Credit Counseling

In 2005, Congress amended the bankruptcy code.  One the changes was a requirement that anyone filing a bankruptcy must take an approved credit counseling course.  This course reviews bankruptcy alternatives and whether any of those alternatives might be appropriate.

After filing, there is a debtor education course.  This course is supposed to focus on managing a budget after bankruptcy.

These courses are not something to be concerned about.  Most last around an hour.  It can be done in-person, over the phone, or the Internet.  They are no-fail, and no one grades or reviews the answers.

Some clients feel they benefit from the course, but most find it to be a waste of time and money.  After all, most clients are filing because of job loss, illness, or divorce, not because they spent carelessly.

Regardless, the course is required.  Upon completion, a certificate is issued and it's filed with the court. If the filer fails to take the course, the case WILL be dismissed without a discharge of debt.

How Much Debt Do You Need to File Bankruptcy?

The answer is simple: there is no minimum.  You can technically file a bankruptcy with just a $1.00 of debt.

However, whether you should or not is a more difficult question.  I've seen people with under $5,000.00 of debt file because they had no income and essentially no ability to pay.  The creditors refused to negotiate, leaving the client with little choice.

On the other hand, I've had a client with over $10,000.00 of unsecured debt decide not to file, because his household income was enough to reasonably pay back the debt after making a few adjustments.  With these clients, I often recommend a certified non-profit debt consolidation agency.  Note this is NOT a debt settlement company!  A debt consolidation agency will help you adjust your budget, work with your creditors, and make a single payment to cover most of your obligations.

Also, it's important to know that bankruptcy isn't just about the amount of debt.  Sometimes it's about reversing a recent garnishment, or stopping a pending foreclosure.  In these cases, a person may have no unsecured debt, yet a bankruptcy is still an option.

In other words: it depends.  The only way to determine if bankruptcy is right in your situation is to setup a no-cost consultation to review your circumstances in detail.

Redemption - Making Your Car Affordable in a Chapter 7

How much is your car worth?  Most people think they know the answer to this question.  More than one client has gotten an unpleasant surprise after I pulled up Kelley Blue Book and showed them their automobile is worth thousands of dollars less than they guessed.  The next reaction is usually a combination of disappointment and fear, because the client still owes significantly more than the car is worth.

So what to do with that "underwater" auto?  The simple solution in a chapter 7 is to surrender the vehicle and discharge the debt.  Problem solved.

Well... sort of.  Except that you live in Northern Michigan where there is little or no public transportation. And everything is too far to walk, and bikes don't work real well in the snow! You need a vehicle to get to work and haul the kids around.  Maybe you can borrow one from family, or buy a clunker before you file, just to get by for a few months.  If you can make it through the gap between your old car getting repossessed and your discharge, you can probably finance a reasonably priced used car.

Too bad you can't just "retain and pay" - that is, keep the car and make the payments while still discharging your personal liability.  Unfortunately, the 6th Circuit has ruled you can't under the 2005 changes to the bankruptcy code.  So you have to do something if you want to keep the vehicle.

You might reaffirm the debt, assuming you can still afford the payments and are not behind (in which case, you might consider a chapter 13).  But then you're stuck paying significantly more for this vehicle than it's worth.  If something goes wrong down the road (literally) you'll be stuck with a big deficiency and will really be in a pickle!  Between surrender and reaffirm on a significantly underwater vehicle, I always strongly recommend surrender.

But there's another option, which many people overlook: redemption.  Redemption is found under 11 USC 722 of the bankruptcy code.  It applies only to chapter 7 bankruptcies.  In short, you get your vehicle free and clear in exchange for paying the creditor the value of the vehicle on the date of filing.

For example: your truck is worth $1500.00 on the day you file a chapter 7 bankruptcy.  You owe $10,000 to ABC Financial.  We file a motion to redeem, and the court agrees the vehicle is worth $1500.  You pay ABC Financial $1500, and you keep the truck.  The remaining $8500 is discharged.

OK, so that's great!  Right?  Oh yeah, except your automobile is worth $5000+ and you don't have that much cash just sitting around (hence the problem).  Unfortunately, this is why redemption is not always possible.

There is one more trick, however: obtaining financing for the payoff.  Friends or family are probably ideal, since they could be secured in the automobile and usually offer reasonable repayment terms.  There are also banks which do "722" financing, such as www.722redemption.com.  I had a client recently obtain 722 financing and lower their monthly car payments by over $100 per month!

A couple things to watch out for though - the new creditor will charge you interest through the nose, so be sure it'll actually save you money.  Also, a cosigner can be a big problem.  If mom or non-filing spouse co-signed for the auto, they will probably still be personally liable on the debt.  So even if you can make the lien go away through redemption, the creditor will be hot on the heels of your friendly co-signor (making him or her not-so-friendly!)

The bottom line: if you're in or considering a chapter 7 and are underwater on your auto, surrender and reaffirmation are not your only option - take a look at redemption!

FAQ: Can I Choose Which Debts to Include in My Bankruptcy?

When Is It Time To Consider Filing for Bankruptcy?

There are a number of "red flags" which indicate it's time to at least talk to a bankruptcy attorney:

• You're falling behind on monthly bills to make your minimum credit card payments;
• You've considered calling a debt settlement company, or have called one;
• You're at risk of having a vehicle repossessed;
• You're at risk of having your home go into foreclosure;
• A creditor is demanding a deficiency payment after a repossession or foreclosure;
• You're mortgage company is offering you a "short sale" to avoid a deficiency;
• A debt collector is threatening to, or has already, sued you;
• You're afraid of money being garnished from your wages or bank accounts;
• You've considered pulling money out of your retirement to pay bills;
• You're thinking about transferring assets to protect them from creditors;
• You're income will be increasing in the near future (potentially affecting your filing);
• You may have an inheritance coming in the next few years;
• You're losing sleep, stressed out about your debt, and the phone won't stop ringing.

If one or more of the above apply to you, you should go talk to a local bankruptcy attorney immediately. Bankruptcy might not be the answer, but better to ask too early than too late. There may even be factors which indicate bankruptcy is not right such as recent large payments to creditors, payments to relatives, recently incurred debt, or an eminent inheritance.

But too often the stigma surrounding bankruptcy alone discourages people from even asking for information until it's too late, resulting in lost time, money, and property.  Most attorneys (including me) charge nothing for the initial consultation.  

It's confidential and there is no obligation.  So why not get the information?

Save your retirement, property, and your sanity; you're going to need all three!