Bankruptcy Blog

Most people know that they are in a financial crisis usually about 3-6 months before they contact an attorney for bankruptcy.  Of course, that’s a general rule; some people know for a much longer time but do nothing, for a variety of reasons.

However, credit card companies are becoming more aggressive in fighting charges that are incurred 60 to 90 days before a person files bankruptcy.  The bankruptcy code actually says that cash advances and “luxury” good items (i.e. flat screen TV) are presumed to be non-dischargeable if purchased within 90 days of the bankruptcy being filed.

On a bankruptcy petition, the Debtor must disclose the first date he or she met with an attorney to discuss bankruptcy and the attorney received money from the debtor.  Also, creditor often look at the date the Debtor took his or her mandatory credit counseling class.  These two dates are important, because a person may not actually file the bankruptcy petition for a long time – sometimes three to six months after meeting with an attorney.  There are a variety of reasons why debtors wait to file.  So creditors are looking at those dates to see what charges were made within 60 to 90 days prior to those dates because then the creditor might argue that charges were incurred with the Debtor either was already contemplating bankruptcy.

In addition, some credit card companies believe under the Code that charges incurred when a Debtor knows he or she will never be able to pay the debt, should also not be dischargeable.

Of course, towards “the end”, in the last six months before Debtors come in to see me, usually they are paying their minimum payments, and then charging their cards to the max again, then paying minimum payments, and charging to the max.  This is not uncommon.

However, if you have a credit card with no balance, or a small balance, and then charge $6000 in a one month period and file bankruptcy four months later, that is a charge that might be contested.  If the Court agreed with the credit card company, that partcular charge might not get discharged – but your other debts that were not contested would.

In any event, once you make the decision in your own mind that you are going to meet with an attorney to discuss bankruptcy, you should try to stop using your credit cards.  Most likely, once you meet with an attorney, he or she will tell you that no only should you stop using them, but you should also stop paying them, because your only option is bankruptcy.

It goes without saying, but sometimes it happens, that a client will come in to meet with me, pay me a portion of all of the fee to file bankruptcy, but have continued to use a credit card, thinking that as long as they are paying the minimum payment, the use is proper.  This is not the case.  My advice to clients is that once they come to see me about their case, even if it is before they have paid me any money, they should stop using – and paying – their credit cards – unless we have discussed another course of action.  For example, for some people bankruptcy is not the best option for them.

Bankruptcy gets rid of a lot of debt and while it is a difficult process it is generally quite easy to have all unsecured debt discharged.  However, paying attention to when you last used your credit cards, and how you last used them, is something you will need to discuss with your attorney.

Clients sometimes ask me whether or not they really should file bankruptcy and if there is any other way to get rid of their debt.  There is a way to get rid of your debt without filing bankruptcy and that is by making settlements with your creditors.  It is important to note that you do not need to hire one of those debt settlement companies to do this, and in fact, you should not hire one.  Those companies don’t have the ability to get any better settlements for you than you would yourself, plus you are giving the debt settlement company money every month that you could be using to pay off your debt.

Usually, in order for a settlement plan to work, you need to stop paying on your debts for at least 8 to 12 months.  Generally you won’t get sued in that amount of time, and your creditors will be willing to settle on the debt from anywhere to 35% to 50% on the debt.  However, you generally have to be able to make a lump sum payment to get the best offer.  The creditors won’t make any offers if you are on time with your payments; it is only when you become severely delinquent that they will start to negotiate.

Note that you need to be able to save money every month, or know you are going to be getting a large tax refund or other lump sum award, so that you can make the lump sum payments to your creditors.  Also, remember that this plan depends in large part on the amount of debt you have.  If you have $10,000 in debt, you could probably do this.  If you have $100,000 in debt, probably not.

There are lots of pitfalls you need to be aware of when settling debt and here are just a few:

1.  You could settle some of your debt, get sued by a creditor before you are able to settle that debt and end up filing bankruptcy anyway.  You would then have paid back lots of debt you would not have had to pay back had you filed bankruptcy from the start.

2.  You will have to pay income tax on the debt that is forgiven.  That’s right.  Unless the debt being forgiven is debt on your primary residence (and there are several exceptions to even that exception), you are going to pay income tax on the debt that is forgiven.  So for example, if your credit card debt is $25,000 and you pay $15,000 and get the remaining $10,000 forgiven, you will pay income tax on that $10,000.  So if your annual income was $50,000, you will have another $10,000 added on to that when you file your return.  Of course, tax on $10,000 is still a lot less money than paying the actual $10,000.  But taxes are not dischargeable and depending on what your other financial obligations are, that tax liability could be difficult to handle.  Remember however, the IRS will generally make a payment plan with you for most IRS liabilities under $15,000.

3.  Making settlements still trashes your credit.  You won’t get any deals unless you go at least 8 months without making payments.

4.  You have to put up with months of relentless, abusive phone calls from creditors.

5.  The interest and late fees will add to the balance – so even if get a creditor to accept 50% of a balance – that 50% is going to be higher than what 50% of the balance was at the time you stopped paying.

These are just a few of the pitfalls of debt settlement.   Be sure to speak with a qualified bankruptcy attorney who can help you understand the risks and benefits to you, once you have had a chance to explain your specific circumstances.