FREQUENTLY ASKED QUESTIONS
Should I file bankruptcy?
Will I lose everything if I file bankruptcy?
What is the bankruptcy process?
Which chapter of bankruptcy should I file?
How do I get started?
How do I get my credit reports?
I owe my parents money, do I have to include them in my bankruptcy?
What is this going to cost me?
What pre-bankrupcy mistakes should I avoid making?
Should I file bankruptcy?
Filing for bankruptcy is an extremely personal decision that only you can make. Many different factors cause people to look to bankruptcy for relief. These include:
Ask yourself these questions:
If you answered yes to any of the above questions, chances are you are already aware that you need immediate financial help but are not sure if bankruptcy is the right avenue. In deciding what to do it can help tremendously to learn as much about the process as possible by having a consultation with an experienced bankruptcy attorney. You can certainly explore some of the alternatives to bankruptcy, including negotiating with your creditors and adjusting your budget to the extent possible. If, however, you have reached the point where you feel you have tried everything and no relief is in sight, then it may be time to make that call and learn about the bankruptcy process and what it will mean for you. Bankruptcy is not the right choice for everyone, but in the right situation can be just what you need to begin your life anew and get a fresh start.
Will I lose everything if I file bankruptcy?
Fortunately, the great majority of clients who file bankruptcy with Shaye Larkin are able to protect all of their real and personal property assets in bankruptcy. Property is protected in bankruptcy using "statutory exemptions", which set for the type of property to be protected and the protection limits. Many states have their own exemption systems, and there is also a federal exemption system. Some states allow you to use either the federal system or that state's own exemption system. Other states, like California, have “opted out” of the federal exemption system, but here we have two sets of state exemptions to choose from, found in sections 703 and 704 of the California Code of Civil Procedure. You can only use one or the other, and the set of exemptions you use depends on the type of property to be protected. The 703 series has a generous “wildcard” exemption currently worth $30,825.00 (including the maximum allowed unused homestead exemption) that can be used to protect any kind of property. The 704 series, however, has generous homestead exemptions, but has no wildcard exemption. The person filing bankruptcy will choose the set of exemptions that will provide the greatest amount of protection for their assets.
If the bankruptcy filer is married but is filing bankruptcy without their spouse, they can not use the 703 series of exemptions without the non-filing spouse signing a “Spousal Waiver” which basically waives their right to use the same exemptions during the time the bankruptcy is pending.
Note: The bankruptcy filer must have lived in the state where they are filing bankruptcy for the two years before filing in order to be able to use that state's exemption system. If the bankruptcy filer has not lived there for two years, they must instead use the exemption system provided for by the state where they lived for the majority of the 6 month period directly proceeding the beginning of the two year period. Some states have residency requirements to use their exemption scheme, so in that case the bankruptcy filer would simply use the federal exemptions.
Sometimes a person filing bankruptcy will have assets that exceed in value the amounts of the allowed exemptions. Non-exempt property may be liquidated in Chapter 7, but can be protected in Chapter 13 so long as the Chapter 13 plan provides for payment to the creditors (in order of priority) the amount they would have received in a Chapter 7 case, had the property been liquidated.
What is the Bankruptcy Process?
Bankruptcy is a good option when a person is at the point where they are significantly in debt and are using their credit cards to pay for basic living necessities, like food and rent. A bankruptcy, like a tax return, is made up of many different documents which include the Petition, Schedules, Statement of Financial Affairs, Statement of Intentions, and Means Test. A typical completed bankruptcy is about 70 pages long. To properly prepare a bankruptcy, the person filing bankruptcy needs to give their attorney a lot of information, including:
1. A new credit report – try to get one from each of the 3 credit reporting agencies, they are free at www.annualcreditreport.com
2. The names, addresses and account numbers of all debts using the mailing address used by the creditor in their two most recent pieces of correspondence, plus any collection agencies
3. A list of personal property items and their current replacement values for their current age and condition
4. Real property information, including deeds of trust, mortgage agreements, and property tax information, as well as a recent broker's analysis of the market value for the property or recent appraisal
5. Copies of tax returns for the previous 3 tax years
6. Paystubs and other income information, such as pension and social security payments, and profit and loss statements for self-employed persons.
7. Lease and other contract information, such as car loans, rental agreements for commercial premises or residential rental agreements between the Debtor and their tenants
8. Other necessary information.
Once the bankruptcy is prepared, it's reviewed, signed and then filed and the person who has filed bankruptcy will be referred to by the court as “Debtor”. The Debtor is assigned a case number, a case trustee, and a hearing date for the Meeting of Creditors. An automatic stay goes into effect which prohibits creditors from contacting the Debtor, and any pending foreclosures, wage garnishments and lawsuits must be placed on hold. There are some exceptions to the automatic stay for persons who have previously filed 1 or more bankruptcies in the year before the present case. Another important factor of filing bankruptcy is that once the case is filed all of Debtor's property becomes part of the “bankruptcy estate” which is administered by the bankruptcy trustee. This means the Debtor cannot transfer or sell property without the trustee's permission until the estate closes. In a Chapter 7, the Debtor can normally do what they wish with their property so long as 30 days have passed since the conclusion of the Meeting of Creditors, but in some cases it is necessary to file a motion asking the trustee and the creditors to abandon certain assets.
About a month to 6 weeks after the case is filed, the Debtor will have a hearing with a bankruptcy trustee who's job it is to administer their bankrupcy case.
In a Chapter 7, the trustee spends usually less than 5 minutes asking the Debtor a few basic questions about the information in their bankruptcy paperwork under oath and before a live tape recorder. Some typical questions include: did you list all of your assets and all of your debts? Are you expecting anyone to die and leave you money or property in the next six months? Do you have a reason to sue anyone? The goal of the trustee is to determine whether the Debtor really cannot afford to pay their debts back and whether there are any unprotected assets that can be liquidated to pay creditors. Creditors can also show up at the hearing and question the Debtor for a limit of 5 minutes, but they rarely do.
If the Chapter 7 Trustee is satisfied that there are no assets to be administered and there is no income available for creditors, they will close their investigation and in approximately 2 to 3 months after the hearing the Debtor will receive their discharge.
In a Chapter 13, the trustee at the hearing will want to make sure the Debtor can afford the Chapter 13 Plan filed with the court and that the plan represents the Debtor's best efforts to repay their debt. If the Chapter 13 Trustee is satisfied that the plan represents the Debtor's best efforts to pay the creditors, and the plan is feasible, meaning it is something they can afford to do, they will confirm the plan. The Debtor then continues to send the trustee a money order every month until the end of the plan, with the first payment due within 30 days of the case being filed. Once the plan is completed, the Debtor will receive their discharge.
Which Chapter of Bankruptcy Should I File?
The first question to ask when deciding which chapter under the bankruptcy code the person considering bankruptcy should file is: do they have a choice? If a Chapter 7 is over and done with in usually less than 4 months and doesn't involve paying creditors, why wouldn't everyone simply choose to file Chapter 7 over Chapter 13? The reason is because there are limits as to who can file and what can be accomplished in a Chapter 7. Deciding which chapter to file requires a thorough examination of the Debtor's complete financial situation to determine whether they are excluded from filing a Chapter 7 for any of the various reasons listed below. If they are not, they may still choose to file a Chapter 13 because there are some things that can be accomplished in a Chapter 13 that cannot be accomplished in a Chapter 7 that may be extremely valuable to the bankruptcy filer depending on their particular circumstances.
WHY NOT CHAPTER 7?
1. THERE ARE LIMITS ON WHO CAN FILE CHAPTER 7
- Has the potential bankruptcy filer filed a previous Chapter7 bankruptcy within the previous 8 years? If so, they cannot file again now.
- Consumer Debtors - is there room in the budget to pay creditors, or does the Debtor not pass the Chapter 7 "means test"? If so, they cannot file a Chapter 7 because it would be an abuse under Section 707(b) of the bankruptcy code. Note however that in some situations the "presumption of abuse" may be successfully rebutted with evidence.
2. THERE ARE LIMITS ON WHAT PROPERTY CAN BE PROTECTED
- Non-exempt property is liquidated in Chapter 7 but can be protected in Chapter 13 so long as the unsecured creditors receive the equivalent in value of the unprotected portion of property over the life of the Chapter 13 Plan.
- If a Debtor is behind on morgage payments, they might lose their home in a Chapter 7 after the lender gets relief from the automatic stay from the Court, but in a Chapter 13 the Debtor is given a lengthy period of time to catch up on the behind payments.
- Preferential payments to family and friends may be seized by a Chapter 7 trustee, but a Chapter 13 plan can provide for the equivalent amount to be paid through the plan so the friends and family are protected.
- A sole proprietor with employees should not file a Chapter 7 because the trustee will likely order them to shut down business during the pendency of the case. In a Chapter 13, Debtors with businesses who have employees are entitled to continue doing business as usual and are given independence in running their businesses so long as they stay current on their payroll taxes and other required obligations.
3. THERE ARE LIMITS ON WHAT DEBTS ARE DISCHARGABLE
Some debts are not dischargable in a Chapter 7 but can be discharged in a Chapter 13 under Section 1328(a) of the Bankruptcy Code. For example, if a Debtor has used a credit card to pay taxes, that debt will not be dischargable in a Chapter 7 but can be discharged in a Chapter 13. Also, debts ordered to be paid pursuant to a divorce settlement cannot be discharged in Chapter 7, but can be discharged in Chapter 13.
4. THERE ARE LIMITS ON WHAT YOU CAN ACCOMPLISH
While personal liability for secured debts like a home or car can be discharged in Chapter 7, so long as the Debtor remains in possession of the collateral, the lender can exercise their rights over the security, including foreclosure of the home ore repossession of the car if payments are not current. While judicial liens can be avoided if they impair the Debtor's exemption of the equity in the property, under current law there is nothing that can be done about voluntary liens, such as mortgages and car loans, in Chapter 7. In Chapter 13, however, if a home appraises for a value that is less than the amount owed on the first mortgage, any junior liens like second mortgages and home equity loans can be "stripped off", provided the Debtor successfully completes their Chapter 13 Plan. In a Chapter 13, a car loan can be "crammed down" to its fair market value on the day the bankruptcy is filed and the creditor is then paid a reduced amount through the plan, so long as the other criteria for cramming down a vehicle loan provided for in Section 506 of the Bankruptcy Code have been met. The same is true for property purchased on store credit cards for which the lender retains a security interest. These things cannot be accomplished in a Chapter 7.
5. THERE ARE LIMITS TO PROTECTION FROM CREDITORS
In a Chapter 7, the Debtor normally receives their discharge after a relatively short period of time after which the creditors of the non-dischargable debts are free to begin collecting again. However, in a Chapter 13, a Debtor can benefit from a lengthy period of protection from the creditors of their non-dischargable debt during which time they can repay the debt at an affordable rate. Also, co-debtors (other persons also obligated for the debts, such as cosigners), are not protected in a Chapter 7 and the creditors are free to go after them for payment on the debt. In a Chapter 13, however, Section 1301(a) of the Bankruptcy Code provides for a lengthy "co-debtor stay" in Chapter 13 cases that protects the co-debtors so long as the case is open, during which time the Debtor can make payments on the debt for which the co-debtor would otherwise be liable.
LIMITS ON CHAPTER 13
Just as there are limits on who can file a Chapter 7, there are also limits on who can file Chapter 13.
1. THERE ARE LIMITS ON WHO CAN FILE CHAPTER 13
Only individuals can file Chapter 13 - not businesses, and they must have regular income sufficient to pay all debts that must be paid through the plan, while at the same time staying current on monthly obligations such as mortgage, child support, and regular living expenses.
To file a Chapter 13, a Debtor must have filed all tax returns required to be filed for the preceding four years per Section 1308 of the Bankruptcy Code. There is no corresponding requirement in Chapter 7.
There are also limits on the amounts of debt a person can have in order to file Chapter 13. These limits are found in Section 109(e) of the code and are as follows:
Unsecured Debts < $419,275
Secured Debts < $1,257,850
2. THERE ARE LIMITS ON WHO CAN OBTAIN A DISCHARGE IN CHAPTER 13
A Debtor cannot receive a discharge in any Chapter 13 case filed within 2 years of a previous Chapter 13 filing in which a discharge was obtained, or within 4 years of a previous Chapter 7 filing in which a discharge was obtained.
Thorough Interview Required
It is crucial for the bankruptcy attorney to conduct a thorough interview of their client who is seeking to file bankruptcy. The first questions should determine what sort of deadlines there are – is the potential bankruptcy filer being sued? Are their wages being garnished? Are they facing a foreclosure sale? That will dictate whether the attorney is even available to take the case and how much time they have to prepare it. In an emergency, the Debtor can file what is called a “skeleton” bankruptcy – you only have to file certain sections of the bankruptcy and have 14 days after that to file the remaining portions
The next group of questions should pertain to assets – what kind of assets are we dealing with? A home? Several homes? What are their goals with respect to the homes- do they want to keep them or surrender them? If they want to keep them, are they current on the mortgages or behind? If behind, Chapter 7 is probably not an option. What are the approximate values of the homes? Are they collecting enough rent to cover the mortgages and other expenses on any rental properties? If not, they may have a hard time obtaining a discharge in Chapter 7 if the trustee believes they are squandering money on non-performing assets. Are there only single mortgages on each property or are there multiple mortgages? Are any of the mortgages possibly unsecured and might be stripped in a Chapter 13? How much is the total secured debt? Over $1,081,400.00? Chapter 13 is not an option. If the Debtor cannot file Chapter 7 because they would lose their property or because they do not meet the threshold requirements for filing, they may consider filing a Chapter 11 instead, or forgo filing bankruptcy altogether.
How do I get started?
Shaye Larkin begins every case with a free 30 minute consultation during which you will receive a personal evaluation of your financial situation, an analysis of your possible bankruptcy options, a brief overview of the process and the estimated fee to be charged if you work with Ms. Larkin's office. If you decide to proceed with the filing of a bankruptcy with Ms. Larkin's office, an in-person consultation is scheduled after that. At the in-person consultation, Ms. Larkin will once again go over with you your financial situation and the bankruptcy process, answer any additional questions you have, and explain how to get together the documents needed for her to file your case. You will be given a bankruptcy “package”, which will include a list of requested documents, a bankruptcy questionnaire, bankruptcy pre-filing disclosures and a retainer agreement. Once Ms. Larkin receives the completed package and fees, she will prepare your case for your review and signing. The normal turnaround time for a bankruptcy filing once all required information has been provided and fees paid is about 10 days, though it is possible for things to be done in a shorter time period in certain situations. Once the case is filed, protection from your creditors begins. Approximately one month after your case is filed, you and Ms. Larkin will attend your bankruptcy hearing during which you will be asked a series of questions by the bankruptcy trustee that are mostly general in nature. If it is a Chapter 7 case, you will receive your discharge between 60 – 90 days after your hearing (depending on the jurisdiction). In a Chapter 13 case, you will be in bankruptcy for a period of 3-5 years, so the process is somewhat different. Ms. Larkin will explain the process for each type of bankruptcy during your consultation.
How do I get my credit reports?
Shaye Larkin recommends you obtain your free annual credit reports from www.annualcreditreport.com
I owe my parents money, do I have to include them in my bankruptcy?
The bankruptcy requires you to list everyone you owe money to, even friends or family, under penalty of perjury. This would include friends, family, and secured automobiles. Listing your friend or family member as a creditor in your bankruptcy has no consequence to them, other than that the debt will normally be discharged. You can of course choose to repay the debt at a later time, if you wish.
What is this going to cost me?
When you hire Shaye Larkin to represent you in bankruptcy, you are hiring her and no one else. Unlike many bankruptcy law firms who will lead you to believe you are hiring an attorney and then pass you off to a paralegal who prepares the case, Shaye Larkin will prepare your case from start to finish herself. When you attend your bankruptcy hearing, you will see those other attorneys fumbling over their files, with no idea what is in the paperwork because it wasn't prepared by them – it was prepared by their paralegal or secretary. There will be no “bait and switch” when you work with Shaye Larkin. Her fees are in the low to middle range (much lower than the big bankruptcy law firms, but slightly higher than the mills that file hundreds of cases a month) and may be paid in installments. What you will get for your fee that you won't get at the big firms or the mills are open lines of communication, including prompt responses to your questions, and the ability to work directly with Shaye Larkin throughout the entire process. Chapter 7 attorneys fees normally range between $900 for the basic case and $2500 for more complex cases, however, Shaye Larkin is sensitive to low income situations and has a reduced fee for persons of very limited means. Ms. Larkin also handles a number of cases per year on a pro bono basis for the AIDS Legal Referral Panel. There is also a court filing fee of $306 that must be paid to the clerk of the court at the time the bankruptcy is filed, but this can be paid in installments and does not need to be paid entirely up front. This fee can also be waived for low income persons who meet the income requirements. Chapter 13 fees follow the statutory guidelines of the jurisdiction in which they are filed but are broken down into a portion paid up front before the case is filed (usually $1500 to $2000) and the remainder paid over time through the 3 to 5 year Chapter 13 plan. The Chapter 13 court filing fee is $281, and it can also be paid in installments rather than entirely up front before the case is filed.
Pre-Bankruptcy Mistakes to Avoid
Unfortunately, by the time many folks visit a bankruptcy attorney they will have already depleted assets, such as retirement accounts, which could have been protected in bankruptcy. They may also have engaged in a number of other practices in the hope of keeping things afloat that could have detrimental results in a bankruptcy case, including transferring balances from one credit card to another, making large purchases, taking out large cash advances on credit cards, failing to respond to lawsuits, borrowing from friends and family, and moving assets out of their names in an attempt to shield them from creditors. You too may be tempted to take drastic measures in attempt to “stop the bleeding” and protect your assets. Unfortunately some of these measures can have negative consequences in bankruptcy. If you have already done any of these things, it is important you let your attorney know so it can be dealt with and the consequences minimized. Here are the reasons you need to avoid doing these things at all costs:
The money in your retirement account is most likely completely exempt (protected) in bankruptcy. If you take money out of your retirement account and give it to your creditors, the money is gone forever. The retirement account could have been protected in bankruptcy and the debt owed to the creditor discharged. Taking a distribution from your retirement account may also result in a large tax liability.
Transferring balances on credit cards
Transferring a balance from one credit card to another is essentially the same as taking out a cash advance and is frowned upon if done in large amounts while you are insolvent, or in close proximity to filing bankruptcy, at which time you are deemed insolvent by the court. If you have made large or recent cash advances on your credit cards of a significant amount, the discharge of this debt may be challenged in your bankruptcy based on false pretenses if you were insolvent at the time you made the cash advances and should have known you could not repay the amount borrowed.
Large purchases before filing
If you have made large purchases in close proximity to filing bankruptcy, or incurred a debt at any time when you knew or should have known you were insolvent and unable to repay the debt, the discharge of this debt may be challenged in your bankruptcy based on false pretenses. Consumer purchases of luxury items made totalling $550 or more on a single card within 90 days of filing bankruptcy are presumptively not dischargeable in bankruptcy.
Cash advances on credit cards
As stated above, cash advances on your credit cards done in large amounts while insolvent or in close proximity to filing bankruptcy, at which time you are deemed insolvent by the court, can result in a challenge to your bankruptcy discharge of those debts. If you have made large or recent cash advances on your credit cards of a significant amount, the discharge of this debt may be challenged in your bankruptcy based on false pretenses if you were insolvent at the time you made the cash advances and should have known you could not repay the amount borrowed.
Failing to Respond To Lawsuits
You should never ignore a lawsuit. If someone serves you with a Summons and Complaint, under California law you have 30 days to file a written response with the Clerk of the Court where you are being sued. There is a proper form you must use, available at the Clerk's office, and you must properly have your response served on the party suing you. If you do not file a proper, timely legal response, the creditor suing you will get a default judgment. After the default judgment is entered, the creditor will normally obtain a “Writ of Execution” from the judge allowing them to levy against your assets, including bank accounts, and garnish your wages. Filing a response to the lawsuit will prevent a default judgment. Ultimately there will be a judgment at some point, but by filing the response you wil have bought your self several months of extra time to plan your next steps. Once you file a bankruptcy, all lawsuits must normally be placed on hold or dismissed, unless the creditor gets permission from the Bankruptcy Court Judge to proceed with the lawsuit (called “relief from automatic stay”. This type of relief is sometimes granted in cases of fraud.
Borrowing from friends and family
Often persons in need of filing bankruptcy may have to borrow money from friends or family to come up with the attorneys fees required to file. This is very common and does not usually present a problem. What does sometimes present a problem is when there is a pre-existing debt owed to a friend or family member that the person now filing bankruptcy has made payments on, and the reason is that such payments may be recovered by the bankruptcy trustee as a “preference”. “Preference” is the term used for certain payments made to creditors before the bankruptcy is filed that resulted in the creditor receiving more than other similarly situated creditors would get through the bankruptcy process. Payments to family members on debts you owe them made within one year of filing bankruptcy are recoverable by the bankruptcy trustee. For regular creditors, the payments must total at least $600 to that one creditor and be made within 90 days of filing. For ordinary creditors, there is usually no consequence to the person filing bankruptcy if the trustee recovers to preference since there is no personal relationship between the creditor and the bankruptcy filer. When the payments were made to a family member, however, this is where it gets painful because the trustee can take action against the family member and force them to return the money. The important thing to remember is there are defenses that can be raised to preference actions, but the best measure is to simply wait a period of time before filing bankruptcy until the payments within the past year are a low enough sum total to not be worth the trustee's while.
If you transfer an asset and do not receive fair market value in return in attempt to hide it from your creditors, this is considered a type of fraud for which there is a long look-back period in bankruptcy. A fraudulent transfer may be voided by the bankruptcy trustee; this means the trustee can recover the asset and liquidate it with the proceeds going to pay the bankruptcy filer's creditors. The bankruptcy filer is not entitled to an exemption on fraudulently transferred assets, which means they would not be entitled to a share of the proceeds of the sale.
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