What You Need to Know About Credit Card Debt in Bankruptcy
Credit card debt is one of the most common factors that contribute to individuals filing for bankruptcy protection.
If you are overwhelmed by your credit card bills, filing a Chapter 7 or Chapter 13 may be the solution. In a typical Chapter 7, the majority (if not all) of your credit card debt will[…]
Many Americans simply have more debt than they can afford to repay.
Despite what you hear, it is rarely due to irresponsibility. No one sets out to accumulate $7,000 in credit card debt, but a temporary job loss, sudden illness or other financial emergency can quickly drain savings and force people to charge normal living expenses.
Bankruptcy Attorneys serving Palm Bay, Florida
Chapter 7 Bankruptcy options – Palm Bay and Melbourne, Florida
When coupled with student loans, signature loans, payday loans and other unsecured loans, consumer debt in America tops $3 trillion. Since most people can expect negligible wage growth and have little savings, credit card debt can easily push a family over its own fiscal cliff.
Even if the debt was not your fault, the bills are still due and something must be done. If paying the bills is not an option, Chapter 7 Bankruptcy may be the answer.
Learn more about Chapter 7 Bankruptcy
In just a few short months, Chapter 7 Bankruptcy can wipe out most unsecured debts including credit cards and medical bills. All that time, your creditors may not take any action against you unless they get special permission from the Bankruptcy Court. After the bankruptcy is over, you still get to keep your house, retirement account, and other valuable exempt assets.
Contact Faro & Crowder, PA today to learn about your Bankruptcy Options
We represent individuals, families, and businesses in Palm Bay, Melbourne, the Space Coast and Brevard County, Florida. Contact us at our office in Melbourne, Florida to learn more about debt-elimination programs. We offer a free initial consult for bankruptcy to help you learn about your debt relief options and moving forward.
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A Home Equity Line of Credit is a secured loan that acts like an unsecured credit card. Many people took out these “second mortgages” on their homes as a way to convert the home equity into cash while staying in the residence.
What happens to your HELOC mainly depends on the Chapter you file.
HELOC in Chapter 7
In a Chapter 7, the discharge order extinguishes your liability on the note, but the lien against the property stays in place. In other words, you have no personal liability to repay the debt, but the bank can foreclose on your house for defaulting on the note once the automatic stay expires. Strip-off may be an option in the Middle District of Florida: if there is not enough value in the home to secure the second lien, the court may remove both the lien and your personal liability in some cases.
Realistically speaking, foreclosure is unlikely for a junior mortgage, such as a HELOC. The proceeds from the sale go to pay the first mortgage, and then if there is anything left, a junior mortgage is paid. There is usually nothing left, especially if you have little equity or even negative equity in the home.
This situation reinforces the idea that Chapter 7 is an excellent option for homeowners who are either current on their mortgages or do not wish to remain in their homes.
HELOC in Chapter 13
Like most other debts, a HELOC can be included in your repayment plan. For example, if you are $1,800 behind on your payments and your repayment plan is 36 months, you could expect to pay about $50 per month towards the HELOC. If the line of credit was a junior lien and was entirely unsecured, you may be able to strip off the loan, just as in a Chapter 7.
The creditor must accept your repayment plan, assuming that the judge approves it. Furthermore, because of the automatic stay, the moneylender cannot foreclose on the lien or make any contact with you regarding the past-due amount through the entire repayment period, without getting special permission from the court.
What was exempt before you inherited it may not be after, according to a recent Supreme Court case.
Clark et ux v. Rameker et al centered around the Chapter 7 Bankruptcy of Heidi Hefron-Clark and her husband, Brandon. In 2001, the Clarks inherited a $450,000 IRA from her mother. When the couple later filed bankruptcy in 2010, they claimed the IRA (then worth approximately $300,000) was exempt property, pursuant to 11 U.S.C. 522(b)(3)(C). The trustee and unsecured creditors objected, arguing that the inherited IRA was not a “retirement account” within the meaning of the statute. The Bankruptcy Court disallowed the exemption. The Supreme Court agreed to review the case, to resolve a split between the Fifth and Seventh Circuits.
A unanimous decision by Justice Sonia Sontamayor focused largely on the ordinary meaning of a “retirement account.” An IRA, 401(k) or any similar defined contribution account is simply money that a worker sets aside in anticipation of retirement. Basically, the account owner worked to fund the account. An inherited IRA, according to the court, is more like a gift, and gifts are normally not exempt in bankruptcy proceedings.
The justices also discussed the legal elements of an IRA. They held that an earned and inherited IRA are different in several key areas:
No additional deposits: The owner of an inherited IRA may never add more money to the account, so the device is clearly not an investment vehicle.
Required periodic withdrawal: In fact, owners of these accounts are required to withdraw money from the IRA, no matter how far the owners are from retirement.
Penalty-free complete withdrawal: The owner of an inherited IRA may withdraw all the money at any time for any purpose, without penalty.
This decision may serve as a precedent in some future disputes, if a trustee challenges an inherited asset in your possession, such as a house or car. An attorney can represent you in these proceedings, and be your advocate in front of the court.
Your credit score is how lender’s determine whether you are going to be a good customer or not, and bankruptcy means many of your creditors did not get what you agreed to pay them.
Many people believe that they are not allowed to borrow money for a certain period of time after they file bankruptcy. You are not allowed to borrow money while you are in Chapter 13, Chapter 12, or Chapter 11 without permission (sometimes from the Court, sometimes from the Trustee).
After your bankruptcy is closed (or with the required permission) you are allowed to borrow. However, lenders are not required to lend to you. Some will, but you will pay a premium for being high risk in the form of higher interest rates, and the amount they will be willing to lend to you will be less. Unfortunately, while you just got out of debilitating debt, the only way to rebuild credit is to borrow money, and pay it back.
For some people, that may mean a credit card that either requires a security deposit or just has a very low credit limit. Charge something every month, pay off the bill in full every month and your credit score goes up every month.
It does seem to be true (the formulas for determining credit scores are closely guarded secrets) that paying in full doesn’t boost your credit as much as paying most of your balance does. That makes sense because the score is supposed to tell lenders whether you are a good customer, and they make more money if you maintain a balance (as long as you don’t default).
Even though your credit will rise more slowly, the difference is not worth the interest you will pay, let alone the risk that you will get back into a situation where your debt load is more than you can handle.
Other people count on staying current on their secured debts, such as a house or car. If buying a new car is a priority, there are some important things to remember.
First, stay away from huge dealers. A small or mid-sized dealer is probably more willing to work with people with lower credit scores.
Second, lower your expectations. You don’t have to buy the cheapest car on the lot, but you probably won’t qualify for the nicest one, and you don’t need it. Remember, you want to own a car, not be owned by a car.
When I see people lease cars they could not afford to buy or finance them and trade them in as soon they have enough equity to make a down payment on a new car with the highest payment they can qualify for, I know their quality of life suffers, their stress level is through the roof, and they are likely candidates for a future bankruptcy.
It’s better to own a modest car outright than to rent a luxury car, and if you are leasing or financing without equity, you are renting.
Third, be upfront with the lender. Before the salesperson runs your credit report, tell him or her that you filed bankruptcy (they will find out anyway, and if they ask directly and you deny it you are committing fraud).
If you can provide a reasonable explanation for why you filed (such as unemployment) and offer a convincing reason why your financial circumstances have changed (you’re working now), lenders are much more understanding.
You also should wait until after the 341. If you filed Chapter 7, you may need to wait until the discharge. That’s only an extra few months anyway. If you filed Chapter 13, you may need the trustee’s permission to acquire new debt.
Make sure the payment fits comfortably inside your current budget. If you cannot afford to pay your ongoing expenses AND put away some money for a rainy day, it does not fit within your budget.
If you are trying to rebuild your credit, savings is crucial. If you do not have savings, any gains you make in rebuilding your credit are a broken transmission, layoff, or illness away from being undone.
Even in Dundee, Scotland, people turn to bankruptcy for a financial fresh start.
Scottish debtors have the option of liquidation or a repayment trust, the equivalent of a Chapter 7 and Chapter 13 bankruptcy. As of April 2014 78 people, including noted soccer player Craig Beattie, have declared bankruptcy in Dundee. The debtors cover a wide range: some are young and some are old, some owe only a few thousand dollars while one claimed debts of $1.1 million.
Yvonne MacDermid, of Money Advice Scotland, stated that many people in debt suffer from mental health problems.
Why People File Bankruptcy
It is a commonly-held myth that most people file bankruptcy because they are poor money managers. While that is certainly a factor in a number of filings, money management is nowhere near the top of the list. Most people file bankruptcy due to circumstances that are totally beyond their control.
Some of the leading factors driving bankruptcy filings include:
Medical bills: Nearly sixty million people struggle with medical bills. Even for those with insurance, may plans have very high deductibles. In addition, 25 million people are skipping doses of prescription medication for financial reasons.
Job loss: Unemployment is still extremely high; many people have been unemployed so long that they have exhausted their unemployment benefits and/or given up trying to find a job.
Injury: If you are hurt and unable to work, your disability income may not be enough to pay the bills.
Death in the family: If a loved one suddenly dies, the funeral costs coupled with the loss of income can be truly overwhelming.
For a free consultation with attorneys who understand that, for the most part, bankruptcy is not your fault, contact our office.
Contact a Brevard County Bankruptcy Attorney at Faro & Crowder, PA
In April 2014, Detroit’s emergency manager stated that he hoped the city would emerge from bankruptcy later this year.
In July 2013, the City of Detroit filed for bankruptcy protection under Chapter 9; it was the largest such filing in the country’s history. Although emergency manager Kevin Orr had hoped that the process would wrap up quickly, the case has dragged on amid numerous objections from creditors. Mr. Orr hopes that the case will be over by October 15.
That date is just a few weeks after Mr. Orr’s 18-month term is set to expire.
The bankruptcy process
A personal bankruptcy under Chapter 7 does not take nearly as long as a much larger Chapter 9 or Chapter 11 proceeding. The debts involved are usually not nearly as complicated, there are few if any third parties interested in the process and the amount involved is minuscule compared to a municipal or business bankruptcy. In fact, the vast majority of debtors never have to go to court at all.
In a Chapter 7, there is a meeting with the bankruptcy trustee about four to six weeks after the petition is filed. The trustee’s main job is to examine the paperwork and ensure that there are no red flags. About four to six months later, most or all of your unsecured debts will be discharged.
In a Chapter 13, the trustee examines your petition and ensures your debt repayment plan disposable income is paid to the Trustee to distribute to your creditors for either three or five years. At the end of that time, any remaining unsecured debts are discharged.
Reestablishing their good credit score is a top priority for most debtors. One way to do just that is by paying your current obligations on time: your mortgage, your car note and any other secured debts that you may have. Responsible use of credit cards is another good way to raise your credit score.
Before Filing Bankruptcy
Be aware that many creditors cancel a consumer’s credit card upon a bankruptcy filing, even if there is little or no outstanding balance. Also be aware that if you make any large purchases on credit in the 90 days prior to filing, such purchases may be presumed fraudulent. The creditor still has to prove fraud in court; in other words, the creditor must prove that you intended to file bankruptcy when you bought that big-screen HD TV or charged your way to and from the Bahamas.
Also, if there is a card you want to keep, consider reaching out to the creditor before you actually file. The moneylender may cancel the card anyway, but you have a much better chance of keeping the account open if you warn the creditor in advance.
After Filing Bankruptcy
In a Chapter 7, there is legally nothing that prevents you from using your existing credit cards or even obtaining new ones. Practically speaking, that may not be possible or practical, for financial reasons.
In a Chapter 13, you generally need the trustee’s permission to take on additional debt. That permission is usually forthcoming as long as you have a legitimate need for the item and the payments fit comfortably within your existing budget.
After Discharge You May Be Inundated with Credit Card Solicitations
Especially after a Chapter 7, you may be inundated with credit card solicitations after discharge. That’s because the creditors know that you generally cannot file a Chapter 7 for at least six years. To make sure you don’t wind up in bankruptcy court again, resist temptation and continue to use credit sparingly. Financing consumables is a recipe for disaster.
You can put a new transmission on a credit card and pay it off in a reasonable time according to a plan. You can also put your groceries on a credit card if you paid cash for the transmission and are therefore a little short this month, and pay the balance in full from your next paycheck. However, if you put your groceries, gas, utilities, or other consumables on your credit card regularly and pay less toward you bill each month than you charge, unless you increase your income, you will eventually build up a balance you cannot afford to service, and you will be right back in bankruptcy.
Contact a Brevard County Bankruptcy Attorney at Faro & Crowder, PA
Payday loans are generally dischargeable without any arguments in a Chapter 7 Bankruptcy, because these loans are unsecured debts. There are, however, a few special cases.
If you borrowed money within 90 days prior to filing bankruptcy, there is a presumption of bankruptcy fraud. Simply stated, the law presumes that you never intended to repay the money and that you used your bankruptcy filing as a sword instead of a shield. In such a situation, the payday lender may file an objection to discharge and a motion to remove the stay.
Many bankruptcy judges do not like payday lenders, believing that these lenders charge usurious rates and take advantage of consumers. Whether that perception is true or false is not the point. Because of this attitude, some judges may require the payday lender to prove fraudulent intent. Intent is particularly hard to prove if the actual loan was originally taken out more than 90 days prior to filing, and the consumer had to keep renewing the loan.
Some payday lenders may require you to surrender a postdated check. After you file, they may attempt to cash the check, arguing that they deposited the instrument in the normal course of business.
But the automatic stay prohibits creditors from taking any action against you, and the payday lender is clearly a “creditor” at that point.
Vehicle title loan
Many people place title loans and payday loans in the same category. For non-bankruptcy purposes, this classification may be appropriate. But, by accepting cash and putting up your car title as security for repayment, the vehicle title loan is a secured debt. The debt itself may be dischargeable, but the lender’s lien on your car title is still valid.
One option is a cram-down. If you borrowed $3000 but your car is only worth $1000, you may be able to pay the $1000 and keep your car. Another option is a conversion to a Chapter 13 bankruptcy, when the automatic stay stays in effect much longer, giving you time to pay off the loan.
Recent scheduled meetings of the Bankruptcy Rules Committee were cancelled, apparently due to lack of interest.
There had been two meetings scheduled in January 2014, one in Chicago and one in Washington, D.C. According to federal law, meetings may be cancelled if there is a lack of public interest, the Standing Committee sees a need for expedited rule change that bypasses public comment, or the proposed amendment is so technical in nature that it does not require a hearing.
The Standing Committee also discusses proposed changes in civil rules, criminal rules and rules of evidence. No further bankruptcy meetings are scheduled at this time.
In 2011, Florida had the second-most bankruptcy filings (94,815) in the country. California held the top spot with a staggering 240,151. Georgia, Illinois and Ohio rounded out the top five.
A cursory glance at these statistics shows the diverse nature of bankruptcy filings. There is no single cause-and-effect relationship. There is no discernible pattern, according to geography or number of filings. People simply get into financial trouble, and bankruptcy is perhaps the best way out.
That being said, a closer look behind the numbers is revealing:
The “average” filer is married, has a high-school education and earns less than $30,000 per year.
The median filing age is 45; the number of filers younger than 25 is lower than ever.
Repeat filers account for 16% of all bankruptcy cases overall.
Chapter 13 Bankruptcy can put you back on the right path, by restructuring some debts and eliminating others. In ten years, your bankruptcy filing will fall off your credit report entirely.
In a boon for debtors, a federal court recently interpreted Section 523(a)(6) very narrowly.
In Communitywide Federal Credit Union v. Laughlin, Mr. Laughlin purchased a new car, with an $18,000 loan from CFCU. Ms. Laughlin was awarded the car in their divorce. A short time thereafter, Ms. Laughlin returned the car to Mr. Laughlin, asserting that she had paid off the note. The car was in very poor condition. Mr. Laughlin had the car repaired, and then sold it to a local dealership, unaware that the CFCU lien had not been paid off or otherwise extinguished.
CFCU sued Mr. Laughlin and obtained a default judgment against him. When the credit union garnished his wages, Mr. Laughlin filed Chapter 7 Bankruptcy. When CFCU filed an adversary proceeding, the trial judge held that the underlying debt was dischargeable, since Mr. Laughlin did not act in bad faith.
Mr. Laughlin apparently took his ex-wife’s story at face value, although it would have been reasonable to do a quick title search and verify that the lien had indeed been paid off. But the appeals court looked instead to the plain language of the statute to determine if the debt was dischargeable. Under Section 523 (a)(6), an otherwise dischargeable debt is nondischargeable if a debtor’s actions “1) caused an injury to the property interest of the creditor; 2) the action causing the injury was willful; and 3) the action was done in a malicious manner.”
While Mr. Laughlin definitely impeded the value of the property by selling it, it did not appear, based on the record, that he had any malicious intent towards the creditor.
Although this decision is not binding in Florida, it is instructive that a court should not draw its own conclusions based on the evidence, but rather base its findings on the evidence itself. Malicious intent is very difficult to prove, so there is a good chance that you may receive your fresh start even if the circumstances are less than 100% in your favor.