Peter Francis Geraci A Bankruptcy Blog - Chapter 7 & 13

If you were like me and set your alarm promptly at 5:00 a.m. to watch some of the Royal Wedding coverage, you saw the elegance and luxurious prince and soon-to-be- princess walk down the aisle.  Amidst economical turmoil and a never ending amount of rainy days, the sun came out and the wedding for this generation went on without a snag. 

The bride and groom decided to walk down the aisle during a terrible economic time. Britain’s economy is shrinking and the unemployment rate is close to 7.7% (as of January 2011). Taxpayers will pay close to $20 million for security for the affair.  During these hard times, who is going to pay for the costs? Taxpayers? No. It’s the Royal Family themselves. If you have a child, start saving now.  The wedding industry is estimated to be a $4 million industry.

When you convert the cost of Prince Charles and Princess Diana’s wedding (approximately $48 million in 1981) to today’s dollars the cost comes to an estimated $110 million.  The Royal Family is spending an estimated $34-$50 million in today’s dollars on Prince William and Kate’s wedding. 

Debt and a tight budget affect everyone including royal families.  According to Forbes in 2009, Queen Elizabeth II’s net worth was close to $450 million and now her majesty’s worth is closer to $420 million.  With income and net worth that high (despite a $30 million decrease in 2 years) a $50 million wedding seems like chump change. But the Royal Family said they would keep the wedding an elegant but restrained event to be mindful of the dreary economic times. 

When you compare the amount to the cost of Prince Charles and Princess Diana’s wedding, the royal family could be keeping a budget. The affair will generate revenue for the country itself but Budgeting is important to those even with tiaras.  Even though the Royal Family’s budget is much larger than us civilians, the principals are the same.  You need to live within your means. It’s just our means are a $40 ice cream cake from Baskin Robbins and theirs is two wedding cakes costing $80,000.

What will a bankruptcy do to my credit? The most redundant question asked by potential bankruptcy filers. The simplest, straight-forward answer is you don’t have good credit now! 

When it comes down to it – there are two major reasons you call a bankruptcy attorney. Number one, you received a lawsuit summons or collectors are calling like crazy.  This means you have not made a payment in some time; your creditor tried contacting you directly and failed so sold the account to a collection agency.  The collection agency tried contacting you directly and failed and hired an attorney to sue you for the balance to try to recoup some of the cost from purchasing the account.  The biggest contributor to your credit score is timely payments – not only did you not make timely payments to your original creditor but the collection agency adds so many late fees there is no way for you to get caught up.

Solution – you file a bankruptcy. You eliminate the poor credit history and at least you have an opportunity to rebuild. In phonebook ads, organizations offer credit cleanup for a substantial fee. Realistically, there is nothing they can do.  The only way to eliminate something from your credit report is to dispute it (and win the dispute) and if you ignored the collection calls, you really don’t have a leg to stand on.  Post-bankruptcy you stay current with your car note, mortgage payment, student loan payment, etc. you can reestablish your credit with timely payments.

Second major reason – you have made payments on time but your credit cards are maxed out and you just found out about a loss of income.  Whether your hours and overtime are going to be cut or if your monthly expenses increased and your fixed income cannot cover the costs and minimum payments, you call a bankruptcy attorney because in the foreseeable future you will not be able to stay current. 

Again, you do not have good credit. In actuality, you have too much credit.  Another major factor when applying for financing is your debt to income ratio.  If you have $60,000 in credit card debt and are making $35,000 per year, you will never pay off the debt.  Even if you do, you will be paying significantly more in interest than anything else. A financer will see the current payments but will also consider you have a tremendous amount of debt and a significant portion of your paycheck is going to minimum payments (well realistically to interest).

Solution – you file a bankruptcy.  Post-bankruptcy, you have no debt! All you have is income! Again, you make your payments on time and put money into a savings account and you will be fine.  Bankruptcy is one of the country’s oldest laws and people have been able to “reestablish credit” for centuries.  

Bankruptcy is like Game 7 of the Stanley Cup Playoffs.  You can win and move on with a fresh start to erase the losses or you can go home still in debt – ashamed of the fact you can’t get a puck past Roberto Luongo.

I went to use my debit card at this little bakery this past weekend and the cashier (who presumably was also the store owner) said she would offer me a 5% discount if I used cash.  Cash will always win over plastic. With cash, you know how much you have to spend and can easily budget to live within your means. My experience at the bakery opened my eyes; I saw gas stations offer cheaper gas prices if someone used cash. Self employed cab drivers will knock a couple of dollars off of the fare if you use cash.

It makes sense, cash is king.  Using credit cards often does not help you or the business.  While the good ole’ plastic maybe convenient, it costs the merchant money to accept your credit card payment.  Not to mention, if you are only paying a minimum payment on the credit card, it costs you money to use the plastic. When you are paying only minimum payments, you are throwing away good money to bad interest.

Filing a bankruptcy forces you to live within a budget. When you file a bankruptcy, you cannot use your credit cards and you see how to live within your means for at least the duration of your bankruptcy.  After your discharge, if you continue to use cash instead of getting into credit card debt again, you will stay debt free and begin rebuilding your credit.  Not to mention – 5% off a lemon meringue pie for using cash? Sold.

I thought public schools were free? Public schools are not allowed to charge tuition but high fees for a public education can send anyone’s budget into a tizzy.  In Chicago for example, most public schools require fees to rent or purchase books and the amounts can climb (quickly) to $400 per child.  That number is not going down anytime soon, last year and for the third year in a row, Illinois cut the school budget for textbook costs. So if you have kids and debt, get rid of the debt so you can afford your kids.

There is a calculator at www.bankrate.com to calculate the cost of raising a child.  The average cost for a child age 0-18 is $190,528 and this amount does not include the costs of college tuition or health care.  For example, according to www.finaid.org, the average costs for students attending four-year public colleges and universities were $15,213 plus an additional $4,000 for textbooks. 

If you have young children, start saving now.  If you have to pay $400 per child in textbook rental fees and you have 3 children, you’re looking at $1,200 to pay for your child’s public education. It would be nice if that was the only other hidden charge but Illinois schools also charge for:

- Use of school property (lockers, towels, laboratory equipment)

- Field trips

- Uniforms and equipment

- Participation in extracurricular activities

- School functions, i.e. prom

- Participation in class, i.e. home economics materials, shop, etc.

- Graduation fees

- School record fees

- Driver’s education fees

- School health service fees.

Fixed incomes beware – kids are expensive. Even when public schools claim to be free, you are looking at some money to pay for your kid’s future. We all want the best for our children and being able to budget and pay for school costs would be a lot easier eliminating or consolidating the other debt.  The $400 minimum payment going to credit card interest could be the $400 payment charged to rent books at your child’s elementary school. 

You cannot blame the schools – with budget cuts you have to make due. But you should be cognizant and the costs of public education and your finances. Filing a bankruptcy would eliminate your debt and allow you to put money away for your child’s future. 

If a bankruptcy law office was like an all request line at a radio station for dischargeable debt, the number one request would be parking tickets.  When you have other debt and are already living paycheck to paycheck, the parking fines are moved to the back burner causing interest and penalties to add up – quickly.  If you ignore the ticket altogether, you may find yourself with a suspended drivers license and thousands of dollars in parking tickets.

So the not-so-good news - you cannot eliminate parking tickets with a Chapter 7 bankruptcy. But, you can consolidate the fines in a Chapter 13 to reinstate your driver’s license. Let’s say you’re a delivery driver and all of a sudden your driver’s license is suspended.  You will ultimately lose your job and be unable to pay on the debt.  However if you file a Chapter 13 bankruptcy you can get the license reinstated hopefully before your employer finds out there is a problem.  A Chapter 13 with Geraci Law, LLC can be filed for little to no money down in as little as one day.

There are four different payment plans with the city. The first is for people with less than $500 of parking or red light tickets. A person is required to put down at least half of the ticket amount as a deposit. You could file a Chapter 7 to get rid of any other debt and get on payment plan with the city for the tickets.

Another payment plan offered by the city is for people with over $500 in parking tickets. This payment plan requires a deposit of $500 or at least 25% of the parking or red-light fines (whichever is greater).  If you have a significant amount of parking tickets and other debt, you are much better off filing a Chapter 13. You can pay off your other debt and take care of the parking tickets.

So the last two payment plans were for debtors who still have valid driver licenses. The third payment plan is for people with booted cars and license suspensions. This would apply to the delivery driver example. To get on a payment plan, you would need to pay a $750 deposit or 50% of the tickets – whichever is more. File a Chapter 13 bankruptcy! You can file a Chapter 13 for less than $750 and get your license back. The repayment is interest and penalty free and again you can get your license back!

It is frustrating to get $100 ticket for being a minute late to pay the meter. But, do not let the tickets get out of hand. If you have a driver’s license suspension and stable income, do not fret. File a Chapter 13 and soon enough you’ll be back behind the wheel.

In this current housing market, the word foreclosure is becoming as popular of a dinner conversation as which celebrity is going to rehab this month.  Foreclosure (and bankruptcy) is not as taboo since you probably have a neighbor or a family member facing the big f-word.

Once most families hit the 90^th day of arrears (when most mortgage companies start reporting to the bureaus), most start thinking about whether the home is worth saving.  You think your children grew up at the home but you owe $250,000 and the house is worth $150,000.  So let’s look at some options to look at the big financial picture

Option 1. You want to save the house. You have invested too much blood, sweat and tears to let the house go and you are about even on what you owe and how much the home is worth.  But you are a couple of payments behind, your mortgage company has stopped returning your calls and you can afford the house.  Affording the house is key – you need to be able to make your mortgage payment and be able to buy food, water, gas, etc. So, you file a Chapter 13 bankruptcy. A filed Chapter 13 will stop all foreclosure proceedings and allow you to spread out the arrears of your home in a 3-5 year repayment without the crazy penalties imposed by your mortgage company.  You can save your home up to the day of the sheriff sale with a filed Chapter 13 bankruptcy.

Option 2.  You cannot afford your home because of a home equity loan you took out a couple of years ago. So now, you have a first mortgage payment with a balance of $250,000 and a second mortgage with a balance of $50,000 and your home was recently appraised at $200,000. You are able to make your first mortgage payment but live off of credit cards in order to stay current with your second mortgage. It is possible to strip the second lien – meaning you file a Chapter 13 bankruptcy consolidate the credit card debt and at the end of the repayment plan the balance of the second mortgage could be eliminated. Now, there are no guarantees here and you would need to meet with an experienced bankruptcy attorney to possibly get rid of the second mortgage.

Option 3: You cannot afford the house but you cannot afford to move quite yet.  Maybe there was job loss or an income reduction but you are choosing between food and your mortgage payment each month.  You have tried working with your mortgage company and the idea of a loan modification is laughed at by your lender. The silver lining is foreclosure takes time – stay at the house, keep it insured and you have free rent. Think about it – the $1500 mortgage payment you are struggling to keep current each month could go toward getting back on your feet. The average time foreclosure takes 17 months. You have 17 months of free rent – that is $25,500 of mortgage payments that could go to getting yourself back on stable financial ground. Your bank took advantage of you so why not take advantage of the bank. I constantly get asked about the morality of staying in a home rent free. My answer is – is it moral for a bank to give you a $350,000 mortgage loan with zero money down when your annual income is $30,000?

Deciding the future of your home is not an easy decision. When you are faced with financial hardship, it is difficult to stomach the loss of an investment. But what are you supposed to? Geraci Law, LLC are professionals at saving homes or providing legal resources to homeowners struggling with mortgage payments.

At some point, everyone will apply for a loan.  When you apply for a loan it is important to look at the terms, the APR and actually read the contract.  If the lender tells you a co-signer is required for the loan, then it’s time to walk away.  I know the new car is pretty but think about the long term repercussions if you cannot afford a loan on your own. Co-signing a debt for someone can be a dangerous undertaking.  You are asking someone to pay for the debt or loan if you are unable to.  If a co-signer is required to get the loan, you should look at your loan application to see what you can improve.

The amount of debt you are in compared to your income can affect your ability to get a loan.  If you have more debt than your annual income, your loan servicer is taking on a risk by giving you more credit. Filing a Chapter 7 bankruptcy would eliminate the other debt allowing you to rebuild your credit to qualify for a better loan.

Another factor is timely payments.  A big contributor to your credit score is payment history.  Missed payments are a sign of your ability to pay creditors – if you have a poor payment history, a potential lender may require a co-signer to ensure payments will be made.   You can get a free annual credit report from our Web site, www.infotapes.com, and look at it. If you have more debt than you can handle, consider a bankruptcy. In the long term, you will probably have a better loan than you would right now and possibly better relationships with your potential co-signers.

If someone asks you to co-sign on a loan, say NO! It is becoming more and more common parents of adult children file a bankruptcy because of the additional financial burden.  Even if you trust the person, things happen. Many people do not plan on losing jobs or defaulting on loans but it happens everyday. If you are a co-signer for someone with bad luck, you are just as responsible for the debt as they are. Often, a car will be repossessed (for example) and if the person you co-sign for is out of work, the creditor will come after you and your wages. 

When applying for a loan, the servicer will look at the amount of your down payment. The recommended amount is 20 percent. If you try to increase the size of your down payment there is less of a loan to finance.  A co-signer attaches themselves to your financial future – you are asking them to pay the debt if you do not. Instead of co-signing, ask your friend or family member if they will gift you money for your down payment if they love you that much. You friend or family could give you the money and protect themselves from possible financial hardship.

Ultimately you are probably helping your family member or friend by refusing to co-sign for a debt. You are telling the person to get a handle on their financial situation – whether by filing a bankruptcy or finding a better loan provider.

On May 19, 2011 Peter Francis Geraci will be a featured speaker at the NBI Live Seminar: "Collections: Seeking and Collecting a Judgment". Mr. Geraci has taught hundreds of hours of Continuing Legal Education courses and continues to stay active as a speaker at numerous CLE conferences. If you're an attorney you can pick up 6 hours of CLE, also certified for the Institute of Certified Bankers (7.50 hours) and the International Association for Continuing Education Training (0.60 credits). The course will be at the Hilton Lisle/Naperville from 9 a.m. - 4:30 p.m. Get info on the course details and register here.

It’s getting close to wedding season when people like me trek back and forth to Bed, Bath and Beyond every other weekend.  I get the love stuff – like replacing I with we and how she’s met the man of her dreams but what about the financial repercussions? Marriage is a binding contract between two people to join their lives and their financial futures.  How does one person with zero debt and “perfect” credit fuse finances with another person with $50,000 in debt? The answer can be found in bankruptcy.

Now, depending on your state, assets and financial decisions of one spouse do not necessarily affect the other. Illinois, for example, is not a community property state but Wisconsin is. Community property related to bankruptcy means any debt that occurred while you were/are married can be either spouse’s responsibility.  If you have no debt but your spouse abuses the credit cards, all of sudden your good credit is tying the knot with your spouse’s debt.

Boy meets girl. Boy falls in love. Girl maxes out her credit cards.  Before the boy proposes, there should be a serious discussion about a bankruptcy. If the girl files and eliminates all of her debt, the boy and girl can enjoy debt-free marital bliss. A chapter 7 bankruptcy can eliminate all the old bad debt and provides an opportunity to rebuild credit as a couple.

So what if you and your betrothed both have debt? You could file separately before the wedding but instead of paying one attorney fee you would be paying two. Instead wait until after the wedding so you are able to file a joint bankruptcy and again, enjoy debt freedom as newlyweds. You could register for a family member to pay your attorney fees.  It’s a great bargain – financial freedom as a gift for you and your soon-to-be spouse.

Before actually calling a bankruptcy law firm and speaking with an experienced consultant, many people try alternatives to get rid of the debt. Often, these alternatives either increase the debt because of missed payments and broken promises by debt settlement firms or complicate the inevitable bankruptcy.  If you are at the point of no return with your debt, bankruptcy is the most efficient way to get a handle on your bills. Let’s review what to avoid doing before a bankruptcy.

A common solution for debt is for someone to borrow money from friends or family members to pay off the bills. If you have less than $3,000 in debt, this might be a good option – especially if you have a family member or friend who loves you that much. The problem arises when you have close to $30,000 in debt. If you borrow money and do not pay off ALL of the debt, you are still in the hole and owe a friend or family member money. Do not pay the friend or family member before your other bills. If you are considering a bankruptcy or are in the process of retaining a bankruptcy attorney, repayment to friends and family could delay or prevent your bankruptcy filing.

Another solution is taking a withdrawal from your retirement account. Your retirement funds are put in a separate account for a reason and the penalties for withdrawals are there for a reason. Taking a withdrawal to pay off part or all of your debt can result in tax penalties. Unless you are going to pay all of the debt and tax penalties you will still be in the red.

Desperate times call for desperate measures as the saying goes. Often, many people will try to quit claim a property or transfer an asset to avoid problems with the bankruptcy. However, the transfer of an asset will not only complicate your bankruptcy but could bar you from filing.  A bankruptcy petition is full financial disclosure and not listing transfers or quit-claims could be considered bankruptcy fraud. Before you do anything drastic, please call a bankruptcy law office.

The most obvious solution is using your savings account to pay debt.  Your savings account is there for emergencies. If you are using your savings account to just stay current with minimum payments, eventually your account is going to be empty and you will still have a big balance of debt. Filing a bankruptcy will eliminate the big balance of debt and protect your savings.

When the creditors are calling from dawn til dusk, it is easy to unplug the phone and try to ignore your reality.  However, debt does not disappear.  Waiting until you have depleted your savings account, retirement account and transferred all of your assets is ultimately going to do more harm then good.  If you want a chance to rebuild your credit and have a successful financial future, consult a bankruptcy law firm.

When I was growing up, my parents stressed the importance of education – not only high school but higher education. Like many families, the cost of college for their children is not only daunting but can be downright frightening. According to a study done by the Department of Education, the average costs for both private and public institutions went from $3,499 per year for the 1980-1981 to $20,435 in 2008-2009 school years. Many parents do not have $20,435 saved up for one year of school for their children, let alone $81,740 for four years of education (in 2008 numbers).

With costs of living increasing every year and the current economy forcing many to return to school, the availability of scholarships is becoming scarcer.  Parents want their children to go to college and are often forced into taking on student loan debt. When many families are facing the reality of their debt and decreasing household income, the question becomes, “will a bankruptcy make me illegible for student loans?”

The easy answer is no. According to the Bankruptcy Reform Act of 1994,

“A governmental unit that operates a student grant or loan program and a person engaged in a business that includes the making of loans guaranteed or insured under a student loan program may not deny a grant, loan, loan guarantee, or loan insurance to a person that is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act”

Now the actual text reads like a lot of mumbo-jumbo, but in short it means a bankruptcy alone cannot deny your student loan eligibility for federal student loans including the Perkins Loan. But there are other factors a student loan lender will look at. Lenders can consider debt discharged in bankruptcy as evidence of a bad credit history but cannot deny a potential student based on the bankruptcy alone.  My argument is, if you have $75,000 in debt and $40,000 in income – your ability to pay back the new student loan debt becomes skewed.  If you file a bankruptcy, you eliminate the debt and all you have is income?

Post-bankruptcy credit history can be another factor. So, if you just received your discharge – make sure to make your payments on time and put money into a savings account. Who knows – getting rid of debt could allow you to save enough money to pay for college and the student loan eligibility becomes moot?

It’s April – a time for rainy days, flowers, and of course taxes.  If you are someone who is trying to negotiate your debt and have been successful, this tax season you may find a 1099-C form in your mailbox. A 1099-C is an IRS form given to debtors who have settled debt or creditors have cancelled debt.  Debt negotiation companies fail to tell many people to file on settled debt. You know what you don’t have to pay taxes on? Discharged debt from bankruptcy.

A 1099-C is required to be filed regardless if you claim additional income or not. You will probably receive a 1099-C if you have settled debt over $600.00. There are exemptions to the form – for example, you do not have to list if the debt is cancelled by a foreign branch or you do not have to file if you settled the interest.  Settled debt can be taxable so when you’re preparing your taxes this year and have settled debt, make sure to check with the IRS or your accountant. For additional information on 1099-Cs, please click here.

Debt settlement does NOT work. Not only, do creditors often refuse to work with you but you get taxed on the settled debt? You leave yourself unprotected against lawsuits, creditor calls and increasing interest. If you have a significant amount of debt, save yourself time, money and stress and look into a bankruptcy.

Whether it was the Teenage Mutant Ninja Turtles or the 30 minute delivery or free ads, pizza became and has stayed the country’s favorite food. Everyone loves a good slice – whether it’s during a football game, business meeting, or your child’s fifth birthday party.  America’s favorite dish however seems to be struggling.  There have been multiple popular pizza places filing or finishing bankruptcies over the last year.

Pizzeria UNO emerged from bankruptcy last year; Chicago-based Giordano’s entered bankruptcy in February and just earlier this week shopping mall food court favorite Sbarro Pizza filed a Chapter 11. America’s favorite food providers are succumbing to higher food costs and competition from frozen pizza (it’s not delivery it’s Digiorno – for example).  With multiple locations closing and other fast food alternatives – what is going to happen to family pizza Friday?

Pizza lovers fear not – a Chapter 11 bankruptcy allows the company to continue operations and according to the Pizza Today (yes it is an actual news source), the pizza industry is still earns approximately $38 billion each year.  These pizza professionals filed for bankruptcy protection to continue to provide the pizza pies. Without bankruptcy law, where would you snack after visiting the mall? Where would Chicagoans get their deep-dish?  Bankruptcy helped your dinner provider and could help you with your own debt.

Homeownership is said to be a pillar of American values.  Many immigrants moved to our fair country with the prospect of owning a piece of land.  Bankruptcy is not the end to the American dream – on the contrary, getting yourself out of debt might afford you a better opportunity to some day own a home. 

Despite having a bankruptcy on your credit report, you may still qualify for a loan.  Before you purchase a house, look at your monthly income and your expenses. Ideally, you should not spend more than 30% of your monthly gross income on your mortgage, taxes, homeowners' association dues and insurance.  Too many people find themselves “house poor” and are not able to save money or actually enjoy the home.

A resource available to potential homeowners is a Federal Housing Administration (FHA) insured loan.  Since 1934, FHA loans have been an option for low down payments, low closing costs and for people with not-so-stellar credit. 

According to the FHA’s Web site, a person can qualify for a FHA loan in as little as two years after filing for a Chapter 7 bankruptcy and could theoretically apply for an FHA loan while in a Chapter 13 repayment (with court approval and timely payments).  For potential homeowners with a foreclosure or an executed deed in lieu, the wait time is three years.  So, with a foreclosure and NO bankruptcy – a potential homeowner would have to wait (theoretically) longer to purchase a home and still have unsecured debt?

After bankruptcy, you may not need an FHA loan.  A major factor for lenders is the size of a down payment – preferably a 20% down payment could eliminate the need for private mortgage insurance or PMI and show you are a serious purchaser.  For example, let’s say you have $70,000 in credit card debt and are making minimum payments of $700 per month (according to www.bankrate.com, you will be paying $700 with 18.9% for more 30 years).

If you took the $700 per month and put the money in an interest-bearing account, you could save $42,000 for a down payment on a home in as little as 5 years.  Post-bankruptcy, you have no other debt and would be able to save money for your goal of homeownership.

As Former President Bill Clinton said, “[T]he objective for young people, with their futures before them and their dreams fresh in their minds, starting out their families, to be able to own their home and to start a family in that way, that’s a worthy objective.” Bankruptcy is not a bad thing - it is a solution to become debt free and can be a way for debtors to achieve financial goals.

To look at other FHA requirements, please visit www.fha.com.

To read President Clinton’s speech on the National Homeownership Strategy, please click here.