Debt Stress Makes Us Sick!

Are you in financial distress?  Is it also causing you health problems? 

A 2008 health poll by the Associated Press and AOL found that people in financial distress are more likely to report health problems, including “serious” health problems like ulcers, severe depression, and even heart attacks.  Individuals reported the following health problems related to debt stress during the poll: 

• 44 percent had migraines or other headaches, compared with 15 percent of those with low levels of debt stress;
• 29 percent suffered severe anxiety, compared with 4 percent;
• 27 percent had ulcers or digestive tract problems, compared with 8 percent;
• 23 percent had severe depression, compared with 4 percent; and
• 6 percent reported heart attacks, twice the rate of those with low debt stress; 

More than half, 51 percent, reported muscle tension and/or lower back pain compared with 31 percent of those with low levels of debt stress.  Those individuals with high debt-related stress also reported trouble concentrating and sleeping. 

This information is neither new nor surprising. In 2005 researchers at three major universities surveyed three thousand people regarding the negative effect of financial stress and found that the top three health effects of financial distress are stress, anxiety, and depression.  Anyone who works with individuals in debt on a regular basis sees the negative physical effects that debt stress can have. 

Financial distress can negatively impact many areas of your life including your health.  Take charge of negative financial stress today and do something to improve the quality of your life.  An experienced bankruptcy attorney can evaluate your situation and give you legal advice that can lead to a fresh financial start.

When Your Town Goes Bust

Lately municipal bankruptcy has been the subject of many news features as economic troubles press cities to consider their legal options.  San Diego and Los Angeles are two major cities that are reportedly considering federal bankruptcy protection.  

While federal bankruptcy protection has been available to U.S. cities since the 1930’s, only a few hundred have actually filed.  Chapter 9 of the Bankruptcy Code provides a financially distressed municipality the opportunity to reorganize its debts under federal protection.  A “municipality” as defined in the Bankruptcy Code includes cities, counties, and special districts.  This definition does not include states.

 A Chapter 9 bankruptcy can only be commenced after the governing body specifically authorizes the filing.  Twenty-six U.S. states have prohibited their municipalities from filing bankruptcy: Alaska, Delaware, Georgia, Hawaii, Illinois, Indiana, Iowa, Kansas, Maine, Maryland, Massachusetts, Mississippi, Nevada, New Hampshire, New Mexico, North Dakota, Oregon, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Virginia, West Virginia, Wisconsin, and Wyoming.  

Once filed the federal bankruptcy law’s automatic stay provision enjoins creditors from taking any collection action against the municipality.  The automatic stay provides an opportunity for the municipality to raise new revenues, renegotiate contracts, or restructure its debt without pressure from creditors.  Chapter 9 is tricky business for the bankruptcy court because the Tenth Amendment to the U.S. Constitution and section 904 of the Bankruptcy Code prevents a federal bankruptcy court from interfering with the city’s political or governmental powers.  The bankruptcy judge is largely a facilitator of the restructuring process. 

The essence of a Chapter 9 bankruptcy is that it gives the municipality an opportunity to reorganize and restructure its debts through an agreement with its creditors called a “Plan of Adjustment.”  If a creditor cannot agree with the municipality, Chapter 9 allows the bankruptcy court to force the municipality’s Plan of Adjustment on the non-consenting creditor.  The bankrupt municipality is also empowered to accept or reject contracts and leases through the Plan of Adjustment. 

Chapter 9 municipal bankruptcy is a very rare and special bankruptcy case.  The stigma and complexity of Chapter 9 makes it a last option for U.S. municipalities.  However, if the debt problem is serious and substantial enough, the federal bankruptcy laws can protect a city of millions and give it a chance for a fresh start, just like it can protect an individual or family in financial distress.

Popular Half-Truths About Bankruptcy

The internet is full of half-truths that feed the speculative fears of the evils of bankruptcy.  Most of this information comes from sources outside the bankruptcy process, like debt counselors, or financial planners who often are selling alternatives to bankruptcy.  The most commonly stated “reasons to avoid bankruptcy” are: 

1.  It will ruin your credit

2.  You will lose property

3.  Not all debts are eliminated

4.  You may be subject to repossession or foreclosure

5.  You may not be able to get a job

6.  You cannot get credit 

Those are serious allegations, so let’s look at them. 

First, bankruptcy is typically a last-resort option, so the average bankruptcy filer’s credit is already ruined.  The bankruptcy wipes the slate clean and stops future adverse reporting for past debts.  In other words, if you are 120 days late on a credit card, your credit report will continue to show that you are 120 days late month after month.  A bankruptcy stops that reporting from the day you file your case so your credit can improve. 

Second, it is exceedingly rare that a debtor loses property unexpectedly.  When it happens it is generally the result of poor communication with the client.  In all other cases the debtor will only lose property that is voluntarily surrendered, meaning the debtor has made a financial decision to not keep a house or car. 

Third, there are actually very few debts that cannot be eliminated.  The most common types are child support, some IRS debts, and student loans.  However, even these non-dischargeable debts can be managed within the bankruptcy. 

Fourth, the bankruptcy automatic stay will stop any foreclosure or repossession.  If the creditor wants to take possession of the property after the bankruptcy filing, it must petition the bankruptcy court for permission. 

Fifth, it is against the federal law to discriminate against a job applicant solely on the basis of filing a bankruptcy. 

Sixth, many bankruptcy debtors have rebuild their financial lives within a year or two of the bankruptcy filing.  It takes time and effort to rebuild, but there are no past debts to drag you down! 

Don’t get your bankruptcy information from internet sources that use scare tactics and half-truths.  Talk to an experienced bankruptcy attorney and get the facts.  Find out how bankruptcy can solve your debt problems today.

Bankruptcy and Court Ordered Marital Obligations

Bankruptcy can have a serious impact on an ex-spouse.  That is because a family court will often assign payment of a joint debt to one party only.  In many cases the obligated party lacks the resources to pay the debt in full or to refinance it.  Therefore the ex-spouse remains legally obligated to the creditor.  This is often the case with automobile debt and credit cards with large balances. 

A court-ordered debt to a former spouse is given special consideration by the bankruptcy laws.  In a Chapter 7 bankruptcy case these debts are generally non-dischargeable.  An order directing payment to a third party (e.g. a mortgage payment) is also generally non-dischargeable if the payment is effectively a form of spousal support.  Even an obligation to pay your ex-spouse’s attorney fees in connection with the divorce proceeding is generally non-dischargeable. 

While past due support obligations are also non-dischargeable debts in a Chapter 13 bankruptcy, debts not in the nature of support (e.g. a division of marital property) can be discharged.  The ex-spouse must contest the debtor’s characterization of the obligation and convince the bankruptcy court that the debt is a support obligation in order to save it from discharge.  If the court determines the debt is a support obligation, it must be paid by the debtor through the Chapter 13 bankruptcy. 

Whether the family court-ordered obligation arises from a property division or from a support obligation, the ex-spouse will likely suffer harm from the debtor’s bankruptcy filing.  The sad truth is that any non-payment of a joint monthly obligation will harm the ex-spouse’s credit report and there is little that can be done to remedy it.  If the debt is discharged through the debtor’s Chapter 13 bankruptcy, the creditor may elect to pursue the ex-spouse and there will be no recourse against the debtor. 

Regardless whether you or your ex-spouse owes a court-ordered joint obligation, if bankruptcy is in the future, you should seek professional help.  It is important to evaluate the impact the bankruptcy will have on the debt and determine a course of action that will best protect you.  Timing can be very critical, so consult with an experienced bankruptcy attorney early.

Discharging Credit Card Balances

As a general rule, credit card debt is among the easiest type of debt to discharge during a Chapter 7 or Chapter 13 Bankruptcy.  However, in some cases credit card companies will dispute the discharge of credit card debt by filing an adversarial proceeding against the debtor in the bankruptcy court.  The creditor may claim that all or a portion of the debt is non-dischargeable.  Debts that are declared non-dischargeable may have to be paid during the bankruptcy, or may survive the bankruptcy altogether. 

A credit card company may claim that the debtor committed fraud in obtaining or using the credit card.  If the creditor can prove that the card was obtained under false pretenses (i.e. that the application was false), the credit card debt may be declared non-dischargeable because of the fraud. 

A credit card company may also claim that charges were placed on the credit card when the debtor had no intention to repay the debt.  Additionally, a presumption of fraud arises where luxury goods and services are purchased or cash advances are taken shortly before the filing of a bankruptcy case.  

Credit card companies are entitled to notice of a debtor’s bankruptcy case, and these companies monitor bankruptcy cases for signs of fraud.  Certain actions send up a red flag including:

• Filing bankruptcy on a new card;
• Taking a cash advance prior to filing;
• Charges for travel or vacation;
• A debt transfer from one card to another;
• Credit charges while unemployed; and
• Charges made after consulting a bankruptcy attorney.

 The more time between the credit card activity and the bankruptcy filing, the less likely the charge will cause a discharge dispute.  The best advice is: if you are considering bankruptcy, stop using your credit cards.  Consult with your bankruptcy attorney regarding the best way to discharge your credit card debt.

Can I Have Money in a Bank Account When I File Bankruptcy?

The two most common types of consumer bankruptcies are Chapter 7 and Chapter 13.  In a Chapter 7 all of the debtor’s property is placed into an estate which is controlled by the bankruptcy trustee.  While no property physically changes hands (at least not at the beginning of the case), the trustee and bankruptcy court have broad legal power over your property.  If you have money in a bank account on the day you file, your bank account and money are assets of the bankruptcy estate.  You are no longer free to transfer funds or assets as they now belong to the bankruptcy estate. 

Take for example that you have $5,000 sitting in your checking account on the day you file bankruptcy.  That money is property of the Chapter 7 bankruptcy estate and is no longer yours to control or use.  If you take the $5,000 out of the bank the day after filing to pay your mortgage payment and other bills, the Chapter 7 trustee can seek to recover those funds, either from you or from the payee. 

During a Chapter 13 bankruptcy the debtor retains possession and control over his or her property, and is free to use any funds in the debtor’s bank account.  An accounting is performed and the debtor’s property is classified as either exempt or non-exempt.  Non-exempt property is not taken from the debtor (as is often the case in a Chapter 7), but the Chapter 13 debtor is required to pay unsecured creditors a sum equal to the amount of non-exempt equity.  For instance, if there is $5,000 in the debtor’s bank account, the debtor may only be able to exempt a portion of the entire sum.  The non-exempt portion must be paid to the creditors through the debtor’s Chapter 13 plan (over three to five years). 

Cash in a bank account can be a problematic issue for a debtor.  Avoiding these problems is the joint responsibility of the debtor and the debtor’s bankruptcy attorney.  Timing is critical to minimizing your financial exposure.  An experienced bankruptcy attorney can help you maximize the benefits of the bankruptcy laws and navigate around any pitfalls.