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Archive for July, 2011|Monthly archive page

How Chapter 7 Works

In Uncategorized on July 30, 2011 at 9:28 am

Most people have heard of chapter 7 bankruptcy. In this posting, I want to explore how it works.

Chapter 7 is based on the idea that you cannot afford to make any payments on your debts. To put it another way, even if you had no debts, your living expenses alone leave you broke by the end of the month. The court doesn’t take your word for this. You have to prove you can’t pay your debts. You submit a statement of your monthly income and living expenses. You must provide proof of earnings and tax returns as well. People with above-median income have additional requirements.

If you successfully prove you meet the income and expense test, you qualify for chapter 7 discharge. But there is a catch. The law limits the assets you retain in chapter 7. If your assets exceed those limits, you lose them to your creditors. Basic assets are protected, such as ordinary household furnishings and clothes. Other exemptions protect home and vehicle equity, but only up to a point. If an asset is worth a lot more than the amount you owe on it, you can lose it.

Can you transfer valuable assets before you file for chapter 7? No. The law permits the court trustee to cancel transfers that occur within the prior year. If you transfer a valauble asset, you may have to wait a year or longer before filing a case.

Another common problem in chapter 7 cases is paying loans from relatives. If you make payments of more than $600 within the prior year, it can cause problems. The court trustee can sue the relative that receive the payments.

Debts are treated differently in chapter 7. Credit cards, loans, utility bills, and medical debts are normally discharged. Student loans are never discharged. Income taxes older than three years might be discharged depending on certain factors. House and vehicle payments continue if you want to keep the house or car. The creditor can require you to be current in payments before they agree to let you keep the loan. The court discharges the debt if you give up the house or vehicle.

Chapter 7 is a powerful tool for getting rid of debts. It does require some planning. You need to qualify by proving you are broke just paying living expenses. It does require planning ahead with your lawyer to make sure you don’t lose assets or subject relatives to lawsuits over loan payments.

Strip Down Vehicle Debt

In Uncategorized on July 22, 2011 at 10:33 am

Its possible to reduce the debt on your vehicle by filing a bankruptcy case. This benefits vehicle owners who owe more than their car is worth. Both chapter 7 and chapter 13 allow for reducing the vehicle loan.

In chapter 7, you can reduce the debt if you qualify for a redemption loan. The new creditor pays the vehicle’s fair market value to your lender. The remaing debt is discharge by the bankruptcy court.

In chapter 13, you may propose a plan that pays the fair market value provided the loan is at least 2.5 years old. The payment for the vehicle is included in the monthly payment you make on all your debts.

Debt Consolidation Is Not The Way To Go

In Uncategorized on July 14, 2011 at 2:52 pm

Debt consolidation companies advertise that they can negotiate with your creditors for lower payments and interest rates. They claim they can help you repay your debt quickly and improve your credit score immediately. If this sounds too good to be true, that’s because it is. Problems with debt consolidation include:
1. It is an unregulated industry under investigation by the federal and state authorities
2. These companies are not forced to deliver what they promise
3. People using these services can pay thousands of dollars in fees before any money goes to creditors.

Debt consolidation scams abound. I see many people who are being sued even though current on their debt plan payments. Take my advice. Chapter 13 is a much better alternative to debt consolidation.

Change Your Chapter 13 Plan

In Uncategorized on July 6, 2011 at 1:23 pm

A client told me recently that her employer reduced her hours. She expects to earn $500 per month less that her previous income. Fortunately, chapter 13 provides flexibility in situations like hers. In many cases, its possible to change the payment amount. The law requires a showing of a substantial change in circumstances. She should have no trouble in meeting this requirement.

We can’t always change the amount of a chapter 13 plan payment. For example, plans must pay out in a maximum of five years. If the proposed payment change is too great, then the court does not approve it. But if you have a change, don’t hesitate to call to see if we can’t change the plan payment.