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Chapter 7 Basics

Posted by Kevin on October 15, 2017 under Bankruptcy Blog | Be the First to Comment

The Bankruptcy Code is divided into chapters.  Chapters 1, 3, and 5 deal with basic concepts that apply to all the various types of bankruptcies.  Chapter 7 deals with liquidations for individuals or businesses.  Chapter 9 deals with municipalities.  Chapter 11 deals with reorganizations and/or planned liquidations of mainly businesses.  Chapter 12 deals with family farms (do not get many of them in northern New Jersey).  Chapter 13 deals with repayment plans for individuals.  For the average consumer, Chapter 7 and Chapter 13 are the two alternatives methods of filing bankruptcy.  For individuals, the object of any bankruptcy is to get a discharge of your debts.  In other words, wiped out.

Let’s look at Chapter 7.  This is sometimes called a straight bankruptcy or a liquidation.  Chapter 7 is basically an asset driven analysis.  You do not make payments, but a trustee can sell your non-exempt property, and pay out your creditors.  The repayment scheme is set out in the Bankruptcy Code.  Upon the conclusion, many of your debts are discharged.  Certain enumerated debts are not wiped out such as domestic support obligations, debts incurred by fraud, certain taxes and most student loans.

After the Bankruptcy Code went into effect, creditor groups complained for the next 25 years that it was too easy for debtors to file under Chapter 7, which in a vast majority of cases, translated into no payments to creditors.  Creditors wanted more debtors to file under Chapter 13 where monthly payments must be made to a trustee and certain creditors need be paid in full.  The 2005 revisions to the Bankruptcy Code considers a debtor’s income in whether he or she can file under Chapter 7.  If the debtor’s income is below the median income for the State based on family size, it is presumed that the debtor can file under Chapter 7.  If the income is above median, a debtor has to pass the “means test” to qualify for Chapter 7.  The means test looks at the debtor’s income for the 6 months prior to filing to arrive arrive at what is called current monthly income.  It then subtracts categories of expenses- some based on national or regional averages, and others based on actually cost.  If the net income is above a certain amount, the debtor cannot file under Chapter 7.

Assuming that you qualify for Chapter 7, the next issue is what property is exempt.  In New Jersey, we can use either the exemptions set forth in the Bankruptcy Code or the exemptions listed in New Jersey statutes.  The New Jersey statutes are mostly about 100 years old and have not been adjusted for inflation, so we almost always use the federal exemptions.

You file a Chapter 7 by filing with the Bankruptcy Clerk a Petition, Schedules of assets, liabilities, income and expenses, and various ancillary documents (over 40 pages).  A trustee is appointed to oversee the case.  If the exemptions cover the value of all of your assets, the case is called a no-asset case.  That means no assets go to the Trustee-you get to keep them subject to any security interests (mortgages and the like).

About 4 weeks after filing, the debtor (and legal counsel) appear before the trustee.  The debtor is required to answer questions from the trustee and any creditors.  Creditors rarely appear at this hearing.  If the trustee believes that your filing is in order and no further action is necessary, a discharge order will be issued within about 6 weeks.  The whole process takes about 4 months.  You cannot file another Chapter 7 and obtain a discharge for 8 years from filing date of the first Chapter 7.

Clearly, Chapter 7 is a bit more complex, but as the title states, these are Chapter 7 basics.

 

When Chapter 7 “Straight Bankruptcy” is Not So Straightforward

Posted by Kevin on July 25, 2017 under Bankruptcy Blog | Comments are off for this article

How can you tell if your Chapter 7 case will be straightforward? Avoid 4 problems.

 

Most Chapter 7 cases ARE straightforward. Your bankruptcy documents are prepared by your attorney and filed at court, about a month later you go to a simple 10-minute hearing with your attorney, and then two more months later your debts are discharged—written off. There’s a lot going on behind the scenes but that’s usually the gist of it.

But some cases ARE more complicated. How can you tell if your case will likely be straightforward or instead will be one of the relatively few more complicated ones?

The four main problem areas are: 1) income, 2) assets, 3) creditor challenges, and 4) trustee challenges.

1) Income

Most people filing under Chapter 7 have less income than the median income amounts for their state and family size. That enables them to easily pass the “means test.” But if instead you made or received too much money during the precise period of 6 full calendar months before your case is filed, you can be disqualified from Chapter 7. Or you may have to jump through some more complicated steps to establish that you are not “abusing” Chapter 7. Otherwise you could be forced into a 3-to-5 year Chapter 13 case or your case could be dismissed—thrown out of court. These results can sometimes be avoided with careful timing of your case, or even by making change to your income before filing.

2) Assets

Under Chapter 7 if you have an asset which is not protected (“exempt”), the Chapter 7 trustee can take and sell that asset, and pay the proceeds to the creditors. You may be willing to surrender a particular asset you don’t need in return for the discharge of your debts. That could especially be true if the trustee would use those proceeds in part to pay a debt that you want and need to be paid anyway, such as back payments of child support or income taxes. Or you may want to pay off the trustee through monthly payments in return for the privilege of keeping that asset. In these “asset” scenarios, there are complications not present in the more common “no asset” cases.

3) Creditor Challenges to the Dischargeability of a Debt

Creditors have a limited right to raise objections to the discharge of their individual debts. This is limited to grounds such as fraud, misrepresentation, theft, intentional injury to person or property, and similar bad acts. With most of these, the creditor must raise such objections to dischargeability within about three months of the filing of your Chapter 7 case—precisely 60 days after your “Meeting of Creditors.” Once that deadline passes your creditors can no longer complain, assuming that they received notice of your bankruptcy case.

4) Trustee Challenges to the Discharge of All Debts

In rare circumstances, such as if you do not disclose all your assets or fail to answer other questions accurately, either in writing or orally at the trustee’s Meeting of Creditors, or if you don’t cooperate with the trustee’s review of your financial circumstances, you could possibly lose the right to discharge any of your debts. The bankruptcy system largely relies on the honesty and accuracy of debtors. So it is quite harsh towards those who abuse the system through deceit.

No Surprises

Most of the time, Chapter 7s are straightforward. The most important thing you can do towards that end is to be completely honest and thorough with your attorney during your meetings and through the information and documents you provide. That way you will find out if there are likely to be any complications, and if so whether they can be avoided, or, if not, how they can be addressed in the best way possible.

 

Major Advantages of Chapter 13 “Adjustment of Debts”

Posted by Kevin on July 2, 2017 under Bankruptcy Blog | Comments are off for this article

Here are some of the other main advantages of Chapter 13:

1. You can keep your possessions that are not protected by property “exemptions,” preventing a Chapter 7 trustee from taking them from you. Thus you retain much more control over the process of saving your assets, avoiding the unknowns of negotiating payment terms with a Chapter 7 trustee in order to keep your non-exempt possessions. Also, in a Chapter 13 case, you have 3 to 5 years to pay to protect such possessions, instead of the few months that Chapter 7 trustees generally allow.

2. Similarly, if you fell behind in payments on your home’s first mortgage, you have the length of your plan—the same 3 to 5 years–to catch up. That’s in contrast to the few months of payments that a mortgage lender would generally allow if you negotiated directly with it after filing a Chapter 7 case.

3. You may be able to “strip” a second (or third) mortgage from your home’s title, and avoid paying all or most of that mortgage. This can happen if the value of your home is less than the balance of your first mortgage. Mortgage “stripping” may save you hundreds of dollars per month. This is completely unavailable in a Chapter 7 case.

4. You may be eligible for “cramdown” of your vehicle loan. If you purchased and financed your vehicle more than two and a half years before filing your Chapter 13 case, and the vehicle is worth less than the balance on the loan, your monthly payments and the total amount you pay for your vehicle can be significantly reduced.  In contrast, in a Chapter 7 straight bankruptcy case you are usually almost always stuck with the monthly payment and loan balance dictated by the vehicle loan contract.

5. In that same situation, if you are behind on the vehicle loan payments you don’t have to catch up those back payments over a few months. In a Chapter 7 case, almost always you must quickly pay off any arrearage if you want to keep the vehicle.

6. If you owe an ex-spouse non-support obligations, you can discharge (write-off) them under Chapter 13—not under Chapter 7. Non-support obligations include requirements in a divorce decree to pay off a joint marital debt or to pay the ex-spouse in return for getting more of the marital property. Discharging such debts can make a huge difference, often making Chapter 13 well worthwhile.

7. If you have any student loans, under Chapter 13, you can apply for an income driven repayment plan for federal loans and reduce payment on private loans.  In most cases, you are not going to discharge those loans, but you will be able to make affordable payments while in the Chapter 13 plan.   Also, you can use the payment history in Chapter 13 as a basis to qualify for a “hardship discharge” of your student loans.  For more information on student loan debt, please join us on www.studentdebtnj.com.

People often assume they need and want a regular Chapter 7 bankruptcy, and it’s often exactly what they do need. But the above short list gives you some idea of the benefits of Chapter 13 that may make it a much better option. That’s one of the reasons you should talk with an experienced bankruptcy attorney, and do so with an open mind. That’s because sometimes Chapter 13 can give you a huge unexpected advantage, or a series of smaller advantages, which may swing your decision in that direction.

 

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.

 

 

 

Keeping All that You Own by Filing a Chapter 13 Case

Posted by Kevin on May 23, 2017 under Bankruptcy Blog | Comments are off for this article

In a Chapter 7 bankruptcy, the trustee sells non-exempt assets to pay your creditors.  The Code provides certain dollar limit exemptions for your home, car, household items and the like.  The problem for some debtors is that Chapter 7 may not exempt all their assets.   Chapter 13 is often an excellent way to keep possessions that are not “exempt”—which are worth too much or have too much equity so that their value exceeds the allowed exemption, or that simply don’t fit within any available exemption.

Options Other Than Chapter 13

If you want to protect possessions which are not exempt, you may have some choices besides Chapter 13.

You could just go ahead and file a Chapter 7 case and surrender the non-exempt asset to the trustee. This may be a sensible choice if that asset is something you don’t really need, such as equipment or inventory from a business that you’ve closed.  Surrendering an asset under Chapter 7 may also make sense if you have “priority” debts that you want and need to be paid—such as recent income taxes or back child support—which the Chapter 7 trustee would pay with the proceeds of sale of your surrendered asset(s), ahead of the other debts.

There are also asset protection techniques—such as selling or encumbering those assets before filing the bankruptcy, or negotiating payment terms with the Chapter 7 trustee —which are delicate procedures beyond the scope of this blog post.

Chapter 13 Non-Exempt Asset Protection

Under Chapter 13 you can keep that asset by paying over time for the privilege of keeping it.  Your attorney simply calculates your Chapter 13 plan so that your creditors receive as much as they would have received if you would have surrendered that asset to a Chapter 7 trustee.

For example, if you own a free and clear vehicle worth $3,000 more than the applicable exemption, you would pay that amount into your plan (in addition to amounts being paid to secured creditors such as back payments on your mortgage). You would have 3 to 5 years—the usual span of a Chapter 13 case—throughout which time you’d be protected from your creditors. Your asset-protection payments are spread out over this length of time, making it relatively easy and predictable to pay.

It gets better-in some Chapter 13s you can retain your non-exempt assets without paying anything more to your creditors than if you did not have any assets to protect. If you owe recent income taxes and/or back support payments (or any other special “priority” debts which must be paid in full in a Chapter 13 case), you can use these debts to your advantage. Since in a Chapter 7 case such “priority” debts would be paid in full before other creditors would receive any proceeds of the sale of any surrendered assets, if the amount of such “priority” debts are more than the asset value you are seeking to protect, you may well only need to pay enough into your Chapter 13 case to pay off these “priority” debts.

This is in contrast to negotiating with a Chapter 7 trustee to pay to keep an asset, in which you would usually have less time to pay it and less predictability as to how much you’d have to pay.

Chapter 7 vs. Chapter 13 Asset Protection

Whether the asset(s) that you are protecting is worth the additional time and expense of a Chapter 13 case depends on the importance of that asset, and other factors.  Generally, this is not a DIY project.  You need to speak with competent bankruptcy counsel to review your options

 

 

Your Income Tax Debt Paid through an “Asset Chapter 7 Case”

Posted by Kevin on October 17, 2016 under Bankruptcy Blog | Comments are off for this article

Here’s an unusual way of paying your income tax debt. The circumstances don’t line up very often, but when they do this procedure can work very nicely.

Generally, when filing a Chapter 7 “straight bankruptcy” a key goal is to keep everything that you own. You don’t want to surrender anything to the Chapter 7 trustee.

But sometimes you own something or a number of things that aren’t exempt. If so, one of your options may be to file a Chapter 13 case to protect your non-exempt asset(s). Almost always that option requires 3-5 years of payments.

If you don’t mind letting go of the non-exempt asset(s), a much quicker option is an “asset Chapter 7 case.” The bankruptcy trustee sells the non-exempt assets and uses the sale proceeds to pay your creditors.

What are the type of non-exempt assets that would fit into this scenario?  It’s not going to be your home.  (That is why we have Chapter 13)  But, say you recently closed down a business.  You may still own some of the business assets, but you have no use for them.  Or you may own a boat or an off-road vehicle that, for whatever reason, you no longer want to keep.  And you owe taxes that are otherwise non-dischargeable. That means the taxing authority will wait until the bankruptcy case is closed, and then start harassing you again for payment.

Under the Bankruptcy Code, in a Chapter 7, debts are paid according to a specific priority schedule.   Taxes have priority over credit card debt, medical debt, or the deficiency on a car loan after repossession.

But, what types of debts have priority over taxes?  The most important are the trustee commission and his/her professional fees.  This could amount to a few dollars.   Other than that, the most typical debts that have priority over taxes are unpaid child and spousal support.

So if you do not owe back support, then the trustee will pay your taxes after paying the trustee’s commission and professional fees to the extent funds are available.

Again, it’s not common that the “stars will line up”.   But when it does, it can be a big plus.  Also, this is not basic stuff so you will need an experienced bankruptcy attorney to navigate you through.

Mistakes to Avoid–Don’t Sell or Borrow Against Assets Protected in Bankruptcy

Posted by on September 8, 2016 under Bankruptcy Blog | Be the First to Comment

 How to How to Get the Most Out of Your Bankruptcy

The focus in bankruptcy is on dealing with your debts, wiping out and getting a handle on the negative side of your balance sheet. But getting a financial fresh start means not just getting relieved of your debts, but also protecting your essential assets—the positive side of your balance sheet. You can maximize this crucial benefit of bankruptcy by not selling, using up, or borrowing against your protected assets BEFORE filing your bankruptcy case.

In my daily work as a bankruptcy attorney, I constantly meet with new clients who have sold, spent, or borrowed against important assets in desperate attempts to keep their heads above water. This is usually a mistake.

Bankruptcy Protects Assets

If you are like most people, bankruptcy will protect all of your assets. First, Chapter 7 “straight bankruptcy” protects all “exempt” assets, so that a very high percentage of people who file under Chapter 7 keep everything they own.  Oddly enough, this is called a “no asset case” because the Trustee does not administer (= sells) any of the debtor’s assets.  Second, if you have assets which are worth more than the applicable “exempt” amounts provided by law, Chapter 13 “adjustment of debts” can almost always protect those “non-exempt” assets as well. And third, if you do have assets that are not “exempt,” with wise pre-bankruptcy planning with a knowledgeable bankruptcy attorney, those assets may be all the better protected once your bankruptcy case is filed.

Get Legal Advice BEFORE Wasting Your Assets

If you are considering spending, selling, or borrowing against any of your assets to pay your debts, do you know whether that asset is one which would be protected in bankruptcy?

Consider a person in her late-50s cashing in a substantial amount of her 401(k) retirement plan to keep paying creditors when those creditors could be—and eventually are–written off in bankruptcy. That decision would likely significantly harm the quality of her retirement lifetime, with no tangible benefit to show for it.  Or consider a husband and wife selling a free-and-clear vehicle that’s in good condition to pay creditors that eventually are written off in bankruptcy.  Under certain circumstances, that vehicle may be exempted or a deal can be made with the trustee that allows you to keep the vehicle.

These kinds of decisions can have serious long-term consequences, so they shouldn’t be made without legal advice about the alternatives.

Easily Preventable Mistakes to Avoid While Considering Bankruptcy

Posted by on August 10, 2016 under Bankruptcy Blog | Be the First to Comment

Words I hate to tell new clients: “If only you’d come to talk with me sooner.”

Consumer bankruptcy attorneys are in the business of  helping people put back in order their financial lives.   Many times we succeed which makes the practice personally gratifying.  However, life is not perfect and some situations are beyond reach even with the strong medicine of bankruptcy. Difficult choices sometimes have to be made.

But the toughest situations are those in which the person took some action—usually not long before seeing me—which may have made some sense at the time but ended up being a mistake, a self-inflicted wound.

The goal of my next few blogs is to help you avoid these.

Here’s what we will be covering.

1) Preferences:  If within a certain amount of time before filing bankruptcy, a debtor pays any significant amount of money (or anything else of value) to someone she owes, the bankruptcy trustee could under certain conditions force that creditor to pay to the trustee whatever amount the debtor paid to the creditor. That creditor could be a relative or friend who had lent the debtor money, and the debtor felt a deep obligation to repay it before filing bankruptcy. This relative or friend could be sued by the trustee to make him or her “return” the money (but to the trustee, not to the debtor).

2) Wasting exempt assets:  New clients constantly tell me how they’ve borrowed against or cashed in their retirement funds in a desperate effort to pay their debts. Or they’ve sold a vehicle or some other precious asset. Then they learn that whatever they’ve sold or borrowed against would have been completely protected in their subsequent bankruptcy case. And the debts they paid with the proceeds would simply have been “discharged” (legally written off) in that bankruptcy. They have lost something of significant value in effect for no real benefit.

3) Surrendering a vehicle that could have been saved:  People often really need a vehicle but owe on it more than it is worth and can’t afford the payments. So they either voluntarily surrender it to the creditor, or wait to file bankruptcy until after it gets repossessed. Instead with a “cramdown,” they could well have been able to keep that vehicle by paying much lower monthly payments and paying much less for it overall.

4) Letting a creditor sue and take a judgment: If a debtor is sued by a creditor and waits until after a judgment is entered, in some situations, that judgment could make the debt harder to discharge in a subsequent bankruptcy case.

5) Selling a home out of desperation:  Bankruptcy—and especially Chapter 13—provides some amazing tools for dealing with debts related to a home, including  the first mortgage arrearage, the second mortgage lien, judgment liens, income tax and child support liens, and other liens of all sorts. Homeowners may hurriedly sell their home because of pressure from any of these kinds of creditors. But if they do so, they could lose out on the opportunity to hold onto their home by saving tens of thousands—or possibly even hundreds of thousands—of dollars. Or at least they could likely sell it at a higher price with more market exposure and/or sell it when the timing is better for their family.

As you can see, doing what seems right and sensible can really backfire if you don’t get legal advice about these kinds of unexpected consequences. In the next few blogs I explain these in more detail so that these mistakes will make sense to you and you can avoid them.  

Income Tax Refunds in Bankruptcy-Chapter 7

Posted by on June 23, 2015 under Bankruptcy Blog | Comments are off for this article

If you’re filing a “straight bankruptcy” case, how do you keep your income tax refund?

 

Keeping tax refunds is all about timing. You can generally keep your refund but absolutely have to play it right, following rules that at first may not make sense. It is all too easy to mess this up, so you truly should have your attorney guide you through it, applying your unique circumstances to your local laws and practices. But here are the general principles at play.

Let’s start with some background to make sense of this:

  • From the bankruptcy system’s perspective, a Chapter 7 case focuses on assets—determining whether you get to keep everything you own or not. That’s why it’s called the “liquidation” chapter. Most of the time you do get to keep everything, but sometimes some of it gets “liquated”—taken from you and turned by your bankruptcy trustee into cash, which then gets paid to your creditors.
  • So where does your tax refund fit into this—is it is an asset that your trustee can take from you? That mostly depends on your timing.
  • Everything you own or have a right to at the moment your Chapter 7 bankruptcy case is filed becomes your “bankruptcy estate.”
  • That “estate” includes both your tangible assets and also intangible ones. One kind of intangible asset is a debt owed to you. A tax refund can be such an intangible asset of your “bankruptcy estate.”

The timing of the filing of your Chapter 7 case determines whether a tax refund is part of your “bankruptcy estate” and therefore could potentially be taken from you:

  • An income tax refund is considered your asset as of the time of the last payroll withholding of the year being considered (so for this calendar (2015), the last withholding would be from your last paycheck in December and your employer would forward that money to the taxing authority in the beginning of January, 2016). That’s because as of that time, the full amount of that refund has accrued. Even though until you prepare your tax returns nobody knows the amount of your refund—or even whether you will be receiving one at all—for bankruptcy purposes, the anticipated tax refund is legally all yours as of the very beginning of the next year. And what’s yours is part of your “bankruptcy estate.”
  • So IF you file after the beginning of the year but before receiving and appropriately spending the refund, that refund is part of your “bankruptcy estate” and is at least at risk of being taken from you. Again, this is true even if you have no idea how much that refund will be, or even whether you are entitled to one.
  • BUT, if you DO receive and appropriately spend the refund before your Chapter 7 case is filed, then the refund is gone and is no longer your asset, and so is no longer part of your “bankruptcy estate.” Your trustee has no claim to it.

Even if your tax refund IS part of your “bankruptcy estate,” it will not be taken from you if it is exempt:

  • Although theoretically it’s safest to file your Chapter 7 case when your tax refund is not part of your “estate”—such as after you receive and appropriately spend it beforehand, sometimes you don’t have that much flexibility about when you file your bankruptcy. Then especially it’s critical to get good legal advice about whether that refund will be exempt based on the local law applicable to the case.
  • Usually, you get to keep most or all of your “estate” because it’s “exempt”—protected. In the same way, tax refunds are often exempt, depending on the amount of the refund and the exemption that’s applicable to it.
  • Some states have specific exemptions applicable to certain parts of the tax refund, or laws that exclude them from the bankruptcy estate altogether, particularly for the Child Tax Credit or the Earned Income Tax Credit.

Even if a tax refund, or some portion of it, is not exempt, sometimes the Chapter 7 trustee may still NOT want it:

  • The trustee may decide that the amount the “estate” would get—the refund by itself or in conjunction with any other non-exempt asset(s)—is not enough in value to justify creating an “asset case.” The amount of refund to be collected may be too small to justify the administrative cost involved to collect and distribute it. You might hear the trustee say that the amount of the refund is “insufficient for a meaningful distribution to the creditors.”
  • What that “insufficient” amount is differs from one court to another, and often even from one trustee to another, so this is another specific area where you need the guidance of an experienced attorney.
  •  Caution: if the trustee is already collecting any other assets as part of the “estate,” then most likely he or she will want every dollar of your tax refunds that are not exempt.

Married Couples in Chapter 7 and Chapter 13

Posted by Kevin on November 25, 2013 under Bankruptcy Blog | Be the First to Comment

Bankruptcy law allows married couples to file bankruptcy separately or together. That option comes with consequences, which can also affect whether you file under Chapter 7 or 13.

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If you’re considering filing bankruptcy with or without your spouse, consider the following:

  • Each spouse has the legal right to join the other spouse’s bankruptcy or not.
  • There are consequences to filing separately or together. Consequences affecting:
    • the preservation of your assets;
    • protection from creditors’ collection activity;
    • the discharge of your debts; and
    • dealing with the IRS and any other income tax authorities.

Today’s blog covers the first couple of these points, and the next ones cover the rest.

_________________________

1.  Each spouse has the legal right to join the other spouse’s bankruptcy or not.

Married spouses often ask if they CAN file together, or if they MUST file together. By law, each person can file his or her own case alone, can file jointly with his or her spouse,  or can decide not to file at all. But the fact that all the options are on the table doesn’t necessarily make the choice easier. In many situations it is in both spouses’ best interest to file either a Chapter 7 or 13 case together, but sometimes there are good reasons for one of them not to be part of that filing.

It can be a delicate choice, legally and personally. One spouse may owe most of the debt, because of a failed business or a prior divorce. One spouse may have run up some debt irresponsibly, perhaps without telling the other. The marriage itself may well be at risk because of financial stress. We’ve all heard that financial problems are one of the top reasons for divorce. The survival of the marriage may hinge on making wise choices about whether to file bankruptcy, who should file, and what kind of case to file.

Another delicate question is whether your marriage will outlast a 3-to-5-year Chapter 13 case. The realities are that:

1) many Chapter 13s do not get finished successfully;

2) when one isn’t finished, dealing with the fallout can be awkward;

3) as much as a Chapter 13 can help your finances, it is a long process requiring some stability and consistency;

4) Chapter 13s can handle changes in circumstances, sometimes even a divorce, but it’s generally not wise to file one if the odds are that the marriage isn’t going to outlast it.

So, if realistically the marriage is not stable enough to survive beyond the completion of a Chapter 13 case, then think about the Chapter 7 option instead.

2.  There are consequences to filing separately or together. Consequences affecting—

a. the preservation of your assets:

One spouse filing alone versus both filing jointly can have an effect on how well your possessions are protected by your applicable property exemption scheme.

In some states you must use that state’s property exemptions, in others you have a choice of that state’s and a federal set of exemptions.  NJ gives you the option.  99% opt for the federal exemptions because the NJ exemptions are so puny.  Under the federal exemptions, if a husband and wife file jointly, the exemptions are doubled.   Say, for example, you have $50,000 equity in your home.  Using the federal exemptions, you can protect around $43-44,000 from creditors.  That together with costs of sale may preclude any trustee action on your home.

Beyond this, sometimes one spouse—one who has much less debt, for example—owns an asset that the spouse who owes most of the debt has no legal right to. For example, consider a relatively new marriage in which the spouse without much debt inherited some property before the marriage. That spouse may understandably not want to risk having that inherited property go to a bankruptcy trustee to pay the other spouse’s debts. So that spouse would understandably not want to file bankruptcy with her spouse.

This kind of situation has to be analyzed very carefully. Both spouses need to understand how well the separate property of the non-filing spouse can be insulated from the other spouse’s bankruptcy case. In Chapter 13 it is harder to avoid having the non-filing spouse’s income and assets affect the other spouse’s case. The two spouses need to be very clear about all the consequences of only one person filing either a Chapter 7 or Chapter 13 case.

Please visit us for our next blog for part 2 of this topic.

Your Vehicle in Chapter 7 and Chapter 13

Posted by Kevin on November 21, 2013 under Bankruptcy Blog | Be the First to Comment

Here are 5 questions to ask to find out which bankruptcy option is better for you and your vehicle.

1.  Is your vehicle protected by the applicable exemption?

The first thing to find out if whether there is any risk that a bankruptcy trustee could take your car or truck from you if you filed a Chapter 7 case.   In NJ, the exemption is only $3675  plus whatever you do not use on your homestead exemption.  So, if your car is reasonably new (and not leased), chances are it is not completely protected by exemption.  So, you have three possible options:

1) File a Chapter 13 case to protect the vehicle. This way you pay enough to your creditors through a court-approved plan so that your creditors receive over time what they would have received had a Chapter 7 trustee taken and sold your vehicle.

2) File a Chapter 7 case and pay the trustee—usually through a short series of monthly payments—for the right to keep the vehicle. This prevents the trustee from selling your vehicle by paying him or her about as much as would have gone to the creditors had the vehicle been sold.

3) Surrender the vehicle in a Chapter 7 case—assuming you don’t absolutely need it—and allow the proceeds to go to your creditors, an especially sensible option if the debt to be paid first is one you need to be paid anyway, such as income tax or back child support.

2.  Are you current or almost current on your vehicle payments but really struggling to keep current?

Either Chapter 7 or 13 can enable you to keep up your vehicle payments by reducing or eliminating your other debts. Bankruptcy is a reprioritization. It empowers you to focus on what’s most important in your financial life. That often is your vehicle, which gets you to work and enables you to take care of your other personal and family responsibilities. Bankruptcy allows you to be wisely proactive, protecting your ability to pay your car payments—and for its necessary maintenance and repairs—before it’s too late.

3.  Are you current on your vehicle payments, or if not would you be able to get current within a month or two after filing a Chapter 7 bankruptcy?

If you are not behind on your payments, you will likely be allowed to continue making those payments after filing bankruptcy, regardless whether your other circumstances point you towards Chapter 7 or Chapter 13.

And if you are not current but can catch up very quickly after filing bankruptcy, you can likely file a Chapter 7 case and keep your vehicle. However, if you can’t catch up that quickly, you will likely need the extra power of Chapter 13 to buy more time with your creditor.

4.  Is your vehicle worth less than what you owe on it, AND did you buy your vehicle at least two and a half years ago?

If you say yes to both of these questions, you would likely be able to do a “cram down” on your vehicle loan in a Chapter 13 case. This means that through your court-approved plan you would in effect be able to reduce the balance of your vehicle loan down to the value of your vehicle, often also reducing the interest rate and extending the payments over a longer period, usually resulting in a greatly reduced monthly payment.   So if you qualify for a vehicle cram down that may be a good reason to file under Chapter 13, because it is not available under Chapter 7.

5.  Are your payments so high that surrendering the vehicle to your creditor—or maybe one of your vehicles if you have more than one—is your best choice?

Although bankruptcy can help you keep your vehicle in many ways, it also gives you the opportunity to get out of a bad deal, or one that no longer fits your present circumstances. Usually when you surrender your vehicle to the creditor you are left owing money—the “deficiency balance”—the difference between what you owe and what your creditor sells your vehicle at an auto auction.  Bankruptcy gives you the opportunity to get rid of that deficiency balance.   Chapter 7 would usually be the quickest way to do that specific task, unless your other financial circumstances pointed you towards filing Chapter 13.

The Usually Easy to Answer First Question for Your Bankruptcy Attorney

Posted by Kevin on November 3, 2013 under Bankruptcy Blog | Be the First to Comment

In deciding between Chapter 7 and 13, get this question out of the way right away: “Can I keep everything I own if I file a Chapter 7 case?”

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Most people do not lose anything that they own when they file bankruptcy. That’s because the law protects (“exempts”) certain kinds of your assets and usually a certain dollar value of them. If everything you own fits within those kinds and those amounts, then you can file a Chapter 7 “straight bankruptcy” and protect everything. Even if you DO own and want to keep things beyond those limits, filing a Chapter 13 case will likely protect those additional things. So, a way to put the question is whether 1) all your possessions are protected under Chapter 7 or instead 2) you need the extra protection provided by Chapter 13.

(This blog is about things you own free and clear. Those that are collateral on debts, such as your home with its mortgage, are a whole separate discussion for later.)

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This is a good first question once you start seriously considering bankruptcy because usually your attorney will be able to answer it quite quickly and assure your possessions are protected in a Chapter 7 case. And if some are not protected, that’s an issue that should be addressed by your attorney and you from the very beginning.

Just because your attorney can usually make this determination quite quickly does not mean that it is not an important question, or that it’s an easy one for someone who isn’t highly experienced in this area of law.

It’s an important question because:

1) If you’re filing bankruptcy you likely can’t spare to lose what you own, so you don’t want to put any of it at risk.

2) You especially don’t want to lose something unnecessarily, since there usually are ways to prevent that from happening.

It’s not an easy question for the inexperienced because:

1) In some states the state law determines what you can keep, while in some other states federal law does, and in others either state or federal law can apply.

2) After knowing which law applies, the asset categories are often not clearly stated in the statutes, and their meaning can turn on court interpretations or even on the informal practices of the local bankruptcy trustees or judges.

3) The laws change—the statutes, the formal court interpretations, and the informal practices, and it is very difficult to keep up with all this without working with it full time.

4) If you moved from another state, the statutes and court interpretations applicable to your former state may or may not apply.

And if everything you own is NOT protected, then Chapter 13 MAY be a great tool for keeping everything. But here are some good questions to ask your attorney in this situation:

1) Are the substantial extra time and cost of a Chapter 13 case worth this benefit?

2) Can those unprotected assets be more efficiently protected by some appropriate pre-bankruptcy planning?

3) Can those assets be protected in a Chapter 7 bankruptcy by paying a reasonable amount to the bankruptcy trustee—in reasonable monthly payments—while avoiding the extra hassles of a Chapter 13 payment plan?

4) If you would pay such money to the trustee, where would that money go, and might at least some of it go where it would benefit you—such as to pay taxes or some other debt that you would not be written off by the Chapter 7 case so you would have to pay anyway?

5) And lastly, would Chapter 13 help you in other ways beyond protecting your assets, so that overall it would be worthwhile?

The Trustee in Chapter 7

Posted by Kevin on November 14, 2012 under Bankruptcy Blog | Be the First to Comment

I am sure that you all have heard the term Trustee in the news.  What exactly is a trustee and what does he do in a Chapter 7 case?

First, let’s get out of the way a whole other kind of “trustee” who you might hear about in the bankruptcy world, the “United States Trustee.” That’s someone who usually stays in the background in consumer bankruptcy cases, so you’ll usually not have any contact with anyone from that office. It is part of the U.S. Department of Justice, tasked with administering and monitoring the Chapter 7 and 13 trustees, overseeing compliance with the bankruptcy laws, and stopping the abuse of those laws.

The United States Trustee establishes a “panel” of trustees throughout the State of New Jersey who actually administer the Chapter 7 cases.  That panel consists mainly of attorneys who are experienced in bankruptcy, but also includes some accountants and other business persons. The debtor and her legal counsel deal with the panel trustee.

A Chapter 7 case is a “liquidation,” meaning that if you own anything which is not “exempt,” it has to be surrendered and sold to pay a portion of your debts. But the reality for most people is that everything they own is “exempt,” so they get to keep their stuff. There is no “liquidation” in those situations.

The Chapter 7 trustee is an investigator-liquidator.  He or she is the person assigned to your case by the bankruptcy system who does primarily three things:

1) investigates your filing to determine if you are honestly disclosing your assets and liabilities, income and expenses;

2) determines whether or not everything you own is “exempt,”;

3) only in the relatively few cases in which something is not “exempt,” decides whether that asset is worth collecting and selling, and if so, liquidates it (sells and turns it into cash), and distributes the proceeds to your creditors.

The Chapter 7 trustee’s investigation starts with a review of the Petition, Schedules and other Statements that are a part of  your bankruptcy filing.  In addition, the Chapter 7 trustee will require that we send him certain documents to verify what is said in our filing  (tax returns, paystubs, deeds, mortgages, mortgage payoffs and appraisal). Then he or she presides at the so-called “meeting of creditors,“ and asks you a list of usually easy questions about your assets and related matters. Lastly, the trustee can expand his investigation and take other action such as deposing the debtor and/or third parties, hire experts like accountants or appraisers, and the like.   It should be stressed that an expanded investigation rarely happens in a consumer bankruptcy.

In those cases where some of the debtor’s assets are not exempt and these available asset(s) is(are) worth collecting, the trustee will gather and sell the asset(s), and pay out the proceeds to the creditors, all in a step-by-step procedure dictated by bankruptcy laws and rules.