Should I file for bankruptcy in Virginia?
You’ve probably asked yourself that question if you have trouble making ends meet each month, if the interest that piles up on your credit card bills is more than the minimum payment you’re making, or if your plan to put a little money away each paycheck keeps getting postponed. Even though the folks on the evening news say the economy is getting better, you may still feel like there’s no way out. Bankruptcy could be the solution for you.
Bankruptcy is an effective option that provides debtors with a way to gain control of their lives and obtain a “fresh start” with respect to their debts. Bankruptcy is not the best option for everyone and does not fit every situation. Before considering bankruptcy, it is important to review (1) whether or not it is necessary, and (2) whether it will provide you with the relief you seek. In the paragraphs that follow, I list several considerations that should be taken into account prior to making the decision whether to file for bankruptcy.
Step 1: Evaluate your situation. List your income, debts, and expenses. One important thing to keep in mind is that most of us don’t do a great job of keeping track of our expenses. If you end up filing Bankruptcy, though, an accurate tally of your expenses could save you lots of money each month, or mean the difference between filing for Chapter 7 Bankruptcy versus Chapter 13 Bankruptcy. So it might be useful to track every penny you spend each week in a small notepad, including the smallest expenses like a candy bar or a cup of coffee from Starbucks.
Once you have all of this information, analyze whether your expenses exceed your income. If the answer is “yes,” examine whether there are adjustments you can make to live within your means. If this is not possible, move on to Step 2.
Step 2: Examine your debts. What are the debts that are giving you the most trouble? If you have mostly credit card debt, you might be able to lower the amount you owe by negotiating with the creditor. However, negotiation has its downsides, including losing future use of the card, possible negative credit reporting, alerting your creditor to your difficulties, etc.
If you have a house payment that you cannot afford, you may have options here as well. It may be possible to negotiate with your lender for a lower monthly payment. Of course, most such loan modifications really only mean turning short term savings into long term costs. In other words, you may just be postponing the inevitable. One of the benefits of bankruptcy is that you’re not just moving today’s headache to tomorrow, you’re finding a permanent solution.
Another option in negotiating with your lender is through a short sale. Recently, lenders have become more responsive to borrower requests to sell homes at an amount below what is owed on the loan. Lenders are now more likely to agree to forgive that portion of the debt that is not covered by the proceeds from the closing. It is important that borrowers who go through the short sale receive assurance from the lender that this debt will be forgiven. In prior years, the debt that was forgiven was subject to tax as ordinary income. That has changed with the passing of the Mortgage Forgiveness Debt Relief Act of 2007. Now many individuals who go through a short sale of their principal residence are not required to pay taxes on the debt that is forgiven. This act is good for transactions taking place between 2007 and 2012. See http://www.irs.gov/individuals/article/0,,id=179414,00.html for more details. Keep in mind that not every person will qualify under the act. It is important to seek counsel from a tax attorney prior to completing a short sale to determine whether the benefit you expect is what you will actually receive. If you qualify under the Mortgage Forgiveness Debt Relief Act, a short sale may be your best option. It is important to note that short sales take time – sometimes months – to complete. If you are considering this option, it is important to begin the process as soon as possible. Waiting until you receive a notice that your home is going to be foreclosed is often too late. Many lenders will not postpone a foreclosure sale to see if a short sale will go through.
Step 3: Consider whether you can liquidate any of your savings to repay debts. This is a possible solution, but one that should be considered very carefully. It is this author’s opinion that it is a bad idea to liquidate IRAs, 401(k)s or other retirement accounts to pay off debts. These assets are often exempt from creditors. This means that if you file for bankruptcy protection, the creditors cannot take or force you to liquidate the accounts to repay your loans. Also, if you liquidate a retirement account you can be subject to penalties and extra income that greatly reduces any financial benefit from such an action.
If you have investment accounts other than a 401(k) or retirement account, make sure you examine whether liquidating and paying down debt will make a difference or if it is just postponing a future bankruptcy. It is important to keep some kind of “safety net” in the event of unexpected expenses.
Step 4: After reviewing these steps, if you are still unable to pay your monthly bills, bankruptcy may be your best option. If you’ve reached this step and would like to talk to one of the experienced bankruptcy attorneys at Solan | Alzamora to get more information about the process, please give us a call at 703-359-0088 or send us an email to set up an appointment.