Ask Dr. Don By Don Taylor, Ph.D., CFA • Bankrate.com

Bankruptcy questions

Dear Dr. Don,
I have a friend who is current on his mortgage and truck payments. He is also current on all his utilities. However, he has approximately $24,000 on credit cards that he can't pay. He inherited them in his divorce.

Some of the credit card companies won't work with him. They want all their money now. They are harassing him at home and at work. They are putting his job in jeopardy. He could lose his job if they keep calling him at work. He tells them how much he can pay each month, but they won't accept it. Should he file bankruptcy? He doesn't know what else to do.
Kathy Credit

Dear Kathy,
Stopping the phone calls at work is easy to do. The Fair Debt Collection Practices Act requires creditors to stop calls to the workplace once they are notified that his employer does not permit these calls. He should notify the creditor in writing, sending the letter via certified mail and keep a copy for his records.

Violation of the FDCPA by his creditors can result in fines. This FTC publication explains the provisions of the FDCPA and how to file a complaint with the FTC and the state attorney general for a creditor's noncompliance with the provisions of this act. (Insomniacs may want to refer to the full act.)

Bankruptcy may be the answer, but your friend should hire a bankruptcy attorney before filing. What was stipulated in his divorce decree isn't binding to his creditors, and if his bankruptcy causes the creditors to pursue his ex-wife for their jointly held marital debts, she may have a case against him for not following the terms of their divorce decree.

In that situation the bankruptcy court's discharge of his debts doesn't help his financial situation because the divorce court can step in and require him to pay those debts.

Bankruptcy questions

Dear Dr. Don,
Can you hold on to a certificate of deposit when filing for bankruptcy? How old does a bill have to be before it can be included in a bankruptcy? Can you use your credit cards up until the day you file?
Tana Trepidation

Dear Tana,
When you file for a Chapter 7 bankruptcy, everything you own will be classified as either an exempt or non-exempt asset. You get to hold on to the exempt assets. The nonexempt assets form a bankruptcy estate that is used to make payments to your creditors. What is an exempt asset in your state is determined by state law.

The bankruptcy court may allow you to offer up an exempt asset to hold on to a nonexempt asset, but you're not likely to hold on to your CD unless it qualifies as an exempt asset. This site lists exemptions by state.

All of your debts are listed in a bankruptcy filing. The bankruptcy court will discharge all eligible debts in a Chapter 7 bankruptcy petition. You can choose to reaffirm a debt, and the obligation to pay will continue after the bankruptcy.

Use your credit cards for "luxury goods or services," loans or cash advances shortly before filing for bankruptcy and you take the risk that these recent debts won't be discharged in bankruptcy. The idea of one last fling with credit before filing for bankruptcy sounds appealing, but it's not as appealing when you're spending your own money, not your creditors'.

The U.S. Code defining what may be considered nondischargeable under federal standards is presented below:

(C) for purposes of subparagraph (A) of this paragraph, consumer debts owed to a single creditor and aggregating more than $1,000 for ''luxury goods or services'' incurred by an individual debtor on or within 60 days before the order for relief under this title, or cash advances aggregating more than $1,000 that are extensions of consumer credit under an open end credit plan obtained by an individual debtor on or within 60 days before the order for relief under this title, are presumed to be nondischargeable; ''luxury goods or services'' do not include goods or services reasonably acquired for the support or maintenance of the debtor or a dependent of the debtor; an extension of consumer credit under an open end credit plan is to be defined for purposes of this subparagraph as it is defined in the Consumer Credit Protection Act;

A Chapter 7 bankruptcy is a liquidating bankruptcy while a Chapter 13 bankruptcy filing allows you to establish a repayment plan and pay down your debts over the next three to five years before the debts are discharged.

Bankruptcy law will be less consumer friendly in 2003 if a new act is signed into law by President Bush. If you plan to file, then filing for bankruptcy before the new laws take effect (180 days after President Bush signs the act) makes sense. Hiring a bankruptcy attorney makes sense, too.

-- Posted: Oct. 28, 2002