Monthly Archives: February 2013

What Is Consumer Debt And Why Is It Important In My Bankruptcy Case?

By Ryan C. Wood

You may hear the phrase “consumer debt” a lot when you are looking into bankruptcy. The reason why it is so important that you know what is considered “consumer debt” is because it may determine whether you can qualify for a Chapter 7 discharge in bankruptcy. Pursuant to 11 U.S.C. §101(8) the term “consumer debt” means debt incurred by an individual primarily for a personal, family, or household purpose. Under 11 U.S.C. §707(b), a trustee (or any party in interest) may file a motion with the court to attempt to dismiss your Chapter 7 case if your debts are primarily consumer debts and the court finds that granting the discharge of your debt would be considered an abuse of the bankruptcy process. How does the bankruptcy court determine whether your debts are considered an abuse of the bankruptcy process? They look at the totality of circumstances, but the most important factor is whether you pass what is called the “means test.” The means test takes your income from all sources (except Social Security Act income) and averages it out for the past six months and compares that average income to other households living in your state. Some of your expenses may also be included in the means test, but most of the expenses are already specified for you based on your household size under the National Standards and Local Standards under the IRS Code.

What should you take away from this? You should note that if your debts are primarily non-consumer debts you are not required to complete the means test form. “Primarily” in this scenario means more than half. So if 51% of your debts are non-consumer debts you do not need to fill out the means test form. This makes it very important to discuss your debts with your bankruptcy lawyer to classify your debts correctly into consumer or non-consumer debts.

Non-consumer debt is really any debt that is not used for a personal, family, or household purpose. You make the determination of whether it is consumer debt or non-consumer debt based on your intention at the time the debt was incurred. One of the biggest categories of non-consumer debt is business debt. Business debt is any debt that was incurred for a business purpose, such as to start up, advertise, or maintain a business. Congress wanted to be sure that entrepreneurs are able to take risks in their businesses to hopefully benefit the economy. If the business does not succeed then the entrepreneur will be able to file for bankruptcy. Other types of non-consumer debt could be debt related to auto accidents (since the debt was not incurred for a personal, family, or household purpose) and personal income taxes.

Real estate debt could be both consumer and non-consumer debt. It is normally consumer debt since you are purchasing and incurring debt to purchase a house for your family to live in. Real estate debt may be non-consumer if the purpose at the time of incurring the debt was for investment (profit generating) purposes. A lot of realtors have created LLCs and were purchasing homes, fixing them up, and selling those homes for a profit. This would be considered a non-consumer debt.

Student loans could also be both consumer and non-consumer debt. This is a gray area in the law. It would depend on the purpose at the time the student loans were incurred. If it was for living expenses like room and board, that portion of the student loan debt could be considered consumer debt. The portion of the student loan that is used for things such as tuition could be considered non-consumer debt. It may be very hard to determine how much of the student loans were used for consumer purposes and how much of the student loan were used for non-consumer purposes.

Credit card debt may also be both consumer and non-consumer debt. If most of the debt was incurred for personal purposes like gas, food, utilities, entertainment, and similar endeavors then the credit card debt is considered to be consumer debt. If the credit card was used for business purposes like to advertise or maintain a business it would be considered non-consumer debt.

If you do not know whether your debt is primarily consumer or non-consumer debt or how to relay that in your bankruptcy petition it is advisable that you seek the services of an experienced bankruptcy attorney to review your case.

Can My Debts Related To A Car Accident Be Discharged In Bankruptcy?

By Ryan C. Wood

The impact of a car accident may be emotionally and physically devastating. It is even more devastating when it has been determined the car accident was entirely or even partially your fault. What happens when you are underinsured or not insured at the time of the accident? The impact of such an event may cause your finances to spin out of control.

If you are financially responsible for a car accident you need to take a look into all the options that are available for you. One of the options is that you may be able to file for bankruptcy to discharge those debts depending on your circumstances. Normally your debts related to a car accident are dischargeable. This is true whether the debts are related to personal injury or property damage. There are two exceptions where the debts arising from a car accident are not dischargeable in bankruptcy. Many bankruptcy lawyers mistakenly believe that any debt incurred resulting from a car accident, whether insured or not, is not dischargeable when filing bankruptcy.

The first exception is if the accident was the result of you driving under the influence and you caused a death or personal injury to the other party or parties. Your financial obligations to pay any criminal fines, court fees, restitution, and bodily injury to the other party are not dischargeable if it is the result of a DUI. That means you would need to pay for the debts yourself. The only portion of your debts that would be dischargeable is property damage related to the DUI.

The other exception is if the accident was the result of a willful or malicious injury caused by you to another entity or to the property of another entity. An example of this could be if you deliberately ran your car into your neighbor’s fence because you hated the sight of the fence. Under this exception, both personal injury and property damage are not dischargeable in bankruptcy.

So what happens if you are financially responsible for the debts caused by a DUI or your willful or malicious injury to another person and you do not have the funds to repay the debt? Although the debts are not dischargeable in a Chapter 7 bankruptcy you can file a Chapter 13 to repay the debts in installments of up to five (5) years. If the debts cannot be repaid within the 5 years due to your financial circumstances you may always file another Chapter 13 bankruptcy to pay the remaining balance.

If you owe a debt related to a DUI or willful or malicious injury it is best to seek the advice of experienced bankruptcy attorneys. They will be able to draft a Chapter 13 plan that will help you repay the debts and hopefully you can move on with your life.

Can Debt Settlement Companies Help Me With My Debts?

By Ryan C. Wood

Many consumers today are struggling to make ends meet. They live from paycheck to paycheck and have creditors hounding them to pay for debts with money they do not have. It does not help that they are bombarded with radio ads and television commercials promising to help them settle their debt for pennies on the dollar. The consumers see or hear these ads and think they have found the solution to their problems. But do these debt settlement companies really live up to their promises and actually help consumers? According to the U.S. Government Accountability Office, their investigations have found that a lot of these debt settlement companies use fraudulent and deceptive practices and poses a significant risk to consumers. As a bankruptcy lawyer I have heard many horror stories and I want to highlight some of the dangers of these debt settlement companies. Hopefully you will be able to make an informed decision on how you can manage your debt.

Settle for Pennies on the Dollar

The claim that these debt settlement companies can settle your debt for pennies on the dollar is the main draw for most consumers when they hear this. They think that they are getting the deal of a lifetime. They are willing to pay some company to help them settle their debts and pay a monthly sum to do so. The problem with these claims is that in order to settle the debt these debt settlement companies advise you that you have to stop making your monthly payments first. If you were paying these companies on time and you suddenly stop, your interest rates will increase and you will soon have penalty and late fees tacked on to your balance. Additionally, not all creditors are willing to participate in these debt settlement programs, so you will have to deal with the nonparticipating creditors on your own. For the creditors that are willing to settle the debt with the debt settlement companies, the next issue is how much are they willing to settle for. Contrary to the debt settlement company’s claims, not all creditors are willing to settle for pennies on the dollar. It depends on the amount of debt you owe and how desperate the companies are to settle. In most circumstances you could have settled the debt on your own for the same amount without having to pay a debt settlement company to do it for you.

Be Debt Free in “X” Months

Debt settlement companies promise that if you pay a certain dollar amount to them every month for who knows how many months you will be completely debt free. The number of months can vary depending on the amount of debt. The most common debt settlement program takes the money you pay them and puts it in a separate account. Every time there is enough money in the account they can then try to settle one of your debts. In the meantime the credit cards that are not getting paid continue to increase the balanced owed with interest and late fees. Eventually one the credit card companies will sue you. I had a client that came into my office crying because she was promised that she would be debt free if she paid $1,000 a month for 36 months on her $60,000 debt. She did not receive a statement from the debt settlement company during the 30 months she paid the $1,000. Later she requested the debt settlement company provide a statement to her so she could see how much debt she still owed. She thought she was almost done with the program since she only had 6 more months to go. To her surprise, the balance she owed on her credit cards was HIGHER than when she first started the program. This was after she had already paid $30,000 into the program. Where did her money go? She was out $30,000 and her debt situation did not improve. In fact, her situation had gotten worse. She should have spoken to a bankruptcy attorney and save herself $28,000.

Avoid Bankruptcy

The debt settlement companies make filing for bankruptcy look like the worst possible solution to a consumer’s debt situation. They do not tell you that their debt settlement program will ruin your credit because you are paying less than what you owe on a debt. The really horrible part is that some debt settlement companies also file bankruptcy cases for their clients. So first they tell potential clients that bankruptcy is bad and you would try our debt settlement program. Then when the debt settlement program does not work after collecting months of fees, the debt settlement company markets the client to use them to file bankruptcy and make all the debt go away forever. These debt settlement companies are just bleeding clients dry from all sides. Additionally, if you settle a debt for less than what you owe you can receive a 1099-C and be required to pay taxes on the money that was forgiven or cancelled. That diminishes much, if not all, of the savings you gained by settling the debt. When you file for bankruptcy you will not have to pay taxes on the amount discharged..

Nonprofit Agency

A lot of debt settlement companies claim they are nonprofit agencies, but you need to verify they are actually nonprofit. Just because they say they are nonprofit doesn’t actually mean they are.

So what are some alternatives to debt settlement programs? If you only owe a couple of creditors the best thing you can do for yourself is to try to negotiate with the creditors by yourself. You can save yourself a lot of headaches and money by doing it yourself. Yes, it does take a little bit more of your time, but at least you don’t have to pay any money for it. If you owe a lot of creditors or if the creditors are not willing to settle for an amount that you can repay comfortably, bankruptcy is another option. Bankruptcy discharges all of your eligible debts forever by federal court order and gives you a fresh start. You can consult with a credit counseling agency approved by the U.S. Trustee for more ways to manage your debt.