Avoiding Your Own Fiscal Cliff: How Bankruptcy Can Help You From Going Over The Edge

The financial news today is focused on only one topic: the fiscal cliff. Will we go over it? Will the powers that be reach a deal and save us from a new recession? What is the fiscal cliff anyway? Simply put the fiscal cliff is the problem that is created when you have too little revenue coming in and too much money going out. People facing bankruptcy are all too familiar with this particular problem. Although there are many reasons people file for bankruptcy, as a general principal, the problems my clients face is either too little income or too much debt. Often times it is a combination of these two factors. So how can bankruptcy help you from going over the fiscal cliff?

Well, for consumers and small business owners, there are two ways out of the debt that is weighing you down. The first way out is called a chapter 7 bankruptcy and is essentially what is thought of as a typical bankruptcy. In chapter 7 a person’s assets and income are examined. Using one of two sets of exemptions a person can protect what they own and as long as their income is not too far above the average California median income for their family size, they can discharge all of their debt. One of the most frequently asked questions about a chapter 7 bankruptcy is, “Can I keep my home?” The answer, more often than not, is yes. In today’s housing markets, many homeowners have little to no equity in their homes. This means that they can file bankruptcy and as long as they stay current on their mortgage, no creditor will be interested in trying to take away their home because it will be of no value to the creditor. If the person considering bankruptcy does have equity in their home there is a way to protect that equity using what is normally referred to as the “homestead exemptions.” As long as the amount of equity in the home does not exceed the exemption amount then you can file bankruptcy, discharge your debt and retain your home and all of its equity.

The other path to debt relief is a chapter 13. In a chapter 13, the debtor makes a monthly payment to the chapter 13 trustee. The amount of these monthly payments is dependent on a few factors. The first factor is if the debtor is trying to save their home by paying back their mortgage arrears through their chapter 13 plan. If so, then their monthly payment has to be at least enough to catch them up on their arrears within three to five years. The second factor is whether or not they have any priority claims that need to be paid. These types of claims usually consist of income tax indebtedness. If the debtor owes the IRS or the Franchise Tax Board income tax that cannot be discharged in the bankruptcy this amount goes into the “pot” of what needs to be paid back through the plan. Finally, the debtor’s income and assets are examined. If the debtor makes significantly more than the average median Californian for their family size, then they may be required to pay back a certain percentage of their total debt even if they owe no mortgage arrears or income tax. If the debtor has assets they cannot protect through exemptions, then instead of liquidating the asset, they must pay back the value of the asset through their chapter 13 plan. Even though in a chapter 13 plan people have to make payments to their creditors, it is often still in their best interests because in the majority of cases they are required to payback far less than the total debt and there are no tax consequences on the amount of debt discharged in the bankruptcy. “Wait a minute!” you say. “Isn’t filing for bankruptcy the same thing as going over the fiscal cliff!” My answer in a word is no. Bankruptcy is a new beginning, a fresh start. For most people considering bankruptcy the only way they are ever going to get out of debt without filing is if they won the lottery or received a huge inheritance. Once you are so far in there really aren’t that many options. Meanwhile you are missing credit card or mortgage payments and your credit score is lower than you thought possible. This is the real fiscal cliff and unfortunately many people choose to teeter on it for far too long. Bankruptcy is a financial tool that gets you off the edge and gives you the fresh start you need to build a better future.

The Law Offices of Melanie Tavare is a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code