BAPCPA changed everything
Our “new” (2005) Bankruptcy Code (the Bankruptcy Abuse Prevention Consumer Protection Act) made Chapter 13 bankruptcy (the “payment plan” bankruptcy) a five-year process for most debtors. The idea, of course, was to make folks pay longer to get more money to those who paid for the new law–Visa and MasterCard issuers. But, as we say here in the South, “Pigs get fed and hogs get ate.” (And, so we’re clear on this, “ate” is pronounced “et.” Be sure to say it the right way.)
Bless their hearts…
We also say, “Bless their hearts” prior to saying something negative about someone. For example, “Bless her heart but she’s just nothing but a [fill in the blank].”
Well, bless these vote buyers’ hearts but they did a little of what I call, “overreaching.” Five years is a long time to be in bankruptcy and, predictably, clients want to know if there are other options to paying all their disposable income and being “stuck” in bankruptcy for five years. And yes, there is. It’s called “debt settlement.” And if there’s no other compelling reason to do a Chapter 13, you should at least consider it. After all, wasn’t Stalin the guy who liked those five-year plans so much?
First step: See the tax man (or woman, as the case may be)
Discharge of indebtedness in bankruptcy is not taxable. However, outside of bankruptcy it is. Still, there’s one huge exception to this: insolvency. If your liabilities (debts) exceed your assets, you’ll just file a Form 982 (“Reduction of Tax Attributes Due to Discharge of Indebtedness”) at tax time. See this helpful video from the National Taxpayer Advocate here. If you demonstrate insolvency, you won’t pay tax on the discharged debt. Warning: You should have a good tax preparer or, preferably, a CPA help you with this.
Second step: Build your war chest
That’s the money you’ll need to settle the debt. How much you need depends on how much debt you have. But keep in mind that you don’t have to settle all of it at once. And building up your war chest is not all that hard to do when you’re not paying 20-30% interest on credit cards.
Third step: Hire a lawyer
Having a lawyer won’t cost you much and will, in all likelihood, be cost-effective. You’ll then have someone in your corner for negotiations and to answer questions. Also, you need to make sure all the paperwork is done correctly so that you’re released from the debt you settled. And, perhaps most importantly, hiring a bankruptcy lawyer brings the immediate threat of bankruptcy to the forefront of negotiations.
The bottom line here is that each case is unique. And for some folks–especially those with higher incomes– debt settlement can work much better than being in bankruptcy for five years. You may pay far less and be done with your financial problems far sooner by not filing bankruptcy.
Would I recommend this as much if Chapter 13 bankruptcy were only three years like it used to be? Absolutely not. Visa and MasterCard need to take note, bless their hearts.