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What Property Can I Keep in Bankruptcy?

March 30, 2011 By Leave a Comment

By Scott Hyder -

One of the most common questions I get is what property may a debtor keep when he or she files bankruptcy. Under the bankruptcy code and Arizona law, certain property is considered “exempt” or “protected” from creditors, including a bankruptcy trustee. Every state has its own laws regarding exempt property. The examples of exempt property given in this article only applies to property in Arizona. Here are just a few examples of exempt property:

Home: A person’s primary residence is exempt, provided that it is does not have more than $150,000 of equity. For example, if a debtor owns a home worth $200,000 and the debtor still owes the bank $100,000, then the home has $100,000 of equity. Therefore, the home is exempt and cannot be taken by the bankruptcy trustee. If the home is worth $350,000 and is paid off, then it has more than $150,000 of equity. As a result, the trustee will force a sale of the home, give the debtor the first $150,000 of sale proceeds, and use the rest of the sale proceeds to pay the debtor’s creditors. These days, most of us have very little or no equity in our homes because of the horrible real estate market.

Vehicles: Each debtor may keep one vehicle, provided that it does not have more than $5,000 of equity. A disabled debtor gets a $10,000 exemption instead of a $5,000 exemption. If you are married, each spouse gets one vehicle so long as each vehicle does not have more than $5,000 of equity. Alternatively, a couple may “stack” both of their $5,000 vehicle exemptions on one vehicle and exempt the single vehicle if it does not have more than $10,000 of equity.

Retirement/Pension: A person’s retirement (such as a 401(k), IRA, 403(b), etc.) and pension is usually 100% exempt property. A lawyer will need to analyze which section of the Internal Revenue Code the retirement plan falls under to make sure that it is exempt. If a debtor cashes out the retirement and puts the money in the bank, the money no longer has exempt status. One of the biggest mistakes a debtor can make prior to filing bankruptcy is to cash out his or her retirement.

Furnishings: Certain furnishings are exempt, such as a couch, dining table, beds, a television, and most appliances, provided that their aggregate value is not more than $4,000 ($8,000 for married debtors). Most of us also have furnishings that are non-exempt and can be taken by a bankruptcy trustee. For example, a microwave is non-exempt (which surprises most people). Video games, iPods, DVD players and most electronics are non-exempt. An entertainment center, a grandfather clock, and family heirlooms are non-exempt. Computer equipment is non-exempt (but, strangely enough, a typewriter is exempt). How does a debtor figure out the good faith value of furnishings? It is not the original purchase price of the furnishings. My suggestion is always to estimate the price of such furnishings if they were purchased at Goodwill or a garage sale.

Tools of the Trade: Equipment and tools that a debtor primarily uses for work are exempt provided that their aggregate value does not exceed $2,500. Therefore, if a debtor uses a computer primarily for work, it will be exempt. If a debtor is a sole-proprietor landscaper, his landscaping tools are exempt so long as they are not worth more than $2,500. Again, the value of such tools and equipment is determined by how much they may cost if they were purchased at Goodwill or a garage sale, not the amount the debtor spent to originally purchase them.

Money in the Bank; Food and Provisions: Any money in a single bank account of $150 or less is exempt. This basically means that the trustee will require a debtor to turn over funds in excess of $150 that existed as of the date of the bankruptcy filing. A competent Arizona bankruptcy lawyer will advise a debtor to use any excess money to purchase food and provisions prior to filing for bankruptcy. Why is that? Because food and provisions for a 6 month supply are 100% exempt. Any money a debtor acquires after a bankruptcy filing is the debtor’s property to keep.

Note that just because a debtor has non-exempt property does not mean that a bankruptcy trustee will take such property. It just means that the trustee has the right to take it. If a debtor’s non-exempt property is minimal or would be difficult for a trustee to liquidate, the trustee may not require the debtor to turn it over. Even if a trustee does require non-exempt property to be turned over, a debtor can still bid on such property at a trustee’s auction in order to keep it.

For more information, please visit http://scotthyderlaw.com

Scott W. Hyder, Esq.
Law Office of Scott W. Hyder, PLC
(602) 923-7370
Copyright 2011 by Scott W. Hyder, all rights reserved

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Differences Between Chapter 7 and Chapter 13 Bankruptcy

March 17, 2011 By Leave a Comment

By Scott Hyder -

You should always first consult an Arizona bankruptcy lawyer to get a thorough analysis of the type of bankruptcy filing that is most appropriate for your situation.

Chapter 7

The most common personal bankruptcy is a Chapter 7. In a nutshell, a Chapter 7 filing allows the debtor to discharge most debts, such as credit card bills and health care charges. A Chapter 7 is streamlined, procedurally simple, and the least costly. Your average basic “no-asset” bankruptcy will cost a debtor anywhere from $1,200 – $2,000 in legal fees for an experienced Arizona bankruptcy lawyer (which admittedly is not cheap for most people in financial distress). More complicated bankruptcies cost more.

In addition, a Chapter 7 will relieve the debtor from most liabilities. For example, if an Arizona foreclosure occurs on a debtor’s home, a Chapter 7 will prevent most junior home equity lenders from suing the debtor for any deficiency amount owed. As a side note, so long as the debtor’s mortgage was used to purchase the house, the mortgage lender is usually prohibited from suing the debtor for any deficiency amount, even without a bankruptcy filing(assuming that the Arizona “anti-deficiency statute” applies). Always consult with an Arizona real estate lawyer to determine whether your mortgage lender can sue you for any deficiency amount if a foreclosure has occurred or is pending.

In return for the debtor receiving a discharge of most debt, the bankruptcy trustee may require the debtor to turn over certain “non-exempt” assets. Most debtors primarily own “exempt” assets — property that is protected and can be retained by the debtor (i.e., a home with $150,000 of equity or less, a car with $5,000 of equity or less, a pension/401(k)/IRA, most furnishings, etc.). To the extent that a bankruptcy trustee requires a debtor to relinquish non-exempt assets (i.e., money in a bank account exceeding $150, a boat, valuable electronic equipment, etc.), such assets will be liquidated, and any cash proceeds will be used to pay the debtor’s creditors.

Chapter 13

So why don’t all debtors file for a Chapter 7? Well, if a debtor earns too much money, the debtor may not qualify for Chapter 7. In such circumstances, a debtor may file a Chapter 13 bankruptcy.

A Chapter 13 bankruptcy is what I call a “payment plan” bankruptcy. A debtor makes monthly payments to the bankruptcy trustee over the course of 3 – 5 years. Once all payments have been completed, most debts are discharged. How much does a debtor have to pay each month? That is always the $25,000 question (after the question “how much is your legal fee?”). In a nutshell, a debtor’s monthly payment will be the debtor’s monthly take-home pay minus the debtor’s “reasonable monthly expenses”. A competent Arizona bankruptcy lawyer will be able to assess your income and expenses and help estimate what your monthly payment will be.

Unlike a Chapter 7 bankruptcy, a Chapter 13 bankruptcy may also be used to help a debtor come current with missed mortgage payments without penalties or interest being assessed (assuming the debtor wants to keep the home and is able to afford an adequate monthly payment to make up missed mortgage payments). Although a bankruptcy filing usually cannot compel a lender to modify its loan for a debtor’s primary residence, a debtor may be able to use a Chapter 13 bankruptcy to completely strip away junior mortgages, depending on the value of the home in today’s market. A Chapter 13 can also be used to pay vehicle loans and other debts secured by personal property, possibly reducing the remaining principal on such loans and requiring the lender to accept a better interest rate.

A competent Arizona bankruptcy lawyer will try to get the debtor’s payments to pay those secured debts that the debtor wants to be paid (i.e., a vehicle loan so the debtor can retain the vehicle), providing the most “bang for the debtor’s buck”. It is not uncommon that the monthly Chapter 13 payment will pay just a small fraction of unsecured credit card debt. Once payments have been completed, the debtor will have paid 100% of missed mortgage payments and car loans, and most debts will be discharged. Furthermore, a debtor will most likely be able to keep property that would otherwise be “non-exempt” and would have to be surrendered in a Chapter 7.

Unfortunately, more than 60% of Chapter 13 bankruptcies fail for one reason: the debtor stops making the monthly payments.

For more information, please visit my website at http://scotthyderlaw.com/

Scott W. Hyder, Esq.

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Converting a Chapter 13 to a Chapter 7 Bankruptcy

December 21, 2010 By Leave a Comment

By Bob P Jones -

You can’t watch the news on TV without hearing the word bankruptcy mentioned. When most people hear the word bankruptcy, they think of chapter 7. Chapter 7 is what individuals prefer to file because it’s quick and it wipes out all the unsecured debt, making the individual virtually debt-free. Some consumers file Chapter 7 and think everything is going smoothly until the trustee contacts your bankruptcy attorney because he thinks that your case is an abuse of the system. At this point, the U.S. trustee can change your case to Chapter 13 because of the belief that you are capable of paying at least part of your debt. People that end up in this situation generally don’t have the money for a Chapter 13, after all of their expenses. Some debtors make a little too much to qualify for the means test, but the reason they are trying to file Chapter 7 is because their living expenses are so high, and have nothing left from their income after they pay their expenses, not including their credit card bills. Your bankruptcy attorney can defend against this motion and can usually be successful.

Qualifying for a Chapter 7 is much different than a Chapter 13 as it is solely based on the income of the individuals filing. Basically, anyone will qualify for Chapter 13. This type of bankruptcy gives the debtor an opportunity to pay back their creditors within a 3 to 5 year payment plan. The trustee will use the individual’s income and expenses to come up with a fair payment plan. The best use of a Chapter 13 bankruptcy is when you’re trying to protect a piece of real estate that has a large amount of equity in it. Chapter 13, as all chapters of bankruptcy, has the automatic stay that will stop foreclosure and allow the debtor to catch up on the arrears owed.

In today’s crazy economy no one is immune from losing a job or having a financial disaster hit their life. If the debtor is in the middle of a Chapter 13 bankruptcy and gets into trouble making their payments, the trustee can dismiss your case. You can let the court dismiss your case, but it will leave you with a lot of late payments due on debt. In this situation, once the automatic stay is lifted, the creditors will come after you with a vengeance. The better alternative is to convert your bankruptcy case to a Chapter 7. Contact your bankruptcy attorney and have them file a notice of conversion with the court. As long as you qualify for Chapter 7, the process should be easy.

After converting your Chapter 13 to Chapter 7, any money that is being held by the bankruptcy trustee should be returned to you less the administrative fees. Many times people in Chapter 13 have their wages garnished to pay their payment plans. It is important to have your attorney stop this immediately because it will usually take at least a pay period to get it stopped. If there are any overages paid, they should be returned to you also. When the conversion goes through, a Chapter 7 bankruptcy trustee will be appointed and a new 341 meeting will be scheduled. Your bankruptcy attorney will have to file amended schedules adding any debt that has been incurred. After your case is converted, you will have your 341 meeting 4 to 6 weeks later, and you should get your discharge about two months after that. The best part is, you will no longer have a payment plan, and after the discharge you should be debt free. The downside to this is you might lose some property that you are trying to protect by filing Chapter 13. This is not necessarily true, as property values continue to drop and you might not have as much equity as you thought. This is something to discuss with your bankruptcy attorney, so you can choose the path that will work best for your situation, pointing you to financial freedom and being debt-free.

The author formed DIY4LAW.Com that specializes in filing bankruptcy under Chapter 7 and Chapter 13 bankruptcy and helps individuals with debt problems and helping stop foreclosure by putting them in touch with a local bankruptcy attorney. Check our website for more answers to bankruptcy questions for a debt free future.

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What is “Lien Stripping” and Can I Use it to Reduce my Mortgage Payments

December 20, 2010 By

mortgage lien stripWith the decline in Atlanta area housing values, a seldom used bankruptcy technique has taken on new life.  The technique is called “lien stripping” and it arises from Bankruptcy Code Section 506(a) and (d).  A lien strip allows a Chapter 13 debtor to use the power of the Bankruptcy Court to transform a secured second mortgage or home equity line of credit into an unsecured debt, thereby eliminating a monthly payment and reducing total debt by tens of thousands of dollars.

Here’s how it works: Let’s say that you own a home worth $250,000.   Perhaps that home was worth $350,000 three or four years ago but its market value has dropped because of the recession.  The balance on the first mortgage is $270,000 and the balance on the second mortgage is $45,000.

In this case, a Chapter 13 debtor can ask his bankruptcy judge to “strip away” the second mortgage debt since all of the value in your home is encumbered by your first mortgage.  In other words, if you were to sell your house, the first mortgage lender would not be paid in full and the second mortgage lender would get nothing.  The second mortgage lender is, therefore, unsecured.

Lien stripping only works when:

  • you are a debtor in a Chapter 13 case
  • the fair market value of your house is less than the balance due on your first mortgage

The Clerk’s Office of the Northern District of Georgia has provided us with sample lien stripping motions, which you can review by clicking on the link.

I suspect that mortgage companies will mount challenges to lien stripping.  There has already been a Minnesota case where a local judge there refused to allow lien stripping.   One day this issue may be considered by the United States Supreme Court.  For now, however, most bankruptcy judges will allow lien stripping and if your second mortgage or HELOC is fully unsecured, you may want to consider it as well.

My friend and colleague, Charleston bankruptcy lawyer Russ DeMott has published a clear explanation of how he approaches the mortgage lien stripping process (in his district, they refer to lien stripping as “mortgage stripping” but the concept is identical.  You can read Russ’ post by clicking on the link.  Russ correctly points out that out of banks and mortgage companies have not cooperated in out of court mortgage modifications and that lien stripping remains perhaps the most reliable tool to modify a mortgage.

I have successfully “stripped” several junior mortgages.  Not surprisingly, the main issue that arises has to do with the fair market value of the home.  You may need to pay for an appraisal to convince the judge that the second mortgage is, in fact, fully unsecured.

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Choosing Between Debt Settlement and Bankruptcy

December 3, 2010 By Leave a Comment

By David Milton Sandy

When life has dealt you a series of tough breaks and you owe more money than you think you’ll ever be able to pay back, then you might consider the two most severe options under the debt management umbrella, debt settlement or bankruptcy.

Bankruptcy’s not a singular option; however, there are two forms of bankruptcy. Chapter 7 liquidates all your eligible debts, immediately. However, chapter 13, requires you to undergo a 5 year payment plan and if you complete the plan then it will discharge any remaining eligible debt. This payment plan will be very tough; generally all your disposable income after a very stringent calculation will be paid into the plan. In some areas, only around 20% of Chapter 13′s will be successfully completed.

Chapter 7′s as expected from the above generally has a very high degree of satisfaction among participants who feel they benefited from the procedure. The expected result at the end of a chapter 13 will be that you hate your lawyer.

A chapter 13 can do something that neither a chapter 7 nor debt settlement plan can do. It can allow you to make up for a deficiency in an item secured by a loan such as your house or car. If you can pay a deficiency out of a chapter 13 and any equity beyond your bankruptcy exemptions within the 5 year plan then you can keep the property, though in many cases an outsized property led to the problems in the first place. If you own property outright above the exemptions you can use a variation of this to essentially buy the property back over the life of the 13.

So that’s the first step, if you have secured property you’d like to try to keep then you need to know what a Chapter 13 will look like and if it could enable you to achieve your desired ends in terms of keeping property. There are very few other really compelling reasons you’d want to do a Chapter 13.

That would be unless; of course you have to go through a Chapter 13 to get relief. Congress has decreed a means test forcing people above the median income for your state with some adjustments to undergo a Chapter 13 and barring the easy Chapter 7. This is out of some notion that people should pay back their debts if they make enough.

So if a 7′s out of the question or can’t achieve your goals in terms of keeping assets then you will need compare to the pros and cons of chapter 13 and debt settlement. Significant pros of bankruptcy include that it’s legally guaranteed, you can’t be sued while undergoing the process, and it’s extremely effective at stopping harassing phone calls. Debt settlement also has really large pros that should be considered in that it’s much more flexible, generally achieved in a shorter period of time, the payments tend to be smaller, and if you have extremely large paid off assets it might be your only shot at keeping them.

Both chapter 13 and debt settlement will at the end of the day be a tough road and anyone who completes either option should be congratulated.

It’s also possible that bankruptcy won’t be an option for some people. Bankruptcies have a substantial stigma attached. In that case, debt settlement might be your only valid option for reducing the effect of overuse of credit in your life.

Overall, though the only way to really decide would be to get a debt settlement plan and a bankruptcy chapter 13 and compare them side by side. You should be able to get plans from each provider and take the time to make a reasoned decision. Debt management has certain basic principles, but everyone’s situation is unique.

David Sandy is a Memphis Bankruptcy Lawyer who likes to write about debt management and debt recovery and formerly extensively practiced divorce law in Memphis, TN.

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Using A Bankruptcy Attorney Or Doing It Yourself

November 22, 2010 By Leave a Comment

By <a href=”http://ezinearticles.com/?expert=Bob_P_Jones” >Bob P Jones</a></p>

<p>In the recent years, the bankruptcy law has seen many changes. The biggest change was when Congress enacted the 2005 bankruptcy code. Since then there has been numerous changes year-to-year. When looking for information on bankruptcy, it’s important to check more than one website to check and see if information is even current. After making the decision to file, individuals should remember to be totally honest with everyone. If the person decides to hire a bankruptcy attorney, they must disclose all their unsecured debt, every asset, including their true value. If a filer isn’t truthful, and the trustee finds out, the debtor will have serious problems. Depending on how flagrant the violation is the judge, in the least, will impose fines and possible jail time. That’s why it’s pertinent when filing bankruptcy to show the court complete honesty.</p><p>In a bankruptcy filing, anyone can file themselves if they want. Hiring a bankruptcy attorney is probably a better idea as the laws have changed dramatically. If you decide to try and go it alone, remember to be very thorough when filling out the bankruptcy forms. It’s advisable to buy software that will help you learn how to file for bankruptcy. If you get through all the paperwork make sure that the petition is signed in all places necessary. If you don’t qualify for the means test or have a lot of property you want to protect, you’ll have to file a Chapter 13 bankruptcy. With the complexity of a Chapter 13 bankruptcy, a bankruptcy attorney will definitely be necessary.</p><p>When someone has a foreclosure pending, Chapter 13 can give a debtor a chance to catch up on payments that are in arrears. Immediately following the filing of a Chapter 13 bankruptcy the automatic stay is put in place, stopping all collection efforts against the debtors. Having an attorney help with a Chapter 13 can be an invaluable resource. The bankruptcy attorney will review their client’s financial situation and give them advice on what would be the most beneficial financial moves for their future. With a <a target=”_new” rel=”nofollow” href=”http://diy4law.com/what-is-chapter13-bankruptcy.php”>Chapter 13</a> being very involved, the attorney and their staff will make sure that the I.’s are dotted and T.’s are crossed. They will make sure that your credit counseling courses are completed and sent in at the proper time. If everything isn’t properly done the petition will be dismissed without prejudice. The creditors then can come after the debtors with a vengeance.</p><p>Deciding on hiring a bankruptcy attorney or trying to do it alone should be a well thought out decision. If you decide on the do-it-yourself route make sure you’re very thorough learning the state exemption laws where you reside. If you don’t think that you’re confident with the filing of the petition, look for a bankruptcy attorney that will fit in your budget. The attorney route will be a little more expensive, but you should be able to sleep at night knowing that your bankruptcy was properly prepared. If you consider the legal expense of $1500, for a Chapter 7 and double that for a Chapter 13, to write off $25,000-$50,000 or more, it is really quite a value. When it comes to protecting your family’s property and future it’s very important to have your bankruptcy filed properly.</p><p>The author formed DIY4LAW.Com that specializes in filing bankruptcy under Chapter 7 and Chapter 13 bankruptcy and helps individuals with debt problems and helping stop foreclosure by putting them in touch with a local <a target=”_new” href=”http://diy4law.com”>bankruptcy attorney</a>. Check our website for more answers to bankruptcy questions</p>

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Bankruptcy Attorney: Do You Need One?

October 26, 2010 By Leave a Comment

By Andrew Stratton -

Do you need a lawyer when facing difficult financial times? In theory, you can handle all of the paperwork necessary to file for bankruptcy without the help of a lawyer. For many looking to file in the near future, the thought of paying a lawyer seems almost impossible. After all, you would not be in this financial mess if you had the money laying around to pay lawyer’s fees, right? While this is a legitimate concern, you should still consider hiring a lawyer. To go through the process without a bankruptcy attorney could mean that you lose your case and are refused the protections due under the law. Representing yourself could also cause you to lose valuable assets and family heirlooms to your creditors.

Truthfully, the law does not require a lawyer when individuals file Chapter 7 or Chapter 13. Simple Chapter 7 cases can often be successfully handled without the help of a law professional. However, individuals rarely have the expertise and understanding necessary to file Chapter 13 without one.

In Chapter 13 cases, debtors must draft a detailed plan, negotiated with creditors and the trustee’s office, and figure out a way in which they could potentially pay back their debts while protecting much of their assets. A bankruptcy attorney has the expertise necessary to create a workable plan that will also be acceptable to the courts and the creditors. A lawyer will also handle all paperwork, thus ensuring that your case is not dismissed because you missed some correspondence from your trustee or failed to respond in a timely manner.

Also, whether you are filling Chapter 13 or Chapter 7, if you have a valuable asset, such as a home with a significant amount of equity in it, you need the help of a lawyer to do all that you can to legally protect that asset. The cost of the lawyer’s fees is far less than the monetary and emotional cost of losing a valuable asset, like your home, that would have been protected under the law if you had filed correctly.

If you are still unsure about hiring a bankruptcy attorney, make an appointment with a few of them. Most lawyers will offer a free or minimal cost consultation to potential new clients. At the consultation, they will explain to you how they can help and what their fees will be. This will help you better evaluate whether or not you can benefit from their services. Chances are that you will decide the cost of a bankruptcy attorney is worth the peace of mind that comes from knowing that you are receiving the full protection due to you through your state’s laws.

If you find yourself facing a difficult financial situation a Raleigh bankruptcy lawyer can help you see the light at the end of the tunnel. For more information, visit: http://www.lawinfo.com/expert/raleighbankruptcylawyer/

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Navigating The Two Types of Bankruptcy

October 6, 2010 By Leave a Comment

By RW Goldberg -

When you are faced with huge debts, no job, and seemingly no regular source of income you might be considering going into bankruptcy. There are specialized attorneys in Portsmouth, New Hampshire that deal with bankruptcy cases in a very professional manner. The choice to go through with bankruptcy is never easy and finding a good attorney can be daunting. You need to seek out attorneys that specialize in bankruptcy cases and will explain to you all your options.

There are two types of bankruptcy that you can select from and your lawyers will be more than glad to help you make the right choices. One of the first things that you need to do before you even start your case is to evaluate and select an attorney from the Portsmouth lawyers available that you feel will work towards solving your problems. You need an attorneys or Portsmouth lawyers that are willing to work as your advocate and advisor in your critical financial situation.

The bankruptcy attorney who is working on your New Hampshire case will work as an advocate toward resolving some of your financial problems by trying to get your debtors to lower the bill and/or lower the interest rate. The Portsmouth bankruptcy attorney is there to advise you on which type of bankruptcy best suits your needs.

The Portsmouth, New Hampshire attorneys all know that if you have mounting medical bills, credit card debts and are faced with foreclosure that a Chapter 7 Bankruptcy is the best recourse that you have in order to get your life back into order. Chapter 7 Bankruptcy will clear up all your debts making it easier for you. You will be able to get credit once again and start all over once you begin working. Your slate is wiped clean. This is what the bankruptcy attorney will work towards for you. By choosing Portsmouth attorneys you will be certain to get a lawyer who is familiar to New Hampshire bankruptcy judges, which will be a great advantage.

When you have a lot of debts like credit cards, revolving charges, hospital bills, and other bills but you are still working you are not entitled to take Chapter 7 Bankruptcy, chapter 13 may be the route you need to pursue. The Portsmouth attorney that you select knows this but they also know that you do have another option that will help you relieve your financial burdens.

Chapter 13 Bankruptcy is another choice that will help you with your financial problems. Your New Hampshire attorney will need to negotiate with the people that you may owe to get your bills lowered. They will work with the bank that holds the mortgage on your home to help prevent foreclosure. Also in medical cases they may need to negotiate for you on your hospital bills getting the balances lowered.

When you go to New Hampshire bankruptcy court your attorney will advocate on your behalf to get your bills consolidated into one payment plan that is court controlled. This is very helpful because you will only pay a small percent on your bills to the courts who will distribute the payments to your debtors. You will not be completely out of debt; however, you will be better off financially because of your Portsmouth bankruptcy attorney’s efforts to help you get out of debt.

RW has been performing SEO and website consulting online since 1997, and specializes in Medical and Legal consulting online. For more information regarding attorneys in Portsmouth please visit http://www.attorneysportsmouth.com.

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Inside the Mind of a Bankruptcy Lawyer – Should I File and if so, Why Should I Choose Your Firm?

September 14, 2010 By

There are dozens of lawyers out there who offer to prepare and file bankruptcy cases.  Some work in high volume "bankruptcy mill" firms that compete on price while others compete on experience, knowledge and service.  Usually the cost differential is a few hundred dollars, but when you are considering bankruptcy, every dollar counts – so why would you want a lawyer like me as opposed to a firm that would offer to represent you for a lower price?

I could offer a glib answer like "if you needed brain surgery, would you look for the cheapest surgeon on the one with the most experience and industry recognition" but that does not really answer the question.  Perhaps it would be helpful if you could look over my shoulder as I analyze a real life situation that came before me recently.

Earlier this month an email arrived from a couple who wanted information about bankruptcy.  The wife wrote that she was a stay at home mom raising 2 children and that her husband lost his job about a year ago, and recently started back to work at a lower paying job.  Their current household income is just under $50,000.  They own a house that is now worth less than what they paid for it – the house is worth about $200,000 – the first mortgage is $210,000 and the second mortgage is $35,000.  They own one older car outright and are financing a mini-van.  They have also incurred around $25,000 of credit card debt – most of which was used trying to keep the mortgage current.

Earlier this year they fell behind on both the first and second mortgage.  The first mortgage lender started foreclosure proceedings, but suspended foreclosure and offered to consider my potential clients for a mortgage modification.  They have been making modified payments for several months but when they called the lender to ask if they had been approved for a permanent modification, the account rep told them that their modification paperwork had not been approved but that their application had been sent to another department for a reconsideration.  News of this decision had not been provided to my prospective clients – the only reason they found out was from their call.  No one from the mysterious reconsideration division was available and their multiple calls have not been returned for over 2 weeks.

They decided to contact me because they are getting the sense that the mortgage company is unlikely to approve their modification and they want to be prepared for a possible foreclosure.  What are their options? Here is what I advised them through my conversation with the wife:

First, I asked what was their desire regarding the house – was keeping the house a priority?  The wife responded that they would like to keep their house but they were not sure they could afford it given the husband's reduced salary.

I explained that Chapter 13 is the type of bankruptcy that can stop a foreclosure but that Chapter 13 would not allow us to change the amount of the monthly payments, nor would it change the total balance due on the mortgage.  Chapter 13 would allow them to "cure" their arrearage by paying that arrearage (the past due payments) over a five year period of time, along with other debts that would also be included in the Chapter 13 payment plan. However, if they were not able to afford the regular monthly payments Chapter 13 probably did not make much sense.

The only possible justification for a Chapter 13 would arise from the possibility that they could use Chapter 13 to "strip" the second mortgage and make that unsecured.  Under Chapter 13 law, a second mortgage that is wholly unsecured, meaning that the balance due the first mortgage exceeds the fair market value of the home.  If the second mortgage is wholly unsecured, we can file a motion to strip the lien, thereby making the second mortgage debt an unsecured claim in the Chapter 13.  If our Chapter 13 plan called for paying unsecured debt at 5 cents on the dollar, then Chapter 13 might be something to consider.

In this case, the wife advised me that the monthly payment due the first lender was more than what they could afford, plus she did not seem enthusiastic about signing on for a five year payment plan, so we decided to remove Chapter 13 from consideration.

We then proceeded to discuss Chapter 7.

I pointed out that Chapter 7 would allow the couple to discharge their credit card debt as well as any potential liability arising from the surrender of their home.  I felt that the real danger came from the second mortgage lender as it has been my experience that first lenders rarely pursue deficiency claims because  of the Georgia law that requires them to go to court to certify the deficiency before a judge within 30 days of the foreclosure.  Second mortgage holders, by contrast, need only file suit on the promissory note associated with their loans.  I see far more deficiency balance claims from second mortgage lenders than from first mortgage lenders.

I also noted that since the foreclosure process could take several months, one strategy here would be to remain in the house and pay nothing – nothing to either mortgage lender and nothing to the credit card lenders.  This strategy would allow my prospective clients to reduce their budget outflow dramatically for several months while they built up a small cash reserve, and then file bankruptcy in four to six months when creditors were starting to take action.  I noted that this strategy was based on economics, and that they would have to be comfortable with the moral implications of this course of action.  I also noted that this "wait until the last minute" strategy would cause significant damage to their credit in addition to the bankruptcy.  By contrast, filing a Chapter 7 when there were few or no 120 day late references would make recovery from bankruptcy a little easier.  Credit reports document payment histories and while a bankruptcy discharge will put the balances at zero, it does not delete the negative payment histories.

On the other hand, I advised the wife that if she and her husband waited to file and the husband secured a better, higher paying job, their household income might leave them with disposable income in their budget, or it might cause their household income to exceed the median income for a family of four, thereby making Chapter 7 much more difficult or impossible.  It has been my experience that when household income exceeds the median (in Georgia the current median income for a family of 4 is $68,258) by $10,000 or more, it can be very difficult to qualify for Chapter 7 under the means test.  Thus, if the husband was actively looking for employment and his target income was $80,000 or more, waiting to file Chapter 7 might not be the best idea.

The wife then asked me about the credit report issue – how long would it take for she and her husband to rebuild their credit.  I responded by saying that it my experience, a Chapter 7 debtor can expect his credit score to remain depressed for eight months to a year following the Chapter 7 discharge.  However, Chapter 7 has the positive effect of eliminating all debt and thereby causing an improvement to the debt to income ratio.  Further, individuals can only file Chapter 7 once every eight years – so from a lender's perspective a recently discharged debtor has no debt and cannot file bankruptcy for at least 8 years.

I assured the wife that I made it my practice to follow up with my clients who had received a discharge to review their credit reports three to five months after discharge.  I have found that at least half of the time, there are errors on the credit reports that artificially depress post bankruptcy credit scores and sometimes, the errors are actionable, meaning that we can collect damages from creditors for Fair Debt Collection Practices Act violations.  In a few cases I have been able to collect enough in damages to cover the attorney's fees and filing fees associated with the original bankruptcy filing!

I ended by conversation with the wife by thanking her for contacting me.  I then followed up our conversation with a brief email summarizing what we had spoken about and providing her with the "get started" link to one of my web sites.

I hope you can see that even a "simple" fact pattern can give rise to a variety of options and pratical considerations.  Consumer bankruptcy is not a "one size fits all" practice and I am able to raise all of the points that I did because I have seen a lot of different issues over the past 23 years.  If you have any questions about what have written here or if you want to discuss your personal situation, I encourage you to contact attorney Susan Blum or me by phone at 770-393-4985 or send us an email.

Filed Under: Avoiding Bankruptcy, Foreclosure, News Tagged With: , , , , , , , , ,

Your 18 Bankruptcy Questions Answered

July 23, 2010 By Leave a Comment

By John M. Crane -

1. What is Bankruptcy?

Bankruptcy is a means for good people in bad situations to legally get a fresh start. There are certain requirements, but generally, anyone meeting those requirements has a legal right to file. As soon as a petition is filed, all creditors are prohibited from attempting to collect on all debts listed in the petition until the Court either discharges you from these debts or determines that you are not entitled to such relief.

2. What is the process for filing?

First, any qualified bankruptcy attorney will probably require you to fill out a questionnaire for them to review to determine whether or not bankruptcy is right for you. If it is determined to be your best option, the attorney will have to decide under which Chapter you will file. You will likely meet with the attorney on more than one occasion to answer questions, provide documents and for the attorney to answer any questions you might have. After the bankruptcy petition (legal papers filed with the bankruptcy court that commences your bankruptcy proceeding) is filed, you will be required to appear in court on at least one occasion, the Meeting of Creditors, for a Chapter 7 filing, and probably more than one appearance if your bankruptcy petition is a Chapter 13 filing (Meeting of Creditors and Confirmation Hearing).

3. What is Chapter 7?

Chapter 7 is a liquidation proceeding under the United States Bankruptcy Code. In a Chapter 7 proceeding, a trustee appointed by the bankruptcy court will take custody of and sell off any of your non-exempt assets. The money received from this sale will be used to pay your creditors. Your debts are then discharged. This means that creditors are forever prohibited to try and collect on these discharged debts in the future.

Certain debts, like taxes, alimony, child support, student loans, and debts that have not been listed in the Chapter 7 petition (as well as debts which have been incurred as a result of either an intentional tort or the defrauding or misleading of a creditor) are not dischargeable. This means that after the discharge, you will continue to be liable for these debts.

4. What is a Chapter 13?

A Chapter 13 is designed primarily for residential homeowners, and allows a person or married couple to pay off all, or a portion, of their debts under the supervision and the protection of the U.S. Bankruptcy Court while remaining in their home. A Chapter 13 Plan is primarily used to repay mortgage arrears, while also addressing all other debts you owe to any other creditors. Payment of your mortgage other debts are generally spread out over a 3-5 year period. Chapter 13 is also used as an alternative to credit counseling. Individuals are permitted to repay their credit card debt over a 3-5 year period without any additional interest charges. A Chapter 13 filing is designed for those individuals who are currently employed and have steady incomes, yet are still overwhelmed with bills, judgments, lawsuits or other financial obligations.

5. What types of property are exempt?

Certain types of personal property is classified as exempt under the Bankruptcy Code. This means that you get to keep this property even after your debts are discharged. In New York, State Law provides for specific exemptions including, among others:(A) cash, checking or savings accounts, U.S. Savings Bond, stocks, and other marketable securities, and tax refunds up to a maximum total of $2,500.00; (B) equity in a motor vehicle up to $2,400.00; (C) basic wearing apparel; (D) $50,000.00 of the equity in your home, co-op or condo; (E) social security benefits; (F) household furnishing and certain appliances; (G) IRA, 401K and other qualified retirement accounts.

6. Will I lose all my credit cards after bankruptcy?

You are required to list all outstanding debts that you owe as of the date of the filing of a bankruptcy petition. Any accounts that have a zero balance do not have to be listed. For those credits cards that have balances, if you agree with the creditor to repay all or any portion of the card’s balance at the time of filing, you may be able to execute a document known as Reaffirmation Agreement that documents your willingness to continue to be responsible for this debt after the bankruptcy is discharged. In most cases, the Bankruptcy Court must approve of the Reaffirmation Agreement before it becomes effective.

7. How long will it take?

A typical Chapter 7 case takes normally 4-6 months. A Chapter 13 case may take anywhere to 3-5 years to complete.

8. What is a Meeting of Creditors?

Section 341 of the United States Bankruptcy Code affords creditors the right to meet with the debtor to determine if a discharge or a reorganization of debt is appropriate based upon the facts and circumstances presented by a debtor in their bankruptcy petition. While creditors do technically have the right to attend these proceedings and to question the debtor, creditors rarely appear at these proceedings.

In Chapter 7 proceeding, the Meeting of Creditors serves two important purposes. First, the Court, through examination by the Court appointed Trustee, verifies that all of the representations contained in your bankruptcy petition are true and correct to your best of your belief and knowledge. Second, the Bankruptcy Court Trustee also utilizes this meeting to verify on behalf of the Court that there are no assets that may be considered non-exempt, which could be sold by the Trustee to repay part, or all, of your debt. A typical meeting of creditors in a Chapter 7 proceeding takes approximately 5-10 minutes to complete.

In Chapter 13 proceeding, a debtor is also required to appear before the Chapter 13 trustee. In a Chapter 13 case, the meeting of creditors serves a slightly different purpose. In addition to verifying that all of the representations made by a debtor are true and correct, the Chapter 13 trustee will also verify that the debtor has calculated the means test properly, and that the debtor has the financial ability with which to make the payments proposed in the proposed Chapter 13 plan. Verification of a debtors ability to make payments in a Chapter 13 case is based upon both the debtor testimony at the meeting and various documentation, usually tax returns and/or pay statements, that must be presented to the Chapter 13 trustee to verify the representations made in your Chapter 13 petition. As in a Chapter 7 case, a typical meeting of creditors in Chapter 13 case takes between 5-10 minutes to complete.

9. How will filing affect my credit?

Under the Fair Credit Reporting Act, a Chapter 7 may remain on your credit report for 10 years. A Chapter 13 filing is legally permitted to be reported for 7 years. The filing of any bankruptcy petition will seriously impact your credit score in the near future. By beginning to slowly build up your credit after your bankruptcy is discharged, you tell future lenders that your problems with credit are now behind you. One way is to obtain a “secured” credit card from a bank as soon as you are able. With a secured card, a debtor puts up a certain amount of money, as little as $200.00, in an account at the bank to guarantee payment. This limit is usually increased as the debtor proves his or her ability to pay the debt.

Two years after your bankruptcy is discharged, you will be eligible for a mortgage loan on similar terms to individuals with similar financial profiles that have not filed bankruptcy. It is then that the amount of your down payment and your employment and income stability become more important to a bank than your past bankruptcy filing.

10. What if I filed before?

For an individual, you may only file for relief under Chapter 7 once every eight years. This date runs from the date bankruptcy is actually discharged. Please note however that the 8-year period does not run from the date of the filing of the first petition, but rather from the date the court issues the bankruptcy discharge.

11. Will I be able to get out of repaying my student loans?

With two exceptions, student loans are not dischargeable in a bankruptcy proceeding. However, the student loan may be discharged if it is neither insured or guaranteed by a governmental unit, nor made under any program funded in whole or in part by a governmental unit or non-profit institution. Finally, the student loan maybe discharged if paying the loan will “impose an undue hardship on the debtor and debtor’s dependents.” 11 U.S.C. Section 523(a)(8)

12. Will I lose my home?

A Chapter 13 proceeding is designed to help residential homeowners keep their home while helping them to reclaim their lives and start anew. Chapter 13 filing is permitted for persons that owe less than $250,000.00 in unsecured debt and less than $750,000.00 in secured debt. Thus, it is possible to file bankruptcy and keep your home.

13. Will I lose my car?

In New York, there is an exemption for a motor vehicle valued at $2,400 or less. If you have a $20,000 car and owe $10,000 on this vehicle, it is likely that the bankruptcy trustee will liquidate such an automobile in a Chapter 7 proceeding.

14. Does my spouse have to file?

New York is a common law state. Unlike community property states, your spouse will not be affected by your bankruptcy if they are not responsible for any of your debt. If they have a supplemental credit card they are probably responsible for that debt, but unless they also signed the agreement, they are probably not responsible in NY. Community property states are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

15. What happens if I don’t list all my property?

Failing to list all property is a crime. Many assets are protected from being seized by the bankruptcy court, but only if they are listed. Bankruptcy crimes are punishable by imprisonment for up to five years. Criminal conduct includes: filing a bankruptcy petition to defraud your creditors; concealing property from the court or bankruptcy trustee; knowingly and fraudulently make a false oath or account; an intentional transfer or concealment of property to defraud creditors; and concealing, altering, destroying, or falsifying records or documents.

16. Will my employer find out?

Technically, Chapter 7 filings are public records and it is possible for anyone to find out. However, unless your employer searches bankruptcy filings, it is unlikely they will find out. The Credit Bureaus will record your filing and it will remain on your credit record for 7-10 years.

17. Can I lose my job?

No. Employers are prohibited from discriminating against you because you filed bankruptcy pursuant to U.S.C. Sec. 525.

18. Is my pension/retirement accounts safe?

Employee contributions to ERISA qualified retirement plans, deferred compensation plans, tax-deferred annuities, and health insurance plans are exempt assets. Also, Section 522 of the Bankruptcy Code states that an individual can now exempt up to one million dollars in an IRA account. Interestingly enough, Section 522 specifically excludes SEP IRA’s from such exemption, although this type of IRA may possibly fall under an ERISA plan (anyone self-employed should consult with their attorney and ensure that their SEP IRA is actually exempt before filing).

I am a New York Licensed Attorney at Law providing Wealth Building and Debt Elimination services through an innovative Life Planning practice where clients can literally transform their lives by designing a road map for their future!

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