Posted by Kevin on September 20, 2018 under Bankruptcy Blog | 
Over the years, I have received numerous phone calls from people who have tried to file a bankruptcy by themselves (known as “pro se” debtors) and have gotten into trouble. I also see first hand what happens when people file without an attorney when I attend “meetings of creditors”, also known as 341a meetings. A 341a meeting is the usually straightforward, usually short meeting with the bankruptcy trustee that everyone filing bankruptcy must attend. Unfortunately, with many pro se debtors, the 341a meeting is not always straightforward or short.
But I wondered whether anybody has actually investigated this question. In searching the internet, I came across a book published a few years ago titled Broke: How Debt Bankrupts the Middle Class. This book is a series of articles about current issues in bankruptcy. One such article is titled “The Do-It-Yourself Mirage: Complexity in the Bankruptcy System” by Professor Angela K. Littwin of the University of Texas School of Law. Professor Littwin analyzed data from the Consumer Bankruptcy Project, “the leading [ongoing] national study of consumer bankruptcy for nearly 30 years.” Her finding: “pro se filers were significantly more likely to have their cases dismissed than their represented counterparts.”
Very interestingly, she also learned from the data that
consumers with more education were significantly more likely than others to try filing for bankruptcy on their own, but that their education didn’t appear to help them navigate the process. Pro se debtors with college degrees fared no better than those who had never set foot inside a college classroom.
She concluded that after bankruptcy law was significantly amended back in 2005 in an effort to discourage as many people from filing, “bankruptcy has become so complex that even the most potentially sophisticated consumers are unable to file correctly.”
Almost 10 Times More Likely to Get a Discharge of Your Debts
In another study, Prof. Littwin stated that “17.6 percent of unrepresented [Chapter 7 “straight bankruptcy”] debtors had their cases dismissed or converted” into 3-to-5-year Chapter 13 “adjustment of debts” cases. “In contrast, only 1.9 percent of debtors with lawyers met this fate.” Even after controlling for other factors such as “education, race and ethnicity, income, age, home ownership, prior bankruptcy, whether the debtor had any non-minimal unencumbered assets at the time of the filing,” “represented debtors were almost ten times more likely to receive a discharge than their pro se counterparts.”
The bottomline is that you are better off going to an experienced bankruptcy attorney.
Posted by Kevin on June 7, 2018 under Bankruptcy Blog |
Eligibility depends on 1) the kind of debtor, 2) the kinds and amounts of debts, 3) the amount of income and 4) of expenses.
1) The Kind of Debtor
If you are a human person, you may be eligible for either a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts” case. You and your spouse may also be eligible to file one or the other of these together in a joint case.
However, if you are the owner or part-owner of a business partnership, corporation, limited liability company or other similar business entity, that business entity could not file its own Chapter 13 case. But it could file under Chapter 7.
2) The Kinds and Amounts of Debts
If your debts are “primarily consumer debts” (more than 50% by dollar amount), then to be able to file a successful Chapter 7 case you have to pass the “means test.” That’s a test related to your income and expenses (discussed more below.) If 50% or more of your debts are not consumer debts, than you can skip the “means test.”
Chapter 7 does not limit the amount of debt you can have to be eligible to file a case. However, you cannot file a Chapter 13 case if your debts exceed the maximums of $394,725 in unsecured debts and $1,184,200 in secured debts (or if you do file a case it will very likely be “dismissed” (thrown out)).
3) Amount of Income
You can quickly and easily satisfy the “means test” and be eligible for a Chapter 7 case if your income is no more than the regularly adjusted and published “median income” for your family size and state.
To be eligible for Chapter 13 you must have “regular income.” That is defined not very helpfully as income “sufficiently stable and regular” to enable you to “make payments under a [Chapter 13] plan.”
Also for Chapter 13, if your income is less than the “median income” for your family size and state of residence, then the plan generally must last a minimum of three years (but in many situations it can last longer, especially if you need it to, but for no longer than five years). If your income is at or above the applicable “median income” amount, the plan must almost always last five years.
4) The Amount of Expenses
In Chapter 7, if your income is NOT less than “median income” for your family size and state of residence, then you may still pass the “means test” and be eligible for filing a Chapter 7 case IF, after accounting for all your allowed expenses, you don’t have enough money left over to pay a meaningful amount to your creditors.
In Chapter 13, a similar accounting of your allowed expenses determines the amount of your “disposable income,” the amount you must pay into your plan each month.
Summary
Once you recognize that you need relief from your creditors, choosing between Chapter 7 and 13 is often not difficult. But because there are many, many differences between them, the choice can sometimes turn into a delicate balancing act between the advantages and disadvantages of those two options. That’s why when you have your initial meeting with your bankruptcy attorney, it’s smart to be aware of and communicate your goals, but also be open-minded about how best to accomplish them.
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 May 27, 2017 under Bankruptcy Blog |
If you borrowed money to purchase your motor vehicle, you have signed a promissory note which is an obligation to pay the loan debt. You also gave to the lender a lien of your vehicle. In bankruptcy, your lender is known as a secured creditor. Although the underlying debt may be discharged in bankruptcy, the lien passes through the bankruptcy because it is a property right. That means that the lender can always foreclose on the lien if you do not make payments.
The Bankruptcy Trustee Only Cares about Equity Beyond Any Exemption
In a Chapter 7 case you have two people besides you who could be interested in your vehicle. Clearly, the lender is interested. But also, the bankruptcy trustee will become interested if there is equity in the vehicle that exceeds the amount of the exemption. In New Jersey, the vast majority of debtors use the federal exemption which is $3775. There is seldom too much equity if you owe on a vehicle, but check with your attorney to make sure this is not an issue in your case.
Dealing with the Lender-
Surrender
You may not want to keep your vehicle for a multitude of reasons. Or you may not be in a position to make the vehicle loan current within a short time after the bankruptcy filing. If you just surrendered your vehicle without a bankruptcy, you’ll very likely owe and be sued for the “deficiency balance” (amount of loan plus all repo and sale costs minus the sales price). Especially in auction situations, that deficiency balance is often much higher than you expect. Surrendering the vehicle in your Chapter 7 bankruptcy eliminates the deficiency scenario. Indeed, that is a common purpose for filing bankruptcy.
Reaffirm
If you want to keep your vehicle, generally you must be either current on your loan or able to get current within about 30 to 60 days after filing the Chapter 7 case. In New Jersey, you are required to sign a reaffirmation agreement, which legally excludes the vehicle loan from the discharge (the legal write-off) of the rest of your debts. Then you have to stay current if you want to keep the car. Remember, because the vehicle loan was not discharged in the bankruptcy, if you miss payments, the lender can repossess the car, sell it at auction and come after you for any deficiency. So talk to your attorney and think carefully about the risks before reaffirming your vehicle loan.
Redeem
You can keep your vehicle if you redeem by paying to the secured creditor the vehicle’s current replacement value (what you would pay a retail dealer for a vehicle of comparable age and condition). I mention this in passing because in over 30 years of filing Chapter 7’s, I have never had a client who redeemed a motor vehicle. Why? Given the price of motor vehicles these days, it takes thousands of dollars to redeem and most of my clients would not have filed bankruptcy if they had a spare $5-10,000 of cash laying around. But, in theory, you could do it.
Conclusion
Usually “straight bankruptcy”—Chapter 7—works best way if your vehicle situation is pretty straightforward: you either want to surrender a vehicle, or else you want to hang onto it. Chapter 7 gives you these options.
Posted by on May 28, 2016 under Bankruptcy Blog |
From the mid-1990’s to 2005, the creditor lobby worked hard to change the Bankruptcy Code. In their eyes, too many people, who could afford to pay part of their debts, were filing under Chapter 7 and walking away scot free. They wanted people to be forced into Chapter 13, where you have to make monthly payments to a Trustee for 36-60 months if the prospective debtor had the means to pay. Finally, in 2005, Congress changed the law which is called “Bankruptcy Abuse Prevention and Consumer Protection ” Act (BAPCPA). 11 years later, there is still confusion among the public about whether you can still file for Chapter 7, or you must file under Chapter 13. To qualify for Chapter 7, you have to pass the Means Test, the bankruptcy court version of what the IRS uses to determine what you can pay on back taxes. The Means Test is not straightforward, and some issues concerning its application are not clear even after a decade of BAPCPA. However, the bottom line is that you can still file under Chapter 7.
1. Bad Publicity
The creditor lobby, the media and sometimes even the bankruptcy system have all had a hand in making many people think that qualifying for “straight bankruptcy” is hard. While it is true that for the first couple of years, Chapter 13 filings were up, after debtor attorneys started to understand the new system, the vast majority of filings in New Jersey are still under Chapter 7.
2. A Confusing Statute
Upfront, BAPCPA is loaded with abuse prevention but I don’t see much consumer protection. The law is poorly written, confusing and sometimes one section contradicts another section. Moreover, because of these statutory contradictions and ambiguities, Courts, all the way up to the Supreme Court, have been scratching their heads trying to make sense of it. If the judges are having trouble with the complexities of the new law, then it is no surprise that ordinary people are confused.
3. Most Can “Skip” the “Means Test”
Parts of the “means test”–the major mechanism now for qualifying under Chapter 7—are mind-numbingly confusing, but many people can avoid all that simply by virtue of their income. Without getting into the calculations here, basically if your “income” (as specially defined for this purpose) before filing was no more than the published median income amount for your state and size of family, then you qualify for Chapter 7 without needing to go through any more of the “means test.”
Also, certain kinds of folks can skip the “means test” no matter the amount of their income, specifically present or recent business owners who have more business debt than consumer debt.
4. Passing the Means Test turned out to be easier than we thought
Even if you are a consumer debtor whose “income” IS higher than the applicable median income amount, through some good lawyering, which is creative but perfectly legitimate, you may well be able to lower your “income” or increase the reporting of your expenses to bring your overall under the applicable median amount. If so, you qualify for Chapter 7.
5. Chapter 13 is Sometimes the Better Option
The purpose of the “means test” is to make people who have the “means” pay back some of their debts through a Chapter 13 case. In the relatively few times that a person does not qualify under Chapter 7 and so has to do a Chapter 13 case, in almost all cases, the amount that must be paid in the Chapter 13 case to the creditors is much less than the total debt, making it not such a bad deal. Also, often a person who “just wants to file Chapter 7 and get it over with” learns that Chapter 13 comes with surprising advantages, which are more helpful to the debtor in the long run.
Posted by on May 30, 2015 under Bankruptcy Blog |
If you can’t discharge your income tax debt through Chapter 7, or make workable payment arrangements on the remaining tax debt, then Chapter 13 can be a good solution.
The Previous Chapter 7 Options
A consistent theme through these past blogs has been that in many situations you do not need to incur the extra expense and time of going through a three-to-five-year Chapter 13 case when other solutions will work. But Chapter 13 IS often an excellent mechanism for resolving all your income tax debts (and usually all your other debts, too).
Chapter 13 Can Be the Easiest Way to Address Your Income Tax Debts
A Chapter 13 payment plan is often a significantly easier way to deal with income tax debts than the other alternatives because:
1. The payment amount going to the taxes are often more reasonable than the IRS/state would require. That’s because they are based on what you can actually afford, by allowing you more reasonable amounts for your expenses.
2. Your Chapter 13 case incorporates ALL your debts in one package, so that you are not forced to satisfy the IRS/state to the exclusion of other important creditors (such as your mortgage, vehicle payments, and child/spousal support). The taxes may have to wait their turn to be paid after debts that are a higher priority for you, instead of just getting paid first.
3. Putting all your debts into one Chapter 13 package also includes all categories of your income taxes—particularly those that are being discharged and those that aren’t. This avoids the situation under Chapter 7 in which you discharge some of the taxes but then have to deal directly with the IRS/state for the taxes that were not discharged.
4. The payments going to the IRS/state can be adjusted during the course of the Chapter 13 if your circumstances change, usually without much room for their objection.
Chapter 13 Can Be a Cheaper Way to Pay Non-Discharged Taxes
It can be cheaper because:
1. In contrast to the other scenarios, under Chapter 13 usually no more interest and penalties can be added after the case is filed.
2. Often you don’t have to pay even the previously accrued penalties.
3. If you have a tax lien attached to any of your tax debts, the lien can sometimes be paid off more cheaply by paying the secured value of the lien instead of the full tax.
If your tax debt is high, and you are paying into your plan for the full five years, these savings can amount to many thousands of dollars.
Chapter 13 Is a Safer Way to Pay Non-Discharged Taxes
It’s safer because:
1. Instead of being at the mercy of the IRS/state if you are not able to make a payment, under Chapter 13 your “automatic stay” protection from all your creditors—including tax creditors—persists throughout your case. So you are not a hair-trigger away from being hit with tax liens, or levies on your wage and bank accounts.
2. You CAN lose this protection, but if you and your attorney deal with your situation proactively you can usually preserve it.
3. This protection is particularly important when your circumstances change—instead of being at the mercy of the IRS/state, your attorney can make adjustments to your Chapter 13 plan. Or if necessary, even more aggressive or creative steps may be appropriate, such as changing to a new bankruptcy case. The point is that you usually have much more control over the situation.
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.
_________________________
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.
_________________________
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 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.
_________________________
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.
_________________________
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.
_________________________
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.
_________________________
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.
Posted by Kevin on January 25, 2014 under Bankruptcy Blog |
Finding the best way out of this seeming Catch-22 depends on a full understanding of your unique situation and your goals.
_________________________
The last blog explained that filing a bankruptcy by yourself immediately protects YOU from IRS collection activity but does NOT protect your spouse. Similarly the legal write-off (“discharge”) of any tax applies to the person(s) filing the bankruptcy but not to your spouse if he or she does not either join you in your bankruptcy case or else files his or her own case.
That makes perfect sense—you don’t get the benefit of bankruptcy if you don’t file bankruptcy! So the simple solution is for spouses to file bankruptcy together. But there are many situations where that’s not so simple. The next few blogs discuss some of the practical problems that can arise, and how to resolve them.
_________________________
One Spouse Has Most of the Debts, the Other May Have Assets
Often one spouse is the only one individually liable on most of the debt. Or one spouse is solely liable on all debt except they are jointly liable on the secured debts—their mortgage and/or vehicle loans–that the couple intend to keep paying on. These situations can happen when one spouse incurred all the debt from operating a business that failed, or that spouse was simply the primary income source, and/or the one with good credit.
In these situations only the spouse whose debts would be discharged would directly benefit from a bankruptcy filing, so the other is appropriately reluctant to be in a bankruptcy that appears to provide him or her no benefit.
But now add two more ingredients to this scenario: 1) a large personal income tax debt that is old enough and meets the other conditions so that it can be discharged in bankruptcy, which both spouses owe because they both signed the joint tax return; and 2) a significant asset not protected by the applicable exemption owned separately by the spouse with less debts. To make this clearer, let’s say the income tax debt is $25,000 for the 2008 tax year, and the one spouse’s separate asset is his or her share in the childhood vacation home, inherited before the marriage, with this spouse’s share being worth about $20,000.
Seeming Catch-22 for Spouse with Less Debt but Liable on Tax Debt
Without the joint income tax debt, the spouse with little or no other dischargeable debt would not want to join in a Chapter 7 bankruptcy case because his or her share of the old family vacation home could well be claimed by the bankruptcy trustee and sold to pay the couple’s creditors. But with the existence of the joint tax debt, a Chapter 7 filed by the other spouse alone would forever discharge that tax debt as to THAT spouse only, leaving the non-filing spouse owing all of the tax—and the continually accruing interest and penalties—by him- or herself. Clearly not a good result.
Indeed the situation on the surface looks like a Catch-22: the asset-owning spouse either joins in on the bankruptcy thus jeopardizes the asset, or else doesn’t join and is stuck with the tax.
Best Solution Depends on the Unique Facts of the Case
It’s in these tough situations that an experienced bankruptcy attorney becomes very valuable. Determining the best solution depends on thorough understanding of the law along with a careful analysis of all the facts of this case—such as whether the couple owed any other taxes and if so how much and for which years, whether they owed any other “priority” debts (including back child or spousal support payments from a prior marriage, or employee wages from the failed business), their current income and expenses, and lots of other potentially relevant facts.
Posted by Kevin on November 21, 2013 under Bankruptcy Blog |
Here are 5 questions to ask to find out which bankruptcy option is better for you and your vehicle.
1. Is your vehicle protected by the applicable exemption?
The first thing to find out if whether there is any risk that a bankruptcy trustee could take your car or truck from you if you filed a Chapter 7 case. In NJ, the exemption is only $3675 plus whatever you do not use on your homestead exemption. So, if your car is reasonably new (and not leased), chances are it is not completely protected by exemption. So, you have three possible options:
1) File a Chapter 13 case to protect the vehicle. This way you pay enough to your creditors through a court-approved plan so that your creditors receive over time what they would have received had a Chapter 7 trustee taken and sold your vehicle.
2) File a Chapter 7 case and pay the trustee—usually through a short series of monthly payments—for the right to keep the vehicle. This prevents the trustee from selling your vehicle by paying him or her about as much as would have gone to the creditors had the vehicle been sold.
3) Surrender the vehicle in a Chapter 7 case—assuming you don’t absolutely need it—and allow the proceeds to go to your creditors, an especially sensible option if the debt to be paid first is one you need to be paid anyway, such as income tax or back child support.
2. Are you current or almost current on your vehicle payments but really struggling to keep current?
Either Chapter 7 or 13 can enable you to keep up your vehicle payments by reducing or eliminating your other debts. Bankruptcy is a reprioritization. It empowers you to focus on what’s most important in your financial life. That often is your vehicle, which gets you to work and enables you to take care of your other personal and family responsibilities. Bankruptcy allows you to be wisely proactive, protecting your ability to pay your car payments—and for its necessary maintenance and repairs—before it’s too late.
3. Are you current on your vehicle payments, or if not would you be able to get current within a month or two after filing a Chapter 7 bankruptcy?
If you are not behind on your payments, you will likely be allowed to continue making those payments after filing bankruptcy, regardless whether your other circumstances point you towards Chapter 7 or Chapter 13.
And if you are not current but can catch up very quickly after filing bankruptcy, you can likely file a Chapter 7 case and keep your vehicle. However, if you can’t catch up that quickly, you will likely need the extra power of Chapter 13 to buy more time with your creditor.
4. Is your vehicle worth less than what you owe on it, AND did you buy your vehicle at least two and a half years ago?
If you say yes to both of these questions, you would likely be able to do a “cram down” on your vehicle loan in a Chapter 13 case. This means that through your court-approved plan you would in effect be able to reduce the balance of your vehicle loan down to the value of your vehicle, often also reducing the interest rate and extending the payments over a longer period, usually resulting in a greatly reduced monthly payment. So if you qualify for a vehicle cram down that may be a good reason to file under Chapter 13, because it is not available under Chapter 7.
5. Are your payments so high that surrendering the vehicle to your creditor—or maybe one of your vehicles if you have more than one—is your best choice?
Although bankruptcy can help you keep your vehicle in many ways, it also gives you the opportunity to get out of a bad deal, or one that no longer fits your present circumstances. Usually when you surrender your vehicle to the creditor you are left owing money—the “deficiency balance”—the difference between what you owe and what your creditor sells your vehicle at an auto auction. Bankruptcy gives you the opportunity to get rid of that deficiency balance. Chapter 7 would usually be the quickest way to do that specific task, unless your other financial circumstances pointed you towards filing Chapter 13.
Posted by Kevin on November 3, 2013 under Bankruptcy Blog |
In deciding between Chapter 7 and 13, get this question out of the way right away: “Can I keep everything I own if I file a Chapter 7 case?”
_________________________
Most people do not lose anything that they own when they file bankruptcy. That’s because the law protects (“exempts”) certain kinds of your assets and usually a certain dollar value of them. If everything you own fits within those kinds and those amounts, then you can file a Chapter 7 “straight bankruptcy” and protect everything. Even if you DO own and want to keep things beyond those limits, filing a Chapter 13 case will likely protect those additional things. So, a way to put the question is whether 1) all your possessions are protected under Chapter 7 or instead 2) you need the extra protection provided by Chapter 13.
(This blog is about things you own free and clear. Those that are collateral on debts, such as your home with its mortgage, are a whole separate discussion for later.)
_________________________
This is a good first question once you start seriously considering bankruptcy because usually your attorney will be able to answer it quite quickly and assure your possessions are protected in a Chapter 7 case. And if some are not protected, that’s an issue that should be addressed by your attorney and you from the very beginning.
Just because your attorney can usually make this determination quite quickly does not mean that it is not an important question, or that it’s an easy one for someone who isn’t highly experienced in this area of law.
It’s an important question because:
1) If you’re filing bankruptcy you likely can’t spare to lose what you own, so you don’t want to put any of it at risk.
2) You especially don’t want to lose something unnecessarily, since there usually are ways to prevent that from happening.
It’s not an easy question for the inexperienced because:
1) In some states the state law determines what you can keep, while in some other states federal law does, and in others either state or federal law can apply.
2) After knowing which law applies, the asset categories are often not clearly stated in the statutes, and their meaning can turn on court interpretations or even on the informal practices of the local bankruptcy trustees or judges.
3) The laws change—the statutes, the formal court interpretations, and the informal practices, and it is very difficult to keep up with all this without working with it full time.
4) If you moved from another state, the statutes and court interpretations applicable to your former state may or may not apply.
And if everything you own is NOT protected, then Chapter 13 MAY be a great tool for keeping everything. But here are some good questions to ask your attorney in this situation:
1) Are the substantial extra time and cost of a Chapter 13 case worth this benefit?
2) Can those unprotected assets be more efficiently protected by some appropriate pre-bankruptcy planning?
3) Can those assets be protected in a Chapter 7 bankruptcy by paying a reasonable amount to the bankruptcy trustee—in reasonable monthly payments—while avoiding the extra hassles of a Chapter 13 payment plan?
4) If you would pay such money to the trustee, where would that money go, and might at least some of it go where it would benefit you—such as to pay taxes or some other debt that you would not be written off by the Chapter 7 case so you would have to pay anyway?
5) And lastly, would Chapter 13 help you in other ways beyond protecting your assets, so that overall it would be worthwhile?
Posted by Kevin on November 19, 2012 under Bankruptcy Blog |
The type of debts that you have are a factor in deciding whether to file under Chapter 7 or Chapter 13.
The Overly-Simplistic But Still Helpful Rule of Thumb
Here’s a decent starting point: Chapter 7 handles your simple debts better than does Chapter 13, and Chapter 13 handles your more complicated debts better than does Chapter 7.
There are three kinds of debts: “secured” for which there is collateral given, e.g., your house; “priority” debts which for most consumer creditors is child support, alimony or taxes; and “general unsecured” debts which include most credit cards, medical debts, personal loans with no collateral, utility bills, back rent, and many, many others.
Simple debts are generally general unsecured debts, and secured debts in cases where a) the debtor is current, their is no equity in the collateral and the debtor wants to keep the collateral or b) the debtor wants to give up or “surrender” the collateral.
Simple Debts- Better Off in Chapter 7
Chapter 7 treats “general unsecured” debts the best by usually simply discharging them (writing them off) forever in a procedure lasting barely three months. You make no payments and you get to keep the property if it is exempt.
Chapter 13 instead usually requires you to pay a portion of these “general unsecured” debts. When you hear a Chapter 13 plan being referred to a “15% plan,” that means that the “general unsecured” debts are slated to be paid 15% of the amount owed. Moreover, if your income goes up during the term of the plan, your payments can increase. So, unless you feel morally compelled to make restitution to your creditors, Chapter 7 is the preferred economic method of disposing of “general unsecured” debts.
As for simple secured debts, in Chapter 7, if you surrender, you give up the property, the debt is discharged and you make no further payments. If you surrender the collateral in a Chapter 13, however, you may be subject to paying a portion of any deficiency through your plan. Clearly, in that case, Chapter 7 is the better alternative.
If you want to keep the property which is current with no equity, in a Chapter 7 the trustee “abandons” the property. That means that it drops out of the bankruptcy and you keep it subject to the secured claim. As long as you keep paying the secured creditor, you get to keep (and someday own outright) the collateral. Moreover, the underlying debt to the bank is discharged, so the bank can never come after you for a deficiency if you default down the line.
Now, you get pretty much the same deal in Chapter 13 ( you keep the collateral and continue with your payments), but you are subject to court supervision for up to 60 months. That can be a hassle. Hence, Chapter 7 is a better alternative because it is quicker and cleaner.
The next blog: how not-so-simple debts are handled in Chapter 7 and in Chapter 13.
Posted by Kevin on November 15, 2012 under Bankruptcy Blog |
Question #1 for cleaning up financially after a failed business: can the business file a bankruptcy without you? Question #2: should it?
This blog is NOT intended to give you all you need to know about whether your no-longer-operating business (or “on its deathbed business”) or you should file bankruptcy. Many factors go into that decision. This blog addresses only the very beginning of this decision-making process: is your business ELIGIBLE to file bankruptcy?
Is Your Business Its Own “Person”?
Your business can only file its own bankruptcy if it is a legally recognized business entity, a legal “person” distinct from you. If you established and ran the business under a formally registered corporation, that corporation can file a bankruptcy. If you established and ran the business as a formal partnership, that business partnership can file a bankruptcy.
In contrast, if you operated the business under your own name, or under a “dba” (“doing business as”), that business is not legally separate from you as an individual, so it cannot file a bankruptcy. That’s true even if you legally registered that “dba” name with a state agency (usually with the “corporation division” of your secretary of state’s office), paid for a local business license, and/or had separate bank accounts for the business. That business is legally just a part of you as an individual and cannot file its own bankruptcy.
How about if your business was established as a corporation but over time you did not keep the corporation’s finances distinct from your own? How about if operated your business in fact as a partnership of three partners and kept distinct partnership books but never formalized the partnership through the state or local authorities? Whether that corporation or that partnership can file a bankruptcy, and what the consequences would be of such a bankruptcy, depends on the circumstances, and requires a careful discussion with an experienced business bankruptcy attorney.
Corporations and Partnerships Cannot File Chapter 13
Chapter 13 is reserved for “individuals”—actual people, not corporations or business partnerships. Specifically “[o]nly an individual with regular income” and who does not owe more than certain amounts “may be a debtor under Chapter 13… .”
Corporations and Partnerships Can File Chapter 7, 11 and 12
Legal business entities like corporations and partnerships can file under Chapter 7, a straight bankruptcy, to help in the orderly liquidation of the business’ assets and the fair distribution of the proceeds to the business’ creditors. Such a Chapter 7 may not be necessary or helpful if the business does not have any of its own assets, other than those which are collateral on secured debts.
Under a Chapter 11 “business reorganization,” the business would continue to operate or be sold as a going concern. Although most bankruptcy courts make an effort to run small business Chapter 11 cases efficiently, they are still very expensive—seldom less than tens of thousands of dollars in court, U.S Trustee, and attorney fees. So Chapter 11 is seldom a practical solution for very small businesses.
Under a Chapter 12 “adjustment of debts of a family farmer or fisherman,” the family farming or fishing operation would continue operating. To qualify that operation must meet certain maximum debt limits, and other qualifications to show that it is sufficiently oriented towards farming or fishing and is sufficiently family-owned.
Whether a business CAN file its own bankruptcy leads to the question whether it SHOULD do so, to be covered in the next blog.
Posted by Kevin on November 14, 2012 under Bankruptcy Blog |
I am sure that you all have heard the term Trustee in the news. What exactly is a trustee and what does he do in a Chapter 7 case?
First, let’s get out of the way a whole other kind of “trustee” who you might hear about in the bankruptcy world, the “United States Trustee.” That’s someone who usually stays in the background in consumer bankruptcy cases, so you’ll usually not have any contact with anyone from that office. It is part of the U.S. Department of Justice, tasked with administering and monitoring the Chapter 7 and 13 trustees, overseeing compliance with the bankruptcy laws, and stopping the abuse of those laws.
The United States Trustee establishes a “panel” of trustees throughout the State of New Jersey who actually administer the Chapter 7 cases. That panel consists mainly of attorneys who are experienced in bankruptcy, but also includes some accountants and other business persons. The debtor and her legal counsel deal with the panel trustee.
A Chapter 7 case is a “liquidation,” meaning that if you own anything which is not “exempt,” it has to be surrendered and sold to pay a portion of your debts. But the reality for most people is that everything they own is “exempt,” so they get to keep their stuff. There is no “liquidation” in those situations.
The Chapter 7 trustee is an investigator-liquidator. He or she is the person assigned to your case by the bankruptcy system who does primarily three things:
1) investigates your filing to determine if you are honestly disclosing your assets and liabilities, income and expenses;
2) determines whether or not everything you own is “exempt,”;
3) only in the relatively few cases in which something is not “exempt,” decides whether that asset is worth collecting and selling, and if so, liquidates it (sells and turns it into cash), and distributes the proceeds to your creditors.
The Chapter 7 trustee’s investigation starts with a review of the Petition, Schedules and other Statements that are a part of your bankruptcy filing. In addition, the Chapter 7 trustee will require that we send him certain documents to verify what is said in our filing (tax returns, paystubs, deeds, mortgages, mortgage payoffs and appraisal). Then he or she presides at the so-called “meeting of creditors,“ and asks you a list of usually easy questions about your assets and related matters. Lastly, the trustee can expand his investigation and take other action such as deposing the debtor and/or third parties, hire experts like accountants or appraisers, and the like. It should be stressed that an expanded investigation rarely happens in a consumer bankruptcy.
In those cases where some of the debtor’s assets are not exempt and these available asset(s) is(are) worth collecting, the trustee will gather and sell the asset(s), and pay out the proceeds to the creditors, all in a step-by-step procedure dictated by bankruptcy laws and rules.
Posted by Kevin on June 6, 2012 under Bankruptcy Blog |
The point of filing bankruptcy is to get relief from your debts. So, under what conditions DO those debts get “discharged”—legally written off—in a regular Chapter 7 bankruptcy?
Here’s what you need to know:
1. You WILL receive a discharge of your debts, as long as you play by the rules. Under Section 727 of the Bankruptcy Code, the bankruptcy court “shall grant the debtor a discharge” (“shall”is a catch word among lawyers which means the court must do it ) except in relatively unusual circumstances:
- If you’re not an individual! Corporations and other kinds of business entities do not receive a discharge of debts, only human beings do.
- If you’ve received a discharge in an earlier case too recently. You can’t get a new discharge of your debts in a Chapter 7 case if:
- you already received a discharge of debts in an earlier Chapter 7 case filed no more than 8 years before your present case was filed, or
- you already received a discharge of debts in an earlier Chapter 13 case filed no more than 6 years before your present case was filed (except under limited conditions).
- If you hide or destroy assets, conceal or destroy records about your financial condition (This does not mean that you cannot find a bank statement from 2 years back. It means that you are playing games and not turning over things)
- If in connection with your Chapter 7 case you make a false oath, a false claim, or withhold information or records about your property or financial affairs.
2. ALL your debts will be discharged, UNLESS a particular debt fits one of the specific exceptions. Section 523 of the Code lists those “exceptions to discharge.” I’m not going to discuss those exceptions in detail here, but the main ones include:
- most but not all taxes
- debts incurred through fraud or misrepresentation, including recent cash advances and “luxury” purchases
- debts which were not listed on the bankruptcy schedules on time
- money owed because of embezzlement, larceny, or through other kinds of theft or fraud in a fiduciary relationship
- child and spousal support
- claims against you for intentional injury to another person or property
- most but not all student loans
- claims against you for causing injury or death to someone by driving while intoxicated (also applies to boating and flying)
3. A discharge from the bankruptcy court stops a creditor from ever attempting to collect on the debt. Under Section 524, the discharge order acts as a court injunction against the creditor from taking any action—through a court procedure or on its own–to “collect, recover, or offset any such debt.” If a creditor violates this injunction by trying to pursue a discharged debt, the bankruptcy court may hold the creditor in contempt of court and, depending on the seriousness of its illegal behavior, can require the creditor to pay sanctions.
