Payment for back taxes are usually built into a chapter 13 bankruptcy plan. Most taxes are exempt from bankruptcy discharge and in order to pay the claims back, receive priority payment status in any bankruptcy plan. The arrears occurring prior to the bankruptcy filing date are built into the plan. Where does a tax refund go when a debtor is in a chapter 13 bankruptcy plan? Continue reading
One of the debts exempt from a bankruptcy discharge is a student loan debt. It use to be that only certain government type student loan debts were exempt from bankruptcy discharge, but after the 2005 bankruptcy law changes, both private and government student loan debts are now exempt from discharge. Nevertheless, there are different ways you can defer the payments of your student loan. Continue reading
Not much more than a generation ago, it use to be you could go with your father to the local bank, and because every one involved in teaching you the ins and outs of banking had a direct interest in teaching you how to broker a loan, you could get a small loan with a modest interest rate with little or no collateral. Today, however, times have dramatically changed!
Most small banks have been swallowed up by the huge corporate banks, and the personalized training concept that use to be passed down from generation to generation is quickly becoming a thing of the past. Banks now look at you as a number they can plug into a formula for profit, and they often are more interested in actuaries than loyalty. Loan officers have become power brokers that are much more at home with credit scoring in relationship to loan default, and they measure success in quantities rather than quality. The more the volume the greater for success, at least according to the actuaries.
So, how does the average person today reasonably go about brokering a simple loan from these new power brokers? Here are some suggestions on what you might do about the power brokers of today:
Keep your business relationships business. Borrowing money is a business decision. Both you and the lender are taking a business risk. Your lender should never be your friend or a family member. You may have to default on a loan one day through no fault of your own. Friends and family might not understand that concept.
Stay away from Unsecured loans if at all possible. Secured loans, like borrowing for a house or automobile, have built in collateral, longer terms and stability in contracts, and normally command smaller interest rates. In default, the repossession and foreclosure processes are usually time consuming legal processes contained within state laws.
Unsecured loans, like credit card debt, tend to have vacillating shorter terms, higher interest rates, and the collections process can often be very stressful for the debtor who defaults.
Never borrow money to make ends meet. A good rule of thumb is if you have to borrow money to make ends meet, you cannot afford the loan even if you think it is temporary. This simply means if you do not have the means to pay the loan on time, do not use your credit. You make secured loans when you know you have the income to make the payments on time. Borrowing on a credit card without knowing for sure you will have income to make the full payment is a bad idea.
Never borrow money with intentions of making the minimum payment in revolving credit. The fastest and easiest way to bankruptcy is to get behind on revolving credit and make only the minimum payments. If you cannot pay back the revolving amount in full at the end of the month, don’t make the loan.
Never max out your limits on credit cards. A credit card company wants to extend you more credit in the hopes you will start making high interest payments on their loan. They will even extend you additional credit if you max out your limits as long as you pay on time. Maxing out your limit on a credit card can be a recipe for default, especially when you begin paying less than the full amount each month.
Dealing with the power brokers in lending institutions today can be very legally complicated. Failure in these types of business relationships can lead to bankruptcy. Filing for bankruptcy protection may be the last resort for settling such business matters. Contact a bankruptcy lawyer in your area if you are experiencing these types of difficulties.
Student loans, both private and government types, cannot normally be discharged in any type of bankruptcy you might file. Unless you can prove you are a hardship case that might never be able to pay the loans, student loans will survive a bankruptcy. The burden of proof in a bankruptcy is on you and often very hard to prove.
Federal laws governing student loans are not without compassionate options. Federal laws provide options for paying back federal student loans when you do not have the financial ability to do so. These laws are designed to allow those of you, who are temporarily without the ability to pay, to pay what you can afford until you are making the kind of money to support the debt.
As an example, a blogger who owed federal student loans came on a bankruptcy forum website recently and blogged, “I know student loans can’t be discharged unless there’s a really good reason, but I have to ask. I was just wondering if the fact I owe $63K and only have an entry level BA degree in psychology [makes a difference]? I just got a job making $12/hr after 90 days probation is up. My husband is an immigrant who is in the unskilled workforce and we have 2 kids. I’m healthy & he’s healthy. There really no hardship other than an inability to make enough to realistically pay these loans off in a timely manner.”
Fortunately, there is hope to pay federal student loans for people like the one in this example. Here are some options she and others like her might consider:
Direct Consolidation Loan. You might first consider consolidating your federal student loans into a Direct Consolidation Loan. This solitary loan may lower you payments down from multiple loan payments in order for you to afford the payment. This is a federal government loan consolidation available through the U.S. Department of Education.
Income Based Repayment (IBR). Once you have consolidated your loans and find you still cannot afford the payments, you can then apply for an IBR plan. An IBR is a repayment plan for the major types of federal student loans that caps your required monthly payment at an amount intended to be affordable based on your income and family size. This type of loan adjustment is for the lowest income producers and may result in $0 payments to the plan if you are at or below the poverty level in your state. There are multiple advantages and disadvantages for this type of repayment plan.
Income Contingent Repayment (ICR). An ICR gives you the flexibility to meet your Direct Loan obligations without causing undue financial hardship. Each year, your monthly payments will be calculated on the basis of your adjusted gross income (AGI, plus your spouse’s income if you’re married), family size, and the total amount of your Direct Loans. The plan provides for a gradual increase in payments and is primarily for ex-students who have the ability to pay more. If you have paid on the plan for 25 years, what has not been paid off will be forgiven. You may still have a tax burden on the deficiency of what was forgiven.
Before you obtain a student loan or file a bankruptcy, you should know your options!
Personal Bankruptcy Story Described
A married couple who are filing a Chapter 13 jointly, recently appealed to a bankruptcy forum website for help. They wrote: “We need to purchase a car prior to [filing a Chapter 13] because both of our cars are older and not in great shape, so we have decided to buy a certified prior owned car for good solid transportation with a factory warranty…I am not a part of the transaction. I sold my truck privately to provide a down payment which we of course need to get to the dealer. My wife still has good credit and is making a loan for the balance owed on the car.
My initial thought was to wire the down payment from our joint account to the bank loaning us the money on the car. However, when the dealer sent the wiring instructions I noticed that the bank the down payment is going to is a bank I owe $8K in cc debt which I am currently in default. If the bank finds out about the transfer, can they seize my down payment on the car and pay off some of the credit card debt, causing us to lose our down payment on the car?”
Shared Bank Account and Cross Col-lateralization
Cross col-lateralization is when you have a shared bank account with a loan in the same banking institution that you also have a checking and/or savings account. Credit Unions are notorious for providing themselves, within the application process when opening a new account, the ability to seize a shared bank account in order to pay off a loan in default. Most commercial banks do not practice cross col-lateralization, but some may.
Shared Bank Account and How It Can Impact a Chapter 13
If the bank in question as described in the bankruptcy story does practice a shared bank account situation that has been shared by cross col-lateralization, it is possible for the banking institution to seize the down payment on the car and use it to pay off the credit card balance with interest and penalties.
A problem arises for the bank which performs the seizure on a shared bank account if the couple files a Chapter 13 as planned. This will most likely cause the bankruptcy trustee to view the seizure as a preferential payment by the couple. If so, he could take back the seized payment and put the money into the bankruptcy estate.
Whether the trustee will then allow the couple to use it as a down payment on reliable transportation to do their daily work in supporting the payment plan for the Chapter 13 will be totally up to the discretion of the trustee. A new car would help the couple get to work which would also overall help protect the bankruptcy estate, something in which the trustee would be interested.
Definition and Complications of a Chapter 13
A Chapter 13, often called a wage earner’s plan, is a type of bankruptcy that requires the filing debtor to make a plan which will pay all or a part of the unsecured debts owed over a 3 or 5 year plan.
A Chapter 13 can be a very complicated type of bankruptcy to file, and the issue of a down payment on a reliable car during the plan is only one of many problems that may arise during this type of bankruptcy. Because of the complication, it may be wise to hire a bankruptcy attorney before you file a Chapter 13.
- Bankruptcy Basics: Six Basic Types of Bankruptcies (betterbankruptcy.com)
- Rental Allowance in a Chapter 13 Bankruptcy (betterbankruptcy.com)
- Vices in a Chapter 13 (betterbankruptcy.com)
- Bankruptcy Basics: Individual Debt Adjustment in Chapter 13 (betterbankruptcy.com)
Ten sound ways to avoid the credit card trap are:
Try never to use a credit card, or use it sparingly. There are many car rental agencies that will take debit cards today, and so will some airlines. Some airlines still take cash and checks. You can own a credit card and use it sparingly to keep the card active, but you must pay the usage on time and in full each month you use it.
Pay off your credit card in full every single month you use it. Know what your checking balance always is and what normal expenses you have each month in relationship to your income. Tag the amount of money in your checking account to what you have spent on a credit card for the month, and do not spend the tagged money for anything else.
Look at credit card debt like any other kind of loan. If you have borrowed money for items like a house or car, borrowing money for other items using a credit card is a loan just as important as borrowing for your car and house. Treat credit cards like you do your secured loans by paying them on time. Failing to pay credit cards on time can result in something just as serious as a repossession or foreclosure. Another trap that might result in you ultimately going bankrupt.
Never allow yourself to come to the place you pay only the minimum payment. Your credit card company lives for the day you get on minimum payments. Most credit card contracts will allow the lender to raise interest payments, shorten time to pay, and increase or decrease your limits when you start paying the minimum amount. All of these conditions can make you a slave to the credit card lender, and even if you have paid the credit card lender the original principal, you will often owe as much if not more than when you started making the minimum payments. This trap can also make you bankrupt.
Manage only one Credit Card at a time. Even if you are married, credit card companies allow you to have more than one person designated to use a card. Having multiple credit cards is harder to manage and creates larger lines of credit that can tempt you. Mismanagement of multiple cards is yet another trap in making you go bankrupt even quicker.
Maintain as low a limit as you need to financially operate. If you need a $1000 limit on your credit card to get a rental car, build credit, or buy an airline ticket, ask your credit card company to keep it at that low of a limit. Less of a limit is more manageable regardless of your budget and can help avoid the trap of going bankrupt.
Do not just put anyone on your credit card. Know the people whom you also allow to use your credit card. Make sure they know your spending rules, have the same type spending philosophy, and you can trust them.
Monitor your credit card interest on an ongoing basis. When the interest goes up, ask your credit card company the reason why and to change it back. If they will not do it, get a new credit card with lower interest rates, cancel the old credit card, and start over.
Never pay interest or late fees on a credit card. See no. 1 and no. 2.
10. Openly and honestly communicate with your credit card company.
Keep an open line of communication with your credit card company, record and document all telephone conversations you have with any company representatives, and keep a file of your communications. All of this is part of being a good manager of your credit card. Act immediately on any negative feedback to help keep you from getting in a bind and going bankrupt.
Why Would you Need to Negotiate a Lower House Payment?
If you bought your home in the beginning part of the 21st century or earlier, recent changes in the housing market may have you, like many other people, in a tough financial situation for a couple of reasons:
Higher interest rates
Interest rates have generally declined in the past few years, setting record lows that have not been seen for 40 years or longer. If you are still paying a monthly mortgage based on a high interest rate, it means you are making a higher payment than you would be paying if you financed your home today.
Lower property value
With the current economic turmoil in the United States and other parts of the world, there has been a rash of foreclosures as people have been unable to continue to make their mortgage payments. The large number of foreclosures has flooded the housing market with a higher-than-normal number of available properties. This surplus has led to a decrease in general in the value of real estate. As a result, if you are one of those who have been lucky enough to be able to continue to make your mortgage payments, it is likely that the value of your home has decreased. This means you may be making payments on a mortgage where you owe more money than your house is actually worth.
If you are in a situation where you face one or both of the above issues, along with other strains on your finances such as a loss of employment or high interest payments on credit card debt, you may be considering bankruptcy or other options to reduce your outgoing cash flow. One option you may not have considered is negotiating a lower house payment.
While mortgage companies would certainly prefer to keep receiving regular monthly payments in full at your current interest rate, they are well aware of the large number of people who are no longer able to maintain those payments. Therefore, it may be in the mortgage companies’ best interest to work with you to keep you making some form of payment, rather than being stuck with a house they do not want.
You heard me right: a mortgage company or bank does not really want your house. Banks and mortgage companies are structured to in large part make money on the interest they earn by loaning people money. When they finance your mortgage, they generate revenue through the interest you pay (as well as late fees if you cannot pay on time). They would prefer not to have to take your home. When they do, this means they lose the revenue stream related to your payment and the interest while they incur expenses related to seizing and selling the house (e.g., attorney fees, real estate fees, loss in value if they have to sell the home at a lower amount than it was originally worth on their books). Therefore, mortgage companies can at times be incented to work with you in negotiating a lower house payment.
Ways to negotiate a lower mortgage payment
Ask for it
You are not the first person who has considered requesting a lower mortgage payment. Mortgage companies and banks generally have a Loss Mitigation Department (although it may be known by a different name than this) to which you can present your case for a reduced mortgage payment. Through a loan modification, the mortgage company may extend the term of your loan, convert the loan to a different type of loan (e.g., a fixed rate from an adjustable rate), or add missed payments to the loan balance so that you can resume normal mortgage payments going forward. If a mortgage company is willing to work with you on reducing your payment, they will want to see financial statements and other documentation to prove you are experiencing financial hardship. But keep in mind that although a mortgage company may in theory have incentive to work with you on a loan modification, they are often very inefficient at carrying out the process. This may mean that stepping through the process in its entirety may be long and time-consuming.
Should I Refinance my Home?
If current interest rates are significantly lower than what you are paying at present, refinancing your mortgage to that lower rate can reduce your payment. Even though you will have to pay various fees for the mortgage company to carry out the finance, which may be rolled into the balance due on the mortgage, the lower interest rate and longer payment term that come with refinancing can reduce your monthly payment.
While declaring bankruptcy should not be done lightly, it is an option that may allow you to re-negotiate your mortgage with your lender. But a bankruptcy is generally not going to allow you to reduce the principle balance you owe on your mortgage outright; rather, it is going to lead the mortgage company to work with you in performing a loan modification as described above. Therefore, bankruptcy should only be considered as a last resort if you have unsecured debt or other financial issues that bankruptcy can help address.
Whatever your situation, it can be tricky to gather all the needed information to make an informed decision about what to do without obtaining professional help.
Hiring a Bankruptcy Lawyer?
A bankruptcy attorney can help you perform this analysis. A bankruptcy attorney will have experience in working within the bankruptcy and other laws applicable in your state to determine, based on your current situation, what makes the most sense for you. Such a consultation is available free of charge and with complete confidentiality, if you simply fill out the short form available below. So please get the help you need today in making this tough decision.
This personal bankruptcy story was posted on the internet in February of 2011 as comments in a bankruptcy discussion: “I have just lost my job. I was there for 10 years. I have lots of purchases on my credit card from August-December. I have never missed payments on any credit cards. I cannot afford the minimums much longer. They are over $1000 per month. Do you think that my creditors will dispute the charges? Is there anything I can do to minimize the risk at this point? I cannot file til September cause I am well over the median income at this point.”
The debtor in this personal bankruptcy illustration has just lost her job and is now stuck with making payments on her credit card she can no longer afford. The minimum payments have taken their toll. Up until this past year, when you started making minimum payments on your credit card for a period of time, the credit card company raised your interest rate and shortened your payment due date. The current administration changed all of that this past year by requiring credit card institutions to give a 45 day notice before they can make any new changes. Although anything like the changes help some, the changes are a pittance of what really needs to be done in re-regulating the banking system. In 1980, the federal government passed a special law which allowed national banks to ignore state usury limits and peg the rate of interest at a certain number of points above the federal reserve discount rate. In addition, specially chartered organizations like small loan companies and installment plan sellers have their own rules. That means that the laws in most states do not have enough teeth to regulate credit card debt. As a result in many cases, about the only way a person can relieve exorbitant debt from various banking institutions is through filing bankruptcy. The new laws this past year were suppose to stop all of that, but in reality, it is business as usual, and bankruptcies flourish.
As an example, the debtor in our illustration has been paying $1000 a month minimum payment. If her minimum payment is 2% of the unpaid balance, a common minimum rate, the debtor owes $50,000 in credit card debt. If she continued to make the monthly minimum for the rest of her life and the credit card company raised her interest rate to 24% APR, the federal maximum, she would never pay off the loan and would still owe the company the $50,000 at the end of her life. Under the 1980 rule changes, credit card companies can charge higher than the 24% APR, and when they do, you can pay the minimum the rest of your life and owe even more than the principal amount you started with. Is there any wonder why the debtor in our illustration is considering bankruptcy protection?
As a society, we have come a long way since the days of debtor prisons and states. The Constitution provided for our protection against those antiquated ways when it gave Congress the power to legislate bankruptcy law making the primary laws governing bankruptcy federal. State laws supplement the federal laws by clarifying the necessary details. The laws have been designed to protect both creditor and debtor making bankruptcy a legal proceeding designed to allow the honest person or business to work their way out of a bad financial situation, or in some cases, to start afresh.
Maybe like so many other Americans, you have felt you have had to use your credit in order to make ends meet and until times get better. Maybe you are paying only the minimum payments in the form of interest on those cards. If this is case, you might be in financial trouble to the point of being bankrupt. As a general rule of thumb, you are legally financially bankrupt if your current sustainable income will not pay all of your living expenses, pay interest on outstanding loans, and reduce some of your principal on those loans while paying on them for five years. If you are bankrupt, common sense indicates you will need a bankruptcy lawyer in order to properly understand how complex bankruptcy laws may apply in your situation. If you determine you are in need of relief from the stress associated with debt and you live in or around the metropolitan area of Honolulu, Hawaii, contact us today . We will help you find a bankruptcy attorney in your area that will help you with any questions you may have on bankruptcy law.
This personal bankruptcy story was posted on the internet in recently as a comment in a discussion on bankruptcy: “…My husband was a foreman in construction and made a lot of money. Then 9-11 happened and due to economic slowing, he got laid off and has been unable to find a steady job since…Now he is in trucking – and gets paid by the mileage – some weeks it is good pay – other weeks not so much. We really struggle. Many of our credit cards have gone into collections and we just do what we can to get by. We have started paying just minimum payments on everything…”
The debtor in this personal bankruptcy illustration has lost income and replaced it with credit card debt in order to bide time. This practice is relatively common and the results of getting so far into debt from the practice that you become legally bankrupt are too. As a general rule of thumb, you are legally financially bankrupt if your current sustainable income will not pay all of your living expenses, pay interest on outstanding loans, and reduce some of your principal on those loans while paying on them for five years. Five years is the maximum legal number of years a United States Bankruptcy Court allows an individual to work their way out of bankruptcy protection.
In 1980, the federal government passed a special law which allowed national banks to ignore state usury limits and peg the rate of interest at a certain number of points above the federal reserve discount rate. In addition, specially chartered organizations like small loan companies and installment plan sellers have their own rules. That means that the laws in most states do not have enough teeth to regulate credit card debt. As a result in many cases, about the only way a person can relieve exorbitant debt from various banking institutions is through filing bankruptcy.
If you put $30,000 on your credit card and the company has a 24% APR attached to it with a 2% minimum payment, your minimum payment will never reduce your debt. If you pay $600 a month for the rest of your life, at our current federal maximum rate legally allowed, you will never pay down any of the $30,000 worth of credit card debt originally owed. That is why the debtors in our illustration are really financially struggling. They are making the minimum payments on many of their cards. This practice is a recipe for making a bankruptcy happen.
Using credit cards to bide time until you can replace the income you have lost may not always be a wise decision, and paying the minimum payment on credit cards may also cause you heartache in the long run. If you have found yourself in the situation of having recently lost income, you are using credit cards paying the minimum payments, and you cannot reduce your debt load within a five year period, you may be a candidate for filing a bankruptcy. Choosing the appropriate bankruptcy to file can be a complicated and tricky process, and common sense indicates you will need a bankruptcy lawyer in order to properly understand how complex bankruptcy laws may apply in your situation. If you determine you are in need of relief from the stress associated with debt, and you live in or around the metropolitan area of Fort Lauderdale, Florida, contact us today. We will help you find a bankruptcy attorney in your area that will help you with any questions you may have on bankruptcy law.