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Court ruling of a divorce can lead you to bankruptcy.

Breaking Up is Hard to Do: A Guide on Bankruptcy and Divorce

Bankruptcy and Divorce

We get many people in our office post-divorce. Going from a two-income household to a one-income household is never easy; one person now pays bills previously split between two individuals. Sometimes, you may have been a house supported by one income, but now that same income is supporting two households due to support payments. Tack on attorneys fees, moving expenses, and related costs, many people are swimming in debt after a divorce. These issues are hard enough to deal with alone, but combine bankruptcy and divorce and the equation gets even more complicated.

It is no wonder why people consider bankruptcy when facing a difficult financial situation post-divorce. The good news is that bankruptcy can help many individuals with debts after divorce, but not all. When dealing with child support or alimony, the obligation will never go away with bankruptcy. That is considering a type of support and an obligation that has been determined important to ensure that your child or ex-spouse can survive. But obligations that are not considered “in the nature of support” can be discharged in a Chapter 13 case, although not in a Chapter 7 one. Non-support divorce debts are usually obligations related to the division of property and the division of debts. This is sometimes the reason we consider that clients should file a Chapter 13 case instead of a Chapter 7 one (even if they can qualify for a Chapter 7).

Chapter 7

We often talk about a Chapter 7 bankruptcy for individuals who are having trouble post-divorce. Debtors file a Chapter 7, which is also called a liquidation bankruptcy, to receive a discharge that cancels unsecured debts. However, it a Chapter 7 doesn’t discharge any divorce-based debts. For example, if you credit card debt owed after your divorce or your own attorney’s fees, a Chapter 7 will usually help to cancel out these debts. However, if you owe your ex-spouse’s attorney’s fees or owe a debt because the divorce decree says you will pay the debt, then a Chapter 7 will not help.

A common scenario is when a joint credit card owed by both spouses prior to the divorce. The divorce decree says that wife will pay the card balance and indemnify the husband going forward. However, the divorce court cannot dictate that a credit card company cannot go after either liable party. As a result, if wife files a Chapter 7 bankruptcy, it would likely discharge the credit card company’s right to seek payment. However, wife’s obligation to indemnify husband in the future would not be discharge. Wife would still have to pay on the debt. This type of situation also occurs regularly with joint tax debt.

Chapter 13

Chapter 13 has a key advantage over Chapter 7. It has what is called a “Super Discharge.” This means certain additional things can be discharged after completion of a Chapter 13 plan. The major benefit to a Chapter 13 is that you can discharge some obligations arising out of a divorce decree.  You can discharge debts dealing with the division of property and the division of debt, often called equitable distribution. You can never discharge child or spousal support — under either Chapter 7 or 13. This means,  if a debtor owe non-support divorce debt, the debt would be discharged at the end of your Chapter 13 case. But, all support debt would need to be paid as normal during the bankruptcy plan. If you are behind on your support, Chapter 13 can be a useful tactic to catch up on the payments.

Attorney Fees

Many times in a divorce case, attorney’s fees are very high. Like previously stated, your own attorney’s fees are usually just considered an unsecured debt that can be discharged in a Chapter 7. However, attorney’s fees owed from your ex-spouse that get awarded can be tricky. The bankruptcy court reviews why the divorce court awarded the fees. If the divorce court awarded fees for work on obtaining support, the bankruptcy court will usually follow the rule of those fees being non-dischargable under all circumstances. If the divorce court awarded fees for work done on an equitable distribution issue, then the bankruptcy court usually allows the fees to be discharged in a Chapter 13. This can be a contentious question, and sometimes requires a hearing in bankruptcy court to determine the proper classification if there is a dispute.

Support Arrearages

If you are behind on your child support or alimony, Chapter 13 does allow you to catch up on that obligation over a period of three to five years. The court requires debtors make all support payments going forward; however, the you could spread catch-up payments out over months or years.

Filing Bankruptcy Before Divorcing

If you are just considering divorcing, sometimes couples can avoid some of the above problems by filing bankruptcy together. Some divorcing couples  file together before the divorce because it can be more efficient. For example, filing a joint bankruptcy will discharge most debt of both spouses. It also usually costs less to file bankruptcy together as a couple as opposed to apart.

Regardless of your situation, you should consult with an experienced bankruptcy attorney. Any Chapter of bankruptcy comes with benefits and risks. Sometimes the difference of support and equitable distribution is unclear. Depending on the factors, there could be arguments supporting varying arguments. Attempting to discharge non-support divorce debts through Chapter 13 can get complicate and require a hearing or trial. Additionally, the bankruptcy codes includes many complicated requirements for Chapter 13 plans; debtors must meet these requirements in order to get a plan confirmed and eventually a discharge.

 

 

Attorney Ashley Morgan is an experienced bankruptcy attorney in northern Virginia.  Ashley has helped many individuals handle debts through bankruptcy and divorce. Reach out to Ashley F. Morgan Law, PC if live in northern Virginia and you are struggling managing your debts for a free bankruptcy consultation.

Car on the back of a tow truck

Can I Keep My Car in Bankruptcy?

Can I keep my car in bankruptcy?

One of the most common questions potential clients ask us is if they can keep a car in bankruptcy. During a Chapter 13, there is rarely an issue with a car. The question really comes up in a Chapter 7, since the court is looking at all your assets; a trustee will sell any non-exempt assets. But, the good news is that most of the time cars are not an issue in a Chapter 7.

The exemption, or protections under the law, in Virginia is fairly high; Virginia residents are allowed a $6,000.00 exemption for vehicles. If the car is owned by two individuals, the exemption is allowed for each person. Additionally, if your car has a high value, you can apply your $5,000.00 wildcard/homestead deed to help protect the car. The exemption only applies to equity in your car; so if you have a car worth $20,000.00 but you owe $16,000.00, you only need $4,000.00 in exemptions to protect the car.

A lot of debtors also say they want to keep their car out of bankruptcy. In bankruptcy you are required to list all assets and all debts. The bankruptcy will discharge the debt on the car, but the lien on the car remains. This means that the contract between you and the bank is gone, but the lender can still repossess the vehicle if payments are not made. So there is no free car, but the car company cannot make you pay for the balance of the loan if you do not want. For most of our clients, if they agree to keep paying on the debt, they can keep the car and will get the title at the end of the payments. But it also allows you the option to give up an underwater car without potential issues.

Reaffirmations

A reaffirmation is basically signing the same contract over again after filing bankruptcy. The creditor will report new payment history to the creditor reporting agencies. However, it also re-obligates you on the entire debt; so, if you fail to pay the entire loan and the car is repossessed, then the creditor can come after you for the deficiency. Additionally, a judge must sign off on the agreement; the court will likely require a hearing to prove that you can pay the debt going forward.

We rarely ever recommend the debtor sign a reaffirmation; on rare occasions there are reasons to sign them. Some creditors require a reaffirmation because they will repossess, even if you are current on your payments. Currently, the only creditor that takes this action is Ford. However, this could change at any moment. It is important to be sure you attorney is up to date about changing policies with varying lenders.

Should you keep your car?

For some of my clients, there is the question of whether you should keep the car. Chapter 7 allows a debtor to surrender the car in bankruptcy without issue of a deficiency or a repossession being reported on your credit report. For many people who have only made one or two years worth of payments on a car purchased new, you likely have negative equity in the car. Additionally, if your car was in an accident or two, there is likely a significant depreciation in value from that damage. Other individuals who find negative equity in a car are those who traded in a car with a large loss on a new car purchase.

Many people love their cars; but, we want to remind them that cars are a depreciating asset and it really is a financial decision that you are making. If you owe $25,000.00 on a car only worth $15,000.00, it is not likely to be a good financial decision to keep that vehicle. Continuing to pay on the car means you will be paying more for the vehicle than it is worth. After bankruptcy, most people’s credit increase. Additionally, many car lenders are willing to give you a car loan since you must wait at least 8 years between bankruptcy court filings (and most car loans are less than 8 years). Now if you owe $10,000.00 on a car worth $16,000.00, it is a lot easier of a decision to keep the car. You can keep that car, trade it in or sell it after the bankruptcy is over.

Cross Collateralization

One issue that most debtors do not know about is cross collateralization. This is a right that only credit unions have. Basically, if the credit union gives you a loan for a car, that lender has a lien against the car to secure the payment. The lien allows the creditor to repossess the car if the borrower does not make all of the payments. The cross-collateralization agreement allows the lien against the car (or any other collateral) to secure additional debts other than the car loan. This means that if you don’t pay a credit card, then the creditor can repossess your car.

Cross collateralization is something very few people know about. Most people understand that when finances get tight, you make sure you pay your car payment, even if you cannot pay your credit cards. But, if you aren’t paying on a credit card or personal loan, the credit union can repossess your car even if you are current on your car payments. This is important to understand when taking out car loans or opening new unsecured credit accounts.

When you file bankruptcy, your obligation to pay on all the debts is discharged, but car loan and cross-collateralized debts all remain with the car lien. This means that you may owe more on your car than you believe. Some lenders may allow you to only pay the car loan amount if you reaffirm the debt, but this policy varies from creditor to creditor. Experienced bankruptcy attorneys will usually have an idea how major lenders deal with your car in bankruptcy.

Other Options

Bankruptcy provides a debtor with various options he/she do not have outside of bankruptcy.

Redemption

One option debtors can do during you Chapter 7 is to “redeem” the car. This means during your case, you purchase the car back from the lender for the value of the car, not the total debt.

Under Section 722 of the bankruptcy code, a debtor in Chapter 7 has the right to force the lender to release its lien in exchange for a onetime payment in the value of the collateral. This can be a great way to keep your car and save money. The most difficult part of this option is coming up with the funds. There are certain lenders and programs that work with debtors on financing this payment.  When making a decision about a redemption, you should consider the total amount that would be paid (principal and interest). Additionally, there sometimes is the option of talking directly to your credit union or bank for a new car loan; this option works best if you have high income or a cosigner. But, if you want to redeem your vehicle, you should consider all possible options; some debtors are able to find the funds from family or friends, selling exempt that you kept during your bankruptcy.

Decide later

The decision about keeping the car does not have to happen immediately in the bankruptcy, unless a reaffirmation or a redemption is needed. Sometimes you want to take more time to make the decision. You do not immediately need to make the decision of whether to surrendering your car back to the lender. You can surrender the car during the bankruptcy or much later, as long as you do not reaffirm the debt. Some of my clients continue to make payments for 3 to 6 months after the bankruptcy. After their credit has bounced back, they apply for a new car payment and surrender their old vehicle then.

You have options

It is important to understand you have a lot of options. Additionally, you must take important steps to protect your assets. Talk to an experienced bankruptcy attorney about all the options that apply to your specific case and your options to handle your car in bankruptcy.

 

 

It is important to understand all your options and rights during a bankruptcy. Having an experienced bankruptcy attorney can help ensure your case goes smoothly and you come out with a fresh start. Ashley F. Morgan Law, PC helps many individuals manage their debts every month. Attorney Ashley Morgan has experience dealing with all the above issues. She understands good credit is important, and she wants her clients to completely understand all the tools at their disposal before taking action.

Credit Score Board

Improving Your Credit Score: Taking Steps Toward Perfect Credit

Improving Credit: Tips and Tricks for Getting Your Score Closer to 850

Often after helping individuals manage their debts, we provide guidance on improving credit. In today’s world your credit score affects every day of your life.

A good credit score can mean getting approved for credit that you need to buy a house or car. A poor score can make it difficult to find an apartment rental or needing a large deposit to turn on the utilities. Improving your credit can help everyone, even individuals with already good credit.

Your credit score is a score created by the credit bureaus using information in your credit report. Credit scores range between 300 to 850. The score is designed to give creditors the likelihood that you will become delinquent on your debts. Your score will also vary slightly between credit bureaus.

Regardless of the reason you need to improve your credit, including old collection accounts, limited credit history, trying to buy a house, etc., the tips below can help you get your credit on track. For most credit cards and loans, you will be offered the best rates when your credit is above 750; you will be qualified for most types of credit if your score is at least 700.

Monitoring Credit Reports

To get a good idea about your starting point, you need to know what your credit looks like. Tools, like Credit Karma and Credit Sesame, give you a good basis about your credit score and what you can do to improve it. But, these are not real credit agencies. There are actually three credit bureaus: Transunion, Equifax, and Experian. Federal law allows you to get a free copy of your credit report every 12 months from each credit reporting company. You should regularly pull your credit report to ensure that everything is reporting accurately. Removing inaccuracies, like late payments, can quickly help you improve your credit. Additionally, reviewing your credit regularly can help you prevent issues with identity theft. Many credit cards now also offer free credit scores, which can help you keep an eye on your credit in between pulling full reports.

Credit Factors

When trying to improve your credit, it is important to understand the factors that make up your credit score. There are five elements that the credit bureaus weigh when determine your credit score: Payment History, Amounts Owed, Length of Credit History, Types of Credit, and New Credit.

Payment History – 35%

As you might expect, the repayment of past debt is a major factor in the calculation of credit scores. It helps determine future long-term payment behavior. Both revolving credit (i.e. credit cards) and installment loans (i.e. mortgage) are included in payment history calculations. This factor is why one of the best ways to improve or maintain a good score is to make consistent, on-time payments.

Credit utilization  – 30%

Creditors look at the total amount you currently owe, and the percentage of the amount owed compared to your available credit. When a high percentage of a person’s available credit is been used, this can indicate that a person is overextended, and is more likely to make late or missed payments. That is why it’s a good idea to keep low credit card balances and not overextend your credit utilization ratio. Additionally, this factor is why it is important to keep old credit cards open, even when not being used.

Length of Credit History – 15%

The credit bureaus look at the length of time all credit accounts have been open and the time since the newest account was opened. Those with a longer credit history have more data on which to base their payment history. This factor is why it is easier for old individuals to have a high credit score than younger individuals.

Types of Credit  – 10%

The credit bureaus want to see a combination of different types of debt, such as credit cards, installment loans (like student loans or car loans), open accounts (like lines of credit), and mortgage loans. This is important to show you can mange different types of debt.

New Credit – 10%

Creditors do not like seeing many recently opened accounts; opening several new credit accounts over a short period (which can be defined as anywhere from 6 months to 2 years) can signify greater risk. Creditors worry it is evidence of you facing financial difficulty. This is why it is recommended no new credit accounts should be opened one year before a major purchase, like a car or house.

Pay Bills on Time

Your payment history makes up 35% of your credit score. One of the easiest ways to improve your score is to always make sure you pay bills on time. Missed payments stay in your credit for 8 years. The more time that passes after a missed payment, the less of an impact it will have on your credit. One missed payment, won’t ruin your credit, but if it was within the last year, the impact will be obvious. Additionally, monthly bills like your electricity, cable and rent usually are not reported on your credit report every month. But, if you do miss a payment or the account goes into collection, the negative mark will usually appear on your credit.

Secured Credit Cards

One of the best tools for improving credit is a secured credit card. A secured card requires a cash collateral deposit that becomes the credit line for that account. For example, if you put $500.00 in the account, the bank will give you a credit card with a limit of $500.00. This allows for you to get a credit card with little risk to the bank; if you miss a payment on the secured credit card, the bank will take the deposit and close your account. Often a bank will reward you for good payment history and add to your credit line without requesting additional deposits or offer you a new credit card. Be sure to check the fine print on these cards; some banks may charge fees.

One important rule to remember about using a secured credit card (or really any credit card) is keeping your balance low. For credit building purposes, you should never have a balance over 30% of your total credit limit. Even if you are paying your balance off in full every month, having too high of a balance signals to creditors you could be over extending yourself.

Loans & Lines of Credit

If you are in need of a vehicle, consider getting a car loan. Or if you do not need a car, look into a line of credit. If it’s a car loan, buy a vehicle that is affordable and that you can pay off successfully. Additionally, you will see a drastic increase in your credit if you can make a large additional payment early on in the loan. A large additional payment will help bring down your credit usage and help improve your credit utilization. You may receive a higher interest rate to start. Shop around for the best rate; usually you will we get the best rate from a credit union. If you get a line of credit, keep in open but use is sparingly. The available credit — without a balance — will help your available credit.

Bankruptcy

For some individuals with many delinquent accounts and limited ability to improve their credit in a reasonable time period, bankruptcy can be used to get you a new starting point. Bankruptcy can even improve your credit faster than just trying to rehabilitate your credit (but it depends on your specific situation).  One of the many reasons bankruptcy is a great tool for managing debt is that it helps improve credit fairly quickly. After filing a Chapter 7, Debtors can usually see offers for new credit soon after filing bankruptcy. After a Chapter 7 discharge, you cannot qualify for a Chapter 7 for another eight years. To many lenders, you may actually appear to be a better risk immediately. The discharge zeros out any past due payments and delinquent accounts. Additionally, your income to debt ratio improves. This also helps your credit utilization rate as well.

Bankruptcy does have its limitations. If your goal is to buy a house, there is a required 2 year wait period to purchase a home after a Chapter 7. Two years post discharge, you may qualify for an FHA mortgage, if you have kept improving your credit and your income allows for it. You may need to wait longer for a conventional mortgage. There is no waiting period to qualify for new credit cards or car loan; however, your interest rates may vary depending on many factors. Since you cannot file a Chapter 7 more than once every 8 years, you will not have the available option if something happens during that period, such as job loss or illness.

Be Diligent

Most important part about improving credit is to keep at it. Your credit will not improve overnight. Being diligent at paying your bills on time, making conscientious decisions about opening new accounts, and understanding your credit report can make all the difference.

 

 

 

 

If you are dealing with debts, make sure you understand all your options. Ashley F. Morgan Law, PC helps many individuals manage their debts every month. Attorney Ashley Morgan has experience dealing with all the above issues. She understands good credit is important, and she wants her clients to completely understand all the tools at their disposal before taking action.

Bankruptcy sign ahead

Chapter 7: Ins and Out of a Bankruptcy Liquidation

A Guide to Chapter 7 Bankruptcies

The most common type of bankruptcy is a Chapter 7 bankruptcy. This is also called a liquidation.  The process usually takes approximately three to four months for a standard case. During this process you file a petition that provides information regarding your income, expenses, debts, assets, and personal information. The bankruptcy process allows you to keep certain items. If you have more then the minimal items the bankruptcy trustee sells the debtor’s nonexempt assets and uses the proceeds of such assets to pay creditors.

Who Can File

Chapter 7 is an option for individuals or businesses. An individual is basically being given a fresh start after filing a Chapter 7. A business that files a Chapter 7 as way to close your business after it is no longer profitable.  Basically, after a Chapter 7, the business ceases to exist.

Parties in a Bankruptcy

There are many important people to know about in your bankruptcy filing. These people include:

Debtor

The debtor is the person (or persons or businesses) filing for bankruptcy. These individuals are looking for relief under the bankruptcy code.

Case Trustee

This person is chosen by the court to represent your creditors. It is his/her job to review your petition, ensure it is accurate, and also determine if you have any assets that the court can take and sell to pay your creditors. The Trustee interviews you at your Meeting of Creditors (also called a 341). The Trustee has a lot of power; he or she can sell jointly owned property, cancel contracts, and much more.

Creditors

These are people that the Debtor owes money. They have the right to review your petition and assets. They also have a right to object to your discharge if they believe it is being done in bad faith or you have certain debts that should be considered non-dischargable.

U.S. Trustee

This person represents the Justice Department. The U.S. Trustee has a responsibility to ensure people are properly filing bankruptcy and that cases are appropriate. Most Debtors never deal with the U.S. Trustee, but they do audit random cases to ensure your paperwork is in order, you have all the proper documentation, and you have followed all the rules.

How to Qualify

When a debtor files Chapter 7, the court looks at the household income. If the household income is below the median for your state, you can qualify for Chapter 7.
If your household income is above the median income for your state, you may still qualify. The court requires that your income is analyzed under what is called the Means Test. This test is basically used by the court to determine if you have any disposable income at the end of every month to pay over to your creditors. The court determines the disposable income by deducting specific monthly expenses from your “current monthly income” (your average income over the six calendar months before you file for bankruptcy). Some of these expenses are actual expenses, such as car payments, mortgage payments, taxes, etc. Other expenses are based on the Internal Revenue Service standards for your county, such as utilities, food, etc. Using these standards, if you have little or no money leftover, then you can usually qualify for a Chapter 7.

Exemptions

The exemptions you can use depend on state law and where you have resided for the past two years. There are also federal exemptions some Debtors are permitted to use. These exemptions, which are really legal protections, allow you to keep certain assets during your Chapter 7. Assets without protections are called non-exempt assets. The trustee in your case looks at these assets to determine if there is value to sell and give to creditors. In Virginia, there are various exemptions that apply for residents. Some of the most common exemptions include:

Clothing

Virginia law allows you to protect up to $1,000 of the value of clothing. Used clothing have a very low resale value; we use thrift store prices to value clothes. The only issues that usually ever arise are if there are a significant amount of newer designer clothes.

Vehicles

Virginia’s automobile exemption allows each individual Debtor up to $6,000.00 in equity in a car. If a car is jointly owned, this means a couple can have up to $12,000.00 worth of equity in the car. This means that if you have a car worth $20,000.00, but there is a $18,000.00 loan on the vehicle, there is only $2,000.00 worth of equity.

Household Good and Furnishings

Each debtor is allowed up to $5,000.00 on household goods. Generally, there is no issue with these items unless you have valuable antiques or collectibles.

Wedding and Engagement Rings

Virginia exemptions permit for an unlimited exemption for wedding and engagement rings. This means there is no limit on the value you can have for an engagement and/or wedding ring.

Tenants by the Entirety

There is an unlimited exemption for property titled Tenants by the Entirety (TBE) when there is no joint debt between the spouses. In Virginia, the law allows property (usually a marital home) to be titled in a specific manner between a married couple, but also requires that no joint debts exist between the parties. Additionally, there are requirements related to the TBE exemption regarding the type of property and how is was obtained. If you think this may apply to you, then I recommend speaking to an experienced bankruptcy attorney. In addition to the above issues, the spouses can have no joint debt; the non-existence of joint debt must also be proven to the trustee in your case.

Federally-Qualified Retirement Plans

Virginia law allows for a generous exemptions for traditional retirement plans, such as your 401(k), IRA, Thrift Savings Plan (TSP), etc. These qualified plans are all 100% exemption. The only caveat

Tools of the Trade

There is a $5,000.00 exemption for assets that are directly related to your primary profession. As a result, it is very important to review your situation with your attorney. For example, if you are a plumber, but have a side job as an Uber driver that brings you in extra money, you would likely be able to use the Tools of the Trade to protect tools necessary for your job as a plumber, but not be able to protect any assets related to driving Uber, such as your car or car cleaning equipment.

Wildcard

Virginia’s wildcard exemption is different than many other states. A wildcard applies to any asset that has no other exemptions available, including cash in the bank and equity in a house. You can use this exemption to supplement any of the above exemptions, if the applicable exemption is not sufficient to protect your property.
Virginia’s wildcard is also called a Homestead Deed; it has this name because a document must be filed in the land records in the county in which you reside. This exemption is a $5,000.00 lifetime exemption. The exemption increases an additional $500.00 for any dependents.The exemption increases to $10,000.00 at the age of 65. However, since this is a lifetime exemption, if you file bankruptcy and use $1,500.00, you only have $3,500.00 remaining for any future bankruptcies filed in Virginia (until you turn 65).

NOTE: The above list of Virginia bankruptcy exemptions is NOT complete or exhaustive list. It includes only the most common exemptions. Additionally, these exemptions may change depending on federal and state law. See an experienced bankruptcy attorney for the most accurate information about exemptions and what exemptions may apply to you.

Warnings about assets, exemptions and transfers 

It is also important to note that transferring assets to avoid including them in your bankruptcy is a bad plan. All transfers of property within two years of filing bankruptcy must be disclosed. The trustee can petition the bankruptcy court to reverse those transactions. If the court determines you did the transfer with the intend to avoid a bankruptcy or to hide assets from creditors, the court may also deny you a discharge of your debts.
The trustee, and potentially the court, review any debts that have been paid back within the last year. If you have paid back family, friends, or business partners, the court can actually sue those individuals for return of the funds. The law provides that you must be treat all creditors the same; as a result, you must treat American Express the same as Uncle Joe. The courts refer to the better treatment as a “preference” because you are giving preferred treatment to one creditor over another.
Once a Chapter 7 bankruptcy is filed, you cannot voluntarily choose to dismiss the case. A judge must grant you permission to dismiss a Chapter 7 case; judges only allow for a dismissal for good cause. An experienced Virginia bankruptcy attorney will be able to review your situation and help prevent potential problems in your case. Having an lawyer handle your case properly from the start can prevent problems later on.

Alternative Options to Chapter 7

If Chapter 7 is not right for your situation, there can be other options. It really depends on why Chapter 7 does not work for you. If you have nonexempt assets, a Chapter 13 is another option to consider. Additionally, sometimes debt negotiation is a better option. If you have limited amounts of debt or cannot qualify for a Chapter 7, sometimes having an attorney help you settle a debt, is a better option. Some of my clients who are trying to stop a foreclosure, are better suited to apply for a modification before considering bankruptcy.
If you are considering bankruptcy, make sure to speak to an experienced bankruptcy attorney. Ashley F. Morgan Law, PC helps many individuals file bankruptcy every month. Attorney Ashley Morgan has experience dealing with all the above issues. She understands bankruptcy is a difficult discussion for many, and she wants her clients to completely understand the bankruptcy process before making any decisions.
Check from the Federal Government/U.S. Department of the Treasury

Tax Refund and Bankruptcy

Many people use their tax refund to pay for necessary expenses. For some, the money allows for repairs on their home; for others the refund allows them to pay off some debt or afford medical or dental procedures. But in general, it is money you have been waiting for all year. When you are struggling financially, this extra money can mean a lot. As a result, many individuals ask us whether they will be able to keep their tax refund in bankruptcy.

The bankruptcy court sees a tax refund as a savings account. You pay into the federal government a little every month and at the end of the year it is waiting there for you to withdraw. This refund affects different chapters of bankruptcy, in different ways.

Chapter 7

If you file a Chapter 7 bankruptcy in the later part of the year or during tax season, this money has had a lot of time to accumulate. If you are due a tax refund and file bankruptcy, you can only keep it, if you are able to exempt or protect those funds. In Virginia, there are exemptions that can protect child credits and earned income credits. Any additional part of the refund must be protected under Virginia’s wildcard exemption. This wildcard exemption is $5,000.00 lifetime protection to be use on cash or cash like assets. This means if you have filed bankruptcy previously or have other cash-like assets, you may have less of the wildcard to apply toward your tax refund.

If you want to protect your tax refund in bankruptcy, talk to an experienced bankruptcy lawyer. A bankruptcy attorney will be able to review your situation, discuss any potential issues and figure out the best plan for you. Sometimes this means waiting until the refund is received and used on normal expenses. But, without an attorney that understands bankruptcy law, you will not be able to make an educated decision.

Chapter 13

Now, a tax refund also plays a role in a Chapter 13. If you are in a 100% plan, which means you are fully paying back all allowed claims, you can keep you tax refund every year during your plan. If your bankruptcy plan pays creditors any less than 100%, the trustee may require that you turn over the refund and he/she will disburse the funds to your creditors. Additionally, your attorney may be able to adjust your budget to reflect the refund over the course of a year. This would mean paying slightly more each month, but being allowed to keep the tax refund.

It is important to have an experienced bankruptcy attorney that can review and understand your situation.

 

 

Ashley F. Morgan, Esq. is a Northern Virginia Bankruptcy Attorney with an office in Herndon, VA. She helps individuals in Herndon, Reston, Centreville, Fairfax Sterling, Chantilly, Woodbridge, Manasass and the surrounding areas file bankruptcy. She understands the importance that a tax refund can play in someone’s finances. Her goal is for her clients to fully understand all their options and make the best decision for their circumstances.

Tax debt can seem like a road block

Many Options Available to Manage Debt from Taxes

Ashley F. Morgan Law, PC helps many people with their debt issues. We pride ourselves in being able to help individuals find the best solutions for their individual problems. Our firm often helps people address their traditional debts, such as credit cards and loans, through the bankruptcy process. We also help people with tax issues through standard tax resolution options, such as payment plans or offers in compromise directly with the Internal Revenue Service. But sometimes we are able to handle all their debts through a bankruptcy. We understand dealing with taxes can be stressful, which is why we want you to know about all potential options.

Most people believe that taxes cannot go away with bankruptcy. There is only some truth to that idea. Some tax debt, such as trust fund taxes, cannot be discharged. Other taxes, such as income taxes, may be discharged if certain conditions are met. For the tax to be potentially dischargeable, the clients needs to have filed the taxes on time (or close to on time). Additionally, the taxes need to have been due three years before you file for bankruptcy, filed at least two years ago and 240 days since the taxes were assessed. There can also be no allegations of fraud related to the tax debt. Make sure to review your situation with an experienced bankruptcy attorney. Timing is especially important with tax issues; last thing you want is to file a few months or days early.

There are certain benefits to managing tax debt through bankruptcy. The most important benefit is that there is one process that is potentially managing all your debt issues.

Chapter 7

A Chapter 7 can help you wipe out unsecured debt and dischargeable tax debt in one quick and efficient process. The downside is that if there are any non-dischargeable taxes, they will remain after the bankruptcy. This option is often best for individuals with older tax debt that now have managed to owe little or receive a refund in recent years.

Chapter 13

A Chapter 13 allows for a three to five year payment plan to manage all non-dischargeable taxes and will result in a discharge of the dischargeable debts that were unpaid. Additionally, the bankruptcy code allows for a little more flexibility for allowable expenses when calculating a payment plan. The court reviews your plan to determine what is reasonable. The IRS follow their allowable guidelines for each county fairly closely.

The downside to a Chapter 13 plan is that it requires all priority tax debt to be paid in the plan, in addition to all other traditional Chapter 13 requirements. So, if you can pay something over the course of your plan, but it is not enough to satisfy the priority taxes, you will not be allowed to utilize a Chapter 13 filing. This option is often best for individual with low to moderate tax debt and decent income. Additionally, if you have higher than average secured debts, such as cars and homes, the bankruptcy court will take those factors into consideration unlike the IRS.

Tax Resolution Plans

A tax resolution payment plan can allow for other perks; the plans are for up to six years, which is longer than any bankruptcy option. These plans are agreements direct with the IRS, which means there is no public record of the agreement. This agreement would result in no public notice regarding the tax issue, unless the tax debt was significant enough or old enough that a tax lien was filed in the land records against you and all of your property (both real property and personal property).

Additionally, some plans can be as low as $0 per month, if the IRS determines you fall into the category of currently non-collectible. This means that you do not have any disposable income under their standards. However, their guidelines are more strict, as discussed above. But, if you have additional outstanding tax debt, a tax resolution does nothing to help manage those additional  debts. This option is often best for individuals with little to no additional debt or that have a substantial amount of recent tax debt or non-dischargeable tax debt with limited income.

Combination of Bankruptcy and Tax Resolution

Finally, we sometimes use both a bankruptcy and tax resolution to achieve the optimal results for our clients. Chapter 7 can help clients get rid of their unsecured debts, surrender any unwanted secured debt, and get rid of any dischargeable tax debt. We then follow the bankruptcy discharge with a tax resolution payment plan. This plan takes into consideration what the client is able to pay. Our firm often uses this debt management option with clients with higher incomes and substantial tax debt. The substantial, non-dischargeable taxes may help a high income individuals qualify for a Chapter 7 who might not otherwise qualify for a discharge.

By offering our clients bankruptcy and tax resolution options, we are able to fully explain all options to our clients ensure they are making the best choice. If you are experiencing financial difficulties of any kind, please let us know. Schedule an appointment to talk to one of our attorneys about all your options. Our experienced attorneys can review your situation, and discuss all potential benefits and drawbacks to each option. We can be reached at 703-880-4881.

 

 

 

Attorney Ashley F. Morgan is a Virginia licensed attorney. She has been helping clients manage various types of debts for years. Ashley focuses on helping her clients finding the ideals solution to their debt problems. Attorney Arthur Rosatti is a Florida licensed attorney has extensive experience dealing with the IRS and negotiation payment plans and settlements. He understands having tax debt and dealing with the IRS is stressful. He strives to make the process as stress free as possible. Both Ashley and Arthur are available to review your debt situation; they always collaborate on cases to ensure that their clients are receiving the best advice possible.

Bankruptcy basics and bankruptcy options.

Bankruptcy: Is it the right option for me?

Many people fear bankruptcy because it means they will lose everything, or they do not want to file because someone might find out that they filed, or the client believes it is an admission of failure. These are not always correct. When someone comes into our office we try to let them know bankruptcy is not as big of a deal as they think. It is a legal and financial decision that must be taken seriously, but it has a lot benefits.

 

Different Types of Bankruptcy

The bankruptcy court is there to help the “honest but unfortunate debtor.” There are different bankruptcy chapters to fit different people’s needs. Some cases we see are for people that are a few months or years behind on a mortgage, or a few months behind on a car payment.  In other cases you just overspent and you can’t catch up. Or even, perhaps, you just went through a difficult divorce and cannot afford your expenses anymore or have crushing medical bills. Bankruptcy can often help your mange your debt. There are four chapters: Chapter 7 (liquidation), Chapter 13 (restructuring for wage earners), Chapter 11 (restructuring for businesses or individuals with high debts), Chapter 12 (restructuring for farmers and fishermen).  Most of our clients file a Chapter 7 or a Chapter 13. Depending on your situation, one of these bankruptcy options may help you achieve your goals.

Chapter 7

A Chapter 7 is usually what most individuals think of when they hear the terms bankruptcy. It is a fairly quick process (three to four months) and it wipes away most unsecured debt and can relieve your obligation to pay secured debts. Any liens remain on the property, which means creditors can still foreclosure or repossess the collateral if you are not current. You can qualify for Chapter 7 in one of two ways. The first way only requires that your household income is below the median for the state. The second way requires what is called the Means Test. This “test” takes your income and reviews it to see if you have any disposable income at the end of the month after taking out allowable expenses. The court allows for certain actual expenses, such as your taxes, your car payment, and your mortgage payment. Then it allows deductions for other allowable expenses, such as the IRS standard for utilities, food, etc. If, after all the allowable deductions are taken out, only a small disposable income remains, then you are permitted to file a Chapter 7.

The reason a Chapter 7 is called a liquidation is because the court will take non-exempt assets and sell them to help pay off your debt. The Court assigns a Trustee to your case to represent your creditors to review your situation and determine what assets are non-exempt. Non-exempt means that there is not a law that allows you to keep the property. Important exemptions in Virginia include: 100% protection for qualified retirement plans, 100% protection for wedding/engagement rings, and $6,000.00 equity in a vehicle (per person), $5,000.00 wildcard exemption for any cash or cash like assets such as (such as money in the bank or equity in a home). Most of my clients do not have any non-exempt assets and after four months they get their discharge and their case closes. If there are non-exempt assets, the Debtor has the choice on whether he or she wants to file a Chapter 7 bankruptcy and surrender those assets or consider filing a Chapter 13 bankruptcy.

Chapter 13

A Chapter 13 is called a wage earner plan. This type of bankruptcy is for those individuals who have steady income. We use a Chapter 13 when individuals have too high of income to qualify for a Chapter 7 or have assets they could lose in a Chapter 7. The major benefit of a Chapter 13 plan is that you get to keep all non-exempt assets because you pay out the value of those assets in your plan. The plans are usually three to five years, which vary depending on your income. The plan requires that you make regular payments to the court during the life of your plan; at the end of your plan your remaining dischargeable debt is discharged. Some of our clients pay 100% back to all creditors. Even our clients that pay 100% back will often benefit from bankruptcy because the case will freeze your unsecured debts and stop them from incurring more interest. We have other clients who pay between 1% to 99% of all debt in their plans, and then we even have what we call a 0% payout plan. The 0% plans are Chapter 13 cases where you have some debt that is secured (cars and houses) or prioritized (non-dischargeable taxes, child support arrears, etc.) over other unsecured debt, and your plan pays the secured debt and the priority debt, but nothing to your unsecured creditors. One of the most common reasons for a Chapter 13 is to stop a foreclosure and then allow the debtor time to catch up on the arrearages. Sometimes we even use a Chapter 13 to help with student loans when you need to temporarily lower your payments.

If your plan is anything less than 100% the court will review your income every year to see if there is an increase, which means they may require you to pay more in. Additionally, if you get a tax refund or inheritance over the next few years, you will turn over the funds over to the Court.

There is a limit on the amount of debt you can have and be in these plans. These limits are unsecured debts of less than $394,725 and secured debts of less than $1,184,200, which will be updated as of April 1, 2019.

Chapter 11

A less common option for bankruptcy is a Chapter 11. This type of bankruptcy usually is only an option for an individual when an individual cannot do a Chapter 7 and has debts over the Chapter 13 debt limits. Businesses also do Chapter 11 to restructure their business. When you hear about major companies filing bankruptcy (such as Toys ‘R’ Us or Sports Authority), they are usually filing Chapter 11. The major benefit of a Chapter 11 is that your repayment plan can be over the course of more than 5 years. However, they are cost prohibitive. It is an expensive and complicated process.

Chapter 12

The last common bankruptcy is a Chapter 12, which is a restructuring of debt for farmers and fishermen. This type of bankruptcy is very similar to a Chapter 13, but provides more flexibility in the payment structure. This is because the court takes into account the seasonal nature of the businesses.

Can People Find Out I Filed Bankruptcy?

As for people finding out that you filed bankruptcy, it may happen. It is not published in the newspaper and notice is not mailed out to family and friends (unless you owe them money or have a joint debt with them). It is a public court filing that can be looked up, but so this can also be said about divorce, collection lawsuits, and foreclosure.

Sometimes people who were referred to our office for help with dealing with debt; they do not know that we help people file bankruptcy. After talking with us, they sometimes figure out that the individual who referred us, likely filed bankruptcy with us, too. Additionally, we have people from all walks of life who are considering bankruptcy, including people who are unemployed, individuals who have multiple properties, people going through divorce, individuals making six figures every year, business owners, and much more. We have other clients who start talking about filing bankruptcy with a friend only to find out the friend filed bankruptcy years ago. You just never know.

Bankruptcy is a Tool to Manage Debt  

As stated before, bankruptcy is a legal and financial decision. Congress included bankruptcy as an option in the law because they understand people need help managing their debts. It is not an admission of failure; it is a way of managing your debts and taking care of your financial situation.

For some, bankruptcy helps wipe away debt and allow a fresh start. For others, bankruptcy can help restructure your payments on various debts, such as your cars, student loans, IRS debt, personal loans, second mortgages, etc.   People often worry they make too much money to file bankruptcy, but there is usually an option out there that will provide some relief. Additionally, even if you make a lot of money, you may still qualify for a Chapter 7 if you have high secured debt payments (car, mortgage, etc.) or court ordered payments (alimony, child support, etc.).

If you will do whatever it takes to start over, perhaps you should consider bankruptcy.  It is not just for the poor and unlucky.  The code was written to allow various options to fit various situations. Bankruptcy is really just a tool in your financial tool box; if you are struggling with debt, it is at least an option you should look into.  For many of our clients, bankruptcy is also a tool to improve their credit, and it helps them get on track for an even higher credit score. We often tell prospective clients that they do not need bankruptcy, or that they have a variety of alternatives; it is not for everyone; it does not solve every financial problem.  But, you really should at least understand how it could benefit your situation. Consider a free consultation with my office; give us a call at 703-880-4881.

 

 

 

 

Ashley F. Morgan, Esq. is a Virginia Bankruptcy Attorney. She helps individuals and business file bankruptcy in the northern Virginia area. She has experience handling Chapter 7, Chapter 11, and Chapter 13 cases. She also understands bankruptcy is only one of many options available to debtors. She wants to help her clients review all potential options to determine what is the best option in each person’s situation. Instead of bankruptcy, Ashley has also helped negotiate settlements and payment plans for her clients when appropriate. Visit Ashley at her Herndon, VA office to discuss options to manage your debt.

Tax Debt

Tax Debt: Why Do I Owe the IRS?

Tax Debt: One of the most confusing debts out there.

Not many things instill fear into Americans than owing taxes to the Internal Revenue Service.  Chills may go down your spine when you open a letter from the IRS with a bill. Your first question is: “Why do I owe taxes?” While income taxes are as certain as death to us, they can be even more troublesome when you get a surprise bill from the IRS that says you have tax debt to pay.

Owing any amount to the IRS is not a pleasant experience but it is important to understand why you received that tax bill in order to fix the problem for future years.  There are many reasons why you would receive a tax bill, some a lot more common than others.

Withholding

The first reason why you would owe taxes is that you are not withholding enough money from your regular paycheck from your job.  Most jobs have a regular salary or hourly rate in which you are paid.  When you are first starting with that job you are asked to fill out a W4 form for the IRS. This form lets your employer know how much federal income tax to withhold from your regular paycheck.  Multiple factors go into the number of allowances you can claim on your W4.  Typically, a single person can claim 1 or 2 on their W4 and have enough tax come out for the year.  Additional allowances can be claimed depending on the number of dependents you have, as well as your age or if you have a disability.

Where people get themselves in trouble is claiming a number way above the number of allowances they are entitled to or going complete exempt on their W4.  While it is great to have that extra money in your paycheck, you are digging yourself a whole that may be too large to climb out of at the end of the year. Then, when you file your taxes, there is a large tax debt that is due to the IRS.

Married couples with kids have another thing to keep in mind when filling out their W4 forms.  If both spouses are working, they can only claim the total number of allowances they are allowed combined between the two spouses.  For example:  married couple with 3 children under the age of 16 has a total of 5 allowances to claim on their W4 forms.  Husband claims 4 allowances on his W4 and the wife claims 4 on her W4 as well.  Combined they are claiming 8 allowances, which is 3 too many.  This will likely result in the couple not having enough taken out of their paychecks by the end of the year.  To be proper, the person with more income should have fewer allowances claimed than the other spouse.  So if the wife is making more money she should either claim 1 or 2 allowances and allow the husband to claim 3 or 4.  More specific calculations can be made depending on the amount of total income to determine how to either give the family a large refund or closer to the exact amount of tax needed by the end of the year.

Self-Employment

One of the most common reasons individuals have tax debt is due to a new business or venture. People who are self-employed have a completely different situation when it comes to paying their federal taxes.  They do not have the benefit of simply filling out a W4 form and have their employer paying the taxes to the IRS.  Self-employed individuals are responsible for paying their own taxes.  This is typically done on a quarterly bases with what are called estimated tax payments.  Individuals have to calculate their tax based on their net business income.  The typical self-employed individual is a truck driver or a construction/labor worker.  These individuals can claim expenses incurred in the pursuit of earning income as business deductions and that reduces their amount of taxable income.

In the past few years, the expansion of the “shared economy” has seen a rise in reported 1099 self-employed income.  When most of these companies started they were not always on point with their 1099 filing for all their users.  This allowed certain individuals to not report all their income.  This has changed and almost all the companies like Paypal, Uber, Lyft, Etsy, and Airbnb will report any income you have earned through them to the IRS.  So it may be nice to earn a couple thousand dollars over the course of the year driving for Uber, you have to remember that that income is still taxable and will have an effect on your tax returns.   However, the problem lies with a lot of self-employed people is the fact they do not make their tax payments throughout the year and then do not have enough saved come filling season to pay their tax bill.  This can cause a snowball affect where they can’t afford to pay both the back amounts owed and keeping current with the taxes that are owed on their current income.  It’s important to consult with a tax professional before this cycle gets too large.  They can help you get into a plan on the tax debt and help you with a game plan to stay current with your taxes moving forward.

Additional Income

The next reason why people end up with tax debt is because they left a source of income off of their tax return.  This can happen in many different circumstances, ranging from a missing W2 or 1099, or even all the way to not reporting a cancellation of debt (1099-C).  If you worked as a subcontractor during any year and earned $600.00 or more, the person or the company is required to provide you with a 1099. Additionally, if a creditor has deemed a debt delinquent and believe it is uncollectable, then they report it to the IRS. Not including these situations in your taxes creates a situations called “under-reporting of income.”  They are like mini-audits.  The IRS has records of all the tax documents that are reported to your individual social security number.  If those records do not match what is filed on your return, it can trigger this type of mini-audit.  Typically, these can be handled pretty straightforward with documentation of why something was left off.  However, it is also a possibility that you made a mistake and will have to accept the changes the IRS makes to your tax return, including additional penalties and interest.  What causes taxpayers to owe in these situations is that they were originally issued a refund, but when the IRS adds additional income it causes the taxpayer to owe additional tax.  At that point the IRS will want the additional tax as well as the refund they already paid you.  It is important to make sure you are reporting all forms of income on your tax returns to avoid having this type of situation arise.

Audits

The next situation that causes someone to owe taxes is the scariest to most taxpayers:  The audit.  The audit process can seem daunting for many reasons.  The main reason is that people think the IRS is out to get them.  This is not the case.  Most cases the IRS initiates an audit because something on your tax return was flagged as being irregular.  Your schedule A deductions or your schedule C business income are the two sections that are most likely to be audited.  Typically, an audit is nothing to worry about if you have the documentation to back up what you are claiming on your tax returns.  The problem comes into play when you either “guess” the numbers or have destroyed any documentation that was used to determine your numbers on your tax returns.   The entire audit process can take 6 to 12 months and requires a lot of back and forth with the IRS over specific numbers.

If you do not have a trained accountant who helped you with your tax returns and can help with the audit it is important to contact a tax professional to go over your options.

These are just the broad strokes to why an individual may end up with a tax bill after they file their returns.  It may come within a month  or years later in the form of an audit.  What is important to remember is that you have rights and options as a taxpayer.  Contact your local tax professional to go over those rights and options.  Ashley F. Morgan Law, PC can help you figure out your tax debt, help you address any taxes you owe, and also aid you getting everything in line going forward.

 

 

Arthur Rosatti, Esq. is a Florida licensed attorney authorized to represent clients with the Internal Revenue Service and the U.S. Tax Court. He has experience negotiating with various taxing agencies on behalf of individuals and companies. His goal is to help his clients ensure their tax debt is accurate and get them into the best plan possible to manage the debt.

 

Significant Tax Debt Can Result in Losing your Passport

Starting in January 2018, the Internal Revenue Service (IRS) will forward information about certain taxpayers to the Department of State to revoke passports. This was the first action taken to enforce the Fixing America’s Surface Transportation (FAST) Act provision, which called for those taxpayers with “seriously delinquent tax debt” to have their passports revoked if they were not taking the necessary steps to deal with the debt. This is being done to encourage taxpayers to deal with their tax debt in as an efficient manner as possible.

Those taxpayers that are deemed “seriously delinquent” are those that owe more than $51,000.00 in back taxes, penalties and interest for which the IRS has filed a Notice of Federal Tax Lien and the period to challenge it has expired or the IRS has issued a levy.

It is important to be proactive with your tax debt in every situation but extremely important if you are over the $51,000.00 threshold. You can protect your passport by getting into a protective agreement with the IRS.

If you have already gotten notice that the IRS has forwarded your account to the State Department, you need to take action in order to get your passport back. Please call our office for a free initial consultation to determine what your best options are. For additional information, check out the IRS website regarding Passport Revocation.

 

 

Arthur Rosatti, Esq. is an attorney at Ashley F. Morgan Law, PC. He has years of experience helping individuals manage their state and federal tax debt.