First, we will look at the alternatives to filing bankruptcy and the pros and cons of each alternative for filing bankruptcy in detail. Potential filers may use one or all of the below-detailed suggestions to restructure their finances in order to avoid filing bankruptcy.
1. Getting Help From Your Family
Family help may be an alternative for you, but you must be careful not to make a bigger mess and create a possible lifetime of resentments. Unless you change your habits and restructure your finances, the problems that got you into possible bankruptcy will likely not change. If you use your family’s money, be sure the money is used wisely and you don’t wind up in bankruptcy anyway. If you have a nonexempt asset, you might want to give them a security interest in the asset, so that if you are not able to pay them back and you wind up filing for bankruptcy, then the family loans are protected by the valid security interest in non-exempt assets.
2. Selling Assets
If you have significant non-exempt assets that can be sold to pay off your debts, it might be wise to do so, since you will probably lose them in the bankruptcy anyway, assuming those assets are not transferred out prior to the Petition filing. The assets that you should sell are known as nonexempt assets. These are assets that are not protected under the bankruptcy or State exemption laws.
If you do sell nonexempt assets, do so at a fair market price. Do not repay friends and relatives if there’s any possibility of bankruptcy prior to one (1) year filing bankruptcy. They may be forced to repay that money to the bankruptcy trustee. Section 547(b).
Exempt assets are those that you will probably be able to keep even if you are filing bankruptcy. So don’t let the creditor force you into selling an exempt asset.
- In Nevada, your home equity is protected up to $550,000.
- Your individual retirement accounts up to $500,000
- An automobile up to $15,000 in value
- Household and personal belongings up to $12,000 in value.
- One gun
Nevada property exemptions. Property exempt from execution listings are found in NRS 21.090 and are briefly described as follows:
- Pension, retirement, or IRA, 1 gun, private libraries, works of art, musical instruments up to $5000 in value.
- Farms trucks, farm stock, farm tools, farm equipment, and supplies not to exceed $4500 in value.
- Professional libraries equipment supplies and tools, inventory, material seized to carry on the trade or business of the debtor not to exceed $10,000 in value;
- for any work income, 75% of the disposable earnings of a judgment debtor during that week, or 50 times the minimum hourly wage prescribed by certain federal fair labor standards act provisions.
- all money benefits privileges or immunities occurring or in any matter growing out of any life insurance.
- all money and other benefits paid pursuant to the order of a court of competent jurisdiction for the support, education maintenance of a child.
- all money and other benefits paid pursuant to the order of a court of competent jurisdiction for the support and maintenance of the former spouse [alimony].
- payments in an amount not to exceed $16,100, received as compensation for personal injury, not including compensation for pain and suffering an actual pecuniary loss.
- payments received pursuant to the federal Social Security act.
- any personal property not otherwise exempt from execution not to exceed $1,000 in total value, also known as the wildcard exemption.
- the stock of the corporation described in subsection 2 of NRS 78.746 except as set forth in that section.
Every state is somewhat different in their approach to exemptions and the values for those exemptions. Nevada is considered a more generous state for allowing the debtor’s exempt property. The other States that have generous homestead laws are Florida, Texas, Massachusetts, and Oklahoma.
3. Lower Credit Card Interest Rates
There is a possibility you may be able to move credit card balances from high-interest rate cards to lower ones. Sometimes this can have a significant effect in lowering your monthly cash outflows, but what ultimately happened is that you wind up extending the terms of the balances that you do owe. Be careful about opening new credit card accounts to pay off old ones. If the new account was opened within the year of your filing bankruptcy, the credit card company may attempt to claim it was fraud and tried to prevent you from discharging that debt.
4. Restructure Your Home Mortgage
Usually one of the largest expenses that you have is mortgages on your home. If you can restructure the mortgage terms, it may give you more cash to pay your regular monthly bills. Begin negotiations with your lender as soon as possible. Most banks and mortgage companies don’t really want your house back, they want the money that is outstanding on the loan. Foreclosure is a huge hassle for everyone involved, so they are usually willing to look at alternatives.
Every government agency has programs designed to avoid foreclosure. If your home is insured by the Federal Housing Administration, Veterans Administration, Farmers Home Administration, or HUD, contact them to see what programs they may have available that is best for your situation. Since the 2008 housing valuation bust, these governmental agencies and bank lenders have created numerous new programs for homeowners to avoid foreclosure.
If you have significant equity in your home, you will almost always get more proceeds by selling it yourself rather than letting it go into foreclosure. But remember, the equity in your home will be protected in bankruptcy up to the state homestead amount. If you’re facing foreclosure, it’s well worth the attorney’s fee to discuss your home and the bankruptcy ramifications on your house.
Be careful about using home equity loans to pay your debts. Home equity loans are secured by your home and may place it at risk if you cannot pay the loan. Home equity loans do have the advantage that they are usually tax-deductible and the interest rate is lower than credit cards. The trap that many people fall into is that they pay off their credit cards, increase their mortgage payments, and then begin using the credit cards again. So, they eventually wind up with more debt than they had started with and now their home is at risk also.
5. Negotiating With Your Creditors
Although this sounds good, in most practical situations, especially with credit cards and consumer debt, renegotiating with your creditors seldom works. Work out agreements are the most valuable when you have significant nonexempt assets available to pay off your debts, but you need time to make the appropriate arrangements.
6. Using Retirement Plans
Using retirement plan monies is almost always a bad idea for several reasons.
- Retirement plan monies are almost always protected in bankruptcy.
- Most debts that you would pay with your retirement plan monies would be wiped out in bankruptcy anyway.
- If you withdraw retirement plan monies early, there may be serious tax due.
- If you don’t repay retirement plan loans, that non-repayment will also incur tax penalties.
7. Threat of Bankruptcy
Part of negotiating with creditors can include the threat of bankruptcy. Sometimes the threat of bankruptcy will give you additional leverage in an offer to pay less than you owe. If the creditor thinks the bankruptcy will completely wipe away the debt he might be willing to accept a greatly reduced settlement on the balance you owe. If you hire a bankruptcy attorney to handle the negotiations, it becomes evident to the creditor that you might fulfill your threat.
Be careful about threatening bankruptcy to secured creditors where you are behind in payments, like automobile loans, because you might wake up one morning and find the car has been repossessed.
8. Moving to Another State
Finally, one of the last alternatives to filing bankruptcy is the simplest but can be fraught with many problems in the future. Occasionally, moving to a different state and simply ignoring the bill collectors, can make financial sense.
Moving to a different state requires a creditor to comply with a different set of laws to collect the debt. If you have few assets, do not care about your credit rating, and most of your income comes from social security benefits, welfare or unemployment, you might decide to totally ignore your past financial problems. This decision will probably require you to change your lifestyle, by not having assets in your name, limiting bank accounts, and dealing more with cash and money orders.
If you are sued, and a judgment is entered against, you may have to worry about bill collectors finding what little you do have. You must be careful about having bank accounts because the judgment holder or a collector can seize all the money in them. In some cases, these judgments can go on for as long as 20 years. So, do not make this choice lightly.
In conclusion, there is always a lot to think about when contemplating filing for any type of bankruptcy. At Harris Law Practice we have been providing financial protection and guidance in the Reno area for the last 45 years. I am here to help. Bankruptcy may not be your only option. Let’s explore all of the alternatives to filing bankruptcy and possibilities that could exist for you.