Articles Posted in Assets and Bankruptcy

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The University of Arizona’s Eller College of Management sponsored an ethics symposium on August 20 for about 75 executives and others. The main point of the symposium was to discuss whether it is moral/ethical for a consumer living in an upside down home to simply walk away from it or “strategically default”. Then, after walking away to take advantage of the various laws protecting the consumer from deficiency balances and taxes.

See the Inside Tucson Business article here.

As stated in the article, most consumers do not walk away from upside down homes, even when it is makes financial sense to do so. I get the sense from the article (I didn’t attend, don’t like the UoA…go devils!) that the experts are a bit surprised by this.

The surprise is I believe, based on the following line of thought:

1. The consumer has limited options because he is fenced in by his own ethical sense of obligation to pay his debt
2. The banks are only fenced in by their drive for profits and fear of losses.

3. The burdens of this whole thing fall unfairly on the consumer as a result…something about the loss of bargaining power.

4. For this reason, and because the lender knew the buyer would or could default, it can’t be unethical for the consumer to simply walk.

Got it? Ethics don’t or shouldn’t exist in this scenario. The bank doesn’t use it, neither should the consumer.

The fact that most consumers do not always adopt this line of reasoning and simply walk away doesn’t surprise me though.
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If you have serious debt and feel that bankruptcy may be in your future, be aware of the following:

1. You should avoid borrowing money or withdrawing money from your IRA, 401k or ERISA qualified retirement plans to pay the debt. These funds should be safe in a bankruptcy case.

2. Don’t borrow money on your home’s equity to pay your bills.

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Most chapter 7 bankruptcy cases filed in the U.S. are considered “no asset” cases. “No asset”, is a term lawyers and others involved in the bankruptcy process call chapter 7 cases in which there are no assets available for the chapter 7 trustee to sell and share with creditors either because they are legally “exempt” or just not worth the time.

So a basic question: What does the law protect?

A good place to start is to read a basic list of Arizona bankruptcy exemptions. The U.S. Bankruptcy Court updates a list every so often and has done so as recently as May 2010. Read it here.

Some interesting points about this list:

1. Most major assets Arizona consumers own are exempt in a chapter 7 bankruptcy case.

– Homes – possibly 150000 in equity is exempt (equity =value minus the bank loan)
– Cars – 5000 in equity per person – Most retirement plan/accounts Continue reading

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Auto finance companies can repossess your car if your are late, they don’t have to wait a certain period of time to do so. Partial payments won’t typically slow the repossession process down and pleading your case to the lender doesn’t guarantee that they will wait forever.

If you are unable to catch up the car payments and the car is repossessed, the “repo man” can’t “breach the peace” however. Generally, this means that he can’t:

1. forcibly remove you from the car 2. force you to stop 3. break into property in order to get the car 4. pretend to be a law enforcement officer 5. threaten you or assault you
If any of the above occur, it is probably wise for you to step away and call the police.

If you want to save the car you may have one of the following options:
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