Preparation and Planning for Filing Bankruptcy

Preparing Finances For Bankruptcy

Preparation and Planning for Filing BankruptcyWhen preparing a case for filing, I typically advise my clients that they should continue doing what they usually do financially speaking. Any change from the status quo tends to look suspcicious. It’s not a good time to make radical financial changes when you know that every move you make might be scrutinized. Sometimes, however, there is a circumstance or situaiton which we can see is going to create a problem if a bankruptcy is filed. When one has a situation like that, the question is whether something should be done to change things; or would it be best just to leave it alone. The ways and means of changing such things in such a way that the situation actually is made better instead of worse is known in my world as “bankruptcy planning.”

Recent court decisions indicate that some modest planning prior to filing a bankruptcy is permitted. But if you go too far with it, you risk all sorts of problems. So where’s the line? Well, it’s much more of an art than a science. I like to think I know it when I see it, but laying down hard and fast rules that will apply in every case would be hard to do. Before making any planning moves at all, if you have bankruptcy in mind, please get yourself face to face with a competent lawyer. I really hate it when my first meeting with a potential client comes a week after that person made a big mistake. I can’t count the times that I have said “I wish you would have come to see me before you did that.” In this blog post the best I can do is make a few general suggestions, things that would usually be correct, but not necessarily always correct.

FIRST, WHATEVER ELSE YOU DO, QUIT USING CREDIT CARDS

The newer the debt is, the more likely it is that there could be a problem getting it discharged in bankruptcy. If you are contemplating bankruptcy, using a credit card can be considered – I hate to use this word – fraud. The creditor may make a claim, usually as part of an adversary proceeding in the bankruptcy court, that you knew or should have known that you were never going to be able to repay the debt. Worse yet, the creditor might claim that you flat out intended to never repay. Any use of one account that totals over $500 or so within the 90 days before filing can bring on an objection from a creditor; under the 2005 law this is a circumstance that is presumed to be objectionable. Large purchases or charges or balance transfers within six months or so prior to filing also tend to draw an objection. Purchases or charges that took place more than six months prior to filing are not quite so likely to be objected to, but each circumstance is different.

When I am getting a case ready to file, I try to screen for transactions that might result in this kind of objection. If it looks to me that an objection is likely, a delay in filing is usually the solution. If the case is filed and an objection is actually filed, I may have to refer my client to an attorney who specializes in defending that kind of case. The retainer agreement I use specifically states that defending adversary proceedings is not included in what I am hired to do. Sometimes I can settle such a claim without referring my client to somebody else. There are also situations where my advice might be that there is no use defending because the case is a sure loser. An example of a sure loser would be a claim for overpayment of unemployment benefits. If a person accepted such benefits while they had a job, there is probably no way to defend. If it’s the kind of claim that just isn’t going to go away, often I can help my client negotiate a payment plan.

Sometimes the best solution is to file a Chapter 13 instead of a Chapter 7. In a Chapter 13 the creditors are discouraged from bringing nondischargeability claims because even if they win, they can’t collect on their win until after the end of the five year payment plan. During the five years they can’t collect any more than their share of what is being paid under the Chapter 13 plan. Some Chapter 13 plans provide for very low payments. Chapter 13 might not be as hard to live with as one might imagine.

DON’T TRANSFER, GIVE AWAY OR TRY TO HIDE ANYTHING

The bankruptcy statute has what is called a fraudulent transfer provision in it which goes back two years. Besides that, the State of Minnesota has a fraudulent transfer statute that goes back six years. These statutes allow the bankruptcy trustee to reverse certain transfers. The transfer reversal is often called a “claw back.” The problem is that there is a temptation prior to bankruptcy to get rid of assets so that the bankruptcy trustee can’t take them. Whatever form the transfer takes, if it was transferred as a gift or sold for less than full value, this property can be taken from it’s new owner. The two year bankruptcy statute covers just about any transfer that was for less than full value. This can include a transfer, or it can also include taking your name off a jointly owned asset. After all, when you take your name off a joint asset, you transfer half to the other owner. The six year Minnesota state statue has a requirement that the transfer have been for the purpose of hindering or delaying creditors, which means that after the first two years it is harder to show that a transfer was fraudulent. The bankruptcy forms you will have to submit ask a lot of questions about what you have sold, transferred or given away in the past two years. Selling something for fair market value is OK, but be ready to document that it was in fact fair value. The forms will ask what the item was, who it was transferred to and what you got in exchange.

“I don’t know” is not an acceptable answer to questions about where your money or assets went. The bankruptcy statute requires that before you file you must keep records sufficient to determine your financial circumstances. One of the things I often tell people who are contemplating bankruptcy is that they should start keeping receipts for everything. Receipts are especially important if you are using cash. We need to be able to explain where all your money went over the past several months before you file your case; and in some instances we have to disclose things that happened years earlier. My personal preference is that my clients run all their finances through a checking account, so there is a good record of everything that happened. There’s no rule agains using cash for everything, but I am always afraid that it looks suspicious.

If you have an account for your child into which you have been depositing funds on a regular basis, stop doing that. If you were thinking of giving your boat or your Harley Davidson to your brother or selling it to him for one dollar, don’t do it. If you have been repaying a debt to a relative, stop making those payments. Repayments of debt to a relative within one year of filing can be clawed back. Repayments to a regular unsecured creditor within 90 days of filing can also be clawed back if the total repayment duing that time is $600 or more. You might love your doctor, dentist, orthodontiist, therapist or chiropractor, but trying to get them paid off before filing the bankruptcy can be a wasted effort.

If someone recently gave you something which you are thinking of giving back, don’t do it. There’s nothing I hate more than having a bankruptcy trustee be able to seize an asset from a relative or friend of my client, when it happens that it was an asset that my client could have claimed as exempt and kept without a problem.

BE CAREFUL WHEN SELLING ASSETS AND SPENDING THE MONEY

As I suggested above, please don’t read this and then assume you know what to do. Consult a competent lawyer before you take action.

It’s not unusual for someone to come in to my office who has an extra car that can’t be exempted in a bankruptcy case, or some other non-exempt asset such as a boat or motorcycle. It there is a loan against the item, the easy answer might be to surrender it back to the lender. If there is equity in the item, selling it might not be a bad idea. As I mentioned above, with any sale the buyer’s name and address, the item itself, the date and the price must all be listed on the bankruptcy petition. In the event that it was something you listed on Craigslist and sold to a person who came by and did not identify himself or herself, I have gotten by with listing the buyer as “Unidentified purchaser from Craigslist.” When selling an item, you must be able to swear that the price was the fair market value. Usually such values are fairly easy to document with a visit to Craigslist or Ebay. It helps if the buyer was somebody you didn’t know rather than a friend or relative.

Of course when you sell something, what you have then is cash. Cash on hand – that is money that is not in the bank – still has to be listed as an asset in the bankruptcy petition. In my experience having too much cash tends to just not be as big a problem as a having hard asset item like a motorcycle that can’t be claimed as exempt. If there is too much cash, there may be acceptable ways in which it can be spent.  One of my favorite bumper stickers says “MONEY TALKS, BUT MINE ONLY KNOWS HOW TO SAY GOODBYE.” Most of my clients are in such dire financial circumstances that their cash can be compared to spit in a hot frying pan. It just doesn’t last long. Typically they need dental work, or their children need dental work, but they have been putting it off. I’ve also had clients who were delaying needed surgery, because they were using what funds they had to try and keep up with credit card payments. Another needed expense that gets put off is car repairs. This can include needed new tires or needed brake work. I’ve had clients living without hot water because they couldn’t afford a new water heater. Others are in serious need of a new refrigerator or dishwasher. Please consult your lawyer first, but often times purchases of such things are considered entirely appropriate because they are necessities of life. Buying needed clothing, groceries and filling up the cars with gas is usually also considered to be entirely acceptable. Paying your lawyer of course is always a good idea.

CONCLUSION

As I said above, this is more of an art than a science. It is very hard to state hard and fast rules that will work every time. Something that might work fine in one case can cause a very serious problem in another. Each case different. Variables abound. The bankruptcy statute is a mine field of “gotchas.” Whatever you may be contemplating when it comes to planning a bankruptcy, don’t do it until after you thoroughly discuss it with your lawyer. And when it comes to choosing a lawyer, I suggest you find somebody who has been around for a while.

Disclaimer

This blog post is for general information purposes only and does not create an attorney-client relationship. It is not legal advice. Please consult the attorney of your choice concerning the details of your case. I am a debt relief agency helping people file for relief under the federal bankruptcy code.

Chapter 7 and Credit Card Debt

Credit Card Debt

Credit Card DebtOne of the main reasons consumers seek bankruptcy relief is overwhelming credit card debt. If you qualify for a Chapter 7 bankruptcy, you could discharge most if not all of your unsecured credit card debt but there are circumstances where your credit card debt may not be dischargeable.

A bankruptcy places your creditors in order of priority. If your bankrupt estate has assets that are not exempt, the trustee could seize those assets and sell them off to repay your creditors in order of priority. Creditors who are unsecured or lack collateral for their loans are lowest in priority.

In most Chapter 7 bankruptcies, however, there are few if any unprotected assets available for distribution. In a no-assets case, unsecured creditors like credit card issuers are unable to collect anything for the unpaid balances on their cards and the debt is discharged.

Challenging the Discharge

There are situations, however, where the card issuer or company may successfully challenge the discharge. These include the following:

  • You obtained the credit card by falsifying information on the application
  • You never intended to repay the credit card company
  • The creditor has a purchase money security interest in the item

If you bought an expensive item with credit, you may have signed a purchase money security agreement even though you may have paid for the item with your credit card like a Sears card. In a bankruptcy, the creditor can claim that you either must return the item, pay its market value, or continue making installment payments for this item.

The more common issue that arises in a bankruptcy is your lack of intent to repay the creditor. Your payment history is vital in this instance as is your conduct in using the card.  A sudden change in the card’s use before filing is suspect. Here are some common mistakes that debtors make with their credit cards before filing for bankruptcy:

  • You made a number of large or expensive purchases with your card in the months leading to the bankruptcy filing.
  • You took out one or more cash advances.
  • You took an expensive vacation or traveled shortly before filing.
  • You maxed out the card.
  • You recently were issued the card and made a number of expensive purchases.
  • You made no payments on the new card.
  • You made no payments or only a few minimum payments after making large purchases or using it extensively just before filing.
  • You were unemployed while making these purchases.

Avoiding or Resolving Challenges to Discharge

If you are likely to have a challenge or objection to your bankruptcy discharge, you might want to consider one of the following strategies for either avoiding or resolving the potential challenge:

  • Wait at least 4-6 months before filing and make more than the minimum payments for each month. The longer you wait and make payments, the less likely the creditor can show that you lacked the intent to repay it.
  • Be prepared to settle with the creditor if or when the creditor makes an objection to dischargeability.
  • Consult with your bankruptcy attorney to see if a trial on this issue is advisable. If you win, you might be able collect attorney’s fees if the court finds that the claim was not “substantially justified.”
  • Consult with an attorney to see if a debt management program is more amenable.

Being prepared and having the advice of a knowledgeable bankruptcy attorney before you file will help you to avoid embarrassing, costly and potentially criminal acts.

The type of objection involved in most of the above situations is made when the creditor files what is called an adversarial proceeding in the bankruptcy court.  This proceeding is considered to be an action separate from the bankruptcy itself and has it’s own court file and it’s own set of documents.  Typically when you hire a lawyer to do a bankruptcy, the attorney fee will not include representation in adversarial proceedings.  The retainer agreement with your lawyer will probably actually EXCLUDE adversarial proceedings.  Defending  those is a practice area all by itself that many ordinary bankruptcy lawyers stay away from.

A good bankruptcy lawyer will screen your case in an effort to be sure that adversarial proceedings are unlikely.  If there is such a proceeding on the horizon, the creditor will tend to threaten an objection before actually filing one with the court.  Your regular bankruptcy lawyer may either try to talk the creditor out of it or try to settle the claim before the creditor files; but if the creditor actually gets to the point of filing the objection, you can expect an additional attorney fee and perhaps a referral to another attorney.

This article is for general information purposes only and is not intended to be legal advice.  Kelly Law Office is a Debt Relief Agency helping people file for relief under the federal bankruptcy code.

The Downside to Debt Consolidation

debt consolidation

debt consolidationDebt consolidation is typically tried in an effort to avoid filing bankruptcy. Often it’s a big mistake. In this process, a consolidator will attempt to compile a person’s debt into one loan that offers a low interest rate and monthly payment. The goal is to allow the person to pay off his or her debt gradually without having to rely on bankruptcy to do the work. This is certainly an option to look into, but it is not as perfect as society makes it out to be. In fact, it may actually be worse than filing for bankruptcy in a lot of cases.

Before you commit to debt consolidation, consider the following disadvantages:

  • You are turning old debt into new debt. Old debt washes in bankruptcy much better than new debt. When debt is new you are more open to the claim that you intended to never pay but had planned all along to file bankruptcy. This is grounds to object to your bankruptcy discharge. When you rob Peter to pay Paul, Peter might get really mad and file an objection in your bankruptcy case. Paul doesn’t mind, but watch out for Peter.
  • Debt consolidation can still damage your credit. If it takes you five years to pay off your outstanding loans, you are going to have at least five years of bad credit. With a bankruptcy, you can at least start rebuilding your credit shortly after you complete the process.
  • Debt consolidation requires a long-term commitment. You have to be able to pay off a loan for a long time, probably longer than any other loan you have had in the past. It is up to you to determine if you can do that with your income.
  • Debt consolidation will not work for all forms of debt. You may still have some loans to pay off independently, thereby defeating the purpose of the “one-stop debt.”
  • Debt consolidation may not save you any money in the long run. Even if you secure a low interest rate, you will probably have to pay off your loan for an extensive period of time. That is going to add up to a lot of extra money that you may not have to spare.

Bankruptcy may not be the solution for every debtor, but neither is debt consolidation. You have to weigh out the consolidation and bankruptcy facts to determine which process is best suited for your debt. Then you can start looking for a debt relief attorney to help you get your finances back on the proper financial track.

Recent Purchases Before Filing for Bankruptcy

When filing for a Chapter 7 bankruptcy, many debtors are concerned about the status of large or luxury purchases they may have made in the weeks or months before filing.

These purchases may have been for expensive jewelry, cars, boats, or other items. Whether these items can be retained by the debtor after filing for bankruptcy depends on the nature of the item and how and when it was purchased.

Credit Card Purchases

The trustee in a Chapter 7 bankruptcy will look to any major purchases you made in the past 90 days or even beyond in some cases. Also, a creditor may challenge your use of their credit card if it can show that your actions indicated an intent to not repay them.

For example, if you bought a $2,500 bicycle on your MasterCard three months ago and made no payments before filing, the creditor is very likely to file an objection to the discharge of that particular debt.  You will be accused of intending to run the debt through bankruptcy at the time it was incurred.  “Fraud” is the term the bankruptcy code uses to describe this behavior.   The creditor’s objection will be likely to prevail.

For some large items bought on a particular credit card, you may have unwittingly signed a purchase money security agreement. In this situation, the creditor could claim title to the item and demand you either return it, pay the current market value of it, or make monthly payments.

Reaffirmation and Redemption

For other expensive purchases made with cash, you may or may not be able to retain the item. Your assets and debts make up your estate. According to law, you have certain assets that are exempt from seizure by the trustee and assets that are nonexempt. Your exempt property is usually protected only up to a certain amount. For example, most states allow a limited homestead exemption regarding your equity. You can also exempt one automobile valued up to a certain amount.

 Automobiles and boats

If you just purchased an expensive car for cash, it is unlikely you can keep the vehicle since its market value will likely exceed the exempt amount.  Under the Minnesota exemptions, you can claim one car of a value up to $4,600;  or if you choose to use the federal exemptions, which are also available in Minnesota, you can claim up to $3,450.00 of equity in a vehicle as exempt.  So with the exemption being lower, why would you choose the federal exemptions?  Because the federal exemptions also include a wild card exemption which you can use for anything up to $11,975.  Excess equity in a car, or anything else that doesn’t fit in one of the specific categories, can be claimed as exempt under the wild card.  If you have assets that you are unable to exempt, however, you can expect the trustee to seize them unless you have the ability to buy the assets back from the trustee.

If you have a loan on the car, some of the lenders will require that you reaffirm the debt with a reaffirmation agreement as a condition of allowing you to keep the vehicle.  Most of the lenders, however, will let you just keep making the payments without a reaffirmation – a procedure called retain and pay.  A reaffirmation agreement is a contract which reinstates the loan as if the bankruptcy never happened.  Such agreements are to be avoided if at all possible.  Since 2j005 the bankruptcy code has not included retain and pay as one of the options, but most lenders will do it anyway.  Another option, one  which is still in the bankruptcy code, is redemption.  Redemption means paying in one lump sum – the full value of the vehicle or other security.  There are a few lenders out there who will finance redemptions, at a very high interest rate, but in general this is rare.

There are no specific exemptions for boats.  If the boat is a very modest one, you might be able to exempt it with the wild card.  Unless you can use the wild card, the trustee will likely sell any boat, and that money will go to the trustee and the creditors.  The best thing to do with a boat is usually to sell it before filing the bankruptcy – for fair market value of course.  You can use the proceeds to hire your lawyer.

Jewelry

Most states have a jewelry exemption.  Under Minnesota statutes the only jewelry exemption is for wedding rings  – up to $2,817.50.   The federal exemptions exempt $1,450 of any kind of jewelry. Your attorney will ask to determine the liquidation value of the jewelry, or how much you could get if you sold it.  A formal appraisal may be needed.  In some cases, the liquidation value is considerably less than what you paid for it and it may fit within an exemption.

If you bought the jewelry on credit and the creditor has a perfected security interest in the item, it could demand you return it or continue making payments. Taking legal action against you and then selling the item is generally an expensive process. In many cases, the creditor may agree to work out a payment arrangement or you could pay the redemption value in one lump sum.  Typically a payment plan would be written up as a reaffirmation agreement.

Reaffirmation agreements have to be filed with the court prior to the date of discharge for them to be legally enforceable.  This means the window during which they can be done is quite narrow.

If you have non-exempt jewelry, as with any asset that is non exempt, you can negotiate with the trustee to buy back the jewelry, if no security interest exists on it, once you determine its resale value.

In any of these scenarios, it is best to consult with a bankruptcy attorney before you file for Chapter 7 protection and to see if a Chapter 13 is more applicable or some other financial option is available.  The bankruptcy code is a mine field of “gotchas,” and it’s not a place you want to go without a lawyer.

The author of this article resides in Minnesota, and the references to exemption laws are intended only to apply to Minnesota residents.  The exemption scenario is different in every state; and if you are not from Minnesota, it could be very different in the state where you live.

This article is intended for general information purposes only and it not intended to be legal advice

The Most Common Reasons People File for Bankruptcy

Unemployment Cartoon

Unemployment CartoonWith the recent downturn in the economy, bankruptcy has become an increasingly popular way for people to relieve their debts. There are hundreds of reasons why a person may choose to file bankruptcy, but some reasons are more prominent than others. Here are the four most common reasons people file for bankruptcy in America:

  1. Medical Bills: With the number of uninsured citizens in the United States rising by the day, many families have high medical debt for accidents they could not pay for on their own. Medical bills can be upwards of $100,000 for one person, and that debt is typically more than one person can pay off. Bankruptcy provides patients with the opportunity to relieve their medical debts and start fresh in the future.
  2. Unemployment: Loss of work is another common cause of bankruptcy in the modern world. As people lose the ability to work, they lose the ability to pay their bills. Thus their debt piles up, and bankruptcy becomes the only solution they have to get back on their feet.
  3. Excessive Debt: Some people just make poor financial decisions, and they end up in debt because they over-exceeded their financial limitations. This is often the case with young adults who are not used to living on their own. Credit card debts and high car loans are some of the biggest financial problems in America, and they are among the most significant causes for bankruptcy.
  4. Divorce: Divorcees often encounter debt that was once part of a marriage. This, combined with the cost of divorce as a whole, may cause someone to build up enough debt to qualify for bankruptcy.

There are plenty of other reasons why you may feel pressed to file bankruptcy, but those are the most common ones at this time. If you happen to fit into one of those categories, you might want to speak with a debt relief attorney to assess your options.

Can I Keep My House If I File Bankruptcy?

Can the lien of the second mortgage be removed from my house? - Bankruptcy

Can I keip my house - BankruptcyOne of the most common questions we hear from our customers who are considering filing for bankruptcy is;

 If I file for bankruptcy can I keep my house?

Unfortunately, it isn’t a simple yes or no. The short answer is sometimes.

Here we will look at the factors that determine whether or not your house can and should be saved.

Chapter 7 Bankruptcy:

When filing Chapter 7, the debtor may or may not be able to keep their house. This liquidates all of your assets to pay your creditors. Your home is included by federal law.

The catch is that most states have their own form of “homestead law” that protects a portion of the equity of a debtor’s home from the bankruptcy process.

If a debtor has less equity than is protected by his state law, they should be able to keep their home as long as they keep making payments. Your home’s equity exemption is determined by the homestead laws of which state you reside.

Chapter 13 Bankruptcy:

When filing Chapter 13, the debtor can generally keep their house as long as they continue to make the mortgage payment.  If your equity in your home exceeds the amount protected by your local homestead laws, then Chapter 13 may be for you.

You might be able to stretch every dollar to make that mortgage payment, but should you? For instance, if you owe creditor’s more than your home is currently worth, your bankruptcy filing might be a good time to cut your losses and walk away.

Do I Want To Keep My House When I File for Bankruptcy?

There are other considerations which also determine your practical ability to keep your home. Are you caught up on payments? How much non-exempt equity do you actually have?  When making the decision whether to try and keep your home or let it go you will want to speak to an attorney in your area who is knowledgeable about local bankruptcy laws.

At the end of the day, it is all a question of whether your house represents an asset or a financial hardship.

When Bankruptcy Won’t Work

Bankruptcy is considered the ultimate relief of financial burdens, but that does not mean that it is right for everyone. In some cases, even bankruptcy may not be able to help you out of your debts. Before you rely on this procedure to remove the pressure from your shoulders, you need to assess your life after bankruptcy. Do you think you could make it then? If not, going bankrupt may be a poor choice

You are usually allowed to keep your vehicle, home, and some other property when you file for bankruptcy, which means that you may still have loans to carry after the process is complete. If your income has been reduced to the point that you can no longer afford to pay for the home you live in and the car you drive, you need to first settle your finances before you can use bankruptcy for assistance. This means that you may have to give back your home, car, or both to get into something you can afford. You can then use the bankruptcy to wipe away any excess money owed to your former lending institutions.

Be realistic about your financial prospects so you do not end up in the same situation later on. After a successful Chapter 7 you will not be able to file Chapter 7 again for another eight years, and you certainly won’t be able to rebuild your credit if you have excessive loans to pay after the process. Rather than getting into that kind of bind, you need to figure out if bankruptcy is right for you at this point in time.

As you know by now, bankruptcy is not an option for everyone. Instead of jumping into this process with the hope of making your life better, you should assess the situation you will be in afterward. If your bills do not fit your current income, no bankruptcy specialist is going to be able to help you out.

Rebuilding Credit After Bankruptcy

Rebuilding Credit After Bankruptcy

Rebuilding Credit After BankruptcyPeople ask me a lot of questions.  A  very common question is “how can I rebuild my credit after bankruptcy?”  Another variation of the question is “how long will it take to rebuild my credit after bankruptcy?”  For most of the people who are calling me, I think that is the wrong question.  Hidden beneath the “how can I rebuild my credit” question is another question which I am afraid is the real question:  “How soon can I get back in debt?”

Once the bankruptcy is completed, most of my clients are really out of debt – or at least nearly out of debt.  That can feel pretty strange for somebody who is not used to it.  It can feel uncomfortable, just not normal, not OK.  There can be a tendency to want to get back into debt as soon as possible, because being debt free is just too strange. Let me suggest this is not the time to be thinking about more credit.  This is the time to focus on staying debt free and actually enjoying being debt free. Being debt free will start to feel really good if you allow yourself some time to let it start feeling normal.

The better question would be “where can I learn some money management methods and principles?” I make no claim of being a money management expert.  If you want such an expert, I have been recommending Lutheran Social Services and/or Family Means for years.  Having said that, however, let me share a few money management ideas that I believe actually work:

  • Never let somebody else handle your check book or checking account.  Always take care of it yourself.  Otherwise you’ll never know what’s going on.
  • Minimize automatic withdrawals – they make it harder for a person to be aware of where the money is going.
  • Sit down and spend some time with your bills.  Touch them, smell them – I’m serious.  Accept that they are real and they are yours.
  • Pay each bill manually or as manually as technology these days permits.  Avoid everything and anything that helps you forget that the bill is there.
  • Avoid credit cards whenever possible.  In the situations where you must have one, use a debit card or a prepaid card.
  • Do whatever it takes to completely rid yourself of the idea that somebody or something is going to come along and bail you out.  No matter what the politicians, your friends, your relatives (especially parents) say, there are no free gifts.  No free bailouts.  No free money of any kind.  It all has a price of some kind that you will have to pay sooner or later.

Everything I’ve ever read about money management says you should do a written budget.  Personally, I’m not sure that’s such a great idea.  Diets don’t work for people who need to lose weight, and I think a budget is a lot like a diet.  Best to take it day by day, being mindful every day of where your money is coming from and where it is going to.  I don’t think it is at all a matter of needing to put yourself on something like a diet.  I think it’s mostly a matter of needing to really just start paying attention.

This article is for general information purposes only and is not intended to be legal advice. Kelly Law Office is a debt relief agency helping people file for relief under the federal bankruptcy code. 

 

How Does Bankruptcy Work

Payday loan worries

Filing for bankruptcy is often seen as an irreversible act that is only to be reserved for dire and desperate circumstances. For many, the very thought of filing brings to mind images of long shameful court battles and loss of wealth, reputation, and good credit standing.

In truth this undesirable image is largely exaggerated and undeserved. What many people don’t realize is that filing for bankruptcy protection is often the first step in climbing out of the dark hole of debt and into the light of financial recovery.

Oh No! Not the “B” Word

Much of the mystery and taboo associated with the subject comes from a general lack of understanding about how bankruptcy works and what it means for the person who is filing. Here we hope to dispel some of the myths and misinformation that surrounds the subject by offering you a brief look into how bankruptcy works.

In the U.S., bankruptcy is constitutionally required to be placed under federal jurisdiction. Thus congress has enacted a number of statutes governing bankruptcy law and proceedings. Likewise, bankruptcy cases must be filed in United States Bankruptcy Court. Although cases are filed under federal jurisdiction, state laws greatly affect certain aspects of the process so it is important to understand that bankruptcy laws vary significantly from state to state.

Six Shades of Debt Relief

Bankruptcy is a blanket term that refers to a variety of legal arrangements that are available to a debtor seeking to liquidate, restructure or resolve his debt. Under Title 11 of U.S. Bankruptcy Code there are six distinct chapters or types of bankruptcy available to debtors depending on who they are and their financial situation.

All attorney David Kelly handles, however, are Chapter 7s and Chapter 13s, so discussion here will be limited to those two kinds of bankruptcy.  We we will focus on the those two types of bankruptcy available to most individuals who have fallen on hard times and are seeking relief from creditors. We will take a look at each process and how each type of bankruptcy works.

How Does Chapter 7 Bankruptcy Work?

Chapter 7: Basic Liquidation

As the name suggests, Chapter 7 is sometimes decribed as the basic liquidation is the sale of the debtor’s non-exempt property and the distribution of the proceeds to creditors. One might think that Chapter 7 is generally the “harshest” form of bankruptcy as it can involve the mandatory sale of ones assets and generally does not involve structured reorganization of debt or a payment plan.

In most states bankruptcy proceedings are handled by a U.S. Trustee operating under the authority of the department of justice. In most Chapter 7 proceedings the process starts with the debtor filing a petition with the bankruptcy court that serves the area where the debtor lives, does business or houses their principal assets.

Along with the petition, the debtor must also submit a collection of documents that provide a detailed account of the debtor’s financial situation.  This includes but is not limited to income, assets, living expenses and debt obligations.

Exempt Property:

Please know that most of the Chapter 7 clients at Kelly Law Office don’t have any assets liquidated at all.  Most if not all of their assets can be claimed as exempt, so that they may keep them.  For assets which are not exempt, the Trustee may allow the Debtor to buy the asset back by paying it’s value rather than surrendering the item itself.

Among the documents filed is a schedule of the debtor’s exempt property. This allows the debtor to retain all property that falls under federal and state protection from the liquidation process. It is important for a person filing for bankruptcy to consult with an attorney to determine which of his assets are exempt from the process.

Stop Collection:

Filing for Chapter 7 stops collection actions against the debtor. As soon as the debtor files for bankruptcy the assigned clerk gives notice to creditors and collection agents listed in the filing to stop all lawsuits and collection efforts against him.

Conclusion:

While the process can involve all eligible assets being repossessed and sold in an effort to satisfy all or a portion of the debtor’s outstanding debts, it is unusual for our clients to lose any assets at all. If any assets are lost, it is usually relatively minimal.  Once the case is completed, most remaining debt is discharged and, with certain exceptions such as student loans, the Debtor no longer owes anything to the creditors listed in the filing.

Side Effects:

Filing for Chapter 7 Bankruptcy has several effects on the debtor in addition to the obvious outcome of debt relief. The filing is recorded on the debtor’s credit history and also affects their ability to file bankruptcy again using the same or other chapter filings.

Chapter 13: Individual Debt Adjustment (Personal)

Chapter 13 Bankruptcy is somewhat similar to Chapter 11 in that the debtor is working to formally or legally restructure and adjust their debt burden in a way that allows them to move forward without the constant hardship of collection activity.

Stop Collection:

Filing for Chapter 13 stops most collection actions against the debtor. As with Chapter 7 filings, the stay or stop in collection activity may only be temporary if one of the creditors is able to get an order lifting the stay with regard to the particular debt owing to that creditor. As soon as the debtor files for bankruptcy the assigned clerk gives notice to creditors and collection agents listed in the filing to stop all lawsuits and collection efforts against him.

Save Your Home

One notable advantage of Chapter 13 filings is that the Debtor may be able to use the Chapter 13 payment plan as a tool to get mortgage payments caught up.  This can obviously help avoid foreclosure of his home. With a Chapter 7 filing, foreclosure may be delayed, but the Debtor is on his or her own to get the payments brought up to date.  While bringing payments up to date in Chapter 13, the Debtor must also start and continue making the regular payments on the mortgage which come due after the case is filed.  Many succeed at this, but often it is very difficult..

Conclusion

A Chapter 13 Bankruptcy may be preferable to a Chapter 7 for the debtor who wishes to get caught up on a mortgage which is behind.  Income taxes which are behind can also be brought up to date in a similar manner under Chapter 13.  The payment plan is not based on the amount of the debt but upon what the Debtors can afford to pay.  Debtors are required to devote their entire disposable income – what’s left over after reasonable living expenses – to their Chapter 13 Plan payments.  If the Trustee is satisfied that a good faith effort is being made, the creditors have little choice but to accept the proposed plan.  Little if any negotiation is involved in most cases.

Summary:  How Bankruptcy Works

Bankruptcy is a legal procedure or device that follows standard guidelines. Here’s how it works:

  1. Debtor or Creditor brings to the attention of the court a debt or group of debts which the debtor has demonstrated he is unable to otherwise pay or resolve.  In Chapters 7 and 13 all debts must be listed.
  2. Debtor (or sometimes the creditor) initiates bankruptcy filing which establishes the chapter under which said bankruptcy is to be carried out.
  3. Debtor is required to furnish a significant body of evidence detailing his financial standing and inability to pay the debts in question.
  4. Creditors are given the opportunity to review the evidence and have the opportunity to file certain objections if they believe that the Debtors do not qualify for the relief they are requesting.
  5. If all goes well, the Debtors will receive a Discharge after a certain period of time, which is essentially a court order which says all or a substantial part of the debts are gone.

This is a basic guide to how the most common forms of bankruptcy work. For more information we recommend you contact an attorney to determine your best course of action given your particular set of circumstances. Bankruptcy law varies greatly from state to state and circumstance to circumstance. We want to make sure you have the tools and knowledge to address your unique set of circumstances as best as possible. It is strongly suggested that you call attorney David Kelly for a no-cost screening over the phone (952-544-6367).

Can Bankruptcy Stop Foreclosure?

Rental property and personal bankruptcy

Can Bankruptcy Stop ForeclosureForeclosures continue to occur at an alarming rate in many parts of the country. Many homeowners who obtained subprime mortgages earlier in the past decade or who now find themselves unemployed or underemployed because of the depressed economy are unable or unwilling to make their monthly mortgage payments

State and federal programs for distressed homeowners to assist in loan modifications are available to some but you may not qualify. For others, a short sale transaction is a way to extricate themselves from a home whose value is less than the loan amount, but these can be complicated and may not work for any number of reasons.

As a result, many people facing overwhelming financial pressures turn to bankruptcy as a solution, but can a bankruptcy stop foreclosure?

The Foreclosure Process

Once you miss at least 3-4 consecutive mortgage payments and the lender has sent you notices warning you of possible foreclosure, the lender will generally begin the process to repossess your home. This can take several months and in some instances more than one year.

Minnesota is a non-judicial foreclosure state, meaning that there is usually no court action. When the foreclosure is done without court action, it is called a “foreclosure by advertisement.” Mortgages typically have a power of sale clause allowing an attorney to foreclose on your home. A lender may choose, however, to go to court in a judicial foreclosure to obtain a judgment of foreclosure.

If your home is taken, there are certain reporting and notice requirements before the lender can sell it at an auction conducted by the sheriff, usually at a greatly reduced price. In Minnesota, as long as it’s a foreclosure by advertisement, you are not subject to a deficiency judgment if the sale is for less than the loan amount.  This means that most of the time, as long as there is only one mortgage, a homeowner in Minnesota can walk away from a house free and clear.  If  there is a second mortgage, however, watch out.  These days the holders of second mortgages are suing people in large numbers after the first mortgage has foreclosed.  Sometimes they don’t even wait for the first mortgage to foreclose if the payments are not up to date.

Accordingly, if you are facing foreclosure, can a bankruptcy stop the foreclosure or benefit you in some way?

Can a Chapter 7 Bankruptcy Stop a Foreclosure?

Whenever you file for bankruptcy protection under a Chapter 7, an automatic stay of all legal proceedings, including foreclosures, goes into immediate effect. A Chapter 7, if you qualify, allows you to discharge most if not all of your debt.

Unfortunately, the lender is allowed to file a motion to lift the automatic stay as it pertains to your property as the lender can otherwise suffer economic harm. In this instance, a Chapter 7 will only temporarily delay the foreclosure.

It is very difficult to fight the motion to lift the automatic stay.  About the only practical way to stop the motion is to get the payments up to date or make arrangements to bring the payments up to date.  In a Chapter 7 the automatic stay ends when the discharge is granted, usually around three months after the case is filed.  This means that most of the time lifting the stay doesn’t mean much anyway, because the stay was going away by itself.

At the least, you may be able to save thousands of dollars while not making any mortgage payments and take the time to look for alternative housing.  Once the foreclosure is stopped, many lenders are very slow to get it started again.  While the automatic stay officially only stops things for about three months, you will very likely gain much more time than that.

Can a Chapter 13 Bankruptcy Stop a Foreclosure?

The other bankruptcy filing available to a homeowner is Chapter 13. Under this plan, you must submit a repayment plan that includes all your creditors and that is approved by the bankruptcy trustee. The automatic stay also goes into immediate effect once you file.

Unlike a Chapter 7, this chapter allows you to keep your home but you must have proof of sufficient income to not only maintain the current mortgage payments but to make up the arrearages over the life of the repayment plan. Many repayment plans are for the maximum 60 months. Under a Chapter 13, then, you may be able to stop the foreclosure so long as the indicated conditions are met.

In a Chapter 13 it might also be possible to do a lien strip.  We’ll know for sure when the Eighth Circuit Court of appeals finally decides the Fisette case.  A lien strip would benefit homeowners with multiple mortgages. It would eliminate payments on all mortgages except the first one. If your home’s value has declined and the first mortgage has secured all the home’s equity, if any, then the other mortgages  would be considered unsecured debt and will be discharged.

In any case involving a foreclosure, consult with an attorney to explore all your legal options.