Hidden Traps of Credit Unions When Filing Bankruptcy

Flag IconWhen it comes to banking accounts and financing a loan, credit unions are often a highly sought-after source for mortgages, vehicle loans, and bank accounts. However, what you may not know about credit unions could come back to have negative consequences against you during and after your bankruptcy.

Credit unions have become a sought-after banking source for many people because they offer competitive banking advantages without some of the hassles and fees of larger banks. Additionally, if you are a member of a credit union, you are essentially a part “owner” of the credit union. You can usually find lower interest rates at credit unions and will usually find much better customer service than a larger, traditional bank because credit unions are non-profit organizations.

There are some down sides, however, to becoming a member of a credit union. Sometimes actually becoming a member can be the most difficult part of the process. Most credit unions have certain requirements for membership – usually the requirements involve being a member of some specific organization or group (e.g. teachers, government employees, school, place of worship, organization, etc.). The membership eligibility requirements will vary depending on which credit union you wish to join, so you will need to contact the credit union for more information on their requirements.

A big trap of credit unions is cross-collateralization, which means that you have both a credit card and a vehicle or home loan with the credit union, and that your vehicle is collateral for the credit card. Cross-collateralization does not always occur, but is very common with credit unions and can have negative implications in your bankruptcy. Read more about the dangers of cross-collateralization here.

Once you do become a member, you may find that you are required to maintain a savings (or “share”) account with a minimum balance in order to also maintain a checking account. Additionally, you will find that ATM machines may be harder to find, particularly if you are traveling to a different state. In order to do your banking, you will usually have to find a credit union branch.

If you become a member of a credit union and later file bankruptcy, there are some repercussions that you will experience as a direct result of your bankruptcy filing. Regardless of whether you file Chapter 7 bankruptcy or Chapter 13 bankruptcy, your credit union will consider the bankruptcy filing a “loss” and will likely close any and all checking or savings accounts you have with the credit union. This is usually the case even if you are going to keep your mortgage loan or vehicle loan through the credit union. The only exception to this rule may be if you file Chapter 13 bankruptcy and are paying back 100% of your unsecured debt in the bankruptcy.

While credit unions are often a better option for folks who are seeking financing due to the lower interest rates, better customer service, and reduced fees, the hidden traps should be carefully reviewed if and when you run into financial hardship.

If you have further questions about filing Chapter 7 or Chapter 13 bankruptcy, contact us today for a free consultation.

What Is Income for Purposes of the Means Test?

Wait a second…I have to qualify to file bankruptcy?  Isn’t it enough that I just simply cannot pay my bills?  How do I determine whether or not I would qualify?  The answer is simple enough: the Means Test.  What is the Means Test you might ask?  The Means Test is a formula used to determine your ability to pay back all of your debts.  This will help determine whether or not you qualify for a Chapter 7 bankruptcy or if you will need to pay back some of your debts and file a Chapter 13 bankruptcy.   The Means Test will take in consideration all of the income coming into the home, as well as some of the expenses that are coming out.

What is considered income for the purpose of the Means Test? Here are the most common types of income that factor into the Means Test:

Types of Means Test Income

W2 Wages/TipsSelf Employment Income (this also includes babysitting income)
Family SupportAlimony
Income from Rental PropertiesChild Support
401k / IRA / Life Insurance WithdrawalsTrust Accounts
UnemploymentPensions

 

Almost all income is considered for the purposes of the Means Test. However, there is a small number of sources of income, generally those that derive from the federal Social Security Act, that are not considered for Means Test purposes.

The Means Test regularly changes requirements for each state, currently, North Carolina is as follows:

Household Size:Median Income for Means Test:
1$37,781
2$50,630
3$55,468
4$67,578

 

Make too much?  Before you get discouraged, there are “qualified” deductions that help bring down that means.  Some qualified deductions are: taxes, medical insurance, life insurance premiums, mandatory deductions from you pay, charitable contributions, court ordered payments, and out of pocket co-pays and prescriptions.

You will need to sit down with your bankruptcy attorney and let them run a complete Means Test on you to determine whether or not you qualify at this time.  Looking at the past six months of pay stubs or a profit and loss will help an attorney determine whether or not you are able to pass the Means Test.

 

Is My Tax Refund Protected in Bankruptcy?

Short Answer: Yes, you are usually able to protect most, if not all, of your tax refund while in bankruptcy.

During the tax season from January through April, it is especially important for both bankruptcy attorneys and debtors to be aware of income tax refunds. One of the most frequently asked questions by the bankruptcy Trustee at 341 creditors’ meetings is “Are you expecting a tax refund?” Most debtors could probably use the extra cash but if it is not properly protected or unwisely spent, the tax refund could end up in the Trustee’s hands.

Tax Date on Calendar

Starting in November, an experienced bankruptcy attorney will ask a client if he or she is expecting a refund. The client should let his/her attorney know how much their refund will be so that the attorney can protect it with the “wild card” exemption. The “wild card” exemption can be used to protect other personal property as well and cannot exceed a certain total amount. Therefore, it is sometimes necessary to choose between exempting a tax refund and exempting other personal property.

We understand that at times the tax refund is needed to pay for necessities such as repairs to a house or car or is needed for living expenses. It is usually okay to use your tax refund on these types of expenses but it is crucial to discuss this in advance with your bankruptcy lawyer. What a debtor does not want to do is use the tax refund to pay for a fancy vacation which the Trustee will not regard as a necessity. Nor should he/she pay back a family member or business partner as the Trustee views this as favoring creditors. In either case the Trustee could make the debtor repay that money to the Court.

Often times the debtor will not acknowledge the receipt of a tax refund if the IRS withholds any or all of it or if the debtor has already spent it. It’s important for the attorney to ask and for the debtor to tell him/her about all tax refunds including why they have been withheld or how they were spent.

Another way to protect a large tax refund is to ask your employer at the beginning of the year to defer more of your salary or projected bonus into an employer IRA or 401K. Do not wait to get the refund, deposit it into your bank account, and then contribute to a retirement fund. The Trustee can consider the tax refund to be part of your “estate”, which they have control over during the bankruptcy process, and require you to pay it to the court.

The bottom line: The best ways to protect your refund in bankruptcy are 1) file your taxes before you file for bankruptcy so you will know exactly how much your refund will be and 2) consult an experienced bankruptcy attorney to help you navigate some of these complicated tax refund and bankruptcy issues.

 

I’m Engaged, Will Bankruptcy Impact My Future Spouse?

Short Answer: Generally, your spouse or soon to be spouse will not be impacted by your filing bankruptcy.


This is a topic that often comes up during a consultation with prospective clients. Let me start by saying there?s no such thing as a joint credit report or a joint credit score. Everyone has his or her own, and they aren?t combined when you marry. Having said this, your bankruptcy will not affect your future spouse?s credit scores. If your future spouse has not co-signed on any loans with you, then your bankruptcy will not affect him or her in any way.

Young African American Couple

While your bankruptcy doesn?t affect your future spouse directly, it could affect your ability to get joint loans in the future should you decide to purchase a house, car, etc. The person who filed bankruptcy’s credit could make it more difficult to get approved for the joint loans and could trigger a higher interest rate.

If you?re concerned that once you get married, your spouse will then become responsible for your debts don?t be! Your debts are YOUR debts. If you file bankruptcy and receive a discharge, most, if not all, of your debts will be eliminated. Your future spouse will not be liable to pay those debts.

The Bottom Line: One person filing bankruptcy does not directly hurt the credit of a spouse or future spouse. Nor will your spouse be responsible for the non-joint debts. However, when you file bankruptcy it will be more difficult to initially obtain good interest rates and this could have an impact on getting joint loans.

 

What is the Difference Between a Bankruptcy Discharge and Dismissal?

Debtors sometimes confuse the difference between a discharge and dismissal but they are two very different and distinct outcomes of bankruptcy.

Discharge Defined

A discharge means that all the requirements set by the court have been met by the debtor. In a Chapter 13 bankruptcy this means that all the debtor’s payments have been made in full and on time. For a Chapter 7 bankruptcy it means that all the creditors and unsecured debts listed in the bankruptcy petition (filed with the Court) have been wiped out. Once the case has been discharged creditors can no longer attempt to collect the debts owed to them. This allows the debtor a fresh start and he/she can move on without the burden of insurmountable debt.

Discharge Time Frame

A discharge usually happens more quickly in a Chapter 7 because assets are liquidated to pay creditors. A Chapter 13 discharge can take as long as three to five years because debts are partially repaid over that time according to the Court approved bankruptcy plan. A discharge is a favorable outcome for the debtor and is his/her goal for filing bankruptcy in the first place.

Dismissal Causes

On the other hand, a dismissal is not the desirable outcome for a debtor. A dismissal happens more frequently in a Chapter 13 than a Chapter 7. A case can be dismissed for many reasons like not being able to afford the Chapter 13 payments because life circumstances have changed (i.e. job loss, etc.). In either type of bankruptcy, not completing required credit counseling and financial management courses could cause a dismissal as well as if the case was improperly filed. A case can also be dismissed for fraudulent reasons, i.e. excessive credit card abuse indicating that the debtor was trying to accumulate massive debt that he never intended to repay or property transfer to a relative just prior to filing.

Dismissal, Creditors and Credit Report

Once a case is dismissed, the automatic stay placed on the creditors that prevented them from being able to collect a debt is lifted, and the creditor may resume attempts to collect a debt. After a Chapter 13 dismissal the debtor cannot file another bankruptcy for 180 days. Whether your case is dismissed, discharged, or active all three statuses will show on your credit report.

One way to ensure a favorable discharge and not a dismissal is to convert a Chapter 13 into a Chapter 7 before it is dismissed. This can be accomplished by consulting your bankruptcy attorney who is familiar with the laws and procedures.

Is Family Support Considered Income for Bankruptcy?

If you are considering filing bankruptcy, I am sure that you have been researching what types of bankruptcy are common and what they may involve. Upon doing your research, I am sure that you have seen the word “qualify” a good number of times.  “How do I qualify?  Is it not enough that I can’t pay my bills?!?!” one might say, but indeed you must meet income qualifications which have a major impact on which ever bankruptcy you choose to file. What is considered income you may ask? The most common type of income is a salary or wages you earn from employment.

Mother and Daughter

Many people going through financially tough times will get support from their family and friends. So, with that said, is family support considered income for bankruptcy? Yes. If you receive financial support from family on a regular basis it is also considered income and must be included in your budget. Just because it’s not reported to the IRS or State when you file your taxes, doesn’t mean it’s not considered income in your bankruptcy.

Here are some other kinds of income that must be included in your bankruptcy:

Unemployment compensation

Babysitting/Side jobs

Child Support

Alimony

Self Employment

SSI (Social Security Income)

Retirement/Pensions

Retirement/Pension withdrawals

Sales of stock

Rental income

Money received for room and board (support from a roommate)

How Do I Know If My 401(k) is ERISA Qualified?

Flag IconIf you are filing bankruptcy and have a 401(k), your attorney will most likely ask you to provide proof that your 401(k) is ERISA qualified.  An ERISA qualified 401(k) is exempted or protected in bankruptcy.  Okay, you are asking yourself, what is ERISA qualified and where do I go to find it if my 401(k) is qualified?

First, ERISA is an acronym for Employee Retirement Income Security Act.  ERISA is a federal law setting the minimum protection standards for individuals contributing to pension and some health plans established by private companies.  ERISA does not apply to federal and state employees, since they are usually government retirement plans.   ERISA requires the private employer to provide information to you about the features of the plan, how it is funded, specific fiduciary responsibilities for management of the plan, etc.  For our purposes, we are specifically looking at retirement or 401(k) plans.

Most retirements plans meet the ERISA requirement.  Often your employer has a letter on file from the Internal Revenue Service that they will provide to you.  This letter states your company’s retirement plan has been reviewed and meets the minimum requirements under ERISA.  If you are unable to obtain the letter directly from your employer, you may contact the 401(k) administrator and ask them to provide you a copy of the plan summary.  You may even have access to your plan summary online.  In the table of contents, there may be a section that speaks about ERISA.  If not, quickly review your plan document and look for the word ERISA.  It may not specifically say your plan has been reviewed by the Internal Revenue Service and meets the ERISA requirements, but it will usually indicate the plan complies with ERISA reporting requirements.

Again, most employer sponsored 401(k) plans meet the requirements under ERISA.  However, it is something you want to verify prior to filing bankruptcy.  Often the bankruptcy Trustee will ask for a copy of your most recent 401(k) statement and a notice of ERISA qualification prior to or at your meeting of creditors.  If you should have any questions about your plan, speak with the administrator of your 401(k).

I Recently Financed a Purchase, Can I File Bankruptcy?

If you recently financed a purchase, e.g., a home, car, furniture or appliance, you should definitely speak with your attorney.  Any purchase made within the 90 days prior to filing bankruptcy may be considered a fraudulent transaction.  Depending on the amount of the purchase or how the funds were obtained to finance the purchase, the Court and/or your creditors could argue there was fraudulent intent even beyond the 90 days.

Family in Front of House

There are several things the Court may consider when someone purchases an asset shortly before filing bankruptcy:

Was the purchase for a necessity? If you financed a vehicle because your previous car had a major mechanical problem and needed costly repairs, you may be able to explain why it was necessary to make the purchase shortly before filing bankruptcy.  The same may be true if an appliance, e.g. your refrigerator, stopped working.

Was the type of purchase reasonable? Did you purchase a used 2006 Honda Odyssey or did you purchase a new 2011 Hummer?  You needed a vehicle large enough for your family of five, but you must use the reasonable test.  The 2006 Honda will probably serve your family’s needs and be a bit more economical than the 2011 Hummer.

Was the financing completed with a legal process? This is best demonstrated with two examples.

If you went to your local dealership and obtained financing, you will probably have no problems with the financing following all of the legal steps.  The only question for this type of financing is whether the dealership and their finance company should have known you were insolvent, bankrupt, at the time they provided the loan to you.  This is an issue that could be played out in the bankruptcy court, but in most cases is not an issue.

If your brother-in-law gave you a $10,000 loan to purchase that used car and did not put a lien on the title of the vehicle, you and your brother-in-law will have some concerns and issues after you file bankruptcy.  Without a valid lien on the title, the loan is not considered a “secured” loan but an “unsecured” loan.  In other words, your brother-in-law cannot legally repossess the vehicle if you fail to make payments to him.  In your bankruptcy, he would be treated like a credit card or medical bill and paid nothing or only a percentage of the amount owed to him depending on the type of bankruptcy you file.  In addition, you may not be able to fully protect the equity in the vehicle.  In that situation, the bankruptcy Trustee could actually sell the car and use the proceeds to pay your creditors.  Needless to say, you or your brother-in-law will be happy with this outcome.

How was the asset purchased? If you recently purchased an asset and charged it on a credit card, you may be required to repay the debt.  If you used a credit card to purchase that $10,000 car with hopes of discharging or eliminating the debt in bankruptcy, you should think again.  Any purchase on a credit card will be reviewed, but any large purchase will most certainly be scrutinized by the credit card company and their attorney.  You can expect a lawsuit in bankruptcy, also known as an adversary proceeding, to be filed against you by the credit card company.  They will argue this debt should not be eliminated in bankruptcy and they will most likely win that argument.  Similarly, if you decided to remodel your home and purchase new stainless steel appliances on your credit card, that debt will most likely not be eliminated.  You may even find that the credit card used to purchase those items is considered a secured creditor.

Was the purchase used to protect an otherwise unprotected asset in bankruptcy? This approach is most often taken by someone who thinks he or she understands the implications of filing bankruptcy.  Again, an example is the best way to explain.  A person had $20,000 in stock that could not be protected in bankruptcy.  Rather than lose the stock, the person decided to cash out the stock and use it as a down payment on a new home.  Now the $20,000 of stock is invested in the home.  It is no longer an unprotected asset, since the person can use his homestead exemption, currently $35,000 for an individual and $70,000 for a couple in North Carolina, to protect the equity in his home.  But not so fast, the person must disclose the sale of an asset within two years of the bankruptcy filing.  Failure to disclose the sale of the stock within the two years would most likely be discovered on review of the person’s tax returns.  Needless to say, the Court would almost certainly see this as an attempt to defraud or perjury if it were not listed on the bankruptcy filing.

Not all purchases financed shortly before filing bankruptcy are problematic, some are for legitimate reasons.  However, you should expect any purchases financed within three to six months of filing bankruptcy to be scrutinized.  This timeframe could be for even longer if the assets purchased were for large dollar amounts or items not necessarily considered a necessity.  You should obviously discuss any recent purchases with your attorney.

 

How Does the Bible View Bankruptcy and Debt?

One dilemma that Christians face as they contemplate how to handle their financial difficulties is: “What does the Bible say about finances and debt?” This can be a difficult question to find accurate answers to. Although Bible verses can be interpreted in many ways, we will review Bible verses that discuss this topic to allow you to prayerfully make the best decision for you and your family. As always, you should consult with your pastor regarding more specific questions regarding the Bible and debt.

Family in Front of House

As anyone with debt and financial hardship knows, debt does not discriminate among races, religion, or gender. Financial hardship can happen to anyone, and it is a very emotional, personal decision to decide to file bankruptcy.

A common concern that Christians who are considering bankruptcy have is whether bankruptcy is considered a sin and whether they will be committing a sin by not repaying their debts.

As many people know, the Bible does speak frequently of debt and how we should handle our debts. Although the Bible does not expressly forbid or approve of going into debt, there are several instances where the Bible gives guidance on how debt should be viewed.

One emphasis that is made in the Bible is how debt can make you a slave to the money owed. Jesus died to free us from slavery to our sins, yet debt can keep us in the grip of the money owed for years – making us a slave to the debt.

In Ecclesiastes 5:5, the Bible says, “It is better to say nothing than make a promise and not keep it.” This verse can be construed to mean that one should not incur debt with the promise of repaying the debt only to later not be able to keep that promise. On the other hand, most people do not intentionally incur debt with the intent of not repaying the debt. Most individuals who have incurred debt and are contemplating bankruptcy were at one point in time able to pay all of their bills, including their credit card debts. Usually, people are considering bankruptcy because of a financial crisis that has affected their income and expenses.

Taxes owed are viewed as a category of debt that must be repaid. In Romans 13:7, the Bible says, “Give to everyone what you owe them: If you owe taxes, pay taxes; if revenue, then revenue; if respect, then respect; if honor, then honor.” In today’s modern bankruptcy laws, most taxes are not dischargeable, meaning they must be repaid regardless of the bankruptcy filing – thus keeping with the views of the Bible on the repayment of taxes.

As you can see from the above verses and analyses, the Bible does not explicitly forbid or encourage debt. With no clear answer on how the Bible views debt, how can one decide how the Bible views bankruptcy?

Once again, the Bible does not give a clear statement on whether bankruptcy is a sin. However, there are several verses in the Bible that do refer to one’s inability to pay their debts.

In Luke 7:42, the Bible says, “When they were unable to repay, he graciously forgave them both. So which of them will love him more?” In Romans 13:8, the Bible says, “Let no debt remain outstanding, except the continuing debt to love one another, for he who loves his fellowman has fulfilled the law.”

One of the more popular verses on this subject is found in Deuteronomy 15:1-2, where the Bible says, “At the end of every seven years you shall grant a release of debts. And this is the form of the release: Every creditor who has lent anything to his neighbor shall release it; he shall not require it of his neighbor or his brother, because it is called the Lord’s release.” This verse is probably the most relevant to the concept of bankruptcy and the “release” of debts that takes place when a person receives their discharge from bankruptcy.

Although the Bible is indeed conflicted regarding debt and the inability to repay debts, there is good news for Christians who are contemplating bankruptcy. The Bible encourages people to not be a slave to their debts, and calls for the release of debts after certain time periods. The Bible is certainly not opposed to the concept of bankruptcy, and bankruptcy is not considered to be a sin.

However, this does not make bankruptcy any easier for a family who is exploring their options and considering filing bankruptcy due to their financial situation. As with any major life decision, it is one that should be prayed over, discussed with loved ones, and considered carefully. If you do decide to file bankruptcy, you will find that you will be blessed with a fresh financial start so that you can continue with your life without being a slave to the debt.

Greensboro Bankruptcy Lawyers Still See Slumping Economy Despite Better Numbers

Greensboro, NC | Bankruptcy LawyersAlthough national bankruptcy filings increased 9% in 2010, North Carolina bankruptcy filings were more varied – filings increased in some parts of the state while they decreased in others.

In the Middle District of North Carolina, there was a decrease of approximately 4.6% - there were 7,170 filings in 2010, compared to the 7,521 filings in 2009. The Middle District of North Carolina includes Winston-Salem, Greensboro, and Durham (and areas in between).

Within the Middle District of North Carolina, cases for bankruptcy in Greensboro, NC were down 4.9%. In 2010, there were 2,389 cases, compared to 2,513 in 2009.

Cases for bankruptcy in Winston-Salem, NC (also in the Middle District) were down 8.6% in 2010, with 2,430 cases filed compared to 2,660 in 2009.

On the other hand, in the Western District of North Carolina, there was an increase in bankruptcy filings of approximately 2.5% in 2010. The Western District of North Carolina includes Asheville, Bryson City, Charlotte, Shelby, and Wilkesboro (and areas in between).

While it is surprising that there is such a difference in the bankruptcy filing trends between two areas that are so geographically close, there are likely reasons for the difference. For example, the job market may be slightly improving in the Middle District while there may be no improvement in the Western District. Additionally, the housing market trends may be more positive in the Middle District areas while there may be ongoing housing difficulties in the Western District cities and towns.

If you are in the Greensboro, Winston-Salem, or High Point areas and are considering filing bankruptcy, contact Duncan Law for a free, no strings attached consultation to learn more.