Bankruptcy
Negotiations with creditors have failed. Repossession is imminent and
foreclosure proceedings have begun. Your income is simply not sufficient to pay
your bills, no matter how low the payments are. It may be time to consider
bankruptcy.
Bankruptcy law evolved as a reaction to the abuses surrounding debtors
prison. Before the nineteenth century a prison system existed for those who
didn't pay their bills. If a merchant filed a claim, the debtor was incarcerated until
his debts were paid. (Women were not found in debtor's prison, not because of
chivalry but because they did riot have the ability to borrow). The lender was
legally responsible for the expenses of the prison stay, including food, but
seldom paid. After all, a debtor would have to sue in order to enforce this law,
and it was rather difficult to sue when in prison. As a result, many borrowers
languished in prison for years, surviving on what their family could bring to them
or, in many cases, simply starving to death. Although some lenders would
doubtless not object to the renewal of debtor's prison, fortunately we live in more
enlightened times. Bankruptcy was created to provide a second chance (or
third, or fourth) to those hopelessly in debt It provides a mechanism to wipe the
slate clean and begin anew. As times have changed, though, so has the
bankruptcy code. Not all debts can be wiped out. The proceedings can be
easily disqualified in the event of improper procedures. There are many things a
debtor should know before resorting to bankruptcy.
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The Bankruptcy Decision
There are two kinds of individual bankruptcy: Chapter 7 and Chapter 13.
Chapter 7 bankruptcy, named for the chapter number in the bankruptcy code,
requires a full liquidation of all debts and cancels all no-exempt debts. Chapter
13 bankruptcy is essentially a court-mandated payment plan that sets up
affordable monthly payments to your creditors,
The decision to declare bankruptcy is not an easy one. Unfortunately,
many bankruptcy attorneys recommend bankruptcy to just about anyone they
consult with. All too often frightened consumers are advised to declare
bankruptcy just to avoid a few debts. This is a mistake. Bankruptcy should truly
be a last resort as the legal system meant it to be. A bankruptcy appears on your
credit for ten years, and although lending criteria are slowly changing, many
lenders will not even consider an applicant who has had a bankruptcy. What's
more, a Chapter 7 bankruptcy can cost you most of your property. Before
making a decision to declare bankruptcy, estimate how bad your situation really
is. On a piece of paper, make a list of all your assets and the approximate value
they could be sold for. On the other side, add up all of your debts. If the debts
exceed the assets by a large percentage, you may wish to consider bankruptcy.
On the other hand, if it seems that your situation may improve (you may get a
new job or a second income), or if your assets are of greater value or close in
value to your debts, a different approach may be appropriate.
Negotiate with your creditors
Explain your situation and ask for more time to pay. If the creditors refuse
and continue to threaten garnishment tell them such action would force you into
bankruptcy. No creditor wants to hear the "B" word. Using bankruptcy as a
threat is a very powerful negotiating tool, confronting creditors with a choice
between getting a little each month or probably getting nothing through
bankruptcy. Don't try this tactic on secured creditors. They may decide to
repossess your property to avoid having to go through court.
Contact Consumer Credit Counseling
As mentioned earlier in the book, Consumer Credit Counseling is a nonprofit
group funded by creditors to help consumers negotiate repayment plans. It
is often able to negotiate payment arrangements better than the individual
because of its constant contact with a variety of creditors. If you can't negotiate
a satisfactory arrangement, give these people a try. Remember, the fact that
you are using credit counseling may appear on your credit record.
Consider Chapter 13 bankruptcy
This kind of filing allows you to repay your debts in a court-mandated
fashion and will appear on your credit record for only seven years, If negotiations
fail or there simply isn't enough money to make ends meet Chapter 7 bankruptcy
may be your only option. Bankruptcy does not necessarily discharge all debts. If
your debts are exempt from bankruptcy, filing will do very little to improve your
situation. If a co-signer was used, the debt would then be owed by the cosigner,
unless that person also declared bankruptcy. In community property
states a spouse's assets and debts would also be included in the bankruptcy,
assuming they are community property. Consider all very carefully before
deciding to file.
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Non-Dischargable Debts - Bills You Have To Pay In Spite Of
Bankruptcy
Certain kinds of debt cannot be automatically eliminated by bankruptcy
filing. They must meet certain requirements before being eliminated by
bankruptcy. If most of your debts are non-dischargeable, bankruptcy may not
solve your financial dilemma. The only ways a non-dischargeable debt can be
eliminated through bankruptcy are through an exception being granted by the
court, a certain period of time transpiring since the debt was due, or because the
creditor does not object to the discharging of the debt. Certain debts can only be
discharged by an exception. They are:
Recent Student loans
This applies to student loans that became due within the last five years.
Any extension of repayment would be added to this time period. Some courts,
furthermore, will only discharge payments that are more than five years past
due. So if the student loan was due seven years ago and the payments were
originally to be made over a five-year period, you would still be responsible for
the last three years of payments. The court may also grant an exception to a
student loan if it would produce an "undue hardship" for you to pay it. This is
rarely granted.
Taxes
Federal, state, and local taxes are not dischargeable for at least three years
after you file your tax return. Even if you've been tied up in tax court for more
than three years, any tax assessed within 240 days of filing for bankruptcy is
non-dischargeable. Property taxes are dischargeable if they are over one year
late, but the lien against your property is not. The bottom fine is that you can
count on the government collecting its tax money eventually.
Child Support and alimony
These can only be discharged in special circumstances, which generally
include agreements that have not been court-ordered. If one spouse has agreed
to assume more than half of marital debts in exchange for lower support
payments, the court may not discharge all debts held by the spouse for
bankruptcy. Consult an attorney if this situation applies.
Fines
Neither fines from a court, judge, or government agency nor surcharges,
penalties, and restitution, as a general rule, can be discharged in a bankruptcy.
The same is true of debts incurred as a result of damage or liability from driving
while intoxicated. The debt incurred from intoxicated driving must be established
in court and a judgment must be issued by a higher court. Small-claims, traffic,
and municipal judgments for intoxicated driving are all dischargeable. Once
again, consult an attorney.
Debts not discharged in a previous bankruptcy
If debts from a previous bankruptcy have been found non-dischargeable,
they cannot be discharged in a later bankruptcy.
Debts not listed on your bankruptcy petition
If you do not include a debt on your petition, it will not be discharged. Many
people filing bankruptcy keep one or more credit lines with small balances or no
balance out of the bankruptcy proceeding to preserve part of their credit
resources. Another strategy is to reaffirm debts on the condition that credit
continues to be offered. The creditor, confronted with a choice between
collecting nothing and maintaining your credit, will sometimes choose the latter.
Be very careful when reaffirming debt. You are not obligated to and you should
have a new written agreement spelling out all of the new conditions.
Other kinds of non-dischargeable debts can be discharged immediately if
the creditor does not object If the creditor objects, these debts will be judged by
the court to be either dischargeable or non-dischargeable. The creditor can ask
that the debts not be discharged if they claim the following conditions existed:
The debt was acquired by Intentionally fraudulent behavior
Fraud in this case is any dishonest act used to obtain credit. Claiming to be
someone you are not, or borrowing money when you have no means or intention
of repaying it, would be clear-cut examples of fraud. Not disclosing certain
relevant facts could also be construed as fraud. If you make a promise and
intend to keep it and believe you will be able to keep it, that is not fraud.
Creditors tend to be paranoid and believe everyone is defrauding them, so this
excuse for non-discharge is often used by creditor's attorneys.
Debts Incurred as a Result of False Written Statements
A blatantly false credit application would qualify. The inaccurate statement
must be an important fact and one that the creditor relied on in order for the debt
to be judged non-dischargeable. A misspelled name or minor error would not
render a debt non-dischargeable. Drastically overstating income or misrepresent
a job title would be considered fraudulent.
Fraudulent usage
If you charge "luxury goods or services" in an amount over $500 within 40
days before filing bankruptcy, the debt is likely to be deemed non-dischargeable.
The same is true if cash advances are obtained fewer than twenty days before
declaring bankruptcy. A lot of small charges, made to avoid pre-clearance,
would also be considered fraudulent if you were over your credit limit or
obviously unable to pay.
Debts resulting from illegal or malicious acts, embezzlement, larceny, or breach
of fiduciary Responsibility
Any money owed because of illegal acts such as embezzlement (taking
property left in your safekeeping), larceny (theft), or the failure to fulfill your
duties as a trustee can be non-dischargeable. The court will usually de a
definition of fiduciary responsibility.
Once you've examined your debts and determined what is dischargeable
and what is not, you can determine whether bankruptcy would enhance your
current financial situation. There are several other things you should know
before you decide whether to file.
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Exempt Assets
A common misconception about bankruptcy is that you lose everything you
own to satisfy your debts. In fact, the court will allow you to keep many things
essential to your well being, and perhaps even a little bit more. Although there is
a federal exemption law, only in states and the District of Columbia allow you to
use it These states let you choose between the state and federal exemption
laws. The in states are:
Connecticut
Hawaii
Massachusetts
Michigan
Minnesota
New Jersey
New Mexico
Pennsylvania
Rhode Island
Texas
Washington
Wisconsin
Vermont
The other states require a person declaring bankruptcy to use state
exemptions.
Here are some examples of things that may be exempt, depending on the
state in which the petition is filed.
· Personal effects
· Furniture
· Cars (up to a certain amount of equity)
· Tools of a trade
· Equity m a residence (sometimes the entire residence)
· Clothes
· Household goods
· Books
· Jewelry
One very interesting exemption is the homestead exemption. When John
Connally, the former governor of Texas, declared bankruptcy a few years ago,
many people were surprised that he was allowed to keep his huge mansion,
valued at several million dollars. Texas has a homestead exemption that allows
anyone petitioning bankruptcy to keep up to one acre in an urban area or 100
acres in a rural area, regardless of value. The ex-governor may have had a very
good attorney, but many other states also offer homestead exemptions.
One bankruptcy strategy is to sell non-exempt property before bankruptcy
and convert it into exempt property. For example, a Texas resident might sell
non-exempt assets and use the proceeds to pay off the home mortgage on her
homesteaded property. You would almost certainly want to consult an attorney
before attempting this kind of transfer of assets, however, since the court could
very easily view such action as an abuse of the bankruptcy laws.
Even if a certain amount of equity is exempt, your creditors can often sell
the asset to recover any excess equity you may have. If you own a car worth
$10,000, for example, and you only owe $5,000 on it and your state exemption is
$1,200, the creditor can sell the car and give you $1,200. Some states allow
'Wildcard" exemptions that can be used to cover the difference.
Knowing which debts are dischargeable and what the law allows a petitioner
to keep, a rational decision can be made whether to file for bankruptcy. If you do
choose to file, there are several ways of going about it-as well as several pitfalls
to avoid.
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Taking Action
When you've decided to take action you can begin the filing process. If
creditors are knocking on the door and repossession, foreclosure, or
garnishment is just around the comer, it may be wise to consider using an
emergency filing to obtain an automatic stay. An automatic stay stops creditors
from taking any further action until the case goes before a bankruptcy judge.
Unlike a bankruptcy filing, which usually contains several pages of information an
emergency filing is only one page long and contains a list of your creditors. The
rest of the petition has to be filed within fourteen days or the case is dropped.
The court will send notices of the pending bankruptcy to the creditors listed, who
must cease all further collection action. If they do not cease, send them copies
of the automatic stay and request that all further collection action cease. A
creditor can ask that the automatic stay be lifted, allowing him to continue
collection action. Only a landlord trying to evict you from a rented dwelling will
usually prevail, unless there is a long-term lease involved. If you are renting on a
long-term lease, which could be considered an asset, the landlord may have to
wait for a formal @g in order to evict YOU.
Once the wolves are at bay, another decision will need to be made: whether
to hire a bankruptcy attorney. Attorneys, as we all know, are expensive. In the
case of a complicated bankruptcy, however, they can be invaluable. If you have
quite a bit of property or valuables, if you are trying to move money from nonexempt
to exempt assets, if your creditors try to make your debts nondischargeable
because of fraud, or if there are any other complications, you may
wish to hire an experienced bankruptcy attorney. Shop around. Don't be afraid
to negotiate. Ask a lot of questions and talk to several attorneys before you
make your decision.
If you have a very simple bankruptcy or can't afford an attorney, invest $15
in a good do-it-yourself bankruptcy book. It will give in-depth information not
covered in this chapter. Typing services am also available to type up bankruptcy
forms. They are reasonably priced and, in the case of a very simple bankruptcy,
can take the place of an attorney. If your case is complicated and you can't
afford an attorney, do your own research. Read a consumer bankruptcy manual
first and then consult a good legal library. There are several legal guides
devoted strictly to bankruptcy. Once you or your attorney have prepared your
case, you're ready for formal work.
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The Filing Process
All the appropriate papers can be obtained from your local bankruptcy court.
Consult the yellow pages under Government Services (usually in the beginning
of the book) for an address and phone number. The court allows you fourteen
days from the date of an emergency filing to complete the formal process. If
Chapter 7 bankruptcy is being filed, you will need to send in the following forms
after you have received them from the court:
· Statement of Financial Affairs.
· Schedule of Current Income and Current Expenditures.
· A schedule describing your debts.
· A schedule describing your property.
· A schedule listing exempt property.
· A summary of the above schedules.
· Statement of Intention in regard to your secured property and what you
intend to do with it
· Statement of Executory Contracts describing contract that will need to
be fulfilled, such as auto leases.
· Bankruptcy Petition cover sheet.
· Mailing addresses of all creditors.
· Any required local forms.
A fee will also be assessed, usually $90, due at the time of filing. The court
will usually accept installments of a four-month period. An application for
installments must accompany the petition.
After your petition is filed, a meeting of the creditors will be arranged. The
court appoints a trustee to preside over the meeting and to be responsible for the
liquidation of assets. With most smaller bankruptcies, only the person filing and
the trustee will attend. The trustee, who is usually a local attorney, will ask
several questions about the information on the bankruptcy documents. Call and
ask the court clerk what papers you will need to bring (usually financial
statements or sometimes even tax returns). If a lot of property is involved,
especially if it is nonexempt, property, your creditors may show up to protest any
exemptions. They may also attempt to grill you about your intent to pay the bill
or about lying on your application. Answer truthfully and there shouldn't be a
problem.
If the creditors' attorneys become abusive, demand a hearing before the
bankruptcy judge before the proceeding goes any further. If the creditors object
to any of your exemptions, they have 30 days after the creditor's meeting to file
an objection with the court. The court will schedule a hearing and you will be
given the opportunity to respond, although you don't have to. A creditor may
also try to claim a debt as non-dischargeable because of fraudulent acts, a @ or
malicious act, or embezzlement or theft. He can only accomplish this if he
successfully raises the objection within sixty days of the creditors' meeting. To
defend yourself, you or your attorney will have to file a written response and be
prepared to argue your case in court.
Once all the requirements have been met and your intentions have been
made clear, the court can declare the bankruptcy discharged. No formal hearing
will be held unless you have chosen to reaffirm your debt in which case the judge
will want to be sure that you understand what you are doing. After this time,
provided the creditors do not raise any objections, the dischargeable debts are
erased.
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Picking Up The Pieces
Bankruptcy was once the lowest disgrace that could befall someone.
Today, however, it is commonplace. Corporations declare bankruptcy to get out
of contracts or avoid legal judgments. Individuals rely on it to protect them from
a society that extends credit too quickly.
Bankruptcy does not mean that you will automatically be denied all credit for
ten years. In fact, many firms look at bankruptcy as a responsible way of
discharging debts when there is no other way out. Creditors fear bankruptcy, but
they also realize that if they lend to someone who has declared bankruptcy, they
need not worry about another bankruptcy for seven more years (you can only file
once every seven years). If you happen to have a good explanation for the
bankruptcy, such as medical bills, divorce, or some other catastrophic event, a
creditor may be willing to overlook it and extend credit. Ask potential creditors
about their policy toward bankruptcies. Their responses may be surprising.
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