The Means Test Gets Meaner for Texans

By Carol Cross Stone | Published: October 16, 2010

Qualifying for a Chapter 7 bankruptcy is getting ready to get harder. In a Chapter 7 bankruptcy, if you pass the means test, you are able to file a chapter 7 bankruptcy, and get rid of unsecured debt, such as credit cards and medical bills; or secured debt (if you want to surrender the item). The primary determining factor in the means test is your average monthly household income. The average is figured based on your last 6 months income. This is compared against the median income of a family in your state that has the same number of members. If your income is above the median, you may still pass the means test, depending on what specific expenses you have. But it is more difficult, and your qualification for a chapter 7 bankruptcy may be challenged.

If you are below median though, you generally qualify for a chapter 7 bankruptcy. There are still some challenges that are possible, but they are fewer and it is much simpler to successfully obtain a chapter 7 bankruptcy discharge.

Periodically, the median income figures are revised depending on what the census bureau data shows for median income. With this turbulent economy, and so many families losing jobs and being cut back – wait for it now – median income has fallen for families in Texas! Surprise. Here’s the comparison:

Means Test Median Income Change in 2010

Median income figures used for Means Test have dropped in 2010.

Family SizeJanuary 2010March 2010November 20102010 Change
138,94038,80137,676Down
1,264
255,65955,66054,288Down
1,371
359,22259,01155,534Down
3,688
466,38166,14564,420Down
1,961

When the credit card companies pushed the legislation through, it seems maybe they knew what they were doing. When income is rising and times are good, people don’t need to file bankruptcy. When incomes are rapidly falling, bankruptcy may be the only solution. Fortunately, as the new law is being interpreted, special circumstances, such as whether you can afford to make a chapter 13 payment, are being considered.

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How Filing Bankruptcy Affects Your Credit Score

By Carol Cross Stone | Published: October 15, 2010

Most people who file bankruptcy worry about how bankruptcy will impact their credit scores.  Obviously, filing bankruptcy does negatively impact a credit score. If you are struggling to pay your minimum payments and have not defaulted on any of your debt, you may have a very good credit score even though bankruptcy is the best course of action.

We are conditioned to strive to obtain a great credit score. The cost of future credit is based on a credit score. What makes a credit score great though is it means you have the ability to handle lots of debt. If you pay off unsecured debt, such as credit cards and signature loans, your credit score improves – you are able to take on more credit. If you pay off a mortgage, a car, or pay your taxes on time, you will not see an improvement in your credit score. When you think about it though, in this turbulent economy, the wiser decision may be to pay down a mortgage, a car, and you always want to pay your taxes on time (the US being the worst creditor to have).

Bankruptcy will definitely lower your credit score. Yet, shockingly, all of my clients who file a chapter 7 bankruptcy receive offers for new credit scores before they even get out of bankruptcy! This is because when you file a chapter 7 bankruptcy, you cannot file another bankruptcy for at least 6 years. So, you make a great credit slave again!

Perhaps it’s time for people to think about what’s really important – having a paid for home and decent transportation for work – not owing the federal government any money since they have such overreaching collection powers. Stop worrying about how the creditors rate you for creditworthiness.

Younger people who don’t own a home worry that bankruptcy will keep them from ever qualifying for home financing in the future. This is not true. You are eligible for consideration in 2 years (1 year on a VA loan) for most types of home financing. Your credit score is not the only factor considered in qualification – your income level and your debt level are equally important. Getting rid of debt even if you have to take the hit to your credit may actually move you closer to being able to qualify.

Bottom line is: don’t be credit score driven. Think of where you are in life and what you need to accomplish for your own financial peace. Act accordingly. If you would like a free consultation to see if bankruptcy may be an option for you, call us. We can help.

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Student Loan Debt: The New Bubble

By Carol Cross Stone | Published: September 28, 2010

Student loan debt exceeds credit card debt for the first time in U.S. history. Why is this devastating news for Americans? With the economy continuing to fall, Americans in debt need to hope for the best and plan for the worst.

Along with tax debt, student loan debt may be the worst type of debt to owe. While the media hype has painted student loan debt as “good debt” (remember when mortgage debt was “good debt?”), it’s a lie. Student loan debt is rarely dischargeable in bankruptcy. The penalty for default can be 25% of the outstanding balance owed. And, more importantly, student loan creditors can garnish wages to collect, seize tax refunds and even prevent a person from obtaining occupational licensing.

If you are one of many Americans who aren’t making enough to pay your bills, consider student loan debt a priority. Treat it like a mortgage or car payment – it’s an essential! Forget about Dave Ramsey’s snowball theory of paying your smallest debt off first. Get rid of student loan debt and counsel your children not to borrow for their educations.

Student loan debt is the new mortgage bubble. More unemployed are borrowing to get education chasing that elusive job. Make your goal a good education, not a mountain of debt.

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How Small Business Can Prepare if Bankruptcy is a Possibility

By Carol Cross Stone | Published: March 8, 2010

With areas surrounding the Longview-Marshall metro region continuing to report a downward spiral of sales tax revenues, we are all affected. No one is feeling the pain more than small businesses. Small businesses cannot withstand a drop in volume of sales as easily as some of the giant big box retailers who can spread loss across performing and nonperforming stores. The profit margin is just too thin.

Many small businesses are operating in the red, and are considering the possibility of closing. Pre-bankruptcy planning is more critical for small business than individual consumers. For example, if a small business is operating as a limited liability company, typically, the manager/members of the LLC have guaranteed business debt. What this means is that if the business closes, a Chapter 7 bankruptcy for the LLC will not get the owner off the hook for that personally guaranteed debt unless an individual bankruptcy is filed. The owner may need to file an individual bankruptcy and dissolve the company. Sometimes a bankruptcy for both the individual and the LLC is best.

Pre-bankruptcy planning is essential. If a business owner believes that the business would be viable if they did not have to service overwhelming debt, starting over by filing a Chapter 7 and starting a new business may work.  Meet with a qualified bankruptcy attorney before making any decisions on how to proceed.

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Can Bankruptcy Help If You Have Been Laid Off?

By Carol Cross Stone | Published: February 9, 2010

While East Texas unemployment is somewhat lower than the nation, the unemployment rate doubled in 2009. We’ve seen major employers, such as Pilgrim’s Pride, U.S. Steel, Trinity, and Titek close or layoff hundreds of workers. This affects the individuals and families of the laid off worker, and it also impacts the businesses that these families supported by spending their wages. Also significant is the length of time it is taking to find a job after being laid off. The Texas unemployment maximum of $406 per week just isn’t enough to pay the bills.

If you have been laid off, set your priorities. Make out a budget to pay the essentials only, your home mortgage, your car payment and insurance, food and utilities. If you have credit card debt or other unsecured loans, you should pay them last or not at all. Try calling your creditors and working out temporary deferments. Definitely, do not borrow from a 401(k) or cash in an IRA to pay unsecured debt. We frequently see people who have borrowed from 401(k)’s or liquidated other nonexempt assets to pay debts that could have been wiped out in bankruptcy. If bankruptcy is inevitable, you are better off to preserve the assets that you do have in order to be able to get back on your feet.

If you pass the means test (and most likely you will if you have lost your employment income and are receiving only unemployment), you have the option of filing a Chapter 7 bankruptcy. This will enable you to wipe out any unsecured debt that you have. It will not help you catch up on a car payment or a house payment. You can, however, if needed, surrender a car in a Chapter 7 if you are unable to continue to afford the payment and have other options.

You may also have the option of a Chapter 13 bankruptcy. This will help you catch up on a past due mortgage payment, past due car payments, and in general reorganizes your debt to reduce the amount you have going out each month. The problem here is that if you are not married with a working spouse or if you don’t have another source of income, it can be hard to show that your plan is feasible.

In other words, you have to be able to demonstrate that you have enough regular income to pay your expenses, plus a Chapter 13 plan payment to repay the past due mortgage. If making your mortgage and car payment is not possible, you may consider a loan modification along with a Chapter 13 bankruptcy. Again, this usually takes more income to the household than just unemployment benefits, but may work if a spouse or family member has income that can help along with the unemployment benefits.

If you have been laid off, don’t panic. Talk with an experienced bankruptcy attorney about your options. You may need to do some pre-bankruptcy planning. Don’t liquidate or transfer any assets without talking with an attorney. This can create problems if you do need to file bankruptcy.

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