Lots of my clients come to me after having tried some type of credit counseling program.  The reaction is always the same — “I should have come to you first.”  The purpose of this post is to give you a sense of how credit counseling works and how a Bankruptcy works.  Hopefully this allows you to make an educated choice on what truly is the best way to move forward with your financial issues.

Debt Relief Companies 

The basics model of a debt relief company is:

1. You make monthly payments to the company.
2. The company uses this monthly payments to build up a “slush fund.”
3. This slush fund “settles” your accounts for less than full balance owed.

This seems great because you are paying less than what you actually owe the creditors (hey you are saving money right).  But here are the cons to going about it this way:

1.  It is very expensive to do this.  Most companies charge at least 20% of the savings.  Thus if they save you $20,000 then you are paying them at least $4,000.
2. You are taxed on the savings.  So if they “save” you $10,000 then you will get a 1099c from the creditors meaning you pay taxes on that $10,000 next year.
3. Your credit still goes down dramatically.  You aren’t making payments to the creditors so your score will still go down.
4. Collection activity still happens.  You still get letters, phones calls, and can still be sued from creditors while in the program.
5. It takes a long time to complete.
6. You’re dealing with a big bureaucratic organization.

Bankruptcy 

Bankruptcy is federal law.  This means a couple of different things:  1) generally everyone is eligible for relief under the US Bankruptcy code via either a Chapter 7 Bankruptcy or Chapter 13 Bankruptcy; and 2)  All creditors are required to operate under the umbrella of Bankruptcy and have no choice but accept the relief you are asking for (either within a 7 or a 13).

When dealing with unsecured debt, Bankruptcy looks at your income and and determines (based the income amount and your household size) how much, if anything, you can afford to pay back to your unsecured creditors.  If the formula determines you can’t afford to pay anything back then you are eligible for Chapter 7 Bankruptcy.  If you are not eligible for Chapter 7 then this same formula determines how much you are required to pay back to your unsecured creditors in a Chapter 13 Plan (most people pay back a percentage of what they owe in a Chapter 13).

Here are a few simplified benefits of Bankruptcy vs. Credit Counseling:

1. The fees are a lot less.  Most Chapter 7 cases can get done for around $2,000 and a Chapter 13 case is generally around $3500.
2. There are no taxes paid on debts discharged in Bankruptcy.
3. It is easier to gain/rebuild credit after a Bankruptcy discharge (a discharge is a Federal Court Order which means new creditors can see it know that you legally do not owe anyone else).  If they know you don’t owe anybody else then they aren’t competing for your dollars and are more likely to give you new credit to rebuild.  Read more about typical results for this here
4. Collection activity is required to stop.  Bankruptcy has a federal injunction that prevents collection activity once you file (no phone calls, letters, and even lawsuits have to stop).
5. It can be extremely fast (Chapter 7 takes about 3 months).
6. You are dealing with an attorney (we have a legal and ethical obligation to do our best for you, answer questions, and finish the job you hired us to do).

Summary

Once you’ve made the decision that you need to do something about your debt then do your research.  I’m not saying Bankruptcy is always the answer.  However, don’t ignore it just because you think it is a dirty word.  There is a reason why a lot of people try other things and then end up in my office.  Remember, Bankruptcy is federal law that was enacted for the general protection of the public.

The post Bankruptcy versus Debt Relief appeared first on DFW Bankruptcy Heroes.

In 2005 Congress passed Bankruptcy Reform Act aka BAPCA.  A major provision in this act was the means test.  The basic premise of the means test is to only allow people to file Chapter 7 who do not have the “means” to pay back their unsecured creditors.  It’s a very mechanical formula and often times not fair.  However, it is what it is and is necessary to pass to file Chapter 7 in the vast majority of cases.

How Does the Means Test Work (1st step median income test)

The means test starts by taking a look at your six month average gross income.  Income is from all sources and not just your pay.  For example, it includes child support and VA disability.  One good thing about the means test is that it does not consider Social Security Disability or Social Security for Retirement.

If your six month average gross income is below the median income then you pass.  If it is above then you continue with the test. The median income is based on your household size and your state.   The number are adjusted every so often.

As of time of this article (Aug of 2018)  the median income numbers for Texas were:

Household of 1:  $47,238

Household of 2:  $63,148

Household of 3:  $69,294

Household of 4:  $78,572

You can always find updated median income numbers here

How Does the Means Test work (2nd step is continue with means test)

If you above median then you continue with the various expenses you are entitled to.  The expense numbers are set numbers for various categories.  Some of these categories include:  Food, clothing, and other household supplies; Out of pocket medical, Household Utilities, Rent/Mortgage, and Transportation.

After the set numbers you plug in your actual deductions for items on your paycheck such as health insurance, tax liability, disability insurance, term life insurance (for the debtors only), and health care spending accounts.

In addition you would then plug in actual expense items for things that are allowed under the test such as child care and charitable contributions.

The Result

Think of this is as an income statement. You have your gross numbers from your job and/or other sources of income.   Then you have your expenses.  If the result is a number that is low enough then you pass and get to file Chapter 7.  The kicker about this test is the expense items you get to use are mandated by certain rules.

If you notice this test has nothing to do with the amount of unsecured debt you owe.  I’ve heard countless times that the test isn’t right because they don’t have any money left over right now.  Yes, that is probably true is you are still paying all your unsecured debt.  This test is designed to see how your budget would operate with the elimination of that debt.  Your general unsecured debt has nothing to do with the means test.  If it did then it would encourage people to take on more debt just to pass the means test.

Collins & Arnove

We have filed thousands Chapter 7 cases and have seen any and all issues with the means test.  This write up is meant to cover the basic approach the means test takes.  There are many situations that are too complicated to explain for the purposes of this article.  We offer a free one on one consultation.  At that consultation I ask that you bring in paycheck stubs, tax returns, and other proof of income.  We will run a free means test for you to see what options you have available.

I routinely have people who come to me second.  They say at their first consultation they didn’t even look at their paycheck stubs for plug in any numbers into a system.  Don’t waste your time with that approach.  Get the answers you need to make a decision right away.

The post Chapter 7 Means Test appeared first on DFW Bankruptcy Heroes.

As a Bankruptcy attorney I hear a lot of misinformation from clients.  The number one thing I hear that is just plain wrong is that their credit will be ruined however.  WRONG!  Believe it or not it is pretty easy to get credit after your case discharges.  I know this may seem counter intuitive.  However think about it from a lenders perspective.  If you have a Bankruptcy discharge then they know that you don’t owe anybody else any money.  Therefore, they aren’t competing with other lenders.  Plus, they know you can’t file Bankruptcy again and that the consumer (you) are going to be hyper sensitive about paying them.   The lender is going to make money off an annual fee to start (possibly) and get the interest.  It’s all about the money for them.  Are they going to start you off up with a $20,000 limit (NO).  Will they start you off $1,000 (YES AND MAYBE MORE).  After you establish a history with them they will start increasing your lines.

Your Score

There is no magic formula for determining your score after the case is filed and discharged.  The credit reporting agencies have their own algorithms.  However, it is pretty normal to be at a 700 after 2 years.  The best thing to do to build your score is to use it and pay it off.  The scores are based a lot on on time payments.  So make sure to do that.  The formula is also based a lot on how much credit you are using vs. how much is available to you.  So make sure to keep those ratios as low as possible.

I Don’t Want Credit Anymore

I hear this a lot too.  It is certainly your right to not use credit and just go cash.  However, I would encourage you not to do that for the simple fact that a good score just helps everything in your life.  I tell people to just $100 on a card every month for gas or some other expense and just pay it off.  They will report the on time payments and increase your lines in an attempt to lure you into making more purchases.

So What is the Downside?

The Bankruptcy is out there forever.  No getting around that.  If you really know how to find it then you can.  It is also on your credit report.   A Chapter 7 is on there for 10 years (from filing date) and a Chapter 13 is on there for 7 years (from your filing date).  Please note that you have to finish your Chapter 13 for it to only be on there 7 years.  If you convert or let it dismiss then it will be on your report for 10 years.

As you can see from above — just because it is on your credit does not mean you can’t do anything.  People get credit cards and cars right after the case is over (if they want).  I have people all the time buy houses after a couple of years.

Bankruptcy is a business decision and the laws were enacted to help you.  I encourage you to treat it as such when determining how you want to handle you debt.

Below are some links for information about this topic

Cost of Bankruptcy

Getting a Mortgage after Bankruptcy 

Credit Score After Bankruptcy

The post Your Credit and Bankruptcy appeared first on DFW Bankruptcy Heroes.

You are required to list all of your property (assets) when you file a Bankruptcy case.  Your property can then fall into exemptions which allow you to keep that property.  The purpose of the exemptions is to give you a fresh start and not a leg up.  Different states have determined what this means for their particular citizens.  However, here in Texas we have strong exemptions that allow most people to keep all of their property despite filing for Bankruptcy.

Any property that does not fall into the Bankruptcy exemptions belongs to the Bankruptcy estate.  In a Chapter 7 case the trustee would take this property and sell it to the benefit of your creditors.  In a Chapter 13, the trustee ensures that your Bankruptcy plan distributes at least the amount of your non-exempt property to your unsecured creditors.  This test simulates what would happen in a hypothetical Chapter 7 case and is called the “Best Interest Test.”

Here in Texas we have the choice between the Federal exemptions and the Texas Exemptions.  A good Bankruptcy attorney will look at your assets and determine which exemption system is best for you.   Below are some common pitfalls that can pop up with exemptions.

Money in the Bank and Tax Refunds

If you own your own home in Texas then you probably have a decent amount of equity because of the recent rising prices.  Most people have be forced into the Texas exemptions because the Federal exemptions systems limit the amount of equity you can have in your home.  The Texas exemptions have an unlimited equity allowance (with an important exception listed below).  The Texas exemption system has no allowance for money in the bank or the equivalent of money coming your way (your tax refund).  Thus, you just have to be careful about which day you file your case.  If you file on payday and you have money in your account then that money will belong to the trustee.  It does not matter that you have a purpose for that money.  From a practical perspective — the trustee won’t bother with the money in your account if the balance is low enough (say $2,000).  However, if your bank account balance and another piece of non exempt property total over $2,0000 then they may.  It is important to talk to a good bankruptcy attorney to determine if your have any assets that may be at risk when you file your case.

Being forced out of Texas Exemptions

There is a federal law what states exemption system you can use.  If you have just moved to a state (within 730 days) then you may not be able to use that state’s exemptions.  You actually may have to use your old state’s exemption system.  This could be very bad for the debtor who does not realize this rule.  For example:  if you sold a house in a different state and then move to Texas then you may not be able to exempt the full equity in it because your old state does not have the same unlimited homestead exemption system as Texas.   There could also be other issues with other categories of property such as household goods, vehicles, jewelry, etc.  All of these categories of exemptions do vary by state.  A good summary of what exemptions are allowed to you can be found here.  

Homestead Limitation

Similar to the above — the homestead exemption is capped to a certain level if you have moved to the state within 1215 days.  The purpose of this rules is to limit high net worth individuals from forum shopping and moving to states with better exemptions to then turn around and file for Bankruptcy.  The dollar amount here is pretty high — it’s limited to $160,375 current.  It is adjusted for inflation every three years — so the number will change in April of 2019.

Conversion of exempt assets

The law is pretty complex here.  However, if you convert what would be non exempt property into exempt property before filing Bankruptcy then the trustee can undo that transaction and bring it back into the Bankruptcy estate.  As the debtor you are allowed to use what is called “exemption planning.”  However, there is a limit.  The limit is not codified — but the Courts generally use a good faith approach for this.  Here are some examples of situations that could be reversed:

1.  Money put into an IRA the year before filing
2. Money put into an Education fund the year before filing
3. Making extra payments on cars and homes

In most cases, the exemptions are pretty clear cut and most cases are determined to be no asset cases.  However, some cases are more complex and you need experienced counsel to guide you and limit your risk.  At Collins and Arnove we have filed thousands of cases and have dealt with all of these issues multiple times.  Call us at 817-888-8210 or contact us online for a free consultation to go over your situation.

The post Bankruptcy Exemptions: Basics and Pitfalls appeared first on DFW Bankruptcy Heroes.

The Lack of  Wage Withholding Requirement 

With Chapter 13 cases a plan payment is made to a trustee who then distributes money according to your Chapter 13 plan.  In the Eastern District of Texas Bankruptcy Court they allow the debtor to make direct payments to the trustee.  These payments are made through a system called TFS.  The TFS system is similar to an ACH draft from your bank.

The standard payment system in the Northern District of Texas Bankruptcy Court is a wage withholding form.  Under this system the plan payment is deducted from your paycheck.  While this may seem convenient once set up, most people do not want their employer knowing about the filing.  There are ways to get around this.  However, they require a formal hearing in front of the Judge.  They are not always granted and are an inconvenience.

Ongoing Mortgage Payments Made Directly by Debtor

If you are behind on your mortgage then the Chapter 13 allows you to catch up on that mortgage.  However, the law requires that you make your ongoing mortgage payment after you file the case.  In the Northern District these ongoing payments are actually made through the Chapter 13 trustee.  This your plan payment would include your arrears plus your ongoing payment.  This system is called a conduit in the Bankruptcy world.  Here is why this system is bad for the client:

(1) It makes your regular monthly mortgage payment actually increase by about 10% since the trustee applies a flat fee to all plan payments to cover their cost; and

(2) The first two mortgage payments you make actually are put into the aggregate to make sure there is enough for the trustee fee and attorney fee incurred in the case.  Thus if the case doesn’t work out then the attorney still gets paid.  To us, this encourages a bad incentive system for the attorney/client relationship.  The attorney is paid their entire fee once a couple of plan payments are made.  We think this system encourages the Bankruptcy Mill model even more.  Make sure to read more about Bankruptcy Mills here

Contract this to the Eastern District of Texas.  In the Eastern District of Texas you are responsible for making your ongoing mortgage payment DIRECTLY to the mortgage company itself.

What This Means for You?

Even though you may live in Dallas, Tarrant, or Hunt county you still have the option to file your case in the Eastern District of Texas.  At Collins & Arnove we file all our cases in the Eastern District of Texas.  When you think of your Chapter 13 you need to think of overall pros an cons of where you file your case.  Will you have to drive a little bit further a couple of more times to meet with your attorney and for your meeting with the trustee?  Yes of course.  But counter that with the fact that your plan payment will be likely be 10% less 5 years (because of no conduit above) and you do not have to do wage withholding.  Take these things into account when you think about who to hire — you’ll be glad you did.  For a summary for why you should call and hire us click here.

Authored by William Collins — partner at Collins & Arnove

The post Filing a Chapter 13 Bankruptcy: Why Your Filing Jurisdiction Matters appeared first on DFW Bankruptcy Heroes.

The Automatic Stay

The first reason why it stops the foreclosure is the Bankruptcy Automatic Stay.  The Automatic Stay is like a stop sign that prevents creditors from taking any collection activity against you (with limited exceptions).  This includes anything from a phone call and letter all the way up to stopping a foreclosure action.  Once you file the Bankruptcy petition then the foreclosure action is STOPPED.

The Chapter 13 Plan

As the debtor you are responsible for submitting a plan or reorganization to your creditors.  In this plan you will let the creditor know how you plan to treat (or pay back) their claim.  When you are behind on your mortgage, and still desire to stay in the house, then you are required to pay back the arrears (what you are behind) back to the mortgage holder.  The good news about this plan is that you can take that amount an stretch it over a period of up to 60 months.  This allows a pretty good chunk of money to spaced out into much more manageable monthly payments.  This is beneficial for the debtor because, outside of the Bankruptcy, the mortgage company will want the arrears to be paid back in a much faster time period.

As the Debtor you want this plan to be “confirmed” by the Bankruptcy Judge.  Once is is confirmed then the mortgage company has no choice but to accept this plan that you have proposed.  Here is what the Judge will want to see in order to “confirm” your plan:

1. That you can afford to make the regular normal payments after the case is filed to the mortgage company.
2. That you have actually made your payments to the mortgage company since the case was filed.
3. That you can also afford to make your Bankruptcy plan payment.
4. That you have actually made these Bankruptcy plan payments since the case was filed.

Example:

Joe has been served with foreclosure papers because he has missed he missed 6 months of mortgage payments from being temporarily unemployed.  He is behind $10,o00 with interest penalties right now.  His normal monthly mortgage payment is $1500.

Joe can file a Chapter 13 Bankruptcy and stop the the foreclosure to keep his home.  Joe will have to show his budget to the Court which demonstrates he can pay his regular payment to the mortgage company ($1500) plus $167 extra per month to be paid through the Bankruptcy payment ($10,000 divided by 60 months).

The post How Chapter 13 Stops Foreclosure appeared first on DFW Bankruptcy Heroes.