We’ve written a series of blog posts answering common questions regarding bankruptcy in Wisconsin, and how it can impact your finances. Call (262) 827-0375

Bankruptcy in Retail Stores: How the Process Works

Retail stores have been struggling since the advent of TV shopping networks and online shopping. Now, with most retail businesses closed down for weeks due to COVID-19, the situation may have become really dire. Many retail businesses may be considering bankruptcy. This post explores the bankruptcy process for retail stores, and complications that may arise because of the pandemic.

Different Types of Bankruptcy

Most businesses choose to file Chapter 11 bankruptcy rather than Chapter 7. Chapter 7 is a straight forward liquidation proceeding where all assets are sold off and creditors paid as much as possible from those funds. The court appoints a trustee who conducts the liquidation. Chapter 11 bankruptcy is a reorganization of the business that allows it to continue to trade in the marketplace while repaying creditors. Generally, the business itself proposes the reorganization plan. It is also possible to file for Chapter 11 bankruptcy more than once, without an onerous waiting period. This is informally called Chapter 22 bankruptcy. We will concentrate on the Chapter 11 process here.

Typical Court Process

When a retail business is considering bankruptcy, the obvious first step is consultation with expert attorneys. The professionals at Burr Law have years of experience dealing with bankruptcy and can guide you through the complexities of the process. When you file for Chapter 11 relief in bankruptcy court, no trustee is appointed. Instead, you become the Debtor in Possession (DIP). You have the exclusive right to propose a reorganization plan for at least 4 months and up to 18 months. Once you do so, your creditors need to agree to the plan, and the court needs to approve it. That is called confirmation and in doing so, the court will decide whether the plan demonstrates 4 factors: feasibility, good faith, best interests of the creditors, and fairness. The whole thing usually takes between 6 months to 2 years.

Typical Business Process

Because you are the DIP, you continue to run your business. With expert advice, you can decide what product lines to discontinue, what marketing strategies to change, and whether some stores need to close. The bankruptcy court must approve any sale of assets, lease agreements, and financing arrangements (mortgages or other secured financing). Usually, it takes 4 months to plan and run a going-out-of-business sale, so there’s a lot of analysis and decision making that needs to happen in a short amount of time. The key, though, is that you get to make those decisions, not the bankruptcy court.

COVID Complications

The aftermath of this pandemic creates unique difficulties for both the court and the business parts of the bankruptcy procedure. Experts anticipate that the numbers of bankruptcy will rise significantly, both personal and business. That means that the bankruptcy court will be flooded with cases, and delays due to packed court schedules may result. Bankruptcy judges may feel pressured to rush through cases, causing precipitous decisions detrimental to those involved. On the business side, with many states still imposing retail store closures, going-out-of-business sales simply cannot happen. And the kind of predictive analysis required to decide about customer traffic and buying behavior will be extremely difficult.

Best Advice: File Now

As a retail business in financial trouble, it may be wisest to file now. You may be able to avoid the overcrowded bankruptcy court schedule, or be at the top of the list. And with the Wisconsin Supreme Court decision, stores are able to open and hold those important going-out-of-business sales, except for some local restrictions. The bankruptcy experts at Burr Law can help you navigate the process.

How Will the New Stimulus Bill Affect Bankruptcy?

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law. This follows the Small Business Reorganization Act (SBRA) that took effect in February 2020. Both of these measures have an impact on those contemplating bankruptcy, or already in the bankruptcy process. Across the United States, people have more household debt now than at the height of the recession – $14.15 trillion as of the fourth quarter of 2019 compared to $12.68 trillion during the third quarter of 2008. And now, millions of Americans are losing their jobs because of the COVID-19 pandemic. Since March 15, nearly 10 million people have filed first-time jobless claims; many of them may be looking to bankruptcy for relief.

CARES Direct Payments

Included in the CARES Act are one-time payments to qualifying individuals of $1200 for anyone making under $75,000 annually, and $500 for each dependent child. If you have made more than $75,000, but less than $99,999, you will still receive a payment, though it will be less than $1,200. The amounts of the direct payments for individuals making more than $75,000 and couples making more than $150,000 will decrease $5 based on every $100 an individual makes over $75,000. An individual with an income of $76,000, for example, would receive a $1150 payment.

CARES and Bankruptcy

Chapter 7

The CARES Act makes temporary changes to bankruptcy law. Those filing under Chapter 7 need to meet a means test; they must not make more than their state’s median household income. For Wisconsin, that is $62,629 (as of 2018). The CARES Act excludes the direct payment from that calculation. So for a debtor just on the borderline, this extra income will not count as “current monthly income” when determining eligibility to file Chapter 7 bankruptcy.

Chapter 13 – Disposable Income

For those who have filed Chapter 13 bankruptcy, these direct payments will not count as “disposable income” for purposes of Chapter 13 plan confirmation. Those debtors are also now permitted to seek modifications of their confirmed Chapter 13 plans if “the debtor is experiencing or has experienced a material financial hardship due, directly or indirectly, to the coronavirus disease 2019 (COVID-19) pandemic.” The modification can be approved after notice and a hearing.

Chapter 13 – Extended Payment Plan

Debtors experiencing such hardships because of the COVID-19 pandemic are also allowed to extend their plan payments for up to seven years after the time that the first payment under their original confirmed plan was due. So if you had a repayment plan of three years, it can be extended another four years. This means that the payments you are currently responsible for would decrease, perhaps substantially..

SBRA and Bankruptcy

The SBRA amends Chapter 11 and creates Subchapter V which applies both to small businesses and to individuals. It significantly increases the amount to qualify for the bankruptcy process. Debtors can have up to $7,500,000 in secured and unsecured debt and still qualify to proceed under this streamlined bankruptcy process. Previously, the debt limit was $2,725,625. With 38 states in complete lockdown and all “nonessential” businesses closed to the public, small business owners can be feeling desperate. For many small business owners who are facing a sudden and dramatic drop in income, this may bring some hope. Small businesses filing under Subchapter V may have a clearer way to obtain relief and maintain their ownership of the business.

The measures that the federal government has put in place to protect the economy during this COVID-19 pandemic can provide some substantial relief to those considering or in the process of bankruptcy proceedings. It’s important to remember, though, that the provisions are temporary. These changes expire precisely one year after their introduction. So as of March 27, 2021, they end. If you are experiencing financial hardship, the CARES Act and SBRA may mean that it is the best time for you to file for bankruptcy. Consult one of the experts at Burr Law for guidance.

Who Pays for Bankruptcies? How Bankruptcies Work

When you’re in desperate financial distress, bankruptcy can be a lifeline. When you declare personal bankruptcy using Chapter 7 under the Bankruptcy Code, you can eliminate all of your unsecured debt (credit card debt, medical debt, etc.). If it’s not possible for you to file under Chapter 7, you can file under Chapter 13. Your unsecured debt will not be eliminated, but it will be greatly reduced and you will have three to five years to pay back that lower amount.

Declaring bankruptcy, however, means instigating a court procedure, and there are certain costs associated with that.

Court Costs

There is an entirely separate court system for bankruptcy and these courts need to be maintained, and the personnel paid. Part of that cost comes from the filing fee that the person filing for bankruptcy (the petitioner) pays. Currently, the national bankruptcy fee is $335 to file for a Chapter 7 bankruptcy. If you are unable to pay that amount in full at the time of filing, you can pay in four installments within 120 days of the date of filing. In other words, you can pay approximately $84 a month for four months. There are provisions to waive the fee entirely if your family income is below 150% of the federal poverty guidelines. As of January 17, 2020, the federal poverty guideline for a family of four in Wisconsin is $39,300. There is also a small fee for the bankruptcy trustee. The filing fee for Chapter 13 is $310.

Credit Counseling Course Costs

When you file for bankruptcy, you must agree to participate in a credit counseling course at the beginning of the procedure, and a debtor education course at its conclusion. The cost of these courses varies widely. Some can be as inexpensive as $10, while some can cost about $60. You must attend a court-approved course. So you can expect to spend an additional $20 to $120. If you have been granted a filing fee waiver due to your low income, course costs are often waived as well.

Attorney Costs

You are not required to use an attorney when you file for bankruptcy, but it would be foolish not to do so. Bankruptcy is extremely complicated and any mistakes can have long-term, serious consequences for you and your family. Having an attorney responsible for the paperwork necessary helps assure mistakes are not made. There are ways to mitigate attorney fees, and certainly, consulting with a firm that specializes in bankruptcy law, like Burr Law, is a sensible course of action. We would be able to assess the nature of your situation, and anticipate the complexity of your case. So we would be able to give you a clear idea of what your attorney costs might be. While only 5% of Chapter 7 bankruptcy proceedings were challenged by a creditor in 2019, if that happens, litigation would obviously increase attorney costs as well.

Cost/Benefit Analysis

It is important to keep the costs associated with bankruptcy in the proper perspective. When you are being buried under a mountain of debt, the logic of incurring a small additional obligation should be apparent. Here at Burr Law we will work with you to make sure that you derive all possible benefits from filing for bankruptcy and still retain the financial means to restart your life.

Student Loan Forgiveness Programs: PSLF and Paying Down Debt

The costs for higher education have risen exponentially and many people find themselves mired in student loan debt. For people whose financial situation is precarious, having student loan payments of $393 a month (the average payment according to the Federal Reserve) makes meeting ends meet impossible. You may have heard of student loan forgiveness programs or student loan payoffs; you may be considering bankruptcy, and wonder if it will help with your student loan debt. Let’s explore your options.

Student Loan Forgiveness Programs

The Public Service Loan Forgiveness (PSLF) program was created in 2007; participants agree to work in public service jobs for the government and other nonprofit organizations for a period of ten years while making regular monthly payments on their loan. At the end of that time, the remainder of their student loan is forgiven. The reality is that this program has not actually resulted in much student loan forgiveness. In 2019, two years after the first participants became eligible, the Department of Education had approved only 1% of those applying for loan forgiveness. There are a multitude of reasons that applicants were rejected including not filing all yearly Employment Certification Forms needed and loans not being eligible for the program. Only direct student loans are eligible, so if you have consolidated your student loans, you will no longer qualify. Missing or mis-paid monthly payments are another reason for rejection. Basically, doing absolutely everything right under the PSLF program is essential, and if you do one thing wrong, your 10 years of public service and loan payments will be for nought.

Student Loan Payoffs

There are several volunteer organizations that will help in paying down student loans. Volunteers In Service to America (VISTA) will pay off $4,725 for 1700 hours work. That equals 42 ½ weeks of 40 hours a week. Americorps offers the same deal: 12 months of full time work earns you $4,725 off your student loan. The Peace Corps means automatic deferment of Perkins, Stafford or Consolidation loans, but that’s not forgiveness. It also offers partial cancellation of your student loan debt at 15% per year, with a maximum of 70%. So you could work full time for the Peace Corps for nearly 5 years and find yourself still owing 30% of your student loan. Wisconsin does have one state-run program called the Health Professions Loan Assistance Program. The HPLAP seeks to increase the number of primary care, dental, and psychiatrist providers working in underserved rural and urban areas of the state. Participants agree to work full time for three years in a designated area, and can receive up to $50,000 in forgiveness. It is unclear how effective this program actually is in eliminating student loan debt.

Student Loans and Bankruptcy

A casual search of student loan debt in bankruptcy will tell you that you will still be obligated to pay your student loans, even if you file for Chapter 7 bankruptcy. This is false. It requires genuine expertise in bankruptcy law in order to have your student loan debt discharged through bankruptcy, but it can indeed be done. If you can successfully prove undue hardship, your student loan will be completely canceled. Filing for bankruptcy also automatically protects you from collection actions on all of your debts. It’s important that you let your attorney know that you are interested in pursuing the discharge of student loan debt as well. It requires extra paperwork, and the development of a sound strategy. The professionals at Burr Law can advise you about the likelihood of having your student loan debt successfully discharged through bankruptcy.

Student loan forgiveness is real, but it is not easy. You might work with the PSLF program for 10 years and find yourself denied; you can work for nonprofit organizations for 3 to 5 years and hope some or most of your student loan can be cancelled. Or you can meet with the experts at Burr Law and find out whether you could submit a strong case to have your student loan debt discharged in bankruptcy.

Tax Returns and Bankruptcy: Do I Get to Keep My Refund in Bankruptcy?

Before exploring the status of any tax refunds, let’s be clear about taxes owed. If you owe taxes, that debt will not be discharged during bankruptcy, whether you file Chapter 7 or Chapter 13 unless 1) that tax debt more than 3 years old; 2)there was nothing fraudulent about the tax returns; 3) and the tax was not assessed within 240 days of filing the bankruptcy petition. Business tax debts cannot be discharged. That said, the status of any tax refunds is not so clear-cut. So the answer to the all important question “Do I get to keep my refund in bankruptcy?” is “It depends.” The issue of tax refunds during bankruptcy is one of a number of complex questions that can arise during bankruptcy. That’s why it is essential to consult with professionals, like the experts at Burr Law, who deal with the intricacies of bankruptcy law every day.

 

Exemptions

Whether you file Chapter 7 or Chapter 13 bankruptcy, you are entitled to exemptions. There are both federal and state exemptions, and Wisconsin is one of only 19 states that allows you to choose which set of exemptions you use. It’s important to note that you must choose one or the other; you cannot mix-and-match the exemption rules. The experts at Burr Law can help you determine which is better for your particular situation. While Wisconsin does not have a specific federal or state tax refund exemption, you can protect it with a wildcard exemption if you are able to use the federal bankruptcy exemptions. Should you choose, your tax refund can become an asset protected through your exemptions, and you would then retain it.

 

Necessary Expenses

Your tax refund may be automatically deposited into your bank account. Can you spend those funds? If you spend your tax refund on necessary expenses like mortgage or rent payments, that is allowable. Other necessary expenses include food, medical expenses, and clothing. While your tax refund counts as an asset, you are allowed to spend money on necessary expenses, and that applies equally to money gained from a tax refund. Basically, as long as you are not spending it on luxury items, it’s all right for you to spend the tax refund you receive. You can also use your tax refund to pay your bankruptcy attorney and associated court costs.

 

Timing – Not Yet Filed

If you have not yet filed bankruptcy, but plan to do so within the year, it is a good idea to adjust your withholding to minimize any refund you may receive. This must be done carefully; if you miscalculate and end up owing taxes, those become non-dischargeable debts. Another way to plan ahead for bankruptcy is to designate more of your income to your employer IRA or 401k. Those retirement contributions will not become assets liable to exploitation during bankruptcy. Pre-planning for bankruptcy will help you avoid the question altogether.

 

Timing – Refund From Income After Filing

Any refund that results from income you earned after filing for bankruptcy is yours free and clear. Also, if any portion of the refund results from income you earned after the filing date, that portion is available to you without restriction. Again, this is a delicate calculation and it is vital that you have an experienced bankruptcy attorney from Burr Law to guide you through the process. You want to adhere to the law in all instances.

 

The issue of tax returns during bankruptcy is complex. With the experts at Burr Law, you can feel confident that all of your individual circumstances will be carefully considered. We will find the best possible solutions for your financial situation.

Can I Keep My Tax Return During Bankruptcy?

If you are considering filing bankruptcy, or have already done so, you may be anticipating filing your taxes and wondering how taxes owed or refunds received will work into a bankruptcy proceeding. This post will explore how your tax return affects your bankruptcy.

Before exploring the status of any tax refunds, let’s be clear about taxes owed. If you owe taxes, that debt will not be discharged during bankruptcy, whether you file Chapter 7 or Chapter 13. Also, any overdue taxes or penalties will remain.

Tax Refunds Are Assets

You may have received your refund directly into your bank account, the refund may be in process, or the refund may result from the taxes you file for the previous year. Any way you look at it, tax refunds are assets. And when you file for bankruptcy all of your assets become part of the proceedings. That fact does not necessarily mean that you will lose your tax refund. Whether you keep all or a portion of it depends on a variety of factors.

Timing – Not Yet Filed

If you have not yet filed bankruptcy, but plan to do so within the year, it is a good idea to adjust your withholding to minimize any refund you may receive. This must be done carefully; if you miscalculate and end up owing taxes, those become nondischargeable debts. Another way to plan ahead for bankruptcy is to designate more of your income to your employer IRA or 401k. Those retirement contributions will not become assets liable to exploitation during bankruptcy.

Protect Refund With Exemptions

Whether you file Chapter 7 or Chapter 13 bankruptcy, you are entitled to exemptions. There are both federal and state exemptions, and Wisconsin is one of only 19 states that allows you to choose which set of exemptions you use. The experts at Burr Law can help you determine which is better for your particular situation. While Wisconsin does not have a specific federal tax refund exemption, you can protect it with a wildcard exemption. In any event, your tax refund can become an asset protected through your exemptions, and you would then retain it.

Refund Used For Necessary Expenses

If you spend your tax refund on necessary expenses like mortgage or rent payments, that is allowable. Other necessary expenses include food, medical expenses, and clothing. Basically, as long as you are not spending it on luxury items, it’s all right for you to spend the tax refund you receive. You can also use your tax refund to pay your bankruptcy attorney and associated court costs.

Timing – Refund From Income After Filing

Any refund that results from income you earned after filing for bankruptcy is yours free and clear. Also, if any portion of the refund results from income your earned after the filing date, that portion is available to you without restriction. Again, this is a delicate calculation and it is vital that you have an experienced bankruptcy attorney from Burr Law to guide you through the process. You want to adhere to the law in all instances.

The issue of tax returns during bankruptcy is complex. With the experts at Burr Law, you can feel confident that all of your individual circumstances will be carefully considered. We will find the best possible solutions for your financial situation.

Can You File Chapter 13 After Chapter 7?
Multiple Bankruptcies

There is nothing prohibiting a person from undertaking multiple bankruptcies. If you have already gone through bankruptcy and find yourself in financial difficulties again, you already know some of the advantages that filing bankruptcy brings. While there are no limits on the number of bankruptcies you can file, there are time frames you need to be aware of. It’s also important to know that these time frames apply to bankruptcy cases that have been discharged, not those that have been dismissed.

Successive Same Chapter Filings

A Chapter 7 bankruptcy can be done and dusted in three to six months with all unsecured debt eliminated. If you have previously filed Chapter 7, eight years must elapse from the date of filing in order for you to file another Chapter 7. In Chapter 13 bankruptcy your unsecured debt may be eliminated or substantially reduced. It is possible for you to file another Chapter 13 bankruptcy after two years. Given that the first Chapter 13 plan would still be in place, it would be wise to consult with one of the experienced bankruptcy attorneys at Burr Law before doing so.

Chapter 13 Then Chapter 7

Typically, you can file a Chapter 7 bankruptcy six years after the filing date of your Chapter 13. That time frame can be shorter if you paid your unsecured creditors in full or if you paid at least 70% of the claims and it represented your best efforts. You will need to meet the income status requirement for Chapter 7 as well.

Chapter 7 Then Chapter 13

Four years after the filing date of your Chapter 7 bankruptcy, you can file for Chapter 13. This is sometimes known informally as a Chapter 20, though that can refer to filing a Chapter 13 immediately after a Chapter 7 (or while it is still pending). When you file a Chapter 13 after a Chapter 7 without waiting four years, you cannot receive a discharge in the Chapter 13 but there are some advantages. In Wisconsin, though, courts rarely allow the filing of Chapter 13 earlier than the four year time limit. If the four years has elapsed, then it is perfectly acceptable to file Chapter 13. That will protect your home and car, eliminate or significantly reduce unsecured debt, and give you time to deal with nondischargeable debts.

Multiple Bankruptcies and Automatic Stays

It’s important for you to know that if your initial bankruptcy case is dismissed rather than discharged, there are implications for the next bankruptcy you file (whatever Chapter it is under). If you file within a year of the filing of the first bankruptcy, and that first bankruptcy was dismissed, the automatic stay that prevents creditors from pursuing all collection action will be limited to 30 days only. Usually it is for the duration of the bankruptcy proceedings. The time limit is based on the assumption that the second filing is done in bad faith, so it is possible to request the bankruptcy court to extend it beyond the 30 days. You would need to demonstrate your good faith to the court for that to happen. In the event that you file three bankruptcies within a year, the automatic stay is voided in the third instance.

Bankruptcy is a complicated legal situation. Multiple bankruptcies present even more intricacies. If you are considering a subsequent bankruptcy, it is vital that you have expert advice. With Burr Law, you have access to the finest bankruptcy attorneys, all of whom are experts on Wisconsin bankruptcy law.

How Does Bankruptcy Affect A Lawsuit?

There is no quick and easy answer to this question. Generally, if the lawsuit involves money or property, it will be temporarily suspended or dismissed. If it is primarily concerned with something else (child custody, for instance), it will not have any effect. When you file for bankruptcy, the bankruptcy court will enter an automatic stay. This injunction means that as soon as any other court learns of the bankruptcy proceeding, it must act accordingly. Usually, lawsuits that involve money or property are immediately suspended, with the possibility of dismissal if the bankruptcy goes through to completion. This is an extremely complicated area of law, however, and it is imperative that you have the advice of bankruptcy experts, like those at Burr Law.

Pending Money/Property Lawsuits

This lawsuit would overlap with the jurisdiction of the bankruptcy court, so typically, the automatic stay will stop the debt collection lawsuit. Your attorney would file a “Suggestion of Bankruptcy.” This lets the judge know that a bankruptcy case is pending, and the entire lawsuit is suspended, at least until the bankruptcy court enters a discharge. When that happens, the court in the collection suit usually dismisses the case since it will be dealt with in the bankruptcy court. However, this course of action is not guaranteed. Though bankruptcy courts issue an injunction that suspends a pending case that has to do with money or property, it may be determined that having another court continue the case would be more efficient. In that situation the bankruptcy court would allow the case to go forward.

New Lawsuits

Likewise, if a creditor wants to begin a lawsuit against you after you have filed bankruptcy, it is possible, though difficult, to do. The creditor can request that the automatic stay be lifted in that particular instance, and it would be up to the bankruptcy judge to decide.

Divorce and Child Custody

Generally, divorce or child custody cases that are in current litigation will not be affected by a bankruptcy action. A number of family court judges will put the case on hold as a courtesy until they get an order from the bankruptcy judge. Bankruptcy courts don’t want to have anything to do with these kinds of family law matters.

Alimony and Child Support

With alimony and child support, the relevance of bankruptcy is apparent. The family court’s imposition of child support or alimony orders could affect a bankruptcy case because of the effect on the debtor’s resources. This is true when the person declaring bankruptcy is the one also paying alimony and/or child support as well as when the person declaring bankruptcy is the one receiving alimony. A bankruptcy court may reserve jurisdiction over a property settlement but even then, bankruptcy courts rarely take issue with a property settlement unless it is extreme.

If you are behind on your alimony payments and legal action has actually begun to collect them, the bankruptcy injunction will suspend that activity. However these are not debts that are dischargeable under either Chapter 13 or Chapter 7 bankruptcy. This can also be the case for many property settlement agreements. Consultation with the professionals at Burr Law can help clarify your position.

A child support creditor (a state agency or the other parent) is subject to the automatic stay just like any other creditor. However, any debts you owe for child support will not be discharged in the bankruptcy case. The creditor can renew collection activities after the bankruptcy court enters the discharge.

Other Lawsuits

There are other kinds of lawsuits where the intricacies of the particular situation mean that bankruptcy might have an affect on them. These lawsuits include: criminal cases, code enforcement and nuisance actions, evictions, and administrative actions. Ask the expert bankruptcy attorneys at Burr Law for help if you are considering bankruptcy.

How to Prepare for Bankruptcy: What to Avoid Before Filing

If you’re considering filing for bankruptcy, it’s important to plan ahead, whether it is Chapter 7 or Chapter 13 bankruptcy. There are a number of strategies that you can use to make sure that your bankruptcy work most effectively to eliminate your debt. Once your bankruptcy is complete, you want to have a completely clean slate to begin your financial life anew.

Timing Is Crucial

Chapter 7 bankruptcy is the best choice for actually getting rid of your unsecured debt. It requires a means test, though; you can’t make more than the median household income based upon your family size for your state. For Wisconsin, the median household income in 2019 for a single filer (the most recent data) is $51,792, for a 2 person family is $67,146, a 3 person family is $82,119, and a 4 person family is $98,317. The calculation of your household income is made from all of your income for the six months prior to the month in which you file for bankruptcy. So if there are particular times of the year when you receive money, either in the form of a bonus from your work or a payout from an investment for instance, it would be wise to file for bankruptcy so that any extra income isn’t included. For instance, if you get a work bonus around the 20th of December every year, filing in December means that your household income is figured from June 1 through November 30. You want to avoid any extra money that might push your household income above the median for your state.

Credit Card Spending

When you are contemplating bankruptcy, it may be tempting to make a number of purchases on your credit cards. You may think that it is a good idea to use them while you still have them, and that it’s your final chance to buy something major. There is some truth to this thinking. With either Chapter 7 or Chapter 13 bankruptcy, you will no longer have access to your credit cards. However, it is important for you to know that some credit card debt can be determined non-dischargeable. If you go on a spending spree just before filing bankruptcy, your credit card company can claim those were fraudulent purchases, that you never intended to repay them, and request that they be declared non-dischargeable. You would need to be able to prove that you intended to repay them or that you didn’t plan to declare bankruptcy.

Presumed Fraudulence

There are some instances where the law presumes that your intent was fraudulent. If you use your credit cards in the three months before filing bankruptcy for luxury goods and services totaling more than $725, fraud is presumed (11 U.S.C. § 523(a)(2)(C)(i)(l). Likewise, If you use your credit cards for cash advances totaling more than $1,000 within 70 days before filing bankruptcy, fraud is presumed (11 U.S.C. § 523(a)(2)(C)(i)(l).

Necessary Spending

The designation of luxury goods is significant. The court will not penalize you for using your credit card for reasonable and necessary living expenses. So, while buying a new elliptical machine for your home would not be allowed, paying for your heating for the winter would. If you are considering getting a cash advance on your card in order to pay for necessary living expenses, it would be better to use your card to pay for the gas you need to get to work, and the groceries to feed your family.

If you’re contemplating filing for bankruptcy, the best advice is to speak to one of the bankruptcy experts at Burr Law. We can help inform your decision, and advise you based on your particular situation.

When Should I File for Bankruptcy? How to Determine if Filing is Right for You

You’re feeling overwhelmed. The credit card payments or medical bills are just too much to keep up with in addition to your car payments, student loans, mortgage/rent, and other monthly bills. You’re paying absurd monthly interest charges and never seeing the capital decrease significantly. It’s just impossible to keep juggling all your financial obligations. It’s time to think seriously about your debt management problems. In this blogpost, we will explore the options of debt consolidation and bankruptcy.

Debt Consolidation: What Is It?

In its most basic form, debt consolidation works by combining multiple debt payments into one monthly payment through obtaining either a secured or unsecured loan. That monthly payment is sometimes lower than the individual payments combined, and the interest you pay is sometimes lower as well. You will maintain your access to credit, though incurring more debt increases the likelihood of the debt consolidation failing. If the debt consolidation loan is secured, then you risk losing your collateral, usually your car or other significant tangible property.

Cross-Collateralization

Sometimes you may risk losing collateral that you aren’t aware you have placed in jeopardy. That can happen when your debt consolidation loan has a cross-collateralization clause that lets the lender take other property it has financed if you default on the debt consolidation loan. For example, if you get your debt consolidation loan through the same bank that financed your car, under the cross-collateralization clause, if you default on the debt consolidation loan, the bank could repossess your car—even if the car payments are current.

Debt Management Plans: Hidden Costs

Some people go to an agency that creates a debt management plan for them and negotiates with the credit card companies on your behalf. It’s important for you to know that agreeing to a debt management plan comes with a number of hidden costs – monetary and otherwise. You will be expected to pay an enrollment fee as well as a monthly fee for each credit card on the plan. Also, most credit card companies will require that an account entering into a debt management plan be closed, so you lose your access to credit. And the fact that you’re engaged in a debt management plan will be noted on your credit report. Most debt management plans run for three to five years, and at least half of clients do not successfully complete the plan.

Negative Tax Consequences
Depending on your financial condition, any money you save from debt relief services such as debt consolidation may be considered income by the IRS, which means you pay taxes on it. Credit card companies and other creditors may report settled debt to the IRS, which the IRS considers income.

Debt Consolidation vs Bankruptcy

There are two types of bankruptcy you can pursue: Chapter 13 and Chapter 7. Chapter 7 is means tested, so you need to make no more than your state’s median household income ($60.773 for Wisconsin).* If you qualify for Chapter 7 bankruptcy, your unsecured debt can be completely eliminated. The whole process takes about four months, and then you can start over with a clean slate. Chapter 13 bankruptcy lasts between three to five years, similar to debt consolidation. With Chapter 13 bankruptcy, the moment you file, there is an automatic stay on all collection action, and you will almost certainly retain possession of your home and vehicle.

If you’re considering debt consolidation vs bankruptcy, it would be a good idea to talk to one of the experts at Burr Law.