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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.
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.
Divorce
and Credit
The
credit and money-related problems that can accompany a divorce used to primarily
affect women. However,
many men are now confronting these issues because increasing numbers of women
are pursuing successful careers and starting their own businesses.
Some women are now their family's major wage earner.
This economic clout means that in some households it is the wife rather
than the husband whose income qualifies a couple for joint credit.
It also means that a growing number of women have the opportunity to
begin their own businesses.
If their businesses fail, these women could create financial problems for
their former spouses.
No matter how happy your relationship, it is wise for both men and women
to prepare themselves financially for the possibility of divorce.
In
this chapter I address some of the problems both sexes are likely to face after
divorce, discuss how best to deal with these problems and tell you what can be
done to avoid them.
If
you are contemplating divorce, it is important that you take certain steps
before filing to help minimize any potential financial damage the change in
marital status may cause, including:
·
Make sure you have good credit separate from your spouse.
If you do not, delay your divorce until you can get some credit and a
bank account in your own name.
For advice about building individual credit, read Chapter 7.
·
Pay all mutually shared bills and credit card debts from joint funds.
That way you do not risk the possibility of their becoming your own debt
to be paid out of your own income once you divorce.
·
If you already have either joint or individual credit, obtain a copy of
your credit record from each of the big three and address any problems you may
find.
·
If some of the accounts in your credit file are joint accounts with
negative histories, and if the adverse information is the fault of your
soon-to-be-former spouse or the result of circumstances beyond your control,
prepare a written explanation of the reason/s for the negative information, and
ask the credit bureau to make this explanation a permanent part of your credit
history. Doing
so may help disassociate you from the account's problems.
It is also a good idea to attach the same explanation to any credit
applications you complete.
If
you have a lawyer or a financial advisor you trust, talk with them about what
you should do to prepare for the change in your marital status.
Should
your spouse file for bankruptcy while you are in the process of divorce, it is
likely that the divorce proceedings will be stopped until the bankruptcy is
completed. During
this time, talk with your lawyer about how to minimize the impact of your
spouse's troubles on your financial situation.
Accounts
Creditors
consider spouses with joint accounts to be equally liable for those accounts.
Because of this, it is very important that you cancel all joint accounts
as soon as possible.
If you do not, you run the risk that you will be liable for making
payments on account balances that your former spouse ran up and cannot pay.
Furthermore, if your spouse is late making payments on joint accounts or
defaults on those accounts, that adverse information will be reflected in your
credit record as well as in your spouse's as long as those accounts are open.
You may then be faced with having to rebuild your own once-good credit.
Close
joint accounts by writing to each creditor and indicating that as of the date of
your letter you will not be responsible for any charges your spouse might run
up.
When
you get ready to close your joint accounts, remember that if you want individual
credit with the same creditors, they have the right to require that you reapply
for the credit if your joint accounts were based on your spouse's income.
If the accounts were based on your income, however, or if either of you
could have qualified for the credit at the time of application you will probably
not be required to reapply.
Avoid
negotiating a divorce agreement that allows your spouse to maintain your joint
accounts in exchange for paying off the outstanding balances on those accounts.
Remember, as long as those joint accounts remain open-whether you use
them or not you will be legally liable for them regardless of what your divorce
agreement says.
Divorce
A
spouse who divorces and does not have separate credit in his or her own name is
in a very vulnerable position.
If the joint accounts are kept open, the consumer risks becoming liable
for an ex-spouse's debt.
If all joint accounts are closed or if the consumer no longer is removed
from an authorized user account, the consumer may be left without ready access
to credit at a time when credit can be especially valuable.
However, if you have your own credit identity separate from a former
spouse, access to credit should be generally unaffected by a divorce-except in
the case of joint account problems.
As was noted in the section on widowhood in Chapter 7, creditors cannot
deny a consumer who shared accounts with a former spouse continued use of those
accounts, nor can creditors change the terms of credit simply because of a
change in marital status.
Creditors can, however, require that you reapply for that credit if you
would not have qualified for the credit on your own at the time application was
first made. In
marriages where there is a significant disparity in earnings between spouses and
the spouse with the smaller income shared accounts with the other, the person
making less money risks losing the credit.
If
you reapply for credit once held jointly or apply for completely new credit,
potential creditors cannot discount or refuse to consider non-job income such as
child support and alimony.
However, they do have the right to request that you prove the reliability
of these sources of income and can deny a person credit if they judge the income
sources to be unreliable.
If you will be relying on non-job income to help you qualify for credit,
it is a good idea to collect and save any documentation you may have that
supports the reliability of that income.
Such documentation might include: canceled checks, legal documents such
as your divorce agreement, a notarized letter from your ex-spouse, bank deposit
slips, etc.
In
evaluating your credit-worthiness, creditors also must consider the credit
history of a former spouse if you can demonstrate that your former spouse's
history reflects your history too.
If that credit history is positive and if you have no individual credit
and never shared credit with your former spouse, you may want to use this
provision to build your own credit record.
However, as we indicated in Chapter 7, this is a long shot.
To
demonstrate that a former spouse's history reflects yours, you may be able to
provide copies of checks you wrote to pay on accounts, letters you may have
written to creditors regarding accounts, etc.
If you are on good terms, you @ may want to ask your former spouse to
write a letter to the potential creditor on your behalf.
If
you are a woman and take back your maiden name after a divorce, be certain to
let your creditors know.
Ask them to begin reporting accounting information to credit bureaus in
your new name.
Then wait a couple of months, and check your credit record again to make
sure that your creditors are reporting correctly to credit bureaus.
Bankruptcy
after Divorce
In
today's economic times, it is not inconceivable for your former spouse to file
for bankruptcy.
Bankruptcy law may wipe out debt that your former spouse owes you as part
of your divorce agreement, but it does not cancel alimony and child support
obligations and does not wipe out tax debts.
A bankruptcy can make it difficult for your former spouse to make
payments, possibly pushing you into bankruptcy too.
Consumers
living in community property states face additional problems.
In those states, both parties in a marriage are jointly liable for any
debts that were incurred during that marriage whether those debts were acquired
individually or together.
That means that if a former spouse, as part of a divorce agreement,
promises to pay off all debt from a marriage and fails to live up to that
agreement, creditors have the legal right to expect payment from the other party
in the now dissolved marriage.
In
such a situation, you have two basic options-pay off the debt and try to save
your own credit history, or file for bankruptcy.
If you want to pay off the debt, and if those financial obligations are
sizable, it is advisable that you try to negotiate a payment schedule with each
of your creditors.
To
arrange a workable payment plan, contact each creditor directly-by letter,
telephone or in person.
Tell your creditors what your situation is.
Explain that you would like to meet your obligations but your income is
such that you will need to work out a schedule of mont that can afford.
If
you do not feel comfortable initiating these negotiations, schedule an
appointment with a counselor at the Consumer Credit Counseling (CCC) office
nearest you. CCC
counselors are professionals, have a lot of experience in creditor negotiations
and are well respected by most creditors.
Do
not opt for bankruptcy without giving it a lot of serious thought.
A bankruptcy will remain on your credit record for up to ten years and
will make it even more difficult for you to build a positive creditr ecord.
Before you make a decision regarding bankruptcy, talk with a CCC
counselor so that you understand all the ramifications of that step, and make
sure that all other options for dealing with your problem have been exhausted.