Posted by Kevin on November 23, 2012 under Bankruptcy Blog | 
Bankruptcy protects your home. Both Chapter 7 and 13 do so, but which is better for you?
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When you are dealing with your home, you are usually dealing with a mortgage. So, if you are comtemplating bankruptcy, you need to consider both the bankruptcy trustee and your mortgage lender. Here are 5 key questions to ask to find out whether a Chapter 7 straight bankruptcy or a Chapter 13 payment plan is what you need.
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1. Is your home worth more or less than the amount of your mortgage?
In other words, do you have equity in your home? Many people who purchased their homes after 2000 do not have equity in their home. In that case, a Chapter 7 trustee will abandon his or her interest in your home. That means, the trustee is not going to sell your home to pay off your unsecured creditors. But, remember, you still have to deal with your mortgage lender.
But, if you have owned your home for a long time, and have significant equity (that means more than the mortgage $43,250 for a married couple), a Chapter 7 trustee will sell your house. To avoid this, you should look into Chapter 13 to protect that value.
2. Are you current on your mortgage and property tax payments, and if not will you be able to get current within a short time after filing a Chapter 7 bankruptcy?
If you are not behind on your home obligations (and there is not equity in the home), in a vast majority of cases, you can continue making payments and keep the home after you file bankruptcy, regardless whether your other circumstances point you to a Chapter 7 case or a Chapter 13 one.
And if you are not so far behind, so that you could both consistently pay the regular monthly payments and catch up on your mortgage and any property tax arrearage within a few months, your mortgage lender may enter into a forbearance agreement with you to allow you to catch up. In those circumstances, you may want to consider filing under Chapter 7 and keep your home. However, if you would not be able to catch up within a short of period of time, you will likely need the extra power of Chapter 13 to buy more time.
3. Do you have a second (or third) mortgage which is not covered by equity in the home?
IF you have a second mortgage and you owe more on your first mortgage than your home is worth, Chapter 13 allows you to “strip” that second mortgage from your home. This means that you would pay very little or perhaps even nothing on it during your 3-to-5-year case, and then the entire balance would be forever written off. This cannot be done in Chapter 7. So of course if you have a significant second mortgage, this is a huge reason to file under Chapter 13.
This also applies if you have a third mortgage, and you owe more on the combination of your first two mortgages than the home is worth, allowing you to “strip” the third mortgage.
4. Do you have any current liens against your home which are not going to be resolved by filing Chapter 7?
Some debts result in liens against your home. Some of those liens can be taken care of with a Chapter 7 filing, some cannot.
For example, if in the past you were sued by a credit card company, medical provider, or collection agency, that creditor likely has a judgment lien against your home. As long as your home has no more equity than allowed by your homestead exemption (without even considering that judgment lien), you will likely be able to have that judgment lien released in a Chapter 7 case.
But, to use another example, if instead you have a lien against your home for owing back child support, a Chapter 7 is not going help you with that lien. After you file and finish a Chapter 7 case, your ex-spouse or local/state support enforcement agency may be able to foreclose on your home to enforce that lien. In contrast, a Chapter 13 case would protect you from any such foreclosure threat, while providing you a mechanism for paying off that debt while under this protection.
5. Do you have any special debts which could threaten your home later after filing a Chapter 7 bankruptcy case?
Even if you do not currently have any known liens or similar threats against your home, you may have future problems if you have one or more special debts which will survive a straight bankruptcy. The prime examples are income taxes, child and spousal support obligations, construction and home repair debts, and homeowner association dues and assessments. In most states, these kinds of debts either are automatic liens against a home or can easily turn into liens. And most liens can eventually be foreclosed to pay the debt underlying the lien. Chapter 13 can either help avoid a lien from attaching to your home or can enable you to pay the underlying debt and get the lien released without it threatening your home.
Posted by Kevin on November 21, 2012 under Bankruptcy Blog |
As we said in the prior blog, more complicated debts are usually handled better in the Chapter 13 context.
More complicated debts include those that 1) are not discharged (written-off) in bankruptcy or in a Chapter 7, 2) are in arrears but are secured by collateral you need to keep, and/or where the debtor has significant equity, or 3) are special situations under the Code.
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Debts Not Discharged in Bankruptcy
If you owe a not-so-large recent income tax debt, or are just a little behind on your support payments, you can file a Chapter 7 case and often be able to take care of the tax or support obligation by arranging for monthly installment or catch-up payments. Using Chapter 13 in that situation would likely be unnecessary.
But if the amount you owe or are behind on is too large, or if the creditor refuses to deal, then Chapter 13 would be better. Why? Because it forces the creditor to be lots more patient. It generally gives you up to five years to pay off or catch up on these kinds of debts.
Secured Debt, Lots of Equity
This is truly tricky. Remember, if the property has significant equity, the trustee may sell the property. If you want to keep the property, you will have a problem in Chapter 7. In fact, your only recourse is to make a deal by buying out the trustee’s interest. If this turns out to be too expensive, you may be SOL.
What about Chapter 13? Assuming you meet the debt ceiling, Chapter 13 can theoretically help. What does that mean? To get your Chapter 13 plan approved by the court, it has to pay out to unsecured creditors as much or more than they would have received in a Chapter 7. So, if you have $50,000 equity in the property after the liquidation analysis, that means that your creditors in a Chapter 13 will have to get at least $50,000. Over 3 years that is $16K+ per year, over 5 years-$10K per year. That’s a big nut to meet every month. So, Chapter 13, in theory, may help you, but , in reality, may be too expensive.
Secured Debts Where You Are Behind
If you want to hang onto your vehicle and/or home but you’re not current on the loan, Chapter 13 allows you to spread out the arrearages for up to the term of the plan. If an aggressive creditor objects, so what. You only need the Judge to confirm the plan.
Special Debts Handled Better in Chapter 13
Chapter 13 has some other features which simply are not provided in Chapter 7, much less provided outside bankruptcy.
Under certain circumstances you can “strip” your second mortgage from your home’s title, so that you pay little or nothing on that second mortgage. This can save a homeowner tens of thousands of dollars, and greatly reduce the monthly cost of the home. In New Jersey, stripping a second mortgage is only potentially available in Chapter 13, not in Chapter 7.
A vehicle “cram down”—in which the amount you owe on your vehicle is essentially reduced to the value of vehicle—is also potentially available only in Chapter 13, not Chapter 7.
If you owe any co-signed debts, they can be favored under Chapter 13 while your co-signer is protected. In contrast, in a Chapter 7 case the creditor would likely be able to pursue your co-signer.
The Limits of a Rule of Thumb
Once again, there’s so much more to deciding between Chapter 7 and 13 than looking at what kind of debts you have and whether those debts are “simple” or “complicated.” There are many other factors, and people so often have unusual combinations of circumstances. This rule of thumb—simple debts lead to Chapter 7, complicated debts lead to Chapter 13—is simply a sensible starting point for your own thinking, and for your conversation with an experienced bankruptcy attorney.
Posted by Kevin on November 19, 2012 under Bankruptcy Blog |
The type of debts that you have are a factor in deciding whether to file under Chapter 7 or Chapter 13.
The Overly-Simplistic But Still Helpful Rule of Thumb
Here’s a decent starting point: Chapter 7 handles your simple debts better than does Chapter 13, and Chapter 13 handles your more complicated debts better than does Chapter 7.
There are three kinds of debts: “secured” for which there is collateral given, e.g., your house; “priority” debts which for most consumer creditors is child support, alimony or taxes; and “general unsecured” debts which include most credit cards, medical debts, personal loans with no collateral, utility bills, back rent, and many, many others.
Simple debts are generally general unsecured debts, and secured debts in cases where a) the debtor is current, their is no equity in the collateral and the debtor wants to keep the collateral or b) the debtor wants to give up or “surrender” the collateral.
Simple Debts- Better Off in Chapter 7
Chapter 7 treats “general unsecured” debts the best by usually simply discharging them (writing them off) forever in a procedure lasting barely three months. You make no payments and you get to keep the property if it is exempt.
Chapter 13 instead usually requires you to pay a portion of these “general unsecured” debts. When you hear a Chapter 13 plan being referred to a “15% plan,” that means that the “general unsecured” debts are slated to be paid 15% of the amount owed. Moreover, if your income goes up during the term of the plan, your payments can increase. So, unless you feel morally compelled to make restitution to your creditors, Chapter 7 is the preferred economic method of disposing of “general unsecured” debts.
As for simple secured debts, in Chapter 7, if you surrender, you give up the property, the debt is discharged and you make no further payments. If you surrender the collateral in a Chapter 13, however, you may be subject to paying a portion of any deficiency through your plan. Clearly, in that case, Chapter 7 is the better alternative.
If you want to keep the property which is current with no equity, in a Chapter 7 the trustee “abandons” the property. That means that it drops out of the bankruptcy and you keep it subject to the secured claim. As long as you keep paying the secured creditor, you get to keep (and someday own outright) the collateral. Moreover, the underlying debt to the bank is discharged, so the bank can never come after you for a deficiency if you default down the line.
Now, you get pretty much the same deal in Chapter 13 ( you keep the collateral and continue with your payments), but you are subject to court supervision for up to 60 months. That can be a hassle. Hence, Chapter 7 is a better alternative because it is quicker and cleaner.
The next blog: how not-so-simple debts are handled in Chapter 7 and in Chapter 13.
Posted by Kevin on November 16, 2012 under Bankruptcy Blog |
In Chapter 13 the trustee is a gate-keeper, overseer, and payment distributor. Quite different than in Chapter 7.
To understand what a Chapter 13 trustee does, we need to get on the same page about what Chapter 13 is. It’s an “adjustment of debts” based on a three-to-five-year payment plan. Moreover, upon successful completion of your Chapter 13 Plan, you get a discharge, and you get to keep your stuff- whether it is exempt or not.
The Chapter 13 Trustee as Gate-Keeper. The trustee’s first role as gate-keeper is to review your plan and object to any aspects of it that he or she believes does not follow the law. Usually any trustee objections are resolved by your attorney through persuasion or compromise, or by having the bankruptcy judge make a ruling on it.
The Trustee as Overseer
After the plan is approved, or “confirmed,” by the judge, the trustee and his or her staff continues to monitor your case throughout its three-to-five-year life. They track your payments, usually review your income tax returns each year to see if your income stays reasonably stable, and file motions to dismiss your case if you don’t comply with these and other requirements.
The Trustee as Payment Distributor
The trustee collects payments from you and distributes the money as specified by the terms of the court-approved plan. As part of that, the trustee’s staff reviews your creditors’ proofs of claim—documents filed by your creditors to show how much you owe—and may object to ones that do not seem appropriate. And when you have finished paying all you need to pay, the trustee informs you and the bankruptcy court, so that the court can discharge the rest of your remaining debt (except for long-term debts such as perhaps a home mortgage or student loan).
Practical Differences between Chapter 7 and 13 Trustees
- The Chapter 7 trustee liquidates assets, or, more often, determines if you have any assets which can be liquidated, fixating on your assets at the point in time when you filed your case. In contrast, the Chapter 13 trustee receives and pays out money over a period of years, based on a bunch of factors but mostly on your ongoing income and expenses.
- Both types of trustees are private individuals, carefully vetted and monitored. The Chapter 7 trustees are chosen out of a “panel” of several trustees within each bankruptcy court, so your attorney will not know (or be able to influence) which one of the trustees will be assigned to your case. In contrast, there is usually only one “standing” Chapter 13 trustee assigned cases from each court or each geographic area within the court’s jurisdiction. So your attorney will almost for sure know which Chapter 13 trustee will be assigned to your case.
Posted by Kevin on November 15, 2012 under Bankruptcy Blog |
Question #1 for cleaning up financially after a failed business: can the business file a bankruptcy without you? Question #2: should it?
This blog is NOT intended to give you all you need to know about whether your no-longer-operating business (or “on its deathbed business”) or you should file bankruptcy. Many factors go into that decision. This blog addresses only the very beginning of this decision-making process: is your business ELIGIBLE to file bankruptcy?
Is Your Business Its Own “Person”?
Your business can only file its own bankruptcy if it is a legally recognized business entity, a legal “person” distinct from you. If you established and ran the business under a formally registered corporation, that corporation can file a bankruptcy. If you established and ran the business as a formal partnership, that business partnership can file a bankruptcy.
In contrast, if you operated the business under your own name, or under a “dba” (“doing business as”), that business is not legally separate from you as an individual, so it cannot file a bankruptcy. That’s true even if you legally registered that “dba” name with a state agency (usually with the “corporation division” of your secretary of state’s office), paid for a local business license, and/or had separate bank accounts for the business. That business is legally just a part of you as an individual and cannot file its own bankruptcy.
How about if your business was established as a corporation but over time you did not keep the corporation’s finances distinct from your own? How about if operated your business in fact as a partnership of three partners and kept distinct partnership books but never formalized the partnership through the state or local authorities? Whether that corporation or that partnership can file a bankruptcy, and what the consequences would be of such a bankruptcy, depends on the circumstances, and requires a careful discussion with an experienced business bankruptcy attorney.
Corporations and Partnerships Cannot File Chapter 13
Chapter 13 is reserved for “individuals”—actual people, not corporations or business partnerships. Specifically “[o]nly an individual with regular income” and who does not owe more than certain amounts “may be a debtor under Chapter 13… .”
Corporations and Partnerships Can File Chapter 7, 11 and 12
Legal business entities like corporations and partnerships can file under Chapter 7, a straight bankruptcy, to help in the orderly liquidation of the business’ assets and the fair distribution of the proceeds to the business’ creditors. Such a Chapter 7 may not be necessary or helpful if the business does not have any of its own assets, other than those which are collateral on secured debts.
Under a Chapter 11 “business reorganization,” the business would continue to operate or be sold as a going concern. Although most bankruptcy courts make an effort to run small business Chapter 11 cases efficiently, they are still very expensive—seldom less than tens of thousands of dollars in court, U.S Trustee, and attorney fees. So Chapter 11 is seldom a practical solution for very small businesses.
Under a Chapter 12 “adjustment of debts of a family farmer or fisherman,” the family farming or fishing operation would continue operating. To qualify that operation must meet certain maximum debt limits, and other qualifications to show that it is sufficiently oriented towards farming or fishing and is sufficiently family-owned.
Whether a business CAN file its own bankruptcy leads to the question whether it SHOULD do so, to be covered in the next blog.
Posted by Kevin on November 14, 2012 under Bankruptcy Blog |
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.
Posted by Kevin on November 12, 2012 under Bankruptcy Blog |
Chapter 7 often protects you from creditors well enough. But if need be, Chapter 13 protects you longer.
The “Automatic Stay” in Chapter 7 Bankruptcy”
The automatic stay is the power given to you through federal law to stop virtually all attempts by creditors to collect their debts against you and your property as of the moment you file a bankruptcy case. It stops creditors the same at the beginning of your case whether you file a Chapter 7 case or a Chapter 13 payment plan.
The benefits of the automatic stay last as long as your Chapter 7 case lasts—usually about three months or so. In many situations, that’s just long enough. The bankruptcy judge generally signs the discharge order just before the end of the case, writing off all or most of your debts. After that point those creditors can no longer pursue you or your assets, so you no longer NEED the automatic stay for your protection.
However, you may have some debts which you will continue to owe after the completion of your case, either 1) voluntarily, such as a vehicle loan on a vehicle you are keeping, or 2) as a matter of law, such as a recent unpaid income tax obligation.
In either of these situations you may well not need protection from these kinds of creditors beyond the length of a Chapter 7 case. You will likely enter into a reaffirmation agreement with the vehicle creditor, purposely excluding its debt from the discharge of your other debts so that you can keep the vehicle and continue making the payments. If you owe for last year’s income taxes, then before your Chapter 7 case is finished you could enter into a reasonable monthly installment payment plan with the IRS—if the amount is not too large and your cash flow has improved because of your bankruptcy case.
The “Automatic Stay” under the Chapter 13 Payment Plan
Simply stated, the automatic stay protection under Chapter 13 potentially lasts so much longer than under Chapter 7 because a Chapter 13 case lasts so much longer—3 to 5 years instead of 3 months. This can create some significant advantages with certain kinds of debts where you need more time, and need protection during that extended time.
Take the two examples above—the vehicle loan and the recent tax debt.
If you had fallen significantly behind on the vehicle loan and had no way to bring it current within a month or two after filing a Chapter 7 bankruptcy, most creditors would not allow you to keep the vehicle. In contrast, under Chapter 13 you’d likely have several years to bring the account current, regardless of the creditor’s objection. In fact in some situations you would not need to catch up the missed payments at all. And as long as you made your payments as required by your court-approved plan, you would be protected from the creditor throughout this time.
In the case of the recent income taxes, if you owed more than what you could pay in an installment plan set up with the IRS, Chapter 13 would likely give you more time and more flexibility. For example, you would likely be able to delay paying the IRS anything for a number of months while paying debts that were even more important—say, arrearage on a house mortgage or back child support—as long as you paid the taxes off within 5 years. Plus most of the time you would not need to pay any ongoing tax penalties or interest, saving you a lot of money. Again, throughout this time you’d be protected from any collection action by the IRS through the continuous automatic stay.
Conclusion
So, the automatic stay stops creditors in their tracks when either a Chapter 7 or Chapter 13 case is filed. The relatively short life of the automatic stay in Chapter 7 will do the trick either if you don’t still owe any debts when the case is done, or if you will be able to make workable arrangements on any that you do still owe. But if you need automatic stay protection to last longer, then Chapter 13 may well be able to give you that along with much more time and more flexibility in dealing with special creditors.
Posted by Kevin on September 10, 2012 under Bankruptcy Blog |
Bankruptcy protects your paycheck because it’s more powerful than a creditor’s garnishment court order
A garnishment is effectively a court order which tells your employer to pay a portion of your paycheck to the creditor instead of to you. Except in rare circumstances, a creditor can’t get that garnishment order without first suing you and getting a judgment saying that you owe the debt. A judgment is the court’s decision that you do indeed owe the debt, how much you owe, and the amount of any additional costs. A judgment authorizes a creditor to use a variety of powerful ways to get money or property out of you to pay the debt, often (but not always) including through wage garnishment.
Bankruptcy stops wage garnishments at four stages of the process:
- before the creditor files a lawsuit, by stopping that lawsuit from being filed in the first place
- very shortly after a lawsuit is filed, by preventing that lawsuit from turning into a judgment
- after a judgment is entered, by not allowing the creditor to get a garnishment order
- after a garnishment order is signed by the court where the judgment was entered, by trumping the garnishment court order with a more powerful bankruptcy “automatic stay”
So your bankruptcy prevents most garnishments from happening. It stops future hits on your paycheck from a “continuous garnishment,” in which there is one garnishment order requiring money to be taken out of your paycheck until the debt is paid. And it also stops new garnishments on an old judgment, for example, when a creditor finds out about your new employer.
Bankruptcy Stops Some Wage Garnishments Only Temporarily
In preventing upcoming wage garnishments, bankruptcy USUALLY does so permanently. This happens when a debt is discharged (legally written off) in the bankruptcy case, as most debts are. Once a debt is discharged, under Section 524(a)(2) of the Bankruptcy Code an injunction is imposed against the collection of that debt every again, by any means including garnishment. So in those situations the bankruptcy filing stops the garnishment, forever.
So when are garnishments NOT stopped permanently? Garnishments are just temporarily stopped by your bankruptcy filing if the debt is NOT being discharged in the Chapter 7 case—such as certain taxes, most student loans, and a few other kinds of debts. The automatic stay preventing the garnishment is in effect only from the time the case is filed until the entry of the discharge about three months later. So, for example, if the IRS was garnishing your wages before the filing of your bankruptcy to collect on a tax that is not being discharged, the IRS can resume doing so after the discharge is entered (unless in the meantime arrangements are made with the IRS to make monthly payments on that debt, which hopefully you would be able to do after the discharge of your other debts).
Bankruptcy Does Not at All Stop A Few Rare Kinds of Wage Garnishments
If you are filing a Chapter 7 case, the automatic stay does not protect you from wage garnishment to pay child and spousal support obligations, for either current or back support. This means that an ongoing garnishment for support will not be stopped by a bankruptcy filing. And if there had been no garnishment earlier, those garnishments could actually start during your bankruptcy case.
Fortunately, Chapter 13 DOES stop garnishments for support, and provides a way to catch up on back support while under the protection of the bankruptcy court.
Present and Past Wage Garnishments
We’ve covered the effect of bankruptcy on future garnishments, including those that would have gone into effect right after the bankruptcy filing. But what about garnishment orders that go into effect just before filing bankruptcy? For example, what if you’re racing to file bankruptcy after a judgment is entered, but your bankruptcy is filed and the automatic stay goes into effect a day or two after the garnishment order is signed but before any money comes out of your paycheck? And how about after the money has been paid by your employer to the creditor, days or even weeks before your bankruptcy filing? Under what circumstance could you possibly get that money back? The next two blogs will get into these questions about present and past garnishments.
Posted by Kevin on July 11, 2012 under Bankruptcy Blog |
In bankruptcy it’s okay to FEEL differently towards some creditors than others. You can also sometimes ACT differently, but only if you very carefully follow the rules.
OK. You are in financial difficulty. You may or may not even have thought seriously about bankruptcy, however. You have lots of creditors and a small amount of money. Some of those creditors are family members- and you have to take care of them. Others are people that you do with business. You would like to take care of them because you want to keep up that relationship. Are there any hidden land mines if you bankruptcy after paying back your cousin, Vinnie, of your main supplier?
The problem with favoring certain creditors is that doing so flies in the face of one of the basic principles of bankruptcy law—that creditors which are legally the same should be treated the same. Mostly that applies to how creditors are treated DURING the bankruptcy case itself. But in certain limited but crucial ways this principle spills over into the time BEFORE your case is filed. Payments you made to a creditor can be undone—the creditor can be forced to pay to the bankruptcy trustee whatever you paid to the creditor within a certain period of time before your bankruptcy filing.
The practical consequences of this can be devastating. You make a special effort to pay someone that you care about, likely when you don’t have much money, only to later risk having your bankruptcy trustee make that person pay that money “back,” not to you but rather to the trustee. Since this can happen long after you paid that creditor, the money you paid probably has long ago been spent, often leaving that creditor scrambling.
If you pay a creditor not long before filing the bankruptcy case, the theory is that you “preferred” that creditor over others. The inappropriate payments are called “preference payments,” or simply “preferences.” The idea is that had you not made those payments, there would have been money to distribute to the creditors overall.
So what are the rules about this so that one can avoid them? If you’d like very effective sleep-inducing bedtime reading, here is Section 547 of the Bankruptcy Code explaining preferences. Nearly 1,400 words, in 57 subsections and sub-subsections!
But the good news is that the basic rule is both reasonably straightforward and often easy to work around if you understand it. So here it is. A preference is a payment (usually money, but it can be any asset) made (voluntarily or involuntarily such as a garnishment) on a prior debt to a creditor (anybody to whom you legally owe money) during the period of 90 days before the filing of a bankruptcy. That period of time stretches out to a full year before filing for payments made to “insiders”—basically relatives, friends, and business associates.
So how do you work around this? Well, if you know about the rule in advance, you avoid paying creditors you care about during those 90-day and 1-year periods before filing, whichever is applicable. And if you’ve already made those payments, you avoid the problem by waiting to file long enough to get past those time periods.
There are other aspects that make this easier than it might sound. Payments to most secured debts (on your home, vehicle) don’t count. The trustee can’t chase payments to a single creditor totaling less than $600 in the case of a consumer debtor or less than $5,000 for a business debtor. And there are various other exceptions.
The bottom line is that overall it’s dangerous to pay creditors who you feel a special loyalty to before filing bankruptcy. The basic 90-day/1-year rule is rather simple, but it has lots of twists and turns so it’s safer to just avoid the issue whenever possible. Often it’s better to wait until after you file your bankruptcy case to pay these people. That’s the subject of the next blog.
Posted by Kevin on July 9, 2012 under Bankruptcy Blog |
Most experienced bankruptcy attorneys know that there is a moral consideration in filing bankruptcy. We know that many clients wrestle with the idea of whether it is morally right for them to file. Books are written about the bankruptcy filings of famous Americans through the years for the dual reasons of demonstrating that filing bankruptcy does not necessarily make you a bad person, and also to demonstrate the moral ambivalence that confronted these famous people when they filed bankruptcy.
You could consider the choice whether or not to file bankruptcy to simply be a “business decision.” Merely a weighing of the costs and benefits of filing and not filing. For many people, that is as far as it goes (and I do not have a problem with that). After all, corporations of all sizes file “strategic bankruptcies” all the time. Their very smart and well-informed managers decide that bankruptcy is the best way to reduce debt and streamline their operations, so that the business can survive and hopefully thrive into the future.
And who doesn’t want to survive and thrive?
But for you, it may not be that cut and dry. You consider yourself more than a business. More than a corporation. For you, the human costs and benefits have to be added into the equation.
For many people, the decision to file bankruptcy is more than a business decision. For many, that’s where morality comes into the decision. We humans are moral creatures. That means that our important choices include the moral assessment of the situation. If we don’t engage in the moral component of this choice, we may experience something akin to “buyer’s remorse”; that is, after the fact we look back and say to ourselves, “why did I do that”?
So what do you need to do to make a good moral decision?
First, accept the choices that you made—good and bad, sensible and short-sighted, intentional and forced—and review the circumstances that got you where you are now. Accept that you made a series of legal commitments to pay your debts, consider how much choice you had at the time about them, and in hindsight what you could have done differently, if anything. Analyse honestly why are you now not able to keep those commitments? Is it because you lost a job or because your spending habits, especially in the area of non-necessities, are out of control? By analyzing choices made, you are not only assessing whether to file bankruptcy, but you are putting yourself on the path not to repeat your mistakes.
Second, consider both the financial costs and benefits of bankruptcy versus the moral costs and benefits of continuing to try to meet those financial commitments. Yes, you can get my debts discharged. But, how will your family, friends, co-workers view you in the future.? Am you being an honest debtor or are you gaming the system? Or will it be viewed that you are gaming the system? Do you have a realistic chance of successfully paying off your debts, and even if so, what would be the likely human costs while doing so? And if you do not have a realistic chance, how do you weigh the benefit of putting up a good fight against the costs that come from just delaying the inevitable?
Third, recognize that you now have both the opportunity and obligation to make a good decision about whether to continue trying to meet those commitments. To just accept the status quo without facing the situation honestly and bravely is making a decision by default, which is likely neither your morally best nor practically wisest move. In other words, you should control your destiny rather than destiny controlling you.
Fourth, get advice so that you know your legal options. You cannot make decisions, whether business or mixed business and moral, without knowing the facts and the law. An experienced bankruptcy attorney not only knows the law, he or she knows what you are going through. More importantly, an experienced bankruptcy attorney can guide you to bankruptcy alternatives if that makes sense for you. You may have the best of all intentions, but with your hours at work cut back, lots of debts, and bill collectors badgering you at work and home, bankruptcy is probably your best and only realistic alternative. On the other hand, you may be a candidate for debt consolidation through a reputable non-profit debt counselor. Or you may have enough equity in your home to get a second mortgage and consolidate your debts. Finally, filing under Chapter 13, where you pay back a portion of your debt, may be economically feasible and fit into your notion of fairness and morality. One size does not fit all. An experienced bankruptcy attorney can put you in a position to make the right decision for you and your family.
Posted by Kevin on July 6, 2012 under Bankruptcy Blog |
Background:
- A creditor which has rights to collateral is called a “secured creditor.” Your obligation to pay what you owe to this creditor is secured by rights it has to take possession and ownership of the collateral if you don’t make your payments on the debt.
- In bankruptcy, secured creditors have a lot more leverage against you because of the collateral than do creditors without any collateral—“unsecured creditors.”
- If you want to keep the collateral, Chapter 7 is sometimes is your best choice, but in many circumstances Chapter 13 can give you more options.
- Secured debts in which the collateral is your home or your vehicle are governed by special rules because of how important those kinds of collateral are to most people.
- But you will not find many blogs talking about secured debts where the collateral is something other than your home or vehicle. The main secured debts of this type are probably furniture and appliance purchases, money loans secured by your own personal assets, and business loans secured by business and/or personal assets.
Cramdown:
- This tool applies only to Chapter 13—it can’t be done in Chapter 7.
- If the collateral securing a secured debt is worth less than the balance on that debt, then you may be able to divide that debt into two parts: the secured part—the amount of the debt up to the value of the collateral, and the unsecured part—the rest of the debt. An example will make that clear. Let’s say you owed $1,000 on a refrigerator, in which the purchase contract gave the creditor the right to repossess that refrigerator if you didn’t make the agreed payments. If the present value of that refrigerator is $600, then the secured portion of that debt would be $600, and the remaining $400 of that debt would the unsecured portion.
- In a Chapter 13 “cramdown” you pay not the total debt, but only the secured part of the debt. You pay the unsecured part of the debt only at the percentage that all the rest of your regular unsecured creditors are paid. That is usually less than 100% and can sometimes be a low as 0%. In the above example, the $1,000 total refrigerator debt is crammed down to $600, and the remaining $400 part of the debt is lumped in with the rest of your unsecured creditors. So if in your Chapter 13 plan your unsecured creditors are receiving 10%, then you would pay only the $600 secured portion, the remaining unsecured portion would get $40 spread out over the term of the plan, and would be discharged (written off) at the end of your Chapter 13 case.
THE cramdown rule with collateral other than your home or vehicle:
- “[I]f the debt was incurred during the 1-year period preceding [the bankruptcy] filing” then you cannot do a cramdown on collateral that is neither your home nor your vehicle. See the last sentence of Section 1325(a) of the Bankruptcy Code (tucked in right after subsection (a)(9)). This means that if the debt is any older than 1 year, you CAN do a cramdown.
So, if you have a debt, more than 1 year old, secured by something other than your home or vehicle(s), in which the collateral is worth less than the debt, you can cram down the debt to the value of the collateral. If so, then because this can only be done under Chapter 13, that would be one factor in favor of filing under Chapter 13 instead of Chapter 7. Talk to your attorney to see if this applies to you, and to find out all the other Chapter 7 vs. Chapter 13 factors to weigh in your situation.
Posted by Kevin on June 29, 2012 under Bankruptcy Blog |
A previous blog focused on ways in which Chapter 7 and Chapter 13 bankruptcy each make it possible for you to keep your vehicle by keeping your vehicle lender satisfied. But to be very practical, today let’s hone in on one very common scenario: you’ve fallen behind on your vehicle loan, but need to keep that vehicle. What are your options?
Saved by the Automatic Stay
As you probably already feel in your gut, you’ve got to accept right away that you are in a very precarious situation. Vehicle loans are very dangerous because of how quickly the collateral—your car or truck—can be repossessed. Realistically, most repossessions do not happen until you’re about 2 months late. But that depends on your payment history, the overall aggressiveness of the creditor, and, frankly, how the repo manager happens to be feeling that day. If you’re not current, you’re in danger.
Once a repossession happens, that does not always mean that your vehicle is gone for good. But in many situations that IS the practical result. To get a vehicle back after a repo usually takes serious money. Money you don’t likely have hanging around if you’re behind on your car payments.
And once the repo happens, thing’s often just get worse—your vehicle is sold at an auction, and you often end up owing thousands of dollars for the “deficiency balance,” the difference between what the vehicle was auctioned off for and the amount you owed on the loan (plus repo and sale costs). Next thing you know, you’re being sued for those thousands of dollars.
All that is preventable, IF you file either a Chapter 7 or Chapter 13 bankruptcy BEFORE the repossession. The “automatic stay”— a legal injunction against repossession—goes into effect instantaneously upon the filing of bankruptcy. Even if the repo man is already looking for your vehicle to repo, once you file that gets you off his list. At least for the moment.
Dealing with Missed Payments under Chapter 7
As stated in the last blog, most vehicle lenders play a “take it or leave it” game if you file a Chapter 7 case. If you want to keep the vehicle, you must bring the loan current quickly—usually within about two months after filing. Unless your lender is one of the relatively few that are more flexible, you need to figure out if not paying your other creditors is going to free up enough cash to catch up on your missed payments within that short time. If not, the lender will have the right to repossess your vehicle if you are not current the minute the Chapter 7 case is completed, usually about 3 months after it is filed. In fact, you may have even less time if the lender asks the bankruptcy court for permission to repossess earlier.
Dealing with Missed Payments under Chapter 13
You have much more flexibility about missed payments under Chapter 13. In fact, you do not need to catch up on them at all.
There are two scenarios, alluded to in the last blog.
If your vehicle is worth at least as much as your loan balance OR if you entered into your vehicle loan two and a half years or less before filing the case, than you will have to pay the entire loan off within the 3-to-5-year Chapter 13 plan period. However, you can reduce interest payments to what is known as the Till rate. That is prime plus a factor for the risk involved in your situation. For all intents and purposes, while interest rates stay low, you should be able to reduce interest to 4.5-5%. Depending on the amount of the loan balance, that can mean a reduction in monthly payments.
If your vehicle is worth less than your loan balance AND you entered into your vehicle loan more than two and a half years before filing the case, then you can reduce the total amount to be paid down to the value of the vehicle. With this so-called “cramdown,” you still must pay that reduced amount within the life of the Chapter 13 plan. And you can reduce interest to the Till rate. Now, you may need to pay a portion of the remaining balance, primarily based on whether you have extra money in your budget to do so. But the savings in terms of both the monthly payments and the total amount to be paid are often huge.
Conclusion
Bankruptcy stops your vehicle from being repossessed, and gives you options for dealing with previously missed payments. Chapter 7 may work if you can pay off the entire arrearage fast enough. Otherwise you may need the extra help Chapter 13 provides. Or you might want to file Chapter 13 to take advantage of the “cramdown” option and reducing interest to the Till rate.
Posted by Kevin on June 27, 2012 under Bankruptcy Blog |
Under Chapter 7, you can pay your vehicle loan mostly by getting rid of all or most of your other debts. Under Chapter 13, you can pay your vehicle loan ahead of most of your other creditors.
Bankruptcy law is about balancing the rights of debtors and creditors. When you file bankruptcy you gain some leverage against most of your creditors. But exactly how much leverage depends on the kind of debt. With a vehicle loan, you get much less leverage than with some other types of debts because the lender has a right to its collateral–your car or truck. But if you want to keep your vehicle (and you need a vehicle in Northern New Jersey), you may be able to use the lender’s rights over your collateral to your advantage.
Let’s see how this works under Chapter 7 and then under Chapter 13.
Favoring your vehicle loan in a Chapter 7 “straight bankruptcy”
Between you and the vehicle lender, your leverage is that you have the right to simply surrender your vehicle to the creditor and pay nothing. The bankruptcy discharges (writes off) any remaining debt. Usually the lender does not get paid enough from selling the vehicle to cover the full balance on the debt.
This means that sometimes we can use the threat of surrender to improve the vehicle loan’s terms, maybe even reduce the balance to an amount closer to the current fair market value of the vehicle.
But unfortunately, many major vehicle lenders don’t see it that way. They made a decision at some point that they make more money by requiring all their Chapter 7 customers to pay the full balance on the vehicle loans, and then take losses on those who aren’t willing to do that and instead surrender their vehicles. But it may be worth a try.
Favoring your vehicle loan in a Chapter 13 “payment plan”
Between you and the vehicle lender, your leverage is both lesser and greater under Chapter 13 than under Chapter 7.
You have less leverage in threatening surrender if your Chapter 13 plan is paying anything to your unsecured creditors. That’s because the vehicle lender would recoup from you at least some of its losses upon surrender, instead of none.
And if your vehicle loan is two and a half years old or less, if you want to keep the vehicle you must pay the full balance of the loan, regardless of the value of the vehicle compared to the loan balance.
But you have more leverage in two ways. With any vehicle loan, including those two and a half years old or less, you do not have to cure any arrearage, and can change the monthly payment, as long as the balance is paid in full by the end of the case.
And if the loan is more than two and a half years old, you can do a “cramdown”—reduce the amount you pay to the fair market value of the vehicle, plus whatever percentage you’re paying to the pool of unsecured debt, if any.
Clearly, Chapter 13 gives the debtor more leverage, if not more options, when it comes to a vehicle.
Posted by Kevin on June 22, 2012 under Bankruptcy Blog |
Three ways bankruptcy can help: 1) write off debts to focus on defense costs, 2) pay only the most important debts and expenses, and 3) reduce chance of related civil liability.
As discussed in a previous blog, criminal fines, fees and restitution are almost never discharged in any kind of bankruptcy case. And yet if you’re facing a serious criminal charge, or have already been convicted, bankruptcy can still be hugely helpful.
If you’re charged with a crime, you need financial resources to pay for your legal defense. You need to be able to focus financially and emotionally on fighting the criminal charge. And then, if you do not win a complete acquittal, you have to figure out how you will pay whatever criminal fines, restitution, or other court and probation fees that the court orders as part of your criminal sentence. So you have to choose what your highest financial priorities are. Because of the grave potential consequences, that usually means paying for a defense attorney, and then paying whatever the criminal court requires of you. Bankruptcy can help in this by re-prioritizing your debts and expenses, and protecting you from your creditors.
1. Bankruptcy can help by writing off all or most of your debts so that you can focus both your attention and your finances on the criminal charge(s) or their aftermath.
Right after you’ve been charged with a crime, unless you indigent and financially qualify for a public defender, your highest priority must be to pay for your criminal attorney and any related costs of your defense. That may mean selling assets, and/or surrendering collateral to creditors, like a vehicle with high monthly payments. And you may need to stop paying all your creditors. Often the cleanest way to reduce your debt load is with a Chapter 7 bankruptcy. In the right circumstances it provides the financial relief you need.
After your criminal case is resolved, especially if you had to serve a jail sentence, you’ve probably had a gap in your income, or now have a job with lower income. You often have continuing financial obligations to the criminal justice system that you must absolutely pay because your release or probation is conditioned on you doing so. These can include restitution payments, probation/supervision fees, treatment costs, community service fees, and/or chemical and electronic monitoring charges. A bankruptcy can clean up your debts so you can pay these criminal fees and avoid re-incarceration. The last thing you need is some ancient creditor garnishing your wages or bank account so that you can’t meet your criminal obligations.
2. Bankruptcy can help you prioritize your debts and expenses so that you can keep paying the ones most important to the criminal conviction against you.
Sometimes the criminal court imposes other kinds of conditions on you which directly require you to keep current on certain of your debts or expenses, beyond the court and probation fees referred to above. Depending on the nature of your offense, you may be required to keep absolutely current on your child support payments, or file and pay income taxes on time, or always maintain vehicle insurance.
Also, your criminal sentence or terms of probation often require you to show up at certain scheduled events—to do your community service, attend probation meetings, or just maintain regular employment. All require reliable transportation. If you cannot make your vehicle payments or pay for vehicle insurance, or at least pay for public transportation, you will not be able to meet these conditions. A Chapter 7 or Chapter 13 bankruptcy may be the best way for you to be able to pay for these necessities.
3. Alleged criminal behavior often results in the threat of civil liability by the injured party. Filing bankruptcy might, under certain circumstances, dissuade that party from filing a lawsuit against you, or lead to a quicker settlement if a lawsuit has already been filed.
Bankruptcy law does make it difficult for you to discharge debts or claims that you may owe for personal injuries or financial damages resulting from certain kinds of allegedly criminal behavior. But, nevertheless, for the following practical reasons a bankruptcy may still help:
a. In a bankruptcy, you must present your financial circumstances in detail, in writing, under penalty of perjury. You are also questioned under oath about them, at least briefly, and potentially in depth. Although that may not sound like a lot of fun, taking the initiative to show that you have no assets may convince the other party—or may more importantly, his or her attorney—that pursuing you would not be financially worthwhile.
b. The other party has to jump through some relatively difficult hoops to establish that the debt or claim should survive beyond your bankruptcy case. Depending on the situation, this may dissuade him or her from spending lots of attorney fees on a difficult battle.
c. With certain kinds of alleged damages, the other party has a very short amount of time to decide whether to pursue you or not. Some may simply miss the quick deadline. Or it may encourage a quicker settlement.
Whether a bankruptcy filing will give you an advantage along these lines is a very delicate tactical question that needs to be very carefully discussed with and analyzed by your attorney. But it is certainly worth considering.
Posted by Kevin on June 20, 2012 under Bankruptcy Blog |
If you’ve heard otherwise you might actually be hearing correctly—especially about restitution—but most likely you’re reading or listening to information that’s now a couple decades outdated. For a long time criminal fines and restitution have not been able to be discharged under Chapter 7, BUT until the early 1990s criminal restitution COULD be discharged under Chapter 13. In fact, a 1990 United States Supreme Court opinion, Pennsylvania Dept. of Public Welfare v. Davenport, clearly stated that criminal restitution was dischargeable under Chapter 13, based on the language that Congress had used in the Bankruptcy Code. However, in direct reaction to that Supreme Court opinion, Congress quickly amended Chapter 13 to make clear that criminal restitution could not be discharged. A few years later Congress tightened up the law again, this time to say that criminal fines could not be discharged under Chapter 13 either. So ever since then the law about this has been quite clear.
But still, complications can arise.
Take the situation where the same conduct by a debtor can result in either civil or criminal liability, or both. Usually, you can figure out very quickly whether the fine is civil or criminal, dischargeable or not. Everybody’s favorite example is OJ Simpson. Remember he was acquitted of murder on the criminal side, but then was held liable for wrongful death in the civil lawsuit against him.
But every once in a while, whether an obligation is a criminal fine or instead a civil penalty might not be so clear. If you own an auto repair shop and the state water quality agency fines you for illegal disposal of waste fluids, that obligation may be a criminal or civil one.
Or in some rare cases under Chapter 13, even some obligations arising directly from a criminal court’s judgment might be considered not to be “restitution, or a criminal fine,” and so can be discharged. That’s because even though Congress tried to “fix” the problem tossed in its lap by the Supreme Court’s Davenport opinion referred to above, it utilized language that was not precise enough and offered a little wiggle room.
Here is real life illustration of this—although I must warn that this may or may not be the way our local bankruptcy courts would interpret the law. The case is worth mentioning to show how courts wrestle with—and can disagree about—these kinds of issues.
A guy named Joseph Elliott Ryan was convicted in Alaska of the federal crime of possession of an unregistered firearm. He did nearly 5 years of prison time and paid a $7,500 criminal fine. But his criminal conviction also included obligations to pay $750,000 in restitution and $83,420 for “costs of prosecution.” On appeal, this huge restitution obligation was overturned and eliminated. He then filed a Chapter 13 case in Idaho and included his remaining obligation for the “costs of prosecution.” When his Chapter 13 case was completed, he had paid less than $3,000 of that $83,420 obligation. But he asked the bankruptcy court to order that the remaining $80,000 or so be discharged. The court refused, saying that “costs of prosecution” are a “criminal fine” excluded from discharge under Chapter 13.
But the bankruptcy court was overturned on appeal, and so that $80,000 “costs of prosecution” obligation was discharged. The appellate court carefully analyzed the meaning of the term “criminal fine” as used in this context and elsewhere, and concluded that this term does not include “costs of prosecution.” It did not matter to the the appeals court that the “costs of prosecution” had been part of a criminal court’s criminal sentence. So Mr. Ryan did not have to pay any more or that criminal court obligation, and was completely debt-free.
To be clear, just about all criminal fines, fees, and restitution CANNOT be discharged under either Chapter 7 or 13. But as Mr. Ryan’s unusual case illustrates, there can still be limited exceptions. In his case, for less than 5 cents on the dollar, and as a result of some smart lawyering, he got a bankruptcy discharge of a criminal court obligation.
Posted by Kevin on June 18, 2012 under Bankruptcy Blog |
The federal government is making billions of dollars on student loans every year. So why double the interest rate on the loans next year? To boost those profits.
The federal government pays tons of money to run its student loan programs, right? The interest rate on those loans is doubling next year from 3.4% to 6.8% in order for the taxpayers not to need to subsidize student loans as much, right?
Not according to law professor Alan White, who says that “Congress’ dirty secret is that the government makes a huge annual profit on student loans.” In his latest blog on the highly respected blogsite, Credit Slips, he cites as his main source “the scrupulously nonpartisan Congressional Budget Office.” According to its data, “$37 billion will flow IN to [the U.S.] Treasury from student loans made this fiscal year at the 3.4% rate.” And that’s after accounting for about $1.5 billion to administer those loans. So the interest rate doubling dispute “is about whether to increase this annual profit next year.” The two parties “are arguing about how much of the federal deficit to plug with student loan interest money.” If the interest “rate will jump up to 6.8% for 2013 loans, [that would yield] another $30 to $40 billion return to Treasury.”
But wait a minute. How about all the money that is lost because of all the borrowers who can’t or don’t pay on their student loans? Prof. White acknowledges that many loans do go into default, but because student loan creditors have “supercreditor powers, especially wage garnishment and tax refund intercepts. . . [, t]here is no statute of limitations… , and even bankruptcy discharge is difficult. The $37 billion Treasury profit for [fiscal year] 2012 is after allowing for estimated credit losses in the $5 billion range.”
So how can there be such a huge amount of profit? “In two words, yield spread. …. Treasury can borrow money at 0.5% or less, and lends it to students at 3.4%. Administrative costs are well below 1%.”
The bottom line: $37 billion profit for taxpayers in 2012, and about twice as much as that in 2013 if the interest rate doubles.
I don’t know if this law professor is right. My head started spinning when trying to figure out the pages and pages of accounting tables in the Congressional Budget Office’s report. But even if he is right, is it such a bad thing for the federal government to be making a profit with its investment of taxpayer money on student loans? After all, we have a huge deficit hole to plug.
But it seems important when making tough choices to frame the issues honestly. It’s one thing to talk about doubling the student loan interest rate so that borrowers are then paying more of, or even all of, the taxpayers’ cost of those loans. It’s an entirely different story if we’re doubling the interest rate from a level where it’s already raking in billions of dollars in profits, making way beyond paying the taxpayers’ cost.
A study by the Brookings Institute concluded that the “United States spends 2.4 times as much on the elderly as on children, measured on a per capita basis, with the ratio rising to 7 to 1 if looking just at the federal budget.” Is it fair to add this additional deficit-paying burden on the younger generation?
Why do we bring up this issue in a bankruptcy blog? Simple. A vast majority of student loan debt is not dischargeable in bankruptcy. Given that college expense has outstripped the inflation rate for the last thirty years, it is no wonder that a college education at a private university costs upwards of $180,000 with poor job prospects in the current market. The salt on the wound is that young unemployed or underemployed college graduates will have the additional burden of paying off a six figure student loan. Congress and the President cannot let this happen or will they because of the cash cow that student loans afford them?
Posted by Kevin on June 15, 2012 under Bankruptcy Blog |
Student loans are not just burdening recent graduates. They’re now directly hurting people you wouldn’t expect. And dragging down the whole economy.
Recent college graduates are clearly hurting in this economy as they come out of school and enter the job market. The national unemployment rate has come down from the Great Recession high of 10.0% in October 2009 to 8.2% in May 2012. But it’s the persistence of extraordinarily high unemployment that is hurting young graduates. Only one other time since the Great Depression of the 1930s had the unemployment rate hit 10%, during the recession of 1981-82. But then, like in most other modern recessions, a strong recovery reduced the unemployment rate quite quickly, in that case down to 7.2% in less than two years. In contrast the current recent graduates are trying to claw their way into their first career jobs in the midst of a “jobless recovery.”
And they are forced to do so saddled under the most student loan debt ever. You’ve probably heard the news of the past few months that total student loan debt now exceeds $1 trillion and is more than the nation’s total credit card debt. Realize that most of these graduates started college before the Great Recession hit, many heading into careers that looked relatively sensible back then but are now disaster areas. Public school teachers, anyone?
And many others made the tough decision to stay in school to ride out the recession, maybe shifting into more reliable fields, only to be confronted with one of the most anemic recoveries in modern history.
But it’s not just these twenty-something year olds who are hurting. Two other populations are being hugely impacted.
First, middle-aged students have gone back to school in a scramble to shift with the rapidly changing economy to more marketable careers. Their gamble has included taking on a huge amount of student loan debt. As the title of this Reuters article says, “Middle-aged borrowers [are] piling on student debt.” It states that in the last three years, average student loan debt has gone up 47% for the 35-to-49 year old age group, more than for any other group.
Second, just as dramatic, parents of students are taking on more and more student loan debt on behalf of their children. According to this Bloomberg article, “Loans to parents have jumped 75 percent since the 2005-2006 academic year… . An estimated 17 percent of parents whose children graduated in 2010 took out loans, up from 5.6 percent in 1992- 1993.”
Hopefully the retrained, re-schooled middle-aged workers will find work that justifies taking out the loans. After all, the labor force has to adjust to the changing realities of the labor market, and if it does so efficiently the whole economy benefits.
And hopefully the parents’ investment in their children’s education will also be worthwhile. Their kids’ increased earning power over their lifetimes may well make it so. And you’d think that if a college student knows that his or her parents are mortgaging their home or their retirement, that student would be motivated to make good use of the education!
A title of a recent report by the National Association of Consumer Bankruptcy Attorneys asks the question squarely: “The Student Loan ‘Debt Bomb’: America’s Next Mortgage-Style Economic Crisis?
I’m a bankruptcy attorney who looks across my desk just about every day into the faces of clients whose investment in higher education did not pan out. I know that in my line of work I don’t tend to hear the success stories, but from where I’m sitting it feels like we’re heading in a dangerous direction.
Posted by Kevin on June 13, 2012 under Bankruptcy Blog |
Every creditor has the right to challenge your ability to write off your debts in bankruptcy. But none of them likely will. Why not?
For most people filing bankruptcy, every debt they intend to discharge (write off) will in fact be discharged.
There are two categories of debts that are not discharged in bankruptcy. The first category includes those special ones that Congress has decided for policy reasons simply should not be subject to a bankruptcy discharge. Among the most common ones are spousal and child support, most student loans, and many tax obligations. Assuming you are represented by a competent bankruptcy attorney, you will know before your case is filed if any of your debts fall into this category.
The second category of debts includes those that are discharged UNLESS the creditor files a formal objection to the discharge. Any creditor can raise an objection. But creditors very seldom do, for these reasons:
1. Although any creditor can challenge your discharge of its debt, it can only win such a challenge if it can prove that you acted inappropriately in certain very specific ways. Proving inappropriate action is not easy and it can be costly. Many creditors first impulse is that they will fight the discharge. Then after they sit down with a lawyer and find out what it is going to cost and what the chances of success are, a vast majority of creditors are sensible enough to not throw the proverbial good money after bad chasing a hopeless cause.
2. On top of that, bankruptcy law discourages creditors from raising challenges in two ways:
a. Debts are presumed to be dischargeable—at least if they do not fit any of the special nondischargeable debts in the first category referred to above. So the creditor has the burden of proving that the debt is not dischargeable, and the debt is discharged if it fails to provide the necessary evidence to meet that burden.
b. The creditor risks being ordered to pay YOUR costs and attorney fees for defending a challenge if you defeat the challenge. This is an added disincentive for a creditor to push a challenge when it has weak facts against you.
However, there are two situations where a debtor may get challenged on her discharge:
1. In cases involving use of credit card for luxury purchases within 90 days of filing or obtaining cash advances within 70 days of filing, there is a presumption that the debtor is trying to defraud the creditor. Since this presumption makes it easier to prove the case, creditors will bring this type of action.
2. Also, you may have a creditor who is motivated less by economic good sense than by a desire to cause you trouble, say an ex-spouse or former business partner.
The best way to deal with these situations is, first, to be completely honest with your attorney in answering every question he or she asks you, whether during a meeting or when providing information in writing. Be thorough in your responses. And second, if you have ANY concerns along these lines, make a point of voicing your concerns, and do so early in the process. Particularly, if you wonder whether you’ve acted inappropriately with any of your creditors; or if you have any personal creditors who are carrying a grudge, discuss it with your attorney. It may be that your concerns are unfounded and that would be a relief. However, if your concerns are real, then it is better to prepare for opposition ahead of time.
Posted by Kevin on June 11, 2012 under Bankruptcy Blog |
Support is Not Dischargeable, If It’s Really Support
If you owe a debt “in the nature of” child or spousal support, that debt cannot be discharged (legally written-off) in either a Chapter 7 or Chapter 13 case.
The point of the “in the nature of” language is that an obligation could be called support in a divorce decree or court order, and yet not actually be “in the nature of” support for purposes of bankruptcy. Or, for that matter, the obligation may not be labelled as support in the decree or order, but could be found to be support. The bankruptcy court makes the call whether an obligation is “in the nature of” support, and it looks beyond the label given to a debt in the separation or divorce documents. Practically speaking, this often times leads to litigation within bankruptcy proceeding- either a motion or an adversary proceeding.
So what’s an example of a debt which is not really “in the nature” of support? Well, how about a personal loan provided to the two spouses during their marriage by one of the spouse’s parents. In the subsequent divorce, the divorce decree obligated the other spouse to repay that loan by paying making payments of “spousal support” until that loan was paid off. In that obligated spouse’s subsequent bankruptcy case, that obligation for so-called “spousal support” would likely be seen as one not “in the nature of” support. Instead the court could well see that obligation for what it really is: an obligation for one spouse to pay a marital debt, not one actually to pay spousal support.
Any Possible Benefit from Chapter 7?
No usually. The best thing that a “straight” Chapter 7 can do to help with your support obligations is to discharge your other debts so that you can better afford to pay your support.
Beyond that there is one other relatively rare situation that can help if you owe back support payments—an “asset” Chapter 7 case.
In most Chapter 7 cases, all of the assets that the debtors own are protected by exemptions, so the debtors keep all their assets. Nothing has to be given to the trustee. Since the “bankruptcy estate” contains nothing, it’s a “no asset” case.
But if all of your assets are not exempt, then the trustee takes possession of the non-exempt assets and sells them. From the proceeds of the sale, the first priority, after payment of trustee fees, are back support payments. They get paid, in full, before other creditors get paid (like credit cards). So if you owe back child or spousal support in an asset case, some or all of it could be paid this way.
Any Possible Benefit from Chapter 13?
Although a Chapter 13 case does not discharge support obligations any better than a Chapter 7 one, it still gives you a potentially huge advantage: Chapter 13 stops collection activity for back support obligations. Chapter 7 does not. This is significant because support collection can be extremely aggressive. In many states, the debtor can lose his or her driver’s license.
In addition to stopping the collection effort, Chapter 13 provides you a handy mechanism to pay off that back support, usually allowing you to pay that debt ahead of most or all other debts. That usually translate into lower payments to your other creditors; in effect allowing you to pay your back support on the backs of other creditors
Posted by Kevin on June 8, 2012 under Bankruptcy Blog |
What does it take to write-off a student loan in bankruptcy? An “undue hardship.” And that is a very tough standard to meet.
When the 1978 Code was enacted, you could discharge a student loan 5 years after the first payment was due or for undue hardship. By 1990, there was an outcry that the 5 year rule was too lenient. It was increased to 7 years. I remember that what would drive the judges crazy when, say, a medical student, usually during his or her residency, would file a Chapter 7 and wipe out $200,000 of student loan debt, and then afterward pull in the big bucks. Admittedly, this was egregious. By the mid-90’s, there was talk that the time period would be increased to 10 years. But Congress, through the Higher Education Amendments of 1998, decided to do away with the time element for discharge of student loans. The Bankruptcy Code incorporated this amendment. So, since 1998, undue hardship to the debtor and the debtor’s dependents is the only way to discharge a student loan.
Undue Hardship is not defined in the Code. That means that the bankruptcy courts were required to decide, on a case by case basis, what undue hardship means. There have been hundreds of decisions relating to what constitutes an undue hardship. Although there are some differences among regions of the country, the general consensus that to meet this “undue hardship” hurdle, you have to show that you meet three conditions:
1. Under your current income and expenses, if you were required to repay the student loan, you would be unable to maintain even a minimal standard of living.
2. This inability to maintain a minimal standard of living while repaying the student loan would likely stretch out over all or most of the loan repayment period.
3. You had made a meaningful effort at repaying the loan, or to qualify for appropriate forbearances, consolidations, and administrative payment-reduction programs.
The bottomline is that very few debtors will be able to get a student loan discharged. That means that even if you file bankruptcy, you will be required to pay off the student loan- no matter how long it takes. Moreover, unlike some debts in which the burden is on the creditor to challenge the discharge of the debt, with a student loan the burden is on the borrower to establish “undue hardship” during the bankruptcy case. Otherwise, no discharge and the debt survives your bankruptcy case. As we said in the opening- a very tough standard.
