When to File for Bankruptcy, How to Recognize the Warning Signs, and General Bankruptcy Advice

When to File for Bankruptcy, How to Recognize the Warning Signs, and General Bankruptcy Advice

When to file for bankruptcy is a question many people have asked themselves. We all make financial mistakes in life, most of them without serious long-term consequences. If you could go back and fix one critical mistake you made before you made it, wouldn’t you want to do that? Of course you would. Unfortunately, many of us do not recognize the signs of impending financial trouble and we take actions that threaten our financial future. Action: You begin to pay your regular monthly bills (mortgage, rent, utilities, etc.) with cash advances, or you are transferring funds between credit cards to keep the balances from exceeding the limit. Result: You are fooling yourself into thinking you can pay these high-interest debts at a later date. In fact, you are not really paying down the debt at all. This is like a Ponzi scheme where you are both the perpetrator and the victim! Action: You lower your payroll withholding to increase your take-home pay, and in the process incur substantial tax debt you cannot pay on April 15. Result: You are buying yourself some temporary relief in your monthly budget, but creating a much more serious problem. Taxes you cannot pay on April 15 incur significant interest and penalties. Filing an extension for your taxes does not prevent the interest and penalties from accruing. Action: You use an equity line-of-credit on your home to pay off high-interest credit card accounts. This converts unsecured debt into debt secured by the equity in your home. This can create a debt you may end up paying for decades, and even jeopardize your home if you cannot maintain the payments. Action: You borrow money from family or friends to “tide you over”. Result: My father always told me nothing comes between people like an unpaid debt. Do you want to ruin a friendship or poison a relationship over money? It’s not worth it. Action: You take money from an IRA or 401(k) retirement plan to pay bills. In my  professional opinion, this is the number one mistake people make. Result: This not only generates a large tax liability, but exhausts funds you will need for retirement, and that are already protected from your creditors. Now, while all these outcomes are undesirable, the negative effect of these mistakes can be magnified if you ultimately have to seek bankruptcy protection from your creditors. Here’s why: In some cases cash advances cannot be discharged in bankruptcy, and in extreme situations debts incurred at a time when you had the inability to repay them may even be non-dischargeable. This is known as a “credit card bust-out”. Back taxes are generally not dischargeable in Chapter 7, although they can be repaid through Chapter 13, often with no additional interest or penalties. When you pay off unsecured debt with your home equity, you transform an unsecured debt, which can usually be discharged in bankruptcy, to a secured debt which must be repaid to protect your home. Not a good trade. When you borrow money from friends or family, you naturally feel an obligation to repay those people. If you do, and subsequently file bankruptcy, those payments can be recovered from those you love for the benefit of your creditors. How will that make them feel? Many clients I see have completely exhausted their retirement accounts to service their debt, and end up filing...

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U.S. Supreme Court strikes down mortgage lien strips in Chapter 7 cases

On June 1, 2015, in a blow to homeowner’s rights, by a 9-0 decision in Bank of America v. Caulkett, the United States Supreme Court struck down a Chapter 7 debtor’s right to “strip”, or void, a junior mortgage lien on a home; even if there is no equity in the home to support the second or third mortgage lien. Previously, if a debtor in a Chapter 7 bankruptcy proceeding owned real property which appraised for less than the balance on the first mortgage, the homeowner could seek a court order allowing release of the lien securing a second or lower priority mortgage loan. While such relief is, at least for the time being, still available to debtors in Chapter 13 proceedings, debtors in Chapter 7 now face the difficult choice of keeping an underwater property, or surrendering it back to the...

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Tackling Tax Problems in Bankruptcy

In my bankruptcy practice I regularly see people who owe taxes dating back years or even decades. Sometimes they avoid facing the problem simply by ceasing to file yearly tax returns. Ignoring the problem, of course, only makes it more difficult to manage. Here are three (3) steps I follow to tackle even the most difficult tax problems. File the returns. If necessary, help the client file original tax returns for the tax years at issue. An independent tax professional can ensure accuracy and objectivity. I have found that clients who prepare their own returns can be their own worst enemy. Understand how my client got into this situation. Sometimes it is under-withholding from payroll, or failure to remit estimated taxes. We address the underlying issue so the problem does not repeat itself. Devise a strategy to handle the problem. Obtain an account transcript from the IRS for each tax year in question. As of January of 2014 you no longer need a Power of Attorney to obtain tax transcripts. The IRS now permits individuals to obtain transcripts instantly and free at http://www.irs.gov/Individuals/Get-Transcript. Once an account is created there are a number of steps to verify identity and prevent misuse. This means that clients must either access the site themselves, or be present while I enroll in the service with their information. The transcripts reflect the critical dates to which the tolling and discharge rules apply. I use a tool found at www.TaxDischargeDeterminator.com for analyzing the various codes and dates on the transcripts. Once we have reviewed all the information we evaluate the client’s options for dischargeability of the taxes owed. Option 1: Wait to file Chapter 7 or Chapter 13 or to let the 10-year statute of limitations expire. Let tax debts age, either beyond the 10-year statute of limitation (subject to tolling) or until they meet the requirements to be discharged (subject also to tolling). In either event, we can work with IRS’ collection division to work out a minimal monthly installment agreement for the tax debts until either the time is right to file BK or the statute has expired. Option 2: File a bankruptcy immediately or in the near future. If we choose to file chapter 13, my client repays the priority or secured tax debt and will discharge unsecured taxes. Priority taxes and penalties may be paid over up to sixty (60) months in Chapter 13, generally without post-petition penalties and interest (if not fully secured), or with interest (if fully secured) or where a co-debtor is also liable. The “older” (non-priority) taxes will be discharged the same as other general unsecured debts. In Chapter 7, the priority taxes will survive but the non-priority taxes will be discharged. Finally, remember that for purposes of calculating debt limits in Chapter 13 tax debts are NOT consumer debts. Roderick Martin has more than two decades experience in Georgia bankruptcy courts. For more information, visit his office at www.cutdebt.com, or call 770.427.5853. For assistance with tax problems “nationwide”, contact Florida tax and bankruptcy attorney Larry Heinkel at either Larry@TaxProblemSolver.com or...

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Hope has a Name

“Start to finish, one of the best professionals I have ever worked with. Honest to the core and he does what he says. I got the sense that Rod really does care about the situation his clients are in and works to make a difficult time as pleasant as possible. If ever you need a first rate, professional advocate that will go the extra mile for you and your family, there is only one place you should turn. I consider Rod a trusted friend and I never thought I would find that in an attorney. Hope has a name and it’s Roderick...

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Exceptional! They made the whole process easy.

“Mr. Martin and his whole staff were exceptional, in every aspect of this process. They were very knowledgeable , very understanding and they handle everything for me. I was very comfortable with all of the staff. They made the whole process very easy for me. Thank You All very Much!!!! And Jackie Thank You for keeping me calm and relaxed”

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