Posted by on May 24, 2015 under Bankruptcy Blog | 
Give gladly to your Chapter 7 trustee assets that you don’t need, if most of the proceeds from sale of those assets are going to pay your taxes.
We are in a midst of a series of blogs about bankruptcy and income taxes. Today we describe a procedure that doesn’t happen very often, but in the right circumstances can work very nicely.
Turning Two “Bad” Events into Your Favor
Most of the time when you file a Chapter 7 “straight bankruptcy,” one of your main goals is to keep everything that you own, and not surrender anything to the Chapter 7 trustee. To that end, your attorney will usually protect everything you own with appropriate property “exemptions.”
If instead something you own can’t be protected, and so must be surrendered to the Chapter 7 trustee, that’s often considered a “bad” thing because you’re losing something.
And that leads to a second “bad” thing—the trustee selling that “non-exempt” property and using the proceeds to pay your creditors. That usually does you no good because those creditors which receive payment from the trustee usually are ones that are being written off (“discharged”) in your Chapter 7 case, so you’d have no legal obligation to pay anyway.
But it may well be worth giving up something you own—particularly if it is something not valuable to you in your present circumstances—if doing so would have the consequence of paying some or all of your income tax debt that isn’t being written off in your Chapter 7 case.
Circumstances in which the Trustee would Pay Your Income Taxes
Consider the combination of the following two circumstances:
1) You own something not protected by the applicable property “exemptions,” which you either don’t need or is worth giving up considering the other alternatives.
2) The proceeds from the trustee’s sale of your “non-exempt” asset are mostly going to be paid towards taxes which otherwise you would have to pay out of your own pocket.
Let’s look at these two a little more closely.
“Non-Exempt” Assets You Don’t Need or Are Worth Giving Up
Although most people filing bankruptcy do NOT own any “non-exempt”—unprotected—assets, there are many scenarios in which they do. In some of those scenarios, those assets are genuinely not needed or wanted, so giving them to the trustee is easy. For example, a person who used to run a now-closed business, and still owns some of its assets, may have absolutely no use for those business assets. Or a person may own a boat, or an off-road vehicle, or some other recreational vehicle, but because of health reasons can no longer use them.
More commonly, a person may own a “non-exempt” asset which he or she would prefer to keep, but surrendering it to the trustee is much better than the alternative. That alternative is often filing Chapter 13—the three-to-five year payment plan. In the above example of a boat owned by somebody who can no longer use it, he or she may have a son-in-law who would love to use that boat. But that would probably not be worth the huge extra time and likely expense of going through a Chapter 13 case.
Allowing Your Trustee to Pay Your Non-Discharged Income Taxes
Letting go of your unnecessary or non-vital assets makes sense if most of the proceeds of the trustee’s sale of those assets would go to pay your non-dischargeable income taxes. Under what circumstances would that happen?
The Chapter 7 trustee is required by law to pay out the proceeds of sale of the “non-exempt” assets to the creditors in a very specific order. If you don’t owe any debts which have a higher “priority” than your income taxes, then the taxes will be paid in full, or as much money as is available, ahead of other creditors lower in order on the list.
The kinds of debts which are AHEAD of income taxes on this priority list include:
- Child and spousal support arrearage
- Wages, salaries, commissions, and employee benefits earned by your employees (if any) during the 180 days before filing or before the end of the business, up to $10,000
- Contributions to employee benefit plans, with certain limitations
If you know that you do not owe any of these higher “priority” debts, then the trustee will pay your taxes (after paying the trustee’s own fees), to the extent funds are available, assuming the tax creditor files a “proof of claim” on time specifying the tax debt.
As you can imagine, each step of this process must be carefully analyzed by your attorney to see if it is feasible, and if so then it must be planned and implemented by your attorney. Again, it will only work in very specific circumstances. But when the stars are aligned appropriately, this can be a great way to get your taxes paid.
Posted by Kevin on May 12, 2015 under Bankruptcy Blog |
Just when you think, as a debtor’s attorney, you have Chapter 7 and Chapter 7 trustees figured out, the system and creative trustees throw you a curve ball.
A majority of my middle class to upper middle class debtors file because at least one spouse lost a high paying job. Unfortunately, just because you lost your job does not excuse you from paying your financial obligations. One of those obligations, at least in the mind of most husband and wife debtors, is the college tuition that they paid on behalf of their children. When I ask my clients to put together a budget, many still list the college tuition payment that they could afford a year or two ago but not now. Of course, that leaves nothing for creditors, but, as my clients protest, they have an obligation to their children.
I have had many a discussion with parents who think they belong in Chapter 7 because they are budgeting $1000 or more per month for tuition, when the reality is that the trustee will never allow such a payment, and will probably force that debtor into a Chapter 13. What the debtor /parent cannot understand is that in the eyes of the bankruptcy trustee, the obligation to pay college tuition belongs to the son or daughter and not the parent. While the parent looks at their child as a child, the trustee looks at them as a full grown adult because they are 18- capable of paying their own way.
Well, for those parents/debtors, some trustees around the country are adding insult to injury. Not only are they prohibiting college tuition as an expense on the means test or Schedule J, they are threatening colleges and universities with actions to claw back tuition paid up to four years before the filing on the grounds that it is a fraudulent conveyance. Now, we usually think of a fraudulent conveyance in terms of the debtor tries to screw his creditors by conveying his second home to his brother prior to filing.
As I stated above, many parents believe that it is their obligation to pay their children’s tuition. But, trustees have been pointing out that it is the student, and not the parents, who gets the benefit of college. The quid pro quo for that benefit is payment of tuition. Therefore, tuition is the obligation of the student and not the parent. By paying the child’s tuition, the argument goes, it is just the same as deeding your home to a relative- your creditors do not get the benefit of that payment, and you, the debtor, are paying the obligation owed by a third party.
So, trustees are going after the colleges who, in more cases than not, are making deals and paying back some or all of the tuition to the trustee. The colleges, in turn, are trying to squeeze the student to recoup the money. Part of the squeeze on the student is to withhold diplomas or transcripts. Of course, if the student is out of school for a few years, that type of leverage cannot work.
We are talking tuition here and not student loans. Parents can be on the hook for Plus loans. Most student loans are not dischargeable in bankruptcy.
The Wall Street Journal had a big article on this topic last week. I have seen other articles on this issue over the last 6 months. So do not be surprised if this issue comes up more and more in consumer bankruptcies.
Posted by on April 30, 2015 under Bankruptcy Blog |
The last blog was about using Chapter 7 to discharge all or most of your debts other than taxes, so that afterwards you could afford to pay off the taxes through monthly payments to the IRS and/or the state. Or if you needed more payment flexibility, the usual alternative would be a Chapter 13 payment plan.
But there’s another possibility.
What if Neither Chapter 7 + Tax Payment Plan, Nor a Chapter 13 Will Work?
You may need a bankruptcy no matter what, to deal with debts other than taxes. But a Chapter 7 case may leave you owing too much income tax to be able to afford the minimum monthly payments that the IRS or the state would require. And a Chapter 13, as helpful as it can be for dealing with tough tax problems, may not be helpful enough. Chapter 13 requires payment in full of all “priority” debts—which includes non-dischargeable taxes—during the life of the case. That means a maximum of 5 years. You may just not have enough money available to pay into a Chapter 13 plan to do that.
So your best option may be to file a bankruptcy and then try to settle with the IRS and/or the state for less than you owe them.
Chapter 7 + Tax Settlement
A tax settlement would often be done in conjunction with and after a Chapter 7 bankruptcy filing, for three reasons:
1. If you owe a bunch of taxes, you are extremely likely to also owe lots of other debts, which need to be dealt with through bankruptcy.
2. Some of your older tax debts may be dischargeable. Trimming that debt away with a Chapter 7 bankruptcy would reduce the amount of remaining tax debt to be settled.
3. With an IRS Offer in Compromise or similar state procedure, you would need to show that you are pretty much focusing all your available financial resources on the settlement. It usually helps to get rid of your other debts to be able to do that.
Clean Your Slate of Other Debts So You Can Settle Your Taxes
You may owe too much in nondischargeable taxes to be able to make either the minimum permitted tax installment payments after the Chapter 7 case, or the necessary Chapter 13 plan payments. Then you may not have much choice except to attempt a tax settlement after completing a Chapter 7 case. (You generally cannot attempt an Offer in Compromise while in a Chapter 13 case.)
But even if you don’t seem to have much choice, before filing your Chapter 7 case you should still have a good idea what the IRS/state might accept once you make the offer a few months later. The basic settlement standard with the IRS is, as stated on its website, that “the amount offered represents the most we can expect to collect within a reasonable period of time.” Determining what that means in your situation, and so whether a particular settlement offer will fly, are delicate judgment calls, which is why you need to work with an experienced professional. Talk with your bankruptcy attorney about whether he or she regularly negotiates IRS Offers in Compromise and/or tax settlements with the state. If not, get a referral to a tax attorney or accountant who does.
Posted by Kevin on April 10, 2015 under Bankruptcy Blog |
The appropriately criticized Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) tried to prevent perceived abuses of the bankruptcy laws in a number of ways. One of them you’ve probably not heard about and can give you a bad surprise if you stumble into it.
The Bad Surprise
Beside the legal write-off (“discharge”) of your debts, the other big benefit you usually get from filing bankruptcy is protection from your creditors. That legal protection is called the “automatic stay,” and prohibits creditors from pursuing you or your money or your other assets. It goes into effect the moment your bankruptcy case is filed, and lasts throughout the life of your case—the few months of a Chapter 7 case and the few years of a Chapter 13 case (unless a creditor files a motion and gets special court permission, the so-called creditor’s “relief from stay”).
But imagine filing a bankruptcy and getting no protection at all from your creditors. Being in a bankruptcy case with the creditors still being able to call you, sue you, garnish your wages. Imagine this happening when you totally don’t expect it. That WOULD indeed be a bad surprise.
Having this happen is very rare, but considering the extreme consequences you want to make absolutely sure that it does not happen to you.
The Abuse Being Addressed
The problem arises in certain circumstances if you filed a prior bankruptcy case which got dismissed—closed without being completed. Before Congress put this law into effect, a very, very small minority of people filing bankruptcy–usually people without attorneys representing them—would file a series of bankruptcies, one after another, for the purpose of continuously delaying a foreclosure or some other action by a creditor. After their first bankruptcy case would get dismissed, they would file another one just in time to again impose the “automatic stay” and stop the foreclosure or other creditor action, and then repeat the cycle. You can see how this could be seen as an abuse of bankruptcy in general and abuse of the “automatic stay” protection in particular.
The Rules
So this is the law that Congress passed to counter this. It has two main parts.
First, if you are filing a bankruptcy case now, AND you filed ONE previous bankruptcy case during the one year before filing this new one, AND that previous case was dismissed, the “automatic stay” goes into effect when you case is filed BUT AUTOMATICALLY EXPIRES after 30 days UNLESS before that time we convince your bankruptcy judge that you meet certain conditions so that the “automatic stay” continues. See Section 362(c)(3) of the Bankruptcy Code.
Second, if you are filing a bankruptcy case now, AND you filed TWO OR MORE previous bankruptcy cases during the one year before filing this new one, AND those two cases were dismissed, then the “automatic stay” does NOT GO INTO EFFECT AT ALL with the filing of the new case. The “automatic stay” CAN go into effect AFTER the case is filed if within 30 days of the date of filing we convince your bankruptcy judge that you meet certain conditions so that the “automatic stay” gets imposed. See Section 362(c)(4).
The details of the conditions that must be met to continue or impose the “automatic stay” in these two circumstances are beyond the scope of this blog, but they require you to establish your “good faith” about why the previous case(s) was (were) dismissed and why you filed the new one.
Some Important Practicalities
If you have never filed a bankruptcy case, or have definitely not done so in the last year, then you don’t need to worry about any of this. And even if you have, these rules don’t apply to you unless your prior case(s) was (were) dismissed. Usually you would know if you’ve had a case dismissed.
Nevertheless, keep in mind that people get unexpectedly tripped up on these rules more often than you might think. It tends to happen one of three ways:
1) A person files a bankruptcy without an attorney, gets overwhelmed by the process and doesn’t follow through, so the case gets dismissed. The person may think he or she didn’t “really” file a bankruptcy case, or may simply forget about it under the stress of the time months later when filing another case.
2) A person sees an attorney, signs some papers, and the case gets filed at court, maybe without the person fully realizing it, and then gets dismissed because he or she doesn’t follow through and doesn’t stay in touch with the attorney. Months later, while seeing another attorney or trying to file a new case without one, the person isn’t aware that he or she had filed that previous case, and/or has forgotten all about it.
3) A person’s Chapter 13 case is dismissed because changed circumstances make it impossible to make the court-approved plan payments. Months later, when creditors are causing problems again he or she files a Chapter 7 without an attorney. Not realizing that the previous Chapter 13 case ended by being dismissed, in the new case the “automatic stay” expires after 30 days, letting all his or her creditors resume all collection activity.
To Be Safe…
Prevent any of this happening to you by 1) carefully considering whether you might have somehow filed a bankruptcy case within the last year, and 2) if there’s ANY chance that you did, telling your attorney in your new case right away. If you did file a case that got dismissed, there is a good chance that your attorney will be able to persuade the bankruptcy court to impose or retain the automatic stay. But that will only happen if your attorney knows about the issue in advance and determines whether your case will meet the necessary conditions.
Posted by Kevin on March 24, 2015 under Bankruptcy Blog |
You can file a new bankruptcy immediately after finishing another one, but why would you?
The last blog was about how long you have to wait to file a new bankruptcy case if you already filed one in the past. Those timing rules talk about both the earlier case and the subsequent case resulting in the discharge of your debts. As the last blog emphasized, if the earlier case did not result in a discharge, then you can file a second case at any time. The waiting periods do not apply.
Similarly, even after successfully completing one bankruptcy case and getting a discharge of your debts, you could file a second one at any time. You just would not be getting another discharge of your debts.
At first glance, this situation doesn’t seem to make practical sense.
Why Would You Ever Even Need a New Bankruptcy?
There are two reasons for a quick second bankruptcy.
First: you could unexpectedly incur one or more significant new debts during your bankruptcy case. Those debts could not be incorporated into that initial bankruptcy case because only debts in existence at the time of its filing can be. And you may need protection from those new debts. Since Chapter 7 cases usually last only about 3 to 4 months while Chapter 13 cases last 3 to 5 years, these interim debts are more likely to arise during the course of a Chapter 13 case. These would usually not be conventional consumer debts, because you would not likely be getting consumer credit while you’re in the middle of a bankruptcy case. Instead the new debts would tend to be unusual kinds like income taxes, perhaps student loans, obligations from a new divorce, and/or a claim against you from a vehicle accident or some other kind of liability.
Second reason for the second bankruptcy: the existence of debts that the earlier case did not write off. A Chapter 7 case could well leave still owing some income tax debt, child support arrearage, and/or student loans, for example. In some circumstances you may need the extended protection of a Chapter 13 case while you either pay or strategically avoid paying those debts, depending on which kind they are.
But What Good Is the Second Bankruptcy Without a Discharge?
Although a discharge of debts would seem to be the primary benefit of bankruptcy, it is by no means the only benefit. Instead, the “automatic stay,” protection from the collection efforts of your creditors, is sometimes benefit enough.
That’s primarily true under Chapter 13. First, the protection often extends for years instead of just the few months that it does under Chapter 7. And second, Chapter 13 provides a mechanism—the court-approved payment plan—to satisfy many of these kinds of new or non-discharged debts while under that protection.
For example, imagine that you owe a large income tax debt, plus some back child support, which were either incurred after the filing of your original bankruptcy case or were not discharged in that case. A new Chapter 13 case would essentially give you up to five years to pay those debts, usually without paying any further interest or penalties on the taxes, all the while being protected from the otherwise very aggressive collection methods of those two kinds of creditors.
But Why Not Just File a Chapter 13 Case and Avoid Filing Two Cases?
That’s a very sensible question, and usually that’s exactly what is done. Chapter 13 is quite flexible, and so a single Chapter 13 filing can usually both take care of all of your debts—the conventional one and the unusual ones like taxes and support—in one package.
But there are a variety of situations in which a single filing would not work. Sometimes you have more debt than is allowed for Chapter 13. So you first need to discharge some of the debt through Chapter 7, thereby enabling you to use Chapter 13 to take care of the taxes and such.
Or you may be contemplating or be in a divorce in which you and your spouse agree to file a Chapter 7 case together to clean up many of your debts, then leaving one of you to file the follow-up Chapter 13 case for the taxes, to cure the arrearage on a home, and any other loose ends.
Or as mentioned above, unexpected new debt could hit you during your first case, making you consider a follow-up case to buy you some continued protection.
This discussion should make very obvious that this kind of strategic planning and execution of not just one bankruptcy but two coordinated ones requires the services of a highly qualified and experienced bankruptcy attorney.
Posted by Kevin on March 11, 2015 under Bankruptcy Blog |
You can file a new case 8 years after filing before (so, now or very soon), or possibly only 6 or 4 or 2 years after, or maybe even with no delay.
The Bankruptcy Code underwent major amendments effective October 17, 2005. Nearly two and a half million bankruptcies were filed in the year before that date, by far the most in any year-long period in history.
Today, we focus on the rules relating to the length of time required from a previous bankruptcy filing until a new one.
More precisely the timing rule refers to the amount of time from the filing of a previous bankruptcy case which resulted in the discharge of debts until the filing of another case also resulting in the discharge of debts.
“Discharge” is the legal write-off of debts provided by the bankruptcy law. It’s the main reason—but often not the only reason—for filing bankruptcy.
If you filed a previous personal bankruptcy—whether it was a Chapter 7 “straight” bankruptcy or a Chapter 13 “adjustment of debts” payment plan—and your understanding is that you finished it successfully, almost certainly you received a discharge of your debts. Near the end of your case you should have received a copy of an order from the bankruptcy court granting you a discharge. If you do have your old bankruptcy documents, bring them to your present attorney. If you don’t, he or she should still be able to determine whether or not you received a discharge.
Finding this out is important because, in the unlikely event that you did not get a discharge, then you do not have to wait any period of time before you can file a new bankruptcy case. (The rare exception is if the bankruptcy court entered an order not allowing you to file a bankruptcy for a certain length of time, which only happens after serious abuse of the bankruptcy laws.)
The Timing Rules
Here is how long you must wait in between bankruptcy filings to receive a discharge of debts in a new bankruptcy case.
IF you want to now file a Chapter 7 case:
–and received a discharge in a previous Chapter 7 or Chapter 11 case, you must wait 8 years from the filing date of the previous case to the filing date of the new case;
–and received a discharge in a previous Chapter 13 case, you must wait 6 years from the filing date of the previous case to the filing date of the new case, BUT you don’t have to wait at all if in that Chapter 13 case you paid 100% of the allowed debts, or paid at least 70% and met some other conditions.
IF you want to now file a Chapter 13 case:
–and received a discharge in a previous Chapter 7 or Chapter 11 or Chapter 12 case, you must wait 4 years from the filing date of the previous case to the filing date of the new case;
–and received a discharge in a previous Chapter 13 case, you must wait 2 years from the filing date of the previous case to the filing date of the new case.
IF you want to file a Chapter 11 case, the timing rules are the same as for Chapter 7 above.
(Note that Chapter 11 is usually for a business, or for a huge amount of debt; Chapter 12 is for farmers and fishermen.)
It’s important to understand that the date the discharge was entered in the previous case does not matter. It’s the filing date that starts the clock running here.
So You Can File Soon, or Possibly Now
So, under any combination—7 to 7, 7 to 13, 13 to 7, 13 to 13, 7 to 11 etc., you can file now.
Posted by Kevin on February 23, 2015 under Bankruptcy Blog |
Often, by the time you are ready to file a personal bankruptcy, your business has no meaningful assets—no inventory or equipment, no receivables, no brand or business name that you could sell. That simplifies your situation because, whether the business is in your own name or under an assumed business name as a sole proprietorship, or is in the form of a corporation, limited liability company, or partnership, its lack of assets avoids a bunch of thorny issues. If your business doesn’t have any assets you don’t need to worry about how to protect them, or how to distribute them to the business’ creditors
BUT, what if your business DOES have some assets?
As long as your prior business was in the form of a sole proprietorship, your personal bankruptcy filing will immediately protect your business assets (as well as your personal ones) from seizure by garnishment, foreclosure, repossession and such. That’s because the assets of your business are legally treated as your assets, and are thus protected by your bankruptcy.
As for secured debts related to the business—secured by collateral like your business vehicle or equipment, for example—the creditor would be prevented from repossessing its collateral, at least temporarily. That gives time for your attorney to offer for you to “reaffirm” the debt—agree to remain personally liable on it—so that you can keep the collateral. Unless the collateral is worth more than what is owed on it—not likely—your Chapter 7 trustee would have no interest in the collateral.
Instead, the trustee will be interested in your “free and clear” business assets (not subject to a lien). However, you will be able to keep such assets to the extent they are covered by your personal “exemptions.”
A property exemption is a provision in state or federal law that allows you to shelter an asset from your creditors, and thus also from the Chapter 7 bankruptcy trustee who acts on behalf of all your creditors. Exemption laws can be quite complicated, and differ from state to state, often radically. In some states you must use that state’s system of exemptions, while in other states you have a choice of using either the state’s exemptions or a set of federal exemptions provided in the Bankruptcy Code. In NJ, you can choose; however, since the NJ exempts are so puny, about 98% of debtors pick the federal exemptions.
The federal tool of trade is as follows:
The debtor’s aggregate interest, not to exceed $2,175 in value, in any implements, professional books, or tools, of the trade of the debtor or the trade of a dependent of the debtor.
(the $2,175 amount is for cases filed through March 31, 2013). This amount is doubled for married couples filing jointly, as long as the asset is jointly owned. Admittedly, that does not sound like a lot of money. However, you do not value the property as if it were new. It is valued in its “as is, where is” condition. In some cases, the value can be pennies on the dollar. If the trustee differs with your valuation, he or she will have to bring in an appraiser to challenge your valuation. If the trustee loses this battle in court, then there is no money in he estate to pay the appraiser. A trustee does not want to get into that position, so he or she will either abandon the property to the debtor or engage in some “horse trading”. The bottomline is that the debtor stands a good chance of getting the bulk of his business property for free or at a nominal cost.
Posted by Kevin on February 12, 2015 under Bankruptcy Blog |
After filing bankruptcy, you hope you never have to do that again. But it’s good to know you can if you need to.
These next two blogs are, first today, an important recent bankruptcy history lesson, and then in the second blog, why this lesson may be quite important to you.
Filing Bankruptcy in Good Economic Times
Eight years ago, in the late winter of 2005, the U.S. economy was relatively robust. The Gross Domestic Product (GDP) had increased in 2004 the most since before 9/11. In fact it would turn out that the GDP increases for 2004 and 2005, at 3.5% and 3.1% respectively, were the best from 2000 through the present.
And yet, more people filed bankruptcy in 2005 than any year in history.
The Bulge in Bankruptcy Filings 8 Years Ago
Here is a table of the total number of bankruptcy filings in the United States for the last 10 years:
| YEAR |
# OF FILINGS |
| 2003 |
1,660,245 |
| 2004 |
1,597,462 |
| 2005 |
2,078,415 |
| 2006 |
617,660 |
| 2007 |
850,912 |
| 2008 |
1,117,771 |
| 2009 |
1,473,675 |
| 2010 |
1,593,081 |
| 2011 |
1,410,653 |
| 2012 |
1,221,091 |
Notice that by far the most bankruptcies were filed in 2005. Not even in the depths of the Great Recession in 2009, 2010, and 2011 were more bankruptcies filed.
The BAPCPA Filing Bulge
The misnamed Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) is the reason for this otherwise oddly timed spike in filings. Other “Bankruptcy Reform” Acts had been kicking around Congress since 1997, and one even passed Congress in 2000 but President Clinton refused to sign that one into law. Then every year after that a similar bill was introduced but never passed, until after the 2004 Congressional elections. President Bush was re-elected to his second term and Republicans had won larger majorities in both Houses of Congress. On February 1, 2005 BAPCPA was introduced in Congress, in March the House of Representatives passed it, in April the Senate passed it, and President Bush signed it into law on April 20, 2005, with an effective date of October 17, 2005.
By the time of the results of the November 2004 election, the odds were high that some major “reform” would become law in the upcoming Congress. That became even clearer a few months later in February when the bill was introduced, so the word started going out that people who were considering filing bankruptcy should seriously consider filing before the new law went into effect. Then when the law did pass, with 6 months until its October, 2005 effective date, lots more people got the word and the rush was on to file before that date.
This filing frenzy is shown by the quarterly bankruptcy numbers during this period, with big quarterly increases from the November 2004 election until the October 2005 new law effective date, and the plummeting of filings right after:
| QUARTERS |
# OF FILINGS |
| 4th Q 2004 |
371,668 |
| 1st Q 2005 |
401,149 |
| 2nd Q 2005 |
467,333 |
| 3rd Q 2005 |
542,002 |
| 4th Q 2005 |
667,431 |
| 1st Q 2006 |
116,771 |
Notice how more bankruptcies were filed in just the 4th Quarter of 2005 than in the entire year of 2006. (See the earlier table). In fact, according to the Administrative Office of the U.S. Courts, of the 667,431 bankruptcies filed in that 4th Quarter (October through December), 630,402 were filed in just the month of October. And more than 600,000 of those were filed in just the first 16 days of that October! That means that during those 16 days, the number of bankruptcy cases filed was about the same as during the entire year of 2006!
Why This Recent Bankruptcy History Matters
This history matters if you, or somebody you know, were one of those millions of people who filed bankruptcy in the run-up to BAPCPA, and because of the economic violence of the Great Recession you again need relief.
If you are one of these people, then you need to be aware of two things:
- The BAPCPA “reform” was both as bad and not as bad as feared. It is probably one of the most badly written pieces of Congressional legislation to have made it into law. It is filled with internal inconsistencies, logical conundrums, and unintended consequences. It has created infinite unnecessary headaches for millions of bankruptcy filers during its 7 and half years, as well as at every level of the federal bankruptcy court system all the way up to the U.S. Supreme Court. But partly because of its dreadfully bad drafting, most of the law’s changes have NOT changed the end result for most people needing bankruptcy relief. Most people filing Chapter 7 “straight bankruptcy” can do so, and most of the tools of Chapter 13 “adjustment of debts” are still available for those who need them.
- If you need bankruptcy help again, you very likely either qualify now or will in the next few months. That’s the subject of the next blog.
Posted by Kevin on January 28, 2015 under Bankruptcy Blog |
Took a little break from blogging. But, now I am back. Eventually, I will be setting up a student loan website and blog. In the interim, I will be making comments about students loans in this bankruptcy blog.
I guess I am dating myself by the next comments. It is unbelievable what people are paying for college and grad school in the US. I went to Dartmouth College from 1969-1973. The first year was about $3000. The last year was about $3500. I had a 50% merit scholarship from my father’s union. He paid the rest out of his salary of about $18,000 (median income in US was $10,512). Mom, like most mom’s in those days, stayed at home. I provided my own spending money by loading trucks during summers and holidays. Forget about the scholarship. The basic nut at Dartmouth was about 17-19% of my father’s gross salary, and 31% of the median income. State colleges would have been less, say 15-20% of median income.
My youngest graduated college in January, 2013. His school, which was a private school, ran about $45,000 on the average. Not anywhere near the most expensive, but pricier than a State school. Median income for 2012 according to the US Census Bureau was $51,371. In other words, where my son went to school, the cost would be 88% of the median income in the US. If he went to a Rutgers, the estimated cost in 2012 was $26,627 or 52% of the median income.
See where we are going here. College costs are out of whack. What you get or don’t get for the money is another question.
Now, I am not an expert on FAFSA. I have read the material, and heard numerous lectures about how it supposed to work. Then, I had to fill it out for my kids. Then you get another picture.
It seems to me that if you earn under say $85,000, a good portion of your kid’s education will be covered by grants and school work programs. If you are over $100,000, however, you are pushed into the realm of student loans.
This is not a fun place to be. In future blogs, we will be going into the law and the practicalities of student loans. Today, I want to give a head’s up not the the parents and students who are already strapped with loans, but the parents and students who are facing the prospect of student loans.
The head’s up is to be pro-active in the process. At the minimum, read everything you can get your hands on. The past few days, I was reading about the dreaded NJ Class loans. These come from the State of New Jersey. Their reputation is that if you are in collection, it is not a walk in the park.
That being said, the website was helpful. Not only did they tell you what could be borrowed and the interest rate, there was a section called the Student Loan Game Plan. The game plan is to make sure that your loan payment is no more than 8-12% of the student’s starting salary. It gave good advice how to prepare for employment during your time at college. Moreover, it provided an extensive listing of occupations together with the average annual starting salary and the amount of student loan principal that could be supported by such an annual salary within the 8-12% guidelines. Finally, the Game Plan warns the parent and student to not over-borrow.
I advise parents to review this website. I am sure that other States have similar websites. Then, take the information to heart. If the State of NJ is telling you not to borrow more than 12% of your student’s intended income, then you better make sure that your kid’s financial aid package does not contain 35% of annual income in loans. Make the tough decisions upfront and avoid a world of pain down the line.
Posted by Kevin on December 27, 2014 under Bankruptcy Blog |
It’s human nature to hold off filing bankruptcy until after the holidays. Here’s what you need to know once you think again about filing.
The Quietest Time of the Year
For most bankruptcy attorneys December is the quietest time of the year. Because:
- people understandably want to focus on family and friends, instead of on their financial troubles;
- the materialism of the season discourages people from taking a realistic view of their finances;
- many mortgage companies ease off on foreclosures, and other creditors and collection agencies back off their collections, during this season, to avoid looking like Scrooges;
- people don’t have time to see an attorney—especially about bankruptcy–with everything they have to get done for the holidays; and
- no one has the emotional space to go talk with an attorney about messy personal finances during this already emotionally taxing time of the year.
Things to Keep in Mind Starting December 26
After getting through the holidays, and with the time for New Year’s resolutions approaching, one of your likely resolutions is to defeat your debts once and for all. If you are considering bankruptcy as one possible way to meet that resolution, be aware of the following after-Christmas, turn-of-the-year issues:
- Some debts ( cash advances on your credit card or purchase of luxury items) you rang up during the few months before filing bankruptcy—to buy holiday gifts or pay for holiday expenses, for example–might not be discharged (legally erased). That depends on some nitty-gritty details of your use of credit, as well as your intentions at the time.
- If you are going to owe income taxes for the 2014 tax year and expect to be filing your bankruptcy case soon after the turn of the year, that 2014 tax debt presents both some challenges and opportunities. Oddly, sometimes that debt can be paid in effect without costing you anything.
- A holiday bonus from your employer or a cash gift from a well-meaning relative can increase your “income” for purposes of the “means test,” either making qualifying for Chapter 7 more difficult or potentially turning your 3-year Chapter 13 case into a 5-year one. These major financial disadvantages can often be avoided through smart timing.
If you understand how bankruptcy works, these potentially troublesome issues can be turned to your advantage. The next blogs will show you how.
Posted by Kevin on December 23, 2014 under Bankruptcy Blog |
Protect your business assets immediately with the “automatic stay” and permanently with property exemptions.
Often, by the time you are ready to file a personal bankruptcy, your business has no meaningful assets—no inventory or equipment, no receivables, no brand or business name that you could sell. That simplifies your situation because, whether the business is in your own name or under an assumed business name as a sole proprietorship, or is in the form of a corporation, limited liability company, or partnership, its lack of assets avoids a bunch of thorny issues.
BUT, even if your business DOES have some assets, as long as that business is a sole proprietorship, filing a personal Chapter 7 case often provides you a sensible way for dealing with those remaining business assets. You may be able to keep those assets if you need them, or if not, you can let your Chapter 7 trustee sell them and pay some of your most important creditors.
Business Assets Protected by the “Automatic Stay”
You may want to keep business assets which you need to use to generate income after your bankruptcy—either as an employee or through self-employment.
As long as your prior business was in the form of a sole proprietorship, your personal bankruptcy filing will immediately protect your business assets (as well as your personal ones) from seizure by garnishment, foreclosure, repossession and such.
As for secured debts related to the business—secured by collateral like your business vehicle or equipment, for example—the creditor would be prevented from repossessing its collateral, at least temporarily. That gives time for your attorney to offer for you to “reaffirm” the debt—agree to remain personally liable on it—so that you can keep the collateral.
Business Assets Protected by Property “Exemptions”
Instead, the trustee will be interested in your “free and clear” business assets. However, you will be able to keep such assets to the extent they are covered by your personal “exemptions.”
A property exemption is a provision in state or federal law that allows you to shelter an asset from your creditors, and thus also from the Chapter 7 bankruptcy trustee who acts on behalf of all your creditors. Exemption laws can be quite complicated, and differ from state to state, often radically. In some states you must use that state’s system of exemptions, while in other states you have a choice of using either the state’s exemptions or a set of federal exemptions provided in the Bankruptcy Code. NJ allows a debtor to choose; however, it is not much of a choice. Why? Because the state exemptions are so puny that about 99.9% of debtors use the federal exemptions. Under the federal exemptions, you get to keep a little over $2,000 of business tools. Under NJ, it would come under the general exemption of $1000. Clearly, in either case, the exemption is far from generous. However, if the assets are older but usable to you, you can make an offer to the trustee. Most trustee will entertain even a lowball offer rather than go through an auction, especially on used items of questionable value.
Posted by Kevin on December 13, 2014 under Bankruptcy Blog |
Careful: if your business is not a sole proprietorship, legal disputes against your business are not “stayed” by your personal bankruptcy’s “automatic stay.”
This series of blogs has been about the benefits of filing a bankruptcy case when closing down your business. Through the power of the “automatic stay”— any ongoing lawsuit against you or your property must stop. But there are some important exceptions to this, situations in which the automatic stay would not apply
Bankruptcy and its automatic stay protect the “person” filing bankruptcy and his, her, or its assets. Other “persons” are generally NOT protected. The issue is whether you and your business are considered to be the same or separate “persons” for this purpose.
If your business is a sole proprietorship, the law considers you and your business to be the same “person.” So a lawsuit against the business would be stopped by your personal bankruptcy filing. But what if your business was set up as a corporation, a limited liability company (LLC), or a partnership, and you are dealing with a lawsuit against both you and the business?
Disputes Against Your Corporation, LLC, or Partnership
- If your business was set up as a corporation or LLC and it is still operating when you file a personal bankruptcy, that filing does not “stay” any litigation against the corporation because it is a separate legal entity, a separate “person.” To the extent the dispute and/or lawsuit is against you personally, that portion would be stayed. But this may not help much if the lawsuit continues to disrupt and threaten your business.
- Even if your business in the form of a corporation or LLC is no longer operating, but itself still owns some assets, those assets are not protected by your personal bankruptcy filing. This includes assets that the business might own outright—such as receivables that it was waiting to receive, or business assets that are the collateral on business loans—such as vehicles or equipment.
- If your business is or was a formal or informal partnership, the partnership’s creditors or adversaries would very likely be able to continue pursuing the partnership and its assets, as well as pursuing your partner and his or her assets, regardless of your personal bankruptcy filing. That’s because partners are generally jointly liable for the obligations of a partnership, and your partner and the partnership itself are both “persons” separate from you. So you have the same problem just outlined above as to partnership assets.
That leads to the main lesson here. If your business legally qualifies as a separate “person,” and has assets that need to be protected, it may need to file its own separate bankruptcy. Since we are focusing on closing down your business in this series of blogs, the filing would be under Chapter 7.
You should really consult with a bankruptcy lawyer on these issues.
Posted by on December 2, 2014 under Bankruptcy Blog |
Don’t assume that just because your income taxes are too new to be written off that 1) bankruptcy can’t help, or 2) only Chapter 13 can help.
Even if none of your taxes can be discharged (written-off), or most of them can’t be, a Chapter 7 bankruptcy may STILL set you up so you can deal with those taxes in a constructive way. You may not need the extra expense and time of going through a three-to-five-year Chapter 13 case.
Clean Your Slate of Other Debts So You Can Pay Your Taxes
So the simple-to-ask, maybe not-so-simple-to-answer question is whether a straight Chapter 7 bankruptcy will help you enough? More precisely, if you filed a Chapter 7 case, after it was done would you reliably be able to make large enough monthly payments to the IRS (or New Jersey) on whatever tax debt(s) that your bankruptcy would not discharge so that those taxes would be paid off safely and in a reasonable time?
“Safely” refers to the fact that you would no longer have protection from your creditors—including your tax creditor(s)—after the three months or so your Chapter 7 will usually take to complete. So after that you’d be on your own dealing with the IRS/NJ. That’s OK if you are confident that you would be able to make consistent monthly installment payments at the required amount—not just right after your bankruptcy is completed but throughout the time until it is paid off. A Chapter 7 is a good idea if you don’t need one of the most important benefits of a Chapter 13 plan as to your tax debts—the continuous protection from creditors that you get throughout the payment process. That’s especially valuable if your circumstances change and you need to lower your payments. At that point you’d probably not want to rely on the flexibility of the IRS or NJ (which can often be more rigid than the IRS).
“Reasonable time” refers to the fact that the IRS and state agencies, in almost all circumstances, will continue adding interest and penalties throughout the time you are making installment payments. Even if they are relatively flexible about stretching out the payments, you need to look at how much the ongoing interest and penalties will add to the amount you must pay before you’re done. In a Chapter 13 case, usually no more interest and penalties get tacked on once the case is filed, which can save a lot of money if you owe a fair amount of non-discharged taxes.
So how do you know whether you will be able to make tax installment payments safely enough and large enough to pay off the tax debt(s) in a reasonable time?
First, it means calculating how much a Chapter 7 case would help your monthly cash flow and your longer term financial stability by discharging your other debts.
Second, you need to know what the IRS and/or state tax authority will likely accept as monthly payments, given the amount of your remaining tax debt and other financial information. From there the amount of additional interest and penalties can roughly be calculated.
Your bankruptcy attorney will help you with these projections and calculations. He or she will then advise you about whether you are a good candidate for cleaning your slate with Chapter 7 and then paying your remaining tax debt directly.
Posted by Kevin on November 29, 2014 under Bankruptcy Blog |
Ongoing litigation, or the threat of it, against you and/or your business, usually dies with your bankruptcy filing.
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A Chapter 7 case can help by:
- immediately stopping most litigation against you and/or your business, at least temporarily;
- permanently stopping most litigation by legally discharging the disputed claim; and
- providing strong disincentives for your adversary to keep pursuing you after your bankruptcy filing.
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This series of blogs is about the benefits of filing a bankruptcy case when closing down your business. The reality is that businesses are often closed as a consequence of litigation, or the threat of litigation, against the business or business owner. These disputes can take every possible form—by way of example, simple collection actions by creditors, contractual disputes with customers, enforcement action by governmental regulators, and fights with other business owners or investors. A bankruptcy often becomes necessary when either the opposing party wins a judgment against the business and/or the owner, or the business runs out of money to pay the attorney fees and other costs of litigation. The business is often already on the ropes, and the judgment, or just the financial and emotional costs of the lawsuit, or sometimes even just the threat of one is enough to persuade the business owner to throw in the towel and close down the business.
The question is: what will happen to the dispute and/or litigation against you and/or the business?
Litigation Immediately Stopped by the “Automatic Stay”
The automatic stay legally stops creditors from taking any new collection action against you, and from continuing any action, including litigation. It is imposed simultaneously with the filing of your bankruptcy, without a judge needing to sign an order. The automatic stay requires your adversary to at least take a pause in his efforts against you, and often persuades him to do nothing further against you.
Why Most Disputes Will End at Your Bankruptcy Filing
This immediate stopping of collection and litigation usually ends up being permanent, for a number of reasons.
Your adversary is usually trying to get you or the business to pay something, and that alleged obligation is discharged—legally written off permanently—in your Chapter 7 case.
Bankruptcy law does allow any of your creditors (including those with alleged claims of any kind) to try to object to the discharge of their debts or claims. But these objections are relatively rare, for two reasons:
1. They are difficult for a creditor to win. The legal grounds for objections are relatively narrow. Debts are assumed discharged unless the creditor can prove to the bankruptcy court that those narrow grounds are met. Instead of just proving the existence of a valid debt or claim, as in a conventional lawsuit, the creditor has to provide convincing evidence that you engaged in certain specific bad behavior, such as fraud in incurring the debt, embezzlement, larceny, fraud as a fiduciary, or intentional and malicious injury to a person or property.
2. The creditor is faced with practical indications that it is wasting its time and money to pursue you further. In filing bankruptcy, you present to the court a rather detailed set of specific information about your finances. You are able to be questioned by the creditors about those documents and about anything else relevant to the discharge of the debts. When these reveal that you genuinely have nothing worth chasing—which is almost always the case—most creditors accept that pursuing you further will do them no good.
The Exceptions: Disputes Not Be Stopped by Your Bankruptcy Filing
There are two sets of exceptions: 1) when you are not protected by the automatic stay; and 2) when a creditor challenges the discharge of its debt or claim. These will be addressed in the next two blogs.
Posted by Kevin on November 28, 2014 under Bankruptcy Blog |
You were downsized or your company went out of business, or your department was outsourced to India. You lost your job and collected for as long as you could. But what you collected in unemployment was not enough to pay all your bills, so you got sued, and some creditors got judgments against you.
While you were unemployed, it really did not make a difference that a few doctors, AMEX and Discover got judgments against you. They could not levy on your unemployment benefits. But, now the economy has gotten better and you just got an offer in your field at about 90% of what you were earning when things went sideways.
Now is the time for you to start thinking about how you are going to deal with those judgments (and other debts that have not been reduced to judgment). With money in your pocket and a few new credit cards, your activity on the credit reporting agencies will increase. Creditors will put 2 + 2 together and figure you have a job. Then, the garnishments will start coming in. Great way to impress a new employer.
Bankruptcy may be the answer. Debt consolidation through a reputable credit counseling company may also keep the wolves away. You owe it to yourself and family to look into these options. Be pro-active.
Final word to the wise. It is holiday season. People are beating each other up at Macy’s all over the US today. Maybe you are thinking that you can have one last fling and then take care of business after the New Year (if any of your credit cards still work). Bad idea. Why? Because cash advances or purchase of luxury items over certain amounts within 70 to 90 days of filing can preclude a discharge of those debts. In addition, it will make any bankruptcy more expensive. So, play it straight.
Now is the time to speak with an experienced bankruptcy attorney.
Posted by Kevin on October 12, 2014 under Bankruptcy Blog |
Chapter 7 can legally write off some business-related taxes, and put you in a good position to take care of the rest.
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Although Chapter 13 can be the best way to handle taxes owed from running a business, not necessarily. Sometimes Chapter 7 is the better solution. Through it, you may be able to discharge some or all of your income tax debts, or maybe at least clean up your debts enough so that you can realistically take care of the remaining taxes.
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If you own, or recently owned, a business that is failing or failed, you likely have a more complicated financial situation than people with just regular consumer debts. You may have heard that the Chapter 13 “adjustment of debts” type of bankruptcy often deals better with messy situations. But you’ve also heard that this option takes three to five years, and that doesn’t appeal to you. However you might also think that the comparatively quick and straightforward Chapter 7 is not up to the task. But it just might be.
In deciding whether a Chapter 7 is right for you in this kind of situation, the main considerations are the kind of debts and the kind of assets you have. We first get into the debt issues, starting today with taxes.
Business Debts…
Chapter 7 tends to be the better solution if most or all of your debts are of the kind that will be discharged—legally written off—leaving you with little or no debt. Chapter 13 is often better if you have debts that are NOT going to be discharged—especially taxes—because it can give you major leverage over those debts. It protects you from them while giving you a sensible way to pay them. So let’s look at this in the context of tax debts.
… Personal Income and “Trust Fund” Taxes
It seems inevitable—people who been running a struggling business almost always owe back taxes. As a small business hangs in there month after month, year after year, often there just isn’t enough money for the self-employed owner to pay the quarterly estimated income taxes, and then not enough money to pay the tax when it’s time to file the annual tax return. Tax returns themselves may not be filed for a year or two or more.
And if the owner was being paid as an employee of the business, or if the business had any other employees, it may have withheld employee income tax and Social Security/Medicare from the paychecks but then did not pay those funds to the IRS and the state/local tax authority. These are the so-called “trust fund” taxes, for which the business owner is usually held liable, and which can never be discharged in bankruptcy.
If you have a significant amount of tax debt, and especially if it includes “trust fund” taxes, and/or the taxes you owe span a number of years, Chapter 13 may be better for a number of reasons. Mostly, it can protect you and your assets while you pay the IRS or other tax authority based on your actual ability to pay instead of according to whatever their rules dictate. And you often have the power to pay other higher-priority debts at the same time or even ahead of the taxes, allowing you to hang onto a vehicle or catch up on child support, and such.
But you don’t always need that kind of Chapter 13 help, so don’t take the Chapter 7 option off the table without considering it closely. Keep these two points in mind:
First, personal income taxes which are old enough and meet a number of other conditions can be discharged in Chapter 7. That could either eliminate your tax debt—if you closed your business a while ago and your taxes are all from a few years ago—or at least reduce it to a more manageable amount.
Second, regardless whether you can discharge any taxes, if you know that you will continue owing income taxes after your Chapter 7 case is completed you may be pleasantly surprised how reasonable the tax authorities can be with their repayment terms. You will need to continue paying interest, and usually also a penalty—both of which would likely be avoided through Chapter 13. But the interest rate right now—with the IRS at least—is quite low, and some penalties reach a cap and stop accruing after that. You do need to keep in mind that the taxing authorities may or may not be flexible about lowering the payments if your finances take a turn for the worse. So you should avoid entering into a tax installment payment agreement unless you have reliable income source.
Posted by Kevin on October 1, 2014 under Bankruptcy Blog |
There are pros and cons to the above statement. That is why we say “Can Help” as opposed to “Will Help”
What happens when a small business goes under. It usually means that not enough money is coming in to pay bills and employees (much less the owner). This can lead to collection efforts from vendors which go from holding back product to suing the business entity and perhaps even the owner for money. Multiple, disgruntled vendors lead to multiple, usually unwinnable lawsuits. Ultimately, you realize that you cannot stay open any longer.
Shutting down a business can be very time consuming and emotionally draining, especially when the vendors are suing the company and you. You have to deal with vendors and suppliers, advertisers, workers, customers, etc. You may have physical plant which will be subject to foreclosure or tenancy action. You may have product that needs to be liquidated. You may need to go after accounts receivable. That is a lot of work, and your inclination is to put everything behind you and move on.
If your business is incorporated or an LLC, it cannot receive a discharge under Chapter 7. For that reason, many of my colleagues at NACBA believe that you should not put a small corporation (sometimes called a close corporation) or an LLC in bankruptcy. However, if the corporation is being sued by multiple creditors and needs to be liquidated in an orderly fashion, a Chapter 7 may be helpful. The automatic stay will stop the lawsuits. The trustee will be responsible for the liquidation. This can free up the owner to move on to new pursuits. (In NJ, this process can be accomplished also but means of a State court Assignment for the Benefit of Creditors.)
On the other hand, if the corporation or LLC is service oriented as with few assets, bankruptcy may be an unnecessary expense.
Under either scenario, a possible issue can be what to do if the principal of the corporation or LLC finds himself as a defendant in multiple lawsuits. If the principal guaranteed the obligation, then he is SOL. Even if principal did not guarantee, a favorite tactic of NJ collection attorneys is to sue the entity and sue the principal under theory of piercing the corporate veil. This is usually a bogus lawsuit but requires that you interpose an answer and move for summary judgment. This can be a major expense especially if you get sued by 10-12 aggressive creditors and may lead to consideration of filing a individual 7. This decision, however, would have to be made on a case by case basis.
If the business entity is a sole proprietorship (d/b/a), then the debtor is really the owner. d/b/a’s can fail for the same reasons that close corporations or LLC’s fail. But, in this case, it is the owner of the business that is on the hook so the owner files the Chapter 7. Filing a Chapter 7 will stop most collection actions because of the automatic stay, and the owner/debtor can receive a discharge. Of course, the bankruptcy will include both the business assets and the personal assets. Most, if not all, of the business assets will probably be sold and the proceeds will be used to pay the trustee and the creditors. The debtor is able to utilize his or her exemptions to save many of his or her personal assets such as the house, car, household furniture and furnishings, clothing and other things.
If you are running a small business that is failing, you need to speak with your accountant first, and then an experienced bankruptcy attorney.
In the next few blogs we will discuss this issue: after closing down a business and filing bankruptcy, when would Chapter 7 be adequate vs. when the extra power of Chapter 13 would be needed, in dealing with particular debt and asset issues. We’ll start the next blog on dealing with taxes.
Posted by Kevin on September 22, 2014 under Bankruptcy Blog |
Filing Chapter 7 bankruptcy while letting go of your home can be a smart combination.
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Chapter 13—the three to five year partial payment plan—consists of an entire toolbox full of different tools to help people hang onto their homes. But that may not be what you need. After getting informed about how those tools would work (or not work) in your situation, you may decide that it’s best for you to walk away from your home. If so, here are some advantages of doing that in conjunction with filing a Chapter 7 bankruptcy:
- Have more control over when you leave:
If you have a foreclosure sale date scheduled, or a foreclosure lawsuit pending, usually you would have no say about when you have to leave. You could even be forcibly evicted by county sheriff deputies. However, if you file a Chapter 7 bankruptcy case, that will delay the foreclosure sale or lawsuit, at least for a few weeks, and possibly for a matter of months. That alone could save you a couple thousand dollars in rent. Also, after a bankruptcy filing, your mortgage lender may well be willing to negotiate a departure date convenient to you, in return for avoiding their need to rack up a lot of attorney fees. As part of the deal you may be willing to sign over your title through a “deed in lieu of foreclosure,” with no risk of further liability since your bankruptcy case is discharging any remaining debt.
- Avoid house-related debt following you:
Depending on your situation, and on your local state laws, after surrendering a house without bankruptcy you risk being saddled with debts coming at you from various directions. Sometimes you could be liable for any deficiency on the first mortgage. Surrendering your house to a first mortgagee does not take you off the hook on a second mortgage. You could also be liable on other debts related to the home—such as unpaid utilities, contractor liens, property tax liens, or homeowner association dues. Many of these debts would be discharged if you filed a bankruptcy.
- Have an attorney in your corner:
Fair or unfair, your mortgage lender will likely treat you better when it knows you are being advised and represented by an attorney (assuming that you would be filing your Chapter 7 case through an attorney). You will have the peace of mind that comes from knowing your rights, understanding what will happen when, and having an advocate available to get directly involved as needed.
- Get a fresh financial start instead of a continuation of a vicious cycle:
If you are surrendering your house and reducing your monthly cost of keeping a roof over your head, you may be tempted to think you don’t need a bankruptcy. Perhaps you don’t. But if you have fallen so far behind on you mortgage that it’s gotten to the point of foreclosure, the odds are that you need more help than giving up your house alone will achieve. You at least owe it to yourself to get legal advice about your financial situation and your realistic options. You can then be pro-active to turn your situation around rather than waiting for the other shoe to drop.
Think about it
Posted by Kevin on September 9, 2014 under Bankruptcy Blog |
Saving the vehicle sometimes is not the best option, so Chapter 7 bankruptcy gives you a safe way out.
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Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” each provide ways for you to catch up on and keep your vehicle if you’re struggling to keep up on the payments. But in spite of these options, it may simply be the best for you to surrender the vehicle and write off what you still owe along with the rest of your debts.
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Bankruptcy gives you a variety of options to deal with a vehicle that you’ve fallen behind on but need to keep. If you’re only a payment or two behind, under a straight Chapter 7 bankruptcy you would likely be given about two months to catch up and then thereafter keep up on the regular payments once you’ve written off the rest of your debts so that you can better afford to do so. Or if you’re further behind, a Chapter 13 payment plan would give you much longer to catch up, and if the loan is more than two and a half years old may even allow you to both make smaller monthly payments and lower the balance through a “cramdown.” Bankruptcy can usually give you a good way to keep a needed vehicle.
Understandably the focus in bankruptcy is usually on how to save your home, or vehicle, or something else of importance. But one of the advantages of bankruptcy is that it can free you from some of your assumptions. One such assumption is the usually accurate one that if you surrender a vehicle to its creditor you will continue to owe a lot of money. This is usually true because 1) vehicles tend to depreciate faster than their loan balances are paid down, 2) once they are surrendered they are usually sold at auto auctions at bargain basement prices, and 3) your account is charged all the surrender and sale costs, all of which usually leave you owing a shockingly high “deficiency balance” after the surrender. The fact that you would continue to owe a lot on a vehicle you no longer have is obviously a big disincentive to surrender it in the first place. But since a Chapter 7 bankruptcy will reliably discharge (legally write-off) any such deficiency balance, that disincentive can go out the window. You can ask plainly: is it better to hang onto this vehicle with the options that Chapter 7 and 13 provides you, or is it just better to walk away owing nothing. Bankruptcy opens you up to both sets of possibilities.
Posted by Kevin on July 5, 2014 under Bankruptcy Blog |
Chapter 7 bankruptcy can often also wipe judgment liens off the title to your home.
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Liens against your property—such as the lienholder’s lien on your car or truck title, or your home lender’s trust deed on your home’s title—generally are not wiped out with a bankruptcy filing. The bankruptcy discharge (write-off) of debts ends your personal liability on that debt but does not end a creditor’s rights in any collateral. Accordingly, a judgment lien—the lien that attaches to your home if a creditor gets a judgment against you—gives the judgment creditor certain rights to your home, including often the right to foreclose on it. But under some circumstances judgment liens CAN be wiped away, or voided, during bankruptcy, so that the creditor would have no such further rights against your home.
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If you still want to make good on your promise to take charge of your financial life, this and the next few blogs may help. They are about less familiar benefits of filing bankruptcy, starting with some less familiar benefits of Chapter 7.
The Chapter 7 version of bankruptcy usually achieves two main goals—it stops all or most of your creditors from collecting against you and your assets, and it “discharges,” meaning it legally forever wipes out, all or most of your debts. In most cases, that’s pretty much what it does for you, and that’s often just what you need. In contrast, Chapter 13—the “adjustment of debts” payment plan—is the creative, lots-of-tools-in-the-toolbox version of bankruptcy, often significantly better for dealing with complicated situations. But Chapter 13 takes at least 3 years compared to as short as 3 months for Chapter 7, it costs at least 3 or 4 times more, and is less likely to be completed successfully.
So here’s a tool which is available under Chapter 7—getting rid of certain judgment liens on your home. Here are the conditions for this to happen:
- You must qualify for and claim a homestead exemption on the real estate upon which you have the judgment lien.
- That lien must be a “judicial lien,” which usually means one gotten through a court judgment, but is specifically defined in the Bankruptcy Code as “a lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.”
- The debt underlying this judgment lien cannot be for child or spousal support, or for a mortgage foreclosure.
- The judgment lien at issue must “impair” the homestead exemption, which the law defines to mean:
- the value of all the liens on the house, including the judgment lien
- PLUS
- the amount of homestead exemption that you could claim if there were no liens on the house
- MUST BE MORE THAN
- the value of the house (assuming you are its sole owner).
So for example, if:
- the judgment lien is $20,000 and your mortgage is $150,000
- PLUS
- your available homestead exemption is $30,000
- that $20,000 judgment lien would be impairing the homestead exemption and could be voided in bankruptcy
- as long as your house was worth less than $200,000.
Lastly, please understand that merely filing the Chapter 7 bankruptcy will discharge the underlying debt that caused the judgment and its lien. But voiding the judgment lien itself takes an extra step. In NJ that means filing a motion and obtaining an order or else the judgment lien will continue to exist against your home. Also, that motion to void the judgment lien needs to be filed while your Chapter 7 case is still open and active, which usually means within about 90 days after your case is filed. Finally, lawyers usually charge a bit more than the ordinary flat fee for providing this service since it entails additional work.
So, if you own a home, find out if you have a judgment lien against the title. If you do, talk to a bankruptcy attorney about whether that lien could be voided in a Chapter 7 bankruptcy case. If so, gaining this very important extra protection for your home could make filing bankruptcy that much more beneficial for you.
