Things to Avoid when Struggling Financially or Considering Bankruptcy

A lot of people find themselves struggling to pay their bills everyday.  Even if you are not immediately considering bankruptcy, if you are struggling to make these payments, it is important to understand that bankruptcy may be the best option for you either immediately or in the future.  Doing something wrong before you file bankruptcy could jeopardize your bankruptcy and could even cause you much more serious issues.

• Overtime Should be Used with Caution

When someone is considering bankruptcy protection, be very cautious with overtime.  The bankruptcy court will assess your income over the last 6 months to determine your ability to pay your debts.  Some people work overtime for a short period of time in order to try to pay their debt or save up money to pay for their bankruptcy attorney's fees.  Working a lot of overtime may make you ineligible for certain types of bankruptcy protection if it pushes your income up too far.  Instead of working to pay outrageous attorneys fees, it might be better to find a lower cost solution, such as a bankruptcy petition preparer to help you with your bankruptcy filing.

• Don't Borrow Money from Friends and Family

The court considers these people creditors, no different than Capital One.  You can't tell the court, "I want to pay my mom because I love her, but I don't care about my credit card company."  These debts will be treated like any other debt and it might cause a rift in the family.

• Don't Pay Back Friends and Family

Payments to friends and family are considered preference transfers.  If you made a payment to a creditor (including friends and family) in the year before your bankruptcy filing, the trustee may sue that creditor to recover the money.  The rationale is simple, everyone must be treated the same.  If you paid me $5,000 and didn't pay anyone else anything else, it simply is not fair to those that you didn't pay anything to.

• Don't Transfer Property Out of Your Name

Some people lose property in a bankruptcy.  To avoid this, often people will transfer their assets out of their name and into someone else's name.  There are 3 problems with this, first it is a preferential transfer and the other person will be sued by the trustee to get the property or monetary equivalent back.  Second, once the trustee has recovered the money or property, you cannot exempt it.  This means that if you had kept it in your name, you may have been eligible for an exemption that you are no longer entitled to after the transfer.  Finally, the Court may move to dismiss your case, or in limited particularly egregious cases, charge you with bankruptcy fraud, a felony.

• Don't Raid Your 401(k)

401(k) and retirement accounts generally are almost universally protected from the Bankruptcy code. This means that the assets in the account are yours and no creditor or bankruptcy court can generally access them.  Unfortunately, many people raid these accounts when they are in financial trouble trying to stay afloat.  Most still end up in bankruptcy, but without their retirement account.  Does it really make financial since to throw away your retirement to pay credit card bills?  

Also, don't forget about the tax consequences of taking this money.  If you are under 65 years of age, withdrawals are taxed as income PLUS you get a 10% penalty.  I have seen people who normally get $5,000 back at tax time suddenly owe thousands of dollars in taxes because they took money from their retirement account.  So in addition to losing your retirement, you lose your tax refund, and now you have to file bankruptcy and figure out how to pay Uncle Sam.

• Don't Change Your Tax Withholdings 

Another action that a lot of people take when they are trying to get more money is changing their tax withholdings on their paycheck to stop or substantially reduce the amount of money being taken from their paycheck.  This can cause a couple of problems.  The first problem is obvious:  at tax time, you will owe Uncle Sam money that you still can't afford to repay.  Eventually, your paycheck will be garnished by the IRS and you will be left without a paycheck.  I once helped a Nurse that made about $100k per year after the IRS garnished her check and left her with just $80 for a two week period.  Don't let that happen to you.

The change of your tax withholdings may also prevent you from filing bankruptcy in the future.  The Court reviews your income and necessary expenses (including tax withholdings) for the last 6 months to determine whether you can afford to pay your debts.  Without this major expense, you may eliminate some of your bankruptcy options.

• Avoid Credit Cards and New Debts

Creditors who have recently extended you credit may claim that you obtained the credit with the intent of filing bankruptcy.  When you obtain credit, you must have a reasonable expectation that you will be able to pay it back.  If you use a credit card then file for bankruptcy protection, the creditor may claim that you fraudulently obtained the credit and had no intention of paying it back.  The longer the period between the last use on your credit cards and the filing of your bankruptcy petition, the better.

• Don't Pawn the Title to Your Car

This is plain painful to see.  If you are paying unsecured credit cards at 10-30% interest with a secured title pawn with an interest rate of 100-200% interest, you are hurting yourself.  In addition, title pawn companies can take your car if you do not renew or pay off your title pawn within 30 days. Forget trying to hide your car, they won't look too hard for it, they simply charge you with theft (a felony).  If you file for bankruptcy protection, you will either need to keep the loan sharks loan or surrender the car.

Simplified Document Solutions is a congressionally designated debt relief agency.  We help people obtain debt relief under the U.S. Bankruptcy Code.  Simplified Document Solutions is BBB Accredited and has an "A" rating with the Better Business Bureau.  We have offices in Conyers, Georgia and College Park, Georgia where we give good people who have run into hard times a fresh financial start for a low fee of only $249.  Please contact us at 678-490-5841 to schedule your free consultation.

What is the best type of bankruptcy to file?

When someone is struggling financially, bankruptcy may be the best option for them to get out of debt and get their lives and their credit back on track.  Bankruptcy generally eliminates or reorganizes your debts to give you a fresh financial start.

Bankruptcy professionals, such as paralegals, attorneys, petition preparers, lawyers and others are often asked "What is the best type of bankruptcy?"  There are 5 types, or chapters, of bankruptcy.  Each is designed to do something different for different situations.  While there isn't necessarily a "best" chapter of bankruptcy overall, there may be a best chapter of bankruptcy for your particular situation.  In order to understand the best type of bankruptcy for you, you first must understand the different types of bankruptcies.

Chapter 7 bankruptcy is the most common form of bankruptcy.  Chapter 7 is often referred to as a "fresh start bankruptcy," a "total bankruptcy," or a "complete bankruptcy."  Many individuals find this type of bankruptcy to fit their situation the best, and it is generally the most simple and successful form of bankruptcy.  Chapter 7 bankruptcy may be filed by either an individual or a business (although businesses that file Chapter 7 must go out of business).  For individuals, Chapter 7 bankruptcy provides you with a quick resolution to a fresh start.  Chapter 7 bankruptcy relies on the theory that the Debtor provides the Court all of their assets (except for exempt assets) in exchange for a discharge (release) from their debts.  It is important to know that very few people lose anything in a Chapter 7 bankruptcy.

Chapter 7 bankruptcy generally only lasts 3-4 months and has almost a 100% success rate.  Generally, all a debtor has to do is file the appropriate paperwork (professionally prepared by Simplified Document Solutions or a competitor), go to a quick hearing to verify the identity of the person and verify the paperwork, and wait for the discharge.

Chapter 7 does have some limitations.  For instance, you must qualify for chapter 7 bankruptcy protection based on your income and expenses.  This keeps some people who have incomes in excess of the median income for their state from filing for Chapter 7 bankruptcy protection.  Georgia has pretty generous exemptions, but some people with valuable property may decide that bankruptcy is not the best option for them because they risk losing this property.  Some debts may also not be discharged.  For instance, student loans are not discharged without filing a lawsuit against the government and/or student loan lender, child support, alimony, and property settlements are not dischargeable, and some taxes are not discharged.  Also, the Supreme Court recently stopped bankruptcy judges from "stripping" second mortgages and homeowner's association liens from your home.

Chapter 9 bankruptcy is designed for municipalities.  It is a reorganization to allow cities, counties, and municipal corporations to shed some of their debt and keep operating.  The most notorious example of this was when the City of Detroit filed bankruptcy a few years ago.  It eliminated some of their unsecured debt and pensions to permit the city to begin the rebuilding process.  Less publicized Chapter 9 filings are school boards and municipal hospitals.

Chapter 11 bankruptcy is a reorganization for businesses and individuals with extremely high debts. This is the third most common form of bankruptcy and it is primarily used for businesses (LLC or Inc.).  Individuals who file for Chapter 11 bankruptcy often do so because their debts are in excess of the debt limits for Chapter 13, as such you often hear of celebrities filing for Chapter 11 protection.  Chapter 11 bankruptcy is incredibly complex and should not be attempted without the assistance of a very experienced Chapter 11 attorney (not just any bankruptcy attorney will be competent to handle this).

Chapter 12 bankruptcy is for family farmers and fishermen.  It is similar to a Chapter 11, although less common.  Because people in these occupations often have irregular income and lots of assets, it is more flexible than other forms of bankruptcy for these individuals.  In order to qualify for this type of bankruptcy, most of your income must come from farming or commercial fishing.  Again, I would not attempt this without a very experienced Chapter 12 attorney.

Chapter 13 bankruptcy is a reorganization for an individual (or married couple).  This is often called a "wage earner plan" because it requires regular monthly payments.  A chapter 13 bankruptcy is a repayment plan that lasts 3-5 years.  Nearly all of your debt is rolled into a Chapter 13 plan and the Debtor is expected to make a payment every month to pay some or all of it off.  At the end of the case, most of your debts are discharged.

Chapter 13 bankruptcy does have some major benefits.  For instance, homeowner's filing Chapter 13 are still permitted to strip off their second mortgage or homeowner's association liens.  If you owe money on a car, it may be possible to reduce the interest rate and stretch out the payments to 5 years. If someone has mortgage arrears, child support arrears, behind on car payments, or owes taxes, a Chapter 13 may permit you to catch up on those payments through the plan. High income individuals are also not excluded from filing Chapter 13, although their income is used in determining the monthly payment and the length of the plan.

Chapter 13 has some downfalls as well.  You are expected to pay all of your income in excess of what is reasonably required for the support of yourself and your family for the entire length of the plan, this often means major sacrifices that people are not ready to make.  Also, you are not allowed to re-establish your credit until the case is completed.  The plan can be especially hard if you lose your job during the case or get ill.  Because of this, more chapter 13 cases get dismissed (thrown out) than discharged.  Making things even more difficult is the requirement in most cases that a debtor turn over their tax refund in every year of the case.  People who get large tax refunds hate this requirement.

Because of the complexity of chapter 13 cases, Simplified Document Solutions often encourages people to seek the assistance of an experienced attorney before doing this.  CAUTION:  Bankruptcy attorneys make a lot more money on Chapter 13 bankruptcy than they do on Chapter 7; giving them a perverse incentive to suggest them to individuals who do not really need them.  You should ask your attorney, "Why are you suggesting a chapter 13?"  Ask yourself "Will I be okay with losing my tax refund?"  Is it reasonable to believe that I might change jobs or become ill in the next 5 years?"  Am I ready to give up eating-out for a full 5 years?" Is this house or this car worth struggling for 5 years?" "Will this car even run in 5 years?" Will I be okay without any new debt for 5 years, why haven't I been okay without incurring debt over the last 5 years, what's changed?"  If you are trying to stop repossession or foreclosure of a home or car, it might make since to buy some time with the property by filing chapter 7 and give it up at the end of the Chapter 7. Be aware that your attorney is ultimately in business to make more money and may not have your best interests at heart.  It is ultimately you that must protect yourself, nobody else will.