San Diego Bankruptcy Law Blog

Using Credit Cards Prior to Filing Bankruptcy is a Big No No!

Luxury credit card purchases of $600 or more and made within 90 days of filing bankruptcy are presumptively non-dischargeable.

Most credit card debts are eliminated by filing for bankruptcy. But be aware: credit card charges racked up on the eve of filing might not be dischargeable in bankruptcy. If you're looking for a simple rule that will make your life much easier, it's this: don't use credit cards before filing bankruptcy, especially 90 days prior to filing. Under section 523 of the Bankruptcy Code, luxury credit card purchases totaling $500 or more and made within ninety (90) days before filing bankruptcy are presumed to be non-dischargeable in bankruptcy.

Debts incurred at any time prior to filing may not be dischargeable if a creditor can prove that the debt was incurred with no intention to pay. Section 523 goes on to carve out cash advances of over $875 within 70 days before filing as presumably non-dischargeable as well.

Large luxury purchases and cash advances right before bankruptcy are considered likely fraudulent. So, if you have gone out and purchased a flat screen TV or expensive sports equipment or a new sofa on credit and now want to file bankruptcy, be aware that a lawsuit from your credit card company objecting to your discharge may very well follow.

What was your "state of mind" when you made the purchases?

Make sure your bankruptcy attorney knows about all purchases of $600 or more you've made on credit cards. He or she will likely advise that you delay filing bankruptcy until the 90 day presumption period has passed. After all, it is possible for well meaning debtors to purchase items on credit not knowing they'll soon be forced into bankruptcy. If this sounds like you, talk to your attorney to make a plan, but don't get too worried. If you didn't purchase the items knowing you'd be filing bankruptcy, or after meeting with a bankruptcy attorney, you've done nothing wrong. If, however, you purchased items knowing that you'd soon be filing bankruptcy, well that's criminal bankruptcy fraud, which is a whole different story.

As a general rule, your credit card company won't have much to complain about if you've recently purchased necessities, such as diapers or food on credit cards and soon after file bankruptcy. Although, using high balance credit cards to purchase the bare necessities can be evidence of financial distress sufficient for a bankruptcy, these small purchases do not give creditors a built in objection to your discharge as if you'd made a $600 or greater luxury purchase. The real problems begin when you purchase luxury items.

A comparative analysis of debt settlement and bankruptcy

Millions of consumers are crushed under the burden of debt after the recent economic depression in the US. In such situation, people rely on debt settlement program or file bankruptcy the last resort for debt relief. These two debt relief plans help people to start their financial life afresh. But before you select a debt relief program it will be essential to understand the both the programs. A comparative analysis between debt settlement and bankruptcy can help you take the right decision.

What is the function of debt settlement and bankruptcy?

The functions of these two programs are completely different from each other. Debt settlement is a repayment plan where the debtor pays less than he originally owed to the creditors. You are required to negotiate a settlement with the creditors to lower the interest rate on the principal balance. The amount you payback is entirely up to the creditors. But on declaring chapter 7 Bankruptcy your debt will be completely discharged. Meaning you will not have to pay any of it back. But in chapter 13 bankruptcy the amount you payback will be determined by how much "net disposable" income you have. The monthly payment will be reduced by an extended repayment plan, usually 36-60 months.

A closer look at the debt settlement procedure:

Debt settlement is a simple debt reduction method that will help you attend financial liberation. In order to settle your debt you can hire the services of a debt settlement company or you can settle your own debt. The experts negotiate with the creditors on your behalf to lower the interest rate on the outstanding balance. The creditor and debtor needs to give mutual consent on the settlement offer before the beginning of the repayment plan. But you need to default on your payment for 2 to 3 months before you negotiate with the creditors. Therefore, your credit score might drop initially but it will eventually increase again.

Know how the bankruptcy process works:

Bankruptcy is a legal procedure where a petition needs to be filed in the bankruptcy court to discharge your debt. You can avoid creditor harassment & any collection procedures if you file bankruptcy. You need to complete a credit counseling session before filing a petition in the court. The procedure of chapter 7 bankruptcy will be completed usually within 4 months whereas it will take 3 to 5 years for the completion of the repayment plan under chapter 13. You can discharge your unsecured debt by filing bankruptcy but the stigma of bankruptcy remains on your credit report for 7 to 10 years. You should also understand that using a debt settlement procedure will also affect your credit the same as filing bankruptcy does.

Comparing the expenses involved in these two programs:

When you hire the services of a debt settlement company they will charge a fee for providing with its services. The company will also charge a percent of the amount saved after successfully negotiating your debt. When you file bankruptcy petition in the court you are required to pay a filing charge, currently $299.00 for a chapter 7 & $274.00 for a chapter 13. The attorney will also charge a fee to represent you in the bankruptcy.

Therefore, you can now analyze your financial situation and take an appropriate decision whether to filing bankruptcy or opt for debt settlement is best for you. Please read the other articles on my blog for further information regarding debt settlement/negotiation.

Discharging Student Loans-Not As Easy As It Sounds

It is a harsh reality of today's post-collegiate environment - two-thirds of all students now graduate with burdensome debt that can follow for many years to come. Following a recent news story on CBS Evening News, a comment was made that a student CAN have their federal student loans discharged in a Chapter 7 bankruptcy IF it is found that repayment of the loan would impose a hardship on the borrower. If only it were that easy...

Discharging private student loan debt in bankruptcy currently requires a showing of "undue hardship," a standard too often difficult to prove and very rarely met. The website FinAid estimates that less than 1% of private student loan borrowers in bankruptcy attempt to seek a hardship discharge of that obligation, and less than half of those people are successful.

Courts typically refer to the following three requirements that a person must meet to qualify for undue hardship to receive a discharge of their student debt:

First, the debtor must not be able to both repay the student debt and maintain a minimum standard of living based on his or her current income and expenses.

Second, these financial difficulties must persist for a substantial portion of the student loan repayment period. Borrowers need to show exceptional circumstances such as a disability or the need to care for a dependent.

Third, the debtor must have made good faith efforts to repay his or her student loans. The court will look to see what legitimate actions the debtor took at least to attempt to repay his or her student loans.

You Can Keep Your Car During Chapter 7 Bankruptcy, But Should You Sign a Reaffirmation Agreement?

You Can Keep a Car in Bankruptcy, But Under What Terms?

In our current tenuous economic climate, more and more normal, honest, hardworking people are turning to bankruptcy for relief from overwhelming debt. In fact, most people who file for bankruptcy are perfectly responsible citizens who have lost homes, lost law suits, incurred unexpected medical bills or other large, unforeseen expenses. One of the most commonly held beliefs about the bankruptcy process is that by filing, you will automatically lose your car. This is simply not true. If you want to keep a car you are still paying for, you may have to give up some of the very benefit your bankruptcy discharge gives you.

Reaffirmation Agreements:

To keep a car on which you are still making payments, you may be requested to sign an auto loan reaffirmation agreement with your auto lender.

An auto loan reaffirmation agreement is a new, legally binding contract, entered into after you file bankruptcy. In this agreement, you promise to repay the car loan instead of having it discharged. While a bankruptcy discharge would have relieved you of your legal obligation to make payments on your vehicle, if you decide to keep the car, you will give up that protection. You agree to again become legally responsible for the car when you sign auto loan reaffirmation agreements in bankruptcy. Whether this is in your best interest depends on the value of the car, the amount of the monthly payments, whether you can reasonably afford to make those monthly payments, how much you still owe on the loan, the interest rate, and other factors.

What is very important to note is that if the auto lender DOES request that you sign a reaffirmation agreement and you refuse to do so, then the lender may be allowed to reposses your car EVEN you are current on the payments.

However, if the auto loan company does not ask you to sign a reaffirmation agreement then you can continue to make the payments and as long as you remain current, they cannot reposses your car. Moreover, if you do default on the loan or just decide to give back the car, since your debt to them was discharged, they cannot come after you for the deficiency.

Are You Upside Down on the Car?

The most important item to keep in mind is that if you owe significantly more than the car is worth, and if you sign a reaffirmation agreement and then later default, the lender will be able to not only repossess the car but also sue you for the balance of what you owe on the loan after subtracting what the lender gets for the car at auction. Your bankruptcy discharge will have no effect on this, because by signing the reaffirmation agreement, you waived its protection as to the car loan.

When a Reaffirmation Agreement Makes Sense:

A reaffirmation agreement can make sense, however, when you have a low balance on your car note, you don't have another option for transportation or you don't want to hurt a co-signer's credit, or if you just want to keep the car for your own personal reasons.

When a Reaffirmation Agreement May Not Make Sense:

Nevertheless, reaffirmation agreements are often not a wise thing for a debtor to sign. Where there are several years left on the loan, the debtor's monthly income is insufficient to comfortably make the car payment and/or the loan balance is significantly more than the depreciated value of the car, it may make far more sense for the debtor to surrender the vehicle rather than to expose him- or herself to the possible future liability for a lawsuit after a repossession of the car.

If you are filing for bankruptcy in California, you need to consult with an experienced debt attorney. If you visit our office, we will help you understand your options and help you avoid making bad decisions that you may later regret. To learn more about auto loan reaffirmation agreements in bankruptcy, contact The Law Office of Mark A. Reed to see if this is the best option for your situation.