Recent Blog Posts in July 2010

How did the rumor that you need to have a certain amount of debt to file? The likely answer lies in the fact that there is a maximum amount of debt to be eligible to file for Chapter 13: you can’t have more than $360,475 in unsecured debt, and can’t have more than $1,081,400 in secured debt to be able to qualify for Chapter 13. There are no maximum debt limits for Chapters 7 or 11; the total debt for Chapter 12 [family farmers] cannot be more than $3,792,650. This means that Chapters 7 and 11 are almost always available, regardless of how much debt you owe.

Not requiring a minimum amount of debt to file is a different question from whether you should file with a small amount of debt. I have counseled many clients over the years that, given a relatively small amount debt, it might not make sense for them to file. After all, you can only get a Chapter 7 discharge once every 8 years (although you can usually file Chapter 13 at any time, regardless of prior filings), and shouldn’t “use up” the discharge when you might need it in the future. This analysis differs depending on many factors. For example, a $5,000 judgment that has resulted in a garnishment on someone earning $20,000 a year would be approached very differently from the same judgment on someone earning $100,000 a year.

Rather than asking whether you have too much or too little debt to file, the better question to ask your bankruptcy attorney is whether, given all of your circumstances, bankruptcy is the best option for you. By the time most of my clients come in to see me, they have already tried everything short of filing, and bankruptcy is their best and least expensive option.

When a Chapter 7  is filed, the debtor must show that they do not have enough income available to pay their creditors any money under Chapter 13 .

Whether the debtor has enough money to require them to be in a Chapter 13 or a 7  is determined though a process known as the “ Means Test .”

In its simplest form, the Means Test takes the debtor’s income for the six month before the filing of a bankruptcy and compares that income to the average income for a person in the debtor’s state with the same family size.  As an example, in Louisiana, where I practice, if a single debtor make $37,331.00 per year or less, he qualifies to be in a Chapter 7 .

So a person without employment can file under Chapter 7 .

Remember the amount of income is only a start when performing the means test calculation.  Other factors are stilled taken into account when determining which Chapter to file.

Also, if a person makes more than the median income for his State and then loses his job, it is usually best to wait until enough time has passed for the debtor to become a “ below means debtor .”

The only time a consumer debtor needs a job (or income) to file for bankruptcy is if he is filing for a Chapter 13 bankruptcy.

The issue of income or lack of income is only one of many issues that are involved in the timing of a bankruptcy filing.

The type of debts you have, the status of those debts and other factors need to be considered.

If you are considering filing for bankruptcy you need to consult an experienced bankruptcy attorney.
by Kevin Gipson, New Orleans Bankruptcy Attorney · Posted in *Filing for Bankruptcy

Bankruptcy can clear some types of tax debt.  It will not clear a federal tax lien that has attached to your assets.  However, when no tax lien has been filed, income tax debt can be discharged and cleared from your record if some very specific requirements are met in either a Chapter 7  or a Chapter 13 proceeding.  Not only can bankruptcy clear IRS income tax debt, it can get rid of state and local income tax debt as well.

Timing is an important issue in clearing a tax debt and there are some other basic steps that must be followed.  To discharge income tax debt, the following rules apply:

1. Your tax returns must have been due three years or more before the  petition was filed;
2. Your tax returns have to have been filed more than two years before the petition;
3. The tax you owe must have been assessed against you by the government for at least 240 days before the case is filed;
4. Your tax returns must have been truthful and not fraudulent; and,
5. You must not have been intentionally attempting to evade or defeat the tax when you failed to pay.

There are some technical rules that can complicate a discharge of tax, but in most cases the tax will be discharged if the above requirements are met.

If a notice of federal tax lien has been filed by the IRS, the tax debt covered by the lien becomes attached to any assets you own at the time it is filed.  What is worse is that it attaches to anything new you get so long as the lien is in effect.  This applies as long as you owe the tax.  Until the collection time limit expires or the tax debt is cleared the lien remain in place.

by Russell DeMott, Charleston Bankruptcy Attorney

I’ve been thinking of some of the bizarre things I’ve seen creditors do lately.  You’ll find a lot written about abusive creditors, mean creditors, heartless creditors, and law-breaking creditors here at Bankruptcy Law Network.  But what about stupid, self-destructive creditors?

It’s obviously bad to violate the Fair Debt Collection Practices Act or the Bankruptcy Code’s automatic stay, to be sure.  But while abusive creditor practices are bad, they’re not necessarily stupid.

What’s been puzzling me lately is some of the downright stupid, self-destructive behavior engaged in by creditors.  It seems to be going on in epic proportions here in the Charleston, South Carolina area.  And I have a feeling it’s probably an issue in other parts of the country.

Why do credit card companies push their customers into bankruptcy by refusing to work with them?  Why is it so hard to get that auto lender to put those one or two payments on the back of that loan?  (They know if they repossess the car, they’ll have a huge loss, after all.)  Why is getting a mortgage modification–even a teeny weeny modification–like asking for a kidney?  And my list of questions goes on.

Why is it creditors behave this way?  It’s like playing poker with someone who thinks he’s holding five aces–with every hand.  Why is it lenders are so unfamiliar with loss mitigation?  Why do they assume that if they plow forward things will turn out all right when their collateral has grossly depreciated–or when they don’t even have any collateral?

My leading theory–and I’m open to other ideas–is that loss mitigation is not taught in business school.  Students learn marketing, product development (and boy can banks develop new products!), finance, and management.  But loss mitigation is simply ignored–at least until the last couple of years. It’s a grand illusion lenders labor under, and it has horrible consequences for both the creditor and the debtor.  Let’s hope loss mitigation 101 gets introduced to business school in the near future.

Often people come to see me who have been working with a debt settlement company but are unable to manage the payments to the debt settlement company or get discouraged with the whole process.  How can bankruptcy be better?

To be clear, a debt settlement company is an entity that will take your money in monthly installments and builds up a sum that will be used to settle your debts.  Once that sum is built up, the debt settlement company will then make a lump sum offer to your creditors for payment in full satisfaction of their claim.  For this “service,” the debt settlement company charges a fee which is typically a percentage of the total debt.

For example, if you have three credit cards totaling $25,000.00 in unsecured debt, the debt settlement company will say that they can settle the accounts for $15,000.00 (approximately 60%) and will charge a fee of $3,750.00 which is 15% of the total debt.  Thus, your total payment to settle $25,000.00 in credit card debt is $18,750.00 ($15,000 paid to creditors and the fee of $3,750.00).  In order to have this money available to make the “settlement offer,” you pay in approximately $800 a month for 24 months (of course, this may vary among companies).  Generally, the debt settlement companies want your accounts to go into “charge off” status.

So what happens if one of your creditors with whom you wish to settle refuses the settlement?  You are still obligated on the debt.  Just because a debt settlement company says that they can settle your debts, that does not mean that the creditor will actually accept the offer.  So, in the above example, if one of the creditors does not settle, you still must pay that creditor or seek some other alternative.

Another issue concerns your credit rating while you are paying the debt settlement company each month building up your “settlement funds.”  Your credit rating or score goes down the tubes.  My colleague, Kurt O’Keefe, has just written a nice piece on that very topic.  See The Secret to New Credit After Bankruptcy. Your score is dependent on your paying your bills on time.  If you do not, such as through paying a debt settlement company, your score goes down.  So, assuming that you do settle with your creditors, your credit score is still trashed.

So how can bankruptcy be better?  First, the fees involved are typically much, much cheaper.  For example, in my area, a routine chapter 7 can typically be accomplished for $2,500.00 to $3,000.00 inclusive of the costs.  In a typical, “no-asset” chapter 7 case, you do not pay anything to your creditors so that you are not obligated to pay $15,000.00 towards your credit card debt (this scenario assumes the case is a “no asset” case).  That money is saved.

While it is true that bankruptcy does not help your credit, once it is done, you can start working toward building your credit back.  Unlike the above scenario with the debt settlement company, as soon as your bankruptcy case is over, you can start toward rehabilitating your credit.  Perhaps in your bankruptcy case, you reaffirmed a mortgage or automobile loan–those creditors will report that you are making your payments on time (assuming that you do).  This will start you on the road to credit rehabilitation.

I rarely recall seeing a debt settlement company that could offer a better “deal” than bankruptcy.  The bankruptcy fees are cheaper and the total cost is generally must less.  Plus, you can start rehabilitating your credit so much sooner with a bankruptcy filing than working through a debt settlement.

By Adrian Lapas, Eastern North Carolina Bk Attorney, posted in Bankruptcy Information