Bankruptcy Alternatives: Finding the right Debt Consolidation Company

Bankruptcy is intended for individuals who honestly cannot afford to repay their debts. In comparison, debt consolidation is intended for individuals who have the necessary disposable income to at repay at least a portion of their debt. Bankruptcy offers many advantages and is often the fastest and cheapest way to eliminate a large amount of debt, but bankruptcy alternatives like debt consolidation should always be considered before making the decision to file bankruptcy.

Unfortunately, the debt consolidation industry contains some unethical companies that don’t have your best interest at heart and are driven by a desire to make money off you. Since you are dealing with sensitive financial information, it is very important to find a reputable debt consolidation company that can put together a plan to get you out of debt. A referral from a friend or family member is a great way to make sure you are dealing with an ethical debt consolidation firm, but people often don’t like talking about their debt problems and a good referral can be hard.

Searching the internet is another popular alternative to finding a reputable debt consolidation company, but the huge amount of listings makes it very difficult to identify the reputable companies among them. Debtconsoldiationcare.comhas developed a solution to this problem by allowing their community members to rate the various debt consolidation companies based on their personal experiences. Individuals can request a free debt evaluation from a company that the other community members rated highly. A debt counselor from one of the highly-rated company then calls you to discus your debt issues and offer possible solutions. also has a active community forum with topics covering a wide variety of debt and credit management solutions including, Bankruptcy, Credit Repair, Identity Theft, and Debt Consolidation and Settlement.

Credit Counseling Requirement Can Prevent Same Day Filings

One of the many changes to the Bankruptcy Code in 2005 was the implementation of two mandatory financial education courses that Chapter 7 bankruptcy and Chapter 13 bankruptcy filers are required to take.

The first course, often referred to as the “Credit Counseling” requirement, must be completed within 180 days beforethe filing of a Chapter 7 bankruptcy or a Chapter 13 bankruptcy. The second course, called the “Debtor Education” or “Financial Management” requirement, must be completed depending on your jurisdiction within 28 days to 60 days after one’s 341 Meeting of the Creditors. Recently, there has been a national trend of rulings amongst bankruptcy judges regarding the former Credit Counseling course and effectively preventing “same-day filings”.

“Same day filings” occur when a with a client hires a bankruptcy attorney the same day that attorney files their Chapter 7 or Chapter 13 bankruptcy case for them. This situation occurs often when a client has an urgent financial matter. Such urgencies typically include pending real-estate foreclosure sales, vehicle repossessions, body attachments, judgments and garnishments. The bankruptcy judges’ ruling that is becoming all-the-more common is the interpretation of the time-frame of when a filer’s Credit Counseling course must be completed.

The Bankruptcy Code states that a filer’s Credit Counseling course must be completed within “180 days before” the filing of their bankruptcy case. More and more bankruptcy judges are now interpreting this language to mean that a filer’s Credit Counseling course must be completed within 180 days literally before the filing of their Chapter 7 or Chapter 13 bankruptcy, and not including the actual day of the bankruptcy filing.

The consequences of filing a case where a Credit Counseling course has been completed on the same day of a bankruptcy filing is in most cases complete dismissal of the filer’s Chapter 7 or Chapter 13 bankruptcy. The bankruptcy filing is void as a matter of law, as if it was never filed. Unfortunately, the only practical course of action for the victims of this situation is the refiling of their bankruptcy and the repaying of the requisite filing fee.

In most situations when a client with an urgent financial matter seeking a same day filing walks into a bankruptcy attorney ‘s office, they have not yet completed their pre-filing Credit Counseling Course because they were unaware they needed to do so. Even with their bankruptcy attorneys’ direction to complete their Credit Counseling Course immediately, the fastest a client in this situation could get their bankruptcy filed would be the next calendar day. Often times this can be one day too late.

Chapter 7 Trustee Buyouts

Last week I had a discussion with one of my Chapter 7 clients about a potential wrinkle to her upcoming bankruptcy filing, commonly referred to in bankruptcy practice as a “trustee buyout”.

When this client had retained our firm back in September, 2006, she had indicated to me that her home was worth $240,000 and that she owed $209,000 on a single mortgage. She had based this $240k valuation from a refinance appraisal she’d received in March, 2006. She was current on her monthly mortgage payments and wished to keep her house through the Chapter 7 bankruptcy via reaffirmation. Unfortunately, due to an illness from which she suffers, things went delayed and we are just now getting to the point where we’re ready to file her Chapter 7 bankruptcy for her.

Last week’s new issue came to light when my client told me that a condo identical to hers in her building had sold in the last month for $250k. Concerned about the possible change in circumstances and how it may affect her future Chapter 7 filing, I did some due diligence on her behalf and checked several websites that produce “CMA’s” (comparative market analysis). The property indeed was being valued on these websites at closer to $250k than the $240k valuation she had initially told me.

When filing a Chapter 7 or Chapter 13 bankruptcy, a filer is entitled to protect a certain amount of equity in their homestead property. The homestead exemption only protects equity in a property that someone lives in. Equity is the difference between what the property is worth after cost of sale and what is owed in total on the property. While it varies from state-to-state, the homestead exemption in Illinois where I practice is $15,000 per person. (Note: The exemption doubles to $30,000 in Illinois for a married couple’s joint filing.)

My client owns her property in fee simple, which means no one else is on the deed to her house. As a general rule, a trustee will typically allow a 7-9% cost of sale deduction off of a house’s valuation to account for broker fees, taxes due at sale, etc. So in this case, with my client property being worth $250k, deducting an 8% cost of sale would leave the value at an even $230k. Remembering that my client owes roughly $209k on her condo, the equity difference between $230k and the $209k owed would be $21k. Because we can only protect $15k of equity at filing in Illinois, this means that the equity in her house is $6k above the exemption amount and could thus be perceived as an asset for liquidation by a bankruptcy trustee.

At this point, I suggested to my client that we needed to get a current appraisal on her property to determine the actual value. She did this immediately and the condo’s value was indeed appraised at $250k. I then gave my client several options on how we could proceed from here:

  1. We could file a Chapter 13 for her instead of a Chapter 7 to protect the exposed equity in her condo. She would be required to pay back at least $6k of the $50k in credit card debt she owed to match the amount that could be liquidated in a Chapter 7.
  2. She could sell her house prior to filing the bankruptcy, protect up to $15k of the equity, and spend down the remaining $6k or so on necessities, like rent, food clothing, etc.
  3. We could file a Chapter 7 for her and if necessary negotiate a “trustee buyout”.

My client had no interest in selling her house and much preferred filing a Chapter 7 bankruptcy to a Chapter 13 bankruptcy, so we decided together that a “trustee buyout” was her best course of action.

In a Chapter 7 where a filer has an asset worth above the allowable exemption, it is usually possible to negotiate an arrangement with the Chapter 7 trustee to pay him the cash amount equivalent to the valuation of the exposed asset and protect the asset itself. In my experience, the payment arrangement can vary in time from 3 months to a year, or even possibly a one-time lump sum payment. It is also often the case that a trustee in a Chapter 7 proceeding will choose to ignore an asset that he could potentially liquidate. If a trustee believes that he could not make a meaningful distribution to the creditors listed in the Chapter 7 proceeding, he can choose to acknowledge the asset but pass on liquidation or further action because the value of the asset is too small to make any kind of repayment dent to the creditors as a whole. Hopefully in my client’s situation above, this will be the case.

Top 10 Bankruptcy Mistakes

Bankruptcy mistakes can be very costly and all too often an individual filing bankruptcy will make inadvertent mistakes that jeopardize their chance of discharging their debts and retaining exempted property. Avoid these Top 10 mistakes and you will be well on your way to a successful bankruptcy filing.

  1. Transferring Real Estate or Other Assets:

Some people try and protect their assets by transferring them out of their name, but this strategy will not work in a bankruptcy proceeding. Recent property transfers must be disclosed to the bankruptcy trustee and the bankruptcy court may “avoid the transfer” and put the parties in the same position they were in before the transfer. Even if you don’t feel that the property or asset that your name is rightfully yours, the bankruptcy court may still “avoid the transfer”. It is often unnecessary to transfer any property or assets before filing bankruptcy as each state has bankruptcy exemptions designed to protect all or a portion of your assets.

Bankruptcy Exemptions by State

  1. Transferring Credit Card Balances:

Transferring a large amount of debt to one credit card can result in debt on the new credit card not being eliminated due to the large amount of debt incurred to one creditor right before filing bankruptcy.The new creditor may have a strong argument that the balance transfer should be presumed fraudulent, especially if the transfer was within 60 days prior to filing and over $1500.

  1. Repaying Loans to Family Members:

The bankruptcy code requires that you treat all of your creditors equally and does not want you choosing which creditors to repay right before filing bankruptcy. The bankruptcy code does not allow you to repay Uncle Bob the $2000 from when the furnace went at the expense of your other creditors.The bankruptcy trustee may pursue the relative for a portion of the funds recently transferred to them.You are required to list debts that are owed to family members, but assuming there is no discharge objection brought, the debt will be legally eliminated and you can repay the loan if you choose to.

  1. Not Including All Your Debts on your Bankruptcy Petition:

You are required by law to include all of your debts on your bankruptcy petition, even if you want to keep the debt. If you want to keep your house and automobile when you file a Chapter 7 bankruptcy , you usually will sign a reaffirmation agreement with the bankruptcy court excluding the discharge of those specific debts.

  1. Ignoring Lawsuits:

Many people fear lawsuits and don’t know what to do when they get a summons in the mail. In most cases, if you have already filed bankruptcy and receive a summons from a debt listed on your bankruptcy petition, your bankruptcy attorney should be able to fax your case information to the creditor’s attorney and get the case dismissed. However, if you are in the process of filing bankruptcy, but the case is not officially filed yet, it can be helpful to attend the designated court hearing and request a continuance to give you an opportunity to file for bankruptcy relief.

  1. Withholding Information from Your Bankruptcy Lawyer:

Bankruptcy Lawyers are often frustrated at 341 hearings when their clients are placed under oath and disclose new information that was previously withheld from their attorney. Bankruptcy lawyers need all the requested information to properly advise you and protect your income and assets. The horror stories about bankruptcy that we’ve all heard are frequently due to an individual failing to disclose vital information to a qualified bankruptcy attorney for proper advice and planning.

  1. Cashing in 401(k)’s, IRA’s, and other Retirement Funds:

Generally, 401(k)’s, IRA’s, and other retirement funds are protected from the reach of your creditors and are allowed to be kept during and after a bankruptcy. However, a common mistake is people cashing in their retirement accounts or obtaining a loan. The money that is taken out of your retirement account is no longer protected from your creditors, and you’ll likely owe penalties and taxes on any accounts that were cashed in.

  1. Filing Bankruptcy when you are expecting a Large Tax Return:

In many states, a tax refund is considered to be an asset that can be liquidated if the bankruptcy exemptions aren’t enough to protect it. Depending on the amount of the refund and the relevant state laws, it is often advisable for you to receive your tax refund and spend the proceeds on living necessities before the bankruptcy is filed. Many states offer a “wildcard” exemption that can be used to protect tax refunds among other things.

  1. Waiting Until the Last Minute Before Filing Bankruptcy:

The moment you file a bankruptcy an “automatic stay” goes into place which prohibits your creditors from any further collection activity against you, but it is unlikely that you will be able to recover any wages garnished or property taken before the filing of the case. Too many people wait until their creditors have already taken action against them before consulting with a bankruptcy attorney. It can take considerable time to prepare the bankruptcy petition, review the relevant documentation, and be certified by a trustee approved credit counseling agency. Once you have made the decision that bankruptcy is your best alternative, you should file as soon as possible to avoid anymore creditor harassment and allow yourself to put future earnings towards long-term goals and savings instead of chipping away at an insurmountable amount of debt.

  1. Not Hiring a Bankruptcy Attorney:

Fortunately, experienced bankruptcy attorneys are aware of all of these common mistakes and many more. Bankruptcy is a complex area of the law and the process has being further complicated with the new bankruptcy laws. Mistakes can be costly and a thorough case evaluation from a local bankruptcy attorney is the best way to identify any possible issues and develop a strategy to relieve your debt problems. Receive a Free Legal Evaluation with a local bankruptcy attorney.

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