Be cautious of debt solution centers

I just saw an advertisement for a debt solutions center that promises to settle your debts for pennies on the dollar. Many of these agencies are pure hogwash! What they do is have you pay in hundreds of dollars a month, charge huge fees, and then occasionally get a creditor to accept a lump some payment for less than you owe – usually for sixty pennies or more on the dollar (rather than just a few pennies). All too often, your money just disappears into a black hole and your debt situation ends up worse rather than better. Even when you do get a debt forgiven for less than what you owe, you get a nice surprise in January of the next year. Any debt forgiveness over $600.00 gets reported by the creditor as income to you. You have to pay taxes on forgiven debt and chances are money is still really tight for you and you don’t have the cash to cover the extra taxes.

So, you have paid huge fees to convert dischargeable credit card debt into non-dischargeable tax debt.

There are legitimate debt help agencies. One that I have had some experience with and feel good about is Apprisen Consumer Credit Counseling Service that I have mentioned before. They will sit down with you and tell you what relief you can expect and what your monthly fee would be and where it would go. The fees are distributed to creditors monthly. If, instead, the agency wants to just collect a large pool of cash with the notion that they may work out a lump sum payout, run away – run far, far away.

Debtor Education Course

In order to file a personal bankruptcy, either Chapter 7 or Chapter 13, you have to complete a course in Credit Counseling. This was meant to prevent people who really did not need to file from doing so, but it has just created a booming industry where you must usually pay $50.00 in order to get the required certificate. It is essentially an additional filing fee except that it goes to private companies. This certificate is the “ticket in”.

There is also a “ticket out”. Within thirty days of your meeting of creditors, you will have to complete a Debtor Education (a.k.a. Financial Management) course. You have to pay another fee (often another $50.00) in order to obtain this certificate. No certificate and no discharge in the bankruptcy. I was excited for five distinct reasons to discover, though, that Dave Ramsey’s group has begun to offer the “ticket out” – the Debtor Education course online. First, I know they will come at the issue from a biblical perspective. Second, Dave Ramsey had to file bankruptcy at one point and so he can relate to what you are going through. Third, they have designed the course to hold your interest. Fourth, it is less expensive than most of the other places. Fifth, and most importantly, they have a real message of hope in the material that will bless you.

Bankruptcy and tax returns

The new year also ushers in tax season. Instead of sugar plums we have receipts of deductions dancing in our heads. This season creates some additional concerns pertaining to bankruptcy. If you are trying to file a Chapter 7 and you just squeak in under the means test, pay special attention to your deductions. If you have claimed too few tax decutions on your W-4, then the trustee might object that the presumption of abuse actually does arise (“presumption of abuse” is legalese in the bankruptcy code for “doesn’t qualify” for a Chapter 7). Another related issue is the size of your tax refund. If you have claimed too few deductions then you will likely have a refund coming to you.

Even if you pass the means test regardless of under-deducting, you still need to be mindful of your refund. If you receive your refund prior to filing your petition, it would be wise to spend in on household necessities like groceries or repairs that are long passed due, but which will not substantially increase the value of your home or automobile. If you will not receive the refund until after filing, be sure to ask your attorney to see if there is a “wild card” exemption available that can cover it. Otherwise, you may have to surrender some or all of your refund to the trustee.

In general, it is not good to claim too few deductions. Sure, you and most people enjoy having the refund once a year, but you are essentially making an interest free loan to the government when you under-deduct. Along with that issue, add the concern about the means test and possibly losing your refund in a Chapter 7 and it is just wiser to claim the actual number of deductions availabel to you.

A New Year and a New Hope

I’ll warn you in advance that this particular post gets a little sappy and dips into spiritual themes. If that is not for you, I do not apologize, but I do give notice. Historically, the practice of law was intimately and inseparably tied with spiritual matters and religion. Something went wrong along the way and the spirit was wrung right out of the law. Thus, there are many unhappy and hope-less attorneys. I choose otherwise and this New Year’s Eve is a ripe opportunity to delve into that choice a bit.

People thrive on hope and this time of year is full of messages of hope. The birth of the Christ child brought the ultimate message of hope, redemption and renewal and so we celebrate Christmas. The need for hope seems universal and one sees the theme play out again and again in the stories of our lives and back into history. Thus, with the renewal of the calendar, we celebrate the ending of 2009 and the start of 2010. There is nothing magical that happens between 11:59 pm and 12:00 am tonight, but we see the new year as a symbol of new hope; a fresh start.

This brings to the fore why I love practicing bankruptcy law: it brings to people a new hope and a fresh start. It is unlike family law that is typically about the end of hope and the close of things (except adoption!), criminal law that is about punishment, or even personal injury where the focus is on pain. Certainly those other areas of law do involve hope and restitution, but it is not the focus on the same level as bankruptcy law.

Certainly, bankruptcy is not a step to take lightly and one should never mistake the legislated ability to discharge one’s debts with some sort of entitlement to avoid financial responsibility. Conversely, one should not mistake the act of taking bankruptcy as a sin unto itself. Rather, bankruptcy harkens back to the year of jubilee discussed in Deuteronomy Ch 15 and elsewhere in scripture. It is a real life example of hope and redemption.

The vast majority of people who contemplate bankruptcy are hard working people and these are the folks I want to help. Perhaps they made a series of innocuous mistakes that ended up with catastrophic results. Perhaps an illness or the anonymous and uncaring force of the economy left them without means. Perhaps sin such as a gambling addiction or a shopping compulsion lead to the point of insolvency. Regardless, bankruptcy offers the promise of starting fresh financially. The lifting of a financial burden can open up hearts to hope for other more significant and deeper renewal. And so, I enjoy practicing bankruptcy because it breeds hope.

Sure, there are some people who abuse the system. They run up debt with every intention of walking away from it. They become serial bankrupcty petitioners. I am sure they are out there, but they are a slim minority. I invite them to go down the road to that law firm that advertises on the television. If you have read this far, you are not one of those folks.

Also, if you read this at all, it is likely that you are hurting financially. I encourage you to consult with an attorney to learn about your options. Bankruptcy may not be necessary; you may benefit from a quality non-profit debt reduction agency such as Apprisen (they have an office here in Lexington). If, however, the debt your are under is overwhelming you and the resources just are not there to get out without losing your home and important property, then do not wait too long to consider bankruptcy. Give yourself the gift of hope on the financial front and then see that hope multiply.

Another perspective on post-holiday bankruptcy blues

The Bankruptcy Law Network addressed the same issue of using credit to buy Christas gifts in this post that I addressed here. If you incur a debt with no intention of repaying it, that particular debt may not be discharged in a Chapter 7. This is a good reason to NOT pay your bankruptcy attorney with a credit card.

Post-holidays bankruptcy filing blues

The commercial pull of Christmas can be irresistible. Everyone else seems to be buying nice and pricey gifts for their loved ones. All the pre-teen and teen kids are craving an iPod Touch or some other even more expensive i-Item. The younger kids are inundated with supremely cool and fantastically expensive toys that walk, talk, and otherwise seem to mimic some surreal lifeform. You feel guilty if you do not buy your most significant other something from Jared or perhaps you are fearful that person would feel slighted if they are not receiving something from this fella’s jewelry store. So, you justify just a little more than you had budgeted to buy gifts. We all have done it. But, now that the festivities have ended and the euphoria of gift giving subsided, the financial cost hits. All those little somethings and not so little somethings add up quick.

Because our society has become oriented around the use of credit, most likely you bought many Christmas gifts with VISA, MasterCard, Discover or American Express. You may have known it was inevitable, but you held off taking that dreadful plunge of actually filing bankruptcy. You wanted to make it through Christmas before facing up to the less than jolly music of debt. This is all entirely normal and understandable, though unlikely to be counted as wise. That is because you now have to deal with 11 U.S.C. Section 523(C)(i)(I). Any debt to a single creditor incurred prior ninety (90) days of filing the peition for “luxury goods” cannot be discharged. So, if you wracked up $500.01 dollars in Christmas gifts on your credit card, you may be stuck with that debt whether or not you can make the payments.

This can happen to the most well-meaning folks who just wanted to make sure their loved ones experienced a good Christmas, but intentions do not matter to the creditors; just the money. If you find yourself in this situation, along with countless others, there is no need to despair. It is important to discuss this with your bankruptcy attorney and determine the best course of action. Depending upon your particular situation, it may be wise to hold off filing bankruptcy for a time. Alternatively, you may need to go ahead and file right away if garnishments or foreclosures are looming. Finally, you may be able to pay back that particular debt if you are relieved of others that are to high to ever pay off. At the very least, though, you need to be aware of the potential impact of Christmas gift buying.

Tax debts can be discharged! – sometimes

A common misconception floating about is that income tax debts can never be discharged. This myth arises from the reality that income tax debts have a favored position in the bankruptcy code. Also, trying to figure out which tax debts are dischargeable can be mind boggling even for attorneys. Frankly the entire bankruptcy code can be mind boggling since most provisions relate back to other provisions that one must read before the original provisional can be understood. Plain english is a foreign concept to drafters of legislation. All that aside, to determine if your income tax debt is dischargeable, start at 11 U.S.C. Section 523(1). Section 523(1) immediately directs you to to two other provisions, the pertinent one here being 11 U.S.C. Section 507(a)(8). Section 507(a)(8) then circles you back into Section 523 making for a dizzying ride. You are welcome to go to these statutes and read them for yourself. If you understand them, you are either a bankruptcy attorney or you missed your calling.

Let me break it down for you with a plain english translation. In order for an income tax debt to be dischargeable, all these requirements must be satisfied:
1) The tax return filing must have been due more than three years before you file your bankruptcy petition. If an extension was filed, then that moved the due date for your filing out so extension periods do not count towards that three years.
2) Were either officially assessed more than 240 days prior to the bankruptcy petition or were not yet assessed but were assessable. I know, that last part does not seem to be in the statute but that is because of how this statute is worded. It is listing what tax debts are excluded from discharge as those assessed within 240 days of filing, so those not assessed and assessed (but assessable) outside of the 240 days are not excluded. Offers in compromise and stays in other proceedings toll this time period plus add on 30 or 90 days respectively.
3) A tax return had to have been filed.
4) If it was filed after the final due date, including extensions (filed late), it had to have been filed at least two years before the bankruptcy petition is filed.
5) There can be no fraud or attempts at evasion of the tax at any time.

In order to know calculate these items precisely, one must obtain a tax transcript from the IRS. This can be obtained by filing a Form 4506T from your friendly Internal Revenue Service agency.

A Party for the Lexington & the Bluegrass

I’ll be there!

Bankruptcy Myth of Non-dischargeable Car Loans

I have heard from two different people looking for relief from their debt that they thought they could not discharge their car loan debt in a Chapter 7 bankruptcy. In fact, one person said they had consulted an attorney on this very issue and they were told they could not discharge their car debt in a Chapter 7 even though the vehicle was already repossessed. The source of the myth is one of the reforms that occurred to the bankruptcy code in 2005. The change was that if you had purchased a vehicle within 910 days (about 2.5 years) prior to filing your bankruptcy petition, that purchase money debt secured against the vehicle could not be “crammed down” or “stripped down”.

Cramming down (or stripping down) a debt is where the amount of the debt secured against property, such as a car, is reduced to the value of that property on the date of filing the petition. For a car, you may owe $15,000.00 but the vehicle is only worth $10,000.00 in order to keep the vehicle. That debt could be crammed down so that you would have to reaffirm (agree to pay) only $10,000.00. Under the old law, the $5,000.00 debt above the value of the car is discharged in a Chapter 7. The change in the law prevents this from being done on cars purchased within 910 days. Now, with recently purchased cars, you either have to pay the entire purchase price or surrender the car.

However, what did NOT change is that the debt of a car loan can be discharged. If your car was repossessed or if you surrender it, then the whole remaining debt will be treated as unsecured and will be dischageable. If you keep your car and the purchase was more than 910 days before the petition, the unsecured part of the debt (the amount over the value of the car) will be discharged and you pay the value. Regardless, the debt of a car loan can be discharged in a Chapter 7.

Bankruptcy Myths Debunked

So many people buy into myths about bankruptcy with devastating consequences on their lives. This is a great report debunking five common myths: