Bankruptcy, A Financial Option

Published By:The Law Offices of Fife & Cesta

By Thomas Cesta1811 S. Alma School Road, Suite 270

Mesa, Arizona 85210Office: 480-850-6541

Bankruptcy is an important decision, not to be taken lightly. But it is a financial decision, not a moral one. Just as stockholders bet on Companies, sometimes for them and sometimes against, Companies make bets on our success and failure—the greater the risk, the greater the reward.Decisions about money are only moral questions when it is a choice between legal and illegal. After that, it is just a math problem. Businesses understand this; and intuitively, so do we, when it is a business filing it. A business is in business to make money. If some of its obligations are preventing the business from turning a profit to benefit the shareholders, then the business needs to address this. Occasionally, bankruptcy is the best method.It is harder to see the problem as just math when it is personal, but individuals and families must also consider the bottom line. When the household cannot make ends meet, something will be left unpaid. Unlike businesses, real people cannot live without food and water; and in modern society we also need electricity, gas, transportation, clothes, etc. Children need an education and adults must plan for retirement. Some individuals and families need to do something extreme to restore their financial health. Sometimes the best solution is bankruptcy.Whether you should consider bankruptcy depends on many factors, not the least of which is what chapter you would need to file. Although there are six

The Law office of Fife & Cesta | 1811 S. Alma School Rd. Mesa Arizona 85210 | 480-850-6541 | http://fifecestalaw.com/

types of bankruptcy under the US Bankruptcy Code, there are only two types that most people will need to consider: Chapter 7 and Chapter 13.A Chapter 7 bankruptcy discharges debts, but no liens; and you may have to give up some assets. A Chapter 13 bankruptcy also discharges debts, but it can extinguish some liens, and reduce what you owe with some others. You can also usually keep all of your assets. However, a Chapter 13 bankruptcy also requires you to make periodic payments of your disposable income to the Trustee, but a Chapter 7 does not. Also, a Chapter 7 is essentially complete in 3 and ½ months, but a Chapter 13 takes 3 to 5 years.[1]In evaluating what chapter you can file, an attorney will conduct a means test calculation. This calculation subtracts expenses from income, to determine disposable income. If there is little or only a minimal amount to pay the creditors, then you may well qualify for a chapter 7 bankruptcy.However, what chapter you qualify to file is not the end of the question. It is also important to consider the amount of debt that will be discharged. If you only have $100 disposable income, but you also only have $5,000 unsecured debt, you would probably be wise to attempt to negotiate the debt, or continue to make payments rather than file for bankruptcy.In contrast, if you have $500 disposable income, but $80,000 in general unsecured debt a bankruptcy might be the right option. In this case, you will

The Law Office of Fife & Cesta | 1811 S. Alma School Rd. Mesa Arizona 85210 | 480-850-6541 | http://fifecestalaw.com/

usually be filing a chapter 13 which will require you to pay into a plan. If you make 60 monthly payments of $500, you will pay $30,000, but you will then get a discharge of the remaining debt.It could also be true that you will have enough disposable income and little enough unsecured debt and other obligations to have a 100% plan—that is, a plan that pays 100% of the unsecured creditor claims. However, this may also be very beneficial to you.

Consider these examples:A consumer, let’s call him Michael owes $40,000.00 in credit card debts. His credit cards have interest rates of 25% (not unusual after a few late payments). At this rate, in order to pay off the debt in just 10 short years, he will need to pay $909.97 a month. The interest alone is $833.33 for the first month. That means that if Michael pays $833.33 each month, the principal will never be reduced and he will owe the debt for the rest of his life.The average “minimum payment” required by credit card companies is designed to require 25 to 30 years of payments. If Michael paid $833.83, it would be just enough to pay off the cards in 30 years. After 5 years of paying $833.83 a month Michael would have paid $50,029.81, but he would still owe

The Law Office of Fife & Cesta | 1811 S. Alma School Rd. Mesa Arizona 85210 | 480-850-6541 | http://fifecestalaw.com/

$39,941.66. This is because $49,971.46 of what he paid would have been interest.Also, every time Michael was late with his payments he would incur late fees on top of the regular payment; and every late payment would hurt his credit.If Michael has little enough disposable income that he qualifies for a Chapter 7 bankruptcy, then he could file a Chapter 7 and the debt would be discharged in about 3 and ½ months. But if Michael had enough disposable income that he needed to file a Chapter 13, Michael would still benefit from the bankruptcy.To pay off the debt in 30 years without filing bankruptcy, Michael would need to have at least $833.83 disposable income a month. But what if Michael had this amount, but instead filed bankruptcy. Assume that Michael will pay $2,500 in attorneys’ fees as part of his plan, and 8% to the Trustee for administering the plan.Michael has enough disposable income to be in a 100% plan. This is because interest is frozen for most of your general unsecured creditors. Michael would pay all of his disposable income each month, $833.83, and in about 55 months he would pay off the general unsecured creditors and get his discharge.[2]So Michael has a choice: pay his creditors $833.83 for 30 years; or file a Chapter 13 bankruptcy and be done in less than 5.

The Law Office of Fife & Cesta | 1811 S. Alma School Rd. Mesa Arizona 85210 | 480-850-6541 | http://fifecestalaw.com/

A bankruptcy discharge brings you back to “zero”; but from negative, zero looks pretty good. After the discharge, you can save or invest any disposable income you have, building your nest egg, rather than the banker’s.Another important consideration is whether there are liens you would also like to strip, or secured debts you would like to reduce. If Michael had a first and second mortgage on his home, and he owed more for the first mortgage than the home was worth, Michael could also strip the second mortgage as part of the Chapter 13.And if Michael had a vehicle for which he owed more than it was worth, he could also do a cramdown, in which what he owes on the vehicle is reduced to the value of the vehicle.[3] Even if Michael qualified for a Chapter 7, he may still want to file a Chapter 13 just to take advantage of lien strips and cramdowns.Every jurisdiction has different filing guidelines and exemptions. To determine the pros and cons of filing, meet with an experience Mesa Arizona bankruptcy attorney today.

The Law Office of Fife & Cesta | 1811 S. Alma School Rd. Mesa Arizona 85210 | 480-850-6541 | http://fifecestalaw.com/

[1] For a more complete discussion of the differences between Chapter 7 and Chapter 13, see my guide What Is The Difference Between Chapter 7 And Chapter 13, And Which One Is Right For Me?[2] There are many factors that affect how many payments will be required, too many to cover in this example. However, no chapter 13 plan will be more than 60 months in length before the discharge can be issued, even if the plan pays less than 100%.[3] There are important specifics to consider regarding lien strips and cramdowns. Be sure to discuss these options with your bankruptcy attorney.

Re-Published from: AVVO Legal Guides

The Law Office of Fife & Cesta | 1811 S. Alma School Rd. Mesa Arizona 85210 | 480-850-6541 | http://fifecestalaw.com/