Bankruptcies Are On the RiseRandall Parker
April 6, 2009 — 1,339 views
According to recent news articles, bankruptcies are at their highest level since October 2005, with an average of 5,945 filings per day during the month of March. Adding to this the fact that 663,000 Americans lost their jobs last month, indications appear to be that this number will only increase during the coming months.
While this is a shame, all too many people file bankruptcy when it is not their best financial option.
Bankruptcy comes in two versions that apply to most consumers. Chapter 7 is a near total liquidation of assets and near total elimination of debts. Chapter 13 is basically a negotiated repayment plan, with terms set and monitored by the courts.
Certain items cannot be discharged in bankruptcy; notably any tax liabilities for the past three years, federal guaranteed loans (i.e. student loans), and any debts incurred as a result of fraud. Other exceptions vary by state, including what assets can be exempted from bankruptcy. As each state sets its own rules in addition to the federal guidelines, I will not get into that discussion here.
The key point to realize is what exactly is being protected by filing bankruptcy. If no one is suing you or threatening to take anything away from you, then you do not need bankruptcy protection. Filing bankruptcy is a move that shields your assets and income from attachment by creditors. If creditors are not filing lawsuits or taking repossessive action against you, then you do not need to file.
Now, what if you do find yourself facing multiple lawsuits and foreclosure actions? Well, take a moment to evaluate your situation. If you are facing the potential loss of your home, take a look at the numbers before you.
If you only have a first mortgage, and the property value is under water, you would likely be best served to either attempt a loan modification with your lender or walk away from the property. Many states are non-recourse states, meaning that the holder of a first mortgage who repossesses your property cannot come after you for a deficiency balance. If you have an equity line or second mortgage, you could find yourself liable for these after a foreclosure as well.
Should someone file bankruptcy to hold onto their car?
Probably not. If you are holding onto a car which you cannot afford, then you do not need it. You can try to negotiate new terms with the lender, and I can guarantee that you will face a lawsuit for any deficiency balance on the sale. You would be better off to sell the car short, and then try to make up any difference. An attorney retained prior to a repossession order would likely be a good investment.
OK, so we try to hold onto the house, and we let go of the car. Now what do we do?
Next, take a look at that stack of bills that you cannot pay. If no one is actively suing you, let them sit for now.
If creditors are suing you, then take a look at what you have at risk. If you have no equity in your house, you won't lose anything there. If your car is secured by a loan, other creditors can't touch it. Your personal property along with any property that you use in your business, trade, or profession, is off-limits in most states also.
That leaves your bank accounts and your paycheck as the primary avenues of recourse for a creditor's attachment.
If you know that judgments exist against you, keeping as little money in the bank as possible should be a given. As far as your paycheck goes, part of your pay is exempt. This varies by state, but you are protected to a minimum of $5.15 (Federal minimum wage) x 30 hours per week. This money cannot be touched.
After that, depending again on your state of residence, only 10% to 25% of the remaining Net Pay can be attached for ALL of your garnishments. It does not matter how many judgments or garnishments you may have against you, the limit is what it is.
Keep in mind that if you work on commissions as an independent contractor or are otherwise self-employed, the rules are different for you. That discussion may follow in a later article.
Generally, Social Security Payments and retirement annuities are off-limits to garnishment up to a certain threshold, which may vary by state.
Many Chapter 13 bankruptcy plans and many plans negotiated by CCCS for their "clients" require payments that can be much higher than that amount. You likely pay more than that now for your unsecured debts, if you are actually in financial trouble.
The problem comes when people facing hard financial times ask a bankruptcy attorney what they should do, and never consult anyone else. Now, I don't want to upset the legal establishment, but I would venture to guess that at least one bankruptcy attorney out there recommends bankruptcy as the answer almost every time.
Just consider how it is they earn their living: If you file, they get paid. If you don't file, they don't get paid. What would you recommend in their position?
Some items are not subject to the previously quoted exemptions. They include back taxes owed to the IRS, Federal Student Loans, spousal and child support, and some others that may vary by jurisdiction. However, bankruptcy won't protect you from these either, so you are stuck with them.
By all means, if you are having financial difficulties, you should consult an attorney. You should also consult an accountant and a financial planner. I would avoid Consumer Credit Counseling Services (CCCS), as they work for your creditors' interests, and not yours.
Other ways out of a financial crisis include loan modification, debt negotiation, and debt settlements. You can do an Internet search to get information on these types of programs, and I will caution you that a great number of people and companies are employed in these areas of expertise, and not all of them are trustworthy. Tread carefully, and try to deal with reputable firms and organizations for this type of help.
As with any advice you may read in articles, and especially online, keep a discerning eye out for your own best interest.
Nothing herein should be regarded as legal advice, and it is not intended as such. Should you need any legal, accounting or financial planning advice, seek the counsel and recommendation of a competent, licensed practitioner in your area.
About the Author
Randall Parker, MBA is President of National Consumer Rights Alliance, Inc. (http://www.ncramembers.org/ ). If you are facing a difficult financial situation, NCRA can help. Visit their website or call them at 202-470-3273. NCRA specializes in credit restoration, mortgage modifications, debt settlement, and provides myriad other benefits to its members.