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.
