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Message #602 Can't pay your debts? (Pt. 1)

What Can You Do If You Can't Pay Your Debts? Part II (mp3 file)


This message will discuss the following questions:

What if you just need more time to pay your debts?

What if your creditors won't give you more time?

When should you use a chapter 13 plan?

Should you file for bankruptcy instead?

Will bankruptcy wipe out all your debts?

If you file for bankruptcy, can you keep any of your property?

How can you find a lawyer to represent you?

First, what if you just need more time to pay your debts?

First, ask your creditors for the time you need. Or ask if you can make a series of small payments over a period of time. If any creditor agrees to one of these arrangements, write a letter to confirm the agreement. Be sure to keep a copy of the letter.

Or, you might try using the services of a credit and debt counseling agency, but be sure to shop carefully until you find one that you believe gives good advice. Using Consumer Credit Counselors, non-profit organizations sponsored by department stores and banks, often people work out plans with their creditors. Look in the white pages of your telephone directory to see if this group has an office in your area. Typically, such organizations cannot reduce the debt you owe, they can only adjust interest rates and/or monthly payments.

Be careful about getting a debt consolidation loan that is used to pay off debts. If the interest, the money that lenders charge for loans, is too high, you may end up with a bigger problem. If you do get a loan, however, make sure all the financial statements that you give the lender are true and complete.

Next, what if your creditors won't give you more time?

If you simply cannot pay your debts as they become due, you may want to consider seeking relief under the bankruptcy laws. One immediate benefit is the creation of an automatic injunction once the case is filed. This "automatic stay" prohibits most debt collection activities. Although a bankruptcy filing may affect one’s ability to obtain credit for a long time, it can provide relief from debt and a fresh start. The two most common bankruptcy filings are Chapter 13 and Chapter 7.

You can file a debt repayment plan under Chapter 13 of the Bankruptcy Code in the nearest United States Bankruptcy Court. The repayment plan allows you to pay your debts over a period of time—usually three but sometimes five years. At the end of this time, all your debts are cancelled -- even if you have not paid them in full -- as long as you tried hard to pay them.

Or you can file for relief under Chapter 7 of the Bankruptcy Code, which is sometimes called "straight bankruptcy." This means you ask the bankruptcy court to discharge most of your debts because you don't have enough money or property to pay them off. A discharge means that you are no longer legally obligated to repay the debt. However, under the new bankruptcy law, which went into effect October 2005, you must qualify, based upon your income, for relief under Chapter 7 based, in part, on your net annual income as determined by "means testing." If your debts are primarily consumer debts, you must now submit to a detailed analysis of your income and expenses. The stated legislative objective for this requirement is to compel those debtors who can pay some (if not all) of their debt to file Chapter 13.

To commence a case under either Chapter 13 or Chapter 7, which you can file either for yourself only or with your spouse, you must pay a filing fee to the bankruptcy court. Under most circumstances, you must also have received a certificate that you have completed a credit counseling course before filing a case under either Chapter 7 or Chapter 13. And, you are now required to complete a course in personal financial management before you can obtain relief.

A trustee is appointed for every Chapter 7 or Chapter 13 case. If you have a Chapter 13 plan, this person collects your payments and pays your creditors. If you file for Chapter 7 instead, the trustee sells any of your property that is not exempt and distributes the money it brings in among your creditors. Once you have filed for Chapter 13 or Chapter 7, the creditors you had before you filed, cannot attach your salary or other possessions. Under appropriate circumstances, a creditor with a mortgage may get relief from the Bankruptcy Court to commence or continue foreclosure proceedings.

What if you lose your job or have a long illness, while you are paying off your debts through a Chapter 13 plan? You can switch from Chapter 13 to a Chapter 7 at any time or dismiss your case. Also, under certain circumstances, you might also qualify for a "hardship discharge" under Chapter 13.

If your Chapter 7 or Chapter 13 case is successful, you will obtain a "discharge" of your debts (in other words, the debts that existed before you filed the case will become unenforceable).

You can obtain a Chapter 7 bankruptcy discharge only once in an eight year period. But you can file for a Chapter 13 plan as often as you need to, as long as the court does not determine subsequent cases to be in "bad faith". Also, you must have a good excuse if you fail to complete the plan.

Next, When should you use a Chapter 13 plan?

You should consider a Chapter 13 plan if you can work out a way to pay off part of your debts over a period of time and still afford the reasonable costs of living.

The law says you can use a Chapter 13 plan if you have a steady income from any source. This means you work for wages, own a small business or receive pension, social security or other benefits. There are also certain financial requirements for qualification under Chapter 13 (for example, your secured debts, like mortgages, or judgment liens, cannot exceed $922,975, and your unsecured debts, like credit card debt, cannot exceed $307,$675. Generally speaking, your credit score will be better once you complete a Chapter 13 plan then if you had simply filed a case under Chapter 7 and obtained a discharge.

If you qualify for Chapter 13, you and your lawyer must work out a plan for the court to approve. The plan must show how you intend to pay all or a reasonable part of your debts. Certain debts usually must be paid in full. These include secured debts, federal or state income taxes that you have owed for the past three years or less) student loans; as well as the court, trustee and attorney fees involved in setting up and carrying out the plan.

Next, should you file for Chapter 7 bankruptcy instead?

If you can't work out any other reasonable way to pay your debts, you might consider straight bankruptcy (Chapter 7). It allows an honest debtor to make a fresh start, by having a court discharge, or cancel, most debts. So, bankruptcy is a way to get out of debt when you owe more money than you can be expected to pay in a reasonable amount of time.

The law says that an employer can't fire you or refuse to hire or promote you because you filed bankruptcy. However, bankruptcy can have a bad effect on your credit rating for a long time (typically, 10 years for a Chapter 7 case and 7 years for a Chapter 13 case). Also, bankruptcy may solve the problems you have now, but it won't protect you if you can't pay new bills.

If you choose bankruptcy, you or your lawyer must file anumber of forms and papers with the bankruptcy court. These include a list of your debts and property, plus information on your income and how you spend it. The court decides if you are better suited for Chapter 13 than bankruptcy. It can order you to have a Chapter 13 plan or dismiss your case.

Also, if a creditor or the trustee files a complaint, a judge can refuse to discharge some or all of your debts through bankruptcy. For example, you may not be allowed to have your debts cancelled if you run up a lot of bills on purpose or borrow money just before filing.

Next, Will bankruptcy wipe out all your debts?

No. The Bankruptcy Code contains provisions regarding which debts are not dischargeable--in other words they will or might survive bankruptcy.

Bankruptcy does not cancel:

*Secured debts.

*Debts to creditors that you did not list on your bankruptcy forms.

*Most income taxes and tax penalties for the last three years.

*Most student loans.

*Child and spousal support.

*Any money that you owe as a result of being sued for death or personal injury while driving under the influence of alcohol or drugs.

Your debts also will not be cancelled if a creditor or the trustee proves that you lied about how much money you have or if you tried to hide some of your property.

Any creditor can also file a "dischargeability complaint" for a determination that its particular debt should not be discharged. If, for example, that creditor can show that you obtained money, credit or property from that creditor by "fraud," its debt will survive bankruptcy.

If the court and the creditor agree, you may choose to reaffirm a secured debt which is in default at the time you file your bankruptcy case. This means that you decide to pay the debt and keep the security, even though bankruptcy would cancel the debt.

If you do not reaffirm a secured debt (such as an automobile loan), under the new law you may lose the secured item after a discharge is entered and your case is closed even if you are current on payments.

Next, if you file for bankruptcy, can you keep any of your property?

If your property is exempt, it cannot be used to pay off debts. When you file for bankruptcy, you can choose between two sets of exemptions, which are provided by California law.

Homeowners generally prefer the set which allows a much larger home equity exemption ($75,000 at the lowest level, rather than $18,675).

These are examples of some of the things that you and your spouse together can keep, under the other set of exemptions which includes the lower homestead exemption – and which is generally the set chosen by people who do not have substantial equity in a home:

*A $18,675 interest in a home and/or burial plot. If you do not own either one, you can apply the $18,675 elsewhere to keep such non-exempt property as an income tax refund. You also have a $1,000 floating exemption, which means you can apply it to any non-exempt property.

*A $2,775 interest in one car or other motor vehicle.

*Any items worth up to $200 in each of these categories: household furnishings and goods, clothing, appliances,books, animals, crops and musical instruments.

*$1,225 in jewelry.

*$1,875 worth of books or tools that you need to earn a living.

*A term life insurance policy.

*Social security and veterans' benefits, unemployment insurance money and pension and profit-sharing plans.

Next, How can you find a lawyer to represent you?

If you do not know a lawyer, ask a friend, co-worker, employeror business associate to recommend one.

Or call your local state bar-certified lawyer referral service. The person who answers your call can make an appointment for you to see a lawyer. If you decide to hire the lawyer, make sure you understand what you will be paying for, how much it will cost and when you will be expected to pay your bill.

What if you do not have enough money to pay for legal advice? You may belong to a "legal insurance" plan that covers the kind of services you need. Or, if your income is very low, you may qualify for a list of legal services agencies view Message 105.

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