Tuesday, 31 March 2020

The Three Main Types Of Consumer Debt


Americans are drowning in debt. In November 2019, American consumer debt climbed to $4.17 trillion. That’s trillion with a T–twelve zeros. Chances are pretty good that you’re one of those Americans, with credit cards, a mortgage, and a car payment or two. And that’s okay–in lots of ways, debt is good for our economy.

The reality is that we are living in a consumer economy, and most of us don’t have the savings to fund large purchases. So we use credit for everything from home purchases to education to new furniture and vacations. When you spend money, the dealership or hotel doesn’t care if you’re taking out a loan, using a credit card, or walking in with a briefcase full of hundred dollar bills–you’re helping their business grow.

Growth means bigger profits, and bigger profits contribute to rising stock prices, which makes a company more valuable. Higher valuations give companies more capital (money) to invest and hire more workers, which leads to job creation and rising incomes. The more money consumers have to spend, the more inclusive and better the economy. So spending is a good thing- as long as it’s done within your means.

All Debts Are Not The Same

The three examples of debt mentioned above–home, education, vacations, and stuff–represent three different kinds of consumer debt. Consumer debt is what you owe as an individual–you’re not a business and you’re not the government. If you’re a small business owner, you know that your business debts are separate from your personal credit cards and loans.

Consumer debt falls into three categories–secured, unsecured, and a nebulous third group that isn’t easily categorized, but in general, involves a court or government debt. Which category your debt falls into matters because if you are considering bankruptcy, that third category can’t be included in a debt discharge.

Secured Debt

The most common debt in the US is secured debt–where you have pledged an asset to the lender to reduce their risk against loss. Mortgages and car loans are examples of secured debt. The lender retains actual ownership of the house and car until you make the final payment, and if you can’t make the payments they seize the asset via foreclosure or repossession.

Your secured debts have a start date and a final payment date, and typically every payment due is the same amount (if you have an adjustable mortgage the amount will change after the predetermined period) on the same day of the month, which is most often the first or fifteenth. If you’re having a tough time managing your debt, secured debt should be your priority since it’s your house and car.

Unsecured Debt

Credit cards and personal loans are examples of unsecured debt–there is no security pledged against default. Card companies consider your overall credit health when they issue a credit card, basing your credit limit on your credit score. Your bank may have given you a personal loan based on the same factors.

Credit cards, including individual store cards like Target and Best Buy, are revolving debt–you have a limit on the card, and as long as you pay the debt off or down every month you can keep using the same credit over and over again. Your minimum payment every month depends on your outstanding balance, and that payment is not enough to keep interest from piling up. Lots of people get in financial trouble when they stick to that minimum payment on several cards until their balances creep up over their limits–you should always make more than the minimum payment.

Personal unsecured debts are amortized like car loans–you have the same payment due over a period of months or years. You can’t “re-use” credit as the balance declines, but you can be assured exactly when that debt is paid off.

Other Debts That Can’t Be Discharged

As noted earlier, there are some debts that stay with your forever, or at least until you pay them in full or negotiate some sort of settlement. And these are debts that involve money you owe to or through the government. Here are some examples.

  • Child support and alimony
  • Any fines, penalties, and restitutions for breaking the law
  • Taxes owed to the IRS or the state of Pennsylvania
  • Any money you owe as the result of someone else’s death or injury because you were driving while intoxicated

Bankruptcy will not wipe those debts out, but it can help you pay them in easy monthly installments.

If you do file for either a Chapter 13 or Chapter 7 bankruptcy, you are still on the hook for these debts. In Chapter 13 you’ll continue to pay then within the plan (through the trustee) and in Chapter 7 you’ll keep paying after the bankruptcy is over.

Student Loan Debt

Student loans have turned out to be crushing debts for many Pennsylvanians, and not just recent graduates. The seismic shift in job opportunities sent many adults back to school after 2008, and they took out loans to finance their re-education. Student loans may be eligible for a bankruptcy discharge if you meet the standards of the Brunner test or the Totality of Circumstance test. For both of these, you need to show undue hardship for your family if you continue to make the payments, and that you have made some good faith effort to repay.

Student loans that were incurred through for-profit, vocational, or trade schools may be eligible for discharge if you can prove they acted in bad faith. Bad faith would be a breach of contract, fraud, or unfair or deceptive business practice.

Take Control Of Your Debt

If you’re using new credit cards to pay off old debt, it’s time to consult one of the attorneys at Cibik & Cataldo. Take a proactive approach to managing your finances before things get out of control and you’re at greater risk of losing your house or car.


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Cibik & Cataldo
1500 Walnut St Suite 900
Philadelphia, PA 19102
(215) 735-1060

Friday, 20 March 2020

What Assets Can You Keep in Chapter 7 Bankruptcy?


Financial pressure can sometimes take a toll on daily life. When you can’t get a handle on your finances, starting over may be necessary to reach the road of financial recovery. For some people, filing bankruptcy is an ideal solution. Bankruptcy is a process in which individuals who cannot repay debts to their creditors seek relief from some or all of their debts.

There are various types of bankruptcies that individuals can file. However, the most common types of bankruptcies you might file include chapter 13 and Chapter 7. Chapter 13 Bankruptcy is a repayment plan. It essentially helps individuals to reorganize their debts by making monthly payments on some of their unsecured debts and all of their secured debts. This payment plan is approved by the court. Additionally, it is set up for debtors to pay off their debt between 3 to 5 years.

Chapter 7 Bankruptcy, however, is known as a liquidation bankruptcy or straight bankruptcy. Out of all bankruptcies, Chapter 7 is the most common among individuals who are having serious financial problems. In this process, a court-appointed trustee is responsible for overseeing the liquidation of your assets. Assets are considered anything that you own that has value. These assets are used to pay off your creditors. If you have any other unsecured debts, it will be erased.

What Assets are Liquidated in Chapter 7?

There are a few nonexempt assets that can be taken if you file Chapter 7. Some of these assets include:

  • Any property that can be sold by the court
  • A second vacation home
  • Additional cars or trucks
  • Cash, bank accounts, stocks, bonds, and other investments
  • Family heirlooms
  • Expensive musical instruments (unless the individual is a professional musician)

Who can File for Chapter 7?

In most cases, anyone who owns a property or has permanent residency can file for Chapter 7 Bankruptcy. However, it’s important to note that there are a few requirements you should be aware of in order to file.

One thing to consider is that if you are filing for consumer bankruptcy, your income must pass the “means test”. The means test was designed to limit the use of Chapter 7 Bankruptcy to only those individuals who can’t pay their debts. This is determined by deducting specific monthly expenses from your current monthly income. The only exception is if you are a qualified disabled veteran or your debts are primarily from the operation of a business.

Another requirement is that you could not have filed bankruptcy previously within a certain period of time. Additionally, you must not be an incorporated entity. It’s important to always be aware that if the courts believe you are cheating creditors, you will be denied Chapter 7.

What Assets can Individuals Keep When they File for Chapter 7 Bankruptcy?

When individuals are considering filing for Chapter 7 Bankruptcy, one of their main concerns is whether their assets will be liquidated and if so, how much of their items will be liquidated. The good news is, Chapter 7 does allow for a few exemptions that may put your mind at ease.

When it comes to Chapter 7, an exemption will determine what assets you get to keep. This can include things such as a home, car, pension, personal belongings, and potentially other property. For instance, if your home is exempt, you will get to remain in your home before and after bankruptcy. However, if your home is nonexempt, the trustee has the right to sell it in order to pay off your unsecured debt.

Exactly how many assets can I protect in Bankruptcy?

How many assets you can protect will depend on the state you live in. Each state has its own rules when it comes to exemptions in bankruptcy. Most states require you to use their state exemptions. With that said, there are 17 states that give you the option to use an exemption system created by Congress. This is called the Federal Bankruptcy Exemption. Please note that you cannot choose two exemptions systems. You must choose one or the other.

Most states and federal bankruptcy do allow you to keep a few of your assets such as a certain amount of equity in your home, along with your personal property. Personal property includes items such as a car and many different retirement accounts. Some states may allow you to keep some wages but this is not likely.

As part of completing your bankruptcy paperwork. You will include all of your property and any exemptions that you claim. It’s important to be aware of potential complications that can occur in your bankruptcy process though. For instance, your car may be part of your exemptions. However, if you have unsecured debt (a car payment), the creditor’s lien on this asset will ensure that the creditor gets paid first.

Let’s take a look at a potential scenario. If you have a vehicle that is worth $15,000 and your state allows you to exempt $10,000. Your car loan will still be $5,000. In this case, the trustee is required to pay the lender the balance of $5,000. This would leave you with an equity of $5,000. These kinds of complications are important to take into account when you consider filing for Chapter 7.

Filing for bankruptcy can be a difficult decision. If you would like to learn more about your bankruptcy options or you would like to know more about how we can help you along your financial journey, contact us today. The trusted bankruptcy lawyers at Cibik & Cataldo have been providing superior, cost-efficient, and value-oriented bankruptcy legal services for over 35 years.

The post What Assets Can You Keep in Chapter 7 Bankruptcy? appeared first on Cibik & Cataldo.

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Cibik & Cataldo
1500 Walnut St Suite 900
Philadelphia, PA 19102
(215) 735-1060