Posted by Kevin on November 27, 2017 under Bankruptcy Blog | 
In a prior blog, we talked about the credit counseling course that a debtor must take before he or she can file under Chapter 7 or 13. After the petition is filed, the debtor must take the debtor education course. This is sometimes called the personal financial management course.
The course is given by a non profit budget and credit counseling agency approved by the United States Trustee. The course is usually taken online but, depending on the provider, can be done over the phone, or even in person. The purpose of the course is to provide the debtor with insight into his or her current financial situation which led to the bankruptcy, and how to budget income and expenses to avoid financial problems going forward.
The debtor education course requirement was part of the 2005 amendments to the Bankruptcy Code. As I stated in the blog dealing with the credit counseling course, in my opinion, one of unspoken policies for the 2005 amendments to the Bankruptcy Code was to discourage bankruptcy filings by making them more time consuming and expensive. The debtor education course requirement (just as the credit counseling course requirement) is an additional hoop through which a debtor is forced to jump. Hate to sound cynical, but in the 12 years since the 2005 amendments, I have never had a debtor tell me how valuable either course was.
So, what happens if you decide to save a few bucks by not taking the debtor education course. The punishment is draconian. No course taken- no certificate of completion filed with the Clerk of the Bankruptcy Court, no discharge. That means that your debts are not wiped out.
I remind my clients at the meeting of creditors that if they have not already taken the debtor education course, they should do so immediately.
Let’s say you mess up and don’t take the course. Any recourse? You may be able to re-open your case to take the course and file the certificate of completion. However, you will incur additional legal and filing fees. In the meanwhile, because your debts are not discharged, your creditors can take action to collect of their debts. Finally, there is some risk that the judge will not let you reopen the case. Don’t put yourself in that position.
Posted by Kevin on November 22, 2017 under Bankruptcy Blog |
In the prior blog, we learned that you may be required to file under Chapter 13 because, simply put, you make too much money to file under Chapter 7. Guess what? There are restrictions on filing Chapter 13 also. First, you must be an individual. That means a live person. Second, you must have regular income. That usually means a job, but it can even include social security or public assistance. Third, your secured debts cannot exceed $1,184,200. Fourth, your unsecured debts cannot exceed $394,725. Items three and four are commonly called Debt Limits which are adjusted periodically.
So, what’s a secured debt. It means generally any debt for which you have given collateral. Examples: a home mortgage or a car loan. But, it can also include a judicial lien, a statutory lien or a filed IRS tax lien. A judicial lien comes about when someone gets a judgment against you, and the sheriff attaches a specific item of property like your bank account. A statutory lien comes about by law. An example is your real estate taxes.
Unsecured claims can be credit cards, medical bills, loans that you guaranteed for your business, and priority debts like back child support.
In the prior blog, we learned that a debtor in Chapter 13 can strip off a second mortgage if that mortgage is totally underwater. For example, your home is worth $200,000. The first mortgage is for $250,000 and the second mortgage is for $100,000. The second mortgage is recorded and would otherwise be considered a secured claim except that there is no collateral to attach to it because the first mortgagee is owed more than the collateral is worth. In that case the stripped off second mortgage becomes an unsecured claim.
So, how do you count the second mortgage when you are figuring out the Debt Limits for Chapter 13. In our example, the stripped off second mortgage is counted with the unsecured claims. So, in our case, you have to add the $100,000 to your other unsecured debts even though there was a mortgage.
Sometimes, the stripped off second mortgage can put you over the Debt Limit for unsecured debt. What happens then? Well, if you do not qualify for Chapter 7, your only alternative is Chapter 11. Ouch. Although individuals can file Chapter 11, that is an expensive proposition.
Posted by Andy Toth-Fejel on November 20, 2017 under Bankruptcy Blog |
Since the 2005 amendments to the Bankruptcy Code, you can’t file an individual bankruptcy case (Chapter 7, 13 or individual Chapter 11) without first taking the so-called “credit counseling.” course from an approved nonprofit budget and credit counseling agency.
What’s Actually Required?
Not much. It’s actually a simple procedure you do on the internet, or by phone if you prefer. You simply provide some information about your debts, income, and expenses. Then are almost always told that your income is not sufficient to pay for your expenses.
180 Days before Filing
The “counseling” session must take place “during the 180-day period” before filing bankruptcy. So be sure that you’re going to be filing bankruptcy within that length of time after you do it. Otherwise, if your bankruptcy filing is delayed beyond the 180 days, you will have to take the course again.
Usually people run into the opposite problem, putting it off too long. Even though you can usually get the requirement out of the way within 24-48 hours, there are situations where debtors come to an attorney to file on the day of a foreclosure sale. In that case, the debtor can be SOL.
Reason for this Requirement
The supposed reason for this requirement was to encourage people to consider options other than bankruptcy.
The United States Government Accountability Office has issued a report which questions that viability of that rationale:
“The counseling was intended to help consumers make informed choices about bankruptcy and its alternatives. Yet… by the time most clients receive the counseling, their financial situations are dire, leaving them with no viable alternative to bankruptcy. As a result, the requirement may often serve more as an administrative obstacle than as a timely presentation of meaningful options.”
My opinion is that one of unspoken policies for the 2005 amendments was to discourage bankruptcy filings by making them more time consuming and expensive. The credit counseling requirement (and the financial management course requirements, see below) are just additional hoops through which a debtor is forced to jump.
Costs/Where to Go ?
When the requirement first came out, it cost about $75-100 for the credit counseling course. Now, the cost is down to $20-35 on the average. You can find a list of approved providers on the US Trustee’s website, but it is easier to get a recommendation from your lawyer.
You also have to take a financial management course after the filing. Same cost. No course, no discharge.
Posted by Kevin on November 3, 2017 under Bankruptcy Blog |
In Chapter 7, debtors make no payments to their creditors but a Chapter 7 trustee can sell all non-exempt property and pay unsecured creditors. The process is over in 4 months or so, and the debtor obtains a discharge of most of her debts. In Chapter 13, however, debtors get to keep even their non-exempt property but must make monthly payments to the Chapter 13 trustee for a period of 36 to 60 months before they can get a discharge of most of their debts.
So, we are assuming that you are having trouble paying your bills. You are contemplating bankruptcy. Why would you choose to make payments for 3 to 5 years to get a discharge when you can pay nothing and get a discharge in 4 months. Well, there are a number of reasons why prospective debtors pick Chapter 13. In 2005, Bankruptcy Code was amended by a law referred to as BAPCPA. BAPCPA adopted what is called the Means Test to determine if you could file under Chapter 7. If your income based on family size exceeds the median for your State, you must pass the Means Test to file under Chapter 7. The Means Test is based on IRS tests to determine how much a taxpayer can pay in back taxes. So, if you are above median income and you fail the Means Test, you cannot file Chapter 7, and are be required to file under Chapter 13 if you otherwise qualify.
But, there are other reasons to file under Chapter 13 even if you pass the Means Test. Say you own a home with significant equity. In a Chapter 7, the trustee can sell your home and pay off your creditors. In a Chapter 13, if you make all payments under a Plan confirmed by the Court, you can keep your home. In addition, let’s say that you own a home but are in arrears on the mortgage. In Chapter 13, you can pay off the arrears over the term of the Plan. That could be up to 60 months.
Finally, say your house was worth $400,000 when you bought it, but after the mortgage crisis, it is only worth $250,000. You owe $270,000 on a first mortgage and $50,000 on a second mortgage. In this case, the collateral covers most of the first mortgage, but the second mortgage is completely unsecured. In other words, if there was a foreclosure, the first mortgage holder would be paid a good amount of what it is owed, but the second mortgage holder would get nothing. In Chapter 13 in our example, you can “strip off” that second mortgage and treat it as unsecured debt since there is no collateral to attach to that mortgage. So, instead of making monthly payments of, say, $300 per month on the second, that creditor gets only a pro rata share of what is paid to the unsecured creditors. If your plan payment is, say, $100 per month, then the second mortgage holder gets to share that $100 with the other unsecured creditors instead of getting $300 per month. A substantial savings. If you make all the payments, the second mortgage holder is required to release the mortgage lien of record.
In some cases, you are forced into Chapter 13, but that does not mean that Chapter 13 cannot provide some real benefits, especially to homeowners. If you think Chapter 13 can help your situation, you should speak with an experienced bankruptcy attorney. Chapter 13 is not a DIY project.
Posted by Kevin on October 15, 2017 under Bankruptcy Blog |
The Bankruptcy Code is divided into chapters. Chapters 1, 3, and 5 deal with basic concepts that apply to all the various types of bankruptcies. Chapter 7 deals with liquidations for individuals or businesses. Chapter 9 deals with municipalities. Chapter 11 deals with reorganizations and/or planned liquidations of mainly businesses. Chapter 12 deals with family farms (do not get many of them in northern New Jersey). Chapter 13 deals with repayment plans for individuals. For the average consumer, Chapter 7 and Chapter 13 are the two alternatives methods of filing bankruptcy. For individuals, the object of any bankruptcy is to get a discharge of your debts. In other words, wiped out.
Let’s look at Chapter 7. This is sometimes called a straight bankruptcy or a liquidation. Chapter 7 is basically an asset driven analysis. You do not make payments, but a trustee can sell your non-exempt property, and pay out your creditors. The repayment scheme is set out in the Bankruptcy Code. Upon the conclusion, many of your debts are discharged. Certain enumerated debts are not wiped out such as domestic support obligations, debts incurred by fraud, certain taxes and most student loans.
After the Bankruptcy Code went into effect, creditor groups complained for the next 25 years that it was too easy for debtors to file under Chapter 7, which in a vast majority of cases, translated into no payments to creditors. Creditors wanted more debtors to file under Chapter 13 where monthly payments must be made to a trustee and certain creditors need be paid in full. The 2005 revisions to the Bankruptcy Code considers a debtor’s income in whether he or she can file under Chapter 7. If the debtor’s income is below the median income for the State based on family size, it is presumed that the debtor can file under Chapter 7. If the income is above median, a debtor has to pass the “means test” to qualify for Chapter 7. The means test looks at the debtor’s income for the 6 months prior to filing to arrive arrive at what is called current monthly income. It then subtracts categories of expenses- some based on national or regional averages, and others based on actually cost. If the net income is above a certain amount, the debtor cannot file under Chapter 7.
Assuming that you qualify for Chapter 7, the next issue is what property is exempt. In New Jersey, we can use either the exemptions set forth in the Bankruptcy Code or the exemptions listed in New Jersey statutes. The New Jersey statutes are mostly about 100 years old and have not been adjusted for inflation, so we almost always use the federal exemptions.
You file a Chapter 7 by filing with the Bankruptcy Clerk a Petition, Schedules of assets, liabilities, income and expenses, and various ancillary documents (over 40 pages). A trustee is appointed to oversee the case. If the exemptions cover the value of all of your assets, the case is called a no-asset case. That means no assets go to the Trustee-you get to keep them subject to any security interests (mortgages and the like).
About 4 weeks after filing, the debtor (and legal counsel) appear before the trustee. The debtor is required to answer questions from the trustee and any creditors. Creditors rarely appear at this hearing. If the trustee believes that your filing is in order and no further action is necessary, a discharge order will be issued within about 6 weeks. The whole process takes about 4 months. You cannot file another Chapter 7 and obtain a discharge for 8 years from filing date of the first Chapter 7.
Clearly, Chapter 7 is a bit more complex, but as the title states, these are Chapter 7 basics.
Posted by Kevin on October 3, 2017 under Bankruptcy Blog |
Over the last couple of years, this blog has dealt with many Chapter 7 and Chapter 13 issues. Some simple, some complex. Every once and awhile, however, it is good to go back to the basics. So, in the next few blogs, that is what we will do.
We will begin with an overview. Many people are skittish about filing bankruptcy. Yes, they are in a bad financial situation. Not enough money coming in, debts are mounting, creditor calls are becoming more than annoying, and maybe there are lawsuits. In society, we are brought up to be responsible and honor our obligations. It is part of being an adult. For many, the thought of bankruptcy is equated with failure. But I take a different point of view. Bankruptcy should be looked as a vehicle for a new start, a fresh start.
Many people do not know this, but the right to file bankruptcy is in the Constitution. Congress is given the right to establish uniform laws concerning bankruptcy. The first bankruptcy law was adopted by Congress in 1800. It was clearly pro-creditor. There were subsequent bankruptcy acts in 1841, 1867, 1898 and 1938.
The next major revision was the Bankruptcy Reform Act of 1978, commonly referred to as the Bankruptcy Code. The Bankruptcy Code marked a significant change in the point of view of bankruptcy laws. It was decidedly more pro-debtor compared to prior law. It allowed a vast majority of debtors to file Chapter 7 where debtors are not required to make cash payments to creditors and keep most, if not all, of their assets.
Creditor groups complained that the Bankruptcy Code was too pro-debtor and lobbied Congress for changes. This led to minor revisions in the 1980’s and 1990’s. The lobbying continued. In 2005, Congress adopted the Bankruptcy Abuse Protection and Consumer Protection Act (BAPCPA). Although this was a major overhaul of many areas of the Bankruptcy Code, from a consumer’s point of view, BAPCPA tries to force more debtors into Chapter 13 where monthly payments must be made by the debtor for periods ranging from 36 months to 60 months. All in all, BAPCPA has made the bankruptcy process more complex and more costly to a prospective debtor.
If there is anything that you should take from this blog, it is that bankruptcy is a right that you have under the Constitution of the United States. It gives you an opportunity to deal with your debts and get a fresh start.
Posted by Kevin on September 9, 2017 under Bankruptcy Blog |
You wanted to follow the American dream and set up your own business. Two years down the road, however, you realize that you are working 70 hours per week and the business is not making money. You have exhausted all your savings and the business has incurred debt out the wazoo. You just want out, and you have heard about Chapter 11 or Chapter 7. What to do?
While you can liquidate your business in a Chapter 11 (liquidating plan), this is very expensive and time consuming. Unless, the business is very large, this may not be the way to go. But what about a Chapter 7?
The first question you have to answer is who (or what) is going into Chapter 7? To a degree, it may depend on how your business was set up. If you have a sole proprietorship (DBA), then under the law of New Jersey, you are the business. So, if the business fails and you want out, you will have to file a Chapter 7. A trustee will be appointed and will administer not only your business assets and liabilities, but also your personal assets and liabilities.
If the business is a corporation or LLC, then under the law, the business is considered an entity separate and apart from you. So, now the issue is who files bankruptcy? One of the primary reasons to file bankruptcy is to get a discharge of your debts. However, the Bankruptcy Code states that a discharge in a Chapter 7 is limited to individuals. The Code defines “individuals with regular income” but not “individuals”. The Code also defines “persons” which includes people but also includes corporations and partnerships. Well, without going into too much more detail, the bottomline is that people can get discharged in a Chapter 7 but corporations and partnerships and LLC’s cannot. So, if you put your LLC into Chapter 7, it does not get a discharge.
But, the analysis does not end there. Your LLC may be have sued by numerous creditors so you have lawsuits pending. Also, these creditors have a penchant for not only suing the LLC but suing the principal and that is you. You have other creditors who have not sued yet but are hounding you on phone. You have inventory and accounts receivable. You have the bank pressuring you on that line of credit which you guaranteed.
Even though the LLC does not get a discharge in Chapter 7, it may be worthwhile to file a Chapter 7 for the business. First of all, because of the automatic stay, all pending lawsuits are put on hold, and your creditors cannot file any new actions unless they get the permission of the bankruptcy court (relief from automatic stay). Also, the trustee takes over and chases the business’s creditors, deals with the landlord and liquidates the inventory. You must cooperate, but the trustee does the heavy lifting.
If you cannot work a deal out with lenders on guarantees, or if the collection lawsuits naming you become too much of a hassle, then the owner should seriously consider an individual Chapter 7.
Bankruptcy issues involving a failing business are complicated. You should seek experienced bankruptcy counsel work work you through the process.
Posted by Kevin on September 1, 2017 under Bankruptcy Blog |
FACT: In bankruptcy, creditors seldom fight the write-off of their debts. Why not? And when DO they tend to fight?
Debts That Creditors Must Object To
This blog post is NOT about the kinds of debts that simply can’t be discharged (legally written off), and don’t need the creditor to object for that to happen. Examples of those are child and spousal support obligations, recent income taxes debts, and criminal fines. Those survive bankruptcy without any effect on them.
Instead this is about ordinary debts and the ability of any creditor to raise certain limited kinds of objections (like fraud) to the discharge of its debt.
Why Objections Aren’t Usually Raised
But if creditors have a right to object, why don’t they do so? If they can make trouble for you, why don’t they?
Simply because doing so is very seldom worth their trouble.
Why not?
1. Creditors seldom have the factual basis on which to object.
2. It takes money for creditors to object, money they may well not recoup.
3. The risk that the creditor would have to pay your attorney fees.
That would happen if the judge decided that “the position of the creditor was not substantially justified.” So if creditors are not very confident of their argument, they could be dissuaded further by the risk of having to pay your costs fighting the objection.
So that’s why most creditors just write off the debt and you hear nothing from them during your bankruptcy case.
When Creditors Tend to Object
Creditors do object sometimes, often involving one of the following two situations:
1. Using leverage against you.
If a creditor thinks it has a sensible case against you, it could raise an objection knowing that you are not willing or able to pay a lot of attorney fees to fight it. The creditor knows that even if you have a good defense to its accusations so that you could well win if the matter went all the way to trial, it would cost you a lot to get to that point. So they raise the objection in hopes of inducing you to enter into a settlement quickly.
2. A Personal Grudge
If a creditor is very angry at you for some reason, he, she, or it might be looking for an excuse to harm you or cause you problems. Ex-spouses and ex-business partners are the most common creditors of this sort. Irrationality is unpredictable, so it sometime drives an objection even when there are little or no factual grounds for it.
The Creditors’ Firm Deadline to Object
Creditors have a very limited time to raise objections: their deadline is only 60 days after the Meeting of Creditors (so around 3 months after your bankruptcy case is filed).
So, talk with your attorney if you have any concerns along these lines. And then if whatever assurances he or she gives you doesn’t stop you from worrying about this, you’ll at least know that you won’t have long to worry before the creditors’ right to object expires.
Posted by Kevin on August 26, 2017 under Bankruptcy Blog |
Is Filing Bankruptcy a Moral Choice?
As a bankruptcy practitioner, I take for granted that filing for bankruptcy is a practical, economic choice. But for many of my clients, it is also a moral choice. They took the money or used the credit with the good faith expectation that they would pay back the creditor, and now they cannot. Does that make them a bad person? How do you reconcile this apparent disconnect?
For many of my clients with misgivings about filing, I advise to meet the issue head on. You’ll feel better (even good) about the decision only after you believe in your head and in your heart that it really is the right step to take.
How to Make a Good Moral Decision
1. What got you to this point of your finances?
You made legal commitments to pay your debts. What has changed so that you are having trouble now meeting those honest intentions to pay? What is making you seriously consider breaking those commitments permanently?
2. Understand your present: what are the costs and benefits of now trying to meet those financial commitments?
The moral benefit of not filing is that you would be keeping your promises to pay your debts. It’s easy to fixate on this and feel guilty about breaking these honest promises. But how about the real costs if you kept struggling to meet them? Consider your physical health, and your emotional health as you deal with the constant stress. Consider the debts’ effect on your marriage and family relationships. What financial and emotional responsibilities do you have to spouse, children, parents, siblings, community that you just can’t handle? You clearly have moral obligations to all these people in addition to obligations to your creditors.
3. You CAN make a good decision: you now have the opportunity to choose and act wisely.
Face your situation honestly. Don’t hide from the truth, even if it means accepting that you’ve made mistakes. Own them. But don’t beat yourself up about them. Focus on the future. Focus on what you have to do (or not do) to insure a better economic future. Not just generalizations but concrete steps. Resolve to make better economic (and other) decisions every day going forward. And then walk the walk.
4. Get good advice: you can only make good decisions if you know your legal and practical options.
You can’t make good economic or moral choices about how to attack your debts without knowing your legal alternatives for doing so. You can’t know whether the best way to deal with your creditors if you don’t know those legal options. It may turn out that credit counseling will allow you to manage your debts within your budget and without filing bankruptcy. It may turn out that a Chapter 13 payment plan fits your set of life obligation better than a Chapter 7 “straight bankruptcy”. But you cannot make those decisions unless you have the facts and options.
5. Weigh your legal options: consider effects on your creditors, yourself, your spouse, your family, and anyone else involved.
Get help from the right people and resources. Do whatever helps YOU make a good decision. Although bankruptcy attorneys are legal advisors, experienced bankruptcy attorneys have dealt with many people in their careers who have focused not only on the economic issues but the moral issues in filing bankruptcy. Discuss these concerns with your attorney. It will help you make the best, well informed decision which is the first step to a much better future.
Posted by Kevin on August 20, 2017 under Bankruptcy Blog |
You can usually get out of an ongoing Chapter 13 “adjustments of debts” bankruptcy case by simply asking to do so.
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Unlike Chapter 7, if you file a Chapter 13 case you can end it—“dismiss” the case—at any time, and in just about any circumstance. But why the difference?
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Explicit Right to Dismiss
Why can a Chapter 13 case be dismissed by the debtor? Because unlike with Chapter 7, Section 1307(b) of the Bankruptcy Code says so. And quite strongly.
“On request of the debtor at any time… the [bankruptcy] court shall dismiss a case under this chapter [13].”
Notice that the debtor can ask for a dismissal “at any time.” This implies that the request could come any time during the life of a Chapter 13 case, including when it might be particularly inconvenient for a creditor. Or whenever. Also notice that the court does not seem to have any discretion about whether or not to dismiss–it “shall” dismiss the case. Not “may” or “might” dismiss it, but “shall” do so.
An Absolute Right to Dismiss?
Actually there has been debate among bankruptcy judges about whether a court can ever prevent a Chapter 13 case from being dismissed on request of a debtor. And a number of judges have decided that in situations of serious abuse or fraud by the debtor, there are other provisions in the law that trump this section and prevent a Chapter 13 case from being dismissed. But still, in the vast majority of situations, a request by a debtor to dismiss a Chapter 13 case results in its near-immediate dismissal.
Why So Different Than Chapter 7?
But why does the Bankruptcy Code—the federal statute governing bankruptcy—provide for a right to dismiss a Chapter 13 case when it does not provide for Chapter 7 dismissal the same way?
Because (beyond the reasons given in the last blog related to Chapter 7) when Congress established the bankruptcy options, it wanted to encourage debtors to file Chapter 13 cases. This was in part so that they paid back at least some of their debts. Congress probably also recognized that filing a Chapter 13 case is generally riskier than filing Chapter 7. That’s mostly because it involves making payments diligently over the course of years, while not getting the reward of the discharge (legal write-off) of the debts unless successfully getting all the way to the end of it. To encourage taking on the risk of starting a Chapter 13 case, Congress made it easy to get out of it if things did not go as planned.
Posted by Kevin on August 5, 2017 under Bankruptcy Blog |
Although the Great Recession started in December, 2007 and ended technically in June, 2009, economic growth has been sluggish through the 2016 election and even to this day. Participation in the work place went from 66.4% in January, 2007 down to 62.5% in October, 2015. That means that people lost their jobs and withdrew from the work force for extended periods of time for a myriad of reasons.
In July, 2017, the Department of Labor indicated that US employers added 209,000 jobs. More importantly, wages are going up. This is bringing many people back into the work force.
It is not surprising that many of the people who had been sitting on the sidelines for extended periods of time have accumulated significant debt over the past few years. In the past, I would receive a steady stream of calls from people who were outsourced (or otherwise laid off) or downsized concerning lawsuits or threatened lawsuits, and garnishments from their creditors. In the last few years, however, I get less such calls. That does not mean that people have not accumulated debt. It probably reflects certain policy decisions made by creditors about the viability of suing people when they are out of work and, therefore, judgment proof.
Once you get a job, however, you may not be judgment proof. Granted, if you go from unemployment to a minimum wage job, you may not be subject to creditor harassment. But, what if you were unemployed for a year or more because your job was outsourced. You have education and skills that in the right job market, could translate into a sizeable salary. In that case, if you get back into your field, it is only a matter of time before debt collectors will be in touch with you.
So what do you do? Wait for the telephone call? Or the summons and complaint to be delivered by the sheriff? Probably, it would be better to be proactive. At the least you should do a personal financial audit. How much debt do you have? Is it unsecured like credit cards or medical bills, or secured (collateral involved). Is it student loan debt that may not be dischargeable in bankruptcy? How much are you going to have from each paycheck after your monthly expenses to pay those back debts? Are there areas where you can cut back?
When we deal with prospective clients, we try to tailor our advice to their specific economic situation. Some may have defenses to creditor action so fighting a collection action in State court may be the way to go. Others may find negotiation with specific creditors can get a payment plan or settlement at a reduced amount. Some are better served by engaging a reputable creditor counseling agency. Others may need the protection afforded by the Bankruptcy Code.
Congratulations. The economy is getting better and you are back in the job market. But, if you have accumulated debt over the last few years, have a plan to deal with it.
Posted by Kevin on August 3, 2017 under Bankruptcy Blog |
You can usually change from an ongoing straight Chapter 7 case into a Chapter 13 payment plan. But getting out of bankruptcy altogether is generally not allowed.
Most Chapter 7 cases are finished in about 3 months. For the most part, the bankruptcy trustee determines that everything you own is covered by property exemptions, so you get to keep it all—the trustee has “no assets for a meaningful distribution to the creditors.” You get your deb discharged and your case is closed. Not much time for your circumstances to change.
But sometimes things happen. Things do in fact change. Your uncle dies unexpectedly and even more unexpectedly you get a chunk of an inheritance. Or you find out you have an asset you didn’t know about. Or something you own is worth much more than you expected. Or you run up a major medical expense right after filing. So now you don’t want to be in the Chapter 7 case, or maybe not in that Chapter 7 case. What can you do?
Common sensically, you figure you can either end your case or switch it to some other kind of bankruptcy.
Dismissal of a Chapter 7 Case
But unlike Chapter 13, you don’t have a right to just end—“dismiss”—a Chapter 7 case.
Why not? You filed the case; why can’t you just end it?
Because the Bankruptcy Code does not give you that right. The theory is that if you submit yourself, and your assets, to the bankruptcy court in order to get the benefits you want from it—immediate protection from your creditors and a discharge (legal write-off) of all or most of your debts—then you’ve got to live with the consequences.
It’s as if you’ve created a new legal person—your “bankruptcy estate”—with the Chapter 7 trustee in charge of it. This new “person” does have a life of its own of sorts, and doesn’t disappear just because you change your mind.
That doesn’t mean you can’t ever get the court to dismiss your case. It just means that you have to have a really good reason. One that doesn’t just benefit you, but also your creditors.
Getting out of a Chapter 7 is a “depends-on-the-circumstances” situation. Honestly, having an experienced attorney at your side would be critical for knowing what to do if this kind of thing happened to you.
Conversion of a Chapter 7 Case
Changing your case from a Chapter 7 before it’s done into a Chapter 13 is much easier. The Bankruptcy Code says that the “debtor may convert a case under this chapter [7] to a case under chapter… 13… at any time, if the case has not been [already] converted… .” (Section 706(a).)
To do so, you do have to qualify for Chapter 13. Among other requirements, this means:
1) you can’t have more debt than certain limits—$394,725 in unsecured debts and $1,184,200 in secured debts (until these amounts are revised as of 4/01/13) (Section 109(e)); and
2) you must be an “individual with regular income,” meaning that your “income is sufficiently stable and regular to enable [you] to make payments under a [Chapter 13] plan.” (Sections 109(e) and 101(30).)
Whether or not you’d want to convert from Chapter 7 to Chapter 13 depends—naturally—on the circumstances. At first blush, changing from what you might have expected to be a three-month procedure into one that will likely take three years or more probably doesn’t sound so good. But if you are converting the case to preserve an asset, or to deal with a special creditor, Chapter 13 can be a very good tool for these purposes.
If either your financial circumstances significantly change after your Chapter 7 case is filed, or your case proceeds in an unexpected direction, Chapter 13 may have actually have been your better alternative at the outset. And if not, it can be a very sensible second choice.
Posted by Kevin on July 25, 2017 under Bankruptcy Blog |
How can you tell if your Chapter 7 case will be straightforward? Avoid 4 problems.
Most Chapter 7 cases ARE straightforward. Your bankruptcy documents are prepared by your attorney and filed at court, about a month later you go to a simple 10-minute hearing with your attorney, and then two more months later your debts are discharged—written off. There’s a lot going on behind the scenes but that’s usually the gist of it.
But some cases ARE more complicated. How can you tell if your case will likely be straightforward or instead will be one of the relatively few more complicated ones?
The four main problem areas are: 1) income, 2) assets, 3) creditor challenges, and 4) trustee challenges.
1) Income
Most people filing under Chapter 7 have less income than the median income amounts for their state and family size. That enables them to easily pass the “means test.” But if instead you made or received too much money during the precise period of 6 full calendar months before your case is filed, you can be disqualified from Chapter 7. Or you may have to jump through some more complicated steps to establish that you are not “abusing” Chapter 7. Otherwise you could be forced into a 3-to-5 year Chapter 13 case or your case could be dismissed—thrown out of court. These results can sometimes be avoided with careful timing of your case, or even by making change to your income before filing.
2) Assets
Under Chapter 7 if you have an asset which is not protected (“exempt”), the Chapter 7 trustee can take and sell that asset, and pay the proceeds to the creditors. You may be willing to surrender a particular asset you don’t need in return for the discharge of your debts. That could especially be true if the trustee would use those proceeds in part to pay a debt that you want and need to be paid anyway, such as back payments of child support or income taxes. Or you may want to pay off the trustee through monthly payments in return for the privilege of keeping that asset. In these “asset” scenarios, there are complications not present in the more common “no asset” cases.
3) Creditor Challenges to the Dischargeability of a Debt
Creditors have a limited right to raise objections to the discharge of their individual debts. This is limited to grounds such as fraud, misrepresentation, theft, intentional injury to person or property, and similar bad acts. With most of these, the creditor must raise such objections to dischargeability within about three months of the filing of your Chapter 7 case—precisely 60 days after your “Meeting of Creditors.” Once that deadline passes your creditors can no longer complain, assuming that they received notice of your bankruptcy case.
4) Trustee Challenges to the Discharge of All Debts
In rare circumstances, such as if you do not disclose all your assets or fail to answer other questions accurately, either in writing or orally at the trustee’s Meeting of Creditors, or if you don’t cooperate with the trustee’s review of your financial circumstances, you could possibly lose the right to discharge any of your debts. The bankruptcy system largely relies on the honesty and accuracy of debtors. So it is quite harsh towards those who abuse the system through deceit.
No Surprises
Most of the time, Chapter 7s are straightforward. The most important thing you can do towards that end is to be completely honest and thorough with your attorney during your meetings and through the information and documents you provide. That way you will find out if there are likely to be any complications, and if so whether they can be avoided, or, if not, how they can be addressed in the best way possible.
Posted by Kevin on July 2, 2017 under Bankruptcy Blog |
Here are some of the other main advantages of Chapter 13:
1. You can keep your possessions that are not protected by property “exemptions,” preventing a Chapter 7 trustee from taking them from you. Thus you retain much more control over the process of saving your assets, avoiding the unknowns of negotiating payment terms with a Chapter 7 trustee in order to keep your non-exempt possessions. Also, in a Chapter 13 case, you have 3 to 5 years to pay to protect such possessions, instead of the few months that Chapter 7 trustees generally allow.
2. Similarly, if you fell behind in payments on your home’s first mortgage, you have the length of your plan—the same 3 to 5 years–to catch up. That’s in contrast to the few months of payments that a mortgage lender would generally allow if you negotiated directly with it after filing a Chapter 7 case.
3. You may be able to “strip” a second (or third) mortgage from your home’s title, and avoid paying all or most of that mortgage. This can happen if the value of your home is less than the balance of your first mortgage. Mortgage “stripping” may save you hundreds of dollars per month. This is completely unavailable in a Chapter 7 case.
4. You may be eligible for “cramdown” of your vehicle loan. If you purchased and financed your vehicle more than two and a half years before filing your Chapter 13 case, and the vehicle is worth less than the balance on the loan, your monthly payments and the total amount you pay for your vehicle can be significantly reduced. In contrast, in a Chapter 7 straight bankruptcy case you are usually almost always stuck with the monthly payment and loan balance dictated by the vehicle loan contract.
5. In that same situation, if you are behind on the vehicle loan payments you don’t have to catch up those back payments over a few months. In a Chapter 7 case, almost always you must quickly pay off any arrearage if you want to keep the vehicle.
6. If you owe an ex-spouse non-support obligations, you can discharge (write-off) them under Chapter 13—not under Chapter 7. Non-support obligations include requirements in a divorce decree to pay off a joint marital debt or to pay the ex-spouse in return for getting more of the marital property. Discharging such debts can make a huge difference, often making Chapter 13 well worthwhile.
7. If you have any student loans, under Chapter 13, you can apply for an income driven repayment plan for federal loans and reduce payment on private loans. In most cases, you are not going to discharge those loans, but you will be able to make affordable payments while in the Chapter 13 plan. Also, you can use the payment history in Chapter 13 as a basis to qualify for a “hardship discharge” of your student loans. For more information on student loan debt, please join us on www.studentdebtnj.com.
People often assume they need and want a regular Chapter 7 bankruptcy, and it’s often exactly what they do need. But the above short list gives you some idea of the benefits of Chapter 13 that may make it a much better option. That’s one of the reasons you should talk with an experienced bankruptcy attorney, and do so with an open mind. That’s because sometimes Chapter 13 can give you a huge unexpected advantage, or a series of smaller advantages, which may swing your decision in that direction.
Posted by Kevin on June 28, 2017 under Bankruptcy Blog |
Here are 3 scenarios where a debtor tries to save his or her home. When is Chapter 7 “straight bankruptcy” enough, and when do you need Chapter 13 “adjustment of debts”?
Scenario #1: Current on Your Home Mortgage(s), Behind on Other Debts
Chapter 7: Would likely discharge (legally write off) most if not all of your other debts, freeing up cash flow so that you can make your house payments. Stops those other debts from turning into judgments and liens against your home.
Chapter 13: Same benefits as Chapter 7, plus often a better way to deal with many other special debts, such as income taxes, back support payments, and vehicle loans. May be able to “strip” (permanently get rid of) a 2nd or 3rd mortgage, so that you would not have to make that monthly payment, and paying little or nothing on the balance during the case and then discharging any remaining balance at the successful completion of your case.
Scenario #2. Not Current on Home Mortgage(s) But Only a Few Payments Behind & No Pending Foreclosure
Chapter 7: May buy you enough time to get current on your mortgage, if you’ve slipped only two or three payments behind. Most mortgage companies and their servicers (the people you actually interact with) will agree to give you several months—generally up to a year—to catch up on your mortgage arrearages. Generally called a “forbearance agreement”—lender agrees to “forbear” from foreclosing as long as you make the agreed payments. Works only if you have an unusual source of money (a generous relative or a pending legal settlement that’s exempt from the other creditors), or if filing Chapter 7 will stop enough money going to other creditors so you will have enough monthly cash flow to pay off the mortgage arrearages quickly.
Chapter 13: Even if only a few thousand dollars behind on your mortgage, you may not have enough extra money each month after filing a Chapter 7 case to catch up quickly on that mortgage arrearages. If lender is inflexible about giving you more time to catch up, a Chapter 13 case forces them to accept a much longer period to do so—three to five years.
Scenario #3. Many Payments Behind on Your Mortgage(s):
Chapter 7: Not helpful here. Buys at best only two to three months or so. Also, no possibility of “stripping”a 2nd or 3rd mortgage.
Chapter 13: Assumes that you can at least make the regular mortgage payment consistently, along with the arrearages catch-up payments. As stated above, gives you up to five years to pay off the mortgage arrearages, Your home is protected from foreclosure as long as you maintain the agreed Chapter 13 Plan and mortgage payments. Does not enable you to reduce the first mortgage payment amount, although in some situations you may be able to “strip” your 2nd or 3rd mortgage.
In my 30+ years of experience as a bankruptcy attorney, have seen Scenario #1 only once (was a close friend and he is still in his home). Usually see Scenario #3 because most debtors do not seek counsel until they are really “in the hole”. Be smart. When things start to go south, call an experienced bankruptcy attorney to learn your options.
Posted by Kevin on June 20, 2017 under Bankruptcy Blog |
Can you really keep everything you own if you file bankruptcy? The Answer: Usually Yes.
Some basics.
There are two basic types of consumer bankruptcies. Chapter 7 is an asset based approach. The Chapter 7 trustee sells your “non-exempt” property and pays your creditors. Chapter 13 is an income based approach where you generally keep your assets but have to make payments to your creditors over a 36-60 month period.
There are two types of creditors: secured creditors (they took collateral as a condition of granting you credit, and can look to the collateral to be paid even after the bankruptcy), and unsecured creditors (basically no collateral).
The purpose of bankruptcy is to give an honest debtor a fresh start. That means that most, if not all, of your debts are discharged, and you can keep all or most of your property.
Now how is that accomplished.
In a Chapter 13, as stated above, you keep the property you want to keep in exchange for making payments over the term of 36-60 months.
In a Chapter 7 “straight bankruptcy,” your debts are discharged—legally written off forever—in return for you giving your unprotected assets to your creditors (as represented by the bankruptcy trustee). But here is the good part: for most people, all or most of their assets ARE protected, or “exempt.” from the trustee and your creditors. Why? The fresh start.
Property Exemptions- The Basics
- The Bankruptcy Code has a set of federal exemptions, and each state also has its own exemptions. In some states you have a choice between using the federal exemptions or the state exemptions, while in other states you are only permitted to use the state exemptions. In New Jersey, we can use either. In many states, choosing which of the two exemption schemes is better for you is often not clear. However, in New Jersey, debtors generally use the federal exemptions. Why? Because many of the New Jersey exemptions were created by statute about 100 year ago or more, and were not adjusted for inflation. Moreover, New Jersey has no homestead exemption.
- If you have moved relatively recently from another state, you may have to use the exemption rules of your prior state. Because different state’s exemption types and amounts can differ widely, thousands of dollars can be at stake depending on when your bankruptcy case is filed.
- In some circumstances, it is not clear how the federal exemptions will be applied. What if you own a car and you owe $10,000 on your car loan. Clearly, the bank (secured lender) has an interest as do you. But, the trustee also may be able to make a claim to part of the value to the car, and sell it.
Navigating through exemptions can be much more complicated than it looks, and is one of the most important services provided by your bankruptcy attorney. It can maximize the amount of property you keep after receiving your bankruptcy discharge.
Posted by Kevin on June 15, 2017 under Bankruptcy Blog |
Bankruptcy is about Discharge
The point of bankruptcy is to get you a fresh financial start through the legal discharge of your debts.
Both kinds of consumer bankruptcy—Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts”—can discharge debts.
This blog post focuses on Chapter 7 discharge of debts.
What Debts Get Discharged?
Is there a simple way of knowing what debts will and will not be discharged in a Chapter 7 case?
Yes and no.
We CAN give you a list of the categories of debts that can’t, or might not, be discharged (see below). But some of those categories are not always clear which situations they include and which they don’t. Sometimes whether a debt is discharged or not depends on whether the creditor challenges the discharge of the debt, on how hard it fights for this, and then on how a judge might rule.
Why Can’t It Be Simpler?
Laws in general are often not straightforward, both because life can get complicated and because laws are usually compromises between competing interests. Bankruptcy laws, and those about which debts can be discharged, are the result of a constant political tug of war between creditors and debtors. There have been lots of compromises, which has resulted in a bunch of hair-splitting laws.
Rules of Thumb
Here are the basics:
#1: All debts are discharged, EXCEPT those that fit within a specified exception.
#2: There are quite a few of exceptions, and they may sound like they exclude many kinds of debts from being discharged. It may also seem like it’s hard to know if you will be able to discharge all your debts. But it’s almost always much easier than all that. As long as you are thorough and candid with your attorney, he or she will almost always be able to tell you whether you have any debts that will not, or may not, be discharged. Most of the time there are no surprises.
#3: Some types of debts are never discharged. Examples are child or spousal support, criminal fines and fees, and withholding taxes.
#4: Some other types of debts are never discharged, but only if the debt at issue fits certain conditions. An example is income tax, with the discharge of a particular tax debt depending on conditions like how long ago those taxes were due and when its tax return was received by the taxing authority.
#5: Some debts are discharged, unless timely challenged by the creditor, followed by a judge’s ruling that the debt met certain conditions involving fraud, misrepresentation, larceny, embezzlement, or intentional injury to person or property.
#6: A few debts can’t be discharged in Chapter 7, BUT can be in Chapter 13. An example is an obligation arising out of a divorce other than support (which can never be discharged).
The Bottom Line
#1: For most people the debts they want to discharge WILL be discharged. #2: An experienced bankruptcy attorney will usually be able to predict whether all of your debts will be discharged. #3: If you have debts that can’t be discharged, Chapter 13 is often a decent way to keep those under control.
Posted by Kevin on June 9, 2017 under Bankruptcy Blog |
How does bankruptcy stop garnishments, foreclosures, and repossessions?
Filing a bankruptcy case gets immediate protection for you, for your paycheck, for your home, and for all your possessions. This “automatic stay” provides this kind of protection for you and your property the moment either a Chapter 7 “straight bankruptcy” case or a Chapter 13 “adjustment of debts” case is filed. Virtually all efforts by all your creditors against you or anything you own comes to an immediate stop.
“Automatic Stay” = Immediate Stop
“Stay” is simply a legal word meaning “stop” or “freeze.”
“Automatic” means that this “stay” goes into effect immediately upon the filing of your bankruptcy petition. That filing itself, according to the federal Bankruptcy Code, “operates as a stay” of virtually all creditors’ actions to pursue a debt or take possession of collateral. Since the filing of your case itself imposes the stay, there is no delay or doubt about whether a judge will sign an order to impose the “stay” against your creditors.
Creditors Need to Be Informed, Sometimes Directly
Although the protection of the “automatic stay” is imposed instantaneous, practically speaking your creditors need to be informed about the filing of your case so that they are made aware that they must comply with it. If your creditors are all listed in your bankruptcy case documents, they should all get informed by the bankruptcy court within about a week or so after your case is filed. This doesn’t take any additional action by either you or your attorney (beyond making sure all of your creditors are listed in the schedule of creditors filed at the bankruptcy court). If you have no reason to expect any action against you by any of your creditors before that, just letting them all be informed by the court is usually all that’s needed.
However, if you are expecting some action by any of your creditors quicker than a week or so after filing the case, be sure to talk with your attorney about it. That way any such creditor can be directly informed by about your bankruptcy filing to stop whatever collection action it was contemplating. Make sure you and your attorney are clear which of you is informing that creditor and in what way.
Creditor Action Taken Unexpectedly
But what if a creditor has not yet been informed of your bankruptcy filing when it takes some action against you or your property in the days after your bankruptcy filing but before it finds out about it?
If this happens, the “automatic stay” is so powerful that in most circumstances such a creditor must undo whatever action it took against you after your bankruptcy was filed, even if this creditor honestly did not yet know about your filing. For example, if after your bankruptcy is filed a creditor files a lawsuit against you or gets a judgment on a lawsuit that it had filed earlier, the creditor must dismiss (throw out) its lawsuit or vacate (erase) the judgment.
Posted by Kevin on June 7, 2017 under Bankruptcy Blog |
Chasing a Discharged Debt is a Violation of Federal Law
The Bankruptcy Code makes it perfectly clear that for a creditor to try to collect on a debt after it is discharged under either Chapter 7 “straight bankruptcy” or Chapter 13 “adjustment of debts” is illegal. Section 524 of the Bankruptcy Code is about the legal effect of a discharge of debt. Subsection (a)(2) of that section says that a discharge of debts in a bankruptcy “operates as an injunction against” any acts to collect debts included in that bankruptcy case. Acts explicitly stated as illegal include:
the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor.
In other words, the creditor can’t start or continue a lawsuit or any legal procedure against you, and can’t act in any other way to collect the debt.
What If a Creditor Violates This Injunction?
Nowhere in Section 524 of the Code does it say anything about what happens if a creditor violates the law by disregarding that injunction. The section does not clearly say what, if anything, the penalties are for a creditor caught doing so.
However, even though no penalties are specified in THAT section, there is a strong consensus among courts all over the country that bankruptcy courts can penalize creditors for violating the discharge injunction through another section of the Bankruptcy Code, Section 105, titled “Power of Court.” The idea is that the injunction against pursuing a discharged debt is a court order, and so a creditor violating it is in contempt of court. So the usual penalties for those who act in civil contempt of court apply.
Penalties Assessed Against Violating Creditors
These penalties for civil contempt can include “compensatory” damages and “punitive” damages.
Compensatory damages are intended to compensate you for harm you suffered because of the creditor’s violation of the injunction. These potentially include actual damages such as time lost from work or other financial losses, emotional distress caused by the illegal action against you, and attorney fees and costs you’ve incurred as a result.
Punitive damages are to punish the creditor for its illegal behavior. So the judge looks at how bad the creditor’s behavior was in determining whether punitive damages are appropriate and how much to award.
Conclusion
The vast majority of the time creditors in a bankruptcy case write the debts off their books and you never hear about those debts again. But even though it’s illegal for creditors to try to collect on a debt that’s been legally written off in bankruptcy, once in a while they do try. Some creditors don’t keep good records or simply aren’t all that serious about following the law.
So after you receive your bankruptcy discharge, if you hear from one of your old creditors trying to collect its debt contact your attorney right away. This needs immediate attention. If the creditor’s behavior is particularly egregious, you and your attorney should discuss whether to strike back at the creditor for violating the law. There might possibly even be some money in it for you.
Posted by Kevin on May 31, 2017 under Bankruptcy Blog |
The Bankruptcy Reform Act of 1978, referred to as the Bankruptcy Code, provided that student loans made by a governmental unit or a non profit institution of higher education was not dischargeable in bankruptcy unless (a) the loan became due before five years before the date of the filing of the petition (in plain English, after 5 years of payments), or (b) if not discharging the loan imposed an undue hardship on the debtor or the debtor’s dependents. Note, private student loans were dischargeable under the 1978 statute. Many students took advantage of the ability to discharge their student loans after five years.
Since in the 1970’s and 1980’s student loans were to be repaid in 10 years, many said that it was unfair to allow students, in effect, to wipe half their debt obligation by filing bankruptcy. So, in the latter part of the 1980’s, the statute was amended to require 7 years of payments or undue hardship. In 1998, Congress amended that statute again to limit the discharge of student loans only to cases where the debtor could demonstrate undue hardship. In the meanwhile, the regulations relating to federal loans started to allow more flexibility in paying back student loans based on the borrower’s income. Those income driven repayment plans morphed into today’s IBR, ICR and REPAY programs.
In 2005, once again, there were major amendments to the Bankruptcy Code under BAPCPA which states for the Bankruptcy Abuse Prevention and Consumer Protection Act (still trying to figure out where the consumer protection comes in). Under BAPCPA, a debtor cannot get a discharge of a student loan unless the debtor can demonstrate an undue hardship on the debtor and the debtor’s dependents. The types of student loans that are not dischargeable included the following:
1. loans made, issued or guaranteed by a governmental unit;
2. made by any program funded in whole or part by a governmental unit or non-profit institution: or
3. any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code, incurred by the debtor who is an individual.
Since many private loans are qualified education loans under the Internal Revenue Codes, private lenders received a windfall under BAPCPA- their loans became non-dischargeable but the private lender was not required to provide income driven repayment plans.
It is difficult to get a undue hardship discharge. You must file an adversary proceeding (lawsuit) in the bankruptcy. The test used by the bankruptcy court in New Jersey to determine undue hardship is called the “Brunner test”, and consists of the following:
1. Based on current income and expenses, the debtor cannot maintain a “minimal” standard of living for the himself and the his dependents if forced to repay the student loans;
2. Circumstances exist which indicate that the debtor’s economic situation is likely to persist for a significant portion of the repayment period of the loan(s); and
3. The debtor has made good faith efforts to repay the loan(s).
The Court has wide latitude in either granting or withholding a discharge to student loans. It also means that if you lose at the trial level, it is very difficult to get the decision overturned on appeal. Obtaining a discharge of a student loan under the Bankruptcy Code is an expensive and not always successful way to deal with student loan debt. However, given the right set of circumstances, it can eliminate your student debt.
Because of the difficulties of proving undue hardship, student loan lawyers have developed various strategies outside of bankruptcy arena to deal with the ever increasing problem of repaying your student loans. I welcome you to visit my student loan website (http://studentdebtnj.com) which provides more options in dealing with your student loan debt.
