Every day I ride home from work, and while listening to the radio I hear the many and varied "Debt Settlement" program advertisements. Every day at work I meet with people who are seeing me with a need to file for Bankruptcy. An increasing number of the people I meet with, and who are now filing for Bankruptcy, have tried "Debt Settlement" programs. The typical story I hear about these companies is not impressive, and in most cases borders on what appears to be fraud. It reminds me of the old saying: "If it sounds to be good to be true, it is probably not true". I am sure some of these companies are having their successes; however, I am not seeing any of their successes with the people I meet. Generally the story I hear, goes like this:

1. The "Debt Settlement Agency" told me they could negotiate down all of my debts;
2. They also set matters up for one payment to be taken directly from my bank account for distribution to my creditors; and
3. Lastly, they told me everything was taken care of, so my payments are made over next several months without fail.

The story when they get to my office actually turns out to be:

1. The payments to the Debt Settlement Agency were made just like clockwork:
2. One or more of the creditors, who I was led to believe were being paid under the "Debt Settlement" program, have now filed a lawsuit against me; and
3. I am about to lose some of my income to a Garnishment Order from a lawsuit I thought was being taken care of by the "Debt Settlement" company.

END RESULT: The end result for the people I have met with, and who were originally in a "Debt Settlement" program, is as follows:

1. They end up filing for Bankruptcy;
2. They end up losing the money they sent to the "Debt Settlement" program; and
3. In some cases they ended up getting a notice from the IRS that they have underpaid their income taxes because they failed to report as "income" the amount of debt the "Debt Settlement Agency" got reduced. [The IRS treats "forgiven debt" as income for tax purposes, unless the debt is forgiven in a Bankruptcy]. If the "Debt Relief Agency" negotiated a reduced amount to be paid to your creditor, your creditor will then report the "forgiven" amount of the debt to the IRS as income under a 1099 Statement so you will be taxed on it. The Internal Revenue Code has a specific provision preventing the IRS from treating debt that is discharged in a Bankruptcy from being treated as "income" for tax purposes.

REMEMBER: "If it sounds to be good to be true, it is probably not true".

Chapter 7 Bankruptcy is sometimes called a "liquidation" bankruptcy -- in general, most of your debts will be cancelled; however, if you have too much income, or too much equity in property, you may be forced into a Chapter 13 Bankruptcy. In a Chapter 7 Bankruptcy, with certain exceptions, nearly all debts can be cancelled. Some exceptions include, but are not limited to: child support, student loans, and taxes; however, under certain circumstances even "income" taxes can be cancelled.

Benefits you receive may include, but are not limited to:

1. Stop harassing phone calls
2. Stop garnishment orders
3. Stop lawsuits
4. Stop mortgage foreclosure actions
5. Stop efforts to repossess property
   
   

Chapter 13 Bankruptcy is quite different from Chapter 7 Bankruptcy. In a Chapter 13 Bankruptcy you submit a "Plan" to pay creditors. Depending on your circumstances, your "Plan" may call for a payment such that your unsecured creditors receive almost zero, it may call for payment of 100% of your debt, or it may call for payment of somewhere between zero and 100%. In those instances where your creditors are paid virtually nothing, your Chapter 13 Bankruptcy may highly resemble a Chapter 7 Bankruptcy. Chapter 13 Bankruptcy is often used to force mortgage creditors to allow you to catch up delinquent mortgage payments over a period of 3 to 5 years. In many cases you may be able to save your home from foreclosure, and still cancel your unsecured debts. In some cases where you have a 2nd mortgage, you may even be able to eliminate the 2nd mortgage altogether. A Chapter 13 Bankruptcy has other benefits which should always be considered before you make the final decision to file a Chapter 7 Bankruptcy.

Over the last several years the banking industry made too many 2nd Mortgage Loans, and Home Equity Loans, with the end result that these loans caused the total mortgage debt a home to exceed the actual value of the home. In addition, the recent depreciation in home prices has caused the true value of many homes to be lower than the remaining amount owed on the 1st Mortgage. A large part of these 2nd Mortgage Loans, and Home Equity Loans, are nothing more than refinanced credit card debt, which was previously unsecured debt [ie. not supported by collateral]. This refinanced credit card debt was then converted into mortgage debt where the home is now the collateral for the liability. In those cases where the value of the home is less than the amount of the 1st Mortgage, the 2nd Mortgage Loans, and Home Equity Loans, do not have any real collateral because the 1st Mortgage essentially eats up all of the value in the home. In this situation, if the home went into a foreclosure, there is really no equity in the home to be used to pay the 2nd Mortgage Loan or the Home Equity Loan. If this is your circumstance, if you file a Chapter 13 Bankruptcy and you complete your Chapter 13 case, you can eliminate ["lien strip"], the 2nd Mortgage Loan or the Home Equity Loan. The 2nd Mortgage, or the Home Equity Loan, are then treated as if they were just like credit card debt. This benefit is only available in a Chapter 13 Bankruptcy, and it can help you eliminate debt you would have lived with for 20 or 30 years.

One of the largest causes of Divorce is poor financial condition. When families with poor financial conditions break up, the end result is more financial pressure. This added financial pressure arises from the loss of two household incomes to support one household, followed immediately by the break up of the two incomes with the need to support two separate households. Then, adding insult to injury, many Divorce Decrees impose obligations to pay debts that are not possible to maintain. In a Chapter 7 Case you can not eliminate these obligations. In a Chapter 13 Case you can eliminate these responsibilities, provided they are not determined to be child support, alimony, or maintenance. Some examples of liabilities which can be eliminated by the filing of a Chapter 13 Bankruptcy are:

1. Orders to pay credit card debt;
2. Orders to pay mortgage debt;
3. Orders to pay unsecured loans;
4. Orders to make payments on vehicle debts; and/or
5. Orders to pay legal costs and attorney fees.

As a general rule taxes owed to the Federal and State taxing authorities are not dischargeable in bankruptcy. One exception to that rule is for "income tax" liabilities. If you meet the following rules, you can discharge Income Tax obligations:

1. The tax is a personal Income Tax. [ie. not sales tax, not a withholding tax, etc];


2. The Income Tax is owed for a period of more than 3 years prior to the date of the filing for Bankruptcy. [ie. 2006 Income taxes were due on April 15, 2007. Three years later, on April 16, 2010, those Income Taxes could become eligible to be discharged in a Bankruptcy;


3. The Income Tax was owed for a return which had been in the hands of the taxing authority for more than 2 years prior to the date of the filing for Bankruptcy; and


4. The Tax Return was a properly filed return. [ie. an accurate return]
   

If you meet the above rules, you may be able to discharge the Income Tax you owe.

Filing for Bankruptcy puts into effect an "Order for Relief" -- known informally as the "automatic stay." The automatic stay immediately stops most creditors from trying to collect what you owe them.

Prohibited Acts By The Creditors

1. Beginning or continuing law suits
2. Collection calls
3. Repossessions
4. Foreclosure sales
5. Garnishment or levies

The automatic stay remains in effect until

A judge lifts the stay at the request of a creditor; the debtor gets a discharge; or the item of property is no longer property of the estate.

Wage garnishment is a State Court Order issued to an employer which allows a creditor to have part of your income taken from your pay to satisfy a judgment for a debt. The creditor must have a Court ordered "judgment" to legally have your income taken by way of garnishment. This money is then sent to the Court for distribution to the creditor who has taken judgment against you. Upon filing Bankruptcy an immediate order is sent to terminate garnishment Orders. This means income can no longer be taken from your wages toward payment of the judgment. As part of the Bankruptcy process, steps can then be taken to eliminate the judgment altogether.

Stopping foreclosure is another positive side effect from filing for Bankruptcy. If your house is being foreclosed on, due to a failure to make mortgage payments, the filing of a Bankruptcy will put a hold on the process. This occurs in both a Chapter 7 Bankruptcy, and a Chapter 13 Bankruptcy.

If the Bankruptcy filing is a Chapter 7, the hold on the foreclosure process is only temporary.

If the Bankruptcy filing is a Chapter 13, the Chapter 13 process will allow you to begin making regular payments again, and it will allow you up to 5 years of time to catch up on the payments you have missed. While in the Chapter 13 process, you may be able to eliminate other debts, reduce interest on other secured debts [ie vehicle debts], and allow you time to put all of your finances back in order.