A generation-skipping trust (GST) allows people to leave assets to grandchildren or other people at least 37.5 years younger. Passing assets from Generation 1 to Generation 3 avoids paying federal estate taxes twice on assets — once when passing to Generation 2 and again when passing to Generation 3.
Although GSTs may avoid estate tax, they aren’t totally tax-free. Assets passing through a generation-skipping trust may be subject to the generation-skipping transfer tax. This tax rate happens to equal the estate tax rate, which ranges from 18% to 40%
. However, the generation-skipping tax generally only applies to estates over $12.92 million in 2023 or $13.61 million in 2024. That number is set to fall to $5 million after 2025.
Price (one-time)
None
Price (one-time)
One-time fee of $159 per individual or $259 for couples.
Price (one-time)
$89 for Basic will plan, $99 for Comprehensive will plan, $249 for Estate Plan Bundle.
Price (annual)
$99 to $209 per year.
Price (annual)
$19 annual membership fee.
Price (annual)
None
Access to attorney support
No
Access to attorney support
No
Access to attorney support
Yes
Who are GSTs good for?
Generation-skipping trusts are best for higher net worth families that want to minimize taxes on their estate, says Diedre Braverman, managing attorney with Braverman Law Group in Boulder, Colorado. People who don’t have a will or estate plan may end up leaving their heirs with taxes that they could have avoided, she adds.
Pros and cons of GSTs
When considering if a GST works best for you, think of the following.
Advantages
When set up properly, a GST may save money in taxes that Generation 2 may have had to pay had they received the assets first. This allows people to leave assets to grandchildren, nieces, nephews, grandnieces, grandnephews, or a younger spouse without having a lot of it swallowed up by taxes, Braverman says.
Trusts may be able to shield assets from lawsuits, bankruptcy and divorce settlements.
Setting up a GST gets you thinking about your legacy. “It may get you into estate planning in general,” Braverman says, “which is a good thing for everybody.”
Disadvantages
Attorney fees associated with setting up a GST vary greatly across the country and can be hefty.
Money in the trust can only be withdrawn for living expenses. While those amounts can be generous, it still has to have some relationship correlated to the beneficiaries’ standard of living, Braverman says.
Trusts require a trustee, which is an ongoing expense.
The generation that gets skipped may have objections. “Generation 2 can typically get income from the trust, but they don’t have ownership in the trust,” says Brian Hill, a partner at Ball Morse Lowe in Norman, Oklahoma. “They can’t sell the asset and go buy a bigger personal home. Because of that, there could be tension.”
How to set up a GST
Work with an estate planning attorney to set up your GST. Some things to keep in mind:
Go slow. Setting up a GST involves at least three generations of people, so it’s essential to think through the process. “This is in place for a long time,” Hill says.
Talk to various advisors. Speaking with different people helps you think through all the different what-ifs, Hill says. Consider including tax professionals, financial planners and even other family members in your conversations.
Keep your appointment. People tend to cancel their appointments when they don’t have all the answers to questions that a lawyer may have sent them before their first meeting, Braverman says. This is a mistake. Working with a good attorney will help you get the answers you need.
Think about what you want your trust to encourage or discourage. Lawyers can put all kinds of provisions in trusts, Braverman says. Stipulations on substance abuse or GPAs or beneficiaries being self-supporting, for example, can help express the client’s overall intent.
GST mistakes to avoid
People often make two common mistakes, according to Braverman.
Naming family members as trustees. Money creates suspicions, and the trustee has a lot of power, she says. This can build resentment and cause problems.
Not considering who will be trustee if your original trustee passes. Consult with your attorney about who will take over if your original trustee can no longer handle the role. Braverman suggests three options for these successor trustees: Trust departments in large financial institutions, trust companies or professional, private fiduciaries.
Frequently asked questions
Can I only leave money to family members in a GST?
No. Money in a GST can go to grandchildren, grandnieces, grandnephews, or anyone who is at least 37.5 years younger than the grantor.
What is the beneficiary of a GST called?
A “skip” person is the beneficiary of a GST who is two or more generations below the settlor’s generation.
Is there a way to avoid paying the generation-skipping tax?
The IRS exclusion allows grandparents to give away $12.92 million in 2023 without paying this tax. This number is set to drop drastically after 2025 — to $5 million.
About one in seven Americans has unclaimed funds lurking somewhere. In fact, there’s an estimated $70 billion in unclaimed assets in the United States. Typically, the amounts people receive when retrieving this money can be small (say, $20) or, in rare cases, it can be a significant amount of six figures or higher.
States typically manage these funds, which can come from forgotten bank accounts, pensions, insurance benefits, wages, savings bonds, and other sources.
If you’re wondering whether there’s any money out there that belongs to you, read on. This guide will walk you through where unclaimed money may be hiding and how to claim it.
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How to Find Unclaimed Money 5 Ways
Money usually remains unclaimed because owners have no idea it exists. That’s why it may be worth searching for unclaimed funds in your name just in case. So how do you go about it? Unfortunately, there’s no single place you can look for all potential unclaimed cash. It may take some work, but here are some steps you can take to help make sure you’re claiming everything that’s yours.
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1. Searching State Databases
A good first step may be to hunt for unclaimed funds at the state level. Each state has an office that oversees unclaimed property, typically housed in the state treasurer’s, controller’s, or comptroller’s office. You can link to your state by visiting the website unclaimed.org, which is run by the National Association of Unclaimed Property Administrators.
Don’t forget to search your name in the database of each state where you have lived, not just the one where you live now. Make sure that you are searching the official state site (it should have .gov in the URL) to avoid scams. If you are married and changed your name, you may want to consider searching under your maiden name too.
You can continue your search by checking MissingMoney.com, which offers a multi-state database endorsed by the National Association of Unclaimed Property Administrators.
All of these searches are free to complete. If someone asks you for money to complete a search, that’s a red flag. There’s no reason to pay to access money that’s yours, unless there is a small processing fee.
If you happen to find unclaimed property, each state has its own process for proving that you’re the true owner and getting your hands on the cash. Many states allow you to file a claim electronically.
Usually you need to provide some kind of official documents to prove that you’re the person named as the owner. Luckily, there is typically no time limit for claiming the money. If the owner has died, you can often claim funds from a deceased relative. You can typically file a claim if you’re an heir, trustee, or executor of the estate.
2. Looking for Unpaid Wages and Pensions
Here’s another possibility in terms of how to find unclaimed funds: Hunt for back pay. If your employer owes you back wages, you can search the Department of Labor’s database. Start by inputting the name of the employer. You typically have to move quickly in this case, since the agency only keeps unpaid wages for three years.
You can also look for pensions from a former employer. Pension funds may be unclaimed if a company closed its doors or ended a particular pension plan. You can look for funds through the website of the Pension Benefit Guaranty Corporation, which is a government agency.
3. Checking for Unclaimed Tax Refunds
If you think you may have failed to receive a tax refund at some point, you can track that down through the Internal Revenue Service’s website. Keep in mind that you will need to know the exact refund amount in order to conduct the search.
4. Searching for Insurance Funds
Many insurance companies transfer unclaimed funds to states, but a couple of federal government agencies maintain their own unclaimed funds databases. The U.S. Department of Veterans Affairs holds onto unclaimed VA life insurance funds for most policyholders and, if they’re deceased, their beneficiaries.
People who had mortgages insured by the Federal Housing Administration can check for potential unclaimed refunds on the website of the U.S. Department of Housing and Urban Development.
5. Finding Savings Bonds
Another potential place to find unclaimed funds could be in forgotten or lost savings bonds. To check whether you have a bond that has reached maturity, check the government’s website Treasury Hunt. You’ll be prompted to enter your Social Security number and your state.
The site also offers advice on finding lost, destroyed, or stolen savings bonds.
• FDIC and Closed Banks You may also want to see if you have any money that is in a lost bank account or one that was held at a now-closed bank. It’s a very rare occurrence, but bank failures do occasionally happen. If you believe you had funds in one that you never received, you can contact the FDIC Claims Depositor Services at 888-206-4662, option 2.
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Being Aware of Scams
Where there’s free money, there are bound to be con artists trying to take advantage of it. Some companies may offer to help you find unclaimed funds and recover the money for a percentage of the amount owed you. Be cautious: These can be scams. Paying these fees is pointless, since you can search for unclaimed property and reclaim it for free (or perhaps for a small processing fee to the state).
The IRS recently warned of another kind of unclaimed money scam, in which a letter arrives, claiming to be from the government, alerting you to a refund you have not yet accessed. This fraudulent communication then says that your banking details are needed to receive the money. If you send that sensitive information, you could end up losing money and having your accounts compromised.
Using Your Unclaimed Money
If you happen to be one of the lucky people who finds cash waiting for them, what should you do with it? You may be tempted to blow the surprise windfall on those new shoes you’ve been eyeing or on a dream vacation.
But depending on the sum you receive and your financial situation, there may be smarter ways to put the unexpected money to use. Consider these possibilities.
Paying Off Debt
If you have high-interest debt, many people suggest putting much of your extra cash toward knocking it out. That’s because interest rates can cause a balance to balloon significantly over time, meaning the longer you wait to pay off your high-interest debt, the more you’ll likely pay overall.
Credit cards and payday loans tend to have high interest rates, but you may also want to check the rate you’re paying on your student loans, car loan, personal loan, or mortgage. One method for potentially paying off your debt faster is to tackle your highest-interest debt first, while staying on top of minimum payments for your other liabilities.
Building An Emergency Fund
Once you’re on top of your debt or at least the highest-interest liabilities, it may be a good idea to establish or pump up an emergency fund.
Financial experts suggest having enough saved to cover three to six months’ worth of living expenses.
It may be a good idea to keep this money in a safe place, like a high-interest savings account, for unexpected emergencies such as car repairs, medical bills, or a layoff. Having an emergency fund may help you avoid getting into high-interest debt in the future since you have that cash cushion to see you through challenging times.
Saving for a Goal
Once you have a basic emergency fund, you may want to start setting aside money to get closer to a big financial goal. Maybe you want to have a wedding, travel, start a business, or buy a home.
Saving in advance means you may need to take out less in loans or pay less in credit card charges. Or you might be able to avoid them altogether, keeping more of your money in your pocket.
Investing for the Future
Another option is to invest your money in an individual retirement account, college savings plan, brokerage account, or another financial vehicle.
Investing your money for the long-term could allow you to take advantage of the power of compounding returns and potentially increase your chances of reaping solid growth over time. It can be tempting to spend your lucky find on short-term fun, but investing may set you up for financial freedom in the future.
Recommended: Weird Ways to Make Money
The Takeaway
How do you find unclaimed funds? Typically, it involves searching on websites to see what pops up. These are usually specific to the kind of money that is sitting unclaimed, whether that means going searching for tax refunds, the contents of closed bank accounts, back wages, or insurance payments.
Whether it’s deciding what to do with reclaimed cash, if you’re owed any, or figuring out how to afford a big goal, life poses plenty of personal finance challenges. Finding the right financial partner can be an important step in making your money work harder for you.
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FAQ
What is the best website to find unclaimed money?
Using a website to find unclaimed money will depend somewhat on the source of the unclaimed funds, such as whether it’s from an insurance claim, a forgotten safety deposit box, or other source. One good place to start can be unclaimed.org, which is run by the National Association of Unclaimed Property Administrators.
What happens if money is unclaimed?
When money is unclaimed, it often goes through a dormancy period (perhaps five years), after which the state takes control of the funds.
How do you claim unclaimed money from the IRS?
If you were expecting a federal tax refund and didn’t receive it, visit the IRS’ Where’s My Refund page and/or call their helpline at 800-829-1040. For state taxes, contact your local Department of Revenue by checking this website.
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The IRS just released retirement plan contribution limits for 2024. The good news is that the limits are going up. Below you’ll find both the 2023 and 2204 contribution limits and catch-up limits. We also include Roth IRA income limits and traditional IRA limits on deducting the contribution.
2024 and 2023 Retirement Account Limits
401(k) and IRA Contribution Limits
Account
2023
2024
401(k), 403(b), TSP, and Most 457 Plans (including Roth Accounts)
$22,500
$23,000
Catch-up Contributions (for those 50 or older)
$7,500
$7,500
Maximum Contribution(50 or older)
$30,000
$30,500
IRA and Roth IRA
$6,500
$7,000
Catch-up Contributions1 (for those 50 or older)
$1,000
$1,000
Maximum Contribution (50 or older)
$7,500
$8,000
SIMPLE Retirement Accounts2
$15,500
$16,000
SIMPLE Catch-up Contributions
$3,500
$3,500
Maximum Contribution (50 or older)
$19,000
$19,500
Source: IRS
Income Limits for Deducting IRA Contributions
If neither the taxpayer nor their spouse is covered by a retirement plan at work, the phase-outs for the deductibility of IRA contributions do not apply. Otherwise, here are the income limits for deducting IRA contributions (note that the amount that can be deducted goes down as income increases through the range, and is eliminated if income meets or exceeds the high end of the range):
Filing Status
2023
2024
Single
$73,000 – $83,000
$77,000 – $87,000
Married, filing jointly, and spouse making IRA contributions is covered by a workplace retirement plan
$116,000 – $136,000
$123,000 – $143,000
Married, filing jointly, and spouse making IRA contributions is NOT covered by a workplace retirement plan
$218,000 – $228,000
$230,000 – $240,000
Married, filing separately, and spouse making IRA contributions is covered by a workplace retirement plan3
$0 – $10,000
$0 – $10,000
Source: IRS
Roth IRA Income Limits
Roth IRA contributions are reduced and potentially eliminated based on how much the taxpayer makes. Here are the income phase-out limits for 2023 and 2024:
Filing Status
2023
2024
Single and Head of Household
$138,000 – $153,000
$146,000 – $161,000
Married Filing Jointly
$218,000 – $228,000
$230,000 – $240,000
Married Filing Separately4
$0 – $10,000
$0 – $10,000
Source: IRS
Saver’s Credit Income Limit
The Retirement Savings Contributions Credit, also known as the Saver’s Credit, is designed to help low and moderate-income workers save for retirement. The credit applies to contributions made to certain workplace retirement accounts, as well as IRA and Roth IRA accounts. Here are the income limits for 2024 and 2023:
Filing Status
2023
2024
Single or Married Filing Separetely
$36,500
$38,250
Married Filing Jointly
$73,000
$76,500
Head of Household
$54,750
$57,375
Source: IRS
Other Limits
There are a few other limits that are now subject to cost-of-living adjustments thanks to SECURE 2.0:
The limitation on premiums paid with respect to a qualifying longevity annuity contract (QLAC) remains the same in 2024 at $200,000.
The deductible limit on charitable distributions from an IRA is increasing in 2024 to $105,000, up from $100,000.
Added a deductible limit for a one-time election to treat a distribution from an individual retirement account made directly by the trustee to a split-interest entity. For 2024, this limitation is increased to $53,000, up from $50,000.
Beyond SECURE 2.0, here are other limits related to retirement accounts:
Defined Benefit Plans: The limitation on the annual benefit under a defined benefit plan under section 415(b)(1)(A) of the Code is increasing from $265,000 in 2023 to $275,000 in 2024.
Maximum 401(k) Contributions: The total contributions allowed to a 401(k), including employer matching contributions, is increasing fro $66,000 in 2023 to $69,000 in 2024.
Source: IRS
Next Up: Just How Rich Could You Be If You Maxed Out Your Retirement Accounts?
The SECURE 2.0 Act of 2022 added an inflation adjustment to the IRA catch-up contribution. Before SECURE 2.0, the $1,000 limit was not adjusted for inflation. Now it is, however, it remains the same for 2024. ↩︎
SIMPLE stands for Savings Incentive Match Plan for Employees and is a retirement plan used by some small businesses. ↩︎
This phase-out range is not subject to a cost-of-living adjustment. ↩︎
This phase-out range is not subject to a cost-of-living adjustment. ↩︎
Rob Berger is the founder of Dough Roller and the Dough Roller Money Podcast. A former securities law attorney and Forbes deputy editor, Rob is the author of the book Retire Before Mom and Dad. He educates independent investors on his YouTube channel and at RobBerger.com.
The mere thought of filing for bankruptcy is enough to make anyone nervous. But in some cases, it really can be the best option for your financial situation. Even though it stays as a negative item on your credit report for up to ten years, bankruptcy often relieves the burden of overwhelming amounts of debt.
There are actually three different types of bankruptcy, and each one is designed to help people with specific needs. Read on to find out which type of bankruptcy you might be eligible for. We’ll also help you determine whether it really is the best option available.
What are the different types of bankruptcy?
In general, bankruptcy is the process of eliminating some or all of your debt, or in some cases, repaying it under different terms from your original agreements with your creditors.
It’s a very serious endeavor but can help alleviate your debt if you calculate that it’s unlikely to you’ll be able to repay everything throughout the coming years.
The two most common for individuals are Chapter 7 and Chapter 13. Chapter 11 is primarily used for businesses but can apply to individuals in some instances. Let’s take a look at some bankruptcy basics and the other details that set them apart from each other.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is designed for individuals meeting certain income guidelines who can’t afford to repay their creditors. You must pass a means test to qualify. Then, instead of making payments, a bankruptcy trustee can sell your personal property to help settle your debts, including both secured and unsecured loans.
There are certain exemptions you can apply for to keep some things from being taken away. It all depends on which debts are delinquent. If your mortgage is headed towards foreclosure, you might only be able to delay the process through a Chapter 7 delinquency.
If you’re only delinquent on unsecured debt, like credit card debt or personal loans, then you can file for an exemption on major items like your home and car. That way they won’t be repossessed and auctioned off.
Eligible exemptions vary by state. Usually, there is a value assigned to your assets that are eligible for exemption. You may keep them as long as they are within that maximum value. For example, if your state has a $3,000 auto exemption and your car is only valued at $2,000 then you get to keep it.
Most places also allow you to subtract any outstanding loan amount to put towards the exemption. So, in the situation above, if your car is valued at $6,000, but you have $3,000 left on your car loan, then you’re still within the exemption limit.
Chapter 7 bankruptcy is the fastest option to go through, lasting just between three and six months. It’s also usually the cheapest option in terms of legal fees. However, keep in mind that you’ll likely have to pay your attorney’s fees upfront if you choose this option.
Chapter 13 Bankruptcy
A chapter 13 bankruptcy is the standard option when you make too much money to qualify for a Chapter 7 bankruptcy. The benefit is that you get to keep your property but instead repay your creditors over a three- to five-year period. Your repayment plan depends on several variables.
All administrative fees, priority debts (like back taxes, alimony, and child support), and secured debts must be paid back in full over the repayment period. These must be paid back if you want to keep the property, such as your house or car.
The amount you’ll have to repay on your unsecured debts can vary drastically. It depends on the amount of disposable income you have, the value of any nonexempt property, and the length of your repayment plan.
How long your plan lasts is actually determined by the amount of money you earn and is based on income standards for your state. For example, if you make more than the median monthly income, you must repay your debts for a full five years.
If you make less than that amount, you may be able to reduce your repayment period to as little as three years. You can enter your financial information into a Chapter 13 bankruptcy calculator for an estimate of what your monthly payments might look like in this situation.
To qualify for Chapter 13, your debts must be under predetermined maximums. For unsecured debt, your total may not surpass $1,149,525 and your secured debt may not surpass $383,175. However, unlike Chapter 7 bankruptcy, you may include overdue mortgage payments to avoid foreclosure.
Chapter 11 Bankruptcy
Chapter 11 bankruptcy is usually associated with companies. However, it can also be an option for individuals, especially if their debt levels exceed the Chapter 13 limits. A lot of the characteristics of Chapter 11 and Chapter 13 are the same, such as saving secured property from being repossessed.
Having to pay back priority debts in full and having a higher income bracket than a Chapter 7 bankruptcy are also common characteristics. However, unlike Chapter 13, you must make repayment for the entire five years with a Chapter 11. There is no option to pay for just three years, no matter where you live or how much you make.
Another reason to pick Chapter 11 is if you are a small business owner or own real estate properties. Rather than losing your business or your income properties, you get to restructure your debt and catch up on payments while still operating your business, whether it’s as a CEO or as a landlord.
One downside to be aware of with a Chapter 11 bankruptcy is that it’s usually the most expensive option. However, you can pay your legal fees over time so you don’t have to worry about spiraling back into debt.
What are the long term effects of bankruptcy?
It should come as no surprise that going through bankruptcy causes your credit score to plummet. Depending on what else is on your report, your score could drop anywhere between 160 and 220 points.
Those effects linger. A Chapter 13 bankruptcy stays on your credit report for seven years. And a Chapter 7 bankruptcy remains there for as many as ten years. Their effects on your credit score do, however, begin to diminish as time goes by.
You’ll probably have trouble getting access to credit immediately following your bankruptcy. Eventually, you’ll start getting approved for loans and credit cards, but your interest rates are likely to be extremely high.
A new mortgage will probably be out of reach for at least five to seven years from the time you file for bankruptcy. Additionally, any employer performing a credit check can see all of these items on your credit report.
Government agencies can’t legally discriminate against you because of your bankruptcy, but there is no specific rule for privately-owned companies. It could be particularly damaging if the job you’re applying for deals with money or any type of financials. No matter where you work, though, you can’t be fired from a current employer because of a bankruptcy.
Should I file bankruptcy?
There’s no correct answer to this question. It’s ultimately something you’ll need to decide on your own. However, there are a few things you can do to make sure you’re making the best decision possible. Start by finding a licensed credit counselor to help analyze your individual situation. They’ll help you review the guidelines for each type of bankruptcy and determine if you’re even eligible.
At first glance, filing for bankruptcy may seem like a great way to settle your debts and move on with your life. Unfortunately, the process isn’t as simple as filling out a form. The effects of bankruptcy will stick with you for years.
As you begin the evaluation process of whether bankruptcy is right for you, there are several considerations to consider. This overview will get you thinking about your situation. It will also point you in the right direction for more in-depth resources when you need them.
Is your current status temporary or permanent?
You should also look at your expected future and compare your potential earnings to your amounts of debt. If you don’t see how you’ll ever pay off that debt, then bankruptcy may be a wise option. Also, understand the types of debt you owe. Tax payments, student loan debt, and liens on your mortgage or car will not be discharged even when you file for bankruptcy.
Once you figure out which specific options are available to you, it’s time to contact a bankruptcy attorney. You’re certainly able to represent yourself, but the process is complicated. It’s usually best to have a professional work on the case on your behalf. Just be sure to interview a few different lawyers to get multiple opinions and prices to compare.
Evaluate Your Situation
Even when your bankruptcy is underway, it’s smart to spend some time evaluating how you got there. Was it due to a one-time financial hardship, like a long bout of unemployment? If that’s the case, then you know that you have a brighter future ahead of you with the promise of work and steady income to pay your bills.
However, if you’re on the path to bankruptcy because of reckless spending, you really need to look inward and address your overspending habits. Otherwise, it becomes too easy to put yourself in the same situation a few years down the road. Use your bankruptcy as a second chance to start fresh with a clean financial slate.
Why Consider Bankruptcy?
If you’re considering bankruptcy, then you’re most likely feeling overburdened with debt and other financial obligations. You probably have a tough time paying your bills each month and may even worry about how you’ll ever pay off some of your outstanding balances.
If you’ve already exhausted your other options, like working overtime and cutting back on your non-necessities, it might be time to seriously think about potentially declaring bankruptcy. Some signs that you might be ready include:
Increased interest rates because of late payments or bad credit
Using credit cards for daily purchases without paying off the balance each month
Already downsized things like house, car, and other assets
Working multiple shifts or jobs
Paying off debt with retirement funds
Wages are being garnished
If one or more of these situations apply to you, then you should probably continue your research into bankruptcy. If not, try finding other ways to improve your financial situation. For example, you could rework your budget if there are easy places to cut back on.
You can also try negotiating with your lenders, particularly if you’re experiencing just a short-term setback. Most lenders are willing to work with you. They would much rather set up a new payment plan than have the debt discharged or settled through bankruptcy.
Bankruptcy Alternatives
If you want to file for bankruptcy it takes careful planning. Due to the long-term legal and financial consequences of bankruptcy, there are many rules that must be followed before you’re eligible.
For example, it’s necessary to show the bankruptcy court that you have obtained credit counseling and considered debt relief options like debt settlement or debt consolidation. Bankruptcy is controlled exclusively by the federal judicial system, which strongly recommends hiring an attorney before attempting to file.
If you need help finding a bankruptcy lawyer, contact the American Bar Association. They offer free legal advice, and you may qualify for free legal services if you are unable to afford an attorney.
Creating a Checklist to Avoid Dismissal
Before you file for bankruptcy, there are several important questions you should ask yourself. There are also several key steps that you need to take. First, it’s necessary to ask yourself if you really need to file for bankruptcy.
If you don’t, you probably won’t be approved anyway. You also need to calculate income, expenses, and assets, find a trustworthy attorney, and select a credit counseling program.
It’s helpful to be methodical and to use a checklist. Failure to take the right steps and find the right credit counseling could result in more wasted money and a bankruptcy dismissal where they throw out the case.
Reasons to Delay Bankruptcy
Even if bankruptcy is the best choice for you, there may be some situations where it’s smart to delay the process so you can maximize your benefits. First, if you had a high income within the last six months that no longer applies to your situation, then you might want to wait.
That’s because the bankruptcy court weighs your last six months of income to determine your eligibility for Chapter 7 bankruptcy. If you had a nice monthly salary a few months ago but have been laid off since then, that means test isn’t going to reflect your current situation accurately.
Another reason to delay bankruptcy is if you are anticipating an upcoming major debt. New debt isn’t allowed to be discharged once you file for bankruptcy.
So, for example, if you’re about to have a major medical surgery, you might consider waiting until it’s over to include the medical bills as part of your bankruptcy plan. Talk to a professional to see the eligibility requirements. Luxury items charged right before a bankruptcy filing, for example, likely won’t be included as part of your debt discharge.
Changes in Bankruptcy Law
Before getting started, it’s important to note the changes that went into effect in 2005 under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). While the changes don’t affect some people applying for bankruptcy, they may affect others.
Federal bankruptcy laws require mandatory credit counseling to make sure you fully understand the consequences of declaring bankruptcy. It also created stricter eligibility requirements for Chapter 7 bankruptcies. For Chapter 13 bankruptcy filings, the law requires tax returns and proof of income.
An informed decision begins with understanding bankruptcy laws, the bankruptcy process, and what has changed. It’s essential to better understand these changes before you make any final decisions.
Filing Under Chapter 7 or Chapter 13
Understanding how bankruptcy works means understanding the process and laws related to Chapters 7 and 13 of the Bankruptcy Code. Depending on the details of your situation, you might be eligible to file under Chapter 7 or Chapter 13. Which route you choose has a lot to do with your income and what assets you want to keep.
Your debts can either be resolved quickly or over a several-year period. It’s helpful to read up on in-depth frequently asked questions related to each route.
Calculating Chapter 7 Means
To have all your unsecured debts eliminated under Chapter 7 bankruptcy, you must qualify under the Chapter 7 means test. Using your personal information, or a basic estimate, an online calculator can help determine this for you. When filing bankruptcy, you must also fill out an appropriate form in which you enter your income, expense information, and data from the Census Bureau and IRS.
If you don’t meet the income level requirements to file for Chapter 7 bankruptcy, you can still file for Chapter 13. A Chapter 13 will settle many of your debts after you successfully complete a three to five-year repayment program.
Qualifying and Qualifying Debts
Your debts qualify for bankruptcy relief when you can prove you are unable to pay them, but a great deal depends on your situation and which chapter you are filing bankruptcy under. Debts can be either unsecured or secured. Secured debts include mortgages, cars, and debts related to a property you’re still paying for.
Unsecured debts include credit card debt, bills, collections, judgments, and unsecured loans. It’s important to know which debts qualify for bankruptcy. But, it’s even more important to know whether your situation makes you eligible for this major step. To determine this, a full financial assessment is necessary. You can start by reading more about debts that qualify.
Defaulting on a Student Loan
If you have defaulted on a student loan, there are several options open to you. Bankruptcy is one of them, but if your goal is to have a student loan discharged under Chapter 7, this can be very difficult.
Nevertheless, taking certain steps as soon as possible can help prevent wage garnishment. Knowing your options can help you make the best choice before matters become more difficult. Under Chapter 13, your defaulted loan can be consolidated with your other bills. This will give you a better payment plan or a temporary reprieve from making payments.
If you have a federal student loan, check out your repayment options, especially if you are facing financial hardship. Otherwise, read more to figure out how to pull yourself out of student loan default.
What Assets You Can Keep During Bankruptcy
Depending on how you file for bankruptcy, there are certain assets you can keep. Different states have different exemptions, and in certain states, you can choose between state and federal bankruptcy exemptions.
If you need to have debts discharged, are out of work, and cannot afford a repayment plan, some assets might be lost. In most cases, however, people who declare bankruptcy can keep their homes and cars and much of what they own while they repay their debts under a modified plan. It all depends on your unique circumstances and how you file.
Get a FREE Credit Evaluation Before You File Bankruptcy
A bankruptcy can affect your credit for 7 to 10 years and should be considered a last resort option when all other options have failed. Many times, people file bankruptcy when it is completely unnecessary. A credit professional can help you fix your credit and deal with your creditors so you can avoid filing for bankruptcy.
Before filing bankruptcy, talk to a credit specialist:
Visit the website and fill out the form for a free credit consultation with a professional credit repair company.
If you want to snag a foreclosure property on the cheap, take a look at the new improved Zillow.
The real estate listing company announced the launch of its so-called “Foreclosure Center” today, which includes tutorials, buyer and seller guides, and most importantly, free foreclosure listings!
You can now access pre-foreclosures, foreclosure auctions, bank-owned properties, and more, alongside their standard listings.
Zillow estimates their pre-market inventory to total more than 1.5 million properties nationwide, along with another 250,000 properties that have already been foreclosed on.
They are also “surfacing” 67,000 foreclosure listings in their for-sale search category (I guess merging them?).
Now if only they could display all that shadow inventory as well…like the people about to walk away, or just behind on the mortgage.
Zillow’s Foreclosure Listings Include Pictures
For better or worse
You can actually get a lot of detail on these foreclosed properties
Including both interior and exterior photos
Which may reveal the condition some of these homes are in
This is what a foreclosed kitchen looks like after being ransacked and left for dead. At least they did some decorating.
So if you ever wanted to see what a gutted, foreclosed home looked like, wonder no longer.
Pictures aside, there are also details galore. Take a look at this screen grab from one property listed as a pre-foreclosure in auction status.
Check Out the Foreclosure Status in Great Detail
Instead of simply marking a property as “foreclosed”
Zillow provides the history of the foreclosure
Including the previous sale, when the NOD was filed
And when the foreclosure auction is scheduled to take place
It actually shows you when and where the auction is scheduled to be held.
The new improved listings also provide more background on the property, including when the owner was served a Notice of Default, the first step in the foreclosure process.
Additionally, there’s mortgage lender information so you can see which bank is involved in the sale, what the unpaid loan balance is, and if and when they acquire the property from the delinquent homeowner.
Finally, there’s trustee and/or attorney information as well
Introducing Foreclosure Estimates
They also provide foreclosure estimates
Which sadly aren’t known as Festimates (I wish!)
It’s basically what Zillow expects the property to sell for
Taking into account that it’s a foreclosed property
Zillow has also come up with so-called “Foreclosure Estimates,” which flank their flagship Zestimates and Rent Zestimates. Why they aren’t called “Festimates” is beyond me.
This figure is essentially what Zillow thinks the property will sell for, and is represented as a dollar amount and percentage relative to the Zestimate.
They tend to be estimated to sell below the Zestimate, which makes sense given that they are foreclosures.
Still, some of the properties will sell above their listing price and below the Zestimate.
Hopefully Zillow will include data about what foreclosed properties sell for versus traditional sales in the future.
Timing Is Everything Though…
Zillow always seems to be a bit behind
When it comes to providing fresh data
So while it’s nice to have access to a wealth of foreclosure information
It needs to be up-to-date to be of any use to a potential home buyer or investor
I hate to break up this party, but Zillow still faces some challenges with its new foreclosure listings.
While they may be winning on the information front, their timing is still a little off.
I browsed a few of their foreclosure listings and noticed that their info was outdated in many cases.
For example, one property listing was chock full of foreclosure information, but didn’t contain any new data since July.
Meanwhile, over on Redfin it was listed as a pending sale as of October 19th.
Redfin actually addressed this issue earlier this month, when it claimed to have much better data than its peers.
For example, it noted that it has 100% of agent-listed homes available, versus only 81% for Trulia and 79% for Zillow.
Additionally, the company said nearly two out of every five listings on Zillow and Trulia are no longer for sale, compared to just one out of 1,000 at Redfin.
The median day to publish a new listing was zero days for Redfin, seven days for Zillow, and nine days for Trulia.
Of course, they only looked at 11 metros in the U.S., though they were major ones like Los Angeles and Chicago.
However, I did come across foreclosure listings in Zillow that didn’t appear on Redfin.
So at the end of the day, you really still need to scour all of these sites simultaneously to ensure you don’t miss a thing.
As president of the University of Pennsylvania, Amy Gutmann was one of the highest-paid administrators in the nation, receiving in her final year a nearly $23 million payout, largely made up of deferred compensation accrued over her 18-year tenure.
But that’s not all.
» READ MORE: Former Penn president Amy Gutmann earned nearly $23 million in 2021, but most of it was accrued over her 18 years as president
The university’s trustee compensation committee in late 2020 quietly authorized a $3.7 million, 0.38% interest home loan to Gutmann, according to tax records and financial disclosure forms. The loan was to help with her “presidential transition,” said Scott Bok, chairman of Penn’s board of trustees.
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Specifically, Gutmann, 73, had lived in the president’s house on campus during her tenure, and she wanted to purchase a home to stay in Philadelphia. She left the presidency in February 2022 to serve as U.S. ambassador to Germany.
“While I won’t be living there while I’m ambassador, we have a place to come back to,” Gutmann said in a 2022 Inquirer interview, noting that she is on unpaid leave from the faculty. “Philly is our home.”
» READ MORE: Confirmed as the next U.S. ambassador to Germany, Amy Gutmann reflects on nearly 18 years as Penn’s president
Penn would not confirm what she purchased with her home loan, but deed records show that in December 2020 — 14 months before Gutmann left the university and two months after the loan was approved — her husband, Michael W. Doyle, a Columbia University professor, closed on a $3.6 million, four-story townhouse in a luxury housing development in the Fitler Square neighborhood. The purchaser’s mailing address on the deed lists “1 College Hall,” which houses administrative offices for the university.
While loans like this are neither illegal nor uncommon, some academics question whether they are financially sound and politically palatable for higher education institutions given the nation’s $1.77 trillion in student loan debt. Faculty and graduate students are striking across the country for better wages and benefits.
At Penn, tuition and room and board will top $84,000 in 2023-24, as the university raised costs 4% this year.
“This is the kind of thing that really undermines the public trust in higher education, particularly the public trust of these elite institutions that have a lot of money,” said Joni E. Finney, retired director of the Institute for Research on Higher Education at Penn. “Amy Gutmann made enough income to purchase that home without Penn’s help.”
Bok did not disclose the terms of the loan, but said it was “consistent with university policy and applicable laws and regulations.”
Gutmann did not respond to requests for comment.
Gutmann’s loans were among Penn’s largest
This home loan arrangement was not unique to Gutmann, nor to Penn.
The university, like some other elite colleges, for decades has provided generous loans to senior leaders, including deans, provosts and presidents. The loans were often for employee recruitment or retention purposes, helping the university attract the best leaders and enabling them to purchase property in Philadelphia’s expensive real estate market, Bok said.
The loans are legal. The U.S. Office of Government Ethics cleared Gutmann to serve as ambassador after she disclosed the loan.
Among Penn’s loan recipients, its largest has been to Gutmann, who also received two other loans from Penn earlier in her tenure, one marked “employee loan” for $700,000 in 2011 and another marked “retention/recruitment” for $1.25 million in 2014. Both were forgiven by the university over a number of years, Bok said.
However, the latest loan is not a form of compensation and is fully expected to be repaid, according to its terms, he said.
It appears she has not begun to pay back the loan. And the amount Gutmann owes to the university had slightly increased in the year since the loan was first extended, the most recent financial tax return shows.
In federal disclosure documents for the ambassador job, she said she will “refinance the loan with a different lender, pay market rate to the university for the remaining period of my government service, or pay off the loan” if the university extends her leave past the initial two years.
A necessary practice, or money misspent?
James Finkelstein, professor emeritus of public policy at George Mason University, who has been studying university president contracts and compensation since the 1990s, said Penn could have invested that money at a higher rate and made more income for the school. He noted that the interest rate she received was the second-lowest of its kind nationwide in more than a decade, and by comparison, the jumbo 30-year fixed rate for mortgages was 3.033% in October 2020 when she got the loan. Today’s rate is even higher, about 7.3%.
Giving the minimum interest rate set by the Internal Revenue Service at 0.38%, the loan would not be subject to taxation, he explained. It assumes that the money will be paid back in three to nine years, he said.
“Why does a university whose mission is educational need to loan this money?” Finkelstein asked. “These presidents are among the most highly paid university presidents in the country. Beyond their base pay, they receive bonuses and deferred compensation. Why is it at the end of their term, the trustees feel the need to reward them further by giving them these loans as they step down?”
Finney said faculty should be outraged.
“Especially as she was walking out the door, what kind of retention are they trying to achieve there?” she asked.
(A university tax record initially coded the $3.7 million as a “retention” loan, but in a later filing, after she was nominated to serve as ambassador, it was reclassified as a “special employee loan.”)
Others defended the arrangement, saying the job of presidents is extremely challenging, with their every move scrutinized and a responsibility for everything that happens at the institution virtually 24 hours a day.
“We’re asking these people to make a very unique kind of commitment,” said Brandon Cotton, president of the Washington- and Florida-based Cotton Law, which represents presidents, provosts and chancellors. “It should be rewarded. In [Gutmann’s] case, they found this method. In my opinion, it was a good method.”
Cotton said he has negotiated for presidents a number of loan agreements, which are often forgivable, and that happens when the leaders deliver outstanding performance.
Gutmann, by all measures, was credited with doing her job exceedingly well, giving Penn nearly two decades of sound and largely smooth leadership. She ran Philadelphia’s largest private employer, a $13.5 billion operation, with its 12 schools, six hospitals, and more than 23,000 full-time undergraduate and graduate students. As Penn’s longest-serving president, she raised more than $10 billion, oversaw construction of many new buildings, and led the school through a recession and pandemic.
» READ MORE: Amy Gutmann: Penn’s long-serving president seeks to bridge the divide | Industry Icons
Penn’s endowment more than quintupled from $4.1 billion, when she left her post as provost of Princeton and joined Penn in 2004, to $20.5 billion in 2022. Under her leadership, Penn prioritized student aid, adopting an all-grants, no-loan financial policy early on in her presidency. And by the time she left, 80% of Penn undergraduates were leaving Penn debt free, she had said.
Still, some say her compensation was simply too much. After news broke of Gutmann’s nearly $23 million payout in her final year, Jonathan Zimmerman, a Penn education professor, wrote a blistering column, asking where the outrage was over this arrangement. Gutmann’s total figure for 2021, reported on the 990 tax form, included her annual compensation of a base salary of $1.56 million and a bonus of $1 million and the $20.2 million deferred compensation and supplemental retirement funds, which also includes investment gains the money made over 17 years.
It did not include the loan.
“I have enormous respect for Amy Gutmann,” Zimmerman said. “I think she was a very successful president. I think presidents have incredibly hard jobs, for which they should be well compensated. But there’s well compensated and then there’s obscene. And we as a culture in higher education and beyond have lost sight of that distinction.”
Finkelstein said: “It’s about the fiduciary responsibility of the university trustees and their judgment.”
A common practice among elite universities
A review of financial tax documents for nearby universities found about two dozen similar home loans extended to staff at Swarthmore, Haverford and Princeton. Others across the United States, from Stanford to Columbia University, have also made similar loans, in some cases to presidents who were leaving.
Columbia gave its recently departed president, Lee Bollinger, a $6 million home loan, tax records show. The former president of the University of Southern California, C.L. Max Nikias, also got one for $3 million.
At some schools, these deals have drawn controversy. New York University notably extended low-interest loans to a former president and top professors to purchase pricey summer homes, drawing scrutiny in a 2013 New York Times investigation.
The loans aren’t always for homes. Drexel University gave its president, John A. Fry, who has been in the role since 2010, a $720,000 loan for an insurance policy, according to the university’s most recent tax filing. Drexel said the policy was purchased on behalf of Fry as part of his overall compensation package.
Over the years, Penn has given its loans varying labels, including “retention,” “recruitment,” “employee loan,” “mortgage assistance” and “special employee” loan. The loans are routinely for primary residences, not vacation homes, the university said. They are to help the employees secure residences near the school.
Penn’s most recent 990 form showed that it also currently has loans extended to Pam Grossman, who recently stepped down as dean of the Graduate School of Education, and Antonia M. Villarruel, dean of the nursing school. Each was for $150,000.
Gutmann’s 5,100-square-foot house, according to a real estate listing from before this sale, was described as a “new world of luxury,” featuring an entrance off a private courtyard, custom doors and millwork, a built-in two-car garage, an elevator, and a fitness center.
Several years were left on the property’s city tax abatement, which reduces the couple’s annual tax bill on the residence to about $6,800. The home has since increased in value by about a half-million dollars, according to online real estate estimates.
According to reports from the second quarter of 2022, the total of all household debt in the United States is a whopping $16.15 trillion. Mortgages make up the bulk of that debt, with student loan, auto loan and credit card debt trailing behind.
On average, adults in the United States carry debt loads ranging between $20,800 and $146,200. If you’re in debt and looking for a way to pay it off, making a plan is a critical step. Find out more about how to get out of debt below.
1. Collect All Your Paperwork in One Place
Before you can get out of debt, you need to know how much debt you actually have. You should also know who you owe and what the terms are, as this can help you prioritize debt payments to pay them off faster.
Start by collecting all your debt paperwork in one place and creating a master list of everything you owe. You can do this in a spreadsheet or with a pen and paper. Information to gather includes:
Statements for all your debts. One way to do this is to spend a month saving all your financial mail and email so you have a comprehensive picture of your debt.
Regular bills that aren’t debts. Your cell phone and utility bills, as well as your rent, should all be included when you gather this financial information. Information about income. Look at paycheck stubs or your bank accounts so you know what, on average, you can expect in income each month.
Your credit reports. Get your free credit reports at AnnualCreditReport.com to ensure you know about all the debt you owe.
Tip: Sign up for ExtraCredit to see your credit reports and 28 FICO® scores in one place.
2. Create a Budget and Determine What You Can Pay Every Month
Using the information you gathered in the above step, create a monthly budget. Make sure you cover all your bills and minimum debt payments. When possible, include an amount that can go toward building your savings. Allocate funds for essentials, such as groceries and gas.
Once you cover all the needs for the month, figure out how much money you have left. How much of that can you put toward extra debt payments so you can start getting ahead on debt?
3. Manage Your Debts in Collections
If you see that you have any debts in collections when you pull your credit reports, make sure you have a plan for taking care of them. Collection accounts have a serious negative impact on your credit score. Creditors may also sue you and try to collect on these accounts via wage garnishments or bank levies if you don’t take action to manage collections. That can throw a huge wrench into your plan for getting out of debt.
Tip: If you don’t enjoy manual calculations, check out Tally. You can use Tally to total up your expenses, pay down credit card bills, and generally figure out where you stand.
4. Consider Your Options
There are two main approaches to paying off debt as quickly as possible: the snowball method and the avalanche method.
The snowball method involves paying off accounts with the lowest balances first. You take any extra money you have—even if it’s just $50—and add it to your regular minimum monthly payment on that small balance. When that balance is paid off, you take the extra $50 plus the minimum payment and add it to the next biggest balance. You keep doing this as you work your way up to larger balances, paying your debt off faster and faster.
With the avalanche method, you tackle accounts according to interest rates. You start by paying off accounts with the highest interest rates first. The thought behind this method is that you save money in the long run by tackling high-interest debt first.
5. Try to Reduce Your Interest Rates
Interest refers to how much your debt costs. If you have a lower interest rate, your debt costs less and you can pay it off faster. Here are some ways you can try to reduce interest rates on your debts:
Ask for a lower interest rate. If you’re a credit card account holder in good standing and your credit history and score has improved since you got the card, you may be able to get a better rate. Call customer service for your card and let them know you are looking for a better deal. They may agree to lower the rate to keep you as a cardholder.
Look into debt consolidation or refinancing. A debt consolidation loan provides funds you can use to pay off higher-interest debts. Refinancing occurs when you get a new loan for a home or car. If you had lackluster credit when you got your auto loan, for example, you may be able to refinance it for a lower rate if your credit has improved.
Get a balance transfer credit card. You may be able to transfer balances from a credit card with a high interest rate to one that has an introductory low APR offer. This may allow you to pay off the debt over the course of 12 to 22 months without incurring any more interest expense.
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Do Your Best to Pay More Than the Minimum
Only paying the minimum on high-interest debt, such as credit card debt, doesn’t get you out of debt fast. It can take years—dozens of them—to pay off credit card balances if you’re only making minimum payments.
Instead, put more than the minimum on your debt whenever possible. You may also want to put any additional funds you receive—such as a tax refund—on your debt to help with this process.
Consider More Options for Getting Out of Debt
Creating a budget, managing your money wisely, and making extra payments toward your debt all help you get out of debt. Here are some other ways you can deal with debt:
Increase your income while cutting unnecessary spending. Join the gig economy with a side job to earn extra money, or sell things you don’t need via online marketplaces.
Undergo credit education and counseling. These services can help you make the most of your monthly budget.
Engage in debt settlement. You may be able to negotiate with creditors, especially for accounts in collections, to settle debts for less than you owe. Just make sure you understand any effects on your credit.
Enter a debt management plan. During such a plan, you make a single payment to a trustee. They use those funds to pay your debts, hopefully in a way that gets you out of debt faster. Declare bankruptcy. If you find you’re unable to pay your debts, much less make extra payments, you may need another option. Chapter 7 and Chapter 13 bankruptcy are potential considerations.
How to Avoid Getting into Debt
Paying off debt doesn’t have to be impossible, but it can be challenging. For many people, it requires altering years’ worth of financial habits. If you’re not already in debt, it may be easier to stay out of it. Create a budget and stick to it, spend wisely and avoid using credit cards for things you don’t need or can’t afford to buy with cash.
If you decide to file for bankruptcy, you must next decide which type of bankruptcy is right for you. Most individuals have three options, and understanding Chapter 11 vs. Chapter 13 vs. Chapter 7 is important in making the right decision.
Bankruptcy can be complex, and even a small mistake in how you file can substantially change the outcome of your case. It’s typically a good idea to consult an experienced bankruptcy lawyer before you file a bankruptcy petition. However, we’ve provided some basic answers below to the question, “What is the difference between Chapter 7, 11, and 13 when it comes to bankruptcy?”
In This Piece
Understand the Types of Bankruptcy
Bankruptcy is a way to reorganize your debts or get your debts dismissed because you’re insolvent. “Insolvent” is simply a financial state where you can’t pay your bills—usually because your debts outpace your income.
People can end up in this situation for a number of reasons. It may be that you lost your job or had reduced income—job losses due to the COVID-19 pandemic are just one example of when this can happen. In other cases, people have unplanned expenses such as medical bills that can put them over the edge financially. Bankruptcy does have some benefits, such as potentially putting a stop to wage garnishments or foreclosures.
Regardless of how you ended up in this position, it’s important not to jump immediately to bankruptcy. Consider all of your options and speak with an experienced bankruptcy attorney to understand whether bankruptcy will help you.
How Do You Know Which Bankruptcy Type is Right for You?
This is a complex personal or business finance question. Consider talking to an attorney to understand your financial and legal situation. An experienced attorney can quickly apply means tests and other information to your case to help you understand what your options are.
What Is Chapter 11 Bankruptcy?
According to the United States Courts, individuals and business entities can enter into Chapter 11 bankruptcy. Typically, this type of bankruptcy is a reorganization of a business. Through the bankruptcy, the debtor restructures and then creates and implements a plan to pay back creditors.
The plan must be approved by a Trustee appointed by the court. The Trustee is typically in charge of implementing and overseeing the plan, ensuring that the business has the income and resources to follow through with it. Once the plan is completed and confirmed, any remaining debts under the bankruptcy are discharged.
This is an extremely simple summary of how a Chapter 11 bankruptcy works. In reality, they can take years and involve numerous legal proceedings on behalf of the person or business filing as well as the Trustee and creditors.
What Is Chapter 7 Bankruptcy?
The main difference when it comes to Chapter 7 vs. Chapter 11 bankruptcy is that Chapter 7 is a liquidation plan. That means there’s no repayment plan associated with a Chapter 7 bankruptcy.
When you file Chapter 7, you typically agree to liquidate your assets to pay off as much of your debt as you can. The remaining debts that are part of your bankruptcy are dismissed.
Whether or not you can file for this type of bankruptcy is determined by income. If your income is below the median for the state you’re filing in, you can probably choose Chapter 7 bankruptcy. If your income is above the state minimum, you must pass a “means test.” A bankruptcy attorney can quickly apply these tests to help you understand whether you meet eligibility for Chapter 7.
You don’t have to give up everything you own in a Chapter 7 bankruptcy, though. You may be able to keep exempt assets, which can include certain personal belongings. You may also be able to keep your home, a car, and other items, even if you owe money on them, if you can continue to make timely payments on those debts.
Again, bankruptcy is a complex process and what you can keep and how your proceeding goes is based on a variety of factors. Consult an experienced bankruptcy attorney to find out more about your individual situation.
What Is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy may sound similar to Chapter 11 because these both involve repayment plans. But when it comes to Chapter 11 vs. Chapter 13, the biggest difference is that Chapter 13 allows someone with regular income to make an adjustment to how they pay back some debts.
Chapter 13 may be an option for individuals who fail the means test for Chapter 7. Typically, Chapter 13 bankruptcy works for people who have stable income to make some payments on debts but they don’t have enough income to pay all the debts as currently structured.
The individual submits a repayment plan to the court. This plan must be approved by a bankruptcy court Trustee. The Trustee is also typically tasked with making payments under the plan, so the individual pays the Trustee. The Trustee’s office then pays various creditors.
Usually during a Chapter 13 you only pay off part of your debts. Priority and secured debts, such as taxes or auto loans, are paid in full. But unsecured, nonpriority debts, such as medical bills and credit card debt, are only partially paid. If you work through your Chapter 13 repayment plan successfully, the remaining debts are dismissed at the end of the repayment plan. That can take three to five years.
Should You File for Bankruptcy?
Only you can decide if bankruptcy is the right choice for you. In most cases, you should consider all your other options and ensure there really is no way to feasibly pay your debts as you agreed. Consider the factors below to determine which type of bankruptcy might be right for you. Then, talk to an attorney to find out more about each option.
Should You File for Chapter 7 Bankruptcy?
What is your income? Not everyone qualifies for Chapter 7 bankruptcy. You have to pass what’s called a “means” test, and you usually don’t pass it if you make more than the median income of same-size households in your state.
Have you filed for bankruptcy before? If it hasn’t been long enough since the last time, you may not be able to file.
What type of debt are you dealing with? Most, but not all, debt can be discharged in a Chapter 7 bankruptcy. If you’re trying to deal with debt that isn’t dischargeable, it may not be worth filing Chapter 7.
Do you want to keep your property? Some property may be exempt, such as your home or a car you need, but you may not be able to keep the same property in a Chapter 7 that you could keep in a Chapter 13, for example. Definitely talk to your bankruptcy lawyer about which property you want to keep and whether it’s possible.
Should You File for Chapter 13 Bankruptcy?
You’ll need to ask all the same questions you’d ask when considering Chapter 7 bankruptcy to find out if Chapter 13 is right for you. You also need to consider whether you have enough income to make some repayment toward your debt. In a Chapter 13 bankruptcy, you restructure your debts and pay some of them over 3 to 5 years before the rest are discharged.
You should also ask yourself if you have the discipline to make the monthly payments to the trustee and follow other rules set by the court. You typically can’t apply for most types of credit, including a mortgage, auto loan or significant personal loan, without getting the court’s approval if you’re in the middle of a Chapter 13 bankruptcy, for example.
Should You File for Chapter 11 Bankruptcy?
Do you have your own business and need to include business debts in your bankruptcy? You might want to consider a Chapter 11 over a Chapter 13. Chapter 11 may also be an option for individuals or couples who have too much debt to qualify for a Chapter 13. Otherwise, all the other questions above apply here, too.
The Main Differences Between the Types of Bankruptcy
To better understand the main differences between Chapter 7, 11, and 13 bankruptcy, consider the table below.
Chapter 7
Chapter 13
Chapter 11
Type of bankruptcy
Liquidation
Reorganization
Reorganization
Income requirements
Yes — can’t make above the median for same-size households within the state
Yes — must have enough income to make the repayment plan viable
Yes — must have enough income to make the repayment plan viable
Can individuals file?
Yes
Yes
Yes
Can businesses file?
No
Only sole proprietors
Yes
How long does it take?
A few months
3 to 5 years
1.5 to 5 years
Debt limitations
n/a
Combined secured and unsecured debts must be less than $2,750,000
n/a
Who Can File for Each Type of Bankruptcy?
In addition to income and debt requirements, each type of bankruptcy has limitations on which individuals or entities can file.
Chapter 7
Chapter 13
Chapter 11
– Individuals – Married couples
– Individuals – Married couples – Sole proprietors
– Individuals – Married couples – Sole proprietors – LLCs – Partnerships – Corporations
What Happens After You File for Bankruptcy
The first thing that happens when you file for bankruptcy is that the automatic stay goes into place. This is a protection that requires creditors to cease all collection efforts until the bankruptcy process can be completed. It’s a powerful protection. For example, even if you’re in the middle of a home foreclosure, the automatic stay can stop that process so you can work through bankruptcy to keep your home.
Once the petition is filed with the court, hearings are set and all creditors included in the bankruptcy are notified. They do have the option of responding to the bankruptcy if desired. You’ll also need to attend the first hearing in your case to testify, under oath, to the truth of everything documented in your petition.
If you’re filing a Chapter 11 or Chapter 13 bankruptcy, you’ll need to file a repayment plan, get approval for it and follow through on it. Once the bankruptcy process is completed successfully, your remaining debts can be discharged.
How Does Bankruptcy Impact Your Credit?
Any type of bankruptcy can impact your credit. It’s a negative item that stays on your credit report and drop your credit score for up to 10 years, depending on which type of bankruptcy you file.
But the truth is that by the time most people get to bankruptcy, they’ve already missed numerous payments and may be in collections with one or more accounts. If this is the case, bankruptcy doesn’t usually drive your credit score much lower than it already is. And there’s a chance that you may see your credit score begin to climb again after bankruptcy as you make timely payments on debts and are better able to manage your finances.
Chapter 11, Chapter 7, or Chapter 13—these are all huge financial and legal decisions. Each comes with its own pros and cons, and it’s important to handle a bankruptcy correctly if you do decide this is the way you want to go. So, talk to a lawyer and get the information you need to make the best decision in your case.
Chapter 7 is removed 10 years after the date the petition was filed.
Chapter 13 is removed 7 years after the date the petition was filed.
Chapter 11 is removed 10 years after the date the petition was filed.
Want to keep an eye on your credit report to understand when negative items fall off it as you’re working to rebuild? Consider signing up for ExtraCredit.
Options Other Than Bankruptcy
Before considering bankruptcy, research other options to help manage your debt. You might find other avenues that are less complex and not as impactful to your credit reports. They can include:
Debt consolidation that reduces how many bills you deal with each month and may create a monthly payment situation that works better for your budget
Debt counseling that brings in professionals who can help you negotiate with your creditors for better terms and manage your money better to make ends meet
Selling property so you can pay off debts that are beyond your current budget
Increasing yourincome with a second job or side hustles so you have more money to pay your debts
Ultimately, whether bankruptcy is right for you is a decision you must make yourself. Start with the information above to gain a brief understanding of your options, and reach out to an attorney to help you understand how these details might apply to your case.
The Impact of COVID-19 on Bankruptcies
Bankruptcies are still proceeding in the wake of the coronavirus pandemic. You may find that hearings related to cases are being handled via phone or web conferencing and not in person.
If you’re making payments on a Chapter 11 or Chapter 13 case and have been impacted financially by the pandemic, you should contact your attorney as soon as possible. They can help you understand the best next steps, which might include filing motions in your case to alter your payments temporarily.
The CARES Act also provides some modifications to how certain elements of bankruptcies are handled. It ensures federal stimulus payments aren’t considered disposable income, for example, and provides Chapter 13 debtors a path to seek modified payment plans if their income is impacted.
The Federal Deposit Insurance Corporation is suing over a dozen mortgage firms in federal courts to recoup funds over loans they brokered over 14 years ago for Washington Mutual.
The agency in its complaints points to a combined 373 home loans it claims were defective for a variety of reasons, according to a National Mortgage News review of federal court records. While dollar amounts sought aren’t disclosed, some alleged bad underwriting for the loans in question includes five-figure kickbacks and six-figure borrower debts.
The FDIC’s pursuit stems from the fallout of its takeover of WaMu in 2008 during the Great Financial Crisis. Deutsche Bank, a trustee for mortgage-backed securities including the defective WaMu loans, sued the agency in 2009 for indemnification for its securities.
The sides reached a $3 billion settlement agreement in 2017, in which the FDIC issued a receivership certificate, which grants payments to Deutsche Bank as the FDIC recoups WaMu funds. The federal agency began requesting indemnification from mortgage companies in 2021 and none, according to court records, have acquiesced.
“I’m really quite concerned about them taking this stance when they stand in the shoes of those banks who were really at fault, lenders at fault, not the brokers who are just giving them information they asked for,” said Mukesh Advani, a Bay Area attorney representing defendant Cal Coast Financial.
The FDIC sued East Bay-based Cal Coast in August over 21 mortgages the company brokered for WaMu and its subsidiary, Long Beach Mortgage Co.
The FDIC declined to comment last week, while its counsel and other companies either declined to comment or didn’t respond to questions. Two lenders facing such lawsuits, Guild Mortgage and Supreme Lending, have responded to the FDIC’s complaints in brewing court battles.
The 14 firms named in lawsuits in the past 12 months range from small operations to major players, such as Freedom Mortgage. Mortgage companies are being sued for indemnification for as few as 14 loans, in Guild’s case, to as many as 72 loans from Benchmark Mortgage. The Plano, Texas-based Benchmark is scheduled to take the FDIC to trial next June, court records show.
Other businesses the FDIC is suing include American Nationwide Mortgage Co.; Lennar Mortgage; The Mortgage Link; Mortgage Management Consultants; New Jersey Lenders; PNC Bank as successor to smaller firms; Primary Residential Mortgage Inc.; Pulte Mortgage and RealFi Home Funding Corp.
The lawsuits are nearly uniform in length and language, describing the FDIC-WaMu receivership’s losses as arising from inaccurate and/or incomplete loan applications and documentation produced by the brokers.
Each company signed broker agreements with WaMu and its subsidiaries, such as Long Beach Mortgage, in 2004 and 2005, according to exhibits attached to each claim. The FDIC in each case includes an exhibit describing in brief the defects of each loan, the majority appearing to be misrepresented credit or income and debt.
In the FDIC’s lawsuit against Lennar, it alleges one borrower suggested a $60,000 monthly income, six times their actual earnings, while another homebuyer failed to disclose over $660,000 in mortgage debt from a previous property. Lennar last week declined to comment on pending litigation.
Each lawsuit also cites a six-year limitation to file claims following the 2017 Deutsche Bank agreement, and attorneys for lenders said they anticipate more FDIC complaints against lenders.
James Brody, an attorney with Irvine-based Garris Horn LLP, represents Guild and was recently retained by The Mortgage Link in its own FDIC litigation. In regards to the Guild lawsuit, Brody shared a statement this week calling the FDIC’s case “extremely weak” and noted the complaint’s lack of specifics around losses attributable to Guild’s brokered loans.
“We certainly anticipate that there will be a number of motions for summary judgment that will be filed with the Court by most if not all parties that don’t decide to settle out because of their own cost/benefit considerations,” he wrote.
Guild anticipates filing a motion for summary judgment to dismiss the lawsuit, Brody said.
Notice of default filings fell a whopping 61.8 percent during September in the state of California, largely due to new legislation that makes it more difficult for lenders to foreclose on borrowers.
The new law, SB 1137, requires mortgage lenders to attempt to make contact with their borrowers, and then wait 30 days after satisfying specific due diligence requirements before initiating foreclosure proceedings.
If a notice of default was filed before the bill was enacted, the lender would need to provide evidence that attempts were made to contact the borrower before taking action.
The sudden impact of the bill is clear, with only 16,352 NODs filed last month, down from 42,790 in August and 36.4 percent less than in the same period a year earlier.
Notice of trustee sales, the final step in the foreclosure process prior to auction, also decreased 47.3 percent from August to just 19,116, but were still up 33.9 percent from September 2007.
There were a total of 23,409 foreclosure sales during the month, a 163.2 percent increase from the same period a year earlier, but 12.4 percent below August’s numbers.
“CA State Senate Bill 1137 has rendered analysis of current activity against prior foreclosure levels useless in understanding market conditions,” said Sean O’Toole, founder of ForeclosureRadar, who provided the September numbers, in a statement.
“What is important to watch now, is how quickly lenders and trustees adjust to the new law. While it is unlikely foreclosures will return to previous levels, given the new requirements; we expect SB 1137 to have no long term impact beyond delaying the foreclosure process for homeowners, and slowing the overall recovery.”
O’Toole, like many of other critics of foreclosure moratoriums, believes such measures will simply delay the inevitable and cause a spike in foreclosure activity further down the line.
Just yesterday, presidential hopeful Barack Obama called for a 90-day foreclosure moratorium for all lenders receiving aid as part of the $700 billion bailout package.