Category Archives: Bankruptcy Help

Student loans: What can be done

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Many people have student loans that they have trouble paying. I am often asked what can be done about student loans.

It is extremely difficult to get student loans discharged in bankruptcy. Therefore, most people need to look at alternatives to bankruptcy to address their inability to afford their loan payments.

Following is a group of links to websites where you can get basic information about the limited options available for reducing student loan payments.

– The first grouping of links leads to web pages about Income-Based Repayment (IBR):

Description of Income Based Repayment

Income Based Repayment Questions and Answers

More Q&As about Income Based Repayment

Income Based Repayment info from a non-profit

– The second link takes you to a website that discusses Income Contingent Repayment (ICR):

About Income Contingent Repayment (scroll down)

– The third grouping of websites is about other flexible payment options:

Repayment Plans

More about repayment plans

Repayment relief

– Finally, here is a website with information about consolidation loans:

Student Loan Consolidation

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Do you have $50,000 to throw away?

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Well, do you? You may have already thrown it away, without even thinking of it that way. The money I’m referring to here would be what you have (or had) socked away in your IRA or 401(k) account. You might be thinking about cashing out that account in order to pay your credit card bills because you are falling behind and your minimum payments just went up, or you lost your job, or you just took a pay cut at work, or for whatever reason I haven’t mentioned here.

I know, you may not have as much as $50,000 in an IRA or a 401(k). It might be only $1200. Maybe it’s a lot more than $50,000. Or you might not even have a 401(k) or IRA account – but this post is targeted to those who do.

If you have fallen behind, or are about to fall behind, on your credit card payments and you are considering taking money from your IRA or 401(k) account to catch up those payments and to avoid bankruptcy, please reconsider. Before you touch any of that money, sit down and work out the numbers, without taking into consideration future job prospects or future money that *might* come your way at some point. Only use current income numbers – will cashing out your 401(k) or IRA savings really be a good thing? Don’t forget to add in the taxes, penalties, and/or interest that you will owe on the distribution from the 401(k) or IRA, plus the fact that if it’s a 401(k) loan, add in the money that you will owe yourself on that loan. And add in how much it will cost you to save up that much money all over again.

If you’ve worked out the numbers, did you notice how expensive it gets to take money out of these types of accounts and to use the money to pay down on your credit card debt? And how the amount probably doesn’t even cover all of your credit card debt? If the latter is the case, then I ask you: Why are you even thinking about it at all?

Regardless of whether you can pay off all of your credit card debt by cashing out a 401(k) or IRA, you would be doing yourself a disservice if you did not consider bankruptcy as an alternative. And I mean *alternative* – what I am trying to prevent by writing this post is a situation in which you cash out the 401(k) or IRA, throw the money at your credit cards, and then file for bankruptcy anyway. Because that will have been a terrible waste, and I’ll tell you why:

In Chapter 7 bankruptcies in New Jersey, most IRA and 401(k) accounts are safe from being taken and used to satisfy your debts.

That’s it, really. So if you are about to cash in that 401(k) or IRA account to pay on your credit cards, please think again and consider the huge costs you will be facing by doing so.

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Tip income can’t necessarily be garnished in New Jersey

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I have to admit, I picked this case for this post mainly because of its cool name, Big M, Inc. t/a Annie Sez v. Texas Roadhouse Holding, LLC. But it also has something interesting to say about debt collection.

The New Jersey Supreme Court decided Big M on July 16, 2010. The issue in the case was whether tips and gratuities are subject to garnishment. As you may recall, a garnishment can happen when a debt collector who has a judgment against you gets a court order to take part of your pay to satisfy the judgment.

Big M involved a waitress working for Texas Roadhouse Holding, LLC whose wages were being garnished. When her creditor, Big M, got a check for only $4.21 from its $672 wage garnishment, it sued her employer. In the course of deciding the case, the trial court judge determined that tips placed on credit cards are garnishable, but cash tips are not. Then the New Jersey Supreme Court considered the case on appeal.

Looking at both New Jersey law and the Federal Consumer Credit Protection Act (CCPA), the court did not find any law directly speaking to the issue of whether tips were subject to garnishment. So it examined an opinion letter and field operations handbook from the Department of Labor, which enforces the CCPA, and found the opinion that tips, whether paid in cash or charged, are not subject to garnishment. Although the New Jersey Supreme Court is not required to follow a Department of Labor opinion, the court chose to give the opinion consideration and deference.

Big M, the creditor, argued that all tips should be subject to garnishment because they are taxable income for state and federal tax purposes. The court did not find this argument persuasive because the process of counting and recording tip income and reporting it for tax purposes does not allow the employer to exercise enough control over tip income to make it garnishable. The whole idea behind wage garnishment is to capture the income while it is still in the employer’s hands, before it gets paid to the employee.

The court held that the amount of control an employer exercises over tip income determines whether those tips are subject to wage garnishment. If the employer pools all the tips and then divides the pooled amount amongst the employees, then tip income could be garnished. But if the tips are generally paid directly to the employee, even if the tips are charged on a credit card, they are not subject to garnishment.

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Utility bills in bankruptcy

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So you got behind on your utility bills and you are going to file for bankruptcy? The past-due debt to the utility company just gets discharged in your Chapter 7 and there’s nothing more to worry about, right?

Well…not necessarily. You might have to worry a bit more about your utilities, especially if you are still receiving service from the same company to whom you owe that past debt.

Utility service in bankruptcy is governed by section 366 of the Bankruptcy Code. Normally, efforts to collect a past-due debt after a bankruptcy filing are stalled by the automatic stay. But when that creditor is a utility, they have the right under section 366 to an adequate assurance of payment.

This assurance of payment generally takes the form of a deposit, usually two times the amount of an average monthly bill. The deposit would have to be paid within 20 days after the bankruptcy filing. If the deposit is not paid in time, the company may discontinue service to the debtor.

So the upshot is that if you owe a utility that you are currently using more than twice your average monthly bill, it might be worth discharging your past-due debt to that utility and paying the deposit. If you owe less than twice your average monthly bill, you are probably better off paying off the debt to the company before filing (less than $600 is best, due to preference payment issues) and keeping current on your utility bills at all times.

If you owe a lot of past-due debt to the utility and you cannot afford the deposit that they are demanding after your bankruptcy filing, you have the option of filing a motion with the bankruptcy court to ask for a lower deposit amount.

It’s best to discuss these issues with your bankruptcy attorney before filing. Ask your attorney to explain your options regarding all types of past-due debt and to recommend a good course of action based on your individual situation.

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Using credit reports in bankruptcy

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If you are considering a bankruptcy filing but you are concerned because you don’t remember which credit card companies you owe and/or exactly how much you owe them all, what do you do?

First, don’t worry. Remember – most, if not all, of your debts are on file somewhere – in your consumer credit reports. It is possible to pull your credit report from each of the three main consumer credit reporting agencies and find out what your creditors have reported with regard to what, and whom, you owe. These three agencies are Experian, Trans Union, and Equifax.

But what if you think you already know exactly who you owe and how much you owe them, prior to filing for bankruptcy? It is still a good practice to pull your credit reports before you file, anyway.

You should pull your credit reports because you may have forgotten a debt, a creditor may be reporting that you owe more than you think you do, and/or one or more of your debts may have been sold to a debt buyer without your knowledge. This is just a good due diligence practice.

The official site for free credit reports from all three credit reporting agencies is annualcreditreport.com. You don’t need to use the ones you see advertised on TV – they will cost you some money, possibly every month. So watch out what services you might be signing up for when you are surfing the net looking for credit report sources.

If you are going to hire an attorney to help with the bankruptcy, speak to that attorney first before you go to the trouble of pulling the reports, unless you just want to see them anyway. The attorney may already have a credit reporting service they want to use. Tell the attorney that you want a copy of the credit report they pull for you. Or, they may want you to pull your own reports first, before starting on your bankruptcy case. Different lawyers go about the preparation of a bankruptcy case in different ways.

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Variable income and the Chapter 7 means test

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In qualifying for a Chapter 7 bankruptcy, means testing is not an issue for people whose pay is below the median for their state and family size, but for those whose income is more, it can be a problem.

The means test is like a big IRS form with spaces for plugging in certain numbers and checking off boxes. If you’ve filed for bankruptcy in years past, you may not have seen it. The form was introduced as a result of the new bankruptcy legislation that Congress passed in 2005, which created more hoops for individual bankruptcy filers to jump through.

It has two main parts: The first determines whether your earnings are above or below median. The second is for those who are above median – it lets you take *certain* deductions from your income in an attempt to lower it to the point where you can qualify for a Chapter 7.

Obviously, it’s preferable not to have to fill out the second part of the Chapter 7 means test.

Those whose earnings vary during the year might be in a better position with regard to the means test than those with steady over-median earnings. Examples of people with variable pay over the course of a typical year include teachers, college professors, those who work solely or primarily on commission, and those who periodically claim unemployment insurance benefits because of temporary jobs or seasonal employment.

Many people credit their variable income for getting them into debt trouble to begin with, since they aren’t always able to afford their monthly payments steadily throughout the year.

How can earnings that vary over the year possibly be to your benefit? Because the means test only includes the earnings you received during the 6 months before your bankruptcy filing. If that prior 6 months encompasses a part of the year during which your income was lower, you have a better chance at your pay being below the median and qualifying for a Chapter 7.

So when considering the question of when you should file, think about filing soon after a period of lower income.

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Debt settlement isn’t usually the best option

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Looking at debt settlement to help rid yourself of credit card debt?

Credit cards are a huge problem in the U.S. A May 21st New York Times article reported that the Standard & Poor’s/Experian Consumer Credit Default Indices shows that the default rate on credit card loans recently climbed to its highest point, 9.14 percent, since the index first began in 2004.

So more people are no longer paying their credit card bills. What are those people who’ve stopped paying on their credit cards doing about their credit card debt?

Hopefully, they’re not paying a debt settlement company to try and “get out of debt.” There are a few cases where using a debt settlement company may be appropriate, but not many. Many debt settlement companies take large fees and tell you to stop paying on your credit card bills. They take monthly payments from you for a long time. Then they make offers to your credit card companies to settle your debts.

Sound like something you can do by yourself without paying the high fees? Yeah, there’s a reason for that – it is.

But many people who are taking the debt settlement route should consider bankruptcy instead. If you’re thinking about pursuing the debt settlement route, ask yourself, “why did I decide that bankruptcy wasn’t for me?” Was it fear? A belief that bankruptcy is too difficult?

You owe it to yourself – and your financial health – to first take the time to do some research. Look around online. The bankruptcy courts have their own websites with plenty of information for potential filers. It can’t hurt you to take the time to educate yourself. You need to know what the potential benefits of bankruptcy are before you commit to the high fees charged by a debt settlement company.

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Could you sue? List it in your bankruptcy papers.

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Yet another question that I always ask clients is whether they have any claims against anyone that they could file in court. In other words, I ask whether or not they have any potential lawsuits against anyone.

Of course, I do need to know about actual, ongoing lawsuits, but in this post I’m talking about claims the debtor might have against another individual or against a company.

Why would I want to know about possible lawsuits you might have against others that you never filed in court? Because they are assets. They are assets because, if filed, they might bring in some money to you.

Now, it’s true that court fees, attorney’s fees and expert witness fees might eat up a lot (or maybe even all) of a recovery you might get in a lawsuit, depending on how much in damages you stand to recover. But a danger of not telling the bankruptcy court about your potential lawsuits is that you might no longer have the right to sue after the bankruptcy is over.

This is because a person who is filing for bankruptcy has an obligation under the law to disclose all of his or her assets or potential assets to the bankruptcy court. When you fail to disclose a potential lawsuit to the bankruptcy court but then you later (after the bankruptcy discharge) file that lawsuit, you have taken an inconsistent position – you’ve sworn to a bankruptcy court that you had no assets other than those you disclosed, and those assets didn’t include a potential lawsuit; and yet, you then filed a lawsuit after the bankruptcy based on a pre-bankruptcy claim. The law basically says that you cannot have it both ways.

When you file for bankruptcy, a bankruptcy estate is created. All of your assets, including potential lawsuits, become property of the bankruptcy estate, except for those assets you have managed to exempt. If you do not specifically list and exempt an asset, it is property of the bankruptcy estate. The rule of thumb is that it is always a better idea to list it and exempt it than not to list it at all.

Got real estate? Tell your bankruptcy attorney ASAP.

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When I initially speak to a potential client, one of the questions I ask is whether or not they’ve ever owned any real estate, even a partial interest in land that they’ve inherited and had nothing to do with.

Why do I ask about real estate? For starters, I ask about real estate because the Chapter 7 trustee who reviews your case is likely to ask you at your meeting of creditors whether you’ve ever owned real estate. If you say yes, the trustee will want to know what you did with the real estate, how much it’s worth, and so on. I like to know the answers to important questions like these before they pop up at the meeting of creditors so that if there are going to be any potential problems, we can address them ahead of time.

What are some potential problems with real estate ownership that could crop up? One example is that even in this economy, you might have equity in your real estate – i.e., it might be worth something – and the amount of equity you have in the property can take up some or all of the limited exemptions available to you. This can have an effect on how much property (including personal property) you’d be allowed to keep after the bankruptcy.

Also, if, for whatever reason, you gave away your real estate – including signing it over to someone else (like a relative) just because you couldn’t afford the mortgage payments anymore, you are likely to have a problem. A transfer like this can look like a fraudulent transfer prior to bankruptcy.

In case you’re thinking ” I didn’t commit fraud,” the term “fraudulent transfer” as used in the bankruptcy setting is a specific legal term that has a specific meaning and is defined broadly in the law. It does not necessarily require intent to commit fraud. It’s just that Congress decided it didn’t like the idea of people dumping assets before filing, probably because it didn’t want people trying to look poorer when they had assets they could have sold to pay their debts but gave away those assets instead.

As a result, I like to ask people about real estate ownership. In case you are thinking of not disclosing current or prior real estate ownership to your attorney, think again – the trustee can take steps to independently research your property ownership situation and find things out. It’s better for everyone that you disclose everything to your attorney so that they can help you figure out the best course of action before you file for bankruptcy.

If you are in NJ and thinking of filing for bankruptcy, consider calling Jennifer Weil for a free telephone consultation to discuss your financial situation at 201-676-0722.

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