Should I File for Bankruptcy?

Should I file for Bankruptcy?This is a difficult question. As you can imagine, I get asked this a lot. Usually “Should I File For Bankruptcy?” is asked as one of the first questions when a new prospective client calls or emails me. Most of the time, the question is too complicated for dealing with by email, so early on in the exchange of emails I am very likely to suggest that the person just call me on the phone.

I usually break the conversation down into two issues: First, can these people file for bankruptcy – are they eligible; and second, we answer the question “should I file for bankruptcy”.

For details of the technicalities of eligibility, you should look at my pages devoted specially to Chapter 13 and Chapter 7. Almost everyone qualifies for one or the other, although I do run into a few who don’t qualify for either.

Assuming that a person qualifies, the question of should I file for bankruptcy is probably harder to figure out. In my opinion nobody should file any kind of a bankruptcy if they have any other options available to them. How does one know if there are any other options? After all there are adds on the TV and the radio for debt management programs and debt consolidation programs.

In my opinion you are out of other choices if your dischargeable unsecured debt – the debt that usually can be gotten rid of in a bankruptcy – equals or exceeds one half of your annual gross income.

So first I will try to figure out how much your annual income is right now, and then I will want to start adding up the debts. When I add up the unsecured debt, I do not include the student loans, because they will still be there after the bankruptcy is finished. I also would not include child support arrearages and most taxes for the same reason. As a practical matter, however, lots of student loan debt or other nondischargeable debt may lower ratio of how much other debt as compared to annual gross income would justify filing in my opinion. The higher the student loan debt, the lower the dischargeable unsecured debt to income ratio I would want to see before taking the case.

What Does The Law Say about Filing for Bankruptcy?

The law doesn’t help answer the question of Should I File for Bankruptcy. It provides for no minimum amount of debt which is required to be there before one can file a bankruptcy.

Every case is different, and there has never been a foolproof mathematical formula that has seemed to work for me. But here’s what I am really trying to figure out:  as a practical matter can these people live long enough and work hard enough to pay off this debt by some time within their reasonable life expectancy?

If the answer is no, then I recommend that either a Chapter 7 or Chapter 13 be filed. What I find is that most of the people who call me have passed the point of no return some time ago.

If you need to talk to a professional about whether or not you should file for bankruptcy, give me a call today at: 952-544-6356

Or Fill Out Our Contact Form Here

Eligibility Requirements for Filing a Chapter 7 Bankruptcy Petition

Debt Relief, MN BankruptcyIf you are one of many people across the country who are suffering from more debts and obligations than your budget can seem to handle, you are probably thinking about seeking the protection of a Chapter 7 bankruptcy. Like most, you may also be wondering if there are specific rules or regulations that determine your eligibility to file a petition.

In order to file a petition for a Chapter 7 bankruptcy, you need to meet certain conditions defined within the bankruptcy codes. To begin with, your level of income must fall below a specific amount, and if so, you next have to pass another set of eligibility standards called the ‘means test’. However, the bankruptcy laws also state that the bankruptcy court can dismiss your petition if you have previously filed for bankruptcy during a specific length of time. The bankruptcy court can also dismiss your petition if feels you might be defrauding your creditors.

In previous bankruptcy laws prior to 2005, the judge presiding over the case could dismiss any Chapter 7 petition if you had enough disposable income to finance a Chapter 13 Bankruptcy repayment schedule to your creditors. With the new bankruptcy laws in effect, there are much clearer guidelines that determine if you will be allowed to remain in Chapter 7 bankruptcy, or if you might be required to petition for a Chapter 13. Only disabled veterans who have built up debts while on active duty, and people who have taken on too much debt because of a struggling business are allowed to submit an uncontested Chapter 7 petition.

These new guidelines for filing a Chapter 7 petition begin by determining how your ‘current monthly income’ amount compares to a standard or ‘median’ income level, and is it also based on your particular household size in your state. This amount is also calculated by averaging your total earnings during the previous six months prior to filing your petition. If your earnings happen to fall below or are equal to this median amount, you will certainly be able to qualify for a Chapter 7 petition.

On the other hand, if your earnings are above this median figure, then you must meet the next challenge by passing the ‘means test’ required in the up-dated bankruptcy guidelines. The means test is used to find out whether you have enough disposable income, after deducting living expenses and other debts like child support or alimony for instance, to repay your creditors over a three to five year repayment plan in a Chapter 13 petition. These guidelines were designed to keep people with higher levels of income from filing for a Chapter 7 bankruptcy.

The new bankruptcy laws also state that you may not file a Chapter 7 petition if you have already received a discharge of your debts in a Chapter 7 case within the previous 8 years, or in a Chapter 13 within the previous 6 years. In addition, you cannot file if either a previous 7 or a 13 was dismissed anytime within the previous six months because you violated a court order, you committed any fraudulent activities, or you dismissed your case because a creditor sought relief from the protection provided by the automatic stay.
Finally, the bankruptcy court can also have your case dismissed if it is felt you attempted to commit fraud against your creditors, or tried to conceal your assets or personal property from the bankruptcy court in order to avoid the liquidation process. The liquidation of your assets is necessary so that the court-appointed trustee on your case can repay as much of your unsecured debts as possible to your creditors.

It is important to remember that simply because you qualify under the means test guidelines does not mean you should automatically file a petition for a Chapter 7 bankruptcy. The test is only intended to confirm that you are eligible to file. Any decision to file for Chapter 7 bankruptcy should be made only after considering all other options and possible alternatives, and only after discussing these options with knowledgeable and qualified bankruptcy attorney.

If your would like to know more about Chapter 7 Bankruptcy and your Eligibility, Call David Kelly Today at: 952-544-6356

Or Fill Out Our Online Contact Form

New Median Income Figures

Just learned that the US Trustee’s Office is issuing new median income numbers effective May 1st. They are going up for all household sizes. This is a good thing.

Please keep in mind that I’m only talking here about the figures for Minnesota.

For a household of one, the present number is $46,161, but after May 1st it will be $47,618. For a household of two it goes from $61,170 to $63,101. For household of three it increases from $71,784 to $74,050, and for household of four it goes from $84,251 to $86,910.

For every additional family member in addition to four, add another $7,500.

I thought right away of one person who I had just spoken with who was discouraged over being just a little over the median. So I called that person just now with the news that now the family is probably a bit under the median.

In case you are wondering, the big deal is that as long as your income is under the median, you can avoid being subjected to what can sometimes be a very difficult means test.

Lien Stripping Update in "Minnesota Lawyer"

Just noticed that Minnesota Lawyer has a good recent article on the subject of lien stripping and the status of the availability of this process for Minnesota residents. This is a process in Chapter 13 bankruptcies involving people who have second mortgages. It has to be a situation where the value of the house is less than the balance on the first mortgage. The theory is that in cases where the homestead is worth less than the balance on the first mortgage, then the second mortgage is not really a secured debt.

One prepares and files a Chapter 13 bankruptcy in which the second mortgage is put in with the unsecured debts. If it succeeds, the debtors should be able to come out the other end – usually after paying in on a Chapter 13 plan for five years – with only one mortgage on their house instead of two. This could really help a lot of people. The trouble right now is that the availability of the process is still under appeal. Besides that, the exact procedure for clearing the lien of the second mortgage from the title as a matter of real estate law is still under discussion.

Once the appeals are over and both the bankruptcy laws and the real estate laws have been fully nailed down, this could be really something. For now I have not found myself willing to subject a client of mine to all the risks involved in this procedure. To me it just doesn’t seem quite ready for prime time. I know lawyers who are going full steam ahead with this, however, and I could refer you to one it you’d like to at least look into it.

Mentioned in Lien Strip article – Not exactly a Claim to Fame

Seems I was quoted in an article in yesterday’s Sunday Pioneer Press. The topic was a process called lien stripping. It involves taking a second mortgage in a Chapter 13 case and throwing it in with the unsecured debts. The second mortgage gets treated as if it were a big credit card instead of a mortgage. At least in theory, at the end of the Chapter 13 payment plan, the mortgage is then just gone. This can only be done in a case where the value of the homestead is less than the balance owing on the first mortgage. The bankruptcy court is asked to treat that second mortgage as if it was unsecured, because as a practical matter there is no security.

I say “in theory” in the above paragraph because the situation is that this process is so new – at least here in Minnesota – that nobody knows quite for sure exactly how it should be done. That is still being worked out. For one thing, the case (Fisette) which says we can do it is being appealed. I don’t expect it to be overturned, but that could happen. For another thing, nobody knows for sure how to clear the title of the second mortgage. The mortgage can be gone as a matter of bankruptcy law, but still be a problem as a matter of real estate law. Real estate law is as if it’s on a different planet than bankruptcy law – maybe in a different solar system. There’s a need for adjustments between the two legal systems before lien stripping can be expected to go smoothly. While those adjustments might be in process, they are certainly not completed at this time.

The whole thing is a bit too up in the air for me, and so far I have been reluctant to try doing any of this. I have been explaining it as a possible option, and I have been referring people who are interested to some of the lawyers who have been doing them – such as Mr. Theisen and Mr. Andresen. People like them should be given credit for having the gumption to push for this, particularly Craig Andresen who is the one who has the case on appeal.

This is a developing area and I’m sure to have more to say about it later.

At the Bankruptcy Institute Today

You might find it hard to get a hold of me today. I’ll be in classes all day at the Bankruptcy Institute. This is an annual event sponsored by the Minnesota State Bar Association’s Minnesota Continuing Legal Education. I was here all day yesterday too.

The highlights yesterday for me were the case law update and the session on “Advanced Chapter 13 Plan Drafting.” Another good session was the one on business owner bankruptcies. Today so far the best thing has been a joke one of the presenting judges just told: something about how what a judge needs is grey hair so he looks serious and hemorrhoids so he looks concerned.

More later.

Harleys and Bankruptcies Don’t Mix

At least that would be the general rule. All rules of course have exceptions.

I just spoke by phone with a person who needs a bankruptcy. The trouble is that he or she is the owner of a Harley-Davidson motorcycle. It’s not paid for. There’s still a loan on the bike with a monthly payment. The usual story in that situation is that if you want to file a bankruptcy – any kind of bankruptcy – the bike has to go. Sell it or surrender it, but it has to go before we can file.

Most of the time when I explain this to the owner of a Harley, it’s the last I hear from that person.

I just spent a very quiet and peaceful weekend at a campground in southern Minnesota. I found that there happened to be a group of over 100 bikers there, mostly if not all riding Harley-Davidsons. I barely noticed them. They partied and carried on, but in a quiet and respectful way. In fact they were some of the most well behaved people I’ve ever seen. I learned later that they were a group of retired police officers, some from Minnesota and some from Chicago. Most of them were dressed in typical biker attire, including jackets and hats bearing one or more variation of the Harley-Davidson logo. Those bikes were obviously an important part of their social life.

Powerful attachment to a Harley-Davidson motorcycle is a phenomenon I’ve seen repeatedly. Often as with the retired cops it can be a really good thing. But I can’t change the way the bankruptcy trustees view these things. In a bankruptcy case, unless it’s paid for and so old that it’s not worth much, a Harley tends to be an asset that they want to seize or a frivolous expense that they won’t allow or both. It’s just not a good thing for anybody contemplating bankruptcy.

Two pro se cases not heard last Thursday

I was at the Federal Courthouse in Minneapolis last Thursday for a meeting of creditors. The room was full and I was planning for a long wait with my client.

To my surprise the trustee – who is the person who runs such proceedings – stood up and asked two apparently married couples to leave. These individuals were there without a lawyer and were obviously pro se – or in other words representing themselves. From the words that were exchanged it sounded as if they had gone to some sort of a non-lawyer document preparation service.

Apparently whoever they had gone to had neglected to tell them that they were supposed to provide a copy of their most recent tax return to the trustee well in advance of the date of the meeting of creditors.

I expect that those parties will be allowed to provide their tax returns to the trustee and reschedule their meeting of creditors – which those who know me know I often call the “hearing,” because that word is a good one to describe what happens. I can’t help but wonder what else might be wrong with those bankruptcy filings.

I’ve been concerned for some time that some of these document preparation outfits are dangerous. If you search this blog I believe you’ll find something from a while back where I was carrying on about such a service located in India which had contacted me and wanted to essentially use my name.

Cleaning up mistakes of low-cost services

I have been reading a discussion this morning on a bankruptcy lawyer listserve. The topic which has captured my attention is how badly some of the document preparation services can fowl up a bankruptcy case. It is not unusual to be told his or her fee is too high; and then a few months later that same person, who filed using a document preparation service, is back asking to have something fixed.

My policy has been that I don’t like to jump in and try to fix something that someone else has screwed up. I fear the risk of malpractice for one thing. Although someone else broke it, once I start trying to fix it the responsibility could rub off on me. I did recently, however, give in to a plea to help with the amendment of some documents. I’m soft hearted, it looked like a simple problem to fix, but I probably still should not have. The case could have had other problems besides the one I was asked to help with. Then what?

Beware of anyone who tells you: There’s nothing involved but filling out a bunch of forms, only takes a few minutes, no need to waste valuable money and time.

Harassment by mail and phone; some that stops after filing bankruptcy and some that might not

During my first meeting with a new potential client, it’s not unusual for that person’s cell phone to be ringing repeatedly. Usually it’s call after call from bill collectors or collection agencies. Once we get a bankruptcy case filed, most such calls will slow down and then finally stop within a few days. This is because of what is technically called the “automatic stay” – a court order issued as soon as a bankruptcy case is filed which tells all the creditors to leave the debtor alone and to stop all collection efforts. I tell my clients to let me know if a creditor doesn’t seem to have gotten the word about the bankruptcy. It might be that there’s a creditor that wasn’t listed and that needs to be added to the creditor list.

Lately, however, I’ve been hearing from my clients about harassment which they are receiving from sources other than bill collectors. For one thing, there are disreputable credit counseling services which are sending out advertising disguised to look like letters from a bill collector. A client faxed me one not long ago, and it had me fooled. It certainly looked like something from a creditor to me. In fact it looked like a notice that the creditor had scheduled an arbitration hearing. I thought it needed immediate attention, so I called the number on the “Debt Mediation Notice.” I told them about the bankruptcy and asked them which creditor they represented. To my surprise they told me that they were a debt settlement service and they didn’t represent anybody. They weren’t trying to collect a debt. They wanted to help my client settle his debts, which obviously was not possible since a bankruptcy had already been filed.

So now when you go in debt apparently one can expect to be harassed not only by creditors, but by businesses that market their services to those who are in financial distress. I find such marketing to be a despicable practice, particularly when it is misleading. Since I saw that “Debt Mediation Notice,” I have been wondering how such organizations would get information on who is in financial trouble. I believe that this afternoon I may have received some insight on that.

I have just received two emails from an outfit that is offering to send out junk mail on my behalf which would be addressed to “homeowners in your area that are 60 or 90 days late on their mortgage payment and/or with late credit card debt balances of $20,000 or more.” They don’t say where they are getting the mailing list for that, but my best guess would be that there must be a credit reporting agency which is selling that information. If that’s legal, somebody ought to pass a law making it illegal.

Filing a bankruptcy only stops the stuff coming in from creditors and bill collectors. Other materials intended for the financially distressed are not affected. Another thing that’s not affected is junk mail from agencies that do the post-bankruptcy-filing counseling. Before filing a case I usually have my client signed up for the required counseling program, but this doesn’t stop aggressive and misleading mail advertising those counseling agencies. Some of the materials contain statements to the effect that the bankruptcy will be dismissed if the counseling is not completed. There may be some truth in that, but the counseling doesn’t have to be done with the outfits that are mailing out that sort of thing. I’ve had some clients get pretty upset upon receiving some of these materials, particularly elderly clients who aren’t used to how misleading some things can be.

So I have deleted those emails which offered to do a mass mailing for me to people who are in financial trouble. I would suggest that if you receive anything like that from one of my fellow lawyers, definitely don’t call that person. Run the other way.

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