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Should filing bankruptcy be your New Year’s resolution?

Did your holiday shopping leave your family thrilled but saddle you with even more debt? If so, you may be thinking about including bankruptcy in your plans for the New Year. Whether that’s a good idea or not depends on how much you spent during the holidays, on what items, and related conditions.

The tax advantages

If you file for Chapter 13 bankruptcy at the beginning of January, any income tax debt from 2018 will be included in your petition. This strategy allows you to pay the IRS in monthly installments instead of dealing with one huge bill that accumulates interest and penalties.

Income tax is considered a priority debt, which means that you can’t eliminate it in bankruptcy like you can with a credit card bill or cell phone account. It must be paid in full via your Chapter 13 repayment plan, which lasts between three and five years. Although you don’t get a “discount,” a priority debt like income tax can reduce the amount of unsecured non-priority debt you would otherwise have to pay.

Eliminating holiday debt?

In 2016, the National Retail Federation estimated that the average American spent $935 during that year’s holiday season. The figure has probably increased since then. If you went all-out on presents this year, then you may feel that January is the ideal time to file for bankruptcy and get a fresh start.

Before taking that step, examine your spending. Did you use credit cards? If so, expect your December spending to be heavily scrutinized by your trustee and the credit card issuers whether you file Chapter 7 or Chapter 13. Applying for new credit or maxing out existing credit not long before filing can cause problems and may even lead to your petition being rejected.

This ban on the use of credit generally applies to what the Bankruptcy Code calls “luxury” purchases, or goods and services that are not essential to your family’s well-being. For example, if you charge groceries or gas (so you can drive to work), it won’t be seen as a luxury expense. Spending $2,000 for a new iMac for your teenage daughter would definitely be treated as unnecessary.

Stop using credit immediately

Once you decide to file for bankruptcy, your best course of action is to stop using your credit cards immediately. If you use credit knowing that you have no intention of repaying it, you risk being accused of fraud and denied the bankruptcy relief you need.

A New York bankruptcy attorney can advise you on how to proceed when you know that filing is inevitable. Although there are many Internet resources dedicated to bankruptcy, only a legal professional can give you the right advice for your situation. Jayson Lutzky has over 35 years of legal experience and has helped many clients file for personal bankruptcy. If you are in debt and are seeking a fresh start, then set up a free in-office initial consultation. Call 718-329-9500 or visit www.MyNewYorkCityLawyer.com/Bankruptcy.

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