Category Archives: Debt

DALLAS BANKRUPTCY ATTORNEY: USING HOME EQUITY LOANS AND TITLE LOANS TO PAY OFF CREDIT CARDS MAY BE A BIG MISTAKE

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Credit card debt has a way of getting out of control.  Small balances can quickly become financial burdens when a missed or late payment results in late fees and an increase in the interest rate.  One strategy for dealing with this type of problem is to refinance the debt.  If you find yourself in this situation, and are looking at ways to pay off your credit card bills, do yourself a favor and keep your eyes averted from your home and your car.

 

It might be tempting to apply for a loan using your home or car as security.  You will generally get a lower interest rate by providing security to the lender than you would with an unsecured loan.  However, by giving the lender a security interest in your house or car you are giving them the right to take your property if you default on the loan.  Before you use your house or vehicle as collateral, step back and take a hard look at your financial situation.  Are your financial troubles the result of bad spending habits?  If after reviewing your income and a realistic budget you believe you can afford your house, car and other household expenses, plus a payment associated with a home equity loan or title loan, then taking out a loan to pay off your credit cards may be a good idea.

 

However, if after reviewing your income and budget, you realize that you don’t earn enough money to meet all of your financial responsibilities, then taking out a home equity loan or title loan is going to cause your home to be foreclosed or your car to be repossessed because eventually you will default on the loan.  If you are in this situation, consider ways to reduce your monthly expenses.  This may mean selling your home and finding a less expensive place to live or downgrading your vehicle.  You are generally better off if you act proactively to resolve your financial situation before you default on your secured loans because it gives you the opportunity to extract any equity from the property rather than losing it to the lender.  If after reviewing your financial situation you realize that you cannot afford to repay your debt, consider speaking with a bankruptcy attorney.

Texas Bankruptcy Attorney:STRATEGIES FOR COPING WITH CREDIT CARD DEBT

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Dallas Bankruptcy Attorney:

STRATEGIES FOR COPING WITH CREDIT CARD DEBT

Recently I read an excellent article by Laura Coffey on MSN.com discussing strategies for reducing credit card debt.  As a bankruptcy attorney, I meet with clients everyday that are struggling with repaying high interest credit cards, and repaying these types of loans can be an uphill battle.  The average interest rate on credit cards is 14.9 percent, but interest rates of up to 28 percent are not uncommon.  At 28 percent interest a credit card balance is doubling every three years.  For many debtors, this makes repaying their debt nearly impossible.

 

Ms. Coffey suggests the following strategies for reducing personal debt:

 

1. Know how much you owe. Collect each of your bills with outstanding debts including all credit cards, mortgage, student loans, auto loans, personal loans, and bank loans. Create a list of all the creditors with monthly payment amount, balance, interest rate, and credit limit for each. Verify the payment due dates and the status of the account.

 

2. Prioritize which bills to pay first. If you can’t pay off all your monthly bills, first pay the bills that are a necessity for health, shelter, basic groceries and basic transportation. Then pay the secured loans such as your car loan. Payments on unsecured loans, such as most credit cards, should come last in these critical situations.

 

3. Obtain a free copy of your credit report and review it. It may contain an error that is creating a lower credit score that is leading to higher interest rates on your loans. If correcting the error results in a higher credit score, contact your creditors to make sure they know about your improved score.

 

4. Contact your creditors to negotiate lower rates. The less money you pay in interest, the more money you have to pay off your bills. If you are in danger of missing a payment, contact your creditors as soon as you realize you have a problem. They may be willing to work out a payment plan, lower your rate, or lower your monthly payment. Explain that you are in debt, the steps you are taking to repay it, and what you can pay today. If you request a lower interest rate and get turned down, politely ask to speak to the supervisor and ask again. Document all conversations, including whom you spoke with, and the date, time, and the results.

 

5. Pay more than your minimum. Your minimum payment is usually only 2 percent to 5 percent of your balance. At this rate, it will take many years to pay off your debt. In fact, your credit card bill now shows exactly how long it will take. You may be surprised about how much you will pay in interest payments by paying just the minimum payment each month.

 

6. If you have multiple credit cards with outstanding balances, focus on paying off the card with the highest interest rate first. Continue to pay the minimum on your other cards until the card with the highest rate is paid off, and then focus your effort on the card with the next highest interest rate. Keep your oldest credit card accounts open and occasionally use them to buy a magazine or a movie ticket — just pay it off each month. This may help improve your credit score.

 

7. Check into transferring your balance to a card with a lower interest rate. If your rate is above 15 percent, it could pay to transfer the balance for that card to one that offers 0 percent APR for at least 12 months for balance transfers. To take full advantage of this 0 percent interest, pay as much as you can above the monthly minimum. Only use this card for the balance transfer, not additional purchases. Pay attention to the balance transfer fee. At the beginning of 2009, the industry standard for a balance transfer fee was 3 percent; now several issuers have increased that fee to 4 percent.

 

Some people have so much credit card debt that they cannot repay their debt, even following these rules.  For those people, bankruptcy may be a good tool for obtaining relief from their debt.  Not all people are eligible to file bankruptcy, so if you are struggling with repaying your debt you should speak with an experienced attorney.  It’s also a good idea not to wait too long to get advice on bankruptcy.  There are limits on how much debt a person filing Chapter 13 bankruptcy can have at the time they file.  If you wait to file bankruptcy and your debt continues to grow due to interest and fees, you may find that you are no longer eligible for Chapter 7 or Chapter 13 bankruptcy.

(Source:  msn.com)

CHAPTER 7 BANKRUPTCY: REDEEMING SECURED PROPERTY

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One of the benefits of filing Chapter 13 bankruptcy is that you can sometimes cram down secured debt on vehicles.  This means that you can force a creditor to accept repayment of a loan by paying the value of the vehicle rather than the entire claim.  Chapter 7 bankruptcy has a similar tool available to debtors with secured property that has depreciated below the claim amount.  Debtors can choose to redeem property by making a single payment to the creditor in an amount equal to the value of the vehicle.  For example, if a debtor owns a car worth $5,000 but still owes $15,000 to the creditor holding the note, the debtor can satisfy the entire claim by paying a single payment of $5,000.

 

There is one limitation on redemption.  Debtors who wish to redeem property cannot do so with property belonging to the bankruptcy estate, meaning nonexempt property.  For example, if you chose Texas exemptions in your schedules, the  money that is in your bank accounts or in the form of stocks and bonds that are not exempt retirement accounts is nonexempt property.  Since this property is nonexempt, it is property of the bankruptcy estate and might be used to make payments to your creditors.  This money cannot be used to redeem property of the debtor, because it no longer belongs to the debtor.

 

Redemption has one other obvious problem.  Most people that would benefit from redemption do not have enough money to make the single payment to the creditor to redeem their property.  Fortunately, there are lenders who specialize in loaning money to debtors who wish to redeem property.  These lenders usually offer high interest loans, so the money saved by redeeming the property should be carefully weighed against the interest which will accrue over the life of the loan.  For many debtors redemption loans are a good way to restructure debt and save a good deal of money.

LIABILITY FOR DEBT AFTER BANKRUPTCY DISCHARGE: IN PERSONAM VS. IN REM

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When determining how a debt will be affected by discharge in bankruptcy, it is important to determine whether or not a debt is in personam or in rem.  “In personam” means “against a person.”  With a few exceptions, in personam liability is discharged in bankruptcy.  For example, credit cards and medical bills are debts against a person, and both are uncollectable against the debtor once they have been discharged in bankruptcy.  “In rem” means “against property.”  In rem liability is uncollectable against a person who has been discharged in bankruptcy, but the debt can still be collected by an action against property that is encumbered by a lien.  For example, mortgages and car loans are discharged against the debtor in bankruptcy, but the debt can still be collected through foreclosure or repossession against the house or the car.

 

There are some situations where in rem liability can be turned into in personam liability, which will allow debtors to discharge a debt while not losing secured property to foreclosure or repossession actions.  For example, judicial liens can be removed by filing a motion in bankruptcy court sometimes called a “Motion to Avoid Lien.”  Additionally, in some cases a bankruptcy judge can remove a second mortgage in a process called “lien stripping.”  Lien stripping removes the lien on the property, so that the debt is no longer secured.  These processes require that a certain set of facts be present in the case, and prospective bankruptcy filers should consult with an experienced bankruptcy attorney to determine whether or not a judicial lien can be avoided or a second mortgage stripped.

BANKRUPTCY: AVOIDING LIENS

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In bankruptcy, debtors have the ability to avoid two types of liens, meaning they can remove the lien from the collateral and make the debt unsecured.  A lien can be avoided if it impairs a debtor’s exemption to which the debtor would have been entitled if not for the lien.  For example, if a debtor owns a television which is encumbered by a lien, and the debtor has sufficient exemptions available to exempt the television if not for the lien, then the debtor can avoid that lien, meaning the television will no longer be encumbered by the lien.

 

Avoiding liens is limited to two different types of liens in bankruptcy.  The first is judicial liens.  A judicial lien is created when a debtor is sued, the plaintiff receives a judgment, and then attaches that judgment to the debtor’s property in the form of a judicial lien.  In bankruptcy, judicial liens can be avoided, with one exception.  Judicial liens resulting from a domestic support obligation owed by the debtor cannot be avoided.  The second type of lien that can be avoided in bankruptcy is a nonpossessory, nonpurchase-money security interest in household furnishings, household goods, wearing apparel, appliances, books, and about ten other types of assets.  For the complete list, take a look at 11 U.S.C. § 522(f)(1) which can be found in The Bankruptcy Code.  The key thing to pay attention to here is that the security interest must be nonpossessory and nonpurchase-money.  Nonpossessory means that the creditor has a lien based upon the fact that they have possession of the property.  Nonpurchase-money means that the debt cannot have been accrued as a result of the purchase of the collateral.

 

The ability to avoid liens is a powerful tool for preserving debtor’s property and reducing their payments in bankruptcy plans.  Unfortunately the ability to avoid nonpossessory, nonpurchase-money security interests does not apply to liens on motor vehicles.  If a debtor uses their vehicle as collateral for a nonpurchase-money loan, the lien cannot be avoided.