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San Francisco Bankruptcy Law Blog

Understanding secured debt and unsecured debt

California residents who are in debt may be interested to learn the difference between secured debt and unsecured debt. Because each type of debt will have different consequences for nonpayment, understanding the difference may be important for a person who is working on a debt repayment plan.

A secured debt is a type of debt that is attached to a physical object like a car or a house. If a borrower does not pay a car loan, for instance, the lender can seize the person's car. A mortgage, which is also a secured debt, works the same way as a car loan. If the borrower fails to make mortgage payments, the lender can seize the person's house in a foreclosure.

How to deal with credit card debt

Credit cards are more popular than ever before. In California, millions of people may overspend when swiping for that next purchase. It's all too easy to put thoughts of repayment off for another day until credit card debt becomes a real problem. Fortunately, there are several ways to deal with credit card debt when things get a little out of hand.

The best way to deal with credit card debt is to avoid it altogether. With diligence and planning, anyone can use credit cards responsibly and avoid racking up a great deal of interest-bearing debt. Keeping track of all credit purchases in a spreadsheet is the best way to track and monitor spending. Relying on bank statements to keep track of spending is not as effective because purchases may not show up for several days.

Issue of shared credit cards and bankruptcy

California residents who are considering filing Chapter 7 bankruptcy may want to become aware that shared credit card debt will become the responsibility of the other person if that person involved in the filing. Discharge of a debt in bankruptcy does not make the debt go away. Discharge simply absolves the bankrupt debtor of liability for the amount.

Creditors are free to go after another person who is jointly responsible for the credit card debt in order to collect on the account. The success of the credit card company will depend on whether the person is listed as a joint account holder or if they are simply an authorized user on the bankrupt debtor's account. If they are an authorized user, they can contact the company, explain they are an authorized user with not liability for the balance.

Health insurance may not eliminate medical debt

California residents facing medical bills may know that paying what health insurance does not cover might lead to unexpected debt and financial hardship. According to one study, individuals with private medical insurance whose copays were more than five percent of their overall income experienced difficulties in paying their living expenses and obtaining additional medical care. This ricochet effect may impact other financial areas.

Among those surveyed, most debtors curtailed spending for other items, affecting rent or mortgage payments, groceries and medical prescriptions. Some individuals used debt management programs to structure their debt in a way that allowed them to pay off medical bills. A survey found that approximately 11 percent of Americans took money from retirement accounts to pay off their debt while others lowered the amount they put in their children's college fund or stopped paying into it altogether.

California's statute of limitations on credit card debt

Residents of California enjoy the protection of a statute of limitations against legal actions to collect a credit card debt after a certain number of years have passed. This is meant to prevent creditors from pursuing unfair cases in which too much time has gone by for the accused debtor to properly be able to assemble the evidence for their defense.

State law sets the expiration date for debt at 4 years. After that point the credit card agency may still attempt to collect on the debt, so long as they do not violate any state or federal statutes governing creditor harassment. However, they may not sue to collect upon it and any such case should be dismissed upon the revelation of the age of the debt.

An overview of corporate bankruptcy

When a public company in California files for bankruptcy, it may do so under either Chapter 7 or Chapter 11 of the bankruptcy code. If it files for Chapter 7 bankruptcy, its assets will be liquidated to repay as many creditors as possible. If it files under Chapter 11, the company's debts will be reorganized and the current management team may continue running the company.

However, a company undergoing Chapter 11 bankruptcy must have any major business decisions approved by a court. Generally, secured creditors get paid back first as they took the least amount of risk. Bondholders are paid after that because there is usually an agreement to return principal and pay interest on the debt. Unsecured creditors and stockholders are generally the last to be paid and may not see their money back.

The IRS views forgiven debt as income

People who think that their financial issues are behind them once their debt has been forgiven need to think again. The Internal Revenue Service often sees forgiven debt as income and wants its share of the action. Any California resident who has more than $600 in credit debt forgiven needs to include that as "other income" on his or her tax return.

Getting debt relief through debt settlement may get the collection agencies to stop calling, but it opens up other issues, like having to declare the debt forgiveness as income. Residents who receive a 1099-C form in the mail have had more than $600 in debt forgiven by a creditor and must count that as annual income. The IRS says the number of 1099-C forms filed with the government agency increased five-fold from 2003 to 2012, and that figure is only expected to rise through 2021.

Addressing potential wage garnishment from a paycheck

A California resident may wonder about the best approach to avoiding wages being withheld from a paycheck to cover an unpaid debt. It is important to note that ignoring a debt may lead to a situation in which garnishment is ordered by a court. However, preventive strategies may enable an individual to keep things from escalating to that point.

One of the most important steps to consider in dealing with a debt can be discussing the issue as soon as it becomes apparent that a payment deadline cannot be met. In some cases, it may be possible to arrive at a manageable payment plan. In cases involving payments that have already been missed, a creditor might even be willing to negotiate a settlement in which a lesser amount can be paid in a lump sum. In other cases, it may be possible to obtain debt relief by negotiating a longer payment period with lower overall payments. Creditors may be willing to work with an individual if they realize that bankruptcy is the alternative, a situation that can often result in little or no recovery of an outstanding amount.

The number of people with collections accounts remains steady

If you have consumer debt that has been sent to collections, you are not alone. Seriously…it may sound cliché, but you are literally (and figuratively) not alone. According to a recent report, more than a third of all adult Americans have some type of debt that is in collections.

The report highlighted a study conducted by the Urban Institute, and the types of debt subject to collections were as diverse as the people who were responsible for the debts. Aside from the credit card debt, past due obligations included past-due gym memberships, unpaid cell phone contracts, and hospital bills were common culprits. 

Easy steps to create an emergency fund

There are countless people in debt because of emergencies that have morphed into financial crises. Whether it is a medical emergency or having to deal with unexpected housing repairs, financial trouble occurs when a person incurs debt responding to the emergency that cannot be readily paid back.

Because of this possibility, it is helpful to protect yourself from financial calamities by having an emergency fund. But if you are living from check to check each month, it may not seem realistic to create such a fund. Nevertheless, there are ways to create an emergency fund without relying on credit cards to do so. This post will highlight them.