Tag Archives: Chapter 13 Bankruptcy

Chapter 7 bankruptcy and why it could be a mistake

Recently on our bankruptcy forum a user asked, “I have thousands of dollars of unsecured debt. I have talked to several people who tout the benefits of filing Chapter 7 bankruptcy. I know, however, that it cannot be all good. I need to know more about the downsides of filing Chapter 7 and whether it’s actually a good choice for me.”

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Top 5 tips for saving money and improving your life

Recently on our forum a user asked, “I find myself on the brink of financial disaster for the second time in my life. I am only thirty years old. I have a decent paying job. I am at a loss. I am wondering if you can give me any tips for saving money and re-establishing financial control before I have to declare bankruptcy a second time.”

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Loan modification what do I need to know?

Recently on our legal forum a user asked, “My wife and I are not currently employed. We are about to lose our home. I keep reading that we might be able to renegotiate the terms of a mortgage with our lender. I think this is referred to as a loan modification. Can you tell me more about this process and what I need to do?”

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Bankruptcy Tips for Chapter 7 bankruptcy

Recently on our bankruptcy forum a user asked, “I am in a financial crisis. My spouse has divorced me, I need to find a job, and I am suffering from a severe medical condition. I have not worked in years, and I am scared. Additionally, I have over $50,000 in medical debts. I am thinking that my only option might be to file Chapter 7 bankruptcy. Do you have any bankruptcy tips for me or things I need to consider before I file?”

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Filing bankruptcy 6 things you should know

Filing bankruptcy is a very important decision. Unfortunately, because the stigma of filing bankruptcy has declined, many filers now file bankruptcy without considering the financial and long-term ramifications of their decision.

Bankruptcy is not for everyone. In fact, most debtors should find alternative means to resolve their financial crisis. Let’s look at six of the top things you need to consider before filing for bankruptcy protection.

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At Arms Length During a Chapter 13

Transaction at a Farmers' Market in 2009.

Transaction at a Farmers' Market in 2009. (Photo credit: Wikipedia)

Throughout the history of bankruptcy in the United States, every angle of making payments in a Chapter 13 has carefully been considered. After all, if you file bankruptcy, no one wants to pay more back to their unsecured creditors than they have to by law, unless of course, you are like my sister.

My sister went through a Chapter 13 and eventually paid back all of her creditors even after some of the debt was discharged. Amiable, but not necessary for everyone.

In fact, some people try to beat the system and pay less than they have to by law. When people take this view of bankruptcy, it is considered fraud and can be punishable, if convicted, by up to 5 years in jail and/or a $250,000 fine. Not everyone that looks at an angle to improve their bankruptcy situation is committing fraud, though.

This interesting personal bankruptcy story popped up on a bankruptcy forum website today, and it makes a good illustration of someone looking at their options and ways to improve their Chapter 13 situation: “Has anyone done this, basically have a relative purchase a home as a rental and you take over the house as if it were your own and eventually when your done with chapter 13 you transfer the property over to your name? I’m in the process of having my mother do this for me. I figure why throw away rental money when I could put it into a house that will eventually be mine. I will be saving $500 a month. I’ll still make a rental payment of 1500 as stated on my ch 13 paper work but my mother will hold the difference in savings and return it to me. Like a savings account, It’s a win win situation right?”

Bankruptcy laws are often complicated and can be very strange at times, especially to laymen who often do not really understand the process and the rules and regulations that accompany them. One thing is for sure, this particular blogging debtor understands enough about bankruptcy laws to ask the right questions.

Bankruptcy laws do not tell you who you can rent from and who you cannot, but a good rule of thumb in dealing with family members is to remember to stay at “arms length.”

The term, “arms length,” is often used as legal jargon in courts of law pertaining to the financial relationship between family members. It basically means that any financial transaction made by family members should be made independent and on equal footing. For instance, a parent selling property to their children must do so at fair market value, or the transaction can be looked at as a “gift” for taxing purposes.

The same holds true in bankruptcy cases. If the debtor’s Mother wants to buy a rental property and rent it to her child, there would be nothing wrong with that transaction as long as she rented it to the child at fair market rental value and money actually exchanged hands. If the Mother wants to gift the money paid and/or property after the conclusion of a Chapter 13, nothing wrong with this either as long as the transaction is reported as a gift for taxing and inheritance purposes.

Doing such transactions are not inherently fraud, but they will most likely raise the inquisitive nature of the bankruptcy trustee. Be ready to prove intent and the fair market rental value of the home when you make such a transaction with a family member during a Chapter 13 bankruptcy.

It is also a good idea to consult with a bankruptcy lawyer before you make the transaction. He or she will know how the bankruptcy trustee will likely act about making such an at arms length deal.

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Chapter 13 bankruptcy but unable to afford your payment plan

Chapter 13 bankruptcy is one of the two common types of bankruptcy used by individuals.  Unlike Chapter 7 bankruptcy that can eliminate an individual’s debt altogether, Chapter 13 bankruptcy is a debt reorganization and debt consolidation plan.

Debt consolidation as a part of a Chapter 13 bankruptcy means that you will submit to a bankruptcy court a payment plan for your debt based on what you can afford to pay.  The payment plan may run for as long as 60 months and would consolidate the various payments you owe into a single payment.

The debt consolidation works because the terms of the payment plan—the length, the interest rate, the total amount owed—are structured so the individual is paying less money each month—an affordable amount of money based on their income—than they were before filing for Chapter 13 bankruptcy.  If the bankruptcy court accepts your debt consolidation payment plan, you simply make the payments for the term of the plan.

What happens if your situation changes during the debt consolidation payment plan period of a Chapter 13 bankruptcy and you can no longer afford to make the payment amount agreed upon with the bankruptcy court in your debt consolidation payment plan?  This change could be because your income has decreased as the result of a job change or other factors, or your expenses could have increased as a result of unexpected medical bills or other issues outside of your control.

If you find that you can no longer meet the obligations as a part of your Chapter 13 debt consolidation payment plan, you have two primary options.

Modifying your Chapter13 Bankruptcy Payment Plan

If you are unable to make the payments under your payment plan for a good reason, such as a job loss or other change to your income, the bankruptcy court may modify your payment plan to match your new circumstances.

If your change is such that continuing to make the payments under the Chapter 13 bankruptcy creates an undue hardship, for instance, you are hospitalized, the bankruptcy court may discharge your debt altogether, which means you do not have to continue to make any further payments under your plan.

Filing for Chapter 7 Bankruptcy

If your income or expenses have changed and you can no longer make the minimum payments necessary as a part of a Chapter 13 bankruptcy, you may also be able to your bankruptcy into a Chapter 7 bankruptcy.  As noted above, Chapter 7 bankruptcy provides additional debt relief, not offered by filing Chapter 13 bankruptcy, because the Chapter 7 bankruptcy can immediately discharge many types of unsecured debts without a debt repayment schedule.

To change to a Chapter 7 bankruptcy, you simply need to qualify for the Chapter 7 bankruptcy by passing the means test and you cannot have declared Chapter 7 bankruptcy within the previous eight years.

Keep in mind that the information above is general in nature.  If you can no longer afford to make payments under your Chapter 13 payment plan, you need to take action by working with a bankruptcy attorney.  A bankruptcy attorney can help evaluate the best option for your specific situation and work with the bankruptcy court to implement your new plan.

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Will Increasing or Decreasing Income Affect a Bankrutpcy Plan?

A Chapter 13 bankruptcy is commonly called a wage earner’s plan. It is a type of bankruptcy most individuals can file requiring you to design a pay back plan with your disposable monthly income to pay your unsecured creditors. During the plan, all secured debts will be expected to be paid on time and up to date.

The plan can be designed to pay all or a portion of your debts over 3 to 5 years, depending on the amount of your disposable income. If the debtor’s current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period “for cause.” If your income is more than the state median, the plan is normally for five years. In no circumstances can a plan be for more than five years. Any unsecured debts still existing at the end of the pay out plan will be discharged.

What happens in a Chapter 13 if your income increases or decreases during the plan period?

Basically, if your income decreases for some reason through no fault of your own, and you cannot make the planned monthly payments to the bankruptcy trustee, you must petition the bankruptcy court to alter your payment plan to account for the loss. Otherwise, you run the risk of getting your bankruptcy dismissed if you cannot make the payments on time.

If your income is lowered enough to bring your total family income below the state median, there exists the possibility you can convert you bankruptcy to a Chapter 7. It would be wise to consult with a bankruptcy lawyer before you convert to consider all the ramifications for converting.

One recent question about increasing your income came from a debtor on a bankruptcy forum website who got a small raise, less than 3%, and an increase in tips. She was in a Chapter 13 plan, and her question was, “In bankruptcy, will increasing your income affect a Chapter 13 plan?”

She was afraid her meager earnings would be quickly gobbled up by the bankruptcy trustee, and she felt like she needed the cost of living raise to compensate for the rise in the cost of living. She also felt like the increase in tips might be temporary as they often are. She also wanted to know whether or not she was required to turn in the increase.

Bankruptcy laws require the woman to turn in any change of income to the bankruptcy court, or for that matter, any other kind of financial change that may occur during a Chapter 13 plan. It is not likely the bankruptcy trustee is going to be interested in such a meager and unstable increase in income. The raise was a cost of living raise and the increase in tips would have to hold up for a long period of time to make any difference.

A Chapter 13 plan is one of the harder types of bankruptcies to file because the bankruptcy laws governing it are complicated, and it requires an ongoing disciplined maintenance of the plan once filed. By filling out the form below, we can help you find a bankruptcy attorney in your area who can help design a Chapter 13 plan for your particular circumstances.

What are Your Options on Inheritance Before Filing Bankruptcy?

Many of you who are needing to file bankruptcy sometimes come into a small financial windfall in the form of an inheritance. What are your options on inheritance before filing bankruptcy?

To help you understand your options if you suddenly come into an inheritance and are considering bankruptcy, lets assume you shared an inheritance with siblings after one of your parents suddenly passed away.

Let us assume you live in Texas, you have not yet filed for bankruptcy, you just got a new job for the first time in three years, you owe a credit union money for an unsecured loan of $7,500, you owe over $75,000 in credit card debt, a collection agency is currently threatening a lawsuit against you, you have student loan payments due that are incurring interest, and you have back taxes due. Your inheritance will be around $25,000 for your share. What are your bankruptcy options to protect yourself?

Option number one is to hold off on filing bankruptcy until the inheritance is settled. The bankruptcy code prevents you from giving preferential treatment to creditors up to twelve months before you file for bankruptcy protection. Bankruptcy court trustees pay particular attention to preferential insider treatment like paying off the debt of a family member, but here are some options for using the inheritance money during the time before filing for bankruptcy:

  • You might use the money to pay off debt that is exempt from discharge in a bankruptcy. Under the illustrated assumptions made, you might use the inheritance money to pay off your student loans and/or back tax burdens. This may be done if your filing either a Chapter 7 bankruptcy or a Chapter 13 bankruptcy.

  • If you want to keep some of the money for yourself, you may be able to dump some of the money in an eligible Individual Retirement Account (IRA).

  • If most of the inheritance is coming from the sale of the home of the deceased, you may rent the home from your siblings using the Texas homestead exemption for your percent of ownership. After the bankruptcy is closed, you can sell the home and keep the proceeds.

  • If willing, your siblings could buy out your share of the inheritance before you file bankruptcy and before the estate of the deceased is settled. The bankruptcy court trustee would most likely give you the the option of buying back your part of the home received in an inheritance anyway if the home becomes a part of the bankruptcy estate.

The second option is to go ahead and file for bankruptcy protection realizing some inheritance estates take years to settle. Regardless of how long it takes the administrator to distribute the assets from the estate of the deceased, your right to any future distribution is a part of the bankruptcy estate. If the asset is not exempted, it is subject to liquidation by the trustee in a Chapter 7 bankruptcy, and he may wait on a settlement of an inheritance as long as it takes.

Theses are just a few of the options you might consider when dealing with bankruptcy and inheritance. If you have inheritance and bankruptcy issues, it may be wise to consider consulting with a bankruptcy lawyer. Let us help you find a bankruptcy attorney in your area of Texas that will answer you questions about bankruptcy laws.