The Bankruptcy Alphabet: “E” is for “Exemptions”

May 11, 2012

A question I am often asked is, “will they sell everything I own if I file for bankruptcy?”  The answer to this question is “No”.  Under both State and Federal law there are allowances for property you can keep.  Those allowances are called “Exemptions”. 

For the vast majority of my clients, those exemptions are more than sufficient to protect everything a client owns.  The whole concept behind filing for bankruptcy is to give someone a fresh start.  If they took everything you have, you wouldn’t have anything left to help you get a fresh start. 

There are even strategies to help clients keep items that are worth more than the exemptions allow.  Those strategies are best chosen before the case is filed.  This is why it is very important to have an accurate inventory of your property before the case is filed.  Once the case is filed, there are fewer strategies available to address excess assets.

The Bankruptcy Alphabet: “D” is for “Debt Settlement”

April 30, 2012

Potential clients often ask me about the possibility of trying to settle their debts, as opposed to filing for bankruptcy. For some, this may be an option to consider. For most people the cost of debt settlement outweighs the benefits.

There are many companies that advertise an ability to settle your debts for pennies-on-the-dollar. If you decide to investigate this route, do your homework. Understand how these companies work and how you will be charged. Do your internet research to try to uncover unhappy customers. Those are easier to find than you might think.

The majority of these companies charge a percentage (usually 15%) of the debt they will be addressing for you. So if you have $50,000 in credit card debt, their fee can easily be $7,500.00. There are generally monthly administrative or processing fees in addition to the percentage fee.

Once you agree to participate, these companies will set you up on a payment plan. What most people don’t understand is that the initial payments are applied to the company’s fees, not to your debts. Meanwhile your creditors are receiving nothing and the interest on your debts is continuing to mount.

Once you accumulate sufficient funds on deposit with the debt settlement company to settle one of your debts, the company will approach one of your creditors about settling the debt for a percentage of what you actually owe. If an agreement is reached with that creditor, the money you have on deposit with the debt settlement company will be used to settle that debt. Meanwhile, the rest of your creditors are becoming restless, having received nothing in many months.

Once a settlement has been reached with one creditor, the debt settlement company will do nothing until you have accumulated enough money on deposit with them so that they can settle another account for you. Quite often one of your creditors will be come too impatient to wait for their money any longer. They will hire a local attorney and will sue you to collect. This is what drives many potential bankruptcy clients into my office.

Clients who have worked with debt settlement companies are often shocked to learn that after months (or years) of payments, very little of their money has been applied to settle their debts. These clients are even more shocked to learn that the debt settlement company couldn’t help them when they did get sued.

The final surprise generally comes at tax time. For many people, they will have to pay tax on the amount of forgiven debt, as if it were income. Who wants to pay tax on income they didn’t receive????

Before you consider settling your debts, consult with an experienced bankruptcy attorney. Most offer free consultations. You will then be in a better position to weigh all of your options.

The Bankruptcy Alphabet: “C” is for “Cancellation of Debt Income”

April 14, 2012

Individuals in financial trouble are often surprised at tax time when they receive a 1099-C statement from a creditor. Many times these statements come from credit card companies where individuals have made a settlement of the debt for less than the full account balance. In other instances the creditor has simply charged off a defaulted debt.

The amount of unpaid debt was canceled by the creditor. This canceled debt is often known as “cancellation of debt” (COD) income. The creditor will then report this canceled debt to the Internal Revenue Service, and the individual will then be taxed on that canceled debt as if it were income.

If you receive a 1099-C, don’t panic. All is not lost. If you meet certain exceptions you will not have to pay the tax on this “income”. One of those exceptions is if the debt was discharged in a bankruptcy filing. If you meet one of the exceptions, Form 982 must be filed with your tax return so that you will not have to pay tax on the canceled debt.

If your tax preparer doesn’t know about Form 982, find another tax preparer.

The Bankruptcy Alphabet: “B” is for the “Benefits of Chapter 13”

March 21, 2012

Potential clients often ask me why anyone would want to file a Chapter 13, if they are otherwise eligible to file a Chapter 7. There are many advantages in Chapter 13 that don’t exist in Chapter 7. While some people may not need those advantages, for others those advantages are essential to achieving a fresh start.

The following are some of the advantages of Chapter 13:

  • Debts which one was orderd to pay as part of the property settlement in a divorce can be discharged
  • A house can be saved from from foreclosure or a car saved from repossession
  • Penalties owed to taxing authorities can be discharged, even if the underlying tax is not dischargeable
  • Homeowners association dues can be discharged
  • Bankruptcy attorney’s fees can be paid over time
  • A tax sale can be stopped, and the tax can be repaid as part of the Chapter 13 plan
  • The loans on rental property, cars, boats and vacation homes can be modified, without the bank’s consent
  • In certain circumstances a second or third mortgage on a home can be removed
  • A debtor can continue to operate their business

There are also some clients who just want to try to repay what they can, but don’t want to be obligated to repay more than they can afford. For those people, Chapter 13 may also be a good choice.  Is Chapter 13 right for you?  Contact a qualified bankruptcy attorney to find out.

See what lawyers around the country have to say on the letter “B”:

The Bankruptcy Alphabet: “A” is for attachment

March 19, 2012

This is my first article in the “Bankruptcy Alphabet” series. I have decided to begin the series discussing wage attachments. I frequently receive calls from potential clients after a creditor has attached his or her paycheck. This can be a devasating situation. Many people are living paycheck-to-paycheck these days, and every penny counts. The good news is that, in most cases, filing a bankruptcy petition will stop a wage attachment.

Once a bankruptcy petition is filed, the court issues an order which stops creditors from taking any further action to collect their debts. It is important to remember that a bankruptcy petition will not stop your wages from being attached to pay ongoing child support or alimony payments.

If you receive notification that your wages have been attached, you should contact a competent bankruptcy attorney right away. The sooner you seek help, the sooner you can stop the wage attachment. It may even be possible for your attorney to recover any money your employer sent to the creditor before the bankruptcy petition was filed.

Read what other lawyers have to say about the letter “A”:

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