Bankruptcy, Is It A Way Out
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.
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
non-profit 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 co-signer, 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.
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.
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.
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 non-exempt to exempt assets, if your creditors try to make
your debts non-dischargeable 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.
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.
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.
Darryl Power over 3 years in online marketing, 1 year in Pay-Per-Click
advertising and 7 years of business management.
http://www.home-grownventures.com
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