I see and hear nothing

We’ve all seen the advertisements from debt consolidation and other companies (who, by the way, are owned by banks and credit card companies) instructing people with debt problems to contact them and avoid bankruptcy as an option.   They give their self-interested reasons for their position, most of which are untrue.

I decided to write this tongue-in-cheek post to give my reasons why someone with debt problems (also known as a “debtor“) should not look into bankruptcy as an option to resolve their debts.

Reason #1: You Prefer To Not Know All Your Options

This one is pretty basic.  Why get all the facts before deciding on something?    Just like going to a doctor for back pain.  One doctor tells you you need surgery.  Why would you want to learn about potentially superior and less invasive alternatives such as physical therapy, prolotherapy, etc?

The real answer is simple:  You cannot make an intelligent decision about anything without knowing the costs and benefits of all available alternatives.   If you close your eyes and ears to your options, you shut out possibilities.  When you are in dire financial straits, this is the time to fully examine your options, including bankruptcy, and determine what works best for you.

Reason #2:  You Prefer to Pay More Than You Can Afford

Did you know that in bankruptcy you often will pay far less (and often nothing) on your debts than you would if you try to do alternative resolution such as debt consolidation or negotiations?  Well, it’s true.  It depends of course on your budget and value of your assets and other considerations, but it is important to have a comprehensive consultation with a bankruptcy attorney to determine how it would affect and/or assist you.

Reason #3:  You Don’t Care About Tax Consequences

Did you know that if you do debt consolidation or negotiate with your creditors and they agree to accept less than 100% of what is owed, that the amount forgiven can become taxable income to you and that income can result in significant tax liability for you?   It’s true.   However, by federal law,  debts discharged (forgiven) in bankruptcy do not result in taxable income to the debtor.   Nifty, huh?

Reason #4:  You Have Rich Friends and/or Relatives

Hey, that’s great.  If they are willing to pay off your debts for you, you are a lucky soul.   However,  you still might want to explore bankruptcy as an option even if you decide not to use it.

Reason #5: You Enjoy Anxiety

What causes anxiety?  Generally it is fear of the unknown.   Nothing defeats anxiety like knowledge and taking charge of your actions.   Yes, Xanax and other drugs work nicely too, but they are short term solutions.   Learn about all your alternatives, including bankruptcy, and then decide what works best for you.

Bankruptcy: To Sum Up

There are lots of myths about bankruptcy but like most myths, if you take the time to learn the truth, you may find the myths to be false.   Most bankruptcy attorneys offer free initial consultations to go over your situation.  I encourage anyone with debt problems to take advantage of that to learn what may very well end up being your best option for a fresh start and debt relief.

Image courtesy of:  sonofgroucho

“A chair is still a chair
Even when there’s no one sitting there
But a chair is not a house
And a house is not a home
When there’s no one there to hold you tight,
And no one there you can kiss good night.”

-Burt Bacharach and Hal David

If there’s anything that is a centerpiece of an individuals’ bankruptcy case, it’s their house and whether they can keep and, if so, how?  I have many clients who call up and think that they automatically lose their home when they file a bankruptcy case.  I have others who believe that they get to keep their house under any circumstance.   The truth lies in between.

There are different options available regarding retaining property depending on which bankruptcy chapter is filed.

Keeping Your House in Chapter 7

In a Chapter 7 liquidation case, whether one gets to keep their house, or any other property for that matter, depends on how much equity is in it, and whether they have sufficient exemptions under applicable law to protect that equity value.    Exemptions are “protections” for value you have in certain assets such that they are “exempt” from collections.  Every state has different exemptions amounts available. Exemption laws are based on the state where you resided for the 2 years prior to filing your bankruptcy case or, if you lived in more than 1 state during that period, in the state where you resided for the greater part of the 180 days prior to that 2 year period.

How to Calculate Equity

How is equity calculated?  This is for some reason a big hurdle for many.  Calculating equity is simple.  You take the fair market value of the property (preferably from an appraisal, or at least a broker’s written opinion) and then subtract out the amounts owed to any mortgages or other liens¹ against the property, and that’s the equity.   In most courts, you can also subtract out another 8% of the fair market value for “costs of sale” of the property.

Assuming there is no equity, or you have sufficient exemptions to cover whatever equity exists, then the bankruptcy trustee will not sell (liquidate) the house.  However, there is still the obvious requirement that you must stay current with your contractually due mortgage payments in order to prevent foreclosure.

Keeping Your House in Chapter 13

Chapter 13 is very different.  You will not lose your house in a Chapter 13 regardless of how much equity there is in it.  However, any non-exempt equity will need to be paid to your creditors over the term of your repayment plan (36-60 months).  ²

Lien Stripping in Chapter 13 (and Chapter 11)

Another nifty feature of Chapter 13, not available (at least not yet) in a Chapter 7 bankruptcy case, is the ability to remove certain liens against real estate.   How and to what extent this can be done depends on a number of factors, including whether the house is the principal residence of the debtor.  If it is, then a junior mortgage can be “stripped” (i.e. removed) if the value of the property is less than the amount owed to any senior mortgages (e.g. the 1st mortgage). ³  For non-principal residences (such as a rental property),  even partially secured liens can be stripped down to the value of their lien.

Catch up on payments in Chapter 13 (and Chapter 11)

Another great feature of Chapter 13 is the ability to use your 36-60 month plan payments to catch up on past due amounts on your mortgage(s).  Frequently one files a Chapter 13 to gain the benefit of the automatic stay to stop a foreclosure, and then propose a repayment plan to catch up on the past due arrearages and reinstate the loan over a period of time.

But whether one gets to keep their house or not, they can always make another place their home because as the great songwriting team quoted at the top of this article point out, a house is not a home.

__________

¹ This excludes liens, such as judgment liens, when they are able to be removed in a bankruptcy case.  This will be discussed more in my Letter “L” blog.

² This isn’t precisely accurate.  Technically, in a Chapter 13 the debtor must pay more than the creditors would receive in a Chapter 7 case, so one gets to deduct anticipated Chapter 7 Trustee administration fees from the equation.

³ This may not be available in all bankruptcy courts, but is allowed in the Central District of California.

This article is part of my bankruptcy alphabet series

Others playing the Alphabet Game:

• Jay Fleischman believes that H is for Household
• Cathy Moran agrees that H is for House
• Cate Eranthe finds H to be about HOA  Dues
• Stuart Ing explains about Household Size
• Cleveland Attorney Bill Balena talks about Honesty
• Christopher McAvoy discusses Harassment
• Mitchell Goldstein examines Households
• Daniel Winter looks at Harrassment
• Kim Coleman-Hardship Discharge,
• Ryan Caldwell-Hearing,
• Jeena Cho-Home,
• Bob Doig-Homestead,
• Bret Nason-Honest But Unfortunate Debtor,
• Chris Carr-Honesty,
• Kurt O’Keefe-How much?
• Peter Behrmann-Household Median Income
• Christine Wilton–Hijacking

Image courtesy of james.thompson

These days the cost of everything is increasing.   Unfortunately, the cost for the privilege of filing a bankruptcy case is also increasing, according to the Judicial Conference for the United States Bankruptcy Court.

Filing fees for all fee-required documents to the bankruptcy court are increasing effective November 1, 2011.    In particular, the following are the new fees to be required for commencing cases under the “main” chapters:

Chapter 7-$306

Chapter 11-$1,046

Chapter 13-$281

The above are only a $7 increase from the existing fees, but an increase nonetheless.

Other fees, such as filing an adversary complaint, Motions regarding the Automatic Stay, and others, will also be increasing by differing amounts.

COURT FILING FEES ARE SEPARATE FROM ATTORNEY’S FEES

The above fees are paid to the court clerk.  They are always IN ADDITION to any attorney’s fees for representation in a case.

Image courtesy of Eric Steuer

Once you get to the promised land in a bankruptcy case–the date your discharge is granted–there is frequently confusion among many as to which of their debts were in fact discharged.   The confusion stems from expectations that there is some official specific ruling as to each debt.   That would be nice, but it’s not the way it works.

The Discharge Notice

When the discharge is entered in a bankruptcy case (for purposes of this article, I am referring to Chapter 7 or Chapter 13 cases; Chapter 11 is somewhat different) the only document that is sent out by the court is a 2-page document that generically states that “the debtor is granted a discharge”.  The second page lists, again generically, which types of debts are usually discharged, and which are not, but does not specify which debts in this case are discharged.

Figuring Out Which Debts Are Discharged

The reason it does not state which debts are discharged is that it is simply impossible.  The bankruptcy code provides numerous exceptions to which debts are discharged.   These exceptions are codified in section 523 of the Bankruptcy Code.¹   Some of these exceptions, such as debts incurred through fraud require the creditor to actively object  within a very specific time frame,  and prevail at trial, in order for the debts to not be discharged.  But many others are automatically not discharged if certain (and in many cases very complicated) conditions are met, and those conditions frequently have many exceptions of their own.  A good example of this is tax obligations.   For a quick look at how income tax dischargeability is determined, click here.

A lot of the criteria for determining whether a debt is discharged is subject to argument and can only be decided by a Judge if brought in front of the judge by one of the parties specifically.  Without that, the best the court can do is issue a general discharge that applies to all those debts which do not have a specific exception from discharge in the bankruptcy code.

Ask Your Attorney!

The bottom line is that most debts, such as credit card, medical, repossession and foreclosure deficiencies,  are in fact discharged.   But you need an attorney to really analyze your facts, preferably before you filed your case,  to let you know which debts might not have been discharged (yet another reason to have a bankruptcy attorney for your case–see more).  Ultimately, if there is a dispute, it will need to be decided by a Judge at trial.

¹ To further complicate matters, each bankruptcy chapter (7, 13, 11) incorporates various parts of section 523 differently, so a debt that is discharged in a Chapter 13 case, for example, may not be discharged in a Chapter 7 or 11, etc. )

Image courtesy of  kangotraveler

As many have already heard, on June 27, 2011 the Los Angeles Dodgers, LLC,  a Delaware Corporation, filed for protection under Chapter 11 of the United States Bankruptcy Code. The filing was done as what most are calling a last ditch effort for current owner Frank McCourt¹ to try and prevent the Commissioner of Major League Baseball from torpedoing McCourt’s ability to enter into certain deals to generate revenue to keep the finances of the team afloat.

Dodgers Stadium

The filing listed approximately $1 billion in assets and $500,000 million in debts, the largest unsecured debt being some $21 million owed on the contract to Manny Ramirez, who retired recently after being traded from the Dodgers.

Chapter 11 is a complex and involved reorganization proceeding in which creditors get to vote for or against a plan of repayment.   It is not necessary for all creditors to vote in favor of the plan of reorganization, but there are requirements for the minimum number that need to approve the plan.

Many corporations take advantage of very liberal laws in the State of Delaware even though their primary business is operated outside of that State.  Nonetheless, it is somewhat problematic that a bankruptcy judge in Delaware may decide the fate of the Los Angeles Dodgers.

Stay tuned!

¹ Ownership may rest in both Frank McCourt and spouse Jamie McCourt, but as of the writing of this post, the California Family Law Court has not made a determination on that issue.

When, or if, to file bankruptcy for a corporation is the subject of major confusion among many corporate owners and officers.  For purposes of this article, when I refer to a corporation, I also mean to include partnerships and  LLCs.

There are only two bankruptcy choices for a corporation:  Chapter 11 or Chapter 7.

Chapter 11 would be used if the goal is to continue operating the corporation’s business and reorganize the debts by proposing a repayment plan to creditors.  Creditors get to vote for or against the plan.  Sometimes less than 100% can be repaid, but there are a lot of complexities to Chapter 11, which is beyond the scope of this article.

Chapter 7 is a straight liquidation of assets of the corporation.   The corporation must (if it has not already) stop doing business when the Chapter 7 case is filed.   A Trustee is appointed to sell the corporate assets and disburse the proceeds in accordance with statute to creditors.   It is very important to understand that corporations do NOT receive a discharge of debts in a Chapter 7 case.

I frequently get inquiries from owners of corporations asking about filing a Chapter 7 case for their corporation so they can discharge the corporation’s debts and move on .    After I inform them that corporations don’t receive a discharge of debts, they ask me how they are going to deal with all that debt.   When I ask if they mean themselves personally or the corporation, their eyes frequently glaze over in a source of some confusion.

The confusion apparently stems from the fact that many small business owners do not understand that a corporation is a separate legal entity (which is, presumably, why it was formed to begin with).   Whether or not a corporation files bankruptcy has nothing to do with any personal obligation the owners or officers of the corporation may have.    For example, if the owner of a corporation signed personal guarantees on certain corporate debts, or has personal tax liability for corporate tax obligations (such as employee payroll trust fund taxes), that obligation does not disappear unless and until those debts are paid.  So unless there are enough assets available in the corporation to pay all those debts, the owner will still owe on those debts for which they are personally responsible regardless of what the corporation does.

So, in short, whether or not a corporation receives a discharge of debts is a big “who cares?” because it simply doesn’t affect anything.   If a corporation is going out of business, it simply doesn’t matter whether the debts are discharged or not because the corporation’s creditors will just sue the corporation and recover against whatever assets of the corporation are available and that does not affect the principals of the corporation.

90% of the time, what these owners of corporation are really looking to do is file a bankruptcy for themselves (the owners) personally–not the corporation.   In such cases, they should consult with a bankruptcy attorney about an individual bankruptcy case.   However, there are times where filing a Chapter 7 case for a corporation is beneficial.   In the case where the corporation has assets and wants to stop doing business, having an independent Trustee appointed to sell and disburse assets to creditors can eliminate that responsibility for the owner(s) of the corporation and release them from liability for not having properly disbursed corporate assets and winding up the corporation properly.   In fact, corporate officers have a fiduciary duty to corporate creditors when the corporation becomes insolvent, so taking a step such as filing Chapter 7 can fulfill that duty.

Another benefit of filing a Chapter 7 for a corporation is that it puts all the corporation’s creditors on notice that the business is terminating and whatever assets may be available will be distributed through the bankruptcy, and that will be all.   Thus, there would be no reason for the creditors to sue the corporation post-bankruptcy, whereas if a bankruptcy is not filed, the owner of the corporation may have to continually appear in court to inform the judgment creditors that the corporation is no longer operating and has no assets.

There are a lot more pros and cons to be discussed and any owner of a corporation in this situation should consult with a qualified bankruptcy attorney to have their situation fully evaluated.

For more information, please also visit http://www.bklaw.com/business_bankruptcy.html

It is very common for people to wait too long to file a bankruptcy case, even after consulting with a bankruptcy attorney.

It seems to be human nature to procrastinate, particularly when faced with doing something as unappealing as filing a bankruptcy case.  Lately, however, I have seen an increase in people waiting too long to file.

It is understandable: Filing bankruptcy is not free and it’s not a fun path to take. People often need to save up money to file, and there may be other reasons to wait to file.   People also like to be hopeful that things are going to change and they won’t need to file.  However, there can be consequences, sometimes dire, if you wait too long.  I’ve had several such cases in the past few weeks.

One client had a consultation with me over a year ago, at which time I advised he should file a bankruptcy case, but should probably wait a couple of months to let more time go by since the last time charges were made on his credit cards (which is sometimes advisable to avoid possible objections).    But eligibility to file bankruptcy, particularly chapter 7, depends on both your income for the 6 months prior to filing, as well as your current income when your case is filed.

So, this client who was more or less unemployed for over a year,  received a job offer that paid a decent amount.  He hadn’t started the job yet.  One of his creditors finally  filed a lawsuit and at that point he contacted me back about filing the Chapter 7 case.  However,  due to the new job, he no longer qualified for Chapter 7, and was looking at doing a substantial repayment plan in a Chapter 13 bankruptcy case instead.     Now this, of course, is not a disaster, but it ended up costing him more in attorneys fees, plus about $30,000 in payments towards his credit cards,(which he could now afford, but if he had filed when I advised, he’d be able to save that money instead!

There are a lot more examples I could provide, but it is important to understand the consequences of waiting and be realistic in your assessment of those risks and to discuss them with your attorney.   This, of course, assumes one has already had a consultation with an attorney.   I could write a whole separate article for people who wait too long to even seek an initial consultation about their financial situation!

What happens if a debtor forgets to list one or more creditors on their bankruptcy papers?   The answer varies depending on where your case is filed and what chapter of bankruptcy was filed, as well as some other factors.

In the 9th Circuit (which includes California, Oregon, Arizona, Washington and Nevada, Idaho, Alaska, Hawaii and Guam) if your case was a Chapter 7 bankruptcy in which no assets were liquidated and sold by the Trustee, and you receive your discharge, there is no consequence for unintentionally failing to list a creditor.   Thus, if you get your discharge, you are discharged from ALL dischargeable debts regardless of whether they were listed or received notice of the bankruptcy.   The two main cases on this are In re Neilsen, 383 F.2d 922 (9th Cir. 2004) and In re Beezley, 994 F.2d 1433 (9th Cir. 1993).   (If the creditor in question has grounds to object to the discharge of the debt– for example, if the debt was incurred through fraud– they can still move to reopen the Chapter 7 case and litigate their nondischargeability claim if they received no notice of the original bankruptcy).

In a Chapter 11, Chapter 13 case or in a Chapter 7 case where assets are being distributed by the Trustee, the failure to list a creditor is more serious and can result in that debt not being discharged.

If your case is filed outside the 9th Circuit, you should consult with a bankruptcy attorney in your area regarding the law in your jurisdiction.

stack of bills

A question I have been repeatedly asked over the years from my potential bankruptcy clients is: How much debt do they need before they can declare bankruptcy? I have found that this question has different intent and meaning to different people. For example, some people think that there actually is a minimum amount of debt required before one is eligible to file a bankruptcy case. That question is very easy to answer: Some amount more than zero.

I think the real question most intend to ask is whether filing bankruptcy is prudent given the amount, and type, of debts they have. This can only be answered after a comprehensive analysis of a client’s complete financial situation.

For example, certain bankruptcies–such as a Chapter 13– can be filed when the only debt one has is secured debt, such as a mortgage, in order to allow time to catch up on payments.

For a Chapter 7 liquidation case, I have filed cases for debtors who have had as little as $5,000 of total unsecured debt to those with over $5,000,000. In the case of the young man who had $5,000 of debt, which is admittedly an unusual amount on which to file a bankruptcy case, the situation was such that it was in his best overall interest–after analyzing his entire situation–to file a bankruptcy case. He was relatively uneducated, had a part-time minimum wage job, and no credit to speak of (the debt was a judgment from a traffic accident). Filing bankruptcy enabled him to get rid of the debt, which he was going to have a very difficult time paying off, and it also enable him to clear off his credit record, obtain a fresh start, and commence rebuilding (or actually in his case, BUILDING) his credit. Several years later, he has several credit cards (on which he is current with payments), a wife, a house, a dog and enough income to survive.

I use that story–unusual though it may be–to point out that sometimes bankruptcy really is the best solution, regardless of how much debt there is. Now obviously if the man in that story had income of $75,000 a year, it would have been a ludicrous decision to file bankruptcy, but it is important to seek the advice of a qualified bankruptcy attorney and see if it is in your best interest to take advantage of the bankruptcy laws which are here to provide assistance in such situations.

Another frequent question I get from potential clients is whether debts that they are making payments on as part of a “debt consolidation” program are dischargeable in a bankruptcy case. In fact, I’ve had numerous people think that those aren’t even debts anymore, once they are in a repayment program, or that magically the 15 debts they consolidated are now just one debt. Let me provide some simple, concise answers or explanations to these questions/comments.

1. Yes, debts that have been consolidated or are in a repayment program are dischargeable in bankruptcy, assuming that there are no independent grounds for objecting to the discharge. (see more on dischargeable debts)

2. When you enter into a debt consolidation program, you still owe the debts until they are paid in full (which presumably includes the fees to the consolidation agency). Thus, if you file a bankruptcy case, you must list any and all such debts. (See our recent related blog on picking and choosing which debts to include in bankruptcy.

3. Just because you have consolidated your multiple debts down into one payment does NOT mean that you don’t owe each of the individual creditors, unless they were paid off by a single consolidation loan that was taken out. What this usually means is that you are paying a company to make the payments to each of the creditors, while you make one single payment to the consolidation company, but you still owe each of the creditors until they are paid off.