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When should I convert my chapter 13 bankruptcy to a chapter 7

When should I convert my chapter 13 bankruptcy to a chapter 7?  Loss of employment loss of income plan is no longer feasible. You no longer need save your home or cars.

Section 348 of the bankruptcy code says that the qualification for a chapter 7 discharge is the petition date and not the conversion date. Therefore if you didn’t qualify for a chapter 7 filing on the date your chapter 13 is filed you cannot convert to a 7

However if it has been at least 8 years since you filed your prior chapter 7 you can dismiss your chapter 13 and then filed a brand new chapter 7

Examples

Mindy filed a chapter 7 bankruptcy on August 1 2007.  The case was discharged on February 1 2008 and was closed the same day.  Mindy filed her present chapter 13 case on August 5, 2011.  On August 2 2013 Mindy filed a motion to convert her case to a chapter 7.  The case cannot be converted to a chapter 7 because Mindy did not qualify for a chapter 7 discharge on the date of her chapter 13 filing.  Mindy can however dismiss her chapter 13 on August 2 2013 and filed a new chapter 7 on August 3 2013.

Atari U.S. operation files for bankruptcy

Atari U.S. operation files for bankruptcy.

A former colleague of mine mentioned this article to me today.  It is surprising to see Atari file Chapter 11 when it seemed recently that there had been a resurgence in interest in playing the classic Atari games such as Asteroids.  Recently I saw someone wearing a re-issued Atari t-shirt with the classic early 1980’s logo.   As a kid growing up in Sheboygan, I remember the afternoon after Christmas morning probably around 1983.  There had to be at least 4 thrown out Atari Game System boxes sitting out on the street for the trash.  A lot changes, many of you out there will remember the ill-fated Radio Shack TRS-80 computer system or the Commodore 64 all early competitors to Atari who always kept their focus on games.  They tried a computer system, but quickly learned that consolidation in the industry doomed them to the scrap yard.

Although I am not intimately aware of the details and facts surrounding Atari’s bankruptcy, it is a Chapter 11 filing which is usually filed where a corporation wishes to survive after a “reorganization” which is a friendly way of saying reducing debt balances, interest rates and eliminating some types of debt.  In this case, Atari (of the United States) is trying to separate from its from its French owner to save its “classic” assets which include classic games such as Asteroids.

When considering debt relief, please consider NLO Nelson Law Office, our firm is a full service personal bankruptcy firm concentrating its practice in the areas of Chapter 13 and Chapter 7 Bankruptcies.  At this time, our firm provides referrals for bankruptcy work that requires either a personal or business Chapter 11 bankruptcy.

If you have ever wondered why a person would file a Chapter 11, think of it simply as a large Chapter 13.  Chapter 13 only allows about $340,000 in unsecured (credit card style) debt and about $1,000,000 in secured debt.  Clients with multiple investment properties and large lines of credit often look to a personal Chapter 11 to handle problems too large for Chapter 13.

NACBA Board of Directors Election Debate – Hear David Nelson talk about his candidacy

Today, an unofficial debate was held by three of the four candidates running for seat #4 in the National Association of Consumer Bankruptcy Attorneys Board of Directors.  Hear David Nelson talk about his candidacy and his passion for consumer advocacy and bankruptcy rights.  Covered in this meeting are the topics of outreach, qualifications, the future and legislative trends.  HAMP, Principal DownPayment, Private Student Loans and Marketing are discussed.

To listen to the recorded debate, goto:  NACBA Debate

New Year’s Fresh Start Bankruptcy Timeline

New Year’s Fresh Start Bankruptcy Timeline

Set Up your Free Bankruptcy Consultation Today!  Fill out the form below for an immediate response.

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NLO Nelson Law Office is a Debt Relief Agency offering debt relief through bankruptcy.

2012 New Year's Eve Fireworks Navy Pier Chicago, Illinois

2012 New Year’s Eve Fireworks Navy Pier Chicago, Illinois

1)  Get Through the Holiday, spend wisely and see our post about credit card use during the holidays
2)  File your taxes as soon as possible
3)  See a Bankruptcy Attorney about Debt Relief Options early in January to find out your options
4)  Receive your tax refund in February and file your bankruptcy.

Why is the New Year such a popular time to file bankruptcy?

Tax Refunds are usually received prior to May 31st of the New Year.  Tax Refunds can be used for legal fees and court costs in a bankruptcy.  The tax refund is listed on the bankruptcy petition, but the portion used for legal fees and filing fees is exempt.

Holiday spending often times puts people “over the top” after years of family budget deficits caused by medical bills, illness, loss of job or overspending.

What should I do if I don’t have much of a tax refund?

You can either wait to file your bankruptcy later after you have saved enough money to pay for it, or you can file a Chapter 13 bankruptcy which allows for all of your legal fee to be included in the bankruptcy “plan”.

Need more options?  Have Questions?

Call David Nelson at 877-464-6656 to set up a free bankruptcy consultation.

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Can I Use My Credit Cards for Christmas Gifts and Still File Bankruptcy?

Can I Use My Credit Cards for Christmas Gifts and Still File Bankruptcy?

  • Schedule Your Free Bankruptcy Consultation By Filling Out this Form




Yes, you can use your credit cards for Christmas and still file bankruptcy. However, you must be extremely careful. If you are filing within ninety days of using your credit cards, you must make sure that you have used them only for “necessary” i

Daley Center Christmas Tree

Daley Center Christmas Tree

tems and not for “luxury” items. If you are filing more than 90 days since you last used your credit card, you can essentially charge anything onto the credit cards except it cannot be in bad faith or with a fraudulent intent. Schedule a Bankruptcy Consultation

At this “Christmas” time of year, people spend excessively and often use credit cards. A large portion of Chapter 7 Bankruptcies are filed in the months of February, March and April because tax refunds can be used for paying your bankruptcy attorney fees, filing fees and due diligence costs such as credit reports.

1. Best Solution: Do not use your credit cards – At All. File Bankruptcy with your tax refund as early as January or anytime after you receive your tax refund.

2. Fair Solution: Use your credit card over the holidays and prior to your bankruptcy for “necessary” items such as groceries and clothing from non-luxury retailers. File Bankruptcy with your tax refund as early as January or anytime after you receive your tax refund. Before even considering this solution, you should seek out a qualified bankruptcy attorney.

3. So-So Solution: Use your credit card for non-luxury items that might be objectionable as non-necessary, such as toys, electronics or other items are not basic survival items, such as food and clothing. You could possibly file in January, February or March but best choice is to file April 30th or later.

4. Not so great solution: Use your credit card for all items at all retailers, including luxury retailers. Purchase jewelry, electronics and just about anything you want. File your bankruptcy at least ninety days after the last purchase. Take the chance that you have made such flagrantly offensive purchases that the creditor files an adversary petition to take away your discharge, or, worse yet, fraud. Bottom line: this is risky at best, but if the purchases are small enough, a calculated risk.

5. Terrible solution that will nearly always run into problems: Use your credit card during the holidays on anything and run every card up to the limit. Include luxury items at luxury retailers. File your bankruptcy whenever you want, such as February. Chances are that if the purchase is over $500 at any one creditor, the creditor will file an adversary lawsuit.

One scenario that happens over and over again (often times with bad results) is the “blowout” Christmas Charger who decides to “let it all out” one last time before filing for bankruptcy. This charger may still have up to $1000 left in credit and may often purchase entirely luxury goods, such as an iPad, Wii, Xbox, large screen T.V., an unnecessary computer, a trip to the Caribbean, or a bunch of jewelry. Then the charger stops in to a local attorney’s office and doesn’t mention the charging, the bankruptcy attorney doesn’t check out the charge bills, the bankruptcy is filed in February and then a lawsuit is file by the credit card company to take away the bankruptcy discharge with regard to the credit purchases. Usually, the debtor is forced to hire a second attorney at $2000 or more to represent the debtor in a defense of the discharge action and usually results in the debtor entering into a promise to pay the entire debt to the creditor with interest over a period of time.

What is the lesson of this article? If you are contemplating bankruptcy, stop using your credit cards and keep it simple. If you must use your credit cards, then use them only on food and clothing and at non-luxury retailers. Under all circumstances, try to not use your credit cards at all 90 days prior to the filing of your bankruptcy.

Three true stories:

Client purchases an $8,000 hot tub one week prior to filing on a line a credit issued from a credit card style creditor. Client files bankruptcy. 2 & 1/2 month after filing bankruptcy, debtor is sued by the credit card company. Creditor seeks to take away the debtor’s discharge with regard to the $8000 debt plus attorney fees and interest or about $10,500 total. If the case was not settled, this would have eventually been a garnishment on debtor’s income for about five years at 15% of his gross salary. Due to a settlement, the debtor was able to pay off the debt under a new agreement over 5 years at a reasonable interest rate. What does this teach us? A luxury item purchased within 90 days prior to a bankruptcy filing that is obnoxious and unnecessary and expensive will result in a nasty lawsuit that will cost the debtor another $1000-2000 in legal fees and possibly ruin all of the benefit of the bankruptcy.

Client purchases a tennis bracelet at Nordstrom as a “gift to herself” for filing bankruptcy…Good Luck! Nordstrom filed suit against the debtor, debtor ended up returning the item and paying about $600 in attorney fees to Nordstrom as a settlement instead of a fraud judgment, which would have resulted in the denial of an entire discharge of all debts. Bottom line: no “gifts” for successfully filing bankruptcy. No jewelry purchases on credit cards included in the bankruptcy up to one day before filing.

Client knows he isn’t going to be able to afford a new riding lawn mower for many years after filing bankruptcy, and one week prior to bankruptcy he purchases a new riding lawn mower for $1500.00. Client files bankruptcy one week later. Client does not tell his attorney about this purchase and does not make the bill available to the attorney, and the attorney must rely upon a credit report to file the bankruptcy petition. Debtor is sued in an adversary petition to deny the discharge of this debt. Result: client ends up paying the debt back over 36 months at 10% interest. Not much better result than if he had purchased it one year after the bankruptcy legitimately.

The one resounding rule throughout these cases seems to be that creditors object to the discharge, but this “un-permitted” purchasing in effect gives the debtor access to a tool right away that he may have needed immediately but would not have been able to get after the bankruptcy. Bottom line: even though the behavior above is in violation of the bankruptcy code and even though creditors dislike this behavior, they do end up preferring to extend a loan at a reasonable interest rate.

NLO Nelson Law Office is a debt relief agency offering debt relief through bankruptcy. To schedule a free confirmation click here and write “Bankruptcy Consultation Request” and hit send. Our office will respond with a variety of times and date for your consultation. Or…call our national toll-free number 877-GO-GO-NLO or 877-464-6656.

cram down chapter 13

1973 Lincoln Town Car

1973 Lincoln Town Car

cram down chapter 13

Cramming Down your Auto Loan: How to Lower Your Interest Rate and Increase the Amount of time to Pay Off your Car!

How to lower the interest rate on your auto loan.  How to increase the amount of time to pay off your auto loan. How to lower your payments. It’s all a part of filing a Chapter 13 Bankruptcy and properly modifying your loan in the bankruptcy plan.

Here’s how it works:

If your car was purchased more the 910 days in the past and the current loan was used to purchase it…oftentimes referred to as a “purchase money loan” you are allowed to both reduce the total loan balance to the appraised value of the car on the date of filing your bankruptcy PLUS you can also reduce the Interest rate the Till rate. The Till rate is :

PRIME RATE (Click Here for Today’s Prime Rate) + RISK FACTOR (1-3%)

TILL v. SCS CREDIT CORPORATION, 124 S. Ct. 1951, 158 L. Ed. 2d 787, 541 U.S. 465 (S.Ct., 2004)
To Read More about Till Case, Click the Attached link:
TILL v. SCS CREDIT CORPORATION

 

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Example:

Jeff’s 2002 Mitsubishi Galant is worth $2400.00. Jeff’s automobile loan is with Wells Fargo. The loan balance at the time of filing his Chapter 13 bankruptcy was $5500.00. The interest rate on this his loan was 22%. He had 24 payments left on his loan. Jeff’s attorney modified the loan as follows in his bankruptcy plan:

Balance to pay off: $2400.00 (This is the current appraised value of the auto)
Interest Rate of Loan: 6.25% (Current Prime Rate of 3.25% plus maximum risk factor of 3% from the Till case.)

What is my auto loan is only 30 days old?

No problem, you can still modify the interest rate down to the Till rate of Prime Rate + Risk Factor BUT YOU CANNOT reduce the loan balance amount.

In this example, Jeff’s 2002 Mitsubishi Galant is still worth $2400.00. Jeff’s automobile loan is still with Wells Fargo. But the loan is only 30 days old and the balance is $5500.00. The interest rate is 22%. Jeff still has only 24 payments to go, but the loan is only 30 days old. In this case:

Balance to pay off stays at $5500.00
Interest Rate of the Loan goes to: 6.25% (Current Prime Rate of 3.25% plus maximum risk factor of 3% from the Till case).

Summary:

Chapter 13 Bankruptcy offers the ability to modify an automobile loan by either reducing the interest rate to Prime Rate Plus a Risk Factor or both reducing the interest rate AND reducing the loan payoff amount to the appraised value of the automobile depending on whether the auto loan is 910 days or older. The Till case is a watershed case that has been followed for years in providing for this treatment of the interest rate. However, the Bankruptcy Act of 2005 added the 910 day rule.

For more information about Chapter 13 Bankruptcy in Illinois, please call NLO Nelson Law Office at 877-GO-GO-NLO (877-464-6656) or email NLO Nelson Law Office Information

file bankruptcy on your own

Clear Lake Iowa

Clear Lake Iowa

file bankruptcy on your own

  • Schedule Your Free Bankruptcy Consultation




File your own bankruptcy.  File your Chapter 341 documents, reaffirmation agreements, filing fee and attend your own Chapter 341 meeting.  How Hard Can it Be?  Avoid Attorney fees and file it on your own.  Warning – it will take a lot of time.  Great for disabled, unemployed or low income filers with uncomplicated cases.  Chapter 13 is practically impossible to do properly on your own, but can be done.  Usually people start it on their own and add an attorney later.

Ever wondered how to file a bankruptcy on your own? Well wonder no more, here is the quick 5 minute course on how to do it!

1. Fill Out the Required Bankruptcy Forms – Link to Official Bankruptcy Forms!
2. Take your pre-bankruptcy credit counseling course at least one calendar day prior to your filing – Link to an Example of Court Approved Credit Counseling Agency!
3. File your bankruptcy by going to the Federal Clerk of Court in your district – Link to Information about Where to File!
4. Submit your Chapter 341 Documents within 14 days to the bankruptcy – Link to Information on how to submit your 341 documents!
5. Attend your 341 Meeting
6. Wait for your Discharge Order!
7. Need Help – Contact the Bankruptcy Assistance Desk – Link to the Help Desk!

8.  Link to “Guide for Individuals filing without an Attorney”, by United States Bankruptcy Court for the Northern District of Illinois.

That’s it.  How hard can it be?  Avoid attorney fees and file it on your own.

So what’s the catch? Why do people use attorneys in probably 95% of all cases:

• What do you fill-in the forms?
• How do I reaffirm a debt, such as to keep my car or home?
• How do I fill out the means test?  It’s worse than doing my taxes!
• What do I say and do at my 341 Meeting of the Creditors?
• Should I be using a Chapter 13 bankruptcy for my higher income and/or need to save my home?
• What is a motion for relief from stay?
• Why has the trustee filed a motion to dismiss?

Bottom line – filing on your own is a good option when you have a lot of time on your hands and can go to the bankruptcy assistance desk to help along the way to confirm your filings are done right. This is great for people who have racked up a lot of debt say $60,000 in credit card debt are now unemployed, getting harassed by creditors and will not likely be re-employed for at least one year. This is true of people in the construction business and other long cycle industries. Another good application for filing on your own is when you have made a lot of money in the past, have lots of debt and then suffer a disability which becomes permanent leaving you with an income that is often only 20% of your former income. In this case you won’t be taking on more debt in the future and you are really in no danger of a lawsuit or garnishment, but you simply want to clean up and get rid of all of the old debt so that you can focus on your new life. Many times these folks will do best using legal aid associations providing pro-Bono – free bankruptcies. One large organization that is used in Cook County is: Legal Assistance Foundation of Metropolitan Chicago.

For a free 1/2 hour bankruptcy consultation to learn whether you qualify for debt relief under bankruptcy or should even consider filing on your own, please call 877-GO-GO-NLO (877-464-6656) or email your request for a consultation to us at info@nelsonlawoffice.com.

illinois hardest hit program

illinois hardest hit program

Illinois Hardest Hit Program – Save Your Home – $25K Grant to Pay Mortgage Arrears

For anyone who hasn’t heard, here’s the news…there’s a new program on the block for saving your home.  And for some people, it’s a hit.

Looking for unbiased help in figuring out how to save your home?  Check out the following housing organizations. Click on the Link.  I have worked with all of them for years and know of their honesty and fair dealing:

The Illinois Hardest Hit Program essentially gets your home out of foreclosure.  Pays all the arrears, court costs, etc. to reinstate your loan fully and then provides up to 18 months of payment assistance.  The cap on the assistance is $25,000.

To apply for this program, please go to (click link):  Illinois Hardest Hit Program

Pro’s:

  • No Fees
  • Completely Reinstates Your Mortgage
  • Up to 18 months assistance

Con’s:

  • Increases the mortgage balance on your home by up to $25,000
  • Does not reduce the total amount owed on your home
  • Does not provide assistance after 18 months which is a problem if a person has not secured employment or their family is only partially employed

Who are the best candidates for this program:

  • Homeowners who are only temporarily out of work and can easily return to work in a stable job within 18 month of starting the program
  • Homeowners whose mortgage has less than $15,000 in arrears or is about 6 months or less behind
  • Homeowner who want to stay in their house for 10 years or more and does not care about having the flexibilty to move….for say a new job, changed family circumstances (divorce) or any other matter

Who are the worst candidates for this program:

  • Homeowners who haven’t made a mortgage payment for over one year
  • Homeowners who are in a profession that has been affected by the severe economic downturn such as construction or union jobs and are unlikely to have stable employment for the next five years
  • Homeowners who want the ability to be flexible in selling their home in the next 10 years

Who should consider a short sale of their home instead of this program:

  • Homeowners who cannot afford their home even when they are fully employed
  • Homeowners who are in an employment industry that will not recover soon and may need to relocate for employment
  • Homeowners who have so much debt on their home that they will not have equity for ten years or more (typically someone with two or more mortgages including a home equity line of credit)

Who should consider a Chapter 7 Bankruptcy instead of all of these options?

  • Homeowners who have unsecured debt (credit card style debt) that exceeds more than 1/3 of their annual take home pay
  • Homeowners who have not made a mortgage payment in over one year
  • Homeowners who have not been able to get a short sale approved by their lender
  • Homeowners who want to easily walk away from a home to simply move-on or need to relocate for employment
  • Homeowners who are insolvent – that is – no real assets outside of retirement accounts

When is a Chapter 13 Bankruptcy Reorganization a  better than the Illinois Hardest Hit Program?

  • When a mortgage debt is more than 6 months in arrears (no payment for at least 6 months or longer
  • When the homeowners property has more than one mortgage such as a second mortgage or home equity line of credit
  • When the homeowner has equity or something valuable to save in the property but also has a large amount of unsecured debt (credit card style)
  • When the total home mortgage debt can be reduced through “stripping off the second and junior mortgages/liens”

Can I Modify my Home Mortgage in Chapter 13 Bankruptcy?

Mrs. Free's Studios Davenport, Iowa

Mrs. Free’s Studios Davenport Iowa

Can I Modify my Home Mortgage in Chapter 13 Bankruptcy?

  • Schedule Your Free Chapter 13 Bankruptcy Home Loan Modification Consultation




Yes – you can modify your home mortgage in a Chapter 13 Bankruptcy by Stripping Off The Second Mortgage and other junior liens.

Today, you can modify your home mortgage in two ways:  Get a modification from the lender or file a Chapter 13 bankruptcy and attempt to strip off the second mortgage on your home.  Oftentimes, this will reduce the balance on your mortgage by 30%.  While this isn’t perfect, it is oftentimes, the difference between being able to keep your home or being forced to surrender it in foreclosure.

So how does this work.? First it is important to determine whether you should file bankruptcy.  Second you need to file a Chapter 13 bankruptcy.  Third, your bankruptcy attorney files an adversary procedure with the court to rule that the value of your home is less than the balance on  your first mortgage.  Fourth get the Chapter 13 plan confirmed by the court whereby the second (third, fourth, fifth and any junior mortgages) are wholly unsecured and will be paid as unsecured creditors.  At the end of the plan (60 months), the second mortgage and all other junior mortgages are released by the lender and the debtor/s is left with a home with only one mortgage.

Does this work in real life applications?  In the last year over 40% of our firms Chapter 13’s had successful plan confirmations with the second mortgage being stripped.    On average this reduced the principal by 30% on the home indebtedness.

So what is not so great?  The first mortgage still has to be paid off in full with all of the arrearages paid back over 60 months along with the costs of collection plus the first mortgage may still have a balance that is more than the home can be sold for…so why has the court allowed this to occur – the answer is in the intent of the bankruptcy code, the idea was that if home mortgages could be modified in bankruptcy, why would anybody pay their mortgage?  Therefore, to save the ability for consumer to get home mortgages from banks, the bankruptcy code strictly prohibits the modification of a home mortgage this is wholly or even partially secured even if secured by only $1.

Bottom line – Chapter 13 offers a crude type of home mortgage modification by getting rid of unsecured mortgages, however, it does not fix long term problems with a first mortgage.  If your first mortgage is OK by itself then this type of modification is for you.  If your first mortgage is still a problem, then it may be wise to simply surrender the home in the bankruptcy and let the lender take the loss.

What are we seeing now is unbelieveable – it never used to happen in the past, but it is happening now: After filing the bankruptcy  and after stripping the second mortgage, the lender on the first mortgage voluntarily modifies the first mortgage to make the plan easier.

So what is this all about?

Well…here’s the best way to describe it.  Typically, the interest rate is reduced to 2% for the first five years and it increases by 1/2% per year after that until it hits the market rate and then becomes fixed at that rate.  The kicker is that the bank will put the arrears on to the balance of the loan.  Doesn’t seem like a big deal, but it is!  If your old mortgage payment was $2400 per month and you were 10 months behind at the time of your bankruptcy filing, then you owe $24,000 in arrears.  In a typical 60 month chapter 13 plan, you will pay $24,000/60 per month to pay back these arrears.  This is $400 per month.  In this case, the bank basically put this into the balance.  So basically, you are now paying 2% interest on $24,000 over the next 30 years or so.  Around $50 per month.  The benefit is theoretically that your home if you keep it for 15 years will finally be worth more than the mortgage; you can sell it, pay off the mortgage and have a happy life.  This is all true with one caveat.  What if you have to get out of the house one year after your bankruptcy ends and you are still “underwater”   Good luck – you just entered another bankruptcy or years of garnishments.

In a nutshell – if you want to live in your house a long time and don’t have a big need to move soon and don’t believe you will be forced to move, then this is the ticket.  Basically, the bank cuts its price on loaning you the money.  But if you need to be more flexible and actually have the debt load be less immediately, then you are out of luck and better surrendering the home in bankruptcy.

Examples:

Ron and Karla bought a home in 2006 for $200,000.  The first mortgage was $160,000 from Wells Fargo.  The Second Mortgage for $40,000 was from Banco Popular.  Ron and Karla were doing great until Karla lost her job in 2008.  The couple missed 8 payments.  The couple was five months into their foreclosure action when they filed a Chapter 13 Bankruptcy.

Ron and Karla hired David Nelson to file their Chapter 13.  David suggested that they keep their home, but attempt to strip off the second mortgage.  Ron and Karla agreed.

Ron and Karla make approximately $70,000 per year together and have two children.  Their budget is tight and the means test says that they need to contribute on 10% of their plan to paying unsecured creditors.

Ron and Karla have no other debts besides the home.  Their mortgage payment was $1400 on the first mortgage, $500 on the second and their tax escrow was $300 per month.

Ron and Karla were $11,200 in arrears on their first mortgage when they filed their bankruptcy.

Here is how their plan payment is figured.

$1400 for payment of the first mortgage regular payment
$300 for tax escrow payment on the first mortgage
$67  (10% of $40,000 divided by 60 months) for payment of the unsecured second mortgage
$187  ($11,200 divided by 60 months)
$1954 Subtotal
$195  Trustee Fee (10% of payment)
$2149 total payment

So how does this work out with their budget

$70,000 Gross Income Per Year
$5833 Per Month Gross
($1458)  Taxes
$4375 Net Income Per Month

$2149 Plan Payment
$250  Gas & Electric
$800  Food
$194  Clothing
$100  Laundry
$250  Medical
$502  Transportation
$130  Auto Insurance
$4375  Subtotal

Square Budget.  Home Saved.  Overall home mortgage modified by overall reduction by 20%

Bottom line – this Chapter 13 accomplishes good things.  With other applications we might have an auto loan, additional credit card debt or other unsecured debt.  For those discussions, please see my other blog postings.

For more information about bankruptcy, mortgage modification or other debt relief options, please call NLO Nelson Law Office at 877-464-6656 or email us at info@nelsonlawoffice.com

Post-Bankruptcy Survival Guide…Budgeting, Planning and Lifestyle Changes

Congratulations!

You’ve successfully completed your bankruptcy.  In 75% of cases, you’ve just completed a Chapter 7 Bankruptcy, which is oftentimes called a “Liquidation” or “Straight” Bankruptcy.  Other debtors have typically completed a Chapter 13 Bankruptcy, which is unique in that it uses a 60 month repayment program to keep debtors on track with their budget and also pay back between 10% and 100% of their debts.  This guide here is especially designed to help those debtors who are leaving a Chapter 7 Bankruptcy.

As you know, the filing is done by your attorney, then 30 days later you have a 341 Meeting of the Creditors.  Ninety days after that you typically have a discharge order and your case is closed.  Here’s the problem,  you have just gone from having typically $60,000 in credit card debt with minimum payments of $1200 and payday loans, garnishments and all sorts of other things that disrupt planning and budgeting.  In this guide, we will discuss how to plan a good budget in the newly-created stable environment.

In The First Year

The first year after a Chapter 7 Bankruptcy can be traumatic. In many cases, a car was surrendered, a house given up at foreclosure, and possibly a new job has replaced the job lost which caused the bankruptcy in the first place.  So let’s talk about the big things to worry about in the first year:

1.  Set Up a Budget
2.  Determine how long you can live in your home if it was surrendered in the bankruptcy
3.  Figure out inexpensive transportation options if you gave up a car in the bankruptcy

The Budget:

Items that cannot be changed:
1.  Electricity
2.  Gas
3.  Water and/or Sewer Bill
4.  Basic Telephone Service
5.  Basic Food
6.  Basic Dry Goods

For Electricity and Gas Bills, you should get on a “budget” plan that allows you to pay the same amount each month. If you are estimating your budget amount, simply take one year of bills and divide the total of all the bills by 12.  This is your average amount spent on that utility.

For Water and/or Sewer Bill, determine whether paid monthly, quarterly, semi-annually or yearly.  If anything other than monthly, set up a savings account at a bank specifically for this bill and the put the same amount in monthly and transfer the necessary amount into your checking account when you are making payments.

For Basic Telephone Service, remember that this is a discussion only for the first year and designed to see how low you can get your fixed utilities that you must have.  The goal is to see just how much flexibility you have.  In this area, you should determine if you want a mobile phone or landline.  The bottom line is, you don’t need both.  I recommend a voice-only plan for less than $50 per month.  Internet Service, TV Service and other services are nice but not necessary for everyday life.  Bottom line: those are part of the choices you get to make with your “extra” income that is now under planning.

Basic Food – What is this?  This is the food that is necessary to live.  Not necessarily what you want or desire, but what is necessary to live a healthy life.  Bottom line: Meat, Fruit, Bread, Dairy.  The typical family of four spends about $800 on these necessary items.  If you have trouble with staying in the budget, simply try one week without the following:
a. Bottled Water
b. Soda
c. Candy
d. Booze (Beer, Wine & Liquor)

Even though this isn’t fun, the point of this exercise to find out how much power you can yield by removing any lack of control over your necessary “fixed” budget items.

Basic Dry Goods:  What is this?  This is the old fashioned way to describe items such as: Toilet Paper, Soap, Razor Blades, Garbage Bags, Cleaning Supplies, Cookware, First Aid Supplies,  Toiletries & Cosmetics.  The typical family can keep this under $400 per month.  If you are having trouble staying within these budget amounts try eliminating:

1. Paper Towels

2. Magazines and Newspapers

3. Anything that won’t be used in the next week

4. House Decorations

5. New Sheets, Linens, Towels, etc.

Items that can be changed:
1. Transportation
2. Insurance
3. Medical
4. Education
5. Recreation
6. Vacation
7. Hobbies and Interests
8. Eating Out, Drinking and Concerts
9. Unnecessary Home Repair or Decoration

Transportation:  Do you need two cars?  Can you do with one or none?  Does your job require you to travel in a way that you need a car?  Is the car that you own a low cost car to run?  This can usually mean less stylish and prestigious transportation, but the reduction in stress from a low cost car is superior to the satisfaction of a prestigious car.

Do you need life insurance?  Do you have kids who will need money if you die?  If so, great…now how much?  Think about this, if one of you dies and the surviving spouse has three years of income to live on, he or she won’t have much trouble getting into a new job and situation to replace the income lost.  If both of you die, then you should have enough money for your guardians to take car of your children for at least several years after you death.  Bottom line:  a 20 year policy of term life insurance equal to your salary times 3 is enough.  This should never be over $100 per month for a healthy married couple in their 30’s.  Do not buy whole life insurance or buy insurance to pay off your house.  This is useless.  The maintenance cost and taxes on a home will take it away from the survivor even though there isn’t a mortgage any more.

Auto Insurance is another one.  If you have less than $10,000 in cash and all of your other assets are in retirement accounts, than the State Minimum Liability Requirements are all you need.  If you have a loan, then get the minimums for collision to satisfy the lender.  As you get more assets you should increase this coverage.  This includes increased equity in your home.

With Health Insurance, the bottom line is: if you don’t have a policy at all from work or paid by yourself, you should get a basic policy that at least gives coverage for the big events and also gets you access to reduced rates at hospitals.  Sometimes a family of 4 can get a policy like this for under $400.  However, you should switch jobs to one that provides health insurance as a benefit until the new Health Care Act changes how we are able to purchase health insurance.

Medical.  This is an easy one.  If you are on a lot of recurring medications which are a monthly fixed amount that you cannot afford, you need to sit down with your doctor and find out which ones are really necessary for your survival and which ones can be swapped out for older cheaper medications that will allow you to survive until you can afford the medications you really want  but may not really need.  A very frank and direct discussion with your physician is necessary because they are not incentivized to reduce your costs.

Education.  You may want to send your kids to a private school, but if the money doesn’t exist now, it may or may not later.  Bottom line: compare your net tuition after scholarships and grants (not loans) with the cost of public, magnet or charter school offerings and try to figure out something does not overburden your fixed expenses.  In the future, if your income increases, you can simply allocate that additional income towards a private school education.  On average, the IRS estimates that a family should spend no more than $147.50 per month on a child’s education pre-college.  While this amount may not work for everybody, it is a good guide to how much to budget for pre-college education.

Recreation.  This is a tough area to budget for, but essentially, in the first year especially, you need to get the most bang for the buck and to be very selfish about making sure that you spend your funds on activities that you and your family like and not to just please others who have suggested an activity.

Vacation.  Depending on your job, vacation may or may not be included.  Bottom line, we all need a vacation.

Here’s a primer on vacation:  There is the one day vacation, the weekend extended and the week off.  Bottom line, if you can do it, one week of vacation away can have dramatic benefits for your mental health and can refresh you greatly.  If one week doesn’t work either because of cost or scheduling days off at work, you should consider extending a holiday weekend and going away somewhere.  Here’s the bottom line: take 30% of your annual discretionary budget and try to save it in a special savings account for your vacation.  If you end up with $900, then pick a destination based upon $450 in upfront charges to go and $450 to spend along the way.  In the end, it is the experiences you have on vacation that are most important and not what you did and/or how much money you spent.

Hobbies and Interests.  It is important to do something that takes your mind off of work and family but is compatible with your obligations to work and family.  For example, you may not be able to afford a sailboat, but maybe you can sail for free as crew.  You may not be able to afford a motorhome, but you may be able to afford a really good tent and use it twelve times every summer.  Your interest may be Roll-Royce History, but you won’t be owning a Rolls-Royce Collection.  You may want to be part of a local club, work as a volunteer at a museum or simply collect books and memorabilia.  When it comes to sports, the cheapest choice is TV, but let’s face it, if sports is your life and you like baseball, then maybe a partial season of tickets is the way to go.

Out to Eat Drinks and Concerts.  Look at how much extra money you have every month and decide how much you want to allocate towards going out, concerts and other entertainment.  If your budget isn’t big, then may pick a concert once every 3 months instead of a mediocre list of events every week.  Or eat before going out and just have drinks.  In the first year after bankruptcy, creativity is the key.  The problem is friends and family who may have unreasonable expectations of  your ability to entertain and spend money going out – this is the first time you will really see what the quality of those relationships are.  After a frank discussion about what you will not be doing any more, you will see the true colors of your friends and learn how to navigate family politics.

Planning Items for the Future

Take the amount of money that is discretionary every month and think about how you would like to spend it:  General Saving,  Saving for something specific, Education, Vacation, Saving for Kids, Saving for Retirement.

After The First Year

1.  Look for a new job
2.  Get a new career
3.  Plan for education to get new career and more income.
4.  Reduce commute to work
5.  Improve Education and reduce cost through public schools that meet your children’s needs
6.  Purchase more reliable car with lower operating costs
7.  Find better place to live
8.  Plan a vacation

Looking For A New Job.  If you have been in the same job for years without any pay increase, maybe it’s time to consider looking at whether your skills are worth more money elsewhere.  This can help with making your budget looser and letting you explore new hobbies, interests and vacations.  The typical jobseeker who is currently employed looks for 6-12 months for a better job before moving on to the next job.  Bottom line: It never hurts to look around.

Getting A New Career.  Before you lose your job, get downsized, get laid off or suffer cutbacks or furloughs at work, it’s time to look at whether you are working in the right industry.  For example, the printing industry has suffered continuous declines for at least 10 years as many types of information are now delivered digitally.  A person with a printing background who has a good grasp of graphic layout should maybe head to a different firm to do web design or advertising layouts which may not be printed but use the same set of skills.  Bottom line: if you are in a dying industry, they usually don’t come back and it is best to switch industries before you are laid off.

Plan Education For A New Career.  It sounds easy, but the typical graduate degree earned while working takes 5 years.  Bottom line: if you think you need more education to make the next step in your career and continue to have increased income, you need to start now to have the education you need in five years.  Choosing a school is dependent upon net cost, logistics and your schedule.

Reduce The Commute To Work.  Reducing your commute to work can sometimes save thousands of dollars per year and sometimes save 10 hours a week in wasted time.  Bottom line:  if you work in an industry where a company is located closer to home, it may take 6 months to a year to make the change.  It is good to start the planning now.

Reduce The Cost of Schooling.  Sometimes you have to break a comfortable habit.  If you have been at a private school for years, but it contributed towards your bankruptcy, then you have to recognize the fact that you may not be able to send your child to private school.  Sometimes Scholarship and Grants can help, but if you need to reduce your budget now to stay out of financial trouble, you should put other concerns aside and do what you need to do.

Purchasing a Reliable Car.  Many times, the least costly car isn’t the one with the lower gas mileage or one that is a car that everybody thinks is great.  What’s important is reducing the overall cost which includes:  Maintenance, Gas, Oil and Insurance.  To do this right, you should look over all of your maintenance costs for the last year, call your insurance company to see how your existing and proposed car rate for premiums, and compare mileage costs.

Find A Better Place To Live.  Finding a better place to live should include the following factors:  1. Proximity to your job 2. School System Quality if you have children 3. Functionality and Space of the New Residence 4.  Overall Cost versus how much you to spend in your budget.  For most people leaving bankruptcy, you must wait three years after your house is sold in foreclosure to qualify for an FHA First Time Homebuyer Loan.

Plan a Vacation.  The key to a long, happy life is making activities outside of work the focus and making work an enjoyable means to an end.  Planning frequent high-quality vacations with an emphasis on moderate cost and high-quality activities is the key.  The best vacations are always planned months in advance and often include friends and family.  Good planning is free.  Great Value is Priceless.

For more assistance with your post bankruptcy situation, please call us at 877-GO-GO-NLO or email our firm at info@nelsonlawoffice.com

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