Are there alternatives to bankruptcy?

By Karen Wilde 

Filing for Chapter 13 or Chapter 7 bankruptcy can be a good option for those struggling with debt; however, some of the alternatives to bankruptcy could lead to an overall better solution to financial problems.

In many cases, people claim bankruptcy in order to stop forms of harassment from creditors. If this is the case, people should take full advantage the local, state, and federal laws in order to stop harassment, rather than go through with the bankruptcy. Because bankruptcy can stay on your credit report for seven years, exploring all available options and reasons for filing is important. 

Can the issue be worked out?
 
From a business standpoint, creditors would much rather work out issues than have a client file for bankruptcy. While many companies will sell debt to collectors, it is much more profitable to the company to have the debt paid by the consumer. With this in mind, it is a wise idea to contact the companies to which the debt is owed. Often times, the company will work with the income restrictions the consumer has in order to reach an agreement. 

Credit counseling agencies
 
Getting help from a credit agency is a wise idea for those who do not possess the negotiating skills to work things out with individual companies. The agency can look at all of the companies money is owed to and help the consumer consolidate and work out payment plans. There are many nonprofit credit and debt counseling services that charge a small fee, or no fee at all. Make sure to choose a credit counseling agency that has been approvedby the United States Trustee Program. The U.S. Trustee program has a useful search engine that allows visitors to find approved credit counseling agencies by state. 

Available repayment plans
 
Many debt counseling agencies will help the consumer to create a payment plan that is designed to pay off all of the creditors money is owed to. This makes it easier to pay the creditors back over time, rather than all at once. According to the Better Business Bureau,a debt repayment plan is “a creditor-approved arrangement that allows you to repay your unsecured debts at reduced interest rates”. The arrangement, which will also reduce your late fees and penalties, will be negotiated by the credit counseling agency. Those who use debt repayment schedules will send their payments directly to the credit counseling agency, rather than to the creditors or companies. 
  
Consequences of not taking action
 
Whether you decide to file for bankruptcy, or look for help from a credit counseling agency, ignoring the debt completely can hurt any consumer in the long run when it comes time to buy a new car or home when it affects the consumer’s credit record. After filing bankruptcy or consulting with a credit counseling agency, make every effort to refine your spending habits. Take finance classes, speak with a finance consultant, limit your credit lines, and set up a savings account. Doing so will help you avoid debt problems in the future.

Karen Wilde has worked with many bankruptcy and foreclosure cases, and knows how important it is to look for bankruptcy alternatives. Finding an experienced bankruptcy attorney can help you find what solution works best for you.

Why student loan delinquency rates are rising

Student loan delinquencies rates are up, way up. According to New York Federal Reserve data 90 day delinquencies have risen 2.5 percent to 11 percent since Q1, 2012. These non-payment rates keep rising in to the tens of billions of dollars despite several types of payment plans offered by federal student loan servicers. Among these plans are the income-contingent repayment plan and the income-based repayment plan, both of which reduce the monthly cost of paying back student debt to a manageable amount. So why do grads keep defaulting?  

Complicated applications

As evident in the following payment programs chart, of the three kinds of income linked payment plans, two have to be applied for on an annual basis. Documentation needed includes a tax return, proof of income and an application form. For the borrowers who forget to remember line X, on document Y, written in font Z, that can mean thousands of dollars of extra interest due to a late payment. Even rocket scientists make errors, it would be wise to assume grads will too. 

Insufficient mediation

If a graduate has a complaint against a financial institution that services a Department of Education loan, that loan is mediated by none other than the Department of Education. The potential for conflict of interest is recognizable. The complaint process is further stifled by poor federal disclosure requirements if required at all.  For example, notification of payment plan expiration is not required to be sent by certified mail, and student loan servicers are not necessarily required to prove they even send such notification. 

Negative amortization

The rise in student loan delinquency is also due to negative amortization. This is when the balance of a loan increases, often indefinitely, because the amount of a monthly payment is less than the amount needed to cover the cost of interest. Even though the federal employees, loan officers and others will incessantly repeat the mantra of working with student loan servicers to implement an affordable payment plan, the loan is really not affordable when it is negatively amortizing. Snowballing debt is not a good way to hit the ground running when professional life is only beginning.

Failed investment

Investments that fail lower individual net worth. Naturally, a healthy thing to do would be take the loss and find alternative solutions; in colloquial terminology, suck it up and move on. This is the advice given by some of the same people who would quite possibly consider short selling their home or defaulting on their mortgages because the value of their real estate is less than the amount of the mortgage. Home owners got bailed out to the tune of $22 billion dollars in mortgage relief per Reuters, student loan borrowers have the benefit of no such program.

Federal protection

Federal student loans are usually not subject to typical rules of bankruptcy relief. The Department of Education and their loans are also subject to immunity from the Fair Debt Collection Practices Act. In effect this makes the government above the same law that many Americans attempt to follow. Apparently, the fiscal solvency of the student loan program is jeopardized by loan forgiveness, yet the federal national debt is set to expire in less than two months and has surpassed $16 trillion dollars; an amount in the vicinity of a 1:1 federal debt-to-income ratio.

A problem with student loans is they were originally encouraged via relatively easy availability to fuel the economic need for an educated workforce. That workforce has been experiencing high unemployment and the labor force participation rate had dropped to the lowest level in decades. This means the same need for educated people that federal programs were intended to meet is not there. Even though the promissory notes for these loans were signed under penalty of perjury, there is a flip side to the coin. Namely, a federal intent of educational benefit that's conditions are no longer completely valid.  

Special kinds of bankruptcy

Chapter Twelve

This chapter is specifically for “family farmers” and “family fishermen” with a “regular annual income.”  It allows them to repay all or some of their debt through a repayment plan that is set up with their creditors. Most repayment plans lasts between three to five years, and the court will need a good cause to allow the plan to go longer than three years. A five year plan will assigned if the individual is required to pay 100 percent of domestic support. Chapter 12 is better for farmers and fishermen because it is tailored towards them specifically because their income is seasonal. Chapter 11 is too expensive for them, and chapter 13 is for wage earners. 

 

Chapter Fifteen

Chapter 15 is a new chapter that was added by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.  It was made to help find better ways of dealing with insolvency cases with debtors, claimants, assets and individuals or parties of more than one country.  The main purpose of this chapter is:

-To promote cooperation between United States Courts and foreign countries involved in cross-border insolvency cases

-Allows for a greater legal certainty for investment and trade

-Protects creditors, debtors and other entities by giving fair administration in cross-border insolvency cases

-Protects the debtors assets allowing for the best value of their assets

-Protects investment and employment by saving failing businesses

This is an ancillary case, which allows a case trustee to act on behalf of the United States court in a foreign country. The petition filed under this chapter must show documents of foreign proceedings and the foreign representative involved. After the hearing, the court will rule it a foreign hearing, then it will have to follow United States bankruptcy codes. 

Chapter 15 allows foreign creditors to follow U.S. bankruptcy codes prohibiting discrimination against them. The most important goal of chapter 15 is to create cooperation between the United States and those involved with foreign countries and cross-border insolvency cases. United States courts and representatives are required to fully cooperate with foreign representatives and foreign courts. 

 

Chapter Nine

Chapter 9 allows for municipalities (cities and towns) to reorganize their debt.  The purpose of this is to provide protection for these municipalities as they make plans to pay off their debts. They can rearrange these debts by reducing principal or interest, extending debt maturities or by refinancing to get a new loan. This chapter does not allow for liquidation because it breaks the Tenth amendment and takes away states’ rights.  The court can be given jurisdiction if the municipality allows it, which gives them extra protection. 

V.K. writes about bankruptcy and reputable bankruptcy lawyers like Jasmine Motazedi.

Could the Deepwater Horizon have caused a British Petroleum bankruptcy?

British Petroleum (BP), certainly lost money after the "Deepwater Horizon" oil rig literally saw a deepwater horizon after exploding in April, 2010. However, the loss of money doesn't necessarily put BP into the red, or so far in to the red that the company will become insolvent. This is especially so after a $7.8 billion shareholder dividend cut over 3 quarters.(1)

To ascertain whether British Petroleum PLC, is likely to go bankrupt or not is a matter of weighing losses against revenues and liabilities arising out of the Deepwater Horizon calamity. Some of the financial damages BP will have to absorb include a very large loss in equity capitalization in addition to liability claims and earnings losses.
 

• BP's debt rating downgraded by Fitch and Moody's• Over $90 billion loss of market capitalization
• $20 Billion set aside for gulf relief
• Estimated $3.3 million 3 month revenue loss
• Potential uninsured losses costing billions more

With assets over $235 billion, and an average annual revenue over $66 billion the over $110 billion losses relating to declines in equity, increased liabilities, relief funds and revenue loss could be sustained without a bankruptcy.(3) However, with a lower debt rating and market capitalization, the company is not as leveraged as it once was which could impact future business operations and income.

In the best-case scenario, BP will be a bad year for shareholders with a public relations and financial scar that will impact share prices, potential insurance costs and to an extent revenue without a bankruptcy. Even with $40 billion in liability payments, BP could still continue its operations due to a high demand and relatively stable price for its oil products in addition to ample assets to cover losses costing billions of dollars while still potentially remaining profitable.

With approximate Q2, 2010 liabilities amounting to only 57 percent of total asset value, British Petroleum, PLC does have some financial leeway even with downgraded and potentially more expensive debt. British Petroleum PLC could quite possibly end the 2010 fiscal year with its first net loss in a while, but it is not unusual for large companies to stay operational with several years of tax-deductible losses on future profits either.

In a June 18, 2010 report by Laurel Brubaker Calkins and Margaret Cronin Fisk, in Bloomberg Business Week, a district judge is cited as stating the many class action lawsuits held against BP could indeed cost more than BP has accounted for.(4) This is further confirmed by Calkins and Fisk's reference of a more than $37 billion liability damage estimate from Credit Suisse.

If the oil spill continues to be a problem and the impending lawsuits and settlements that arise out of the Deepwater Horizon oil rig explosion continue to mount, the costs could far exceed $20 billion and potentially reach or surpass the widely publicized $75 billion liability cap set forth by the Oil Pollution Act of 1990. If BP's uninsured losses exceed the solvency threshold for the company to continue, then bankruptcy becomes a more real possibility. Until the actual damage costs are determined in their full scope, such a scenario can only be estimated as probable if damages significantly beyond $20 billion occur.

Sources: 

1. http://bit.ly/amW76p (Reuters)
2. http://bit.ly/afuHIx (Securities and Exchange Commission)
3. http://yhoo.it/afcGiJ (Yahoo Finance)
4. http://bit.ly/a4ZwIU (Bloomberg Business week)
5. http://bit.ly/bWr2tS (International Business Times)