Choosing Between the Alternatives
1.0 Are There Any Alternatives to Bankruptcy?
1.1 In General
It is not uncommon for individuals to try other options before resorting to bankruptcy. Some of these options are more helpful than others depending upon your circumstances. A number of these will be discussed below.
1.2 Should I Borrow Money To Get Out of Debt?
Unfortunately getting a loan to get out of debt is more likely to compound your problems than to solve them. Usually, debt consolidation loans only delay the inevitable. The main reason being that the interest that you will pay on the new loan is an additional debt that must be repaid in addition to the original obligations. In some circumstances where you have very high interest debt and are able to convert all of the debt to low interest there may actually be a savings. In such a situation obtaining the loan may be advisable if you can make the regular monthly payments and if you do not incur any new debt. Many individuals after paying off high interest credit card debt with a low interest loan cannot resist the temptation to continue using the credit cards. In addition, you should attempt to pay off the low interest loan as quickly as possible by making double or triple payments.
An interesting new practice engaged in by some credit card companies is to send you an application for a new credit card under a different name with the suggestion that you use it for a balance transfer at a lower initial rate when they realize your debt is high enough to cause you trouble. If you accept this offer, you may find that your credit card debt is suddenly non-dischargeable in bankruptcy because you incurred “new debt” exceeding $500 in the 90 days prior to filing by using the new card for a balance transfer.
Another problem often experienced with debt consolidation loans is the problem of collateral. If you are already in financial difficulty, most lenders will not give you a new loan without securing it in your real or personal property. This is to ensure that if you file bankruptcy later the creditor is in a better position than if they had given you a signature loan. If the debt consolidation loan does not solve your financial difficulties and you end up filing a chapter 7 bankruptcy you must choose between surrender of the collateral, reaffirmation, or redemption. This means that if you have pledged essential property you will end up paying the loan in one way or another to keep the property. Further, if you have “puffed” (exaggerated the value of your property) on the loan application, you will be guilty of fraud which may make the loan non-dischargeable.
If you end up filing a chapter 13, the creditor will be considered secured and thus entitled to greater payment than for an unsecured note. This will make your court plan payment higher than the income you may have available. As a general rule converting unsecured debt into secured debt is a bad idea.
1.3 Should I Get a Second Mortgage on the House?
Many individuals look at a second mortgage or a home equity line as a way of using the equity available in their home to get rid of high interest debt. Unfortunately, most home equity lines or second mortgages are high-interest debt themselves. Not only does this type of debt have the problems indicated above, but it puts the family home at risk and increases the monthly expenditures for basic necessities. Once having obtained a second mortgage, it is not uncommon for individuals to continue the spending patterns which got them in trouble in the first place, and to resort to additional refinancing until such time as the home is lost through an inability to make the mortgage payments. It should also be noted that debts which are attached to real property survive bankruptcy and must be payed unless the property is surrendered. Getting a second mortgage is almost a guarantee that you will be talking to a bankruptcy attorney within 6 months to 2 years.
1.4 Should I Sell Property To Get Out of Debt?
If you are considering using the equity in your home to pay high interest debt, it often makes more sense to actually sell the home and use the proceeds to retire debt. While there are costs associated with the sale of property (usually 7% of the total purchase price) you can negotiate these costs and they will often be less than the interest you will pay on a home equity loan. For example, assume you are borrowing $40,000 dollars against the equity in your home at 14% interest. Your typical monthly payment will be $473.95 over a period of 30 years this will result in total payments of $170,622.00. Subtracting the original amount of the loan shows that you are paying $130,622.00 in interest payments.
If you have luxury items such as expensive cars, boats, big screen TV’s or expensive firearms; it may be wise to sell these items if doing so would eliminate your debt. As indicated above, if you were to file a chapter 7 bankruptcy you would most likely lose these items to the chapter 7 Trustee who would sell them in an attempt to pay off your creditors. In a chapter 13, the court would require you to surrender these items if you are still making payments on them. In some jurisdictions the court may even require you to sell them in an effort to reduce your debt.
In the past, there was something called the “Bulk Sales Act”. This allowed debtors to sell an on-going business free and clear of the claims of creditors. This money could then be used to pay the claims of creditors or at least create a reservoir of cash from which negotiations could be made. Currently the only way to sell assets free and clear is in a bankruptcy.
Another alternative is called “An Assignment for the Benefit of Creditors”. This is where a third party takes control of property of the debtor and then sells it, using the proceeds to pay the claims of creditors. Unfortunately, unless the property is substantial, there will not be enough money after sale to pay all of the claims of the creditors. In which case, the remaining debt is still owed and creditors can still pursue the debtor.
1.5 What About Voluntary Debt Repayment Plans?
While this appears to be an ideal solution, that avoids bankruptcy, voluntary payment plans often do not work. First, they are voluntary. This means that all of your creditors must agree to take monthly payments. If you have even one creditor who will not participate or who later changes their mind, that creditor could obtain a judgement against you, begin garnishing your wages, and then you would not have the ability to make your monthly payment. It should also be noted that the attorney has not seen a voluntary payment plan managed by the debtor actually work since the mid-80's.
Voluntary payment plans managed by a non-profit company have a slightly better track record. However, they have problems that you should be aware of. First, you are at the mercy of the reputation and honesty of the third party handling your plan. Unfortunately, a number of such services are not as reputable as they should be. Some will tell you that they will do things that they are not capable of doing, such as eliminating interest. Some will indicate that all of your creditors have reached agreement on your repayment plan, when in fact they have not. As a result, you continue to receive billing notices while being told that the debt is being handled by the credit counseling company. Others will simply pocket the money you send to them, tell you that they are paying your creditors when they have not, and then disappear. A reputable company will contact all of your creditors with a form on which the creditor indicates what they are willing to do (reduce interest, reduce principle, waive late payments, etc.). Once all the creditors have responded with a commitment to participate, they will then sit down and determine your monthly payment. If you decide to participate in such a plan, ask to review all the signed forms before making your first payment.
Second, because the plans are voluntary most credit card companies will not reduce interest or waive over limit or non-minimum payment charges, although they will reduce the monthly payment. This means that the debt is accumulating faster than it is being paid off. As a result, the plans almost never pay out within the promised time period. Many clients come in after three to five years in a voluntary payment plan when they discover that their debt is higher than when they originally started.
Third, it should be noted that these companies cannot help with post-dated check loans, secured debts such as mortgage, car, or furniture payments, or many priority obligations like taxes or child support. You will rarely be able to reduce the payments or interest on these kinds of debts.
Fourth, these companies normally report participation in their program to the Credit Bureau. This can impact an individuals credit for up to three years after making the final payment on their program.
And finally, voluntary debt repayment plans generally do not work if your unsecured debt exceeds three to five thousand dollars. This is because the interest is causing your debt to increase faster than you are paying it down. For a plan to work you must be paying all the currently accruing interest plus something towards principle.
1.6 What About Using Lump Sum Settlements?
An effective way of retiring debt can be to negotiate a lump sum settlement with a creditor. Attorneys often call this an accord and satisfaction. This occurs when you pay a creditor less than the full amount of its claim to satisfy the debt. If you have an amount of cash (or can borrow such an amount) totaling between 40-60% of your debt you may be able to negotiate a cash payment with your creditors. There are also a number of services which will do this for you. Typically they charge a percentage of what they have been able to save you.
There are a few problems with settlements. First, most creditors will not negotiate with you unless you are at least three month in arrears on the debt. Second, you must have a source of ready cash that the creditor is not aware of. Third, you will need to make the payment agreed upon within 2 to 5 days. Fourth, these agreement need to be reduced to writing and signed by both parties. Otherwise you will find that the creditor promptly forgets the agreement. Fifth, if you are dealing with a collection agent you will need to obtain proof of their authority to collect the debt. Otherwise you could pay and settle only to find you still owe the balance to the original party. And finally, if you end up filing bankruptcy, the creditor may be required to refund the money to the bankruptcy court trustee if you paid more than $600 in the 90 days prior to filing.
As a final note, if you get behind on your mortgage payments the lender will usually not accept partial payments thereafter. They may even send a payment back to you if it does not bring the mortgage current. If this happens, place the money you do have available and any returned payments in a separate savings account. Do not spend it on something else. If the bank later offers you a workout plan they will require a substantial down payment. The money in savings may make a workout possible. If you have spent the money, you must either file a chapter 13 or lose the home.
2.0 How Can I Tell If I Need to file a Bankruptcy?
If you answer yes to any of the following questions it may be an indicator that you need a bankruptcy.
1. Are you a single individual or a family with one income and more than $8000 in unsecured debt?
2. Are you a two income family with more than $12,000 in unsecured debt?
3. Have you been making only the minimum payments (or less) on your credit cards for six months or more?
4. Is your house more than two payments behind?
5. Are you behind on your utility payments?
6. Are you using a credit card to pay for necessities like food or clothing?
7. Do you have a second mortgage and credit card debt?
8. Has your wife gone to work to pay the interest on your debt?
9. Has your wife gone to work to pay for basic necessities like food and clothing?
10. Are you paying for more than two vehicles?
A yes answer to any of the questions above indicates a serious financial situation in which your monthly expenses exceed your regular income.
In the attorneys experience he has noted that if consumer unsecured debt exceeds 8,000-12,000 dollars, most individuals will never be able to pay the debt off. Typical credit card debt is structured so that if you were to make only the minimum payment each month, always pay on time, and never incur new debt, it would take approximately 46 years to repay the obligation. If you miss one payment per year or are late on your payments it can take more than eighty years to repay the debt.
3.0 How Do I Know Which Bankruptcy is Best For Me?
Chapter 7's tend to work best for individuals who are: young, have a large amount of debt, have few assets, have little income, or are elderly. Chapter 13's work best for individuals who have a small amount of debt, who have substantial assets, are delinquent on payments for a home or vehicle that they want to keep, or have debts that they could not discharge in a chapter 7 such as taxes or child support. Chapter 13 is primarily designed for individuals who have suffered a short term reduction in income but are generally able to handle their debt.
4.0 What Are the Ethical Considerations of Filing a Bankruptcy?
The answer to this question is based in large measure upon your own personal circumstances. If you have incurred debt for personal or luxury items without having the intent to pay for those items or you have run up large amounts of consumer debt and file bankruptcy every six years as a life style choice; it is probably not ethical for you to file bankruptcy. However, if you are like most individuals who feel a hesitancy to file for bankruptcy because you feel responsible for the debts that you have incurred or you do not wish to harm your creditors, that very hesitancy indicates that you are not acting unethically. Bankruptcy is designed to help people who get in over their heads whether it be through poor life choices (from which they have learned), or who have had no control over the debt (such as catastrophic medical expenses for a child).
Occasionally individuals have told me that their religious leader has indicated that bankruptcy is contrary to “God’s will”. However, such religious leaders have apparently failed to take into account that God through Moses established a bankruptcy code for the children of Israel. This is found in Deuteronomy Chapter 15. Nor, that religious leaders have filed for bankruptcy relief. It is interesting to note that the time periods in the Biblical bankruptcy code are similar in some respects to the former law.
The real determination that must be made from an ethical standpoint is a balancing of interests. For example, on one side of the ledger is the need of the creditor to receive payment and ones moral obligation to pay debts that one has incurred. On the other side of the ledger are a number of factors including ones ability to repay, an individual’s obligations to spouse and/or children, and an individuals obligations to society.
If the debt is so large that it would be impossible to repay, such a situation weighs in favor of filing bankruptcy.
Research has shown that the primary cause of divorce is debt. Unfortunately, the inability to pay ones obligations as they come due causes tremendous emotional stress especially for women because of their inherent need for security and for men because of their inherent need to provide for wife and family. The inability to have these needs met often result in divorce with its attendant ills. The filing of a bankruptcy which can keep a family together benefits society as a whole and therefore weighs in favor of filing.
Research has further shown that if a father, through working more than one job, is unable to make a meaningful contribution in the lives of his children or if the mother is working outside of the home, the children will tend to delinquency and criminal activity. This problem is further compounded because women who are employed outside of the home to provide for basic family necessities often tend to feel bitter about doing so, which leads to marital discord. As a result, discharging debt so that the mother can remain in the home taking care of the children and the father through working no more than one full time job can maintain meaningful relationships with his wife and children weighs in favor of filing bankruptcy.
Finally the strength of a society is founded upon the strength of its individual family units, the ability of its citizens to participate in the political process, and the ability of the father to make religious practice an important part of his family’s life. If a husband and father is so burdened by debt that he lacks the emotional ability or time to do these things and the filing of bankruptcy will remedy that lack, society is benefitted by the filing of bankruptcy.
Often, individuals will be concerned because of the perceived moral stigma of having filed bankruptcy. Research has shown that individuals approaching bankruptcy today have the same concerns as those filing in the late 1800's. What has apparently changed is a public acceptance of the consumer debt that naturally leads to bankruptcy. Up until the mid 1900's most of society believed that debt should be avoided at all costs. Unfortunately that situation has changed and more individuals are providing greater amounts of consumer debt to a public more willing to incur it. Research has shown that consumer bankruptcy filings are directly linked to the amount of national consumer debt. As consumer debt rises so do bankruptcy filings. It may also be important to note, that while specific individuals and businesses can in fact be hurt by bankruptcy filings, the economy at large absorbs the losses from bankruptcy filings and most credit institutions make up for those losses in the form of interest rates, charges, and fees.
5.0 Does My Spouse Need to File Bankruptcy With Me?
It is not always necessary for both spouses to file bankruptcy. The question that must be asked is whether both spouses are responsible for the debt that is being sought to be discharged. Under current law debts are divided into separate and marital obligations. You are not responsible for the separate debts of your spouse. However, you may be responsible for the martial debts incurred by them even though you did not sign the contract. Thus if your spouse has an obligation for food, clothing, shelter, utilities, or medical expenses you will probably be responsible for those debts. If only your spouse files bankruptcy, these creditors are then able to pursue you to collect the debt. Because it is often cheaper and easier to file a joint bankruptcy then to fight the claims of marital debt creditors it may be better to both file bankruptcy.
6.0 Can I Change My Mind After I File?
It is not uncommon for an individual’s circumstances to change once they have filed bankruptcy. As a result you may find it desirable to dismiss or convert your bankruptcy proceeding. A chapter 7 will be dismissed automatically if you fail to appear at the first meeting of creditors (unless the trustee or one of the creditors objects) or you may file a motion with the court requesting that your bankruptcy be dismissed. You should be aware, that if you file a chapter 7 you may not actually be able to dismiss the case once you have started if the court determines that it would be in the best interests of your creditors to keep you in a chapter 7. However, a chapter 7 can be converted to a chapter 13.
A chapter 13 will be dismissed if you do not appear at the first meeting of creditors, do not make your first plan payment (or any payment thereafter) or by filing a request with the court that the case be dismissed. In a chapter 13 you have an absolute right to dismiss your bankruptcy (unless it was previously converted from a chapter 7. A chapter 13 can also be converted to chapter 7.
7.0 How Does Bankruptcy Effect My Job Opportunities?
According to federal law you can not be discriminated against for exercising your federal rights. This should mean that no employer could use your bankruptcy filing against you. However, the filing of a bankruptcy can affect your employment if there is a “rational basis” for the employer’s decision. For example, you may not be able to obtain a seat on the stock exchange, or work for the state department, or the CIA if you have filed bankruptcy. The idea is that an individual with financial problems may be more likely to mis-manage someone else’s money or be susceptible to bribery. Thus, if your current employment requires financial responsibility, the filing of bankruptcy could have an impact upon you.
8.0 Can I Minimize the Consequences of Filing?
8.1 In General
Advance preparation can improve the impact of filing bankruptcy. However, the time between your preparations and the actual filing of bankruptcy can make a big difference. A number of the typical options and their actual impact are discussed below.
8.2 Can I Give Away Property Prior to Filing?
As part of a bankruptcy filing the court requires you to disclose any transfers of property made during the last year. Any transfers made within this time period, if they are substantial (meaning over $600) can be set aside by the court. Thus if you were to give a $2000 car to a relative prior to filing, that transfer would have to be disclosed, and the trustee would have the option of setting aside the transfer, obtaining the vehicle and selling it for the benefit of your creditors. If a transfer occurs more than one year prior to filing, you may still lose the property if you are continuing to use it. The bankruptcy court requires you to disclose any property which you are using that belongs to another person. Thus, if you transferred your $2000 car over a year ago but continue to use it, make repairs on it, and pay for the insurance, the trustee could set aside the transfer and sell the property.
8.3 Can I Sell Property Prior to Filing?
You can sell any property that you wish prior to the filing of a bankruptcy as long as you sell it for its actual value. If you sell property for less than its fair market value, the bankruptcy trustee can set aside that transaction, obtain the property, and sell it to help pay unsecured creditors. If you sell property and have not yet been fully paid for the property, the payments are an asset that belongs to the court and can be used to pay your creditors.
An additional consideration in the sale of property is the dollar amount of the proceeds. If you receive more than $1000 the court may require you to account for the use of those funds. If you have retained a share of it in cash the court will take those funds. If you have paid any creditor more than $600 within the 90 days prior to filing, that creditor may be required to refund the money to the court. Further, if you give any of the proceeds to a relative that money may have to be given back to the trustee.
8.4 Can I Pay Off Certain Creditors Prior to Filing?
There are a number of rules in connection with making pre-petition payments to creditors. If these rules are violated the creditor can be required to give the money back to the court so that it may be redistributed pro-rata to your unsecured creditors. First, you may make any payments on regularly scheduled debts as they come due. Therefore if you have a $1200 monthly mortgage payment, you may make your monthly payments without any harm coming to that creditor. Second, you may pay less than $600 on any bill. As long as you do not exceed this amount the bankruptcy court will not require the creditor to give the money back. However, if you pay more than $600 and the debt is an obligation that is past due, the court could ask for return of those funds.
8.5 Can I Give a Security Interest to A Creditor Prior to Filing?
[This section has been deleted because the author is no longer legally allowed to give this advice.]
8.6 Loading Up
Loading up is to when you convert non-exempt assets (such as cash) into exempt assets prior to filing. Since the Court can take any cash in your bank account on the date of filing, the idea is to convert that cash to a possession that is exempt under the Code. While bankruptcy planning makes sense, you should be very careful about the assets you purchase prior to filing. Some of them may be non-exempt.
Loading up also includes the concept of incurring secured debt prior to filing. As indicated above, under the new law attorneys are expressly forbidden to tell you the advantages of such purchases and may not encourage you to incur any debt prior to filing. It should be noted that there is an interesting provision of the new law that 403(b) and 414(d) retirement loans are not classified as debts (although they are non-dischargeable). Thus, an attorney might be able to tell you the advantages of incurring 403(b) or 414(d) loans.
8.7 Hiding Assets
A more common problem are debtors who attempt to hide assets from the Court. The Court has extraordinary powers to bring back property that you may have given to another person for less than its fair market value prior to filing. As a result, you should generally not attempt to dispose of assets prior to filing. If you have specific questions about a particular item, you should ask the attorney.
9.0 Do All Creditors Have To Be Listed?
The short answer is yes. All debts must be scheduled with the name and address of the creditor. This is so they can receive notice of the bankruptcy and get their fair share of any money distributed by the trustee. The failure to list a creditor may mean that those creditor’s rights are not affected by that bankruptcy. Therefore they may still be entitled to sue and collect their obligation against you. Sometimes you may wish to omit a debt because it is to a relative or you do not wish the party to know you have filed. While the attorney sympathizes with this desire, it should clearly be understood that it is a violation of the law not to list each of your creditors. When you sign the bankruptcy statements and schedules you sign that they are true, accurate, and complete. In addition when you appear for your first meeting of creditors you must assert under oath in answer to the trustee’s questions that you have listed all of your creditors and all of you assets.