Credit Scores (Part 1)

In this series on Credit Scores, I will discuss the various types of credit reports and the factors which influence your credit score.  Credit reports consist of detailed information regarding an individual’s current and past financial obligations.  Credit scores are essentially a numerical grade of the information contained within the credit report.  These scores are used by credit card issuers, auto lenders, mortgage companies, and other lenders to judge the applicants financial responsibility prior to issuing credit. Remember you can obtain your free credit report from each agency one time per year at www.annualcreditreport.com.  Contact the attorneys at Fears Nachawati with any questions. 

 
TYPES OF CREDIT SCORES
  1. FICO Scores - FICO (otherwise known as the Fair Isaac Corporation), created the first credit scores in the 1950s. Since their creation, FICO scores remain the most widely used scoring model by lenders with over an estimated 90 percent of the market share in 2010 of scores sold to firm for use in credit related decisions.  Although there are different FICO scoring models, the scores generally range from 300 to 850.
  1. Credit Reporting Agency Scores - Credit Reporting Agencies (Equifax, Experian and TransUnion) each utilize their own scoring model, which causes scores to vary among the three main agencies.  These scores were originally created to predict performance on credit obligations.  However, today these scores are primarily used as educational scores for consumers.  Each agency uses differing ranges of scores.  For example:
    • Equifax’s Credit Score ranges from 280 to 850.

    • Experian Plus Score ranges from 330-830.

    • TransUnion TransRisk New Account Score ranges from 300-850.

  1. VantageScore - VantageScore is produced by VantageScore LLC, which is a joint venture of the three credit reporting agencies.  It was developed as a competitor to FICO. VantageScore results range on a scale from 501-990.
CALCULATING THE CREDIT SCORE
 
While there are multiple credit scores, as noted above, the credit score of primary concern is the FICO score.  The FICO score is generally based on five categories, each of which are weighted to have a varying impact on the overall score.  These categories, sorted by overall importance, are:
  • -Payment History (35%)
Credit payment history is one of the most important factors in a FICO score.  Lenders, who want to know whether you’ve paid past credit accounts on time, place a heavy reliance on payment history.  While a few late payments may not have a major impact on the credit score, numerous late payments, or a history of routinely late payments, will significantly drop the credit score.  FICO specifically looks at how late the payments were made, how much was owed, how recently the late payments occurred, and how many late payments are on the account.  Typically, late payments are reported as either 30 days late, 60 days late, 90 days late, 120 days late, 150 days late, or a charge off.  It is important to note that when a debt is “charged off,” it does not mean that debt is no longer owed.
 
Account types considered for payment history include credit cards, retail accounts (i.e. department store credit cards), installment loans, finance company accounts, and mortgage loans.  Public records and collection items also fall under the payment history category, which include the filing of bankruptcy.  Paying accounts on time, or a good track record on most of your accounts, will have a positive influence and increase your credit score.
 
  • Amounts Owed (30%)
The second leading influence on credit scores is the amount of debt owed on specific accounts.  Credit scores are affected by the number of accounts you have with balances.  In addition, the proportion of credit limits utilized will affect the credit score as well.  For example, when someone is approaching their credit limit on a card, this may indicated that they are overextended and more likely to make late or missed payments.
  • Length of Credit History (15%)
As the category suggests, the length of time your credit account has been open influences your credit score.  Having numerous recently opened accounts will negatively impact your score.  In addition, the length of time from your last activity on an account may also lower your score.
 
  • Types of Credit in Use (10%)
Credit scores are effected by total number of open accounts you have and the overall makeup of that mix of credit.  It is not necessary to have each type of credit account considered to establish good credit.  However, it is also important not to open a lot of accounts you do not intend to use.  
  • New Credit (10%)
The number of recently opened accounts will effect the credit score.  Opening multiple credit cards in a short period of time may negatively effect your score.  In addition, running up high balances on recently opened cards will also have a negative impact.  
 
Credit inquires also fall into the New Credit category when determining the credit score.  Checking your credit report will not effect your credit score as long as the report is obtained directly from the credit reporting agency.  Reports from all three may be obtained for free from www.annualcreditreport.com.  Multiple credit inquires from creditors may negatively impact your score.  However, numerous inquires in a short period of time, such as when shopping for a car, are typically treated as a single inquiry and will have little impact on the overall credit score.
 

Will I Lose My Property if I File Bankruptcy?

Many clients I meet with are concerned that they will have to surrender their house and car if they file bankruptcy.  As long as you can afford to maintain the payments on the mortgage and car note, you will not lose either in a bankruptcy filing.  Most states provide exemptions for your house and car which allow additional protection for these assets.

In addition, for those who have fallen behind on mortgage or car payments, Bankruptcy may actually provide a favorable option to keep these assets and catch up on payments over time.  A Chapter 13 Bankruptcy, which typically takes 36-60 months to complete, places debtors on a payment plan which commits their disposable income to their creditors.  This is beneficial for debtors who experienced a temporary setback, just as a loss of job, and needs additional time to catch up on car payments or mortgage arrears.  In the Chapter 13, the arrears are spread out over the length of the bankruptcy plan, providing a manageable payment arrangement as opposed to trying to catch up in one lump sum.  Keep in mind that you are still responsible to maintaining regular monthly payment to the mortgage or car creditor during the bankruptcy in the event these are listed as a pay direct obligation and the monthly payments are not part of your bankruptcy plan, which varies from district to district. If you have questions regarding your assets, exemptions, or Chapter 13 payment plans, contact an attorney today at 866-705-7584 or send an email to fears@fnlawfirm.com.

 

Getting Married During My Bankruptcy

For those involved in a Bankruptcy, rest assured that your Bankruptcy case will not prevent you from getting married.  For those involved in a Chapter 13 Bankruptcy however, your upcoming marriage may have an effect on your case.
 
In a Chapter 13 Bankruptcy, you are required to pay your disposable income into your bankruptcy plan in order to pay back your creditors.  The calculation to determine your disposable income includes all household income.  Even if you file an individual case, as opposed to a joint case with your spouse, your spouse’s income is still included as the household income.  For those who get married after their case is filed, their household income may increase if their new spouse is employed.  The Bankruptcy Trustee will want to review their income to see if you can afford a higher return to your creditors.  While your new spouse’s credit will not be affected by your bankruptcy, their income may still come into play.   However, your spouse will have their separate expenses which they were responsible for before the marriage.  
 
If you decide to get married during your bankruptcy, congratulations!  Also, discuss your situation with your bankruptcy attorney who can assist you making any necessary changes to your bankruptcy plan and make sure any changes fit inside your budget. If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com.
 

Chapter 13 Discharge

Chapter 13 Discharge

The discharge is the overall of any consumer bankruptcy case.  This is occurs at the conclusion of the case and it is a permanent injunction that eliminates the dischargeable debts.  A chapter 13 debtor is entitled their discharge after they complete of their chapter 13 plan payments and so long as the debtor has:

1.      1. certified that they have made all domestic support obligations (child support and/or alimony) that came due during the case  (if applicable);

2.       2. has not received a discharge in a prior case filed within a certain time frame see How Often Can I File Bankruptcy? ; and

3.      3.  completed an approved course in financial management course  

The court will enter the discharge order an opportunity for notice and if necessary a hearing.

The discharge releases the debtor from all debts provided for by the plan and these creditors may no longer initiate or continue any legal or collection action against the debtor. 

 

Jurisdictional Limit on Chapter 13

 In order to be eligible to file chapter 13 bankruptcy there are certain requirements that must be met.  First of all only individuals can file for chapter 13.  In other words corporations, partnerships, business and municipalities cannot file chapter 13, although there are other reorganization chapters which they can file.   Although an individual who is self-employed or operating a business can file a personal bankruptcy.
                Additionally, 11 U.S.C. § 109 places debt limits on chapter 13 as well. Currently a debtor may not have more than $383,175 in unsecured debts and $1,149,525 in secured debt. These amounts are adjusted periodically to reflect changes in the consumer price index and it is important to verify the current limits.  The US Courts usually provide the information on their website

If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com.

Donald Trump, 50 Cent, and Chapter 11 Bankruptcy

During the recent Republican debate in Cleveland, Donald Trump stated that he has never filed a personal bankruptcy. However, his companies have filed for Chapter 11 bankruptcy protection four times in 18 years. How is this different from rapper Curtis Jackson, better known as “50 Cent,” who filed personal Chapter 11 bankruptcy earlier this summer?
 
Jackson’s Chapter 11 bankruptcy is a personal reorganization bankruptcy. The Bankruptcy Code allows an individual may file for financial reorganization under either Chapter 11 or Chapter 13. Both Chapter 11 and 13 stop collection activities while the individual formulates a repayment plan. In some cases the bankruptcy court may approve a plan to restructure or change personal debts. For instance, liens on secured property may be stripped off, interest rates changed, repayment times lengthened, and some debts may be paid “pennies on the dollar” or discharged without payment.
 
Most individuals seeking a repayment plan and reorganization of personal finances choose Chapter 13 rather than Chapter 11. Chapter 11 is a more complex bankruptcy process and is used primarily by businesses to reorganize (a company cannot file under Chapter 13). An individual, such as Mr. Jackson, is ineligible to file under Chapter 13 if the person owes more than $383,175 in unsecured debts (such as a personal judgment, credit cards, and medical bills), or more than $1,149,525 in secured debts (such as mortgages and car payments).  Mr. Jackson reportedly owes in excess of $28 million.
 
On the other hand, Donald Trump avoided personal bankruptcy by incorporating his business activities.  His first business bankruptcy, a 1991 case involving the Trump Taj Mahal in Atlantic City, left his business more than $3 billion in debt. Unfortunately, Mr. Trump himself was not completely insulated from this financial collapse. In exchange for a lower interest rate and more time to make loan payments, Mr. Trump gave up half his ownership and equity in the Trump Taj Mahal, and sold off personal assets.
 
During that time, Trump told The Washington Post that he passed a beggar in New York and said to his now ex-wife, model Marla Maples, “You see that man? Right now he’s worth $900 million more than me.”
 
If you are struggling financially, speak with an experienced bankruptcy attorney and discuss your financial strategies. The federal law can be a useful tool to reorganize business or personal liabilities and provide for a more successful future.
 
If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com.

Lien Stripping Your Home

Bankruptcy Code sections are like little boxes. Sometimes, the facts of a bankruptcy case will fit neat and tidy into a box. Other times, judges, trustees, and attorneys disagree whether a case can fit inside a bankruptcy box. 

 
One example of this is lien stripping a home mortgage during a Chapter 13 bankruptcy case. The general rule allows a Chapter 13 debtor to strip-off an entirely unsecured junior mortgage. In other words, if you own a home worth $400,000, and the amount owed on the first mortgage is $400,000 or more, you can strip-off any junior mortgage (like a second mortgage or a HELOC). Because the senior mortgage is more than the equity available in the home, there is no equity to secure any part of the junior mortgage. The bankruptcy court can declare the junior mortgage an unsecured debt and strip-off the lien securing the property. The junior mortgage debt is paid at the same rate, or discharged, along with all other unsecured debts in the case.
 
Simple, right?
 
But what if the facts of your case do not fit neatly into this bankruptcy box? Take, for example, the case of Serge and Lori Boukatch of Arizona. The Boukatches filed Chapter 13 bankruptcy in 2011. The couple listed their home at $187,500 and two liens: a first mortgage to Wells Fargo Bank in the amount of $228,300; and a second lien to MidFirst Bank amounting to $67,484.96. The bankruptcy court subsequently converted the case, and the Boukatches received a Chapter 7 discharge in 2013.
 
In 2014 the Boukatches filed a second Chapter 13. They claimed that the prior Chapter 7 bankruptcy had discharged their personal liability on the MidFirst Bank junior lien and asked the bankruptcy court to strip-off its entirely unsecured lien. The bankruptcy court refused to lien trip in this situation because they were ineligible for a Chapter 13 discharge, but the 9th Circuit Bankruptcy Appellate Panel (“B.A.P.”) allowed the stripping.
 
The B.A.P. discussed three approaches to lien stripping in a Chapter 13 case, ultimately agreeing with the third approach: that nothing in the Bankruptcy Code prevents lien stripping even where discharge is unavailable. “Third approach” courts hold that the mechanism triggering the lien-strip is completion of the plan rather than discharge. Therefore, when a debtor completes his or her plan, the provisions of the plan, including lien stripping, become permanent. The B.A.P. stated that full repayment of the debt secured by the lien is not required because the Bankruptcy Code only requires full repayment of “allowed secured claims.” The panel concluded that “the wholly unsecured status of MidFirst’s claim, rather than Debtors’ eligibility for a discharge, is determinative.”  
 
Bankruptcy is not a one-size-fits-all process. Fortunately, a skilled attorney can find the right-sized box for your bankruptcy issues. If you are experiencing financial difficulties, speak with an experienced bankruptcy attorney and discover how the federal law can help you.
 
If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com.

File Bankruptcy and Buy a New Car!

It may sound funny, but a new car purchase and a bankruptcy filing often go hand-in-hand. Bankruptcy reorganizes personal finances, and sometimes purchasing a new car is part of that reorganization. 

 
Chapter 7
In some Chapter 7 cases it may be advantageous for an individual to purchase a new car before filing bankruptcy. If the individual has a good enough credit score, it may make sense to purchase a new car since credit rates and terms may change after the bankruptcy is filed. 
 
In other cases it makes sense to purchase a new vehicle after a Chapter 7 bankruptcy filing. Individuals with very bad credit and outstanding debts may find that they are unable to finance a vehicle before filing bankruptcy. However, after the bankruptcy is filed, financing may be available. Why?
  • •The individual has resolved the outstanding debts;
  • •The individual’s debt –to-income ratio is usually low;
  • •The Chapter 7 debtor can only receive one Chapter 7 discharge every 8 years;
Some lenders will approve a new car loan immediately after the debtor files bankruptcy with the assistance of an attorney; others require that the debtor first attend the 341 meeting; and still others require that the debtor receive a discharge before approving a loan.
 
Chapter 13
Like a Chapter 7 debtor, an individual contemplating Chapter 13 bankruptcy may find that purchasing a new car before filing bankruptcy is in his or her best interest. A unique feature of Chapter 13 is the ability to “cram-down” many vehicle loans. In 2005, Congress (at the behest of big banks) stopped debtors from cramming-down vehicle loans to value unless the loan is older than 910 days (approximately two and a half years). However, many bankruptcy courts will allow a Chapter 13 debtor to cram-down the interest rate, and sometimes any negative equity from a trade-in that was rolled into the loan.
 
What this means is that if you purchase a new car before Chapter 13 bankruptcy, you may be able to use the bankruptcy laws to reduce the interest rate, the term (and pay up to five years), and in some cases strip off negative equity. Since success in Chapter 13 depends on predictable finances, controlling auto expenses and repairs in critical. As a side note, a new car purchase may also be attractive in situations where there is excess disposable income. The individual may be faced with an option of paying on a new car or paying unsecured creditors (like credit cards or medical bills).
 
A debtor may also purchase a new car during after filing Chapter 13 bankruptcy. A Chapter 13 bankruptcy is a three to five year repayment plan under the supervision of the federal bankruptcy court. Consequently, the debtor must have the approval of the bankruptcy court before incurring a new car debt. Obtaining Court approval can be difficult to navigate and always depends on the debtor’s financial situation.
 
Auto loans are often a large part of an individual’s finances. The individual’s automobile situation should be discussed and all options reviewed before filing bankruptcy. In many cases a purchasing a new car is a sound financial management.
 
If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com.
 

How Bankruptcy Can Help if You are Behind on Your Mortgage Payments

If you happen to fall behind on your mortgage payments, then filing Bankruptcy may provide an option to help you catch up and get current on your mortgage.  Specifically, a Chapter 13 Bankruptcy will help the debtor reorganize their creditors and provide for the mortgage arrears to be paid out over a period of 36 to 60 months.  In addition, the Bankruptcy filing would prevent or delay an upcoming foreclosure if the case is filed prior to the sale date. 

Once a debtor files for bankruptcy, an automatic stay is immediately put into place.  The automatic stay, as provided under Section 362 of the Bankruptcy Code, prohibits creditors from continuing collection activity against the debtor during their bankruptcy case.  After the bankruptcy case is filed, the debtor, who may be at risk of foreclosure, must make payments to their Chapter 13 Trustee according to the terms of their Chapter 13 Plan.  The Chapter 13 plan will provide for the payment of the mortgage arrears, along with other creditors if applicable depending on a case by case situation.  If the debtor fails to make the payments according to the Chapter 13 Plan, then the bankruptcy court dismiss the case, or the creditor may petition the court to allow foreclosure proceedings to resume.

Chapter 13 allows the debtor to reorganize their debts and pay them off through a three to five year repayment plan.  If the debtor continues to pay each month, then filing for a Chapter 13 bankruptcy will provide an efficient way to prevent foreclosure and catch up on missed payments.  The debtor must be able to pay the Chapter 13 Plan payments and their regular mortgage payments each month, depending on the jurisdiction which their Bankruptcy case is filed. 

Filing a Chapter 13 bankruptcy is extremely beneficial if you are behind on your mortgage payments.  Due to the automatic stay, creditors will be unable to continue collection activities. You can focus on reorganizing your debts and create a payment plan that will satisfy all of your creditors. 

Delay on Foreclosure due to Chapter 13 Bankruptcy

Foreclosure on homes often happens when lenders want to retrieve the remaining balance of a loan from the homeowner who has stopped making payments. Normally, the lenders will not begin the legal process until the homeowner skipped out on 3 or 4 months worth of payments.  Keep in mind, the foreclosure process varies in each state.  In Texas, foreclosures only take place on the first Tuesday of the month.  In addition, the creditor must provide certain notices informing you of the sale prior to any foreclosure date.  Although there are loss mitigation options available through some lenders, Chapter 13 Bankruptcy also provides an option to delay or prevent foreclosure while providing an avenue for you to catch up on the mortgage arrears.

Chapter 13 is often called “Reorganization Bankruptcy” because it allows you to reorganize your debts and prepare a payment plan. If your home is being foreclosed, then you can file for Chapter 13 and extend your repayment length.  Typical Chapter 13 cases range from 36 to 60 months and arrange monthly payments to your priority, secured, and in certain situations, unsecured creditors.  For many, Chapter 13 provides a beneficial option for people to catch up on the arrears by including the arrears in the Plan and spreading the amount out over five years.  While in Chapter 13, all payments must be made on time, including the regular on-going mortgage payments if they are not part of the Bankruptcy Plan. When the debtor completes all plan payments, the arrears on the mortgage will be cured and the debtor will exit the bankruptcy current on their mortgage.  

Will Filing Bankruptcy Effect my Job?

The stress of filing for bankruptcy is extremely hard on individuals and families. Most individuals going through the bankruptcy process are stressed, tired of creditors calling and just want to get their financial situation in order. The last thing that you want to worry about the effects that bankruptcy has on your job and employment opportunities.  

If you file for a Chapter 7, then most employers will not find out about the case.  While Court documents are typically public information, the only way an employer will generally find out is if you tell them, or if a creditor has began the process to garnish your wages.  Although there is no wage garnishment in Texas for consumer debt, filing for bankruptcy will stop withholding your wages. If you file for a Chapter 13, then there is a possibility that the judge will order your Chapter 13 payments to be deducted from your earned income. In that case, your employer will be notified.

Filing for bankruptcy has no impact on your employment.  According to 11 U.S.C. § 525(b), no private employer may terminate employment, or discriminate, against an employee for filing bankruptcy. You cannot get fired nor will you be refused a position due to filing for bankruptcy. However, it may be wise to speak to your employer about your financial situation. Some people who have a lot of debt or are considering bankruptcy have a lot of weight on their shoulders. Being open and honest with your employer will allow them to create an environment that is comfortable for you to resolve your personal matters. 

How Long You Must Stay in Chapter 13 Bankruptcy

The chief feature of a Chapter 13 bankruptcy is the repayment plan. A Chapter 13 bankruptcy gives a debtor time to restructure personal finances through monthly payments. How much time is the subject of today’s post.

100% Repayment

In general, a proposed Chapter 13 repayment plan must last between three and five years (36 and 60 months). However, there are exceptions. Some jurisdictions allow debtors to propose a repayment plan that is less than 36 months, if the debtor is paying back 100% of all debts (including nonpriority unsecured claims). 

Three to Five Year Plan

The length of a Chapter 13 repayment plan is often dictated by the debtor’s average income for the six-month period preceding the bankruptcy filing. When the debtor is below his state’s median income for a similar household, the plan can usually be anywhere from 36 to 60 months long. Median income for each state can be found on the U.S. Trustee’s website. A “below median” Chapter 13 debtor has flexibility in adjusting payments during the bankruptcy case.

Five Year Plan

If the debtor has an income that is above his state’s median income for a similar household, the debtor is typically stuck with a 60-month plan. Some courts allow above-median debtors to propose shorter repayment periods if there is no disposable income. By law, a Chapter 13 plan cannot exceed 60 months.

Hardship Discharge

When a change occurs during the bankruptcy case which makes it impossible to complete the debtor’s Chapter 13 repayment plan, the debtor may request a “hardship discharge” and end the case early. To qualify for a hardship discharge, the debtor must show:

  • A financial change that makes the debtor unabile to continue making the scheduled Chapter 13 plan payments;
  • The change in finances must be beyond the debtor’s control;
  • The change must be serious and on-going;
  • Modification of the repayment plan is not practical or feasible; and
  • If a hardship discharge is granted, creditors will receive at least as much as they would have received during a Chapter 7 case.

Hardship discharges are only granted for the most extreme cases. The Bankruptcy Code also limits the scope of the hardship discharge to that of a Chapter 7 discharge, so some debts that would be discharged in a Chapter 13 case may not get discharged if the case ends early. 

As Long as You Need

Finally, many debtors only remain in Chapter 13 for as long as it takes to solve their financial difficulties.  For instance, if the only reason the debtor files Chapter 13 bankruptcy is to stop a foreclosure, once the debtor cures an arrears or modifies loan payments, there may not be a need to remain in bankruptcy. A Chapter 13 debtor is generally able to dismiss the bankruptcy case almost as a matter of right, as long as there is no “bad faith” involved in the dismissal. See Marrama v. Citizens Bank, 127 S.Ct. 1105 (2006).

 

 

Can I Keep My Anticipated Tax Refund If I File Chapter 13?

Your Chapter 13 bankruptcy is an opportunity to pay creditors over three to five years. Your monthly payments are largely determined by whatever you can afford to pay, but there are other rules. One of these rules directs that you must pay unsecured creditors an amount equal to what they would receive in a Chapter 7 liquidation bankruptcy. This can be a sticking point when it comes to an anticipated tax refund in a Chapter 13 case.

When you file bankruptcy, any income tax refund you are entitled to, but have not yet received, is property of the bankruptcy estate. While you can keep any amount of your tax refund that is protected by legal exemptions, any non-exempt amount must be either paid over the Chapter 13 trustee for distribution to creditors, or your monthly plan payments are increased to account for the non-exempt tax refund. Consequently, proper application of exemptions is very important. In some cases, your tax refund may be entirely protected by legal exemptions, especially when the refund is small.

If you are unable to exempt money from your anticipated tax refund, the traditional advice is to delay filing until your refund is received and spent. The most important part of this strategy is to file your bankruptcy case after the money is gone. Speak with your attorney about the do’s and don’ts of spending a tax refund.

One situation sometimes overlooked by pro se debtors and inexperienced attorneys is the “accrued” tax refund. A debtor’s entitlement to a tax refund accrues during the tax year, even though it may not be owed or payable to the debtor until after the bankruptcy case is filed.  For instance, if the debtor files bankruptcy on October 1, three-fourths of the debtor’s full refund has (arguably) accrued. If the total refund is $4,000, then $3000 is a pre-filing asset. The debtor must account for this $3,000 and either claim it as exempt, or non-exempt (and therefore available for distribution to creditors). A partial year tax return may be beneficial in this type of situation.

Debtors lose anticipated income tax refunds regularly through poor pre-bankruptcy planning and carelessness.  This unfortunate situation can be easily rectified by working closely with a your attorney and your CPA. If you are considering a bankruptcy filing and expect an income tax refund, discuss your situation with an experienced bankruptcy attorney.

Supreme Court to Decide Bankruptcy Issue

Imagine that you propose a Chapter 13 repayment plan to repay your creditors, but the bankruptcy court refuses to confirm it.  What can you do?

If you live in the Third, Fourth or Fifth circuits, you may immediately appeal the bankruptcy court’s decision. However, if you live in the First, Second, Sixth, Eighth, Ninth or Tenth circuits, you are stuck with either proposing another plan or having the case dismissed. In these circuits, only after the case is dismissed is the issue a final, appealable order.

Partly as a result of this split of opinion between the circuit appellate courts, the U.S. Supreme Court recently agreed to hear the issue as part of the case of Louis B. Bullard v. Hyde Park Savings Bank et al, a case on appeal from the First Circuit. In that case the debtor proposed a plan to split a home mortgage debt into secured and unsecured portions. Pursuant to the plan he would then pay the secured portion at one rate and the unsecured portion at the same rate as all other unsecured debts in the case. The bankruptcy court rejected the plan. When the debtor appealed, the appellate court found that the bankruptcy court’s rejection of the repayment plan was not a final order because the debtor could simply propose another plan.

This issue has potential far-reaching consequences in Chapter 13 and Chapter 11 business bankruptcy cases. The Supreme Court will likely hear oral arguments in the spring.

A Dangerous Trap for Chapter 13 Debtors

A Chapter 13 bankruptcy debtor may sigh in relief once the bankruptcy case is filed. The weeks of collecting documents, dodging creditors, and examining finances is over and the bankruptcy automatic stay has provided a much needed “breathing spell” from collection activities. For the immediate future, the Chapter 13 debtor has only one job to do: pay the trustee. Paying the trustee may seem simple and mundane, but some debtors quickly realize that there are no simple tasks in bankruptcy.

The Bankruptcy Code directs the debtor to pay the trustee the amount proposed in the repayment plan not later than 30 days after the bankruptcy case is filed. Section 1326(a)(1) of the Bankruptcy Code states:

Unless the court orders otherwise, the debtor shall commence making payments not later than 30 days after the date of the filing of the plan or the order for relief, whichever is earlier, in the amount—

(A) proposed by the plan to the trustee;

Many debtors elect to have their plan payment withheld from their wages and sent directly to the Chapter 13 trustee. Some courts require that wage earning debtors must execute a wage withholding. Unfortunately, for some debtors it may take several pay cycles to start the wage withholding. In the meantime, some may spend their paychecks unaware that a deficit is accruing in their bankruptcy case. When the plan payments are not delivered to the trustee as required, the trustee will ask the bankruptcy court to dismiss the debtor’s case for “failure to commence” the bankruptcy case.

There is no exception in Section 1326 for wage withholding orders. Bankruptcy courts ordinarily put the responsibility for paying plan payments squarely on the shoulders of the debtor and ignore pleas of “not my fault.” If your employer cannot deliver payment to the trustee on time, you must make arrangements to pay the first payment yourself. The best solution to this potential trap is to work closely with your payroll department to ensure that the trustee is paid.

"At-Risk" Property during Bankruptcy

Imagine that you sit down with your bankruptcy attorney for an initial consultation. You have worked hard all of your life and have acquired some personal property and real estate. You are scared and have important questions to ask. You start with the most pressing: “What will the trustee take if I file bankruptcy?” 

The lawyer on the other side of the table leans back and smugly relies, “It depends.”

That weasel-answer is, of course, technically correct, but it doesn’t even begin to answer your question. Let’s take a few minutes and begin to actually start answering your question.

Chapter 13 Trustee

A debtor does not generally lose property to a bankruptcy Chapter 13 trustee. A Chapter 13 bankruptcy is a repayment rather than liquidation bankruptcy. Consequently, the trustee may not seize or compel the sale of the debtor’s property, although in some cases a debtor may choose to voluntarily sell or surrender an asset for liquidation.

Chapter 7 Trustee

Unlike a Chapter 13 bankruptcy case, a Chapter 7 is a liquidation proceeding. The bankruptcy trustee is appointed to sell assets and pay unsecured creditors with the debtor’s property. Every debtor is able to protect certain property using legal exemptions – in many cases the debtor loses nothing. Legal exemptions are simply laws that protect a debtor’s equity in property, such as household furniture, clothing, and limited equity in a house.

A Chapter 7 trustee may compel the sale or turnover of property to reach “non-exempt” equity. The determination of non-exempt equity can be complex, but it always starts with a valuation of the property. Next, secured debts are subtracted. Finally, legal exemptions are applied to protect the unsecured equity. Anything remaining is the non-exempt equity that the Chapter 7 trustee can reach.

To illustrate, suppose you have a car worth $10,000, you owe $2,000 to a secured creditor (e.g. Ford Credit), and you have $3,000 in available legal exemptions. The calculation to determine any non-exempt equity is the fair market value of the car minus the amount you owe minus the legal exemption, or

$10,000 - $2,000 - $3,000 = $5,000 in non-exempt equity

The Chapter 7 bankruptcy trustee can demand turn-over of the car or payment of $5,000. The trustee may take and sell the car, pay the lender, pay you the $3,000 exemption amount, and pay the costs of the sale. The trustee keeps a percentage as his fee and divides the remaining amount among your unsecured creditors.

While it is unusual to disagree over the amount of exemptions, the debtor and trustee often have disagreements regarding the fair market value of property. In some cases the bankruptcy judge is asked to decide the value of an asset.

Non-exempt assets can be found in many sources. However, some assets are less attractive to the trustee because of the difficulties of selling the asset (e.g. a horse). Additionally, the non-exempt equity in an asset may be too little to bother. Here are a few of the easiest non-exempt targets for the trustee:

  • Cash money or bank deposit
  • Commissions earned but not paid
  • Lawsuit settlement or judgment
  • Income tax refund
  • Property transferred fraudulently, especially to a family member
  • High dollar unsecured property, like a house or vehicle

It is important to determine an accurate value of all property and to calculate all legal exemptions before filing bankruptcy. Then you and your attorney can discuss strategies for protecting your property.

What the Bankruptcy Trustee Will Not Tell You

While the bankruptcy process expects a debtor to “spill the beans” about his finances, there is no reciprocal obligation to help a debtor reorganize before, during or after bankruptcy. The bankruptcy trustee is ethically (and legally) forbidden from giving legal advice to a debtor. The trustee effectively acts as an advocate on behalf of creditors during bankruptcy. Let’s look at what the bankruptcy trustee cannot or will not divulge to a debtor:

The debtor can keep assets that are of no value to the bankruptcy estate. The Chapter 7 bankruptcy trustee is charged with finding assets that can be taken and sold to pay creditors. However, certain assets have little or no practical value (called de minimis, Latin for “very little value”). For example, a prized Beanie Baby collection that is worth $500 on eBay is of no interest to the trustee. Even if a buyer was ready and able to pay $500 for the collection, the trustee must make an accounting, open a bankruptcy estate, collect assets, send notices, and finally distribute money to creditors. The trustee expects to be compensated for his time, but with only $500 available, there is a good chance that the trustee will consider working at far below his hourly rate not worth the effort.

Legal advice. While the trustee is (usually) a licensed and experienced bankruptcy attorney (or CPA), the trustee is prohibited from giving the debtor legal advice. That is the case even if the debtor is acting pro se and has made a very serious and obvious mistake, and even if the debtor has hired a putz of an attorney who is inexperienced or incompetent.

The trustee’s office is understaffed and overworked. Whether it is the Chapter 13 standing trustee’s office or a Chapter 7 interim trustee, there is more work than hours in the day. Many bankruptcy errors, lies, and omissions are ignored for the sake of expediency. To illustrate, pretend that the debtor’s mother has loaned the debtor $300. The debtor received a tax refund of $300, paid her back, and then immediately filed bankruptcy. This repaid debt is a fraudulent transfer to an insider creditor. The trustee can avoid the transfer and demand the money from the debtor or his mother, but is that likely? Probably not. The costs involved for the trustee are too great and the benefit to creditors is too small. Suppose the debtor failed to account for this transfer in the Statement of Financial Affairs? Will the trustee seek to deny a bankruptcy discharge because of this perjury? Again, probably not. Now consider how the response might change if the amount at issue was $3,000? Or $30,000? Or $300,000?

File Bankruptcy and Live Longer?

Consumer bankruptcy attorneys have long known that filing bankruptcy can relieve personal stress. Clients burdened with overwhelming debt are able to “start fresh” after bankruptcy without the stress of debt collectors chasing them. Now there is evidence that filing bankruptcy may actually lead to a longer and more prosperous life.

Recently, a paper published by the National Bureau of Economic Research (NBER) examined 500,000 bankruptcy filings in the United States to measure the effect of bankruptcy laws on consumers. The authors, economists Will Dobbie and Jae Song, found that filing Chapter 13 “increases annual earnings by $5,562, decreases five-year mortality by 1.2 percentage points, and decreases five-year foreclosure rates by 19.1 percentage points.” The authors postulate that filing bankruptcy can also eliminate the disincentive to work after a paycheck garnishment. Once a paycheck is garnished, some individuals may stop working because the benefits of receiving a reduced paycheck are outweighed by the costs of working. Bankruptcy can stop a paycheck garnishment cold, and in some cases return garnished money to the worker.

The study theorizes that bankruptcy can help people live longer due to decreased daily stress in their lives. Chapter 7 bankruptcy can quickly eliminate unpayable debts, usually within 4 or 5 months. Chapter 13 bankruptcy can help protect a car from repossession and a home from foreclosure while the individual reorganizes personal debts over three to five years.

While the many financial advantages of bankruptcy are well-documented, the NBER study highlights some benefits of bankruptcy that may be overlooked. Now the bankruptcy debtor can not only look forward to a fresh financial start after bankruptcy, but also a wealthier and longer life.

Filing Chapter 13 after a Chapter 13 Discharge

Chapter 13 cases last 3 to 5 years. A lot can happen in that time. In some cases, a debtor may need additional bankruptcy relief. This article will address some of the rules of filing a second Chapter 13 case after receiving a Chapter 13 discharge.

Eligibility for Chapter 13 discharge

The law restricts the availability of a Chapter 13 discharge if the debtor received a Chapter 13 discharge in a previous case. Section 1328 of the Bankruptcy Code states that a court may not grant a Chapter 13 discharge to a debtor who has received a Chapter 13 discharge in a case filed under chapter 13 of this title during the 2-year period preceding the date of such order.

The time period described in Section 1328 is measured between filing dates, not discharge dates. To illustrate, suppose a debtor files her first Chapter 13 case on January 3, 2013, and she receives a Chapter 13 discharge. She is eligible to file a second Chapter 13 case and receive a discharge on January 3, 2015.

It does not matter under what chapter the original case was filed. For instance, if a case was filed as a Chapter 7 on January 3, 2013, converted to Chapter 13, and discharged, the debtor is still eligible to receive a second discharge on January 3, 2015 (2 years after the filing date). This is because the original case commencement date did not change, even though the debtor converted to another bankruptcy chapter.

Note that Chapter 13 cases generally last between three and five years, meaning that a debtor could hypothetically receive a Chapter 13 discharge, then immediately file a second Chapter 13 case that is also eligible for discharge.

Eligibility to be a Chapter 13 debtor

The time limit contained in Section 1328 is not a statute of limitations and does not disqualify the individual from filing Chapter 13 bankruptcy. There is no general limit to the number of times or frequency an individual may file Chapter 13 bankruptcy. That said, a debtor is ineligible to be a bankruptcy debtor for 180 days after the Chapter 13 case closes if it was dismissed:

  • by the court for willful failure of the debtor to abide by orders of the court, or to appear before the court in proper prosecution of the case; or
  • after the debtor requested and obtained the voluntary dismissal of the case following the filing of a request for relief from the automatic stay.

See 11 U.S.C. § 109(g).

Applicability of the Automatic Stay

The Bankruptcy Code also limits the reach of the automatic stay in a case filed after a Chapter 13 discharge. The automatic stay is effective for only 30 days if you had a bankruptcy case pending within 365 days of the case filing. See 11 U.S.C. §§ 362(c)(3) and (4). The bankruptcy court may extend the automatic stay if your case is filed “in good faith” and you are not abusing the bankruptcy system. Even if the automatic stay is terminated, most courts find that the property of the bankruptcy estate is still protected from creditors. That may include your house or your vehicles. Additionally, garnishments of post-bankruptcy wages are generally protected in a Chapter 13 case. 

Buying a Vehicle before Filing Bankruptcy

 While having reliable transportation is important for most American families, it can be critical for a debtor in Chapter 13 bankruptcy. The average Chapter 13 case lasts three to five years, and during that time the debtor is prohibited from incurring additional debt without court approval. While it is possible to get court approval for a different vehicle during the bankruptcy case, it is not an easy process when factoring in a conservative bankruptcy court judge, the objection from the bankruptcy trustee, and the scarcity of lenders and auto dealers who will work with a debtor in bankruptcy. Consequently, a debtor who purchases a vehicle during bankruptcy often overpays for a vehicle he or she doesn’t want.

The answer for many debtors preparing to enter Chapter 13 bankruptcy is to finance a new vehicle before filing bankruptcy. There are several good reasons to do this, including:

  • A newer vehicle is less likely to fail than an older vehicle, and a new vehicle has a “bumper to bumper” warranty that will last three to five years (or more). That means that the bankruptcy case will not fail because of an expensive vehicle repair, or the need to purchase a new vehicle.
  • Many debtors can benefit from a new vehicle purchase on the bankruptcy Means Test. The Means Test calculates disposable income that is available to pay unsecured creditors (like medical bills and credit cards). For some debtors, the purchase of a new vehicle will qualify the debtor for Chapter 7 bankruptcy. For others, money that is spend on secured creditors (like a car payment), will reduce the amount available for unsecured creditors. For most debtors, the issue is simply this: would the debtor rather spend money buying a new car, or repaying credit cards during the bankruptcy case?
  • The Bankruptcy Code generally allows a vehicle to be crammed down to value, unless it is purchased within 910 days of the bankruptcy filing. See Section 1325(a), hanging paragraph. While cram down is not available to modify the principle amount owed on a “910 vehicle,” most courts allow the interest rate to be modified. The U.S. Supreme Court has stated that the proper interest rate to use in a cram down case is about 2% over the prime interest rate (called the Till rate, after the case). See Till v. SCS Credit Corp., 541 U.S. 465 (2004). As an example, if a Chapter 13 debtor obtained a vehicle loan at 19% interest, the loan interest rate could be crammed down to a more reasonable interest rate. This rate may be discovered by contacting the local Chapter 13 trustee’s office, or it is often posted on the standing trustee’s website.

For many debtors, purchasing a new vehicle prior to bankruptcy is simply planning for bankruptcy success. The U.S. Supreme Court, in Milavetz, Gallop & Milavetz, P.A. v. U.S., 559 U.S. 229 (2010), specifically approved the idea of incurring a debt just prior to a bankruptcy filing, so long as the debtor intends to pay the debt in full and doesn’t incur the debt with a “bankruptcy motive.”

If the impetus in financing a new car prior to bankruptcy is a “bankruptcy motive,” the court will find that the debtor has not acted in good faith and the he (and his attorney) will be answering questions regarding abuse of the bankruptcy system. In order to stay on the “right side of the law,” a vehicle purchase on the eve of a Chapter 13 bankruptcy filing should be necessary, “sensible” (one judge quipped that he would not allow a debtor to keep a car nicer than his own), affordable, reliable, and meet the needs of the debtor’s family. Think of it this way: a $20,000 Ford Focus is fine, a $30,000 Toyota Camry maybe ok if it is within the debtor’s budget and means, and a $70,000 Lexus is not. See a common sense discussion of purchasing a new car on the eve of bankruptcy in the case of In re Wolf, No. 13-13174-BFK (Bankr. E.D.Va, October 3, 2013).

When purchasing a vehicle before bankruptcy, be mindful that the vehicle title must be recorded within 30 days in order to create a valid and enforceable lien on the vehicle (called “perfecting the lien”). See 11 U.S.C. § 547(c)(3)(B). If the debtor files bankruptcy and the lender records its lien after the 30 day period, the bankruptcy trustee may be able to set aside the lender’s lien as an avoidable preference and declare the vehicle free and clear. The trustee can then take and sell the vehicle. Section 547 offers the debtor a “safe harbor,” but only if the lien is recorded within 30 days of purchase, regardless of what the state law provides. See Fidelity Financial Services, Inc. v. Fink, 522 U.S. 211 (1998). To make matters worse, Section 522(g) prevents a debtor from claiming exemptions in voluntarily transferred property that the trustee recovers for the estate. See Russell v. Kuhnel (In re Kuhnel), 495 F.3d 1177 (10th Cir. 2007). The debtor may lose both the vehicle and any vehicle exemption in equity. This is certainly a grave penalty for the debtor, especially since the debtor did nothing wrong.

The solution to this trap is simple: before filing, ensure that the lender or lienholder has recorded its interest with the state Department of Motor Vehicles timely. Having a copy of the recorded lien for the bankruptcy trustee will help clarify the matter.

If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com.

Domestic Support Contempt Actions during Chapter 13 Bankruptcy

 Once a bankruptcy case is filed, the bankruptcy automatic stay stops creditor collection action and provides the debtor some temporary breathing room in order to restructure personal finances. There are limits to this protection, however. One of the most common exceptions during a Chapter 13 bankruptcy case concerns collection and enforcement of domestic support obligations (DSO), such as child support and alimony. 

 
The Bankruptcy Code allows two ways to enforce and collect a DSO after the debtor has filed bankruptcy:
•Section 362(b)(2)(B) allows “the collection of a domestic support obligation from property that is not property of the estate.” 
•Section 362(b)(2)(C) allows actions “with respect to the withholding of income that is property of the estate or property of the debtor for payment of a domestic support obligation under a judicial or administrative order or a statute.”
 
When a DSO is enforced through a state court contempt action, the bankruptcy court first considers whether the DSO is collected or enforced from property of the bankruptcy estate. The debtor’s property is part of his bankruptcy estate, such as bank accounts, vehicles, and real estate. Wages and other income streams are also property of a Chapter 13 debtor’s bankruptcy estate. Consequently, when a state court holds a Chapter 13 debtor in contempt, the exception at issue is usually Section 362(b)(2)(C), which permits enforcement or collection from property of the bankruptcy estate.
 
When a state court seeks to hold a debtor in contempt for non-payment of a DSO, the critical question is whether the DSO involves a judicial or administrative wage garnishment. Appellate courts have found that enforcement through state court contempt violates the bankruptcy automatic stay if the debtor is compelled to pay a DSO during bankruptcy where there is no garnishment or other wage withholding order. See In re DeSouza, 2013 WL 2991034 (1st Cir. B.A.P. 2013); Lawinda v. Seyffer (In re Lewinda), 2011 Bankr. LEXIS 4299 (B.A.P. 9th Cir. Aug. 1, 2011). Note that some lower courts have permitted enforcement of a DSO through contempt on bankruptcy estate property without a wage withholding order, so long as there is a court or administrative order establishing the obligation. See In re Powers, 2010 Bankr. LEXIS 825 (Bankr. S.D. Ind. Mar. 12, 2010); In re Friedberg, 2009 Bankr. LEXIS 1542 (Bankr. D. Conn. May 8, 2009)).
 
If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com.

Can I End My Chapter 13 Bankruptcy Early?

 One of the chief benefits of bankruptcy is the ability to restructure your finances under court supervision and protection. A confirmed Chapter 13 plan means that pre-bankruptcy creditors cannot sue or harass you as long as you stick with your plan. The problem is that Chapter 13 bankruptcy lasts a minimum of 36 or 60 months, depending on your income. What if you don’t want to wait that long and want out early?

You have four options for terminating a Chapter 13 case early, receiving the benefits of a bankruptcy discharge, and walking away:

Convert Your Case: You may be able to convert your Chapter 13 case to one under Chapter 7, receive a discharge, and end your case early. This is especially useful if you have paid a secure arrearage during the bankruptcy case or otherwise cured a default. For instance, suppose you are an under-median debtor behind on your mortgage and forced into Chapter 13 because your mortgage lender refused to accept payments. If you are able to obtain a home loan modification during the repayment period, you may decide to convert your case to Chapter 7 and include the post-petition canceled mortgage debt in the bankruptcy discharge along with all other dischargeable debts. You can convert the case at any time, as long as you otherwise qualify.

 

Pay 100%

The growing trend among appellate courts interprets the bankruptcy “applicable commitment period” as a minimum time a debtor must remain in bankruptcy. In other words, you must remain in Chapter 13 bankruptcy a minimum of 36 or 60 months. The only exception to this minimum period is if you repay all of your unsecured claims in full as provided in Section 1325(b)(4)(B) of the Bankruptcy Code.  

 

Hardship Discharge

A Chapter 13 hardship discharge may be granted by the bankruptcy court if you are unable to complete your repayment plan, and will end the case before the plan termination date. To obtain a hardship discharge you must first show an inability to continue making the scheduled Chapter 13 plan payments and that modification is not practical. Hardship discharge is available when something serious has happened that reduced your income or ability to (re)pay creditors. The change must be beyond your control, and creditors must receive at least as much as they would have received during a Chapter 7 case. The Bankruptcy Code limits the scope of the hardship discharge to that of a Chapter 7 discharge, so some debts that are dischargeable in a Chapter 13 case are not discharged if the case ends early for hardship.

 

Modify Your Plan

Some bankruptcy courts may allow an above-median debtor at the time of the case filing to modify the bankruptcy case after confirmation to reduce the time of repayment when the debtor’s income drops below the state median income level. These courts hold that the “disposable income” test, as set forth in section 1325(b) of the Bankruptcy Code does not apply to modified plans under Section 1329. A modified plan must still continue for a minimum of 36 months.

 

If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com.

Payments held by Chapter 13 trustee

When a debtor’s Chapter 13 bankruptcy case is terminated early, the first question asked is, “What happens to my money that the trustee is holding?” The answer depends on whether the Chapter 13 plan was confirmed prior to a dismissal, or whether the case is converted to a Chapter 7.

Unconfirmed Chapter 13 Case

If the debtor’s Chapter 13 Plan was not confirmed prior to dismissal, money held by the trustee is returned to the debtor. After the dismissal of the Chapter 13 case, the trustee makes an accounting, and pays trustee's fees, attorney fees and/or adequate protection payments to creditors. Any remaining money is generally returned to the debtor. See In re Stamm, 222 F.3d 216 (5th Cir. 2000)(holding that when a Chapter 13 case is converted to Chapter 7 before confirmation of a plan, wages paid by the debtor to the trustee under the proposed plan do not become part of the Chapter 7 estate and must be returned to the debtor).

Confirmed Chapter 13 Case

If the debtor’s Chapter 13 Plan was confirmed prior to the dismissal of the case, there is a split of opinion on where the money goes. The Third Circuit Court of Appeals directs the trustee to return undistributed money to the debtor. See In re Michael, 699 F.3d 305 (3rd Cir. 2012). Conversely, the Fifth Circuit Court of Appeals states the right of creditors to money paid to the trustee under direction of a confirmed plan is superior to the debtor’s. See Viegelahn v. Harris (In re Harris), No. 13-50374 (5th Cir. July 7, 2014). In the Fifth Circuit, the trustee may pay creditors after he case is converted. These funds are generally not property of the Chapter 7 bankruptcy estate (see below).  

Dismissed Case

If the debtor’s Chapter 13 Plan is dismissed by the bankruptcy court after the case was confirmed, any money held by the Chapter 13 trustee is returned to the debtor. See 11 U.S.C. § 349(b)(3)(dismissal generally revests the property of the estate in the debtor); see also In re Nash, 765 F.2d 1410 (9th Cir. 1985) (holding that any undistributed earnings paid to a Chapter 13 trustee pursuant to a confirmed plan must be returned to the debtor upon dismissal of the Chapter 13 case). 

If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send and email to fears@fnlawfirm.com.

Cram Down a House

“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 for a debtor’s home.

The exception in Section 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. Take for example the case of In re Benafel, 461 B.R. 581 (9th Cir. BAP 2011). 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 Bankruptcy Appellate Panel was when the court should determine the real property as 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. Obviously, the risk of a court finding bad faith diminishes the more time between the date the home is rented and the date of the bankruptcy filing.

 

While lien stripping a home loan only applies to a junior mortgage, cram down of investment property applies to all mortgages. Suppose the debtor has a first mortgage of $100,000, a second mortgage of $100,000, and the real estate has a fair market value of $90,000. In a lien stripping situation, the second mortgage can be entirely stripped off as unsecured, and the first mortgage is fully secured to $100,000. In a cram down situation, the second mortgage is crammed down to zero and the first mortgage is crammed down to $90,000, the value of the real estate. In effect, the second mortgage is now unsecured, and the first mortgage is bifurcated into a $90,000 secured debt and a $10,000 unsecured debt.

The problem with cram down is that most courts require the crammed down mortgage must be paid in full through the Chapter 13 plan. This not only adds trustee fees to the cost of the mortgage, but also places the burden to increase the monthly payments to the creditor or refinance the loan before the close of the bankruptcy case. On the other hand, cram down can be useful if a junior mortgage is undersecured. The debtor may cram down the junior mortgage and pay it off over the bankruptcy term.

For instance, say the amount owed on a first mortgage is $100,000, a second mortgage is $100,000, and the debtor’s rental property has a fair market value of $120,000. The debtor could cram down the property to $120,000 value, continue paying the first mortgage at the contract rate, and pay the remaining $20,000 crammed down second mortgage over five years. The unsecured $80,000 on the second mortgage is paid at the same rate as other unsecured creditors and the remaining balance is discharged at the end of the case.  

If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com

Lien Stripping in Chapter 13 Bankruptcy

 Section 506(a) of the Bankruptcy Code separates the debtor’s obligations into two general categories or “claims”: secured claims and unsecured claims. Secured claims are obligations in which payment is guaranteed (or “backed” or “secured” or “collateralized”) by property. Section 506(a)(1) provides that a secured creditor's claim is “a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property . . . and is an unsecured claim to the extent that the value of such creditor's interest . . . is less than the amount of such allowed claim.” Consequently, when the value of the property is less than the amount of the secured claim, Section 506(a) allows the obligation to be divided into a secured claim and an unsecured claim.

For instance, suppose the debtor finances a car for $40,000. It’s commonly said that a car depreciates the minute it drives off the lot, so let’s say the car is now worth $35,000 and no payment has been made. In bankruptcy, this car loan would have a secured claim of $35,000 (the value of the collateral) and an unsecured claim of $5,000.

The most notable prohibition against reducing the amount owed on a secured obligation is found in Section 1322(b). This provision, often called the “anti-modification provision,” prohibits a Chapter 13 debtor from modifying the rights of a secured claim when the claim is secured only by the debtor’s principal residence. The U.S. Supreme Court in the case of Nobelman v. American Savings Bank, 508 U.S. 324 (1993), decided that 1322(b) means that a claim against the debtor’s primary residence cannot be bifurcated into secured and unsecured claims. However, most bankruptcy courts have distinguished the ruling in Nobleman to allow a junior mortgage to be stripped away if the value of the senior claims are more than the value of the debtor’s home.

To understand how lien stripping works, consider the following “negative equity” example of a debtor’s home:

Value of home:           $330,000

First mortgage:            $360,000

Second mortgage:       $40,000

Amount of equity       -$70,000

Most courts allow the $40,000 second mortgage to be stripped off and reclassified as an unsecured debt because the amount owed on the first mortgage is more than the value of the home. In other words, the second mortgage is not actually secured by anything because the amount owed on the first mortgage “eats up” all of the home’s equity. There is no equity left to secure the second mortgage. If the second mortgage was partially secured, even by one dollar, the second mortgage could not be lien stripped according to Nobelman.

If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com

Chapter 13 Bankruptcy

 A Chapter 13 bankruptcy case is primarily used to repay all or some of an individual’s debts. It is also known as a debt adjustment case, or a “wage earner's plan.” Chapter 13 can stop a foreclosure or repossession and allow the individual time to make payments over three to five years, often even over the objection of a creditor.

A debtor who is behind on a mortgage or car loan is able to catch up in a Chapter 13 bankruptcy. Through Chapter 13, the debtor may restructure debts and sometimes change loan terms, such as the interest rate and the time for repayment. Some upside-down vehicle loans can be “crammed down,” meaning the obligation is reduced to the value of the vehicle and then paid over three to five years.Second or third mortgage debts can also be stripped off, if the amount of the first mortgage is equal to or more than the value of the home.

Chapter 13 differentiates between three types of debts: first, priority debts, including most taxes and child support, must be paid in full. Second, secured debts, debts secured by collateral, must be paid with interest over the life of the plan, or surrendered back to the creditor. Finally, unsecured debts, like credit cards and medical bills, are paid in accordance with the debtor’s financial ability. This may be as much as 100% or as little as 0%.

 

The main feature of a Chapter 13 bankruptcy is the repayment plan, which must be approved by the bankruptcy court. A Chapter 13 plan will propose a monthly payment to pay all or some creditors over three to five years.  Once the bankruptcy court approves a Chapter 13 plan (called “confirmed” in bankruptcy lingo), the court will direct the bankruptcy trustee to pay creditors (and keep a percentage as a fee) in accordance with the confirmed plan.

 

There are monetary limits on the amount of unsecured and secured debts in a Chapter 13, currently set at $383,175 in unsecured debts and $1,149,525 in secured debts. Debtors who exceed these limits are not eligible for Chapter 13 relief and should consider a Chapter 11 reorganization bankruptcy.

 

The Bankruptcy Code does not allow joint debtors to double the Chapter 13 debt limits. Most courts apply the plain meaning of the statute and disqualify couples who exceed the debt limits. A minority of courts will look at the individual debtor’s debts to determine whether the individual falls under the debt limits. In these courts if both debtors are individually under the debt limits, the joint case is allowed to proceed. In those cases, if only one debtor qualifies and the other debtor does not, the qualifying debtor may continue with her Chapter 13 case, while the nonqualifying debtor must convert to another chapter.

If a claim is “underwater,” such as a junior mortgage, it is classified as unsecured for purposes of the Section 109(e) so long as it is not supported by any part of the collateral’s value. This is the case even when the creditor’s lien has not been avoided as of the petition date, and even if the loan is not avoidable at all. Similarly, most courts will bifurcate a debt into secured and unsecured portions when analyzing the debt limits of Section 109(e).

 

When pushing Chapter 13 debt limits in a joint case, the debtors should consider: (1) filing separate cases for married couples (and consider filing a Chapter 7 for one spouse and a Chapter 13 for the other); and (2) using Chapter 20. Your attorney can help you decide the best strategy to maximize your bankruptcy benefits.

If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705. 7584 or send an email to fears@fnlawfirm.com

What if I'm Over the Chapter 13 Debt Limit?

There are monetary limits to the amount of unsecured and secured debts in a Chapter 13, currently set at $383,175 in unsecured debts and $1,149,525 in secured debts. Debtors who exceed these limits are not eligible for Chapter 13 relief and should consider a Chapter 11 reorganization bankruptcy.

The Bankruptcy Code does not allow joint debtors to double the Chapter 13 debt limits. See 11 U.S.C. § 109(e); see also In re Kersner, 412 B.R. 733 (Bankr. D. Md. 2009). Most courts apply the plain meaning of the statute and disqualify couples who exceed the debt limits. See In re Miller, No. 13 B 2178  (Bankr. N.D.E.D.IL., 2013); In re Archibald, 314 B.R. 876 (Bankr. S.D. Ga. 2004).

A minority of courts will look at the individual debtor’s debts to determine whether the individual falls under the debt limits. If both debtors are individually under the debt limits, the joint case is allowed to proceed. See In re Werts, 410 B.R. 677 (Bankr. D. Kan. 2009). If only one debtor qualifies and the other debtor does not, the qualifying debtor may continue with her Chapter 13 case, while the nonqualifying debtor must convert to another chapter. See In re Butler, 2010 WL 2035373 (Bankr. D. Dist. Col. 2010); In re Tabor, 232 B.R. 85 (Bankr. N.D. Ohio 1999).

When pushing Chapter 13 debt limits in a joint case, the debtors should consider: (1) filing separate cases for married couples (and consider filing a Chapter 7 for one spouse and a Chapter 13 for the other); and (2) using Chapter 20 (filing a Chapter 7 case to eliminate dischargeable unsecured debts, then filing a Chapter 13 case to deal with secured or nondischargeable debts).

There are many options available to debtors in bankruptcy. It takes an experienced guide to help you choose the right path to a financial fresh start. Call today and find the best road to success in your case. 

If you are considering filing for bankfruptcy please call the experienced attorneys at Fears | Nachawati to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com

Is a Mortgage Loan Servicer Subject to the FDCPA?

For many homeowners, the monthly home loan payment is sent to a mortgage servicer, not to the lender. A mortgage servicer is a company that acts as a mortgage holder’s agent and collects and processes the monthly mortgage payment for a percentage of the interest payment. Distinguishing when a company is a servicer or a note holder can be confusing because big banks like Wells Fargo and Bank of America have servicing groups. U.S. Bank may hold the home loan note, but Bank of America may service the loan for U.S. Bank.

Mortgage servicers operate under many federal and state laws, such as the Real Estate Settlement Procedures Act (RESPA) and the Truth-in-Lending Act (TILA). A mortgage servicer is obviously a “third party” and a “collector”, but does the mortgage servicer meet the statutory definition of a debt collector and fall under the Fair Debt Collection Practices Act (FDCPA)?

The FDCPA’s definition of “debt collector” excludes creditors and those who collect debts that are not in default. See 15 U.S.C. § 1692a(6)(F)(iii). Consequently, if a home loan is transferred to a mortgage servicer while the loan is current, any attempt to collect the debt by the home loan servicer is not subject to the FDCPA. The FDCPA does not apply to that servicer even if the loan subsequently goes into default status. If a home loan is transferred to a loan servicer during a time when the loan is in default, then its collection activity is subject to the FDCPA.

But don’t always believe the plain language of the statute because sometimes the courts have different interpretations. . .

In 2012, the United States Court of Appeals for the Sixth Circuit (which hears federal appellate case from Kentucky, Michigan, Ohio, and Tennessee) held that a mortgage servicer was liable under the FDCPA even though the loan was not in default. In Bridge v. Ocwen Federal Bank, FSB, 681 F.3d 355 (6th Cir. 2012), the appellate court held that the mortgage servicer and the purchaser of the mortgage were subject to the FDCPA because the mortgage servicer treated the mortgage as if it were in default and attempted to collect it as a defaulted debt. Contrary to the plain language of the FDCPA, the court explained that it interpreted the definition of debt collector found in the FDCPA to include mortgage servicers who treat a loan as if it were in default even when it is not. The holding concluded that the reason for mistakenly treating the mortgage as defaulted, such as a clerical mistake, error, or even intentional, does not matter.

If you are being harassed by a loan servicer, speak with an experienced bankruptcy or consumer debt attorney regarding your state and federal legal protections. Your attorney can explain your options for stopping harassment and saving your home from foreclosure.

If you are considering filing for bankruptcy please contact the experienced attorneys at Fears | Nachawati for a free consultation. Call us at 1-866-705-7584 or send an email to fears@fnlawfirm.com .

 

Bankruptcy Waivers are Generally Void

When a person is short of money, he may ask for a loan. Usually the more desperate the person’s financial situation, the higher the interest rate becomes – and the greater the creditor’s risk that the individual will file for bankruptcy protection. In order to manage that risk, some loan contracts contain bankruptcy waivers.

A bankruptcy waiver is an agreement that the borrower will not file bankruptcy and discharge the debt. Courts consider these waivers unenforceable and are considered void against public policy. See Klingman v. Levinson, 831 F.2d 1292 (7th Cir. 1987); see also In re Citadel Properties, Inc., 86 B.R. 275 (Bankr. M.D. Fla. 1988)(“A total prohibition against filing for bankruptcy would be contrary to Constitutional authority as well as public policy”).

While courts agree that an agreement that impairs a party’s ability to file for bankruptcy protection is void, courts have disagreed when it comes to waivers of specific bankruptcy protections. For instance, a secured creditor may include a provision that waives the automatic stay on the real estate, which will allow the creditor to quickly obtain relief from the automatic stay and proceed with a foreclosure or repossession. The creditor must still seek an order lifting the stay from the bankruptcy court, but the waiver provides evidence of the debtor’s consent and reason for the court to lift the stay protection. See In re Cheeks, 167 B.R. 817 (Bankr. D.S.C. 1994).

A pre-petition bankruptcy waiver is generally binding on the debtor unless it was obtained by coercion, fraud or mutual mistake of material fact. See In re South East Financial Associates, Inc., 212 B.R. 1003 (Bankr. M.D. Fla. 1997). These waivers are not binding against third parties, like creditors or the bankruptcy trustee. Consequently, if a waiver affects the rights of other creditors in the bankruptcy case, a court is not likely to enforce the waiver. Some courts look to a series of factors to determine if the waiver is enforceable and valid, including:

(1)   the sophistication of the debtor,

(2)   the consideration for the wavier,

(3)   whether other parties or creditors are affected, including unsecured creditors and junior lienholders, and

(4)   the feasibility of any Chapter 11 or 13 repayment plan. 

See In re Sky Group International, Inc., 108 B.R. 86 (Bankr. W.D. Pa. 1989).

Pre-petition bankruptcy waivers are serious business, and it is always best to avoid them. However, if your loan agreement contains a bankruptcy waiver and your finances have taken up permanent residence in Brokeville, consult with an experienced bankruptcy attorney regarding your rights under the federal bankruptcy Code.

If you are considering filing for bankruptcy please contact the experienced attorneys at Fears | Nachawati for a free consultation. Call us at 1-866-705-7584 or send an email to fears@fnlawfirm.com .

 

 

Problems with Hiding Property in Bankruptcy

People do dumb things when under pressure.

One of the dumbest things a person can do during the bankruptcy process is to conceal assets. The truth is that with proper advice and planning, a debtor will never lose anything in bankruptcy, unless it’s the debtor’s choice and in his or her best interest. The problem arises when the debtor panics and does not disclose property to the bankruptcy court, the trustee, or even his own attorney.

There are two well-known penalties for hiding property during a bankruptcy case. First, the Bankruptcy Code allows a court to deny the debtor’s discharge based on the debtor’s misconduct during the case. Second, the debtor may be criminally charged with bankruptcy fraud. But there are some lesser-known penalties to consider.

Loss of Exemption

Some courts have barred a claim of exemption when the debtor intentionally concealed or failed to disclose bankruptcy estate property. These courts find that the debtor must have engaged in bad faith by not disclosing the asset. The Bankruptcy Code does not specifically allow the court to deny exemption based upon the debtor’s bad faith conduct, but these courts hold that the power is granted generally by Section 105(a).

May Lose Right to Amend

Courts are very liberal in allowing a debtor to amend bankruptcy schedules to include “forgotten” property - unless there is evidence of bad faith or prejudice to a creditor. Bad faith is found when the debtor has knowledge of the undisclosed property or has motive for concealing. Prejudice to a creditor is determined by the circumstances and has been found when:

  • a debtor exhibits “inordinate delay” in amending his exemption schedules;
  • the late amendment harms the litigation posture of the creditors;
  • permitting the debtor’s amendment will delay the administration of the bankruptcy estate and distribution to creditors; or
  • creditors have already received distributions from the estate.

Cannot Claim Ownership Later

Under principles of judicial estoppel, a debtor may be barred from asserting an ownership interest in property when he disclaims the interest in a prior legal case. This often arises when a debtor has a potential (or pending) personal injury lawsuit and “forgets” to include the case in a prior bankruptcy case. Courts have consistently found that the debtor loses standing to prosecute the claim for failing to identify a legal property interest in the bankruptcy case. Some courts have found that a debtor who fails to claim ownership in a bankruptcy case may not claim ownership of the property in a subsequent bankruptcy case. That means that the debtor may not use exemptions to protect the property in another bankruptcy.

No Longer Property of the Debtor

Omitted property in a Chapter 7 case can cause an on-going ownership problem for the debtor. When a debtor files Chapter 7 bankruptcy, all of the debtor’s property becomes property of a bankruptcy estate. If the debtor receives a discharge, the abandonment provisions of Section 554 apply. Scheduled property is either abandoned by the trustee back to the debtor during the case, or is abandoned back to the debtor when the case is closed. Unscheduled property is not abandoned and remains property of the estate (indefinitely!). See Section 554(d); see also See Pace v. Battley (In re Pace), 146 B.R. 562 (9th Cir. BAP 1992), aff'd, 17 F.3d 395, (9th Cir.1994) (unscheduled property remains in estate after case is closed).

The omitted property issue identified above is different for Chapter 13 cases. As in a Chapter 7 case, all of the debtor’s property becomes part of the bankruptcy estate at filing. After acquired property also becomes part of the estate. However, upon confirmation of the plan, all property of the estate (scheduled or unscheduled) reverts to the debtor.

Obviously, the better practice is to disclose all property. There is nothing magical about how the debtor uses the Official Bankruptcy Forms to disclose property, so long as there is enough information to adequately inform the reader (and the trustee) on notice of the property, its estimated value, and the situation.

If you are considering filing for bankruptcy please contact the experienced attorneys at Fears | Nachawati for a free consultation. Call us at 1-866-705-7584 or send an email to fears@fnlawfirm.com .

File a Proof of Claim in Your Chapter 13 Case

Once the Chapter 13 bankruptcy plan is confirmed, the trustee will pay allowed claims. The first step for a creditor to obtain an allowed claim is to file a proof of claim in the case. But Section 501(c) of the Bankruptcy Code also allows the debtor to file a proof of claim if “a creditor does not timely file a proof of such creditor’s claim.” The claim must be filed “within 30 days after the expiration of the time for filing claims.” See Rule 3004, FRBP.

Why in the world would a debtor file a proof of claim in his own case?

Consider this scenario: the debtor files Chapter 13 bankruptcy and proposes to pay 100% of his mortgage arrears and discharge 100% of his high medical bills. His plan is confirmed, but two years later he discovers that the trustee has been sending 100% of his plan payment to his medical creditors and has not sent a dime to his mortgage company! How did this happen? Because the medical creditors filed a timely proof of claim and the mortgage company did not.

In the first place, this problem should never occur if the debtor and his counsel are vigilant and monitor the claims as they are filed. Second, once it was discovered that the mortgage company failed to file a proof of claim in the debtor’s case, the debtor should file one to ensure that the trustee pays the arrears (and possibly the future mortgage payment, if local rule dictates). A debtor filing a proof of claim in his own case is actually in a stronger legal position, since the burden is on an objecting party to prove that a claim is invalid or the claim amount is incorrect.  

You know that old joke about “When you assume. . .?” An experienced and competent attorney never assumes that a creditor will file a proof of claim. Careful monitoring of a bankruptcy case is necessary to safeguard the debtor’s interests.

If you are considering filing for bankruptcy please contact the experienced attorneys at Fears | Nachawati for a free consultation. Call us at 1-866-705-7584 or send an email to fears@fnlawfirm.com .

Post-Petition Debts in Chapter 13

A lot can happen during the three to five years of a debtor’s Chapter 13 repayment plan. Even though the Chapter 13 trustee forbids the use of credit during the repayment period, the trustee is powerless against life. To paraphrase Forrest Gump, “Stuff happens.” 

 

Post-Petition Tax Debts

One of the most common post-petition debts that happen during Chapter 13 bankruptcy is the tax debt - so common that Congress put in a special provision for it in the Bankruptcy Code. See 11 U.S.C. § 1305(a)(1). The bankruptcy court allows tax creditors to file claims for post-petition tax debts, and then treats the claim as a pre-petition, priority debt (meaning that it must be paid in full during the bankruptcy case). The debtor is required to amend his repayment plan to account for this new debt, which may mean making a larger payment each month. This may also cause unsecured creditors to receive less.

Post-Petition Consumer Debts Incurred Without Court Approval

During Chapter 13 bankruptcy all of the debtor’s income belongs to the bankruptcy estate. That is why using credit is forbidden – the debtor’s income cannot be used to repay post-petition creditors during the bankruptcy case without permission. If a new credit debt is incurred without court permission, it is not part of the bankruptcy case, no portion is discharged at the end of the case, and, if the debtor attempts to pay the post-petition debt, the trustee or creditor may file an objection stating that the debtor is not devoting all disposable income to repaying bankruptcy debts.

Despite the Bankruptcy Code’s prohibition and the trustee’s admonition, some debts arise without prior court permission. The debtor may still seek the court’s approval by showing that it was not possible to get court approval ahead of time. For example, a medical bill after a car accident is not foreseeable, and it is impractical (or perhaps impossible) to get the court’s permission prior to receiving medical treatment. To include this type of debt in the debtor’s bankruptcy case, the creditor must agree to submit a proof of claim, and the debtor must amend the bankruptcy plan. If the bankruptcy court refuses to include the debt in the repayment plan, the automatic stay will still prevent the creditor from seeking payment from property of the bankruptcy estate (including the debtor’s wages) during the Chapter 13 case. If the creditor refuses to submit a proof of claim and receive partial repayment through the plan, the debtor may consider either conversion, or dismissal and refilling later to include this new debt.

Post-Petition Consumer Debts Incurred With Court Approval

The most common post-petition debt incurred with court approval is the new car purchase. The debtor must first contact the trustee’s office and gain the trustee’s support before asking the bankruptcy court for permission to incur the debt. Generally, the court will approve new debt, or an extension of credit, if it is necessary for the completion of the bankruptcy plan. See Section 1305(a)(2)(approval of credit is available “for property or services necessary for the debtor’s performance under the plan”). In other words, the debtor must show that he or she needs a car to get to work to make money to pay the plan payment. With court approval, the debtor may include the debt in the plan once the creditor files a proof of claim.

To buy a car during Chapter 13 bankruptcy the debtor needs to (1) negotiate financing and loan terms with the car dealer; (2) contact the trustee, explain why the car is necessary to complete the plan, and state the terms of the loan and how the debtor will pay it; (3) petition the bankruptcy court to approve the new debt; (4) file an amended plan and schedules to account for the new car payment; and (5) ensure that the auto lender files a proof of claim. If all of these steps are followed, the auto lender has a secured interest in the vehicle and receives the full contract price during the bankruptcy case.

If you are considering filing for bankruptcy please contact the experienced attorneys at Fears | Nachawati for a free consultation. Call us at 1-866-705-7584 or send an email to fears@fnlawfirm.com .

Tax Refund Anticipation Loan During Chapter 13 Bankruptcy

A Chapter 13 bankruptcy is a three to five year commitment between the debtor, his attorney, the trustee, and the bankruptcy court. This relationship does not stop once the debtor’s proposed repayment plan is confirmed by the court. The debtor is expected to cooperate with the trustee’s requests and the requirements of the bankruptcy throughout the case.

In a Chapter 13 case the debtor is prohibited from obtaining credit without prior approval from the trustee and bankruptcy court. An income tax refund anticipation loan, check, or temporary debit card is an extension of credit secured by the debtor’s tax refund, and just the sort of loan that is banned. These short-term are commonly offered by preparers during tax season, and are similar to payday loans with high interest rates.

Tax anticipation loans are not allowed during a debtor’s Chapter 13 plan. Not only are these loans an unauthorized use of credit by the debtor, the tax refund itself may be (and often is) part of the debtor’s estate. In most cases the Chapter 13 bankruptcy trustee will allow the debtor to keep a small refund or part of a refund for reasonable and necessary expenses (such as auto or home repairs, etc.). However, the trustee may seek turnover of some or all of the debtor’s tax refund to use toward paying creditors in the bankruptcy case. By obligating yourself to a tax refund loan, you may complicate your finances considerably. The trustee may avoid the loan and take all of the refund, leaving you with a post-petition debt that is neither dischargeable nor stayed by the bankruptcy case.

Before you agree to an income tax refund anticipation loan or other credit, speak with your Chapter 13 attorney. In most cases the advice is clear, “Don’t do it!” Your attorney is your advocate and counselor during the case, so do not hesitate to call to discuss your financial matters.

If you are considering filing for bankruptcy please contact the experienced attorneys at Fears | Nachawati for a free consultation. Call us at 1-866-705-7584 or send an email to fears@fnlawfirm.com.

Non-priority, non-dischargeable tax debt

For most bankruptcy debtors, dealing with an income tax debt in Chapter 13 comes down to whether the debt will be paid ahead of other creditors (and in full under the plan confirmation requirements of Section 1322(a)), or paid along with other unsecured creditors with the remaining tax debt discharged at the end of the case. In bankruptcy jargon, the debtor’s income tax debt is either a priority, non-dischargeable claim; or it is a non-priority, dischargeable claim.

However, there is a special circle of inferno reserved for a Chapter 13 debtor with a tax debt that is not classified as a priority claim, and therefore cannot be paid ahead of general unsecured creditors, but is also non-dischargeable. This special ring of hell bears the inscription “non-priority, non-dischargeable claim” at its gate (which is Latin for “Abandon all hope, ye who enter here”).

A debtor with a non-priority, non-dischargeable income tax claim cannot use Chapter 13 to pay the tax debt in full during the plan without also repaying all other unsecured creditors 100%. It also means that any portion of the tax obligation not paid during the bankruptcy case will survive, and any tax lien on the debtor’s property will continue after bankruptcy. [Unpaid non-priority, non-dischargeable tax debts used to be discharged upon completion of a Chapter 13 payment plan, but the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 repealed this portion of the Chapter 13 “superdischarge.”]

Deciphering whether a tax debt is a priority, non-dischargeable claim; a non-priority, dischargeable claim; or a non-priority, non-dischargeable claim is best discovered using a Venn Diagram. But short of drawing pictures, let’s look at the Bankruptcy Code for what makes a tax debt non-dischargeable, and then the conditions that make the debt a priority debt. At the end we can see how a non-priority, non-dischargeable claim might occur.

Non-Dischargeable Tax
Section 523(a) of the Bankruptcy Code states that a discharge under Chapter 7, 11, 12, or 13 does not discharge a debtor from any individual income tax debt

  1. That is a secured tax debt (11 USC § 507(a)(3))
  2. That is a pre-petition tax debt that was
    1. last due, including extensions, within three years of the bankruptcy filing (11 USC § 507(a)(8)(A)(i); or
    2. assessed within 240 days of the bankruptcy filing (11 USC § 507(a)(8)(A)(ii))
  3. When a return was not filed (11 USC § 523(a)(1)(B)(1))
  4. When the return was filed within two years of the bankruptcy filing (11 USC § 523(a)(1)(B)(2))
  5. When a return is fraudulent or the debtor attempts to willfully “evade or defeat such tax.” (11 USC § 523(a)(1)(C))

Priority Tax
Special priority status is given to certain income tax debts, and distribution of assets in Chapter 7 or regular payments under Chapter 13 pay these tax debts before FDIC claims, DUI/DWI personal injury claims, and general unsecured claims. Section 507(a)(8) sets out the criteria for a priority income tax claim:

  1. The pre-petition tax debt is
    1. last due, including extensions, within three years of the bankruptcy filing (11 USC § 507(a)(8)(A)(i); or
    2. assessed within 240 days of the bankruptcy filing (11 USC § 507(a)(8)(A)(ii))

Non-priority, non-dischargeable tax debt
The most common way a Chapter 13 debtor can fall through the cracks of the Bankruptcy Code and get stuck with a non-priority, non-dischargeable tax debt is by filing a late tax return. In fact, some bankruptcy courts dispute that a late filed return is eligible for discharge because a “return” is defined by many state laws as being timely filed. This is an important distinction that is currently in litigation. See McCoy v. Miss. State Tax Comm., 666 F.3 924 (5th Cir., 2012)(a late-filed tax return is, by definition, not a return and hence the taxes can never be discharged); but see Gonzalez v. Massachusetts Dept. of Revenue, BAP No. MW 13-026 (B.A.P. 1st Cir. March 6, 2014)(Massachusetts state tax liabilities of the debtor were dischargeable even though his tax returns were filed late after applying Massachusetts law defining a “return”).

Most bankruptcy courts will not allow a Chapter 13 debtor to pay a non-priority, non-dischargeable tax debt ahead of other general unsecured creditors by establishing a “special class” for the debt. While 11 U.S.C. Section 1322(b)(1) permits a plan to designate a class of unsecured claims, it may not “discriminate unfairly.” Nondischargeability, by itself, does not justify special classification. See Copeland v. Fink (In re Copeland), 2014 BL 27501 (8th Cir., No. 12-4018, 1/31/14).

A non-priority, non-dischargeable tax debt places the debtor in a difficult position. Since the debt is not dischargeable, the debtor may elect to eliminate other burdensome unsecured debts through Chapter 7 and deal with the tax debt outside of bankruptcy. The debtor may also pay a portion of the tax debt during Chapter 13 at the same rate as other unsecured, non-priority creditors, while enjoying the protection of the automatic stay. Finally, the debtor may elect to file “Chapter 20,” that is, file a Chapter 7 to discharge unsecured debts, then file a Chapter 13 case immediately after. The debtor would then be able to pay 100% of the non-priority, non-dischargeable tax debt during Chapter 13 without also paying other general unsecured creditors (which were discharged in the prior Chapter 7 case).

For further questions or for a free consultation, contact the experienced attorneys at Fears | Nachawati Law Firm. Call us at 1.866.705.7584 or send an email to fears@fnlawfirm.com.

What to Expect at My Trustee's Meeting

As part of every bankruptcy case, each debtor will have a meeting with the Trustee. This meeting, which is commonly referred to as the 341 Meeting, or Meeting of Creditors, is required to take place within a reasonable time of filing according to Section 341 of the bankruptcy code. Generally, the meeting occurs within 30 days of filing the case.

It is common for debtors to feel nervous prior to their Trustee’s meeting. Although all of the creditors listed in the bankruptcy schedules are invited to attend the meeting, generally no creditors show up. In fact, most 341 meetings typically only take between 10-15 minutes to complete. Your attorney will attend the meeting with you and, depending on the trustee, will generally ask most of the questions.

Common questions asked at the meeting are:

  • Do you understand the differences between a Chapter 7 and Chapter 13 bankruptcy
  • Do the schedules list all of your assets?
  • Do the schedules list all of your liabilities?
  • Is everything contained in your schedules true and correct?
  • Is there a claim you can file against another party?
  • Will you be entitled to a windfall of money, such as an inheritance or insurance proceeds, within 6 months of filing the case?
  • Have you filed bankruptcy before?

At the 341 meeting, you will also have the opportunity to provide a brief explanation of what caused you to file the bankruptcy. Keep in mind you will be required to present two forms of identification at the meeting. Typically, debtors bring their driver’s license and social security card. You will need originals of both forms of ID. In addition, attendance of the meeting is mandatory and your case may be dismissed if you do not show up. Contact a bankruptcy attorney if you have questions about your upcoming 341 meeting.

If you are considering filing for bankruptcy, contact the experienced bankruptcy attorneys at Fears | Nachawati to set up a free consultation. Contact us today at 1.866.705.7584 or send an email to fears@fnlawfirm.com

Will the bankruptcy Trustee take my dogs or cats?

When you file for bankruptcy you need to list all assets, while a pet may seem more like a liability then an asset, you still need to list them on your petition. Your pets typically don’t have a value beyond the sentimental value, but it is possible if it is a prize breed that it may hold more significant value. In Texas you can exempt a house hold pet using the Texas exemption Tex. Prop. Code secs. 42.001(a); 42.002(a)(11) or the federal exemption 11 U.S.C. sec. 522(d)(3). As long as your pet is exempt it is not subject to seizure by the Trustee. In the vast majority of cases a Trustee will not want to attempt to sell a pet to pay off creditors, therefore there is nothing to worry about.

In a chapter 13 case you will need to list your pet but you may also have a budget item for pet care. While most Trustee’s will not take issue with your pet care budget item, it is important to note that they will look at the reasonableness. If you have a large pet care cost the Trustee can object to the confirmation of your plan. This is especially true if your other budget items for food and household items are also high. The court will not make you give up your pet but they may find that it is not reasonable to budget a large amount of money to keep a pet if your creditors are not being properly paid.

Also, note that if you have a budget item for pet care but failed to list any pets then the Trustee may make you amend your schedule to list your pets. This is because the bankruptcy petition is signed under perjury and it does request that you list EVERYTHING that you own.

Additionally if you have livestock, horses or other animals these animals will typically carry a value more than sentimental value. They will need to be listed with a value provided. Again, Texas is good at allowing you to exempt live stock; specifically you can exempt: “2 horses, mules or donkeys plus a saddle, a blanket and bridle for each, 12 head of cattle, 60 head of other livestock, 120 fowl, forage on hand for each animal.”

If you have animals or pets and are considering filing for bankruptcy, contact the experienced attorneys at Fears | Nachawati for a free consultation. Call us at 1.866.705.7584 or send an email to fears@fnlawfirm.com

Using Student Loans to Qualify for Chapter 7 Bankruptcy

In 2005, Congress changed the bankruptcy laws to include a new “means test” for consumer debtors. The purpose of the means test is to ensure that debtors are not “abusing” the bankruptcy system by unfairly discharging debts they can afford to repay. The means test is a gatekeeper for Chapter 7 bankruptcy and disqualifies certain high income debtors from Chapter 7 who can afford a repayment plan in Chapter 13. Congress also created a business exception to the means test. If the individual debts are “primarily” business debts, the debtor can avoid taking the means test, and can avoid being presumptively disqualified from filing a Chapter 7.

Most courts have stated that “primarily” means that more than half of the individual debts are business debts. Separating a consumer debt from a business debt has proven a more challenging question for bankruptcy courts. The starting point is Section 101(8) of the Bankruptcy Code, which defines a consumer debt as a “debt incurred by an individual primarily for a personal, family, or household purpose.” Many courts have distinguished a business debt as one that was incurred with a “profit motive,” that it was created for the purpose of trying to turn a profit. Non-consumer debts are generally business-related debts, such as:

  • Investment real estate
  • Business vehicle loan
  • Business utilities
  • Business credit
  • Business insurance

Some debtors have argued that a student loan debt is a business debt when it is incurred with a profit motive. These cases are examined on a case-by-case basis. The primary inquiry is whether the debt was incurred primarily for a personal, family, or household purpose, which necessitates a trial. When the lion’s share of student loans are used to pay living expenses, rather than funding a professional education, the student loan debt is often characterized as a consumer debt. See In re Stewart, 175 F.3d 796 (10th Cir. 1999).

Recently, a south Texas bankruptcy court found that $220,931.04 of a debtor’s $251,058.00 student debt for dental school was spent on tuition, books and fees. The court applied the “profit motive” test, and found that the majority of the debtor’s student loans were incurred with a business purpose (obtaining a professional degree), and not spent on the debtor’s household expenses. When added to the debtor’s other obligations, the court found that the debts were not primarily consumer debts and that the means test did not apply. See In re De Cunae, No. 12-37424 (Bky.S.D.Tex. Dec. 6, 2013).

Debtors with primarily non-consumer debts are not required to complete the means test, however the bankruptcy trustee may still argue that the debtor has the ability to pay creditors and should be forced into Chapter 13 by the bankruptcy court after looking at the “totality of the circumstances.” See 11 U.S.C. §707(b)(3)(B). The Bankruptcy Code imposes a good faith requirement on Chapter 7 debtors, and some courts have found that the lack of good faith may constitute “cause” for dismissal under §707(a). See 11 U.S.C. §707(b)(3)(A). In other words, if the debtor can reasonably adjust his budget to pay creditors—consumer or business creditors—the bankruptcy court may disqualify the debtor from Chapter 7.

There are many roads to Chapter 7 bankruptcy, and an experienced bankruptcy attorney at Fears | Nachawati can help you identify the right path for you. If you need debt relief, discuss your situation with experienced and knowledgeable counsel. Call us at 1.866.705.7584 or send an email to fears@fnlawfirm.com.

What is a Regular Income in Chapter 13?

Section 109(e) of the Bankruptcy Code sets three basic eligibility requirements for a Chapter 13 debtor:

  1. The debtor must be an “individual.” For bankruptcy purposes, an individual is a subset of a person, and is distinct from a partnership or a corporation. See 11 U.S.C. §101(41). Only real live human beings (“individuals”) are allowed to file Chapter 13 bankruptcy.
  2. The debtor must not exceed the Chapter 13 debt limits. The last time these limits were adjusted was on April 1, 2013, and they are currently limited to: unsecured debts less than $383,175, and secured debts less than $1,149,525.
  3. The debtor must have a regular income.

Section 101(30) of the Bankruptcy Code defines “regular income” as “income sufficiently stable and regular . . . to make payments under a plan.” Courts have recognized that Congress intended a liberal interpretation of “regular income.” The test for regular income is not the type or source of income, but rather its regularity and stability. Debtors who do not have sufficient income to pay ordinary living expenses have been found to lack the regular income to be eligible to file a Chapter 13. Some examples held to qualify as regular income include:

  • Social Security income
  • Income from employment
  • Business income
  • Spousal support income
  • Child support income
  • Contributions from family members

Under the original Bankruptcy Act, Chapter 13 plans were restricted to wage earners, and sometimes a Chapter 13 case is still referred to as a “wage earner” bankruptcy. This limitation denied Chapter 13 relief to some individuals with regular income, such as small business owners or social welfare recipients, because their incomes did not come from wages, salary, or commissions. Congress modified the Bankruptcy Code so that individuals with “regular income” could qualify for Chapter 13 bankruptcy relief. Congress made it clear that “[e]ven individuals whose primary income is from investments, pensions, social security or welfare may use chapter 13 if their income is sufficiently stable and regular.” H.Rep. No. 95-595, 95th Cong., 1st Sess. 119, reprinted in 1978 U.S.Code Cong. & Ad.News 5963, 6080.

If you have a regular income and need debt relief, you may qualify for Chapter 13 bankruptcy. A Chapter 13 bankruptcy can give you an opportunity to pay whatever you can afford to creditors over three to five years, under the protection of the bankruptcy court. At the end of the case, many debts that remain are discharged forever. Speak with an experienced bankruptcy attorney at Fears | Nachawati for more information on how Chapter 13 and the federal bankruptcy laws can help you. Call our office at 1.866.705.7584 or send an email to fears@fnlawfirm.com to set up your free consultation.

Are Car Accident Debts Dischargeable in Bankruptcy

Bankruptcy attorneys understand that disaster can strike at any moment. Individuals rarely make appointments at a bankruptcy law firm when life is going well. Bankruptcy relief is for when things have gone very wrong, sometimes unexpectedly, like in the case of a car accident. Fortunately, bankruptcy law can provide you with options to discharge debts arising from a car accident.

Property Damages
The Bankruptcy Code generally allows a debtor to discharge debts for property damage caused by an auto accident. The lone exception to this rule is Section 523(a)(6) which excepts debts from discharge “caused by willful and malicious injury by the debtor to another entity or to the property of another entity.”

The U.S. Supreme Court pointed out in Kawaauhau v. Geiger that a willful and malicious act is not the same as a negligent or even reckless act:

only acts done with the actual intent to cause injury fall within [Section 523(a)(6)’s] scope. The section's word “willful” modifies the word “injury,” indicating that the nondischargeability takes a deliberate or intentional injury, not merely . . . a deliberate or intentional act that leads to injury. 

Kawaauhau v. Geiger, 523 U.S. 57, 61–62 (1998). Most auto accidents are the result of negligence and are outside the scope of Section 523(a)(6). Even in drunk driving cases, the defendant is usually found to have exhibited actions of “reckless disregard” and not “willful and malicious.” Consequently, Section 523(a)(6) is often a losing argument in drunk driving cases involving property damage.

The exception found in Section 523(a)(6) only applies in a Chapter 7 case. There is no property damage exception in a Chapter 13 case, so any property damage caused by an auto accident is discharged in a Chapter 13 bankruptcy.

Personal injuries
The Bankruptcy Code is less forgiving of personal injuries and contains more restrictions when discharging these debts. The most restrictive of these exceptions is found in Section 523(a)(9) which excepts from discharge any personal injuries caused by operating a vehicle while intoxicated. This exception applies to bankruptcy cases filed under Chapter 7 or Chapter 13.

A bankruptcy court may find that a state court judgment satisfies all of the necessary elements to meet the exception found in Section 523(a)(9). On the other hand, the bankruptcy court is not bound by an acquittal in a state court DUI case, since the standard of proof is different in state court criminal proceedings. A bankruptcy court may find that personal injuries are not dischargeable under Section 523(a)(9) even after the debtor was acquitted of criminal DUI (or never charged at all).

When the personal injury is not caused by intoxication, Section 523(a)(6) excepts from discharge personal injuries (and property damages, see above) willfully and maliciously caused by the debtor. This section does not apply to Chapter 13 cases, which has its own provision. Section 1328(a)(4) disallows discharge of a debt for “damages, awarded in a civil action against the debtor as a result of willful or malicious injury by the debtor that caused personal injury to an individual or the death of an individual.” Note that in Chapter 7 cases, Section 523(a)(6) excepts personal or property injuries, but only if the debtor acted willfully and maliciously. In Chapter 13 cases, a debt is excepted if it is (1) to a person; (2) an award was made in a civil case; and (3) the injury caused by the debtor was willful or malicious. For further information or a free consultation contact the experienced attorneys at Fears | Nachawati today. Call us at 1.866.705.7584 or send an email to fears@fnlawfirm.com.

Can I file a Medical Bankruptcy?

Medical debt is often a major influence in the decision to file bankruptcy. Although some only want to file bankruptcy on their medical debt, there is no such thing as a "Medical Bankruptcy." Under the bankruptcy code, debtors are required to list all of their creditors in their schedules. This includes all secured creditors, unsecured creditors, and even personal loans from family and friends. It is important to keep in mind that the schedules are signed under penalty of perjury and intentionally leaving off a creditor is a violation of the bankruptcy code.

With the increasing cost of medical care, even people with health insurance may be left with significant medical debt after suffering serious aliment. An extended hospital stay or serious injury may leave someone with a large amount of medical bills which remain their responsibility after the insurance has covered a portion of the expenses. In addition, medical issues often lead to a decrease or loss of income.

Fortunately, for those faced with overwhelming medical debt, bankruptcy provides an avenue for relief. Medical debt, like general unsecured debt and secured debts which are not reaffirmed, are dischargeable through Chapter 7 and Chapter 13 bankruptcies. If you find yourself drawing in medical debt, consult a bankruptcy attorney about your financial situation. Although you will have to include all of your debt, a bankruptcy is designed to provide filers with a "fresh start" and in many cases, helps people rebuild credit quicker than slowly paying down a significant amount of debt. Contact us today for a free consultation at 1.866.705.7584 or send an email to fears@fnlawfirm.com.

Dance Mom Digs Out of Debt with Bankruptcy Help

When you’re at the end of your financial rope, bankruptcy can be a safety net. In the case of Grogan v. Garner, 111 S.Ct. 654 (1991), the U.S. Supreme Court said,

The central purpose of the [Bankruptcy] Code is to provide a procedure by which certain insolvent debtors can reorder their affairs, make peace with their creditors, and enjoy a new opportunity in life with a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.

The federal bankruptcy laws provide different relief for different situations. Sometimes a person needs to start over. A Chapter 7 bankruptcy will discharge financial obligations and give the debtor a needed fresh start. Sometimes a person needs time to reorganize his or her finances, so a Chapter 13 can provide a repayment plan over three to five years. Chapter 13 is a way to dig out of debt under the protection and supervision of the federal bankruptcy court.

Recently, TMZ reported that dance instructor and television reality star Abbey Lee Miller emerged from Chapter 13 bankruptcy on New Years Eve, 2013. Miller is the star of Dance Moms, a popular dance reality television series on Lifetime network. According to TMZ, Miller filed bankruptcy in 2010 owing more than $400,000 and was at risk of losing her home and dance studio.

Chapter 13 provided Miller with protection from her creditors and time to increase her business and personal income, largely due to the success of Dance Moms which premiered in 2011. Lifetime began airing season four of Dance Moms in January, and Miller is also hosting a second show on Lifetime, Abby's Ultimate Dance Competition. Of course, her dance studio and business is thriving due to her celebrity. TMZ reports that Miller has paid all of her creditors in full.

During Chapter 13, the debtor pays creditors whatever she can afford over three to five years (or sooner under some circumstances). Sometimes, as in Abbey Lee Miller’s case, things get a lot better after a person files bankruptcy. Miller was able to increase her income substantially and rescue her business, she just needed some time. Time provided courtesy of the federal bankruptcy laws.

Direct Payments to Secured Creditors

In a chapter 13 plan, depending on the jurisdiction, you may propose a plan that requires you to make payments to your creditors directly. Typically the ongoing mortgage payment or even a car payment can be made directly. This may also be advantageous if your payment already has a low interest rate and if the terms of the note are favorable.

Your payment will resume with the next month’s payment after the case is filed. Payments to secured creditor must be made timely. Filing for bankruptcy gives you a lot of advantages that you normally would not have with your creditors. Therefore, some of the luxuries you had outside of bankruptcy do not extend to your bankruptcy case. Most importantly you cannot be late on ongoing payments. If you had a grace period on your mortgage or other secured debt you no longer have one while in bankruptcy. If you fail to make your payments the creditor can file a motion for relief from stay and then attempt to collect on their debt. This means the secured creditor may be able to foreclose or repossess the collateral.

If you are in the middle of a chapter 13 case and you are having difficulty making your payments to your secured creditor contact your bankruptcy attorney because they can provide you with options for dealing with this issue.

If you are considering filing for bankruptcy, contact the experienced attorneys at Fears | Nachawati to set up a free consultation. Contact us at 1.866.705.7584 or send an email to fears@fnlawfirm.com.
 

How Long do I Have to Wait Before I Can File Bankruptcy Again?

If you have filed bankruptcy in the past and find yourself in need to file bankruptcy again, there are certain time limits between bankruptcy filings. The time limits will depend on which chapter you filed previously, as well as if you received a discharge and when you received it.

Previous Chapter 7
If your previous case was a chapter 7, you cannot receive a discharge in a subsequent chapter 7 case for eight (8) years.

If your previous case was a chapter 7, you also cannot receive a discharge under chapter 13 until four (4) years have passed from the date you filed chapter 7.

Previous Chapter 13
If you filed for chapter 13 previously, you cannot receive a discharge under chapter 7 within six (6) years of filing the chapter 13. There are however, exceptions to this 6 year rule. In your previous chapter 13 if you paid all your unsecured claims at 100% or if you paid at least 70% and the plan was proposed in good faith and it was your best effort, the rule does not apply.

If your previous case was a chapter 13 you cannot receive a second discharge in a subsequent chapter 13 for two (2) years from the date the first case was filed.

Previous Case Current Case Time Limit
Chapter 7 Chapter 7 8 years from date previous case was filed
Chapter 13  Chapter 7  6 years from date previous case was filed*
Chapter 7  Chapter 13  4 years from date previous case was filed
Chapter 13  Chapter 13 2 years from date previous case was filed

* With the exceptions for cases that paid 100% or at least 70% to unsecured creditors and the plan was proposed in good faith and was the Debtor’s best effort.

Filing for chapter 13 even though not eligible for a discharge
Even though you may not be entitled to a discharge sometimes a Debtor will file for chapter 7 and then turn around to file chapter 13. This is often referred to as a “Chapter 20”. The advantage here is that any unsecured debt would have been wiped out in the previous chapter 7 case, and now the Debtor can use the chapter 13 plan payment to pay off a mortgage arrearage or tax debt.

If you are considering refilling for bankruptcy, contact the experienced attorneys at Fears | Nachawati with any questions or to set up a free consultation. Call us at 1.866.705.7584 or send an email to fears@fnlawfirm.com.

 

Credit During Bankruptcy

There are many situations when a person needs credit during an open bankruptcy case. Refinancing a home mortgage, redeeming an automobile, or simply applying for a new credit card are circumstances when a debtor needs to obtain credit during bankruptcy. Fortunately, the bankruptcy process allows the debtor to obtain the credit he or she needs while concurrently pursuing a bankruptcy discharge.

When a debtor applies for credit during an open bankruptcy case, the application not only affects the debtor and the creditor, but also concerns the trustee and the bankruptcy court judge. The creditor is concerned that the bankruptcy will interfere with the extension of credit, and the bankruptcy trustee and judge are concerned how the extension of credit will affect the bankruptcy case.

Chapter 7
For Chapter 7 cases, the reach of the bankruptcy court is limited to those assets you owned and debts you owed on the date you filed bankruptcy. The judge does not have jurisdiction on financial matters after the bankruptcy (called “post-petition”). While the bankruptcy court does have jurisdiction to approve or reject a reaffirmation agreement for a pre-petition debt, the court cannot forbid a post-petition extension of credit.

Chapter 13
For Chapter 13 cases, the court has continuing jurisdiction over your finances during the bankruptcy case. A Chapter 13 debtor is required to commit all of his or her disposable income to repay creditors. Any new credit must be approved by the bankruptcy judge since a new payment obligation may impact the Chapter 13 repayment plan.

Vehicle loan
There are no prohibitions to purchasing a vehicle after filing Chapter 7 bankruptcy. Nevertheless, most lenders require the debtor to receive a Chapter 7 discharge prior to extending financing for the vehicle. The main reason for this is the potential for the vehicle and the loan to become involved in litigation. For instance, prior to receiving a discharge, the debtor may convert the case to Chapter 13, or dismiss and re-file, and attempt to modify some terms of the vehicle note (for instance, the change the interest rate or stretch the payment terms).

Obtaining a vehicle during Chapter 13 bankruptcy requires the debtor to show that the vehicle purchase is “necessary to the completion of the Chapter 13 bankruptcy plan.” In plain language, you need the car to get to work to make the money to pay the creditors in the plan. When a vehicle purchase is reasonable and necessary, the courts are generally willing to approve the purchase on credit.

Home loan
Purchasing a home during an open Chapter 13 bankruptcy is difficult, but not impossible. While individual lenders will have different approval guidelines, the debtor must first qualify for an FHA or VA guaranteed home loan, which requires:
1. written approval from the trustee and bankruptcy court for the new credit;
2. a 12 month history of perfect payments on a confirmed bankruptcy plan; and
3. no further derogatory credit entries after the bankruptcy was filed.

Home loan modification under the federal Home Affordable Refinance Program (HAMP) is specifically authorized during Chapter 13 bankruptcy. This modification of a secured debt in bankruptcy requires the permission of the bankruptcy court and trustee, and will require the debtor to amend the Chapter 13 repayment plan. One recent trend is for local courts to require mortgage mediation sessions or other court supervised processes between the debtor and lender before a loan modification may be approved.

Purchasing a home after filing a Chapter 7 bankruptcy requires re-establishing your financial profile by showing a responsible use of credit. Generally, that means two to four years of rebuilding, but in some cases the wait may be shortened. If you are considering filing for bankruptcy, contact the experienced attorneys at Fears | Nachawati with any questions. Call us at 1.866.705.7584 to set up a free consultation.

Sales Tax, Trust Fund Tax, and Bankruptcy

Contrary to popular myth, bankruptcy does not discharge every financial obligation. Congress has identified a few debts that, in fairness, should not be discharged in a bankruptcy case. Some of these debts are enumerated in Section 523 of the Bankruptcy Code, including debts for fraud or embezzlement, domestic support obligations, and student loans. Some of these debts are never dischargeable, and some may be discharged under certain conditions.

One type of debt excepted from discharge by the Bankruptcy Code is when the debtor is liable for “a tax required to be collected or withheld and for which the debtor is liable in whatever capacity.” 11 U.S.C. §507(a)(8)(C). This type of tax is commonly called a “trust fund tax,” which is a tax either paid to or withheld by a person or business and kept “in trust” to be paid over to the government. Examples of a trust fund tax include income taxes and Social Security (FICA) taxes withheld from the paychecks of employees, and sales taxes collected by vendors from their customers. Trust fund taxes do not include the employer’s matching Social Security (FICA) taxes, employment, or sales taxes not actually collected, but are due as the result of an audit, or related penalties and interest.

Even when a company or corporation protects its officers and shareholders with limited liability from business debts, a taxing authority (such as the IRS) can still “pierce the corporate veil” to determine which individual (or individuals) was responsible for collecting, keeping, and paying over taxes—this person (or persons) is called a “responsible party.” A trust fund recovery penalty may be assessed against a responsible party, which is also not dischargeable in bankruptcy. The only way for a responsible party to resolve a trust fund tax debt without payment is to wait for the ten year statute of limitations to expire.

Because trust fund tax debts are not dischargeable in bankruptcy, a responsible party unable to pay the tax debt should consider a Chapter 13 bankruptcy filing. During a Chapter 13 case, the individual submits a plan to repay the tax debt in full over three to five years. A benefit of bankruptcy is that the trust fund tax does not continue to accrue interest or penalties during the repayment period. After the debtor has paid the taxes according to the bankruptcy plan, the debt to the taxing authority is forever and completely extinguished. If you are considering filing for bankruptcy, call the experienced attorneys at Fears | Nachawati with any questions or to set up a free consultation. Call our office at 1.866.705.7584 and let us help you start over.

If your vehicle has been repossessed, you may be able to get it back by filing bankruptcy, if you move quickly.

Section 542 of the Bankruptcy Code requires that entities in possession of “property of the bankruptcy estate” are generally required to turn the property over to either the trustee (in Chapter 7) or the debtor (in Chapter 13). Section 541 of the Bankruptcy Code defines property of the estate as “all legal or equitable interests of the debtor in possession as of the commencement of the case.” The debtor’s continuing rights to and interests in a repossessed vehicle are determined by state law. In many states, these rights are only available to the debtor for a few days or weeks after the repossession (although sometimes continuing until the creditor sells the vehicle or otherwise transfers title).

If your vehicle is property of the bankruptcy estate, most courts say the creditor must return the vehicle to the estate immediately upon learning of the bankruptcy filing:
“[S]ection 362 requires a creditor in possession of property seized as security–but subject to a state-law-based residual equitable interest in the debtor–to deliver that property to the trustee or debtor-in-possession promptly after the debtor has filed a petition in bankruptcy under Chapter 13.”
Weber v. SEFCU (In re Weber), 719 F.3d 72 (2d Cir. 2013). The few exceptions to this majority rule are Bell-Tel Fed. Credit Union v. Kalter (In re Kalter), 292 F.3d 1350 (11th Cir. 2002) (applying Florida law to find no exercise of control) and Charles R. Hall Motors, Inc. v. Lewis (In re Lewis), 137 F.3d 1280 (11th Cir. 1998) (applying Alabama law).

If the creditor refuses to return the vehicle, or does not return the vehicle “immediately” upon learning of the bankruptcy filing, a bankruptcy court may sanction the creditor. The creditor is prohibited from selling or transferring estate property after the bankruptcy is filed.

Chapter 13
In a Chapter 13 bankruptcy case, a repossessed vehicle that is estate property is immediately returned to the debtor’s possession. The debtor is required to provide “adequate protection” to the creditor to assure that the property will be safeguarded (usually that means insured) and that the creditor will be adequately compensated. This usually takes place by submitting a Chapter 13 plan of repayment to the bankruptcy court. Repayment of the vehicle loan terms can be modified to alter the length of payments, interest rate, and sometimes the principal amount owed.

Chapter 7
In a Chapter 7 case, a repossessed vehicle that is property of the bankruptcy estate is turned over to the bankruptcy trustee. The Bankruptcy Code gives the Chapter 7 debtor the option to seek an order of redemption to keep the vehicle. In a redemption, the debtor pays the fair market value of the vehicle to the creditor (usually in one lump sum) and the title transfers to the debtor free and clear of all liens. If the lump sum payment is beyond the debtor’s financial ability, there are lenders available who specialize in bankruptcy redemption loans.

If you are considering filing for bankruptcy, contact the experienced attorneys at Fears | Nachawati for more information and a free consultation. Call our office at 1.866.705.7584 or send an email to fears@fnlawfirm.com.

Child Support Issues in Bankruptcy

If a debtor has a court order to pay child support, the bankruptcy code defines child support as a domestic support obligation and is non-dischargeable. This means after a successful case has been completed, and the discharge order has been granted, any remaining balance owed on the child support will continue after the bankruptcy. For this reason the debtor must list the child support creditor on the bankruptcy; the trustee in the case may request to review the child support order.

Child support is also considered a priority debt. In a chapter 13 case secured creditors (mortgage, cars, etc.) and priority creditors (domestic support, taxes, etc.) are typically paid before other creditors. Additionally, in order for a chapter 13 plan to be feasible all priority creditors must be paid in full. This means if you have a child support arrears you will need to pay the arrears off in 5 years. Typically, this can be an advantage to most debtors because child support can be paid out over 5 years as opposed to the original terms; however, this may also make the chapter 13 plan more difficult if there is a very large amount of arrears.

If a debtor is current on child support, the debtor will continue to make the payments directly or will have it withdrawn from the debtors pay check. If the child support pays off during the case the plan payment may need to be increased to adjust for the additional disposable income.

If a debtor receives child support income it is included in the bankruptcy. In a chapter 7 case this means the child support income would be included on the means test. In a chapter 13 case the child support income would be included as part of the debtor’s disposable income and can go towards the debtors plan payment. In both chapters an important distinction is the debtor will actually receive child support and is not just entitled to it.

If you pay or receive child support and are considering filing for bankruptcy, the attorney’s at Fears | Nachawati can answer your questions. Please Call us for a free consultation 1.866.705.7584 or send an email to fears@fnlawfirm.com.

High Income Chapter 13 Debtors Stay in Bankruptcy Five Years (Maybe)

When Congress amended the Bankruptcy Code in 2005, it introduced a means test to compel high income debtors to repay a greater portion of debts. Debtors with average incomes higher than their state’s median income were disqualified from filing Chapter 7 bankruptcy, and any Chapter 13 case filed by these high income debtors must repay creditors over a full five years

But what if an above-median debtor files a Chapter 13 bankruptcy, but there is no disposable income to pay unsecured creditors?

This issue has been debated by various courts with different results. Most recently, the Ninth Circuit Court of Appeals in the case of In Re Flores (9th Cir. Aug. 29, 2013) decided that above-median debtors must remain in Chapter 13 repayment for a full five years, despite not paying anything to unsecured creditors. In other words, the debtor pays any secured creditors, priority debts, administrative claims, etc., and pays nothing to unsecured creditors over five years – even if that means making a payment of zero to the bankruptcy trustee. The rationale for this strange ruling was grounded in a U.S. Supreme Court case, Lanning v. Hamilton, 130 S. Ct. 2464 (2010). In Lanning, the Court rejected a mechanical approach when calculating a debtor’s projected disposable income, and instead adopted a forward-looking approach to account for changes in the debtor’s income or expenses that are known or virtually certain at the time of confirmation. The Supreme Court decided that forward-looking approach was a common sense way to calculate a debtor’s payments to unsecured creditors in Chapter 13 bankruptcy.

The Flores court struggled with whether an above-median debtor, who was not obligated to pay anything to unsecured creditors during a Chapter 13 bankruptcy case, was still obligated under the Bankruptcy Code to remain in bankruptcy for a full 60 months. In its initial ruling in 2012, the Ninth Circuit Court held that a debtor in this position was only obligated to remain in bankruptcy for 36 months. Then, after the case was re-examined by the court of appeals judges sitting en banc, the Ninth Circuit reversed itself and joined the Sixth, Eighth, and Eleventh circuits in finding that the Bankruptcy Code requires that an above-median bankruptcy debtor must remain in Chapter 13 bankruptcy for a full 60 months. The Flores court reasoned that under the forward-looking, non-mechanical approach dictated by Lanning, the debtor must remain in bankruptcy for five years because there could be an increase in income, which would increase the amount recoverable by creditors.

The Flores decision rests on the dynamic tension between the debtor’s income at the time of confirmation and what may happen in the future. And a lot may happen. In some cases the debtor’s income increases, which means that unsecured creditors may be paid something. But other times the debtor’s income decreases. Interestingly, many courts around the country are now permitting debtors, who were above-median at the time of the case filing and placed into 60 month plans, to modify their bankruptcy cases to reduce the time of repayment to a minimum 36 months when the debtor’s income drops below the state median income level. So stay tuned, this debate isn’t over yet!

If you need bankruptcy relief, but earn a high income, speak with an experience bankruptcy attorney and discuss your options. The federal bankruptcy laws are constantly changing and you need an experienced guide to help you navigate your case to a successful conclusion. Call the experienced bankruptcy attorneys at Fears | Nachawati Law Firm for more information and a free consultation. Contact us by calling 1.866.705.7584 or sending an email to fears@fnlawfirm.com.

What is a "priority debt" and how will it affect my Chapter 13 case?

When you file a Chapter 13 there are certain debts you are required to pay 100% while you are in the Chapter 13 plan. The two categories of debts that you typically absolutely have to pay in a Chapter 13 are: 1) “Secured debts” (debts secured by collateral on which you have fallen behind and want to keep) and 2) “priority debts”.

What are priority debts? A priority debt is a category of certain debts that Congress thought was so important to be paid that you have to pay them 100% in order to be in a Chapter 13. The two most common types of priority debts required to be paid in a Chapter 13 are taxes and domestic support obligations.

Outstanding tax obligations such as IRS and state taxes are also priority debts. These are typically taxes owed for recent tax years and taxes owed for late-filed returns. The most common examples are 1040 taxes. These debts must be paid 100% through a Chapter 13 plan.
Another common type of priority debt is domestic support obligations, such as past-due child support or alimony. If these are debts are not paid while in the Chapter 13, the Attorney General will most likely ask for dismissal of the case.

So how do these priority debts typically affect a Chapter 13 plan? Say, for example, you are filing a Chapter 13 to catch-up on your mortgage to prevent foreclosure. You are behind $5,000 on your mortgage. You are behind $5,000 on child support, and you owe $8,000 to the IRS. In this hypothetical situation what would your payment be? Since a Chapter 13 plan can last for 60 months, and you are required to pay 100% of the debts listed, the payment would be at least $18,000 divided out over the 60 months ($300/month).

If you have questions about how a Chapter 13 bankruptcy works, or you would like a free consultation contact the attorneys at Fears Nachawati today! Call us at 1.866.705.7584 or send an email to fears@fnlawfirm.com.

Purchasing a Home after Bankruptcy

Various government programs are available to assist individuals in purchasing real estate. Naturally, wherever there is government, there are rules—many rules. But on a positive note, a history of bankruptcy is not a death blow to home ownership. Below are general guidelines for purchasing a home after bankruptcy.

 

2013 FHA Guidelines –You may apply for a FHA insured loan as early as one (1) year after bankruptcy if you experienced an economic hardship that caused more than a 20% drop in household income. Otherwise, you must wait two (2) years after a Chapter 7 bankruptcy discharge and one (1) year after a Chapter 13 bankruptcy has been discharged or dismissed. The minimum down payment is 3.5% and credit must be re-established with a 640 minimum credit score.

 

A Chapter 13 debtor who has made twelve (12) timely payments on a confirmed plan can qualify for a FHA loan if there are no other credit delinquencies and if they receive bankruptcy court permission.

 

2013 VA Guidelines – The VA Lender Handbook spells out guidelines for a veteran to qualify between one (1) and two (2) years after a bankruptcy discharge:

  1. The borrower and/or co-borrower must reestablish satisfactory credit, and
  2. The bankruptcy must have been caused by circumstances beyond the borrower or co-borrower’s control (such as unemployment, medical bills, etc.)

 

If you have finished making all payments in a Chapter 13 bankruptcy case, the lender may conclude that you have reestablished satisfactory credit. If you have satisfactorily made at least 12 months worth of the payments and the Trustee or the Bankruptcy Judge approves of the new credit, the lender may give favorable consideration. In this situation 100% financing is available and credit must be re-established with a minimum 620 credit score

 

2013 USDA Guidelines - You may apply for a USDA rural loan three (3) years after the discharge of a Chapter 7, or one (1) year after a Chapter 13 bankruptcy (with evidence of twelve months of timely plan payments). In this case 100% financing is available. The USDA does not enforce a credit score minimum, but generally at least a 640-660 score is required.

 

2013 Conventional (Fannie Mae) - You may apply for a Conventional Fannie Mae loan after your Chapter 7 bankruptcy has been discharged or dismissed for four (4) years, two (2) years from the discharge of a Chapter 13.  A two (2) year waiting period for Chapter 7 debtors is allowed if certain “extenuating circumstances” can be documented.  The time is extended to sixty (60) months if there are multiple bankruptcies within the last seven (7) yrs. There is a minimum down payment is 5% and credit must be re-established with a minimum 680 credit score.

 

2013 Conventional (Fannie Mac) – This loan guarantee generally requires a borrower to wait eighty-four (84) months (that’s 7 years!) after bankruptcy unless either “extenuating circumstances” are met (then the waiting period is 24 months) or when “financial mismanagement” is present (then the waiting period is 48 months). The minimum down payment is 5% and a 680 credit score with a perfect rental history are required.

 

2013 Jumbo Mortgage Guidelines - You may apply for a Jumbo mortgage loan once any chapter of bankruptcy has been discharged for four (4) years. That waiting period is extended to five (5) years if multiple bankruptcies are present on the credit profile.

Negative Aspects of Bankruptcy

Bankruptcy attorneys are in the business of representing bankruptcy clients. Consequently, asking a bankruptcy attorney whether you should file bankruptcy is a lot like asking the salesman at the Ford dealership whether you should buy a new Chevy Camaro. You will likely get a very biased and self-serving answer. So today, instead of extolling the virtues of bankruptcy, let’s take a hard look at the down-side of filing bankruptcy.

 

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Are Traffic Tickets Dischargeable in Bankruptcy?

The general rule is a bankruptcy does not discharge any fine or penalty payable to a governmental unit. Specifically in Chapter 7 section 523(a)(7) it forbids the discharge of civil penalties or criminal fines. This means that in a Chapter 7 bankruptcy government fines are not wiped out. However in a Chapter 13 case they may be dischargeable.

Bankruptcy Code 1328(a)(3) allows a Chapter 13 debtor to discharge non-criminal government fines if he completes all the court approved plan payments. This can sometimes include minor offenses such as parking tickets, speeding, or failing to stop at a stop sign. Even if the debt would not be dischargeable, some or all of the debt may be paid during the Chapter 13 plan. Furthermore the automatic stay does stop the creditor, in this case the government, from collecting from the debtor during the 3-5 year plan payment. This means that the Debtor can reorganize their other debts and then pay the traffic debt after the bankruptcy has completed if it has not been paid or discharged.

Another exception is a fee might be dischargeable when it is meant to reimburse a governmental entity for money it has actually spent or financial loss it has actually incurred, separate and apart from any related fines and penalties. A good example is when a city bills you for demolishing an illegal structure or clearing derby from your property. The costs of removal would be dischargeable, while any penalties or fines from having the illegal structure on the property would not be. These fees might be dischargeable in bankruptcy because they were an attempt to recover the actual costs involved in clearing, replacing, or demolishing rather than the penalty.

For more information and a free consultation, contact the experienced attorneys at Fears | Nachawati by calling 1.866.705.7584 or sending an email to fears@fnlawfirm.com.

Proof of Claim

A proof of claim in bankruptcy is a document filed with the bankruptcy court that registers a claim against the debtor’s bankruptcy estate. A proof of claim may always be filed in a Chapter 13 case, but is only allowed in a Chapter 7 when there are available assets to distribute to creditors.

The proof of claim sets out the amount owed to the creditor as of the date of the bankruptcy filing and, if relevant, any claimed priority status. The proof of claim can be filed by a creditor, or the trustee or debtor if the creditor does not file one first. Upon receipt of a claim, the Chapter 13 trustee, debtor, or creditor may object to the proof of claim. Some of the reasons for filing an objection are:

  • the claim is unliquidated, meaning the exact amount hasn’t been determined (such as in a lawsuit without a final judgment);
  • the claim does not account for set-offs that benefit the debtor;
  • the amount of the claim is in dispute; or
  • the creditor claims a higher priority than it is entitled to.

An objection to a proof of claim must be made in writing and filed with the bankruptcy court. A copy of the objection and the notice of court hearing date are mailed to the creditor, the trustee, and the debtor. If the creditor fails to respond to the objection by the time set forth by the court, the objection will be upheld. If the creditor responds to the objection, the issue is tried before a bankruptcy judge who will either uphold the objection and disallow the claim or overrule the objection and allow the claim.

If creditors are entitled to file claims in your bankruptcy case, it is important to monitor these claims closely for errors. Because the trustee may only pay creditors who file claims, debtor’s counsel should file secured claims for creditors the debtor wants to pay, such as a home loan or car payment. Failure to file a proof of claim could result in losing the asset. For more information or a free consultation, please contact the experienced bankruptcy attorney’s at Fears | Nachawati Law Firm by calling 1.866.705.7584 or sending an email to fears@fnlawfirm.com.

Mortgage Tax Break Set to Expire

As a general rule, any debt cancelled or forgiven by a creditor must be added to the individual’s income for tax purposes. At the end of the year, a creditor who cancels of forgives a debt must send an IRS Form 1099-c to the Internal Revenue Service and to the taxpayer. Called “cancellation of debt” by the IRS, a cancelled or forgiven debt is no longer borrowed money that will be repaid; it is income that the taxpayer must claim on his or her tax return.

For example, say you borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which is generally taxable income to you. Cancelled debts can arise from charged off loans, debt repayment plans, foreclosures, and short sales.

After the housing bubble burst and many Americans lost their homes, Congress enacted the Mortgage Debt Relief Act of 2007. The Act generally allowed taxpayers to exclude income from a cancelled or forgiven debt after they lost their homes. In other words, the Act meant that taxpayers did not have to pay taxes on any loan deficiency if the home was lost to foreclosure or sold in a short sale.

The Act was intended as short-term relief to help taxpayers avoid high tax debt. It was initially set to run until the end of 2009, but was extended for another three years, then extended again to the end of 2013. It will now expire on December 31, 2013. The Washington Post reports that it is unlikely that Congress will extend this relief again.

This is very troubling news to homeowners still struggling to pay or modify underwater homes. Without this relief, many individuals who lose their homes to foreclosure may be charged huge tax bills many months or even years after foreclosure. Since new tax debts are not dischargeable in bankruptcy, individuals will now suffer the injury of tax debt on top of the insult of losing a home. A large non-dischargeable tax debt can make it impossible to financially recover for many years.

Some states avoid this imputed income problem by prohibiting the lender from assessing a deficiency against a foreclosed home. However, most states do not have this provision, and some only protect certain home deficiencies (such as from a primary home mortgage) and not others (such as a deficiency from a home equity line of credit).

If you are facing a foreclosure sale on your property, discuss your options with an experienced bankruptcy attorney. Filing bankruptcy before foreclosure can avoid the nightmare of cancellation of debt income. Your bankruptcy attorney can review your case and offer a legal solution to your financial problems. For more information and a free consultation contact the experienced attorneys at Fears | Nachawati by calling 1.866.705.7584 or sending an email to fears@fnlawfirm.com.

Bankruptcy Statements

As a part of your bankruptcy petition you will also attach certain statements. This article will describe the various statements that are common in a consumer bankruptcy case.

The Statement of Financial Affairs
This statement is the big picture the debtor’s finances over the last couple years leading up to the bankruptcy. This document will list your previous year’s income—payments to creditors and family members—and will list information about other transfers or business transactions. This document is extremely detailed and an experienced attorney should help you fill it out. The Trustee in your bankruptcy case will want to make sure that the information is correct and will look for certain transfers that may be an issue in your case.

The Chapter 7 Statement of Intention
The statement of intention, like the name suggests, provides the Debtor’s intentions towards certain debts and contracts in the case. Typically, in a consumer case, only the Debtor’s secured debt and leases are listed. This statement is where the Debtor will inform the court and creditors if they intend to keep and reaffirm a debt or if they intend to surrender the debt.

The Chapter 7 Statement of Current Monthly Income and Means-Test Calculation
Usually, this statement is called the means test; this statement is used to determine if you qualify for a chapter 7 case. The first part of the test averages your previous six months income and compares it to the median income for your household size. If you are below the median the test stops there; being below median means that the bankruptcy code has determined that you have no disposable or extra income that should pay your unsecured creditors. If you are above median you move on to the second part of the text that deducts your expenses from your average income to see how much, if any, disposable income you have remaining. The expenses are tied to the IRS standard expenses but in some areas the bankruptcy code allows you to depart from the standard expenses. If after all the deductions are removed and you have no additional disposable income, you will qualify for a chapter 7 case.

The Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income
This statement looks nearly identical to the chapter 7 means test but has a few differences. The chapter 13 statement calculates if you qualify for a 3 year plan or a 5 year plan, by comparing your average income to the median income as in chapter 7. If you are below the median income you qualify for a 3 year plan, and if you are above it you qualify for a 5 year plan. The second part of the test as in chapter 7 deducts your expenses from your average income to see how much, if any, disposable income you have remaining. After the test is complete if there is disposable income remaining this amount would be multiplied by 60 (60 Months in a 5 year plan) and is used to determine how much should be paid to your unsecured creditors. The chapter 13 statement is a very complicated statement and is usually reviewed with a great deal of scrutiny. Your attorney will need to go over all of your income and expenses with you to ensure that it is filed correctly.

As with all bankruptcy paperwork, the statements you make are crucial to the success of your case. They are signed under penalty of perjury and must be filled out accurately. For more information and a free consultation, contact the experienced attorneys at Fears | Nachawati by calling 1.866.705.7584 or sending an email to fears@fnlawfirm.com.

Buying a Car During Chapter 13 Bankruptcy

Being in Chapter 13 also means that you must play by the bankruptcy court’s rules. One rule is that you may not use credit during the bankruptcy case. So what happens if you need to replace your vehicle during your bankruptcy case?

Buying with cash
A bankruptcy debtor may buy a car with cash during an open Chapter 13 case without permission from the trustee or bankruptcy court. There is one caveat: if your bankruptcy plan requires you to pay all disposable income to the trustee for the benefit of creditors, you may not use a bonus check, tax refund, or other irregular income unless you have permission from the trustee. As always, it is advisable to speak with your attorney before making a large cash purchase during Chapter 13 bankruptcy.

Getting a loan during Chapter 13 bankruptcy
Financing a car loan during bankruptcy requires a few steps. Since the monthly payment must be approved by the trustee and bankruptcy court, the first step is to ask your attorney what the trustee will ordinarily sanction. First, your attorney will contact the trustee to receive consent. After that, you and your attorney should start the process of obtaining court approval by filing a written motion. Your motion will include the following information:

1. Why you need to purchase a vehicle
2. Are you trading in a vehicle
3. How much you plan to spend
4. How much you will put down and amount financed
5. The approximate amount on monthly payments, term, and interest rate
6. How the new payment will affect your Chapter 13 plan.

The motion will request the court to issue an order allowing you to proceed with the purchase and financing of the vehicle based on the terms outlined in the motion. You may also need to modify your Chapter 13 Plan. In some cases you may be able to reduce the amount paid to unsecured creditors in order to afford the new car payment. Your attorney may also need to amend your bankruptcy schedules.

Once you receive the court’s permission, you can go car shopping! Unless you have already obtained financing, you will need to seek a loan from one of the car dealer’s lending sources. This often requires substantial leverage and influence, so generally dealing with a large dealer is preferable over a smaller dealership. Larger dealerships are often better at overcoming difficult credit issues, such as an open bankruptcy case. It may also be worth a telephone call to the dealership to discuss your situation before actually visiting the lot. If you or a loved one have questions about these issues or are considering filing bankruptcy, please contact the experienced attorneys at Fears | Nachawati for information or a free consultation. Call us at 1.866.705.7584 or send an email to fears@fnlawfirm.com.

Justice Department Announces New Means Testing Figures

The United States Trustee Program, a component of the Department of Justice, recently released new median income information to be used in determining bankruptcy eligibility. The bankruptcy means test is meant to identify individuals and families with higher incomes and encourage repayment of debts. Debtors with a family income above their state’s median income for that family size must complete additional testing to qualify for Chapter 7 bankruptcy or to calculate monthly disposable income paid during Chapter 13. Those below the state median income are immediately eligible for Chapter 7 bankruptcy.

In many states the median income levels have dropped, making it easier to avoid payment to unsecured creditors in either Chapter 7 or Chapter 13 bankruptcy. The new state median incomes per family size are listed below which is found at the UST website. If you or a loved one is considering filing bankruptcy please contact the experienced attorneys at Fears | Nachawati for a free consultations or further questions. You can contact us by calling 1.866.705.7584 or sending an email to fears@fnlawfirm.com.

 

     

FAMILY SIZE

 

STATE

1 EARNER

2 PEOPLE

3

PEOPLE

4

PEOPLE *

ALABAMA

$39,768

$48,770

$51,621

$66,434

ALASKA

$53,489

$76,118

$82,377

$85,581

ARIZONA

$41,993

$55,022

$56,503

$64,604

ARKANSAS

$37,081

$46,495

$50,755

$58,333

CALIFORNIA

$47,798

$62,009

$66,618

$75,111

COLORADO

$50,242

$65,701

$71,138

$83,330

CONNECTICUT

$60,403

$72,761

$86,254

$104,670

DELAWARE

$51,711

$62,350

$68,439

$85,806

DISTRICT OF COLUMBIA

$45,793

$89,233

$89,233

$101,582

FLORIDA

$41,334

$51,839

$53,952

$63,196

GEORGIA

$40,631

$52,610

$55,829

$68,085

HAWAII

$52,975

$65,708

$80,618

$83,538

IDAHO

$40,303

$51,105

$52,366

$59,971

ILLINOIS

$47,536

$61,253

$70,014

$81,680

INDIANA

$41,250

$51,926

$61,021

$71,113

IOWA

$42,346

$58,057

$64,027

$76,173

KANSAS

$43,793

$57,502

$65,394

$72,453

KENTUCKY

$40,633

$47,788

$53,639

$67,839

LOUISIANA

$38,639

$49,078

$53,768

$68,890

MAINE

$40,560

$53,979

$61,702

$72,841

MARYLAND

$58,202

$75,992

$86,655

$105,685

MASSACHUSETTS

$55,794

$69,569

$84,269

$105,299

MICHIGAN

$44,072

$52,540

$61,110

$74,863

MINNESOTA

$48,876

$64,454

$77,579

$90,945

MISSISSIPPI

$35,306

$44,149

$44,149

$51,140

MISSOURI

$40,994

$51,421

$57,468

$72,230

MONTANA

$40,419

$55,715

$60,107

$69,954

NEBRASKA

$41,866

$59,564

$61,380

$73,402

NEVADA

$41,054

$55,349

$55,349

$61,732

NEW HAMPSHIRE

$52,588

$67,408

$82,656

$97,499

NEW JERSEY

$60,317

$70,150

$85,575

$103,946

NEW MEXICO

$38,914

$49,538

$50,548

$55,184

NEW YORK

$47,414

$59,631

$70,151

$83,614

NORTH CAROLINA

$40,736

$51,662

$55,049

$66,147

NORTH DAKOTA

$44,098

$61,172

$72,041

$87,154

OHIO

$43,057

$53,075

$60,679

$76,381

OKLAHOMA

$39,749

$51,097

$55,641

$64,916

OREGON

$44,779

$55,568

$60,693

$70,812

PENNSYLVANIA

$47,119

$55,872

$70,092

$81,961

RHODE ISLAND

$48,651

$61,510

$74,720

$91,592

SOUTH CAROLINA

$39,301

$48,891

$54,010

$62,490

SOUTH DAKOTA

$39,040

$56,899

$60,259

$75,267

TENNESSEE

$39,759

$48,053

$56,042

$62,805

TEXAS

$41,354

$56,296

$59,567

$68,566

UTAH

$49,347

$57,734

$65,311

$70,176

VERMONT

$43,772

$60,346

$67,388

$79,128

VIRGINIA

$51,817

$65,510

$75,774

$90,945

WASHINGTON

$52,996

$63,409

$72,286

$84,970

WEST VIRGINIA

$42,415

$45,284

$54,229

$65,442

WISCONSIN

$43,958

$57,903

$67,808

$80,198

WYOMING

$51,116

$65,237

$70,319

$76,120

         

* Add $8,100 for each individual in excess of 4.

   

Bankruptcy Schedules

The bankruptcy schedules are designed to list all of your assets, debts, income, and expenses. This article will outline the different schedules and the information you should disclose in a common consumer bankruptcy case.

Schedules A and B

Schedules A and B list all of the assets the debtor owns. Specifically, schedule A lists all the real property the debtor owns. This means all land, houses, oil and gas interests, time shares, future interests in real property, and any other real-estate. The debtor will also list the value of such property and the amount of any secured claim on the property. Schedule B lists all personal property—essentially everything else. This list would contain all monies in cash or bank accounts, all security deposits, all household items, art, pictures or prints, jewelry, sporting equipment, clothing, cars, boats and pets. Some commonly missed items include: stocks, bonds, or other investments; life insurance policies (especially those with a cash value); an interest in a business or partnership; an entitlement to an inheritance from a deceased person;  property held for you in trust; or entitlement to sue someone for money damages (car accident, personal loan, etc.).

 

Schedule C

Schedule C lists all your exemptions. Generally exemptions are the particular code that protects your property. In Texas you can use either the Texas exemptions or Federal exemptions. Both exemptions have their advantages and disadvantages and it is important that you speak to attorney about which set you should use. Any non-exempt property can be sold to pay creditors in a chapter 7 case and can cause your plan payment to increase in a chapter 13.

Schedules D, E and F

On schedules D, E and F you list all of your creditors. Specifically, schedule D lists all of your secured creditors. A secured creditor is a creditor who holds an interest in collateral you are purchasing. The most common examples are a mortgage, a car note, and a purchase money agreement (typically for furniture or other household items). In order to keep the collateral the debts must be satisfied (paid). Schedule E lists all of your priority debt. The typical priority debts in a consumer case are income taxes and/or a domestic support obligation (such as child support or alimony). Priority debts are generally non-dischargeable debts that congress has decided are entitled to special treatment. In a chapter 7 case these debts will pass through the bankruptcy and in a chapter 13 case these debts must be paid during the life of the plan. Schedule F lists all of your general unsecured debts. This is essentially all other debts, including: credit cards, medical debt, student loans, pay day loans, deficiencies on surrendered or repossessed collateral, and personal loans. These debts, with the exception of student loan debt, will be discharged or wiped out at the end of the bankruptcy case.

Schedule G

Schedule G lists any leases or executory contracts you are a party to. An executory contract is one where both parties have the ability to breach, or break the contract.  In a typical consumer case you will list any residential leases or car leases on schedule G. These leases are either assumed or rejected—meaning you either keep the lease or you don’t. If you reject the lease then any remaining default is discharged in the bankruptcy.

Schedule H

Schedule H lists any co-debtors. This is where you list any co-signers on any of your debts. If a married couple is filing they do not need to list each other on the petition, but if one spouse is filing individually they need to be listed.

Schedule I and J

On Schedule I you list all the sources of income you have in the household. In Texas, under the 5th circuit opinion, all income—with the exception of social security income—must be listed on the schedule I. In addition to wage income, types of income include: family contributions, unemployment, retirement, child support, disability (non-social security); real-estate or rental income, interest and dividends, pension, and any other sources. On schedule J you list your budget or your expenses. While everyone’s budget is unique the Trustee will compare your budget to the IRS standard expenses for your household size. If your budget item is higher than the IRS standard amount your budget may be under scrutiny and you may need to provide supporting documentation to explain why your budget is higher.

In conclusion, bankruptcy schedules are a highly detailed and important part of your bankruptcy case. They are signed under penalty of perjury and must be filled out accurately. For more information and a free consultation, contact the experienced bankruptcy attorneys at Fears | Nachawati by calling 1.866.705.7584 or by sending an email to fears@fnlawfirm.com

The Affects Bankruptcy can have on a Co-signer

On Schedule G of any bankruptcy petition you will find a list any co-debtors or co-signers that you may have on any of your debts. In a chapter 7 case your co-signer is not affected by the bankruptcy filing, for better or for worse. The co-signer’s credit is not impacted by the filing and they do not take any hits on their credit report. However, the co-signer is also not stayed from collections and is not discharged at the end of the case. This may or may not be a problem depending on the type of debt and the Debtor’s intentions. If the debt is a secured debt like a mortgage or a car payment then the Debtor has an option to reaffirm the debt and continue making payments. Therefore the co-signer is not harmed by the filing since the Debtor will continue to perform on the contract. As it is, outside of bankruptcy if the Debtor defaults the co-signer becomes responsible. Similarly if the debt is student loan debt, the debt will not be discharged at the end of the case and the Debtor will still need to make payments. If the Debt is a general unsecured debt the debt will most likely be discharged and the co-signer will remain obligated.


In a chapter 13 case the co-signer is impacted by the bankruptcy filing. The co-signer is afforded a co-debtor automatic stay. Because the bankruptcy code anticipates that in order to propose a successful plan of reorganization, the Debtor and co-debtor should be stayed so the plan can be confirmed. Like the automatic stay for the Debtor, the co-debtor stay, prevents any collecting proceedings to be brought against the co-debtor. The co-debtor stay can be lifted for the same reasons the debtor’s stay can be lifted.


In many cases the Debtor is the co-signer and the no filing Debtor is the primary on the note. In this situation any dischargeable debt can be surrendered and discharged by the filing Debtor and the co-debtor will stay responsible. If you have any further questions about what affects bankruptcy may have on a co-signer, call the experienced bankruptcy attorneys at Fears | Nachawati. If you are considering filing bankruptcy call us for a free consultation at 1.866.705.7584, or send an email to fears@fnlawfirm.com.

What is the Section 341 Meeting of Creditors?

Many debtors are surprised to learn that when they file bankruptcy they typically do not have to go in front of a judge. The one time that debtors typically have to attend “court-like” proceedings is the Section 341 Meeting of Creditors, often also referred to as the “Trustee Meeting”.

Many people get nervous when they hear talk of a “creditor’s meeting” and they picture a bunch of people in suits yelling at them. That is not typically what happens at the 341 meeting. At the Trustee meeting creditors do not typically show up. It is typically just a debtor, their attorney, and the Trustee. The Trustee is appointed by the Department of Justice to oversee bankruptcy cases. The Trustee’s role is to represent the creditors. It is an important distinction to note that while the Trustee represents the creditors, he/she does not work for the creditors.

The Trustee’s job is essentially to review a debtor’s bankruptcy petition and see if there are any assets to distribute to creditors.  Once the Trustee reviews a debtor’s petition, he will typically ask the debtor questions about the petition. For instance, the Trustee will commonly ask debtors how they have valued their property, where they are currently working, etc. This meeting can last from 10 – 15 minutes.

The only things clients are typically responsible for bringing to this meeting are a social security card and drivers license to prove their identity. Sixty days after the Trustee meeting, a debtor will typically receive their discharge which legally erases most unsecured debts. If you, a family member, or a friend are considering bankruptcy and have questions, contact the attorneys at Fears | Nachawati today and they will be happy to help! Call us at 1.866.705.7584, or send an email to fears@fnlawfirm.com.   

Be Careful When Filing a Second Bankruptcy

Even though the bankruptcy rules are very flexible, sometimes it makes sense to dismiss a bankruptcy case and refile later. This is especially true when circumstances change, such as a temporary loss of income.

In order to combat the appearance of “bankruptcy abuse,” Congress enacted new restrictions for repeat filers in 2005. One of those restrictions is found in section 362(c)(3)(A) of the Bankruptcy Code, which limits the automatic stay to thirty days after filing for a debtor who files a second bankruptcy case within one year of a prior dismissal. Specifically, the law states:

(3) if a single or joint case is filed by or against a debtor who is an individual in a case under chapter 7, 11, or 13, and if a single or joint case of the debtor was pending within the preceding 1-year period but was dismissed, other than a case refiled under a chapter other than chapter 7 after dismissal under section 707(b)--

 

(A) the stay under subsection (a) with respect to any action taken with respect to a debt or property securing such debt or with respect to any lease shall terminate with respect to the debtor on the 30th day after the filing of the later case[.]

The Bankruptcy Code also provides that a debtor may ask the court to extend the automatic stay, but only if a motion is filed and the matter is heard before the expiration of the thirty day period. Most courts agree that the automatic stay cannot be extended once the thirty day period has expired. After filing the second bankruptcy case, the debtor must quickly file a motion to extend the automatic stay and request a hearing. Otherwise, the period may run and the debtor may lose automatic stay protection.

But some clever attorneys have asked, “what exactly is at risk?”

Like many of the new provisions of the Bankruptcy Code added in 2005, this new law is full of holes and ambiguities. The most glaring in this case is what stay protection terminates “respect to the debtor.” A minority of courts, including the Ninth Circuit Bankruptcy Appellate Panel, interpret what Congress means. These courts say that Congress meant to say that all automatic stay protections are lost at the end of the thirty days. See In re Reswick, 446 B.R. 362 (9th Cir. BAP 2011)

The majority of bankruptcy courts, including a recent decision out of the Northern District of Texas (In re Williford, Bankr. Court, ND Texas, 2013), interpret what Congress actually says. What the statute says is that the stay terminates with respect to the debtor, meaning the debtor and the debtor’s exempt property. Under this interpretation, the automatic stay is not terminated as to the debtor’s property that is part of the bankruptcy estate.

Bankruptcy law can be very convoluted. You need the assistance of an experienced bankruptcy attorney to guide you through the law, rules, caselaw, and political leanings of the judge. For more information or a free consultation please contact us at Fears | Nachawati Law Firm by calling 1.866.705.7584

Income Tax Issues in Bankruptcy

Bankruptcy law and tax law are two separate areas of law but the two often intersect.  In order to successfully complete a bankruptcy case you must often be in compliance with tax code provisions and tax issues can be resolved with the bankruptcy process. Find some examples below of common tax issues in a chapter 7 and chapter 13 bankruptcy cases.

Is Tax Debt Dischargeable in Bankruptcy

As a general rule tax debt is not dischargeable in bankruptcy. Sometimes old tax debt can be discharged.  The analysis for discharging tax debt is complicated and usually requires an attorney to review.  There are five rules for discharging tax debt. The debt must meet all five of the rules to be dischargeable. Those rules are:

1.    The due date for filing a tax return is at least three years ago.

2.    The tax return was filed at least two years ago.

3.    The tax assessment is at least 240 days old.

4.    The tax return was not fraudulent.

5.    The taxpayer is not guilty of tax evasion.

 If you believe that your debt may qualify it’s a good idea to provide your attorney your tax transcript for the year you owe. It will usually contain the information you need.

Tax Debt in Chapter 13

In order to get your chapter 13 case confirmed the past 4 years tax returns must be filed with the IRS.  While the bankruptcy code requires the past 4 years it is usually a good idea to file all necessary returns. If you have not filed the IRS may show that you owe money. If that is the case you would want to make sure that the debt is paid in the chapter 13 plan.

Any tax debt that you owe can be classified three different ways. Normally tax debt is entitled to a priority. This means that the debt is not dischargeable and needs to be paid out over the life of the chapter 13 plan. This is true for most IRS debt and thus a chapter 13 case can be a good way to pay off your taxes. If there is a tax lien in place then the IRS Debt is secured. This means that the IRS has a security interest in all of your property.  You will then have to pay the IRS up to the value of all your property, which you will have listed on schedule B of your petition. Lastly IRS debt can be general unsecured debt.  This means that the IRS collects only a pro rata share along with all your other unsecured debt. Then, at the end of the case some or all of the IRS debt may be discharged.

 

If you have mounting tax issues contact the experienced attorney’s at Fears | Nachawati 1.866.705.7584

Inheritance During Chapter 13 Bankruptcy

Just as debts incurred after a case is filed are not subject to the bankruptcy discharge, so is property acquired after bankruptcy not at risk of turnover in a Chapter 7 case. Essentially, whatever you own is used to pay whatever you owe, and the rest is discharged at the end of the Chapter 7 case.

One exception to this general rule is an inheritance. Since bankruptcy attempts to balance the rights of the debtor with the rights of creditors, it would not be fair to allow a debtor who is expecting an inheritance to file bankruptcy, discharge all of his debts, and then collect a fat inheritance. Consequently, Congress enacted section 541(A)(5)(a) of the Bankruptcy Code which states that an inheritance can be used to pay creditors (i.e. included in “property of the debtor’s estate”) if the debtor acquires or becomes entitled to acquire the inheritance within 180 days after filing bankruptcy. In other words, if your aunt Bessie dies within 6 months of your bankruptcy filing, the trustee could take the inheritance to pay your creditors, even after your case is closed.

While the above is the rule for Chapter 7 cases, it is different for Chapter 13 debtors. In a Chapter 13 case, the debtor is expected to contribute whatever he reasonably can to pay his creditors. In the case of an unexpected inheritance during a Chapter 13 case, the debtor must pay the inheritance into the plan, minus any exemptions. Yes, even if the right to the inheritance arises more than 180 days after the bankruptcy filing date.

The Fourth Circuit Court of Appeals recently made this issue clear when it decided the case of Carroll v Logan. In Carroll, the debtors filed bankruptcy; then received an inheritance of $100,000 three years later during the repayment period of their Chapter 13 case. The bankruptcy Trustee moved to modify their plan and pay the $100,000.00 to creditors. The debtors objected, arguing that section 541 states that inheritance property is “property of the estate” only when the right to acquire it occurs within 180 days of the bankruptcy filing date. In this case the right to the inheritance was well outside that 180 day limit.

The trustee countered that section 1306 of the Bankruptcy Code expands section 541 to include property acquires after commencement of the case but before the case is closed, dismissed, or converted to a case under a different chapter. The bankruptcy court and the appellate courts agreed with the trustee, and approved the order to pay the $100,000.00 inheritance into the plan.

Interpreting the Bankruptcy Code is challenging work, even for skilled professionals. That is why it is critical to hire counsel for your bankruptcy case who is committed to staying informed of trends and changes in the bankruptcy world. If you are considering bankruptcy, contact the experienced bankruptcy attorneys at the Fears | Nachawati Law Firm for a free consultation by calling our office at 1.866.705.7584.

 

Bankruptcy Can Help Avoid Foreclosure

Bankruptcy attorneys often advertise that filing bankruptcy can stop foreclosure. However, because of the self-serving interest bankruptcy attorneys have in the matter, it is understandable that consumers have difficulty trusting mere advertising. Now, a new paper from researchers at the University of North Carolina concludes that filing bankruptcy is, in fact, effective in avoiding a foreclosure sale.

The researchers analyzed 4,280 lower-income homeowners who were more than 90 days late on their 30-year fixed-rate mortgages. They found that when a homeowner in the midst of foreclosure filed for bankruptcy, a future foreclosure auction was 70% less likely to occur. While both Chapter 7 and Chapter 13 reduced the chances of a subsequent foreclosure auction, a homeowner who filed Chapter 13 was five times more likely to retain his home.

A copy of the paper can be found at www.ssrn.com

Filing bankruptcy immediately stops the foreclosure process by virtue of the automatic stay injunction. Bankruptcy debtors are given time to reorganize their finances and negotiate with their mortgage company for a resolution. If there is no agreement reached with the creditor, the homeowner has options, including:

• walking away from the home and surrendering the property back to the bank;
• stripping off an entirely unsecured junior mortgage;
• forcing the bank to accept payments over three to six years for any mortgage arrears; or
• entering a home modification program to reduce principal and/or interest.

Filing for federal bankruptcy protection shifts the balance of power away from the foreclosing creditor and places it into the hands of the consumer debtor. Throughout the bankruptcy process, the creditor must answer to the federal bankruptcy court and negotiate directly with the debtor’s attorney.

Bankruptcy can be a very effective option when the bank is unwilling to work with you.
If you own a home that is in danger of foreclosure, speak with an experienced bankruptcy attorney at the Fears | Nachawati Law Firm and discuss your options. For a free consultation, contact our office at 1.866.705.7584.

Answering Chapter 7 Trustee Questions at the 341 Meeting

Your Chapter 7 bankruptcy meeting of creditors (also called the “341 meeting” or “Trustee’s meeting”) can be intimidating. Fortunately, you have selected experienced counsel and have cooperated to provide honest and accurate financial information. At this point, your attorney has a good handle on the case, but one wildcard still remains:
your nervousness.

When people get nervous they often either clam up or they talk too much. Neither case is beneficial when answering the Trustee’s questions. Below are some general guidelines that will help you answer the Trustee’s questions without complicating your case.

Tip #1: Breathe
Remember that the 341 meeting is not “court” and the Trustee is not a judge. However, the Trustee should be shown professional respect and always address him or her courteously. Your attorney will be by your side to assist you, but cannot answer questions for you. Consequently, you should relax and remember that the bankruptcy process is designed to help honest but unfortunate people get a fresh start.

Tip #2: Listen to the Question
The Trustee asks the same general questions to all debtors, but will have additional questions specific to your case. It is important to listen and make certain that you understand the Trustee’s question before answering. Sometimes the question itself will tell you the right answer. You may also ask the Trustee to repeat the question. Your attorney will be fully engaged at this time and can advise you if you become confused or do not understand a question.

Tip # 3: Answer the Question
The second worst thing a debtor can do during the 341 meeting is to volunteer information to the Trustee. For instance: discussing the value of your car when the Trustee asked about your income is just asking for trouble. Your nervousness may come across as evasive or demonstrate a guilty conscious.

Answer the questions asked in as few words as possible: be brief! Don’t explain yourself or justify your situation. Don’t guess at the Trustee’s next question; let the Trustee do his or her job. In many cases the Trustee becomes interested in an issue only because the debtor continues to ramble on nervously about it.

Tip #4: Be Honest
Your testimony at the 341 meeting is made under oath and is recorded. Intentionally providing false or incomplete information may constitute the federal crime of perjury, or bankruptcy fraud. Dishonesty is the worst thing a debtor can do at this meeting. If you need to refer to your schedules or other documents for clarification, do so. If you do not know the answer to a question, don’t guess! Guessing can only complicate your case. If you do not know, say so.

It is crucial to have an experienced attorney by your side when conducting the 341 meeting. If you are considering bankruptcy, contact the experienced bankruptcy attorneys at the Fears | Nachawati Law Firm today to begin the process to a fresh financial start. For a free consultation, contact our office by dialing 1.866.705.7584.

Surrender Property During Bankruptcy

If you need to walk away from real estate, a boat, a car, or other expensive personal property, it is a good idea to speak with a bankruptcy attorney. The federal bankruptcy laws may allow you to walk away from the debt without owing additional money on the property.

Deficiency Balance
Surrendering property before bankruptcy can create a new debt, called a deficiency balance. Essentially, a deficiency balance is the amount owed on a loan after the property is sold. Returned property is often sold at auction, which commonly brings less than the property’s real value; so you are left owing the remaining balance.

In many cases, a deficiency balance can be avoided by surrendering the property during bankruptcy. Most courts will allow you to surrender certain property back to your creditor in full satisfaction of the outstanding debt. That means that the creditor takes the property back, but has no further claim against you. This has little value during a Chapter 7 bankruptcy, but can mean a great deal you file a Chapter 13. By waiting to surrender the property during the Chapter 13 case, the creditor has no unsecured claim to add to your monthly plan payment.

Surrendering property in full satisfaction of a debt is a complicated bankruptcy issue and there is disagreement among the circuit courts as to its applicability. If you are considering walking away from property, speak with a knowledgeable bankruptcy attorney in your area to discuss your options.

Tax Liability
When a creditor “forgives” a debt, the creditor is required to issue an IRS Cancellation of Debt Form 1099-C. This form is sent to the IRS and to the debtor. The IRS includes the amount of the cancelled or forgiven debt as income, unless the debt is protected by the Mortgage Debt Relief Act of 2007, the debtor is insolvent at the time of the cancellation, or some other exception applies. If the debt is not accepted, the tax debt owed to the IRS can be very difficult, if not impossible, to discharge. While the Tax Code provides several exceptions to a tax levied by a cancelled or forgiven debt, it is never good to be on the radar screen at the IRS.

A debt that is surrendered during bankruptcy is not taxed as income. The federal law specifically excludes all debts discharged during bankruptcy from income. As a result, it is always better to file bankruptcy before a creditor forgives or cancels a debt and issues a 1099-C.

If you are considering bankruptcy, the experienced bankruptcy attorneys at the Fears | Nachawati Law Firm can navigate you through the sometimes confusing process bankruptcy entails; and can help you re-establish financial freedom from overwhelming debt. For a free consultation, contact our office at 1.866.705.7584.

 

 

Bankruptcy is Lasting Protection

If you are struggling with overwhelming debts that you cannot pay, bankruptcy can shield you from creditors and legally restructure your personal finances. The federal law contains many consumer protections that can give you “breathing room” to account for and reorganize your financial affairs. These protections are available to a debtor before, during, and after bankruptcy.

 

Before Bankruptcy

There are several powerful consumer protections available to all consumer debtors, including:

• The Telephone Consumer Protection Act, which limits when and how a debt collection call can be placed.
• The Fair Credit Reporting Act, which regulates how consumer credit information is collected and reported.

Perhaps the most useful federal protection for a pre-bankruptcy debtor is the Fair Debt Collections Practices Act, or FDCPA. This law states that a third party debt collector (collection agency or attorney) must stop all communications with the consumer after an attorney is hired. Consequently, after hiring a bankruptcy attorney to prepare a bankruptcy case the debtor gains the added benefit of obtaining relief from collection harassment under the FDCPA.

 

During Bankruptcy

Once the bankruptcy case is filed, the debtor receives the protection of a court injunction, commonly called the “automatic stay.” The automatic stay is a temporary injunction that prohibits all collection activity during the bankruptcy case. All telephone calls, mail harassment, lawsuits, garnishments, repossessions, and foreclosure activities must stop immediately once the bankruptcy case is filed. The automatic stay continues throughout the bankruptcy case, until either the court orders the stay lifted, the debtor receives a discharge, or the case is dismissed. Co-debtors are also protected by the automatic stay if the debtor files a Chapter 13 case, but not if the case is a Chapter 7 bankruptcy.

 

After Bankruptcy

After the debtor receives a discharge, the automatic stay temporary injunction is replaced by a permanent injunction contained in the discharge order. A creditor or subsequent collector is forever barred from collecting on a debt that is discharged in bankruptcy. Specifically, the creditor may not contact or collect from the debtor personally. However, the creditor may have other collection rights available, including collecting from a co-debtor who did not file bankruptcy.

If you are struggling with debts you cannot afford to pay, speak with an experienced bankruptcy attorney and discuss your options. Bankruptcy is powerful and lasting relief that can permanently discharge your debts and help you start on a new and better financial path. For a free consultation with an experienced bankruptcy attorney at the Fears | Nachawati Law firm, contact us by calling our office at 1.866.705.7584.

Bad Bankruptcy Advice Can Spell Disaster

The Miller case out of the Northern District of California is a good example of how important it is to receive sound legal advice during a bankruptcy case. Debtor Carla Miller filed her Chapter 7 petition on August 8, 2013. Her schedules, made under oath and written in her own hand, disclosed that she was self-employed in the jewelry business, had no inventory, and between $6,000 and $7,000 in personal jewelry. Miller valued her home at $1,550,000, which meant there was no equity in the home.

Miller’s case was a classic “no asset case,” but at the 341 meeting the Chapter 7 trustee discovered that the bankruptcy schedules were not accurate. Miller failed to disclose business inventory in her jewelry business that amounted to $50,000 at wholesale values. Additionally, her home was estimated to be worth $2,300,000, which meant that there was equity available to pay her creditors.

Miller asked the bankruptcy court to dismiss her case and claimed that she received bankruptcy advice from a business that was practicing law without a license. In the alternative, she asked to convert her case to a Chapter 11, should the court deny her request to dismiss.

The bankruptcy court pointed out that there is no statutory right to dismiss a Chapter 7 case, therefore the debtor has a heavy burden to persuade a court to dismiss her case on account of “fairness.” In addition, even when there is a statutory right to dismiss, that right may be forfeited if the debtor has engaged in bad faith conduct.

In this case the court found that Miller had filed false schedules in bad faith. The court stated:

"Nothing in Miller’s pleadings or her declaration or her address to the court convinces the court that there are equitable considerations militating in favor if dismissal. To the contrary, the court found her intelligent, calculating and undeserving of sympathy. She underestimated the seriousness of a bankruptcy filing and the diligence of a bankruptcy Trustee. There is no equity in allowing her to escape the consequences of her actions."

The court pointed out that the Trustee, creditors and the real estate agent stood ready for payment from the proceeds of selling Miller’s non-exempt jewelry and real estate. Dismissing the case would not be fair to these individuals.

Finally, the bankruptcy court denied Miller’s request to convert her case to Chapter 11 (and thereby have a better opportunity to protect her assets). The court said that bad faith conduct is a bar to conversion as well as dismissal.

The Miller case is a prime example of how quickly a bankruptcy case can turn bad without the leadership of a seasoned bankruptcy attorney. Reliance on bad advice is generally not a valid excuse, so it is important to get your advice from someone who knows bankruptcy law and who can protect your legal rights. If you are considering bankruptcy  the experienced bankruptcy attorneys at the Fears | Nachawati Law Firm can provide you with thorough, sound legal advice that is necessary to complete the bankruptcy process both legally and efficiently. For a free consultation, contact us by dialing our office at 1.866705.7584.

Surrendering Property After a Chapter 13 Confirmation

Bankruptcy law is a balancing act between the rights of the debtor and his or her creditors. In Chapter 7 liquidation cases, the judicial calculus is fairly simple: take everything you own, subtract legal exemptions, sell what’s left to pay creditors, and discharge the rest. Because Chapter 7 debtors are generally “broke,” most Chapter 7 debtors lose no property and pay no creditors.

Chapter 13 cases are different. In a Chapter 13 case, the debtor keeps all of his property, but must pay creditors what amounts to a fair share according to his ability to pay over three to five years. That sounds easy enough, only life does not exist in a vacuum. Circumstances change. However, the Bankruptcy Code and its interpretation is not always fair when dealing with these changes.

For instance, suppose a debtor wins the lottery during the Chapter 13 repayment period. Generally the debtor will have to commit all of these winnings to the bankruptcy plan. Sounds fair so far, but what if the debtor agrees to pay the arrearage and future mortgage payments on his upside-down house, but then his employer transfers him to a different state? Can the debtor surrender the house after he has promised to pay the debt? In other words, can the debtor surrender the property after the Chapter 13 plan is confirmed?

The majority of bankruptcy courts, including those in the Sixth and Eleventh Districts, do not allow debtors to modify their bankruptcy plans to surrender collateral to their secured creditors. This issue is very complicated because of the competing policies of the binding effect of the court’s order confirming the Chapter 13 plan and the desire to promote the consumer debtor’s reorganization. In essence, the majority of courts point to the fact that the debtor received a benefit by modifying payment terms, or even reducing principal balances through the Chapter 13 plan. It is not fair to allow the debtor to modify the original contract and make the creditor assume the risk of the collateral’s depreciation. These courts say that the debtor can’t have his cake, and then make the creditor bake him another cake several years down the road.

A minority of bankruptcy courts, including courts in the Fifth and Eighth Districts, have found that the risk of depreciation “is inherent in every installment loan and most
creditors have structured their businesses around this fact.” See In re Coates, 180 B.R.
110, 199 (Bankr. D.S.C. 1995). Consequently, both parties bear the risk of depreciation, even after confirmation. These minority courts allow modification of the bankruptcy plan to allow surrender of collateral except in situations of bad faith or excessive or abusive depreciation caused by the debtor (e.g. if the debtor wrecked the vehicle and did not maintain insurance).

Chapter 13 bankruptcy law is not for the part-time attorney and is certainly not an opportunity for a lay person to play lawyer. Bankruptcy law can be very complicated, and there are risks. If you need bankruptcy relief, don’t place your income or property in jeopardy. Find an experienced bankruptcy attorney and protect your rights and interests by contacting the Fears | Nachawati for a free consultation and financial assessment. Call us at 1.866.705.7584 to set up an appointment and begin resolving your debt.

The Foreclosure Law of Texas

Texas is a non-judicial foreclosure state. This means that the foreclosure process can be quite quick. A non-judicial foreclosure as the name would suggest, is not a court proceeding; but rather, a foreclosure that is accomplished via a series of notices.

The first notice is a default notice, which is mailed to the Debtor. The default notice/demand letter provides that the Debtor has twenty days to cure the mortgage, or the mortgage or servicer will go forward with a foreclosure sale.

The second notice is the notice of the foreclosure sale. This notice must allow at least 21 days for the sale date. The notice will be mailed certified to the Debtor and is then posted on the courthouse door and filed with the county clerk. In Texas, foreclosure will take place on the first Tuesday of the month starting at 10:00 am.

After all the proper notices are given, the sale will take place on the county court house steps. The sale is an auction, and the home will go to the highest bidder. Whoever buys the property will pay off the mortgage. Typically, the lender will buy back their mortgage.

After the mortgage is paid, any remaining deficiency balance is an unsecured debt. A mortgage company can then sue the lender for the difference between the sale and the amount of the debt. They will also usually get attorney fees and other expenses.

At the fastest, a foreclosure can take place within 41 days; however, since the date for foreclosure sale is always the first Tuesday of every month, the amount of time will vary from case to case.

There are several ways to stop a foreclosure. The first and most obvious is to pay off the default and get current on the mortgage. This is usually not an option for most debtors, since they do not have the funds to become current.

A Debtor can also file for a loan modification with their lender. The loan modification process can be a frustrating one, and will usually involve the Debtor sending documents repeatedly to the mortgage company. The final result, however, can be rewarding. If the modification is approved the Debtor can have payments reduced and have the arrearage put into the back of the note.

Be careful with mortgage rescue companies. There are a lot of companies that offer mortgage assistance to people who have fallen behind on their mortgage. It is always a good idea to research any company you would work with. While many companies are legitimate, there are still plenty that are not.

Be wary of any company that has you transferring the property from your name into someone else’s name or a company that wants you to place your home in a trust or LLC. This can confuse the title, but will ultimately not stop a foreclosure. It can also have damaging effects on your ability to keep your home in the future.

Also, be careful of filing a lawsuit on the basis that the deed of trust was not signed by the original lender or signed by MERS. MERS is the mortgage electronic systems and there was a trend whereby people would sue the lender based on the fact that the lender was not the mortgagee listed on the original note. Since Texas is a title theory state, the holder of the note is the owner of the house until the lender is paid in full. A lawsuit to try a title will usually not be successful. Courts are not in the practice of denying the mortgage company the right to collect under the debts.

Another option is to file for chapter 13 bankruptcy. Chapter 13 is a 3-5 year plan payment that allows Debtors to get current on their mortgage through the chapter 13 process. The automatic stay in bankruptcy will stop the foreclosure sale and allow the Debtor to reorganize their debts. Furthermore, a Debtor may file chapter 13 and still pursue a loan modification.

For more information about saving your home or for filing for bankruptcy, contact the experienced attorneys at the Fears | Nachawati Law Firm at 1.866.705.7584.

Bankruptcy Courts Open During Government Shutdown

The federal court system, including the United States Bankruptcy Courts, will remain open during the government shutdown as a result of congressional infighting. Bankruptcy dates, including 341 meetings, bankruptcy deadlines, and court hearings will proceed without interruption or alteration.

In a memorandum sent from the Administrative Office of the U.S. Courts, the federal courts will keep their doors open for two weeks by using revenue from filing fees and long-term appropriations that are not part of the annual budget. This money will be used to pay staffers as normal. If the shutdown continues longer than two weeks, some staff may be furloughed while others may be forced to work without pay until the shutdown ends.

Federal courts are considered “essential” services that fall under the Anti-Deficiency Act, a federal law that keeps the government running in the event that federal funding is frozen. All federal courts are encouraged to conserve as much as possible by deferring non-crucial expenses. The Justice Department, which oversees the United States Trustee’s Program, said that its attorneys would postpone many non-critical civil matters.

Most experts do not expect the shutdown to last longer than a couple weeks. If the shutdown continues, there may be delay in some cases. If you have specific questions regarding how the government shutdown may affect your bankruptcy case, the experienced attorneys at the Fears | Nachawati Law Firm can assist you, and clarify the process. For a free consultation, contact our office at 1.866.705.7584.

Consumer Bankruptcy Takes a Plunge in 2013

The First quarter of 2013 saw a plunge in the number of bankruptcy cases that were filed. The overall number of consumer cases has fallen by 30%; with the biggest drops coming in states hit hardest by the recession.

The reasons for the decline include the fact that interest rates are lower and people are able to refinance their mortgage or credit. Additionally, a large number of people have already filed; therefore there are less people who have a short-term need to file.
While overall bankruptcies are declining, experts believe the factors that have caused bankruptcy to decrease may soon reverse.

For instance, Henry Hildebrand III, a Chapter 13 Bankruptcy Trustee based in Nashville expects chapter 13 bankruptcy filings will start to climb up again as homes continue to gain value and the employment rate gradually improves. This is because people will be filing to keep large secured debts, such as mortgages and vehicles. Unlike a Chapter 7 filing where someone's property is sold and the proceeds are used to eliminate most debts, consumers file under Chapter 13 in order keep their assets; like their homes and cars, by establishing a plan payment for 3 to 5 years.

Another reason for the current decline is most likely the result of the decrease in consumer borrowing. Many consumers may be staving off filling by living on credit. The extension of the successive discharge bar date from 6 to 8 years in 2005 could also be causing a few re-filers to wait until they are eligible for another discharge.

If you are considering bankruptcy, the experienced attorneys at the Fears | Nachawati Law Firm can help you navigate through the sometimes confusing process of filing a bankruptcy and get you back on track to financial stability. For a free consultation, contact our office at 1.866.705.7584.

Filing a Bankruptcy Pro se

Pro se is a Latin phrase meaning "for oneself" or "on one's own behalf.” A bankruptcy is a complicated procedure but a debtor has the option to file a case on their own without an attorney. Sure the Debtor can download forms from online or get them from the library, and there are also books and websites that can walk a Debtor through the process. However, bankruptcy law is very complex, incredibly precise and the many forms to be filed can be exceptionally complicated. The forms require a large amount of detail, and if certain things are missed the case can be dismissed. If your case is thrown out (dismissed) creditors can come after you again.

The success rate will depend on the type of case. Some jurisdictions require debtors who own a business to hire an attorney to file the bankruptcy case. Also, the success rate for a chapter 13 case that is filed pro se is extremely low. This is because there are added complications and local rules that determine when and how the pleadings are to be filed, and in what manner.

Even in a simple chapter 7 case, pro se filers run the risk of losing an asset like a house or car if the documentation is not filed correctly, or they could misinterpret a request and you could be charged with bankruptcy fraud.

If you are thinking about filing for bankruptcy and have questions, contact the experienced attorneys at the Fears | Nachawati Law Firm, who can guide you through the process and get you back on stable ground financially. For a free consultation, call our office at 1.866.705.7584.

Cram Down a Vehicle in Chapter 13

While some Americans are able to get by without a personal vehicle, having reliable transportation is necessary to most. Whether it is a means to get to work or to school or to take the kids to soccer practice, a vehicle can be an important part of daily life. It is no wonder that one of the first questions bankruptcy clients ask is, “Can I keep my vehicle during bankruptcy?” Fortunately, a Chapter 13 bankruptcy debtor may be able to keep his or her vehicle and qualify for lower monthly payments.
   Commonly called a “cram-down,” Section 506 of the Bankruptcy Code allows a bankruptcy court to separate a creditor’s claim into two parts (called “bifurcation”). The first part is a secured claim, which is allowed up to the value of the securing collateral. The second part is an unsecured claim, which is paid at the same rate as other general unsecured creditors or simply discharged at the end of the case.
   Take for example, a vehicle with a fair market value of $10,000 and a loan of $20,000 secured by a perfected lien. Under the cram-down provisions, a bankruptcy court can designate $10,000 of the loan as secured (equal to the vehicle value) and $10,000 as unsecured. The secured portion is paid over three to five years in the debtor’s plan. The remaining unsecured debt is treated the same as the debtor’s medical bills, credit cards, and other unsecured debts. Obviously, cram-down can be a tremendous benefit to a debtor with an upside-down vehicle loan.
Not all vehicle loans qualify for cram-down. Section 1325(a) of the Bankruptcy Code prohibits bifurcation under certain circumstances. Let’s look at when those limitations occur:

. . .section 506 shall not apply to a claim described in that paragraph if[:]
(1) the creditor has a purchase money security interest securing the debt that is the subject of the claim,
(2) the debt was incurred within the 910-day period preceding the date of the filing of the petition,
(3) and
a. the collateral for that debt consists of a motor vehicle (as defined in section 30102 of title 49) [and]
b. acquired for the personal use of the debtor…

   First, if the secured loan isn’t a purchase money interest (PMSI), there is no cram-down prohibition. Black’s Law Dictionary defines PMSI as the interest created when a buyer uses the lender’s money to make a property purchase and the lender retains a secured interest in the property as collateral for the loan. See Black's Law Dictionary (9th ed.2009). Refinancing loans or pledges of a vehicle as collateral are not PMSI loans, so Section 1325(a) does not apply.
   While the federal bankruptcy laws are meant to be uniform across the country, the sweeping changes to the Bankruptcy Code in 2005 left many questions that are still being resolved by different circuits. Courts are also currently struggling with whether inclusion of negative equity from a trade-in or purchase of an extended warranty plan transforms or bifurcates the PMSI. If transformed, then section 1325(a) does not apply. If bifurcated, then the loan is split into PMSI and non-PMSI interests. Section 1325(a) would only apply to the PMSI portion.
   For instance, the Ninth Circuit in the case of In re Penrod broke from the rest of the country and decided that the amount of negative equity in a trade-in that was rolled into a new vehicle loan could be stripped off, even when the loan is less than 910 days old. This case highlights the different interpretations of the new bankruptcy laws and why it is critical to investigate current case law in the jurisdiction and local bankruptcy court practices.
   Second, a vehicle is ineligible for cram-down if it was purchased within 910 days of the bankruptcy filing. Vehicles ineligible for cram-down during Chapter 13 bankruptcy must be repaid over the three to five year repayment period. If the vehicle was purchased more than 910 days before the bankruptcy filing, the court may bifurcate the loan in a cram-down.
   Third, is the property a “motor vehicle” as defined by 42 USC 30102? The answer will almost always be “yes,” but this definition does leave some wiggle room. A “motor vehicle” means a vehicle driven or drawn by mechanical power and manufactured primarily for use on public streets, roads, and highways, but does not include a vehicle operated only on a rail line. Consequently, a Segway, a travel trailer, semi trailer, racing bike, dirt bike, and ATV are all outside the classification of “motor vehicle.”
   Fourth, the vehicle must have been acquired for the personal use of the debtor. The term “personal use” is not defined by the bankruptcy code. Most courts interpret this section to mean non-business use. Some courts use a totality of the circumstances test and find that a vehicle is not acquired for personal use if it allows the debtor to make a “significant contribution” to the family income. Vehicles such as a delivery van or work truck with racks used in the debtor’s business probably fail the “personal use” test. A tougher question is when the debtor purchased the vehicle for a child or non-filing spouse. A vehicle acquired for the personal use of a non-filing family member may be outside the protection of the hanging paragraph.
   One last note: even if the principal amount of the secured loan is ineligible for cram-down, the interest rate can be adjusted to a maximum allowed rate, called the “Till rate” so named after the U.S. Supreme Court case, Till v. SCS Credit Corp., 541 U.S. 465 (2004). The Till rate is adjusted twice a year by the bankruptcy court, and has recently been around 5%. Vehicle debt for many Chapter 13 debtors is paid at the Till rate over the course of the bankruptcy case.
   If you are considering bankruptcy, the experienced attorneys at the Fears | Nachawati Law Firm can help you navigate through the sometimes confusing process of filing a bankruptcy and get you back on track to financial stability. For a free consultation, contact our office at 1.866.705.7584.

 

Collision of Tax Return and Bankruptcy Forms

Bankruptcy attorneys use many tools to uncover the debtor’s finances. Actual bills from collectors, a tri-merge credit report, bank statements, pay stubs, deeds, and promissory notes are all commonly requested documents to assist the attorney in drafting the bankruptcy petition and schedules.

Many debtors (and some attorneys) overlook the wealth of information contained in the 1040 tax return. This information is especially useful for completing the Statement of Financial Affairs (SOFA), which is a declaration, under oath, of the debtor’s financial transactions. Since recent tax returns are sent to the bankruptcy Trustee’s office for review, it is prudent to review these documents to ensure that the information provided in the bankruptcy paperwork is truthful and consistent with the Form 1040.

Here are a few gold nuggets that may be discovered when examining the debtor’s 1040:

- Income: Does it match the income disclosed on Line 1 of the SOFA?
- Distributions from retirement accounts: Open retirement accounts must be listed on Schedule B. Closed accounts are listed in the SOFA.
- Gains or losses from sales of stock
- Investment real estate: Does the debtor make the appropriate disclosures regarding real property in his bankruptcy schedules?
- Charitable contributions: This can provide good evidence for means test purposes or SOFA disclosures.
- Business interests including partnerships and estates: Where there is a business, there are usually business assets.
- Form 1099 Cancellation of Debt: The SOFA asks about debt settlement or foreclosures.
- Dividend income
- Student loan interest

Taking the extra time to inspect the debtor’s 1040 can save time scrambling to explain to the bankruptcy Trustee why the information contained in the tax return does not match the information in the bankruptcy schedules. The tax return can also help uncover issues that may be confusing to the debtor when answering questions on the bankruptcy forms. If you are considering bankruptcy, the experienced bankruptcy attorneys at the Fears | Nachawati Law Firm are here to assist you, and are eager to help you make a fresh start financially. To set up a free consultation, call our office at 1.866.705.7584.

 

Three Reasons to Consider Bankruptcy in Early Fall

 It is always a good time to consider solving your financial problems, but the fall season is an especially good time to seek professional help. Below are three reasons to consider bankruptcy in the early fall:

Reason Number One: Tax Refunds
When you file Chapter 7 bankruptcy, an accounting is made of all of your property and it is all “placed” into an estate under the control of a bankruptcy trustee. The Bankruptcy Code gives long definitions of what property is included and excluded from the debtor’s estate, but the simple answer is “all legal or equitable interests” you have in property as of the filing date of the bankruptcy petition.

An income tax refund is an entitlement that increases during the year. Since Chapter 7 property is determined by the filing date, filing your bankruptcy before December 31 means that only a portion of your refund is property of the bankruptcy estate. The earlier you file, the less the trustee can get at. For debtors who generally receive large income tax refunds, filing early can exclude thousands from the bankruptcy estate and eliminate the need to use personal bankruptcy exemptions to protect income tax refund money.

Reason Number Two: End of the Year Bonuses
The means test provision of the Bankruptcy Code starts with a six month “look-back” at your income. An employment bonus received at the end of the year will inflate your monthly income, and can either make you ineligible to file Chapter 7 bankruptcy or increase your monthly Chapter 13 plan payment. By filing before the end of the year, your yearly bonus is not included in the initial means test income calculation.

Reason Number Three: A Fresh Start Next Year
The typical no-asset Chapter 7 bankruptcy is over in about four months. By filing your bankruptcy in early fall, you will receive a discharge of your debts and a new plan of financial reorganization around the beginning of the year. If you are struggling financially and are ready to make a fresh start, the experienced bankruptcy attorneys at the Fears | Nachawati Law Firm can provide you with the legal guidance needed to alleviate debt issues and start over financially with a clean slate. To set up a free consultation, click here, or dial 1.866.705.7584.

Honest Fees for Honest Work

Most individuals are in a very serious financial state when they first consult with a bankruptcy attorney. Many bills may be unpaid and money is often extremely scarce. Fortunately, experienced bankruptcy attorneys are able to assess a potential client’s financial situation, and quote a reasonable fee for obtaining needed relief. In a Chapter 7 case, fees are paid up front. In a Chapter 13 case, the majority of attorney fees are included in the monthly plan payments.

A less experienced (or less scrupulous) attorney may sometimes be evasive when estimating fees in a bankruptcy case. While every case is different and poses unique challenges, an experienced attorney will identify issues, know the probable outcomes, and is able to place the case on a track that will quickly and efficiently speed it to a successful conclusion. In other words, an experienced and honest attorney should be able to give you a very good idea of the fees involved in your case before it is filed. In most cases, your attorney will charge a flat fee for his work. If your attorney seems unsure, hedges on his fees, or charges an unreasonable sum, it’s probably time to find another attorney.

Case in point: attorney Jason J. Mazzei is in hot water with a Pennsylvania bankruptcy court over attorney fees. Mazzei charged a client $8,200 and recommended that she file Chapter 7 bankruptcy. Upon review of the case by the bankruptcy trustee it was discovered that the debtor only had $6,371 in debts.

Mazzei, who operates 23 offices around the state of Pennsylvania, agreed to refund the $8,200 to the client and pay an additional $14,582 to cover other costs in the case. The bankruptcy court has also appointed an expert “for the purpose of investigating the operations of Mazzei, and of his firm Mazzei and Associates, with respect to various matters of concern,” according to court records. Mazzei has agreed to pay the expert's fees, which can go up to $40,000.

The moral of this story is simple: avoid a bad situation by employing a bankruptcy attorney who is both experienced and honest. Most bankruptcy attorneys are able to successfully represent you for a reasonable fee. If you sense that your attorney is either inexperienced or dishonest, find another attorney ASAP. If you are contemplating filing for bankruptcy, ethical and tenured bankruptcy attorneys at the Fears | Nachawati Law Firm can give you the legal guidance and counseling needed to make a fresh start. Begin financial recovery today by clicking here, or contacting our office at 1.866.705.7584.

The Automatic Stay

The automatic stay is the shield that protects a debtor while in bankruptcy. This means that when a debtor files for bankruptcy, a creditor is prevented from taking any action against the debtor, the property of the debtor, or the property of the bankruptcy estate. In other words a creditor cannot call, they cannot send a demand for payment, they cannot repossess a car, and they cannot foreclose on a house. The automatic stay goes into effect when the debtor files bankruptcy; not when the creditor gets the notice.

The reason for the automatic stay is that it allows the debtor relief from their creditors, so that the trustee can administer the bankruptcy estate. In a chapter 7 case the trustee can determine the assets to be liquidated and can allow them to liquidate the assets. In a chapter 13 case it allows the plan of re-organization to run its course.

There are a few exceptions to the automatic stay. For example, a suit for domestic support obligations (i.e., alimony or child support) are not stayed. Some other examples include: criminal cases, divorce proceedings, assessment of taxes.
In a chapter 13 case, a cosigner will be protected by the automatic stay. In all other chapters, the automatic stay will only protect the debtor and the debtor’s property. The stay typically ends when the case is dismissed or closed.

If a second bankruptcy case is filed within one year of a previous case, the automatic stay only lasts 30 days. This means that in a chapter 13 case the debtor will usually have to ask for the stay to be extended. In any additional cases filed after the second case within 12 months, there is no automatic stay. A motion to impose stay must be filed to create the automatic stay. For either of these motions, the debtor must show by a preponderance of evidence that the current case was filed in good faith.

The stay can also be lifted. A party in interest, usually a creditor, can request relief from the automatic stay. They will typically do this if the debtor is not making payments, or if they are failing to provide adequate protection to the creditor.

The automatic stay is a powerful tool; which can help many debtors get the fresh start that a bankruptcy offers. For more information about bankruptcy, contact the experienced attorneys at the Fears I Nachawati Law Firm by clicking here or calling our office at 1.866.705.7584.

Lien Stripping Home Loans in Texas Bankruptcy Cases

Lien stripping is the process that can transform 2nd liens on homes into mere unsecured debt. Most people understand that as long as a lender has a lien on your home, they can foreclose if you don’t pay. But if the lender no longer has the lien, then the debt can potentially be discharged (wiped out) in a bankruptcy. However, there are several limitations on the lien stripping process in bankruptcy:

First, in Texas, you can only use lien stripping for chapter 13 cases. You cannot use it for chapter 7, and if you commence a chapter 13 case with lien stripping and then later convert it to chapter 7, then the lien is not stripped.

Second, the lien that you intend to strip must be completely unsecured. For example, if you still owe $200,00 on your primary (1st) lien and $50,00 on your 2nd lien and your house is worth $215,000 then the 2nd lien is still partially secured. Therefore, it cannot be lien stripped AT ALL. In this example, it could only be stripped if the value of the house falls to $200,000 or below.

It is also important to remember that once a lien is stripped, the debt does not instantly or completely disappear. The debt associated with the lien is first transformed into unsecured debt once it is stripped. That means it is treated as if it were credit card debt in the bankruptcy case. In many chapter 13 cases you are required to pay a portion of your unsecured debt. Although that portion is typically small, it means you may still be required to pay a portion of it through the bankruptcy plan. You must also complete the bankruptcy payments and get a discharge before the lien will disappear. Once the lien is stripped, you are not required to pay any of the 2nd lien payment directly to the lender. Instead, you will pay the portion of unsecured debt that is required for your case directly to the Trustee.

This process is not simple, even for an experienced bankruptcy attorney. That being said, you can expect there will be extra attorney fees (in addition to the usual fee for chapter 13). However, if you meet all the above criteria for lien stripping, the extra fee is usually worth it.

As with any legal matter, you should always discuss your particular situation with an attorney who is experienced in such matters to determine if it will be beneficial to you. If you are considering filing for bankruptcy, the experienced bankruptcy attorneys at the Fears | Nachawati Law Firm can give you the thorough education and guidance needed to navigate through the bankruptcy process and get back on track to financial stability. For a free consultation, click here or contact our office at 1.866.705.7584.

Many Home Loan Modifications are in Default, Again

 The U.S. Treasury Department reports that approximately 46% of homeowners who received loan modifications in 2009 under the Troubled Asset Relief Program (TARP) are once again in default. According to a TARP special inspector report, one-third of homeowners who received TARP loan modifications have stopped paying their loans. The inspector finds that many of these “modified” loans under TARP only reduced the monthly payments by a mere 10% or less. However, loan servicers are paid $400-$1,600 for permanent loan modifications.

The special inspector reports that over 10% of the 865,000 homeowners who received loan modifications are currently 1 or 2 payments behind. More than 306,000 homeowners have re-defaulted as of the end of April. The report finds that the small reduction in monthly payment coupled with the existence of overall personal debt contributed to this new round of defaults. Additionally, as many as 9.7 million out of 75 million households are “upside-down” in home value; meaning the home is worth less than what is owed on its mortgages.

Bankruptcy may provide an answer to this troubling news. In Chapter 13 bankruptcy, an entirely unsecured second mortgage may be stripped away and discharged. New home loan modification programs are also available during bankruptcy to further reduce principal and get your home “right-side up.” Bankruptcy under Chapter 7 or 13 can permanently discharge pesky credit cards and medical bills, and restructure secured debts like car or home payments.

Bankruptcy can help you permanently solve your debt problem. In many cases, reducing or discharging personal debt makes it possible for a family to afford a home mortgage payment without living in constant fear of default. If you are contemplating filing for bankruptcy, the experienced attorneys at the Fears | Nachawati Law Firm can give you the legal guidance you need to get back on your feet. For a free consultation, contact us here or call our office at 1.866.705.7584.

Will Filing Bankruptcy Affect my Job?

One of the most common questions that new clients asked their bankruptcy attorneys is whether bankruptcy will affect their job. In almost every case, especially in regards to your current job, bankruptcy does not affect your employment. Section 525 of the bankruptcy code specifically prohibits discriminatory treatment of persons who are in or who have been in bankruptcy, but there are some limits. The primary limitations are based on whether the bankruptcy is related to a CURRENT or FUTURE employee and whether the employer is a GOVERNMENTAL AGENCY or a PRIVATE ORGANIZATION.

Governmental employees are protected from bankruptcy discrimination much more thoroughly than those working for private employers. Bankruptcy law prevents governmental agencies from discriminating against both CURRENT employees and applicants for FUTURE employment. They cannot deny employment, terminate employment, or discriminate with respect to employment individuals who are either currently in a bankruptcy or have been in bankruptcy. The law even protects someone whose spouse or family member was in bankruptcy. Governmental agencies cannot deny, revoke, suspend or even refuse to renew a license, permit, charter or franchise to a person, or against a person who was or is in bankruptcy.

Additionally, governmental agencies that operate student loan or grant programs may not deny loans or discriminate against those in bankruptcy. Private agencies who offer loans guaranteed, or insured pursuant to a student loan program are also prohibited from denial or discrimination.

Current employees of private companies are protected from termination and discrimination due to bankruptcy in the same manner as governmental employees.  However, private employers may use credit checks and background checks to find out about any financial problems (including bankruptcy) that a potential employee may have, and they may use this information as a hiring factor. Employers must obtain permission from the job applicant to perform such credit or background checks, but failure to give consent can be a reason to refuse employment as well.

Some chapter 13 Trustees require Trustee payments to be withheld directly from Debtors’ pay. In these instances, the employer’s payroll department will be aware that an employee has a bankruptcy case pending. However, strict privacy protections generally prevent employers from making such personal financial information available to an employee’s immediate supervisor without a valid reason.

In general, discriminatory treatment against persons in bankruptcy is rare, but any such concerns should be discussed with a bankruptcy professional prior to filing. If you are considering filing for bankruptcy and have questions about the process, contact the experienced bankruptcy attorneys at Fears | Nachawati Law Firm here, or call our office at 1.866.705.7584 for a free consultation.

Who is the Trustee in My Bankruptcy Case?

In order to better administer bankruptcy cases, the Bankruptcy Reform Act of 1978 created the US Trustee program. The US Trustee program is under the Department of Justice and the US Trustee in charge of the program is appointed by the Attorney General. There are 48 states that use the US Trustee program to administer their bankruptcy cases. (Alabama and North Carolina do not participate in the program). 

In chapters 7 or 13 cases, an Interim Trustee is appointed to administer the bankruptcy case.  In the different chapters, the Trustees serve slightly different roles:

In a chapter 7 case, the Trustee is primarily charged with insuring that all non-exempt assets are liquidated and that the proceeds are used to pay creditors. The chapter 7 Trustee will step into the shoes of the debtor and is able to sell the non-exempt assets in place of the debtor. It is important to note that in most consumer cases, there are rarely any assets to liquidate; therefore, the Trustee reviews the petition and conducts the meeting of creditors to insure that all property has been listed and has been properly exempted.

In a chapter 13 case, the Trustee is primarily charged with receiving the debtor’s monthly plan payment and then distributing the payment to the debtor’s creditors. The chapter 13 Trustee reviews the debtor’s petition and conducts the 341 meeting of creditors. The Trustee wants to ensure that the debtor is pledging all of their disposable income to their chapter 13 plan.

It is important to understand the role of the Trustee in your case. The Trustee is an attorney who is opposing counsel, which means that they are not on the side of the debtor. They are also not on the creditor’s side, either. The Trustee usually acts as a referee and makes sure that both sides play fair, under the rules in the bankruptcy code. For more information about bankruptcy Trustees, or about filing a case, contact the successful attorneys at Fears | Nachawati Law Firm here or call our office at 1.866.705.7584 for a free consultation. 

What Paperwork do I Need in Order to File a Bankruptcy, and How do I get Started?

 The bankruptcy process always begins with the filing of a petition in Federal Bankruptcy Court. Before that, it is always wise to retain an attorney to help you prepare the petition.  All of the schedules and the statement of financial affairs contained within the bankruptcy petition are filed under penalty of perjury, so it is important to get the information correct.

In order to effectively prepare a petition, the attorney will need documentation from the client so that the petition is accurate and will withstand scrutiny from creditors, the Trustee, and the Bankruptcy Court. Gathering documents is an integral part of the client’s role in filing either a Chapter 7 or Chapter 13. The better a client’s documentation, the easier it is for an attorney to assist that client.

The documents necessary to file a bankruptcy will vary based upon an individual client’s situation. However, the following list constitutes many of the documents that will be needed in just about any type of bankruptcy:

·         A list of your assets and liabilities- Typically, an attorney will provide you a packet of questions to fill out concerning your assets, their market values, and what is owed on any of those assets. This paperwork is critical for advising a client about what to expect in either a Chapter 7 or Chapter 13 case. Typically, it is helpful to know how much is owed on a house or car so the attorney can determine how much equity you have in the property; which in turn determines what set of property exemptions you want to use and what you can protect. Additionally, while most attorneys will run a credit report for clients, it is helpful if the client prepares a list of debts that they owe. Credit reports are not always accurate. We often find that medical bills and payday loans are not typically reported to the credit bureaus, but need to be included in a bankruptcy because they are dischargeable debts.  A list of the debts you think you owe will be immensely helpful in a bankruptcy case.

·         Copies of your last two income tax returns- This is necessary for several reasons. First, it helps to show the Trustee your income level over a period of 2-3 years, which helps the Trustee understand your situation a little better. Second, the last two years of tax returns are required to be presented to the Trustee at least a week ahead of your Meeting of Creditors. Third, in a Chapter 13, a debtor is required to have filed their last four tax returns. Lastly, tax returns are very helpful for filling out the Statement of Financial Affairs.

·         Copies of your pay statements for the last six months- Paystubs are critical, especially for consumers in either a Chapter 7 or Chapter 13. In 2005, Congress changed the Bankruptcy Code to include a new thing called “The Means Test”. The Means Test is a mathematical formula for determining whether someone qualifies to file a Chapter 7/how much the payment will be in a Chapter 13. Obviously, this is a critical part of bankruptcy. Part of the Means Test is to determine what a household’s gross income over the last six months was. Accordingly, that’s why an attorney typically needs to look at your paystubs for the last six months. If you are self-employed, an attorney will typically have you fill out a profit and loss form.

·         Copies of your bank statements for the last six months- Bank statements can be very useful tools for the Trustee in verifying your assets at the time of filing; they also help paint a picture of what is going on in your monthly finances. Accordingly, Trustees often request copies of your bank statements.

·         Credit Counseling Certificate- In order to file a Chapter 7 or Chapter 13, a debtor is required to take a credit counseling course and provide a certificate of completion to the Court. The course can be done online, over the phone, or in person. The class typically takes anywhere from 25 minutes to an hour. It is an absolute requirement that this course be completed by the debtor prior to filing.

After the client assembles this information, a bankruptcy attorney is able to get to work and prepare a Debtor’s bankruptcy petition. After the petition is prepared, the attorney will sit down with the client and review the petition extensively. After the petition is signed and approved by the client, the attorney will file the petition in Federal Bankruptcy Court, which will start the bankruptcy process and protections.  If you are considering a bankruptcy, make sure you meet with an attorney. The experienced bankruptcy attorneys at Fears | Nachawati offer free consultations and would be more than happy to walk you through the process. For more information, contact us here or call out office at 1.866.705.7584.

I Received Notice that my Bankruptcy Case is Being Dismissed, What Should I do?

 While in a bankruptcy case a party can move to have the case dismissed. Dismissal put simply, ends the bankruptcy case and you no longer have the protection of the bankruptcy code and its automatic stay.  When your case is dismissed your creditors can restart collection actions, this means that they can call you, file lawsuits and/or if you are behind on your house or car payments, then they can foreclose or repossess the collateral.  If you get a notice that your bankruptcy case is in the process of being dismissed the first thing to do is CONTACT YOUR ATTORNEY. There are ways to avoid a dismissal, but without first speaking with your attorney it may not be avoidable.

There are a variety of reasons why your bankruptcy case may be up for dismissal; below are the most common examples and some possible solutions to resolve a dismissal.

The most common dismissal is for failure to make plan payments. In a chapter 13 case, if you fall behind on your plan payments a party, typically the Trustee, can move to dismiss your case.  In order to avoid dismissal you will need to get current on the plan payment. The ideal solution is for you to make a large payment to get caught up, but this is not always possible. You may also be able to work out a short term payment plan with the Trustee, whereby you send in an increased payment for a short number of months until you pay off the amount you were behind on. Another option may be to modify your chapter 13 plan and try to pay the delinquency over the remainder of your plan. There are a variety of options, so speak to your attorney about which is best for your case.

Another reason for dismissal is failure to confirm your chapter 13 case. This will typically be filed if you miss your first plan payment, failed to provide documents, file amendments, failed to conclude your 341 meeting, or other confirmation issues. The best way to resolve these dismissal actions is to work with your attorney to make sure they have all the required documentation and information needed to confirm your case. If you fail to get the case confirmed, the case can be dismissed.

Throughout a chapter 13 case the debtors are required to stay current with their ongoing income tax obligations. The IRS can ask for your case to be dismissed if you have a large tax liability and are unable to timely resolve the tax debt. The reason for this type of dismissal is that the bankruptcy code wants debtors to avoid a double insolvency; put in another way, being bankrupt while in bankruptcy which frustrates the “fresh start.” A debtor will want to make sure before the case is filed that their withholding is sufficient to cover any tax liability, or that they send in quarterly taxes to the IRS to cover any potential liability. If something happens and you do have a large liability, your attorney can work with the IRS to possibly include the post petition liability in the plan. Section 1305 of the bankruptcy code allows some post-petition priority debts to be included in the chapter 13 plan. If this happens to you, it is important to speak to your attorney because the IRS and the Trustee must agree to allow you to include the IRS debt, and they will want to insure that a future tax debt does not arise.

A bankruptcy dismissal is a very serious matter. If you receive notice that a party is seeking dismissal, contact your attorney as soon as possible. Responding quickly to these matters is essential in working out a resolution. If you have any questions regarding how chapter 13 works contact the experienced attorney’s at Fear I Nachawati here for a free consultation, or call our office at 1.866.705.7584.

Understanding the Educational Requirements for Filing and Completing a Chapter 13 Bankruptcy Case.

 Bankruptcy is a complicated process and should never be attempted without the aid of an attorney. But even so, those who file for bankruptcy (commonly referred to as “Debtors”) are required to fulfill certain educational requirements themselves. These requirements are not intended to train the Debtor on how to conduct the legal process, but rather, they are meant to give Debtors the knowledge to understand their role in the process. There are basically two requirements that all Debtors must fulfill in order to complete their bankruptcy case:

First, since October 2005, Debtors have been required to complete a “credit counseling” session. The primary goal of the session is to organize the Debtor’s specific financial information in such a way that a trained counselor can provide feedback to the Debtor about their situation. For this reason, this requirement MUST be completed prior to a Debtor actually commencing the bankruptcy process. In fact, the bankruptcy attorney is generally required to file a completion certificate with the Court at the same time the bankruptcy case is filed; proving that the Debtor has actually met this requirement.

The session can be conducted online or over the phone and can usually be completed in about 90 minutes or less. There are numerous organizations that offer this service, and fees usually range from about $15 to $40 per person. However, Debtors should make sure that the session they intend to participate in is one that has been approved by the state or jurisdiction in which they intend to file the bankruptcy case.  A list of those can be found at www.usdoj.gov/ust. The outcome of this process provides the Debtor with an analysis of his or her income and expenses and often times illustrates in “dollars” the Debtor’s financial dilemma. 

The second requirement is often referred to as a “Debtor Education” course. This course cannot be commenced until the Debtor actually files the bankruptcy case. Although this course can also be taken online or over the phone, it is often taken in person and in conjunction with other requirements of the bankruptcy case.  Since this course is designed to provide Debtors with specific information about their role in the bankruptcy process, it is often offered and conducted by the local Office of the Standing Chapter 13 Trustee.  Most Trustees offer the course at no charge to the Debtor.  Your bankruptcy attorney will advise you about the options available for this course in your particular area.  In the alternative, most Trustees allow you to take the Debtor Education course online or over the phone as well.  There is usually a fee for taking the course online or over the phone and it is usually offered by the same organizations that offer the credit counseling sessions. Fees for this course are typically a bit higher than the credit counseling sessions. The course typically takes 2-4 hours to complete, depending on whether it is an “in-person” or online course.  Debtors are required to provide their bankruptcy attorneys with a certificate of completion for this course as well. 

Failure to complete either of the above requirements can result in disastrous consequences for the Debtor. Failure to complete the credit counseling will likely result in the case either not getting filed at all or being dismissed almost immediately after being filed.  Failure to complete the debtor education can result in the case being closed without having received a discharge of debts.  Understanding and completing these requirements is a critical part of the bankruptcy process. For a free consultation, contact the attorneys at Fears | Nachawati  here or by calling the office at 1.866.705.7584.

 

 

 

 

 

 

 

 

Educational Debts that are Dischargeable in Bankruptcy

The general rule in bankruptcy is that a debtor is not able to discharge student loans absent a showing of undue hardship (a very difficult standard to meet in most courts). However, not every debt to a college or university is accepted from discharge. Some debts, like unpaid tuition, may qualify for discharge during bankruptcy.

The bankruptcy discharge is very broad; ts interpretation favors discharging debts and providing the debtor with a fresh start. Consequently, and exception to discharge is treated very narrowly. Congress has carved out the student loan exception and identified the following debts as non-dischargeable (except for undue hardship) under bankruptcy chapters 7, 11, 12, or 13:

(A)(i) an educational benefit over payment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or

(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or

(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual. 

Consequently, non-dischargeable education debts are qualifying loans (generally requiring evidence of a promissory note), or educational payments made by the school to the student, as in an advance of cash or exchange of money. Owed college tuition does not fit into the non-dischargeable category. For instance, if you attend classes without paying or signing a promissory note (an agreement signed on or about the same time providing for a definitive amount to be repaid, in specified installments, by a certain time, and at a certain interest rate), you likely can discharge this debt in bankruptcy. The same principle applies to debts at the student union, gym, bookstore, and room and board debts.

The determination whether a debt is dischargeable in bankruptcy is usually a complicated matter. Your bankruptcy attorney can explain how the local bankruptcy court will analyze the debt and the likely conclusion. For a free consultation with one of our experienced bankruptcy attorneys, contact us here or call the office at 1.866.705.7584. 

                                                                                                                   

Should you consider trading vehicles prior to filing chapter 13 bankruptcy?

 Although common sense might lead you to believe that it is a bad idea to acquire a new loan for a vehicle prior to filing bankruptcy, this may not be true in many situations.  Consult with your bankruptcy attorney and consider these issues:

First, there is no per se violation for acquiring a new secured debt prior to filing bankruptcy, so long as it is done “in good faith”. Generally, that means that you had a legitimate need for another vehicle. Perhaps your current vehicle is older and beginning to have mechanical difficulties. If you anticipate the cost of repairs to be significant, it may not make sense to spend a lot of money on repairs on an older vehicle.  Of course, you should also consider whether you need to purchase a vehicle at all.  The availability of public transportation in your area may make it unnecessary to actually own your own vehicle, but there are many areas of the country where public transportation is not a practical option.  As such, virtually all bankruptcy Trustees recognize that being a reliable worker requires having reliable transportation.

“Good faith” also means purchasing a vehicle that is within your needs and within your means.  Obviously, you should avoid purchasing vehicles that are considered luxury brands, but you should also select a vehicle that fits your needs.  There is usually no need for an SUV type of vehicle if you don’t have a family, and if you have to commute long distances it would be wise to purchase a fuel efficient car.

Another consideration is whether you believe your current vehicle will continue to be reliable throughout the term of your bankruptcy. This is important because once you file your bankruptcy case most Trustees and Courts won’t allow you to incur any new debt without first getting permission from them.  Therefore, assuming you will need to finance the vehicle, you can avoid this permission issue by purchasing the vehicle prior to filing. Furthermore, it is easier to obtain credit from a lender when purchasing prior to filing. Many lenders refuse to lend at all if you are already in a bankruptcy case.

Finally, if you believe that purchasing another vehicle prior to filing is the right option for you, then consider these issues when acquiring the loan.  First, be truthful on the loan application. Most lenders are going to be surprised if you file for bankruptcy protection shortly after acquiring the loan, and if they re-examine your application after that and determine you provided false or misleading information, they can ask the bankruptcy Court to set aside (undo) the financing transaction.  Or even worse, they may be able to bring a legal complaint against you for providing fraudulent information on your loan application. Also, it is usually not a good financial decision to purchase financing extras; such as credit life insurance in this type of situation. The attorneys at Fears | Nachawati would be happy to guide you and advise you on what your best course of action is. 

 

Filing for Divorce While in an Active Bankruptcy

 

 Sometimes while in a Chapter 13 case a couple may decide to file for divorce. An active Chapter 13 case will not prevent Debtors from filing for and getting a divorce but it does add a few additional steps to the process. (This post will outline the steps taken in Texas to get a divorce. Since divorce is a state preceding, the steps may be different depending on the state in which you are filing.)

If the Debtor is represented by an attorney, it may be necessary for the divorce attorney to obtain permission to serve as counsel for the Debtor from the bankruptcy court. This is because a Debtor typically has to ask permission when obtaining the use of professional services, such as an attorney, and because the Debtor cannot obtain new debt without court permission, such as attorney fees.

The next step will be for the Debtor or their attorney to file a petition for divorce in the state court. After the petition is filed in state court the Debtor can request permission to proceed with the divorce. The Debtor will need to file a motion to lift the automatic stay to allow the state court permission to grant the divorce. The reason for this is that the state court may be dividing up the assets and debts of the Debtors. Typically the Chapter 13 trustee will ask that the divorce decree be provided to their office after it is granted. This is so that they can review the effects the divorce will have on the current case.

Once the court grants the motion the state court can proceed with the divorce and can enter the final decree of divorce. 

After the divorce is granted it is important that the Debtor contact their bankruptcy attorney because their schedules may need to be updated to reflect the changes in the household. If the Chapter 13 case originally was a joint-petition between the two married Debtors, the Debtors can continue in the bankruptcy together even after the divorce.  If you are contemplating filing for bankruptcy but have concerns about your marriage, the attorneys at Fears Nachawati can help discuss your issues and advise you on how best to proceed through the process. For answers to any of your bankruptcy questions, contact us today for a free consultation.   

 

Recent Issues in Student Loan Debt

According to the Consumer Financial Protection Bureau, student loan debt has topped $1 trillion dollars in the United States. If you include the debt owed to private student loan companies the total debt reaches $1.2 trillion. This report coincided with Congress’s inability to reach a deal before the July 1st deadline, to keep interest rates on federally backed student loans at 3.4%. Currently the interest on new government loans has doubled to 6.8%. Subsequently, the Senate has reached a tentative deal that would base future rates for student loans on the ten-year note plus an additional percentage, keeping the loans at a projected rate of 3.86 percent. Furthermore, graduate students could borrow at 5.4 percent and parents could borrow at 6.4 percent. This may be good news for future borrows, but this doe not resolve massive amounts of student loan debt plaguing Americans.
The Senate has recently begun investigating so-called debt consolidation companies who have been employing deceptive practices to capitalize on the student loan crisis. These companies charge debtors an exorbitant amount of money claiming to reduce their student loan payments, when in fact these companies are just enrolling debtors into already available federal repayment programs without disclosing the information to the debtors.
Bankruptcy is not always an option for people dealing with high student loan debt. The current standard for discharge is that the debt places an “undue hardship” on the debtor. This standard sounds relatively simple; however, in actuality is a very high threshold, requiring nearly complete disability to achieve.
Even if you do not meet this standard there may still be some relief options that are available in bankruptcy. If a debtor has income, but not enough income to pay the large student loan payment, they may be able to file a Chapter 13 bankruptcy case. A Chapter 13 bankruptcy is a 3-5 year payment plan. While the Chapter 13 case will most likely not wipe out the student loan debt, the payment plan can usually lower the payment, making it more manageable for the debtor. In addition, the bankruptcy will also wipe out any other unsecured debt the debtor may have, such as credit cards or medical bills. After the bankruptcy, with all their unsecured debt paid off and some of their student loan debt paid, many debtors can then manage a direct payment on the balance to pay off the remainder. An issue that Chapter 13 can create is that the loans will continue to earn interest while the debtor is in the repayment plan. So if the payment plan is only paying the interest, or nothing to the student loans, the total amount can increase over the plan. However, the debtor will be able to hold off on these payments while in the case. While Chapter 13 may not be a permanent solution, it can stop a default or give a debtor time to improve their financial situation. The attorney’s at Fears and Nachawati can help you make sense of your student loan debt and determine if a bankruptcy case can assist you in helping ease your student loan burden. To get started with a free consultation, call us today.

Calculating Your Chapter 13 Payments

Chapter 13 bankruptcy law and procedure appears to be a complicated mess to the outsider. The heart and soul of Chapter 13 is the repayment plan, but obtaining a confirmed plan can sometimes get technically difficult. Confirming a Chapter 13 plan essentially boils down to examining six “tests” outlined in the Bankruptcy Code:
1. Administrative claims
2. Priority claims
3. Secured Creditor claims
4. Best efforts of the debtor test
5. Best interest of creditors test
6. Feasibility

Administrative Claims
Administrative claims are paid 100% during the Chapter 13 case. Common administrative claims include court fees, trustee fees (3% to 10% of each monthly payment), and attorney fees.

Priority Claims
Priority claims are paid 100% during the Chapter 13 case. Priority claims include:
• certain recent taxes
• domestic support obligations such as alimony and child support
• salaries, wages, or commissions owed to employees
• certain customs duties and penalties owed to the government
• claims arising from death or injury caused by operation of a vehicle while intoxicated, and
• contributions owed to employee benefit plans.

Secured Creditor Claims
For secured property that is retained, any arrearage is paid 100% during the Chapter 13 case. In other words, if you fell behind a few payments on your house or car, you must pay that amount during the bankruptcy. You must also pay any future payment that comes due during the case or the creditor can ask the court for permission to repossess or foreclose on the property. In some cases the terms of a secured debt can be modified by the bankruptcy court and paid in full during the case.

Best Efforts of the Debtor Test
This test means what it says: the debtor must make his best effort to repay unsecured creditors. The bankruptcy law looks to your disposable income and to the applicable commitment period as calculated and determined by the bankruptcy means test. The debtor and bankruptcy trustee sometimes disagree on the means test calculations, which can result in a payment to unsecured creditors between 0% and 100% of the total debt.

Best Interest of Creditors Test
Under this test you must pay your unsecured creditors in a Chapter 13 case as much money as they would receive if you filed a Chapter 7 bankruptcy. This calculation includes equity in non-exempt property and the money the trustee can recover from any preference payments or fraudulent transfers of property, minus the cost of liquidation and the trustee fees and expenses. For instance, if you have a car worth $10,000, you owe $2,000, and you have a $2,000 in available exemptions, then you must pay your unsecured creditors $6,000 during your case for the non-exempt equity in your car.

Feasibility
Your plan payment must be feasible, meaning it must be both practical and affordable.

Chapter 13 is a powerful tool for restructuring your finances in a way that you can afford. The tests contained in the Bankruptcy Code form the framework for balancing the rights of both you and your creditors. In most cases your payments in Chapter 13 bankruptcy are significantly less that your payments before bankruptcy. An experienced bankruptcy attorney can analyze your situation and tell you exactly how much you have to pay during your Chapter 13 case.
 

Considerations for Using Chapter 13 to Avoid Repossession of a Vehicle

 

 

Chapter 13 bankruptcy includes a provision to prevent all collection activities after a bankruptcy case is filed.  This provision is commonly called the “automatic stay”.  In the case of repossession, it means that a lender (Creditor) must stop all repossession activities IMMEDIATELY upon the filing of the bankruptcy case.  It even means that the vehicle cannot be sold to anyone else for a period of time AFTER repossession so long as the buyer (Debtor) still has some “interest” or some “right” to take the vehicle back. 

 

These “interests” or “rights” may vary from state to state and; therefore, should be the subject of a whole separate discussion.  However, it does form the basis of one of the benefits of Chapter 13 bankruptcy.  The benefit is that the Debtor is usually able to get the vehicle back shortly after repossession if the bankruptcy case is filed during this period of time.  However, another issue to consider is that the Debtor is usually obligated to pay certain fees incurred by the Creditor as a result of having to repossess the vehicle if the Debtor intends to keep the vehicle. 

 

Most importantly, the Debtor should compare the cost of saving the vehicle in bankruptcy versus the amount of money the Debtor actually has invested in the vehicle.  The cost of saving the vehicle should include the fees for the bankruptcy (both attorney fees and filing fees) as well as Trustee fees and additional interest that may be incurred by keeping the vehicle in bankruptcy.  Once again, bankruptcy fees vary but it is typical to expect approximately $3,000.00 in bankruptcy fees in Chapter 13.   In addition, Trustee fees are typically 7-10% of the value of the debt included in the bankruptcy plan.  Therefore, a vehicle that has a debt of $20,000.00 would cost as much as an additional $2,000.00 in Trustee fees.  It is easy to see from this example that a vehicle for which a debt of $20,000.00 is owed may not be worth saving; unless the vehicle is worth over $25,000.00. 

 

However, the example above assumes that saving the vehicle from repossession is the only reason for filing the bankruptcy.  In most cases, the repossession or potential repossession of a vehicle may be only one of many reasons for filing the bankruptcy case.  Most consumers who have experienced financial difficulty that prevented them from making their vehicle payments are also having difficulty with other payments such as mortgage payments and/or credit card payments.  If the Debtor in this example has credit card debt of $5,000.00 or more and can eliminate some or all of it in bankruptcy, then it may still be a good alternative to seek bankruptcy protection.  

 

Two common situations where it may not be advisable to save a vehicle from repossession in bankruptcy are where the vehicle is worth LESS than the debt that is owed on it, and where the Debtor is not able to make the vehicle payments at all.  Chapter 13 requires that the Debtor must commence making payments to the Trustee within 30 days of filing the bankruptcy case.  And because of the fees mentioned earlier in this blog, it is unlikely that the Trustee payment is going to be much less than what the vehicle payment was originally.  So if the Debtor is still without income or unable to make a monthly payment to the bankruptcy Trustee, then filing bankruptcy will probably not be a good alternative for saving the vehicle.

 

There is one exception to the situation where the vehicle is worth less than the debt that is owed on it.  In cases where the vehicle has been OWNED for more than 910 days, (approx 2.5 years) then it is possible to “cram down” the debt owed on the vehicle to the current value of the vehicle.  Determining the value of a vehicle in this situation can be difficult, but where it is clear that the value is less than the debt, there is a definite benefit to using Chapter 13 to save the vehicle. 

 

Of course, every person’s financial situation is different and there may be other considerations for filing Chapter 13 besides the ones mentioned above. But if you are in danger of losing your vehicle to repossession you should speak to a bankruptcy professional and consider Chapter 13 as one of your alternatives.

 

 

 

How are Monthly Payments Determined in a Chapter 13?

For many debtors, a Chapter 13 bankruptcy can be a good solution to financial difficulties. Perhaps the most important feature to most debtors is that a Chapter 13 can allow you to catch up on house and car payments and will stall a foreclosure or repossession. Chapter 13 offers many advantages, in that it allows a debtor to get on a payment plan to catch up on their debts and/or repay a certain percentage of their creditors. Each month, a Trustee will collect funds from the debtor and distributes those funds to the debtor's creditors. To allow you time to catch-up, we can divide up what you owe over a period of up to 60 months. But what is going to determine someone's monthly Chapter 13 plan payment? The monthly Trustee payment is going to be determined by a combination of four (4) factors: 1) your household income and expenses, 2) any "priority debts" that you have such as recent tax debt or child support arrears, 3) the amount of arrears on the secured debts for property you wish to keep (for instance mortgage or vehicle arrears), and 4) the value of any non-exempt property that you have. All of these factors affect your Chapter 13 plan payment and can make the Chapter 13 process very complicated (usually too complicated) for pro-se debtors. If you are considering filing a Chapter 13, the attorneys at Fears Nachawati will help guide you through this complicated process and explain how it works step-by-step. It is our job as attorneys to work hard to make sure that your payment is as low as is possible under the law and that is what we will do. Contact us with any questions today!

Keeping or Surrendering your Home or Car in Bankruptcy

 When you file for bankruptcy you can choose to keep or surrender secured collateral, such as your house or car. Depending on what chapter you file, you can also use a bankruptcy to become current on any payments that you may have missed.

 

Keeping your Secured Collateral:

All secured debts, such as mortgages and car loans that the debtor intends to keep must continue to be paid; or if the debtor rents their home or leases their car they must continue to make all of their rent or lease payments. Chapter 13 debtors should make sure that any direct payments are paid after the date the bankruptcy is filed (post-petition). This is excluding any creditors which are paid through the bankruptcy plan. Home owners insurance and automobile insurance must be maintained on any home or vehicle that the debtors intend to keep after the bankruptcy. All Home Owners Association fees must continue to be paid after the bankruptcy is filed.  The debtor must also make all utility bill payments on any utilities that they intend to maintain during the bankruptcy and thereafter.

In a Chapter 7 Bankruptcy, a debtor can elect to file a reaffirmation agreement to keep their secured collateral. A reaffirmation agreement is a voluntary promise to continue to pay for your house or car. A reaffirmation agreement means that you will remain liable for the debt; meaning that if you fail to pay, the creditor can come after you for the delinquency.  In a Chapter 13 Bankruptcy you can pay your secured debt through the Chapter 13 Plan. Sometimes you will continue to make your payments directly to the lender; usually a mortgage.

Surrendering your Secured Collateral

Sometimes a debtor realizes that they can no longer afford to make payments on their home or car and decide to surrender it during the bankruptcy.

While the bankruptcy will discharge the underlying obligation to pay for the debtor’s mortgage or car loan, it is still ultimately up to the bank on when to retake possession of the debtor’s home or car.  Therefore, the debtor will still be responsible for maintaining the insurance on the property and is responsible for its up keep (mowing the lawn, trimming the hedges, etc.).

Often times, it may take the creditor a while to repossess or foreclose on a car or home.  A debtor may continue to enjoy the property even after the bankruptcy, but must be cautious because the creditor will foreclose and evict the debtors at some point.

Making the decision to keep or surrender secured property in bankruptcy is extremely important in the bankruptcy process. The attorneys at Fears Nachawati will be able to walk you through this important process. To get started with a free consultation, call us today.

Property Exemptions Available to Texas Residents in Bankruptcy

As a resident of Texas (residing in the state for more than two years), certain property you own will automatically be protected from seizure by your creditors. This protected property is commonly known as “exempt property”. Most notably, any equity in your homestead and/or vehicles (as much as $30,000 for vehicles per household member) will be protected from your creditors. The only exception to this is if your creditor has been granted a security interest in the property like a mortgage or car note. Under Texas law, creditors typically have to get a judgment before they can try and collect any “non-exempt” or unprotected property from you to satisfy a debt. The most common types of property that are non-exempt under Texas law are bank accounts and ownership interests in businesses.

Upon filing bankruptcy, a Texan has two sets of property exemptions they get to choose from: 1)the property exemptions provided by the Federal Government, or 2) the Texas property exemptions. The set of property exemptions that will be best for you will largely depend on the type of property you need to protect and the amount of equity in that property. If you have a large amount of equity in your house and vehicles, the Texas exemptions might be best for you. In addition to protecting your house and vehicles, you can also protect home furnishings, tools of the trade, jewelry, firearms, and livestock. The major things that are not going to be protected under the Texas exemptions are business interests  (like ownership interests in companies or LLCs) or money in bank accounts.

The Federal property exemptions are only available to those who file bankruptcy. Like the Texas exemptions, the Federal exemptions allow you to protect equity in your homestead and vehicles, but not as much dollar-wise as the Texas exemptions. However, the Federal exemptions are more flexible than the Texas exemptions and allow you to protect things like bank accounts, business interests, and other miscellaneous property with the “wild card exemption.” The wild card exemption can be used to protect any sort of property you want; if you don’t have equity in any real estate, you can protect up to almost $12,000 in property! Certain property like social security proceeds, life insurance values, and retirement accounts (401K, IRA, etc.), are typically protected under both Federal and State exemptions.

Choosing the right set of property exemptions and applying them properly to your assets is extremely important in bankruptcy. If you claim the wrong exemptions, you can lose property that would otherwise be protected. The attorneys at Fears Nachawati will be able to walk you through this important process and make sure that you are able to keep all of the property you are entitled to keep by law. To get started with a free consultation, call us today.

What Does the Supreme Court's Ruling on DOMA Mean for Gay and Lesbian Couples Looking to File Bankruptcy in Texas?

Recently, in US v. Windsor, the United States Supreme Court struck down the Federal Defense of Marriage Act as unconstitutional. What this ruling essentially means is that the Federal Government can no longer deny federal benefits and protections to gay and lesbian couples who have married. This will include bankruptcy, seeing as how bankruptcy is Federal law. Prior to the decision by the Supreme Court, gay and lesbian couples could not file bankruptcy together as one household; the Windsor decision will change that. However, there is an important caveat to Windsor in that the Supreme Court did not rule that banning gay marriage is unconstitutional or should be legally recognized by the states.

Texas is currently a state that does not recognize gay marriage. So, in order to file bankruptcy as a married couple in Texas, a gay or lesbian couple would have to get married in a state that DOES recognize gay marriage. Currently California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont, and Washington all recognize gay marriage. Since, the Federal Government can no longer discriminate against gay and lesbian couples who have married, the Federal Bankruptcy Court would be required to recognize the Debtors’ out of state marriage, and grant the couple a discharge despite Texas not recognizing gay marriage as a matter of Federal law.

Chapter 13 Bankruptcy Timeline

A Chapter 13 is a repayment bankruptcy case that takes three to five years. To keep the case moving along, the federal law has imposed certain deadlines on a Chapter 13 case for the debtor, the trustee, and the bankruptcy court to follow:

Day of Filing - The bankruptcy court issues a case number. Use this case number when notifying creditors with pending legal or collection action of your bankruptcy filing. If you have not filed all of the required bankruptcy schedules, the court will issue a show cause order to dismiss your case. You are required to file the necessary schedules by the court’s deadline, usually 14 days from the date of filing. 11U.S.C. §521

30 Days After Case Filing - Commence plan payments to the Chapter 13 Trustee.

7 Days Prior to 341 Meeting - Tax returns for the most recent tax year must be sent to the bankruptcy trustee. These documents are usually sent to the trustee on the date that you file your case. 11U.S.C. §521(e)(2)(A)

1 Day Prior to 341 Meeting - Tax returns for the prior 4 tax years filed with the IRS and state must be sent to the bankruptcy trustee. These documents are usually sent to the trustee on the date that you file your case. 11 U.S.C. §1308

21 to 60 Days After Filing - Your 341 meeting of creditors will be held. You are required to attend this meeting and all of your creditors will receive notice of this meeting and may attend (although it is rare that any actually show up). 11U.S.C. §341, 11 U.S.C. §343, Fed. Rule 2003.

(Generally) 21 Days after the First Setting of the 341 Meeting – Creditor objections must be filed so the debtor’s plan can be confirmed without further notice or hearing absent timely objections. Determined by local rule.

90 Days after the First Setting of the 341 Meeting - Creditor’s bar date for proof of
claim filings. 11 U.S.C. §502, Fed. Rule 3002

180 Days after the First Setting of the 341 Meeting -Governmental bar date for proof of claim filings. Fed. Rule 3002

(Generally) 45 Days after the First Setting of the 341 Meeting - You must file your Financial Management Course certificate with the court. 11U.S.C. §1328; Determined by Local Rule.

Three to Five Years after Case Filing – Discharge Order entered by the court. 11U.S.C. §1328. Additional filing requirements may be imposed on the debtor or trustee by local rule, such as motions and notices.
 

The Big Decision: Chapter 7 v. Chapter 13

For Americans who are considering whether to file for personal bankruptcy, there are many decisions. For instance, you may have asked yourself whether you should hire an attorney, when you should file, or how long it might take you and your family to recover financially, professionally, or emotionally from your bankruptcy filing.