Except in the simplest of matters, that personal decision should only be made with the guidance of an experienced bankruptcy attorney.
The question is when should these decisions be made, after a short meeting with the attorney or after a thorough analysis is complete?
I think that many debtors are under the impression that a simple one hour consultation with an attorney (or often non attorney) is enough to allow them to make these decisions.
In fact, many calls to my office start with something like, "I spoke to an attorney (friend, paralegal etc.) and I am ready to file a chapter 7 bankruptcy". My initial thought is usually, "how are you so sure"?
At most, a short consultation can provide the debtor with the sense that bankruptcy may end up their only option in the long run. It may also provide some detailed information about how bankruptcy works and what problems may be encountered by the debtor.
However, the planning involved to prepare and file a well done bankruptcy case, the final decision as to which chapter makes the most sense, and the verification that there is not some better non bankruptcy alternative, cannot be made without a thorough review of hundreds of facts, timing issues, potential changes and other issues.
This analysis is often made more complicated by the inability of the debtor to provide complete information at the initial consultation and during the analysis process, changes in the debtor's situation, changes in the law, etc. etc.
I suggest that my clients, even in "simpler situations" hold off on their decision making until I have put together a case from "stem to stearn", and spent a few hours with them at an analysis meeting. This way the "stones" are all turned over, before decision making is done.
I find that this creates less surprise and a well planned case.
You should wait as well for your attorney to finalize his or her analysis before setting your heart on a solution. Even if you are sure that you are a chapter 7 candidate.
A key to obtaining a favorable i.e. low number is to be able to show the highest "budget" possible when taking this test.
In an attempt to do so, many bankruptcy filers throughout the U.S. have been showing as part of their budget the debt owed on cars they know will be surrendered, with some mixed results.
The question of whether this is possible has ended in the 9th circuit.
In American Express v. Smith, the Court of Appeals has ruled that subsections (b)(2) and (b)(3) of section 1325 of the bankruptcy code provide that if an expense is not reasonably necessary "for a debtor's and/or dependants' maintenance and support, it is not included in the calculation of disposable income"..."items that a debtor has surrendered or intends to surrender are not necessary for his or her support or maintenance."
In other words, if you know you are not going to keep the car for whatever reason, the amount you owe on it can't be used to determine the amount you can pay your unsecured creditors in a chapter 13 bankruptcy. i.e. you will end up paying more to unsecured creditors if surrendering the car.
]]>Maryland Bankruptcy Attorney Brett Weiss has short list of reasons why he thinks a corporation or LLC will end up using a chapter 7 bankruptcy. His article can be found here.
The three in short form are as follows:
1. The attorney who suggests using a chapter 7 bankruptcy for the LLC or Corporation simply doesn't understand that a bankruptcy discharge is not available for the entity.
2. If tax debt would be paid first from assets that a chapter 7 trustee would "gather" thereby preventing personal tax debt in the future.
3. For purposes of "fairly" distributing assets in an attempt to reduce the chance that a creditor will continue collection activity against the entity.
The process of determining who or what should file for bankruptcy is rarely simple. If you are associated with an LLC or Corporation with significant debt, contact an experienced bankruptcy attorney.
]]>When homeowners sell a home “short”, they are asking the lender to agree to the sale even though they will not be paid the total amount of the mortgage.
The common Scenario:
Home purchased in 2006 for $480,000.00. The first mortgage amount is $370,000 and a second for $85,000.00. The house is now worth $320,000.00. A buyer exists who wants to purchase the home for about $320,000.00. If the lenders that hold the first and second mortgages agree to the sale, they will be paid less than they are owed.
In theory, this sounds great for the homeowner. He or she can avoid the foreclosure stigma and all its hassles and move on with life more quickly.
The question is then, why would the seller who is considering a bankruptcy, want to be careful about doing it?
1. From a debt liability standpoint, it may be unnecessary.
In the scenario above, both the first and second mortgage holders will lose money. Normally, they could sue the homeowner for the deficiency balance either after a foreclosure sale or after a short sale anyway.
However, Arizona state law prohibits the collection of the deficiency balance on a residence in most instances, especially where the loans are “purchase money” and a foreclosure would be “non judicial”. Further, the lenders may agree in writing, not to sue on the deficiency.
If they don’t waive that right, or if it is otherwise collectible, then bankruptcy may be the best way to deal with it. Especially, if bankruptcy was going to be used anyway, to deal with all issues at once.
So, if the sole purpose of the short sale is to avoid a deficiency based collection action, be careful.
2. It may damage credit.
If you don’t pay or breach the contract, the lender will report it to the credit bureaus. Some say that the effect on the report is as bad as or worse than foreclosure or bankruptcy.
A short sale causes a “taxable event”. In essence, the unpaid difference is treated as income to the seller. There are ways to avoid the “income” from being treated this way. Primarily, the Federal Mortgage Forgiveness Debt Relief Act must apply to the seller; the seller must meet an “insolvency” test or file for bankruptcy (preferably prior to a foreclosure sale).
Before the short sale is finalized, the seller must make sure #s 1 or 2 apply or timely file for bankruptcy.
4. There are lots of players who make money from the short sale, and the seller isn't one of them
The list of players in the system who stand to make money from the short sale is lengthy. Other lenders, brokers, real estate agents, title agencies, escrow agencies, the IRS, and the buyer all stand to come out farther ahead then the seller. If bankruptcy is going to be used anyway, all of the effort made to complete the short sale may be a waste of time.
5. Other debt
If the seller has a substantial amount of other debt, and his or her circumstances make it clear that bankruptcy may be necessary anyway, then why bother? The seller may simply choose to file the bk, give up the home in the bankruptcy and discharge all the debt. (A foreclosure may still appear on the credit report and the question becomes which is worse again)
6. Chapter 13 bankruptcy may help save the home
A chapter 13 bankruptcy will allow the qualifying filer to catch up home mortgage arrears over time. It may also allow the homeowner to treat the completely unsecured second mortgage as an unsecured debt and wipe it away leaving just the first mortgage payment to contend with.
If the home is worth less then is owed on the first, (like in our scenario) and the seller has steady income, a chapter 13 bankruptcy is at least worth talking about with your attorney before the short sale is complete.
]]>I don't sell bankruptcy as a commodity. Why?
1. There are other options that may better fit the client's situation.
2. The client may have personal reasons for choosing to deal with the debt before relying on bankruptcy.
3. The ethics rules I subscribe to and are required to practice by, demand that I put my client's interest first.
4. Bankruptcy is not always the best option from a financial standpoint. There are those situations where the client will lose more financially in bankruptcy than outside it.
Having said that, I must admit that most of those I meet with, come to the conclusion, after review of their own numbers and how the law works, that bankruptcy makes the most financial sense.
A recent cnn.com article describes a woman with serious credit card debt who has chosen to live on a budget and pay the debt off. No matter her circumstance (she may have more non exempt asset value then debt or simply doesn't qualify well for a bankruptcy from an income and budget standpoint) you have to give her some respect for trying.
If you have serious credit card debt, I am not suggesting that you simply disregard bankruptcy as an option.
I do suggest that you sit down with a sharp pencil and clean paper to look closely at your actual income and budget. If it appears that paying the debt back will be difficult, find an experienced bankruptcy attorney who will personally help you understand your options. Preferably, someone who doesn't "advocate" bankruptcy, just your best interests.
]]>Prior to the 2005 changes to the bankruptcy code that resulted in what is now known as "bapcpa", a debtor could "retain and pay" or "ride through" on it's car loan as long as he stayed current on the car payment.
The creditor with the security interest in the car was left without any legal obligation to sue on, should the car be surrendered or repossessed and a deficiency balance existed.
No reaffirmation agreement was typically necessary. (read more about what a reaffirmation agreement is here)
Not signing a reaffirmation agreement was good for the debtor because he obtained the best of both worlds as a result. i.e. Keep the car and make the payment, but not be liable on any deficiency balance should he not be able to afford the car down the road and after surrender.
Many attorneys felt as a result, that advising a client to sign a reaffirmation agreement with the creditor on the car loan inside of the bankruptcy case was malpractice. Especially if the car was upside down, i.e. it was worth much less then what was owed on it.
If the reaffirmation was signed unnecessarily and the debtor lost the car down the road he would then owe what sometimes amounted to a large deficiency balance nullifying some of the "fresh start" benefit gained in the bankruptcy case.
]]> The Ninth Circuit in the above mentioned case has now it appears eliminated the choice.At least in relation to personal property.
No more "retain and pay". (Read the Decision here)
It appears that now, at least as far as federal law is concerned, debtors will have to choose at the outset of the case whether to:
1. sign a reaffirmation agreement
2. surrender the car
3. or find a way to "redeem" or pay a lump sum for the car
1. Challenge the Assessment
Challenge the amount of the tax by filing correct returns, amending returns, appealing the audit results, litigating the audit results etc.
2. Statute of Limitations Defense
The IRS has a limited period of time to collect debt. If they don't collect within this period, they are out of luck. Many taxpayers are able to use this to their advantage, especially in combination with non collectible status or installment agreement arrangements.
3. Installment Agreement/Non Collectible Status
The IRS must typically allow a taxpayer to set up a monthly payment on what is owed if the taxpayer will comply with a few requirements. The amount paid does not have to be enough to pay the tax debt off within the statute of limitations period. In fact, the amount paid monthly may be nothing. It all depends on the taxpayers ability to pay. This number is based on how much the government will agree that you need to live on, subtracted from your income. Assets are taken into account as well.
These programs are used to pay the debt in full over time, OR to get the taxpayer to the statute period mentioned above. In our office, they are also often used to buy time until the tax debt can be considered "dischargeable" or can be wiped away in bankruptcy.
]]> 4. Offer in Compromise
The "grand slam" of tax defense is the Offer in Compromise or "OIC" for short. The OIC if successful, will create a forced settlement of the tax debt for an amount based on the taxpayer's "reasonable collection potential".
If the taxpayer meets some stringent criteria and has very few other debt problems, then the OIC is the best choice. Most people with serious tax debt, don't qualify, as they make "too much" money, (The average acceptance rate is typically less then 20% of offers filed) AND OR they have substantial other debt.
5. Bankruptcy
As a result of the inability to use an offer in compromise or because of substantial other debt, or both, many find that a bankruptcy is the best option.
A well planned bankruptcy MAY also aid an OIC as the IRS is supposed to at least consider the effect of the potential bankruptcy on the collectibility of the tax debt.
Unfortunately, many “tax professionals” fail to take bankruptcy into account when considering the taxpayer's best options. It doesn't fit their business model in the short term.
I have been able to help clients deal with literally millions of dollars in tax debts via the use of the bankruptcy code.
If you have significant tax debt, you may want to at least consider it.
Technically, such an agreement in bankruptcy law is made between the debtor or the person who filed the bankruptcy, and the creditor who was owed money prior to the bankruptcy filing. That agreement "waives" the discharge of the debt that would occur at the end of the case if nothing were done.
In english...debtors owe creditors money for things like cars and houses. Those creditors maintain a security interest in the home or car to protect them should the debtor not pay.
If the debtor fails to pay for the home or car, the creditor will repo or foreclose to try and recoup the loss, and then maybe, especially where cars are concerned sue the debtor for any remaining balance owed.
When a bankruptcy is filed by the debtor, that obligation to pay on the particular debt will be discharged or wiped away should the case reach a successful conclusion.
What happens if the debtor gets the discharge of the debt and the creditor with the security interest is not being paid?
The creditor will eventually take the asset that was previously acting as security anyway, but the debtor will be free from ever paying the debt back.
The problem? The debtor doesn't want to lose the asset.
He or she simply wants to pay as they were, and keep the house and the car.
Prior to 2005, most Courts allowed for the debtor to simply continue to make the house and car payment directly to the lender, and NOT sign a reaffirmation agreement in Bankruptcy. Most of the time, the lender simply accepted the payments and continued as if nothing had happened.
BUT something had, because no reaffirmation agreement was signed, the debtor got the best of both worlds. He or she kept the asset, continued making payments on it, but the obligation to pay was gone.
]]> This meant that if sometime after the bankruptcy was over, the debtor didn't want the car anymore, it would be surrendered and the lender could never sue the debtor for the deficiency balance that may be owing.Of course, lenders have never been happy about this arrangement.
In 2005, bankruptcy law was changed. It changed in relation to reaffrmation agreements in that it appeared to the debtor to choose at the outset of the case to reaffirm the debt related to a house or car, risking debt after the case was over if the asset was eventually surrendered or lost. The debtor could also choose to surrender, or "pay" i.e. one lump sum, for the asset as well.
Despite this many continued to simply "retain and pay" as described above. This situation i.e. the attempt to figure out what the law really required in relation to home and car loans, has been the subject of some fighting and much speculation throughout the country.
It appears to be answered now, at least in the 9th Circuit Court of Appeals. Visit this entry to read more.
]]>Now, having said that, this powerful discharge has it's limits. It isn't perfect.
1. It doesn't deal with every debt. Some debts cannot be "discharged" by statute, like child support, newer income tax debt, spousal maintenance etc.
2. Even though the personal liability may no longer exist as a result of the "discharge", liens recorded against the debtor's property, may survive the bankruptcy unless they are modified or removed.
3. You can't get very many of them too close together. There are time limits that prevent "serial" bankruptcy filings and thus too many discharge "events". The creditor has to have some time to collect the debt between discharge dates.
4. Not everyone needs bankruptcy for purposes of obtaining a discharge. Some need it for other reasons, like saving a home from foreclosure or restructuring the repayment of debt. These people don't care as much about the discharge as others.
For those debts like credit card, repossession related, old income tax and medical bill debt that are typically governed by it, not only are they "gone", the discharge acts as a "permanent injunction" or a court order at the close of the case, against those same creditors. It replaces the "automatic stay".
If the creditor continues, post discharge, to attempt collection, that order is being violated, and can result in "punishment" for the offending creditor. Possibly even "punishment" in the form of money to the debtor.
If you have overwhelming debt, have been losing sleep consistently over it, and see no way to pay it in a reasonable amount of time, you probably need to "aquaint" yourself with the "discharge" provisions of the U.S. Bankruptcy Code.
]]>There is the cost for the attorney, a filing fee, education course fees, and possibly some "due diligence" related expenses as well.
Is it all worth it? Shouldn't you just consider representing yourself to save part of the cost?
What is that saying?....."the more you know, the more you realize how much you don't know? Something like that anyway.
Maybe put another way, "you know just enough to be dangerous". No? ok maybe this...
Bankruptcy law and the law in general, are like an iceberg. On the surface, the iceberg doesn't look that big. It's pretty and white sitting on a sea of glass.
But just about the time you think you can maneuver the boat right up next to it, you realize the larger part of the iceberg is under the surface, and your boat is sunk. Think "Titanic". (You probably were anyway)
I often speak with people who have filed their own bankruptcy case, and come to me to ask for advice about the IRS debt that survived the filing. Many times, some experienced legal advice prior to the filing of the bankruptcy would have resulted in the discharge of the tax debt. The law that governs this advice...is the "ice" under the water.
What would the filer with this large tax debt, be willing to have paid for the advice if he could go back in time? What would the captain of the Titanic have paid for that matter?
You know what they say... "a pound of prevention is worth an ounce of cure".....or is it the other way around? Oh... I give up.
Chapter 13 Bankruptcy is also known as a "wage earner plan" or personal "reorganization". In a Chapter 13 bankruptcy, the debtor with a "regular" income, is able to keep non exempt assets and pay some portion of the debt over a 3 year to 5 year period. Sometimes the debt paid is a small amount and sometimes it is larger, depending on a number of different factors including the amounts of the debtor's income and budget, types and amounts of debts, and the debtor's non exempt asset value.
Certain debts that cannot be discharged in Chapter 7, can be discharged in Chapter 13.
Chapter 13 also provides a mechanism for individuals to prevent foreclosures and repossessions, while catching up on their secured debts.
Chapter 11 bankruptcy is a reorganization case as well, and is typically only used by a debtor who doesn't qualify for either a chapter 7 or chapter 13 bankruptcy or a business entity.
In Chapter 11, the debtor will typically retain possession of assets and continue to operate the business.
The debtor devises a plan of reorganization which, if accepted by creditors can bind both the debtor and the creditors to its terms. Plans commonly call for repayment out of future profits, or a sale of assets.
]]>A bankruptcy client's common refrain is, "how do I pay for a bankruptcy attorney when I can't pay my bills?"
There are a number of ways to come up with the attorney fee, some are sensible, others are borderline ridiculous. Smashing your 10 year old child's piggy bank just isn't worth it in the long run.
One way to pay for a bankruptcy attorney that is often overlooked, and that will allow the case to be filed before the fee is fully paid, is to use a chapter 13 bankruptcy instead of a chapter 7 bankruptcy.
A few attorneys in Arizona will agree to take a small amount upfront and to then build the remainder of the attorney fee into the plan. It gets paid over time via monthly plan payments and it is interest fee.
I like to do this for cooperative clients, because it allows them the ability to get a case analyzed and filed now instead of later.
The upfront attorney fee can be as low as $350.00 depending on the individual facts of the case and the client's willingness to cooperate. A filing fee must be paid to the Court and a pre petition class must be taken as well prior to filing. The filing fee for a chapter 13 case is $274.00 and the pre petition class is typically $40.00 to $60.00.
If you have steady income, but are low on funds for an attorney, you should consider chapter 13 bankruptcy.
]]>The Bankruptcy formally begins with the filing of a bankruptcy "petition and schedules" with the U.S. Bankruptcy Court. A stay against collection is issued upon the filing i.e. creditors have to cease activity, and the filer must disclose his or her financial life in detail to the court.
Bankruptcy law "trumps" conflicting state law as a result of the Supremacy Clause of the Constitution, except for property exemption issues which vary from state to state.
I
]]>Doing so is unnecessary. (although providing notice to the local court and other parties may be in order to ensure they are aware of the filing).
The filing of the bankruptcy petition alone invokes the bankruptcy code's automatic stay and it applies to collection activity in and out of court. (See 11 U.S.C. Section 362 of the bankruptcy code).
The "stay" provision takes effect the moment the case is filed and the debtor and his or her property is under the protection of the bankruptcy court itself with a few minor exceptions.
If you are in a bankruptcy case, and a creditor is continuing it's collection activity with knowledge that you have filed, it has probably violated federal law.
Talk to your bankruptcy attorney or a bankruptcy attorney experienced with automatic stay litigation in bankruptcy, if you are having this problem.
]]>Most of my clients seem to understand this when speaking to me initially.
What they don't always understand, is that everything about your present financial life and many things about your past financial life, must be disclosed to the Court under the penalty of perjury.
You cannot exclude certain assets or debts from this disclosure requirement.
If you owe your cousin 2500.00 for the work he did on your home, and he considers himself to be a creditor of yours, you must disclose to the court that he is a creditor and propose to treat him the same as other creditors in a similar position.
If you re paid your cousin the money within a certain period of time prior to filing, you must disclose it.
If you owe child support or are owed child support you must disclose it.
The trade off for the loss of privacy and perhaps for some, the shame of filing, is the "Fresh Start" or the removal of the obligation to pay on most debts.
The decision to make that trade, rests with the debtor.
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