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Putting a Stop, at Least Temporarily, to Your Home’s Foreclosure

Posted by Kevin on October 29, 2019 under Bankruptcy Blog | Be the First to Comment

Both Chapter 7 and Chapter 13 will stop a foreclosure.

The Bankruptcy Code says that a bankruptcy “petition filed… operates as a stay, applicable to all entities, of—…  any act to… enforce [any lien] against any property of the debtor…  .” See Section 362(a)(4). This means that the mere filing of your bankruptcy case will immediately stop a foreclosure from happening.

But What if the Foreclosure Still Occurs?

But what if your bankruptcy case is filed just hours or even minutes before the foreclosure sale, but the foreclosing mortgage lender or its attorney can’t be contacted in time for them to be informed? Or what the lender is contacted in time but messes up on its instructions to its foreclosing attorney so that the foreclosure sale mistakenly still takes place? Or what if the lender refuses to acknowledge the effect of the bankruptcy filing and deliberately forecloses anyway?

As long as the bankruptcy is in fact filed at the bankruptcy court BEFORE the foreclosure is conducted, the foreclosure would not be legal. Or at least would very, very likely be immediately undone. It does not matter whether the foreclosure happened mistakenly or intentionally.

A Foreclosure by Mistake

If a foreclosure happens by mistake after a bankruptcy is filed, or because the lender didn’t find out in time, lenders are usually very cooperative in quickly undoing the effect of the foreclosure. It is usually not difficult to establish that the foreclosure occurred after the bankruptcy was filed, and that usually quickly resolves the issue. If a lender fails to undo such a foreclosure after being presented evidence that the bankruptcy was filed first, the lender would be in ongoing violation of the automatic stay. This would make the lender liable for significant financial penalties, so they usually undo the foreclosure right away.

A Foreclosure Purposely Conducted after Your Bankruptcy is Filed

This almost never happens. If you are harmed by a foreclosure intentionally done after your bankruptcy filing, you can “recover actual damages, including costs and attorneys’ fees, and in appropriate circumstances, may recover punitive damages.” See Section 362(k). Bankruptcy judges are not happy with creditors who purposely violate the law. Enough of them have been slapped that most creditors know better.

Chapter 7 vs. Chapter 13

For purposes of stopping a foreclosure that is about to happen, it does not matter whether you file a Chapter 7 or Chapter 13 case. The automatic stay is the same under both.

But how long the protection of the automatic stay lasts can most certainly depend on whether you file a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts.” That’s because even though you get the same automatic stay, each Chapter gives you very different tools for dealing with your mortgage. That’s why your mortgage lender will likely react differently depending on which Chapter you file under and how you propose to deal with the mortgage within each.

Bankruptcy Helps with Debt Problems Even without Writing off Every Debt

Posted by Kevin on September 14, 2019 under Bankruptcy Blog | Comments are off for this article

Neglecting Bankruptcy as an Option

If you have a debt that you have heard cannot be discharged (legally written off), you may not be seriously considering bankruptcy as an option. You probably have not seen a bankruptcy attorney. That could well be a mistake.

Getting the Law Right

But whether or not a specific debt can be discharged, you would be wise to get legal advice about it, for the following 4 reasons:

1. Some debts that can’t be discharged now perhaps can be in the future. Almost all income taxes can be discharged after a series of conditions have been met, which mostly just involve the passage of enough time. So your attorney can create a game plan for you using the tax timing rules to discharge as much tax debt as possible. Timing can also be important with student loans, especially if you have a worsening medical condition or are getting close to retirement age, making for a better argument of “undue hardship.”

2. Even if you can’t discharge a particular debt, bankruptcy can permanently solve an aggressive collection problem.  Often your biggest problem is how aggressively a debt is being collected. For example, you may want to pay your back child support (which is not dischargeable) but the state support enforcement agency is threatening to suspend your driver’s and/or occupational license.  The filing of a bankruptcy triggers the automatic stay which will stop collection efforts during the term of the bankruptcy or until the Court vacates the stay for just cause.  A Chapter 13 case then will allow you the time (3 to 5 years) to catch up on the back support payments based on your budget.

3. Bankruptcy can stop the adding of interest, penalties, and other costs, allowing you to pay off a debt much faster. Unpaid income taxes and certain other kinds of debts take more time to pay off because a part of each payment goes to the ongoing interest and penalties. Certain tax penalties in particular can be large. Most of these additions to the debt are stopped by a Chapter 13 filing, allowing you to become debt-free sooner and by paying less money.

4. Bankruptcy allows you to focus on paying off the debt(s) that you can’t discharge by discharging those you can. You may have a debt or two that can’t be discharged, but you likely also owe a set of debts that can be. Even if bankruptcy can’t solve your entire debt problem by simply discharging all you debts, as long as you can discharge most of your debts that would likely make your remaining debt problem much more manageable.

Conclusion

So don’t let the fact that you’ve heard that you have a debt or two that can’t be discharged in bankruptcy stop you from getting legal advice about it. Your financial life could well still be greatly improved through one of the bankruptcy options.

 

Save Your Sole Proprietorship Business through Chapter 13

Posted by Kevin on February 17, 2019 under Bankruptcy Blog | Comments are off for this article

“Adjustment of Debts of an Individual with Regular Income”

That is the formal name given to Chapter 13 of Title 11—the U. S. Bankruptcy Code.

As the word “Individual” indicates, you must be a person to file a Chapter 13 case—a corporation cannot file one. This also applies to a limited liability company (LLC) and other similar types of legal business entities.

But if you have a business which you operate as a sole proprietorship, you and your business can file a Chapter 13 case together.

The assets of your sole proprietor business are simply considered your personal assets. The debts of your business are simply your debts.

This is true even if your business is operated under an assumed business name or d/b/a.

Chapter 13 Helps Your Sole Proprietorship Business in 6 Major Ways

1) Chapter 13 addresses both your business and personal financial problems in one legal and practical package.  You are personally liable on all debts of your sole proprietorship business, as well as, of course, your individual debts. So as long as you qualify for Chapter 13 otherwise, you can simultaneously resolve both your business and personal debts.

2) Chapter 13 stops both business and personal creditors from suing you, placing liens on your assets, and shutting down your business. The “automatic stay” imposed by the filing of your Chapter 13 case stops ALL your creditors from pursuing you, including both business and personal ones. Your personal creditors are prevented from hurting your business, and your business creditors are prevented from taking your personal assets.

3) Chapter 13 enables you to keep whatever business assets you need to keep operating. If you do not file a bankruptcy, and one of either your business or personal creditors gets a judgment against you, it could try to seize your business assets.  Also, if you filed a Chapter 7 “straight bankruptcy,” under most circumstances you could not continue operating your business. However, Chapter 13 is specifically designed to allow you to keep what you need and continue operating your business.

4) Chapter 13 gives you the power to retain business and personal collateral which secure a business debt even if you are behind on payments. Chapter 13 will allow you to pay those arrearages over the term of the Chapter 13 plan which could be between 36-60 months usually with no interest.

5) If you have second or third mortgages of your personal residence which are completely underwater (e.g. residence worth $200,000 subject to a $225,000 first mortgage and a $60,000 home equity loan), Chapter 13 allows you to strip off the second mortgage and treat it like an unsecured date.  That means that the $60,000 second gets paid for pennies on the dollar from your monthly payments to the Chapter 13 trustee.  And if you successfully complete the Plan, the second mortgage must be cancelled of record.

6.  Business owners in financial trouble are generally also in tax trouble. Chapter 13 gives business owners time to pay tax debts that cannot be discharged (permanently written off), all the while keeping the IRS and other tax agencies at bay. Chapter 13 usually stops the accruing of additional penalties and interest, enabling the tax to be paid off much more quickly. Tax liens can be handled especially well. At the end of a successful Chapter 13 case you will have either discharged or paid off all your tax debts, and will be tax-free.

When a Chapter 7 “Straight Bankruptcy” Helps You Enough on Your Home

Posted by Kevin on February 11, 2019 under Bankruptcy Blog | Comments are off for this article

Chapter 13 Is a Powerful Package

If you want to keep your home but are behind on your mortgage payments, a Chapter 13 “adjustment of debts” is often what you need. It comes with an impressive set of tools to address many home debt problems. It gives you more time to catch up on the mortgage, may enable you to “strip” a second or third mortgage off your title, and gives you very helpful ways for dealing with property taxes, income tax liens, judgment liens, and such.

When Chapter 7 is Enough

But what if you have managed to fall only a few months behind on your mortgage, and could afford the payments if you just got relief from your other debts?

Or what if you aren’t even keeping the house, but do need a little more time to find another place to live?

Then you may not need a Chapter 13 case, and could save the extra time and cost that it would take compared to Chapter 7.

Buying Just Enough Time for What You Need

The “automatic stay”—the bankruptcy provision that stops virtually all actions by creditors against you or your property—applies to Chapter 7 just as it does to Chapter 13.  So the filing of a Chapter 7 case stops a foreclosure just as quickly as a Chapter 13 filing.

But Chapter 7 usually buys you much less time than a Chapter 13 could.

If you are not very far behind on your mortgage payment(s) and want to keep your home, when you file a Chapter 7 case your mortgage lenders will usually give you several months to catch up on your back payments. You must immediately start making your regular monthly payments, if you had not been making them, and must enter a strict schedule for catching up on the arrearage. In return the lender agrees to hold off foreclosing, as long as you make the payments as agreed.

Where do you get the money to make these extra payments?  By discharging your pre-petition debt in the Chapter 7, it could free up hundreds of dollars per month.  The key, then, is to make sure that you use that money to pay the mortgage arrearage and not spend it on other items.

If instead, you are not keeping the house but just need to have more time to save money for moving into a rental home, a well-timed Chapter 7 case will buy you more time in your house. During that time you don’t pay mortgage payments, enabling you to get together first and last month’s rent payment, any necessary security deposit and other moving costs.

The tough-to-answer question is how much extra time would a Chapter 7 filing give you. It mostly depends on how aggressive your mortgage company is about trying to start or restart the foreclosure efforts.  A pushy lender could, soon after you file your case, ask the bankruptcy court for “relief from the stay”—permission to start or restart the foreclosure process. If so, then your bankruptcy filing would buy you only an extra month or so.

Or on the other extreme, a mortgage lender could potentially take no action during the 3-4 months or so until your Chapter 7 case is finished. At that point the “automatic stay” protection expires, and the lender can start or restart the foreclosure. Or it may sit on its hands even longer.  Your bankruptcy attorney will likely have some experience in how aggressive your particular mortgage lender is under facts similar to yours.

Advantages of Paying Your 2018 Income Tax through Chapter 13

Posted by Kevin on January 21, 2019 under Bankruptcy Blog | Comments are off for this article

Say you owe $8000 on your 2018 federal taxes and have $18000 of credit card debt.  If you file under Chapter 7, you should discharge the $18,000 credit card debt, but you will owe the IRS $8000- and they will come after you.

Chapter 13 can help.

Payment of 2018 Income Taxes in Chapter 13 Case

Chapter 13 is a very flexible procedure, especially appropriate for taking care of income tax debt. If you file in 2019, your plan will include taxes owed in 2018.   In fact, that 2018 taxes (and any other years) income tax MUST be paid in full under the terms of your Chapter 13 plan. But the requirement that you pay that tax in full can be used to your advantage in a Chapter 13.

Basic Benefits

No matter what else is going on in your Chapter 13 case, you get three major benefits for paying your 2018 taxes through it.

1. The IRS (and any applicable state income tax agency) cannot harass you during the repayment process.

2. You have much more flexibility on the terms for paying the 2018 tax, including the ability to delay paying anything while focusing on even higher priorities (such as a home/vehicle/child support arrearage).

3. No additional interest or penalties are added while you are in the Chapter 13 case, so you will pay less while paying off the 2018 tax debt.

Paying Off Your 2018 Tax For Free

Sometimes the fact that you owe some recent income taxes can cost you absolutely nothing beyond what you would have had to pay anyway through your Chapter 13 case. How could this be?

The justification for this comes from the Chapter 13 requirement that you must pay all your “disposable income” into your plan each month during the required period of time. Usually that means that all your creditors are scheduled to receive a certain percent of the debt you owe them.  However,  priority creditors (including taxes) and secured creditors are paid first, and then whatever is left over is divided among the “general unsecured” creditors (credit cards).

An Example

Say you have disposable income of $300 per month, a 3 year plan and general unsecured debts of $18,000.  You have to pay into the plan (assuming no trustee or attorney fees for the sake of simplicity), $10,800 (36 months times $300 per month) which would go to “general unsecured” debts.

But now assume that you have a 2018 income tax debt of $8,000. You would still pay $300 per month for 36 months, but now the $8,000 income tax would be paid out first, reducing the amount paid out to the “general unsecured” creditors.  Those creditors would receive only $2,800 ($10,800 minus $8,000) out of the $18,000 owed to them, and you still get a discharge.

Since those 2018 taxes are not dischargeable, you, are, in effect, paying your taxes off the backs of your unsecured creditors.  And you not only discharge your credit card debt but you paid your taxes in full. Not bad.

Pass the Means Test by Filing Bankruptcy in 2018

Posted by Kevin on December 10, 2018 under Bankruptcy Blog | Comments are off for this article

The timing of your bankruptcy filing can determine whether you qualify for quick Chapter 7 vs. paying into a Chapter 13 plan for 3-5 years.

The means test requires people who have the “means” to do so, to pay a meaningful amount on their debts. If you don’t pass the means test you’re effectively stuck with filing a Chapter 13 case.

Be aware that a majority of people who need a Chapter 7 case successfully pass the means test. The most direct way to do so is if your income is no larger than the published “median income” amounts designated for your state and family size. What’s crucial here is the highly unusual way the means test defines income. This can create potential timing advantages and disadvantages.

The Means Test Definition of Income

When considering income for purposes of the means test, don’t think of income as you normally would. Instead:

1) Consider almost all sources of money coming to you in just about any form as income. Included, for example, are disability, workers’ compensation, and unemployment benefits; pension, retirement, and annuity payments received; regular contributions for household expenses by anybody, including a spouse or ex-spouse; rental or other business income; interest, dividends, and royalties. Pretty much the only money excluded are those received under the Social Security Act, including retirement, disability (SSDI), Supplemental Security Income (SSI), and Temporary Assistance to Needy Families (TANF).

2) The period of time that counts for the means test is exactly the 6 full calendar months before your bankruptcy filing date. Included as income is ONLY the money you receive during those specific months. This excludes money received before that 6-month block of time. It also excludes any money received during the calendar month that you file your Chapter 7 case. To clarify this, if you filed a Chapter 7 case this December 15th, your income for the means test would include all money received from exactly June 1 through November 30 of this year.

The Effect of this Unusual Definition of Income

This timing rule means that your means test income can change depending on what month you file your case.

So if you receive an unusual amount of money anytime in December, it doesn’t count if you file a Chapter 7 case by December 31.  Think year end bonus. Remember, if you file bankruptcy in December, only money received June through November gets counted.

So let’s say you got an extra $1,500 as a bonus in December. If you file in December that extra doesn’t count. But if you wait until January to file, December money is counted because the pertinent 6-month period is now July 1 through December 31. That extra $1,500 gets doubled, increasing your annual income by $3,000. That could push you above the designated “median income” for your state and family size.  Then, you may not qualify for Chapter 7.

Conclusion

It is a fact that most people wait way too long before their initial consultation with a bankruptcy lawyer.  Our advice is to consult early so you can know your options and  possibly formulate a strategy which can save you money over the long haul.

 

Understanding Debts- Part 2

Posted by Kevin on November 7, 2018 under Bankruptcy Blog | Be the First to Comment

In the previous blog, we talked about debts in general, and secured debts in particular.  Today, we will talk about general unsecured debts and priority debts.

General Unsecured Debts

All debts that are not legally secured by collateral are called unsecured debts.  And “general” unsecured debts are simply those which are not one of special “priority” debts that the law has selected for special treatment. (See below.) So the category of “general unsecured debts” includes all debts with are both not secured and not “priority.”

General unsecured debts include every imaginable type of debt or claim. The most common ones include most credit cards, virtually all medical bills, personal loans without collateral, checking accounts with a negative balance, unpaid checks, payday loans without collateral, the amount left owing after a vehicle is repossessed and sold, and uninsured or under insured vehicle accident claims against you.

It helps to know that sometimes a debt which had been secured can turn into a general unsecured one. For example, a second mortgage that was fully secured by the value of the home at the time of the loan can become unsecured in a Chapter 13 bankruptcy if the home’s value falls significantly.  Or what was originally a general unsecured debt may, in certain circumstances, turn into a secured debt.

Priority Debts

As the word implies, “priority” debts are ones that Congress has decided should be treated better than general unsecured debts.

Also, there’s a strict order of priority among the priority debts. Certain “priority” debts get paid ahead of the others (and ahead of all the general unsecured debts). In bankruptcy getting paid first often means getting paid something instead of nothing at all.

This has the following practical consequences in the two main kind of consumer bankruptcy:

In most Chapter 7 cases there is no “liquidation” of your assets for distribution to your creditors. That’s because in the vast majority of cases, all the debtors’ assets are protected; they are “exempt.” But in those cases where there ARE non-exempt assets which the bankruptcy trustee gathers and sells, priority debts are paid in full by the trustee before the general unsecured ones receive anything. And among the priority debts those of higher priority are paid in full before the lower priority ones receive anything.

In a Chapter 13 case, your proposed payment plan must demonstrate how you will pay all priority debts in full within the 3 to 5 years of your case. Then after the bankruptcy judge approves your plan, you must in fact pay them before you can be discharged

Here are the most common priority debts for consumers are:

  • child and spousal support—the full amount owed as of the filing of the bankruptcy case
  • certain income taxes, and some other kinds of taxes.

 

 

Your Bankruptcy Options If You Owe Income Taxes After Closing Your Business

Posted by Kevin on May 14, 2018 under Bankruptcy Blog | Comments are off for this article

Most people who close down a failed small business owe income taxes. Chapter 7 and Chapter 13 provide two very different solutions.

 

Here are the two options:

Chapter 7 “Straight Bankruptcy”

File a Chapter 7 case to discharge (permanently write off) most of your debts.  This can include some or even all of your income taxes. If you cannot discharge all of your taxes, right after your Chapter 7 is completed, you (or your attorney or accountant) would arrange a payout plan (either lump sum or over time) with the IRS or other taxing authorities.

Chapter 13 “Adjustment of Debts”

File a Chapter 13 case to discharge all the other debts that you can, and sometimes some or even all the taxes. If you cannot discharge a significant amount of your taxes, you then pay the remaining taxes through your Chapter 13 plan, while under continuous protection of the automatic stay against the IRS’s or state’s collection efforts.

The Income Tax Factor in Deciding Between Chapter 7 and 13

In real life, especially after a complicated process like closing a business, often many factors come into play in deciding between Chapter 7 and Chapter 13. But focusing here only on the income taxes you owe, the choice could be summarize with this key question: Would the amount of tax that you would still owe after completing a Chapter 7 case (if any) be small enough so that you could reliably make workable arrangements with the IRS/state to pay off or settle that obligation within a reasonable time?  If so, consider Chapter 7.  If not, then consider Chapter 13 which provides the automatic stay during the 5 year period allowed to pay taxes.

How Do You Know?

To find out whether you need Chapter 13 protection, you need to find out from your attorney the answers to two questions:

1) What tax debts will not be discharged in a Chapter 7 case?

2) What payment or settlement arrangements will you likely be able to make with the taxing authority to take care of those remaining taxes?

The IRS has some rather straightforward policies about how long an installment plan can last and how much has to be paid. In contrast, predicting whether or not the IRS/state will accept a particular “offer-in-compromise” to settle a debt can be much more difficult to predict.  Generally, it takes more attorney or accountant time to negotiate an offer in compromise, so the cost factor to the debtor should be considered.

When in doubt about whether you would be able to pay what the taxing authorities would require after a Chapter 7 case (either by installment plan or offer in compromise), or in doubt about some other way of resolving the tax debt, you may well be better off under the protections of Chapter 13.

 

 

Choosing the Right Solution in a Closed-Business Bankruptcy Case

Posted by Kevin on March 28, 2018 under Bankruptcy Blog | Comments are off for this article

Whether to file under Chapter 7 or Chapter 13 depends largely on your business assets, taxes, and other nondischargeable debts.

You have closed down your business and are considering bankruptcy.  What are your options?

If you operated as a sole proprietor (DBA), then all the debts of the business are your personal debts.  If you operated as a corporation or LLC, then the business was a separate entity.  So, the business entity is liable for its debts, then, absent fraud, you are liable only for those debts which you personally guaranteed.  In addition, you personally may be liable to taxing authorities for certain taxes.

Then, you have to consider remaining assets of the business.  If a DBA, then you own the assets which become part of your bankruptcy estate upon filing.  If it a corporation or LLC, then the entity owns the assets.  But if you are the 100% owner of the business, then the stock or other ownership interest is an asset of the bankruptcy estate.  So, the trustee can get to the assets through your ownership interest.

Your options would be to file under Chapter 7 or Chapter 13.  A Chapter 7 is generally over in 4-5 months and requires no payments.  A Chapter 13 lasts from 36-60 months and requires payments each month.  It would be understandable if you preferred to file under Chapter 7.

Likely Can File Under Chapter 7 Under the “Means Test”

The “means test” determines whether, with your income and expenses, you can file a Chapter 7 case.  The “means test” will still not likely be a problem if you closed down your business recently. That’s because the period of income that counts for the “means test” is the six full calendar months before your bankruptcy case is filed. An about-to-fail business usually isn’t generating much income. So, there is a very good chance that your income for “means test” purposes is less than the published median income amount for your family size, in your state. If your prior 6-month income is less than the median amount, by that fact alone you’ve passed the means test and qualified for Chapter 7.

Three Factors about Filing Chapter 7 vs. 13—Business Assets, Taxes, and Other Non-Discharged Debt

The following three factors seem to come up all the time when deciding between filing Chapter 7 or 13:

1. Business assets: A Chapter 7 case is either “asset” or “no asset.” In a “no asset” case, the Chapter 7 trustee decides—usually quite quickly—that all of your assets are exempt (protected by exemptions) and so cannot be taken from you to pay creditors.

If you had a recently closed business, there more likely are assets that are not exempt and are worth the trustee’s effort to collect and liquidate. If you have such collectable business assets, discuss with your attorney where the money from the proceeds of the Chapter 7 trustee’s sale of those assets would likely go, and whether that result is in your best interest compared to what would happen to those assets in a Chapter 13 case.

2. Taxes: It seems like every person who has recently closed a business and is considering bankruptcy has tax debts. Although some taxes can be discharged in a Chapter 7 case, many cannot. Especially in situations in which a lot of taxes would not be discharged, Chapter 13 is often a better way to deal with them.

3. Other nondischargeable debts: Bankruptcies involving former businesses get more than the usual amount of challenges by creditors. These challenges are usually by creditors trying to avoid the discharge (legal write-off) of its debts based on allegations of fraud or misrepresentation. The business owner may be accused of acting in some fraudulent fashion against a former business partner, his or her business landlord, or some other major creditor.  These kinds of disputes can greatly complicate a bankruptcy case, regardless whether occurring under Chapter 7 or 13. But in some situations Chapter 13 could give you certain legal and tactical advantages over Chapter 7.

 

 

What Happens to the Owner Whose Business Fails

Posted by Kevin on March 4, 2018 under Bankruptcy Blog | Be the First to Comment

In the prior blog, we learned that a corporation or LLC (business entity) can file bankruptcy under Chapter 7.  Are there any situations where the owner of the business would file bankruptcy when the business fails?  The answer is yes under the following circumstances:

– the business is being operated as a sole proprietorship; or

-the owner of the business has provided personal guarantees of the obligations of the business.

If the business entity is a sole proprietorship (for example, John Smith doing business as “The Hot Dog King”), the business and the owner are the same person for legal purposes.   All the assets and liabilities of the business are in the name of the owner.  If that business fails,  the creditors can bring a lawsuit against the owner.  Moreover, if the creditor obtains a judgment, that creditor can look to any of the assets of the owner to be made whole.  That includes both the business assets and personal assets of the owner.  To avoid this outcome and allow for an orderly liquidation of the assets of the sole proprietorship, the owner can file bankruptcy, and obtain a discharge of debt.

If the business is a corporation or LLC, the law considers the business to be an entity separate from its owners.  In many cases involving businesses, creditors (especially banks, inventory suppliers, and the like) will require the owner to guarantee business debt.  If the business defaults on the obligation, the creditor, which is the beneficiary of the guarantee, may sue the guarantor/owners, obtain a judgment, and attempt to levy on any assets of the owner including assets that have nothing to do with the business.  To avoid this outcome, the owner/guarantor can file bankruptcy, and obtain a discharge of debt.

Will the owner of the business, either as a sole proprietor or a guarantor of debt,  be able to file a Chapter 7 or will he or she be forced into a Chapter 13 where 3-5 years of payments to creditors are required.  While individuals are generally subject to the means test (which we spoke about a few blogs back) , the good news is that you do not have to pass the means test at all unless your “debts are primarily consumer debts.”  So if your debts are primarily business debts—more than 50%–you avoid the means test altogether.

Let’s be clear about the difference between these two types of debts.  A “consumer debt” is a “debt incurred by an individual primarily for a personal, family, or household purpose.”  So, business guarantees are not consumer debts.  It can be argued that cash advances on credit cards which are used by the business are not consumer debts.    If you had taken out a second mortgage on your home for the clear purpose of financing your business, that second mortgage would likely be considered a business debt.  It depends on the purpose for incurring the debt.

Certainly there are times when the line between a business and consumer debt is not clear. Given what may be riding on this—the ability to discharge all or most of your debts in about four month under Chapter 7 vs. paying on them for up to 5 years under Chapter 13—be sure to discuss this thoroughly with your attorney.

The Expenses Step of the Chapter 7 “Means Test”

Posted by Kevin on February 18, 2018 under Bankruptcy Blog | Comments are off for this article

If your income is lower than the median income for your household size within your State, there is a “no presumption of abuse” and you can, almost always, file under Chapter 7.  If, however, your income is higher than “median income,” you may still file a Chapter 7 case by going through the expenses step of the Means Test.

The concept behind the Means Test is pretty straightforward: people who have the means to pay a meaningful amount to their creditors over a reasonable period of time should be required to do so.  That means they must file under Chapter 13 where payments are made to creditors over a 3-5 year period.

But putting that concept into law resulted in an amazingly complicated set of rules.

One of the complications is that the allowed expenses include some based on your stated actual expense amounts, while others are based on standard amounts. The standard amounts are based on Internal Revenue Service tables of expenses, but some of those standards are national and some vary by state. There are even some expenses which are partly standard and partly actual (certain components of transportation expenses).

Disposable Income

If after subtracting all the allowed expenses from your “income” you have some money left over, whether you can be in Chapter 7 depends on the amount of that money and how that compares to the amount of your debts:

  1. If the amount left over—the “monthly disposable income”—is no more than $128.33, then you still pass the means test and qualify for Chapter 7.
  2. If your “monthly disposable income” is between $128.33 and $214.17, then apply the following formula: multiply that amount by 60, and compare that to the total amount of your regular (not “priority”) unsecured debts. If the multiplied total is less than 25% of those debts, then you still pass the means test and qualify for Chapter 7.
  3. If after applying the above formula you can pay 25% or more of those debts, OR if your “monthly disposable income” is more than $214.17, then you do NOT pass the means test, UNLESS you can show “special circumstances”.

THAT’s Complicated! 

If you don’t pass the means test you, will likely end up in a 3-to-5-year Chapter 13 case. Not only will that mean you cannot discharge your debts until the end of the 3-5 year period, but you may well also end up paying thousands, or even tens of thousands, more dollars to your creditors. It’s definitely worth going through the effort to find a competent bankruptcy attorney to help you, whenever possible, find a way to pass the means test.

 

U. S. Bankruptcy Laws Took Very Long to Get Off the Ground

Posted by Kevin on January 30, 2018 under Bankruptcy Blog | Be the First to Comment

The Constitution empowered Congress to “pass uniform laws on the subject of bankruptcies,” which then took more than 100 years to do so.

 

  • The United States started its existence without a national bankruptcy law. The Second Continental Congress established the United States with its founding constitution consisting of the “Articles of Confederation and Perpetual Union,” drafted in 1776-1777.  The Articles of Confederation were not ratified by the original 13 states until 1781.  The Articles did not provide for a nationwide bankruptcy system.
  • The American Revolutionary War formally ended in 1783 with the signing of the Treaty of Paris.  The Articles of Confederation proved inadequate, so in 1787, a constitutional convention was called to draft a new constitution.  The U.S. Constitution was ratified by the states in 1789.  It did allow for, yet did not create, a national bankruptcy law. It merely empowered Congress to “pass uniform laws on the subject of bankruptcies”.
  • Three different times during the 1800s, a federal bankruptcy law was passed in direct reaction to a financial “panic.” But these federal laws were each repealed after the financial crises were over. The first act was passed in 1800 but repealed in 1803. The second was passed in 1841 but repealed in 1847.  The third bankruptcy act was passed in 1867 but repealed in 1878.
  • During the long periods when there was no nationwide law in effect, the states developed a patchwork of bankruptcy and debtor-creditor laws. But these local laws became more and more cumbersome as commerce became ever more interstate.
  • Finally, Congress got it right when it passed the Bankruptcy Act of 1898.   The 1898 Act lasted 80 years.  This law was inspired by commercial creditors to help in the collection of debts.  However, it included the following very important debtor-friendly provisions: most debts became dischargeable, and creditors no longer had to be paid a certain minimum percentage of their debts.
  • This Bankruptcy Act of 1898 was amended many times, significantly in 1938 in reaction to the Great Depression. Among other things, the 1938 amendment added the “chapter XIII” wage earners’ plans, the predecessor to today’s Chapter 13s.
  • The 1978 Bankruptcy Reform Act, the result of a decade of study and debate, gave us the Bankruptcy Code. It has been amended every few years since then, most significantly in 2005 with BAPCPA, the so–called Bankruptcy Abuse Prevention and Consumer Protection Act.

Satisfying the Debtor Education Requirement

Posted by Kevin on November 27, 2017 under Bankruptcy Blog | Comments are off for this article

In a prior blog, we talked about the credit counseling course that a debtor must take before he or she can file under Chapter 7 or 13.  After the petition is filed, the debtor must take the debtor education course.  This is sometimes called the personal financial management course.

The course is given by a non profit budget and credit counseling agency approved by the United States Trustee.  The course is usually taken online but, depending on the provider, can be done over the phone, or even in person.  The  purpose of the course is to provide the debtor with insight into his or her current financial situation which led to the bankruptcy, and how to budget income and expenses to avoid financial problems going forward.

The debtor education course requirement was part of the 2005 amendments to the Bankruptcy Code.  As I stated in the blog dealing with the credit counseling course, in my opinion, one of unspoken policies for the 2005 amendments to the Bankruptcy Code was to discourage bankruptcy filings by making them more time consuming and expensive.   The debtor education course requirement (just as the credit counseling course requirement) is an additional hoop through which a debtor is forced to jump.  Hate to sound cynical, but in the 12 years since the 2005 amendments, I have never had a debtor tell me how valuable either course was.

So, what happens if you decide to save a few bucks by not taking the debtor education course.  The punishment is draconian.  No course taken- no certificate of completion filed with the Clerk of the Bankruptcy Court, no discharge.  That means that your debts are not wiped out.

I remind my clients at the meeting of creditors that if they have not already taken the debtor education course, they should do so immediately.

Let’s say you mess up and don’t take the course.  Any recourse?  You may be able to re-open your case to take the course and file the certificate of completion.  However, you will incur additional legal and filing fees.  In the meanwhile, because your debts are not discharged, your creditors can take action to collect of their debts.  Finally, there is some risk that the judge will not let you reopen the case.  Don’t put yourself in that position.

 

Chapter 13 Basics- Debt Limits

Posted by Kevin on November 22, 2017 under Bankruptcy Blog | Be the First to Comment

In the prior blog, we learned that you may be required to file under Chapter 13 because, simply put, you make too much money to file under Chapter 7.   Guess what?  There are restrictions on filing Chapter 13 also.  First, you must be an individual.  That means a live person.  Second, you must have regular income.  That usually means a job, but it can even include social security or public assistance.  Third, your secured debts cannot exceed $1,184,200.  Fourth, your unsecured debts cannot exceed $394,725.  Items three and four are commonly called Debt Limits which are adjusted periodically.

So, what’s a secured debt.  It means generally any debt for which you have given collateral.  Examples: a home mortgage or a car loan.  But, it can also include a judicial lien, a statutory lien or a filed IRS tax lien.  A judicial lien comes about when someone gets a judgment against you, and the sheriff  attaches a specific item of property like your bank account.  A statutory lien comes about by law.  An example is your real estate taxes.

Unsecured claims can be credit cards, medical bills, loans that you guaranteed for your business, and priority debts like back child support.

In the prior blog, we learned that a debtor in Chapter 13 can strip off a second mortgage if that mortgage is totally underwater.  For example, your home is worth $200,000.  The first mortgage is for $250,000 and the second mortgage is for $100,000.  The second mortgage is recorded and would otherwise be considered a secured claim except that there is no collateral to attach to it because the first mortgagee is owed more than the collateral is worth.  In that case the stripped off second mortgage becomes an unsecured claim.

So, how do you count the second mortgage when you are figuring out the Debt Limits for Chapter 13.  In our example, the stripped off second mortgage is counted with the unsecured claims.  So, in our case, you have to add the $100,000 to your other unsecured debts even though there was a mortgage.

Sometimes, the stripped off second mortgage can put you over the Debt Limit for unsecured debt.  What happens then?  Well, if you do not qualify for Chapter 7, your only alternative is Chapter 11.  Ouch.  Although individuals can file Chapter 11, that is an expensive proposition.

Chapter 13 Basics-Why File?

Posted by Kevin on November 3, 2017 under Bankruptcy Blog | Be the First to Comment

In Chapter 7, debtors make no payments to their creditors but a Chapter 7 trustee can sell all non-exempt property and pay unsecured creditors.  The process is over in 4 months or so, and the debtor obtains a discharge of most of her debts.  In Chapter 13, however, debtors get to keep even their non-exempt property but must make monthly payments to the Chapter 13 trustee for a period of 36 to 60 months before they can get a discharge of most of their debts.

So, we are assuming that you are having trouble paying your bills.  You are contemplating bankruptcy.  Why would you choose to make payments for 3 to 5 years to get a discharge when you can pay nothing and get a discharge in 4 months.  Well, there are a number of reasons why prospective debtors pick Chapter 13.  In 2005, Bankruptcy Code was amended by a law referred to as BAPCPA.   BAPCPA adopted what is called the Means Test to determine if you could file under Chapter 7.  If your income based on family size exceeds the median for your State, you must pass the Means Test to file under Chapter 7.  The Means Test is based on IRS tests to determine how much a taxpayer can pay in back taxes.  So, if you are above median income and you fail the Means Test, you cannot file Chapter 7, and are be required to file under Chapter 13 if you otherwise qualify.

But, there are other reasons to file under Chapter 13 even if you pass the Means Test.  Say you own a home with significant equity.  In a Chapter 7, the trustee can sell your home and pay off your creditors.  In a Chapter 13, if you make all payments under a Plan confirmed by the Court, you can keep your home.  In addition, let’s say that you own a home but are in arrears on the mortgage.  In Chapter 13, you can pay off the arrears over the term of the Plan.  That could be up to 60 months.

Finally, say your house was worth $400,000 when you bought it, but after the mortgage crisis, it is only worth $250,000.  You owe $270,000 on a first mortgage and $50,000 on a second mortgage.  In this case, the collateral covers most of the first mortgage, but the second mortgage is completely unsecured.  In other words, if there was a foreclosure, the first mortgage holder would be paid a good amount of what it is owed, but the second mortgage holder would get nothing.  In Chapter 13 in our example, you can “strip off” that second mortgage and treat it as unsecured debt since there is no collateral to attach to that mortgage.  So, instead of making monthly payments of, say, $300 per month on the second, that creditor gets only a pro rata share of what is paid to the unsecured creditors.  If your plan payment is, say, $100 per month, then the second mortgage holder gets to share that $100 with the other unsecured creditors instead of getting $300 per month.  A substantial savings.   If you make all the payments, the second mortgage holder is required to release the mortgage lien of record.

In some cases, you are forced into Chapter 13, but that does not mean that Chapter 13 cannot provide some real benefits, especially to homeowners.  If you think Chapter 13 can help your situation, you should speak with an experienced bankruptcy attorney.  Chapter 13 is not a DIY project.

Bankruptcy Basics

Posted by Kevin on October 3, 2017 under Bankruptcy Blog | Be the First to Comment

Over the last couple of years, this blog has dealt with many Chapter 7 and Chapter 13 issues.  Some simple, some complex.  Every once and awhile, however, it is good to go back to the basics.  So, in the next few blogs, that is what we will do.

We will begin with an overview.  Many people are skittish about filing bankruptcy.  Yes, they are in a bad financial situation.  Not enough money coming in, debts are mounting, creditor calls are becoming more than annoying, and maybe there are lawsuits.  In society, we are brought up to be responsible and honor our obligations.  It is part of being an adult.  For many, the thought of bankruptcy is equated with failure.   But I take a different point of view.  Bankruptcy should be looked as a vehicle for a new start, a fresh start.

Many people do not know this, but the right to file bankruptcy is in the Constitution.  Congress is given the right to establish uniform laws concerning bankruptcy.  The first bankruptcy law was adopted by Congress in 1800.  It was clearly pro-creditor.  There were subsequent bankruptcy acts in 1841, 1867, 1898 and 1938.

The next major revision was the Bankruptcy Reform Act of 1978, commonly referred to as the Bankruptcy Code.  The Bankruptcy Code marked a significant change in the point of view of bankruptcy laws.  It was decidedly more pro-debtor compared to prior law.   It allowed a vast majority of debtors to file Chapter 7  where debtors are not required to make cash payments to creditors and keep most, if not all, of their assets.

Creditor groups complained that the Bankruptcy Code was too pro-debtor and lobbied Congress for changes.  This led to minor revisions in the 1980’s and 1990’s.  The lobbying continued.  In 2005, Congress adopted the Bankruptcy Abuse Protection and Consumer Protection Act (BAPCPA).  Although this was a major overhaul of  many areas of the Bankruptcy Code, from a consumer’s point of view, BAPCPA tries to force more debtors into Chapter 13 where monthly payments must be made by the debtor for periods ranging from 36 months to 60 months.  All in all, BAPCPA has made the bankruptcy process more complex and more costly to a prospective debtor.

If there is anything that you should take from this blog, it is that bankruptcy is a right that you have under the Constitution of the United States.  It gives you an opportunity to deal with your debts and get a fresh start.

 

 

Bankruptcy Is a Moral Choice

Posted by Kevin on August 26, 2017 under Bankruptcy Blog | Comments are off for this article

Is Filing Bankruptcy a Moral Choice?

As a bankruptcy practitioner, I take for granted that filing for bankruptcy is a practical, economic choice.  But for many of my clients, it is also a moral choice.  They took the money or used the credit with the good faith expectation that they would pay back the creditor, and now they cannot.  Does that make them a bad person?  How do you reconcile this apparent disconnect?

For many of my clients with misgivings about filing, I advise to meet the issue head on.  You’ll feel better (even good) about the decision only after you believe in your head and in your heart that it really is the right step to take.

How to Make a Good Moral Decision 

1. What got you to this point of your finances?

 You made legal commitments to pay your debts. What has changed so that you are having trouble now meeting those honest intentions to pay? What is making you seriously consider breaking those commitments permanently?  

2. Understand your present: what are the costs and benefits of now trying to meet those financial commitments?

The moral benefit  of not filing is that you would be keeping your promises to pay your debts. It’s easy to fixate on this and feel guilty about breaking these honest promises. But how about the real costs if you kept struggling to meet them? Consider your physical health, and your emotional health as you deal with the constant stress. Consider the debts’ effect on your marriage and family relationships.  What financial and emotional responsibilities do you have to spouse, children, parents, siblings, community that you just can’t handle?  You clearly have moral obligations to all these people in addition to obligations to your creditors.

3. You CAN make a good decision: you now have the opportunity to choose and act wisely.

Face your situation honestly. Don’t hide from the truth, even if it means accepting that you’ve made mistakes. Own them. But don’t beat yourself up about them. Focus on the future. Focus on what you have to do (or not do) to insure a better economic future.  Not just generalizations but concrete steps.  Resolve to make better economic (and other) decisions every day going forward.  And then walk the walk.

4. Get good advice: you can only make good decisions if you know your legal and practical options.

You can’t make good economic or moral choices about how to attack your debts without knowing your legal alternatives for doing so.  You can’t know whether the best way to deal with your creditors if you don’t know those legal options.  It may turn out that credit counseling will allow you to manage your debts within your budget and without filing bankruptcy.  It may turn out that a Chapter 13 payment plan fits your set of life obligation better than a Chapter 7 “straight bankruptcy”.  But you cannot make those decisions unless you have the facts and options.

5.  Weigh your legal options: consider effects on your creditors, yourself, your spouse, your family, and anyone else involved.

Get help from the right people and resources. Do whatever helps YOU make a good decision.  Although bankruptcy attorneys are legal advisors, experienced bankruptcy attorneys have dealt with many people in their careers who have focused not only on the economic issues but the moral issues in filing bankruptcy.  Discuss these concerns with your attorney.  It will help you make the best, well informed decision which is the first step to a much better future.

 

Dumping Your Chapter 13 Case Midstream

Posted by Kevin on August 20, 2017 under Bankruptcy Blog | Comments are off for this article

You can usually get out of an ongoing Chapter 13 “adjustments of debts” bankruptcy case by simply asking to do so.

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Unlike Chapter 7, if you file a Chapter 13 case you can end it—“dismiss” the case—at any time, and in just about any circumstance. But why the difference?

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Explicit Right to Dismiss

Why can a Chapter 13 case be dismissed by the debtor? Because unlike with Chapter 7, Section 1307(b) of the Bankruptcy Code says so. And quite strongly.

“On request of the debtor at any time… the [bankruptcy] court shall dismiss a case under this chapter [13].”

Notice that the debtor can ask for a dismissal “at any time.” This implies that the request could come any time during the life of a Chapter 13 case, including when it might be particularly inconvenient for a creditor. Or whenever. Also notice that the court does not seem to have any discretion about whether or not to dismiss–it “shall” dismiss the case. Not “may” or “might” dismiss it, but “shall” do so.

An Absolute Right to Dismiss?

Actually there has been debate among bankruptcy judges about whether a court can ever prevent a Chapter 13 case from being dismissed on request of a debtor. And a number of judges have decided that in situations of serious abuse or fraud by the debtor, there are other provisions in the law that trump this section and prevent a Chapter 13 case from being dismissed.  But still, in the vast majority of situations, a request by a debtor to dismiss a Chapter 13 case results in its near-immediate dismissal.

Why So Different Than Chapter 7?

But why does the Bankruptcy Code—the federal statute governing bankruptcy—provide for a right to dismiss a Chapter 13 case when it does not provide for Chapter 7 dismissal the same way?

Because (beyond the reasons given in the last blog related to Chapter 7) when Congress established the bankruptcy options, it wanted to encourage debtors to file Chapter 13 cases. This was in part so that they paid back at least some of their debts. Congress probably also recognized that filing a Chapter 13 case is generally riskier than filing Chapter 7. That’s mostly because it involves making payments diligently over the course of years, while not getting the reward of the discharge (legal write-off) of the debts unless successfully getting all the way to the end of it. To encourage taking on the risk of starting a Chapter 13 case, Congress made it easy to get out of it if things did not go as planned.

Saving Your Home Through Chapter 7 and Chapter 13 in Three Scenarios

Posted by Kevin on June 28, 2017 under Bankruptcy Blog | Comments are off for this article

Here are 3 scenarios where a debtor tries to save his or her home. When is Chapter 7 “straight bankruptcy” enough, and when do you need Chapter 13 “adjustment of debts”? 

Scenario #1: Current on Your Home Mortgage(s), Behind on Other Debts

Chapter 7:  Would likely discharge (legally write off) most if not all of your other debts, freeing up cash flow so that you can make your house payments. Stops those other debts from turning into judgments and liens against your home.

Chapter 13:  Same benefits as Chapter 7, plus often a better way to deal with many other special debts, such as income taxes, back support payments, and vehicle loans. May be able to “strip” (permanently get rid of) a 2nd or 3rd mortgage, so that you would not have to make that monthly payment, and paying little or nothing on the balance during the case and then discharging any remaining balance at the successful completion of your case.

Scenario #2. Not Current on Home Mortgage(s) But Only a Few Payments Behind & No Pending Foreclosure

Chapter 7:  May buy you enough time to get current on your mortgage, if you’ve slipped only two or three payments behind. Most mortgage companies and their servicers (the people you actually interact with) will agree to give you several months—generally up to a year—to catch up on your mortgage arrearages. Generally called a “forbearance agreement”—lender agrees to “forbear” from foreclosing as long as you make the agreed payments. Works only if you have an unusual source of money (a generous relative or a pending legal settlement that’s exempt from the other creditors), or if filing Chapter 7 will stop enough money going to other creditors so you will have enough monthly cash flow to pay off the mortgage arrearages quickly.

Chapter 13:  Even if only a few thousand dollars behind on your mortgage, you may not have enough extra money each month after filing a Chapter 7 case to catch up quickly on that mortgage arrearages.  If lender is inflexible about giving you more time to catch up,  a Chapter 13 case forces them to accept a much longer period to do so—three to five years.

Scenario #3. Many Payments Behind on Your Mortgage(s):

Chapter 7:  Not helpful here.  Buys at best only two to three months or so. Also, no possibility of “stripping”a 2nd or 3rd mortgage.

Chapter 13:  Assumes that you can at least make the regular mortgage payment consistently, along with the arrearages catch-up payments. As stated above, gives you up to five years to pay off the mortgage arrearages,  Your home is protected from foreclosure as long as you maintain the agreed Chapter 13 Plan and mortgage payments. Does not enable you to reduce the first mortgage payment amount, although in some situations you may be able to “strip” your 2nd or 3rd mortgage.

In my 30+ years of experience as a bankruptcy attorney, have seen Scenario #1 only once (was a close friend and he is still in his home).  Usually see Scenario #3 because most debtors do not seek counsel until they are really “in the hole”.  Be smart.  When things start to go south, call an experienced bankruptcy attorney to learn your options.

 

Keeping All that You Own in Bankruptcy

Posted by Kevin on June 20, 2017 under Bankruptcy Blog | Be the First to Comment

Can you really keep everything you own if you file bankruptcy?  The Answer: Usually Yes.

Some basics. 

There are two basic types of consumer bankruptcies.  Chapter 7  is an asset based approach.  The Chapter 7 trustee sells your “non-exempt” property and pays your creditors.  Chapter 13 is an income based approach where you generally keep your assets but have to make payments to your creditors over a 36-60 month period.

There are two types of creditors:  secured creditors (they took collateral as a condition of granting you credit, and can look to the collateral to be paid even after the bankruptcy), and unsecured creditors (basically no collateral).

The purpose of bankruptcy is to give an honest debtor a fresh start.  That means that most, if not all,  of your debts are discharged, and you can keep all or most of your property.

Now how is that accomplished.

In a Chapter 13, as stated above, you keep the property you want to keep in exchange for making payments over the term of 36-60 months.

In a Chapter 7 “straight bankruptcy,” your debts are discharged—legally written off forever—in return for you giving your unprotected assets to your creditors (as represented by the bankruptcy trustee). But here is the good part: for most people, all or most of their assets ARE protected, or “exempt.” from the trustee and your creditors.  Why?  The fresh start.

Property Exemptions- The Basics

  • The Bankruptcy Code has a set of federal exemptions, and each state also has its own exemptions. In some states you have a choice between using the federal exemptions or the state exemptions, while in other states you are only permitted to use the state exemptions.  In New Jersey, we can use either.   In many states, choosing which of the two exemption schemes is better for you is often not clear.  However,  in New Jersey, debtors generally use the federal exemptions.  Why?  Because many of the New Jersey exemptions were created by statute about 100 year ago or more, and were not adjusted for inflation.  Moreover, New Jersey has no homestead exemption.
  • If you have moved relatively recently from another state, you may have to use the exemption rules of your prior state. Because different state’s exemption types and amounts can differ widely, thousands of dollars can be at stake depending on when your bankruptcy case is filed.
  • In some circumstances, it is not clear how the federal exemptions will be applied.  What if you own a car and you owe $10,000 on your car loan.   Clearly, the bank (secured lender) has an interest as do you.  But, the trustee also may be able to make a claim to part of the value to the car, and sell it.

Navigating through exemptions can be much more complicated than it looks, and is one of the most important services provided by your bankruptcy attorney.  It can maximize the amount of property you keep after receiving your bankruptcy discharge.