Tips And Guide For Debt And Loan Management

First, value your home at the lowest reasonable amount. Look around your neighborhood, see what similar homes are selling for and use the lowest price you find in your paperwork.
Next, reduce your equity analysis for the potential cost of sale. We are not saying you are going to sell your home, you are merely trying to show the trustee how much he would get if he did sell your home. Because he would have to hire and pay for a real estate agent, you can reasonably reduce your equity, for these purposes, by that amount.
For example, Greg’s home is worth $200,000, and he owes $150,000. That gives Greg $50,000 in equity. He’s worried that if he files bankruptcy, he may lose his house because the equity limit in his state is $40,000. However, if Greg accounts for the cost of sale of his home, he will be fine and can safely file his case. Typically, 8 percent is used to calculate the cost of sale. In Greg’s case, this amount would equal $16,000. Thus Greg’s actual equity is $50,000 less the $16,000 cost of sale, which means his equity is therefore really $34,000.
There is a lot to think about before filing bankruptcy. You must be sure that you have the type of debts that will get discharged. You must also be assured that most, if not all, of your assets will be protected. Make sure you figure this all out before you file.

To figure out whether you will be able to fully exempt your house, you will need to do two things:

1. Figure out how much equity you have in your home. Look at what houses are selling for in your neighborhood to get a good idea of what your house is worth if you were to sell it today. Subtract the amount you owe your lender(s), and that is your equity.
2. Look up your equity limits and see whether you fall under the limit for your state.

As with your personal property, you want to show your home with the lowest possible, yet nevertheless reasonable, amount of equity so that you remain under your state’s exemption limit.

You may be concerned that your mortgage company will foreclose on your house if you file for bankruptcy, but that is usually a groundless fear. If you are current with your mortgage payments when you file and stay current throughout the case, then your lender cannot foreclose. It would be illegal. When your case is over, you will continue to make payments as if nothing has happened. Things are a bit different if you are behind on your mortgage and you want to file a Chapter 7. In that case, you will need to make up the past-due amount within about a month or two from the date you file, as well as keep current throughout the entire case. If you remain in arrears after filing bankruptcy, your lender will eventually go before the bankruptcy court and ask for permission to foreclose on your house.

Remember, if any of your property is over the corresponding limit, the trustee overseeing your case will take it and sell it. He will keep part of the proceeds and use the bulk of the money to pay back your creditors. Thus, a key to protecting assets in bankruptcy is to make sure that the values listed in your schedules are below the exemption limit, thereby giving your trustee no legal possibility of seizing your property. Your attorney will probably advise you to list the lowest possible, albeit ostensibly reasonable, value for your assets. When valuing your car, he will recommend that you use the low blue book value instead of the high blue book value. Or you can use the price listed in the classified ads, as that is generally lower than even the low blue book value. Reduce the car’s value even more for high mileage and problems in need of repair.
What you want to do is reduce the amount of equity you show in a piece of property that is potentially over the limit. Although your washer and dryer may have cost $1,000 new, what are they worth used? Maybe $200. Using a yard sale or liquidation value for your property in your schedules is both perfectly acceptable and intelligent. We know that all of this is complicated. You really need an attorney to make sure your assets are properly protected. Your yellow pages will list all bankruptcy attorneys in your area. Make a couple of appointments with a few different ones; your initial consultation should be free. Find one you like, dicker about the fee a bit, and hire one to help you through this process. You don’t perform surgery on yourself, and you shouldn’t represent yourself in court either.

Some states allow debtors to choose between the state’s exemption system and the federal exemption system. Most states, however, have only one exemption system and no choice. Before you file, you must figure out whether your state’s system would allow you to exempt all of your assets.
The federal exemption system is similar to those in use by the states and is therefore useful to explain what you can protect. Although only some states use this particular system, all states use a system that is at least very similar. Your state will, in all likelihood, have a different list of items with different amounts, especially with regard to real estate. As indicated previously, some states are very generous when it comes to real estate, and others are not.
The important thing about any exemption system is that it is the equity in, not the gross value of, your property that is the critical factor. For example, Spencer has a home worth $100,000 with a $75,000 mortgage. Spencer thus has only $25,000 worth of equity in his home and needs to exempt only that amount. If he owes $9,000 on a car that is worth $10,000, then he needs to exempt only the $1,000 equity he has in the car in order to keep it. It is also important to understand that your equity is the amount you would get less any sales commissions and taxes due, which may reduce your actual equity even more.
The next thing to understand about exempting property is how the last item in this list, the wild card, works. The wild card is the key to keeping your assets when you file for bankruptcy. (Although most states have a wild card, not all states do, so be sure to find out the exact rules in your state. Ask a local bankruptcy attorney.) The wild card is just like its poker namesake. You can play this card in the bankruptcy game to protect anything. You use it to protect home equity, cars over the $2,400 limit, cash in the bank (notice that money in the bank has no separate exemption in the preceding list), a boat, or any other item or items up to the wild card limit.
You will notice that in the preceding list, the wild card is the “unused portion of the homestead exemption, up to $8,300 per debtor.” What this means is that if you have no home equity that you need to protect with your homestead exemption, you can use the $8,300 exemption to protect any other asset. If you have some home equity that needs protection, but it is less than $8,300, the difference is available as a wild card exemption.
Here are some examples of how the wild card might work:

• Sheree’s home is worth $100,000, and she owes $95,000 on it. She would use $5,000 of her homestead exemption to protect her home equity. The remaining $3,300 (remember, $8,300 total is available under this wild card system) could be used in wild card exemptions to protect other property.
• Sydney and Sierra don’t own a home, but they do own a car that is paid off and is worth $10,000. They could use their $2,400 auto exemption, combine it with $7,600 from their wild card, and still have $9,000 to use to protect other property. (Remember, they each get $8,300 in wild card exemptions, for a total of $16,600.)
• Mara has $5,000 in the bank and owns no home (she’s a renter). She could use her wild card exemption to protect her bank account and still have $3,300 left over to protect other property.

Again, because each state is different and allows exemptions and wild cards in different amounts, we strongly advise you to seek out a bankruptcy attorney to draft your bankruptcy paperwork, if for no other reason than to make sure that your property is protected.

In your bankruptcy paperwork (called your petition and schedules), you are required, under penalty of perjury and a $500,000 fine and possible jail time, to list all of your assets, both real property and personal property, including household goods and items, cars, real estate, pensions, clothing, and bank accounts. Before you file, you want to make sure that you will be able to keep all of these assets. Bankruptcy trustees do not make a lot of money per case, so they are on the hunt for unprotected assets that they can seize because they get a percentage of whatever the asset is sold for. Because it is awfully hard to get out of bankruptcy once you have filed, you better be pretty darn sure before you file that you will be able to keep most, if not all, of what you own.
In order to keep everything you own (your estate), it all must be exempted in your paperwork. When you exempt a piece of property, you tell the trustee that you plan to keep that property. The process of exempting property consists of nothing more than listing all property you own in your schedules and then listing the corresponding laws that allow you to keep that property.
Although this process may seem simple, it is not, because each state puts different limits on how much property a debtor can keep when filing for bankruptcy. Although the rest of bankruptcy law is federal (meaning the same rules apply in all 50 states), exemption rules are made state by state.
Some states, like Florida, are quite liberal with their exemption laws. In Florida, there is no limit to the amount of home equity you can have when filing bankruptcy. You could own a $1 million house, file bankruptcy, keep the house, and wipe out your other debts (of course, you would have to still continue to pay your mortgage). Other states are not so liberal. In New York, a single person can only exempt $10,000 worth of equity in a home, and a married couple can only exempt $20,000. In Delaware, there is no home equity exemption at all.

Other than secured and unsecured debts, you may also owe student loans, past-due child support, or taxes. Should you file bankruptcy if you have these sorts of debts? Are they dischargeable? “Maybe” is the answer to both questions. The only way to get rid of child support or alimony arrears is to file a Chapter 13 bankruptcy and repay them in full over a period of several years. They cannot be wiped out in a Chapter 7.
Student loans can only be discharged if you can pass the following undue hardship test:

1. The debtor cannot maintain even a minimal standard of living if forced to repay the loan.
2. This state of affairs is likely to exist for a significant portion of the repayment period.
3. The debtor has made good faith efforts to repay the loan.

All three parts of the test must be met to qualify for a hardship discharge. If you are not almost destitute, do not waste your time and money trying to get student loans discharged this way.
Taxes, too, are not easily discharged (surprised?). Although there are too many kinds of taxes for any sort of detailed discussion here, essentially, taxes are dischargeable if the following conditions are met:

1. A tax return for the year in question was filed on time, or if not, then it was filed at least two years before the bankruptcy.
2. The tax is over three years old.
3. The tax was assessed more than eight months before the bankruptcy was filed.
4. The debtor did not willfully evade the taxes.

For example, if you filed your 1993 taxes on time, but you still owe and have not received a new assessment recently, you could get those taxes discharged in a Chapter 7. If this situation does not apply to you, it still may be possible to get rid of the debt in a Chapter 13 bankruptcy.

Unsecured debts are not associated with any sort of collateral. Most of us have a lot of unsecured debt. The typical example is a credit card. When a credit card company issues you a credit card, it normally does not ask for any sort of collateral and so any debt you incur is considered unsecured debt.
Besides credit cards, the following are other types of unsecured debts:

• Medical bills
• Legal bills
• Utility bills
• Unsecured lines of credit
• Bounced checks

The advantageous thing about unsecured debts (where bankruptcy is concerned) is that these debts are completely wiped out by a Chapter 7 discharge. You could owe $75,000 to 10 different credit card companies, $3,000 in medical bills, and another $2,000 in other bills and have all of this debt discharged in your bankruptcy. In a Chapter 7, there is no limit as to how much unsecured debt you can have discharged (which is not true for a Chapter 13).
If you are having a difficult time figuring out whether a certain debt you have is secured or unsecured, the key question to ask yourself is this: Have you pledged any sort of collateral to secure the debt? If the answer is no, then the debt is unsecured. Most people have a lot of unsecured debts (credit cards mostly) and a couple of secured debts (car and home loans).
If you have a lot of unsecured debts, then filing Chapter 7 will help you a lot. Unsecured debts are the easiest type of debts to get discharged in a bankruptcy.

Again, a secured debt is one that is attached to some sort of collateral, such as a car loan. A bank will happily lend you money to buy a car as long as the car is used as collateral to secure the loan. If you fail to pay back the loan, the bank will repossess the car and sell it to pay back the loan. The car secures the loan.
There are many other sorts of secured debts:

• Mortgages. Any time you borrow money against your home, a mortgage is created. All mortgages are secured against the house.
• Judgment liens. The holder of a judgment can file a lien against the property of the one who owes the judgment. That is called a judgment lien. When the property is sold (usually a house or car), the lien is paid before the defendant receives any money.
• Big-ticket items bought at department stores. Creditors such as Sears and JC Penney’s, as well as most electronics stores, have a security agreement as part of their standard credit applications. That means that many of the expensive items you buy at these places are considered secured merchandise. If you bought a washer and dryer last year at Sears, that is a secured debt. Surprise!

The important thing to understand before filing bankruptcy is that secured debts are not automatically discharged in a bankruptcy. Although your personal liability for the debt will be discharged, the security interest survives the bankruptcy. Stay with us here; this is a very important (albeit very difficult) concept to grasp. We’ll try and make it simple. A secured creditor essentially has two methods of collection if the debt is not repaid. The first is to take back the property securing the debt by repossessing the car or foreclosing on the house. But what if the resale of that property repossessed is not enough to cover the debt? Then the lender can always sue you for the difference. Why? Because of the second method ensuring repayment: your personal liability under the contract. Jillian was sued for this very reason. She still owed $10,000 on her car when she was laid off from her job. She was unable to continue to make her car payments and thus her lender eventually repossessed her 1997 Honda Accord. The lender sold the car at a wholesale auction for $4,000 and then sued Jillian for the $6,000 balance she owed on her contract.
Had Jillian filed bankruptcy, she could not have been sued. Why? Because bankruptcy wipes out your personal liability for your debts. No liability means there is nothing to sue you over. Debts in bankruptcy are wiped out because the bankruptcy court issues an order stating that your personal liability for all debts has been discharged. Thus, for example, when a credit card debt is discharged, the credit card company can no longer come after you.
That is not true for secured creditors. In a Chapter 7, the security interest survives the bankruptcy even though your personal liability does not. What that means is that after a bankruptcy, a lender holding a security interest can still take the property back, but because your personal liability for the debt has been discharged, it cannot sue you for the difference. In Jillian’s case, had she filed bankruptcy, the entire $6,000 balance on her car loan would have been wiped out because she would no longer have had any personal liability for the debt.
Thus, when you file bankruptcy, you have a few different ways to handle secured debts. Two of these options relate to keeping the debt. The third is a way to get rid of the debt.

1. Reaffirm the debt. A reaffirmation is an agreement between you and the creditor stating that you want to keep your property, you agree to keep paying for it, and you agree to remain personally liable for the debt. Thus, you and the creditor enter into a new contract by signing the reaffirmation. For example, the company that finances your car may require that you sign a reaffirmation agreement if you want to keep the car. Because the whole idea in bankruptcy is to wipe out your personal liability, take this piece of advice: if possible, avoid reaffirmation agreements.
2. Redeem the debt. A redemption is also a new contract between you and the creditor. But whereas a reaffirmation is a contract to pay back the debt in monthly installments, a redemption is a contract to pay back the debt in a reduced lump sum. Sears might agree to let you keep that washer and dryer if you agree to pay $250 within 30 days. The best part about a redemption is that no new personal liability is being created. Accordingly, a redemption is better than a reaffirmation.
3. Surrender the property. Reaffirmation and redemption allow you to keep property but force you to keep debts. Because the idea here is to get rid of debts, you might want to consider the surrender option. With a surrender, you simply give the car back to the lender. Because your personal liability will be wiped out with the bankruptcy discharge, and because your giving back the property means the lender already has its collateral back, your responsibility for the debt will be completely wiped out by the discharge. Your personal liability is gone, and the property is returned, so the lender has no more tools to get at you.

The key point, then, when contemplating bankruptcy is that it is only your personal liability, not the security interest, that is discharged in your bankruptcy. If most of your debts are secured ones, Chapter 7 bankruptcy may not solve your problems, although the option to get out of a bad contract still makes it attractive to some people.