Should I use my 401k or IRA to pay late bills?

If you can avoid it, do not use your retirement assets to pay bills.

One mistake people make to prolong having to file for bankruptcy protection is to use the funds that are shielded from creditors in bankruptcies, such as IRAs, pension funds and 401(k)s. Many people have borrowed against their 401(k) or maxed out the equity in their home and have had to file a bankruptcy anyway.

Unfortunately they have spent the assets that are protected in the proceedings and would have given them a fresh start. Borrow from your retirement nest egg only as a last resort.

If I file bankruptcy, can I ever get another credit card?

You as a consumer are being encouraged to take on more debt than ever before. Do you think filing a bankruptcy will stop these companies from pursuing you?

On the contrary, you will find another offer for more credit cards in your mailbox sooner than you think. These companies are more willing to give you new cards because they assume now that you have filed for bankruptcy you have more money. It’s easier for credit card companies to put you in bankruptcy and then start you all over again.

Is bankruptcy counseling required by law?

Before filing for bankruptcy most applicants must now undergo credit counseling in a government-approved program. The purpose of this counseling is to give you an idea of whether you really need to file for bankruptcy or whether an informal repayment plan would get you back on your economic feet.

After the conclusion of bankruptcy proceedings, but before any debt can be discharged, bankruptcy filers must participate in a government-approved financial management education program. It’s mandatory. Counseling is required even if it's obvious that a repayment plan isn't feasible or you are facing debts that you find unfair and don't want to pay. You are required only to participate, not to go along with any repayment plan the agency proposes.

If the program comes up with a repayment plan, you will have to submit it to the court, along with a certificate showing that you completed the counseling, before you can file for bankruptcy. Once your bankruptcy case is over, you'll have to attend another counseling session, this time to learn personal financial management.

Can a bankruptcy stop a foreclosure?

Though bankruptcy can delay a foreclosure, a Chapter 7 liquidation won't stop it for long. Chapter 13, however, was designed with foreclosure problems in mind. A typical foreclosure scenario is where, because payments have been missed, the lender demands immediate payment of a huge sum of money -- perhaps the entire loan amount -- and there is no way you can come up with it.

Filing for Chapter 13 bankruptcy will stop the foreclosure and can force the lender to accept a plan where you make up the missed payments and the loan amount through monthly payments over the next three to five years. To make this plan work, you must be able to demonstrate that you will have enough income in the future to support such a repayment plan.

Should I file if I have no income or property?

If you don't anticipate having a steady income or some property that a creditor could take, bankruptcy is probably not necessary. If you don’t have a full-time job or own a home, your creditors probably won't sue you. Why? Because it's unlikely they could collect the judgment from you. Instead, they’ll write off your debt and treat it as a business loss for their income tax purposes. In a few years, your debt will become legally uncollectible anyway.

Will a bankruptcy eliminate property liens?

A bankruptcy court's discharge of your debts wipes out your obligation to pay your creditors, but if the creditor has a lien on your property, the lien will survive your bankruptcy unless you exercise certain procedures during your bankruptcy case. If your creditor has taken you to court and slapped a judgment lien on your property, you may be able to remove it.

A bankruptcy eliminates debts, but it does not eliminate liens. So, if you have a secured debt, a debt where the creditor has a lien on your property and can repossess it if you don't pay the debt, bankruptcy can eliminate the debt, but it does not prevent the creditor from repossessing the property. A bankruptcy eliminates debts, but it does not eliminate liens. But if they do repossess your property, bankruptcy does prevent the creditor from coming after you for additional money. Creditors will usually come back after you if the sale of your property didn’t generate enough cash to pay off the amount you still owe them. Or if you figure out a way to keep the bidding down when you see your property on ebay.

What's not protected in a bankruptcy?

Under the new bankruptcy law many protections have been eliminated. Most taxes that you owe, some credit card debt and student loans, are not covered by the new law. And if they are covered, the new bankruptcy law makes it harder to qualify.

For example, filing for bankruptcy no longer delays or stops eviction actions, driver's license suspensions, legal actions for child support, or divorce proceedings. Child support and alimony take priority over any other creditor.

Child support and alimony obligations will survive your bankruptcy -- you will continue to owe these debts in full, just as if you had never filed for bankruptcy. In addition, some types of debts cannot be claimed if your creditor convinces a judge that they should survive your bankruptcy.

Under Chapter 13, how much money will I have left?

Under the old rules, people who filed under Chapter 13 had to devote all of their disposable income -- what they had left after paying their actual living expenses -- to their repayment plan. The new law adds a wrinkle. Although Chapter 13 filers still have to hand over all of their disposable income, they have to calculate their disposable income using expense amounts dictated by the IRS -- not their actual expenses. That is.. if their income is higher than the median in their state.

These IRS expense amounts are often lower than actual expense. What's worse, these allowed expense amounts must be subtracted not from your actual earnings each month, but from your average income during the six months before you filed. This means that you may be required to pay a much larger amount of "disposable income" into your plan than you have to spare every month. Certainly, this stipulation will lead to more Chapter 13 failures.

How is Chapter 13 different from Chapter 7?

Chapter 13 is often preferable to chapter 7 because it enables you to keep a valuable asset, such as a house. It is also favored because it allows you to create a “plan” to repay creditors over three to five years. Under chapter 13 you must make payments to creditors, through the court trustee, based on your anticipated income over the period specified in your debt repayment plan. You are protected from lawsuits, garnishments, and other creditor actions while the plan is in effect.

Isn't there some income test for bankruptcy filers?

According to the IRS, if your income is less than or equal to the median income in your state, for a family of your size, you can file for Chapter 7 total liquidation. But what if your income is more than the median income in your state? The IRS has created a test called the “means test” to figure out whether you really should be making payments on a Chapter 13 plan. If your income is enough after you subtract certain expenses the IRS allows and debt payments they will require you pay, then you will be forced into a Chapter 13 plan.

What happens to my property during a bankruptcy?

It used to be that in a Chapter 7 you could list the value of your property for what it would sell for at an auction. What it would sell for was left up to your own interpretation. Those who were smart, would list their used furniture, cars, antiques, and other property they wanted to keep, with little or no value. Because it was listed as little or no value that property became "exempt property" and could not be taken by creditors or the court trustee. This enabled files to keep most of which they already had.

Now, the courts won’t ask you ..how much do you think your property is worth. The trustee will expect you to specify the cost to purchase it. Not sell it at an auction. Taking into account the property's age and condition of course. At an auction, your used dining room set would sell for little or nothing. But if you were to go into a store and purchase that same used dining room set, it could go for three times as much. This is what the court trustee is hoping for. With this new law the courts look at the purchase price as opposed to the amount you’d get at a fire sale or an auction. Hence, the trustee can raise the value placed on your property, which means more filers will have their property taken and sold by the court trustee to pay off the creditors.

Why does it cost so much to file bankruptcy?

What’s very noticeable has been the surge in legal costs. Attorney’s fees to file a bankruptcy have sky rocketed. Now your attorney must personally vouch for the accuracy of every piece of the information you provide them. Every document, every account number and every dollar and every cent must be verified by your attorney. These new requirements, make it tougher to find an attorney to represent your case.

If I owe taxes can I file for bankruptcy protection?

Under the new bankruptcy law, if you want to file Chapter 7 or Chapter 13 you must show proof of your income by providing federal tax returns from the last tax year. If you owe taxes and have not paid taxes for the previous tax year, you must do so before the bankruptcy will go through.

What is a chapter 7 bankruptcy?

A chapter 7 bankruptcy or liquidation, is a court-supervised procedure where a trustee collects your assets, reduces them to cash, and pays your creditors.