Archive for the ‘Planning Tips’ Category
Thursday, May 19th, 2011
When a debtor calculates a Chapter 7 means test analysis he is entitled to deduct from income transportation expenses associated with ownership of a car. All Florida debtors can deduct from income a general transportation expense which is approximately $250. There is another deduction associated with the expense of owning a car known as the “ownership expense.” The ownership expense is calculated using the debtor’s car payment and a fixed allowance of about $500. Based upon a recent court ruling, debtors who own a car free and clear of any liens are not eligible to take any ownership expense despite the obvious costs associated with owning a car in Florida. The car ownership deduction is limited to people with car debt.
This past week I provided legal services to a woman who is a bankruptcy paralegal in a high-volume bankruptcy office located in Illinois. We discussed how her office handles car expenses in the means test. The attorney she works for recommends that prospective debtors who own cars outright get a very small car loan in order that the debtor qualifies for the car ownership allowance.
In Florida, for example, debtors get a $1,000 base car exemption. Most debtors today also qualify for a $4,000 wildcard exemption which can be applied to protect car equity. Assume a debtor in Florida owned outright a car worth less than his applicable exemption limit. Using the advice provided by the Illinois attorney, the debtor would get a very small car loan prior to filing bankruptcy, if and as necessary, to help him qualify for the means test. The small loan would not significantly affect his monthly household budget. If the debtor’s car was worth more than the allowable exemption the trustee would demand payment of non-exempt equity.
There are a some pitfalls with this plan. To name a few, the debtor must be prepared to explain what he did with the money borrowed on the car. Using the borrowed money to pay his bankruptcy attorney, or pay priority debts such as tax debt, may be acceptable. Second, bankruptcy attorneys are not supposed to encourage their clients to incur debt prior to filing bankruptcy. Issues aside, my client’s suggestion is an inventive way for some clients with free and clear cars to improve their means test results.
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Monday, March 28th, 2011
Bankruptcy trustees seem to be getting tougher on debtors who incur significant credit card debts and large secured debt obligations prior to filing Chapter 7 bankruptcy. I am seeing challenges asserted against significant credit card charges within six months prior to filing bankruptcy. That does not mean that you cannot use a credit card for six months before you file. It means that large charges or a substantial increase in credit within the prior six months could draw scrutiny.
In my experience, more than half of my clients have increased unsecured borrowing in the months leading up to their bankruptcy. Some for good reason; some for not good reasons. Some people, after they see bankruptcy as a good option, will intentionally run up credit cards to buy things they want but do not need. These people are trying to take advantage of their creditors and the bankruptcy system; trustees should come down hard of this type of debtor abuse.
Other people file bankruptcy reluctantly after a financial setback such as a job loss, pay decrease, or unexpected large debt. These people will use credit cards to buy necessities because they hope that their fortunes will improve and they can avoid bankruptcy. In my opinion, such individuals should not be penalized for increasing debts.
However, as a practical matter, if creditors and trustee do not distinguish properly the good and bad reasons for credit card debt prior to bankruptcy these people with good motives are taking a big risk when they borrow in order to buy time to work out of their financial situation. If they are unable to increase income, or decrease expenses, these well-intentioned debtors may have recent debts challenged in Chapter 7 bankruptcy.
People in financial difficulty may have a difficult choice. Few people want to file bankruptcy. But bankruptcy may be the more conservative option at the onset of financial problems. For if you need to incur debts to sustain you while you look for non-bankruptcy solutions you may find that bankruptcy is a more difficult and risky option if your self-help efforts don’t work out because the debt you incurred during your hardship may be challenged. .
Posted in Chapter 7, Planning Tips | Comments Off
Monday, March 7th, 2011
For those blog readers considering bankruptcy, I composed a video cartoon explaining the basics of of filing Chapter 7 bankruptcy in Florida. You are invited to watch and learn.
Posted in Chapter 7, Planning Tips | Comments Off
Tuesday, December 7th, 2010
How much is my car worth? This a question asked by most bankruptcy debtor’s who plan to file Chapter 7 and own a car free and clear of any liens. Florida law exempts only $1,000 of car equity in most cases, and cars’ liquidity makes them a prime target of Chapter 7 trustees who seek to recover non-exempt assets for creditors.
My own clients have suggested many methods they intend to use to value their own non-exempt cars. Example valuation standards are: written appraisals from their personal used car “guy”; an average of the car’s wholesale and retail values; the bid they get at Carmax, the Blue Book etc. This past Tuesday I was at a creditors meeting and I asked a bankruptcy trustee how she, and other trustees she speaks with, determine the value of debtor’s automobiles. She said that most trustees she has spoken with use the “trade-in” or in the yellow NADA book. That’s the book the banks use for car lending. She said that some trustees use “loan value” which is close to the “trade in” value. Carmax provides the lowest valuation based on auction wholesale price.
If you plan to take a car through bankruptcy make sure you are “on the same page” and in the same value book as your bankruptcy trustees.
Secondly, if there is something wrong with your car you need to adjust the car value and tell the trustee at the creditors meeting. One of my recent clients told me his car was worth $4,000 based on NADA value. The trustee made him buy back $3,000. After the creditor meeting the client told me that, “oh, by the way” the car air conditioner had been broken for some time and required a $2,000 repair. That fact, if known before the trustee meeting, probably would have removed the car as an issue. Now, the client is facing a difficult task of explaining why he believes his car is worth $2,000 when he swore on his bankruptcy petition it was worth $4,000.
Your bankruptcy attorney is not going to perform a mechanical inspection of your car and is not an expert on car values. Anything that could lower your car’s value must be considered before you sign your bankruptcy petition.
Posted in Chapter 7, Planning Tips | Comments Off
Tuesday, December 7th, 2010
How much is my car worth? This a question asked by most bankruptcy debtor’s who plan to file Chapter 7 and own a car free and clear of any liens. Florida law exempts only $1,000 of car equity in most cases, and cars’ liquidity makes them a prime target of Chapter 7 trustees who seek to recover non-exempt assets for creditors.
My own clients have suggested many methods they intend to use to value their own non-exempt cars. Example valuation standards are: written appraisals from their personal used car “guy”; an average of the car’s wholesale and retail values; the bid they get at Carmax, the Blue Book etc. This past Tuesday I was at a creditors meeting and I asked a bankruptcy trustee how she, and other trustees she speaks with, determine the value of debtor’s automobiles. She said that most trustees she has spoken with use the “trade-in” or in the yellow NADA book. That’s the book the banks use for car lending. She said that some trustees use “loan value” which is close to the “trade in” value. Carmax provides the lowest valuation based on auction wholesale price.
If you plan to take a car through bankruptcy make sure you are “on the same page” and in the same value book as your bankruptcy trustees.
Secondly, if there is something wrong with your car you need to adjust the car value and tell the trustee at the creditors meeting. One of my recent clients told me his car was worth $4,000 based on NADA value. The trustee made him buy back $3,000. After the creditor meeting the client told me that, “oh, by the way” the car air conditioner had been broken for some time and required a $2,000 repair. That fact, if known before the trustee meeting, probably would have removed the car as an issue. Now, the client is facing a difficult task of explaining why he believes his car is worth $2,000 when he swore on his bankruptcy petition it was worth $4,000.
Your bankruptcy attorney is not going to perform a mechanical inspection of your car and is not an expert on car values. Anything that could lower your car’s value must be considered before you sign your bankruptcy petition.
Posted in Chapter 7, Planning Tips | Comments Off
Monday, November 30th, 2009
These are hard times especially for small businesses. I frequently hear from small business owners who want to "file bankruptcy for their business." The small business owner usually has personally guaranteed most of his business debts. For some reasons, the troubled small business owner often thinks his first step in a bankruptcy solution is to file bankruptcy for his business. Then, he thinks, he may also file bankruptcy personally for his guaranteed debt and his personal credit cards. This is often the wrong strategy.
I read a good blog post on this subject by Maryland bankruptcy attorney Brett Weiss. People thinking of filing bankruptcy for their small business should read this article. I agree with what Mr. Weiss has written. In most cases, corporate bankruptcy for a small business is not necessary- its a waste of the client's money.
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