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Bankruptcy Alternatives to Filing Chapter 7 or Chapter 13 Bankruptcy

Saturday, December 17th, 2011

So many people have asked me about bankruptcy alternatives and bankruptcy debt that I’ve decided to publish my standard response. There is no easy way to get out of debt. Some hard choices are in front of you but there are always alternatives to the long-lasting effects of bankruptcy and bankruptcy debt.

 

There are five basic strategies for getting your debt back under control. I’ve listed them in order of best (1) to worst (5) in terms of the effect they will have on your credit:

  1. If your credit isn’t in terrible shape, can you reduce your other expenses while you pay the debt off? Perhaps some fairly painless changes to your lifestyle can bring your bills in line with your income. If not, some hard choices may be required. Some examples:
    • Do you really need things like cable T.V.? Get rid of the extraneous expenses.
    • Ask a relative for a loan.
    • Can you do without the second car? Sell it.
    • Pull equity out of your home by refinancing.
    • Apply for a non-secured signature loan.
    • Sell your home, pay off your debts with the proceeds, and rent.
    • Cash out your 401K/retirement benefits.
    • Sell those family heirlooms/jewelry/guns that are too valuable to use anyway.

     

  2. Sometimes the best way out of your financial situation, especially if your problem is credit card debt, is to just not pay your bills, and save the money you would have put towards minimum payments into a savings account. Really. Find out more about this here. 
  3. If you are willing to negotiate with your creditors (meaning long conversations on phones, letter writing, dealing with less-than-cooperative (or shall we say hostile?) customer service people) you can try and settle your debts yourself for less than you owe, sometimes without damaging your credit rating. Get all the details here. 
  4. If your credit is already hosed and the suggestions above won’t make a dent in your debt, I’d suggest going through Consumer Credit Counseling Services (CCCS). Check your Yellow Pages for the local office. CCCS will give you a plan for paying off your debts as if you were in a Chapter 13 bankruptcy without ever filing a bankruptcy. More about CCCS. 
  5. If Consumer Credit Counseling Services (or CCCS) won’t take you, you may want to consider bankruptcy. Doing a Chapter 13 bankruptcy takes longer, but your credit is in a little better standing than it will be if you file Chapter 7. You have up to 5 years to pay off your debts when you file Chapter 13 bankruptcy. Another plus is the bankruptcy drops off 7 years from the date you FILE, not finish. Therefore, you will have the bankruptcy for a maximum of 7 years. 
  6. If you are so far in debt that you will never be able to repay it, the best solution may be a Chapter 7 bankruptcy. A Chapter 7 bankruptcy is the least desirable credit-wise but you are typically out of bankruptcy in 6 months and you don’t have to repay any debt. One disadvantage is that this shows on your credit report for 10 years from the date of filing your bankruptcy. Another disadvantage is that creditors are starting to tighten their credit requirements. You may have a tough time getting financing in the future.

 

There is no magic solution for getting out of debt. Don’t believe anyone who tells you otherwise.

 

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Chapter 7 Bankruptcy – Which Debts Can I Include?

Saturday, December 17th, 2011


Dischargeable Debts

The main focus of bankruptcy relief is discharge from your debts. Discharge means that your personal liability for a debt ends, and creditors can’t make any further collection efforts. However, not all debts are eligible for discharge, or are “dischargeable.” You take control of your bankruptcy and financial fresh start when you know what the scope of discharge is and what it means in your case. In a Chapter 7 Bankruptcy case, the following types of debts are dischargeable:

  • Business Debt
  • Judgments
  • Credit Card Debt
  • Mortgages (but you will lose your home)
  • Auto Loans or Leases (but you will lose your car)
  • Apartment/Home Leases
  • Collections
  • Medical Debt

Non-Dischargeable Debts

Certain types of debts cannot be discharged in a bankruptcy. These debts are called non-dischargeable and apply in every case. However, certain debts that are normally dischargeable may be ruled as non-dischargeable if a debtor has committed a crime or fraud.

Non-dischargeable debts in a bankruptcy: Circumstances in Which Normally Dischargeable Debts May Become Non-dischargeable.
  • back child support and alimony obligations, and debts considered in the nature of support
  • student loans, unless repayment would cause you undue hardship
  • income taxes less than three years past due, and
  • court judgments for injuries or death to someone arising from your intoxicated driving.
  • debts incurred on the basis of fraud, such as lying on a credit application or writing a bad check
  • debts from willful or malicious injury to another or another’s property
  • debts from larceny (theft), breach of trust or embezzlement, or
  • debts arising out of a marital settlement agreement or divorce decree that aren’t otherwise automatically non-dischargeable as support or alimony

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Can I Include a Student Loan in My Chapter 7 Bankruptcy?

Saturday, December 17th, 2011


The Bankruptcy Code (11 U.S.C. § 522(b)) allows an individual debtor to protect some personal property from the claims of creditors because it is exempt under federal bankruptcy law, or under the laws of the debtor’s home state.

Many states have taken advantage of the provision in the Bankruptcy Code that permits each state to adopt its own exemption law in place of the federal exemptions, and in these states, the treatment of exemptions looks much like it did before the Bankruptcy Code was enacted in 2005. In sixteen states and the District of Columbia, you can chose the exemptions that work the best for you – either the federal exemptions or your home state’s exemption statute. It is always best to check with an attorney in your state to see what exemptions apply to your individual case.

Some of the primary exemptions that may be available to an individual filing bankruptcy under federal laware as follows:

 

Exempt Property

  • Homestead (equity in your primary residence) – depends on your state. In Texas, there is unlimited homestead. In Arizona, it is limited to $100,000 in equity. For a fairly complete list, you can visit this website.
  • Automobile (equity held in one vehicle) – up to $3,225. The equity in your car is based on the car’s market value, less any loans against it.
  • Household Items (appliances, furniture, clothes) – up to $10,775 and $525 maximum per item.
  • Jewelry and Heirlooms – up to $1,225 in value.
  • Tools of the Trade – up to $1,850 in value.
  • Life Insurance – includes disability benefits and unmatured life insurance policies.
  • Alimony and Child Support – amount reasonably necessary for support of debtor and dependents.
  • Public Benefits – such as unemployment, workers compensation, public assistance, Social Security or Veteran’s benefits.
  • Retirement Funds – are exempt under § 522(d)(12) of the Bankruptcy Code. The exemption applies to pension, profit sharing and stock bonus plans, employee annuities, Individual Retirement Accounts (IRAs), deferred compensation plans such as your 401(k) account, and certain trusts. The 2005 amendments to the Bankruptcy Code expanded the protection allowed to certain tax-exempt retirement plans that weren’t always protected under former law.

Non-exempt Property

  • Expensive Musical Instruments (unless you’re a professional musician),
  • Stamp, Coin and Other Collections,
  • Cash, Bank Accounts, Stocks, Bonds, and other investments,
  • Second Car or Truck, and
  • Second or Vacation home.

The following states allow a debtor to choose either federal or state created exemptions (but not both): Arkansas, Connecticut, The District of Columbia, Hawaii, Massachusetts, Michigan, Minnesota, New Jersey, New Mexico, Pennsylvania, Rhode Island, South Carolina, Texas, Vermont, Washington, and Wisconsin.

All remaining states have opted not to allow its residents to utilize the federal exemptions, so each state has its own statutes which define and list the exemptions. Talk to a bankruptcy lawyer in your area to determine which set of exemptions is best for you.

 

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