assets. For instance, if you were to become sick and fall several payments behind on your mortgage, you could file Chapter 13 bankruptcy and catch up from what you are behind on your mortgage over five years as well as paying the mortgage going forward. This is often a powerful tool with cars as well where if you fall behind on a car and it gets repossessed, you are able to catch up on the car, even sometimes extending the loan and getting a better interest rate on that car.
There are two basic programs that are available for consumers who are looking to file bankruptcy. The first is called Chapter 7 bankruptcy which is complete, fresh start bankruptcy. Basically what a Chapter 7 bankruptcy will do for you is eliminate all credit card debt, medical debt, personal loans, cash advances and payday loans and some tax debt for individuals. Some of the things that Chapter 7 will not eliminate are student loans and recent income tax debt.
Also available for consumers are a Chapter 13 reorganization of your debt; Chapter 13 is a good tool for someone who has fallen behind but now has the ability to catch up but needs to hold off creditors while they are allowed to do so.
This is the case of Guermo Gomez who comes to me from Franklin Park, Illinois seeking debt relief. Mr. Gomez has never filed a bankruptcy before. He does not own any real estate and he currently lives with his family. He rents from his father on a month to month lease. He does not own or operate a vehicle. He has a checking and savings account with very little in it, minor household goods and very little in the way of clothing. He does have a 401(k) which is protected in the amount of $20,000.
He is currently single but he does have for dependent children ages nine, five, four and three. He has been working the past seven years as a driver for a grocery store earning approximately $77,000 per year; when we break that down per month, that’s about $3900 net in pocket per month.
In terms of monthly expenses, he’s got approximately $3900 as well. That between the $800 in rent, $220 and cell phone, $1300 for food, $600 for clothing, $120 for laundry, $600 for transportation and $180 for auto insurance. You have to remember, his food budget is very high because he has a lot of mouths to feed in his house with his minor children.
In terms of a Statement of Financial Affairs, he did have an auto that was repossessed a couple years back. He did have a small business that he has no equity in and he’s not going to move forward with. And he has not received any kind of unemployment or workers compensation. There are no co-debtors. He owes for no student loans and he owes no income tax debt.
Let’s talk about what Mr. Gomez does have and that is Pay Day loan s and credit cards of approximately $15,000. Based on this situation, even though Mr. Gomez is making a fair amount of money, I would recommend a Chapter 7 fresh start to eliminate the credit card, stop the Pay Day loan harassment and get back on his feet. So Chapter 7, Mr. Gomez, that’s what I recommend for you in your particular situation.
This is the case of Darva Simmons who comes from Elmhurst, Illinois seeking debt relief. Ms. Simmons file a Chapter 7 bankruptcy over eight years ago so she is eligible for another Chapter 7 should that be necessary. She owns no real estate. She is renting a month-to-month lease and the landlord lives in Elmhurst, Illinois. She has a 2010 Kia Soul that is co-owned and she would like to keep paying for that vehicle. She is currently up to date. Her monthly payment is $425 and she owes about $12,000 on that vehicle.
In terms of personal property, she has a checking account at Chase Bank with a very nominal value. She has minor household goods and minor clothing. She does have a security deposit on hand with her landlord $1045. She did get a tax refund in 2011 but the refund was not significant. She does not have the ability to sue anybody for personal injury or workers compensation and she does not expect to inherit any money in the next six months.
She is married and she does have one minor child, an 18-year-old daughter who is still living in the house. She works as an office administrator at the University of Illinois and her husband is a laborer with Aramark.
In terms of monthly income, she and her non-filing spouse have approximately $3600 coming in per month between the two of them. When we look at her monthly expenses, there is $1045 for rent, $225 for electric and gas, $250 for telephone, $30 for Internet access, $400 to $500 for transportation, $100 for recreation, $150 per month for charity, $143 per month for auto insurance and $425 per month for an auto payment. Joe also helps contribute to the college cost of her daughter who still lives at home for her living expenses.
In terms of the Statement of Financial Affairs, Ms. Simmons makes approximately $25,000-$30,000 per year depending on overtime. She was recently garnished for a dental bill and she did have a prior address from 2008 to 2010 in Elmhurst, Illinois. The only co-debtor is on her vehicle with her spouse she owes no student loans and she does not owe any tax debt, state or federal. She does have a Comcast bill and she does have a personal loan and a credit card bill.
The debt is not excessive and I do feel she has a couple options here. First, Ms. Simmons could try to work out installment payment plans with the creditors and pay for it on her own without needing to file for bankruptcy. If, however, she feels she cannot be successful with those creditors or they won’t work out any kind of deal, then Ms. Simmons can avail herself of Chapter 7 bankruptcy protection. She can continue to make her car payment; that is called reaffirming a debt. And she can eliminate the rest of her miscellaneous debt. So Chapter 7 is a possibility for Ms. Simmons from Elmhurst, Illinois.
This is the case of Dan and Emily Rady who come to me from Chicago, Illinois. They are here to talk to me about Chapter 7 or Chapter 13 bankruptcy.
In terms of information concerning their debt, they have real estate with an approximate equity of $25,000. They each have a vehicle but there’s very little in the way of equity in the vehicle. The husband is up-to-date on his car payments; wife is not up-to-date on her car payment. In terms of income and expenses, there seems to be a little bit of excess income if we eliminate the amount that they are paying for credit cards which is $650 in minimum payments per month. Since neither person has filed bankruptcy before, they are still eligible for either Chapter, whether it is a Chapter 7 or a Chapter 13.
However, we want to do what’s best by the clients. We want to make sure that if there is disposable income per month that the clients submit to a Chapter 13 repayment plan which could effectively lower the amount that they are paying for their cars and all of their remaining debt. We are going to do this by looking at their paycheck stubs and scrutinizing their expenses. Once we put that information into the bankruptcy software, I will be able to determine whether or not the Chapter 13 plan is feasible and more importantly or equally importantly, what is the amount that they are going to have to pay per month and what is the percentage that the unsecured creditors are going to receive under their plan.
An experienced bankruptcy attorney will be able to manipulate the numbers, enter the proper numbers and make the proper adjustments so that the clients will be paying the proper amount to the Chapter 13 trustee over the course of 3 to 5 years.
Just on my vision of the paperwork in front of me, I do believe that a Chapter 13 would be in their best interest. I simply don’t know at this point what the exact dollar figure that I would propose to the Chapter 13 trustee. However, once we do a Chapter 13, these clients will no longer have to make a car payment directly and since wife was behind on her car payment and subject to repossession, the Chapter 13 will stop any risk whatsoever of the vehicle being repossessed. Provided the clients can make their trustee payment on time each month, the creditors will have to accept that plan payment and they will be prohibited from contacting the debtors, trying to collect on the debtors and most importantly, prohibited from trying to repossess the vehicle. So my strong recommendation is a Chapter 13 for Mr. and Mrs. Rady from Chicago.
The hottest topic in South Florida is the real estate "short sale." Actually a short sale is nothing new, but it now quite the vogue. A short sale basically means that the mortgage lender (or lenders) agree to satisfy its mortgage lien and allow the transfer of the real estate in exchange for receipt of less than the full amount of the amount due on its mortgage loan. In a short sale, the real estate is sold to a buyer who obtains a new mortgage. As the net proceeds of the sales price is less than the full amount due on the mortgage lien(s), the mortgage holder(s) must agree to accept a "short" payoff in exchange for release of its mortgage lien.
Despite this basic definition, there is more involved with the short sale and whether it is actually beneficial to the homeowner facing foreclosure. The fact that the internet is full of courses, books, and seminars offering to turn out "short sale experts" should in and of itself advise caution.
It is been my experience so far that many homeowners facing foreclosure seek out the "short sale", but do not entirely understand the process or many of its implications. Some do not even seem to understand where they stand on various issues even after a "short sale" supposedly took place. Apparently, one of the short sale's greatest boosters, at least at present, is the real estate broker or other "third party negotiator" who would earn a commission upon the closing of a short sale.
At this time, it seems that substantially more are failing to achieve a short sale than are those who have achieved one. Many seem to seek out the short sale as almost a holy grail and advise that they are in the "process of a short sale", but few have actually advised that they have completed one. Many seem to indicate frustration in the attempt to communicate with the mortgage lender(s) and/or actually complete a short sale.
Apparently the most difficult item in the short sale process is communicating with the lender and any second mortgage holder, such as a "home equity loan." In addition to the agreement of the first mortgage holder, the agreement of any junior mortgage holders must also be obtained. Outstanding judgment or tax liens may also be an issue as the buyer would need to receive clear title.
One of the most important issues in the short sale is whether the homeowner is actually released from liability for the "short" or unpaid amount. If the mortgage company and/or the second mortgage company do not release a person from liability for the unpaid portion, the benefit of a short sale to a homeowner may be questioned.
Another important issue is the federal income tax consequences. If the unpaid mortgage debt is forgiven, "discharge of indebtedness income" may be implicated. Discharge of indebtedness income basically involves the recognition as income for federal income tax purposes of the discharged mortgage debt. But there are various exceptions to the recognition of discharge of indebtedness income, such as the insolvency exception or discharge in bankruptcy. Although a form 1099 may be issued as to the homeowner/seller to the IRS, one of the various exceptions to the rule may apply and income taxation on the discharge amount may not be due. A complete analysis of this issue should be completed before one commits to undertake a "short sale."
Many seem to seek out the short sale to "save their credit." One should try to get the best understand possible of whether a short save will actually save or protect one's credit from the reporting of a foreclosure. In general, a credit reporting agency may report accurate information on your credit report. Although a "foreclosure" may not be reported on one's credit, a mortgage delinquency may. One may question the effective difference.
A short sale may be in the mortgage lender's supposed "best interest." But one should realize that many lenders may be under contractual or regulatory restrictions that may not permit them to agree to a short sale. Furthermore, one may actually be communicating with the lender's loan servicer and not the actual mortgage lender.
The apparent word on the street is that a short sale takes many weeks to pursue and that you need to furnish substantial documentation. One may need to furnish personal financial information such as paycheck stubs, bank statements, 401(k) statements, and tax returns. One may also need to further information about a hardship.Jordan E. Bublick, Miami and Palm Beach, Florida, Attorney at Law, Practice Limited to Bankruptcy Law, Member of the Florida Bar since 1983
Be careful if you are contemplating a bankruptcy and you hold title to real property. Even if you don’t believe you have any equitable interest in the home, a bankruptcy trustee may disagree with you.
A common scenario is where you take title to a residence your relative owns. Imagine your parents want to leave their home to you as a probate avoidance device. Well, perhaps they should have executed a trust or will, but they didn’t. They transferred title to you. You never paid the mortgage, you never lived there at the home, you never had anything to do with it. You believe you just hold bare legal title.
Now imagine you file chapter 7 bankruptcy. All your assets get put into the bankruptcy estate. Does your parent’s home go into the estate? That’s a tough question to answer. Perhaps if you can prove your parents transferred title as a probate avoidance device (resulting trust anyone?), you can convince the trustee you have no equitable interest in the property. However, are you certain you will be able to convince the trustee? If you aren’t sure, it is probably unwise to file chapter 7 bankruptcy where you can’t risk the uncertainty of having your parent’s lose their home.
The bankruptcy trustee has the status of a hypothetical bona fide purchaser for value under 11 U.S.C. § 544(a) (3) – this says that a bankruptcy trustee takes free of any interest in real property that could be avoided by a hypothetical bona fide purchaser. In California, a prudent purchaser analysis is required whereby it is critical to determine who is in possession of the property, among other things. So where the persons living in the property are not the same as the title holder, this could be construed in some cases as constructive knowledge on the part of a hypothetical purchaser, and in turn, the bankruptcy trustee. However, if you are contemplating bankruptcy and live in a home in which you claim you only hold bare legal title, this could represent an insurmountable issue for one to overcome.
Bare Legal Title arguments are complicated and fact intensive. Each case turns on the facts and laws of each state. Be careful when filing bankruptcy if you hold legal title to real property or any property that you do not actually believe is yours. If you hold bare legal title, work with a knowledgeable attorney to ensure you have a chance of keeping such property out of the estate. Otherwise, prepare for trouble if you don’t do so.
In all chapter 7 individual cases where consumer debts are at issue, the persons filing for chapter 7 bankruptcy are subject to the Chapter 7 Means Test within official Bankruptcy Form 22. Again the means test, in short, determines whether or not you have too much disposable income for purposes of filing for chapter 7 bankruptcy.
What happens though if you do not pass the means test? Is all hope lost? Well, the answer is not always. You can file at another time, typically in the future, if your household income will decrease or face significant reduction for whatever appropriate reason. But if you must file the bankruptcy case now, and you don’t otherwise qualify under the Means Test, then a presumption of abuse under Form 22 must be checked. In other words, someone who files chapter 7 bankruptcy and shows too much discretionary income is subject to the presumption of abuse. Thus, the United States Trustee must determine whether they will dismiss or convert the chapter 7 case to chapter 13 or another chapter of bankruptcy.
Now, it is possible to overcome the presumption – Section 707(b)(2)(B)(i) of the Bankruptcy Code says it is. Persons filing bankruptcy would have to demonstrate special circumstances that rebut the presumption of abuse, such as a serious medical condition, loss of income, retirement, etc. There must be an explanation to the US Trustee’s satisfaction that the debtors’ income and/or expenses have changed and there is no reasonable alternative to it. In essence, debtors must show that any such disposable income that is reflected on the Means Test pursuant to Form 22 is no longer the case, that it is no longer an accurate or realistic reflection of household income for the debtors.
In such limited circumstances, it is possible to establish that debtors are entitled to file chapter 7 bankruptcy even though they do not initially appear to qualify. The California Chapter 7 Bankruptcy Means Test can be complex and requires the analysis of a knowledgeable bankruptcy attorney. With the help of the right attorney, it is possible to overcome the presumption of abuse, and it is more than possible to successfully file for California chapter 7 Bankruptcy.
Should I Get a Debt Consolidation Loan to Pay Off My Credit Cards? 
Alan Henry Dear Lifehacker,
I've racked up a good bit of credit card debt, and while I'm slowly paying it down, it's a pain wrangling multiple bills with different interest rates. My credit union is offering debt consolidation loans with a lower rate than any of my cards—should I take that, use it to pay off all of my cards, and only have one, low-interest bill to pay every month?
Sincerely,
Trying to Dig Out
Dear Trying to Dig Out,
It's tempting, isn't it? Getting rid of all of your credit card bills, no more annoying multiple payment to multiple creditors, just one, automatic loan payment every month that comes out of your account automatically and you're back on the road to being debt free, right? Well sure—but it comes with a couple of pretty big caveats that might sour the milk for you. Let's explain, and then you can decide whether it's a good idea in your case.
When Debt Consolidation Loans Don't Make SenseFull size
In more cases than not, debt consolidation loans don't make sense. They're certainly attractive: the lure of being able to pay off all of your credit cards is a strong one, especially in exchange for a single monthly payment to your bank or credit union at a lower interest rate. It's definitely a tantalizing opportunity, but it's not perfect. Remember, debt consolidation loans are financial products, which means financial institutions wouldn't offer them to you if they didn't make money from them. Here are a few tips to make sure you're not falling into a trap:
- Do the math on your credit cards and their interest rates, and figure out how long it would take you to pay them all off at your current payment rate. Compare that to the length of the consolidation loan you're looking at taking out. Your average 5 year (60 mo) debt consolidation loan, even at a lower interest rate than your credit card, may cost more over the long haul than if you just paid your cards down faster. Photo by 401(k) 2012.
- Check what your monthly payment on a debt consolidation loan would be. Are you at least paying that much towards your credit cards now? If the loan payment is more than you pay towards your debts (and it fits into your budget), it might be time to up the ante and just put more money to your credit cards. If the loan payment is less than you pay to your cards, you'll likely wind up paying way more interest over time, since your loan term will probably be long.
- Once your cards and debts are paid off, will you cancel the credit cards? Sure, you get credit cards with zero balances and no bills out of the loan, but one of the biggest problems with debt consolidation loans is that they do nothing to change the behaviors that got you into debt in the first place. Instead, they add another creditor to your pile, and fan the flames of going into debt to pay off more debt. If you even think you might be tempted to use those cards again after paying them off, or if you're using debt consolidation as an easy out or way to avoid really looking at your budget, it's not right for you. The last thing you want is to take out a loan, pay off your cards, and then charge up your cards again—now you've done nothing but dig your hole twice as deep.
When Debt Consolidation Loans Make SenseFull size
If you're hopelessly drowning in debt, know that you can't negotiate any lower interest rates with your credit card companies or creditors, or if the math works out, a debt consolidation loan may be a good decision for you. Similarly, if you're in serious trouble with high interest rates, high monthly payments (that you're having trouble with already), and too many bills, a debt consolidation loan might help. Combined with a debt repayment plan or credit counseling, it can be used to pay off all of your debt at a fraction of their original cost. If it may be a good time to strike, pay it all off, and walk away debt-free. Photo by erules123. Of course, those situations aren't the norm, and most of us with credit card bills looking to get rid of them aren't in that position. That's not to say there aren't situations where debt consolidation loans can offer people who really need them the breathing room to get out of debt and organize their finances. ReadyForZero has a great post on this topic, and showcases some examples of when debt consolidation can be a good choice—and even save you money on interest while getting you out of debt faster.
It All Comes Down to Mathematics and BehaviorFull size
It may seem attractive to just take out a nice big loan, pay everyone off, and only deal with that one monthly loan payment—one you can even have automatically taken from your checking account every month—but all you're really doing is paying a financial institution to do something for you that you can do on your own. It feels great not to get a bunch of bills in the mail or fret over who you pay when and how much, but you can do the same thing on your own:
- Start by creating a realistic budget.
- Then decide whether you want to pay highest interest cards first or lowest balance cards first.
- Set up auto-pay so you're paying more than the minimum payments every month, paperless billing so you don't get the bills in the mail (although you should still review them every month), and let your money manage itself.
Still, even if the math of a debt consolidation loan works out in your favor, your behavior may be the real problem. Paying off all of your credit cards and debts with a loan only shuffles the deck chairs around—you still owe money you have to pay, and if you go charging up those freshly paid-off credit cards again, those deck chairs may as well be on the Titanic.
Make no mistake: if you want help with your debt, you should get it. Don't let social stigma or ego get in the way—there are plenty of ways to get on the right track that go further than blog posts and stop short of putting you back in debt to someone else. Debt repayment and credit counseling programs can negotiate lower interest rates on your behalf, or help you do it yourself. They can help you with your budget, and help you plan a route out of debt that turns your credit into a tool you control, as opposed to a monster than controls you. If you need the help, get it—and definitely do that before you take out a loan. Photo by Media Bakery13 (Shutterstock).
Good luck,
Lifehacker
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