bankruptcy blog
Bankruptcy Is More Common Than You Think
Filing for bankruptcy is not something that most people want to do. However, it may provide the best, most straightforward solution to dealing with overwhelming debt. Many people struggle for months and even years before they decide to take the first step to a fresh start by setting up a free bankruptcy consultation.
During the contemplation phase, a person can experience a myriad of emotions: shame, guilt, frustration, or sadness. It is hard to admit to yourself and others that you may need help. I have seen people make the decision to liquidate a retirement account in an attempt to resolve the situation only to be left with a tax bill from the IRS. I call this replacing the monkey on your back with a baby gorilla: both are a burden to carry. Seeking support from a bankruptcy attorney can protect the retirement account and eliminate the debt.
Figuring this all out on your own can be both overwhelming and isolating. I am here to tell you that you are not alone (https://www.marketplace.org/2017/07/25/economy/americans-emergency-savings-wealth). While confiding with a trusted family-member, co-worker, or friend, you may be surprised that others have experienced similar situations. Having that shared experience will empower you to take steps to address the issues and move toward solutions.
In many consultations, the person I am meeting with will divulge that they finally decided to come in because someone provided them with the support to make the decision. It is also common that the person shares that he or she should have made the decision long ago. You don’t have to go this path alone. Life can change in big ways in a moment. Letting in support allows you to get outside of your own head when making a decision. You may be thinking your way in a circle trying to figure out how to pay off your debt when a simple and straightforward solution like a bankruptcy is readily available.
Letting in support can be hard. But it doesn’t have to be. Here are a few simple tips to get started:
- Write down who you would trust to share your financial struggles with.
- Write down your goals, e.g., financial stability, spend more time with my children instead of figuring out how to pay debt.
- Let in support for taking meaningful action, e.g., scheduling a free bankruptcy consultation.
- Be open to questioning your most closely held beliefs, opinions, and assumptions, e.g., “I have to do this alone. I will never get out of this.”
When Filing Chapter 13 Bankruptcy Makes Sense
A chapter 13 bankruptcy, which involves a 3-5 year repayment plan, is almost always a better option for the financially distressed than the current status quo.
I use the analogy of the ever-growing gobstopper. Without filing bankruptcy, you pay your monthly minimum payments on your credit cards. Because you’ve made those payments, you end up running out of disposable cash before your next paycheck. As a result, you use your credit cards again to pay for basic living expenses.
For example: Your monthly minimum credit card payments are $950. A large chunk of that goes towards interest. Before your next pay day, you run out of cash and have to charge $950 for new tires and summer soccer registration for your kids. The gobstopper is bigger the next month even though you started it off by taking a big chomp out of it. On top of paying those monthly minimum credit card payments, you have a monthly vehicle payments totaling $400, medical bills totaling $150 per month, and a monthly student loan payment of $400. You pay $1,900 per month on debt, but are not getting anywhere. You make $4,500 take-home pay per month, but feel as though you are living paycheck to paycheck.
You may never reach a point where you are unable to pay your minimum payments. However, if you look at the back of your credit card statement, you will find a little section that shows you how much you will eventually pay in interest and how long it will take to pay off the balance interest if you only pay the minimums, assuming you make no new purchases.
Now let’s add some more layers and see what a Ch. 13 bankruptcy would do in this scenario:
- You owe $21,000 on a car loan, which includes the total interest you would pay over the lifetime of the loan
- You owe $5,000 in medical debt
- You owe $15,000 on credit cards
- The estimated attorney’s fees to be paid in your Ch. 13 is $4,000
- The Chapter 13 Trustee receives up to 10% of the payout, which is $4,500
- If you were to pay 100% of all of your debt back, the total payment would be $45,000, which can be paid over 5 years.
- The monthly payment would be $750/month for 60 months.
- Even adding the student loan payment of $400 only brings the monthly total to $1,150, which is much better than paying $1,900/month.
The benefits of filing are that:
- You can pay for your financed and leased vehicles through your Chapter 13 bankruptcy.
- You keep all of your property even if that property is not exempt and would be liquidated in a Chapter 7 bankruptcy.
- You can be debt free in 3-5 years.
- You pay most of your attorney’s fees through the plan.
- You typically pay less than 100% of unsecured debt through the plan without interest. The unsecured debt you don’t pay gets discharged (eliminated) at the end of your plan with some exceptions like student loans and some tax debt. If, through your plan, you only paid 50% of your credit card and medical debt, the other 50% would be discharged, meaning you would not be liable for paying that once you made your last plan payment.
- You keep making your monthly mortgage payments directly to your mortgage company.
- You make one payment a month that handles all of your debt (except for your mortgage payment and student loan payments). In most cases that payment is paid directly from your paycheck, which is convenient and stress-free.
Transferring Property Before Bankruptcy
“I can just give my truck to my brother, right?” Many clients and prospective clients have asked me some variation of this question. The quick answer is an outright “no” because doing so may be a fraudulent transfer.
Under Nebraska State Law, a person cannot simply transfer an asset without receiving reasonably equivalent value in exchange for the transfer if that person is insolvent or if the person becomes insolvent as a result of the transfer. Otherwise, a person would have incentive to transfer all property to another without receiving anything in exchange if they were trying to shield assets from their creditors or from liquidation in a Chapter 7 bankruptcy.
For example: You own a truck worth $15,000. As I have previously discussed, you will be able to exempt $10,000 under the new Nebraska Exemption Laws, leaving $5,000 as unexempt (unprotected) and subject to liquidation in a Ch.7. If you simply re-titled the vehicle in your brother’s name without receiving any payment and then file Chapter 7 bankruptcy, the Chapter 7 Trustee may go get the truck from your brother and undo the transfer.
The look-back period under Nebraska State Law is four (4) years, meaning that your creditors or the Chapter 7 Trustee can look at all transfers made within four (4) years to see whether or not a fraudulent transfer has occurred. Under bankruptcy law, the look-back period is two (2) years.
Under bankruptcy law, you may be denied your discharge (elimination of legal obligation on your debts) if you transferred property within the one year prior to filing with the intent to hinder, delay, or defraud a creditor. A creditor would have to bring a lawsuit (called an adversary proceeding) against you to have the Bankruptcy Court determine that you should be denied a discharge. Even though these are uncommon actions that creditors bring, it is still something to be mindful of.
For example: If you gave title to your brother without him paying for it, you would have to list that in your eventual bankruptcy paperwork. A creditor that is paying attention may use that as evidence that you should be denied your discharge.
You can avoid these issues by doing one of the following:
- Receive proper value for the transfer. Your brother can buy your truck for $15,000.
- Undo the transfer. Have your brother transfer the truck’s title back to you.
- File a Ch. 13 bankruptcy. You can repay the value of the transferred asset to your creditors through a 3-5 year repayment plan.
- Wait to file. If you cannot do one of the above actions, you can choose to wait beyond the reach of the look-back period.
What to Expect in Your Bankruptcy
Filing for bankruptcy does not have to be stressful. Hiring an experienced bankruptcy attorney can ensure that your path towards a fresh start is a smooth one.
Getting Started
The first step is to schedule a free initial consultation with one of our experienced bankruptcy attorneys. During the consultation, the attorney will listen to your story, addressing your questions and concerns regarding your financial distress. By the end of the consultation, you will find relief knowing your bankruptcy options for dealing with your debt, which are typically a Chapter 7 or Chapter 13 bankruptcy.
Attorney’s Fees and Filing Fee
In a Chapter 7 bankruptcy, the attorney’s fees and filing fee must be paid prior to drafting and filing your case. In a Chapter 13 bankruptcy, only a portion of the attorney’s fees and the full filing fee are due prior to filing your case. The majority of attorney’s fees are paid as a part of your Chapter 13 repayment plan. Our Accounts Manager will take the time to ensure that you understand the fees to be paid and the scope of our representation.
Financial Information and Documentation
In any bankruptcy, you are required to provide information pertaining to property you own, debts, income, and expenses. Typical information to provide includes pay stubs, bank account statements, and tax returns. Also, you will be required to complete a Credit Counseling Course within 180 days prior to filing. Once all requested information has been received, the bankruptcy paperwork can be drafted and reviewed with your bankruptcy attorney.
Case Filed
After you sit down with your bankruptcy attorney to review and sign the paperwork, you are ready to file your bankruptcy. Once filed, your creditors receive notice and the bankruptcy laws prohibit them from contacting you or otherwise attempting to collect a debt. You will have to appear one time at court for the First Meeting of Creditors. The bankruptcy trustee, who is assigned to oversee your case, conducts the meeting. We support you to answer the trustee’s questions regarding the documents that we will have reviewed prior to filing.
The Discharge Eliminates Your Debt
At the end of your case, the goal is to discharge or eliminate as much debt as possible. Some debts cannot be discharged, including student loans, some tax debts, and domestic support obligations (child support and alimony). In a Chapter 7, the court typically discharges your debt approximately three months after you file. In a Chapter 13, the discharge is entered once you make the final payment of your 3 to 5 year plan.
Til Debt Do Us Part
One of the main stressors leading to divorce is debt. Debt may be a main point of contention before, during, and after divorce. You and your former spouse may have decided to split all of your debt 50/50. You may have kept only the debts in each of your respective names. Your spouse may have agreed to refinance the home mortgage to remove your name. The multitude of outcomes depends on the unique facts of your case. However, no matter the outcome, you believe that you resolved the debt issue once and for all when your divorce decree was finalized. If only it were that easy.
What does a divorce decree really do with debt?
Removing the romance, marriage and divorce is simply an agreement between two people. Debt is typically owed to a third party. A divorce decree states how the marital and non-marital debt is to be handled between the spouses. It does not impact the third party creditor’s rights. If, in the future, one spouse does not follow the decree, the creditor who is owed the money does not care what your decree says. They weren’t a party to the divorce
For example, suppose as a part of the divorce, Spouse A agreed to pay 100% of a joint credit card. In the future, Spouse A becomes unemployed and stops paying the credit card payment. The credit card company will seek payment from Spouse B as well. It won’t take into consideration what Spouse A and Spouse B agreed to as a part of the divorce.
What happens when a person files for bankruptcy after a divorce is final?
The federal bankruptcy law’s impact on divorce-related debt can be daunting and confusing. Many times, Spouse B receives the bankruptcy notice without any forewarning from Spouse A.
If you are Spouse B, you have no idea what this means and how it impacts the debts you had dealt with in your divorce. Your spouse agreed to pay 100% of the credit cards that were in both your names. Chapter 7 and Chapter 13 bankruptcy treat divorce-related debts in different ways.
In a Chapter 7, the filing ex-spouse may be able to discharge or eliminate his or her obligation to the credit card company. However, the filing ex-spouse is not exempt from the obligation to the non-filing ex-spouse to repay 100% of the credit card debt pursuant to the divorce decree. The person filing the bankruptcy may not ultimately receive as a fresh of a start as originally thought.
In a Chapter 13, the outcome is different. The filing ex-spouse can discharge their obligation to both the credit card company and the non-filing ex-spouse to pay 100% of the credit card debt pursuant to the divorce decree. This is sometimes referred to as the super-discharge. It may be the main motivating factor for filing a Chapter 13 over a Chapter 7.
Bankruptcy Isn’t as Scary as You Think
You may be struggling with your debt, wading through a sea of information and misinformation online regarding possible solutions. Most quests for knowledge start with a question posed to Google. “Should I hire a bankruptcy attorney or hire a debt settlement company?” On the radio, you may have heard the tantalizing advertisements where a debt settlement company promises to get you out of debt without filing for bankruptcy.
Pay 50% of your debt. Be debt free fast. The debt settlement ad usually also mentions a key fear of anyone struggling with debt, if you file for bankruptcy you will lose your house, car, and other personal possessions.
First, in well over 90% of Chapter 7 bankruptcy cases, the person who discharges their debt retains all of their property. However, I have seen situations where a person liquidates a retirement account to settle debt only to later find out that their retirement would have been 100% protected in a bankruptcy in Nebraska. The other downer was that the liquidated retirement money only went to paying for a debt settlement company’s fees and not towards any of the person’s debt.
Second, many people struggling with debt are not in the position to pay on any of their debt let alone settle it for 50%. When your income is just enough to cover basic living expenses (housing, food, clothing, transportation, etc.), a bankruptcy that discharges your debts makes the most sense. Hiring a debt settlement company almost always delays the inevitable.
Third, a bankruptcy is the faster and more efficient solution. The Chapter 7 bankruptcy can take only 3-4 months and it handles all of your debt at one time (with some exceptions like student loans and some tax debts). A debt settlement company may not be able to settle your debts for 2-3 years. Additionally, many creditors require you to default and be in default for quite some time before being open to settling. While they wait, interest, penalties, and even attorney’s fees accrue.
Fourth, the cost of filing a Chapter 7 bankruptcy is extremely affordable as compared to a debt settlement company’s fees. The general cost of a consumer Chapter 7 case can range from $1,500 to $2,500. A debt settlement company charges a percentage of the cancelled debt. Additionally, you may be at risk of paying taxes on the cancelled portion of the debt.
For example: You had $10,000 worth of credit card debt. By the time the debt settlement company settles the debt, you owe $15,000 because of the accruing interest, penalties, and attorney’s fees. After liquidating a retirement account, you pay $7,500 to the creditor as a part of the settlement. You pay 20% of the cancelled amount ($7,500), which is $1,500, to the debt settlement company for its fee. The total you paid was $9,000, which is only $1,000 less than the original principal balance. On top of that, you receive a 1099-C at tax time and may owe taxes on the cancelled portion of the debt. Overall you may end up paying back 100% or more of the original debt.
If you filed a Chapter 7 bankruptcy instead, you would have paid $1,500 to an experienced bankruptcy attorney. You would have kept your $7,500 retirement account. You would have eliminated your legal obligation to pay the $10,000 debt and would suffer no potential income tax consequences come tax time. In effect, you saved $8,500 and achieved the same end result.
When figuring out how to handle your debt, it can be overwhelming. Meeting with an experienced Nebraska bankruptcy attorney who can comprehensively provide you with your bankruptcy and non-bankruptcy options is a good place to start.