Bankruptcy May Not Be Your Best Option

Bankruptcy rules have changed and it’s not as good a deal as it used to be. Even with a Chapter 7, it’s the trustee’s prerogative to require a reduced payment plan for credit cards, vendors and other debts. It may not be a clean sweep that wipes out all your debt. But the real problem is with tax issues. There is no relief in bankruptcy for IRS or state taxes. If you owe taxes you will be required to pay your debt. Bankruptcy will not work to relieve these issues. Under such circumstances you must consider other options that are more effective for reducing tax debt.

Another issue of importance in a bankruptcy that may not work out as well as you’d hoped is your home. The problem is that with the current reduced value of homes due to the real estate decline, many people live in homes that carry more debt than the home is worth. This may be an acceptable situation for the home owner, but in bankruptcy proceedings the bank can make a motion for relief from the stay based on the collateral – the home – being worth less than the mortgage and there is a distinct possibility the court will allow the liquidation of the house because there is not enough value to cover the bank’s secured party position. In other words, inadequate collateral is what’s argued. There are occasions you will be allowed to keep the house even if the collateral is not worth as much as the debt but upon the first late payment, you will be facing foreclosure.

There is a time and place when bankruptcy is appropriate and works, it’s just not at any time, or for everyone. So what is an acceptable alternative to bankruptcy that will do a better job in such situations?

A workout, of course, as follows:

1. The house can be refinanced with a short payoff. In other words, work out the debt, reducing it so the house is worth more than the debt. There is a double-win. Payments are reduced, equity restored and you are not in jeopardy of losing it to the bank, a much better conclusion.

2. Do an Offer in Compromise (OIC) for the tax debt and have it reduced to an affordable payoff.

Both plans can be initiated privately without a court’s intervention and without lawyers as they are both business strategies, not legal strategies.

There are other reasons bankruptcy should be avoided but these are the two main issues you want to be aware of. If you find yourself in a position where you are considering bankruptcy as an option, consider the above workout strategies as well. Discuss your bankruptcy plan with a lawyer and ask him about the above issues regarding taxes and your home, then discuss the issues with a workout specialist before you make up your mind. It may be that a workout will deliver a better conclusion than bankruptcy.