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

Redemption is a process during a Chapter 7 bankruptcy case where a debtor is able to retain a vehicle by paying the secured creditor the value of the vehicle, not the total debt that is owed. For example, if you owe $15,000 to Ford Motor Credit, but the car securing the debt is only worth $10,000, you can use the redemption process to pay only the value of the vehicle ($10,000), keep the car, and discharge the remaining unsecured debt ($5,000).

Redemption is only available to those debtors who are able to pay the entire value in one lump sum. So in our example above, after the bankruptcy court approves the redemption, Ford Motor credit must receive the entire $10,000. Payments are not allowed. While this may appear to be an insurmountable obstacle, the truth is that there are several financing sources available to you. Some finance companies specialize in providing loans to debtors in bankruptcy, including 722 Redemption Funding and Fresh Start Loan Corporation. Experienced bankruptcy attorneys are very familiar with these companies and other finance sources.

The process for obtaining a redemption auto loan is very similar to qualifying for a traditional loan. Finance companies require a loan application and assurances that you will be able to repay the loan (e.g. steady employment, reasonable debt to income ratio, good payment history, etc). The interest rate can be high for a redemption loan; however the resulting monthly payment is often lower than the original monthly payment. 

If you are interested in lowering your monthly payments through the redemption process, discuss your options with your attorney. It is important to carefully consider all of the advantages and disadvantages before making a decision to redeem a vehicle. Some of the advantages of a redemption loan are:

• Retention of the vehicle;
• Vehicle is no longer “upside down;”
• The creditor cannot repossess the vehicle;
• Usually results in a lower monthly payment.

The main disadvantage of a redemption loan is:

• High interest rate

Redemption is not the only option for keeping a vehicle after a bankruptcy. A skilled bankruptcy attorney can explain all of your options and help you obtain the best deal for you and your family. 

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 Many tough decisions are made when a family is struggling with debt.  Often debts are paid according to priority.  Those bills at the lowest priority may not get paid at all.  While this may be a good strategy under ordinary circumstances, it may back-fire when a bankruptcy is imminent.

The act of paying one creditor while ignoring another is called a preference payment by the bankruptcy laws.  The debtor preferred to pay one creditor and not others.  A preference payment is defined as a transfer of money made before a bankruptcy filing, to pay on a pre-existing debt, made while the debtor is insolvent, and gives the creditor more than it would receive from the liquidation of the debtor's assets during a Chapter 7 bankruptcy.

In deciding who should get paid first, the Bankruptcy Code divides creditors into classes and creates a hierarchy of preferences.  For instance, the Bankruptcy Code prefers that child support is paid before credit cards, and that a secured car payment is paid before a medical bill.  In many cases a pre-bankruptcy preference payment is perfectly fine; in other cases it can create trouble for the debtor and the creditor.  This is especially true when one creditor in a class receives more than other creditors in the same class, or a creditor in a lower class receives money before creditors in higher classes.

When a preference payment occurs within 90 days of the bankruptcy filing, the bankruptcy trustee can ask the court to order the preferred creditor to turn over the payment(s) for distribution according to the hierarchy of preferences.  This period is increased to one year if the creditor is an “insider” creditor.  An “insider creditor” is generally a relative, business partner, etc. who has a special relationship with the debtor.

Common preference payment scenarios include:

1.              Repaying a personal loan from a family member just before filing bankruptcy;

2.              Paying one business vender, while ignoring others.

3.              Transferring a credit card balance from one card to another.

4.              Paying off a credit card, medical bill, or personal loan just before bankruptcy.

When the trustee requests turnover of a preference payment, the creditor is faced with either complying with the request or litigating the matter in bankruptcy court.  There are legitimate preference payment defenses which largely depend on the circumstances of the payment.  However, the general practice of bankruptcy trustee is to sue first and ask questions later.

If you are struggling financially, seek out legal advice early and avoid making mistakes with preference payments.  An experienced bankruptcy attorney can help you make wise financial decisions and avoid preference payment situations.

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There are some strange myths concerning bankruptcy.  Many of these myths are told by well-meaning, but uninformed financial “experts.”  Today’s post will look at six common myths.

Taxes cannot be discharged in bankruptcy

This myth is based in some truth.  Tax debt is especially hard to discharge, and in some cases the debtor may not discharge tax debt.  The truth is that discharging tax debt often depends on how long you have had the tax debt and what has happened in the meantime.  It is important to speak with an experienced bankruptcy attorney about your circumstances and get competent legal advice.

You lose everything in a Chapter 7 bankruptcy

Everything?  Really?  The truth is that only four percent of all Chapter 7 cases are asset cases.  In the remaining 96% the debtor loses nothing.  Additionally, secured property like a car or home may be reaffirmed and the debtor retains the property and continues to pay the debt.

You can lose your job if you file bankruptcy

The federal law prohibits a government or private employer from terminating or discriminating against an employee who files bankruptcy.  It is illegal for your employer to fire you because you filed bankruptcy.

You can’t get credit after a bankruptcy

A bankruptcy discharges unsecured debt and reorganizes your finances.  Bankruptcy can make it easier for you to pay your bills.  Many debtors are able to purchase cars and obtain credit within months after the bankruptcy discharge.  Many others are able to buy a home two years after the discharge.

You can only file bankruptcy once

While the Bankruptcy Code attempts to prevent multiple and abusive filings, bankruptcy is always available to those who need it.  There are time restrictions that may prevent a second discharge, for instance, an individual debtor who received a chapter 7 bankruptcy discharge to file another Chapter 7 after eight years.  However, that debtor is eligible for a Chapter 13 after four years.

If you have a job you can’t file bankruptcy

The truth is that Chapter 13 bankruptcy is called a “wage earner’s” bankruptcy and the debtor must have an income stream to qualify.  Many families with multiple incomes are eligible to file bankruptcy.

Don’t be misled by bankruptcy myths.  Get the facts from an experienced bankruptcy attorney and ensure the law is working for you.

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When a small business encounters tough times, it is not uncommon for the business owner to do what is necessary to keep the business alive.  The obligation to keep the business going for family and employees is strong, and can often result in the business owner making decisions that create personal financial hardship.

Small business owners are required to withhold taxes from their employees' paychecks and pay the Internal Revenue Service (IRS).  Employment taxes consist of two parts: (1) the employer's portion, and (2) the employee's portion.  The employee's portion is withheld from the employee's wages by the employer, and consists of a 6.2% Social Security tax and a 1.45% Medicare tax.  The employee's portion is held in trust by the employer until it is remitted to the IRS.  The employer portion of the tax is paid directly to the IRS.  This obligation is comprised of a matching contribution of 6.2% as Social Security tax and 1.45% as Medicare tax. 

When an employer cannot pay the IRS, things can go south very quickly.  The IRS can close a business for failure to pay employee taxes, and can attempt to collect personally from each owner or manager responsible for withholding and paying the tax (known as a “responsible person”).  The IRS can collect 100% of the debt from each of the responsible persons until the debt is paid.  Usually this results in owners and officers pointing out each other’s personal assets in a “get him not me” effort to avoid payment.  This can be very nasty business.

The federal bankruptcy laws can help manage this impossible situation.  While in some cases an individual can file bankruptcy and discharge the employer's portion of the tax debt, the employee's portion is not dischargeable.  However, bankruptcy allows the debtor to propose a plan to repay non-dischargeable payroll taxes, often without stopping business operations.

If you are a small business owner with an employer payroll tax problem, consult with an experienced bankruptcy attorney and discuss your options.  The federal bankruptcy laws may be able to provide the time and opportunity to repay your tax debt and continue your business.

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Even if you are not a football fan, chances are you have heard of Michael Vick.  Vick was enjoying wealth and fame as a star quarterback in the National Football League, until authorities discovered that he was running an illegal dog fighting ring.  Vick served 18 months in a federal prison, lost his fame and fortune, and filed bankruptcy.

As it goes in this land of opportunity, the Philadelphia Eagles gave Vick a job after his release, and recently he had one of the best games by a quarterback in NFL history.  During a Monday Night Football game in front of a national television audience, Vick accounted for 413 yards of total offense and six touchdowns. 

This is also good news to Vick’s creditors.

Vick is playing under a one year contract during 2010 which Fox Sports reports is worth $3.75 million in base salary, a $1.5 million roster bonus which was paid in March, and possible performance incentives of over $2.7 million.  According to the terms of his bankruptcy plan, Vick is able to keep $300,000 of this salary while the rest goes to repay $20 million in debt and administrative expenses.  Vick’s confirmed Chapter 11 plan pays his creditors on a scale of

10% -40%:

            Vick’s Earnings                       Percentage to creditors

                 0 - $750,000                            10%

$75,0001 - $250,000               25%

$250,001 - $10,000,000          30%

$10,000,001+                            40%

The repayment period is January 1, 2010 through December 31, 2015.  Vick’s recent record setting performance and continued success in the NFL could mean a multi-year contract.  This gives creditors reason to smile.

CNBC reports that Andrew Joel is one creditor who is taking an active interest in Vick’s on-field success.  Joel’s company, Joel Enterprises, sued Vick on a breach of contract issue and is owed $6 million.  Joel told CNBC, “I don’t think I’ll get all of my money back, but I now think I’m getting more than I originally thought.”  Joel stated that while he has yet to see payment through the bankruptcy, he expects money in the future.  However, “the bankruptcy lawyers and the Atlanta Falcons are in line before me,” he said.

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A Chapter 7 bankruptcy is sometimes called a liquidation bankruptcy.  In its simplest description, a Chapter 7 bankruptcy liquidates all of your property to pay your creditors.  Any remaining debt is discharged.  However, that description is not exactly accurate, or practical.  The truth is that most debtors who file Chapter 7 bankruptcy do not lose any property while erasing all or most of their debts.

Once your Chapter 7 bankruptcy case is filed, an impartial case trustee (sometimes called an “interim trustee” or “panel trustee”) is appointed.  The main functions of the Chapter 7 trustee are to oversee and administer your bankruptcy case.  When you file a Chapter 7 bankruptcy all of your assets are placed into a temporary “estate.”  The estate is the temporary legal owner of all property in which you have a legal or equitable interest as of the date you file bankruptcy.  The trustee examines the estate to determine whether there are assets that can be sold to pay creditors.

Most Chapter 7 cases are considered “non asset cases,” meaning that all the debtor's assets are exempt or subject to valid liens.  However, when non-exempt assets are available, the trustee may take and sell these assets to pay creditors.  The Chapter 7 trustee oversees the accounting and payment of creditors from funds obtained by liquidating non-exempt assets of the debtor. 

The Chapter 7 trustee also presides over the debtor’s meeting of creditors required by Section 341 of the Bankruptcy Code.  The Chapter 7 trustee is usually an attorney or accountant with extensive bankruptcy law and auditing experience, but is forbidden from offering legal advice to a debtor in bankruptcy.  The trustee is under a duty to investigate the debtor’s affairs, examine the debtor under oath, and submit reports to the bankruptcy court and Office of the U.S. Trustee.  At the meeting of creditors the Panel Trustee is required to ask the debtor specific questions outlined in the U.S. Bankruptcy Code, including:

Did you read the schedules before signing?

Did you list all of your assets?

Did you list all of your debts?

Are the schedules accurate?

Do you want to make any corrections to the schedules?

Do you have a domestic support obligation?

If the trustee discovers evidence of fraud during the examination of the debtor, the case may be passed to the Department of Justice for further investigation.  The trustee may also find assets through unconventional means, such as avoiding pre-bankruptcy transactions made by the debtor in an attempt to protect assets from creditors.

The best advice for dealing with the bankruptcy trustee is to plan and prepare.  Use an experienced bankruptcy attorney to prepare your bankruptcy filing accurately and honestly.  When the paperwork is in order, there are no assets to liquidate, and there are no signs of fraud, the case goes smoothly and quickly.  However, when the bankruptcy schedules are inconsistent or incomplete, you may find yourself squarely on the trustee’s radar. 

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New data from the Administrative Office of the U.S. Courts reveals that American consumers filed more than 1.5 million non-business bankruptcies during the federal government's fiscal year ending September 30.  That is 14% higher than fiscal year 2009, when around 1.3 million consumer bankruptcies were filed.

“As the issues of unemployment and economic stress weigh heavily on today’s elections, consumers continue to seek the financial shelter of bankruptcy,” said American Bankruptcy Institute Executive Director Samuel J. Gerdano. “We anticipate that there will be nearly 1.6 million consumer bankruptcy filings by year end.”  The American Bankruptcy Institute is the nation's largest association of bankruptcy professionals.

At this current pace, the number of consumer bankruptcies for 2010 would be the highest number in the past five years.  In 2005 Americans filed over two million bankruptcies cases, 630,000 of these were filed in the two week period before bankruptcy law revisions made it more difficult discharge debt.

Gerdano expects the number of bankruptcies to continue rising in the months ahead as unemployment stays near 10% and access to credit remains tight.  Personal bankruptcy filings have been climbing steadily since the recession began in 2007 which left millions of Americans unemployed or underemployed.  During the federal fiscal year 2010, Chapter 7 filings increased nearly 15% to over 1.1 million, from 989,227 in fiscal 2009.  Chapter 13 filings rose 9.2% during the year, while Chapter 11 filings fell 3.8%.

If you are struggling with debt and considering bankruptcy, you are not alone.  Bankruptcy is a legal process protected by federal law, guaranteed by the U.S. Constitution, and overseen by a federal judge and agents of the United States Justice Department.  Bankruptcy is the right way to legally resolve a debt problem that you cannot pay.  If you need legal protection from your creditors, contact an experienced bankruptcy attorney and discuss your options.

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Military service is a selfless and honorable public service.  Veterans deserve our respect and our gratitude.  Congress has passed many laws attempting to give veterans a preferred status to meet special needs that result from service to our country.  For instance, wounded veterans receive health care after discharge, and veterans often have hiring preference for jobs.

In recognition of the potential economic hardship that extended military service may impose on our reservists and national guardsmen, Congress has made a special exemption from the bankruptcy means test.  Members of the Reserves or National Guard who file bankruptcy while on active duty or within 540 days after release from active duty are excluded from all forms of means testing.  The means test is a mandatory calculation that determines whether the debtor’s income is low enough for you to file Chapter 7 bankruptcy.  

Disabled veterans are also exempted from taking the means test.  However, this exemption only applies if the indebtedness was primarily incurred during service on active duty or while performing a homeland defense activity.

Active duty servicemen and servicewomen are not excluded from the means test.  However, active duty personnel receive protection under the Servicemembers Civil Relief Act (SCRA).  The SCRA protects active duty military personnel from default judgments and evictions, and can even reduce the servicemember’s interest rates.  Active duty personnel serving in a combat zone are also excused from completing pre-bankruptcy credit counseling.

If you have served in this country’s military and are now struggling with debt, speak with an experienced bankruptcy attorney and learn how our national laws can help you in your time of need.  The bankruptcy laws broadly protect Americans overwhelmed by debt, and specifically protect certain veterans who have suffered financial hardship as a result of their service.

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Every so often a client will say, “I am hopelessly in debt, but I don’t want to ruin my credit score with bankruptcy.  It is still very good.”  This statement is just like the old joke, “I can’t be broke, I still have checks!”  A credit score is supposed to be an indicator of your financial health.  Unfortunately, many people assume that their financial health is indicated by the credit score.  Consequently, they continue to misuse credit, in many cases borrowing from credit sources to pay monthly credit obligations.  It is a vicious cycle of debt.

In today’s economy your credit score is not the only factor a lender considers when issuing credit.  Financial institutions are using new sources to profile their customers.  A recent article by Wall Street Journal writer Karen Blumenthal entitled New Ways Bankers Are Spying on You reports that banks are now examining rent and utility payments, bank deposits, as well as estimating your home’s value in order to gauge your financial health.  Blumenthal writes that in one case a bank customer was denied a credit after the lender reviewed his home loan records, determined that the value of his California home had declined, and noticed that his mortgage principal wasn't declining—giving away that he has an interest-only mortgage.

Financial good health is living within a budget, using credit responsibly, controlling debt and excess spending, working towards short and long-term financial goals, and contributing to savings and investments.  It is difficult to manage just one of these aspects when a person is overwhelmed by debt.

Fortunately, the federal bankruptcy laws provide an answer for individuals living beyond their means and buried in debt.  Bankruptcy offers a legal means to restructure or eliminate your debts while protecting your family’s assets including real estate, vehicles, or retirement accounts.  During bankruptcy creditors cannot contact you directly and the vast majority of debtors do not lose any property.

If you are drowning in debt, don’t be fooled by a high credit score.  Your financial house is built on sand and it is time to rebuild on solid ground.  Consult with an experienced bankruptcy attorney and discover how the federal law can get you back on the path to financial health.

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The bankruptcy law requires the debtor to list all of his or her assets in paperwork filed with the court.  The court requires the debtor to file a standardized form called “Schedule B” which lists all of the debtor’s property.  The instructions for completing Schedule B direct the debtor to “list all personal property of the debtor of whatever kind.”

A common question from bankruptcy debtors is, “Do I have to list property that belongs to my child?”  The answer is, “It depends.”  If the child is a minor, you likely own any property that you purchased for the child, like bedroom furniture, clothing, toys, etc, even if you gave the property as a gift.  On the other hand, if a minor child paid for an item from his or her own funds, then you would identify your relationship to the property on Schedule B.  For instance, if your 17 year old son worked a summer job to purchase a car with is own money, your disclosure would identify the car and state that it is being held for a minor child.  The court cannot take what is not yours.

Property that has been transferred to a minor or adult child with the intent to protect the asset from turn-over during the bankruptcy must be disclosed.  These transfers are often attacked as fraudulent and may be lost during the bankruptcy case.  The usual problem with this type of transaction is it is done without the guidance of an attorney.  State and/or federal exemptions that can protect the debtor’s assets may be compromised when the property is transferred immediately before filing bankruptcy.  The legal protections available to you may be lost by this transfer.

Money held in trust for your child is generally not property of the estate.  For instance, a bank account set up under the Uniform Transfers to Minors Act (UTMA) naming you as custodian is usually protected.  This type of account is irrevocable and the money belongs to your child, not to you.  However, funds you contribute to this account during a time when you are insolvent may be found to be fraudulent transfers and the Chapter 7 trustee could obtain the funds to pay your creditors.

Protecting assets belonging to a debtor’s child is usually not an area of large concern.  If you have an unusual situation and your child has an ownership interest in a valuable asset, it is important to discuss the best means to protect the asset with an experienced bankruptcy attorney.  Don’t leave the protection of your child’s asset to chance.  Get the advice you need by calling today.

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Garnishing a debtor’s wages is one of the most common and effective means a creditor has to get paid.  A garnishment is a typically a court order (in some rare cases a garnishment can come from another source), and directs the debtor’s employer to withhold a certain amount or percentage from the employee’s pay.  This amount may be limited by state or federal laws, depending on the type of debt and the income source, and the debtor may be able to assert certain “exemptions” that restricts the amount of the garnishment each pay period.  The garnishment usually comes unannounced and is delivered just before the debtor’s payday, to ensure that the creditor receives the maximum amount from the garnishment.

Certain income sources receive increased protection from garnishment like Social Security, retirement plan benefits, public assistance, workers' compensation, and unemployment or disability benefits.  However, certain debts like child support can collect from most of these income sources.

When a garnishment is taking more than you can afford to pay, it may be time to consider filing bankruptcy.  The federal bankruptcy laws will stop debt collection including garnishments.  The moment the bankruptcy case is filed a temporary injunction known as the “automatic stay” stops all creditor actions immediately and automatically – even if the creditor has no knowledge of the bankruptcy filing!  This stay continues throughout your bankruptcy case unless terminated or modified by the bankruptcy court.  For most garnishments, the debt will be discharged at the end of the bankruptcy case and the creditor can no longer collect from you.

Once you have filed your bankruptcy and the garnishment has stopped, it may be possible to have wages that were withheld from your check returned to you, provided your employer has not already sent the funds on to the court or to the creditor.  Ask your attorney whether you can have funds returned once you file your case.

If you have a wage garnishment, consider your options by consulting with an experienced bankruptcy attorney.  Your attorney can explain how the federal bankruptcy laws can stop your wage garnishment and put your wages back into your pocket.

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The traditional wisdom for debtors in bankruptcy was to protect your home and discharge unsecured debts.  In some cases, bankruptcy attorneys advised surrendering a vehicle and eliminating the monthly auto payment in order to afford the home mortgage.  Back when real estate prices were appreciating at staggering rates, that wisdom was sound advice.  It was important to protect an asset that was appreciating quickly and could be used to secure a family’s financial future.

Unfortunately, times have changed.

Over the past few years housing prices have flattened, or even depreciated.  In many areas home prices have dropped significantly.  For a debtor who is upside-down on a home loan, it usually doesn’t make sense to try to dig out of negative equity and continue to pay on a home that is a liability, not an asset.

If your mortgage is stressing your family’s budget, it may be wise to walk away.  It is important to consider surrendering your home during bankruptcy and renting rather than continuing to pay a burdensome mortgage payment, taxes, insurance, home repairs, and maintenance.  The question to answer is whether walking away will save you money in the short run and the long run.

One tool for this analysis is provided free of charge at Trulia.com.  Trulia maintains a rent vs. buy calculator that compares the cost of buying a home against the costs of renting.  Using the calculator you can determine whether keeping your home is a smart financial decision.  Trulia also publishes a Rent vs. Buy Index, which tracks whether buying a home or renting is less expensive in America's 50 largest cities, based on current market conditions.

Deciding whether to walk away from a home is often difficult, but is an important consideration for any home owner facing bankruptcy.  When a debtor surrenders property in bankruptcy there is generally no financial consequence to the debtor, and the debt is discharged by the bankruptcy court.  If you are considering surrendering your home during bankruptcy, speak with an experienced attorney and discuss the advantages and disadvantages of the process.  Your bankruptcy attorney can help you reach a decision that is right for you and your family.

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Many individuals trying to make ends meet take on extra work to pay off debt.  In some cases the added income is enough to make a difference.  In other cases the second job makes no difference, or can even make the financial situation worse.

Working a second job can often create additional unexpected expenses.  Additional travel, food, and child care costs are a few added expenses that will eat away at any increased income.  A second job can create more stress on the family when one spouse is working and the other spouse must increase his or her responsibilities at home.

For some people increasing the family's income can have a big negative consequence on a future bankruptcy.  The bankruptcy "means test" is a calculation that determines whether your income is low enough for you to file Chapter 7 bankruptcy.  The means test is designed to prevent individuals with the ability to pay creditors from filing a Chapter 7 bankruptcy.  Higher income debtors must file Chapter 13 and repay their debts over five years.

When a family that would otherwise pass the bankruptcy means test increases its income, there is a danger that the increase will push the income over the threshold and force the debtors into Chapter 13.  Additionally, the trustee may flag the case for abuse when a debtor voluntarily quits a job and decreases the family income prior to filing bankruptcy.  The debtor is demonstrating that he could afford to repay something, but has chosen to not pay creditors by quitting the second job.

If you are struggling with debt, consult with an experienced bankruptcy attorney before taking on a second job.  It is important to have an understanding of the risks involved and a clear strategy for getting out of debt.  As the saying goes, "Hope for the best, but plan for the worst."  Just make sure that your plan doesn't leave you in a worse financial position.

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