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/Tips Self Employment Income (this also includes babysitting income)
Family Support Alimony
Income from Rental Properties Child Support
401k / IRA / Life Insurance Withdrawals Trust Accounts
Unemployment Pensions

 

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.

 

What is the Difference Between a Bankruptcy Discharge and Dismissal?

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)

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.

 

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.