Reduce Debt Increase Wealth

Bankruptcy

July 18, 2021 MisterChuck Season 2 Episode 70
Reduce Debt Increase Wealth
Bankruptcy
Show Notes Transcript

Types of bankruptcy and what the requirements may be to file and get bankruptcy relief. Note I am not an attorney, and this is not legal advice

.Articles Links:

https://www.credit.com/debt/filing-for-bankruptcy-difference-between-chapters-7-11-13/ by Gerri Detweiler

https://www.creditkarma.com/advice/i/chapter-7-bankruptcy-means-test By Lance Cothern, CPA

Charles McDonald:

Hello, I'm your host, Mr. Chuck. I'm a retired accountant turn truck driver, I have reduced my debt to zero in a short matter of time. debt reduction to achieve financial freedom takes commitment, confidence determination. Bankruptcy is a legal process through which people or other entities who cannot repay debt to creditors may seek relief from some or all their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor. That's what bankruptcy is all about. For those of you who are thinking that bankruptcy may be an out to their debt problems. Here's the basic information you need to know before you get started. I am not an attorney, and this is not legal advice. I cannot stress that enough. This is only a program to give my listeners basic information on subjects, which may affect their life. Since this program is about how to reduce debt, bankruptcy may be an option, but it's an option that you only use in the last resort. That's what we're gonna be talking about. They're known as chapter seven, Chapter 13, Chapter 11. And there's also a chapter 12, and many others that we're not going to talk about chapter 12. Bankruptcy is for farmers and fishermen. So we're not going to cover that. The basic three is 7, 13 and 11. What is it? What's the difference? chapter seven bankruptcy doesn't require a repayment plan, but does require you to liquidate or sell non exempt assets to pay back creditors. This is for individuals and or businesses. Chapter 11. bankruptcy is a business reorganization plan, often used by large businesses to help them stay active well repaying creditors. So for individuals chapter elevens, does not apply, unless you have a large business of some type. Chapter 13 bankruptcy, eliminates qualified debt through a repayment plan over a three or a five year period. And over that three or five years, you're making payments to the court, chapter seven, and chapter 11. And chapter 13, bankruptcy all impact your credit, and not all your debts may be wiped out. Let me stress that not all your debts may be wiped out. So here's some friendly advice. I was an accountant. I did tax returns for businesses. For many years. One of the most common things I dealt with was people coming in saying they got letters from the IRS, and they owe the IRS money for past years, maybe 1015 years ago, a lot of them said I file bankruptcy and I don't owe that anymore. The only thing I could tell him is you need to talk to the attorney that handled your bankruptcy proceedings. I don't know anything about bankruptcy, and I don't know anything about yours. federal income taxes is one of those items that may not be wiped out. In order to make sure it's included. You have to have all your tax returns filed up to date, at the time you file bankruptcy. Anything that happens after you file your bankruptcy is not gonna be included. Even if you're up to date and you owe their money and they're pursuing you. Bankruptcy may not wipe out that debt. You need to talk to the attorney that's handling it. You need to find out what debt will remain after you file bankruptcy and do whatever it is you're gonna do. Now let's talk about the different types. Chapter Seven. How does that work? You can eliminate most of your unsecured debt and some secured debt by surrendering your assets. unsecured debts or debts not secured with collateral including most personal loans and credit cards. So your house and your car have collateral being the home or the car. And you have to qualify for certain to file chapter seven. And one of the things you have to do is is a medium income test that you have the past and then there is a couple forms you need to fill out and and present and present to the court. And the best person or people who chapter seven works for people who own little or no property and have a lot of debt with no collateral. If you have a lot of credit card debt, you don't own our house, you're not buying a home, maybe you doing have a car payment, then that may be a way to get rid of it, which is no repayment plan required, and nothing else is going on. There are things you got to do before you do this filing. And we're going to cover that in a little bit. Chapter 11 bankruptcy is businesses and submitting a reorganization plan to restructure debts to help repay creditors over time. It's often used by large corporations, but can also help certain people and small business owners if they don't qualify for chapter seven or 13. Chapter 11 is more complicated bankruptcy filing and isn't typically used by individuals. And we'll leave it at that. So if you're an individual, and you have a fairly good business with maybe a lot of assets, and you got behind and debt, because you had a closed down for COVID. And you got behind, maybe you might qualify for chapter 11. Now all these different chapters you have to qualify in order to use them. And it's you know, income based tests and all kinds of forms you got to fill out and all kinds of every time and you file you got to pay a fee, and there's a fee for filing for bankruptcy. Now, of course you need an attorney, make sure the paperwork is all filled out correctly. Even if you do it yourself, an attorney should review it to make sure you got it right and should be aware and advise you of what's going on and represent you in court because you're probably going to be too busy to go to court every you know few months or whenever it is. The chapter 13 is the second most common type of bankruptcy use primary by individuals. The goal of chapter 13 is to eliminate your debt by creating a repayment plan to pay back all or a portion of what you owe over three or five years, you make monthly payment to a court trustee. And the trustee distributes the money to your creditors. At the end of your plan, the remaining unpaid debts are discharged. So you make payments on a monthly basis to the trustee who then pays your creditors and he's gonna pay your creditors based on whatever legal terms that's required. At after the period of time, whether it's a three year or five year I most them that I ever came across were five year plans. So at the end of five years, whatever debt did not get paid off, is gonna be discharged. That's only the debt that's part of this plan. There may be debt that was not part of the plan that you still have. I cannot stress that enough. It said earlier that not all debt is discharged in bankruptcy, some of them may not qualify and I don't know what that's gonna be but I know federal income tax could be one of those. The chapter 13 when you file it creates automatic stay that stops most collection app actions and which generally means creditors can't seek wage garnishment making calls demanding payment or file lawsuits. Automatic stays also protect your co debtors and can save your home from foreclosure. However, you must continue to pay your mortgage or the lender can get the court to start foreclosure proceedings. Work with your attorney so they can communicate with your creditors and work with you to determine what debts you should continue to pay if any. And this is gonna vary state by state and definitely This is only for the United States. Every state has different laws. So it's gonna vary from state to state. That's why we're being vague here. So we got seven which is complete discharge of your debt with no repayment plan. We have 11, which is mostly for large companies to restructure their To repay their creditors over time, we have chapter 13, which is mostly for individuals, which is a payment plan, where you have a plan that you submit to the court, the courts not doing this for you, you have to come up with the plan submitted to the court, and make either a three or five year payment, we pay it to the trustee. Seven and 13 is the most common for individuals. Seven, if you're an individual was little or no assets, a lot of unsecured debt 13. If you have substantial amount of collateral loans or credit, such as a home, a second home, a car about anything with that title, it's going to have collateral credit attached to it. Those are the items that maybe you sell your second home, you sell one of your cars, you sell one of your boats, you make a payment to them, and then whatever is left over, it may be discharge through bankruptcy, is it better to file seven or 13 seven is generally more affordable to compare to chapter 13. And provides a relatively quicker way to get out of your debts. Filing chapter seven might be a good option if you have little or no property, have an income level that falls below the means thresholds, which is a test you got to pass have mostly unsecured debt, such as medical bills, credit card debts and personal loans, can't commit to a repayment plan for the next three or five years, maybe you don't have the income, maybe you are disabled or became disabled or retired. So it depends on your individual circumstance. And chapter 11 is a reorganization plan. Chapter seven is a liquidation bankruptcy. So if you file for seven, you have to sell your assets to pay as many creditors as possible. Generally speaking, you do this because if you sell the asset, you can't get the lien release, because you can't sell it for what you owe on it. And it's gonna definitely create your credit score. But before you can do all this, we started out before you can even file for bankruptcy, you have to go and get credit counseling, and you got to get credit counseling from court approve credit counselor, and what are they gonna do? Well, they're gonna do what I've been telling you. One, you got to set up a budget, you gotta identify how much your income is on a monthly basis, you got to identify all your debt, you got identified all your living expenses, now you got to put yourself on the budget, and two, you have to come up with some type of repayment plan. So all your debt, you're gonna have to come up with how much you can afford to pay him. And it's probably got to be more than a memo amount. Or if you got so much debt, maybe some of it, you can't even repay, they just got to be included in that repayment plan. And you have to have debt counseling, to go over all this information and to help you and maybe make payments for three or six months, or for a period of time. And to determine if you're actually can be on a credit plan so that you can file for chapter 13. Because you would have to submit a payment plan. If you can't keep up with a payment plan for whatever reason, she has to demonstrate that to the debt counselor, which you have to put yourself on a stricter budget. You can't have any wasteful spending. That's why I wouldn't I don't like talking about bankruptcy. I feel that if you had enough income to get that credit, you should have enough income. If you keep your spending under control, to repay those loans that you received. It's a matter of you making the decision and realizing you're spending more than you need to you're spending money where you don't need to spend it. You have wasteful spending got bad spending habits. Whatever it is, it's up to you to get it under control. We're going to come back here in one moment. And we're going to talk about the means testing the income means testing or I don't really know what it's called, but something long Those lines. If you listen to this podcast using an apple podcast app, please rate and review this podcast. If you don't know how to rate and review within the apple podcast app, do a search even if you're already at reduced that increased wealth, you do a search. When the search is done, you click on reduce that increase wealth, he then scroll down through the episodes and towards the bottom, you'll see write a review, you can rate the stars Bay, if you click on write a review, you can write your comments and then click on the number of stars you wish to select. Check my show notes for the articles that I've been referring to. And there's two of them. The one on the I just talked about is from credit.com, filing for bankruptcy differences between chapter 711 and 13. With the most common, the seven and 13 being the most common chapters for individuals, seven is a complete liquidation with no repayment plan, which then you must pass a means income means test in order to see if you qualify. And then there's chapter 13, which is a repayment plan over a three or five year period. So if you're thinking about chapter seven, because that's the last expensive and quickest way, and maybe you don't have a lot of assets, so you might think you qualify. But before you can even file, you have to fill out paperwork, of course, in addition to the paperwork for filing the bankruptcy, and there's a couple forms a statement of your current monthly income and means test calculation. A bankrupt bankruptcy means test determines whether your income exceeds a certain amount. This test is required to show that you're eligible for chapter seven bankruptcy based on your state's income standards. This is gonna vary from state to state. And of course, you have to go through and fill it out. And there's a lot of information a one minute it's gonna be complicated, time consuming, and find a bankruptcy professional to help you we generally recommend starting with a credit counselor. In fact, it's required by law to do so before filing chapter seven bankruptcy. Imagine that. So whether they going to require Well, the debt counselor is going to require you to set yourself up on a budget and identify all your debt and come up with some type of plan and maybe they're going to help you come up with that plan. One, that's your first expense pan for a debt counselor. Your second expense will be paying for your bankruptcy attorney. And your third expense would be paying for the bankruptcy fees as you file these forms. I'm sure every form you file is gonna have a fee associated with it. $300 here $500 there I don't know what it is, but there's going to be forms. So if you go to credit karma.com chapter seven bankruptcy means tests and it goes through and it tells you all the different things I want to know your marital status, is you gonna file bankruptcy with your spouse or if you're just filing and your spouse is not filing and they want to know your income. And make sure you list all your income. So that would be not only your wages or to be interesting calm if you have rental property be the rental property income. So you would probably need to get your past tax return out and refer to that since you're a 12 months in a year and multiply your income by 12 to get your annual income. then compare your annual income to your state's annual median family income for your household side as determined by the United States Department of Justice website. This comparison takes place in part two of form 122 a dash one who needs to fill it out. Let me see if you complete it each show your income is higher than the medium, you must file form 122 a dash two this is the actual means test. The calculation you enter on this form determines how much money you have available to pay off other debts. So what they're doing is you gotta have compare your income to your state's average income. Then if your income is higher than The median, which is the average, then you got to do a calculation to see how much money you have available to pay off the debt. And I'm sure they got all kinds of things in there, like your exemptions, like your house and food and clothes and stuff like that. I don't know, I've never done it, and I'm not gonna go into the details of it. So it's gonna be a lengthy process, it may take you some time. But this, if your test fails, just because you fail the chapter seven bankruptcy means test today, doesn't mean you fail it again and a couple of months. So as your income balling and falls even lower, and maybe you redo it, maybe you can put it off for three months, and then you might be able to do chapter seven. But if you fail the test, you can want to move forward. Again, now we're looking at 13. So the two main chapters is seven for complete liquidation of your debt, or 13, which is a plan on a three or five year period. Like I said earlier, the most common that I ever ran across is the five year and there's that they pay it off, you pay the trustee on a monthly basis, and they pay your creditors. However, based on your plan, maybe after the period of time is over. If not everybody gets paid and the remaining balance is poof, gone, and you go on you quit pay into trustee. The bottom lines chapter seven means test helps determine if you qualify for chapter seven bankruptcy filling out the forms can be complicated. So it's a good idea to consult with a bankruptcy professional to help you fill them out correctly. That would be an attorney and also maybe the debt counselor who is approved by the court. It's also important remember that bankruptcy is is serious legal decision that comes has real consequences. Make sure you explore all your options before deciding to move forward with chapter seven bankruptcy. bankruptcies negative effect on your credit may include making it harder to shucker credit in the future and have to pay higher rates of interest on any debt, you do end up taking on bankruptcy No matter if it's seven or 13 should be your last resort. Maybe something significant happened, that reduce your income. And maybe that whatever happened, that reduced your income is not going to go away. Maybe you were in an accident and you're totally partially disabled, and you're unable to work, or at least unable to work at the job you were previously doing and unable to make that amount of income, then you may be a candidate for bankruptcy. But if nothing serious has happened to you, in your life to cause a dramatic loss of income, you need to get yourself on a budget. You need to get yourself on a debt reduction plan. And you need to be serious about your debt. And if you're just thinking about bankruptcy, whether it's seven or 13, as an easy way out to get out of your current debt situation, you're probably not going to like the result at tn. I'll be back in one moment was my final thought maybe you know somebody struggling to pay off credit card debt. If you can refer them to this podcast. I really appreciate it. And maybe we can work together to help them get rid of those pesky credit cards if nothing else. My final thoughts. Bankruptcy is not for everybody. And there's two major types of bankruptcy, chapter seven, and chapter 13. These two sections are for individuals, mostly seven is complete liquidation of your assets to dissolve your debt, and 13 requires a payment plan. In order to do chapter seven, you need to pass a median test which compares your income to the median income of your state. So that will vary from state to state to dollar. If you cannot pass the median test and your income is still falling. You may wait a few months and try the test again and see if maybe it qualifies. If you want to press ahead you can always do a chapter 13 but before Do anything related to bankruptcy, you need to go to a credit counselor, and have them work with you. So if you're going to a credit counselor for any reason, make sure it's a credit counselor approved by the bankruptcy court. And if you go to their bankruptcy court website, they have a list of these credit counselors that are pre approved. Or you can ask them if they're approved by the bankruptcy court. Your goal is to reduce your debt or get out of debt and make your life easier. Bankruptcy is not an easy way out. It's probably one of the harder ways because you have to do what you should have been doing to start with, you got to create a budget. You got to live within your means. You got to come up with a payment plan, a payment reduction plan, you can do all that stuff on your own. But it doesn't count for bankruptcy court, unless you go to a credit counselor. Maybe you been working on that. Maybe you're making some progress. And you think that progress is too slow. So you want to speed it up bankruptcy may not be the way to go. So stick with it. Keep your budget on track, keep your spending under control, and you will get your debt under control and be debt free and reach your financial freedom goals. Whatever they may be