Bankruptcy Is Affordable

Bankruptcy is simply a “tool,” but you should only use the “tool” of bankruptcy if there is no other way to handle your debt problems.

Don’t Touch Your Retirement Or Your Home Equity To Solve Your Debt Problems.  Here’s Why:

  1. Your retirement and home equity are protected from creditors, so don’t give it to them.
  1. You may pay a penalty to withdraw from your retirement, and you certainly will pay income tax to withdraw. That could be up to 30% of the amount you withdraw.
  1. Remember, the only thing worse than filing bankruptcy is using your retirement or home equity to cover some of your bills, then still having to file bankruptcy to handle the rest of your bills.

Bankruptcy Doesn’t Create Income Tax Liability Like Debt Settlement

A debt settlement agreement is an agreement between you and a creditor, where the creditor accepts a lesser amount than it what is owed, yet it is treated as full payment.

If the portion of the debt that is not paid (or “written off”) by the creditor exceeds $600, then the creditor is required to send the IRS a Form 1099 for cancellation of debt.  You must claim as income the amount of debt that was cancelled!

That means you must pay income tax on the amount of debt cancelled under that debt settlement agreement.  In bankruptcy, there is no income tax to pay on debts discharged in bankruptcy.

Case Study:  I had a client that came into my office for a debt consultation.  He said that he had $60,000 in credit card debt that he settled for just $20,000.  He said that “he felt like Tarzan” when he settled his debt for $40,000 less than the total amount owed.  However, that great feeling went away when he received a Form 1099 for the $40,000 that was cancelled.  He owed the IRS $15,000 as part of that transaction!  I told him that he no longer had a debt problem; instead, he had a tax problem.  I also told him that he could have filed bankruptcy and would not have been required to pay the IRS the $15,000 that he had to pay as part of the debt settlement process.

The Cost Of Filing vs. The Amount Of Your Debt

The cost to file your case is likely to be a small fraction of the amount of debt you are handling using the “tool” of bankruptcy.

Chapter 7 – No Monthly Payment To A Trustee

Most clients pay out the fees for a Chapter 7 over time as we work on putting the case together.  The fees are set up on a payment plan that you choose.

At the point that you hire me, you can refer your creditor calls to me. That’s quick and easy relief!

Chapter 13 – A Monthly Payment To A Trustee for 36 – 60 Months

You can consolidate your debt into a monthly Chapter 13 plan payment that is tailored to your budget.  The downside is that it’s the most expensive type of bankruptcy as a result of having a payment to a trustee for 3 to 5 years.

Sometimes the benefits to a Chapter 13 bankruptcy make it worthwhile.  Sometimes it may be the only form of bankruptcy that you qualify for.  My guideline here is that you look at ALL your options, then pick the one that’s best for you.