Posted by Kevin on December 22, 2020 under Bankruptcy Blog | 
In virtually every Chapter 7 “straight bankruptcy” case, you never go to court. But you DO go to a formal meeting, usually lasting 5 to 10 minutes, one that you must attend. If you don’t, your case can be dismissed.
This meeting is with your Chapter 7 trustee, but it is misleadingly called the “meeting of creditors.” It is sometimes referred to as the “341 hearing,” named after the Section 341 of the Bankruptcy Code which addresses it.
This meeting is not one in which all your creditors attack the debtor for filing bankruptcy. What usually happens is that the trustee will question the debtor about his or her petition, or documents that were submitted after the filing. The questioning is usually not intensive. Although creditors are given the opportunity to be there, most of the time they do not attend. Why not? Because usually there is no reason for them to attend. The grounds for objecting to bankruptcy are very limited so most creditors can’t object. So they don’t waste their time.
The creditors that tend to be at the 341 hearing are those which have collateral in personal property such as your motor vehicle or furniture, or creditors with an axe to grind. In the past in New Jersey, certain collateral creditors sent representatives to the 341 hearings. They routinely questioned debtors usually about their intention about the collateral (retain or surrender). But now, most of these creditors forego the 341 hearings in favor of making arrangements with the debtor’s attorney either over the phone or by email.
The axe to grind creditors are usually ex-business partners or ex-spouses. For them, its just not just the money, it’s personal. My experience has been, however, that trustees are very adept at controlling these types of creditors, and they make sure that the 341 meeting is not used as a vehicle for making ad hominem attacks on the debtor. That does not mean that the trustee will not give such creditors some leeway in questioning the debtor. The one area of concern is that these creditors tend to know the debtor pretty well as opposed to credit card companies or mortgage lenders. They may know if the debtor had been engaged in cutting corners or engaging in questionable behavior. Be sure to talk with your lawyer well in advance if you have any concerns in this area. He or she will warn you if your circumstances raise any red flags, and will prepare you for the meeting.
Rarely, if there isn’t enough time for legitimate questions, a second meeting of creditors can be scheduled. Or the conversation with a creditor might continue informally outside the hearing.
There is one person who is NOT allowed to be at the meeting: the bankruptcy judge. As the Bankruptcy Code says: “The court may not preside at, and may not attend, any meeting under this [341] section… .” So the meeting is definitely not a court hearing.
Conclusion
At most Chapter 7 meetings of creditors there are no creditors, or, at most, one or two. It’s rare that a creditor will ask tough questions, but it can happen. Your attorney will prepare you for the types of questions that will be asked at the meeting. Be sure to share any concerns with your lawyer so you won’t worry unnecessarily.
Posted by Kevin on July 22, 2020 under Bankruptcy Blog |
Your Chapter 7 trustee may pay your priority debts—in full or in part—through the proceeds of the sale of your unprotected, non- exempt assets.
Our last blog post was about what happens to priority debts in a no-asset Chapter 7 case. Most consumer “straight bankruptcy” Chapter 7 cases are no-asset cases. This means that the bankruptcy trustee does not take anything from the debtor because everything is protected and “no assets” are distributed to creditors. Hence, the name.
No-Asset Case Even If Some Assets May Not Be Exempt
To understand how this actually works, sometimes from a practical point of view, a Chapter 7 case is a no-asset one even when not all assets are exempt. That’s because the bankruptcy trustee has some discretion about whether to collect and liquidate an otherwise unprotected asset. Here are three reasons why he or she may not pursue an asset:
- The value of the asset, or the amount beyond the exemption, is too small to justify the trustee’s collection efforts. Example: A vehicle worth only a couple hundred dollars more than the vehicle exemption.
- Finding and/or selling the asset may be too expensive compared to its anticipated value. Example: A debt owed to the debtor by somebody who can’t be located and likely has no reliable income.
- The asset could be more of a detriment than a benefit to the trustee. Example: real estate with hazardous waste contamination.
Usually your bankruptcy lawyer will be able to reliably predict whether your Chapter 7 case will be an asset or no-asset case. But not always. Trustees have wide discretion about this. Moreover, before filing, your lawyer doesn’t know which trustee will be assigned to your case. And some trustees are more aggressive than others.
Paying Priority Debt through a Chapter 7 Asset Case
If you know that you will have an asset case, you may be able to pay a priory debt through your case.
In our last blog post our main point was that in a no-asset Chapter 7 case you have to pay any priority debts yourself directly to your creditors after completing the case. But in an asset case, the trustee is required to pay any of your priority debts before any other debts. The trustee collects and liquidates your non-exempt assets (any not protected by exemptions). From the proceeds he or she then pays you your exempt amount, and then pays his or her fee, and then pays debts only to the extent there’s money available. Priority debts get paid before general unsecured debts.
For Example
Assume you owe $4,000 to the IRS for last year’s income tax. That tax is a priority debt. You also owe $75,000 in medical bills and unsecured credit cards. Those are general unsecured debts. If you filed a Chapter 7 case in which everything you owned was protected, that would be a no-asset case. The IRS debt can’t be discharged (legally write off). So you would have to make arrangements to pay it after your Chapter 7 case was over. Most likely the case would discharge the $75,000 in other debts.
But now assume that you have a boat that you no longer want because it costs too much to maintain. There’s usually no exemption for a boat. So the Chapter 7 trustee takes and sells your boat for $5,000. The proceeds of that sale go first to pay the administrative fee of the trustee (since there is no exemption for the boat, the debtor gets nothing). A trustee gets a fee of 25% on the first $5000 of assets that are distributed. So, the trustee gets $1250, the IRS gets $3750 and general, unsecured creditor get nothing. You would be required to pay the IRS $250.
Conclusion
In some circumstances paying a priority debt in a Chapter 7 case is not a bad deal. This is especially true if you have an asset not protected by an exemption that you don’t mind surrendering.
Posted by Kevin on July 19, 2020 under Bankruptcy Blog |
Priority debts are largely unaffected by a Chapter 7 case—it does not discharge them, so you need to pay them after finishing your case.
Most Chapter 7 Cases Are No-Asset Cases
Chapter 7—“straight bankruptcy”—is the most common type of consumer bankruptcy case. They are generally the most straightforward, lasting about 4 months start to finish. Usually everything you own is protected by property exemptions. You discharge, or legally write off all or most of your debts. Secured debts like a home mortgage or vehicle loan are either retained or discharged. You either keep the collateral and pay for it, or surrender it and discharge the underlying debt. Bankruptcy does not discharge certain special debts like child/spousal support and recent income taxes.
A “no-asset” Chapter 7 case is one, as described above, in which everything you own is covered by property exemptions. So you keep everything you own (with the exception of collateral you decide to surrender). It’s called a no-asset case because your Chapter 7 trustee does not get any assets to liquidate and distribute to any of your creditors. A large majority of Chapter 7 cases are no-asset ones.
What Happens to Your Priority Debts in a No-Asset Chapter 7 Case?
Most debts that Chapter 7 does not discharge are what are called priority debts. These are simply categories of debts that Congress has decided should be treated with higher priority than other debts. In consumer cases the most common priority debts are child/spousal support and recent income taxes.
Priority debts generally get paid ahead of other debts in bankruptcy. This is true in an asset Chapter 7 case—where the trustee is liquidating a debtor’s assets. In fact, the trustee must pay a priority debt in full before paying regular (“general unsecured”) debts a penny!
But in a no-asset Chapter 7 case the trustee has no assets to liquidate. So he or she cannot pay any creditors anything, including any priority debts. So, essentially nothing happens to a not-dischargeable priority debt in a no-asset Chapter 7 case.
Dealing with Priority Debts During and After a Chapter 7 Case
However, one benefit you receive with some priority debts is the “automatic stay.” This stops (“stays”) the collection of debts immediately when you file a bankruptcy case. This “stay” generally lasts the approximately 4 months that a no-asset case is usually open. This no-collection period gives you time to make arrangements to pay a debt that is not going to get discharged. So you can start making payments either towards the end of your case or as soon as it’s closed. The hope is that you’ve discharged all or most of your other debts so that you can now afford to pay the not-discharged one(s).
The automatic stay applies to most debts, but there are exceptions. Child/spousal support is a major exception. Filing a Chapter 7 case does not stop the collection of support, either unpaid prior support or monthly ongoing support.
So, with nondischargeable priority debts that the automatic stay applies to, during your case you and/or your bankruptcy lawyer should make arrangements to begin paying that debt. With debts not covered by the automatic stay, you need to be prepared to deal with them immediately.
If neither of these make sense in your situation, consider filing a Chapter 13 case instead. TChapter 13 takes a lot longer—from 3 to 5 years usually. But if you have a lot of priority debt, it can help.
Posted by Kevin on June 20, 2017 under Bankruptcy Blog |
Can you really keep everything you own if you file bankruptcy? The Answer: Usually Yes.
Some basics.
There are two basic types of consumer bankruptcies. Chapter 7 is an asset based approach. The Chapter 7 trustee sells your “non-exempt” property and pays your creditors. Chapter 13 is an income based approach where you generally keep your assets but have to make payments to your creditors over a 36-60 month period.
There are two types of creditors: secured creditors (they took collateral as a condition of granting you credit, and can look to the collateral to be paid even after the bankruptcy), and unsecured creditors (basically no collateral).
The purpose of bankruptcy is to give an honest debtor a fresh start. That means that most, if not all, of your debts are discharged, and you can keep all or most of your property.
Now how is that accomplished.
In a Chapter 13, as stated above, you keep the property you want to keep in exchange for making payments over the term of 36-60 months.
In a Chapter 7 “straight bankruptcy,” your debts are discharged—legally written off forever—in return for you giving your unprotected assets to your creditors (as represented by the bankruptcy trustee). But here is the good part: for most people, all or most of their assets ARE protected, or “exempt.” from the trustee and your creditors. Why? The fresh start.
Property Exemptions- The Basics
- The Bankruptcy Code has a set of federal exemptions, and each state also has its own exemptions. In some states you have a choice between using the federal exemptions or the state exemptions, while in other states you are only permitted to use the state exemptions. In New Jersey, we can use either. In many states, choosing which of the two exemption schemes is better for you is often not clear. However, in New Jersey, debtors generally use the federal exemptions. Why? Because many of the New Jersey exemptions were created by statute about 100 year ago or more, and were not adjusted for inflation. Moreover, New Jersey has no homestead exemption.
- If you have moved relatively recently from another state, you may have to use the exemption rules of your prior state. Because different state’s exemption types and amounts can differ widely, thousands of dollars can be at stake depending on when your bankruptcy case is filed.
- In some circumstances, it is not clear how the federal exemptions will be applied. What if you own a car and you owe $10,000 on your car loan. Clearly, the bank (secured lender) has an interest as do you. But, the trustee also may be able to make a claim to part of the value to the car, and sell it.
Navigating through exemptions can be much more complicated than it looks, and is one of the most important services provided by your bankruptcy attorney. It can maximize the amount of property you keep after receiving your bankruptcy discharge.
Posted by Kevin on April 7, 2017 under Bankruptcy Blog |
Your Business as a Sole Proprietorship
Practically speaking, your business is operated as a sole proprietorship if you did not create a corporation, limited liability (LLC), partnership, or any other kind of formal legal entity when you set up that business. You own and operate your business by yourself for yourself, although the business may have a formal or informal “assumed business name” or “DBA” (“doing business as”).
There are various advantages and disadvantages of operating your business this way. For our immediate purposes what’s important is that you and your business are legally treated as a single economic entity. That’s different than if your business operated as a corporation which would legally own its own assets and owe its own debts, distinct from you and any other shareholder(s). This blog post, and the next few on this broad topic of business bankruptcies, assumes that you operate your business as a sole proprietorship.
Chapter 7
Chapter 7, “straight bankruptcy,” or “liquidating bankruptcy,” allows you to “discharge” (legally write off) your debts in return for liquidation—surrendering your assets to the bankruptcy trustee in order to be sold and the proceeds distributed to your creditors. In most Chapter 7 cases you receive a discharge of your debts even though none of your assets are surrendered and liquidated, because everything you own is protected–“exempt.”
But if you own an ongoing business—again, a sole proprietorship—which you intend to keep operating, Chapter 7 may be a risky option. You and your attorney would need to determine if all your business’ assets would be exempt under the laws applicable to your state. Certain crucial assets of your business—perhaps its accounts receivable, customer list, business name, or favorable premises lease—may not be exempt, and thus subject to being taken by the trustee. Proceed very carefully to avoid having your business effectively shut down in this way.
Chapter 13
The Chapter 13 “adjustment of debts” bankruptcy option is generally better designed than Chapter 7 for ongoing sole proprietorship businesses. It provides much better mechanisms for retaining your personal and business assets. Even business (and personal) assets that are not “exempt” can usually be protected through a Chapter 13 plan.
You and your business get immediate relief from your creditors, usually along with a significant reduction in the amount of debt to be repaid. So Chapter 13 helps both your immediate cash flow and the long-term prospects for the business. It is also an excellent way to deal with tax debts, often a major issue for struggling businesses. Overall, it allows you to continue operating your business while taking care of a streamlined set of debts.
Next…
In the next few blogs we will focus on some of the most important benefits of filing a business Chapter 13 case.
Posted by Kevin on October 17, 2016 under Bankruptcy Blog |
Here’s an unusual way of paying your income tax debt. The circumstances don’t line up very often, but when they do this procedure can work very nicely.
Generally, when filing a Chapter 7 “straight bankruptcy” a key goal is to keep everything that you own. You don’t want to surrender anything to the Chapter 7 trustee.
But sometimes you own something or a number of things that aren’t exempt. If so, one of your options may be to file a Chapter 13 case to protect your non-exempt asset(s). Almost always that option requires 3-5 years of payments.
If you don’t mind letting go of the non-exempt asset(s), a much quicker option is an “asset Chapter 7 case.” The bankruptcy trustee sells the non-exempt assets and uses the sale proceeds to pay your creditors.
What are the type of non-exempt assets that would fit into this scenario? It’s not going to be your home. (That is why we have Chapter 13) But, say you recently closed down a business. You may still own some of the business assets, but you have no use for them. Or you may own a boat or an off-road vehicle that, for whatever reason, you no longer want to keep. And you owe taxes that are otherwise non-dischargeable. That means the taxing authority will wait until the bankruptcy case is closed, and then start harassing you again for payment.
Under the Bankruptcy Code, in a Chapter 7, debts are paid according to a specific priority schedule. Taxes have priority over credit card debt, medical debt, or the deficiency on a car loan after repossession.
But, what types of debts have priority over taxes? The most important are the trustee commission and his/her professional fees. This could amount to a few dollars. Other than that, the most typical debts that have priority over taxes are unpaid child and spousal support.
So if you do not owe back support, then the trustee will pay your taxes after paying the trustee’s commission and professional fees to the extent funds are available.
Again, it’s not common that the “stars will line up”. But when it does, it can be a big plus. Also, this is not basic stuff so you will need an experienced bankruptcy attorney to navigate you through.
Posted by Kevin on July 11, 2012 under Bankruptcy Blog |
In bankruptcy it’s okay to FEEL differently towards some creditors than others. You can also sometimes ACT differently, but only if you very carefully follow the rules.
OK. You are in financial difficulty. You may or may not even have thought seriously about bankruptcy, however. You have lots of creditors and a small amount of money. Some of those creditors are family members- and you have to take care of them. Others are people that you do with business. You would like to take care of them because you want to keep up that relationship. Are there any hidden land mines if you bankruptcy after paying back your cousin, Vinnie, of your main supplier?
The problem with favoring certain creditors is that doing so flies in the face of one of the basic principles of bankruptcy law—that creditors which are legally the same should be treated the same. Mostly that applies to how creditors are treated DURING the bankruptcy case itself. But in certain limited but crucial ways this principle spills over into the time BEFORE your case is filed. Payments you made to a creditor can be undone—the creditor can be forced to pay to the bankruptcy trustee whatever you paid to the creditor within a certain period of time before your bankruptcy filing.
The practical consequences of this can be devastating. You make a special effort to pay someone that you care about, likely when you don’t have much money, only to later risk having your bankruptcy trustee make that person pay that money “back,” not to you but rather to the trustee. Since this can happen long after you paid that creditor, the money you paid probably has long ago been spent, often leaving that creditor scrambling.
If you pay a creditor not long before filing the bankruptcy case, the theory is that you “preferred” that creditor over others. The inappropriate payments are called “preference payments,” or simply “preferences.” The idea is that had you not made those payments, there would have been money to distribute to the creditors overall.
So what are the rules about this so that one can avoid them? If you’d like very effective sleep-inducing bedtime reading, here is Section 547 of the Bankruptcy Code explaining preferences. Nearly 1,400 words, in 57 subsections and sub-subsections!
But the good news is that the basic rule is both reasonably straightforward and often easy to work around if you understand it. So here it is. A preference is a payment (usually money, but it can be any asset) made (voluntarily or involuntarily such as a garnishment) on a prior debt to a creditor (anybody to whom you legally owe money) during the period of 90 days before the filing of a bankruptcy. That period of time stretches out to a full year before filing for payments made to “insiders”—basically relatives, friends, and business associates.
So how do you work around this? Well, if you know about the rule in advance, you avoid paying creditors you care about during those 90-day and 1-year periods before filing, whichever is applicable. And if you’ve already made those payments, you avoid the problem by waiting to file long enough to get past those time periods.
There are other aspects that make this easier than it might sound. Payments to most secured debts (on your home, vehicle) don’t count. The trustee can’t chase payments to a single creditor totaling less than $600 in the case of a consumer debtor or less than $5,000 for a business debtor. And there are various other exceptions.
The bottom line is that overall it’s dangerous to pay creditors who you feel a special loyalty to before filing bankruptcy. The basic 90-day/1-year rule is rather simple, but it has lots of twists and turns so it’s safer to just avoid the issue whenever possible. Often it’s better to wait until after you file your bankruptcy case to pay these people. That’s the subject of the next blog.
Posted by Kevin on May 8, 0201 under Bankruptcy Blog |
Most of the time, you get to keep whatever you own when you file bankruptcy. These 10 truths tell you how it works.
Truth #1. Exemptions can be trickier than they seem to be: There is much more to protecting your assets than just matching assets to exemptions. Although some exemption categories are straightforward, important ones often are not. Some require knowing prior court decisions, and/or how the local trustees and judges are informally interpreting them.
Truth #2. Federal and state exemption schemes: Congress has left it up to each state whether to use a federal set of exemptions in the Bankruptcy Code for bankruptcies filed in that state, or instead a set of exemptions created by the state, OR even to allow each debtor to choose to use either the federal or state set of exemptions. In New Jersey, we generally employ the federal standards. Why? Because most of the NJ exemptions were instituted about 100 years ago and were never adjusted for inflation.
Truth #3. Which exemption scheme you must use can depend on how long you’ve lived in your present state: If you have not been “domiciled” in your current state for two full years before filing bankruptcy, you cannot use the set of exemptions available to residents of your state. You must use the state you were “domiciled” in during the 6-month period immediately before those two years. And if you were “domiciled” in more than one state during that 6-month period, you must use the exemptions available to the residents of the state where you were domiciled the longest during that 6-month period.
Truth #4. If you have assets that exceed the applicable exemptions, you stand a much better chance of protecting them with pre-bankruptcy planning: This is one of the most important reasons to meet with a competent attorney well before you are pushed into filing bankruptcy. What you do with your assets before filing bankruptcy can be scrutinized by the trustee and/or creditors afterwards, so you must get thorough legal advice beforehand. Doing so can make all the difference in protecting what is important to you.
Truth #5. Some trustees are more aggressive than others, and asset values are matters of opinion: Therefore, do not be surprised if a trustee challenges the value that you assign to an asset.
Truth #6. It is crucial to be thorough in listing assets AND exemptions: Failing to be thorough in listing your assets in your bankruptcy documents can jeopardize your entire case, and in extreme cases even lead to criminal charges against you by the U.S. attorney. Also, failing to list an asset which would have been exempt can result in losing the right to claim that exemption later, and then losing that asset.
Truth #7. Just because you have an asset that’s worth more than the exempt amount, doesn’t necessarily mean the trustee will take it: Trustees can decide not to pursue an asset that is either partly or completely not exempt because 1) the asset is not worth enough to justify the trustee’s efforts to collect or liquidate it; 2) the trustee is not willing to bear the costs to collect or liquidate it (such as the attorney fees needed to pursue a claim of the debtor); or 3) the asset’s detriments arguably outweigh its benefits (such as a parcel of land polluted by hazardous waste).
Truth #8. If you have an asset that you want to keep that is not exempt, you can usually “buy it back” from the trustee as long as you have the money to do so within a few months: It may seem like a bad deal to have to pay a Chapter 7 trustee to keep something you already own (such as a vehicle). But if the alternative is doing without a vehicle, or risking getting an unreliable one, or filing a 3-to-5 year Chapter 13 case to save your vehicle, buying it back from the trustee could be by far the best way to go.
Truth #9: You don’t ALWAYS want to avoid having the trustee claim an asset: Sometimes you may actually want the trustee to take a particular non-exempt asset or two. You may not need them—such as the leftover assets of a closed business—and may appreciate handing the liquation hassles over to the trustee. This could especially be true if the trustee will be paying a significant part of the proceeds of sale to a debt you want paid, such as taxes or back child support.
Truth #10. The difference in exemptions under Chapter 7 and 13: Although the set of exemptions used in filing under both chapters is the same, the exemptions are used for a different purpose. In Chapter 7, the exemptions determine whether you have any non-exempt assets for the trustee to take from you, and distribute their proceeds to your creditors. In Chapter 13, the exemptions are applied in the same way but for the purpose of imagining whether there are any non-exempt assets that a hypothetical Chapter 7 trustee would have taken, and if so paying the estimated amount to the creditors over the life of the Chapter 13 plan.
