Think You Can’t Afford to File for Bankruptcy?

According to a new study by the Federal Reserve Bank of New York, changes originally enacted in 2005 to the Bankruptcy Abuse Prevention and Consumer Protection Act have made it substantially more difficult for “financially struggling people” to file for bankruptcy relief.

While it’s true that changes like these have made it tougher for people to seek bankruptcy protection in general, I don’t believe the additional hurdles put into place present a significantly greater financial hardship than before these changes were made. Remember, as stated in a couple of my prior blogs, there may be several different options to explore if you’re in need of debt relief.

The three common debt relief choices are:

Ignore the debt. Typically under California law, there’s a four-year statute of limitations for debts (except those made with an oral contract, for which the statute of limitations is two years). While I generally do not advise clients to go this route, especially if your debt(s) were incurred recently, you may just simply ignore your debt and hope the statute runs. In my experience, though, creditors are a pretty unforgiving bunch. Eventually you may get sued, which will eventually lead to having your wages garnished, liens attached to your property, and/or bank accounts/other property seized and forfeited to your creditor(s). Also, interest, penalties, and other fees for non-payment will keep accruing on your debts, worsening the situation.

Negotiate to settle the debt. In general, creditors are willing to reduce the overall balance owed on a debt, if they know they are going to get paid, especially if (1) you’ve missed at least a few payments and (2) you are willing to pay off the settled amount promptly (either lump-sum or over only a couple of months). The bad news is the government has made it a bit harder to negotiate with creditors. There is now a mandatory requirement that, with certain exceptions, creditors issue a 1099 Form for any balance forgiven in a settlement when the settlement amount equates to a more-than-$600 reduction from the balance you actually owe, You will then have to declare that 1099 amount on your taxes as if it were income (and pay taxes on said amount). Say, for example, you owe $2,000 and you negotiate a lump-sum settlement of $1,200, you will receive a 1099 for $800 to be added to your gross income for the year when tax time comes around.

File for bankruptcy relief. If neither of the first two options work, you will probably find yourself in bankruptcy court. In my opinion, in general, the greatest change that impacts one’s ability to file for bankruptcy relief has been the increase in allowable attorney fees in bankruptcy cases. For example, here in San Diego, California, bankruptcy attorneys can now initial fees of up to $3,600.00 for a Chapter 13 consumer bankruptcy filing, up from $1,700.00 in 2012. These fees usually do not include certain administrative costs and other miscellaneous fees for actions that may take place during the course of the bankruptcy case.

Where does this leave people in need of relief?

In general, if push came to shove, most people can come up with the requisite monies needed to hire a bankruptcy attorney to assist them in getting rid of a far more substantial amount of debt. For those who aren’t able to do so, there will always be attorneys (including myself) who usually don’t charge the allowable “standard” attorney’s fee.

There’s also the option of representing yourself in matters of bankruptcy relief, though of course, you’re held to the same standards and requirements as an attorney representing you in such an action. In my experience, those charged with monitoring your bankruptcy case (court websites, court clerks, the U.S. Trustees’ office) can be both understanding and helpful in providing information that may assist you with proceeding on your own.

A word of caution: There are individuals and businesses out there offering bankruptcy preparation services for “reduced fees.” Across the U.S., bankruptcy courts have had issues with such services, since they generally offer document preparation services with minimal instructions on how to file. The end-product is often incomplete and there’s usually no follow-up after the bankruptcy petition is filed. While not all such bankruptcy preparers operate this way, I urge you to carefully explore your options before choosing such a service.

In conclusion, while it is true that desperate times call for desperate measures, there are several non-drastic opportunities out there for debt relief, contrary to what the public is being led to believe by recent studies and news articles. So if you find yourself in a personal financial crisis, don’t just curl up into a ball and hope your problems will magically disappear; reach out to a skilled debt relief professional and explore your options.

Are you in need of legal counseling for bankruptcy or debt issues or have any questions regarding the above? The Law Offices of Ian S. Topf offer free consultation in a variety of issues, ranging from bankruptcy, family law and estate planning to traffic violations and landlord/tenant disputes.

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