BEWARE OF DEBT SETTLEMENT OR DEBT CONSOLIDATION COMPANIES—CHAPTER 7 AND CHAPTER 13 BANKRUPTCIES OFFER GREATER RELIEF!!!

With uncontrollable interest rates of 25% or more, credit card balances can double in amount before you know it. Debt Consolidation and Debt Settlement Companies prey on people who have fallen into a fiscal and emotional crisis and are desperate. There are things you should know before signing up with one of Debt Settlement Companies or Debt Consolidation Companies:

Debt settlement and debt consolidation companies cannot guarantee that all of your creditors will sign onto their plan. That means that you can end up paying a monthly amount and also be sued by creditors who decided not to be bound by a debt settlement or consolidation plan. (Once these creditors sue and obtain a judgment, they can garnish your wages and restrain, freeze and levy on your bank accounts.) Further, the costs and fees to these companies are huge and it is often the case that the companies pay themselves first before even paying your creditors. Debt settlement and consolidation companies (and even law firms that offer debt settlements) often sign up people into plans that contemplate a monthly payment that people cannot afford. The result is that many who enter into these arrangements default and end up wasting thousands of dollars and filing for bankruptcy.

Additional things you should know;

  • Most people who enter into debt settlement or consolidation plans would have qualified for bankruptcy had they filed. I know this first hand because many of my bankruptcy clients first tried unsuccessfully to settle their debts through these companies. They would have saved a lot of money and aggravation had they sought bankruptcy first. If you qualify for chapter 7 bankruptcy, then with the exception of certain debts such as recent income taxes or domestic support obligations, and absent fraud, all of your debt may be able to be discharged for ZERO (0) PAYMENT to creditors. This is unlike a debt settlement or debt consolidation plan which contemplates monthly payments that you often cannot afford.
  • Upon filing for bankruptcy, there is an “Automatic Stay” that BARS creditors from suing you. A debt consolidation or debt settlement company cannot prevent all creditors from suing you, garnishing your wages and freezing your bank accounts as there is no Automatic Stay. The Automatic Stay is imposed by the Bankruptcy Code.
  • If you have significant income or assets that need to be protected beyond ordinary exemptions afforded to you, you can file a chapter 13 bankruptcy. Upon filing for chapter 13, all interest on all credit cards and loans stops. This is critical as interest is what causes your debt to double. Chapter 13 contemplates a plan which provides for monthly payments. As the plan is based upon what you can afford, it is often the case that the monthly payments made under the chapter 13 plan are substantially less than what you were paying under a debt settlement or debt consolidation arrangement. All chapter 13 debtors benefit from the Automatic Stay so they cannot be sued, their wages cannot be garnished and their bank accounts cannot be restrained and levied upon. Further, even if the creditors are paid a SMALL fraction of the amount owed them under the plan, at the end of the plan, all debt, with limited exception (such as for recent taxes and domestic support obligations) is discharged. So you may have a plan that provides creditors with only a 15% recovery. When you complete the plan, those creditors’ claims will be discharged even though they were not paid the 85% plus interest.
  • There are no tax consequences in a chapter 13 or chapter 7 bankruptcy, unlike a settlement outside of Bankruptcy Court. If you settle outside of Bankruptcy, the IRS will treat the savings as income to you and tax you, unless you prove you were insolvent. This is not true in a bankruptcy as you will not be treated as earning income if you discharge your debt. So, for instance, if you discharge $50,000 of debt in a chapter 7 or chapter 13, you will not be taxed as having $50,000 as additional income.

If you want to learn more about the foregoing and see what chapter you would qualify for, please feel free to contact Barbie D. Lieber, Esq. at 646-480-1826

Will I Be Able To Keep or Will I Lose My Inherited IRA If I File For Chapter 7 Bankruptcy And Can Chapter 13 help Me?

You may lose your inherited IRA if the amount of such inherited IRA is greater than any applicable exemptions in a chapter 7 Bankruptcy. However, a chapter 13 bankruptcy filing may afford you the protection you need.

Will I lose my Inherited IRA in A Chapter 7 Bankruptcy?

Possibly; on June 12, 2014, the US Supreme Court ruled in the case of Clerk v. Rameker that IRAs inherited by someone other than a spouse cannot be considered retirement funds and protected from creditors as typical IRAs are. Unlike typical retirement funds, a person who inherits such "inherited IRA" can withdraw the funds at any time without having to first await his or her own retirement. Justice Sonia Sotomayor wrote for the majority of the Court and recognized that "nothing about the inherited ARA's legal characteristics would prevent (or even discourage) the individual from using the entire balance of the account on a vacation home or sports car immediately after her bankruptcy proceedings are complete." Accordingly, the debtors in the Clerk case will not be able to shield their inherited IRA which is worth around $300,000 from their creditors who are owned approximately $700,000. The chapter 7 trustee will be able to distribute the funds to the creditors

What does this mean for You?

If you have an IRA that exceeds any applicable exemption to which you may be entitled and file a chapter 7 bankruptcy, you will have to turn over the IRA funds or a portion thereof to the chapter Trustee for distribution to creditors. So for instance, in New York, a chapter 7 debtor can elect to use the Federal Exemptions afforded under the Bankruptcy Code. If such debtor does not own a home, the debtor may be entitled to protect up to $12,725 in non-exempt assets, which is known as the "wild card exemption." However, if such person is not entitled to such exemption or if the IRA exceeds the $12,725, then such individual will have to turn over the excess amount to the trustee as such amount is not protected.

Will a Chapter 13 Bankruptcy Filing Help Me Save My Inherited IRA?

Yes; it can provide more protection than in chapter 7 if you have the funds to pay the non-exempt portion over time or if someone is willing to assist you in paying those funds over time. A chapter 13 is a payment plan which is based upon your disposable income as well as your non-exempt assets. Monthly payments are made by debtors to the chapter 13 who then distributes them to creditors. For instance, if you have an inherited IRA worth $32,725 and no other non-exempt assets, and are able to avail yourself of the wild card exemption, then (depending on your income) you may be able to propose a chapter 13 plan that allows you to pay the $20,000 portion of the inherited IRA over a 5 year period, together with the Trustee's commission of 10%. This would be equal to $367 per month over 60 months. At the end of the five (5) year period, you would be afforded a discharge of all dischargeable debts. So, for instance, even if you had $100,000 in debts and only paid $22,000 under the plan, you would receive a DISCHARGE of ALL OF YOUR DEBTS upon completion of your plan payments. Further, during the five year (5) period, no creditor could take actions to collect from you (including garnish your wages and levy on your bank accounts) as there is an automatic stay. Not only does chapter 13 serve to protect assets from being liquidated by a chapter 7 trustee, but it is also allows individuals whose income exceed the thresholds of chapter 7 to be able to file for bankruptcy.

Please feel free to contact  Barbie D. Lieber, Esq. of Lieber & Lieber, LLP at 60 East 42nd Street, New York, New York 10165 at 646-480-1826 or Barbie@lieberlegal.com if you would like to learn more about Chapters 13 and 7, as well as how Chapter 13 can be used to protect your interest in an inherited IRA.

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