Debt Resolution Fridays – June 12, 2020

Each week, bankruptcy attorney Elizabeth Domenico spends time educating the community about their debt resolution options.

Debt Resolution Fridays is dedicated answering your debt questions. See what Coloradans asked on June 12, 2020. (A transcript of the event is available below.)

Need help with debt?

Set up a case assessment with a member of our Debt Resolution Team. Call 303-688-0944 or schedule the appointment online when you click here.

Good morning. This is our weekly debt resolution and bankruptcy discussion. I’m Attorney Elizabeth Domenico with Robinson & Henry. And for the last few weeks, we’ve have been having a live event where people can call or send in messages for information about debt resolution, help with bankruptcy, questions about small businesses, sometimes specific to the pandemic we’re going through.

Sometimes it’s just specific to general life events that have happened. So I am here today to answer those. We also have the ability for you to view these after if you’re not able to be viewing in with us live here right now. We’re gonna spend about 15 to 20 minutes taking those questions and giving you some answers. Some stuff we may have already touched on, but it’s always good if you’re viewing in live here to be able to get that information.

We also have our website that in addition to these live events and the video recordings, we have a series of topics relevant to certain things that again, people are interested about or that we have felt have come up that we’ve gotten quite a bit of feedback that sometimes are helpful. Also too as they’re going through this, if there’s something that you can’t get through or the time gets cut short, because we are doing these typically weekly, we always can get those and prepare them for the week following if you aren’t able to get them answered, or if you have a really pressing concern, we are offering consultations at the office.

You can call in and make an appointment. That number is 688-0944. I’ll also repeat that at the end of the appointment, live event, excuse me. And you can schedule an appointment. You also can go onto our website, robandhen.wpengine.com and feel free to schedule an appointment on available calendar without having to call in. So I’m going to pull up the questions. It looks like we already have a few here coming in.

Question 1: Can your bankruptcy ever be denied?

So the first question is from Terry. Terry asks if you have a bankruptcy that you file if you could ever be denied.

So when you file bankruptcy, you are tasked with giving the court certain information so they can assess your financial means to make payments, what debts you have, what type of assets you have.

So the first thing you need to remember is you have to be truthful and honest. You are under penalty of perjury when you’re filling out your paperwork, because you’re asserting to the court that everything you present is true and correct.

So as long as you don’t make any material misstatements to the court, you will typically meet the first hurdle.

Most Common Reason for Denial

The single largest reason for denial is for people who either don’t follow some court rule or who for some reason are trying to hide things such as homes, cars, money or people they owe money to. So you can be denied if you’re not truthful. So that’s the very first thing.

So as long as you’re truthful and honest in your disclosures, and that’s why a lot of times it’s important to have an attorney or professional who can walk you through. ‘Cause sometimes you don’t know what information is being asked for, or if it’s relevant and that’s an attorney’s job is to help you make that determination to make sure you’re not missing large things that the court is asking you to report.

Other Reasons for Denial

The second reason that it might be denied is if you fail to follow some court order, if you don’t pay your filing fee, if you don’t complete your credit counseling courses, those are all reasons that they could dismiss or deny your case.

Falling Behind on Payments

Specifically in chapter 13 bankruptcies, if you don’t make your plan payments that you agree upon to the court, that could be an also another reason that your case is dismissed or you’re denied a discharge.

Should You Navigate Bankruptcy on Your Own?

So there’s a lot of different things that could happen, which again is why we give these consultations and help for people so they can navigate this bankruptcy. And some instances can be done on your own. It’s really not recommended. It’s really an idea where you really wanna have an attorney or other person, a legal professional helping you out so you can make sure all the forms are filled out, you follow all the court procedures. Chapter sevens are somewhat a little bit easier to do yourself.

Chapter 13s and chapter 11s we absolutely do not recommend trying to do on your own. And sometimes judges can even require you to get an attorney depending upon your circumstances. So that’s why give us a call, ask us questions. We can help you navigate through that.

Question 2: Can bankruptcy affect a security clearance?

Next we have a question. If a bankruptcy can affect a security clearance? That is a very common question I get.

We have a lot of military professionals as well as veterans or people in the financial industry, especially since there’s a let down in the Colorado Springs area where we have an office that definitely want to know the answer to this.

Most of the Time, No.

I will tell you that in the time I’ve been practicing, which has been over a decade, that I’ve never seen anyone denied a security clearance due to a bankruptcy.

Now, there is a little bit of work that typically has to be done most of the time. You should make your commanding officer or otherwise person in position if you’re in the financial industry aware of the bankruptcy.

I have had instances where the officers or bosses have asked me to write a letter just stating the circumstance that this person is a bankruptcy, they’re taking care of either through repayment and in a chapter 13 or liquidation in a chapter seven that their debt’s gonna be taken care of.

Why a Clearance or Position May be Denied

The background of why it could potentially have an impact is because if you’re in a position where you have this clearance or you’re in a fiduciary capacity with people’s finances and you have debt, there is a risk of bribery or something being able to be done where you’re deceitful with taking money due to gambling or paying off debt. And they don’t want that to be an issue.

So there are work grounds. But my recommendation is you’re always upfront and honest and just ask if it’s gonna be an issue. And if it is, then we can discuss other alternatives to bankruptcy. But in reality, I’ve never seen it impact and prohibit someone from getting or renewing a security clearance.

The only thing I will say is if you’re in the midst of getting a series seven or a series nine licensure, and it’s brand new, you probably want to wait to file a bankruptcy until after you’ve received those, because it can put a halt until the bankruptcy is done on the ability to obtain those type of licensures.

Question 3: Are their tax implications to bankruptcy?

Next, Katie from Denver asks if there are any tax implications to bankruptcy? I’m not quite sure the breadth and scope of what you’re asking, but I can kind of tell you a little bit about what I’ve seen.

Forgiven Debt v. Discharged Debt & Taxes

So a lot of times when you do debt settlement, you will have a tax implication because when you have debt, that’s what is called forgiven. You can have that lender tax what you don’t pay.

Example: Credit Card Debt Forgiveness

So let’s say you had $10,000 you owed on a credit card and your lender settled for 5,000 and you paid that, you would then likely get a 1099, especially if it’s a credit card or a loan from a bank that is sent to both the IRS and to you that says that $5,000 that you didn’t pay that you had, quote, forgiven is then taxable as if it were income to you.

So if you have a large amount of debt and you are getting a lot reduced and forgiven, you could put yourself in a new tax bracket or result in tax liability.

Example: Discharged Debt Via Bankruptcy

Now, unlike that scenario, a bankruptcy actually discharges your debt. So if you’re in a chapter seven and you’re just getting rid of the debt and you’re not paying any of it back, or in a chapter 13 and you paid some of it back but not all of your unsecured debt back, you will get a discharge, meaning that the creditor can’t come back after you, they can’t sue you if they don’t get their money through the bankruptcy. The discharge does not have a tax consequence.

Reporting Discharged Debt to IRS

Now, in reporting that you have filed the bankruptcy, especially in periods of time where you’re in a chapter 13 for anywhere from three to five years, it is important to potentially let the taxing authorities know that you have filed bankruptcy. There’s a special form and they’ve changed the form number. So you would wanna talk to a tax professional about what form you would need to file with your taxes that shows you are either inactive bankruptcy, or you’ve received a discharge.

Because sometimes these lenders try to give you 1099s and not have it shown as a discharge. Or there’s just some confusion where you didn’t pay the debt and they charged it off and issued you a 1099 instead of you having paid it. And if you’re in this limbo period with having filed a bankruptcy that stops them from being able to tax you on it.

So it’s always important to make sure you let your professional know when you’re doing taxes and bankruptcy about either the discharge or the filing so they can find the appropriate forms.

Question 4: When is personal debt enough to justify bankruptcy?

Casey, from Colorado asks, when is personal debt enough to justify bankruptcy?

Everybody’s different. Some people have a lot of debt. Some people in the grand scheme of things don’t have very much. What I will say is there’s really not an amount that would qualify or disqualify you from bankruptcy. A lot of it has to do with your individual circumstances.

Debt Loads are Difference for Everyone

If you owe $5,000 on a credit card, and that’s your only debt, but you are getting garnished and you have a very small amount of pay coming in and they’re taking 25% and you can’t afford for them to keep doing that for six months on six months off, which they’re allowed to do, and it’s impeding your ability to make your rent payment or other obligations, then maybe that’s enough for you to wanna consider bankruptcy because that would stop them from being able to garnish you.

Some people say I’ve got a million dollars in debt. Well then certainly it may make sense, but maybe they have a lot in terms of real estate, or they have a business where they may lose connections if they file bankruptcy.

There’s really no amount that would justify or not justify it. It’s really your specific circumstances and how the debt is impacting you on a day to day basis. That’s why we don’t just say we’re a bankruptcy attorney. We are a debt resolution attorney because everybody’s different as I think I’ve mentioned before.

And looking at your individual circumstances to say what’s the best option for you is what we’re here for. What we’ll do is we’ll sit down, you fill out a form, we look at your assets, look at your income, we look at the type and amount of debt you have and say, here are your options. And then say, well, within these options, what is the best option? And sometimes bankruptcy is the best option, and sometimes it’s not.

But it’s important to get an idea of what all the options are and then discuss based upon your goals and your finances and your certain circumstances what that looks like for you individually.

Question 5: Can you make too much money to file bankruptcy?

Sherry from Colorado asks if you can make too much money to file bankruptcy. The nice thing about bankruptcy is, is there’s no cap on the amount of money you can make to file.

How Income Impacts Bankruptcy

Now, in certain circumstances, if you have very high income relative to what the state of Colorado has set as what we call median incomes, and there are guidelines as for qualification for chapter seven what you can and can’t make.

And if you exceed that, then the court would probably say a chapter 13, or maybe even a chapter 11, which depends on the amount of debt, not really your income would be looked at to say what if any of this debt do you have to pay back?

The more money you make over those median income figures and your median income figures have to do with the amount of people in our household, how many family members, and those are set out by the United States Trustee’s office. And they vary from state to state, which is another reason why it’s good to talk to a legal professional to see what those standards are and where you fall within those relative to your income.

When Income Limits Your Bankruptcy Filing

In some circumstances, the very worst case scenario is if your income is very, very high relative to that number, you may end up paying all of your debt back in chapter 13 and chapter 11 bankruptcy over a period of up to five years.

Now, one nice thing is, is that the interest and penalties do stop occurring during that time and your creditors cannot force you to have a garnishment or liens put on your home.

So bankruptcy may not always be where you’re getting rid of a lot of the debt and maybe more of a workout to make a more reasonable payment schedule of your debt over a period of time so that you can make better cash flow on your monthly budget.

Question 6: Which Chapter of bankruptcy to lender favor more?

A very common question I always get asked is do potential under his view a chapter 13 more favorably than a chapter seven since chapter 13 is a repayment plan?

We have found no indication from any clients that I’ve had that lenders view a chapter 13 or a chapter seven more favorably. Some instances where you would have this difference looked at would be again in the military or financial field.

Some for whatever reason, employers in military look more favorably upon a chapter 13 where you are trying to repay and maintain your debt. I have people had experiences where they’ve told me that.

But by and large overall, there’s really in terms of getting a home in the future, getting credit lended to you isn’t gonna be a preference that you’re going to be denied because you did a seven versus a chapter 13.

Question 7: How does restitution play into bankruptcy?

One question is how does restitution play into bankruptcy? Can you include that in chapter 13?

Restitution Cannot be Discharged

So if you are ordered to pay a fine to the court through restitution or any kind of criminal penalty, that’s not gonna be something that you can discharge in bankruptcy.

Payment Plans Could be an Option

But just like child support, which is also non-dischargeable, you could look at using a chapter 13 which is a repayment of certain debts over a period of anywhere from three to five years to become current or pay your restitution obligation.

You have to just talk to the entity that you are owing that money to and let them know that that’s gonna happen because sometimes they have these payments set up automatically through payroll or some other avenue.

But the court does say you can take that amount owed and you can pay it back over that period of time in a chapter 13 bankruptcy.

Question 8: Can I refinance my house and still file bankruptcy?

John from Colorado wants to know if it’s possible to refinance his house and still fill for bankruptcy. They’d like to keep their house, but would like to reduce the payments, are there any options?

Timing is Key

So with refinances and bankruptcy, the big thing is timing. If you have the ability to wait to file a bankruptcy because you don’t have creditors knocking down your door and you have decent credit, you probably want to try to refinance the home if you can before you file bankruptcy.

We don’t recommend pulling money out of the property before filing, because then we have to look at ways to protect that. Because if you take it out of your home, it loses its protected status if you just put it in a bank account. So not taking money out is probably a good idea.

Refinance Before You File

But lowering your payments through a refinance is definitely something if you could do it before you file would be appropriate because typically once you file, you’re gonna take a negative impact to your credit score and that there might preclude you from then being able to refinance. Once you file a bankruptcy, you probably, again, due to that negative credit impact are going to have to wait a few years to file for refinance.

You probably won’t have a good enough credit right after ordering a filing. But if you can’t, then again, that two year period is kind of the mark we look at once you file a bankruptcy that you should be looking to be able to get refinanced after that. And if you’re in a chapter 13 and some people say, well, if I’m in the bankruptcy for three to five years, how am I going to refinance?

Again, it has to do with your credit score. If you wanna refinance with you in a chapter 13, that is definitely something we have a lot of clients do. You do have to get permission from the chapter 13 trustee to do that. But again, it is something that can be done about two years after you file as the normal date. Couple more questions.

Question 9: If I file business bankruptcy, will it hurt my personal credit?

If I file for business bankruptcy will my personal credit be affected? I have to assume they’re connected, right?

It Depends on Personal Guarantees

Well that all depends on the actual liability that is owed on the business debt. If the business itself files for bankruptcy and there are no personal guarantees or obligations on any of the business debt, then no. It should not have an impact on your personal credit score.

If a bankruptcy is filed for the business itself as a separate entity and you are also a debt holder on that debt personally, and then you don’t pay the debt, well certainly your impact of credit can happen, but that’s not due just to virtue of the business having filed bankruptcy, that has to do with nonpayment of debt. If the debt’s being paid and you end up taking it on personally, then you’re not gonna have that negative impact.

So just like one common question is if I file bankruptcy, is my spouse gonna be impacted? Well, the only impact would be is if the debt was joint with the spouse and they did not pay.

Just because someone files bankruptcy and someone else’s on the debt, it doesn’t decrease your score. Now it will show in the section where the notation is on your credit report that there was a bankruptcy filed by an account holder. But it cannot show that you personally have filed bankruptcy if you haven’t, and it can’t negatively impact the credit score as long as that debt is being paid, even if the other person or business or party who owed the debt has declared bankruptcy.

Now, when we have joint debt, we always recommend whether it’s business and personal or spouse and filer to always have the other person who may be obligated on the debt to run a credit check. They’re not supposed to, but sometimes the lenders do things that they’re not supposed to and they report it incorrectly and it does impact the other party’s score. At that point, you really probably want to take legal intervention because that would be what we consider a violation of the Fair Credit Reporting Act, and that other person would have some legal recourse they could take against that lender for detrimenting their credit score.

Question 10: Is there a bankruptcy option to improve my credit faster?

Steven, from Boulder asks is there a bankruptcy option that will let you improve your credit faster?

No.

There’s really no difference in the credit impact from chapter seven, chapter 13, or chapter 11. You’re gonna take some type of hit to your credit, regardless of whether it’s very low already or very high.

It’s More About Debt Type Than Bankruptcy Type

Sometimes what I’ve found is depending upon the type of debt you have, that can impact how much your credit score is affected.

If you have credit card debt, but not a lot of debt, such as a car loan or a mortgage, we typically see a much faster recovery, but a much larger drop initially.

How I Strategically Help My Clients

One thing we do as part of our representation for every bankruptcy client is we run a credit report. It’s gonna contain all three bureaus. So we make sure we can get as much of the debt as reporting. And then it also tells us what your existing credit score is. And then particular to this one, it tells us what 12 months after bankruptcy your credit score will look like if you don’t do anything other than let it sit. And within that first year, it’ll give us a good idea if it’ll go up a lot on its own.

If it doesn’t, then what we like to do is depending upon the goals of the individual, say someone says, “I wanna be able to buy a new car. “Or in that two years, I wanna be able to buy a house.” We can help them with how to rebuild that credit faster through some tailored, specific advice, whether it’s getting a new car loan or getting secured credit cards that you pay off every month. There are different ways to rebuild it. But in terms of a specific chapter of bankruptcy, seven or 13 isn’t going to mean faster recovery just by having done a certain chapter.

Question 11: When should I cut my losses and file bankruptcy?

Cameron from Denver asks if there’s a particular point where you can just cut your losses and file for bankruptcy. Again, this is all specific to everyone’s circumstance.

Right now, especially with small business owners, people are wondering, how long should I give this? Corona has been going on for three months or so now, I maybe haven’t seen a larger recovery, but maybe our summer months are really good. And if their restrictions ease up, then I’ll be able to recover.

That’s a question only you can really answer is with small businesses how far you’re willing to go before looking at doing that.

Find Out if Your Creditors Will Work With You

Another thing is how willing are your creditors to work with you at this point? We know that a lot of mortgage companies, car lenders, and even credit card companies right now, due to the pandemic, are offering deferment forbearance or even more manageable and reasonable options than they ever have before. How long they’ll continue to extend those and how long and how much relief that will give to people is a question I don’t think really anyone knows.

Talk to a Bankruptcy Attorney for Your Options

So again, and I’m gonna be beating a dead horse here say talk to a professional. What we can do is develop a game plan of certain scenarios and say, okay, if this is your goal, maybe we give it this amount of time. And right now, here are the options. And worst case scenario go down the road, and if that doesn’t happen, then maybe we look at bankruptcy as the last alternative.

Some people may say, “You know what? “I’ve got a house, I’ve got bank accounts, “I’ve got assets that I don’t wanna wait around for them “to try to garnish or attach. “I wanna look at filing bankruptcy now “while everything is somewhat slow “and then come out of this “in a much better financial position.” And again, that’s gonna be on a case by case basis.

Some people absolutely don’t wanna file bankruptcy. So we look at every alternative besides that to help them.

And some people say, “I’ve done my research. “I already know bankruptcy is a good option for me. “I just wanna get it done.” Certainly I think if you’re in the position where you may be at risk of losing your home through foreclosure or a large wage garnishment, that’s not going to allow you to get any type of workout with a payment plan. And they’re just gonna take your money. Then I think bankruptcy is something you really do wanna consider because it is the quickest way to stop them from being able to foreclose, repossess and take garnishments from your paycheck.

Question 12: What can I expect from mortgage forbearance?

I think we’ve got time for one more question. Someone asked if, see, they keep hearing mixed things about mortgage forbearance that you will owe a lump sum at the end, but I’ve heard lump sum payments depend on your loan. Can you help clear this up?

What the Mortgage Company May Not Tell You

There is a lot of stuff that’s going on right now that mortgage companies aren’t being very upfront about. For example, and this only has to do with active clients that I have in bankruptcy. They call the mortgage lender. They are offered a three month forbearance. They sign the paperwork, they don’t have to pay for three months.

The Lump Sum Payment

Well, what the mortgage company doesn’t tell them and what we don’t find out until the actual agreement is filed with the bankruptcy court, is that in three or six months time, this individual is going to have to come up with that money in a lump sum, or they will then be in default again.

So some lenders are very clear about this and some are not. And it does depend on the lender and type of loan. But the ones I have seen probably about five in the last month filed all carried that lump sum provision that says, oh, you need to call your lender or work with your attorney to try to bring this current at the end of that forbearance period, because you’re gonna owe it all in a lump sum.

Which doesn’t really make a whole lot of sense to me why they’re doing it that way and whether or not being upfront about it. Because if most people saw that, they probably wouldn’t agree to it.

But that is just something you’re going to very specifically want to ask your lender before you enter into any kind of forbearance agreement with them. Again, if you would like us to look things over and guide you on that, it is something we absolutely are very happy to do. So I think that’s all the time that we have for this week.