September 26, 2016

5 Must Have Discussions Before Filing For Bankruptcy

 

Article contributed by Brooke Chaplan. Email her at brookechaplan@gmail.com.

Bankruptcy can be a great way for a person in a financial crisis to obtain a fresh start on their financial life, and be freed from the burden of a heavy debt load. Prior to filing bankruptcy, consider the issues involved with filing. As no two people are alike, neither are two financial conditions alike. Some of the common issues that should be contemplated prior to filing are below.

Consider Other Options

As part of the full and honest evaluation, consider non bankruptcy options. If a financial crisis is merely temporary, a 401k loan, a home equity loan, or even a sale of assets may be enough to end the crisis. This is especially true if the debts carry a high interest rate. If this option is considered, interest rates, the repayment period, and monthly debt service must be analyzed, as well as the effect of default. For instance, in a home equity loan situation, the individual risks foreclosure.

Seek Credit Counseling

Though credit counseling prior to bankruptcy was merely a good idea in the past, it is now a requirement for filing. A person must have completed a bankruptcy screening by an approved bankruptcy counseling service. The Office of the US Trustee has a list of approved companies. A trained counselor will review the person’s finances and determine if eligible for bankruptcy relief. If so, the person will receive a certificate that must be filed in their bankruptcy case. The certificate is good for 180 days from the date it is issued.

Some companies may be able to work out an arrangement to pay creditors a lesser amount, or to decrease the interest rate on some debts. With good credit counseling, an arrangement may even dispense with the need for bankruptcy. 

Personal Property

The Bankruptcy Code provides that certain property is exempt from creditors. Types of exempt property include a portion of the persons home equity, retirement accounts, a vehicle, clothing, a certain amount of jewelry, etc. The exemptions may vary depending on where the person resides, as the code provides that exemptions are determined by state law. If the property was used as collateral for a loan, the loan may have to be paid back in order to keep the property. Before filing, the person should make a full and complete inventory of assets and have it reviewed by a competent bankruptcy professional to determine which property is exempt. 

Pass the Means Test of a Chapter 7

If a person is filing a Chapter 7 bankruptcy, a means test is now conducted. A person will prepare a budget listing income and monthly expenses. Expenses include taxes and insurance, child support or alimony, mortgage or rent, utilities, food, car expenses, etc. Under the means test, it will apply only to those with income above the median average for the state in which they reside. The person’s actual expenses may be considered to an extent, but the bankruptcy court will use standard amounts for the person’s locality, published by the IRS. The standard expenses are available through the office of the US Trustee. According to a Chapter 7 Attorney in Austin, if the person will have excess income at the end of the month, the person may not be eligible for a Chapter 7 discharge of debts. 

Funding for Chapter 13

A Chapter 13 bankruptcy can be beneficial to persons who are behind on mortgage payments, owe back taxes, or a high interest vehicle loan. But Chapter 13 is not for everyone. If the person is behind on mortgage payments, the current payment must be made, plus a payment towards the arrearage. Most past due taxes are paid in full during the plan. However, if the person is not able to make these payments, the plan will not succeed.

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