In previous posts, we have been discussing some of the rights debtors have under bankruptcy law, such as the ability to choose when to file and the protection from having to pay creditors after debts have been discharged fair and square. Here, we talk about yet another way in which bankruptcy law seems to favor the debtor, this time in regard to the way in which Inherited IRAs are protected in bankruptcy (in a way similar to how normal IRAs are protected).
When you file for bankruptcy, your IRA (short for Individual Retirement Account) is typically protected from creditors, which means they can't get their hands on it. However, a debate has risen over whether an Inherited IRA should have the same protection in bankruptcy.
Initially, the courts ruled that Inherited IRAs should not be protected under bankruptcy in the same manner as regular IRAs are. However, when this decision was taken to an appeals court, the decision was overturned.
At the appeals court, the 8th Circuit’s Bankruptcy Appellate Panel disagreed that the funds should not be protected. Rather than focusing on who contributed the funds, the court concluded that the federal bankruptcy exemption only requires the funds to be “retirement funds” to be protected. In short, Inherited IRAs are protected if you file for bankruptcy.
In 2005 when Congress amended the bankruptcy law, most of the provisions did not benefit the consumer. However, Congress did add the provision that protected IRAs and retirement fund assets and also required states to do the same. So here again we have a pro-consumer law that favors the debtor in bankruptcy.
If you are thinking of filing for bankruptcy and have knowledge that you may be inheriting a relative's IRA or any other assets, it is always recommended that you contact an experienced bankruptcy who is well-versed in matters involving bankruptcy and inherited assets. With some types of inheritances, the debtor is not so protected, so hiring an attorney is advisable if you want to maximize the outcome of any inheritances.
Filed under Bankruptcy legislation, Consumer Protection by 
Bankruptcy and short sales
What is a short sale? A short sale is when a lender allows a person to sell their house for a quantity that is not large enough to pay off the mortgage owed. Lenders wanting to avoid the foreclosure process, for example, will agree to a short sale and a foreclosure will thus be prevented. When people are experiencing financial problems, it is common for them to consider selling their house using this method to get out of a taxing mortgage. Unfortunately, a short sale leads to obvious complications when bankruptcy is involved.
The problems associated with proceeding with a short sale before filing bankruptcy are outlined in a Bankruptcy Law Network post on bankruptcy and short sales. Please refer to this blog post for a detailed run-down of this topic. For our purposes, we will focus on a couple main reasons why it is not wise to proceed with a short sale if a bankruptcy is inevitable in your case.
First, keep in mind that a short sale can be useful if the mortgage is the main (possibly the only) source of your financial problems. If this is the case, then sure, a short sale may be a good idea. However, if you face multiple financial problems and bankruptcy is inevitable, a short sale is often unnecessary and a bad idea.
Think about it like this: when you file bankruptcy, you are likely to be relieved of your mortgage debt anyway. Also, as the Bankruptcy Law Network post mentions, a short sale can be worse for your credit score than can a bankruptcy; a sale will inevitably be reported to your credit report since you failed to pay the entire balance on the mortgage.
Another thing to think about is whether your mortgage is considered “underwater.” If you have an underwater mortgage, meaning you owe more on the house than it is even worth, then not all of your mortgage debt will be erased; you may still be responsible for the remaining debt on the house even after the short sale (known as the deficiency).
The above are just some of the reasons why it is not necessarily the best idea to do a short sale if you are considering bankruptcy. Because the topic of short sales and bankruptcy is complicated, it is also obviously advisable that you consult with a bankruptcy attorney if you are considering either.
Now, there may be cases in which a bankruptcy and a short sale can both be done, but as the Bankruptcy Law Network reports, the best way to do this is to do a short sale after bankruptcy has been filed. A short sale can be feasible after the bankruptcy case has ended, but again, it can be a complicated matter and it is recommended that you consult with your bankruptcy attorney before moving forward.
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In our last post, we discussed the right of debtors to choose when to file bankruptcy and a court case which helped confirm these rights. In this post, we discuss yet another recent court ruling which seems to favor the debtor. In this case, the ruling provides bankruptcy filers more protection from creditors.
Here’s the case: A man filed for Chapter 13 bankruptcy and began a repayment plan approved by the bankruptcy court. All of the creditors that the man owed were told about the payment schedule and none had any objections. The man successfully fulfilled the repayment plan and the debts were discharged by bankruptcy court. After the debts were discharged, however, the company that had issued the man’s student loans protested that he still owed them $4,000 in interest, even though it was not included in the original payment plan. The case was taken to the Supreme Court, which ruled in favor of the debtor, who held that the debtor had fulfilled his Chapter 13 bankruptcy obligations and therefore did not owe the additional $4,000. The court's reasoning was because the creditor did not ever protest when they were originally told about the payment schedule.
This ruling is a positive precedent for all bankruptcy filers and provides them even more protection from creditors. If creditors fail to object to payment plans within the time they are allowed to protest, they will not be able to successfully object after the debts are discharged. In short, once your debts are discharged by the bankruptcy court, you no longer need to worry about creditors collecting any more debt.
For bankruptcy filers and debtors, this ruling should be considered a breath of fresh air. This is because ever since 2005, when the Bankruptcy Abuse Prevention and Consumer Protection Act was passed, debtors' rights under bankruptcy laws have been limited. With these two recent rulings, however, at least some important rights of debtors during bankruptcy are being established by the courts.
Filed under Bankruptcy legislation, Consumer Protection, Student Loans and Bankruptcy by
Looking at a relatively recent court ruling, it turns out that the timing of when you file bankruptcy could be very important and change the way your bankruptcy ultimately turns out.
The new bankruptcy laws – which changed in 2005 – established that if you successfully time when you file for bankruptcy, you may be able to "leave out" income from the six month income window required by the means test. Meaning that if you time it right, you might be able to exclude some of your income, and in doing so, qualify for Chapter 7 bankruptcy instead of Chapter 13 based on this exclusion. This type of practice of using timing to your advantage when you file was questioned in court by the U.S. Trustee in a Washington bankruptcy case in December 2009. The Bankruptcy Law Network reported on this ruling and the report is summarized below.
In the case, the debtor was self employed as an insurance agent and broker until late summer of 2008. In August 2008 he became an independent contractor with American General Insurance and was paid $8,000 a month, which was significantly more than he was making when he was self employed. The debtor filed Chapter 7 bankruptcy on October 30, 2008. In doing so he was able to exclude his October income from the calculation of the means test’s six month income. This exclusion had the result of allowing the debtor to qualify for Chapter 7 since his income was low enough. Had he included October income, it would have bumped him into the category of a Chapter 13 filer.
The U.S. Trustee that brought this case to court claimed that how the debtor timed his Chapter 7 bankruptcy filing was in "bad faith." As suggested above, if the debtor had waited until November 1st to file for bankruptcy, then October’s income would have been included in the means test. If this was the case, the presumption of abuse would have arisen and the debtor may have not qualified for Chapter 7 – and would have instead had to do a Chapter 13 (debt reorganization).
How did the court rule in this matter? The court did not agree with the U.S. Trustee that the debtor wrongly manipulated the means test. The court determined that bankruptcy law allows a debtor to choose the date that they decide to file a bankruptcy case. People involved in a lawsuit are allowed to get the most out of their rights to the extent that law allows. Because of this, the debtor in the case was found to be exercising his rights in a legal manner, not in bad faith.
This outcome of this case provides an important precedent for when it comes to planning for the means test. If this judgment holds, then the date you file for bankruptcy can potentially be timed to benefit you – and can potentially put you in the Chapter 7 bracket rather than the Chapter 13 bracket. Of course, this would only work in particular situations like the one mentioned above; this would obviously not work for everyone thinking of filing bankruptcy.
Consult with an attorney before deciding when to file to make sure you are getting the most out of your rights. But also, please be sure to learn all you can about Chapter 7 and Chapter 13, so that you know which type works best for you. Some debtors want to file Chapter 13 over Chapter 7, since there are some benefits (like being able to hold on to some particular assets, for example).
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In a previous post we discussed the problems that can arise from paying off tax debt with a credit card. Now, however, we will discuss the opposite, using money gained from your tax return to pay off debt – personal loans or credit card debt, for example. While the former is a bad idea (see the blog post for reasons why), the latter can be a good practice.
With spring comes the much anticipated tax return. Many people look at the tax return as extra money and a means to splurge a little on themselves. It is rarely thought of as a means to pay off debt. While splurging on yourself is much more enjoyable at first, I recommend looking into paying off personal loans or other debt, like credit card debt. However, once you have made the decision to do this, there are some things to keep in mind about these different types of debts which may influence your decision as to which ones you will pay off and how you will pay them off (i.e. will you pay off your debt all at once or in installments over time, etc.). Here are some factors to keep in mind:
Using your tax return to pay off personal loans
Some personal loans have an early payment penalty, which means if you pay your personal loan off early you are charged a fee. This is common with large secured loans like mortgage loans or student loans. Also, borrowers with bad credit history sometimes have an early payment penalty on personal loans. If you do have an early payment penalty, it may make more sense to hold off and pay the loan off as scheduled, rather than using your tax return to pay it off all at once.
Using your tax return to pay off debt (like credit card debt)
If you are thinking about using your tax return to pay off debt, it may be a good idea to pay off the debt that has the highest rate of interest, such as paying off high interest credit card debt before paying off your lower interest personal loan. However, the Credit CARD Act of 2009 says that borrowers that make steady payments on their credit cards for six months may qualify for a lower interest rate. So again, you may want to pay off your debt in installments using your tax return as opposed to all at once. But if it is the case with your debt that it is much higher interest than your personal loan debt, it may make more sense to use your tax return to pay off your credit card debt and not your personal loan debt.
Reducing the amount of taxes you pay throughout the year in order to pay off your debts throughout the year
It is also possible to reduce the amount of taxes you pay throughout the year. If your return is consistently of a considerable amount, you are essentially giving the government more money than is necessary throughout the year. By figuring out how to reduce your tax payments (putting yourself in a different tax bracket, for example – through legal means of course), you can use the extra money you receive throughout the year to help pay off your debt throughout the year, and will also not be so reliant on using credit cards and personal loans.
A quick example of what this looks like: If you are a single worker (no spouse) and no one claims you as a dependent, let's say you claim 2 in the personal allowances section of your W-4 instead of 1. Both ultimately result in you paying the same amount of taxes to the government, but I believe that claiming 2 instead of 1 would result in you having more money available to you throughout the year as opposed to getting it all back at the end of the year. In any case, it is recommended that you consult a professional if you are looking to use your tax return to pay off your debt throughout the year – which can be a good practice.
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