A few months ago, a ruling by an Idaho bankruptcy judge said that parents with a college savings plan for their children could lose the college savings to creditors when they file for bankruptcy.
The Idaho case involved parents who had put money in to a 529 college savings account for their daughter. When the parents filed bankruptcy shortly after opening the account, the judge ruled that the account is considered part of their assets and can therefore be used to repay creditors. The judge ruled this because the parents had legal control over the funds they could theoretically use the money for reasons other than for their daughter to attend college if they so wanted to.
This ruling is important for bankruptcy filers because if they want to put money in a 529 savings account for their children, they will need to consider some safety measures to take first. Because money put into the account at least 720 days before you file for bankruptcy will most likely be protected, it is a good idea to invest early. The reason this condition is in place is so that filers don’t take advantage of the system by trying to save their assets by opening 529 accounts right before they file.
Another possible precaution to take if you are thinking of filing for bankruptcy is to keep the account in another person’s name – your child, for example. If they are also interested in adding education funds and are financially stable it can protect the account from creditors because the account is not legally yours.
The Idaho ruling does not mean that every bankruptcy judge will follow the same decision, but it brings up some issues about how bankruptcy can affect your children and lets filers know that it’s important to take safety measures to protect your children’s’ college savings funds. Contact a bankruptcy attorney to ensure that the money in your 529 account or any other college fund will be safe if you file bankruptcy.
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If you are going to file for Chapter 7 bankruptcy, you must take the “means test” first to prove that your case is not taking advantage of the system. Taking advantage of the system refers to filing Chapter 7 in order to erase all your debts EVEN THOUGH you have the ability to pay them off over time under a Chapter 13, which is more a repayment plan. If it is determined that your income is above a certain level during the means test, then you are expected to file a Chapter 13 bankruptcy, not a Chapter 7.
People often wonder what is involved in this so-called “means test.” The first thing you need to do to complete the means test is to determine your “current monthly income.” This is determined by finding the average of your income for the past 6 months, multiplied by 12, and then compared to the median income for families of your size in the state in which you reside. You must gather proof of any source of income from the last 6 months. On top of your pay stubs, this includes any child support, alimony, bonuses, and dividends you have received. If you are married your spouse’s income also matters even if they are not filing for bankruptcy. This is because your household is receiving support from your spouse and that money must to be available for creditors. If you run your own business you must determine your net income for the last 6 months with your gross income and business expenses.
Once you have then determined your current monthly income, that’s when you compare it to your state’s “median family income.” The median family income for your state is determined by the US Census Bureau by looking at the income level in every state where half the families make more and half the families make less. The median family income is also determined by the size of your family – since larger families are expected to have higher income numbers. Thus, every additional individual in the family increases your median family income. For example, if you have a family of three people you are considered to have a higher median family income than if you were a family of one.
In the end, the means test determines whether you are above or below a certain point – financially speaking. If you are above that certain level, then you will have to file for Chapter 13 and repay your debts over a period of 3 to 5 years (not the best news if what you’re looking for is a quick and painless elimination of debts). But if you are below that certain income level, then you will be able to proceed with your Chapter 7 filing.
The means test can be confusing to the common filer, but an experienced bankruptcy attorney knows all about it and can be very helpful in helping you to complete the means test. It is one of the first steps the lawyers here at Clark and Washington take in filing your bankruptcy.
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It can be difficult to navigate the complex legal system when filing for bankruptcy after a divorce. I want to cover some of the basics of what occurs in a bankruptcy following a divorce to help smooth out the stressful process.
On Joint Filing – Once the divorce is finalized, you and your ex-spouse can no longer file a joint bankruptcy petition. How your bankruptcy filing can affect your ex-spouse depends on which chapter of bankruptcy you choose to file.
On Dividing Belongings – When you go through a divorce you need to divide your debts and belongings between yourself and your ex-spouse. Laws vary between states so speak further with a bankruptcy attorney to find out what responsibilities you have for various debts and belongings.
On Filing Chapter 7 – If you or your ex-spouse file for Chapter 7 bankruptcy and debt that was held jointly during your marriage gets discharged, then creditors may be able to collect that debt from the non-filing spouse.
On Filing Chapter 13 – If you or your ex-spouse file for Chapter 13 bankruptcy, most debts are eventually repaid and the non-filing spouse is typically protected from having responsibility of any debt. Cosigners and co-debtors are more protected in Chapter 13 than in Chapter 7.
While bankruptcy discharges many debts, debts such as child support and alimony cannot be erased. Consulting a divorce attorney about adjusting the terms of your divorce could be a helpful option.
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Cosigners typically have stronger credit than the primary borrower, and so their signature on lending papers can help the primary borrower get a better loan. A cosigner also takes responsibility to pay the debt if the primary borrower fails to pay. If you are going to file for bankruptcy, it’s important to understand how all parties involved in your finances will be affected, including any cosigners you may share a loan with.
Depending on which chapter bankruptcy you file (chapter 7 or chapter 13), cosigners may be affected differently. If you file a Chapter 7 bankruptcy, most debts are completely discharged, which means you are not responsible for payment. However, your cosigner is still responsible for making payments. If you file a Chapter 13 bankruptcy, you will be responsible for making payments according to the terms outlined in your repayment plan. As long as you make payments according to your chapter 13 schedule, your cosigners are not responsible for paying your debt.
But bottom line: any payment you fail to pay or pay late will damage both you and your cosigner’s credit. If you have a cosigner in a business loan, they are not at all protected by bankruptcy filings.
Because in many cases cosigners are close friends or relatives that have offered a helping hand, it can be very difficult to know that your bankruptcy filing will likely negatively affect them. While it is a very unfortunate consequence of bankruptcy, you need to make sure you decide which chapter of personal bankruptcy to file by choosing the one that will work best for you. Your cosigner did take on significant legal responsibility and personal risk by signing the lending papers and should understand the consequences.
Before filing, I strongly suggest speaking with a bankruptcy attorney who can help you identify the best direction to take and who can make sure that your best interests come first.
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Many times people try to avoid filing bankruptcy for as long as possible, and then file when it is the absolutely last choice. Waiting for financial desperation is not always the best way to decide when to file for bankruptcy. It’s easy for filers to dig themselves into a deeper hole and make it more difficult for themselves in the event that they actually do end up filing for bankruptcy.
To avoid digging yourself into such a deeper financial hole by not filing for bankruptcy, it is important to know signs that show that filing for bankruptcy may be better to do sooner than later:
1) If you are borrowing money to pay your debts, it is a warning sign that bankruptcy may be a better option. Using one credit card to pay another, depending on payday loans, or asking family and friends for loans can all dig you into a deeper hole.
2) If you use your retirement funds to pay your debts. Often your retirement accounts are exempt from creditors in bankruptcy court and would be heavily taxed if you take it out early.
3) If you are experiencing increased stress and pressure, bankruptcy can potentially relieve that. Debt can put tension on relationships with family and friends, as well as your state of mind.
4) If you are unable to pay minimum payments on your debts, it may be time to file bankruptcy.
5) If you are constantly selling your stuff for cash in order to pay your debt. This is another bad sign. While it can be good to sell unnecessary items you have acquired, if you are giving up things that are valuable to you, it could be a problem.
6) If you are constantly contacted by bill creditors, filing for bankruptcy can end their communication.
Every financial situation is different and it’s important to understand the best option for you. Filing for bankruptcy can give a debtor a chance to start over financially and put an end to the stress. I recommend contacting a bankruptcy attorney if you’re experiencing any of the above-mentioned warning signs.
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