Discharge of Debt Tag

19 May MBNA or IRA? Financial Choices & Personal Responsibility

I routinely meet with families with substantial credit card debt who are considering getting a fresh start through bankruptcy. They find the thought of bankruptcy painful; they have usually worked very hard to make the minimum payments and feel responsible for repaying the debt. "It's my debt and I want to repay it," is a frequent refrain. My retort is: how much do you have saved for retirement? All too often, the answer is "Nothing". I think the conclusion from that question and answer is obvious, and becomes more so to the extent the debt is large and/or the couple is middle aged or more. Striving to repay debt on credit card terms is frequently impossible, and if not impossible, it is a foolhardy choice.
Read More

18 May Filing for Bankruptcy: Can I Be Denied A Discharge?

Creditors believe that bankruptcy was seen as an 'easy out' for too many people and that consumers really could afford to pay their credit cards. In 2005, when the revisions to the bankruptcy code were passed, one new requirement was added to audit cases after the bankruptcy discharge was issued. In rare cases of 'substantial aduse', the auditors can recommend a revocation of the bankruptcy discharge. So the remedy you thought you had could be lost.

In the 18 months since the law became effective, how many cases have had their discharges revoked? Right now statistics are not available, but preliminary reviews of "substantial abuse", that is, filing bankruptcy when there is the ability to pay occurs in less than .64% of cases. That is one case in every 140 filed - a very small number. Prior to the change in the law, estimates were that 25% of all cases filed were fraudulent.

Read More

17 May Debt Management Plans & IRS Form 982 (Part 3)

There is a hidden trap to debt management plans andpaying less than what you owe. Under the IRS rules, someone has realized income from the non-payment of that debt. This is logical, if you think about it. Consider what happens to that $5,000 cash advance if you do not repay it. didn't you just get the benefit of $5,000? If the creditor doesn't get repaid, or is repaid less than what you owe, the creditor has suffered a loss and you have realized a gain. That is taxable income.

In two privious posts, we discussed credit counseling, settlements and Debt Management Plans.See Credit counseling and DMPs, Part 1 andWhat is a Debt Management Plan?, Part 2.

So when you settle a debt for 40% of the total balance, expect to receive a Form 1099 showing that you received income for the other 60%. This is the hiden trap of settlement plans or DMPs, if you pay less than what is owed. At the end of the settlements or the DMPs, you will owe the IRS money. Which would you rather owe money to, Visa or the IRS?

Read More

16 May What is a Debt Management Plan? (Part 2)

A debt management plan is designed to pay off your debt by restructuring your payments over a fixed period of time. In the 'before' times (before the revisions to the Bankruptcy Code in 2005), it was possible to attempt such a payment plan with your creditors.

A DMP (debt management plan) can take several forms. If you have the ability, it is possible to pay off your accounts in full for less than what is owed by making a lump sum payment. This lump sum payment could have been as little as 25% of the total balance. More recently, lump sum payments need to be much larger, in many cases as much as 80% of the balance due.

Read More

14 May What Not to Do Before Bankruptcy

When I read Jonathan Ginsberg's post about a client who made a mistake that will delay filing his bankruptcy, I was reminded of a similar situation that came up with some of my clients.  Jonathan's client made the mistake of transferring credit card balances to take advantage of lower interest rates, when the balances could have been wiped out in bankruptcy.  My clients--in a last-ditch effort to avoid bankruptcy--refinanced their home, took the equity out, and paid about $30,000 in credit card bills, and $4500 to the debtor's father. 
Read More