1. Preferences in Bankruptcy
2. Bankruptcy - Objections to the Chapter 13 Plan
3. What to Expect From Your First Bankruptcy Consultation With An Attorney
4. What Information Will I need to File Bankruptcy?
5. Bankruptcy - What is the Chapter 7 Means Test?
6. Bankruptcy - Are You Exempt From the Chapter 7 Means Test?
7. Sample Debt Dispute/Debt Validation Letter
8. How To Pay For Bankruptcy
9 HOA Dues and Bankruptcy
10. Lies Collection Agencies Tell
11. Bankruptcy Timing - When to File the Petition and Related Documents
12. Bankruptcy Exemptions - What Are They?
13. Bankruptcy - What to Expect From Your Meeting of Creditors
14. Bankruptcy - What is the Automatic Stay?
15. Who Is The Bankruptcy Trustee and What Is Their Role?
16. Filing Bankruptcy Without An Attorney - What You Don't Know CAN hurt you
17. When Life Happens During the Chapter 13 Plan
18. The 1099-C Surprise
19. But I'm Judgment Proof, Aren't I?
20. Shouldn't I have Signed A "Reaffirmation Agreement" During My Chapter 7 Bankruptcy?
21. Restoring Your Life, And Your Credit After Bankruptcy
22. "Truthiness" in Bankruptcy
23. Filing Bankruptcy With Your Spouse - Practical Implications
24. Balancing Emotions In Bankruptcy And Focusing On The Big Picture
25. The Basics of Chapter 7 and Chapter 13 Bankruptcy and How to Choose the Right Chapter
This legal guide discusses the issue of preferences in bankruptcy - what defines a preference, and the consequence of a preferential payment to a creditor.
What is a preference?
In bankruptcy, a preference is a payment or series of payments made to a creditor which resulted in that creditor receiving more than other similarly situated creditors. These payments are potentially recoverable by the Bankruptcy Trustee, who can then share them with the other creditors to even the playing field.
What constitutes a preference under the Bankruptcy Code?
Section 547 of the Bankruptcy Code defines what payments constitute a preference recoverable by the Trustee. Specifically, Section 547 states the Chapter 7 trustee may avoid preferential payments made by the Debtor if 1) they are payments on an antecedent debt (not a current obligation), 2) aggregating $600 or more, 3) made while the Debtor was insolvent, 4) within 90 days of the filing of the bankruptcy (non-insider rule), which allowed the creditor to receive more on it's claim than it would have had the payment not been made and the claim paid through the bankruptcy proceeding.
An insider is a person who's relationship with the Debtor is such that they should have known of the Debtor's insolvency so there are special rules which apply to insiders. Examples of insiders include relatives, business partners, and corporate officers or directors. The rule with regard to insiders is that the Trustee can potentially recover ANY amounts paid to an insider (they do not have to aggregate more than $600) within the 12 months before filing bankruptcy. It is a much longer lookback than the lookback for regular creditors.
Defenses to a preference action
There are several defenses a creditor can bring in a preference action. One such defense would be if the payments were made in the ordinary course of business affairs of the Debtor. Another would be if the Debtor made the payment in contemporaneous exchange for new value.
Impact on Debtor
There is no consequence to the Debtor in having made the preferential payment to creditors, so long as no fraud was involved. The consequence is to the person or entity who received the money. The Trustee can force them to turnover the money and then share the proceeds with the other creditors. Of course, if it is a relative of the Debtor, the Debtor would most certainly prefer to avoid having their family member sued as part of the bankruptcy case. Thus, any time there are preferential payments at issue it is best to hire an attorney to help with planning the bankruptcy case.
This legal guide discusses objections to Chapter 13 Plans in Chapter 13 Bankruptcy cases.
What is an objection to the Chapter 13 Plan?
Not everyone may be happy with the Chapter 13 Plan you have filed. For a number of permissible reasons discussed previously and below, the Chapter 13 Trustee or any creditor may have a beef with you about the plan contents. The proper way to voice one's rejection of the plan is by filing an "Objection" with the court. If there are no objections to the Chapter 13 Plan you have filed, congratulations! It is now ready for the judge's stamp of approval which is a process called "Confirmation of the Chapter 13 Plan". The more experienced an attorney is at filing Chapter 13 Plans, the more likely they are to get them confirmed quickly. However, bankruptcy law continues to be in a state of flux and even experienced attorneys can be challenged from time to time in the Chapter 13 cases they file.
Objections by the Chapter 13 Trustee or Creditors to the Plan
Pursuant to Section 1322, of the Bankruptcy Code, the Chapter 13 Trustee or any creditor may object to the Chapter 13 Plan any time prior to confirmation for any of the following reasons:
The Plan is Not Feasible
The Trustee or Creditors can object if the Chapter 13 Plan is not feasible, i.e., there is insufficient income to support the required plan payments or that the plan itself does not adequately provide for all required claims in the required amounts.
The Plan Has Not Been Filed In Good Faith
The Trustee or Creditors can object if the Chapter 13 Plan is not in good faith, for example, the Debtor has filed a plan they could not possibly afford, or perhaps offers less to creditors than they can afford to pay.
The Chapter 13 Plan Unfairly Discriminates
The Trustee or Creditors can object if the Chapter 13 Plan unfairly discriminates; an example of this would be creating a separate class for student loans; a creditor might object to student loan creditors receiving a higher percentage under the plan than other unsecured creditors and that therefore the plan unfairly discriminates.
The Plan is Not In The Best Interest of Creditors
The Trustee or Creditors can object if the Chapter 13 Plan is not in the best interest of creditors in that it does not pay them what they would receive in a Chapter 7 bankruptcy per Section 1325 of the Bankruptcy Code.
The Chapter 13 Plan Contains Errors
The Trustee or Creditors can object if the Chapter 13 Plan contains other errors; for example, maybe it is not the most current model chapter 13 plan required by the particular division in which it is filed, or maybe information is listed in the wrong section on the plan.
Attorneys handle consultations differently. Below is how things are done at my office, and the offices of some of my colleagues.
The free 30 minute telephone consultation
I start every case with a free 30 minute telephone consultation during which I get an idea of the issues involved in the case and whether it is likely to be a Chapter 7 or Chapter 13 bankruptcy that would be filed, or no bankruptcy at all. Some attorneys like to send the potential client a questionnaire to fill out before the initial consultation in order to better narrow down the discussion areas for the consultation. During my initial telephone consultation I find out the following pieces of information:
1. Whether there are any financial emergencies, such as a pending wage garnishment, foreclosure sale, lawsuit, or other matter.
2. What jurisdiction the potential client lives in and how long they have lived in this jurisdiction and the State of California.
3. The type of debt at issue, for example, credit card debt, tax debt, student loan debt, child support, medical bills, mortgages.
4. What types of an estate are we dealing with, for example, real property with significant equity, real property with no equity, no real property, minimal personal property or potentially non-exempt personal property.
5. The amount of household income involved and whether it will be a single filing or joint filing between spouses.
6. What the potential client's intentions are with respect to any secured assets, such as their home.
7. Whether there have been any transfers of assets in the past 4 years, and the circumstances involved.
8. Other issues that stem from the conversation, such as underwater junior mortgages.
During the conversation I might check the zillow value of any real property at issue to get an idea of the potential equity or lack of equity involved. While sometimes further research is necessary, I can usually get a good idea of what type of bankruptcy would need to be filed and provide an estimate of the fee I would charge for representation should my client decide to move forward with my office. I also give the client a brief summary of the bankruptcy process for either a Chapter 7 or Chapter 13 bankruptcy case filing.
The next step
Assuming the client wants to proceed with the filing of a bankruptcy case, the next step would be to schedule an in-person consultation with me during which we further discuss the bankruptcy process and go over the detailed questionnaire they will need to fill out in order to provide me with the necessary information. I also give my client a list of documents to get for me which will vary somewhat depending on the type of bankruptcy to be filed. For example, a bankruptcy involving an operating business would mean producing documents related to the business's organization, day to day operations, assets and liabilities.
A bankruptcy involving real property would mean producing a copy of the grant deed, deeds of trust, most recent mortgage statement(s) and a recent broker's opinion of the current fair market value for the property.
I normally have my clients pull their own credit reports at www.annualcreditreport.com. They also do their credit counseling on their own and give me a copy of the certificate of completion when ready.
In addition to the detailed questionnaire and list of document requests, I also give my client a list of pre-filing admonitions, pre-filing disclosures required by Sections 342(b)(1) 342(b)(2)(A) and (B), 527(a)(1), 527(a)(2) and 527(b) of the Bankruptcy Code, and a retainer agreement.
When the client has all the information, documents and fees ready, we set up an appointment for an in person interview and begin the process of preparing the bankruptcy.
A bankruptcy is made up of many different documents which include the Petition, Schedules, Statement of Financial Affairs, Statement of Intentions, and Means Test. To properly prepare a bankruptcy, the Debtor needs to give their attorney a lot of information, including the items listed below.
A new credit report
Try to get one from each of the 3 credit reporting agencies, they are free at www.annualcreditreport.com
List of debts, creditor names and addresses
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 and law firms representing the creditors.
The Debtor needs to provide their attorney with a list of personal property items and their current replacement values for their current age and condition.
Real property information
The Debtor needs to provide their attorney with 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
The Debtor needs to provide their attorney with copies of any tax returns they have filed for at least the previous 3 tax years.
The Debtor needs to provide their attorney with paystubs and other income information, such as pension and social security payments, and profit and loss statements for self-employed Debtors.
Leases and Contracts
The Debtor needs to provide their attorney with lease and other contract information, such as car loans, rental agreements for commercial premises or residential rental agreements between the Debtor and their tenants.
Other necessary information
Preparing a bankruptcy is a process. As the attorney prepares the case, they will likely discover other pieces of information they need in order to ensure complete accuracy.
This legal guide discusses the Chapter 7 Means test which became a requirement in Chapter 7 Bankruptcy cases in 2005.
The Chapter 7 Means Test
The "Means Test" is the result of what is commonly referred to as BAPCPA. In 2005, in response to the demands of credit card companies who thought the bankruptcy rules at that time were too lenient on consumer debtors, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act. The result of the act is a law that makes the bankruptcy process more cumbersome and expensive than the prior law. The means test is a lengthy document that must be filled out by debtors who's debts are primarily consumer debts. The means test takes the debtor's income for the 6 calendar months prior to the month of filing and based on the average monthly income divides debtors into two categories:
1) Debtors whose income is below the state median for their household size, and
2) Debtors whose income is above the state median for their household size.
For Debtors whose income is below the state median for their household size, they need only complete parts I, II and III of the means test. As for Debtors who are above the state median in income for their household size, they must complete the remaining parts of the form.
The form then requires a calculation of the Debtor's monthly disposable income by taking the Debtor's gross monthly income from which certain deductions are then taken to come up with an end result that will determine whether the Debtor must instead file a Chapter 13 bankruptcy.
The means test is really mean because only certain deductions the Debtor relies on to offset their income will be based on real numbers. Other deductions, such as the amounts paid for utilities, food, clothing and transportation are determines by IRS standards based on the geographical region where the bankruptcy is to be filed.
Not everyone has to complete the Chapter 7 Means Test
The bankruptcy code excludes from the Means Test Requirement Debtor's whose debts are not primarily consumer debts, disabled veterans if their debt was incurred primarily during a time of active duty, or while performing homeland defense duty, and 1. Members of a reserve component of the Armed Forces and members of the National Guard who were called to active duty (as defined in 10 U.S.C.? 101(d)(1)) after September 11, 2001, for a period of at least 90 days, or who have performed homeland defense activity (as defined in 32 U.S.C. ? 901(1)) for a period of at least 90 days, are excluded from all forms of means testing during the time of active duty or homeland defense activity and for 540 days thereafter (the "exclusion period").
The first question to ask before completing the Chapter 7 Means Test is whether the Debtor is exempt from completing the means test for any of the reasons discussed below
The Debtor's debts are not primarily consumer debts
If the Debtor's debts are more than 50% non-consumer debts, they need only certify as such on the first page of the means test and do not need to complete the remaining sections. A consumer debt is one that is incurred primarily for personal, family or household purpose. Examples of debts which are not consumer debts are debts incurred for business reasons and income taxes. When is the character of the debt determined? This is an unresolved issue. If you ask the United States Trustee this question, they will tell you that the character of the debt is judged at the time the debt was incurred. This is the opinion reached in In re Booth, 858 F.2d 1051, 1054-1055 (5th Cir. 1999).
The Debtor is exempt from the means test if they are a disabled veteran (as defined in 38 U.S.C. ? 3741(1)) whose indebtedness occurred primarily during a period in which the Debtor was on active duty (as defined in 10 U.S.C. ? 101(d)(1)) or while performing a homeland defense activity (as defined in 32 U.S.C. ?901(1)).
Reservists and National Guard Members; active duty or homeland defense activity
Members of a reserve component of the Armed Forces and members of the National Guard who were called to active duty (as defined in 10 U.S.C.? 101(d)(1)) after September 11, 2001, for a period of at least 90 days, or who have performed homeland defense activity (as defined in 32 U.S.C. ? 901(1)) for a period of at least 90 days, are excluded from all forms of means testing during the time of active duty or homeland defense activity and for 540 days thereafter (the "exclusion period").
NOTICE OF DISPUTE OF DEBT and REQUEST FOR DEBT VALIDATION
Your office has been calling me about a debt you claim I owe but which I have no knowledge of. The purpose of this letter is to dispute this debt, which I do not believe I owe. I am also requesting that you validate this debt you claim I owe by providing the documentation and information requested below. This is not a refusal to pay, but a notice sent pursuant to the Fair Debt Collection Practices Act, 15 USC 1692g Section 809(b) that your claim is disputed and validation is requested.
Pursuant to Section 809(b) of the Fair Debt Collection Practices Act: "If the consumer notifies the debt collector in writing within the 30-day period described in subsection (a) that the debt, or any portion thereof, is disputed, or that the consumer requests the name and address of the original creditor, the debt collector shall cease collection of the debt, or any disputed portion thereof, until the debt collector obtains verification of the debt or any copy of a judgment, or the name and address of the original creditor, and a copy of such verification or judgment, or name and address of the original creditor, is mailed to the consumer by the debt collector." Accordingly, please provide me with the following:
1. A detailed accounting of what the money you say I owe is for;
2. A detailed explanation of how you calculated the amount you say I owe;
3. Copies of any documents that show I agreed to pay what you say I owe;
4. Identify the original creditor and provide their current contact information;
5. Proof that the Statute of Limitations has not expired on this account;
6. Documentation showing that you have the legal right to collect this debt;
7. Documentation showing that you are licensed to collect in my state; and
8. Provide me with the contact information for your Registered Agent for Service of Process.
I know and understand my rights under the Fair Debt Collection Practices Act and the Fair Credit Reporting Act. I know that since I disputed this debt in writing within 30 days of the date of your bill, that you must verify the debt and mail the requested verification to me at your expense. I also know tat you cannot add interest or late fees except as allowed by the original contract or state law.
I further understand that you are not required to respond to this request, however, if you continue to try and collect this debt without fist validating it, you will be violating the Fair Debt Collection Practices Act. Be advised that I am carefully documenting all of our communications and I will not hesitate to report any violations of the Fair Debt Collection Practices Act and/or the Fair Credit Reporting Act to my State Attorney General, the Federal Trade Commission and the Better Business Bureau.
I have disputed this debt; therefore, until validated, you know your information concerning this debt is inaccurate. Therefore, if you have already reported this debt to any credit-reporting agency, such as Experian, Equifax or TransUnion, then you must immediately inform them of my dispute with this debt. If your office reports any information on my credit report that you know to be inaccurate, you may be held liable for fraud under both federal and state law, in addition to defamation of character, violation of the Fair Debt Collection Practices Act and the Fair Credit Reporting Act. If any negative mark is found on my credit report by your company or the company you represent, legal action will follow.
Filing bankruptcy can be expensive, especially when you plan to hire an attorney. Here are some tips on how to come up with the fees necessary to get your bankruptcy case filed and begin your fresh start.
Save up over time
The first way is to save up over time. If you have stopped paying your creditors, you can try setting aside some of the money you spent on monthly minimum payments for your bankruptcy attorney fees. Keep in mind that the longer you go without paying your creditors, the more likely they are to file a lawsuit.
Wait until tax time
If you are expecting a tax refund, you can wait until after tax time to file bankruptcy so you have the money from your refund.
Borrow from a friend or family member
Most of my clients get help from a friend or family member with their bankruptcy fees. If it is a gift, it counts as income on the means test. If it is a loan, the friend or family member gets listed as a creditor, but this doesn't affect their credit rating. It does mean the debt wil be discharged in your bankruptcy, but you can always choose to repay them later if you wish.
Have a garage sale or sell items on Craigslist
You can sell your household goods and furnishings at their fair market value and use the money to pay your bankruptcy fees. You can also sell items second hand on Craiglist. Just make sure you keep track of your earnings and try to get the most you can for the sale. There are shops who will buy gold and other jewelry - you can shop around for the best price.
Borrow from your 401k
Caution: this could result in you owing taxes! I advise borrowing from a 401k only as a last resort. Also remember that once that money is out of your 401k and in your bank account, it is subject to levy by any creditors who have obtained judgments against you.
Homeowners association dues frequently come hand in hand with condominium ownership, as well as other types of housing. Many homeowners elect not to keep their homes after bankruptcy. Bankruptcy can discharge all the past due HOA dues as of the day the bankruptcy is filed, but not future dues.
Post-filing HOA dues are not dischargeable in bankruptcy.
When surrendering a home in bankruptcy, it may be a significant period of time before the lender forecloses on the property and thus the owner is still on title and liable for HOA dues as they come due. Section 523(a)(16) of the Bankruptcy Code provides that HOA dues that accrue after the day the bankruptcy is filed are not part of the bankrutcy discharge. This means the homeowner is still on the hook for them. Here are some suggestions of what to do.
Stay in the Home and Continue to Pay HOA Dues Until the Foreclosure Sale
If possible, you can continue to pay the HOA dues until the foreclosure sale. Sometimes this is not so easy if the homeowner is already behind because it may be hard to get the HOA or it's collection agent to accept the payments. The best thing to do is stay current.
Rent the Home out for Enough Money to Pay the HOA Dues
If you have already moved out of the condominium, consider renting the property out so you will at least have enough money to pay the HOA dues.
Do a Deed In Lieu of Foreclosure
You can try deeding the property back to the lender to get your name off title prior to a foreclosure sale. Unfortunately, the lender is not likely to accept this, particularly if there is an HOA lien involved. This is because competing lien interests are best dealt with at a foreclosure sale where the liens can be paid out of the sale proceeds in order of priority. The lender may also not want the responsibility of maintaining the property, which falls on the owner.
Sell the Home
If you sell the home, you are no longer the title owner and the HOA dues will no longer be your responsibility. Unfortunately it is not always easy to sell a home if there is an unpaid HOA lien. The buyer will want this lien to be paid by the seller, usually. The HOA may be willing to accept a short sale, in which they receive less than the full amount owed on the lien. It is often worth a try.
File a Chapter 13 and Convert to Chapter 7 After Foreclosure Sale
You can avoid a post-filing HOA dues liability by filing a Chapter 13 bankruptcy and then when the foreclosure sale happens, convert the case to Chapter 7 to discharge the HOA dues that have since accrued. Of course, converting to Chapter 7 would need to be an option, meaning you would have to qualify for Chapter 7, and you have to be careful if you have non-exempt assets, because you can lose them in a Chapter 7. There are also eligibility requirements for Chapter 13.
Collection agencies buy up debts for pennies on the dollar hoping to get some return on their investment. They typically engage in strongarm tactics to get their money, including calling repeatedly and making threats. They are also known for telling outright lies. Here are some examples.
We are going to have you arrested for this.
There are no debtors prisons in America. With a a few exceptions, such as tax evasion, child support, or check fraud, you cannot be arrested for failing to pay a debt. A collection agency who makes this threat is violating the Fair Debt Collections Practices Act.
You cannot discharge this debt in bankruptcy.
While there are some type of debts that are not dischargeable in bankruptcy, so long as no fraud is involved, credit card debt and payday loans ARE NOT ON THE LIST. Many times my clients have come to me believing a debt is not dischargeable just because I collection agency told them so. First of all, most collection agents are not attorneys and to tell you a debt is not dischargeable in bankruptcy is practicing law without a license - illegal in every state. Second of all, even in the case of fraud, a debt can still be discharged if the creditor does not file a timely complaint in the bankruptcy case. So don't listen to these remarks. The collection agent is not your friend. They do not represent your interest. Do not assume a debt is not dischargeable in bankruptcy unless a licensed, experienced, reputable bankruptcy attorney has told you so.
We will take your tax refund
Only certain creditors can offset a tax refund. Generally, these include debts for unpaid child support, back taxes, student loans, and other government debts. If a collection agency incorrectly tells you they will take your tax refund, they are violating the Fair Debt Collection Practices Act.
We wll go after your family for payment
Unless your family member is also liable on the contract because, for example they cosigned the loan, the collection agency cannot go after them for payment. These types of threats violate the Fair Debt Collection Practices Act.
When in Doubt, Talk to an Attorney!
Never rely on anything a collection agency tells you as legal advice. To know your rights, talk to an attorney.
Proper timing is often crucial in bankruptcy cases. This legal guide explores the important issue of when is the best time to file bankruptcy in various scenarios.
If there is a pending emergency, such as a wage garnishment or foreclosure sale, that will dictate how much time you have to prepare and file the bankruptcy. If there is insufficient time to file all of the required documents, you can instead file what is called a "skeleton bankruptcy". This involves only filing the Petition, Statement of Social Security Number, Creditor Matrix and Verification of Creditor Matrix, and the Certificate of Completion of Credit Counseling. You then have 14 days to prepare and file all the other required documents. I prefer not to file skeleton bankruptcies unless absolutely possible because I like to know as much about my client as possible before putting them in the system. I do not like surprises and the less homework done before filing the case, the more likely we are to experience an unhappy surprise down the road, such as an asset that turned out to be far more valuable than my client said it was and which is now possibly at risk of seizure by the Chapter 7 Trustee. I file the bankruptcy documents shortly after they are prepared - when they are fresh and all of the information is current and accurate. To ensure accuracy, it is best to file the case the same day it is signed. Make sure you get bank account summaries from all open bank accounts showing the current balance in the accounts as of that day.
Reasons to Delay the Filing of a Bankruptcy Case
If you are doing exemption planning, then of course you would wait to file the bankruptcy until after the value of the assets at issue fall within the allowed exemptions. If there have been a lot of recent charges to credit cards, it may be prudent to postpone filing in order to create some distance between the purchases and the bankruptcy filing. Otherwise, depending on the amounts of the charges at issue as well as the types of purchases made, the Debtor may be at risk of having their bankruptcy discharge challenged by an angry creditor under either 523(a)(2)(A) or 523(a)(2)(C) of the bankruptcy code on the grounds that they knew or should have known that they were insolvent at the time the charges were made and would go unpaid. Certain transfers of assets might also make it a good idea to postpone filing.
A Chapter 7 Trustee can recover assets transferred in fraud of creditors, but fraud can be imputed if the Debtor was in a distressed financial state at the time of the transfer and received less than fair market value in exchange for the asset transferred. The Trustee can void the transfer and liquidate the asset for the benefit of the Debtor's creditors. To prevent this from happening, it may be prudent for the Debtor to postpone filing bankruptcy until the statute of limitations on the Trustee's right to recover fraudulent conveyances has passed. Lastly, if there is tax debt involved, you will want to analyze the account transcripts for dischargability issues and the Debtor may need to postpone filing until the taxes have met all the time rules for dischargability. This is a complicated issue beyond the scope of this seminar and will require your further research.
Hire a Reputable Attorney to Help You Prepare and File Your Bankruptcy Case
The decision to file bankruptcy, including timing, should not be made without consulting with an experienced and reputable bankruptcy attorney. Issues such as exemption planning are very complicated and subject to being challenged later if not done properly. Make an appointment with a bankruptcy attorney near you who can help guide you through the process.
This legal guide explains what bankruptcy exemptions are and how we use them to protect assets in bankruptcy.
EXEMPT VS. NON-EXEMPT PROPERTY
In bankruptcy we use "exemptions" to protect assets. There are state exemptions and also a set of federal exemptions (found in Section 522 of the Bankruptcy Code). Some states use their own exemptions, some use federal exemptions, and some use both state and federal exemptions. Here in California we have two sets of exemptions to choose from, both found in the California Code of Civil Procedure. The 703 series, found in CCP Section 703, has a generous wildcard exemption (also called "the grubsteak") that is currently worth a total of $30,825 (including the maximum allowed unused portion of the homestead exemption) which can be used to protect any property. The 704 series, found in CCP Section 704, does not have a wildcard exemption but instead has a generous homestead exemption which can be used to protect equity in the home. The amount of equity you can protect ranges from between $300,000 and $600,000 and depends on what the average sales price for a single family home is in the county where the property is located. This new homestead exemption went into effect in January of 2021 and replaced a set of three homestead exemptions that were previously used and chosen from based on certain factors.
Of the two California exemption systems, we choose the one that will best afford the Debtor the ability to protect their assets.
Which Exemptions Apply?
Section 522(b)(3)(A) of the Bankruptcy Code provides that Debtors cannot use their state's exemption scheme unless they have resided in the state for the entire two year period which immediately precedes the date of filing bankruptcy. If the Debtor has lived in their state for the full two years before the case is filed, they use that state's exemption scheme. If the Debtor has not lived in the state where they are filing bankruptcy for the full two years before filing, then the rule is that you must use the exemption scheme for the state in which the Debtor lived the majority of the 180 days immediately preceding the 2 year period. So then you must look to that state's exemption scheme to determine whether that's state's exemptions are required or the federal exemptions. (Some states limit their state exemptions only to residents so since the Debtor no longer lives there, they would then need to use the federal exemptions instead).
What Happens to Non-Exempt Property In Chapter 7?
In a Chapter 7, non-exempt property can be liquidated by the Chapter 7 Trustee and the proceeds used to pay the creditors in order of priority. Bear in mind that the Trustee will not choose to liquidate all non-exempt property. If property is of minimal value or will be cumbersome or costly to liquidate, the Trustee will be disinclined to spend the time and resources liquidating. Bear in mind, however, that there is a trend among Chapter 7 Trustees in conducting shortsales of underwater properties in order to "carve out" a portion of the proceeds to benefit the creditors of the estate. When planning how to use the exemptions, keep in mind the Trustee's costs of liquidating. If the asset is cash, there are no costs involved. The Trustee will make a demand for payment and the money is turned over. If the asset is a car, however, the Trustee will usually sell the car at a public auction for which there are significant costs. If it would cost the Trustee 10% of a car's value to liquidate it, this can be factored into the amount of equity needed to be exempted by the Debtor to keep it from being sold. For real estate, there are costs of sale, and the bankruptcy Trustee must consider that 6% of the real estate value is allocated to costs of sale when determining whether there is any non-exempt equity.
What are the Debtor's Options With Regard to Non-Exempt Property?
If there are non-exempt assets, the Debtor has a few choices: 1) Proceed with the Chapter 7 filing with the understanding that such assets may be liquidated by the bankruptcy with the proceeds going to pay their creditors in order of priority. This may be a good way to ensure non-dischargable tax debt is taken care of since it will have priority over general unsecured creditor claims. 2) Plan the bankruptcy filing over time to the extent possible to provide for allowable liquidation of non-exempt assets or conversion of non-exempt assets into exempt assets. There are substantial limitations to this which are discussed in Section VIII. 3) If the Debtor is eligible, they can file a Chapter 13 instead. The non-exempt assets will not be liquidated so long as the Debtor's Chapter 13 Plan provides for payment to the creditors in the amounts they would have received in a Chapter 7 case had the property been liquidated.
This legal guide explains what happens at the Section 341 "Meeting of Creditors" - an important hearing that takes place in bankruptcy cases.
The Meeting of Creditors - What is it?
The Chapter 7 Meeting of Creditors, also called the "341 Hearing" after the section in the Bankruptcy Code to which it pertains, is the opportunity for the Trustee and any creditor to question the Debtor under oath about their financial situation and statements made in the bankruptcy documents.
Section 341 of the Bankruptcy Code provides as follows:
Sec. 341. Meetings of creditors and equity security holders (a) Within a reasonable time after the order for relief in a case under this title, the United States trustee shall convene and preside at a meeting of creditors. (b) The United States trustee may convene a meeting of any equity security holders. (c) The court may not preside at, and may not attend, any meeting under this section including any final meeting of creditors. Notwithstanding any local court rule, provision of a State constitution, any otherwise applicable nonbankruptcy law, or any other requirement that representation at the meeting of creditors under subsection (a) be by an attorney, a creditor holding a consumer debt or any representative of the creditor (which may include an entity or an employee of an entity and may be a representative for more than 1 creditor) shall be permitted to appear at and participate in the meeting of creditors in a case under chapter 7 or 13, either alone or in conjunction with an attorney for the creditor. Nothing in this subsection shall be construed to require any creditor to be represented by an attorney at any meeting of creditors. (d) Prior to the conclusion of the meeting of creditors or equity security holders, the trustee shall orally examine the debtor to ensure that the debtor in a case under chapter 7 of this title is aware of - (1) the potential consequences of seeking a discharge in bankruptcy, including the effects on credit history; (2) the debtor's ability to file a petition under a different chapter of this title; (3) the effect of receiving a discharge of debts under this title; and (4) the effect of reaffirming a debt, including the debtor's knowledge of the provisions of section 524(d) of this title. (e) Notwithstanding subsections (a) and (b), the court, on the request of a party in interest and after notice and a hearing, for cause may order that the United States trustee not convene a meeting of creditors or equity security holders if the debtor has filed a plan as to which the debtor solicited acceptances prior to the commencement of the case. Text of statute downloaded from //www.canb.uscourts.gov/rule/federal
The Trustee's Role at the 341 Hearing
At the Chapter 7 Meeting of Creditors, 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 goals of the trustee are to determine whether the Debtor really cannot afford to pay their debts back, whether there are any unprotected assets that can be liquidated to pay creditors, and whether the Debtor was truthful in their bankruptcy paperwork. Creditors can also show up at the hearing and question the Debtor for a limit of 5 minutes, but they rarely do. If there are complicated issues of concern to the trustee, the meeting can continue for an extended period of time. If the Trustee does not get sufficient answers to all of their questions during the first Meeting of Creditors, they will continue the hearing and the Debtor will be required to reappear. The Debtor will also need to reappear if they did not bring with them the required documentation: their original drivers license and original verification of their social security number in the approved format (either a social security card, W2 from the Debtor's employer for the most recent tax year, Medicare card or some other official documentation prepared by someone other than the Debtor or someone acting on Debtor's behalf that shows the social security number. The Trustee may also schedule a Rule 2004 exam if there are matters requiring an extended period of questioning.
This legal guide explains the automatic stay that goes into effect upon the filing of a bankruptcy case.
The Automatic Stay - What is it and what does it apply to?
Once the bankruptcy is filed, an automatic stay goes into effect which prohibits creditors from contacting the Debtor, and any collection activities, including foreclosure sales, 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. There are also exceptions for certain types of legal matters, for example, criminal prosecutions and child custody or visitation matters. The rules pertaining to the automatic stay are found in Section 362 of the Bankruptcy Code, a particularly lengthy section. Specifically, Section 362(a) of the Bankruptcy Code provides that the filing of a petition for relief operates as a stay applicable to all entities of:
(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;
(2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title;
(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate;
(4) any act to create, perfect, or enforce any lien against property of the estate;
(5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title;
(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title;
(7) the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor; and
(8) the commencement or continuation of a proceeding before the United States Tax Court concerning a tax liability of a debtor that is a corporation for a taxable period the bankruptcy court may determine or concerning the tax liability of a debtor who is an individual for a taxable period ending before the date of the order for relief under this title. (Text of statute downloaded from //uscode.house.gov/uscode-cgi/fastweb.exe)
What does the Automatic Stay not apply to?
Section 362(b) provides that the filing of a bankruptcy petition does not operate as a stay in many situations, including the following:
(1) under subsection (a) of this section, of the commencement or continuation of a criminal action or proceeding against the debtor;
(2) under subsection (a) - (A) of the commencement or continuation of a civil action or proceeding - (i) for the establishment of paternity; (ii) for the establishment or modification of an order for domestic support obligations; (iii) concerning child custody or visitation; (iv) for the dissolution of a marriage, except to the extent that such proceeding seeks to determine the division of property that is property of the estate; or (v) regarding domestic violence; (B) of the collection of a domestic support obligation from property that is not property of the estate; (C) with respect to the withholding of income that is property of the estate or property of the debtor for payment of a domestic support obligation under a judicial or administrative order or a statute; (D) of the withholding, suspension, or restriction of a driver's license, a professional or occupational license, or a recreational license, under State law, as specified in section 466(a)(16) of the Social Security Act; (E) of the reporting of overdue support owed by a parent to any consumer reporting agency as specified in section 466(a)(7) of the Social Security Act; (F) of the interception of a tax refund, as specified in sections 464 and 466(a)(3) of the Social Security Act or under an analogous State law; or (G) of the enforcement of a medical obligation, as specified under title IV of the Social Security Act;
(3) under subsection (a) of this section, of any act to perfect, or to maintain or continue the perfection of, an interest in property to the extent that the trustee's rights and powers are subject to such perfection under section 546(b) of this title or to the extent that such act is accomplished within the period provided under section 547(e)(2)(A) of this title;
(4) under paragraph (1), (2), (3), or (6) of subsection (a) of this section, of the commencement or continuation of an action or proceeding by a governmental unit or any organization exercising authority under the Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and on Their Destruction, opened for signature on January 13, 1993, to enforce such governmental unit's or organization's police and regulatory power, including the enforcement of a judgment other than a money judgment, obtained in an action or proceeding by the governmental unit to enforce such governmental unit's or organization's police or regulatory power;
(5) [Repealed. Pub. L. 105-277, div. I, title VI, Sec. 603(1), Oct. 21, 1998, 112 Stat. 2681-866;]
...and many other situations that are too numerous to include here. You can visit the statute to see the entire exhaustive list – it goes on and on for many pages. (Text of statute downloaded from //uscode.house.gov/uscode-cgi/fastweb.exe)
Hire a Lawyer to Help You with Bankruptcy
If you felt overwhelmed by the magnitude of the bankruptcy code section applying only to the Automatic Stay aspect of bankruptcy, realize that this only a very small part of all the law bankruptcy attorneys are expected to know in order to be competent. Bankruptcy law encompasses not only bankruptcy law itself, but attorneys also need to know many substantive areas of law that come into play every day in bankruptcy cases. For example, community property issues and and community debt issues are prevalent, thus attorneys need to understand family law in addition to bankruptcy law. Bankruptcy is not a do it yourself project. Get yourself a qualified, reputable bankruptcy attonrey to help ensure the process goes smoothly.
The bankruptcy trustee is appointed by the United States Department of Justice to administer bankruptcy cases which are filed. This legal guide explores the role of the trustee in bankruptcy cases.
The Bankruptcy Trustee's Role
Once the bankruptcy is prepared, it's reviewed, signed and then filed. Once a the bankruptcy is filed, the Debtor is assigned a case number, a case trustee, and a hearing date for the Meeting of Creditors. 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 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 bankruptcy case.
Bankruptcy Code Section 704 - The Trustee's Duties
The Trustee's duties are spelled out in the very very wordy Section 704 of the bankruptcy code, which provides as follows:
(a) The trustee shall -
(1) collect and reduce to money the property of the estate for which such trustee serves, and close such estate as expeditiously as is compatible with the best interests of parties in interest;
(2) be accountable for all property received;
(3) ensure that the debtor shall perform his intention as specified in section 521(a)(2)(B) of this title;
(4) investigate the financial affairs of the debtor;
(5) if a purpose would be served, examine proofs of claims and object to the allowance of any claim that is improper;
(6) if advisable, oppose the discharge of the debtor;
(7) unless the court orders otherwise, furnish such information concerning the estate and the estate's administration as is requested by a party in interest;
(8) if the business of the debtor is authorized to be operated, file with the court, with the United States trustee, and with any governmental unit charged with responsibility for collection or determination of any tax arising out of such operation, periodic reports and summaries of the operation of such business, including a statement of receipts and disbursements, and such other information as the United States trustee or the court requires;
(9) make a final report and file a final account of the administration of the estate with the court and with the United States trustee;
(10) if with respect to the debtor there is a claim for a domestic support obligation, provide the applicable notice specified in subsection (c);
...and the list goes on and on for several pages – you can review the statute on your own if you would like to see the exhaustive list of duties. (Text of statute downloaded from //uscode.house.gov/uscode-cgi/fastweb.exe)
The Trustee's Investigation
Basically, the Trustee investigates every bankruptcy case filed. They request documents to ensure the Debtor has been truthful in their bankruptcy paperwork, is eligible for the relief requested, and to see whether there are non-exempt assets that may be liquidated for the benefit of the Debtor's creditors. Types of documents which normally must be turned over to the Trustee upon the filing of a Chapter 7 bankruptcy case include copies of tax returns, paystubs from the Debtor's employer, real estate documents and broker's opinions of the value of the real estate, life insurance policies and bank statements. 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 file a "No Asset Report" fairly soon after the Meeting of Creditors (discussed in Section VII), close their investigation and in approximately 2 to 3 months after the hearing the Debtor will receive their discharge. In a no-asset case in which the Trustee has filed a "No Asset Report", the bankruptcy case will usually close within 2-3 days of the discharge being entered. If, on the other hand, the Trustee believes there are assets to be distributed to creditors, they will file the necessary paperwork to "open an estate" and begin the process of recovering and liquidating the assets. The bankruptcy case will not close until the liquidation process has been completed and the trustee files their final report.
When it comes to filing bankruptcy, the cost of going alone can ultimately be far greater than what you would have spent had you hired an attorney from the beginning. This article explores the common pitfalls of representing yourself in bankruptcy.
Pennywise, pound foolish
Bankruptcy attorneys fees can be costly for a person already struggling financially. Because of this many persons will file bankruptcy on their own without an attorney, relying on bits of pieces of information they get on the internet. Unfortunately, trying to save money can cost you significantly more money if things are not done correctly. Assets can be lost, which might have otherwise been protected with careful planning. When a bankruptcy is not properly prepared, things unravel very soon after the case is filed. By the time the pro se debtor realizes they need an attorney, it may be too late. Even if it is not too late, the amount of money the debtor will have to pay to an attorney to get things back on track at that point will be significantly more than what they would have paid had they hired the attorney to prepare the case from the beginning. Here are some common mistakes pro se debtors make.
Filing under the wrong chapter of the Bankruptcy Code
When a homeowner is behind on their mortgage, Chapter 13 is usually the best type of bankruptcy to file. A Chapter 13 bankruptcy will provide a lengthy period of repayment and automatic stay enabling the debtor to catch up on the arrearages over time. Unfortunately, many pro se debtors think filing a Chapter 7 bankruptcy is the solution to stop a foreclosure sale, only to find out 2 months into the bankruptcy that the mortgage lender is requesting relief from the automatic stay to resume the foreclosure proceedings. Chapter 13 is also usually the better bankruptcy when there are nonexempt assets the Debtor wants to keep. Nonexempt assets can be lost in a Chapter 7 if the Chapter 7 trustee chooses to sell them for the benefit of creditors. Many pro se debtors do not realize that by filing a Chapter bankruptcy they will lose assets that could have been saved by filing a Chapter 13 bankruptcy and paying some money into a plan. By filing under the wrong chapter of the Bankruptcy Code, assets can be lost that might have been saved had the bankruptcy been filed under the correct chapter. Many pro se debtors file under Chapter 7 when they in fact are not eligible due to their disposable income. Consumer debtors with disposable income sufficient to pay back some of their debt will face an uphill battle in a Chapter 7. The bankruptcy code allows for such cases to be dismissed for abuse or converted to Chapter 13.
Leaving out assets and debts
I recently was at a bankruptcy hearing where the Chapter 7 trustee was going over a long list of assets the pro se debtor had omitted from their bankruptcy case but which the trustee had discovered by doing a simple public records and DMV check. Upon discovering the omitted assets the trustee filed a motion for denial of the debtor's discharge and for an order demanding turnover of assets. The pro se debtor seemed like an honest person, but was just in way over his head. At some point it must have occurred to him that he needed an attorney and he had one present with him at the hearing. The attorney explained to the trustee that the entire bankruptcy was basically going to have to be reprepared.
Even though there is now an attorney helping this debtor, it is too late for many of these assets to be saved. They are non-exempt, and will be taken to pay the creditors of the bankruptcy estate. Had this debtor been to see an attorney before putting himself in bankruptcy, he might have been able to carefully plan how to protect those assets. This debtor's actions, while indeed foolhardy, nonetheless appeared to be unintentional.
If a debtor is found to have intentionally concealed assets from the bankruptcy estate, not only can their discharge be denied, but they can lose any exemption they might otherwise have had to protect those assets. They can also be criminally prosecuted. Leaving out debts from a bankruptcy case is another typical problem, though less a problem here in the 9th circuit where we have the In Re Beezely decision. The In Re Beezely case says if a debt is omitted from a no asset bankruptcy case, so long as there was no fraud involved in incurring the debt, it is still discharged. The problem is that so many pro se debtor cases turn into ASSET chapter 7 cases, and when that happens, an omitted creditor is not discharged.
Using incorrect exemptions
The primary reason for filing bankruptcy is to protect assets like wages and homes and cars and jewelry from creditors. This is accomplished by asserting the proper bankruptcy exemptions. Pro se debtors will commonly assert the wrong exemptions, assert the correct exemption but in the wrong amount, or not assert an exemption at all. Exemption issues are very complicated. Which exemptions are appropriate depend on whether you have lived in the state where you are filing for the 2 years immediately before filing. If you have not lived in the state you are filing for the 2 years before filing, then you must use the exemption scheme for the state where you lived the majority of the 180 days prior to the beginning of the 2 year period.
Exemptions schemes vary widely from state to state. Some states have their own exemptions systems, and some rely on the federal bankruptcy exemptions. In some states the bankruptcy debtors can use either the state exemptions for that state, or the federal exemptions. And in other states the state exemptions are only for residents, so a non resident debtor would need to use the federal exemptions.
California has two sets of state exemptions and does not use the federal exemptions (though there are a few federal exemptions which are still allowed to be used, such as federal social security exemption). Assuming the debtor has lived in California for the full two years before filing bankruptcy, then the debtor must choose one of two sets of bankruptcy exemptions best applies in their situation. They cannot pick and choose the exemptions they like from each set. It's one or the other. If the debtor does not properly assert the bankruptcy exemptions, or asserts them in the wrong amounts, the assets an be taken from them by the Chapter 7 trustee and sold to their creditors. Pro se debtors may also misunderstand that exemptions have limits, and just because they assert an exemption does not mean that asset will be fully protected.
Failing to file the required documents and missing deadlines to file documents
Pro se debtors often become overwhelmed with the large number of different documents which are required to be filed in a bankruptcy case. Typically one or more documents are left out, and there are strict time deadlines for getting them filed. The clerk will review the filing and send out an order warning the debtor that if the documents are not filed within a designated period of time, the case will be dismissed. If the documents are not filed by the required deadline, the case is then dismissed.
Relying on misinformation found on the internet
One size does not fit all - the rules for filing bankruptcy have subtle but very important differences depending on where you file. Many pro se debtors, unaware of these nuances, will rely on information they find on the internet which may not be correct for their jurisdiction. For example, in some jurisdictions, a reaffirmation agreement is required to be executed in order to keep secured collateral. Signing a reaffirmation agreement as part of a Chapter 7 bankruptcy has very serious legal consequences.
A pro se debtor may read about reaffirmation agreements on the internet and think they need to sign one too. Or they may receive one from their second mortgage lender and sign it, not realizing this is a very bad idea because if this property ever goes into foreclosure, they are now personally liable for the a debt that would have otherwise been discharged in their bankruptcy. Here in California we are not required to sign reaffirmation agreements for secured debts like mortgages an car loans, and most attorneys will advise you that signing one is a very, very bad idea. Another example would be the use of exemptions, which are very different from state to state.
Consult with a reputable bankruptcy attorney before proceeding
Even if you plan to file bankruptcy pro se, you should at least consult with an attorney before proceeding. I can't tell you how many times a client called me telling me they have a "very simple case" and after a few minutes speaking with me, they learn this is not the case at all. They think they have no assets so there is nothing a Chapter 7 trustee can take, until I explain to them that all those payments the made to their father on the loan they owe him are now recoverable by the Trustee. Or that because their name is on title to their mother's home, that property is at risk of being sold for the benefit of their creditors if they file bankruptcy. Your situation can be far more complicated than you realize, and only an experienced bankruptcy attorney will be able to tell you just how complicated it is. So do yourself a favor and make an appointment with a reputable bankruptcy attorney in your area who can go over your situation with you and advise you how to proceed.
You're a year or so into your Chapter 13 Plan, and you're finding it harder and harder to make ends meet. The cost of living has gone up substantially since you filed your case, but your payment has stayed the same. Or maybe you've had a job loss and making the plan payment is now impossible.
The Bankruptcy Code Contemplates Life Changes During the Chapter 13 Plan
Life is not static. When you filed your Chapter 13 Plan at the beginning of the case, you were expected to come up with a monthly budget based on your situation and expectations at that time. However, when you and your attorney prepared the budget, neither of you were equipped with a crystal ball. Things can and do come up in life that dramatically affect your situation and there is often no way to predict them. Families grow and needs change. Changes in the economy can affect job stability, as can illness, death and divorce. The Bankruptcy Code contemplates this and provides options for debtors in Chapter 13 Plans. These options are discussed below.
Modification of the Chapter 13 Plan
Section 1329 of the Bankruptcy Code allows a Debtor (or Trustee, or the holder of an allowed unsecured claim) to modify their Chapter 13 Plan at any time prior to the completion of the payments under the plan to: 1) increase or reduce the amount of payments on claims of a particular class provided for under the plan; 2) extend or reduce the time for such payments; for a case on reducing the time for payments due to special circumstances, 3) alter the amount of the distribution to a creditor whose claim is provided for by the plan to the extent necessary to take into account any payment of such claim other than under the plan, or 4) reduce amounts to be paid under the plan by the actual amount expended by the Debtor to purchase health insurance for the Debtor and/or the Debtor's dependents if the Debtor meets certain other criteria.
The procedure for bringing a motion for modification of the Chapter 13 Plan depends on the jurisdiction. In San Francisco, it is done by what is called a "20 day notice and opportunity for hearing scream or die motion". If, after being served with notice and opportunity for hearing no objection or request for hearing is filed by the trustee or any creditor, the relief is granted by default.
Section 1328(b) of the Bankruptcy Code allows the Debtor to obtain a "hardship discharge" if there has been a change in circumstances beyond the Debtor's control that causes the Debtor to be unable to afford making anymore plan payments at all. To meet the requirements for a Hardship Discharge, the Debtor must show: 1) The Debtor's failure to make plan payments is due to circumstances beyond their control that are not the Debtor's own fault; 2) The creditors have received at least as much through the Chapter 13 that they would have received in a Chapter 7; and 3) Modification is not possible. An example of a situation that might merit a hardship discharge would be a serious injury or illness
Conversion to Chapter 7
Section 1307 of the Bankruptcy Code allows the Debtor to convert their case to a Chapter 7 at any time if their circumstances have changed to the point where they can no longer make their payments but are ineligible for a hardship discharge under Section 1328(b), so long as they otherwise meet the requirements for filing under that Chapter. Section 1307(b) allows the Debtor to dismiss their Chapter 13 case at any time. Any debts that have not been completely paid through the plan will remain the Debtor's obligation.
On the other hand, if the Debtor needs a Chapter 13 discharge in order to complete the process of removing an underwater junior mortgage, complete a cram-down on a car, discharge a debt that would not be dischargable in Chapter 7, or other reason, then conversion to Chapter 7 would not be a good idea. A better alternative would be to apply for a hardship discharge in Chapter 13, if the Debtor is eligible, or modify the plan to the lowest possible payment the Debtor can afford. Many jurisdictions will accept a Chapter 13 payment amount of $45 a month or even lower so long as long as all amounts required to be paid through the plan are taken care of. For example, if the Debtor was originally making plan payments in the amount of $650, assuming it did not present a problem for any remaining secured or priority debt to be paid through the plan, modifying the plan to a payment amount of $45 a month or lower (if allowed) would enable them to still obtain a Chapter 13 discharge necessary to void the lien, complete the cram-down of the car, discharge the debt not dischargable in Chapter 7, etc.
Stay in contact with your Attorney during the Chapter 13 Plan
When life gets chaotic, it is easy to get overwhelmed and let things go until it's too late to fix them. Stay in contact with your Chapter 13 attorney and communicate with them. If you are not able to make your Chapter 13 Plan payment, call your attorney and let them know. Your attorney can advise you on what options you have. Do not wait until the Chapter 13 Trustee files a motion to dismiss your case to tell your attorney how hard you have been struggling. By then it may be too late to fix things.
You thought your troubles were behind you. Debts have been charged off or settled or discharged in bankruptcy. The phone calls have stopped. Then one day you receive a "1099-C Cancellation of Debt" IRS tax form from one of your creditors. You're thinking - debt cancelled? Great! But is it?
What is Form 1099-C?
When a creditor cancels a debt, they typically will file a 1099-C with the IRS so they can write off the loss. If the debt was cancelled due to bankruptcy, there is a box that is checked to indicate this is the case. The IRS treats cancelled debt as TAXABLE INCOME to you unless you fall within a few narrow exceptions.
THE EXCEPTIONS TO TAXATION OF CANCELLATION OF DEBT INCOME
Income from cancellation of debt is not taxable in the following situations:
The debt is canceled due to bankruptcy. The bankruptcy must have been filed prior to the cancellation of debt for this exception to apply.
The debt is canceled when you are insolvent. However, you cannot exclude any amount of canceled debt that is more than the amount by which you are insolvent.
The debt is qualified farm debt and is canceled by a qualified person.
Real Property Business Debt
The debt is qualified real property business debt.
The Mortgage Forgiveness Debt Relief Act
The Mortgage Debt Relief Act applies to debt forgiven in calendar years 2007 through 2014 and allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief. The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home's value or the taxpayer's financial condition.
A non-recourse loan is a loan for which the lender's only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income.
WHAT DO I DO IF I RECEIVE A 1099-C FROM MY CREDITOR?
If you receive a 1099-C from one of your creditors, you need to give this to your tax preparer so they can advice you how to proceed. This author recommends you only use a tax preparer who is very experienced in 1099 issues and understands the exceptions to taxation. If your debt was cancelled due to bankruptcy, you will need to give your tax preparer your bankruptcy information so that can be included in your tax filing. When you are claiming an exception to taxation of income from cancellation of debt due to bankruptcy or insolvency, you need to use IRS Form 982.
You just got served with a lawsuit from a collection agency who's been hounding you for sometime. You're unemployed, or living on social security. Why don't they just leave you alone? You've heard the term "judgment proof", and you think it might apply to you... but what does it mean?
The meaning of the term "Judgment Proof"
The term "judgment proof" is a term of art used to describe a person who's only assets are exempt assets, and who's only income is exempt income, such that they would be exempt from wage garnishment or levy. What assets are exempt? Sections 703 and 704 of the California Code of Civil Procedure set forth the exemptions which can be used to protect assets from judgment creditors in California. There are also federal exemptions which protect pensions, retirement accounts and social security. If all of your assets are exempt, and your income is protected as well, you are what we call "judgment proof".
But if I'm judgment proof, why am I being sued?
Being judgment proof does not mean no one can obtain a judgment against you. Regardless of your income or assets or lack thereof, you can be sued and a judgment can be obtained against you. All being judgment proof means is that if a judgment is obtained against you, the creditor will be unable to collect. Your creditors can still hound you and demand payment. They can still call you. They can also wait and see if your situation improves and then try again. Judgments in California are good for 10 years and can be renewed for successive 10 year periods.
If I am Judgment Proof, does that mean I cannot or should not file bankruptcy?
Many people who are judgment proof file bankruptcy. Just because your assets and income are exempt from collection does not mean you cannot utilize the bankruptcy system to get rid of your debt. It is a life enhancing right to be able to rid oneself of debt and obtain financial freedom. A bankruptcy discharge can provide great peace of mind and comfort and is often preferable to spending years fighting with creditors and collection agencies, sending them letter after letter only to have your claim of being judgment proof and exempt from collection fall on deaf ears. To find out of bankruptcy is a good idea for you, even if you are judgment proof, contact a reputable bankruptcy attorney in your area today.
You have just found out your timely car payments or mortgage payments are not being reported on your credit report, and you learn it is because you didn't sign a reaffirmation agreement while your bankruptcy case was open. Or perhaps you were turned down for a refinance because you didn't reaffirm.
What is a reaffirmation agreement?
When a debtor with secured debt, such as a car loan or mortgage, files a Chapter 7 bankruptcy, they have three options with regard to the secured collateral. They can either surrender the collateral and discharge the debt, they can redeem the collateral for it's fair market value, or they can reaffirm the debt by signing a reaffirmation agreement. A reaffirmation agreement is a lengthy document that promises the debt will not be discharged in your bankruptcy. The agreement is filed with the court and can be rescinded anytime prior to discharge or within 60 days from the date it is signed - whichever occurs first. If reaffirming a debt will constitute a financial hardship, a hearing is required in front of a judge who will either approve or deny the reaffirmation agreement.
A reaffirmation agreement is not a new contract; It is not a new contract, although new terms, such as a reduced interest rate, can be included if the parties agree. By signing the agreement, the car or home lender will be able to communicate directly with the debtor without hindrance from the automatic stay, and will resume sending monthly billing statments that they may have previously stopped sending due the bankruptcy filing. They will also normally resume allowing the debtor to pay their monthly bill at the bank branch or by electronic debiting, something most secured lenders will stop upon the filing of a bankruptcy case. Most bankruptcy debtors who are planning to keep their home or car might think that sounds fine with them - but there are significant risks to signing one of these documents that you should know about. These risks are discussed below
A Reaffirmation Agreement will create personal liability that would have otherwise been discharged in the bankruptcy case
When you sign a reaffirmation agreement, you are promising to be personally liable for a debt that would have otherwise been discharged in your bankruptcy. That is fine if you are able to continue to make the monthly payments, but what if you can't? The lender will be able to repossess the collateral and sue you for the remaining deficiency. With regard to house, this means if the lender does a judicial foreclosure sale, which are sometimes done in California, you will be personally liable for the deficiency owed after foreclosure. Even if a foreclosure sale is done by non-judicial means, if you reaffirmed a "recourse" second mortgage, you will be liable after the foreclosure sale for any deficiency owed. Most likely the reason you filed bankruptcy was because of unforseen events that caused a financial crisis. You may think you can afford your payments, but unforseen events have happened before, and can happen again.
A Reaffirmation Agreement is NOT REQUIRED in California
While this author is informed that there are some jurisdictions that require bankruptcy debtors to sign reaffirmation agreements in bankruptcy in order to keep secured collateral, that is not the case in California. Furthermore, your home cannot be taken from you so long as you are current on your monthly payments. With regard to cars, it is a little trickier. If there is a provision in your car loan contract that states the act of filing bankruptcy constitutes a breach of contract, the lender CAN repossess the car if you do not sign a reaffirmation agreement in your bankruptcy case. That is the law, but then there is the reality. The reality is that most car lenders are perfectly fine with you keeping the car after bankrutpcy WITHOUT signing a reaffirmation agreement so long as your car payments are current. If you don't sign a reaffirmation agreement and you later can't make the payments, you simply return the car to the lender and whatever remaining balance is owed will be included in your prior bankruptcy discharge.
A few things you should know if you don't sign a reaffirmation agreement....
Your lender will probably stop mailing you your monthly loan statements, so you will need to make sure you send in your payment on time every month to the correct address. Your lender may tell you that you cannot pay at the bank branch anymore, so if you are accustomed to paying your loan at the bank, you would instead have to mail in your payment. Your lender will stop reporting your timely car or mortgage payments on your credit report so you will need to report them to the credit bureau yourself. You do this by requesting your payment history from the car or mortgage lender, and then disputing the debt with each of the three credit reporting bureaus on the basis that your credit report does not reflect your true payment history. You submit your payment history, and the car or home lender will have 30 days to object. If they do not object, the payment history will be reflected on your credit report. You will have to repeat this process as time goes on.
Additionally, your lender may say you are not eligible to refinance your loan because you did not execute a reaffirmation agreement as part of your bankruptcy. If that happens, you will need to find another lender. Lastly and perhaps most importantly, some lenders will treat your contract as in default if you do not execute a reaffirmation agreement and reaffirm the debt while in Chapter 7 bankruptcy. If there is a clause in the secured collateral contract which states a bankruptcy filing will result in the contract being declared in default, under current law this is permissible. Unfortunately, if the lender chooses to exercise this option, they typically will repossess the collateral.
Talk to an attorney before deciding to reaffirm a loan
Reaffirming a debt has serious legal consequences. It is because of these legal consequences that most attorneys will advise AGAINST signing a reaffirmation agreement, and most judges will deny them. If you are not represented by an attorney in your bankruptcy case, you will definitely want to consult with one prior to signing a reaffirmation agreement.
If you have not relied on credit cards in a long time, life after bankruptcy will not be much different than it was just before you filed your case, except for the fact that you no longer have those pesky payments to make and you can actually see the bottom of your mailbox when you open it. For others, living life without credit may require some adjustments. Particularly for self-employed persons, living without credit is a bit like walking on a tightrope without a net. It may take a year or two before you no longer feel vulnerable. What you need to do in the interim is SAVE YOUR MONEY as much as possible. Even if it's only $20 a month, save something EVERY MONTH. Gradually, you will have a savings which will act as your credit card in emergencies. If you use it, pay it back as soon as possible.
How Can You Save When You Have No Money??
If you have no income, saving is of course not possible for you presently. This opportunity will come for you down the road and you can revisit this article at that time. For those who do have some money, however little, SAVING IS POSSIBLE. It takes work and creativity, but you can do it; here are some suggestions:
Create a budget that limits discretionary spending and stick to it
Set financial goals. Commit to saving a certain amount every month, no matter what. Be sure your goal is realistic, but not too easily reachable.
Redefine what it takes to make you happy
Discover the joys in thrift store shopping
Get rid of your car
Get rid of your cable
Rent DVDs and CDs at the library, where they are free
Grow your own vegetables
Bring your lunch to work instead of going out to eat
Make our own pizza
Quit paying for the gym and go for hikes and bike rides instead
Go to museum on the monthly free days
Take classes at the library
Make your own lattes
Do your own home maintenance
Get Skype for long distance phone calls
Go to matinees instead of evening movies
Take fewer trips to the store
Pay attention to how much things cost per unit (read the shelf tags at the store carefully)
Buy only what's on sale
Consolidate your student loans
Use free ATMs
Shop around for cheaper car insurance
With careful budgeting, you will be able to establish a savings in no time at all, even if you have never saved before. In time, you'll wonder how it was you ever came to be so dependent on credit cards.
What About Rebuilding My Credit?
For many folks, the last thing they want to do when they finish their bankruptcy is go out and get a new credit card. Debit cards make life without credit fairly easy – virtually all banks offer them as a convenience for checking account customers and they can be used to buy airline tickets, rent cars, and have all the dignity of a regular credit card. Eventually, however, most people will want to try rebuilding their credit. Once you receive your discharge, there is nothing stopping you from applying for new credit, but you will need to start small, just like you did in the beginning, when you first began building your credit history. Here are some suggestions.
Pull Your Credit Report and Check for Errors
Three months months after you receive your bankruptcy discharge, visit www.AnnualCreditReport.com (//www.annualcreditreport.com/) and request copies of your credit report from Transunion, Equifax and Experian. Go through each report carefully. For every debt that was discharged in your bankruptcy, there should be a notation which states “included in bankruptcy" or “discharged in bankruptcy". If any creditors are continuing to report you as delinquent on your account, or if you see a debt that says “charged off" but does not say “discharged in bankruptcy" or “included in bankruptcy", that means there is an error that needs to be corrected or your credit will continue to get worse over time.
Fortunately, correcting credit report errors is quick and easy. After you have made note of the error(s) in each report, go to the main website for each credit reporting bureau, where you will see a link for reporting errors in your credit report. Follow the instructions on the website for reporting the error(s). You will need the copy of your credit report so you can provide the credit report number. When you are prompted to state the reason for the error, choose “this debt was included in my bankruptcy". It will then ask you for the date your case was filed, and possibly your case number. Once you have completed reporting the error(s), you will should receive a confirming email stating the matter will be investigated. Once your bankruptcy filing and discharge have been confirmed by the credit reporting agency, the credit report will be corrected, normally within a week of you reporting the error.
It may also be helpful to put a one paragraph statement on your credit report explaining you credit history. You can mention your years of timely payments, and the event or events that caused your financial difficulty which were beyond your control, for example, illness, divorce, etc., and how you are now back on track. This statement will stay on your credit report until you remove it, and anyone who looks at your credit report will see it and can take it into consideration.
Secured Credit Cards
A secured credit card is a type of credit card that requires you to put down a security deposit, for example, $300, for which you are given a small line of credit, such as $250. These are very easy to get and can help you to build your credit if you use them carefully. The trick is to never use more than a third of the available credit, or you will actually hurt your credit. Don't pay it off and reuse it – keep a small balance going and make regular, minimum monthly payments to show a credit history. With each monthly payment, your credit score will improve. If you get more than one secured credit card, again – never using more than a third of the available credit and making regular monthly payments - your score will improve that much faster.
Unsecured Credit Cards
There are a few good companies out there who will give you an unsecured credit card with a small line of credit but be careful – shop around. A few companies who tout offers of credit cards to persons with less than perfect credit are actually offering you a card that will already have a balance on it when you receive it for a service fee they will have charged you in advance of you even using the card. This fee may cause the balance on the card to be larger than the available credit.
I strongly caution everyone about taking out a loan to buy a car. There is no bigger waste of money, in my opinion. As soon as you drive a car off a lot, it is worth far less than it was when it was just sitting there, waiting for a dreamy eyed customer to come along and take it home. Rest assured, once you receive your discharge there will be no shortage of car loan offers in your mail box. Somehow all the major car dealers know when you've received your discharge and are anxious to reel you in. Why would they want to loan someone just out of bankruptcy a huge sum of money to buy a new car? Two reasons: 1) after having been relieved of your debt, you are in the best position to begin making new payments; and 2) they can charge you a ridiculously high interest rate!!
There are SO many alternatives to car ownership – most cities have great public transportation – there is also car pooling, City CarShare, and Zip Cars, just to name a few alternatives. If you must own a car, rather than taking out a car loan and paying interest, why not wait until you have saved up a couple thousand dollars and purchase a used car that will get you where you need to go? If you must drive long distances and therefore need a newer car that you lack funds to purchase on your own, consider sharing with a friend – a car partner who either already has a car you can use, or who is willing to pool their savings with yours to purchase a newer car together. A bit idealistic? People are doing it.
Rebuilding your credit will take time. Until you have rebuilt your credit, you will be somewhat vulnerable in a few situations, such as in renting a new apartment. Here are a few suggestions for dealing with a potential landlord.
Renting an Apartment
It is true that many landlords will require a credit check before agreeing to rent an apartment to a potential tenant and may be deterred by a poor credit history. Your best chances may be with a private landlord, not a major apartment management company. If the landlord for an apartment you like is hesitant to rent to you because of your credit history, try negotiating with them. For example, you can offer a higher security deposit, or pay several months in advance, to give them added assurance that you will be able to make your future rental obligations. You can also have your current landlord, as well as former landlords write letters of recommendation for you which mention your history of timely rent payments.
Will My Bankruptcy Cause Me To Lose My Job?
Federal law prohibits discrimination against an employee because they have filed bankruptcy. Chances are, your current employer will never know about your bankruptcy unless you owed them money and, as a result, had to include them in your bankruptcy among your other creditors. The bigger worry for most people these days is the credit check most employees have to go through as part of the hiring process for new employment. Federal laws provide protection against bankruptcy discrimination in these situations as well. Of course, discrimination can be hard to prove. Fortunately, however, many employers are more concerned about you not being distracted by burdensome debt when they do a credit check, and an employee who has been relieved of their debt in bankruptcy would certainly be preferable over one who was hopelessly distracted by their financial woes.
The World English Dictionary defines “truthiness" as “the quality of being considered to be true because of what one wishes or feels, regardless of the facts." 1
Truthiness can lead to disastrous consequences if relied on by a Debtor in bankruptcy. When a person files bankruptcy, they are required to disclose many pieces of information pertaining to their financial circumstances. A Trustee is appointed who will administer the bankruptcy case by, among other things, investigating the Debtor's financial situation, reviewing the bankruptcy paperwork filed with the court, questioning the Debtor under oath, recovering assets for the benefit of creditors where applicable, and, also where applicable, collecting payments and paying allowed claims. In conducting their investigation, the Trustee will rely on a variety of sources, including, but not limited to: public records, DMV records, transfer of title records, as well as checking and savings account records. In other words, the Trustee will rely on facts to establish the truth or falsity of the documents presented by the Debtor in the bankruptcy case.
A Debtor's failure to disclose pertinent information in their bankruptcy case can result in the loss of assets, dismissal of their case, or worse, regardless of whether the Debtor honestly believed they were being truthful. If a Debtor in bankruptcy actually knows or has reason to know that the information set forth in their bankruptcy paperwork is false, they have committed a bankruptcy crime. Title 18 of the United States Code sets forth the law of what constitutes a bankruptcy crime and includes the following acts, which are punishable by fine and up to five years in prison:
Knowingly and fraudulently concealing assets belonging to the Debtor;
Knowingly and fraudulently concealing information relating to the financial affairs of the Debtor;
Knowingly and fraudulently making a false oath, account or claim;
Knowingly and fraudulently making a false declaration under penalty of perjury;
Making a false or fraudulent representation regarding the Debtor's financial condition, and
Refusing to obey a lawful order of the court
Title 11, Section 727 of the United States Code also provides for denial of discharge if any of the above acts are committed. There are many unfortunate stories involving criminal prosecution and denial of discharge of persons found to have knowingly concealed assets in their bankruptcy – assets that in many cases would actually have been protected had they been properly disclosed. Had those folks read this article before filing their bankruptcy cases, things might have turned out differently for them.
It is important to note that truthiness does not have to involve intentionally lying and concealing information in order to cause serious problems in a bankruptcy case. Here is a common bankruptcy scenario involving “truthiness", which does not involve an actual intent to lie or conceal:
Bankruptcy Attorney: Has anyone died recently that might leave you money or property – an inheritance?
Bill P: Well, my dad died two months ago, but he doesn't own anything. Besides, I hear probate is going to take months. I don't think I'll get anything.
Bankruptcy Attorney: Did he own a house?
Bill P: No, he was in a nursing home.
Bankruptcy Attorney: Do you know if he had a life insurance policy?
Bill P: Yeah, he did, me and my two brothers are named as beneficiaries, but we're not going to get it for a long time, my brother said, so I don't see this affecting my bankruptcy. It's not something I have now.
Bankruptcy Attorney: If we file your bankruptcy now, we have to disclose the expected inheritance as an asset. How much will you be getting, do you know?
Bill P: Only about $30,000.
Bankruptcy Attorney: That could be a problem for your Chapter 7 – your car is worth $17,000, and we won't have enough exemptions to protect the inheritance. Let's discuss some options.
Bill P: Can't we just not mention it? It's really not mine now anyway – my brother said it will be at least 9 months before everything is divided up. So how is that an asset that I have now?
Bankruptcy Attorney: It's what we call an “interest in a decedent's estate" - money or property you expect to receive in the future as a result of someone having already passed away. It's an asset that must be disclosed in your bankruptcy if you file now.
Just imagine what would have happened if Bill had not consulted with an attorney and filed bankruptcy on his own, without first obtaining a lawyer's advice. He would have omitted the inheritance, believing that because he wouldn't actually receive the inheritance for several months, it was not an asset he had to disclose now in his bankruptcy. At his bankruptcy hearing, the Trustee would ask the same questions posed by his attorney. Bill would be under oath; if he did not answer the questions truthfully, he would be committing perjury.
Trustees have very broad investigative powers. If the Trustee discovers the expected inheritance, the likely consequence for Bill would be: 1) he would be required to amend his bankruptcy to include the asset, and if he refuses, his bankruptcy discharge would likely be denied, 2) he would then lose any exemption or portion of exemption he might otherwise have to protect the inheritance, and 3) the inheritance would be liquidated by the trustee to pay his creditors. Fortunately, Bill has an attorney who will advise him of the consequences in failing to disclose the asset in his bankruptcy, as well as the alternatives to filing his bankruptcy now.
The previous scenario is a pretty obvious example. Truthiness in bankruptcy can take many forms, however, other than as described above. Before a person files bankruptcy, it is crucial that they conduct a diligent investigation of their affairs. The Debtor who has filed a Bankruptcy Petition will be deemed to have full knowledge and understanding of the information contained therein, and will be held responsible for the truthfulness of its contents. The information contained in a bankruptcy must be based on hard facts and exact numbers, to the extent possible. Estimating numbers without confirming their accuracy is another form of truthiness in bankruptcy which can lead to big problems.
For example, the bankruptcy paperwork to be filed with the court requires all Debtors to accurately state their income from all sources. Providing an incorrect estimate of one's income can result in a person filing the wrong chapter of bankruptcy, and ultimately dismissal of the case. Believing one does not have to list “under the table" income because “there is no record of it" is yet another example of truthiness in bankruptcy that can come back to haunt the Debtor.
Here is another example. The bankruptcy paperwork to be filed with the court requires Debtors to list all of their assets, along with the corresponding fair market values. Before filing bankruptcy, a person should carefully inventory their possessions and determine the appropriate fair market values for their assets. Providing an incorrect estimate of the value of one's assets can result in the loss of those assets. Most Bankruptcy Trustees are very knowledgeable about property values and are understandably suspicious when they see a figure that looks comparatively low. Trustees regularly conduct their own appraisals of assets to confirm the accuracy of the figures provided by Debtors and to determine whether the asset's value exceeds the bankruptcy exemptions that would be used to protect it. If the asset turns out to have unprotected value, it will likely be sold by the Trustee with the proceeds going to pay the Debtor's creditors. Believing an asset doesn't have to be disclosed because “it was a gift" or “it's ugly – who would want it" are still more examples of truthiness in bankruptcy that will, at the very least, draw the ire of the Trustee, and at worst, can result in the loss of the assets, denial of discharge, or even criminal prosecution.
Fortunately, the pitfalls of truthiness in bankruptcy are absolutely avoidable simply by fully understanding one's situation. A good bankruptcy attorney will conduct a probing interview with their clients, asking questions to make sure the client actually understands the nature and extent of their financial affairs, and has a realistic impression of their situation. The Attorney will also request certain documents to confirm much of what the Debtor has told them, such as copies of deeds, tax returns, credit reports, printouts from Kelley Blue Book showing the value of their vehicle, etc. The Debtor must be honest with their attorney and disclose all pertinent pieces of information. Without disclosure, there can be no protection. When the bankruptcy is finalized and ready to be signed, there should be no loose ends for the Trustee to hang the Debtor with. This will ensure everything goes smoothly once the case is filed, and there are no unfortunate surprises later on.
Collins English Dictionary - Complete & Unabridged 10th Edition 2009 © William Collins Sons & Co. Ltd. 1979, 1986 © HarperCollins Publishers 1998, 2000, 2003, 2005, 2006, 2007, 2009
One of the first questions married couples facing bankruptcy ask their attorney is usually “do we both need to file?"
The primary reason for this question is that couples often hope to protect one spouse's credit by having only the other spouse file. However, if the spouses are filing the bankruptcy in a community property state, such as California, it is usually best for both of them to file bankruptcy together, if they have been married for a period of time. The reason is that by virtue of the community property and community debt laws in place, the non-filing spouse will continue to be legally responsible for the marital debts that have been discharged in the filing spouse's bankruptcy, even if those debts were only in the name of the spouse who filed bankruptcy. In a community property state, such as California, a debt incurred by either spouse, during the marriage, that is for the benefit of the community, is the legal responsibility of both spouses, regardless of whose name the debt was incurred under. Further, only the spouse who receives the discharge in bankruptcy will actually be relieved of the liability for the debt. Therefore, even if the spouses have kept their affairs separate, including all of the credit accounts, in a community property state, the practical effect is that both spouses remain liable for the marital debts of the other spouse. The only exception would be if the parties entered into a properly drafted pre-marital agreement whereby each spouse agrees to keep debts incurred during the marriage their sole responsibility, for which the other spouse will not be liable.
It is possible, however, that the filing spouse's creditors may not even be aware of the non-filing spouse, and may never attempt to collect. Additionally, in the event the filing spouse's creditors do attempt to collect against the non-filing spouse, there is some protection in that they would be prohibited from levying against any community property assets because those assets also belong to the spouse who has received bankruptcy protection. This would include wages, bank accounts, and any other community property assets. Also, once the marriage ends, either by divorce or death, the community is gone and there is no individual liability created by virtue of the community relationship as to those debts that were not the contractual liability of the non-filing spouse.
Regardless of the risk of marital creditors collecting against the non-filing spouse, both spouses often choose to file bankruptcy together because it will better enable them to start fresh, with no debts of either spouse holding them back. Filing a single bankruptcy between two spouses also saves money as there is only one attorney fee and one court filing fee. Additionally, if spouses work together as a team, the process in gathering the necessary information for the attorney to prepare the case can be much easier.
Difficulties sometimes arise, however, when spouses do not assume equal responsibility for the amount of work to be done in gathering the required information and filling out the required documents. It is very common in many families for one spouse to assume the role of the financial manager. Thus, it is no surprise that when it comes to gathering the required information for preparing the bankruptcy, this task is often assigned to the spouse most familiar with the family's finances, or who is better organized, or simply more comfortable with the process. Due to the magnitude of work involved, this can sometimes cause the more involved spouse to feel seriously overwhelmed. On the other hand, when spouses divide the workload, problems can also arise if one spouse does not feel the same sense of urgency in getting things done, or is less organized, which can undermine the work already completed by the other spouse.
It is important to remember, that no matter who does the work in gathering the information, both spouses will be held legally responsible for knowing and understanding the information in the bankruptcy. Therefore, it is imperative that both spouses are involved. Here are some suggestions for balancing the workload between spouses while at the same ensuring maximum involvement in the process by both parties so that things can go smoothly for everyone.
DISCUSS YOUR MUTUAL GOALS. Set aside a quiet time during which you both can talk freely about what you hope to achieve in filing bankruptcy, your immediate needs, and some of your long term hopes after the process has concluded.
SET A TIME FRAME. If you have a deadline due to a pending foreclosure or lawsuit, your time frame has already been set for you. Regardless, even if there is no immediate deadline, both of you may have your own ideas about when you would like to have the bankruptcy filed and ultimately concluded. Discuss your needs with each other and then set a schedule for completing the various tasks requested by your attorney.
WORK TOGETHER. Much of what you need to do will be gathering documents, and it's entirely possible only one spouse knows where they are kept. Now is a great time for the other spouse to become more involved in the financial affairs of the household, and knowing where things are kept and how they are organized is the first step. When it's time to do the required credit counseling, complete the counseling at the same time, if your schedules allow. This is yet another opportunity for both spouses to participate in looking carefully at their financial affairs, even if it's the first time. The mandatory credit counseling will require you both to state what you spend in various categories of living expenses. Even if one spouse does all the shopping, usually the other spouse will buy things for themselves during an average month, such as work lunches, health aids, gas, etc. By communicating with each other and contributing what you each know, you will be able to come up with a more complete financial picture both for the mandatory credit counseling and for preparing your bankruptcy.
Both spouses should take responsibility in pulling their own credit reports and review them for accuracy, together with their spouse. Work together as much as possible in filling out any debt worksheets given to you by their attorney, checking them for accuracy as much as possible. Do not assume your spouse is aware of every debt you may have, or that you are aware of every debt your spouse has. Work together as much as possible in completing any questionnaires given to you by your attorney, answering the questions together wherever possible, filling in your own separate information where required, and reviewing the information provided by the other spouse. Read and discuss the disclosures and retainer agreement provided to you by your attorney. Share your thoughts and questions with each other, and your attorney. Remember to give your attorney email addresses for both spouses, so your attorney can always copy the other spouse in the communications.
TAKE SANITY BREAKS. When you start to feel that all of this is a bit too much to handle, it's time to take a break. Take a walk to the local farmers market for some fresh strawberries. Go for a walk on the beach. The combination of exercise and fresh air will help you clear your mind for a bit and give you the boost of energy you will need to continue with the process.
People go through many different emotions – sometimes over many years – before they ever experience the relief a Bankruptcy Discharge provides by releasing them from liability for their debts. Usually the trigger is a loss of income or increase in living expenses or both. They may spend months feeling positive that they can turn things around, waiting for a certain event or series of events that will enable them to repay their debts, such as a new job, lawsuit settlement, or even winning the lottery. Because they are hopeful that luck will eventually find them, the thought of filing bankruptcy may be the furthest thing from their mind for a long time. While they still have available credit, it is easy to have hope.
They may transfer balances from one credit card to another to stay current and by doing so they may have excellent credit. Over time, however, if income doesn't increase, credit runs out and at some point they struggle just to make the monthly minimum payments. Gradually, over time, that hope fades and fear and desperation set in. They may begin to borrow from friends and family, with tearful promises to repay, feeling so ashamed and hating themselves for having to ask. The phone begins ringing off the hook; when they answer it, it's an angry bill collector demanding to know when payment will be received. Earnest explanations and promises to repay fall on deaf ears and are met with harsh threats.
At some point, reality sets in, and with it, the thought of bankruptcy. They remember a friend somewhere, sometime ago, who said they had filed. At the time, it seemed so far from something they themselves would ever consider, let alone be in a position to have to consider. But now, things have changed. The shoe is on the other foot. And they are frightened. And ashamed. What to do? The following is a guide to understanding these emotions and suggestions for how to keep them in check.
UNDERSTAND THE EMOTIONS
It is normal to feel embarrassed and ashamed about not being able to repay your debts. I regularly hear from my clients that they wish they could repay their debts and would not be filing bankruptcy, had they any other options. It is also normal to be fearful of the process. The process itself is very detailed and tedious, requiring the accumulation of substantial amounts of personal information, which can be difficult for folks already experiencing depression and anxiety about their debts.
Simply gathering all of ones debt information can be overwhelming and requires focus on areas of one's life that they might not want to face. It also feels invasive – your personal financial picture is going to be examined with a magnifying glass. This, compounded with the fear of what others will think, including future landlords, employers and even your friends and family, can cause fearful feelings to proliferate.
Most fears can be resolved simply by learning more about the process. It goes without saying that persons who are the least informed about the bankruptcy process are often the most fearful about filing and suffer for years in silence, feeling there is no alternative. Some may have come from countries where bankruptcy is an extremely difficult, frightening, debtor-unfriendly process, and/or are known for having corrupted judicial systems where legal authority are feared and mistrusted. Many folks fear bankruptcy because they think it would mean the loss of valuable assets to their creditors, believing rumors they may have heard that have little or no basis in fact.
The key to resolving these fears is information, and the first step to becoming more informed is to meet with a qualified bankruptcy attorney. Your bankruptcy attorney will review your specific situation, answer your questions and discuss with you your bankruptcy options, including the type of bankruptcy you may be eligible to file, whether all of your assets will be protected, and whether the types of debts you have can be discharged in bankruptcy. Once you are armed with this information, and knowing what you know, have decided to go ahead and file bankruptcy, you can begin the next step toward balancing the flood of emotions you may be feeling.
TAKE A DEEP BREATH AND REMIND YOURSELF: A) IT IS YOUR RIGHT TO FILE BANKRUPTCY, B) YOU DID NOT CHOOSE YOUR PRESENT CIRCUMSTANCES, C) YOU'VE DONE THE BEST YOU CAN DO AND D) IT'S TIME TO CUT YOUR LOSSES AND MOVE FORWARD
The days of debtors prisons are long over and filing for bankruptcy is now a protected right under Article 1, Section 8 of the United States Constitution. Bankruptcy is considered to be good for the economy because the relief from debt gives people the ability to spend money again on things they may have put off buying, such as cars, furniture, homes, etc., which, in turn, stimulates the economy. Corporations file bankruptcy every day. So do cities and municipalities. It's a right we all have to enable us to start fresh.
Without this right, people would be very fearful of taking chances, and would be less inclined to start their own businesses for fear of what would happen if the business failed. Innovation would be stifled. Society would not be where it is today. Lastly, bear in mind that you have most likely already paid a significant amount of your debt back, and what you owe now is probably a lot of interest. You've tried your best. Look at this as you would any other business decision. It's time to cut your losses, move forward and don't look back. In a few years, when you remember this difficult time, you will think to yourself: “wow, I didn't think things would ever get better, but they did!" And they will.
SURROUND YOURSELF WITH SUPPORTIVE PEOPLE
The bankruptcy process can be much easier if you surround yourself with people you feel comfortable sharing your feelings with. Many isolate themselves during this time out of shame. Do not go through this alone. If you do not feel comfortable sharing your feelings with friends or family, look into local support groups in your area, where you can meet with people in your same situation who know and feel exactly what you are going through. You will see that you are not alone, that many others are in your same situation, or in even worse situations, and that they are getting through it, just like you will.
FOCUS ON THE BIG PICTURE
Imagine what it will feel like to be completely out of debt years earlier than scheduled. Regardless of whether you accomplish this in a Chapter 7 bankruptcy, or a Chapter 13, bankruptcy brings order to chaos. It's a means to both an end and a new beginning. It is a learning experience. You will learn things from this process that will shape the decisions you make for the rest of your life, and you will hopefully never find yourself in this situation again. You will be years ahead of all those poor folks who still think they need to buy the latest Ipod, or XBox, or take out a new car loan.
You will never again fall into that trap. You will be immune. Do not worry about your credit – you will rebuild it if you choose to do so, and for your information, bankruptcy does not destroy your credit. Yes, it will appear on your credit report 10 years from the date of filing, and yes, your credit score will go down a certain number of points, but it does not go down all the way to the bottom, unless you are almost there anyway. If you want to rebuild your credit after bankruptcy, you will have opportunities to do so, and all of the good information that is presently on your credit report – your years of timely payments, will still be there. You will get through this, and you will come out better. You'll see.
What is Bankruptcy?
Bankruptcy is the right we all have to be freed of excess debt by having some or all our debts extinguished while at the same time protecting our assets so we can get a fresh start and go on to lead newly productive lives. This is accomplished through a discharge, and the way it is obtained depends on whether it is a Chapter 7 or Chapter 13 bankruptcy that is filed.
Chapter 7: In a Chapter 7 bankruptcy, covered in Chapter 7 of the Bankruptcy Code, all dischargable debts are discharged usually in a period of 3 to 4 months.
Chapter 13: In a Chapter 13 bankruptcy, covered in Chapter 13 of the Bankruptcy Code, a percentage of the debt is repaid through a 3 to 5 year plan depending on the Debtor's income and expenses. After the plan is completed, the remaining dischargable debt is discharged and any non-dischargable debt remains.
There are limits to what kinds of property can be protected in bankruptcy and there are limits to what kinds of debts can be discharged. If the Debtor files a Chapter 7 bankruptcy and has equity in property exceeding in value the amount of the allowed exemptions, the property will be sold to pay their creditors. They can instead file a Chapter 13 and so long as the Debtor's creditors will receive the dollar equivalent of what they would have received in a Chapter 7 case (had the property been liquidated) through the Chapter 13 plan, the property will be protected, but the Debtor has to pay some of the debt back in order for that to be accomplished.
How is Property Protected in Bankruptcy?
Property is protected in bankruptcy using exemptions. Many states have their own exemption systems, but there is also a federal exemption system that is used in situation where the Debtor's state allows for them to be used instead. 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. A Debtor 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 Debtor has not lived there for two years, then they must 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 Debtor would simply use the federal exemptions.
What is a Discharge and Which Debts can be Discharged in Bankruptcy?
Generally, dischargable debts include: - Credit card debt - Medical bills - Utility bills - Unpaid balances after foreclosure or surrender of secured property like a home or car - Personal loans - Some taxes
A list of which debts are not dischargable in bankruptcy is found in Section 523 of Title 11 of the U.S. Code. They include: - Student loans - Some taxes - Domestic support obligations - Debts incurred while driving under the influence - Debts ordered to be repaid by the court because they were incurred by fraud or deceit - Restitution - Criminal fines and penalties, such as parking tickets. The effect of a discharge is covered in Section 524; the primary effect is for the Debtor to no longer be liable for the debts which are covered by the discharge.
OVERVIEW OF THE 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 is comprised 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 50 pages long. To properly prepare a bankruptcy, the Debtor needs to give their attorney a lot of information, including: - A new credit report (try to get one from each of the 3 credit reporting agencies, they are free at www.annualcreditreport.com (//www.annualcreditreport.com)) - The names, addresses and account numbers of all debts, plus any collection agencies - A list of personal property items and their current replacement values for their current age and condition - 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 - Paystubs and other income information, such as pension and social security payments, and profit and loss statements for self-employed Debtors - Copies of tax returns for the previous 3 tax years - Leases and other contract information, and other necessary information.
Once the bankruptcy is prepared, it's reviewed, signed and then filed. Once filed, 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 bankruptcy 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 Should the Debtor File?
The first question to ask when deciding which chapter under the bankruptcy code the Debtor should file is: does the Debtor 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. 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 Debtor depending on their particular circumstances. Persons wishing to file bankruptcy should first meet with a qualified attorney to discuss the issues involved in their particular situation and to learn which type of bankruptcy will best meet their needs.
Why not Chapter 7? - Eligibility Limitations
Debtor may not be eligible if they have filed a Chapter 7 within the previous 8 years, or if their debts are primarily consumer in nature and their budget (or the Chapter 7 Means Test) show they have disposable income and can afford to pay at least part of their debt back in a Chapter 13.
LIMITATIONS ON PROTECTION OF ASSETS If the Debtor has assets that exceed the exemption limits; these assets can be sold in a Chapter 7 with the proceeds going to pay their creditors, but can be protected in a Chapter 13, so long as a certain amount is paid to their creditors through the Chapter 13 Plan. If the Debtor is behind on their mortgage, they could catch up on the behind payments in Chapter 13, but not Chapter 7.
LIMITATIONS ON DISCHARGE OF DEBTS Some debts are not dischargable in a Chapter 7, which would be dischargeable in a Chapter 13, including debts owed as part of a Marital Settlement Agreement. If a Debtor has used a credit card to pay a non-dischargable tax or student loans, that would not be dischargeable in a Chapter 7 but could be discharged in Chapter 13.
LIMITS ON CHAPTER 13 - Must be an individual with regular income - Secured debts must total less than $1,257,850 - Unsecured debts must total less than $419,275*
*These figures change over time; check with Shaye for the current figures