The Minimum Payment Swamp

Credit cards are great, aren't they? They offer you some freedom, some flexibility . . .and you can pay them off over time rather than having to come up with a big pile of cash all at once. Of course, you pay a price for that that flexibility in the form of interest on the balance. But still, you pay it off in a couple-few months, it's not so bad, right?

OK, but what happens when you can't do that? I mean, suppose you've had a really big expense and now you have a larger balance than you usually like to carry. Suppose your income has gone down recently so now you have to rework your budget, you know, so you can pay rent AND eat this month. Where do the credit card payments fit in?

Of course!!! Minimum payments!!! Our friends at TBTF Bank, NA (To Big To Fail Bank . . .) have generously offered to allow you to pay off your debt in increments called "minimum payments." This is the lowest amount you are required to pay in order to pay off your balance. Paying the minimum payment each month keeps the creditor happy and keeps you from defaulting. Sweet! Right?

Not so fast. When you pay only the minimum each month, you are doing very little to decrease the principal you owe. A lot of that minimum payment is being applied to interest. For example, if you have a $3,000.00 balance on a card that carries an interest rate of 14.99%, a likely monthly minimum payment will about $120.00. This will decrease a bit each month as you pay down the principal. At that rate, it will take you almost 9 years to pay off that balance. And that's assuming you don't use that card at all during that time. Add to that the other minimum payments on your other cards and you could be looking at hundreds of dollars each month going out just to keep the banks off your back. After a while it can feel like your way through a dense, muddy swamp; take a couple of steps forward, sink down into the muck, pull yourself out, couple more steps forward, sink down . . .lather, rinse, repeat.

So . . .what do you do?  If you have regular income and your ordinary living expenses are manageable, you might want to consult with a credit counselor to see if you qualify for a debt management plan. If you qualify, you should be able to pay off the credit card debt at greatly reduced interest over a period of 4 to 5 years. If, however, the debt has become completely unmanageable and you are having to pick and choose between paying a bill and going to the grocery store this week, it may be time to contact a bankruptcy attorney. A bankruptcy practitioner will explain the pros and cons of filing a bankruptcy and will outline the steps necessary to do so. He or she should also explain your non-bankruptcy options.

Or . . .you can just keep slogging through that swamp.

Reaffirmation . . .

Look in the mirror. Smile confidently. Say, "I'm good enough; I'm smart enough, and, doggone it, people like me." (Apologies to Al Franken and Stuart Smalley . . .) OK, that's NOT what I'm talking about when I say "reaffirmation."

A reaffirmation in bankruptcy is a process by which you agree that a secured debt will not be discharged along with the rest of your dischargeable debt. In a typical Chapter 7 bankruptcy, an individual (or a married couple) will receive a discharge of all of their dischargeable debt. Certain debts, such as past-due income taxes, student loans and domestic support obligations cannot be discharged. (Well, under certain circumstances, some past-due income tax debt may be dischargeable, but that's a topic for another post).

Certain secured debts though  may need to be reaffirmed if your intention is to keep the collateral. A secured debt is one which is associated with some piece of property which the lender can repossess if the debt is not paid. Probably the debt that most people might think of is a car loan. You don't pay, they send out the roll-back. A mortgage is also a secured debt. If a secured debt is discharged in bankruptcy, that means that if you stop paying, the lender can still take back their collateral, such as your car, but they cannot pursue you for any deficiency or shortfall they might experience when they resell the collateral.

If you have reaffirmed the debt, however, then the debt survives the bankruptcy as though you had never filed; the lender can not only repossess the collateral, it can go after you for the difference when they sell the thing for less than you owe. This is something you often see with car loans; you have a car and you owe, let's say, $17,000.00, It's a 2009 something-or-other and it's in good shape. But you fall behind on the payments, and the lender sends out the guy with the truck and repossesses the car. They sell it at auction and get $8,000.00 for it. You still owe them $9,000.00. If, however, you have filed a Chapter 7 bankruptcy and have voluntarily surrendered the car, then the entire debt will be discharged. If, on the other hand, you filed the Chapter 7 and you reaffirmed that debt, you are still going to be on the hook for the difference.

There are many instances where reaffirming a debt is not a bad idea, and there are times when it really IS a bad idea. Your bankruptcy attorney will be able to explore all of your options with you and help you to decide what is likely to be your best course of action.

I Don't Want To Lose My . . .(fill in the blank) . . .

For many of my clients who come in for the initial consultation, one of the first questions is, "What about my        ?" Usually the "blank" is a car, but often it is furniture, investment accounts and other personal property. As always in things legal, not just bankruptcy, there's no short or simple answer. (And you thought I was going to say, "It depends . . ."). Although it does depend. The answer to the question about the car or the house or any other item of property depends initially on what you want to do with it. Next, it depends on what the Bankruptcy Code will let you do with it.

Of course I am talking about exemptions. Great. What's an exemption? When a bankruptcy is filed (and I'm talking about consumer bankruptcies here, not the General Motors variety), something called "the Bankruptcy Estate" is created. What that means, for all intents and purposes, is that once you file a bankruptcy, all of your stuff now becomes property of the Bankruptcy Estate. Under Section 522 of the Bankruptcy Code, however, an individual debtor can exempt certain property out of the Bankruptcy Estate, up to specified values. For example, that car you were worried about . . .the Code allows an individual debtor to have a vehicle for his or her personal or family use, worth up to $3,450.00. Now, many people don't own their car outright, and are paying a car loan or have a lease. In that case, it usually doesn't matter what the thing is worth, because it is securing a debt, and if anyone (like the Chapter 7 Trustee) were to sell the car, they would have to satisfy that debt first. (There are other provisions relating to keeping a car which is subject to a loan, but that's a topic for a different post.)

So, you have a car, you own it outright, and it's worth . . .let's say $7,000.00. Bye bye car, right? Not necessarily. Once you have exhausted that exemption of $3,450.00 for the car, you are allowed to use a so-called "wildcard" exemption, which in most cases will eat up the excess non-exemptable portion of the car value. This same sort of exemption can apply to other personal property as well, allowing you to keep most, and in some cases all, of certain personal property that might otherwise exceed the allowable amounts. Of course, there is quite bit more analysis that goes along with the process and is best left up to your bankruptcy attorney.

This is why it is very important for you to provide your attorney with a complete and accurate inventory of your personal property (your stuff plus cash, bank accounts, and other types of accounts), so that he or she can do the necessary analysis to properly apply and claim the appropriate exemptions.

What About My Refund . . .????

Ah yes . . .January is over, February has slapped us in the face and is sitting back and laughing about it, and the W-2s have bloomed. Unless I miss my guess, it must be tax time again.  And for many people, that means that a refund is in the cards.

But wait . . .says a client . . . I'm filing bankruptcy!!  WHAT ABOUT MY REFUND??? Are they going to take that? Well . . .your're going to hate me for this . . .it depends.

It depends on how much you are expecting to receive and on how much of it (or even all of it) can be exempted under the available exemptions. Let's say you are expecting to receive about $5,000.00. But you are just on the verge of a bankruptcy filing; all that's left to do is go to your lawyer's office to review your petition and schedules, and sign it. And let's say that you own your house, and by some miracle (in this climate!) you actually have some equity in it . . .for this example, let's say you have in the neighborhood of $10,000.00 in net equity. (Net equity would be what you get to put in your pocket after the mortgage, the broker's commission and all closing costs have been paid). Under the federal exemptions you are permitted to keep up to $21,625.00 in equity in your house; in this example, after exempting (keeping) your $10,000.00 worth of equity, about $11,625.00 remains. In Pennsylvania, we can choose whether to use the federal exemptions or the state exemptions. Using the federal exemptions there is good news!!

The Bankruptcy Code allows you to use up to $10,825.00 of the unused portion of the amount you were allowed to use for your house. So, under this scenario, you would be able to keep your tax refund. Using the same analysis, if you have no equity in your house, or if you don't have a house, then you would still be able to use the unused portion of the homestead exemption, and you would be able to keep your tax refund.

Of course, the above example is just a hypothetical situation, and there are other factors that each individual client may have to consider when looking at the exemptions. This is just one reason why there are no easy answers in bankruptcy!

Why File Bankruptcy?

Why should I file a bankruptcy?  For some, the question might elicit a "duh . ." response. As in, "Why should I file a bankruptcy?."  "Duh . . .to get rid of your debt."  (Shrugging, head-shaking and eye-rolling are optional).

But seriously . . . a lot of my clients ask me this. It usually stems from a sense of wanting to do the right thing, which usually includes paying your creditors. And while that is a good and moral and appropriate goal, for many people it just is not a feasible goal. Even making your best effort and paying the minimum payments each month, even one credit card with a $6,000.00 balance can take years . . .YEARS . . .to pay in full. Multiply that by three or four or even eight and, unless you are still not old enough to drink, your grandchildren might be paying that off some day. Okay, I exaggerate. A bit. The point is, if you have so much debt that, realistically, you will be paying and paying and paying and never hopping off that treadmill for the forseeable future, bankruptcy should be something you are considering.

Ask yourself questions like these:  is it possible to completely pay off all my debt over the next five years just paying the minimum? Is it possible to pay it all off in about five years if I doubled the minimum payments? Can I afford  to consistently pay out $                  regularly while covering all ordinary and necessary expenses? If you can reasonably see this happening; if you can see fitting regularly monthly payments into your budget over the next five years; then you may be able to avoid bankruptcy.  If, however, you cannot see yourself being able to do that, it is probably time to consider filing bankruptcy.

Bankruptcy: Lets Get Started!

The main purpose of this blog is to provide consumer bankruptcy information.  I am an attorney in Lancaster, Pennsylvania, and I practice primarily in bankruptcy and family law. In the course of my bankruptcy practice, certain questions seem to come up more frequently than others, so, with this blog I hope to address and answer them.


It probably goes without saying that bankruptcy is a huge and difficult step for most people to take.  No one likes to feel as though they're shirking responsibility by not paying their bills. No one likes to feel like they're just giving up. But most of my clients are on a debt treadmill, running and running and never losing any weight . . . never catching up and certainly never getting ahead.  Bankruptcy is, for many people, the best and most viable solution.


But because it is a big and intimidating step, and because it can seem like a complicated process, I want to try to help clear up some of the mystery and answer some common questions for anyone who might stumble upon this page. (Of course, if you found my website and clicked on the blog link . . .YAY!! And thanks!)