Tag Archives: bankruptcy petition

Bankruptcy Alphabet: B is for Borrow

Yesterday, we talked about asking the right people questions about bankruptcy. Today, we’re continuing our discussion and talking about borrowing in the context of bankruptcy. When you feel your financial world crumbling, there is a natural inclination to raise more money. The most common examples of this is borrowing against retirement funds, from family, friends, home equity line, against a children’s college fund or against someone else’s home equity. This is akin to putting a bandage over a wound that requires stitches and pretending that the Band-Aid is a permanent solution. The Band-Aid does nothing to solve the underlying problem and soon, you have to face your financial situation.

So, why is borrowing such a bad idea? Let me count the ways.

You need to retire one day. Chase doesn’t.

Retirement funds have a special status in bankruptcy in that most of the time, we can protect 100% of it. So, by liquidating or borrowing against your retirement funds, you are exchanging dischargeable debt with protected funds. Additionally, if you liquidate your retirement, or borrow against it but fail to repay, such funds are subject to income tax and penalties. Recent taxes are non-dischargeable. And trust me when I say that you don’t want to owe money to Uncle Sam. Lastly, your retirement money is just that - money set aside for retirement. It should not be used to repay credit cards.

Borrowing from friends and family.

In bankruptcy, family and friends are known as “insiders.” Borrowing from insiders can create problems. First, any money you repaid to insiders within last 12 months of filing must be disclosed on your bankruptcy petition. And the trustee can unwind the repayment by demanding the money back from the insider. Having the trustee threaten your family or friend for money you repaid probably won’t make for pleasant dinner conversation. Furthermore, instead of owing money to a Chase (which would be discharged) now, you owe money to your best friend. Lastly, even if you don’t repay any money, the debt to the insider must be disclosed on the bankruptcy petition. Meaning, your friend or family will receive notice of your bankruptcy.

Turning non-secured debt into secured debt.

This is another no-no. Oftentimes, clients will borrow against their home or worse, from their parent’s (or other’s) home to repay their unsecured debt, such as credit cards. It may sound like an attractive offer, with a reduced interest rate bundled into a single loan. But, this is a potential landmine. What happens when the client can’t repay the secured debt? Now, the home is subject to foreclosure!

So, instead of the worst case scenario being a potential lawsuit by credit card, now the client is facing foreclosure of their home or their family member’s home. Even after bankruptcy, liens generally survive. In another words, if you had $50,000 in credit card debt, that debt is discharged in bankruptcy. After the bankruptcy, that is the end of that debt. But let’s suppose, you borrow $50,000 from your home equity loan. Now, even though you won’t be personally liable for the debt after bankruptcy, the home equity lender may be able to foreclose* on your home.

*Sometimes, it’s possible to “strip” and get rid of a second mortgage.

Other B’s from Bankruptcy Attorneys

Bailout
Bank Account
Bank Account Levy
Bankruptcy
Bankruptcy Petition Preparers
Best Interest of Creditors
Business
Business
Business & Individuals
Business bankruptcy
Businesses and Business Debt
Buy Low and Sell High

Image credit: dizznbonn

Should I borrow from family and friends to pay off my credit card?

By: Jeena Cho

Q: I’ve had my hours reduced at work and no longer working overtime. To make ends meet, I’ve been using my credit cards. I have about $30,000 in credit card debt, paying very high interest rate (hovering around 30%). I have five cards. My parents offered to loan me $15,000 from their savings. Can you help me settle my debt? I don’t want to file for bankruptcy.

I get questions like this all the time. Clients wanting to borrow money from family and friends to pay off or settle credit card debts. Usually, the question is prefaced by “I read on Google…” or “My friend told me…” I cringe every time someone says this because I’ve met too many clients who has tried this strategy, failed and comes in to file for bankruptcy anyway. Now, in addition to listing Chase, Discover, American Express, etc. on his or her bankruptcy petition, the client has to add the family member or friend on the petition too.

To make matters worse, if you’ve repaid your family or friend before filing the bankruptcy, he or she may be considered an “insider.” This means that the Trustee in your case can potentially demand the money back from your family or friend! That sure makes for an uncomfortable conversation at the dinner table.

The reason why debt settlements generally don’t work is because it’s difficult (if not impossible) to get all of your credit cards to play ball. You might be able to settle 4 cards, but what if the last card holds out? Or decides to sue you instead? How about taxes? Do you have enough money set aside for taxes on the forgiveness of debt? (That’s right. Whatever the credit cards forgive, will be attributed as income to you.) Don’t make the mistake of throwing your family or friend’s good money after your bad credit card debt.

Debt settlement can work in some cases where the client has 1 or 2 creditors and has lump sum cash to settle. For more information on debt settlement, read our Guide to Living Debt-Free/ Bankruptcy and Other Alternatives.

Have you tried debt settlement? Did it work out for you? Please share your story.

Image Credit: futurowoman

Can I keep a credit card if I file bankruptcy?

by: Jeena Cho, San Francisco Bankruptcy Attorney

One of the most common questions I get from clients is “Can I keep a credit card if I file bankruptcy?” The answer is generally “no.” For many clients who has relied on credit cards to get by on a daily basis, it’s difficult to imagine life without one. It’s important to keep the end result of bankruptcy in mind - a life without debt. Imagine being able to have a savings, a retirement fund, or your set money aside for your children’s college fund. For many who has been living paycheck to paycheck, on the edge, it’s often difficult to imagine.

In general, any debt you owe must be listed on your bankruptcy petition. This means that even if you have a balance of $1 on a credit card, it must be listed. The opposite of this is also true. If there is a $0 balance, it does not need to be listed. However, I discourage you from paying off a credit card with hopes of keeping it for the following reasons.

1. It will probably be cancelled anyway. Most financial institutions get electronic notices of bankruptcy. This means that most likely, even if the card is not listed, the bank will get notice that you have filed for bankruptcy. Even if the bank does not get notice of your bankruptcy, most credit card companies will run your credit report periodically and will most likely cancel your card.

2. Preference. If you pay any one credit card over another in excess of $600 in the 90 days prior to your bankruptcy, the Trustee in your case can get the money back from the credit card as a preference. This can cause delays in your bankruptcy, hence not advised.

You can get new credit after bankruptcy. (Although, I don’t recommend it.) Clients often tell me they received offers for car loans and credit cards shortly after filing for bankruptcy. It’s important to read the fine print as oftentimes, there is a very high monthly charge, interest rate and no grace period. The reason for these new offers are simple. After bankruptcy, you cannot file for 8 years (in case of Chapter 7 bankruptcy) and 4 years (in case of Chapter 13 bankruptcy). So, the creditors view such clients as “good bets.” The clients have no debt and can’t re-file for several years.

Almost any purchase requiring a credit card will accept a debit card. You can also get secured credit cards after bankruptcy (e.g., you give the credit card $1,000 in exchange for a credit card with a $1,000 credit limit). As mentioned in the beginning, I encourage you to save money after bankruptcy and live within your means.

This example is merely meant as an informational tool. You should consult with a San Francisco bankruptcy attorney to discuss the specifics of your case.