For many young people, getting a credit card is a rite of passage into adulthood. Unfortunately, many people are never taught how to properly handle money and end up struggling to keep up with mounting credit card debt. Here are three of the most common mistakes people make with credit cards:

1. Signing up for a credit card with no real income. Many college students and adults with limited incomes fall into this trap. They think that having a credit card is a smart way to pay for books, food, personal items and other expenses they have. But the truth is that unless you have an income, it makes absolutely no sense to sign up for a credit card because it won’t take long to fall behind on bills.
2. Co-signing for family or friends. When you co-sign for a card, you’re agreeing to be responsible for all credit card debt in the event your loved one can’t continue making the payments. Are you really willing to take on credit card debt you didn’t run up, or ruin your credit because you can’t afford the payments?
3. Using credit cards for everything. Charging up a lot of stuff you know you can’t afford is just dumb. Put off making purchases until you have the cash to pay for them. If you can’t help yourself and have a real problem controlling your spending, get help from a debt counseling firm. You may need advice on how to deal with emotional issues that are contributing to your financial problems.

The best way to avoid credit card debt is simply to not use credit cards. Save up enough cash for your purchases and contribute to a savings fund for unexpected expenses.

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Generally speaking it is difficult, almost impossible, to discharge a student loan in bankruptcy. The debtor has to show “undue hardship”, and if you are physically able to go to work you will have difficulty showing undue hardship. Except that a few years ago one Arizona debtor was able to discharge part of his student loans in a Chapter 13 case.

Here’s what happened. The debtor put his student loan in a five year Chapter 13 plan. The student loan lender received notice of the plan in the normal course of the bankruptcy. The student loan lender did not object to the plan. After the debtor completed his Chapter 13 and the court issued a discharge order the student loan lender went after the debtor’s income tax refunds to collect the student loan. The creditor claimed that the debtor could not discharge any part of the student loan unless he filed a separate adversary complaint within the bankruptcy proceeding alleging undue hardship.

The bankruptcy court said the balance of the debtor’s student loan was discharged even though the debtor neither claimed nor proved undue hardship in the bankruptcy case. The court said that the lender cannot collect the student loan after the Chapter 13 discharge because the lender had proper notice and never objected to the debtor’s plan.

Although you cannot assume your student loan lender will similarly fail to scrutinize your own Chapter 13 plan, this case suggests that it may make sense to include student loans in a Chapter 13 plan. The same result will not apply to Chapter 7 where creditors with non-dischargeable loans do not have to intervene in order to protect their rights after the Chapter 7 discharge. See, 553 F 3d 1193

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Last week we discussed Credit Cards: The Fast Route to Bankruptcy in Canada and we learned that the vast majority of people who file bankruptcy in Canada owe money on credit cards. Some of those people have money in RRSPs; should they cash out their RRSPs to avoid bankruptcy?

Under current bankruptcy laws in Canada, RRSPs are exempt from seizure by the trustee if you go bankrupt, except to the extent of your contributions in the twelve months prior to bankruptcy. In other words, if you go bankrupt, you only lose the contributions you have made to your RRSP in the twelve months prior to bankruptcy.

(The rules are somewhat more complex than this. For example, if an RRSP is locked in as a result of previous employment, or if there is a life insurance component, it may also be exempt. Consult a bankruptcy trustee to review your specific situation).

This means that in many cases you can declare bankruptcy, eliminate your debts, and not lose your RRSP. What should you do?

Your first option would be to cash in your RRSP and use the proceeds to repay some or all of your debt, thereby avoiding bankruptcy. Here are some thoughts to consider before cashing in an RRSP to repay debt:

First, all withdrawals from an RRSP are taxable in the year you receive them. If you make significant withdrawals, you may bump yourself into a higher tax bracket, leaving a significant tax liability at the end of the year. The bank may with-hold up to 30% on your withdrawal for tax, but if you end up in the 40% or higher tax bracket at the end of the year, you could still have a significant tax liability. So, before cashing in an RRSP, speak to a tax professional to determine exactly what you will owe in tax.

If you are in the 50% tax bracket and you take $50,000 out of your RRSP, you will only net $25,000, so be careful.

Second, cashing in your RRSP to pay only some of your debt may not be a wise move. It all depends on how much debt you have remaining. If you currently have $20,000 in debt and $100,000 in your RRSP, cashing in $25,000 (or whatever is necessary to net $20,000 after tax) is probably a prudent financial decision. You eliminate your debt, and still have money in your RRSP.

However, if you have $100,000 in debts and only $20,000 in your RRSP, cashing in your RRSP and paying the tax still leaves you with significant debt; in that case a consumer proposal or other debt management solution may be more prudent.

Finally, the interest rate you are earning in your RRSP, and the interest you are paying on your debts is also a consideration. If you are earning 1% interest in your RRSP, but you are paying 25% interest on your department store credit card, it may be wise to cash in your RRSP and pay down the high interest debt. Remember that credit card interest is after-tax interest, so it’s very expensive.

There is no one correct answer for everyone. If you have debts, and you have an RRSP, start with our free, instant interactive debt options calculator to review your options, and then consult a bankruptcy trustee to review your specific situation.

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Generally, people seek for bankruptcy advice before actually filing it. As we all know that it is a legal process and contains various formalities. So, it is better to discuss about the debts, creditors, reason of bankruptcy filing etc. with experts or bankruptcy attorneys. These kinds of advices will help to increase the confidence and deal with legal issues. After discussing with experts, you can understand the minor and major things of bankruptcy process nicely.

Bankruptcy advice plays very important role in the complete procedure. Debtors are under no obligation and free to discuss their case with financial consultants, experts and bankruptcy attorneys. Usually, debtors do not choose the right chapter while filing the bankruptcy. It is very important to file bankruptcy as per your criteria and financial condition. There are three important chapters, bankruptcy chapter 7, chapter 11 and chapter 13.

Bankruptcy attorneys are best people to get the bankruptcy advice from. They are professionals and deal under such procedures only. You can apply for under bankruptcy chapter 7, if you have no problem with liquidation of assets. In chapter 13, you have to make the part payments towards the creditors and bankruptcy chapter 11 is only for organizations, companies and partnership firms.

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The general rule is that any property a debtor acquires after he files his bankruptcy petition is not part of his bankruptcy estate. The biggest exception to the general rule is money received as part of an inheritance or life insurance policy. All property the debtor receives by “bequest, devise, or inheritance:” or as a beneficiary of someone’s life insurance within 180 days after the filing date becomes part of the bankruptcy estate and is taken to pay the bankruptcy creditors. The debtor gets any part of the inheritance or insurance proceeds remaining, if any, after the creditors are paid.

I assumed it did not make a difference if the debtor’s inheritance of his parent or grandparent’s money was through the probate of a will as opposed to the administration of a living trust. In the past few decades the living trust has become the primary tool to pass on an inheritance because it avoids probate. I saw a 2010 bankruptcy case that indicates that “inheritances” from a living trust are not included in the above referenced bankruptcy definition of “bequest, devise, or inheritance.” In other words, the case finds that when a debtor becomes entitled to money left by a deceased ancestor though the terms of a living trust the debtor’s recovery is not part of the bankruptcy estate. Apparently, several bankruptcy courts around the country have held that when a debtor becomes entitled to assets in a living trust after someone’s death the debtor’s interest was acquired by the trustmaker’s gift during the trustmaker’s lifetime as opposed to being acquired after death.

I would agree with the court analysis if the ancestor had made a lifetime gift to an irrevocable trust because the debtor/beneficiary’s interest would vest during the ancestor’s lifetime rather than upon his death, or if the ancestor’s revocable trust left the debtor an inheritance subject to a valid spendthrift provision which provisions protect money from the beneficiary’s creditors. This bankruptcy court refers decisions of other bankruptcy courts with broader holdings that, for example, payments made to a debtor from inter vivos trust within 180 days of filing are not interests by what of bequest, devise, or inheritance and that such words do not encompass a revocable living trust. In my opinion living trusts are essentially will and probate substitutes, and without spendthrift protection, their beneficiary interests vested in the debtor within 180 days should be included in the debtor’s bankruptcy. Case No.10-30571 Northern District of Florida, August 6, 2010..

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While filing the bankruptcy, it is important to discuss about bankruptcy assets with bankruptcy attorney or experts. Assets are tangible things which help you to live your life without any problem such as table, car, home, computer, home appliances, cell phone, laptop, chairs etc. Under bankruptcy chapter 7, courts sell these assets to recover the amount of creditors. Generally, bankruptcy attorney or experts can help you to exempt the assets from liquidation.

Bankruptcy filing without lawyer or attorney can be a good invitation for creditors to collect the bankruptcy assets. Mostly people transfer or sell the assets to their family, relative or friends to save them from creditors. But it is not a good practice because court or creditor can easily find out those assets. Creditors have right to checkout the financial transaction of debtors for last one year.

It is not necessary to give up the complete bankruptcy assets. Bankruptcy attorney provide a list to court though which they ask exemption on few assets. It means a good paper work and bankruptcy experts play vital role to save the assets of debtor. Car and home can be claimed as part of exempt assets.

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