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The difference between secured and unsecured debt?

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We have a lot of Indianapolis Bankruptcy clients come in for a free consultation and wonder what is the difference between secured and unsecured debt.  The difference between the types of debt can be confusing.  Many times I explain that there are two types of debt:  secured debt and unsecured debt.

First, let’s discuss secured debt.  When you have a secured debt, an item is tied to it and pledged as collateral.  A lien is put on the asset which gives the lender the right to take away the asset if you are behind on making the payments.  An example of when you would have secured debt is a mortgage.  When you have a mortgage it is secured by your house, and the lender puts a lien on the home.  If you become delinquent on the payments or stop paying the monthly payments, then the lender will foreclose on the home.  Another example is if you get a loan to purchase a car.  The car is the item that is tied to the loan and it is pledged as collateral.  If you fall behind on your monthly payments, then the lender can repossess the car.

Unlike secured debt, unsecured debts are not tied to collateral.  This means that the lender does not have the right to any collateral for the debt.  If you fall behind on payments, the lender cannot take any of your assets – at least according to the loan agreement you have made.

With unsecured debts, the lenders still have other actions they can use to get you to pay.  Many times they hire a debt collector to get you to pay.  If that doesn’t work, many times they will sue you and ask the court to garnish your wages, take an asset, or put a lien on your house until you have paid back the debt.  Many times the delinquent status is reported to credit bureaus, making the default show up on your credit report.

There are many unsecured debts.  The most common is credit card debt.  Other unsecured debts include medical bills, student loans, and payday loans.

If you are struggling with your secured debt or unsecured debt, our office can help.  Whether the solution is debt settlement, an Indiana Chapter 7 bankruptcy, or an Indiana Chapter 13 bankruptcy, we can help.  If you live in Indiana, don’t hesitate to give my office a call today to set up a free face-face consultation.

Also, for more information, check out the video below.

-Indianapolis Bankruptcy Attorney John F. Bymaster

 

 

Time-tested Brands and Chapter 11: The New Norm?

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Let’s discuss time-tested brands and Chapter 11: The New Norm?  Why are so many time-tested, brand-name businesses filing for Chapter 11?   Attention is focused on the Radio Shack Chapter 11 case pending with 9,000 jobs on the line.   Is Chapter 11 the best mechanism for saving a failing business?

The answer is usually “yes.”  Through the flexibility of Chapter 11, a business’s “ongoing” value can be salvaged in numerous ways.  When most people think about a Chapter 11, they understand Chapter 11 to be a reorganization of the existing entity.   The traditional understanding of Chapter 11 seems to be as such: (1) the same corporate entity, shareholders, and leadership will remain active and in charge, 2) existing secured debts will be reduced to market value and bad leases rejected, and 3) unsecured creditors will be paid at a dramatically reduced amount.   This scenario is a very common goal and outcome of Chapter 11.   But, a more “liquidation-type” scenario is many times much more appropriate and beneficial to the overall ongoing concern of all parties.

To salvage overall value and to prevent collective societal waste of resources, Chapter 11 many times is used to “liquidate” into a “reorganized” state.    This simply means that several “buyers” or “bidders” will come to the table to purchase different aspects (or the entirety) of the business in an auction-like scenario.  Many times, these “bidders” will desire to purchase the name of the business and continue operation with existing employees.   Other times, these bidders will choose to absorb or merge the companies’ resources into another company, creating a variety of “salvaged” scenarios.  Just because a Chapter 11 is moving toward a more liquidation route does not necessarily mean that the brand name or employment arrangements will not continue.

Remember cases such as American Airlines and Kmart where Chapter 11 saved these brand-name companies.   Kmart not only recovered from Chapter 11 bankruptcy but went on to purchase the Sears Corporation five years after their Chapter 11 bankruptcy filing.   Chapter 11 can be the only option powerful enough to save the value of a business and protect as many employees from losing their jobs as possible.

With our high-debt, ever-changing economy, these Chapter 11 filings – that are now so prominent and common place in the news –  may only be the beginning.   Our economy is encountering fundamental changes with technology and problems with over-dependence on complex debt systems: much greater overall “reorganization” is almost inevitably on the horizon.

– Indianapolis Bankruptcy Attorney John F. Bymaster

Will Bankruptcy Stop Car Repossession?

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Several of our Indianapolis bankruptcy clients ask, “Will bankruptcy stop car repossession?”  The answer is YES, filing either an Indiana Chapter 7 or Chapter 13 bankruptcy will immediately stop an automobile from being repossessed.  When filing a Chapter 7 or Chapter 13 bankruptcy it is sometimes even possible to have a vehicle that was recently repossessed returned to you IF they have not yet sold the vehicle.

When you file a Chapter 7 bankruptcy the repossession is immediately stopped, and it is likely that the repossession can be postponed for 2-6 months.  If you cure the loan or come up-to-date on the loan before the bankruptcy case is closed, then you can usually keep the vehicle forever as long as you keep making payments on the loan until it is paid off.

Chapter 7 is not the only way to stop repossession.  Chapter 13 can be a very powerful tool to stop the repossession.  Chapter 13 not only immediately stops repossession, but it also has a mechanism in it that will restructure the vehicle payments.  This mechanism allows you to pay arrears (payments that are past due), and it also allows you to restructure the car loan so that you can pay it over time often in lower monthly payments.

There is one misconception that I would like to address about vehicles and bankruptcy.   Many times our clients are stressed out because they worry that they will lose their car if they file bankruptcy.  Most of the time you can keep your car when you file bankruptcy.  However, you must continue to make the payments either directly to the creditor or to the Trustee in Chapter 13 cases.  The rare time that you can’t keep your car when filing bankruptcy is if your car is very high-valued and paid-off.  In this rare circumstance, the vehicle’s paid-off value can exceed Indiana’s bankruptcy exemptions.  Since this is very rare, you can almost always keep your cars when you file for bankruptcy.

If you are behind on your vehicle and it is going to be repossessed, there is still hope.  Don’t hesitate to give our office a call today to schedule a free face-to-face consultation.

-Indianapolis Bankruptcy Attorney John Bymaster

Will I ever be able to discharge student loans in bankruptcy?

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Our clients frequently ask this question, “Will I ever be able to discharge student loans in bankruptcy?”  We frequently tell our clients that there has been some talk about student loans being discharged throughout Washington, but no action has been taken yet.

Now as the “student-debt crisis” looms over the nation, more aggressive action has been taken.   Senators Richard Durbin and Harry Reid have introduced a bill into Congress that would once again allow student loans to be discharged in bankruptcy.   Although both Senators are Democrats, but there is bi-partisan support for aggressively addressing the “student-debt crisis” even to the level proposed in the bill.

The “crisis” of student loan debt becomes evident upon exploring some of the statistics behind the problem.  There are approximately 40 million Americans with student loan debt with an average student loan debt at a striking $29,000.   With these statistics, it is easy to deduce that there is approximately $1.2 trillion of student loan debt held by young adults, their parents, and grandparents across the nation.

Did our congress make a horrible mistake in 1978 by making student loans non-dischargeable?   Has education become big business in America both in the student loan market and in high-tuition schools?   How did it become “good public policy” to enslave young people and their families with non-dischargeable massive debts instead of making other avenues for obtaining education?   These are the questions that are being asked both in Congress and around the country.

Senator Durbin, in support of the proposed student loan bankruptcy bill, stated “Too many Americans are carrying around mortgage-sized loans debt that force them to put off major life decision like buying a home or starting a family.”   He went on to explain how this burden of student loan debts affects for decades not only students but their entire families.

A substantial amount of these former students now carry such “mortgage-sized” student loans never receiving a diploma that provides the financial advantage necessary to allow them to repay the student loan.   These student loan providers and colleges are quick to saddle massive, non-dischargeable debts on 18-year-old students who have no real-life employment or debt repayment experience to understand the magnitude of their decisions.

President Obama has also recently made efforts to address the “crisis” by creating a “Student Aid Bill of Rights” which is primarily designed to promote changes in the student loan laws especially by collecting information about student loan abuses.

Returning to our clients’ common question, “Will we ever be able to discharge student loan debts in bankruptcy?”  The answer to that question will likely soon be determined or debated in Congress.  My answer, as a bankruptcy attorney, would be that allowing student loans to be dischargeable in bankruptcy once again is the only rightful and appropriate way to balance out the current crisis and to restore our “big business” schools back to their original design: education.

– Indianapolis Bankruptcy Attorney John Bymaster on the “Student Loan Crisis”

Bankruptcy and the Bible: Is it “moral” or “Biblical” to file bankruptcy?

Many times our clients find themselves in a moral dilemma: is it “moral” or “Biblical” to file for bankruptcy?   The answer to this is “yes.”  It is morally acceptable and “Biblical” to file for bankruptcy relief if you are appropriately in need of such relief.

In Deuteronomy 15:1-2, God’s law for the nation of Israel puts forth a “bankruptcy-like” system very similar to our own U.S. Chapter 7 system:

At the end of every seven years thou shalt make a release.

And this is the manner of the release: Every creditor that lendeth ought unto his neighbour shall release it; he shall not exact it of his neighbour, or of his brother; because it is called the Lord’s release.

But, unlike our bankruptcy system, God’s “bankruptcy” or debt forgiveness was to happen AUTOMATICALLY every 7 years instead of the requiring the party to “declare” bankruptcy (as if you are fully entitled to it).   Note also, that with ancestral lands being required to stay within the family, the bible also offered very liberal “bankruptcy exemptions” to protect real and personal property.

Although the models of Chapter 7 and Chapter 13 bankruptcy are very similar to how the Bible dealt with insolvency within the nation of Israel, it is important to point out that our modern bankruptcy system is not identical – at least not in the spiritual or “national” aspects of “the LORD’s Release” (the Shemita in Hebrew).  These basic “principles” of debt forgiveness prevent social injustices such as slavery and imprisonment for debts. The greater spiritual aspects of the LORD’s release (the Shemita) are so extensive that entire books have been written on the subject.

Another important point is that bankruptcy is never or rarely “immoral” in itself.  However, the actions leading up to bankruptcy or certain abusive uses of bankruptcy can be immoral, especially when they are found in their extreme ends.  Getting loans without any intent to repay them is certainly “bearing false witness.”   The Bible warns to “neither a borrow nor lender be” and that the “borrower is servant to the lender.”   Keep in mind, however, that many times after making some bad financial choices, you will likely have no choice: you will need to file bankruptcy.   Bankruptcy is not “wrong” in itself: but continuing in financial irresponsibility after bankruptcy can and certainly should be looked at as “wrong” or “anti-biblical.”   At least, if it can be avoided.

-Indianapolis Bankruptcy Attorney John F. Bymaster

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