Bankruptcy is not an easy choice to make. We realize this and are ready to help you with all the information you might need for a decision and planned strategy.
Our firm understands the difficulties you are facing in deciding to file for bankruptcy or take other steps towards resolving your debt situation. Below you will find answers to common questions and concerns regarding bankruptcy.
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Debt Settlement FAQs
Debt Settlement FAQ
1. What Is Debt Settlement?
Debt Settlement is a process in which your debts are negotiated for a lesser amount than what is owed and repaid through a payment plan or in a lump sum payment.
2. Why would creditors choose to settle debts rather than simply charge you interest and late fees over and over again?
Well, it’s really a matter of dollars and good sense. Creditors know that if you get into such a bad financial position that you can’t pay your monthly payments, you may decide to declare bankruptcy or simply do nothing. In this case they may get nothing! Therefore, they are usually very willing to settle for a lower amount, given your hardship, than risk getting nothing at all, especially with a bankruptcy among the alternatives.
3. Will Debt Settlement Affect My Credit Score?
If you are current on your payments, it is very difficult, if not impossible to settle your debt. Creditors typically want to see that you are in a hardship situation before they are willing to negotiate. Therefore, you will have to voluntarily stop paying your unsecured debts, allowing them go into delinquency before settlement. In addition, you cannot pick and choose which debts you wish to settle in most cases. Your creditors and/or collections agencies may review your credit report, and most will be unwilling to negotiate when they see that they are being offered less than what is owed to them while others are being paid on time as agreed.
4. How Will Debt Settlement Affect My Taxes?
In general, in the United States, the IRS considers debt which is forgiven as income. This means if you borrow $15,000 on your credit cards and settle it for $8,000, the $7,000 difference is taxable as income since it is not repaid. However, the IRS will often waive this tax liability if you can show that you were insolvent during the time in which your debt settlement took place.
5. How long does a debt settlement program last?
Debt settlement programs assume an effort that will continue for many months. The time needed to produce a settlement depends on a number of factors. These may include: (a) your financial hardship, (b) the age and balance of the accounts that you owe your creditors, c) the funds you have available to pay for a settlement and (d) the willingness of individual creditors to enter into debt settlement negotiations. While no guarantees can be given, generally, the quicker you save money the sooner you will be in a position to reach your goals. Increased savings will provide you with the option to accept lesser discounts and will also enable you to accumulate funds to reach your debt settlement goals more quickly. However, any settlement must be acceptable to both you and your settling creditor.
Benefits of Bankruptcy
Chapter 7 Bankruptcy
The benefits include:
All dischargeable unsecured debts are discharged.
Your creditors must stop all lawsuits or harassment actions.
Wage garnishment is halted.
You may keep exempt property. This includes, within limits, clothes, wedding rings, furniture, appliances, a modest car and tools of your trade including books.
Home owners may retain their home equity up to a certain amount.
You may keep your car or home if you can keep up the payments.
Chapter 13 Bankruptcy
Here are some of the benefits:
As with Chapter 7, all creditor action against you is halted.
You may keep all of your property.
You pay off your unsecured debt interest free.
You may reduce your overall monthly payments by having your debts consolidated into one payment to the bankruptcy trustee.
This action buys time to handle a bankruptcy foreclosure. You may include your home loan arrearages in your payment plan. You may then keep the home if you can maintain your mortgage payments in addition to the Chapter 13 payment for your past debts.
1. “I have to qualify for bankruptcy.” - False. Anyone can qualify for bankruptcy.
The real question is under which chapter you qualify. Under the new law, which went into effect in October 2005, you qualify for a simpler, quicker Chapter 7 bankruptcy if your household income is below the median income for your state or if you pass a “Means Test” to see if you have minimal disposable income as determined by bankruptcy law.
Otherwise, you will have to file a Chapter 13 bankruptcy in which you make some contribution of your income (based upon your ability to pay) for a period of three to five years. However, you will obtain a discharge of your debts in both chapters.
2. “I will never have credit again if I file for bankruptcy.” - False.
There are two aspects to the consequences of filing for a bankruptcy: 1) The amount of time it takes to rebuild your credit and, 2) The amount of time it stays on your credit report. A bankruptcy will stay on your credit report for ten years. However, the national average time to recover credit is eighteen months.
The fact of bankruptcy is not a bar to obtaining credit. There is no law prohibiting a person from obtaining credit after bankruptcy. (In fact, you will probably get new applications in the mail from lenders eager for a customer with renewed debt capacity).
After bankruptcy, creditors evaluate you on how you have managed your finances:
Have you paid your new debts on time since the filing?
How much debt do you have now after the filing?
After the bankruptcy, generally you will be debt-free, so you are in a better position to handle new debt.
Note, however, that you need to consider whether new credit is that important to you. If you did not manage it well the first time, going back to financing your life with debt is not the answer.
3. “I will not be able to have credit for ten (or seven) years.” - False.
This is commonly confused with Myth #2. People confuse the amount of time the bankruptcy is on the credit report with how long, on average, it takes to recover credit.
4. “I will lose everything I own in bankruptcy, including my home and my car.” - False.
There are exemptions in every state, commonly known as poor debtor’s laws that allow you to keep the bare necessities. There are also federal bankruptcy code exemptions that can be used if state law allows it. If the value of the property is less than the debt, the court-appointed administrator of your case (known as a trustee) will allow you to retain the property. In a Chapter 13 case, you may keep any property that is not protected by the exemptions so long as you pay its value in your plan.
5. “I need to have a minimum amount of debt to qualify for bankruptcy.” - False.
What really matters is whether you can afford to pay off the debts you have in your specific situation. A debt of $5,000 may be overwhelming if the disposable income you have available will not pay it all off in a reasonable amount of time. Take a look at the disclosures on your credit cards that have been required by the new federal credit card law and see how long it will take you to pay off your balance paying the minimum payment.
6. “I am a bad person if I file for bankruptcy.” - False.
Remember that bankruptcy is a form of relief and not a punishment. Filing for bankruptcy does not make you a bad person. It was passed by policy-makers as the law of the land for the specific purpose of giving people an opportunity to get a “fresh start” financially. The law does not require you to explain how you got into this situation. The law recognizes unexpected life events occur such as lay-offs, under-employment, illness or divorce.
7. “If I file for bankruptcy it will affect my spouse.” - False.
Under the law, you are only liable for the debts for which you signed. If your spouse did not sign on the debt, then he or she is not responsible for it. The exception to this rule is when both signed and are jointly and severally liable (that is, the creditor can hold either of you or both responsible). In that case, the other liable party should continue to pay.
8. “Everyone will know I filed for bankruptcy.” - False.
Bankruptcy records are public information. Unless someone specifically searches for you, it does not come to light.
9. “I am making the minimum payments on my credit cards and my credit score is good. I don’t need to file bankruptcy.” - It depends.
Don’t fool yourself. See #5 above. Take a look at the disclosures on your credit cards that have been required by the new federal credit card law and see how long it will take you to pay off your balance paying the minimum payment.
10. “Taxes cannot be wiped out in bankruptcy.” - False.
Income taxes can be discharged under the following conditions:
a. The taxes relate to a tax year more than three years old.
b. Tax returns were filed by the debtor more than two years before the bankruptcy filing.
c. The IRS or a state tax agency has “assessed” the tax (noted in its records that the tax debt is fixed in amount and due and payable) more than 240 days before the bankruptcy filing.
11. “I need to have US citizenship to file for bankruptcy.” - False.
The relevant requirement for filing for bankruptcy is that you reside, are domiciled or have your principal place of business or most of your property is located in the district of the federal court in which you file during the prior six months.
12. “I can choose which debts or property I put into the bankruptcy.” - False.
You have to list all of your debts. Bankruptcy is not designed to favor just the debtor. There is a balance between the rights of debtors and creditors. It would not be fair to the creditors if you got to pick and choose which debts you could list. If you purposely omit debts or property in your bankruptcy, you may face a dismissal of your case and possible criminal charges.
Note that, for some debts, you may state your intention to reaffirm the debt. That is, you state your intention to maintain personal liability. The creditor, at his discretion, can usually give you a new contract where you agree to keep the debt, subject to court approval. You are always free to voluntarily re-pay if you wish.
Your attorney will work with you in planning to protect your property or file under the proper bankruptcy chapter so you can retain it.
13. “If I file for bankruptcy, creditors can still take my earnings even after I file my case.” - False.
In a Chapter 7 bankruptcy, any wages you earn after the bankruptcy filing are yours to keep. The only exception is an inheritance you come into within six months after the filing.
In a Chapter 13 bankruptcy, part of your earnings will be applied to your debts because you are entering a payment plan over a specified period of time.
However, the amount applied to your debts depends on your income and must be a reasonable amount that is affordable to you.
14. “I will not be able to get rid of most of my debts.” - False.
Most debts are dischargeable with a few exceptions. All unsecured debt is usually dischargeable, such as credit cards, medical bills, unsecured loans, etc. There are exceptions to this, such as certain types of taxes, domestic support obligations, etc.
Secured debts are also dischargeable, and you cannot be sued on them after the bankruptcy. You must either continue to pay, exercise your rights to redeem (make a lump sum payment of the value of the property to release in full the creditor’s lien), or reaffirm if the creditor requires it to keep the property. the agreement you signed giving the lender rights to the property as collateral survive the bankruptcy.
15. “I will be repaying all my debts in Chapter 13.” - False.
Your payment in Chapter 13 is generally based upon what you propose to do in your plan and what you can afford to pay. For example, let’s say you propose to pay your mortgage arrears of $18,000 in 60 months. Not counting the trustee’s commission for administering the plan, that would amount to a payment of at least $300/month. If you could comfortably pay $400/month given your income and expenses, then this is the amount that would be confirmed by the court.
If you have $6,000 in credit card debt, the $100 excess over the $300 would pay the credit cards at 100% -- hence you would be repaying all your debts, in this example. However, if your credit card debt total is $3,000, the distribution would be only 50%. This plan still meets all the requirements for confirmation. Rarely does a plan provide for 100% payment. 100% payment occurs only when the debtor has sufficient disposable income.
Chapter 7 Bankruptcy FAQs
1. Will I ever get credit again?
Yes. Most recover credit within a year and a half. Bankruptcy can be on your credit report for ten years. However, so are all the late payments, judgments, repossessions, foreclosures and the like. Bankruptcy clears the slate and allows a person to move forward. Your credit report is only one of the factors taken into account in evaluating a person for a loan. A key factor is the amount of existing debt the person still owes and shows up on the credit report. Remember, however, that getting new credit lines to continue living on debt is not the answer.
2. Will I lose my job?
No. The law prohibits discrimination against a person for having filed bankruptcy. If there is any impact with respect to your job, it will be because of a finding of personal financial irresponsibility and not because of the bankruptcy, in and of itself, which is often a result of events beyond the person's control such as divorce, a job lay-off, illness, etc. Losing employment because of personal financial irresponsibility is limited to the rare job that absolutely requires financial responsibility in the holder of that position.
3. Will my employer find out?
No. The filing is a public record in the court, but the information has to be actively sought out. As stated above, it is prohibited as grounds for employment discrimination.
4. Will I be turned down for a job in the future?
No. See answer to question #3 above.
5. Will I lose my security clearance?
Probably not. But this is a question that should be checked in in your particular situation, the type of clearance you have, and your employer. However, generally the bankruptcy itself is not the issue. The issue could be the person’s inability to manage his personal finances if that is a factor. Our firm has had clients who have had to file bankruptcy and continue to work for sensitive governmental agencies, such as the FBI and Transportation Safety Administration (TSA).
6. Will it affect my immigration status?
No. The bankruptcy itself does not have an impact on immigration status. Bankruptcy provides relief from debt, but is not a “public benefit” in the sense of directly providing cash or subsidized support for long-term living expenses from a governmental source.
7. Will I get rid of all my debts?
Yes. Generally, the debts of a typical consumer debtor are mostly of the types that are fully discharged, such as credit cards, judgments, deficiency judgments for debts remaining from foreclosure or repossession. There are a few types that cannot or are difficult to discharge, such as student loans (which can only be discharged upon a showing of extreme hardship by the debtor), governmental fines, debts stemming from some offenses society deems should not be released in bankruptcy, such as malicious acts of the debtor, loans procured by fraud and some types of taxes. Note, however, that the bankruptcy court gives you a forum in which to ask a judge to determine whether the debts are of the nondischargeable type.
8. Can I deal with my tax debts in bankruptcy?
Yes. Bankruptcy can completely discharge some taxes, all penalties and generally provide a means to pay what cannot be discharged in an interest-free payment plan as well as provide a forum to determine the amount or contest the tax liability. Each situation, however, needs to be examined carefully to see what relief may be available.
9. What are the chances I will NOT be approved?
None. The main exception is if you lie to the court on what you present in your filing regarding your assets, liabilities and financial affairs. A motion can be filed to order a dismissal of your case with a prohibition to re-filing for a stated time period or a lawsuit within the bankruptcy asking for denial of discharge of a specific debt. In some cases, criminal charges can be brought. Remember that your conversation with your lawyer is protected from disclosure. As a result you can be candid and frank about your situation. Doing otherwise will place you and your case at risk.
10. I am waiting for approval of a loan modification. Will it be affected?
No. The present federal government regulations for the Obama plan loan modification program (HAMP) bars lenders from disqualifying HAMP loan modification applicants because of bankruptcy. Our firm’s experience has been that some improve the chances for a modification, during and after bankruptcy, probably because the overall debt-to-income ratio improves.
11. Will someone from the court come to my house?
No. Again, this is very rare. The only time that it may happen is if the court-appointed administrator in Chapter 7 needs to send
over a realtor or an appraiser to value the home or property in the rare instance that the debtor has non-exempt property. This issue would be anticipated beforehand. Any visit would be coordinated with your attorney.
Chapter 13 Bankruptcy FAQs
In Chapter 13, the debtor proposes a payment to the court determined in part upon his income and on what he proposes to do in his plan to restructure his finances.
1. What if I get a raise during the time I am in the plan?
Generally, a payment plan can be modified post-confirmation only where there has been an “unanticipated, substantial” change in the debtor’s finances. There is no exact dollar figure of what that means, but it can safely be stated that normal year-to-year raises will not trigger a payment increase.
2. What if I need a loan to replace my car?
The debtor needs to seek court approval. But generally, if the request is necessary, reasonable and will improve the debtor’s performance in the plan, the courts will permit the debtor to take out new debt. For example, a car loan to get a modest vehicle that will provide transportation to and from work.
3. Will my employer find out?
The court will require an order to the employer to deduct payments directly from wages in almost all cases. However, the court order goes to the payroll department, not your supervisor. Again, you’re protected from employment discrimination. In fifteen years of bankruptcy practice, we have yet to see a client lose his job for exercising his legal rights.
4. What are some of the common mistakes to avoid?
Often, debtors come to the bankruptcy lawyer's office after already having made costly mistakes that could easily have been avoided, including:
Borrowing against a home to pay down credit cards. Now the debtor has turned what, in many cases, was unsecured debt, which could have been wiped out completely, into secured debt that the debtor must pay off or lose the house. Worst yet are predatory loans where the payments are so onerous as to make foreclosure almost a certainty.
Borrowing against a 401K plan. The debtor takes a loan out against a 401K plan and then finds he can't make the payments. If the debtor defaults on the loan, a distribution of the full loan proceeds will be declared for that tax year. The debtor will now have a tax liability (that cannot be discharged) equaling about a third to a half of the loan taken out to pay debt that was probably dischargeable in the first place.
Moving debt around to take advantage of low interest credit card offers. If the debtor files bankruptcy within a short time after this transfer, lenders left "holding the bag" often move in court to block the discharge claiming fraud for incurring the debt when the debtor knew he would not be able to pay it back.
Playing the "ostrich." Unable to face his or her financial problems, the debtor avoids getting help. The delay permits interest on priority taxes (that you must pay off) to build and also gives the IRS time to file a tax lien for persons with back tax debts. This delay makes the dischargeable tax debt into secured debt the debtor must now pay off.
Getting help from the "one trick pony." When shopping for help, pay attention to 1) the range of solutions and 2) the effectiveness of the solutions the debt professional offers. Always ask questions.
Accountants and enrolled agents. Debtors with tax debts must be aware that neither accountants nor enrolled agents can offer bankruptcy options unless they have a license to practice law. Usually they will offer only an offer in compromise, which may not be the best option for your case or an installment agreement which is almost no relief at all. Commonly Asked Questions: Would this tax debt be dischargeable in bankruptcy? Are you making a guarantee that my offer will be approved? What amount will be accepted as an approved offer by the IRS? How long will it take?
5. How long does it take?
Our firm can prepare a complete filing within a week and an emergency bankruptcy filing within an hour to invoke the automatic stay and stop debt enforcement action immediately. (Note: Credit counseling must be performed before the filing or the case will be rejected by the court. This can be done online.) Also, generally, all fees and costs are due before the filing is submitted to the court.
What if I have Loans and/or a Checking Account with a Credit Union?
Cross collateralization is a clause in a purchase contract that secures a loan which serves as collateral for all other loans made with the borrower in the past, present, and future. This type of loan is usually found at credit unions, but can sometimes be found at your typical banks.
Cross collateralization most commonly occurs with car loans. When you buy a vehicle from a bank or credit union you usually sign a security agreement that secures your car to the loan. This results in the lender holding the title to your car until you pay off the loan. If you default on the loan the bank or credit union can repossess your car. Most people are aware of this kind of agreement.
However there may also be a clause in the vehicle loan that ties any unsecured loans to that vehicle too. So if you later open a line of credit, a credit card account, or take out a personal loan from the same lender, those normally unsecured debts now become secured to your vehicle. If you decide to pay off your car loan to take possession of your car title, the credit union or other lending institution may not let you have the title until all your loans owed to them are satisfied. That means you could be paying much more for your car than you owe and probably more than it’s worth.
This dilemma becomes particularly sticky in bankruptcy, especially if the debtor is trying to file a Chapter 7 bankruptcy. In a Chapter 7 bankruptcy you either have to surrender your vehicle or reaffirm the debt. If you reaffirm the debt and your loan is with a credit union that has secured all other debts to your car you will have to pay those debts back too before you can keep you car. Normally those other debts would have been wiped out as unsecured debt in a Chapter 7. Most people who file bankruptcy don’t have the extra cash to pay of all of their debts.
One solution would be to file a Chapter 13 bankruptcy and repay your debts over a three to five year period. In a Chapter 13 bankruptcy the debtor can use the “cramdown” provision of the bankruptcy code. That allows you to pay the full amount of the value of the car and not all the other debts owed to the lender. The remaining debt is treated as unsecured debt and is discharged in bankruptcy.
Another cross collateralization trap can occur when a debtor has a loan and a checking account at the same lending institution. If he or she becomes past due on the loan the lender may access his or her checking account to pay the loan or freeze the account until it becomes current.
1101 Connecticut Ave NW Suite 450 Washington, DC 20036
Law Office of A Gordon
1101 Connecticut Ave NW
Washington, DC 20036
Call Us: 202.509.4680