BANKRUPTCY AND DEBT RELIEF
There Are Four Basic Methods to Deal With Debt 1. Pay in FULL (no more interest and finance charges)
2. Consolidate the Debt into monthly payments.
3. Settle the Debt for less than owed.
4. File Bankruptcy.
All debts are not created equal
Some debt is more important than others. If you are having trouble paying your bills, take the time to prioritize your bills. Make a list of what is important -see below what is important. Always pay the essential debts first. There is a difference between the bill collectors who call you and demand payment immediately and the bills you MUST pay before the collectors demands.
Essential Debts
An essential debt is one which you should put at or near the top of your list for payment. If you let an essential debt slide, you could face serious, consequences. Rent or mortgage. Unless you know you are going to move and have an alternate place to live, make paying your rent or mortgage a top priority. Mortgage payments may be different. If you've lost your job and it looks long-term, you should be realistic about whether you can afford to stay in your home. You might be better off selling your home, renting a lower cost place and using what's left over to pay your other essential bills. If you decide to stay put, payments on a home equity line of credit or second mortgage are also essential because you can lose your house if you don't pay.
Utility bills. Being without gas, electricity, heating, water or a telephone is dangerous.
Child support. Not paying can land you in jail unless you convince the judge that you really couldn't pay.
Car payments. If you need your car to keep your job, make the payments. If you don't, consider selling it to avoid repossession. You may be able to use any leftover money to buy a cheaper car.
Other secured loans. Secured debts are linked to specific items of property. If you don't repay the debt, most states let the creditor take the property without first suing you and getting a court judgment. If you don't care whether the property is taken or are confident that the creditor doesn't really want it, don't worry about missing a payment or two. If the property is something you cannot live without, however, you'll need to keep that debt current.
Unpaid taxes. If the IRS is about to take your paycheck, bank account, house or other property, you'll want to negotiate to set up a repayment plan immediately.
Nonessential Debts
A nonessential debt is one with no immediate or devastating effects if you fail to pay. Paying these debts is a desirable goal, but not a top priority. Credit and charge cards. If you don't pay your credit card bill, the worst that will happen before the creditor sues you is that you will lose your credit privileges.
Department store and gasoline charges. If you don't pay these bills, you'll probably lose your credit privileges and, if the debt is large enough, you may be sued.
Loans from friends and relatives. You may feel a moral obligation to pay, but these creditors should be the most understanding with you.
Newspaper and magazine subscriptions. These debts are never essential.
Legal and accounting bills. These debts may be essential especially if you need your lawyer to do work for you. Remember, you don't bite the hand that is helping you.
Unsecured loans. An unsecured loan is not tied to any item of property. The creditor cannot take your property. If you refuse to pay, the creditor can collect from you only by suing you and obtaining a court judgment. These unsecured debts are rarely, if ever, essential to pay first.
Essential or Nonessential?
Some debts straddle the line between essential and nonessential. Not paying won't cause severe consequences in your personal life, but it could prove painful nonetheless. In deciding whether or not to pay these debts, consider your relationship with the creditor and whether the creditor has initiated collection efforts. Some of these debts include: Auto insurance. In some states, you can lose your driver's license if you drive without insurance. In California, you cannot even register your car without proof of insurance.
Medical insurance or bills. These may or may not be essential. There are lots of doctors. You may not have to pay them if you cannot afford them. Always make your your health insurance will cover the medical treatment. If you don't have health insurance, see if you qualify for Medicare or other public assistance.
Car payments for a car that is essential for your job. The inconvenience of not having a car may justify making these payments.
Court judgments. Once a creditor has a judgment, the creditor can collect it by taking a portion of your wages or other property. If a particular judgment creditor is about to grab some of your pay, the fact that the original debt may have been nonessential is irrelevant.
Student loans. Paying an old student loan isn't essential if the holder of your loan isn't hassling you. But paying the loan may become essential if the IRS is about to intercept your tax refund, the holder of your loan threatens to garnish up to 10% of your wages or you are making payments under a "reasonable and affordable" repayment plan to rehabilitate your loan and get out of default.
Do not, under any circumstances, make payments on nonessential debts when you have not paid essential ones, even if your nonessential creditors are breathing down your neck. This may sound obvious, but when pressured by bill collectors, many people forget the obvious. For example, if you pay a few dollars on an old hardware store bill just because its collector is the loudest or most persistent, you may face eviction or have your heat turned off in mid-March because you won't have enough money left to pay for these crucial services.
Consolidate Your Debts
There are many debt consolidators available. Many are legitimate and many are not. Some are fronts for large banks and considered to be collection agencies. Generally, if you owe more than $1000.00 to $2000.00 or more than your weekly paycheck, your likelihood in succeeding with a Debt Consolidation is dismal. You will likely pay for the average 4-6 months, be unable to pay further and will have lost all the payments made with little effect on reducing your debt. Settle the Debt for less than Owed. If you owe a lot of debt, many times creditors will accept less than what you owe in full settlement of the debt. We may be able to assist you in the negotiation with the creditors. The advantage, of course, is that you are paying less than you owe. The disadvantage is that you will need to come up with a lump sum of money to pay the settlement and you may have to pay income tax on the debt that was forgiven.
File Bankruptcy.It isn't as bad as it sounds. Bankruptcy does NOT destroy your credit. You may have better credit after bankruptcy than before. You can rebuild your credit. You may be able to buy a house six months after you finish your bankruptcy. Remember, a bankruptcy may be on your credit for seven to ten years, but a judgment may be good for 20 years. There are many types of bankruptcy.
Goals of the Bankruptcy SystemA fundamental goal of the federal bankruptcy laws enacted by Congress is to give debtors a financial " fresh start" from burdensome debts. The Supreme Court made this point about the purpose of the bankruptcy law in a 1934 decision: [I]t gives to the honest but unfortunate debtor…a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt. Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934).
This goal is accomplished through the bankruptcy discharge, which releases debtors from personal liability from specific debts and prohibits creditors from ever taking any action against the debtor to collect those debts.
Types of BankruptcyBankruptcy cases are provided for under the Bankruptcy Code. The cases are traditionally given the names of the chapters that describe them. Chapter 7 Chapter 7, entitled Liquidation, contemplates an orderly, court-supervised procedure by which a trustee takes over what you own (assets of the debtor' s estate), reduces them to cash, and makes distributions to creditors, subject to the debtor' s right to retain certain exempt property and the rights of secured creditors. Because there is usually little or no nonexempt property in most chapter 7 cases, there may not be an actual liquidation of the debtor' s assets. These cases are called " no-asset cases." A creditor holding an unsecured claim will get a distribution from the bankruptcy estate only if the case is an asset case and the creditor files a proof of claim with the bankruptcy court. In most chapter 7 cases, if the debtor is an individual, he or she receives a discharge that releases him or her from personal liability for certain dischargeable debts. The debtor normally receives a discharge just a few months after the petition is filed. Amendments to the Bankruptcy Code enacted in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 require the application of a " means test" to determine whether individual consumer debtors qualify for relief under chapter 7. If a debtor' s income is in excess of certain thresholds, the debtor may not be eligible for chapter 7 relief. Chapter 12 Chapter 12, entitled Adjustment of Debts of a Family Farmer or Fisherman with Regular Annual Income, provides debt relief to family farmers and fishermen with regular income. The process under chapter 12 is very similar to that of chapter 13, under which the debtor proposes a plan to repay debts over a period of time– no more than three years unless the court approves a longer period, not exceeding five years. There is also a trustee in every chapter 12 case whose duties are very similar to those of a chapter 13 trustee. The chapter 12 trustee' s disbursement of payments to creditors under a confirmed plan parallels the procedure under chapter 13. Chapter 12 allows a family farmer or fisherman to continue to operate the business while the plan is being carried out. Chapter 13 Chapter 13, is a repayment plan whereby you may pay a percentage of you debt. It is entitled Adjustment of Debts of an Individual With Regular Income. Chapter 13 is often preferable to chapter 7 because it enables the debtor to keep a valuable asset, such as a house, and because it allows the debtor to propose a " plan" to repay creditors over time usually three to five years. Chapter 13 is also used by consumer debtors who do not qualify for chapter 7 relief under the means test. At a confirmation hearing, the court either approves or disapproves the debtor' s repayment plan, depending on whether it meets the Bankruptcy Code' s requirements for confirmation. Chapter 13 is very different from chapter 7 since the chapter 13 debtor usually remains in possession of the property of the estate and makes payments to creditors, through the trustee, based on the debtor' s anticipated income over the life of the plan. Unlike chapter 7, the debtor does not receive an immediate discharge of debts. The debtor must complete the payments required under the plan before the discharge is received. The debtor is protected from lawsuits, garnishments, and other creditor actions while the plan is in effect. The discharge is also somewhat broader (i.e., more debts are eliminated) under chapter 13 than the discharge under chapter 7. Chapter 11 Chapter 11, entitled Reorganization, ordinarily is used by businesses or individuals that desire to continue operating a business and repay creditors concurrently through a court-approved plan of reorganization or individuals with close to a Million dollars of secured debt. The chapter 11 debtor usually has the exclusive right to file a plan of reorganization for the first 120 days after it files the case and must provide creditors with a disclosure statement containing information adequate to enable creditors to evaluate the plan. The court ultimately approves (confirms) or disapproves the plan of reorganization. Under the confirmed plan, the debtor can reduce its debts by repaying a portion of its obligations and discharging others. The debtor can also terminate burdensome contracts and leases, recover assets, and rescale its operations in order to return to profitability. Under chapter 11, the debtor normally goes through a period of consolidation and emerges with a reduced debt load and a reorganized business.
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Bankruptcy and Debt Relief
