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Credit After Bankruptcy

People often worry about the possibility of obtaining credit after bankruptcy. We are here to give you honest information about the impact that Bankruptcy will have on future creditworthiness. Contrary to what most people think, a Bankruptcy case will often improve a person’s credit score and provide faster access to credit in the future.

Bankruptcy Does Not Prevent You From Gaining Credit

Many prospective clients who come to the Law Offices of Christopher Alliotts are often hesitant to file Bankruptcy because they think it will ruin their credit for many years to come. This is a myth and is simply untrue. Our Attorneys are happy to dispel that myth and properly inform you with the facts about the reality of Bankruptcy’s effect on your credit. You can repair your credit worthiness much faster than you realize.

Your Credit Score is Already Damaged

If you are considering Bankruptcy, you probably have missed a payment or two on some bills. Or your unsecured debt is too much for your income and you are making minimum payments only and never retiring certain debts. If that is the case, then your credit score is already being damaged by a lack of progress in retiring debt. When most of our clients first come to us, their credit score is less than 650 and cannot qualify for a new loan or an extension of credit. After engaging in the Bankruptcy process the path to credit enhancement is clear and certain – without the burden of past obligations.

Bankruptcy is the First Step to Repairing Your Credit

Unlike debt consolidation programs, which typically require that you pay your debts in full, Bankruptcy typically eliminates your debts in months, not years, and for substantially less money. More importantly for your future well-being, once your case is complete your credit score is typically around 650 and it will increase if you pay your obligations on time.

Few of our clients realize that you can qualify for a new car loan as soon as your discharge is entered, which in turn will help you improve your creditworthiness. In addition, you can qualify for a new home loan in two or three years. Without a Bankruptcy case, you will be paying your old debts for years; your credit score will remain static and depressed; and you will not be able to qualify for new low-interest conventional credit for years to come. Our clients often tell us that they are surprised at how easy the Bankruptcy process is and how easy it was for them to get new credit once their case is complete.

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Income Tax Debt

Income tax debts may be eligible for discharge under Chapter 7 or Chapter 13 of the Bankruptcy Code. Filing for bankruptcy is one of five ways to get out of tax debt, but you should consider bankruptcy only if you meet the requirements for discharging your taxes. Tax debts are associated with a particular tax return and tax year. The bankruptcy law lays out specific criteria for how old a tax debt should be.

Five Rules to Discharge Tax Debts

If the income tax debt meets all five of these rules, then the tax debt is dischargeable in bankruptcy.

1. The due date for filing a tax return is at least three years prior to the start of the bankruptcy case.

a) The tax debt must be related to a tax return that was due at least three years before the taxpayer files for bankruptcy. The due date includes any extensions.

2. The tax return was filed at least two years ago.

a) The tax debt must be related to a tax return that was filed at least two years before the taxpayer files for bankruptcy. The time is measured from the date the taxpayer actually filed the return.

3. The tax assessment is at least 240 days prior to the start of the bankruptcy case.

a) The IRS must assess the tax at least 240 days before the taxpayer files for bankruptcy. The IRS assessment may arise from a self-reported balance due, an IRS final determination in an audit, or an IRS proposed assessment which has become final.

4. The tax return was not fraudulent.

5. The taxpayer is not guilty of tax evasion.

Some Tax Debts Not Dischargeable

Tax debts that arise from unfiled tax returns are not dischargeable. The IRS routinely assesses tax on unfiled returns. These tax liabilities cannot be discharged unless the taxpayer files a tax return for the year in question.

Other Tax Issues in Bankruptcy

To the extent that a person cannot eliminate a tax debt, Chapter 13 allows a person to pay off that tax debt without any further penalties and interest over a period of five years.

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Canceled Mortgage Debt: What Happens at Tax Time?

The Mortgage Forgiveness Debt Relief Act gives some taxpayers a break.

Thanks to the Mortgage Forgiveness Debt Relief Act of 2007, homeowners who have had mortgage debt forgiven or canceled (perhaps through a mortgage modification or restructure) or who have suffered through a foreclosure may not owe income tax on that forgiven debt come tax time. To learn about the tax implications of forgiven debt and whether you can exclude forgiven mortgage debt from your taxable income on your tax return, read on.

Canceled Debt Is Usually Taxed as Income

Ordinarily, when debt is forgiven or canceled by a lender, the amount that has been forgiven is considered income for tax purposes, whether the debt is a mortgage or another kind of credit. That means you must report the amount of the canceled (or forgiven) loan on your tax return and pay taxes on it, just like any other kind of income. The amount of the loan is considered income only once it’s forgiven — and not when you first borrowed the money. (When it’s clear you won’t be repaying the money you received, tax law recognizes the money as income.)

The Mortgage Forgiveness Debt Relief Act of 2007

To keep financially strapped homeowners from taking a second hit at tax time, Congress passed the Mortgage Forgiveness Debt Relief Act of 2007. What this means for taxpayers is that, if part or all of your mortgage debt on your principal residence is forgiven in any tax year from 2007 to 2012, you might be able to exclude as much as $2 million of that forgiven debt from your taxable income.

Can You Get Tax Relief for Your Forgiven Mortgage Debt?

If some or all of your mortgage debt has been forgiven or canceled by your lender, will you be able to get out of paying income tax on that forgiven debt under the Mortgage Forgiveness Debt Relief Act of 2007? Here are some key factors to consider.

  • Only mortgage debt canceled or forgiven sometime in the calendar years (not tax years) 2007 to 2012 qualifies under the Act.
  • The forgiven debt must have been incurred to purchase, build, or make significant renovations to your principal residence (not a vacation home or a property you rent out to others). The IRS jargon for this kind of debt is “qualified principal residence indebtedness.”
  • Qualifying debt can include mortgages that were reduced through modification or restructuring or mortgage debt that has been canceled altogether through foreclosure.
  • Proceeds from refinanced debt will qualify for exclusion from income only if those proceeds were used to make significant renovations or improvements to your principal residence — not to make purchases or pay other bills.
  • If your forgiven mortgage debt qualifies, you can exclude up to $2 million of the amount of the debt ($1 million if you are married and filing separately).
  • You can find out the exact amount of mortgage debt that’s been forgiven by looking at any paperwork sent by your lender. Specifically, look for a notice called “Form 1099-C: Cancellation of Debt.”
  • If your forgiven debt qualifies under the Mortgage Forgiveness Debt Relief Act of 2007, even though the debt will be excluded from your income and you won’t need to pay income taxes on it, you still need to report the forgiven debt to the IRS (on Form 982) as part of your tax return.

The IRS has more information about the Mortgage Forgiveness Debt Relief Act of 2007 and instructions for taxpayers at www.irs.gov.

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Stop Wage Garnishment & Account Levies

Bankruptcy Prevents Garnishments and Levies

Has a Creditor obtained a judgment against you in Court and is garnishing your wages? Do you owe back taxes to a government entity that is garnishing your wages or placing liens against your property? Filing a Bankruptcy case will immediately put an end to such enforcement measures and prevent further garnishment or levies on your bank account from continuing.

How Bankruptcy Stops Wage Garnishment and Levies

When a Chapter 7, Chapter 11 or a Chapter 13 case is filed, an automatic stay goes into place. The automatic stay immediately stops the wage garnishment. Upon entry of your discharge, the debt is cancelled or otherwise satisfied and the Creditor cannot garnish your wages again. The Bankruptcy process is a permanent solution. Filing Bankruptcy allows you to eliminate your debt that caused the garnishment or levies on your accounts, including the tax debt, so that you can move forward without having to worry about these issues in the future.

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Stop Creditor Harassment

Bankruptcy Can Make the Calls Stop

Are you sick of answering non-stop phone calls at all hours of the day and night from Bill Collectors? Tired of opening letters stamped “final notice” that endlessly fills your mailbox? Are people harassing and embarrassing you at work? Bankruptcy is the most effective, if not the only, way to stop the harassment from Creditors.

How Bankruptcy Stops Creditor Harassment

When a Chapter 7, Chapter 11 or Chapter 13 Bankruptcy case is filed, Section 362 of the Bankruptcy Code automatically imposes a “stay” of virtually all actions by Creditors to collect on your outstanding obligation and efforts to repossess your property. In other words, the “automatic stay” requires that creditors stop contacting you by telephone or through the mail. If they do not stop such actions, the Bankruptcy Court has authority to issue monetary sanctions against the creditor. There is no comparable provision under any other law. Thus, the automatic stay of the Bankruptcy Code is the most powerful tool that a debtor has against creditors. In this way, the Attorneys at the Law Offices of Christopher Alliotts, Inc. can protect you and your family from Creditor abuses.

Bankruptcy is a Permanent Solution to Creditor Harassment

We know that you don’t just want the Creditor harassment to stop temporarily. You want to solve your problems once and for all. Bankruptcy is designed to help you permanently eliminate your debts, so that your Creditors have no legal grounds to pursue collections of past debts in the future.
When your Bankruptcy case is complete under either Chapter 7 or Chapter 13, you will receive a “discharge” of your debts. A discharge is an order of the Bankruptcy Court that means that all the debts you had prior to the date of filing of your Bankruptcy case, with certain limited exceptions, are forever cancelled. If a Creditor tries to collect such a debt after you receive your discharge, the Bankruptcy Court will enforce its Order of Discharge against the offending Creditor.

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What to Do If a Bill Collector Crosses the Line

Here’s what to do if a bill collector uses abusive tactics.

In order to deal with debt collectors, it pays to learn what they can and cannot do. Although most bill collectors are careful to follow the law when contacting you, some are not. If a bill collector goes too far, you can take action.

The Fair Debt Collection Practices Act

The federal Fair Debt Collection Practices Act, or FDCPA (15 U.S.C. § 1692 and following), prohibits debt collectors from engaging in abusive behavior.

The FDCPA covers debt collectors who work for collection agencies. It does not cover debt collectors that are employed by the original creditor (the business or person who first extended you credit or loaned you money).

If a debt collector that works for a collection agency breaks the law, you can take steps to make sure it doesn’t happen again.

What Debt Collectors Can’t Do

Debt collectors from collection agencies cannot do any of the following:

  • Call you repeatedly or contact you at an unreasonable time (the law presumes that before 8 a.m. or after 9 p.m. is unreasonable).
  • Place telephone calls to you without identifying themselves as bill collectors.
  • Contact you at work if your employer prohibits it.
  • Use obscene or profane language.
  • Use or threaten to use violence.
  • Claim you owe more than you do.
  • Claim to be attorneys if they’re not.
  • Claim that you’ll be imprisoned or your property will be seized.
  • Send you a paper that resembles a legal document.
  • Add unauthorized interest, fees, or charges.
  • Contact third parties, other than your attorney, a credit reporting bureau, or the original creditor, except for the limited purpose of finding information about your whereabouts. Unless you have asked collectors in writing to stop contacting you, they can also contact your spouse, your parents (if you are a minor), and your co-debtors.

 

What to Do If Debt Collectors Break the Law

Here’s what you can do if debt collectors engage in illegal activity:

1. Tell Them to Stop

Under the FDCPA, you have the right to tell a collection agency employee to stop contacting you. Simply send a letter stating that you want the collection agency to cease all communications with you. All agency employees are then prohibited from contacting you, except to tell you that collection efforts have ended or that the collection agency or original creditor intends to sue you or take advantage of some other legal remedy.

Don’t hide from debt collectors. You can tell a collector to stop calling even if the collector is not breaking the law. However, many debt counselors feel that, unless you’re judgment proof (that is, broke for the foreseeable future) or truly plan to file for bankruptcy, the best overall advice is not to ignore the debt or try and hide from the debt collector. Usually, the longer you put off resolving the issue, the worse the situation and the consequences will become. Whether you negotiate directly with the collector or obtain a lawyer’s assistance, many counselors feel the best strategy almost always is to speak to the collector.

2. Document Illegal Behavior

If a debt collector breaks the law, document the violation as soon as it happens. Start a log and write down what happened, when it happened, and who witnessed it. Then, try to have another person present (or on the phone) during all future communications with the collector.

In some states, you can record phone conversations without the debt collector’s knowledge. In others, this tactic is illegal. Check with your state consumer protection agency to find out what is permitted where you live. (To find your state consumer protection agency, see Nolo’s article State Consumer Protection Offices.)

3. File a Complaint

File a complaint with the FTC. File an official complaint with the Federal Trade Commission (FTC), the federal agency that oversees collection agencies. Contact the Federal Trade Commission at 6th and Pennsylvania Ave. NW, Washington, DC 20580 or at www.ftccomplaintassistant.gov. In your complaint:

  • Include the collection agency’s name and address, the name of the collector, the dates and times of the conversations, and the names of any witnesses, and
  • Attach copies of all offending materials you received and a copy of any tape you made.

Send the complaint to state agencies. Send a copy of your complaint to the state agency that regulates collection agencies for the state where the agency is located. To find the agency, call information in that state’s capital city or check the state’s website.

Send the complaint to the creditor and collection agency. Finally, send a copy of the FTC complaint to the original creditor and the collection agency. The original creditor may be concerned about its own liability and offer to cancel the debt.

Once your complaint is filed, don’t expect immediate results. The FTC may take steps to sanction the agency if it has other complaints on record. The state agency may move more quickly to sue the collection agency or shut it down for egregious violations. Your best hope is that the creditor will offer to cancel the debt.

4. Sue the Debt Collector

If you’ve been subject to repeated abusive behavior and can document it, consider suing the collection agency. But if the illegal behavior was merely annoying, don’t bother. For example, if the collector called three times in one day but never again, you probably don’t have a case.

To sue the debt collector, you can represent yourself in small claims court or hire a lawyer and go to regular court. (The other side may have to pay your attorneys’ fees and court costs if you win.)

Money damages. If you win in court, you are entitled to recover:

  • The amount of any actual financial losses you suffered — for example, your therapy fees, if you suffered extreme anxiety as a result of the collector’s actions, or the amount you paid to switch to an unlisted number to avoid harassment, and
  • An additional amount (unrelated to actual losses) up to $1,000 for any violation of the FDCPA.

 

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Medical Bills Bankruptcy Solutions

What is Medical Bankruptcy?

In a broad sense, “medical bankruptcy” can be understood as a legal protection availed against debts arising out of medical treatment, hospitalization expenditure, medication costs, and nursing as well as physiotherapy charges. Medical debt may be able to be easily discharged by filing a bankruptcy. Some of the major causes of medical bankruptcy are:

  • Hospital and health insurance costs increase drastically
  • Substantial increase in the hospital stay for uninsured Americans
  • Retirees grossly underestimate health care costs
  • Lack of children’s health insurance increasing in large numbers across the U.S.
  • Availing your health insurance while unemployed

Medical debt and filing for medical bankruptcy

As per the year 2005 study conducted by the Harvard University, it was found that:

  • Medical bills were responsible for half of all the bankruptcy filings within the U.S.
  • Three-quarters of the bankruptcies filed had medical insurance, the reasons for the bankruptcies being high cost of medical insurance, laws allowing insurance companies to prevent sick people from availing health care insurance, and the inability of seriously ill individuals to continue with their health insurance while at work.
  • 55% of all new bankruptcy filings or 1,100,000 Americans are likely to file for bankruptcy every year.

Medical debts are unsecured debts, so there’s no collateral available, which the creditors can repossess. However, the medical debt can be tied to collateral, and the insurance company may be able to garnish your wages, or claim a part of equity in a home, in case a bankruptcy filing protection is not availed.

Medical Bankruptcy and Chapter 7

The Chapter 7 bankruptcy is fundamentally designed to eliminate any or all unsecured debts. Unsecured debt consists of debt relating to:

  • Medical Bills
  • Credit Cards
  • Payday Loans
  • Some Personal Loans
  • Utility Bills
  • Parking Tickets

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Loan Modifications

Many people think that their troubles can be solved by getting their loan modified or their debts consolidated. While loan modifications, short sales and debt consolidation may be possible, they are rarely the complete solution that some would like you to believe. Our experience is that the vast majority of our clients have been disappointed, if not defrauded, by proposed loan modifications or debt consolidation companies that have taken their money without providing a final solution to their financial difficulties. In most instances, these unscrupulous actors simply make the matter worse.  The Attorneys of Law Offices of Christopher Alliotts, Inc. will provide you with straightforward guidance about all of your options, including short sales, loan modifications and credit consolidation, among other possible tools to resolve your financial challenges.

Loan modification is difficult, time-consuming and frustrating. Further, the programs governing them are constantly changing. More than that, there are many unscrupulous individuals posing as professionals that take advantage of distressed homeowners. They typically promise results, but do little more than take your money with little or no results and you never hear from them again. Fraud in the loan modification business has become so rampant that federal and state authorities have had to actively curb such activities. Thus, our advice is caution. Do not pay someone to modify your mortgage unless you speak with a Bankruptcy Attorney first.

In light of the financial crisis, our experience is that banks historically do not want to do any meaningful loan modifications. That has recently changed with government intervention, instigating HAMP and other programs designed to keep homeowners in their homes. The results have been mixed at best. Still, there are instances in which homeowners can obtain enough relief so that they can stay in their homes with affordable payments for a number of years. However, people need to be realistic about what they expect from a loan modification as well as their expectations over the current and future value of their home. It is a process of negotiation.

In addition to potential tax consequences from a forced foreclosure sale, commencing a Bankruptcy case before the foreclosure sale stops the foreclosure process and provides the Homeowner the means to force constructive dialogue with the Lender. Once such dialogue has commenced, many Lenders give a more meaningful consideration to a loan modification, even if they previously denied the borrower’s request for a modification. If nothing else, filing a Bankruptcy case will extend the time you have to live in your home.

Often, a Lender will proceed with the foreclosure process while, at the same time, promising to modify your loan. It is important for a homeowner to not let the date of a foreclosure sale pass without seeking Bankruptcy advice and engaging counsel to file on their behalf to halt such proceedings. This is a very important consideration in several respects. With proper planning you can modify your loan to keep your home.

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Short Sales

Often times, a homeowner will simply walk away from their home mortgage obligations with the hope that it will end their problems by surrendering the property. That, however, allows the Creditor to sell the property for less than the full amount of the debt, leaving the residual balance owed as a responsibility of the homeowner. As a result, homeowners seek to work with the Lender to find alternative options such as a “short sale”. However, a short sale is more often than not the worst alternative for a distressed homeowner. The reasons for this opinion are many.

First, in a short sale, a homeowner will have to move out of their home sooner if they did a bankruptcy case. Second, unless you specifically negotiate the cancellation of the balance of the debt, the bank may be able to pursue you for the balance – just as if you walked away from the home in the first place. Third, if there is a second mortgage or line of credit, such debt will not be canceled absent the agreement of the Lender; if the Lender does not agree to the short sale, they will pursue payment of the balance (often through the Courts seeking a judgment) and the homeowner will have to file Bankruptcy to cancel that debt. Finally, and perhaps most importantly, a short sale could have painful tax consequences, which most banks and brokers do not explain as part of the process. All of the foregoing problems can be avoided in a Bankruptcy case.

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Debt Consolidation

Most people try debt consolidation in the hopes of avoiding bankruptcy in order to preserve their credit.  The results of debt consolidation are typically much different.  Unfortunately, our experience is that debt consolidation only delays the process of rehabilitating one’s credit, often for several years.  Monthly payments under debt consolidation programs are usually much greater than the cost of bankruptcy.  A person can re-establish their credit much faster after a Bankruptcy case than with debt consolidation.

More fundamentally, debt consolidation programs are essentially unregulated and do not have the Federal oversight that the bankruptcy process does.  As a result, many debt consolidation programs are scams by people seeking to take your money.  Further, such programs do not offer any real protection from collection activities.  We have found that people make payments for months or years under a debt consolidation program only to be sued by one of their creditors.  At that point, the client has to file a bankruptcy case anyway.

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