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Medical Cost Increases Are Shrinking . . . Really?

24 May

Health care costs have been rising more slowly. Although this is partly tied to the poor economy, some of the change appears to be more long lasting.

 

Without a doubt, the most important question for the federal budget: how fast will health care spending grow?

The news of the last few years has been surprisingly good. Contrary to earlier forecasts, the increases in U.S. health care spending have been meaningfully curtailed. But the critical question is whether this recent slowdown in medical cost increases will continue as the economy improves. If the recent trend were to continue, the impact on the U.S. economy and on government and household finances could be hugely beneficial.

Health Care Spending Has Increased Much Less Than Projected

From 2009 through 2011, total health spending grew at annual rate of just 3.9% per year, the lowest in the last five decades. That low pace seems to have continued in 2012 and into 2013. In contrast, between 2000 and 2007, the annual spending growth ranged between 6.2 and 9.7%.

Is Slower Growth the New Normal, or an Aberration Tied to the Poor Economy?

Economists largely agree that the deep recession and sluggish recovery are the main reasons for slowing growth in health care spending. Millions lost their jobs, and often their insurance coverage. Other struggling families had trouble paying their co-pays or deductibles and so were less likely to go to a doctor.

But the reductions in health care costs have been deeper than expected, indicating that there was more going on than just the bad economy. Now there’s lots of new data showing changes taking hold in the the health care system related to other factors:

  • The Affordable Care Act’s reduced reimbursement rates are forcing the medical establishment to bring down costs.
  • Has been less development of big, breakthrough technologies to drive up spending, after decades of saturation with new product and services.  
  • Administrative expenses appear to finally be starting to go down. Billing and collection costs are likely to fall with medical records increasingly computerized and with standard operating rules part of the Affordable Care Act (ACA) and state laws.
  • Efficiency efforts are taking hold. Examples include declining rates of hospital-acquired infections, and a new emphasis on reducing readmissions.
  • Rising out-of-pocket payments for patient is playing a major role. The portion of employer-sponsored medical insurance plans which require paying a deductible has sharply risen in the last several years, and the deductible amounts have also been rising. Patients who have to pay a larger share of their own health costs generally use less medical services.

Conclusion

As the economy continues to slowly improve, health care costs will likely climb somewhat as well. But there are other new important factors that will continue to tamp down cost increases.

Recent Articles for Further Reading

”Assessing the Effects of the Economy on the Recent Slowdown in Health Spending,” Kaiser Family Foundation, April 22, 2013.

“Health Care Cost Containment Strategies Used In Four Other High-Income Countries Hold Lessons for the United States,” Health Affairs, April 2013.

“If Slow Rate Of Health Care Spending Growth Persists, Projections May Be Off By $770 Billion,” Health Affairs, May 2013.

“The Forecast Slowdown in Medicare Spending: Is More Coming?,” Report@JAMA (Journal of the American Medical Association), February 21, 2013.

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The Federal Budget Deficit is Shrinking, and Fast

22 May

This year’s deficit is now expected to be about 59% as much as last year’s, and the next five years’ deficits even less.  

 

After a string of several years of budget deficits larger than 1 trillion dollars per year, the current fiscal year’s U.S. budget deficit is now expected to be about $642 billion. (This fiscal year ends on September 30, 2013.) Then during the subsequent five years—2014 through 2018—the deficit is expected to be even less than this year.

The Apples-to-Apples Comparison

Deficit amounts are often expressed in percentage of GDP—the gross domestic product. It seems sensible to base the size of a nation’s government’s debt on the size of that nation’s economy.

By this measure, the deficit will be falling from more than 10% of GDP in 2009 to about 4% this fiscal year. And it’s projected to go down to about 2.1% of GDP in 2015. For the sake of long-term comparison, the average deficit over the last 40 years was 3.1% of GDP.  

Why is the Deficit Shrinking, and Faster than Expected?

The deficit projection is about $200 billion less than was projected just a few months ago. The decrease is not so much from the impact of the “sequester” political stalemate (which was already calculated into the previous projections), but instead for two other reasons: tax revenues from both individuals and businesses are increasing faster because of the improving economy, and the mortgage financing giants Fannie Mae and Freddie Mac have recently returned to profitability and are starting to repay the bailout money that taxpayers invested in them.

The Congressional Budget Office

To gauge the reliability of this information, it’s worth considering the reliability of its source.

This all comes from a report on updated budget projections by the Congressional Budget Office (CBO) released earlier this month.  This report is mandated by law. The CBO’s mandate is to be “strictly nonpartisan,” conducting “objective, impartial analysis,” without making policy recommendations. 

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What Makes Chapter 13 So Special for Your Home and Your Vehicle?

20 May

Chapter 13 is bristling with tools to help you manage your mortgage and vehicle loan.

Chapter 7 vs. Chapter 13 in General

Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” give you two very different ways of attacking your debts. Grossly oversimplifying, Chapter 7 cleans off your slate of simple debts so that you can have a fresh start within a few months. Chapter 13 shoves your debts around in a way that you can sensibly deal with your more complicated debts, so that you can have a fresh start after three to five years. Debts on your home and vehicle can be among these “more complicated debts” better handled under Chapter 13, especially if you have fallen behind and are at risk of foreclosure or repossession.

Saving Your Home from Foreclosure

  • Chapter 13 stops a foreclosure, and then gives you 3 to 5 years to pay any mortgage arrearage. That length of time significantly eases the burden of catching up.
  • Although that arrearage is usually caught up by chipping away at it month-by-month, you may be able to do so in other ways, including by selling your home a few years after filing the case. This can give you some valuable flexibility, and allows you to keep your home for a crucial chunk of time—to stay in a local school district another couple years, for example—for less money each month.
  • You may be able to significantly, permanently reduce the monthly cost of keeping your home by “stripping” off any second or third mortgages that have no equity. If your home is worth no more than your first mortgage, the second mortgage can be removed from your home’s title, allowing you to stop paying that second mortgage. Same with a third mortgage if the home is not worth more than the amount of the first and second mortgage balances combined.
  • If you’ve fallen behind on your property taxes, you are given time to bring them current similar to the way your mortgage is brought current. What’s important is that during that stretch of time, your home is protected from the taxing authority’s foreclosure, and from your mortgage lender itself foreclosing for you not having paid those taxes.
  •  Most judgment liens can be taken off your home title permanently. The debt that resulted in a judgment against you is either paid in part or sometimes not at all, and then at the end of your case the balance is discharged (written off).
  • If you have a lien on your home which secures a debt that cannot be discharged—such as child/spousal support arrearage or relatively recent income taxes—you pay off that debt through your Chapter 13 plan, and at the end of your case the lien is released from our title.  

Saving Your Vehicle from Repossession

  • If you are behind in your payments, and your vehicle loan is less than two and a half years old, then Chapter 13 will allow you to catch up on your back payments through relatively small installments lasting as much as five years.
  • If you are behind but your loan is more than two and a half years old, you can do a “cram down”: reduce the balance to the fair market value of the vehicle, usually reduce the interest rate, and stretch out the payments beyond the usual length of the contract. These all work together usually to reduce both your monthly payment and the total you for the vehicle.
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What Makes Chapter 13 So Special?

17 May

Would you like to favor certain important creditors over others? Often, Chapter 13 makes this possible.

Leveraging the Bankruptcy Laws

One of the basic principles of the United States system of bankruptcy is that it does not allow favoring some creditors over the others. That is, not unless that favoring is recognized as justified in the eyes of the law. In a variety of ways, creditors are recognized as legally different. For example, secured creditors have rights to collateral that unsecured creditors don’t. And certain debts can’t be discharged (written-off) in bankruptcy, such as child support, many types of taxes, and most student loans. Chapter 13 is a particularly good tool for leveraging in your favor the ways these and other ways that the law allows—indeed requires—you to treat creditors differently.

Here are two good illustrations.

Curing First Mortgage Arrearage

The law highly favors residential first mortgage lenders. The theory is that these lenders should be treated well in bankruptcy to lessen their risks, thereby encouraging more investment in the residential mortgage capital markets, to make mortgages more readily available for future homeowners.

So, if you were behind on your home mortgage and wanted to keep the home, in a Chapter 13 case you would be required to make payments on the arrearage and bring it current before you could get out of the case. But, because in a Chapter 13 payment plan you are usually only required to pay what you can afford, this means that catching up on your mortgage most of the time results in many or most of your other creditors getting paid less. Sometimes these other creditors may even not be paid anything, just so that you can afford to save your home. If your home is one of your highest priorities, and you are behind on the mortgage payments, then consider using Chapter 13 to favor your payments to catch up on those missed payments.

Child Support Arrearage

Another kind of debt that is highly favored in the law is child support, for rather obvious reasons. As a result, if you get behind on support payments, the collection procedures that can be used against you are extremely aggressive. In most states it includes the possibility not only of losing your driver’s license, but also your occupational or professional license—your livelihood could be taken from you.

Chapter 7 “straight bankruptcy” provides no direct help if you owe back support. The “automatic stay” that protects you from other creditors does not even apply to support debt under Chapter 7. This means that the aggressive collections can just continue; the bankruptcy filing has no effect on it.

But in a Chapter 13 “adjustment of debts,” you ARE protected from support collections, as long as you follow the rules—keep strictly current on ongoing regular support payments and on the Chapter 13 plan payments. Through those plan payments, you are required to pay off the entire support arrearage before completing the case. But you want to pay it off because you don’t want to owe any when you finish the case and lose the protection it provides.

Similar to home mortgage arrearages, you can essentially take money away from your other creditors in order to pay off the support arrearage. Indeed, in most situations, your support arrearage is paid 100% before you pay anything to the rest of your unsecured creditors. 

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Chapter 7 Complications

15 May

What if your income is too high, all your assets aren’t protected, you’re not current on your secured debts, and you can’t write off all your debts?

 

If Your Income is Higher than “Median Income”

To qualify to file a Chapter 7 “straight bankruptcy” case, you must pass the “means test.” The easiest way to pass it is if your income is no higher than the “median income” for your state and family size. “Median income” is the amount at which half of the households within an area earns more and the other half of the households earns less. (It is lower than “average income” and considered a more accurate representation because it is less skewed by the relatively few extremely high income earners.)

Here is a table of the current “median income” amounts for your state and family size.

 “Income” has a specialized meaning for this purpose, much broader than normal taxable income. It generally includes all funds received from all sources, with limited exceptions. And instead of being based on what was received during a previous year, it looks only to the 6 full calendar months before the bankruptcy filing.

Although passing the “means test” is easiest if your income is less than median, often you can still pass the test and file Chapter 7 based on your expenses or under unusual circumstances. But qualifying may get more complicated.

If Not All of Your Assets Are “Exempt”

In most Chapter 7 cases, all of your assets are protected through “exemptions”—categories of assets which cannot be taken from you by the bankruptcy trustee (acting on behalf of the creditors). But sometimes you may own one or more assets that are not covered by an exemption, giving the trustee the ability to take it, sell it, and pay the proceeds to your creditors. But this can play out in a number of ways.

Your bankruptcy trustee may decide that the time and expense to collect and sell the non-exempt asset would not be worth the likely sale proceeds.  Some assets are difficult to value, or to sell, or determining their value would cost a fair amount of money—for example, if a lawsuit would need to be filed to potentially turn a claim into cash. The trustee has a lot of discretion about what to do with any non-exempt assets.

If you have such a non-exempt asset that you want to keep, you can pay the trustee for the right to keep it. Your attorney can often arrange for you to keep the asset by paying what the trustee would have received from selling it.  The trustee would then pay that money to your creditors.

Finally, the trustee may just go ahead and take the non-exempt assets, sell them, and use the proceeds to pay a portion of your creditors.

If Not Current on Your Secured Debts

Generally, in a Chapter 7 case if you are behind on your home mortgage or vehicle loan or other secured debt, you may be able to keep the collateral or you may decide to surrender it.

The creditor may let you catch up by paying the regular monthly payments plus an extra amount for the arrearage. Whether you will be able to do this depends on the kind of debt and the flexibility of the creditor. Vehicle loan creditors don’t tend to be flexible, usually making you to get current within a month or two after filing. Mortgage holders are usually more flexible, usually giving you about a year to get current.

The further behind you are on a debt with collateral that you want to keep, the more difficult it would be to do this in a Chapter 7 case.

However, you always have the right to surrender the collateral to the creditor, and then discharge whatever remaining debt you may owe. This generally does not complicate a bankruptcy case, even though the remaining balance after a surrender can still be huge.

If You Have Debts That Continue to Be Owed

The main purpose of a Chapter 7 case is to discharge (write off) your debts. Most if not all of your debts will usually be discharged. But some special ones may clearly not be dischargeable (certain taxes, support obligations, for example). Others may be at risk depending on the aggressiveness of the creditor. The last thing you want is to file a case only to learn that some of the debts you expected to be discharged will not be. Avoiding such bad surprises is a good reason for you to have an experienced bankruptcy attorney. 

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Chapter 7 vs. Chapter 13–Dealing with Furniture, Appliances, and Electronics

10 May

What happens to the furniture, computer and such that you owe money on? Can they be protected under both Chapters?  

 

When a client comes into our offices worried about collateral on a debt, it’s almost always about their home and/or vehicle. And so the decision about whether to file a Chapter 7 “straight bankruptcy” or instead a Chapter 13 “adjustment of debts” often turns on which is better for their home and/or vehicle. That decision is seldom driven by how other collateral is affected, which is candidly why you see much less information about this on bankruptcy attorney websites. Let’s fix that shortcoming right here with these next two blog.

Types of Debt with Other Collateral

There’s a wide world of possible debts with other kinds of collateral—everything from business loans secured by inventory to income taxes with a tax lien on every shred of possessions you own. Many of those unusual kinds of secured debts operate by special rules, so we could easily write an entire blog on each of those kinds of special secured debts.

But for this blog we’re focusing on the most common non-home/non-vehicle type of collateral, which is tangible personal property such as furniture, appliances, TVs and electronics.

You can have a debt with this kind of collateral one of two ways. The first happens when the debt was entered into in order to buy the collateral. This can be with a bank or store credit card, a line of credit with the store, or a separate contract. The second happens when you already own something and provide it as collateral on a debt, such as with a loan for money from a small loan lender. Today’s blog is about the first kind—“purchase money” secured debt. The next blog will be about the second kind—“non-purchase money” secured debt.

Is the Collateral Really Collateral

Whether you are in a Chapter 7 or Chapter 13 case, the threshold question is whether the furniture or computer (or whatever else) is really collateral on the debt related to the purchase. In other words, does the creditor have a legal right to repossess the furniture or computer or whatever you bought?

The answer to that generally turns on the terms of the contract that governs the transaction. Just because you owe money for the purchase of something, that alone usually does not give the creditor the right to repossess it. If you did not grant the creditor that right within the contract (which you may or may not know you did), the debt is likely just an unsecured debt. The debt could be discharged (written off) in bankruptcy without the creditor being able to make any claim on the furniture or whatever you bought.

There’s often much more to this secured/not-secured issue. For example, the contract for a revolving account terms could make the items purchased collateral on the debt, BUT you may have already made enough payments so that something purchased a while ago is no longer collateral on the debt. So this question about whether the things you purchased are collateral or not is clearly one that you need to discuss with your attorney.

Will the Rights to the Collateral Be Enforced?

If the furniture or other item purchased is determined to be legally collateral on a debt, the next question is whether the creditor will bother to assert its rights to that collateral. Sometimes it’s just not worth for them to enforce their contractual rights. There is a tendency not to when the collateral has depreciated so much that it literally costs them more to take it back and sell it than how much the proceeds of sale would likely be. Also, creditors change their collection policies over time, especially after being bought out by other companies.

The contract will only tell you what the creditor’s rights are, not whether it is enforcing them. That’s something only a highly experienced bankruptcy attorney would likely know.  

Purchase Money Secured Debt in Chapter 7

Assuming that the collateral IS legally tied to the debt, and the creditor IS enforcing its rights, your options in a Chapter 7 case are:

  • If you want to keep the collateral, enter into a “reaffirmation agreement” with the creditor, a commitment to continue to be liable on either a portion of or the entire debt in spite of your bankruptcy, in return for your right to keep the collateral.
  • If you want to keep the collateral but don’t want to reaffirm all or part of your legal liability, you could continue making payments until either the collateral was paid for or you surrendered the collateral. The advantage of this is that if you ever do surrender it, you would owe no potential “deficiency balance”—debt beyond the value of the collateral. The potential disadvantage is that sometimes you run the risk of repossession for not reaffirming.  
  • If you want to keep the collateral, “redeem” the collateral by paying no more than its fair market value in a lump sum.
  • Surrender the collateral to the creditor if you don’t want it, and discharge the debt.

Purchase Money Secured Debt in Chapter 13

  • If you want to keep the collateral, and you bought it at least a year ago, simply arrange in your Chapter 13 plan to pay off the lesser of the fair market value of the collateral or the loan balance. If you bought the collateral less than a year ago, you’ll have to pay the full loan balance. Either way, at the completion of your case you would owe nothing more to the creditor and would own the collateral free and clear.
  • If you want to surrender the collateral, you may end up paying something to the creditor if it claims you owe a deficiency balance, but that unsecured debt would just go into the pool of your other unsecured debt, usually just reducing what the other creditors would receive, without increasing what you have to pay. 
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Chapter 7 vs. Chapter 13–Gaining Power Over Your Home Mortgage

08 May

See these bullet points on dealing with your home lender under Chapter 7 and under Chapter 13.

 

Considering the importance of your home, it’s no surprise that the choice between filing a Chapter 7 “straight bankruptcy” and a Chapter 13 “adjustment of debts” often turns on how each would handle your mortgage. Here is how each would do so.

Chapter 7

  • If you are current on your home mortgage and want to keep your home, you would just continue making the payments after filing bankruptcy. If it has been a struggle to keep current, it should be a lot easier after discharging all or most of your other debts.
  • If you are not current but only a few months behind on your mortgage and want to keep your home, usually you can enter into a “forbearance agreement” with your mortgage lender. It agrees not to foreclose in return for you paying extra each month to catch up within a specified time, usually not more than a year. This works if your bankruptcy improves your cash flow enough so that you can afford to pay both your regular and catch-up payments each month.
  • If you have a judgment lien against your home as a result of a creditor’s lawsuit against you, in many circumstances that lien can be “avoided,” taken off the title. The underlying debt from the judgment would almost always be discharged—legally wiped out.
  • Most other kinds of liens—from taxes, child/spousal support, remodeling contractors, your homeowners association, for instance—are usually not affected by a Chapter 7 case. You will likely need to pay off the debt to get rid of the lien. Talk with your attorney because there are many kinds of liens, each with their own rules.
  • If you are close to a sale on your home but there is a foreclosure sale coming up, a Chapter 7 filing can stop the foreclosure and buy time to close the sale. Coordinate this carefully with your attorney because 1) the Chapter 7 trustee can sometimes complicate the situation, and 2) this buys you only a limited amount of time.
  • If you have decided to surrender your home, Chapter 7 can still stop a foreclosure and buy you more time to be in your home rent-free, more time to save money for your upcoming rent payments and moving costs.
  • If you were to surrender your home without bankruptcy, depending on your state’s laws you could owe a large “deficiency balance” on your first and/or second mortgages—the difference between the amount the home would sell for and the amount of the loan balances. Your Chapter 7 case would discharge any such deficiency balance.

Chapter 13

  • If you are current on your home mortgage and want to keep your home, you would just continue making the payments after filing your Chapter 13 case. (Usually you would continue paying directly to your mortgage lender, but in some jurisdictions you may pay through your Chapter 13 trustee.) If it has been a struggle to keep current on the mortgage, it should be a lot easier because Chapter 13 often radically reduces how much you pay to other creditors.
  • If you are not current, then Chapter 13 gives you much more time to catch up than a Chapter 7 case.  You enter into a court-approved “plan” for getting current on the mortgage, the payments for which are based on your ability to pay. The plan incorporates all your other debts into one package–including other important debts like income taxes, support obligations, and vehicle loans—while protecting you from all your creditors.
  • If you have a second mortgage, and the value of your home is less than the balance on your first mortgage, then Chapter 13 can “strip” that second mortgage off your home. You would no longer have to make that monthly payment, often significantly reducing what your home costs you each month. And your home would become much less “under water,” making keeping the home much more worthwhile in the long run.
  • If you have a judgment lien against your home as a result of a creditor’s lawsuit against you, just as in Chapter 7, often that lien can be “avoided”—taken off the title.
  • Chapter 13 provides a favorable way to take care of most other kinds of liens. With income tax liens, the underlying tax debt can be paid through the Chapter 13 plan, and then the lien released at the completion of the case. Same thing with child/spousal support liens. These kinds of creditors can be very aggressive, but under Chapter 13—unlike Chapter 7—they cannot take any collection action whatsoever while you pay off the underlying debts, as long as you fulfill your obligations under the plan.
  • If you want to sell your home, Chapter 13 gives you some flexibility about when to do so, even if it’s a few years down the line. For example, if you want to stay in your neighborhood until your child finishes at the local school or until you can downsize, or perhaps even until the property value increases, that timing can often be built into your Chapter 13 plan.
  • As with Chapter 7, if you are close to a sale on your home but there is a foreclosure sale coming up, a Chapter 13 filing can stop the foreclosure and buy time to close the sale. Usually it can buy your more time than a Chapter 7 can.
  • You can surrender a home under Chapter 13 as with Chapter 7. Depending on the circumstances, you may be able to delay the surrender longer. After the surrender, you would be able to adjust your Chapter 13 plan to account for the changes in your housing expenses. 
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Chapter 7 vs. Chapter 13–Power Over Your Vehicle Lender

06 May

File under Chapter 7 if you don’t need lots of help keeping your vehicle. File under Chapter 13 if you do.

 

Many factors come into play in deciding between Chapter 7 and Chapter 13. As far as your vehicle loan is concerned, the above two oversimplified sentences simply reflect that this decision often turns on how far behind you are on your vehicle loan, and on how much you want to keep your vehicle.

Today’s blog is about how Chapter 7 and Chapter 13 each handle debts secured by your vehicle. The next blogs cover your home and other kinds of consumer collateral, like furniture and appliances.

Chapter 7—Limited Help for Your Vehicle

If you are struggling to make the payments but have managed to keep current on your car or truck loan, and want to keep the vehicle, Chapter 7 will usually give you the right amount of help. It’ll discharge (wipe out) most or all of your other debts so that you’ll be able to pay your vehicle loan more easily.

If you have fallen just a little behind—a month or maybe two—and want to keep your vehicle, Chapter 7 may still work for you. Almost always you will be require to get current on your vehicle loan very quickly—within a month or two of filing the bankruptcy case. So a Chapter 7 case is appropriate if it will improve your cash flow enough that you’ll be able to get current that quickly—and then pay consistently after that.

Regardless whether or not you are behind, Chapter 7 may allow you to save lots of money by “redeeming” your vehicle. If your vehicle is worth less than you owe on it, you can pay the amount of the vehicle’s value in a lump sum to the creditor, and then it must give you the vehicle free and clear. If you don’t have access to the money needed to redeem, you may be able to get a loan specifically for that purpose from a redemption loan lender. The interest rate would be relatively high, but the loan could be well worthwhile if the new amount financed is thousands of dollars less than your initial loan.

Regardless whether or not you are behind, if you have decided to surrender your vehicle to your creditor, Chapter 7 will discharge any “deficiency balance.” That’s the difference between how much you owed and how much your vehicle was sold for, often amounting to thousands of dollars.

Chapter 13—Serious Help for Your Vehicle

Chapter 13 gives you much more time than Chapter 7 does to catch up on your vehicle loan payments if you’ve fallen behind. Instead of giving you just a month or two to bring your loan current, Chapter 13 can give you years to do so. Your attorney proposes and the bankruptcy court approves a “Chapter 13 plan,” often after some input from the trustee and/or your creditors. That plan requires you to make monthly plan payments to the Chapter 13 trustee, a portion of which are earmarked for paying off the vehicle loan arrearage. In the meantime you and your vehicle are protected from repossession and any other collection action. You do have to hold up your end of the deal—consistently make the plan payments and the regular vehicle loan payments, keep insurance in place, and fulfill any other requirements under the plan.

If you got your vehicle loan more than two and a half years before filing the Chapter 13 case (more than 910 days before, to be exact), we can do a “cramdown” on that loan. This means that we can rewrite the terms of the loan, usually reducing the monthly payments (often significantly), reducing the balance down to the fair market value of the vehicle. We can usually reducing the interest rate as well. The end result is that you can pay thousands of dollars less for your car or truck, and own it free and clear at the end of your case. Cramdown is not available in a Chapter 7 case.

If your vehicle is worth much less than what you owe on it, and you qualify under the above 910-day rule, Chapter 13 may be worth considering even if you are current on your vehicle loan. Certainly if you are on the fence about which type of case to file, the benefits of a cramdown can swing the decision in favor of Chapter 13. 

Important note: This blog has been about dealing with your vehicle loan lender, while assuming that any equity on the vehicle is fully protected by an exemption. If your vehicle is not fully protected, your attorney will talk with you about your options about that. 

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Chapter 7 vs. Chapter 13–It’s a Matter of Time

03 May

Put aside all the detailed advantages and disadvantages of these 2 options. The core difference is how each uses time in your favor.

 

The Biggest Difference—Time

We could give you a helpful list of the practical differences between Chapter 7 and 13, and we do that in our other blogs. But let’s focus today on these two options’ completely different treatment of time, and how, depending on your circumstances, one or the other is better for you.

Chapter 7—One Point in Time

Chapter 7 bases just about everything on that moment in time when your case is filed. It looks at your assets and your debts as of that moment. It particularly bores in on your assets as of that moment, generally caring very little about what new assets you acquire into the future. There are limited exceptions—like if you tried to hide assets that you owned before filing, or if you get an inheritance soon after filing. But otherwise Chapter 7 has a steely-eyed fixation on the filing date.

That means that Chapter 7 is usually very fast. In a straightforward case, about three-four months after filing most or all of your debts are discharged (written off), and your case is closed. A fresh financial start in a 100 days, give or take. If speed is important to you, Chapter 7 has that advantage.

Chapter 13—Stretching Out Time in Your Favor

Speed isn’t always in your favor. Chapter 7 is more limited than Chapter 13 in the problems that it can solve. So getting in and out of bankruptcy quickly isn’t so good if you’ve only taken care of some of your debt problems and the others are still sitting on your lap. Chapter 13 buys you time to deal with those other problems.

Chapter 13 looks less at the moment you file the case and more at giving you a span of years to do what you need to do and receive protection from your creditors in the meantime. Here are just a few of the very special ways it does this:

  • One kind of particularly dangerous debt—child/spousal support arrearage—can  never be discharged in bankruptcy AND can you with extraordinarily aggressiveness (such as suspending your driver’s and occupational/professional licenses) that are not stopped EVEN FOR A MOMENT by a Chapter 7 filing. In contrast, Chapter 13 DOES stop collection of support arrearage, and gives you years to catch up, often under such flexible terms that you can pay some other creditors first (such as to catch up on a home mortgage or vehicle loan).
  • Certain other kinds of similarly dangerous debts—recent income taxes, for example—cannot be discharged in bankruptcy if they are not old enough. Collection on taxes IS stopped by a Chapter 7 filing, but the speed of Chapter 7 is a disadvantage here, because its protection ends as soon as the case ends. In contrast, Chapter 13’s protection usually lasts the full three-to-five-years that the case is active, giving you that much time to pay it, again often allowing you to pay some other creditors ahead of it if necessary. And generally the interest and penalties stop accruing, so that you are not paying for the privilege of paying slowly.
  • If you are behind on your home mortgage payments, Chapter 13 gives you years to catch up, perhaps in the meantime allowing you to “strip” a second or third mortgage off your home title altogether.
  • Chapter 13 can sometimes allow you to hold off on selling your home until a couple years later, at a time when it would be better for your family and your home’s value may have increased.  

Many factors come into play in deciding between Chapter 7 and 13. But a sensible starting point is that Chapter 7 is fast when you want fast, and Chapter 13 is deliberate when that’s what you need. Chapter 7 tends to be the choice that makes sense if all or most of your debts will be discharged, solving all or virtually all of your debt problems. Chapter 13 instead tends to be the better choice if a Chapter 7 would leave you with continued debt problems, and you need the benefit of time and some stronger tools to deal with them. 

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Options Other Than Bankruptcy

01 May

Can serious debt problems be solved through settlement, consolidation, or sometimes even by simply not paying? What are the advantages/disadvantages? 


When clients come to see us for a consultation they deserve knowing all their options, including ones other than bankruptcy. Here are three of them.

1. Debt Settlement

If payments on a debt are not paid when due, and the debt falls further and further into default without payment, the creditor may become motivated to settle the debt for substantially less than the amount due under the contract. In general, a debt is more likely to be settled at a deeper discount:

  • as the debt gets older, especially as it approaches its statute of limitations
  • if the creditor determines that it will likely never be paid because the debtor appears to be long-term judgment-proof—is not expected to have any assets or income that could be tapped for future garnishment or seizure.
  • as the risk increases that the debt could be totally written off in bankruptcy
  • when the debt is sold to a collection agency, and especially when that happens more than once with a particular debt.

The hoped-for advantage of settling a debt this way is the possibility of avoiding bankruptcy.

But consider these possible disadvantages:

  • Interest, late fees, and litigation and other costs can increase the balance on a debt very quickly when a debt is in default. So even if you settle a debt for “pennies on the dollar,” the amount paid may still be quite high because of the skyrocketing amount of the debt.
  • The creditor’s write-off of a major part of its debt can sometimes be considered “income” for tax purposes, possibly resulting in you owing a significant amount of unexpected income tax.
  • You must have a way to get enough cash to make realistic lump-sum offers to the creditors. If you have to borrow that cash from friends or relatives, you may well simply be digging yourself deeper into debt, AND jeopardizing some of your most important life relationships.
  • Hiring a debt negotiation company to do this settlement work is seldom worthwhile. Instead get some unbiased guidance for how to negotiate with your creditors from an attorney, whose legal and ethical obligation is to you alone.

2. Debt consolidation

The benefit of consolidating and/or refinancing your higher-interest unsecured debt into another loan with a lower interest rate and maybe a longer term of payments is that it might lower your monthly payment(s) just enough so that you can keep current. This may particularly make sense with specialized types of debt, such as student loans or maybe older higher-rate mortgages or vehicle loans.

But the potential disadvantages are very serious:

  • One of the most damaging mistakes that people make is to incur a secured debt in order to pay off an unsecured debt (for example, paying off credit card debt or medical bills with a home equity line of credit). This changes debt that would likely have been easily written off in bankruptcy into debts that likely can’t be written off without surrendering the collateral.  
  • As foolish as it may sound, paying down credit cards and similar kinds of credit all too often leads to those sources of credit being run up and maxed out again when cash is tight. This just leaves you deeper in debt.

3. Non-payment of debts

People who are “judgment-proof” may have the alternative of simply not paying their debts. “Judgment-proof” does not mean that a creditor can’t sue and get a judgment against the debtor, but rather that the creditor cannot legally reach any of the debtor’s income or assets to satisfy the judgment.  For some people, this can be a sensible short-term, and sometimes even long-term, strategy.

The disadvantages with this:

  • Even if you really are “judgment-proof,” some creditors will still sue you, in the hopes that one of these days they will get the money from you somehow. So at the very least you need to be prepared to be sued by knowing exactly how you should react when that happens.
  • Being “judgment-proof” at one point does not mean that you will be forever. Either your circumstances could change or the pertinent laws could change, leaving you at risk. Hiring an attorney at every turn to find out if any of your income or assets were in jeopardy could get expensive.

As you weigh these three alternatives to bankruptcy, keep two things in mind, the first about the role of your attorney, and the second about timing.

As mentioned above, when you get advice from an attorney, that attorney has a legal and ethical duty to you and nobody else. That’s applies to your initial consultation as well. In laying out the advantages and disadvantages of your options, he or she can make strong recommendations. And you can certainly ask him or her to make judgment calls about your best course of action based on your goals. But an attorney will not “make you” file bankruptcy or any particular Chapter of bankruptcy. You meet with an attorney so that you can make a well-informed decision, with whatever help you need in making that decision..

In contrast, people who work for a debt consolidation or debt settlement business are generally paid to sell you whatever service they offer. 

On the issue of timing, common sense says that you ought to get information and advice about your alternatives early rather than late. Otherwise it could cost you in countless ways. Your choices could be more limited, costing more in money or in not fulfilling your goals as well as you otherwise could. The sooner you get good advice, the more it will help you. 

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