Negotiations with creditors have failed. Repossession is imminent
and foreclosure proceedings have begun. Your income is simply not
sufficient to pay your bills, no matter how low the payments are. It may
be time to consider bankruptcy.

Bankruptcy law evolved as a
reaction to the abuses surrounding debtors prison. Before the nineteenth
century a prison system existed for those who didn’t pay their bills.
If a merchant filed a claim, the debtor was incarcerated until his debts
were paid. (Women were not found in debtor’s prison, not because of
chivalry but because they did riot have the ability to borrow). The
lender was legally responsible for the expenses of the prison stay,
including food, but seldom paid. After all, a debtor would have to sue
in order to enforce this law, and it was rather difficult to sue when in
prison. As a result, many borrowers languished in prison for years,
surviving on what their family could bring to them or, in many cases,
simply starving to death. Although some lenders would doubtless not
object to the renewal of debtor’s prison, fortunately we live in more
enlightened times. Bankruptcy was created to provide a second chance (or
third, or fourth) to those hopelessly in debt It provides a mechanism
to wipe the slate clean and begin anew. As times have changed, though,
so has the bankruptcy code. Not all debts can be wiped out. The
proceedings can be easily disqualified in the event of improper
procedures. There are many things a debtor should know before resorting
to bankruptcy.

The Bankruptcy Decision

There are two kinds
of individual bankruptcy: Chapter 7 and Chapter 13. Chapter 7
bankruptcy, named for the chapter number in the bankruptcy code,
requires a full liquidation of all debts and cancels all no-exempt
debts. Chapter 13 bankruptcy is essentially a court-mandated payment
plan that sets up affordable monthly payments to your creditors,

The
decision to declare bankruptcy is not an easy one. Unfortunately, many
bankruptcy attorneys recommend bankruptcy to just about anyone they
consult with. All too often frightened consumers are advised to declare
bankruptcy just to avoid a few debts. This is a mistake. Bankruptcy
should truly be a last resort as the legal system meant it to be. A
bankruptcy appears on your credit for ten years, and although lending
criteria are slowly changing, many lenders will not even consider an
applicant who has had a bankruptcy. What’s more, a Chapter 7 bankruptcy
can cost you most of your property. Before making a decision to declare
bankruptcy, estimate how bad your situation really is. On a piece of
paper, make a list of all your assets and the approximate value they
could be sold for. On the other side, add up all of your debts. If the
debts exceed the assets by a large percentage, you may wish to consider
bankruptcy. On the other hand, if it seems that your situation may
improve (you may get a new job or a second income), or if your assets
are of greater value or close in value to your debts, a different
approach may be appropriate.

Negotiate with your creditors

Explain
your situation and ask for more time to pay. If the creditors refuse
and continue to threaten garnishment tell them such action would force
you into bankruptcy. No creditor wants to hear the “B” word. Using
bankruptcy as a threat is a very powerful negotiating tool, confronting
creditors with a choice between getting a little each month or probably
getting nothing through bankruptcy. Don’t try this tactic on secured
creditors. They may decide to repossess your property to avoid having to
go through court.

Contact Consumer Credit Counseling

As
mentioned earlier in the book, Consumer Credit Counseling is a
non-profit group funded by creditors to help consumers negotiate
repayment plans. It is often able to negotiate payment arrangements
better than the individual because of its constant contact with a
variety of creditors. If you can’t negotiate a satisfactory arrangement,
give these people a try. Remember, the fact that you are using credit
counseling may appear on your credit record.

Consider Chapter 13 bankruptcy

This
kind of filing allows you to repay your debts in a court-mandated
fashion and will appear on your credit record for only seven years, If
negotiations fail or there simply isn’t enough money to make ends meet
Chapter 7 bankruptcy may be your only option. Bankruptcy does not
necessarily discharge all debts. If your debts are exempt from
bankruptcy, filing will do very little to improve your situation. If a
co-signer was used, the debt would then be owed by the co-signer, unless
that person also declared bankruptcy. In community property states a
spouse’s assets and debts would also be included in the bankruptcy,
assuming they are community property. Consider all very carefully before
deciding to file.

Non-Dischargable Debts – Bills You Have To Pay In Spite Of Bankruptcy

Certain
kinds of debt cannot be automatically eliminated by bankruptcy filing.
They must meet certain requirements before being eliminated by
bankruptcy. If most of your debts are non-dischargeable, bankruptcy may
not solve your financial dilemma. The only ways a non-dischargeable debt
can be eliminated through bankruptcy are through an exception being
granted by the court, a certain period of time transpiring since the
debt was due, or because the creditor does not object to the discharging
of the debt. Certain debts can only be discharged by an exception. They
are:

Recent Student loans

This applies to student loans
that became due within the last five years. Any extension of repayment
would be added to this time period. Some courts, furthermore, will only
discharge payments that are more than five years past due. So if the
student loan was due seven years ago and the payments were originally to
be made over a five-year period, you would still be responsible for the
last three years of payments. The court may also grant an exception to a
student loan if it would produce an “undue hardship” for you to pay it.
This is rarely granted.

Taxes

Federal, state, and local
taxes are not dischargeable for at least three years after you file your
tax return. Even if you’ve been tied up in tax court for more than
three years, any tax assessed within 240 days of filing for bankruptcy
is non-dischargeable. Property taxes are dischargeable if they are over
one year late, but the lien against your property is not. The bottom
fine is that you can count on the government collecting its tax money
eventually.

Child Support and alimony

These can only be
discharged in special circumstances, which generally include agreements
that have not been court-ordered. If one spouse has agreed to assume
more than half of marital debts in exchange for lower support payments,
the court may not discharge all debts held by the spouse for bankruptcy.
Consult an attorney if this situation applies.

Fines

Neither
fines from a court, judge, or government agency nor surcharges,
penalties, and restitution, as a general rule, can be discharged in a
bankruptcy. The same is true of debts incurred as a result of damage or
liability from driving while intoxicated. The debt incurred from
intoxicated driving must be established in court and a judgment must be
issued by a higher court. Small-claims, traffic, and municipal judgments
for intoxicated driving are all dischargeable. Once again, consult an
attorney.

Debts not discharged in a previous bankruptcy

If debts from a previous bankruptcy have been found non-dischargeable, they cannot be discharged in a later bankruptcy.

Debts not listed on your bankruptcy petition

If
you do not include a debt on your petition, it will not be discharged.
Many people filing bankruptcy keep one or more credit lines with small
balances or no balance out of the bankruptcy proceeding to preserve part
of their credit resources. Another strategy is to reaffirm debts on the
condition that credit continues to be offered. The creditor, confronted
with a choice between collecting nothing and maintaining your credit,
will sometimes choose the latter. Be very careful when reaffirming debt.
You are not obligated to and you should have a new written agreement
spelling out all of the new conditions.

Other kinds of
non-dischargeable debts can be discharged immediately if the creditor
does not object If the creditor objects, these debts will be judged by
the court to be either dischargeable or non-dischargeable. The creditor
can ask that the debts not be discharged if they claim the following
conditions existed:

The debt was acquired by Intentionally fraudulent behavior

Fraud
in this case is any dishonest act used to obtain credit. Claiming to be
someone you are not, or borrowing money when you have no means or
intention of repaying it, would be clear-cut examples of fraud. Not
disclosing certain relevant facts could also be construed as fraud. If
you make a promise and intend to keep it and believe you will be able to
keep it, that is not fraud. Creditors tend to be paranoid and believe
everyone is defrauding them, so this excuse for non-discharge is often
used by creditor’s attorneys.

Debts Incurred as a Result of False Written Statements

A
blatantly false credit application would qualify. The inaccurate
statement must be an important fact and one that the creditor relied on
in order for the debt to be judged non-dischargeable. A misspelled name
or minor error would not render a debt non-dischargeable. Drastically
overstating income or misrepresent a job title would be considered
fraudulent.

Fraudulent usage

If you charge “luxury goods or
services” in an amount over $500 within 40 days before filing
bankruptcy, the debt is likely to be deemed non-dischargeable. The same
is true if cash advances are obtained fewer than twenty days before
declaring bankruptcy. A lot of small charges, made to avoid
pre-clearance, would also be considered fraudulent if you were over your
credit limit or obviously unable to pay.

Debts resulting from illegal or malicious acts, embezzlement, larceny, or breach of fiduciary Responsibility

Any money owed because of illegal acts such as
embezzlement (taking property left in your safekeeping), larceny
(theft), or the failure to fulfill your duties as a trustee can be
non-dischargeable. The court will usually de a definition of fiduciary
responsibility.

Once you’ve examined your debts and determined
what is dischargeable and what is not, you can determine whether
bankruptcy would enhance your current financial situation. There are
several other things you should know before you decide whether to file.

Exempt Assets

A
common misconception about bankruptcy is that you lose everything you
own to satisfy your debts. In fact, the court will allow you to keep
many things essential to your well being, and perhaps even a little bit
more. Although there is a federal exemption law, only in states and the
District of Columbia allow you to use it These states let you choose
between the state and federal exemption laws. The in states are:

Connecticut

Hawaii

Massachusetts

Michigan

Minnesota

New Jersey

New Mexico

Pennsylvania

Rhode Island

Texas

Washington

Wisconsin

Vermont

The other states require a person declaring bankruptcy to use state exemptions.

Here are some examples of things that may be exempt, depending on the state in which the petition is filed.