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Financial Hardship and Bankruptcy: Don’t use exempt from creditor assets to pay current debts.

Financial hardship can occur at anytime. No matter how secure your financial situation may presently be, you never know what the future may bring. Job security is an oxymoron. Your position may become outdated because of new technology, your position may be outsourced overseas, or the company you work for may suffer its own financial hardship and either liquidate or reorganize. If you are able to retain your position in the latter circumstance, you may receive a decrease in salary. The same applies if you are an entrepreneur and you are self-employed, which does give you somewhat more control over your destiny.  In addition, divorce can be extremely detrimental to your financial circumstances.

Once a job loss or self-employment income loss occurs, then it is very easy to start spiraling into a financial abyss. You have acquired a certain standard of living and debts to be paid, including essentials such as your rent or mortgage, car loans, food, utilities, etc. When you don’t have the funds to pay your debts then you may use your credit cards for current living expenses and payment of your essential debts, thus incurring more debt that cannot be repaid. Once you miss or are late paying a credit card payment, then you will incur late fees and if you continue to miss or are late on your payments your interest rate will increase astronomically resulting in your debt increasing exponentially, until there is no hope to pay it off.

Or instead of or in addition to using your credit cards to pay for your living expenses and debts, some debtors will take funds from assets that would be exempt in a bankruptcy and pay their essential debts such as the mortgage or rent, car loans, as well as unsecured credit card debt or other unsecured debt such as medical bills, so that they don’t fall behind. Examples of reducing exempt property to pay debts are obtaining second mortgages on homes where they reside, taking funds from retirement accounts and paying taxes and possibly penalties, or taking all or part of the cash value of a life insurance policy. Depending on your age or other cirecumstances, this can be disastrous to use funds that you need for retirement to pay current living expenses and unsecured debt.

Unfortunately, this occurs to many people who are devastated because they cannot pay their debts, although that they cannot do so most often is no fault of their own. It is important to know prior to this occurring how to protect and keep your property if you must file for bankruptcy. In short, do not use up assets that will be exempt in bankruptcy to pay your unsecured debt. Or do not pay off any secured debt which will make it a non-exempt asset. In example, do not pay off your vehicle. Either keep a loan that you have on it or get a loan on it. There has been a U.S. Supreme Court ruling in Ransom v. FIA Card Services decided January 11, 2011, that in short sets the precedence that a debtor who does not make a loan or lease payment may not take the car-ownership deduction in Paragraph 23 and 24 of the means test; however, the debtor may deduct the operating expenses in 22A. This may drastically change whether you will pass the means test and be eligible for a Chapter 7 bankruptcy, rather than a Chapter 13 bankruptcy,

If your credit score has been demolished by unpaid bills, you have nothing to lose by filing bankruptcy. In actuality, bankruptcy is a new beginning and if you qualify, chapter 7 will wipe out all or most of your debts and often times you will be able to obtain credit again shortly after your discharge. Most bad consumer debt will remain on your credit report for 7 years whether paid or not, while paid or unpaid judgments may remain on your credit report for 7 years or longer depending on state law. Lenders are less likely to lend to you with bad credit, then to lend to you after a bankruptcy.

Chapter 13 is available for those who do not qualify for a Chapter 7 bankruptcy, although there is a 60 month plan period.  This Chapter does have benefits that are not available in a Chapter 7 such as the ability to pay arrearages for secured property loans during the plan and preventing a foreclosure or repossesion of a vehicle. 

Call us today at (813) 672-1900 to schedule a free consultation to discover your options.  Visit our website at www.familymaritallaw.com for more information. 

By: Lynette Silon-Laguna Google+

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All Family Law Group, P.A.
The law firm of All Family Law Group (Lynette Silon-Laguna, P.A.) provides legal services to the cities of Tampa, Clearwater, Brandon, Riverview, Lakeland, Valrico, Gibsonton, Lithia, Mango, Palm River, Plant City, Seffner, Sun City Center, Apollo Beach, Ruskin, Temple Terrace, Carrollwood, Thonotosassa, Lutz, FishHawk, MacDill Air Force Base, and all of Hillsborough, Pinellas & Polk Counties.

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