If you are thinking about filing for bankruptcy, do not accumulate any credit card debt for holiday gifts. Otherwise you may run into trouble over what debts are dischargeable in your case.  Instead, come up with thoughtful ways to express your love and appreciation for your loved ones that do not involve spending a lot of money on gifts this holiday season.

When money is tight, financial anxiety can cloud the holidays, making the temptation to use credit cards nearly irresistible. We live in a rather materialistic culture, so when we express our love and affection through gifts we tend to let price carry too much meaning, often by allowing the gifts we give to define our worth. That is particularly true with our close loved ones, whom we are reluctant to disappoint.

The feelings about expressing love through pricey gifts may be especially intense if there is tension in the marriage, or within the household, which is often the case when there are financial pressures.  But we all know that the price of a gift is not a true measure of our love and that gifts do not buy love. To help you follow your wiser impulses, here are three suggestions.

1.  Give gifts appropriate to your financial circumstances, no matter how modest they may be.  That is the only responsible way, and in fact shows your love—especially to family members—more than if you gave gifts you could not afford.

2.  Direct your energy toward coming up with a gift idea that reflects the connection between you and the intended recipient.  Make it a gift that the person will enjoy but also one that shows you really put thought into it.

3.  Communicate honestly with your loved ones about your financial circumstances.  Do this in a way that is appropriate for the relationship, which will be different for extended family, your significant other, and/or your children. This communication need not be negative.  Instead, it can be a constructive conversation about priorities, honesty, and your love for the other person.

Following these tips can be difficult, but sometimes it needs to be done.

Photo by Billy Halsey.

Beginning in 2012, about 1.6 million student loan borrowers will be able to make smaller monthly payments and make fewer payments before their balances are forgiven. President Obama announced these changes to the Income-Based Repayment Plan on October 26, 2011.

Here’s a short summary of the changes:

1. Monthly payments:  Under the Income-Based Repayment Plan, payments top out “at an amount intended to be affordable based on your income and family size.” The payment amount has been 15% of disposable income, but it’s going down to 10% only for students who are currently taking out Federal student loans or who have yet to take out new Federal student loans.

2. Repayment term:  The 25-year repayment period under the plan will be shortened to 20 years.

So if your income is low enough, your payments can be very low over the 20-year period.

Unfortunately, these Income-Based Repayment Plan changes only apply to people who 1) Graduate in 2012 or later, 2) Took out their first student loan no earlier than 2008, and 3) Will be taking out at least one new federal student loan in2012 or later. It is designed only for current and future student loan borrowers.

But even if you don’t qualify for new Income-Based Repayment Plan changes, the older version requiring payments of 15% of your income over 25 years can help by saving you money in your budget.

But a major limitation is that the Income-Based Repayment Plan does not apply to private student loans. To discover your options regarding private student loans, you must contact your lender.

And even if you do have a federal student loan, you cannot be in default on the loan to qualify for this Plan. To find out what type of student loans you have and their default status, go to the National Student Loan Data System for this and related information.

Photo by a.mina.

Anyone considering filing bankruptcy should be aware that court filing fees are increasing on Nov. 1, 2011.  While it is not a large fee increase for filing a Chapter 7 or a 13, it is notable for being the first increase in a long time.  A disclosure form containing general information about the different chapters of bankruptcy, including details on the filing fees, will have to change.  The fee changes come as a bit of a surprise, considering the short notice that the Bankruptcy Court provided on October 17, 2011.

That said, the changes in the fees to file a Chapter 7 and a Chapter 13 are small.  The Chapter 7 filing fee will go up from $299 to $306 and the Chapter 13 filing fee will rise from $274 to $281.  As you can see, the Chapter 7 filing fee crosses that psychological $300 barrier.  It’s only $7 more, but the fact that it’s over $300 now makes it seem like a whole lot more.  Numbers are funny that way.

Photo by 00dann.

In New Jersey, it will be a little easier or a little harder to qualify for a Chapter 7 as of November 1, 2011. Whether it’ll be easier or harder for you depends on your family size.

The bankruptcy system looks to the U.S. Census to calculate each state’s median income, as applied to family size. If your income is below your state’s median income for your family size, then in most situations you would be eligible for a Chapter 7. But if your income is above the median and you still want to file a Chapter 7 case, then you have to fill out a long and rather complicated form detailing your allowed expenses to determine whether or not your filing of a Chapter 7 would be “abusive.” So if you want to file a Chapter 7 bankruptcy, it’s a lot easier if you’re below the median.

On November 1, new median income amounts become applicable. In New Jersey, for a household of 1, the median income level will rise slightly from $59,060 to $60,322.  For a household of 2, it will drop from $70, 680 to $67, 503.  The new figures for all states can be seen here. Remember, if the median income goes up, that makes it a little more likely that your income will fall below that median, and you’ll have smoother sailing qualifying for Chapter 7.  New Jersey has some of the highest median income levels in the U.S.

So, if your income is close to the applicable median amount, and the median is increasing for your family size in your state on November 1, then you have a better chance at falling under the median if you file on or after that date.

Please understand that the meaning of “income” in the bankruptcy context is different from conventional meanings of that word. Bankruptcy “income” is calculated using a six-calendar-month look-back period that is doubled and then divided by 12 for an average monthly income. It includes all sources of income from all family members other than social security and does not only include taxable income.

Because of this and many other complicated issues, you should consult with a bankruptcy attorney about median income questions.

Photo by Rafa.Garcés.

Sometimes the timing of your bankruptcy filing hardly matters, but other times it’s huge. The two examples in this post should convince you that you do not want to be rushed to file because a creditor got a judgment against you is now garnishing your wages. Since the timing of your bankruptcy filing can be a strategic decision, you should preserve the ability to file bankruptcy at a time that’s best for you.

1. Choosing between Chapter 7 and 13:  Being able to file a Chapter 7 generally requires you to pass the means test. This test largely turns on a very special definition of “income.” For many people, means test income can change every month. So you may not qualify to file a Chapter 7 one month but maybe you can the next month. Being able to delay filing means being able to file when you are likelier to pass the means test and not be forced into a Chapter 13. Chapter 7 cases are usually shorter and normally cost less than Chapter 13 cases.

2. Discharging debts:  Getting certain debts discharged can be more difficult if you incurred them within a certain amount of time before your bankruptcy case was filed. Delaying the filing of your case makes it less likely that the dischargeability of one of these debts would be successfully challenged. If a creditor is successful in challenging the dischargeability of a debt, you would still owe the debt, possibly along with the creditor’s costs and attorney fees and your attorney’s fees.

If you get sued, what do you do to avoid getting a judgment against you, so that you’re not rushed into filing bankruptcy at a bad time? See a bankruptcy attorney as soon as possible. The earlier you get advice, the more options you will have.

Photo by: mao_lini.

If you have a judgement against you from a creditor, it can hurt you. Judgments can hurt in three ways:  1) They allow the creditor to use powerful collection tools against you; 2) A judgment can make you rush into bankruptcy at a bad time; and 3) Under some circumstances, a judgment can make it harder to discharge the debt in your bankruptcy.  This post addresses only the first of these three.

Most creditor and collection-agency lawsuits for debt collection result in judgments against those who owe the debts. That’s because the reason for debt collection suits is to legally establish that the debt is owed, which is usually not in dispute. Also, much of the time the debtors are at the ends of their financial ropes and can’t afford an attorney to find out their options or to defend the lawsuit. So judgments are entered “by default”—meaning the deadline for the debtors to respond passed without any action by them, allowing the creditor to get a judgment. Sometimes debtors do not receive notice that a judgment has been entered against them or they receive notice and do not recognize it for what it is. Thus, many debtors do not realize there are judgments against them, especially when nothing apparently happens for months or even years afterwards. And very few people are fully aware of the possible consequences.

Most people know that a judgment gives a creditor the power to garnish wages and/or to levy against bank accounts. But preventing garnishments by keeping your bank account empty and by not being paid a regular wage often are not enough to make you “judgment proof.” For example, a judgment usually becomes a lien against any real estate you own now or will own in the future. That includes not only property held in your own name but also your rights to property held jointly with a spouse, parent, or through a trust or estate. A creditor has other tools available, including getting a judge to order you to answer questions under oath, in writing, about what you own – in New Jersey, this is called an “information subpoena”.

Beyond the direct damage a creditor with a judgment can do to you before you file your case, such a creditor can cause you problems in your bankruptcy case.

If you file bankruptcy quickly to stop a garnishment or other collection activity, you lose one of your most important advantages: the timing of your bankruptcy filing. Much of what happens in your bankruptcy case turns on exactly when it was filed. Not having the flexibility to pick the best timing can, among other things, turn a Chapter 7 into a Chapter 13, can mean a difference of many thousands of dollars, and can turn a straightforward case that meets your goals into a more complicated matter.

The lesson here is, whenever possible, take the time to see a bankruptcy attorney if you have overall financial problems, particularly if you are being sued. Try not to wait until after a judgment has been entered against you.

Photo by Dennis Wong.

Bankruptcy can help both sides of your balance sheet. Getting a fresh start means not just being relieved of debt, but also protecting essential assets. You can preserve this  benefit by not selling, using up, or borrowing against your protected assets BEFORE your  case is filed. In order to regain your financial footing, you will need housing, basic household goods, clothes and – where appropriate – tools of the trade, unemployment or disability benefits and retirement savings. Bankruptcy usually protects these things. Specifically, Chapter 7 protects all “exempt” assets. And if the applicable exemptions do not protect all of your property, Chapter 13 usually provides protection. But bankruptcy cannot protect what you’ve sold, given away or used up. Clients often recount how, within the year or so before deciding to file their case, they depleted their retirement account or sold off household goods in an attempt to avoid bankruptcy. But those things usually would have been protected had they filed their case when they still had the assets. As they say, hindsight is 20/20, but if you are one of those trying to avoid bankruptcy and you are thinking of spending, selling, or borrowing against any of your assets, do you know whether it would be protected in bankruptcy? This type of decision has long-term consequences and is often made without any legal advice about the alternatives. If someone in her 50s cashes in a 401(k) retirement account to pay credit-card companies, that decision can hurt her retirement years.  Or if a couple sell a debt-free car that is in good condition, believing that they’ll lose it in a bankruptcy, that decision could adversely impact their ability to get to work. People tend to wait until they are at the end of their rope before getting legal advice, well after they have made these types of adverse decisions.  But you can obtain a better fresh start by going for legal advice early enough to preserve your assets.

Photo by e.t.

Why not? Because you may be able to keep a vehicle you thought you couldn’t afford. Under certain conditions, a Chapter 13 bankruptcy might allow you to pay smaller monthly car loan payments. You may be able to pay off the debt and own the it free and clear for less than the loan balance.

It may very well be a good decision for you to give up an unaffordable car, but you should consider all of your options first.

If you need a car but cannot afford the monthly payments, you probably figure that you don’t have any choice but to lose it. You know the contract requires you to make the payments or else the vehicle gets repossessed. You may have been trying hard for months to keep or to get the payments current, putting up with late fees and constant notices or phone calls from the creditor threatening repossession. You would have already let the car go except you’ve got to have it for work and/or other family obligations, and you have no way to replace it. You feel stuck, with no good options.

On top of everything else, you might have heard that a bankruptcy can’t help much, at least for hanging onto the car—that you still have to either make the payments, and catch up if you’re behind, or else lose it.

That’s true, in a “straight bankruptcy,” a Chapter 7.

But it’s not necessarily true in a Chapter 13 case. If you meet two conditions, you may be able to do a “cramdown” on the vehicle loan: lower your payments and likely pay less overall on the loan. You may well also be able to lower your interest rate.

The two conditions to be able to do a “cramdown”:

1) Your vehicle loan was entered into more than 910 days before your Chapter 13 case is filed (that’s just about two and a half years before); and

2) At the time your case is filed, the value of your vehicle is less than the balance on your loan.

If your car loan meets these two conditions, your loan could be essentially re-written through a Chapter 13.  The total amount you must pay down could be reduced to the value of the car, which is known as a “cramdown”. That’s called the “secured portion” of the debt. Also, a new monthly payment is calculated—representing the amount needed to pay off the smaller balance, often at a lower interest rate, and often on a longer remaining term.

What happens to the “unsecured portion”—the part of the debt beyond the value of the vehicle? It gets lumped in with the rest of your unsecured debts, usually not requiring you to pay anything more to all your unsecured creditors regardless of your vehicle loan.

And what if you’re behind on your vehicle loan when you file your Chapter 13 case—when do you have to pay that arrearage? You don’t. It’s just part of the re-written, new “crammed down” obligation.

As you can see, you may not want to surrender a car or allow it to be repossessed if you could keep it while having it cost you much less to do so. Sometimes having a reliable vehicle is essential to achieving a successful re-start of your financial life.  Before you lose that essential part of your financial plan, carefully consider all of your options.

Photo by m.gifford.

The fact is, you need to tell your attorney about all of your income, regardless of whether it is derived from an illegal source or whether you think it is not taxable or should not count. Not all income is necessarily countable as such for certain purposes in bankruptcy – such as Social Security on the means test portion of the bankruptcy papers – but it all needs to be disclosed to your attorney so that their analysis can be completed accurately.

Illegal sources

A recent case from Pennsylvania highlights a problem with illegal income and failing to report it in bankruptcy. The debtor filed a Chapter 7 and received a discharge of her debts. Later, she was convicted of heroin and cocaine trafficking. As a result, the trustee for her bankruptcy case asked the court to revoke her discharge based on fraud, claiming that the debtor failed to report her revenue from her drug trafficking activities.

The court decided that while the debtor had a duty to report all income, even if it was from illegal activity, the trustee did not meet her burden of proof to show that there was a knowing and fraudulent intent behind the failure to report the illegal income. The trustee lacked basic evidence as to the amount of income and when it was received.

While the debtor in the Pennsylvania case prevailed in the trustee’s action against her, the case serves as a reminder of the pitfalls that await the debtor with illegal income. The debtor who has current income derived from illegal activity may wish to think twice about filing bankruptcy at all.

Unreported taxable income

And the potential debtor who has had income that was not reported to the IRS or to state taxing authorities when it should have been may wish to delay filing for bankruptcy until the tax issues have been defined more clearly. Specifically, any tax returns that should have been filed but were not need to be filed so that any tax debt or refund amounts can be set prior to filing. It is difficult to list a tax debt (or a refund owed to you) on your bankruptcy paperwork if you do not know exactly how much it is.

Additionally, you are required to provide your bankruptcy trustee with copies of your tax returns. Your case can be dismissed for failure to provide these copies.

Photo by Dave Dugdale.

The Dodgers’ owner, Frank McCourt, has been going through a divorce for the past couple of years. One of the issues in the McCourt divorce is whether the Dodgers team is community property under California state law. If the judge decides that the team is community property, that means it is jointly owned by both Mr. and Mrs. McCourt. Under that scenario, a sale of the team to pay Mrs. McCourt in a marital property settlement would have been possible. However, the team’s bankruptcy filing changes things. Now the team’s creditors are to be paid according to the dictates of the Bankruptcy Code. As a result, Mrs. McCourt could be cut out of proceeds from a sale of the team.

Since this blog is primarily focused on New Jersey, you should know that New Jersey is NOT a community property state. However, even if you live in New Jersey now but were (or are) married and owned property with a spouse in a community property state, you should let your bankruptcy attorney know so that they can properly assess the situation. There are certain disclosure requirements in a bankruptcy where community property is involved, due to the presumption of joint ownership.

For a more in-depth analysis of the financial issues facing the L.A. Dodgers, along with a copy of the team’s main filing in the Delaware bankruptcy court, check out the blog Dodger Divorce.