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

This article is part of my bankruptcy alphabet series

Here’s something many don’t realize.  You can earn above the median income for your location and household size and still qualify for Chapter 7  bankruptcy.    What’s that, you say?  You’ve read online (or your “Friend” told you) that if you’re below the median income, you can file for bankruptcy without doing a repayment plan (such as in a Chapter 13 case) and if you’re above it, you cannot.

A Little Knowledge Can Be Dangerous

The eligibility requirements for filing bankruptcy, particularly Chapter 7 are extremely complex thanks to the changes in the laws that went into effect in 2005.     The median income is a part of the “Means Test” analysis which is ONE of the tests used to determine eligibility.   It is possible to be below the median income and still not be eligible for Chapter 7, and it is possible to be above the median income and qualify.

Below Median Income Doesn’t Mean Automatic Qualification

The median income is merely the starting point.  If you are below the median income, for the income you received from ALL sources EXCEPT social security in the six calendar months prior to commencing the bankruptcy case, then you “pass” the means test (or, more accurately, the means test will not apply in that case).

However, you can be below the median and your budget of “actual” current income and expenses showing surplus income that could render you unable to remain in a Chapter 7 case.

The Means Test and Why Above-Median Doesn’t Mean Automatic Disqualification

If you are above the median income, then the means test must be performed.  The means test is a mind-numbingly complex, and somewhat random, set of calculations that includes certain allowed IRS expense deductions from your income, and other actual expense deductions, such as mortgage payments, etc.   After going through the test, if you are showing the ability to make a certain amount of payments to your creditors,  a “presumption of abuse” will arise in the Chapter 7 case and you may need to either switch to a Chapter 13 repayment plan, or have your case dismissed.

Similar to the under-median case above, if you pass the means test as an above-median income debtor, you can still be ineligible for Chapter 7 based on your actual current income and expenses if they are showing a surplus available to pay your creditors, based on allowed expense criteria.

See an Attorney

In short, it is virtually impossible to correctly anticipate what will happen in your case without having a qualified bankruptcy attorney represent you, not to mention correctly completing the required means test and other forms.

For others writing on the letter “M” see:

• Matrimonial Law in Bankruptcy    Philadelphia Suburban Bankruptcy Lawyer, Chris Carr
  Means Test    Omaha and Lincoln, Nebraska Bankruptcy Attorney, Ryan D. Caldwell
  Means Test    New York Bankruptcy Lawyer, Jay S. Fleischman
  Meeting of Creditors    Colorado Springs bankruptcy Attorney Bob Doig
  Modify    Northern California Bankruptcy Lawyer, Cathy Moran
  Monthly Income    Metro Richmond Consumer and Bankruptcy Attorney, Mitchell Goldstein
  Mortgage Arrears    Hawaii Bankruptcy Lawyer, Stuart T. Ing
  Mistakes    Cleveland Bankruptcy Attorney, William (Bill) Balena
  Marriage    San Francisco Bankruptcy Lawyer, Jeff Curl
  Members of Household Wisconsin Bankruptcy Lawyer, Bret Nason
  Mortgages and Bankruptcy Taylor, Michigan Bankruptcy Attorney Chris McAvoy
• Means Test-Marin County Bankruptcy Attorney Cate Eranthe
• Median Income–Livonia Michigan Attorney, Peter Behrmann

Image Courtesy of Double–M

This article is part of my bankruptcy alphabet series.

One of the most common situations we bankruptcy attorneys see in our practice is clients that have borrowed money from their 401k or other retirement plans to try and keep up with their debts.  Usually this is as a last resort before considering bankruptcy, but the last resort really should be whatever step they took before borrowing from their retirement.

Old fashioned 401k plan

Borrowing against one’s retirement is bad for a number of reasons.

Depleting your retirement will not help your future

You spent a lot of hours earning the money that is in your retirement and took the advantage of a retirement account to do so.  These accounts have many benefits, including that they are not taxed until you withdraw the money.  You also, in many cases, get a tax deduction for contributing to them as it reduces your gross income.  To take out a 401k or retirement loan, you must pay a fee to do so, making it even less attractive from a financial standpoint.

Failure to repay a 401k or other retirement loan will result in tax consequences.

If a retirement loan is not repaid, not only do you lose the fees you have to pay to take out the loan in the first place, but the loan then becomes taxable income to you.   Depending on your other income and financial situation, this can result in a significant tax debt.

Payments on retirement loans do not count towards bankruptcy eligibility

People think that a 401k loan is the same as a loan against their car, or house.  It is not.  You are simply repaying yourself.   As such, most (if not all) bankruptcy courts will not include the amount being repaid when analyzing your budget to see if you have income available to pay your creditors.   Thus, if you have net income of $3,000 per month, and necessary living expenses (such as rent, mortgage, car payment, food, clothing) of $3,000 per month, but $700 of that $3,000 is your retirement loan deduction from your paycheck, you will likely not be eligible for a Chapter 7 case, and would have to do a repayment plan in a Chapter 13 (or Chapter 11) instead.

This is one of the biggest obstacles clients of mine face.  They finally run out of options, and money, and decide they need a fresh start and want to file a bankruptcy but because of the 401k loan (which they think they MUST pay), they don’t have any surplus income, yet also may not qualify for a Chapter 7  (which requires no repayment to creditors).

Know the Risks Before Borrowing

I’m not saying that it never makes sense to borrow against your retirement.  Sometimes using it to save your home can be as important as the future benefit from the retirement funds themselves.   But be sure to understand the problems you are getting yourself into by doing so, and use that when weighing your decision.

For others writing on the letter “K” see:

1. 401k    Marin County Bankruptcy Attorney, Catherine Eranthe
2. Keep    Northern California Bankruptcy Lawyer, Cathy Moran
3. Keep your retirement accounts    Taylor, Michigan Bankruptcy Attorney, Christopher McAvoy
4. Keeping Secured Loans    Hawaii Bankruptcy Lawyer, Stuart T. Ing
5. Keeping your business     Dorota Trzeciecka Bankruptcy Blog
6. Keys    New York Bankruptcy Lawyer, Jay S. Fleischman
7. Kids    Colorado Springs Bankruptcy Attorney Bob Doig
8. Knowledge    Omaha and Lincoln, Nebraska Bankruptcy Attorney, Ryan D. Caldwell
9. Knowledge    Metro Richmond Consumer and Bankruptcy Attorney, Mitchell Goldstein
10. Know    Cleveland Area Bankruptcy Lawyer, Bill Balena
11. Keep    San Francisco Bankruptcy Attorney, Jeena Cho
    
12. Keeping Creditors at Bay  Wisconsin Bankruptcy Lawyer, Bret Nason
13. Knowing What Bankruptcy Attorney to Hire: Livonia Michigan Lawyer, Peter Behrmann

Image Courtesy of Kenteegardin

and www.SeniorLiving.Org

“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

Credit card and student loan payments do not factor in to the analysis for determining Chapter 7 eligibility.  It seems not a day goes by that I’m not trying to explain to a potential client why their payments to debts owed to unsecured creditors do not count in their budget in determining eligibility to file under Chapter 7 of the Bankruptcy Code.    They certainly aren’t an allowed expense on the dreaded “means test“, which uses specific expenses allowed by the IRS.   But it also doesn’t “count” as part of an ordinary current income/expense analysis, which is also used for determining eligibility.  If such an analysis shows a surplus of income, then one may not be eligible for Chapter 7 and may need to do a Chapter 13 or Chapter 11 (if too much debt for Chapter 13) repayment plan instead.

A typical scenario is where the client has income of, let’s say $5,000 per month; $3,800 after taxes.   Their monthly expenses–as they see them–are $5,000 per month, so there’s no way they cannot qualify for a Chapter 7 case in their minds because they have a monthly deficit of $1,200.    But of that $5,000 per month in expenses,  $1,500 are minimum payments on credit cards,  and $600 for student loan payments, neither of which qualify as “necessary living expenses” in a bankruptcy case.   So when those are subtracted out, the client has almost $900 per month they can afford to pay to their creditors, according to their budget.    This is probably way too much of a surplus to do a Chapter 7 case.  The court, instead, would want them to repay that amount to their creditors over 36-60 months in a Chapter 13 case.

Doing so may repay anywhere from approximately 10%-100% of their unsecured debts depending on what they owe (with any unpaid portion being discharged in the Chapter 13 or 11 case), but the point is their creditors will be receiving something and that is the criteria.

Except for certain taxes, domestic support obligations and other debts designated as “priority” debts under the bankruptcy code (11 U.S.C. 507), you can’t use credit card payments, student loan payments, or payments on any unsecured debts you owe as an expense in your budget to determine what you can afford to pay to your credit card, student loan, or other unsecured lenders!  That would be nonsensical.   One stated purpose of the bankruptcy law is to have those that can afford to make payments on their debts do so, and those who can’t don’t.   If your budget shows you have the ability to make some meaningful payments on your debts as shown above, you will likely not be eligible for Chapter 7 but will need to take advantage of a different bankruptcy chapter.

A question I frequently get asked is whether filing a bankruptcy case will eliminate the liability of any co-debtors or co-signers on loans or other debts owed by the party filing bankruptcy.   The answer is no unless, of course, the debtor filing bankruptcy is doing a 100% repayment plan in a Chapter 13 or Chapter 11 case.

The key for this lies in a common misconception people have about what bankruptcy does.    Bankruptcy discharges the  party filing bankruptcy from the legal obligation of paying on a given debt;  it does not eliminate the debt itself.  The debt still exists  and the party who is owed the debt cannot pursue recovery of that debt from a party discharged in bankruptcy.

The entire reason for having a co-signer on a loan or credit card application, for example,  is so that if the primary obligor defaults on the debt (such as by filing bankruptcy), they can recover against the co-signer.

If filing bankruptcy could discharge the debts of people other than the party filing the bankruptcy, we could all benefit by having one person in the United States file a bankruptcy case, and we’d all be discharged from our debts.   That obviously doesn’t make any sense (fun though it may be to imagine).

Oh No!

For bankruptcy cases filed after October 2005  individuals must,  after filing their case,  take a  Financial Management Course and file Official Form 23 along with the certificate of completion to receive a discharge in any bankruptcy case.  The financial management (sometimes also referred to as the debt management) course is different from the pre-filing credit counseling course which must be filed along with the initial bankruptcy petition.  These courses must be taken from an institution approved by the Office of the United States Trustee.

Many debtors who file bankruptcy cases without the assistance of a qualified bankruptcy attorney eventually receive a shocking notice in the mail which states:  “Case closed without discharge.  Debtor has not filed a Financial Management Course Certificate proving compliance with the required instructional course requirement for discharge.”  However, they’ve done everything else required of them except for taking the required financial management course and filing the required Form 23.   All that time and work, and no discharge?

YOU CAN FIX THIS:  IT’S NOT TOO LATE

Fortunately, there is usually a solution if this happens in your case.  Pursuant to 11 U.S.C. 350,  and Federal Rule of Bankruptcy Procedure  5010 you can file a motion to reopen your case and, if granted, take and file the required financial management course certificate. The best way to accomplish this is to hire a bankruptcy attorney for this purpose to make sure the facts of your case are presented properly and maximize your chances to have the Motion granted and to get your discharge entered.

There is a court mandated filing fee for the Motion to Reopen for the purpose of filing official form 23 (presently $260) and attorney’s fees vary, but this is not the time to skimp and save.  You have now discovered one of the reasons why you should have hired a bankruptcy attorney in the first place; now is the time to do so and obtain your discharge.

**If your case was filed in the Southern California Area and you need assistance, please click here and explain your situation.

Photo Credit:  Flickr

One of the advantages of filing for bankruptcy is that it triggers something called an “automatic stay.” The stay takes effect immediately, and prohibits creditors from engaging in most debt-collection activities, such as demanding loan payments by phone or mail. The purpose of the stay is to ensure that the bankruptcy process can distribute a debtor’s assets to creditors in an orderly fashion, and to ensure that one creditor cannot take advantage of another by racing to capture scarce assets.

The basic concept of the automatic stay is well-settled in bankruptcy law. But the precise scope of the stay is a matter of some dispute, and bankruptcy courts have issued numerous opinions attempting to clarify the types of creditor activities that the stay does and does not allow.

The Bankruptcy Appellate Panel for the Ninth Circuit (BAP) recently added to this body of case law in In re Zotow,  2010 Bankr. Lexis 2178 (9th Cir. BAP 2010).  The case involved a married couple whose assets included a home mortgage that required monthly payments of principal, interest, and approximately $185 in escrow items such as taxes and homeowners’ insurance. The couple fell behind on their payments and eventually filed for bankruptcy under Chapter 13. After receiving notice of the bankruptcy, the mortgage lender calculated a new escrow payment of approximately $300 per month. The lender then notified the couple in writing to explain the higher amount and its effect on the total monthly mortgage payment. The Chapter 13 trustee later made post-petition installment payments to the lender based on the new escrow amount.

The couple argued that the lender violated the automatic stay in two ways: (1) by increasing the required amount of the post-petition escrow deposits as a ruse to collect pre-bankruptcy escrow arrears, and then sending notice of this increase; and (2) by receiving the increased post-petition mortgage payments from the Chapter 13 trustee.

Before addressing these arguments, the court explained that a creditor communication generally violates an automatic stay where direct or circumstantial evidence shows that the communication was geared toward collection of a pre-bankruptcy debt, was accompanied by coercion or harassment, or otherwise put pressure on the debtor to pay. On the other hand, “mere requests for payment,” or statements providing information about a debt where the debtor has an interest in receiving the information to formulate a confirmable Chapter 13 plan, are generally permissible.

Applying these guidelines, the court rejected both of the couple’s arguments and held that the lender did not violate the automatic stay. The lender’s notice was permissible because it was not an invoice, merely set forth the facts of the debt, and was not accompanied by a payment coupon or envelope. The couple, moreover, had an interest in receiving the information in the notice to formulate an appropriate Chapter 13 plan, and neglected to challenge the higher escrow amount soon after receiving the notice.

The lender’s act of receiving the higher escrow payments was also acceptable under the stay because it did not involve any act to collect a pre-bankruptcy debt. Indeed, the lender did not act at all; the Chapter 13 trustee simply made the payments as required under a local rule for post-petition contract installment payments.

In re Zotow involves a fairly technical issue, but is an important case nevertheless. If you are contemplating bankruptcy, you should know your rights, and what creditors can and cannot do during the bankruptcy process. An experienced bankruptcy attorney can help you understand the types of relief you can expect from an automatic stay and take action to enforce the stay where necessary.

This is a guest post written by Brandon Moreno, Vice President of the Utah Bankruptcy Hotline. The Utah Bankruptcy Hotline maintains a network of unaffiliated Utah bankruptcy attorneys who provide debt relief and consumer bankruptcy counsel.