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Louisiana Legal Blog

Not all debts can be forgiven in bankruptcy

Louisiana residents and others who are thinking about filing for bankruptcy can generally choose between filing for Chapter 7 or Chapter 13 protection. In a Chapter 7 case, eligible assets are sold with the money used to pay off as much debt as possible. In a Chapter 13 case, debts are reorganized and paid over a period of time. It is important to note that not all debts can be eliminated in a bankruptcy proceeding.

For example, it is not possible to discharge child support or certain types of tax debt. As a general rule, student loans can't be discharged either. To get rid of student loans in bankruptcy, it is necessary to show that a significant hardship would exist by continuing to repay them. Among debts that are eligible to be reduced or eliminated in a bankruptcy proceeding include mortgage balances, auto loans and personal loans.

Many people unable to pay store credit card bills

When store employees offer a discount or other benefit for signing up for a store credit card in Louisiana, many consumers find the offer tempting. However, the delinquency rate on these store-branded cards has reached its highest point in seven years according to a report from Equifax, the credit reporting bureau. These store-affiliated credit cards have their highest rate of delinquencies since 2011, the bureau said. Approximately 4.65 percent of these accounts are at least 60 days overdue for a payment, an increase from 4.08, the rate of delinquency reported in March 2017.

The credit bureau said that there are a number of reasons that consumers may be behind on their credit card payments. In some cases, they may believe they no longer have to pay the bill if the retailer shuts its doors or declares bankruptcy. However, in these cases, there is almost always a creditor that runs the cards on behalf of the retailer; that lender is still reporting to credit bureaus, pursuing collections and otherwise maintaining ownership of the debt. In other cases, the improving economy has meant that more people are being approved for store credit cards, including some people who are simply unable to pay back the debt they have accrued.

Strategies to manage Louisiana consumer debt

Americans are on pace to hit $4 trillion in consumer debt by the end of 2018 according to LendingTree. In 2010, they had non-mortgage debt equal to 22 percent of their income. Today, that number is 26 percent, and over the past two years, consumer debt totals have increased by 5 to 6 percent. Auto loan and credit card debts have increased by 7 percent on an annual basis.

However, with the credit card delinquency rate at 2.4 percent, most people have been able to keep such debt to a reasonable level. As interest rates continue to climb, it could be beneficial for those with high interest credit card debts to look into refinancing them. Student loan and auto loan balances generally come with lower interest rates, so rate hikes may not have the same impact on a person's finances.

Do I have enough debt to file for bankruptcy?

The bills are piling up. Maybe it happened gradually--a missed credit card payment here, a missed car payment there--or maybe it was sudden: severe illness, loss of employment or another catastrophic change. Either way, it's more than you can handle. You've heard that declaring bankruptcy can wipe out debts and give you a fresh start, but you aren't sure if that's an option. Do you really owe enough to consider that?

Tips for recovering from bankruptcy

A Lending Tree study found that most people who file for bankruptcy recover with a credit score of at least 640 within a few years. Some people in Louisiana may be among the 40 percent whose credit score reached 640 within a year. Within two years, nearly two-thirds had this score.

The study also found that terms for loans got more favorable within a few years of bankruptcy. While the costs for a $15,000 auto loan were $2,171 within a year of bankruptcy, the same costs dropped to $799 two or more years later. People who were able to get their credit scores above 720 after three years were offered APRs similar to those who had the same scores and no bankruptcy on their records.

How bankruptcies are reported to credit agencies

If a person files for Chapter 13 bankruptcy, it will generally stay on his or her credit report for seven years. If a person files for Chapter 7 bankruptcy, it will generally stay on his or her credit report for up to 10 years. In a Chapter 13 case, a court will allow a Louisiana debtor to use regular income to pay off debts over a period of three or five years.

In a Chapter 7 case, an individual has non-exempt assets sold with any funds raised used to cover balances owed to creditors. Any remaining balance left over after items are liquidated is discharged. Individuals may be able to ask that a bankruptcy be removed from their credit report by asserting that an entry is not accurate. It is also possible to ask the court that handled the case if it verified a bankruptcy entry before it was added to a credit report.

How bankruptcy impacts a person's ability to borrow

There were more than 700,000 personal bankruptcies filed in 2017 according to a study done by LendingTree. Medical and credit card debt were among the most common reasons why Louisiana residents filed for protection from creditors. Although bankruptcy can help a person overcome a debt, it can also cause credit problems in the short-term. For instance, someone who is a year removed from bankruptcy will be charged an interest rate of 10.8 percent.

A borrower who has no bankruptcy on his or her credit report would be charged a rate of just 7.8 percent. This translates to an extra $2,171 in interest on a $15,000 loan paid over 60 months. Those who take out a personal loan within a year of filing for bankruptcy will pay $1,427 more in interest on a $10,000 balance paid off over three years.

The reason credit card rates are increasing

For Louisiana residents and others with credit card debt, an increase in the federal funds rate can lead to higher bills. This is because the fed funds rate and credit card interest rates are linked together. In March 2018, the Federal Reserve increased this rate to 1.75 percent. While other debts can be impacted by changes to this rate, credit card balances are the most likely to be subject to variable rates.

As of February 2018, the average interest rate for a credit card issued by a bank increased to 15.32 percent from 14.99 percent in November 2017. The reason why the funds rate rises periodically is that the Fed wants to contain inflation. Inflation tends to be more of a concern during good economic times when job creation is strong and wages increase.

Should I work with a debt consolidation company?

You may have seen their ads on TV or in your social media feeds. Debt consolidation companies often promise to do many of the same things bankruptcy does: help you manage overwhelming debt, simplify your monthly payments, and put you on the road to financial recovery.

This may sound just like the solution you need. But what’s the catch? Is debt consolidation really a good idea?

Bankruptcy might discharge some tax debts under narrow conditions

Bankruptcy might offer relief to people overwhelmed by multiple debts in Louisiana, but tax debts often do not qualify for discharge. Bankruptcy laws, however, contain numerous exceptions to general rules, and certain circumstances could make the discharge of a tax debt possible.

Timing matters a great deal. People cannot toss current tax bills into their bankruptcy filings. In general, a tax debt needs to be documented on tax returns that are at least two or three years old. A tax bill assessed a minimum of 240 days before a bankruptcy filing might also qualify for discharge. Any taxes that arose from the filing of fraudulent or frivolous tax returns will not meet requirements for discharge.