This information is provided for potential clients as background information. For an understanding of asset protection planning, even as it pertains to Medicaid planning some understanding of how bankruptcy and creditor-debtor law affects decisions is needed. I practiced consumer bankruptcy for the first half of my career as an attorney.
Bankruptcy is a powerful tool. Filing Bankruptcy stops ALL attempts to collect civil judgments and debts. It does not stop criminal prosecutions nor does it stop a family court from determining or enforcing child support.
Bankruptcy can be used to restructure or reject contracts. While in bankruptcy you often have equal or greater negotiating power with creditors such as the IRS or secured creditors. Instead of being forced to accept what the creditor wants you MIGHT be able to set payment terms.
This is a very complex area of the law and application of the law to the “facts” and even the choice of which law to apply can be critical. In certain matters, you may be able to choose what law to apply.
As examples, you have the choice of exemptions, i.e. state or federal or even sometimes a choice of whether to file chapter 7 or to file chapter 13.
Bankruptcy is not a “cure-all”; it is a tool to help you restructure your finances. If your income is not large enough to pay your monthly expenses filing bankruptcy will not solve your problems. It may postpone your problems, but your problems will reappear.
The first step to solving your financial problems is figuring out how much you are spending and on what you are actually spending your money. If you are already keeping good records you are way ahead. If you are not reviewing how you spend your money periodically, there is a lot that you can learn by creating a summary. There are many excellent books on budgeting and inexpensive budget software programs which could help you.
The second step is to create a budget based on what you actually have available. This may require the advice of an attorney to help you determine what you can do. Pay for your necessities first, then pay for the items that can be taken from you if you do not pay the loan. Items that can be repossessed include the mortgage on a house, car payment, and similar creditors. These creditors are called “secured” because you signed a document giving the creditor the right to take back the asset purchased if you do not pay. The asset is considered the “security”. I typically ask someone who wants to visit with me about possibly filing for bankruptcy to create what I call a “living expense” budget. Budget for the necessities only so that we know what you have left to pay debt after you pay for your living expenses. This should not only include items like rent, child care, utilities and food, but include items that you do not buy every month. Budget on a monthly basis for items you need every year such as clothing, dental bills, medical bills, insurance, car repairs and similar expenses.
The next step is to determine what type of debts you have and how much. Typically creditors are classified as secured, priority and unsecured. A priority debt is a debt that gets paid before other types of debt in a bankruptcy. An unsecured debt is one in which the creditor only gets paid what is left after the other types of creditors get paid. A typical unsecured debt is a credit card or past due medical bill.
There are some debts that cannot be wiped out in a bankruptcy, such as government guaranteed student loans, the trust-fund portion of payroll taxes, and income taxes on unfiled tax returns and on returns filed less than 3 years ago.