Property loss may lead to bankruptcy

Dear Liz: I recently lost a rental property to foreclosure, and the lender is after me for the difference between what I owe and the sale price of the property (roughly $58,000). If I am sued, is there any way to get out of this debt without paying?

Answer: If you are sued by this or any other lender, you should consult an experienced bankruptcy attorney about your options. If you can’t afford to pay a deficiency judgment — the difference between what you owe and what the property is worth — bankruptcy could allow you to erase or reduce the debt.

Although some states, including California, protect homeowners from such lender lawsuits, the protection does not extend to rental or commercial property. It can also be waived, inadvertently or otherwise, when a homeowner signs lender documents to arrange a short sale. Anyone who is selling an underwater home or who is in danger of losing one to foreclosure should discuss the situation with an attorney familiar with real estate and bankruptcy laws.

Don’t pay medical bills with credit cards

Dear Liz: I was involved in a car accident and had no medical insurance. The hospital bill came to $39,000 and a helicopter ride was $15,000. The only way I could pay this was using credit cards. I have high credit scores. Am I better off filling for bankruptcy?

Answer: You were better off not using the credit cards. If you hadn’t charged your medical bills, you probably could have negotiated a lower settlement amount with the hospital and medical evacuation company.

In many cases, people without insurance are initially charged more than those whose insurance companies have negotiated lower rates. We’re not talking minor discounts, either: The “sticker price” for hospital care for an uninsured person can be two or three times the price paid by insurers, according to the National Consumer Law Center.

Medical providers in these situations are often willing to settle for the lower, negotiated rate, but you have to ask.

Also, most hospitals have charity programs that could have paid some of the cost if your income isn’t high. A typical charity program would erase bills for people whose incomes equal 200% or less of federal poverty limits, and would offer discounts for those with incomes up to 400% of those limits.

Even if you didn’t qualify for the charitable program, a close review of your bill might have turned up errors that, if corrected, could have lowered your cost.

Furthermore, most medical providers have payment plans that would have allowed you to reduce your debt over time at a much lower interest rate than what you’re probably paying on your cards.

Now that you’ve charged these bills, you have to make a realistic assessment of whether you can pay them off within five years. If not, bankruptcy may be a better option. A Chapter 7 liquidation would allow you to erase unsecured debts such as medical and credit card bills, but may not be available if your income is too high. In that case, a Chapter 13 repayment plan would require you to repay some of your debt over the next five years and erase any remaining bills after you completed the plan.

Alternatively, you might negotiate a settlement with your credit card companies.

Any option other than paying your bill in full will trash those excellent credit scores. The damage won’t be permanent, but it initially will be severe, and it may take several years for your credit to fully recover.

Dealing with an “underwater” car loan

Dear Liz: My husband and I have made every mistake when it comes to finances. We filed for bankruptcy protection last year. We were able to keep our car but it’s worth much less than what we owe. We want to buy a better car and return this one to the lender, but when I called the lender the representative said they would garnish our wages. Can they really do this or is it a scare tactic? Do you know a better way to get rid of this debt?

Answer: You reaIly need to talk to your bankruptcy attorney to see what your risk might be. If you “reaffirmed” the loan and promised to keep paying it, then the lender may be able to sue you for the difference between what you owe and what the car is worth.

In many cases, the best way to deal with an “underwater” vehicle — one that’s worth less than you owe — is to “drive out of the loan” by continuing to make the payments until the obligation is paid off.

Then you should continue to drive the car for a few more years while you save up enough cash to buy your next car, or at least to make a big down payment so that you’re not underwater.

The fact that you want a better car is really no excuse for reneging on your commitment. By the way, you wouldn’t be “returning the car to the lender.” You would be agreeing to a voluntary repossession, but that doesn’t get you off the hook. In most states, lenders can indeed come after you for the difference between what a repossessed car is worth and what you owe.

Sometimes, bankruptcy is inevitable when people are facing insurmountable debt. But you took the wrong lesson from yours: Instead of realizing you needed to change your financial habits, you seem to think there’s a “get out of jail free” card when it comes to debt.

When bankruptcy is the best of bad options

Dear Liz: When would you say filing for bankruptcy would be necessary, or is it ever? I have approximately $30,000 in credit card debt, $50,000 in student loans and a $104,000 mortgage. I’m unemployed and can’t find a job that would cover day care for a toddler as well as after-school care for a special-needs child. However, my field is finance — go figure, huh? — and I don’t want to kill my chances of resuming my career with a bankruptcy. What can I do?

Answer: Bankruptcy is sometimes the best of bad options, particularly when you’re facing unsecured debts such as credit card bills that equal more than your annual income or that would take you five or more years to repay. Five years is typically how long you’d be required to chip away at your unsecured debt in a Chapter 13 bankruptcy repayment plan, although given your lack of employment you may qualify for a Chapter 7 liquidation bankruptcy, which would erase your credit card debt.

Your student loans typically can’t be wiped out in a bankruptcy, nor can your mortgage. But you probably qualify for economic hardship options that would allow you to reduce or suspend payments on any federal student loans. Private student loans don’t have similar provisions, but you may be able to work out a payment plan with your lenders or you may have enough financial room to pay them if your other debt is wiped out.

By federal law, a bankruptcy can’t be used against you in employment decisions. Employers may, however, hold against you the late payments, charge-offs and collection accounts that frequently precede bankruptcy, so the protection offered by the federal law may not be of much help.

It’s a tough call to make, and you’d benefit from some advice. Consider contacting a legitimate credit counselor, such as one affiliated with the National Foundation for Credit Counseling, to see if a debt management plan could help you. But you also should talk to an experienced bankruptcy attorney so you understand all your options and the possible consequences of each.

Bankruptcy won’t erase child support obligation

Dear Liz: Why are child support arrears reported to credit agencies if they cannot be discharged in bankruptcy? And, why is it one can discharge some federal income taxes in bankruptcy but not child support?

Answer: Child support is not a run-of-the-mill debt. It’s a family support obligation, and one of the few debts that can land you in jail if you ignore it.

That’s because the welfare of your kids is at stake. The Internal Revenue Service will still be able to carry on if you negotiate a settlement or discharge some of your debt in bankruptcy, but skipping your child support obligations could doom your children to poverty, poor health and a host of other ills.

Although you can’t erase your obligation in bankruptcy, a Chapter 13 bankruptcy filing — which involves a payment plan — may enable you to catch up on any missed payments. A bankruptcy attorney can provide details.

In any case, the ability to erase a debt in bankruptcy isn’t among the criteria for reporting debts to credit bureaus. Other debts that typically can’t be discharged, such as student loans, also show up on credit reports.