bankruptcy blog
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.
Blindsided
You agree with your spouse to meet with an attorney regarding your financial issues. The first thing your spouse says is that you no longer own your home. You freeze. You’re still living there. Your spouse says that you lost your home because you failed to pay your property taxes and have been renting the home for several months from the new owner. The attorney hesitates before informing you that a bankruptcy won’t help you regain ownership of your home. He continues that had you filed a Chapter 13 before the tax deed transferred ownership, then you would have had an opportunity to pay the property taxes owed in a plan over 3-5 years.
This situation occurs frequently with varying degrees of severity. Your spouse could have told you that he or she paid a bill that you just received a garnishment notice for from your employer. Your car lender repossesses your car without warning because the car insurance has lapsed without your knowledge. In any partnership, it is common for there to be a division of labor with one spouse managing the household finances. However, it is important that the non-managing spouse to have a general understanding of the state of household finances. Here are some tools and tips for spouses to ensure that understanding:
- Review monthly bank statements, retirement statements, billing statements, and tax returns. When the statements come in the mail or in a paperless format, set aside time to review the documents with your spouse. This will increase your mutual understanding of your financial situation and protect you against any unexpected financial issues in the future.
- Monitor your Credit Report. Use a free service like creditkarma.com to know what is going on with your debt. Your credit report will show whether any of your accounts are in default or any of your creditors have filed lawsuits against you and received judgments.
- Create separate budgets and compare. Now that you are reviewing your financial information, create a budget separately from your spouse then compare. Hopefully, this will inspire a conversation about your financial goals and motivations. Try using a free online tool like mint.com to assist you with managing this aspect of your finances.
- Seek support from an accountant, financial adviser, or attorney. You may need assistance with understanding your finances with ease. Many professionals in the financial services industry offer free consultations to advise you of your options and to dispel common misconceptions regarding personal finances. If you unexpectedly find yourself in financial distress, it is helpful to have already built a meaningful relationship with a financial professional who can advise you knowing your goals and what matters most to you.
It is never too late to initiate these good habits. If you need some tools to have that courageous conversation about finances with your spouse, refer to my last blog. Your finances impact every aspect of your life. You don’t have to be in the dark about them. Start today and take control of your financial future.
Having the Courageous Conversation about Finances
We all have conversations that we need to have, but, for numerous reasons, haven’t. As we avoid the issues, they snowball, expanding to the size of the room until there is no air left to breath. It can be that suffocating. We talk to everyone who will listen (and some who pretend to) except for the person we actually need to have the conversation with.
Discussing finances with your spouse, partner, friend, or family member can be uncomfortable. Think about the time you’ve spent splitting a bill amongst friends at a restaurant. Remember the time you had to mention to your spouse that you used the credit card for that one trip to Lowes? Having the conversation about your budget doesn’t have to be paralyzing or a blame game. Before you have a courageous conversation about your finances, consider:
- Timing & Location. You may feel as though there is never an appropriate or best time to initiate the conversation. The longer you wait, the more time you have to conduct the conversation in your head. You should wait until your emotions are in check so that you bring a clear, conscientious mind to the conversation. Observe whether the other person would be in the right mindset to engage in the “money talk.” In line at the grocery store check-out is probably not the best time to be creating your budget.
- Intentions. Determine why you want to have the conversation. Be specific. Be mindful. Take time to write down and organize your thoughts ahead of time. Focus on the future and disclose what you’d like to see more of – a consistent budget, more collaboration in making financial decisions or more accountability.
- Trust. Being open, honest and calm will create an environment where everyone feels supported and empowered. Be vulnerable, staying mindful when you feel yourself becoming defensive. You will achieve the best outcome when the other participants in the conversation feel as though you are coming together to create a shared solution.
- Facts. Stick to the facts. Math does not lie. Download your bank statements, credit card bills, mortgage statements, retirement statements and any other information relevant to the conversation. With a clear picture of your financial situation, it will be easier to get on the same page and partner for a path forward. With clarity comes focus. With focus comes ease. With ease comes grace.
- Humility. Set aside your ego. This is not about being right. Actively engage with the other person to create a solution to a shared problem. Ask questions to better understand the other person’s perspective and concerns.
With these tools, you are now empowered to initiate that courageous conversation regarding your budget, debt, or need to file a bankruptcy. It will not make the conversation easy, but it will make it easier. Many situations can be resolved or mitigated if you simply start the conversation.
Sick of Medical Debt
You are looking at the ceiling of the inside of the ambulance as a mysterious sharp pain pulses in your abdomen. Last you remember, you were playing with your kids at your seven-year-old daughter’s birthday party. Your ex-husband had actually decided to come this year and even brought the chocolate cake, your daughter’s favorite. You close your eyes, bracing for the next wave of pain. The ambulance rumbles into the hospital parking lot. The medics throw open the back doors of the ambulance and roll the gurney onto the ground and through the hospital’s automatic doors. As you can recall later, you are asked questions regarding your place of birth and the name of the current president. It is all a blur.
You wake up in a hospital bed in a deep foggy haze. The doctor tells you that you will have to take it easy, which is easier said than done. You work on your feet all day as a teacher’s aide and have three kids under the age of 10. There are no days off. You end up having to take two unpaid weeks off from work to recover from your hospital stay. To keep it all together, you use your credit card to make your car payment and that month’s rent.
Then the hospital bills start rolling in. There is one for the ambulance ride, another for the emergency room, yet another for the blood testing, one for the medical imaging, two for different specialists and a separate bill for the hospital stay. You are overwhelmed. The total for the stay is more than you can afford to pay. The medical provider suggests that you apply for a loan, but you’re nervous that your credit will prevent you from obtaining any additional loans.
You are not alone (see NPR coverage called "Bill of the Month"). More people are insured than ever before. However, many are still struggling to pay their medical bills. The Consumer Financial Protection Bureau, who oversees consumer financial trends and behavior, released data in 2014 estimating that 43 million people have medical debt that is damaging their credit.
When navigating medical debt, you need to know that you have options and rights. Many healthcare providers want to work with you to ensure that you can repay the amounts owed. In some instances you can apply for financial assistance. You may be surprised that you qualify and end up paying nothing on the medical bills.
Medical debt and the subsequent collection practices can be confusing. As such, stay organized. You should keep notes of who you spoke with, the date you spoke to them, and the subject matter discussed.
Know that you can request proof of the debt in writing. The collector has to prove that the debt is valid. Starting September 15, 2017, the three major reporting agencies, Experian, Equifax and TransUnion, will set a 180-day waiting period before medical debt can be reported on your credit report. Once the medical debt is paid, you should request that the medical debt be removed from your credit report.
Your life can change in big ways in a flash. When that happens, you should know that you can get back on your feet and achieve financial wellness.
Bankruptcy: A Fresh Start
You walk out of your house in the morning to find that your vehicle is not in the driveway. You look again, discovering that it has not suddenly reappeared. Bewildered, a multitude of thoughts rush through your head. Was it stolen? Did it get repossessed? How will I get to work? What do I do now?
You just started your new job after being unemployed for several months. During that time, you fell behind on your bills, using up most of your savings and cashing out a retirement account. You had to decide whether to make your car loan payment or feed your kids. You chose the latter. Your ex-spouse only sporadically pays the court-ordered child support payment of $500. He now owes you close to $60,000.
You’re the responsible one. You juggle it all. You’re doing the best you can.
For the last couple of months your phone has been blowing up nonstop with calls from creditors. Past-due notices and final requests are stockpiled on your kitchen table. Each dollar and debt is tracked on a notepad. You have been figuring out how you could make this all work. It is overwhelming.
You walk back inside and look for your car loan statement to find a number to call because you’re worst fear has come true, your car lender repossessed your car. You know exactly where it is. The person on the other side of the phone explains that you can cure your car loan with a $2,500.00 payment today. You don’t receive your first paycheck for two weeks and have $1,000 in your bank account, the last remaining from your tax refund. You have rent, utilities, and groceries to pay for, which will eat up that money.
You are not alone. In the first three months of 2017, 966 bankruptcy cases were filed in Nebraska. The reasons for filing a bankruptcy run the gambit from overwhelming medical debt to a sudden loss of income. Considering bankruptcy is a smart decision if you are having difficulty paying your debt on top of your monthly living expenses, including items such as your rent, mortgage, groceries, and car insurance.
You may qualify to file a Chapter 13 where you retain all of your property and pay some or all of your debts though a payment plan that lasts 3-5 years. A Chapter 13 can help you save your car or house if you have fallen behind. You may qualify to pay only a portion of your unsecured debt (medical bills and credit cards) without interest, which is a paramount benefit of the Chapter 13 bankruptcy.
You may qualify to file a Chapter 7 where you can keep all of your property and eliminate all of your debt with some exceptions like student loans, child support, and most tax debt. By filing a Chapter 7, you would receive the benefit of a fresh financial start, allowing you to move on to rebuild your credit sooner rather than later.
Deciding whether to file a bankruptcy is a complex and emotional decision. Finding the right attorney to work with you to make that decision is crucial. Instead of worrying what will come next, you should meet with a bankruptcy attorney to discover your options for dealing with your financial situation.
You’re not in this alone.