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Bankruptcy Reform – What You Must Know
There are two main types of bankruptcy plans for consumers in the U.S. The first is a Chapter 7 filing, known as “liquidation,” which is where you get to write off debts that you can’t pay. The second form of bankruptcy for individuals is a Chapter 13 filing, which is called a “wage-earner repayment plan.” Under Chapter 13, you pay back, some, but not all, of your debts, based on what you can afford.
In October 2005, a sweeping overhaul to the bankruptcy system in America occurred. Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act, in a purported effort to stop people from walking away from their debts when they had the ability to repay. The bottom line is that you can’t simply wipe out your debts in bankruptcy court the way you once could. To be eligible for a Chapter 7 filing, not only do you have to go through credit counseling within 180 days of your filing, you must also show that you don’t have the ability to pay back your creditors.
You must submit a form showing your monthly income and expenses. Under the new law, if you want to file for Chapter 7 bankruptcy protection, you must now pass an income test and a “means” test. The income test compares your income to the median income in your state, based on the number of people in your household. If your income exceeds your state median income, the bankruptcy trustee or any creditor can bring a motion to dismiss your bankruptcy filing on the grounds that is an “abuse” of the bankruptcy system. The “means” test involved in a Chapter 7 filing examines whether or not you can afford to pay at least $100 a month to your creditors over the course of five years (a total of $6,000). If you are deemed capable of repaying this amount, you’ll be shifted from Chapter 7 into Chapter 13 for five year’s repayment.
Restoring Your Credit after Bankruptcy
If you’ve been through a bankruptcy, you probably feel like you’ve been through the ringer, personally, emotionally and financially. But don’t despair. You can regain your financial footing little by little. Here are three ways to re-build your credit after bankruptcy.
1. Avoid sub-prime credit cards
These cards have high interest rates and ridiculously high fees. It’s not uncommon to find sub-prime cards, at 20% interest, that give you a $500 credit limit, but then impose $200 or more in miscellaneous fees. So right off the bat, you’re in debt, and the credit limit you have is far lower than you expected.
2. Do business with a Credit Union
Credit unions’ mission is to serve their client’s best interests. They’re not out to gouge you and make a king’s ransom on your economic misfortune or your financial naivety. In fact, they’re very good at providing financial literacy and education, if necessary. So if you need a loan or credit card after a bankruptcy, try a credit union. Find one via the Credit Union National Association at www.cuna.org.
2. Get a Secured Credit Card
Don’t stress yourself out if you can’t get a regular credit card after your bankruptcy has been discharged. Instead, start small. Get a secured card, where you have to put up cash into an account. The amount you put up, let’s say it’s $500, are typically your credit limit. Just pay your bills on time every month and you will slowly but surely establish a track record of someone who is credit-worthy. Soon you’ll find that other, better credit offers come your way.
Delinquent Taxes: What To Do about Them
If you owe back taxes to the government, a little-known measure of recourse is to propose an “Offer in Compromise” to settle your delinquent tax bill. Most taxing authorities will accept a lump sum or a payment plan for less than the amount you owe, to settle old taxes. Some of the entities that will consider an “Offer in Compromise” are the Internal Revenue Service, the Franchise Tax Board, and the State Board of Equalization. They’ll even be willing to negotiate to lower any late fees and interest charges that have accumulated, along with self-employment or Medicare taxes due.
If you’ve lost your job, retired, got sick, had a business that went bust, or have filed bankruptcy, you have pretty good odds of getting a tax authority to accept your “Offer in Compromise” – or at least be amenable to working out some mutually acceptable deal with you. The reason is that the Offer in Compromise program was designed to collect back taxes that the government might otherwise never collect. In some cases, people who owe tax debts have been able to pay anywhere from 10 cents to 50 cents on the dollar when they work out an “Offer in Compromise” as a settlement.
If you’d like to learn more about this topic, read up on the subject at www.nolo.com.
