Archive for the ‘Chapter 7’ Category
Monday, October 4th, 2010
If you file bankruptcy and want to keep your car subject to a car loan you have to sign a reaffirmation agreement with the car lender wherein you agree to remain personally liable if you fail to make the payment in the future after your bankruptcy is over. Reaffirmation of car debt is an express requirement in the bankruptcy law. The bankruptcy law does not similarly refer to an obligation to reaffirm a secured debt, such as your home mortgage.
Absent the specific requirement to reaffirm secured loans most bankruptcy debtors refused to sign reaffirmation agreements with mortgage lenders. The listed the mortgage on their bankruptcy schedules to discharge personal liability under the mortgage note while they continued making their mortgage payment. That way, the debtors could stay in their house if they continued making mortgage payments after bankruptcy, but if the debtor’s had future money problems they could walk away from the house and be protected from personal liability because their bankruptcy had already wiped out their personal liability. This was not a problem in the past when housing values were increasing, but the issue became more important when values crashed. When mortgages were no longer secured by underlying value the homeowner’s personal liability became more of a concern.
In 2009, a Florida bankruptcy court required homeowners to sign a reaffirmation agreement tendered by their mortgage lender if the debtor wanted to stay in their house. The court acknowledges that bankruptcy courts around the country differ on this issue, but the court concludes that the law in the 11th Circuit, including Florida, requires reaffirmation of all debts including mortgages. The result is that if you file Chapter 7 and want to keep your house you also may have to commit to future personal liability for the mortgage debt. 2009 WL 3625386
Posted in Chapter 7, Court Decisions | Comments Off
Sunday, September 19th, 2010
If you pay back debts owed to family members or business partners within one year prior to filing Chapter 7 bankruptcy the trustee can go after the people you paid to return the money to the bankruptcy estate. You cannot pay your family and partners first and leave your general unsecured creditors, such as credit cards, to “pound sand” in your Chapter 7 bankruptcy. It’s called a “preference”, and the trustee can get the money back.
One of my ongoing clients is considering filing bankruptcy. When I asked him whether he had repaid any loans to family members recently he said that over the past year he had paid his father over $50,000 during the year. I told him that these repayments would be a big issue in a bankruptcy. I asked how he paid so much money to his father when he had also told me he wasn’t making much money and had no assets.
The man had a business that rebuilt and sold old automobiles. The business was a separate LLC. He and his father had an ongoing loan arrangement in which his father would advance funds to buy old cars and the parts to rebuild the cars. The client would fix the car, sell the restored car, and then repay his father with interest from the sale proceeds. This was a revolving and ongoing arrangement. Without his father’s loans and his repayment of the loans from sales the client could not conduct his business because he was not credit worthy at banks, especially in today’s lending environment. The $50,000 loan repayment amount is the sum of all money repaid from the sale of the cars.
Bankruptcy preference law has several exceptions, and this client’s arrangement falls within the exceptions. The client’s repayments to his father as part of his ongoing business financing is not the type of family loan repayment which is the subject of preference law. There would be a reversible preference if, on the other hand, the client had an ongoing obligation to repay his father $50,000 from a prior loan, and the client used non-exempt money to repay his father’s old loan while paying little or nothing to the non-family creditors.
Posted in Chapter 7, True Stories | Comments Off
Tuesday, September 14th, 2010
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.
Posted in Chapter 13, Chapter 7, Credit, Current, Foreclosure, General consumer bankruptcy info, Georgia Bankruptcy, Lenders, Mortgage, a, and, because , choosing a bankruptcy lawyer, claims, deficiency, document, easier , exceeds, georgia, histories, house, household, in, income, keeping, lender, median, payment, priority , proceedings, pursue, rarely, reports, responded, started, the, wife | Comments Off
Friday, September 10th, 2010
Persons considering Chapter 7 bankruptcy must qualify for Chapter 7 under the “means test.” The means tests evaluates your disposable income after expenses. This week a caller asked me if a self-employed person could successfully manipulate income for purposes of the means test. After I explained median income and the means test, this caller stated that he could make his income whatever it needed to be for purposes of filing bankruptcy.
The caller was self employed. If a self employed person wants to file Chapter 7 bankruptcy the means test considers the amount of income the self employed person was paid from his business during the prior six months including salary and profit distributions. The means test does not look at the business’s gross income or business expenses.
The caller proposed that he could retain money in the business rather than pay it to himself as profit distributions in order to lower his personal income prior to filing bankruptcy. He wanted to know if his plan would work.
Business profits not distributed to the owner would increase the business’s cash deposits and the business value. If the business ends up with equity because of retained cash the Chapter 7 trustee could claim the business’s net equity as part of the owner’s bankruptcy estate. However, in most cases where self employed business owners consider Chapter 7 the business’s debt is greater than business assets. Retaining extra cash inside the business usually does not make the business solvent nor create equity in the owner’s interest.
There arguments a trustee or creditor could make to counter this type of pre-bankruptcy planning. For example, a creditor may argue that the debtor is “fraudulently transferring” money he is entitled to receive back into the business, or that the debtor is using the business as an “alter ego” to hold his personal salary and profits. These are academic arguments which I believe would not be pursued except in an egregious case. In practice, some self employed business owners probably can manipulate personal income within the scope of legitimate pre-bankruptcy planning in order to pass the means test.
Posted in Bankruptcy Questions, Chapter 7 | Comments Off
Wednesday, August 25th, 2010
Homestead protection in bankruptcy gets complicated when there are non-resident co-owners of the debtor’s homestead. An example is when parents help an adult child buy a home and insist on placing their names as co-owners of their child’s house.
A caller from south Florida asked me how a Chapter 7 bankruptcy would affect his homestead owned jointly with his parents free and clear. His parents purchased a house in Florida for their son. The house was titled jointly in the names of the son, who lives there, and the two parents. All three family members have credit card problems and are considering bankruptcy. The son asked me whether his Chapter 7 bankruptcy would affect is parents’ interest in his house. The house qualifies for unlimited homestead protection under the bankruptcy rules.
If the son files Chapter 7 only the son’s partial interest in the house is at issue. The Chapter 7 trustee has no interest or rights relating to what the parents own including the parents’ interest in the house (if any). The son’s ownership of the house would be exempt as homestead because the house is his primary residence.
The result is more complicated if the parents file Chapter 7. The parents’ Chapter 7 trustee may have a claim against the parents’ interest in their son’s house because the parents do not reside in the home as their own homestead.. The trustee could not force the sale of the home as long as the son resided there. The trustee could place a lien on the parents 2/3 interest which would be payable upon the sale or refinance, and the trustee could sell the lien on proceeds to an investor or to the debtor himself.
The parents could argue in their bankruptcy that they have no equitable interest in the house subject to their bankruptcy estate because they intended to transfer all beneficial interest in the house to their son. This position may be viable if the son has been paying all taxes, mortgage payments, and other expenses and if the son exclusively uses the property. The parents’ filing of a gift tax return or other written evidence of their intent to gift the property to their son would substantiate this position. It is possible for the parents to have part of the bare legal title without them having any equity interest subject to their own bankruptcy trustee, but that position depends on the facts.
This is another example of why parents should not jointly own assets with their children for estate planning or any other reason.
Posted in Bankruptcy Questions, Chapter 7 | Comments Off
Thursday, August 12th, 2010
There is the well-known proverb that, to a carpenter everything in the world looks like a nail. Or, surgeons want to operate to cure any and all ailments. The same is applicable to some bankruptcy attorneys. I assisted a couple with asset protection last year. The couple faced joint liability from a failing business investment. They had $150,000 liquid cash, and they were expecting another $200,000 from the proceeds of a real estate sale. I explained that they would lose the cash in bankruptcy. I advised them to spend down the cash and possibly invest in a new homestead which would be exempt I they were sued.
Since my advice, the creditor sued and obtained a judgment against the couple. The couple too al their liquid cash remaining, about $310,000, about bought a $400,000 homestead with a small mortgage. The creditor began aggressive collection efforts. The collection fight made the couple nervous and fearful about their assets so they consulted a bankruptcy attorney with the hope of putting the problem behind them.
As the couple reports, the bankruptcy attorney told them that the money used to purchase the house was not exempt in a Chapter 7 bankruptcy first, because the amount of equity invested in the homestead exceeded the bankruptcy exemption(about $275,000) permitted within 40 months of purchase, and two, because the conversion of substantially all their cash to a homestead could be attacked as a fraudulent conversion in bankruptcy. He told these people to file a Chapter 13 bankruptcy so that their house would not be liquidated and they could pay only their available monthly cash flow to their creditors.
I think Chapter 13 bankruptcy would be a poor idea for these debtors. In a Chapter 13 bankruptcy the debtors have to pay through a five year plan not only what they clear each month after reasonable expenses but also all the money their creditors would have received in a Chapter 7 liquidation. If these people had filed Chapter 7 the trustee would have claimed as non-exempt part or all of the $310,000 they invested in their homestead. The non-exempt homestead equity (it could be all if seen as fraudulent conversion) would still have to be paid to the Chapter 13 trustee during a five year plan. In any bankruptcy, 7 or 13, their homestead equity is at risk.
If they simply stayed far away from bankruptcy as I had originally advised their creditor had no way to attack any of their homestead exemption in state court collection. I think their bankruptcy attorney pushed them to Chapter 13 because bankruptcy is the only tool in his legal toolbox- just like the carpenter or the surgeon only uses the tools he is comfortable with. The bankruptcy attorney failed to appreciate that these people had better legal protection tools outside of bankruptcy court.
For most people heavily in debt bankruptcy is the only tool to fix their situation. People with assets should get a second and even a third opinion before filing bankruptcy. Bankruptcy filings are usually irrevocable- once you go in you cannot get out.
Posted in Chapter 13, Chapter 7, True Stories | Comments Off
Monday, August 9th, 2010
Many mortgage companies ask Chapter 7 bankruptcy debtors to sign reaffirmation agreements if they intend to stay in their house through their bankruptcy. Reaffirmation means that the debtors will remain personally liable on their mortgage note after the bankruptcy discharge, and it means the lender can sue them if they subsequently are unable to make payments. I saw a good discuss of the mortgage reaffirmation topic in a blog post by Atlanta bankruptcy attorney Jonathan Ginsburg. Mr. Ginsburg points out two problems with not signing a reaffirmation; first, future mortgage payments do not help restore credit, and two, without reaffirmation the bankruptcy is a technical mortgage default. In addition, I have found that bank's do not cooperate with debtor's who subsquently need documentation, such as payoff numbers, if they have not formally reaffirmed personal liability after bankruptcy.
Notwithstanding the above, I advise my clients not to reaffirm mortgage debt because doing so results in a large personal financial liability. I agree with Mr. Ginsburg's conclusion that lenders will unlikely default a mortgage for any reason as long as the borrower is making payments. I also agree that merely continuing current payments by itself will not result in personal liability absent a signed reaffirmation agreement.
Posted in Chapter 7 | Comments Off
Thursday, August 5th, 2010
If you plan on marrying someone facing bankruptcy do you also marry their debt? Generally, the answer is "no", but in some cases, your fiance’s debt walks down the aisle. You are not liable for your spouse’s debt- that’s the general rule. Sometimes you end up paying the debt anyway. Consider the case of young couple who came to my office this week.
A young lady had over $50,000 of credit card and related debts. She was a school teach with income of approximately $30,000, well below median income. She had no non-exempt assets and based on her income alone she could solve her debt problems with a Chapter 7 bankruptcy. She stated that she recently married a man whose income was near $75,000. The husband had no unsecured debts. Because means test income is based on "family income" her new husband’s income had to be considered in the wife’s means test even though the husband had no need to file bankruptcy. I explained to the new client that because she was living with her relatively affluent new husband she had become ineligible to file Chapter 7, and her only bankruptcy option was a repayment plan under Chapter 13. In effect, her she and her husband would have to use the husband’s earning to repay part of the wife’s debt in Chapter 13. The husband married his wife’s debt.
People considering both bankruptcy and marriage should speak with a bankruptcy attorney before they get married. In this case, the wife could have, and should have, filed Chapter 7 bankruptcy before the wedding day (or, at least before she and her husband began living together as one household). In other instances, marriage can increase household size to help qualify for Chapter 7, or marriage can result in the merging of financial accounts and other property that make valuable assets exempt in a subsequent Chapter 7. Marriage, divorce, and bankruptcy are interrelated; proper legal planning can either save or cost you substantial money.
Posted in Chapter 13, Chapter 7 | Comments Off
Wednesday, July 14th, 2010
The United States Supreme Court rarely accepts cases that affect consumer bankruptcy debtors. Recently, however, the Court considered an issue that potentially impacts all debtors – the treatment of exemptions.
The term "exemptions" refers to property you own that is protected from the reach of the trustee or creditors. For example, every state provides for exemptions that include your clothes, a certain amount of household goods, a certain amount of equity your car, and a certain amount of equity in your home. Georgia has fairly stingy exemptions – you can read the Georgia exemption law by clicking on the link.
When property is declared as exempt, it does not count for purposes of counting up your assets. If you own property that exceeds the exemption available to you, that property could be seized and sold by a Chapter 7 trustee or it could force you to pay back a higher percentage of your unsecured debt in a Chapter 13. Exemption planning and exemption calculation are important functions for consumer bankruptcy lawyers.
The Supreme Court decision in Schwab v. Reilly requires debtors and their attorneys to be more exact when identifying exemptions, and applies to cases filed in Georgia and everywhere else in the United States. The article that follows is a guest post written for this blog by Brandon Moreno, Vice President of the Utah Bankruptcy Hotline. The Utah Bankruptcy Hotline maintains a network of unaffiliated Utah bankruptcy lawyers who provide debt relief and bankruptcy counsel to consumers in Utah.
On June 17, in Schwab v. Reilly, the U.S. Supreme Court issued a decision that limits the extent to which individuals filing under Chapter 7 can exempt their property from the bankruptcy estate. The case arose out of the interplay between two important rules. One imposes dollar-value limits on the extent to which a debtor can exempt certain types of property. The other requires interested parties to object to a debtor's claimed exemptions within 30 days after the conclusion of the creditors' meeting, or else lose the ability to retain any of that property for the bankruptcy estate.
The question in Schwab was, what happens when a debtor both reports an asset with an estimated market value and claims an exemption for the asset equal to the market value, the trustee does not object because the claimed exemption falls within the applicable-dollar value limit, and it later becomes apparent that the asset's true market value exceeds the claimed value and the applicable dollar-value limit? According to some lower courts, the trustee's failure to object entitled the debtor to an exemption equal to the entire market value, regardless of whether that value exceeded the limit imposed by the rules. In Schwab, however, the Supreme Court rejected that approach. According to the Court, the trustee need not have objected to the exemption to preserve the estate's ability to recover value in the asset beyond the value the debtor declared exempt. The rationale for this conclusion was that the trustee had no basis for objecting in the first place–on its face, the exemption appeared to comply with the limit imposed by the rules, and there was no way of knowing beforehand that the asset would appreciate in value beyond the limit.
The Court's analysis was somewhat complex, but an example helps to illustrate the effect of the ruling. Imagine that an individual files for Chapter 7 protection and reports an asset–in this example, office equipment–to which he assigns an estimated market value of $5,000, that he claims a $5,000 exemption for the equipment, and that the applicable dollar-value limit on office equipment exemptions is also $5,000. Given the dollar-value limit, the trustee concludes that the claimed exemption is appropriate and therefore does not object. The thirty-day objection period then passes, and a third-party appraises the equipment and assigns a market value of $8,000. Under the prior approach of some lower courts, the trustee's failure to object would have entitled the debtor to an $8,000 exemption for the equipment. But Schwab invalidates that approach and establishes that the debtor will be entitled to an office equipment exemption of $5,000, even though the true value of the equipment exceeds that amount by $3,000. The $3,000 remainder goes to the bankruptcy estate, to be distributed among the creditors.
For individuals contemplating Chapter 7 bankruptcy, the lesson of Schwab is twofold: First, even if you accurately report an asset's value and claim a valid exemption equal to that value, you cannot later capture any serendipitous increase in value beyond the limits imposed by the rules. Second, if for some reason it is important to you to exempt the full market value of an asset or the asset itself, rather than a particular monetized interest in the asset, Schwab suggests that it might be appropriate to claim an exemption for "full fair market value (FMV)" or "100% of FMV." Thus, going back to the example above, the debtor might try to claim an exemption of "100% of FMV" for his office equipment, rather than $5,000. A court could reject this claim if it later became apparent that fair market value exceeds the $5,000 limit. But Schwab also suggests that phrasing an exemption claim in this manner effectively places other parties on notice that the debtor seeks to exempt the entirety of the asset's value. If a debtor provides this notice and others nevertheless fail to object, the debtor may be able to keep a subsequent increase in market value beyond the otherwise applicable dollar limit.
Posted in 13 , Bankruptcy, Chapter 7, Chapter 7 issues, Debtors, Exempt Property, Protected property issues, a, accepts, an, and, appraises, assigns, bankruptcy exemptions, calculation, cases, chapter, claimed, court, entitled, equipment, exemption, falls, hotline, hotline , maintains, market, network, object, office, passes, planning, rarely, reilly, rejected, requires, schwab, states, supreme, the, third party, united, united states supreme court bankruptcy decision, utah, v, the | Comments Off
Tuesday, July 13th, 2010
There are usually several things you can do to prepare for filing bankruptcy if you can anticipate the need to file months in advance. I consulted with a client living in Ft. Myers who he will need to file Chapter 7 bankruptcy by the end of this year. He needs to wait until year end so that his repayment of family loans in 2009 will not be reversed as preferential payments chosen creditors. The told me he usually gets a significant tax refund and asked me if there is anything he can do to avoid losing the refund over to the bankruptcy trustee after his creditor meeting anticipated early in 2011.
I suggested that this client change his income tax withholding to zero for the balance of the year. My CPA tells me that taxpayers have the right to set their withholding amounts. If the client does not withhold taxes for the second half of the year he will probably wipe out any tax refund accrued during the first part of the year and end up owing taxes when he files in April, 2011. There will be no tax refund receivable if he files bankruptcy later in 2010. The client can spend the extra money not withheld by the IRS on necessary house or medical expenses, bankruptcy attorney fees, or on a dream vacation. This person is not obligated to give the IRS money now to hold for the benefit of his creditors and a bankruptcy trustee after filing. Better that the client use the money for himself than forfeit a 2011 refund in his bankruptcy case.
Posted in Chapter 7, Tax in Bankruptcy | Comments Off
