Talking about our financial difficulties is taboo in this society.

We lionize those who make a fortune.  Everyone expects to live the middle class life.  What’s wrong with you if you aren’t making it?

We are more willing to talk about our sex lives than our money troubles.

Most of those meeting with a bankruptcy lawyer for the first time manifest some kind of shame, the sense that their financial hole is the sign of a moral as well as financial failure.

And as long as no one will talk about money troubles outside of a lawyer’s office, each person imagines that they are the only one with this sort of problem.

They imagine that they will have to justify their situation to the bankruptcy judge in order to get a discharge. They see themselves alone and exposed.

The profit in cultivating shame

The cult of silence may be why the debt settlement/debt management businesses do so well.

For a price, you are told, you can hire someone to get you out of the hole without declaring bankruptcy and therefore declaring failure.

Only those models seldom work.

Writing one check for the same amount as you wrote a bunch of smaller checks is still the same amount of money. It’s not the number of checks that is the problem, it’s the amount of money necessary to retire that debt, even over time.

The debt settlement model fails because creditors don’t stop trying to collect when contacted by one of these for profit outfits. The first money paid by the consumer goes to the company, not the creditors.  No one but the debt settlement folks get paid while you build up money in their hands.  The some portion of the creditors getting nothing get fed up and sue you.

The business model works only for the debt settlement folks.

And as long as they can convince you that bankruptcy is an unacceptable choice, they prosper.

Bankruptcy neither shameful nor rare

Over the past five years, an average of 1.3 million consumer bankruptcy cases have been filed.  One study of American families done before the Great Recession said one in seven families would be better off if they filed bankruptcy.

It’s probably more today.

Three life events are closely tied to the need for bankruptcy:  job loss, divorce, and illness.  Hardly a cause for shame in that list.

The “typical” bankruptcy filer is married, middle aged, white, working, and college educated.  Doesn’t sound like a pariah class, there.

Tom Friedman, columnist for the New York Times, names generous bankruptcy laws as a necessary feature for a country that wants to thrive in the global economy.   People can take economic risks when failure isn’t a life sentence.

Let’s give a shout out for bankruptcy as a vital reset for families burdened with debt they can’t reasonably pay.

More about making the decision to file bankruptcy

One test for whether you need bankruptcy

Six rotten reasons not to file bankruptcy

Which California seniors don’t need bankruptcy

Image:  © Farina3000 – Fotolia.com

Trying to decide between bankruptcy and debt settlement as the better path to financial health?

Own a home?

Here’s the killer reason why bankruptcy alone protects you from a serious tax consequence down the road.

Debt forgiven outside of bankruptcy gets deducted from the basis of your home.   Result:  more potentially taxable capital gains on sale.

Here’s the backstory and the low down on the exception to the exception that protects your home from a tax hit in the future.

Tax consequences of forgiven debt

When choosing between bankruptcy and settling your debts outside of the bankruptcy court, an advantage to bankruptcy has always been the favorable tax treatment of forgiven debt.

Debt forgiven or cancelled in bankruptcy is not added to taxable income. IRC 108

 

You may receive a 1099 form showing the forgiven debt, but by filing Form 982, you claim your right to exclude the forgiven debt from your income.

By contrast, make a deal with your creditors to take, say,  1/3 of what you owe in full settlement, and Uncle Sam treats the 2/3 of the debt that was cancelled as if you received it as income.  Taxable income. Ouch! [Read more…]

We’re so used to thinking about married folk as a couple, rather than as two individuals:  George and Gracie;  Bill and Hillary;  John and Abigail.

The Bankruptcy Code feeds that perception when it allows a married couple to file a joint case.  Two people, one set of papers, one filing fee.

But while filing together is permitted, it is not required.

You don’t need your mate’s consent or participation to get relief from your debts. You can file bankruptcy without your spouse.

Likewise, your mate can file bankruptcy whether you approve or not.

Complications in single spouse bankruptcy

Things can get dicey when the non filing partner is absolutely non cooperative.

Since 2005, the bankruptcy means test requires analysis of the last six months of paystubs for both parties, if they live together. There’s no uniform approach by judges if the non filer won’t provide information.

Then there’s the issue of jointly owned property.  File bankruptcy and all the assets of the person filing are brought into the bankruptcy estate.  The estate could include an operating business if the business is run by the non filer as a proprietorship, rather than a corporation or LLC.

Bankruptcy law allows a trustee to sell assets where the debtor (the person who filed bankruptcy) owns only a partial interest in the asset.

Then, in community property states like California, a bankruptcy filing by one spouse brings all of the community property into play.  (In exchange, all future community property of the couple is protected from the debts the filer discharges.)

The secret bankruptcy discharge for married Californians

Advantages of one spouse filing

I frequently recommend that only one spouse file bankruptcy.  The reasons and advantages are many in a community property state like California.

All of the couple’s community property is protected from creditors, regardless of which spouse files the case.  One advantage to filing alone is to preserve the other’s right to file bankruptcy later,  should there be debts that aren’t dischargeable in the first case.

I think of the right to file bankruptcy as a valuable commodity which shouldn’t be squandered when there might be a need for debt relief for the couple sooner than the Bankruptcy Code permits another filing.

I use single spouse filings to get couples below the Chapter 13 debt limits, or to protect an underwater home while the couple seeks a loan modification.

So whether your spouse is game to file or not,  you can, and perhaps should, file bankruptcy alone.

More

When your estranged spouse files bankruptcy

Debts of the marriage under California’s community property system.

How to interview a bankruptcy lawyer

What should bankruptcy cost?

 

Image courtesy of rez atkinson.