I’ve been saying it for years:  It will cost you more money in the long run to not use an attorney for bankruptcy (or for using a bad attorney) than it will to hire a competent one at the outset.
Now there is impartial, empirical evidence to support this.

Bankruptcy Court Report

A new report issued by the United States Bankruptcy Court for the Central District of California found that debtors who represent themselves pro se (without an attorney) in a Chapter 7 bankruptcy case succeed in obtaining a discharge of their debts only 61% of the time, versus 95% for those represented by attorneys.  In Chapter 13 cases the success rate was less than one percent for those not represented by an attorney versus 55% with an attorney.  (Chapter 13 is used for, among other things, to stop foreclosures by catching up on past due mortgage payments over a period of time; removing junior liens against real estate, and/or doing a repayment plans–at zero to 100% depending on circumstances–of one’s debts).

It is important to also consider that simply not getting a discharge is not the only problem that can result from filing without being represented by an attorney.  In some cases, the denial of discharge may be permanent, preventing the filing of a future bankruptcy case to eliminate the debts; or, there may be other negative consequences in a subsequently filed case, such as not receiving the protection of the automatic stay during the case.

Also, while representation by an attorney does not guarantee success 100% of the time (in many of those cases that don’t succeed, particularly in Chapter 13, the reason is the failure of the client/debtor to make the required payments to the court trustee), it clearly gives one the best chances of success and, as can be seen above, the chance for success in a Chapter 13 case is practically zero without an attorney.

The report states that “common problems in self-represented debtors’ cases include: the failure to file required documents, resulting in dismissal; filing a chapter which may not be correct for the debtor’s circumstances; choosing incorrect property exemptions; unnecessarily filing bankruptcy in the first place; not filing the required credit counseling or financial management certificate; being unable to answer or adequately defend an action seeking to deny discharge; and not understanding the significance of certain motions or adversary actions. Self-represented creditors are often harmed by not filing a proof of claim in time, by missing the deadline to file a dischargeability action, and having difficulty filing an objection to a claim.”

The report also takes aim at “bankruptcy petition preparers”, who are people or agencies that simply fill out forms, but are not attorneys and strictly prohibited from giving any legal advice .   It points out that “[t]hough some BPPs in the district get good results for debtors, some practice outright fraud.”

There has never been more clear actual evidence of the need for competent legal counsel.   Less than 61% succeeded in their Chapter 7 filings and less than 1% in Chapter 13.  That’s incredible.   Do you want to risk your financial future to save a few dollars?

Image Credit: Casey Serin

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

Bankruptcy as an Option for Dealing With Debts

If you are crushed under an insurmountable amount of debt, it can get your heart-rate up. Resolving economical issues is best executed through an extensive approach. One viable option that you might consider employing is bankruptcy. Although you could also opt to consolidate debt, bankruptcy provides you with the opportunity for a fresh economical future, also known as a “fresh start”. Based on the kind of bankruptcy you file, your debts get reduced or eliminated, or you obtain extra time to pay them off.

Personal Bankruptcy–Not All Debts Are Dischargeable

However, when you declare personal bankruptcy, not all debts are dischargeable. Liabilities that you cannot reduce or liquidate via Chapter 13 or Chapter 7 bankruptcy include child maintenance, court fines, alimony, and debts incurred as a result of drunk driving.  Liabilities such as back taxes and student loans normally do not qualify for bankruptcy debt relief but these debts may be dischargeable under certain circumstances.

The following are a few important things that you need to know:

Certain back taxes

If certain requirements are met, some taxes are dischargeable in bankruptcy. For details on these requirements, click here.

General loans and credit cards

You can discharge general loans as well as credit card bills in your bankruptcy filing. However, if you have used any fraudulent means to obtain loans, the creditor may successfully object to the discharge of that debt.

Federal student loans

There is new movement afoot in Congress to make it easier to discharge student loans in bankruptcy, but as of this time it is very difficult. The only way currently is if the debtor can prove “undue hardship” as that term is defined by case law. There are other non-bankruptcy means of dealing with student loans under certain circumstances.  To see more about these visit http://www.bklaw.com/chapter7/student_loans.html

Secured loans

Loans that are obtained with collateral such as a home or an automobile are dischargeable, but the lien remains against the property on which it is secured. Under certain circumstances liens can be removed or reduced. Discuss with your attorney what options might be available in your situation.

You may also discharge past due cable and utility bills, tuition, rent, and medical debts in bankruptcy. However, if you fail to pay your rent after bankruptcy you may be lawfully evicted by your landlord. Moreover, you may be required to pay an extra deposit to your utility companies if you do not stay current with your obligations, even after bankruptcy.

Need More Information?

For more information on which debts are dischargeable in bankruptcy,  please visit http://www.bklaw.com/discharge.html

Author’s Bio: Martha Jackson loves to write financial articles and she is a contributory writer associated with the Debt Consolidation Care Community and has written several articles on debt consolidation, debt settlement and get out of debt for various financial websites. She holds her expertise in the Debt industry and has made significant contribution through her various articles.

Image Courtesy of  Caitlyn_and_Kara

This article is part of my bankruptcy alphabet series

People are Not Numbers

When numbers are used to identify people, it’s usually when they are in prison.   The Bankruptcy laws used to be about helping out people (and businesses) in need.   They were about equitable solutions to serious financial problems.   Laws in general are designed to help society as a whole, but one must never forget it is always about people.   When a potential bankruptcy client comes into my office with debt problems, it is very personal to them.   Most of my clients never imagined being in this situation, and they would hope that the laws (and their attorney) are there to treat them as individuals, and not numbers.

The New Bankruptcy Laws

Back in 2005 the Republican controlled Congress and President G.W. Bush passed sweeping changes to the Bankruptcy Code that had been in existence for several decades prior.   These “new bankruptcy laws” were designed to reduce bankruptcy eligibility to a numbers game instead of basing it on need and the overall good for society.

Prior to 2005 the overriding purpose of the bankruptcy laws was one of equity.   I discussed courts of equity in my bankruptcy alphabet post on Justice.   Bankruptcy judges at that time had far more ability to balance the needs of a bankrupt debtor to get a fresh start with the rights of the creditors to get paid.

With the new bankruptcy laws, Congress instituted a very complex “means test” to determine threshold eligibility to file under Chapter 7.  The means test, in its base form, takes any and all income received by the debtor in the six calendar months prior to filing the bankruptcy case and subtracts from that certain expenses allowed under IRS guidelines (one size fits all, apparently).

The Saving Grace is Attorneys

While bankruptcy attorneys are of course bound by the laws, experienced ones have figured out where the laws can be applied beneficially for their clients and how to maximize the effectiveness for their specific case.   Similarly, while Congress tried to reduce the flexibility bankruptcy judges have to make equitable rulings, there is still plenty of room for Judges within the laws to do Justice and reach a fair and just result in each case, hopefully never forgetting these are people, not numbers in front of them.

The best way to avoid being just a number in the bankruptcy process is to hire a bankruptcy attorney that understands where the laws have been, where they are, and where they may be going.

Others Writing on the Letter “N”:

• Naked–New York Bankruptcy Lawyer Jay S. Fleischman
• Never–Cleveland Bankruptcy Attorney, William Balena
• No Asset–Metro Richmond Consumer and Bankruptcy Attorney, Mitchell Goldstein
• No Asset Report–Honolulu Bankruptcy Lawyer, Stuart T. Ing
• Non-PMSI–Philadelphia Suburban Bankruptcy Attorney, Chris Carr
• Nondischargeable–Northern California Bankruptcy Attorney, Cathy Moran
• Nondischargeable–Metro Richmond Consumer and Bankruptcy Attorney, Mitchell Goldstein
• Nondischargeable Debt–Omaha Nebraska Bankruptcy Attorney, Ryan D. Caldwell
• Notice–Colorado Springs Bankruptcy Attorney, Bob Doig
• Non-exempt Property–Miami Bankruptcy Attorney, Dorota Trzeciecka
• Notice–Taylor, Michgan bankruptcy Attorney, Chris McAvoy
• Negative Notice–Jacksonville Bankruptcy Attorney, J. Dinkins G. Grange
• NACBA–Wisconsin Bankruptcy Lawyer, Bret Nason
• California Nothern Bankruptcy Court, Cate Eranthe
• Non-Attorney Bankruptcy, Peter Behrmann

Image Courtesy of lrargerich

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

You Cannot Pick and Choose Which Assets and Debts to List

One of the most common misconceptions people have about bankruptcy is that you can pick and choose which debts one “files bankruptcy on” (I hate that phrase) or which assets can be included.  Not a week goes by that I don’t get at least 2 or 3 people start out their consultation with me by saying “I only want to include these debts”  or, “I have property in another state (or country) that I don’t want to include”.

There are few questions in the law that have simple answers but, happily for this article,  this one is easy.

When you file a bankruptcy case, you must list (i.e. “include”) all assets wherever on the planet earth or the universe they may be located, and all debts no matter who they are owed to (yes, this includes your mother, your best friend, and any other person or entity to whom you owe a debt).

What About My Spouse?

If you live in a Community Property state, such as California, you must list all debts and assets of your spouse–even if they are not joining in the bankruptcy filing– if they were incurred or obtained during the marriage and are not separate property.   If you’re unsure about this, talk to a bankruptcy and/or family law attorney.

Does that mean I can’t repay my family or friends?

No.  To my knowledge, there has never been a law passed in the history of mankind that prevented someone from repaying a debt to another.   Bankruptcy simply takes away the legal obligation to do so.  If you want to file bankruptcy, discharge your debts, and then pay them all back anyway, you may do so.

For others writing on the letter “L” see:

• Lie, the Big Mortgage Industry St. Clair Shores MI bankruptcy attorney
• Lien New York Bankruptcy Lawyer, Jay S. Fleischman
• Lien Stripping Omaha and Lincoln, Nebraska Bankruptcy Attorney, Ryan D. Caldwell
• Lift the Stay Marin County Bankruptcy Attorney, Catherine Eranthe
• Luxuries Colorado Springs Bankruptcy Attorney Bob Doig
• Long Term Payments, Chapter 13 Plans Philadelphia Suburban Bankruptcy Lawyer, Chris Carr
• Liquidated Metro Richmond Consumer and Bankruptcy Attorney, Mitchell Goldstein
• Lien Stripping Honolulu Bankruptcy Attorney Stuart T. Ing
• List It Or Lose It Allen Park, Michigan Bankruptcy Lawyer, Christopher McAvoy
• Life Insurance Cleveland Bankruptcy Lawyer, Bill Balena
• Life After Bankruptcy San Francisco Bankruptcy Attorney, Jeena Cho
• Lawyer Wisconsin Bankruptcy Lawyer, Bret Nason
• Listing Assets-Livonia, Michigan attorney, Peter Behrmann

Image courtesy of Mr. Mystery

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

This article is part of my bankruptcy alphabet series.  Continuing with the Letter “I” in the Alphabet Series:

You’re sitting around watching the Lakers get beat again or just enjoying a good book when the mail comes, and inside it is a lawsuit from a bankruptcy trustee of your nephew, who recently filed a bankruptcy case, seeking to recover from you the $5,000 your nephew repaid you ten months ago.   You think you’re being treated unfairly, but after you speak to a few bankruptcy attorneys, you will realize that by being a relative of the debtor who filed bankruptcy, you have a problem!

Insiders are treated differently than others in a bankruptcy context, a lesson many learn the hard way.

There are many ways in which insiders are treated differently than others in bankruptcy.   This article will not attempt to list all of them, but will focus on repayments by the debtor (preferential transfers) .

What or Who is an Insider?

Insiders are those with a close enough relationship to the debtor (person who filed the bankruptcy case) so that the laws make certain actions different with respect to these individuals or entities than with others.

Per the statutory definition set forth in 11 U.S.C. 101(31), an insider INCLUDES the following:

(A) if the debtor is an individual–

• (i) a relative¹ of the debtor or of a general partner of the debtor;
• (ii) partnership in which the debtor is a general partner;
• (iii) general partner of the debtor; or
• (iv) corporation of which the debtor is a director, officer, or person in control.

(B) If the debtor is a corporation, insiders include–

• (i) directors of the debtor corporation;
• (ii) officers of the debtor corporation;
• (iii) persons in control of the debtor;
• (iv) partnerships in which the debtor is a general partner;
• (v) general partners of the debtor, or;
• (vi) relatives of a general partner, director, officer, or person in control of the debtor.

(C) Partnership debtors have similar definitions for its insiders.

It is important to note that the above list is not exclusive, meaning that a court can determine others to be insiders even though they do not meet the definitions of the above listed parties.

¹ Relatives include all the way down to great grandchildren of the debtor, or cousins and others within the third degree of affinity or consanguinity, including step or adoptive relationships

The Downside to Being Inside

One of the ways insiders are treated differently is with respect to transfers made by the debtor prior to filing a bankruptcy case.   In particular, with respect to a preferential transfer (essentially repaying a debt that entitles the creditor to receive more than they otherwise would have in a Chapter 7 case), the time period for the transfer is only 90 days for most parties.  Thus, if a debtor repays an “ordinary” creditor within 90 days prior to filing a bankruptcy case and meets the other requirements for a preferential transfer, the Trustee in a Chapter 7 case can sue that creditor to recover the amount transferred.   However, for an INSIDER, the period is ONE YEAR prior to filing the bankruptcy case!

Thus, if you are an individual and repay a relative money within one year prior to filing a bankruptcy case, the relative can be sued to recover that amount.  This can be a big surprise, but one that is quite common since for some reason, many people who file bankruptcy think they are being smart by repaying their family members first before filing bankruptcy.   Unless you want to wait more than one year after repaying them, you are putting them at risk.   There are other types of transfers which can be recovered if they occur several years prior to filing a bankruptcy case.

Another Insider Example

In a Chapter 11 context, Insiders are not allowed to vote for or against the proposed repayment plan, and have other restrictions on rights that other creditors do not have.

Others Playing the Bankruptcy Alphabet Game:

1. Lincoln, Nebraska Attorney–Involuntary Bankruptcies
2. New York Bankruptcy–Jay Fleischman–I is for Income
3. Marin County attorney–I is for Income
4. Northern California attorney–I is for IRS
5. Colorado Springs Bankruptcy attorney–I is for in forma pauperis
6. Hawaii bankruptcy attorney–I is for Independent Contractor
7. Michigan Bankruptcy Attorney-I is for Income tax refunds
8. Philadelphia Bankruptcy attorney-I is for IRA
9. Northern Ohio Bankruptcy Attorney–I is for Involuntary Chapter 7
10. Metro Richmond Consumer and Bankruptcy Attorney–Insiders
11. Wisconsin Bankruptcy Lawyer, Bret Nason–Insolvency
12. San Francisco Bankruptcy Attorney, Jeena Cho-Instant
13. Cleveland Bankruptcy Attorney, Bill Balena–Involuntary Petition
14. Omaha and Lincoln, Nebraska Bankruptcy Attorney, Ryan D. Caldwell–Involuntary Petition
15. Pittsburgh Bankruptcy Attorney, Shawn Wright–Insurance
16. Livonia Michigan Bankruptcy Attorney, Peter Behrmann–IRS Tax Debt
17. Coleman & Kempinski–Investigate your Options
18. Christine Wilton-Injunction and Chapter11-LA.com-Injunction

Image courtesy of RalphBijker

“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

It's not mine--it was a gift!

This article is part of my bankruptcy alphabet series

Gifts come in many shapes and sizes and, while usually a welcome thing, can have unintended consequences in a bankruptcy case.  There’s basically two types of gifts:  Those you give, and those you receive.

Gifts Must Be Listed As Assets On the Bankruptcy Schedules

When preparing the papers to be submitted in a bankruptcy case, any competent attorney will ask their client to list all of their assets, because that is required by the Bankruptcy Code.   I’ve had many clients over the years give me their list, but omit items that were given to them as a gift.   When I am fortunate enough to avert disaster and discover this before their case is filed,  the reason clients give for omitting it is that they think since they didn’t purchase it, it isn’t an asset.   Huh?   If your rich relatives give you their $10 million dollar house, putting title into your name,  just because you didn’t purchase it, it isn’t yours?  Wrong.   Gifts are just as much of an asset as anything else.   If you own it, it’s an asset.  And if you don’t have sufficient exemptions available under applicable law to protect it, you could lose it (depending on which bankruptcy chapter you file).    Regardless, you must list it or else you could face the loss of your discharge under Section 727 of the Bankruptcy Code, and/or possible criminal sanctions.

Gift Income Counts Towards the Means Test

Another frequent scenario is family assistance.  That is, when a friend or family member gives (rather than loans) money to the debtor to help with living expenses.   Thanks to the new (as of 2005) means test created by Congress,  all income received in the six (6) calendar months prior to filing a consumer bankruptcy case counts towards one’s eligibility to file.   Thus, even if the debtor who wishes to file bankruptcy has no wage or unemployment income at the time they file, they could conceivably be ineligible to file a Chapter 7 case now because of income received as a gift from friends and family within that 6 month period.   Of course, the easy solution to this is to have those gifts be loans, or to wait more than 6 months after receiving them to file a bankruptcy case.

Gifts You Make to Others:  Fraudulent Transfers or Charity?

The other side of this coin is gifts that the person filing bankruptcy (debtor) makes.   The bankruptcy papers require disclosure of any gifts made to any entity in the 12 months prior to filing the bankruptcy case if it exceeds $200 to a family member, or $100 to a charitable organization.   It also requires disclosure of ANY transfers of assets made in the 2 years prior to filing the case, for any purpose outside of the “ordinary financial affairs” of the debtor.  Presumably this would exclude normal and regular gifts (such as the holiday or birthday variety).

The reason for these disclosures is to enable a Trustee or creditors of the debtor to determine if assets were essentially “squandered” which could otherwise have been used to pay the creditors.    If large enough and outside the ordinary financial affairs of the debtor, a Trustee can sue the recipient of the gift to recover the value thereof, and if the transfers are particularly large and obvious, it could be grounds for denial of the debtor’s entire discharge under Section 727 of the Bankruptcy Code.   Charitable organizations are usually safe from such gifts,  as are holiday and birthday gift recipients, especially if they were regular donations.

But, if you’ve been Johnny (or Judy) Generous giving out large gifts,  you better wait at least a year before filing a bankruptcy case (particularly Chapter 7).   In fact, to prevent the Trustee from recovering on a fraudulent transfer theory,  it needs to be at least 2 years, and possibly more depending on the laws of your state.

As always, it is very important to discuss all specifics of your situation with a qualified bankruptcy attorney before filing a case!  (See more on why hiring a bankruptcy attorney is so important).

Others playing the Bankruptcy Alphabet Game:

• Jay Fleischman believes G is for Garnishment
• Cathy Moran believes G is for Guaranty
• Ryan Caldwell talks about G for General Unsecured Creditors
• Cate Eranthe examines how G is for Gumshoe
• Stuart Ing explains how G if for Garnishment
• Bill Balena opines that G is for Good Manners
• Christopher Carr thinks G is for Garnishment
• Jenna Cho believes G is for Good to Me
• Mitchell Goldstein posits G is for Good Faith
• Bret Nason-Garbage,
• Chris Carr- Garnishment,
• Daniel Winter-Garnishment,
• Ray Kempinski-Gee!!!,
• Bob Doig-Goals,
• Chris McAvoy-Good Faith,
• Monica Shepard-Guilt
• Kurt O’Keefe-Feeling Guilty
• Peter Behrmann-Personal Guaranty
• Birmingham Bankruptcy-Garnishment

Image Courtesy of Howard Dickins