Bankruptcy is Legal – But is it Moral?

I usually don’t give much thought to the question of whether filing a bankruptcy is the moral or ethical thing for a person to do.  I decided a long time ago that it  is, at least for my clients in the kind of cases that I accept.  For one thing, I don’t recommend bankruptcy unless it’s the last resort.  In other words, if the client has other alternatives, I recommend against filing bankruptcy and suggest that other avenues be tried first.  I have referred hundreds of people to Lutheran Social Services Financial Counseling and to Family Means financial counseling, my two favorite alternatives to bankruptcy.  Lots of debt settlement companies are operated by crooks, and you really have to watch out for them; but these two are strictly legitimate.

Most of my clients are absolutely overwhelmed and buried in debt.  If they are going to keep paying their unsecured debt, they don’t get to eat – and vice versa.  I believe that a person’s first duty is to himself or herself and his or  her family, and his or her second duty is to the community.  Under both duties, it is your obligation to take care of yourself well enough that you and your family don’t become homeless wards of the state.  If you can at least support yourself, you are saving the community the cost of supporting you. Your duty to continue paying your debts to a bunch of bankers is much lower on the hierarchy of values, and the value of self preservation will trump that every time.  If you need to file a bankruptcy to be able to properly care for yourself and your family, it could even be a moral obligation that you do so.

In biblical times all debts were canceled every seven years. (Deuteronomy 15:1-2) Everyone was given a fresh start at the same time every seven years whether they were current with their debts or not. Even citizens who had sold themselves into slavery were set free in the year of jubilee, which occurred every fifty years. (Leviticus 25: 10-13) Selling oneself or one’s family into slavery was apparently one approach to raising money to pay debt.  We no longer have slavery these days, but sometimes what I see my clients doing prior to filing bankruptcy seems to have similarities to slavery.  Seems like slavery to me if you spend all your time and resources working in the service of Capitol One or Discover.   It also seems to me that the sort of debt forgiveness practiced in Biblical times has similarities to bankruptcy today – except bankruptcy can usually be done only every eight years.

Here in the United States, bankruptcy is provided for in Article 1, Section 8, Clause 4 of the United States Constitution.  This authorizes  Congress to enact “uniform laws on the subject of Bankruptcies throughout the United States.”  Our founding fathers obviously thought that Congress should have the power to provide laws for the kind of safety net that is found in bankruptcy.  Under those laws for most individuals the only way to get your debts canceled is to file a Chapter 7 bankruptcy or Chapter 13 bankruptcy.  Even then some debts (most taxes, child support, alimony, most student loans, etc.) are not dischargeable.  

If things have gotten so bad that the debtor really can’t pay, bankruptcy is a good thing for the debtor and the creditor too, since the creditor is now able to stop wasting resources trying to collect. Large debts can be like quick sand. The harder one tries to get out, the deeper one gets.  Most bankruptcies seen in my office are filed long after they should have been.

This post is for general information purposes only, is not legal advice, and does not create an attorney-client relationship.

“Thank you” Recently Received from Client after Bankruptcy Discharge

During the holidays several of my clients received their bankruptcy discharge.  The discharge is a court order which states that the Debtor is no longer legally obligated to repay most if not all of  his or her debts.  In most cases the only debts that are not discharged are student loans and taxes.  Sometimes even taxes can be discharged, but that’s a topic for another blog post.

When that discharge comes out,  many of my clients thank me profusely.  For some reason I often have a hard time accepting thanks.  When I was growing up I think it was part of the culture to assume that when somebody was just doing their job, there was no need to thank  them.  And if somebody thanked me I tended to say “no need to thank me” or “it was nothing” or other similar words which more or less blew it off.  Later in life I learned that such responses diminish the importance of the gratitude being expressed and the person expressing it, and a simple “you’re welcome” is a much better way to respond.

Gratitude is one of the most noble of feelings and it should always be acknowledged – still it remains hard for me to do.  Even so, with the client’s permission I’d like to share with you the following somewhat poetic excerpt from an email I received from one of the clients who recently got that discharge:

“This is the best holiday present ever!
That difficult experience of the past few years can now finally be a ghost….So many sleepless nights.
Thank you David for helping us to straighten out our lives..
We still have a hard road a head to try to prepare for being too old to be employed…
It would have been impossible with the mess we were in and it is still a long shot but we do have better odds now.
You were our guiding light and we will always be grateful.
Many many thanks to you David, …….”

I tend to get a little emotional around the holidays anyway, but this email really touched me.

Close any Extra Bank Accounts Before you File Personal Bankruptcy

Maybe Nasty Bank

When it comes to what bank accounts you have open at the time of filing a personal bankruptcy, the adage “keep it simple” certainly applies.  In either a Chapter 7 bankruptcy or a Chapter 13 bankruptcy, the trustee is going to want to see a statement for every bank account that you have open on the day the case is filed. The more bank accounts you have, the more complicated that can get.  It seems as if every time I have a case where my client has more than three bank accounts, that client has trouble getting the required statement for at least one of them.

If the bank is also one of the creditors which you have listed in your case, you might find them particularly uncooperative when you try to get a statement. I was making a video on another subject when I made a few parenthetical remarks about how, before filing personal bankruptcy, you should close as many bank accounts as possible.  

There are enough other things that can go wrong in any bankruptcy case, without having to worry about not being able to get a statement from some obscure bank that has no offices nearby and which has shut down your on line access. In this video I explain that prior to filing a bankruptcy case, it is prudent to close as many of your bank accounts as possible. It’s best to go into your bankruptcy case with only has one bank account – a checking account at a bank or credit union which is not a creditor.

Your bankruptcy lawyer should know where the best places to bank are from a bankruptcy perspective. Some banks and some credit unions are more bankruptcy friendly than others. We have one bank in particular in the Twin Cities Minnesota area which will freeze your accounts when they find out you filed a bankruptcy, and they tend to do that whether you owe them money or not. That bank of course is to be avoided. This posting is for general information purposes only and is not legal advice. It does not create an attorney-client relationship.

I am a debt relief agency. I help people file for relief under the federal bankruptcy code.

Dave Kelly, Kelly Law Office, Minnetonka, MN 952-544-6356

What if You Have a Rental Property and Need to File Bankruptcy?

Rental property and personal bankruptcy

Here’s a video I posted at YouTube where I comment about how rental properties should be dealt with in a personal bankruptcy.  I talk primarily about Chapter 7 personal bankruptcy, but I also get into Chapter 13 bankruptcy to some extent.  Unless it is properly handled, the filing of a bankruptcy may result in the property being taken away from you. It’s complicated and you would be well advised to find and consult a good lawyer about the exact situation you have with your rental property.   The video is only three and a half minutes long, and only scratches the surface if it even does that.

These days it has become common for families to have a former home that they could not sell. Maybe they outgrew the old house, or maybe they had to move because of their employment. Not being able to sell the old place, the best they could do was to rent it out. It seems as if most of the time these places have a negative cash flow, although not always.

When the time comes to look into filing a personal Chapter 7 or Chapter 13 bankruptcy, the rental property can become quite a problem. Typically the trustee will not find it acceptable to say on your budget sheet that you intend to continue to pay the expenses of a property that is losing money.

Even if the place has a positive cash flow, trying to keep it in a bankruptcy situation tends to be more trouble than it’s worth. The extra income might be just enough to disqualify you from filing a Chapter 7 bankruptcy, especially if you have stopped paying the mortgage on the property.

The best way to hang on to a rental property, if that is something that you really want to do, may be to do a Chapter 13 bankruptcy instead of a Chapter 7. For that to work you would need to have the equity in the property not amount to much and to have it producing a positive cash flow.

Unless it is properly handled, the filing of a bankruptcy may result in the property being taken away from you. It’s complicated and you would be well advised to find and consult a good lawyer about the exact situation you have with your rental property.

This is for information purposes only and is not legal advice. Neither the video nor these comments create an attorney-client relationship. Please consult the attorney of your choice concerning the details of your case.  I am a debt relief agency. I help people file for relief under the federal bankruptcy code.

Hope you like the New Look of my Web Site

Well, it took about three weeks to complete, but I think I now have all the pages on my web site converted to the new design.  I have tried to make the pages look brighter and more optimistic in color scheme and tone, and easier to read.  In particular, I’ve tried to make the pages more friendly to mobile devices. A little over two years since I hired a gentleman to redesign my entire site.  I must have liked the design he chose, because I said yes to it.  But it certainly did not grow on me over time.  The longer I looked at it the less I liked it.  I started to feel that it was too dark and foreboding, almost Gothic, with it’s almost black background image and dark brown graphics.  It seems to me that people with financial problems are probably already depressed enough without looking at something that gloomy.  The other thing was that I was having trouble making changes and updating content.

There were many things about my own site that I could not figure out when it came to editing. I went back to the website creation software I had been using before I hired the expert – Microsoft Expression Web.  I checked for updates and found that there were none.  In fact Microsoft has discontinued the program and is now giving it away for free.  I found a template that looked as if it could accommodate what I had in mind, and then went to work rebuilding the entire site one page at a time.  It can be very tedious, but I started to enjoy it after while.

As I went along I updated all the content that needed updating, and added a bit more content here and there.  I found errors in the HTML code that needed to be corrected, and did that. Then I tested the pages in Internet Explorer, Firefox and Chrome.  For reasons I can’t understand things would look straight in one browser, and be not lined up right in another.  I also tested the pages on my Samsung Galaxy and my Kindle Fire.  Finally I started to launch the pages and the new images one item at a time.

Looks to me as if I have it all now. But if you see something that  looks goofy, I wish you would let me know.

Getting Rid of that Judgment Once and For All

Hennepin County District Court

When you read about bankruptcy you are very likely to see quite of bit of carrying on about stopping garnishment, stopping foreclosure, ending harassment from creditors, stopping those nasty phone calls, and in general making the debts just go away.  Bankruptcy tends to be good for all those things.  You may not see as much about getting judgments cleared from your record, however, because the discharge of your debts from the bankruptcy court does not automatically do that.

The bankruptcy court discharge is an order from a bankruptcy judge which eliminates most personal liability for unsecured debts.  It contains among other things an order addressed to your creditors requiring that they make no further collection efforts.  It just requires the creditors to stop.  For the most part, it doesn’t require the creditors to take any other action.  One of the things it does not require is that they file a satisfaction of judgment with the state district court if they have a judgment against you.  So when your bankruptcy is done, the creditors will leave you alone.  You won’t hear from them again.  If the creditor has a judgment against you, the creditor is prohibited from trying to collect anything on the judgment.  But the judgment itself just sits there and continues to be a matter of public record just as it was before the bankruptcy.

Most of the time for most people that is a big “SO WHAT?”  As long as the creditor is paralyzed and can’t collect, who cares whether the judgment is still on the record?  After all, the judgment will expire when it is ten years old, and the bankruptcy discharge definitely prevents the creditor from renewing the judgment before it expires.  But sometimes a lender will care if you are trying to get a mortgage or refinance an existing mortgage.  In certain odd instances an employer or future employer might care too – judgments don’t look the best on a background check.

If you should be one of the relatively rare folks who really needs to get the judgment cleared from the state court record, there is a procedure for doing that.  It is not part of the federal bankruptcy statute, but is a matter of state law.  In Minnesota, the process is laid out in Minnesota Statutes Section 548.181.  The clerk of court in most Minnesota counties can provide you with a form for this and a set of instructions to go with it.  The form and instructions for Hennepin County can be found here.  The statute is fairly easy to understand and reads as follows:

“548.181 DISCHARGE OF JUDGMENTS AGAINST BANKRUPTCY DEBTORS.

Subdivision 1.Application for discharge.
 A judgment debtor who has received a discharge under United States Code, title 11, or an interested party, upon paying a filing fee of $5 for each judgment, may apply to the court administrator of any court for the discharge of all judgments entered in that court against the judgment debtor that were ordered discharged by the bankruptcy discharge.
Subd. 2.Application requirements; service. 
An application under subdivision 1 must identify each judgment to be discharged, must be accompanied by a certified copy of the judgment debtor’s bankruptcy discharge or a certificate by the clerk of the United States Bankruptcy Court of the discharge, must state the time the judgment creditor has to object as specified in subdivision 3 and the grounds for objection as specified in subdivision 4, must be served at the expense of the applicant on each judgment creditor either:(1) in the manner provided for the service of a summons in a civil action and must be accompanied by an affidavit of service; or(2) by certified mail to the judgment creditor’s last known address as it appears in the court record, and must be accompanied by an affidavit of mailing.
Subd. 3.Objection to discharge.
 The court administrator, without further notice or hearing, shall discharge each judgment except a judgment in favor of a judgment creditor who has filed an objection to discharge of the judgment within 20 days after service of the application on the judgment creditor. An objection to discharge of a judgment must be served on the judgment debtor in the same manner as an answer in a civil action.
Subd. 3a.Certification of discharge. 
Upon receipt of a filing fee of $5, the court administrator shall certify to the judgment debtor or other interested party the judgments against a person that have been discharged by the administrator.
Subd. 4.Court order. 
If a judgment creditor objects to the discharge of a judgment, on motion of the judgment debtor, the judgment creditor, or other interested party, the court shall order the judgment discharged except to the extent that: (1) the debt represented by the judgment was not discharged by the bankruptcy discharge; or (2) the judgment was an enforceable lien on real property when the bankruptcy discharge was entered. If the judgment was an enforceable lien on some, but not all, real property of the judgment debtor, the discharge shall only be entered as to real property not subject to an enforceable lien.

 

That looks pretty easy doesn’t it?

Well, IT’S NOT AS EASY AS IT SEEMS.  Here’s the catch. Even though the law clearly states that the filing fee is only $5.00, Hennepin County has started charging a regular district court filing fee of $324 as well as the $5.00.  As far as I know, they are the only county in the state that is doing that, but don’t be surprised if you run into it in some other county.  I expect that the idea is going to spread.  You have to pay one filing fee per judgment, so if you have a lot of judgments to get rid of this could really run into money.  It’s probably a violation of law for them to be doing this, but for a few hundred dollars nobody so far has been able to afford to challenge it.

Around the year 2000 the court clerks across the state came up with forms and instructions for this that are available to the public.  Since then nobody has hired me to do this procedure. You definitely need a lawyer to do the bankruptcy itself, but once the bankruptcy is completed most people can do this judgment discharge application themselves.

This post is for general information purposes only and does not create an attorney-client relationship.  It is not legal advice.  It is recommended that you consult the attorney of your choice concerning the details of your case.

Those Troublesome Timeshares

A vacation timeshare can become like a stone around your neck.  I would say if you are thinking of getting one, don’t.

Vacation Timeshares can be like a stone around your neck.
A vacation timeshare can be like a stone around your neck.

A while back I heard from some people  I had done a Chapter 7 bankruptcy for in 2006.  After hearing nothing for years, out of the blue they were being sued for dues and maintenance fees by a timeshare company. The vacation  timeshare was owned at the time of filing the bankruptcy.  My clients were asking me the obvious questions:  Wasn’t that taken care of when we filed the bankruptcy?  How can they be suing us now?

Timeshares are unusual animals and a bankruptcy discharge might not apply to the maintenance fees and ownership association dues which accumulate AFTER the filing of the bankruptcy.  Any fees owing from before the filing of the bankruptcy would, however, ordinarily be discharged.

When it comes to fees which accumulate after the filing, the reason they might not be dischargeable is a provision among those that Congress added to the bankruptcy code in 2005, Section 523 (a) (16).  If you go here you can see it, just scroll down to (16).  This was written mostly to apply to condo and homeowner association fees, but it also says “in a share of a cooperative corporation … for as long as the debtor or the trustee has a legal, equitable, or possessory ownership interest in such unit, such corporation or such lot …”

Some timeshares involve real estate ownership and are a version of a condominium or townhouse setup.  Others are cooperatives that own the property and the customer gets a membership in the coop.  If you have either of these, you are probably liable for the fees which are accumulated AFTER the bankruptcy filing and continue to accumulate until you are no longer an owner.  This is or can be a terrible spot to be in, because many of these places have quit trying to take back the units when they are not being paid for.  Most of them are worth little or nothing and can’t be sold.  A timeshare owner might be stuck with it indefinitely.

However, if you merely have a contract that gives you a license to use the facilities during a certain time, without any sort of ownership of the property, then liability for the fess would probably not continue after the bankruptcy filing.  The bankruptcy should kill it for good.  So exactly how the timeshare is set up makes a big difference.   I have looked over many stacks of timeshare documents, some of them even in foreign countries.  Those papers tend to be very hard to wade through, very hard to figure out.  I can read and write, and I even went to law school, but sometimes it can be hard to figure which category a certain timeshare setup belongs in.

If you have a timeshare of any kind and are considering bankruptcy, be sure to tell your lawyer all about it. If you can sell it before filing the case, you probably should.  Make your best effort to figure out whether it has a market value and what that is.  Provide your lawyer with all the paperwork you may have about it.  Make sure it is properly listed and properly described in your bankruptcy petition, and make sure that whoever is running the organization gets notice of your bankruptcy filing.

Then cross your fingers, hold your breath, or better yet –  pray a lot.  Hope the darn thing goes away.

As with any other financial matter, if you are considering a bankruptcy, don’t make any serious moves without consulting your attorney first.

This post is for general information purposes only and is not legal advice.  It does not create an attorney-client relationship.  If you need legal advice, please consult the attorney of your choice. 

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).

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