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Alternatives to Bankruptcy
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There is just no easy way to get out of
debt, you have to face up to the consequences. A bankruptcy is not
always the answer, as the effects are long lasting. There are four
ways to handle debts that are out of control, listed in best to
worst in regards to the effect it will have on your credit:
- If your credit isn't in terrible shape, can you reduce your
other expenses, even if it means making hard choices or just
change your lifestyle to fit your income? Some ways to do this:
- Selling the second car
- Pulling equity out of your home
- Applying for a non-secured signature loan
- Loan from a relative
- Selling your home and paying off your debts with the
proceeds and then renting
- Cashing out your 401K/retirement benefits
- Selling family heirlooms/jewelry/guns
- If your credit is already gone or one of the above isn't an
option, go through Consumer Credit Counseling Services (CCCS).
Check your yellow pages for the local number. In this way you're
paying off your debts as if you were in a Chapter 13 BK, but you
don't file a BK.
- If CCCS won't take you, you may want to consider bankruptcy.
Doing a Ch 13 takes longer, but your credit is in a little
better standing than if you do a Ch 7. In the Ch 13 they give
you up to 5 years to pay off your debts. The disadvantage is
that you're in BK for up to 5 years plus your credit report
shows your BK for 7 more years after you have finished paying
off your debts.
- If you are so far in debt that you can never repay it, then
the best solution may be a Chapter 7 BK. A Ch 7 is the least
desirable credit-wise, but you are typically out of BK in 6
months and you don't have to repay any debt. The disadvantage is
that this shows on your credit report for 10 years from the date
of filing your BK, and creditors are starting to tighten their
credit requirements, and you may have a tough time getting
future financing.
There is no magic solution.
Don't believe anyone who tells you otherwise.
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How to Avoid Foreclosure
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When you miss your mortgage payments,
foreclosure may occur. This is the legal means that your mortgage
company can use to repossess (take over) your home. When this
happens, you must move out of your house. If your property is
worth less than the total amount you owe on your mortgage loan,
your mortgage company or HUD could seek a deficiency judgment. If
that happens, you not only lose your home, you also would owe your
mortgage company or HUD an additional debt. Foreclosure or a
deficiency judgment could seriously affect your ability to qualify
for credit in the future. So you should avoid it if all possible!
DO NOT IGNORE THE LETTERS FROM YOUR MORTGAGE COMPANY. If you
are having problems making your payments, contact your mortgage
company immediately. Explain your situation. Be prepared to
provide them with financial information, such as your monthly
income and expenses. Without this information, they may not be
able to help. Stay in your home for now. You may not qualify for
assistance if you abandon your property.
Some of your options include the following:
- Special Forbearance. Your mortgage company may be able to
arrange a repayment plan based on your financial situation. Your
mortgage company may even provide for a temporary reduction or
suspension of your payments. You may qualify for this if you
have recently lost your job or your source of income or if you
had an unexpected increase in living expenses. You must furnish
information to your mortgage company to show that you would be
able to meet the requirements of the new payment plan.
- Mortgage Modification. You may be able to refinance the debt
and/or extend the term of your mortgage loan. This may help you
catch up by reducing the monthly payments to a more affordable
level. You may qualify if you have recovered from a financial
problem but your net income is less than it was before the
default (failure to pay).
- Partial Claim. Your mortgage company may be able to work
with you to obtain an interest-free loan from HUD to bring your
mortgage current. You may qualify if:
- your loan is at least 4 months delinquent but no more than
12 months delinquent;
- your mortgage is not in foreclosure; and
- you are able to begin making full mortgage payments.
When your mortgage company files a Partial Claim, HUD will
pay your mortgage company the amount necessary to bring your
mortgage current. You must execute a Promissory Note, and a Lien
will be placed on your property until the Promissory Note is
paid in full. The Promissory Note is interest-free and will be
due if you sell or leave your property, or when your mortgage
matures.
- Pre-foreclosure sale. This will allow you to sell your
property and pay off your mortgage loan to avoid foreclosure and
damage to your credit rating. You may qualify if:
- the "as is" appraised value is at least 70% of the amount
you owe and the sales price is 95% of the appraised value;
- the loan is at least 2 months delinquent prior to the pre-
foreclosure sale closing date; and
- you are able to sell your house within 3 to 5 months
(depending on what your mortgage company agrees to).
An additional benefit to this option is the assistance you
will receive with the Seller-paid closing costs.
- Deed-in-lieu of foreclosure. As a last resort, you may be
able to voluntarily "give back" your property to the mortgage
company. This won't save your house, but it will help your
chances of getting another mortgage loan in the future. You can
qualify if:
- you are in default and don't qualify for any of the other
options;
- your attempts at selling the house before foreclosure were
unsuccessful; and
- you don't have another mortgage in default.
A housing counseling agency can help you determine which, if
any, of these options may meet your needs. You should also
discuss the situation with your mortgage company.
One last thing, beware of scams! Solutions that sound too
simple or too good to be true usually are. If you're selling
your home without professional guidance, beware of buyers who
try to rush you through the process. Unfortunately, there are
people who may try to take advantage of your financial
difficulty. Be especially alert to the following:
- Equity skimming. In this type of scam, a "buyer"
approaches you, offering to get you out of financial trouble
by promising to pay off your mortgage or give you a sum of
money when the property is sold. The "buyer" may suggest that
you move out quickly and deed the property to him or her. The
"buyer" then collects rent for a time, does not make any
mortgage payments, and allows the mortgage company to
foreclose. Remember that signing over your deed to someone
else does not necessarily relieve you of your obligation on
your loan.
- Phony counseling agencies. Some groups calling themselves
"counseling agencies" may approach you and offer to perform
certain services for a fee. These could well be services you
could do for yourself, for free, such as negotiating a new
payment plan with your mortgage company, or pursuing a
pre-foreclosure sale. If you have any doubt about paying for
such services call HUD-approved housing counseling agency. Do
this before you pay anyone or sign anything.
Here are several precautions that should help you avoid being
"taken" by scam artist:
- Don't sign any papers you don't fully understand.
- Make sure you get all "promises" in writing.
- Beware of any loan assumption where you are not formally
released from liability for your mortgage debt and contracts of
sale.
- Check with a lawyer or your mortgage company before entering
into any deal involving your home.
- If you're selling the house yourself to avoid foreclosure,
check to see if there are any complaints against the prospective
buyer. You can contact your state's Attorney General, the State
Real Estate Commission, or the local District Attorney's
Consumer Fraud Unit for this type of information.
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Chapter 7 Bankruptcy
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Chapter 7 bankruptcy is a liquidation
proceeding. The debtor turns over all non exempt property to the
bankruptcy trustee, who then converts it to cash for distribution
to the creditors. The debtor receives a discharge of all
dischargeable debts.
To file a Chapter 7 bankruptcy:
- You must reside or have a domicile, a place of business, or
property in the United States or a municipality.
- You must not have been granted a Chapter 7 discharge within
the last 6 years or completed a Chapter 13 plan.
- You must not have had a bankruptcy filing dismissed for
cause within the last 180 days.
- It must not be a "substantial abuse" of Chapter 7 to grant
the debtor relief. Generally speaking, if after you pay the
monthly expenses for necessities there is not enough money to
pay the remaining monthly debts, then granting a discharge would
not be an abuse of Chapter 7.
- It would not be fundamentally unfair to grant the debtor
relief under Chapter 7.
The most common reasons for consumer bankruptcy are:
- Unemployment
- Large medical expenses
- Seriously over extended credit
- Marital problems
- Large unexpected expenses
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Bankruptcy and Bills
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The underlying policy of bankruptcy law
is that the honest debtor who is in debt beyond his/her ability to
repay the debt should be given a fresh start through the discharge
of debts in a bankruptcy proceeding.
Not all debts are dischargeable. Generally speaking, the
following debts will not be discharged:
- Taxes.
- Spousal and Child Support.
- Debts arising out of willful or malicious misconduct.
- liability from driving while intoxicated.
- debts from a prior bankruptcy.
- Student loans.
- Criminal fines and penalties.
Those debts which are secured will be discharged, however,
expect the creditor to take the necessary legal steps to take back
the property. In most cases if the debtor's equity interest in the
property is exempt, the debtor may retain the property by
redemption or reaffirmation.
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Bankruptcy and Bill Collectors
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One of the major benefits of filing for
protection under Chapter 7 is that many creditor actions are
stayed. This means that debt collection efforts and foreclosure is
halted.
Once a creditor or bill collector becomes aware that you have
filed for bankruptcy protection, he/she must stop all efforts to
collect the debt. After your bankruptcy is filed, the court mails
a notice to all the creditors listed in your schedules. This
usually takes a couple of weeks. If this is not soon enough, then
you should have your representative inform the creditor
immediately. If a creditor continues to use collection tactics
once informed of the bankruptcy they may be liable for court
sanctions and attorney fees for this conduct.
Your attorney deals with your creditors. It may be the only
time you ever have the luxury of saying "you'll have to talk to my
lawyer"
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Your Personal Property
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Once the bankruptcy is filed, all the
property of the debtor at the time of the filing and certain other
property to be received in the future, becomes the property of the
bankruptcy estate. This means that the bankruptcy trustee will
take control of this property for purposes of satisfying the
creditors. HOWEVER, there is certain property which is either
excluded or exempt and the debtor will be able to keep it.
Property or asset exemption are determined based upon your
situation, income and the laws of your state. The best way to
determine which property to keep requires a detailed analysis of
your situation. You need a good lawyer.
As for real property in many states, dependent upon which
exemption scheme is selected and your circumstances, you may
exempt up to $100,000 in equity. When calculating your equity you
should use a value that is based upon a forced liquidation as
opposed to the best selling conditions to arrive at a value for
your home. Once you determine this value, subtract the amount owed
plus selling and transfer costs from the value to calculate the
equity. As for personal property, in California, you are permitted
exemptions for a variety of personal property. This includes,
automobiles, household furnishings and personal effects, jewelry,
tools of the trade, retirement plans, un-matured life insurance,
personal injury awards, earnings, animals and some other
miscellaneous property. The value of each exemption and which
exemptions can be used are determined by the statutory exemption
scheme is selected. (State laws vary)
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Your House and Car
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Depending upon which exemption scheme is
selected and your circumstances, you may exempt up to $100,000 in
equity. When calculating your equity you should use a value that
is based upon a forced liquidation as opposed to the best selling
conditions to arrive at a value for your home. Once you know the
value, subtract the amount owed plus selling and transfer costs
from the value to calculate the equity. In the depressed
California market, liquidated properties are often valued less
than what we like to think the property is worth.
Depending upon which exemption scheme is selected, you may keep
your car if your equity is equal to or less than the allowed
exemption. Generally speaking, depending upon the exemption scheme
selected, you may exempt as little as $1200 or as much as $9100.
When calculating your equity you should use the Kelly Blue Book or
a comparable guide. Once you know the value, then subtract the
amount owed from the value to calculate the equity.
Generally, most courts understand that you need a car to work
to get back on your feet. Apply rules of common sense here: If you
own vintage cars which are free and clear and worth thousands of
dollars, you are probably not going to be able to keep them. If,
on the other hand, you have a car worth $10,000 and you owe $8000
on it, you will most likely keep it. Again, the need to talk to a
good lawyer should be evident. Most leased vehicles have no equity
and therefore are entirely exempt. If you owe money on your car or
it is leased you must still make the payments. In those instances
you will have to redeem or reaffirm the property to keep it.
However, in some circumstance your representative can re-negotiate
the loan or the lease to get a more favorable deal for you.
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About The Bankruptcy Process
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When making financial decisions during
the process, you should consult your attorney. In particular there
are three items worth mentioning.
- Under bankruptcy law, certain luxury purchases over $1000
within 60 days of the bankruptcy filing are presumed
non-dischargeable.
- Under bankruptcy law, cash advances aggregating $1000 within
60 days of the bankruptcy filing are presumed non-dischargeable.
- Debts involving materially false financial statements are
non-dischargeable under certain circumstances.
If you file the bankruptcy yourself, you must fill out the
forms. There are several forms. There could be between 30 and 60
pages in your petition, schedule and other papers filed at the
time of your bankruptcy. You must follow the local and federal
bankruptcy court rules in completing the forms. Preparing these
forms requires an understanding of both bankruptcy law and local
state law in order to enter the information correctly and
accurately. The forms have to be typed and a certain number of
copies must be included with the filing. Today, most attorneys use
a computer system to prepare these forms because of there
complexity and voluminous nature.
About 30 to 40 days after you file the bankruptcy you will have
to attend a hearing presided over by the bankruptcy trustee. This
hearing is called the First Meeting of Creditors. At this hearing
the trustee will ask questions under oath regarding the content of
your bankruptcy papers, assets, debts and other matters. After the
trustee is done, your creditors will be permitted to question you.
Do not worry, your attorney will be there to represent you and
your attorney will help you prepare for the hearing. Sometimes,
after your hearing is over, various creditors will approach you to
discuss the status of secured property or the your desire to
retain a credit card. Your attorney will negotiate with them, with
your knowledge and approval.
After this hearing you will normally not need to return to
court. However, if a creditor files a motion or an adversary
action, most likely you will have to return to court. This is the
exception and only your attorney can determine if this is likely
to happen.
Under normal circumstances, the bankruptcy court will
automatically issue the discharge 60 to 75 days after the First
Meeting of Creditors.
You can reestablish credit though and be back in "A" credit two
years after the discharge of Bankruptcy. The bankruptcy is a
judgment and will be listed for a period of up to 10 years after
the discharge. You must wait 6 years to file again or if your
bankruptcy was dismissed you must usually wait for 180 days to
re-file.
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Bankruptcy Questions and Answers
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I am a co-signer for a debt, how
does bankruptcy affect my obligation?
If the debt is a dischargeable debt then
you will not have to pay it. However, the cosigner will become
primarily responsible for the debt. Be sure to list the co-signer
as a creditor in your schedules as they have a contingent claim
against you.
Can I keep my house after bankruptcy?
Depending upon which exemption scheme is selected and your
circumstances, you may exempt up to $100,000 in equity. When
calculating your equity you should use a value that is based upon
a forced liquidation as opposed to the best selling conditions to
arrive at a value for your home. Once you know the value, subtract
the amount owed plus selling and transfer costs from the value to
calculate the equity. In the depressed California market,
liquidated properties are often valued less than what we like to
think the property is worth.
Can I keep my credit cards after bankruptcy?
Under some circumstances you may keep
your credit cards. There are many factors which must be
considered. Some of those include the credit card balance at the
time of the bankruptcy, what the credit card company is willing to
do and your ability to pay the present and future credit card
debt.
Will I lose my job?
No. Bankruptcy laws prohibits
discrimination based upon a debtor filing for protection under the
bankruptcy laws.
Can I go to jail if I file bankruptcy?
No. There are no debtor's prisons in the
United States.
Will my employer find out about my bankruptcy?
Under normal circumstances, unless your
employer is a creditor, your employer will not know.
Will bankruptcy stop a wage attachment?
Yes.
Will bankruptcy stop a judgment?
Yes. Most civil judgments are stopped by
bankruptcy.
Will a bankruptcy remove a lien?
Under some circumstances once the
bankruptcy proceedings have started, special motion can be filed
to remove certain liens. It will take a bankruptcy court order to
remove them. This is a complicated area of the bankruptcy law and
an attorney should be consulted.
Will bankruptcy stop an eviction action?
Perhaps. However, this will only delay
the inevitable. The owner is entitled to possession of his
property and at best you will be able to remain in the property
until you have received your discharge from bankruptcy or the
landlord obtains an order from the bankruptcy court. I must
caution you that if the only reason you filed the bankruptcy is to
stop an eviction then this might be considered an abuse of Chapter
7. If the bankruptcy court finds that this is true then the court
can immediately dismiss the bankruptcy and impose other legal and
monetary sanctions on you.
Will bankruptcy stop a foreclosure?
Yes. However, a home is an asset usually
secured by a deed of trust. The mortgage company is entitled apply
to the court for relief from the automatic stay, the order
preventing creditor action by virtue of the bankruptcy. Depending
upon several factors, you may be able to prolong a foreclosure
until you have received your discharge from bankruptcy. Usually,
to keep a home that is in foreclosure you will have to make a deal
with the note holder.
I am divorced, will bankruptcy wipe-out my obligation to pay
community debts?
In general, you will be discharged from
all dischargeable community debts. However, you should discuss
this with your family law attorney to understand the other
implications of the filing of a bankruptcy during the pendency of
a dissolution action (divorce case). Also, remember that if you
are discharged from community debts, your spouse is responsible
for the entire balance owing on the debt. Put another way, they
shift the responsibility on to you.
Are there any debts that I can't wipe out in bankruptcy?
Yes, there are certain debts that are NOT dischargeable in
bankruptcy. Generally speaking, the following debts will not be
discharged: Taxes; Spousal and Child Support; Debts arising out of
willful misconduct and or malicious misconduct by the debtor;
liability for injury or death from driving while intoxicated;
non-dischargeable debts from a prior bankruptcy; student loans and
criminal fines, penalties and forfeitures. Those debts which are
secured will be discharged, however, expect the creditor to take
the necessary legal steps to take back the property. In most cases
if the debtor's equity interest in the property is exempt, the
debtor may retain the property by redemption or reaffirmation.
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Disclaimer:
This information deals with Chapter 7 consumer bankruptcy. Each state
has its own bankruptcy laws, so you need to check with your state for
details. Information dealing with Chapter 13 bankruptcy and consumer
debt restructuring is not discussed in the above FAQs. The information
contained in the above FAQs is provided for general information
purposes only and is not intended to be a legal opinion nor legal
advice nor is it intended to be a complete discussion of all the
issues related to the area of Chapter 7 consumer bankruptcy. Every
individual's factual situation is different and you should seek
independent legal advice regarding specific information. |
