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?
_________________________
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.
_________________________
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.
_________________________
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.
