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Bankruptcy can help in a lot of ways. One less well-known benefit is to free up a copy of a college transcript to use for employment or future school applications, when you can’t afford to pay the college back right now. As of 2015, Americans owe more in student loan debt than credit cards. And a growing portion of that debt is in default. In some cases, your former college will be a servicer of those loans for a state lender. Or the college is owed money from some other account, like room and board or part of tuition. In those cases, the college will sometimes hold the transcript hostage to satisfaction of the debt or at least reasonable payment arrangements. You can’t blame the college for trying to do its part to support the financial system that keeps it alive. But when the former student files bankruptcy, the rules change. When the bankruptcy is filed, an automatic stay is typically created. The stay prevents a creditor from taking any action to collect the debt owed without the court’s permission. The automatic stay is a broad and powerful tool. Recently, a Bankruptcy Judge concluded that a college withholding a transcript to force payment of a debt was a violation of the stay and the only question was what damages would be ordered. The Judge concluded that it did not matter that the student loan owed to the college would not be wiped out in the bankruptcy. It mattered that the college continued to use this tool to “encourage” payment. And that’s enough to get the college into trouble. So keep this in mind. Getting your transcript freed up may not be a good enough reason to consider bankruptcy. As we say, don’t drive a nail with a sledgehammer. But if your debt load is a problem – which is likely if you have college loan problems – then it may be worth exploring how bankruptcy could benefit you.

Everyone with debts has at least one bill they’d like to pay, even if they can’t pay them all. So if you are already filing Chapter 13 bankruptcy and repaying some debt, why not treat some better than others? Sometimes that is allowed and sometimes not. It’s a complicated issue because, at the heart of the Chapter 13 plan, there is a pool of money – the payments you make – which has to be divided among creditors. If one is paid more, others get less typically. So favoring one means discriminating against others. The law requires some discrimination. For example if you aren’t paying everyone in full, then you typically have to provide for special “priority” claims to be paid in full. These are things the government has a special interest in – paying the trustee, child support, recent taxes and so on. In other cases, like your home and car, the law often allows payment of these “secured” debts in preferential ways over your other debt because you need those assets to keep going (and putting the money into the pot each month!). But what if the debt is one you can’t wipe out at the end of the typical case, like student loans? Can you pay those in full and “short change” the other debts you can wipe out? Sadly, there are only limited ways to do that because it gives you a “head start” not a “fresh start” at the end of your case, according to some. So arguing that your sister’s loan to you deserves special treatment because she’s been good to you probably won’t fly. But all is not lost. If paying the debt with special treatment is necessary to keep your case afloat or otherwise earning income, then it might be better received by the court. So some judges have allowed restitution and some business-related debts to be paid preferentially, recognizing that going to jail or having to close your business down is counterproductive to getting anyone paid well.

Corporations and LLC’s don’t get a discharge in a Chapter 7 bankruptcy, so what’s the point of filing? Ensuring that business assets go to pay payroll, benefits, and taxes is a compelling reason. Chapter 7 is a liquidation proceeding; the trustee appointed by the court will gather up and sell the corporation’s assets and pay creditors in the order of their priority under the Bankruptcy Code. It is the notion of priority, then, that may make it advantageous for a corporation going out of business to file bankruptcy. The Code’s priority scheme provides that claims with a higher priority are paid in full before claims with a lower priority get anything. The business owner probably has two personal concerns about what happens to the business assets: they want to receive payment in their role as employee, and to see that taxes for which the individual owners might be liable personally get paid from corporate assets to the extent possible. The owner’s concerns dovetail nicely with the priority scheme: unpaid wages incurred in the 180 days before filing or cessation of the business, whichever came first, have a priority for payment. Claims are capped at $10,000 per employee. Taxes owed to governmental agencies have a high priority for payment in bankruptcy. While the shareholder probably isn’t liable for the corporation’s income tax or property tax, the individual owners may well be liable for any unpaid trust fund taxes (employment taxes) or for unpaid sales tax. The owner shareholder has a real interest in payment of these taxes before payment of run of the mill business debts. So, one very good reason for a business corporation to file a Chapter 7 bankruptcy is to see that priority claims are paid, instead of the claim of a unsecured creditors without a priority who may file a proof of claim or a collection action.  

Even if you surrender your home in bankruptcy, you are still liable for your homeowner’s or condominium owner’s association dues that become due after the date of filing. As a general rule, all the debt that you owe on the day you file your bankruptcy is discharged, including past-due HOA and COA dues. However, because you remain the deed-title owner of your real property until your lender takes the property back, you owe current dues and assessments going forward.  But this doesn’t answer the question, “Should I pay?” Well, the answer depends on your plan, but one thing is for sure. You should pay your HO and COA dues if you continue to live in the home or if you continue to rent out your rental property.

STUDENT LOANS: Several factors should be considered regarding student loans. First, student loans, including parent PLUS loans, are generally not dischargeable in bankruptcy without a showing of undue hardship. The burden to prove undue hardship is very great. Second, if you are in financial difficulty, you may not have a high enough credit score to get a parent loan to help your child pay for college. So if you are having debt problems when your children are still several years away from going to college, you should consider filing bankruptcy to wipe out your debts, so that you have more money available to help out your college bound kids, and your credit score can recover by the time you have to get loans to help your kids pay for college. CO-OWNERSHIP AND COSIGNED LOANS: Many parents want to try to help out by setting up joint bank accounts with their minor children. If you have done this, and then file for bankruptcy, you may find that your bankruptcy trustee attempts to seize the bank account and use it to pay towards your creditors. There are ways to set up accounts to prevent this from happening. Similarly, if you cosign a loan for your child to help them out, if they ever get into financial difficulty and have to file bankruptcy, your credit score will be negatively affected and you will be hounded to pay the bill.

STRESS: Being deep in debt, receiving harassing calls from creditors, being threatened with garnishment, repossessions and foreclosure will often cause you and your spouse to experience overwhelming stress and anxiety. Your children, even young ones, also feel the stress. It affects their school work and their emotional and physical health Uncontrolled debt often leads to marital conflict and divorce. The kids become the biggest losers. Filing for bankruptcy will usually relieve the debt burdens and the stress. This will often save a marriage and restore emotional as well as financial security for the entire family.   PROVIDING FOR YOUR FAMILY: When you’re paying out all of your income to try to cover your minimum debt payments, you often have difficulty paying for even life’s basic necessities. The little extras that mean so much to children, such as music lessons, dance lessons, tutoring, summer camp and regular health exams, are often neglected. After filing for bankruptcy, your family budget can afford to give your children much of the nourishment they need to grow into healthy and well-adjusted adults.   EDUCATIONAL EXPENSES: When you are having financial difficulty, it is often difficult to properly afford your children’s educational expenses. In the 2005 changes to the bankruptcy law Congress specifically allowed parents to include in their allowable expenses some educational costs for their children under 18 years old. For older children, however, Congress felt that paying college tuition at the expense of unsecured creditors should not be allowed.

I’ll admit that most of my clients never wanted to come see me. Most of my clients are embarrassed by the fact that they even have to ask about filing bankruptcy. Struggling with debt is hard and it can literally suck the life right out of you. For most, it seems like the end of the world. Generally, when I speak with folks, the stories revolve around the same themes. They have tried their best to manage their finances but through one thing or another, they just can no longer juggle the debts. They are constantly badgered by telephone calls demanding payment immediately. They are tired of going to the mailbox to get another batch of letters with red print shouting “pay now!” They are tired of a sheriff’s deputy showing up at their home to serve yet another lawsuit against them. Yet, once a bankruptcy case is filed, these problems go away. The crushing weight of debt is lifted off your back. Because of the automatic stay, you will no longer receive collection calls or visits from the sheriff. But, once your case is over and your debts discharged, you will find a new financial future. To be sure, as far as credit goes, it may be initially more difficult but credit will become available. The simple fact is that bankruptcy is not the end of the world. It is a new beginning-a fresh start. Just as the night is darkest before the sunrise, so it is with the bankruptcy world. Once you decide that you are tired of laboring against insurmountable debt and take the action to rid yourself of that debt, the sun starts to peek through the horizon.

A Zombie Deed is a piece of real estate that you thought was gone, foreclosed, lost forever and no longer yours, but to your dismay, you find that you still own the property long after you thought it was gone. For example, you know you have missed mortgage payments and you know that your mortgage lender would not give you the mortgage modification that you thought would help you save your home. Foreclosure has started and you have moved from the home to beat the court marshals from forcibly moving you out. You may have also filed bankruptcy to discharge the obligation of the mortgage debt and avoid the possibility of any deficiency judgment making you responsible for the difference between the value of the home and the debt. But none of this helps you until the title to the house leaves your name and goes to the bank. That means that the foreclosure action has completed and the property has been auctioned or that a Surrender of Real Estate in bankruptcy has been recorded on the land records where the property is located. There have been a number of cases where the bank had changed direction after starting a foreclosure and stopped just short of completion. The homeowners never find out about it because they have left the property in anticipation of the foreclosure. But the bank has decided that it has too many houses in inventory, or that the home isn’t worth the cost of pursuing it, or that there are title problems caused by improper paperwork. With over 5 million foreclosures in the last three years, these things happen. Or in other cases, the homeowners have filed bankruptcy and thought that the bankruptcy discharged somehow. While bankruptcy does discharge the debt, it does not remove the lien from the property or act to transfer title. The consequences of a Zombie Deed means that you remain responsible for the priority taxes and homeowner association charges. You remain responsible for the condition of the property which may cause a nuisance for trash, overgrown vegetation, or vandalism. Worse yet, if someone gets hurt on that property, you could be sued for the injuries; all when you thought it was long gone. In short, do not assume you have taken care of everything by walking away from your home.

I see people make many mistakes when filing for bankruptcy. It could be in their paperwork or it could be failing to plan appropriately. Here are the top two things that people do wrong when filing for bankruptcy protection. Using Your IRA, 401K or other Qualified Retirement Plan. Bankruptcy exemptions protect your IRA, Inherited IRA, 401K, etc. from creditor’s claims. Why then would you use that money to pay unsecured creditors. In a nutshell, these assets are protected from creditor’s claim either inside or outside of bankruptcy. So, if a debt collector tells you that your 401K will be garnished, he is lying. Also, if your kids are hitting you up for a loan, and your only source for the funds are your retirement plan, it may hurt, but you need to tell them no. Preferential Transfers (Paying back friends or relatives before filing) The bankruptcy code was designed to protect both debtors and creditors. In this way, the debtor will be protected from their creditors and creditors can be assured that actions taken by the debtor will be scrutinized to prevent debtors from liquidating all their assets prior to filing. Well, a preferential transfer to a friend or family member prior to filing for bankruptcy protection is a big no-no. It’s not that we don’t want Mom and Dad to be repaid, it’s just that we don’t want them to get paid to the detriment of the other creditors. Here, the bankruptcy can and will sue the friend and family member to get the money back into your bankruptcy estate.