10 Steps to Filing for Bankruptcy in 2016

2016Thinking about filing bankruptcy?  Make 2016 the year of being proactive about debt problems, instead of being reactive.  Too many times, the decision to file for bankruptcy comes after a lawsuit is filed and a judgment is entered, the garnishment has started, or the bank account has been levied.

Knowing you are in a financial crisis and that creditors are hovering makes planning easier, even if bankruptcy is your ultimate course of action.

If you need to file bankruptcy in 2016, hear are the steps to help you be prepared:

1. Review your credit reports.

You need to know how much you owe and who you owe in order to make the best decision for your particular circumstances.  Are the balances so high that you cannot reasonably expect to pay them off within the next 5 years?  How high are the interest rates?  Is a creditor lawsuit or garnishment imminent?  Remember, even old accounts could lead to a lawsuit.  That means creditors might be preparing a lawsuit against you while you’re reading this.  Are you able to negotiate with your creditors to settle your debts for less or lower interest rates?   A free site for obtaining both your credit report(s) and credit score is creditkarma.com, and this site lets you login anytime to see updates to your reports.  You can also obtain free credit reports from all 3 credit reporting agencies once per year at www.annualcreditreport.com, however if you use this site please either save or print a copy of the report(s) that you pull for your attorney, as you will not be able to access them again for another year.

2. Look at the public record section of your reports.

Are creditor judgments showing up in your credit file?  Are filed tax liens listed?  Judgments do not always show up on your credit, but if you do have any court judgments or tax liens at all, know that the creditor  may attempt a bank levy or a wage garnishment at any time.

3. Check to see if your current employer or bank is listed on your credit report.

Collection agencies and creditors do their best to search for information about you when they are planning on filing a lawsuit, or attempting a wage garnishment or bank levy.   They first look at your credit report, as your current address, current employer, and even the bank you bank with may be listed as a creditor on that report.  A valid residential address and/or employer address will ensure that a creditor will be able to find you to serve you with Summons in any lawsuit.  And knowing your current employer or bank information will allow a creditor to easily institute a wage or bank garnishment as well.

4. Prospective employers can show up under the “credit inquiry” section.

Anyone looking at your credit will appear under the “credit inquires” section. For instance, you may be applying for a job, and as part of the application may authorize your prospective employer to conduct a credit check. Even if not divulged elsewhere on your credit report, this information tells a creditor two things: (1) approximately where you live, because you are likely looking for work near your home, and (2) where you may have just started working.  Clients who recently started a job and then have their wages garnished soon thereafter are often confused as to how the creditor found out about the job so quickly.

5. Be especially careful during tax season.

Creditors are very aggressive February through April. They know you are getting a tax refund and usually that refund gets directly deposited into your bank account. The bank levy can happen at any time, even right after the refund hits your bank.  Speaking of which, leads into our next point:

6. Keep bank accounts low.

Once they have obtained a judgment against you, creditors can easily levy bank accounts.  As most banks now have several different branch offices, the creditor doesn’t have to levy the branch where you opened your account.  They simply provide the corporate office with the judicial order authorizing the bank levy.  If the creditor looks at your credit report and sees a credit inquiry, the creditor also will look for small banks and credit unions near that employer’s location, or for banks where you might be banking but may also have a small loan or credit card account showing up on the credit report.  You could have your rent or mortgage money in the account when it is levied, or checks outstanding that have not cleared, which will then overdraft your account when they hit.  And filing bankruptcy after the levy means you are unlikely to get that money back.  If a bank levy is an imminent possibility,  you may want to consider having paychecks or other money deposited onto a money card instead, as these are often harder to discover and levy against.

7. Don’t bury your head in the sand.

Doing nothing will not make everything go away.  There is nothing worse than having to react to a financial crisis after it has occurred.  You stand to lose much by waiting, as beside bank levies and wage garnishments, if you fail to appear in court in response to a Rule to Show Cause or a Citation to Discover Assets a body attachment (warrant) can be entered against you and you could wind up in jail.  Make bankruptcy be a decision that you plan for, and not something you are forced into when your back is against the wall.

8. Contact the creditor to preempt collection efforts.

Avoid a bank levy or wage garnishment by contacting the creditor.  Perhaps you can convince them that your assets and/or wages are exempt and that it is not worth their time and effort to pursue you.  Maybe you can reach a payment agreement to forestall collection by the creditor, or negotiate to settle your debts for less. However, please be aware that if there is an open court case with regard to that creditor (regardless of whether or not a judgment has yet been entered), DO NOT sign any payment agreement in writing.  This agreement could then be incorporated into a court order, and if you later fall behind on payments under the agreement it can be prosecuted as contempt of court for violation of a court order, which can also land you in jail.  Also, if you do settle out a debt and the creditor writes off $600.00 or more in bade debt, be aware that you will receive a 1099-C in the mail next year that you will need to report on your taxes as income, which may raise your taxes and could impact the Earned Income tax credit or or other tax credits.  (Bankruptcy does not result in a 1099-C, and does not impact your taxes.)

9. Start your bankruptcy attorney payment plan right away.

If you can’t afford the creditor’s payment plan, start paying your bankruptcy attorney right away. You can make weekly, bi-weekly, or monthly payments now, and likely will have the balance paid off within a short time and will be ready to file before a creditor has time to cause you much damage.  Our office can file a motion at the time we file your case to pay the court filing fee in installments after the case is filed and while the case is pending, so the client does not have to come up with this additional money beforehand.  You might also be able to use your tax refund to pay off any balance owed.

10. Once you’re finished paying, immediately file your case.

Don’t be the client that pays, but never sends back in the paperwork, or fails to complete the online Debtor counseling class that is required to file the case.  Often I am holding onto a client’s money and their file for several months, only to be contacted after the levy or garnishment begins. I can stop future garnishments, but sometimes I can’t get the money back for the client if it has already been levied.  Once you have paid the attorney fee balance, keep in touch with your attorney, and get them all the necessary paperwork in order to file your case as soon as possible.

www.manuelassociates.com  or Call Us : 217-344-3400

BANKRUPTCY AND DIVORCE

divorce-love

Divorce and bankruptcy often go hand-in-hand.  Many divorces are attributed to overwhelming financial debt, a job layoff by either party, or other significant reduction in income.  Also, it is inevitable that the financial pressure only increases upon the separation of the parties, as now the same income must support two separate households instead of just one.  The addition of child support and/or alimony being levied against one party may also contribute to that party’s overall inability to meet their financial obligations.

Absent a bankruptcy filing, the creditors’ legal rights are not directly affected by a divorce.  Joint debts owed to creditors survive intact, and creditors can continue to pursue either or both spouses, including pursuing all available state law remedies such as foreclosure, wage and bank garnishments, repossession, liens, or levies.   This is true even if one spouse agreed to pay the other spouse’s bills in the divorce, because the creditor was not a party to the divorce action and thus, such an arrangement remains strictly  an agreement between the parties themselves.  The harmed party’s sole remedy then lies with enforcement through the family law court, which is often costly and time-consuming.

Consequently, divorcing spouses often consider filing bankruptcy, either individually or as a joint Petition.  However, due to the nuances contained in the Bankruptcy Code, it is important for spouses and family law attorneys to consider the implications of divorce orders and settlements in advance – BEFORE they are finalized by the divorce court.  Otherwise, short-sided debtors may find themselves in the precarious position of having to pay debts that they can ill afford, and which might have been dischargeable but for the divorce proceedings themselves.

Most people are aware that domestic support obligations — alimony / spousal maintenance and child support obligations — are not dischargeable in bankruptcy.  11 U.S.C. 523(a)(5).   However, few people are aware that other debts, which would normally be dischargeable if a Debtor files a case before a divorce is entered, can be made non-dischargeable simply by way of the divorce settlement or court order.   11 U.S.C. 523(a)(15) controls the Chapter 7 dischargeability of “property division” obligations and other non-domestic support obligations, and states that the general discharge does not apply to a debt owed “to a spouse, former spouse, or child of the debtor and not of the kind described in [Section 523(a)(5)] that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record, or a determination made in accordance with State or territorial law by a governmental unit.”  In layman’s terms, this means that if one spouse either agrees in a divorce settlement, or is otherwise court-ordered to pay a particular debt or debts, and is to indemnify and hold the other party harmless thereon, then those debts then become non-dischargeable in a subsequently filed bankruptcy case filed by that party.  This is true even if the ex-spouse is not personally liable for the debt and was not directly damaged by the non-payment.  Courts have held that the indemnification provision in the parties’ marital settlement agreement creates a new debt that runs between the spouses. See In re Harn, 208 WL 130914 (Bankr. C.D. Ill. 2008).

This is why planning is of vital importance!  Under most circumstances, it is advisable to file a bankruptcy case before obtaining a divorce judgement.  The divorce can have been filed and still be pending at the time of filing of the bankruptcy case, as long as the final judgment concerning property and debt allocations have not yet been entered.   Once a bankruptcy has been filed by a party, the divorce Judge is prohibited from assigning the filing party any of the debts that were included in the bankruptcy.  (Therefore, for single filing cases, it is important that all marital debts are included in the bankruptcy filing – even those that may be in the other spouse’s individual name.  The other spouse can be listed as a co-debtor for those and any other joint debts.) This does not keep the divorce court from ordering a filing spouse to pay alimony and/or child support, but said obligations would be non-dischargeable in bankruptcy regardless of when they were incurred, so this is not really an issue with regards to the timing of the filing of a case.

As explained, there is generally no distinction in a Chapter 7 regarding the dischargeability of different types of the two different types of family law obligations.  However, a Chapter 13 could not be more different.  Chapter 13 discharges are divided between the uncommon “hardship” discharge of Section 1328(b) and the common general discharge of Section 1328(a). Chapter 13 debtors who are granted a “hardship” discharge are NOT discharged from debts relating to property division obligations. However, the court’s entry of a general chapter 13 bankruptcy discharge after the successful completion of a confirmed chapter 13 plan DOES discharge an individual debtor’s debts relating to property division obligations. See Section 1328(a)(2) by omission.  Therefore, for debtors who did not plan ahead and now owe debts that they agreed to take on in a divorce but can no longer pay, this may be a way out.  However, Chapter 13 is much more onerous than a Chapter 7 when it comes to traditional domestic support obligations: if a debtor owes an arrearage for alimony or child support, this usually must be paid in full in the Plan unless the debtor can show that this would pose a hardship, and then is payable only to the extent the debtor is able, but any unpaid amounts still would remain non-dischargeable.  What’s more, a precondition to a chapter 13 general discharge  requires a debtor to pay all domestic support obligations that have come due AFTER filing the bankruptcy case, and to certify under penalties of perjury that all domestic support obligations owed as of the date of the certification have been paid, (including amounts due before the case was filed, but only to the extend provided for by the plan).   Thus, if the Debtor can successfully complete a 3-5 year bankruptcy plan, and pay all alimony and child support obligations during this time, they would be able to discharge their other debt obligations.

However, an ounce of prevention is better than a pound of cure, and thus, a little pre-planning can eliminate this costly mistake that is made by debtors everyday – debtors who simply do not know the perils of their decisions.  What is even worse though is that there are family law attorneys that fail their clients miserably by not knowing the intricacies of bankruptcy law and how the two fields interrelate.  More family law attorneys need to understand the consequences of the wording routinely espoused in settlement agreements and  divorce decrees, and advise their clients appropriately.  More widespread knowledge of these laws will help divorce clients make more informed decisions when it comes to their cases, and the eventual outcome will not come as a surprise to those who find that they cannot meet their financial obligations post-divorce.

www.manuelassociates.com  or Call Us : 217-344-3400