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14 Lies About Bankruptcy

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Search the words “bankruptcy”, or “filing for bankruptcy”, or even “Rhode Island bankruptcy lawyer” on the internet and you will discover a subject surrounded by a confusion and misinformation.

However, if you are drowning in debt, it becomes crucial to separate fiction from fact. Is bankruptcy as bad as your creditors would have you believe? Let’s analyze a few of the charges leveled at bankruptcy to find the truth.

Myth 1:  Under The NEW Bankruptcy Law….There’s No More Help (or It’s Too Late To File)

Nothing could be further from the truth. Despite what you may have heard from the press, this claim is completely unsupported. In reality, you can do almost as much (and in some cases, more) under the new law as you could under the old law. Many clients are actually making out better under the new law than they did under the old.

Myth 2:  Everyone Will Know You Have Filed For Bankruptcy

This is another falsehood. The average person can obtain a financial fresh start without the world ever finding out: chances are the only people who will know about your RI Chapter 7 filing are the people you decide to tell. Although it is true that your bankruptcy is a matter of public record, the number of bankruptcies filed yearly is so massive that the possibility of anyone knowing you filed is extremely remote.

It is crucial to note the importance of not telling others of your bankruptcy filing. Like divorces and cancer, financial problems makes good gossip, and if you tell one person, you tell the world. Unless you actually want your friends and family to know you filed for bankruptcy, keep it under your hat.

Myth 3:  You Will Lose Everything You Have

Most of my clients don’t lose anything. Every state, including Rhode Island and Massachusetts, has its own set of exemptions that protect various kinds of property under bankruptcy. For example, Rhode Isand’s exemption laws protect a person’s house, car, truck, household goods, furnishings, retirement plans, IRAs, wages, personal injury claims, and cash value in life insurance. In most cases, creditors will not require the signing of a reaffirmation agreement to keep secured property.  Even if you have more property than can be covered by available exemptions, filing for the slightly-more-expensive Chapter 13 bankruptcy allows you to keep your property.

Myth 4:  You Will Never Be Able To Own Anything Again

No matter how many people believe this myth, it too is untrue. If anything, bankruptcy actually helps you get back on your own feet financially. In the future you will be able to buy, own, control and possess whatever you can afford, and if you are able to come up with the money for it, there is no law preventing you from buying homes, cars, trucks, equipment, household goods, et cetera.

Myth 5:  You Will Never Get Credit Again

The opposite is true: filing for bankruptcy leaves you in a better position to get credit than not filing. This is because filing for bankruptcy eliminates debt. Once your debt is behind you, you look more attractive to banks and credit card companies. In fact, it probably won’t be long before you start getting credit card offers-which is a mixed blessing because you don’t want to get right back into debt all over again.

Banks, credit card companies and other lenders might charge you higher interest rates at first, and will demand more money in down payments, but if you are financially responsible and keep your job, the quality of your credit will only improve as time goes by. In most cases, if a client has not re-established good credit after 3 years, it is not because he filed bankruptcy; something else must have happened to disrupt his credit.

Myth 6:  Filing Bankruptcy Means You’re a Bad Person

On the contrary, filing bankruptcy is a sign of financial responsibility.

Filing RI bankruptcy helps remove certain debts so you can take better care of your family, freeing your loved ones from the constant threat of unpaid bills and harrassing bill collectors.

Over 750,000 families file for bankruptcy relief every year. The majority of these are industrious, honest, law-abiding people who have simply fallen on hard times-whether it be job loss, family emergencies, medical difficulties, failed businesses, or otherwise. Bankruptcy laws were created with such unforeseen circumstances in mind, in order to allow families trapped under crushing mountains of debt to make a fresh start for themselves.

Myth 7:  Filing Bankruptcy Will Hurt Your Credit For 10 Years

To believe this myth is to confuse two entirely different concepts. The fact that a bankruptcy filing is reported on your credit report for up to 10 years does not mean that you will have no credit, or bad credit, for 10 years. In reality, filing for federal debt relief might not actually have a negative effect on your credit score at all.

Generally speaking your credit is already a mess-or maxed out-by the time you make an appointment to see a bankruptcy attorney. More than likely you have very little or no credit for bankruptcy to hurt.

Myth 8:  If You’re Married…Both You and Your Spouse Have To File For Bankruptcy

Thousands of cases exist in which husbands or wives filed for bankruptcy separately from each other. While it is sensible for a husband and wife who both have a lot of debt to file for bankruptcy together, doing so is never a legal requirement.  If there is not enough debt in both spouse’s names, I will only file for the spouse who actually needs help.

Myth 9:  It’s Really Hard To File For Bankruptcy

With an experienced bankruptcy attorney, filing for bankruptcy is far from difficult. In all honesty, the most difficult part of filing for bankruptcy is making the decision to do so. After that decision is made, filing bankruptcy in Rhode Island should be a straightforward process.

Myth 10:  Only Deadbeats File For Bankruptcy

Most who file consumer bankruptcy do so in order to protect their family from financial ruin. The majority of people who file for debt-relief are hardworking individuals who resort to filing as a last-ditch attempt to deal with large bills. Life-changing experiences like divorce, job-loss, failed businesses, illness, and unforeseen emergencies can happen unexpectedly.  As a step to free your family from crushing debt created by these events, bankruptcy is a noble act.

Compare this to the real definition of a deadbeat: someone who lets himself get deeper and deeper into debt each year, allows creditors to abuse him, and pays his hard-earned money to those creditors while his family suffers.  His house falls apart, his car falls apart, his life falls apart, his family falls apart.

He doesn’t seek to fix his situation because he doesn’t care. “Deadbeats” don’t file for bankruptcy: financially responsible people who care about their families do.

Myth 11:  Even If You File For Bankruptcy, Creditors Will Still Harass You and Your Family

The moment you file bankruptcy, an order called the “automatic stay” is issued by the Rhode Island Bankruptcy Court. This order is a grave warning that tells your creditors to leave you alone. The automatic stay prohibits you from all collection actions and even prevents your creditors from being allowed to talk to you. Creditors must cease all new collection attempts and halt all collection attempts they have already started. Their failure to do so gives you the right to take your creditor to court. Bankruptcy Court Judges are not friendly to violators of the “automatic stay.” In essence, creditors can either leave you alone or suffer the consequences: many Bankruptcy Court Judges have been known to issue severe punishment on offending creditors.

Think about the peace of mind you will have once you file for bankruptcy protection. No more collection letters, phone calls, repossessions, lawsuits, or threats of foreclosure from hungry creditors. You are protected by the “automatic stay”and have the full force of the bankruptcy court system backing you.

Myth 12:  If You File For Bankruptcy, It May Cause More Family Troubles and May Even Lead To Divorce

Filing for bankruptcy does not cause family troubles-not being able to provide for your family does. Stress and anxiety in the family are the products of the symptoms, not the cure. When unpaid bills loom, creditors can knock at the door, and nothing can be done about it.  In this environment, families will experience tremendous levels of pressure. If this pressure is allowed to continue for long, it can lead to family rifts and even divorce.

Bankruptcy, by its very nature, is designed to remove this pressure by destroying debt. Once the burden of debt is removed, stress lowers and your family can breathe easy again. Filing for bankruptcy can be an important first step in re-building relationships strained by financial hardship.

Myth 13:  You Can Only File Once For Bankruptcy Protection

Under Chapter 7 bankruptcy law, you can get a “discharge” once every eight years, allowing you to file for debt relief again if necessary. The wait is even shorter under Chapter 13, where it is only six years.

Myth 14:  You Can Pick and Choose Which Debts and Property To List In Your Bankruptcy

Unfortunately, this is not only impossible, but illegal. You must list all of your property and all of your debts when filing for bankruptcy. One of the prime reasons people want to leave out a debt is because they want to continue paying it off. However, the same result can be achieved under bankruptcy. Bankruptcy does not prohibit you from paying back whoever you like. In fact, in some cases you need to continue paying certain debts under bankruptcy-if you want to keep cars, trucks, or houses you owe money on, for example, you must continue paying off your debt.  You are protected under law and are able to keep the property for as long as you stay current on these loans.

Bottom line:  Knowledge is power. And in these days of financial instability, economic turmoil, and rampant debt, knowledge about your financial options is crucial to keeping your family and possessions secure.  Wouldn’t you prefer to know the truth about bankruptcy than remain in the dark about your options?  Before you come to your own personal verdict, make sure you know enough information to make a responsible decision.

The sad truth is that myths and ignorance are a creditor’s best friends.

Debt Settlement Plans: Part II

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You’ve tried calling each credit card company to work out a debt settlement plan, but they aren’t interested.  Interest rates have only skyrocketed in the past year.  The bills keep coming and you are drowning in debt.

What if your “minimum payments” on credit cards add up to $ 1,000 a month?  Few debtors can honestly afford repaying such a high amount without using other cards for their daily living expenses.  It becomes a game of robbing Peter to pay Paul.

It would seem like a miracle for a “credit counseling” company to get your payments down to $750 per month by decreasing your interest rates.  Who wouldn’t want to save $ 250 a month?  Although saving $250 per month may sound good at first, here is the bigger question.  Do you honestly even have the $ 750 available?

If you can only afford $300 a month, a plan that requires you to pay $750 per month will not do you much good. You are still in debt. For this reason, “credit counseling” companies and “debt management” companies focus exclusively on the amount of savings they offer, rather than whether you can actually afford your payments.  Many clients who ended up filing bankruptcy in Rhode Island wasted thousands of dollars on unrealistic repayment plans first.

Added to the misleading nature of “debt management” company claims are hidden fees and fraud. Consumer Reports claims that

” Many [“debt management” companies] advise rolling high-interest debt into a second mortgage. But by using your house as collateral for what was unsecured debt, you risk losing your home. Some firms can persuade creditors to cut your debt. But if you miss payments they can later back out of the deal and demand full payment, potentially landing you in bankruptcy court after you’ve already paid a large portion of your debt.”  Consumer Reports online report, June 2005.

Filing Chapter 7 bankruptcy offers a straightforward, honest, effective alternative to the misinformation propagated by “debt management” and “credit counseling” companies. Federal bankruptcy laws were created by Congress for the purpose of helping hardworking citizens pay off their debts.  Unlike DMPs, bankruptcy actually reduces both interest and debt. In fact, bankruptcy is the only way to completely eliminate a debt.

Bottom line: Before you look into signing up for an unrealistic debt management plan, consider consulting a qualified Rhode Island bankruptcy lawyer.

RI Bankruptcy Filing: Can’t I Just Keep One Credit Card?

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Will the Rhode Island Bankruptcy Court let me keep one Credit Card out of my Chapter 7 case?

The quick answer is no. When a debtor files a RI bankruptcy, she must list ALL of her debts. If there is a balance owed to anyone on the day her case is filed, she must list that creditor in her Rhode Island Chapter 7 bankruptcy petition.

Many filing for bankruptcy relief will ask me, a RI bankruptcy lawyer, for permission to leave just one card out, in case of a future emergency. I understand their fear. Because we live in a society run on credit, how would any of us survive on cash alone? Fortunately, there is good news.

As you may remember, the typical Rhode Island Chapter 7 bankruptcy takes about 90 days from the date of filing to the date of discharge. Once your case comes to completion and your debts are wiped out, your financial picture changes drastically for the better.

Most filing for RI bankruptcy relief see their credit score improve after a bankruptcy filing. The reason for this is because a credit score is based on the consumer’s debt to income ratio. By filing a Chapter 7 bankruptcy and destroying unsecured debt, you are improving this ratio and making yourself more credit-worthy.

After your RI bankruptcy case is over, don’t be surprised by the rush of credit card companies looking to do business with you. You are a good risk in their eyes not only because of your new credit score, but because you are unable to file a Chapter 7 bankruptcy again within the next eight years.

But what about debts owed to friends or family members?

All debts must be listed; even debts owed to friends and family members. It all comes down to whether the money was given to you as a gift, or as a loan. If it is a gift, as is often the case, then there is no debt and the friend or family member does not have to be listed as a creditor.

However, if the money was given as a loan, even if there were no formal promisory note (IOU) signed, the obligation must be listed in your bankruptcy petition. Be careful to think this matter through accurately. If you owe money to mom, she must be listed as your creditor.

One last piece of advice. At the bankruptcy hearing, and on the bankruptcy petition itself, you will be asked under penalties of perjury if you repaid any debts to friends or family members in the past year. Understand that the bankruptcy trustee has the power to request copies of your bank records. If you have repaid debts to friends or family members, you must fully disclose this information.

RI Bankruptcy Law: Discharge vs Debt Cancellation

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RI Bankruptcy law is complex.  If you are drowning in bills, make sure you understand the difference between cancellation vs discharge in bankruptcy.  If you make the wrong decision, you may end up with a large income tax obligation.

First, what is debt cancellation?  Debt cancellation is when a a creditor loses hope of ever getting paid.  For business reasons, they decide to stop chasing you.  They may decide to sell your account to a collection company for a few pennies on the dollar, but they are essentially “writing you off.”

For the debtor who has been pursued for collection, a creditor’s decision to cancel the obligation may sound like good news.  What’s not to like about a quiet telephone and no harassing bill collectors?

Here is the bad news.  When a creditor cancels your obligation, they often file a Form 1099-C (Cancellation of Debt) with the IRS.  The canceled amount is then treated as regular income.  In other words, you are about to get hit with a big tax obligation.

This is the last thing a person struggling with bills ever thinks about when calling a debt settlement company.  “You mean to say, I can settle my credit card bills and still end up owing the IRS?”  Yes!  It reminds me of the  famous movie line, “just when I thought I was out, they pull me back in.”

Imagine successfully negotiating the cancelation of $ 50,000 of debt.  If you are in the 25% income tax bracket, you could end up owing $ 12,500 in income tax.  Not good.

A bankruptcy discharge under RI Bankruptcy Law, however, is much more powerful.  According to the United States bankruptcy code, discharged debts are NOT the same as canceled debts.  A discharged debt is not treated at taxable income.  Very good.

But what happens if a creditor files a Form 1099-C on a debtor who has filed for RI bankruptcy relief?  While this should be confirmed with your CPA, the solution is found in IRS Form 982.  This form should negate the usual effect of a 1099-C.  In other words, Form 982 allows a debtor who has filed for bankruptcy relief, to exclude from gross income the debt discharged in bankruptcy.  It will not be treated as taxable income.

As you consider how best to solve your present financial dilemma, be very skeptical of any debt settlement company promising to make your creditors “an offer they can’t refuse.”  In many cases, you will be walking yourself into an income tax nightmare.  Don’t pay anyone to help settle your debt without first understanding the protections available under RI Bankruptcy law.  Bankruptcy law is just more powerful.

(As a footnote, the Mortgage Debt Relief Forgiveness Act of 2007 may absolve a homeowner from paying income tax on canceled mortgage debt if it is on their primary residence.  While this law won’t prevent a bank from suing you for default,  it will make the canceled mortgage debt a non-taxable event.)

Medical Bills and Bankruptcy: Health vs. Wealth?

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Medical bills are now one of the biggest reasons why a person chooses to file a Chapter 7 bankruptcy in Rhode Island.  The last few years have been very tough on the pocket books of most Rhode Island families.  Factor in the cost of health care and illness and your finances can fall apart even faster.

It’s a given that life is getting more expensive, but more Rhode Islanders are discovering just how expensive getting sick really is.  Everyone knows that it’s important to stay healthy and to seek medical help.  But with health care costs rising, many are putting their health on the back burner. When choosing between wealth or health, most are using their limited finances to pay for mortgages, car loans, food and other necessities and foregoing health insurance.

Bankruptcy due to illness or injury is clearly on the rise in Rhode Island.  Recent studies show that medical problems contribute to about half of all Chapter 7 cases filed.  Even if you have health insurance, you or your neighbor could be just one illness or accident away from needing to file for bankrutpcy relief.

Most people filing for bankruptcy relief due to medical bills, also known as a medical bankruptcy, are primarily middle class.  While medical bankruptcy is not a real type of bankruptcy, the term has become more popular.  This is due to the increase of people having to file Chapter 7 bankruptcy protection because of too much medical debt.  For many Americans, filing bankruptcy to wipe out medical bills has become the new insurance policy.

While more than half of those filing for bankruptcy had medical coverage, their average out-of-pocket costs, including co-pays and deductibles, was around $12,000.  For those without insurance, there is little hope of ever being able to repay the debt.  Most are forced to file for bankruptcy because many hospitals or medical offices refuse to accept affordable payment plans.  The debtors have no way out other than to file a Chapter 7 bankruptcy.

The good news is that a Chapter 7 bankruptcy can discharge medical bills.  You don’t have to continue to struggle with unaffordable medical debt.  If you are being sued by a hospital or other health care provider, call a skilled Rhode Island bankruptcy lawyer.  He will answer your questions and go through all of your medical and non-medical bills.  If you qualify under the median income figures for Rhode Island and have not filed a Chapter 7 bankruptcy in the past 8 years, you may be able to file your case and wipe out your debt immediately.

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