Texas Bankruptcy Blog : Texas Bankruptcy Lawyer & Attorney : Fears Nachawati law Firm : Chapter 7, Chapter 13, Consumer Bankrutpcy : Dallas, Fort Worth, Austin, Houston, San Antonio

In 2012, more than 1,000,000 Americans filed for personal bankruptcy. Job loss, health issues and divorce were just a few of the principle drivers that pushed these individuals into the protection of the bankruptcy court. For most, declaring bankruptcy wasn’t simply a legal act. It was a challenging personal choice, too.

Traditionally, many debtors feel emotions like guilt, shame and embarrassment for finding themselves so close to insolvency. They worry that bankruptcy is an irresponsible choice. They wonder what their parents, friends, and siblings may say about them.

Sometimes, bankruptcy is an irresponsible choice. For a debtor who has plenty of cash-on-hand and ample monthly income to cover his or her costs, it may be difficult to justify filing for Chapter 7 or Chapter 11 bankruptcy. In some situations, bankruptcy may not be the best way forward.

On the other hand, in most situations, declaring bankruptcy is the right decision, not the wrong one. The unexpected is part of life. Sometimes housing prices fall unexpectedly or interest rates rise when you least expect it. You can’t always guess when you’ll inexplicably lose your job or face an expensive medical condition. For many, it’s unfair to hold yourself to an unrealistic standard. For these situations and more, bankruptcy isn’t just available to you – it was intended for you.

Ready to find out more about the role personal bankruptcy may play in your future? The attorneys at the Dallas law firm of Fears Nachawati are prepared to give you the advice you need. Talk to us today for your free consultation.

“Cram down” is lawyer-speak for a bankruptcy court reducing a secured interest to the value of the property. For instance, if a bass boat is worth $2,000 and there is a $4,000 balance owed to the bank, the bankruptcy court can cram down the secured interest to $2,000. The remaining $2,000 is now unsecured and paid at the same rate as other unsecured debts.

The Bankruptcy Code allows cram down of many secured debts in a Chapter 13 bankruptcy. One notable exception is a mortgage on the debtor’s primary residence found in section 1322(b)(2). A Chapter 13 debtor may not reduce the amount of a primary or secondary home mortgage simply because it is underwater. The debtor may strip off a wholly unsecured junior lien (thereby making the debt unsecured), but if any part of the junior debt is secured, lien stripping is not allowed. Cram down is never allowed.

The exception in 1322(b)(2) only applies to the debtor’s primary residence, not to other property owned by the debtor. This distinction seems simple enough, but reasonable minds can disagree about the details, and often do in the world of bankruptcy courts. Take for example the recent case of In re Benafel. In Benafel, the debtor moved out of her home under threat of foreclosure. Benafel rented out her home in March of 2010 and filed Chapter 13 bankruptcy that same month. She proposed to cram down her rental property and the trustee objected.

The issue before the Ninth Circuit Court of Appeals was when the court should determine whether the real property is a Chapter 13 debtor's principal residence for purposes 11 U.S.C. §1322(b)(2)'s prohibition. The court said that the date for this determination should be the day the bankruptcy case is commenced – the day the debtor files for bankruptcy. On that day Ms. Benafel no longer lived in her home, so she was allowed to cram it down to value.

Moving out and filing bankruptcy can be tricky business. If this is done solely for the purpose to avoid the section 1322(b)(2) prohibition, the bankruptcy court may find the debtor has acted in bad faith. Before taking the initiative to move out of your home, speak with an experienced bankruptcy attorney for advice.
 

Section 104 of the Bankruptcy Code authorizes adjustments of certain dollar amounts every three years to account for inflation. The effective date of the most recent changes was April 1, 2013 and increased bankruptcy dollar amounts by 6.3%. The next adjustment will occur on April 1, 2016. These increases affect many aspects of bankruptcy, including property exemptions; means test calculations; and fraudulent transfers.

Here are some of the changes:

Federal Exemptions
• The federal bankruptcy homestead exemption amount increased from $21,625 to $22,975.
• The federal motor vehicle exemption amount increased from $3,450 to $3,675.
• All other federal exemption amounts increased.

Chapter 13 Bankruptcy Eligibility
The debt limit for eligibility to file Chapter 13 bankruptcy increased. To qualify for Chapter 13, a debtor must have secured debts less than $1,149, 525 (previously it was $1,081,400) and unsecured debts less than $383,175 (previously it was $360,475).

Credit Card and Cash Advance Limits
To prevent debtors from charging up credit cards on a pre-bankruptcy spending spree, Congress established limits on credit card charges and cash advanced. These limits have increased. Now if you charge more than $650 in luxury goods within 90 days of your bankruptcy filing, or taken out more than $925 in cash advances within 70 days of your bankruptcy filing, those charges are presumed to be non-dischargeable. Both of these limits were increased by $50 from their former amounts.

Means Test Threshold
The means test is the gatekeeper for Chapter 7 eligibility. A case is “presumed abusive” if, after applying statutorily allowed deductions, too much income remains. The amount that determines “too much” income has increased from $11,725 to $12,475 in one case and $7,025 to $7,425 in another.

No two bankruptcy cases are identical. For many bankruptcy cases, the process is part law, part accounting, and part creativity. Applying the bankruptcy laws creatively to your financial situation is the recipe for a successful bankruptcy outcome. If you are struggling with debt, make sure that your attorney is experienced, knowledgeable about the law, and will zealously represent you during the bankruptcy process.

Back in 2005, lobbyists for big banks convinced Congress that rampant abuse plagued the federal bankruptcy system. Congress bought into this theory and passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Congress sought to curtail consumer bankruptcy abuse with a number of “safeguards” which in hindsight have proven costly and unnecessary. As part of these safeguards, Congress directed the United States Trustee Program (USTP) to establish procedures for conducting random audits of bankruptcy petitions, schedules, and other information in consumer bankruptcy cases.

These audits have proven expensive for the USTP and on March 20, 2013, the USTP indefinitely suspended all random audits of bankruptcy debtors. In fiscal year 2012 the USTP paid independent accounting firms to audit over 600 cases. These independent auditors found that bankruptcy debtors had made material misstatements in only 16% of these cases. A material misstatement indicates the audit produced information that challenged the accuracy, veracity, or completeness of a debtor’s petition, schedules, or other filed bankruptcy documentation.

The bankruptcy process requires the debtor to disclose all assets, debts, income and expenses. Any “material misstatement” is usually the result of an oversight, like a debtor failing to list a savings account with a $200 deposit. The typical bankruptcy debtor is at the end of his or her rope and often under a great deal of stress when preparing for bankruptcy. Debtor attorneys have known all along that the vast majority of bankrupt individuals are looking for a fresh start, not a head start.

If you need an honest and legal fresh financial start, consult with an experienced bankruptcy attorney. Your attorney can explain how the federal bankruptcy laws can help you restructure your finances and get the relief you need.

Your Chapter 7 bankruptcy trustee is assigned dozens of cases each month and must process these cases as efficiently as possible. Most of these cases speed through the bankruptcy process to discharge without complication. Avoiding the attention of the trustee is a joint responsibility of your and your attorney. So how can you “fly under the trustee’s radar?”

Step 1: Tell Your Attorney EVERYTHING
You have a legal responsibility to disclose all of your assets, debts, income, and expenses. Your attorney’s job is to protect your income and assets, and ensure your debts are discharged. Your attorney will devise a game plan for your case based upon the information you disclose. If the trustee discovers something that you have concealed or forgotten, your attorney’s preparation is blown and now you are squarely in the trustee’s spotlight.

Step 2: Be Detailed
If your bankruptcy schedules report an asset without providing additional information, the trustee may ask questions. Make no mistake, questions from the trustee are always bad! For example, your high mileage 2008 Chevrolet Malibu may be reasonably valued at $4,000, but if you do not give the trustee sufficient information and details about the car, you will have to explain your valuation at the 341 meeting. Fully disclosing within the schedules demonstrates that you are confident about your valuation and have nothing to hide.

Step 3: Fill Out the Forms
Debtors and careless attorneys routinely leave blanks on the schedules. Two items that are often good indications of careless reporting are Bank Accounts, and Jewelry. A debtor who leaves these items blank is stating, under oath, that he does not have a bank account or own jewelry. The trustee will always ask. This can get comical when the trustee asks about jewelry and the debtor is wearing earrings, a wedding ring, a watch, a necklace, or a nose ring!

Step 4: Provide Documents
The trustee is required to examine tax returns and pay statements. Most trustees want to verify the amount of money in your bank account on the day you file bankruptcy, so bank records are requested. If you fail to provide these documents, you have placed yourself on the trustee’s short list of interesting debtors.

Step 5: Be Consistent
Are your bankruptcy schedules consistent? For example, if you reported an income of $100,000 for the prior year, and currently report income of $2,000 per month, you are waiving a red flag of inconsistency that the trustee will examine. Likewise, if you report a car payment as a monthly deduction, but do not list a car on your property schedule, guess who must answer trustee questions?

Step 6: Do Not Volunteer Information
One of the worst things to do at the 341 meeting is to volunteer information to the trustee. Some people get nervous and start confessing details about their finances. This often appears the result of a guilty conscience and suddenly the trustee is very interested in you and your case - even when there is absolutely nothing to hide!

Keeping out of the trustee’s crosshairs is a matter of common sense. The Chapter 7 trustee has a job to do and by providing documents and information, you make that job easier. Working closely with your bankruptcy attorney to detail your finances will make your bankruptcy case go smoothly.
 

It is common knowledge that the Bankruptcy Code stays collection actions “against the debtor,” including lawsuits. When a bankruptcy case is filed, a temporary injunction is automatically and immediately issued against all creditors that freezes all pending lawsuits against the debtor. However, the bankruptcy automatic stay does not prevent debtor lawsuits against a creditor or another party.

While debtor’s lawsuit is not stayed by the bankruptcy laws, the question arises as to whether a Chapter 7 debtor can prosecute the lawsuit. Recently the Sixth Circuit Court of Appeals clarified that only the trustee can file suit in connection with a Chapter 7 debtor’s pre-petition cause of action, unless the action is first abandoned. When a bankruptcy case is filed, a debtor’s lawsuit becomes property of the bankruptcy estate and the debtor is no longer the owner of the lawsuit. Consequently, only the Chapter 7 trustee can prosecute the action; the debtor has no standing to pursue it unless the trustee first abandons the lawsuit and it is no longer property of the bankruptcy estate.

When a lawsuit continues either by or on behalf of a debtor in bankruptcy, there is nothing that prevents a party from defending itself. However, counterclaims against the debtor are generally suspended during the debtor’s bankruptcy. This can create an inequitable situation where the plaintiff can zealously attack while the defendant’s counterclaims are frozen. Consequently, courts differ on the approach to this situation, and a court may encourage a party to apply to the bankruptcy court for relief from the automatic stay. Modification of the automatic stay “for cause” may permit a counterclaim or lawsuit to proceed against a debtor in bankruptcy.

If you have a potential lawsuit that has either not been filed or is pending in a state or federal court, speak with your bankruptcy attorney about the matter. Your interest in the case must be disclosed to the bankruptcy court and trustee. Your bankruptcy attorney can discuss the lawsuit with the trustee and determine whether the trustee wants to become involved in this action. In many cases, the trustee will abandon the interest and the debtor can continue his or her lawsuit.

The bankruptcy laws require a consumer debtor to complete an approved course in financial management as a prerequisite to receiving a discharge. This class is different than the credit counseling class required prior to filing your case. The financial management class curriculum must be approved by the Office of the U.S. Trustee and approved classes are required to last a minimum of two hours. Your bankruptcy attorney has a list of approved agencies, or you can find an agency by visiting the U.S. Trustee’s website at www.justice.gov/ust.

CHAPTER 7
Once you complete the financial management course, you must file your certificate and Official Form 23 with the bankruptcy court. For Chapter 7 debtors, these forms must be submitted no later than 45 days after the date of the first scheduled meeting of creditors. Rescheduling or continuing your meeting does not change the 45 day timeline. If you miss this deadline, the court will close your case without discharge. Most courts will allow the debtor to reopen the case by paying a fee, file the certificate, and receive a discharge. However, you may incur additional attorney fees to reopen a closed case.

CHAPTER 13
Chapter 13 bankruptcy debtors file the financial management course certificate and Official Form 23 no later than the date of the last plan payment. It is always recommended to take your financial management course within the same time frame as a Chapter 7 debtor (45 days). This reduces the risk of denial of discharge. Additionally, the financial management course provides budgeting information that contributes to a successful Chapter 13 case.

Hiring an experienced bankruptcy attorney means that you get the benefit of a seasoned office staff with safe-guards and procedures to protect your interests. Your attorney will remind you several times during your case to complete the financial management course. However, taking the course is your responsibility. If you encounter any difficulty in completing the course, discuss the matter with your attorney as soon as practical.
 

Retaining property is vital to a bankruptcy fresh start. The bankruptcy laws allow the debtor to keep essential items like clothes, jewelry, tools of the trade, retirement funds, and often a home. Perhaps the most important item after bankruptcy is a motor vehicle needed to get to work, school, or to the grocery store. While bankruptcy laws allow the debtor to retain a motor vehicle, it is subject to a legal exemption in the amount of equity the debtor has in the vehicle.
Determining the amount of equity in a motor vehicle is fairly simple. First, establish the vehicle’s fair market value, and then subtract the amount of outstanding liens. The lien is a security interest in the vehicle that is noted on the back of the title, or by some other agreement. Most states require the lienholder to “perfect” the lien by recording it with the state department of motor vehicles. That way all other creditors have notice that the lienholder is first in line to collect from its collateral. A perfected lien “eats up” any equity available to unsecured creditors in bankruptcy. For instance, if the fair market value of a car is $10,000, and the outstanding loan is $10,000, the car has no equity available for unsecured creditors – provided that the lien is perfected.
Unfortunately, when a vehicle is financed through a private loan with a family member, the lien may not be perfected. When a motor vehicle lien is not perfected, the lienholder loses its place in line and is placed at the same level as unsecured creditors with respect to claims against the bankruptcy estate. The vehicle may be taken the chapter 7 bankruptcy trustee, sold, and the proceeds equally divided amongst unsecured creditors.
So what can be done? First, a perfected lien may not matter if the debtor has sufficient available exemptions to protect the property. Second, the debtor could sell the vehicle prior to filing bankruptcy and purchase another vehicle. The only caveat is that the sale of the vehicle must be an “arm’s length” transaction for a fair price, and the lien must be perfected within 30 days of the purchase. Third, your attorney may advise you to have the lien perfected. Generally, liens perfected within 90 days of a bankruptcy are subject to avoidance by the bankruptcy trustee as a preference. Essentially, a preference is when a creditor receives better treatment than other unsecured creditors. By avoiding the lien, the trustee can take and sell the vehicle. While 90 days is a magic number for general creditors, the preference period is extended to one year for insider creditors such as a friend, business partner, or family member. By perfecting the lien, your attorney is playing a game of poker with the trustee. The trustee is forced to call your attorney’s bluff and file an action to avoid the lien. This may be more trouble than it is worth, especially if the amount of non-exempt equity is small. Finally, you may consider filing a Chapter 13 bankruptcy and paying an amount equal to the non-exempt equity over the repayment period. This allows you to keep your vehicle, but your lienholder only receives an amount equal to other unsecured creditors.
Your attorney is always in the best position to advise you regarding unperfected motor vehicle liens. There are many potential courses of action possible, and your attorney can discuss the best option for you.
 

While the Bankruptcy Code gives the debtor many options to retain a personal vehicle and continue paying a lender, sometimes it makes more sense to just walk away. In those cases, the debtor wants to know how long he or she has before the bank takes the vehicle. The first consideration in addressing this issue is recognizing that the automatic stay protects a Chapter 7 debtor from any collection action. Until the creditor is otherwise authorized, it cannot take the vehicle during a bankruptcy case.

The Bankruptcy Code specifically authorizes two times when a debtor loses its automatic stay protection for secured collateral. Each Chapter 7 debtor is required to file a statement of intention with the court which announces the intent to surrender, redeem or reaffirm (or in some cases “ride through”) property secured by a lien. If the debtor fails to file a statement of intention within 30 days after filing the bankruptcy case (or by the date of the section 341 meeting of creditors, which ever is earlier), the automatic stay is lifted.

The automatic stay also terminates for secured property if the debtor fails to follow-thru with his intention to surrender, redeem, or reaffirm within 30 days after the first date set for the section 341 creditors’ meeting. Note that just because the automatic stay is lifted and the collateral is no longer property of the bankruptcy estate does not mean that a creditor can immediately repossess the collateral. The debtor must still be in default under the terms of the contract/loan agreement before the collateral can be repossessed.

Finally, the automatic stay is terminated when the debtor receives a bankruptcy discharge. In this case the debtor’s personally liability is discharged, but still has possession of the secured collateral. If the debtor is in default for not making payments on the loan, the creditor can immediately repossess the vehicle.

The best advice is to surrender your vehicle back to the bank shortly after your bankruptcy filing. The reason is that you are responsible to safeguard the vehicle, which means insurance, maintenance, and otherwise protecting the vehicle from harm or damage. Damage to the vehicle after you file bankruptcy could expose you to liability that is not included in your bankruptcy discharge.

Surrendering property in bankruptcy is usually a simple matter. Your attorney and the bank coordinate a time and place, and you drop off the car. In some cases the lender may send a person or tow truck to get the car. Nearly always the debtor is given advanced notice. If you have specific questions about how a surrender will take place in your case, speak to your bankruptcy attorney.