Can I Use My Credit Card in Bankruptcy?

The short answer is no.  This is because while you are in bankruptcy you should not be incurring new debt without court permission.  Most of the time a credit card will not issue a card to someone who is in an active bankruptcy case, because they do not want to violate the bankruptcy code and face sanctions from the bankruptcy court.  Furthermore any cards that a debtor has prior to filing the case will be discharged in the bankruptcy case, except under rare exceptions.  Therefore the debtor will not be able to continue to use their cards.  

The entire point of a bankruptcy case is to get a fresh start and to get rid of the debt and allowing a debtor to continue to incur debt while in the bankruptcy case complicates and frustrates this goal.  When preparing to file a bankruptcy case a debtor must take a look at their finances and make sure that they are living within their means and question why they would have a need to continue to spend on credit. 

If you have any questions about bankruptcy, contact the attorneys at Fears Nachawati today. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com for a free consultation.

Chapter 12 Bankruptcy

While many people are familiar with chapters, 7, 11, and 13 another chapter that is available is chapter 12.  A chapter 12 is agricultural and is for “family farmers" or "family fishermen." with "regular annual income."   The chapter 12 allows for farmers and fishermen to reorganize their debts in a reorganization plan to pay all or some of their debt.  The chapter 12 plan is an installment plan over three to five years.  Generally, the plan is for three years unless the court approves longer “for cause." If the plan proposes to pay 100% of child support or alimony if any exist, it must be for five years and must include all of the debtor's disposable income.  A case may not exceed 5 years.

 In order to file for chapter 12 the debtor must meet four criteria when they file the case:

  1. The debtor(s) must be engaged in a farming operation or a commercial fishing operation.
  2. The total debts must not exceed $4,031,575 for a farming operation or $1,868,200 for a fishing operation.
  3. If a family farmer, at least 50%, and if family fisherman at least 80%, of the total debts must be related to the farming or fishing operation.
  4. More than 50% of the gross income of the individual or the husband and wife for the preceding tax year must have come from the farming or commercial fishing operation.
 
Chapter 12 is less complicated, and less expensive than chapter 11, but allows for more debt than a chapter 13 because Chapter 13 is designed for wage earners who have smaller debts than those facing farmers. In chapter 12, Congress sought to combine the features of the Bankruptcy Code which can provide a framework for successful family farmer and fisherman reorganizations.
The only a family farmer or fisherman with "regular annual income" may file chapter 12, but the chapter 12 makes allowance farmers and fishermen whose income is seasonal. 
 
If you have any questions about bankruptcy, contact the attorneys at Fears Nachawati today. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com for a free consultation.
 

Bankruptcy Filing Fees

When a debtor files for bankruptcy the court charges a filing fee to file the case.  For a chapter 7 case the courts charge a $245 case filing fee, a $75 miscellaneous administrative fee, and a $15 trustee surcharge.  These fees are paid to the clerk when the case is filed. Although with a chapter 7 case a debtor can request to pay the filing fee in installments or have the fee waived. 

If the Debtor is asks the court to pay the fee in installments the number of installments is limited to four, and the final payment must be made no later than 120 days after the case is filed.  For cause shown, the court may extend the deadline, but the last payment then must be paid not later than 180 days after the case is filed.  Failure to pay these fees may result in the case being dismissed. 
 
If the debtor's is unable to pay in installments and the income is less than 150% of the poverty level, the court may waive the filing fee. 
 
For a chapter 13 case the courts charge a $235 case filing fee and a $75 miscellaneous administrative fee.  The debtor may also request to pay these fees in installments or for the fee to be waived, however the Debtor must also make a chapter 13 plan payments so the Debtor must have sufficient income to pay the plan to remain in the case. 
 
If you have any questions about  Bankruptcy or filing fees, contact the attorneys at Fears Nachawati today. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com for a free consultation.

What is a Chapter 7?

A chapter 7 is a liquidation chapter. This means that a chapter 7 Trustee can sell or liquidate property to pay off your creditors. A chapter 7 Trustee can only sell property that is non-exempt. Most Debtors will find that all of their property is exempt.  Each state has its own exemption laws and some states opt into the federal exemptions. You should contact an attorney to discuss the exemptions that will apply in your case.  Generally, the debtor’s house, car, household furniture, electronics and pets will all be exempt. 
 
If there are no assets then a chapter 7 Trustee will issue a report to the court stating that they did not liquidate any property.  Then the case will proceed to discharge and be closed. If a Trustee does determine that there are assets to sell he will file a notice with the court and the creditors and proceed to sell the assets. The Debtor will receive a discharge but the case will not close until the assets have been sold and creditors have been paid in whole or in part.
 
In order to initiate a chapter 7 case a debtor files a petition with the bankruptcy court for the area the debtor lives.  In addition to the petition, the debtor must also file schedules of assets and liabilities; a schedule of current income and expenses and a statement of financial affairs
 
 After the case is filed the debtor must also provide a copy of the tax return for the most recent tax year to the chapter 7 Trustee assigned to the case. These must be sent 7 days prior to the 341 meeting or the case may be dismissed.  Debtors whose debts are primarily consumer debt have additional requirements. They must file: a certificate of credit counseling and all pay stubs if any received in the 60 days before filing. 
 
If you have any questions about Chapter 7 or Chapter 13 Bankruptcy, contact the attorneys at Fears Nachawati today. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com for a free consultation.
 

Credit Scores (Part 2)

In part two of our blog on credit scores, we will discuss how to rebuild your credit score after completing a bankruptcy.

 
While the filing of bankruptcy places a negative report on your credit, rebuilding your credit rating after completing a bankruptcy is a manageable task.  Once completing a bankruptcy, the debtor’s credit report will not reflect a positive credit history, which makes up the largest influence on the overall credit score.  Also included in credit history, is the public record of filing bankruptcy.
One method of keeping at least some positive credit history after completing a bankruptcy is reaffirming debts during a Chapter 7.  In the typical case, debtors have the option of reaffirming their secured debts, including mortgages, car notes, and debts secured by other property such as furniture or electronics.  After reaffirming those debts, the terms essentially stay in place as if they were not including in the bankruptcy.  The payment history for reaffirmed debts should continue to reflect the payments made prior to, and after, the bankruptcy has been completed.
 
Even if there are reaffirmed debts after a bankruptcy, debtors will need to establish a positive credit history to help rebuild their credit after the completion of their case.  One method of establishing a positive credit history is to open, and use, a credit card after discharge.  While many debtors believe they will be unable to qualify for a credit card after bankruptcy, they will likely get inundated with credit card offers soon after their discharge.  Although there is generally a negative perception to one’s ability to maintain credit with a bankruptcy on their record, many lenders will offer credit to recent bankruptcy filers because their debt has likely been eliminated and they are ineligible for another discharge for eight years.  
 
It is important to note that any credit cards obtained after a recent discharge will likely come with unfavorable terms and high interest rates.  Accordingly, it is generally considered the better practice to open one or two secured credit credits after bankruptcy.  Secured credit cards work like regular credit cards but require a security deposit to open which generally range between $500-$1,500.  The deposit typically becomes the credit limit for the card.  As with unsecured credit cards, each offer varying terms and differing interest rates.  When using the card to establish and build credit, it is important to use the card each month and pay off the entire balance.  Prior to signing up for a secured credit card, you will want to ensure the issuer reports to all three major credit bureaus.  After a period of making regular payments on time, you will eventually qualify for an unsecured credit card at near market terms.
 
After building a positive credit history through the use of credit cards, you can eventually look to purchase a car or even a house.  Federal Housing Administration (“FHA”) loans are available to former debtors after 2 years from a Chapter 7 discharge.  In addition, FHA loans may be obtained during a Chapter 13 after one year of timely plan payments.  These timelines may be adjusted if the borrower provides an explanation of extenuating circumstances which led to the bankruptcy filing along with their application for the FHA loan.
 
When working to reestablish your credit and build a favorable credit score, it is important to continue to monitor your credit report for errors and inconsistencies.  While there are Credit Repair companies willing to assist, these companies are generally perceived as a scam.  Disputes to information on the credit report can be done effectively on a “Do-it-Yourself” basis.  Most disputes can be completed online at through the websites for the three major credit reporting companies.
 
GUIDELINE FOR IMPROVING CREDIT
 
Below is a suggestion for steps to take following bankruptcy to rebuild credit:
 
1) Get a Credit Report and Check Your Score
 
Credit reports can be obtained for free from each agency once per year.  After completing a bankruptcy, it is important to review the credit report to check for any errors.  Make sure debts which were discharged are reflected correctly.  Also ensure that any debts which were reaffirmed continue to show the credit history.  Dispute any inconsistencies with the credit agencies.  
 
2) Open a Bank Account
 
If you do not already have a checking or savings account, open a new account.  Get an account that allows automatic bill pay and set it up to prevent missed or late payments.
 
3) Apply for a Secured Credit Card
 
Although you will receive offers for unsecured credit cards shortly after completing bankruptcy, secured credit cards will likely provide better terms and lower limits which should help prevent falling back into debt.  The credit limit on secured credit cards is generally the deposit required to open the account.
 
4) Pay Off the Balance Every Month
 
Make sure to use the card to make small purchases every month.  Having an open credit card without any usage does not help build credit.  It is also important to pay the balance in full on time each month.  The amount of debt owed makes up a large portion of the credit score.  Because the credit limit is likely to be small when opening secured credit cards, it is best to not leave running balances on the cards from month to month.  Paying off the balance in full also prevents accruing interest.
 
5) Continue to Monitor Your Credit
 
Continue to pull a credit report and monitor for inconsistencies.  Make sure any new accounts are showing their timely payments and continue to dispute any incorrect information.  As previously mentioned, you are entitled to one free credit report per agency per year.  It is best to spread these free reports over the year and obtain a report every 3-4 months from one agency at a time.

If you have any questions about Chapter 7 or Chapter 13 Bankruptcy, contact the attorneys at Fears Nachawati today. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com for a free consultation.

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.
 

The Typical Chapter 7 Timeline

 A lot of my clients have not previously filed for bankruptcy.  One of the most common questions is gaining an understanding of the general timeline and process of your typical Chapter 7 Bankruptcy.  In general, Chapter 7 is the quickest bankruptcy to complete.  The typical Chapter 7 case is completed within three to six months of the filing date.  Keep in mind, before you can file a Chapter 7 bankruptcy, you need to complete your pre-filing Credit Counseling Course from a certified credit counseling agency.  You must also qualify for Chapter 7 by passing the Means Test, which will be completed by your attorney and filed as part of your petition and schedules.

 
After your case is filed, the Court will assign a Trustee to your case and schedule the Section 341 Meeting, otherwise known as the Meeting of Creditors.  This meeting generally takes place around 30 days after the case was filed.  It will be held by the Trustee assigned to your case.  All of your creditors are invited to attend the meeting, however, creditors rarely attend.  At the meeting, you will discuss the schedules filed in your case and provide a brief explanation on what caused you to file for bankruptcy.  These meetings typically last 10 minutes.
 
Creditors have 60 days from the completion of the Meeting of Creditors to file an objection to discharge.  Assuming there are no objections, you should receive your Discharge Order roughly 60 days after your Meeting of Creditors.  Once the Discharge is entered by the Court, your case will be closed and your Bankruptcy will be completed.  Please see our series on rebuilding credit after your bankruptcy for further discussion of how bankruptcy affects your credit. If you have any questions about Chapter 7 or Chapter 13 Bankruptcy, contact the attorneys at Fears Nachawati today. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com for a free consultation.
 

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.

 

What If I Don't Qualify for Chapter 7 Bankruptcy

In order to file Chapter 7 Bankruptcy, you will need to complete and pass a Means Test, which is filed as part of your bankruptcy paperwork with the Court.  In general, the Means Test takes a six month look at your income and compares that with the median income for a similar family in your state.  If you earn more than the median income, minus allowable expenses, and show enough disposable income to pay back your creditors while maintaining a minimal standard of living, you may not qualify for a Chapter 7 bankruptcy.  However, this does not mean you cannot utilize the protection of the bankruptcy court to help you resolve your financial difficulty.

In the event you do not qualify for a Chapter 7 Bankruptcy, you may still qualify for a Chapter 13 Bankruptcy.  Under Chapter 13, your attorney will calculate a payment plan, which generally ranges from 36-60 months, to provide payments to your creditors in line with your budget.  At the completion of your bankruptcy plan, you are entitled to a discharge of the remaining debt, subject to certain restrictions.  Your bankruptcy plan may only provide for a return of a certain percentage of your unsecured debt, such as medical bills and credit cards.  In the event there is a portion of this debt remaining, it is subject to discharge at the end of the case.  While Chapter 13 takes longer to complete than a Chapter 7, you are still protected from collection efforts, foreclosure, repossession, and lawsuits while you are in an active bankruptcy.  Although you will be placed on a budget, you will have peace of mind by being protected from your creditors while maintaining a manageable payment plan to help get you on the right financial path.

If you have any questions about Chapter 7 or Chapter 13 Bankruptcy, contact the attorneys at Fears Nachawati today. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com for a free consultation.

 

Fears | Nachawati Attorneys Selected to 2015 Super Lawyers List

Fears Nachawati Law Firm is proud to announce that Partner Majed Nachawati has been selected to the 2015 Texas Super Lawyers list. Each year, no more than five percent of the lawyers in the state are selected by receive this honor.  Additionally, Partners Bryan Fears and John Raggio, were both selected to the 2015 Super Lawyer Rising Stars list. Super Lawyers is a rating service of outstanding lawyers from more than 70 practice areas who have attained a high degree of peer recognition and professional achievement. The annual selections are made using a patented multiphase process that includes a statewide survey of lawyers, an independent research evaluation of candidates, and peer reviews by practice area. The result is a credible, comprehensive and diverse listing of exceptional attorneys. The Super Lawyers lists are published nationwide in Super Lawyers Magazines and in leading city and regional magazines and newspapers across the country. Super Lawyers Magazines also feature editorial profiles of attorneys who embody excellence in the practice of law.  

Partner Majed Nachawati appointed as Panel Chairman of State Bar of Texas Grievance Committee

We are proud to announce that Fears | Nachawati Law Firm Partner, Majed Nachawati, has recently been appointed as Panel Chairman on Panel 2, District 6 Grievance Committee of the State Bar of Texas. This appointment is highly prestigious, as the position is filled based up on nominations from other grievance committee members, and ultimately appointed by the Committee Chair.  The Committee’s job is to make sure that attorneys throughout the state of Texas uphold the integrity of the practice of law and remain accountable to the public and their clients. As part of his new role, Mr. Nachawati will be responsible for presiding over panel proceedings, evidentiary hearings, and the summary disposition docket. He is dedicated to protecting the public through his work on the Grievance Committee and hopes to advance and improve the quality of legal services to the public during his term as Panel Chairman.  Information about the firm or Mr. Nachawati can be found at www.fnlawfirm.com or by calling the firm at 1.866.705.7584.

Car Title Loan Trap

Car title loans can be a problematic debt trap.  If you need money fast, then using your as collateral may be an option. If you take out a title loan, the lender will take your title and place a lien on your car in exchange for a short-term loan.  If you stop making payments on the loan, then the lender has the right to repossess your vehicle.

There are many disadvantages to this type of loan. First, the borrower does not have to meet any qualifications in order to receive a car title loan. All the borrower needs is a source of income and a vehicle in to receive a loan. Unlike many other financing options, the approval process for a car title loan is nonexistent and the borrower does not have to qualify for the loan. This procedure can be dangerous for borrowers who are already in a large amount of debt. The lenders do not base their approval process on your credit score, so acquiring a car title loan could produce more debt for the borrower. Second, the interest rates on car title loans have been known to exceed 100 percent. Short-term loans are expected to be repaid quickly. If the borrower is unable to make payments to the lender, then late fees and interest rates skyrocket causing the borrower to pay back more than they originally acquired. Third, the borrower is at risk of losing their vehicle. If the borrower is unable to make payments, then the lender has the right to sell the vehicle that was originally used as collateral.

If you decided that a car title loan is the best option for your current situation, then be sure to make your payments on time to avoid late fees and high interest rates. It is extremely important to read the fine print when signing up for a car title loan. By reading the fine print, you are better able to completely understand the terms and conditions so you are not caught off guard by hidden fees. 

What Records Will the Bankruptcy Trustee Require?

The bankruptcy system is built on trust. It really isn’t designed that way, at least not intentionally, but this trust system has developed from necessity. The volume of bankruptcy cases necessitates that bankruptcy trustees accept most debtor statements without verification, and rely on the examination of a few records for the rest. Many of these records are mandated by the Bankruptcy Code or Federal Rules of Bankruptcy Procedure. Other records are required by the local rules of the bankruptcy court. Finally, the bankruptcy trustee may request other debtor records.

All debtors are required to submit a copy of the last filed tax return and pay advices for the past 60 days to the bankruptcy trustee. In addition, most trustees will request some or all of the following documents, but all of these documents should be delivered to the debtor’s attorney for analysis prior to the case filing:

  1. Last six months of pay check stubs for all jobs, and profit/loss statements for any business. All income information from the past six full months is needed in order to complete the bankruptcy Means Test. For a W-2 employee, this information can be obtained from the debtor’s employer or human resources office. The debtor is also obligated to send copies of all pay advices received within the last six months to the bankruptcy trustee.
  2. Last two years of income tax returns. The Statement of Financial Affairs requires income information for earnings during the past two years. The bankruptcy trustee may also request this information.
  3. Real estate deeds and mortgage paperwork. Some bankruptcy trustees require copies of real estate deeds. It is always a good idea for the debtor’s attorney to have copies of real estate records so that ownership interests in property can be properly ascertained. This is not a good time to “forget” about a timeshare in Florida, or that the debtor’s name is on the deed to his mother’s house. 
  4. Vehicle titles along with lease or purchase agreements. Similar to real estate deeds, the bankruptcy trustee may require production of vehicle titles and purchase agreements (also called promissory notes). In many cases a perfected security interest can help the debtor keep a vehicle, or lower Chapter 13 plan payments, so it is in the debtor’s best interest to ensure that this paperwork gets to his attorney for review.
  5. All loan paperwork. This includes personal loans to banks, finance companies or payday lenders; personal guarantees; and co-signor agreements (which may include agreements guaranteeing a child’s student loan or apartment lease).
  6. All unexpired contracts. The debtor may have the opportunity to accept or reject a contract, like for a cell phone or satellite television.
  7. Appraisal paperwork for real estate or personal property. Appraisals aid in developing a strategy to protect the debtor’s property.
  8. Any tax bill showing assessed value. Property assessments are useful when discussing real estate values with the trustee.
  9. Any child support or maintenance (alimony) court order. Most domestic support orders are not dischargeable, but some are. The prudent debtor will discuss the situation with his attorney.
  10. Most recent credit reports. Credit reports contains useful information like creditor addresses, the date obligations were incurred, and collection agency contact information. The federal law entitles consumers to receive a free, no-obligation, no credit card required credit report once each year from each credit reporting agency.
  11. Information regarding debts, including bills and collection letters. Credit reports are a great start, but the most practical way to obtain creditor information is to save periodic bills received by mail.
  12. Documents that impact income, assets, debts, or expenses.  Examples of this are a foreclosure notice, or a notice of an upcoming bonus or commission.
  13. Investment records. Some investments are exemptible, other are not. All investments, including retirement accounts, should be reviewed prior to filing.
  14. Life insurance policy with a cash surrender value. Term life insurance policies generally have no value. Other life insurance policies may be exemptible assets.
  15. Last six months of bank statements. Every bankruptcy trustee will ask for bank statements. The debtor’s attorney must review bank statements to uncover suspicious transactions before filing the case.
  16. Proof of insurance on all property secured by a lien. Creditors (and sometimes the trustee) will request proof of insurance to ensure that a secured asset is being protected and safeguarded by the debtor.
  17. Documents pertaining to legal claims or pending lawsuits, including lawsuits filed by the debtor. The debtor’s attorney needs lawsuit information to determine whether the debtor/plaintiff will be able to maintain a lawsuit during bankruptcy or keep any money judgment. The debtor’s attorney also requires lawsuit information when the debtor is a defendant to notify the federal or state court to stop the case once the bankruptcy case is filed.

New Credit Score for Those without Credit

The traditional wisdom is that having any credit score is better than not having a score at all. Lacking a credit score makes it very difficult for a lender to calculate the risk of extending credit to a particular consumer. Consequently, a person with fair or even poor credit may be extended credit after evaluating all circumstances, while a person who pays her bills on-time and pays cash, but has no credit score, may be denied outright.

Some individuals fail to re-establish their credit history after bankruptcy. This is an obvious mistake when you compare a person with no credit history after bankruptcy with a person who has a year of rebuilding. When the individual with no credit is evaluated for a mortgage, a car loan, or even a new job, the last activity on his or her credit report is the bankruptcy discharge. The person who has rebuild his or her credit with have demonstrated responsible use of credit and on-time payments during the past 12 months.

Is this fair? Some banks are now saying, "No."

Responding to bank requests, the Fair Isaacs Corp., producers of the popular "FICO" credit score, recently announced that it is developing a credit score for the estimated 53 million people who do not use credit cards, auto loans, house payments, etc. The new score will use alternative data including payment history on utility bills, cable bills and cell phone bills as well as other information in the public record such as the number of addresses the person has had in the recent past (an indicator of stability).

This new scoring system may have unexpected consequences, including the potential for more sources of negative information for consumers with "traditional" credit scores. The product "is largely a response to banks’ desire to boost lending volumes by increasing loan originations to borrowers who otherwise wouldn’t qualify, many of whom tend to be charged more for loans."

Problems with Payday Lenders

 

One of the most common causes of bankruptcy includes the accumulation of payday loans. Payday loans are extremely easy to obtain, most borrowers are unable to pay the lenders back in full, which creates an unlimited debt trap.   One major issue which causes payday loans to become difficult to repay is the extremely high interest rate built into the loan. This never-ending process can put many people in an immeasurable amount of debt.

It is commonly known that all you need to obtain a payday loan is a checking account and a job or source of income. This creates an environment for borrowers to easily take out loans if they are in a difficult financial situation. Many times, debtors are able to obtain multiple payday loans in the same month as it is a highly unregulated industry.

The majority of borrowers are unable to pay their loan back by the due date and tend to take out more than they can afford to pay back. This allows lenders to increase the interest amount and charge the borrower more for not paying their loan back on time, in addition to the inclusion of late fees and penalties. However, if a borrower is unable to pay their loan back in full by the due date, then the lender will extend the loan with a large fee attached. The borrower continues to create a financial hole and a boundless debt trap.

The Consumer Financial Protection Bureau is in the process of passing a proposal that would make it difficult for payday lenders to take advantage of borrowers through outrageous fees. The process will take a long time, but the outcome may be highly beneficial to consumers who are drawn to small-dollar loans.  

How are Debts Handled in Bankruptcy

Individuals who have been through the bankruptcy process are often happy to talk about their experiences. Usually this is not a bad thing, but sometimes it can lead to misinformation and unrealistic expectations. How your friend’s debts were treated in her case may be very different from how similar debts are treated in your case. For instance, a bankruptcy court may find that a $5,000 credit card debt must be paid in full in one case, partially paid in another, and not paid at all in a third.

A debt that is included in a bankruptcy case can take several different paths and be altered in several different ways. What “legally” happens to the debt depends on the type of debt and the laws that apply to it; the intent of the debtor; and the order of the bankruptcy court. In certain situations it even matters how and when the debt was created! Let’s take a look at common types of debts in bankruptcy cases and how they are often treated.

Priority Debts

The Bankruptcy Code instructs the bankruptcy trustee to pay creditors in accordance with a priority hierarchy. For example, recent tax debts are paid ahead of credit cards; owed child support obligations are paid ahead of medical bills.  Priority debts have little impact in most Chapter 7 cases, where there is no money to pay creditors from the bankruptcy estate. However, priority debts play a large part in Chapter 7 cases when assets are distributed or in Chapter 13 repayment cases. In Chapter 13 cases, some priority debts must be repaid in full before the bankruptcy court will grant a discharge. Note that priority debts may be discharged at the end of a bankruptcy case unless they are also non-dischargeable debts.

Non-Dischargeable Debts

Non-dischargeable debts are either excluded from a bankruptcy discharge by law, by a court, or by agreement between the debtor and creditor. The Bankruptcy Code identifies several kinds of debts that are not discharged during a Chapter 7 case, a Chapter 13 case, or in either case. When a debt is excepted or excluded from the bankruptcy discharge, it survives the bankruptcy case either in whole or in part.

Secured Debts

Secured debts, like car payments and house loans, are secured by collateral. Treatment of a secured debt during a bankruptcy case is complex. A secured debt may be discharged in whole and the collateral surrendered (called “surrender”); discharged and the property retained (called a “lien stripping”); or discharged in part (called a “cram-down”). In a Chapter 7 case a debtor has the choice of “reaffirming” the debt with the creditor at the same or changed terms. A reaffirmed debt survives a bankruptcy discharge.

Unsecured Debts

Unsecured debts commonly include medical bills, credit cards, unsecured personal loans, debts to family members, and old tax debts. Unsecured debts in a Chapter 7 no-asset case are discharged, unless excepted as a non-dischargeable debt. Unsecured debts in a Chapter 13 case are either discharged at the end of the case, paid in full, or paid at a “pennies-on-the-dollar” rate with the remaining amount discharged.

Your debts and financial situation will dictate how your debts are treated in bankruptcy. Don’t rely on general rules found on the internet or advice about how your friend’s debts were treated in her bankruptcy, call an experienced attorney and have your own case fully and professionally evaluated.

What is an Adversary Proceeding?

By definition, an Adversary Proceeding is a lawsuit filed within the bankruptcy case. Only three parties can file the complaint that initiates an Adversary Proceeding; these parties include the creditor, the trustee and the debtor. When an Adversary Proceeding is filed, the parties must go in front of the Judge and explain their case.

When a creditor files an Adversary Proceeding, it is usually because the creditor is fearful that their particular debt is being wrongfully discharged in the underlying bankruptcy case.  However, there are certain categories of debts that are declared non-dischargeable. The non-dischargeable debts include certain taxes, past due child support, student loans, damages arising from drunken driving accidents, and, depending on the circumstances, credit cards and personal loans may be non-dischargeable as well. These debts make up the main cause of Adversary Proceedings.  By filing a lawsuit, the creditor is hopeful that they the debt will be declared non-dischargeable and essentially survive the underlying bankruptcy case.

The Bankruptcy Case Trustee, or the United States Trustee, can also file an Adversary Proceeding against the parties to the Bankruptcy case.  For instance, the Trustee may file an Adversary Proceeding against a creditor to collect money if the creditor has received funds or assets from the debtor prior to the Bankruptcy that would be considered a preferential payment.  On the other hand, the trustee may file against a debtor if paperwork was not filled out correctly or on time, if a court date was missed or if schedules were intentionally filled out incorrectly.  Last, the debtor is able to file an Adversary Proceeding.  For example, the debtor can bring suit against a creditor if the creditor has violated the automatic stay or discharge injunction.

The judge will take into account each side of the adversary proceeding and will determine the outcome through a hearing or a trial.  Essentially, an Adversary Proceeding is a separate lawsuit filed within the Bankruptcy Court related to the underlying Bankruptcy Case.

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. 

Can Creditors Harass You After You File Bankruptcy?

When you file bankruptcy, an automatic stay is put into effect under Section 362 of the Bankruptcy Code.  The automatic stay prevents all collection activity while the bankruptcy case is active without an order of the Court.  The protection provided by the automatic stay prohibits creditors from contacting the debtor, which allows the debtor to have some breathing room during the bankruptcy process.  

Creditors will receive a notice from the Court that the debtor has filed for bankruptcy.  However, some creditors ignore the bankruptcy case and continue to call or pursue collection activities.  If this occurs, the creditor is in violation of the automatic stay.  If a creditor initially violates the automatic stay, then it is likely out of error.  Generally, the debtor informs the creditor of the open bankruptcy case, which will stop all further calls.  If a creditor continues to call after they have received the notice of bankruptcy filing and after the debtor has informed them of the bankruptcy case, then the debtor should notify their attorney or the bankruptcy court. The bankruptcy court has the power to sanction creditors for violating of the automatic stay, which could result in fines or monetary damages against the creditor.  

Under Section 362 of the Bankruptcy Code, the creditor is absolutely prohibited from harassing the debtor after a bankruptcy case has been filed.  The automatic stay was put in place upon filing, and creditors who violate the automatic stay could face sever ramifications.

Should I Take Money Out of My 401K to Pay Off Debts?

Your retirement fund, also known as 401K, is something that you work your entire life for. The last thing you want is for bankruptcy to swipe all of your retirement savings out from underneath you. Luckily, under state and federal law, your 401K plan is considered “exempt” or a protected asset in bankruptcy. No creditor can legally touch any funds in your 401K.

However, under no circumstances should you ever take money out of your 401K to pay off debts or use as cash to cover everyday expenses. Money that you pull out of your 401K is not protected if you file for bankruptcy and it will eventually have to be paid back into your retirement plan or it will be taxed. Therefore, your bankruptcy trustee will treat the money that you loaned from your 401K as a debt obligation.

In addition, money withdrawn from your 401k or other retirement account will count as additional income for income tax purposes as well as income to determine your eligibility for filing bankruptcy.  If you withdraw from your 401k within six months from filing bankruptcy, the withdrawal will be used in the calculation for means tests purposes.  Prior to touching your retirement, consult with your attorney or account to make sure you understand the potential ramifications.   

Be very careful if you are considering taking any money out of 401K. Not only may hinder your bankruptcy case, but it can also affect your taxes. If you take funds out of your 401K then you will be taxed on the amount at a higher rate, and if you take a loan from your 401K, then you will be charged interest that is going back into your retirement account (so you are essentially paying yourself back). If you need to retrieve access into your 401K balance early, then you are probably in a jeopardizing financial situation and will most likely not have the means to reimburse your 401K at a later date. 

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.  

Save Money Today

Many families who struggle to make ends meet talk about establishing a family budget and reducing expenses. Some suggest “sacrificing” and “tightening the belt” to save money. While admirable, sometimes it is not necessary to do without in order to save money. Below are three easy ways to immediately save money without changing your lifestyle.

Pay TV

The entertainment world is changing. Last year almost 200,000 Americans cancelled their pay TV subscriptions. More and more people are moving away from pay TV and using internet services such as Hulu, Amazon, and Netflix for cheaper entertainment. The younger a person is, the more likely that person is to watch shows on a wireless device or computer and not subscribe to pay TV. The consequence is that satellite providers, cable companies, and even phone companies are hurting for business.

You can save money today by starting a bidding war for your dollars. Contact Dish TV, DirecTV, your area cable company, and your local phone/internet television providers and tell them that you are willing to subscribe to company with the best deal. Be sure to get the offer in writing (by email or otherwise) and review any contract before signing up.

Cell Phone

The cellular carrier marketplace is crowded. The prize these companies covet is the two-year plan -- the customer that obligates for two years of service. Some companies will even buy out an existing obligation at a competitor, just to earn your business. This all adds up to a powerful bargaining position for you.

If you are a “free agent” without a contract, then you can shop around for the best deal. Be sure to investigate additional hidden discounts such as company or military discounts. If you are not a free agent, research competitor deals that include buying out your contract, then use that information to negotiate better terms with your cellular company’s customer retention department.

Gasoline

Gas prices are lower, that’s good. However, you can still save more money at the pumps by being a watchful consumer. A ten cent difference in price per gallon between filling stations can mean a $1.60 savings for a 16 gallon tank. Fill up once a week and that’s $83.20 a year. “Big deal,” you say? Well, it’s your money.

GasBuddy, a free cell phone app can save you money with each fill up. GasBuddy uses user feedback to track the current prices of local gas stations, making it easy to quickly find the best deal. GasBuddy is especially useful for premium gas, where prices may not be displayed on a road sign and can vary by $.20 or more between stations.

Contingent, Unliquidated and Disputed Debts, and Why It Matters

During your bankruptcy you will account for your debts on official bankruptcy forms. The bankruptcy code requires you to list all debts and indicate whether the debt is contingent, unliquidated, or disputed. Below is a quick primer on these types of debts and why you should accurately list the debt.

Contingent debt

A contingent debt is a debt owed to the creditor that depends on some event that hasn’t yet occurred. This includes a debt that may never arise because the event may not occur. Contingent debts are only identified when the contingency that creates the debt is probable and the amount of the liability can be estimated.

Why would you list a debt in your bankruptcy that may or may not arise? Simple, a contingency debt means that certain obligations exist currently that may give rise to a debt in your future. In many cases you can discharge those obligations. For instance, suppose you have co-signed for a car loan for your brother-in-law. Even though you have no liability until your brother-in-law defaults (which may never occur), you may still discharge that potential liability during bankruptcy.

Unliquidated debt

An unliquidated debt means that the exact amount of the debt has not yet been determined. For example, suppose you sue someone for personal injuries. Your attorney agrees to take the case under a contingency fee agreement (1/3 of the recovery, for instance). The debt to your attorney is unliquidated because you don’t know how much, if anything, you’ll win and, consequently, what you will owe your attorney.

Like contingent debts, it is important to list unliquidated debts even though the exact amount is not yet determined. Once the amount is clear and undisputed, the debt is “liquidated.” Liquidated and unliquidated debts are often dischargeable during bankruptcy.

Disputed

A debt is disputed when you and the creditor do not agree about the existence or amount of the debt. For instance, suppose you believe you owe Capital One $1,000 for a credit card debt, and Capital One asserts that you owe $2,000. You would list Capital One as a creditor, list the full amount asserted by Capital One, and identify the debt as “Disputed.”

Listing the debt makes it eligible for inclusion in the bankruptcy discharge. It also alerts the bankruptcy trustee that the creditor may not be entitled to a full distribution of any estate assets. 

Practical Concerns Regarding Wage Garnishment and Bankruptcy

When an individual files a personal bankruptcy case, the bankruptcy automatic is triggered and most collection actions, including garnishments against the debtor, must immediately cease. Further creditor activity generally violates the automatic stay protection – even where the creditor is unaware of the bankruptcy filing!

While the automatic stay casts a long shadow of protection, it is not magical. As a practical matter, a garnishment will continue at least until notice of the bankruptcy filing is received. Therefore, it’s in the debtor’s best interest to send notice to all parties involved in the garnishment to ensure that money is not taken after the bankruptcy case is filed.

Creditor and Collecting Attorney

Faxing notice of the bankruptcy filing to the garnishing creditor and counsel is the first step in stopping a garnishment after a bankruptcy filing.  While the clerk of the bankruptcy court will send out notices, it may be a few days until the creditor and attorney receive them.

Once a creditor is informed of a bankruptcy filing, it is the creditor’s responsibility to ensure that no further collection action takes place while the automatic stay is in effect. Most courts consider “doing nothing” to stop a wage garnishment is effectively a violation of the stay injunction and is penalized by contempt of court. The automatic stay is “intended to stop the snowballing,” and “all who have a part in the garnishment must take such positive action as necessary to give effect to the automatic stay. No action is unacceptable; no action is action to thwart the effectiveness of the automatic stay.” See In re Elder, 12 B.R. 491 (Bkrtcy.M.D.Ga. 1981).

State Court

In some jurisdictions, the debtor can obtain an order from the bankruptcy court quashing a state court wage garnishment order. Most state court judges are aware of the automatic stay’s effect on a wage garnishment order and will rescind the order without bankruptcy court direction. Unfortunately, most employers are not experts on the bankruptcy automatic stay. Failure to revoke or rescind the state court order may lead to confusion at the employer payroll office and delays in stopping a wage garnishment.

Sherriff

Garnishment orders must be enforced. In many areas that means the sheriff’s office is responsible for collecting garnished wages and turning the money over to the court for distribution to a judgment creditor. Consequently, it is always a good idea to send the law enforcement collector notice of the bankruptcy filing.

Employer

Wage garnishment orders direct an employer to withhold money from the debtor’s paycheck for a certain time period. The employer will continue to withhold wages in accordance with the state court order until either the end of the garnishment period or directed otherwise. It is imperative to send notice of the bankruptcy case filing to the debtor’s payroll office and direct it to stop all wage garnishment. As noted above, notice of the bankruptcy filing alone may not be enough to stop the wage garnishment.

Stopping a wage garnishment after a bankruptcy filing is generally a matter of notifying the appropriate parties. While it is ultimately the creditor’s responsibility, leaving the notice procedure to the garnishing creditor is often a risk, and could lead to delays in stopping the garnishment.

Ways to Prevent Debt

You are not alone if you have managed to create a substantial amount of debt for yourself over the years. Many Americans have trouble managing their money and it can be very easy to find yourself drowning in debt from student loans, over spending or medical bills. However, there are several ways to reorganize your spending habits to prevent debt from growing or becoming uncontrollable. 

The number one plan for managing money is to create a budget. A budget allows you to set limits on your spending. You can set a specific amount for groceries, gas, clothing, entertainment and miscellaneous activities; and you can manage your monthly bills. By creating a budget, you can easily see where all of your money is going and how much you spend on each category. Many smart phones have budget apps or you can create a personalized budget that caters to your needs on an excel spreadsheet. Another way to prevent debt is to use cash. Using cash is an easy way to not overspend and will allow you to keep up with how much you spend. Also, avoid using a credit card. Swiping a credit card is effortless and has the possibility to make you feel as if you have an unlimited amount of money. The credit card bill will come in and you will regret the impulse shopping spree that you went on with your credit card. Always stay on top of your spending and do not spend more money than you make.

Preventing debt for you and your family is not difficult. If you are willing to stick to a budget, use cash and avoid using your credit cards; then you will be able to manage your money and focus on rebuilding your financial freedom. 

A Second Bankruptcy, the Automatic Star, and a Foreclosure

In 2005, Congress, with help (and influence) from creditor lobbyists, chose to add restrictions to the automatic stay and make it harder for a serial filer to get debt relief. Section 362(c)(3)(A) provides that if an individual debtor files a second bankruptcy case within a year of dismissal, the automatic stay terminates “with respect to the debtor on the 30th day after the filing of the later case[.]” The automatic stay may be continued by the bankruptcy court upon a showing of good faith by the debtor.

In English, Section 362(c)(3)(A) means that if you file a second bankruptcy case within a year after the first is dismissed (either by you or by the court), you must ask the bankruptcy court to continue the automatic stay protection or it will expire after thirty days. However, courts across the country disagree as to the effect of this termination.

The vast majority of courts find that when the stay is terminated under Section 362(c)(3)(A), the debtor and his property is fair game, but property of the bankruptcy estate is still protected. This interpretation was recently confirmed by the First Circuit Bankruptcy Appellate Panel in the case of Witkowski v. Knight (In re Witkowski), No. 14-34, __ B.R. __ (B.A.P. 1st Cir. Nov. 13, 2014).

In the Witkowski case, the debtor filed several bankruptcy cases attempting to forestall foreclosure of a residence. When the debtor filed one bankruptcy case within a year of a previous dismissal, and the lender continued a pending foreclosure sale according to state law. The debtor did not seek to extend the automatic stay, but filed a motion seeking sanctions for continuing the foreclosure action in violation of the stay.

The Witkowski court agreed with the debtor and with the majority of courts that the automatic stay was not terminated as to property of the bankruptcy estate, which included the debtor’s residence.

The court then turned to the question of whether the lender’s action constituted a violation of the bankruptcy stay injunction. The court distinguished between taking new action against the debtor and “maintaining the status quo” by continuing a state law foreclosure. The court found that the lender did not take new steps in the foreclosure process after the bankruptcy case was filed and, therefore, did not violate the automatic stay.

While other courts may derive a different result, there are two important rules to learn from Witkowski: (1) most courts agree that the termination of the stay under Section 362(c)(3)(A) does not affect estate property; and (2) there is a growing trend to allow the “maintenance” of foreclosure sales commenced pre-bankruptcy. These are important issues that merit a close watch in the future.

VA Benefits and Bankruptcy

With malice toward none, with charity for all, with firmness in the right as

God gives us to see the right, let us strive on to finish the work we are in,

to bind up the nation’s wounds, to care for him who shall have borne the

battle and for his widow, and his orphan, to do all which may achieve and

cherish a just and lasting peace among ourselves and with all nations.

- Abraham Lincoln, Second Inaugural Address, March 4, 1865

 

Abraham Lincoln is considered the father of the Veteran’s Administration, which arose out of the national desire to care for civil war veterans. From 2000 to 2013, the number of veterans who were receiving disability payments rose by almost 55 percent, from 2.3 million to 3.5 million. Some of these veterans are permanently and totally disabled, and unable to work. Some struggle with debts that they cannot pay with their monthly VA check.

It is important to have an experienced attorney working on your side if you file bankruptcy when in receipt of VA disability compensation benefits. Many debtors (and some attorneys!) believe that VA disability benefits are entirely excluded from the bankruptcy process. This is not true. Whether VA disability benefits are protected during bankruptcy can depend on the circumstances of the case.

Means Testing

VA disability compensation is included in the debtor’s Chapter 7 Means Test calculation. However, many veterans in receipt of VA disability can avoid the Means Test altogether if the individual is (1) a veteran who is entitled to compensation under laws administered by the Secretary for a disability rated at 30 percent or more, or (2) a veteran whose discharge or release from active duty was for a disability incurred or aggravated in line of duty. Additionally, the debts in the veteran’s bankruptcy case must have been “primarily” incurred while on active duty, or while performing a homeland defense activity. “Primarily” is generally interpreted by the bankruptcy courts as greater than 50%.

The Bankruptcy Estate

Even though VA disability compensation is used to determine the veteran’s eligibility to file Chapter 7 bankruptcy, these benefits are not part of the debtor’s bankruptcy estate. In other words, the VA disability compensation is protected from creditor garnishment and is also protected from the trustee during bankruptcy (although there are exceptions including federal offsets and child support debts). Generally, the debtor cannot be forced to use this money to pay creditors during bankruptcy. 

If you are receiving VA benefits and need bankruptcy relief, consult with an experienced attorney who can protect your money and discharge your debts. Your attorney can review your situation and advise you on the right way to avoid trouble during your bankruptcy case.

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.

Are Student Loans Forever?

We all know some things are forever, for instance:

“A diamond is forever.”

“A marriage is forever.”

“Ignorance can be fixed, but stupid is forever.” 

Many debtors believe that student loans are also forever, but that is not the case. While most bankruptcy debtors do not qualify for reducing or eliminating federal student loans through bankruptcy, there are several government programs that assist borrowers with eliminating student loans. Debtors emerging from bankruptcy with student loans should review their options for repaying these loans, including government-sponsored programs. 

  • The Department of Education's Public Service Loan Forgiveness Program allows workers employed at most government and nonprofit agencies to eliminate their student loans after 120 monthly loan payments. These payments may be made at a reduced rate based on the employee’s income. To qualify, the employee must work at least 30 hours each week for a public service organizations. After ten years the worker can apply for loan forgiveness which will erase any remaining balance on eligible student loans, including Direct Loans and Direct Consolidation Loans.
  • Teachers who first took out Direct Loans or Stafford Loans in October 1998 or later can also take advantage of the Teacher Loan Forgiveness Program. This program allows teachers to eliminate up to $17,500 after five years of service in certain schools or educational service agencies that serve low-income families. To receive the full amount, you have to be a highly qualified secondary-school math or science teacher or special education teacher serving children with disabilities. Teachers in other areas can get up to $5,000.
  • Perkins Loan borrowers are eligible for several forgiveness and cancellation opportunities. Many educators in elementary and secondary schools, firefighters, law-enforcement officials, nurses and active-duty military personnel in hostile-fire areas qualify to have as much as 100% of their Perkins Loan balances canceled under certain conditions. 

Student loans are not forever, but managing your non-dischargeable student loan debt requires careful planning and diligence. If you are emerging from bankruptcy with student loans, review your repayment options with your attorney as part of your plan for future financial success.

Student Loan Reform Stalled

 
President Obama’s student loan proposal has taken a back seat to new pressing issues that face the country. The conflict in Syria, and now the government shut down and debt ceiling debate, have curbed current efforts to tackle this continuing issue.

Congress’s inability to work together may be casting a shadow on any attempts to reform the broken Student Loan system. The President’s proposal included expansion on income-based repayment, and a “race to the top” provision, which requires congressional action. Not included in the proposal was an expansion on bankruptcy laws that would allow a discharge through the bankruptcy process.

In 1970 restrictions were put on the dischargeablilty of student loans to prevent law and medical students from discharging the debt immediately upon graduation. Then in 2005 the laws were expended and also included private student loans as well as public student loans.

With out the ability to discharge student loans in bankruptcy, this is placing a huge burden on consumers all across the country. Student loan debt is growing rapidly and there have been few proposals to solve the problem.

If you have questions about your student loan debt or about bankruptcy, the experienced attorneys at the Fears | Nachawati Law Firm can clarify and resolve any questions or issues you have on these sometimes confusing items. For a free consultation, contact our office at 1.866.705.7584.

 

How Bankruptcy Affects Auto Insurance

The amount of an auto insurance premium is determined by statistical data that predict the individual’s risk for a loss. Common factors that impact an insurance premium include year, make and model of the vehicle (e.g. more expensive cars are more expensive to repair and insure), the age and gender of the driver (e.g. a young male is statistically more likely to have an accident than a middle aged woman), and how the vehicle is used (e.g. driving a short daily commute is less likely to be in an accident than a traveling salesman).

Another predictor of risk used by 92% of all insurance companies is the individual’s credit score. Filing bankruptcy will drive down an individual’s credit score and will ordinarily increase insurance premiums. This begs the question, what can an individual do to keep his or her insurance rates low when filing bankruptcy?

The first and most obvious answer is, lock in your insurance rate before filing bankruptcy. Instead of a six month auto insurance policy, consider one with a term of twelve months. Paying the policy in full prior to bankruptcy also reduces the chances of being canceled for a poor credit score. Credit scores are generally lowest immediately after a bankruptcy filing and will increase during the subsequent twelve months.

Another option is to do some rate shopping. Not every insurance company discriminates on the basis of credit, and some are more forgiving when it comes to personal bankruptcy. An independent insurance agent with connections to several different companies should be able to find a reasonable rate, especially if there is a good history of paying insurance premiums, no insurance claims, and no moving violations in the past three years.

Bankruptcy is often trading a short-term pain for a long-term gain. An experienced bankruptcy attorney can prepare you for some of the issues surrounding your bankruptcy filing and lessen the temporary sting. If you are considering filing for bankruptcy, the experienced bankruptcy attorneys at the Fears | Nachawati Law Firm can offer you the legal guidance and assistance needed to get back on your feet financially. For a free consultation, contact 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.

Be Careful Who You Pay When Struggling Financially

A family must make tough choices when money is tight. Cutting back on expenses, doing without, making lower cost substitutions, and delaying payments to creditors are all tactics to stretch a family’s budgets until things get better. Often creditors are prioritized, so the family doctor gets paid, while a credit card payment may get postponed.

Repaying a loan to a friend or family member before filing bankruptcy can create issues in your case. The Bankruptcy Code allows the Trustee to avoid payments to “insider” creditors made within a year of the bankruptcy filing date. Insider creditors are relatives, general partners, partnerships in which the debtor is a general partner, directors, officers, persons in control, affiliates, and insiders of affiliates of the debtor. The Trustee can sue an insider creditor and force the return up to one year of these payments.

However, not every payment to an insider creditor can be avoided. Section 547 of the Bankruptcy Code describes payments that can be avoided as “preference payments. They include:
1. A transfer of an interest of the Debtor in property
2. To or for the benefit of a creditor
3. For or on account of an antecedent debt owed by the Debtor before such transfer was made
4. Transfers made while the Debtor was insolvent (the Debtor being presumed to be insolvent within the 90-day period preceding the filing of a petition); and
5. Made within 90 days before the filing of the bankruptcy petition (or within one year if the creditor was an insider); and
6. That enables the creditor to receive more than such creditor would have received in the case were a Chapter 7 liquidation proceeding.

If you have made a preference payment to an insider creditor, there may be defenses. The three most commonly used in an individual bankruptcy are: the Ordinary Course of Business Defense, the Contemporaneous Exchange Defense, and the Small Commercial Preference Defense.

Ordinary Course of Business: In order to prevail with this defense the debtor must show that the debt was incurred in the ordinary course of business between the two parties, was paid according to the ordinary course of business between the two parties OR paid according to ordinary business terms as are customary in the industry.

Contemporaneous Exchange: This defense centers on when the preference payment was received. A preferential transfer may not be avoided if it was intended by the debtor and the creditor to be, and in fact was, a contemporaneous exchange for new value given to the debtor and the antecedent debt of the creditor was not affected by the debtor’s payment. An example of a contemporaneous exchange is a purchase situation: you pay your mother $2,000 and she gives you her car.

Small Commercial Preference Defense: Section 547(c)(9) of the Bankruptcy Code limits transfers could be avoided in a commercial case (currently amounts less than $6,225). This section specifically provides, “if, in a case filed by a debtor whose debts are not primarily consumer debts, the aggregate value of all property that constitutes or is affected by such transfer is less than [$6,225].” This section applies to an individual debtor who does not have primarily consumer debts.

The bottom line is this: preference issues are complex. Don’t turn over money requested by the Trustee until your attorney advises you to do so. If you are considering filing a bankruptcy, the experienced bankruptcy attorneys at the Fears | Nachawati Law Firm can offer the legal representation needed to file for bankruptcy and start the process of financial recovery. For a free consultation, click here or call our office at 1.866.705.7584.

 

How can I get in Trouble in a Bankruptcy?

For the most part, bankruptcy is largely a trust process. What this means is that it is extremely unlikely that any court representative or creditor will ever come to your home and take an inventory of what you own. The trade off for that is that you have to swear under penalty of perjury that everything in the bankruptcy petition and schedules is true and correct to the best of your knowledge. You will also be testifying to that effect in front of a Bankruptcy Trustee. The only way you can get in trouble in a bankruptcy is if you lie or hide something. The most common examples of this are that someone will hide property (usually by giving it to a family member) or lie about their income. Committing perjury (lying under oath)in a bankruptcy can have absolutely horrible consequences, including seizure of assets, the revocation of the bankruptcy discharge, and potential jail time and fines.

Here in the Dallas/Fort Worth area, there was a famous case a few years ago where a pharmacist filed for bankruptcy. He had hidden nearly $6 million dollars in cash in his house when he filed for bankruptcy. He disclosed none of that money in his case. In a bankruptcy case, that money would have been used to pay off his creditors. Federal agents later raided his home and found all of the money in various hiding places. The pharmacist is now serving 14 years in federal prison, and he also had to forfeit all of his money. More information on the case can be found at: http://www.dallasnews.com/news/crime/headlines/20130717-colleyville-pharmacist-and-son-get-prison-time-for-tax-fraud1.ece. More recently, a reality television star from the Real Housewives of New Jersey has been indicted for bankruptcy fraud for lying about their income. More on that story can be found at: http://www.nj.com/entertainment/index.ssf/2013/09/trial_real_housewives_teresa_joe_giudice_postponed.html.

So what is the moral of the story? If there’s a lesson to be learned it is that in bankruptcy (and out), honesty is always the best policy. A competent bankruptcy attorney can help you overcome many issues. Anything you tell an attorney is covered by attorney/client privilege so make sure that you always give your attorney the complete picture, ugly or not. The only way you can truly get in trouble in bankruptcy is by not telling the truth. If you have complicated issues that you want an attorney to look at, come visit with the attorneys at the Fears | Nachawati Law Firm. Our successful bankruptcy attorneys can help you sort out your financial issues and put you back on the right track to financial stability. To set up a free consultation, click here or call our office at 1.866.705.7584.

 

 

New Federal Housing Administration Policy for Home Loans After Bankruptcy

New guidelines issued by the Federal Housing Administration make it easier for some to qualify for a home loan after bankruptcy. This policy changes the waiting period from two years after a bankruptcy discharge to twelve months, as long as certain conditions apply.

The general rule for obtaining a federally guaranteed home loan is that a bankruptcy must have been discharged twenty-four months prior, and that there must have been some “extenuating circumstances” that caused the bankruptcy. If you simply decided to not pay your debts, the rule is seven years.

Under the new FHA policy, a bankruptcy debtor may qualify for a home loan within twelve months after a bankruptcy discharge, foreclosure, short sale, or deed-in-lieu of foreclosure. The twelve month period runs from either the date of the discharge or the date that the property was legally transferred to the mortgage company; whichever is later. Consequently, if your bankruptcy discharges in November of 2013, but the bank forecloses on the property in January of 2014, the twelve month period runs from January 2014.

Additionally, the bankruptcy filing must be shown to be the result of an “economic event” that caused a six month loss of income of at least 20%. That includes a job loss, major pay reduction, or serious medical condition causing economic loss.

Finally, the debtor must show a history of good credit before the “economic event,” and good credit (or no credit) for the twelve months after the bankruptcy discharge. For those who are unable to meet the new FHA qualifying guidelines, the original two year waiting period still applies. The full text of the FHA announcement and new policy can be read here.

If you are contemplating filing for bankruptcy and have additional questions, the experienced attorneys at the Fears | Nachawati Law Firm are happy to assist you. For a free consultation, click here or call our office at 1.866.705.7584.

What Liability Remains if I Surrender my House or Car in a Bankruptcy?

Filing a Chapter 7 can be a great tool for consumers, which potentially allows them to walk away from a debt that they can no longer afford; such as large house or car payments. Anytime a consumer files for bankruptcy, their obligation on their secured debts is automatically extinguished. It is up to the debtor whether or not they want to continue with those obligations through the “reaffirmation” process which has been discussed in previous posts.

So how does it work? Once you file a bankruptcy, your secured creditors can no longer sue you in your personal capacity; their only recourse is either repossessing or foreclosing on their collateral, but you could walk away unscathed. This means that if you are in the middle of a foreclosure proceeding, once you file a Chapter 7, you are no longer on the hook for what is owed on any possible deficiency.

 An example of this would be: Dave owes the bank $100,000 on his mortgage, but his house is only worth $50,000.The bank had started foreclosure proceedings against Dave, but had not actually foreclosed. Dave decided to file a Chapter 7 bankruptcy. Once the creditor files a motion to lift stay, the creditor can continue with the foreclosure, but Dave would no longer be responsible for a deficiency balance (i.e., the $50,000 he would have owed had the bank foreclosed without the bankruptcy). However, the title to the property will remain with the debtor until the bank actually forecloses on the property and a new owner is established.

This sometimes comes as a shock to people, but sometimes the bank won’t foreclose right away. In fact, sometimes it can take years for a bank to foreclose. The bankruptcy has discharged all of the balance on the mortgage owed by the debtor, but sometimes there can be additional post-petition expenses associated with the property that won’t actually be covered by the bankruptcy, most commonly these are property taxes, expenses for upkeep, and homeowner’s association dues. Remember, you are the owner of the property until the bank actually forecloses and sells the property to someone else.

In many states, including Texas, property taxes are assessed and due on the first of the year. Whoever owns that property on January 1st is responsible for the taxes for that year. Typically, homeowners’ fees and upkeep for the property are owed by the owner of the property, despite the bankruptcy. So if you are surrendering property in a bankruptcy, it is greatly in your interest to get a property out of your name as soon as possible. This can be done in several ways; typically deed-in-lieu of foreclosure and short sales are good options. The main idea is to get the property out of your name as fast as you can to cease any ongoing liability on a property that you no longer occupy.

If you have questions about how surrendering property in a bankruptcy works, contact the knowledgeable attorneys at the Fears Nachawati Law Firm for a free consultation here, or call our office at 1.866.705.7584. We are willing and obliged to assist you, and answer any and all questions you have.

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.

Personal Guarantees and Bankruptcy

 A financially struggling small business owner can become confused as to the extent of his or her personal liability for business debts. The answer is found in the relationship between the individual and the debt, in other words, “Is there a personal guarantee?”

What is a Personal Guarantee?

A personal guarantee is a contractual promise that obligates a person to a loan. All “personal” loans have a personal guarantee, i.e. the bank gives you money and you promise to repay it. The promise to personally repay the debt is sometimes backed by the individual’s good credit, and other times by property pledged as collateral.

Personal Guarantees can be Discharged in Bankruptcy

Most personal guarantees can be discharged in bankruptcy. Some personal guarantees cannot be discharged because the underlying debt is non-dischargeable (such as some student loans or some agreements in divorce cases). Whether a personal guarantee is discharged depends largely on the relationship between the original obligor and the debtor issuing the personal guarantee. The most common relationships are:

  • Individual
  • Co-debtor
  • Sole Proprietor
  • Company

Individual

A personal guarantee is standard for most personal obligations. In other words, if you borrow money, you are obligated to repay the debt. If you don’t pay, the lender can collect from you personally. Discharging a personal obligation in bankruptcy means that the debt is no longer enforceable against the discharged debtor. However, the creditor may seek to collect on any property pledged as collateral for the debt.

Co-Debtor

Personal guarantees are often given for co-signed loans. There is a great deal of confusion surrounding co-signed loans. Many people believe that a co-signor is not directly obligated for the debt. While a lender will seek payment from the borrower first, the co-signor is 100% obligated for the full amount of the debt. Consequently, if the borrower files bankruptcy, the co-signor owes the entire debt.

Sole Proprietor

Bankruptcy is not much help in a sole proprietor situation because the business does not legally exist. An unincorporated business is an extension of the owners, so there is no business to file bankruptcy. All sole proprietor business debts are personal debts.

Company

Most small business debts are personally guaranteed. When a business files bankruptcy, the creditor will turn to the guarantors for payment. If the debt is not personally guaranteed, the creditor is left to collect from business assets.

If you are you burdened by personal guarantees on your business debts, speak to an experience attorney at Fears | Nachawati and see if bankruptcy is right for you. Bankruptcy can discharge personal guarantees and get you back on your feet again. For a free consultation, contact us here or call our office at 1.866.705.7584.

Who is a Good Candidate for Chapter 7 Bankruptcy?

 A person or family whose primary financial difficulty stems from excessive, unsecured debt (i.e., credit cards, medical bills, civil judgments, signature loans, etc. ) is a usually a good candidate for chapter 7.  Unlike a chapter 13, a chapter 7 has no provision to pay back any debt for which you are delinquent. Therefore, if you are delinquent on house payments or car payments a chapter 7 is not going to provide a solution to help you retain those assets in the face of foreclosure or repossession. For those who are either not delinquent on their house and vehicle payments, OR who wish to surrender their house or vehicle, a chapter 7 can provide an effective solution for eliminating unsecured debts. There are primarily three issues that must be evaluated to determine whether a person can achieve financial relief with a chapter 7: 

First, a candidate must qualify for chapter 7 by proving that their annual household income is below certain amount based on their family size and the county in which they live. These amounts are based on the median income levels of all families living within that county. Generally, a family’s household income must fall below these amounts to qualify. These median income amounts are derived from IRS data each year and are published annually by the U.S. Trustee’s office on their website. There are some exceptions to these median income limits, but those involve a detailed analysis of a family’s specific debt burden, which is beyond the scope of this writing. The primary tool used for this detailed analysis is known as the “Means Test”. Candidates for chapter 7 MUST meet the income qualifications for chapter 7 or they will not be allowed to receive a discharge under chapter 7. Those who do not meet the income qualifications for chapter 7 are generally given the opportunity to file bankruptcy pursuant to chapter 13 instead.

Second, a candidate will need to determine if they own any property that is going to be “non-exempt” under the bankruptcy rules. This is important because usually, any non-exempt property must be surrendered to the Trustee shortly after chapter 7 is filed.  Ultimately, the determination of whether property is non-exempt or not is made by the Trustee and/or the bankruptcy Judge. However, prior to filing, bankruptcy attorneys routinely spend time helping their clients determine if they own any property that a Trustee will likely consider to be non-exempt. Determining whether a specific piece of property is non-exempt in EVERY situation is very difficult and beyond the scope of this writing, but some typical examples of non-exempt property are listed below:

-Rental houses, vacation homes, time share property

-RVs, boats, campers, motorcycles (unless used as primary transportation)

-Extra motor vehicles, (typically any vehicle beyond the number of licensed drivers living in the household)

-Savings accounts, investments and securities (unless its part of a 401k, 403b, IRA, KEOGH or other special retirement account)

-Luxury items, such as high-value jewelry, collectibles, or art work

It is important to remember that non-exempt property does not prevent one from filing chapter 7.  Rather, it becomes a factor in considering whether surrendering the property is worth the benefit of obtaining a discharge of all other unsecured debts.

Lastly, having the types of debts that can be successfully discharged (eliminated) in chapter 7 is essential to being a good candidate for chapter 7.  Again, it is impossible to determine which specific debts can be eliminated in every situation without the help of an expert bankruptcy attorney.  But for purposes of this writing, readers can consider this:

Debts that are almost always dischargeable:  Credit cards, pay day loans, signature loans, medical bills, civil court judgments (unless fraud is involved), and property taxes for property you no longer own.

Debts that are sometimes dischargeable, depending on circumstances:  Older income taxes, overpayments by social security or unemployment providers, monetary penalties in criminal matters, state taxes, and sales and use taxes.

Debts that are almost never dischargeable:  Recent income taxes, student loans, child support, spousal support, and non-monetary criminal penalties.

If you are contemplating filing for bankruptcy, the experienced attorneys at

Fears | Nachawati will be happy to discuss your options with you. For a free consultation, contact us here or call our office at 1.866.705.7584.

Discharging an SBA Loan in Bankruptcy

 Defaulting on a Small Business Administration (SBA) Loan has serious consequences. An SBA loan is a private loan for small business owners, made by a bank that is guaranteed by the federal government. Usually SBA loans require the business owner to personally guarantee payment and may also include a lien on real property. When an SBA loan is defaulted, the lender will attempt to collect from the borrower. Any amount the lender is unable to collect is paid by the SBA as an insurance claim.

The collection process may include seizing income tax refunds, off-setting against government entitlements (such as Social Security), a legal judgment, wage garnishment, or other asset seizure. Fortunately, the SBA has an offer in compromise program to negotiate debt forgiveness. Unfortunately, participation in this program may result in a taxable event when the debt is compromised. For instance, you may offer to pay $10,000 on a $30,000 debt, but the $20,000 that the SBA forgives is taxed as income.

SBA loans are eligible for discharge during bankruptcy. Unlike federally guaranteed student loans, there is no “undue hardship” test to pass before discharging the debt. There is no tax consequence if the SBA loan is discharged, and neither the original lender nor the SBA can collect from the debtor personally (including benefit off-sets, lawsuits, wage garnishments, or other asset seizures). Note that if the SBA loan is guaranteed by real property, the property lien will survive a personal bankruptcy discharge. Property pledged as collateral to the SBA must be paid or surrendered.

If you have defaulted on an SBA loan, speak with an experienced bankruptcy attorney at Fears | NachawatiLaw Firm to discuss your options. A skilled insolvency attorney can help you weigh the pros and cons of your options and carve a path to financial health. For a free consultation, contact us here or call our office at 1.866.705.7584.

 

Statute of Limitations on Debt Collection Action in Texas

The Texas civil practices and remedies code sets the statute of limitations on a breach of contract for a debt, either in writing or oral for 4 years. (See Tex. Civ. Prac. & Rem. Code § 16.004(a)(3)).  This means that from the time of the last payment by the debtor, the creditor has 4 years to file a lawsuit to obtain a judgment on the debt. However, even after the debt has surpassed the 4-year limitation, that doesn’t necessarily mean that you don’t need to worry about it any longer. There are many nuances to this rule that can cause issues for debtors who are straddled with debt.

First, the statute of limitation is a defense. This means that a creditor can still file a lawsuit even if the 4 years have passed. It is then up to the debtor to plead that the debt is past the statute of limitations. If the debtor doesn’t answer the lawsuit the creditor may still get a default judgment, and it can be costly to go in after the fact to get it reversed.

The statute of limitations starts from the time the debt defaulted. Defaulted means from the last time the debt was paid. So a debt may be more then 4 years old, but if you make a payment then that will reset the clock on when the statute runs. This includes a settlement payment if you try to work something out with a creditor.

Debt information will remain on your credit report for up to 7 years. Even if your debt has past the statute of limitations, the debt will still affect your credit score. The credit reporting agencies will list the debt for up to 7 years and this can result in a negative credit score.

Most creditors will file a lawsuit well before the statute of limitations runs, especially if the debt amount is high. This is because most creditors know the statute of limitations and want to make sure that they do not become time barred from filing.

The strongest aspect of the statute of limitations is that it stops a creditor from pursuing a judgment on a debt after the limitations have ended. This means that the creditor will never be able to attach their judgment on any of the debtor’s property, and they cannot get a court to enforce it.  Also, if a debtor were to file a chapter 13 bankruptcy, the statute of limitations can prevent the creditor from being paid out by the chapter 13 plan payment. If you have an old debt that is ruining your credit, or if a collector is harassing you, contact the experienced attorneys atFears | Nachawati Law Firm at 1.866.705.7584. We offer a free 60 minute consultation and will review your debts with you to determine what the best course of action is. 

Claims and Causes of Action in a Bankruptcy Case

 When filing for bankruptcy, you will be required to list all of your property and assets on your schedules or bankruptcy paperwork. A type of asset that is often overlooked includes any potential lawsuits you may be able to bring. Usually, these kinds of cases would be a personal injury case, like a car accident or slip-and- fall case, or it could be a wrongful termination, or even a breach of contract. It is important that if you have a cause of action, you make sure that it is listed on your bankruptcy schedules. Failing to list a cause of action can cause this potential suit to be barred. In other words, you would not be able to pursue that lawsuit at any point in the future.  This is because of the legal doctrines of judicial estoppel or res judicata. Note: you can also be subject to penalties under the bankruptcy code for failing to list assets.

Failure to disclose a cause of action in bankruptcy could result in a total bar to prosecution of the cause of action through judicial estoppel.  Put simply, you can’t have your cake and eat it too. Judicial estoppel is an equitable doctrine which prohibits a party from taking a position on an issue that is clearly inconsistent with what they previously asserted. So in other words, you can’t say that you do not have a lawsuit and then later claim that you do because it’s convenient. Debtors may also find their causes of action barred by res judicata if they fail to disclose the causes of action on their schedules. Res judicata seeks to prevent parties from having multiple opportunities to litigate the same claim that they have or should have already taken care of.

The value listed on the schedules for a cause of action or a potential cause of action can also have judicial estoppel effects. For instance, if you claim a cause of action for a very small value or no value, you may be limited to that amount if/when you pursue the lawsuit.

Value is also important so that you can exempt the cause of action. Certain types of lawsuits fall under state or federal exemptions. For example, awards from personal injury lawsuits or wrongful death lawsuits can qualify for federal exemptions under 11 U.S.C. § 522(d)(11). Under the Federal exemptions debtors can also use the 11 U.S.C. § 522(d)(5) or “wildcard” exemption to exempt the asset.

Therefore, it is very important that if you are preparing to file for bankruptcy that you tell your attorney about any lawsuits you may have.  The attorneys at Fears | Nachawati will be able to walk you through this important process and make sure that you are able to protect your lawsuit and make sure you file under the right chapter or use the correct exemptions. To get started with a free consultation, call our office at 1.866.705.7584.

Check Your Credit Report After Bankruptcy

 The Federal Trade Commission (FTC) recently released a study citing that one in four American consumers have errors on their credit reports. In some cases, these errors are serious enough to cause higher interest rates for auto loans, insurance, and other credit products.

Most people examine their credit reports when preparing for bankruptcy. Credit reports issued by Trans Union, Experian, or Equifax offer a wealth of useful information, like creditor names, addresses, account numbers, and amounts. However, few see the need to review their credit reports after bankruptcy.

One common misconception is that the bankruptcy court will report to the credit bureaus. It does not. It is your responsibility to ensure that the information in your credit report is accurate. Discharged debts should be listed as “included in bankruptcy,” with a balance of “zero.” There should be no collection activity listed on your credit report after the filing date of your bankruptcy case. For instance, the addition of a third party collector after the date you filed bankruptcy violates the bankruptcy automatic stay injunction and should be removed from your credit report. Likewise, overdue payments after the filing date are considered collection actions and should be removed.

Cleaning up your credit report is the first step to credit recovery after a bankruptcy case. In many cases, a person can improve his credit score to an average score within a year or two after bankruptcy. However, any stumble along the way will only magnify the bankruptcy filing and keep your credit score low. For this reason, it is important to monitor your credit report for errors or any changes at least twice a year.

The federal law mandates that each credit reporting agency must issue a free credit report to a person once a year upon request. To facilitate this directive, the three major credit bureaus have created a consumer website: https://www.annualcreditreport.com. At this cite you can obtain an entirely free credit report without a credit card or on-going financial obligation. A copy of your credit bureau credit score is also available for a nominal fee.

Checking your credit report for errors after bankruptcy is the first step to recovering from bankruptcy. Equally important is continuing to monitor your report as you rebuild your credit. With patience and vigilance, the recovery process can be surprisingly quick. Many bankruptcy debtors are able to obtain car or home loans at average interest rates just a few years after filing bankruptcy. If you are considering filing for bankruptcy or have any questions, the experienced bankruptcy attorneys at Fears | Nachawati Law Firm can provide the legal guidance and advice you need to make a fresh start financially.  For a free consultation, contact the attorneys  here or by calling the office at 1.866.705.7584.

 

What is "Cross-Collateralization," and How Might it Affect My Bankruptcy?

Cross-collateralization is a process where a bank or credit union will contractually turn an unsecured debt (such as a credit card) into secured debt (like a mortgage) by tying it to another loan. The easiest way to explain this is by looking at the most common example, a credit card and a subsequent car loan from a credit union:

Joe has a credit card with Federal Credit Union. Joe carries a balance of around $5,000 on his Federal Credit Union credit card. At some point, Joe decides that he wants to purchase a vehicle. Federal Credit Union offers him a better interest rate than other lenders so he decides to finance his vehicle with Federal Credit Union. Joe decides to buy a $20,000.00 car. He pays $2,000 down, so he only needs to finance $18,000.00 of it. Federal Credit Union agrees to lend Joe this money, but only if he will agree to “cross-collateralize” his credit card debt and attach a security interest onto his new vehicle. What this essentially means is that Joe will now owe Federal Credit Union $23,000.00 ($18,000.00 on the car loan plus the $5,000.00 credit card debt) to pay off his car in full instead of just the $18,000.00.

Cross-collateralization clauses can often come as surprises to consumers who expect the title to their car after they have paid off their car note. It can also complicate decisions when looking into filing a bankruptcy. In a Chapter 7 most “unsecured” debts can be discharged; meaning that the consumer won’t have to pay back those debts. The most common types of unsecured debts are medical bills, payday loans, and credit card debts. However, in order to keep secured debts in a Chapter 7, you have to continue to pay on these debts if you want to keep the collateral (like a mortgage or car note).

Using the example above, what would happen to Joe’s car debt if he decided to file for bankruptcy? For purposes of this example, let’s say that Joe’s car was now worth $15,000.00, he owed $10,000.00 on the car, and owed Federal Credit Union $8,000.00 in credit card debt. Typically, unsecured debts like credit cards are discharged in a Chapter 7; however, because Federal Credit Union put a cross-collateralization clause in his car loan contract, the $8,000.00 credit card debt Joe owes is no longer “unsecured”. Instead the loan is “secured” because it attaches to Joe’s vehicle worth $15,000.00. What this means for Joe is that instead of discharging the debt, Joe is now going to have to pay Federal Credit Union $18,000.00 to keep his vehicle that is only worth $15,000.00; thus taking away any equity that Joe had in the vehicle.

If you are interested in filing bankruptcy and have a cross-collateralized loan (or if you’re not sure whether or not you have one), it would be well worth your time to consult with an experienced bankruptcy attorney who can walk you through your options. For a free consultation, call the experienced attorneys at Fears | Nachawati Law Firm today.

 

 

My Creditor is Suing me. What do I do?

 Often times, the reason that a debtor will choose to file bankruptcy is because a creditor is suing them. Usually, it is a credit card that they have been unable to pay do to some unforeseen circumstance. Many debtors will also try to make payment arrangements with the creditor but are unable to do so either because they have too much income or too little.  

If your creditor sues you the first thing that will happen is that you will receive a citation. This will be served upon you either by a sheriff or a process server. If the creditor is unable to serve you, they may also be able to get court permission to use an alternative service; by either posting the citation on the door or mailing it to you.  

After you have been served you are only given a certain number days to file an answer. The standard answer deadline in Texas is the Tuesday following 20 days after the debtor was served. If the debtor doesn’t file an answer the creditor can get a default judgment, which is basically an automatic win for the creditor. If the debtor files an answer, then the creditor will either send discovery requests to the debtor to get more information, or set the case for trial and prove their case.

A judgment will allow the creditor to attempt to collect on their debt by attaching it to non-exempt property. Exempt property in Texas includes your homestead, your car, and personal items. Also, the Texas constitution prohibits a creditor from garnishing your wages, but they can attach the judgment to your bank account and garnish your money until the judgment is settled.

Filing for bankruptcy imposes an automatic stay, which will stop all collections. This includes a lawsuit. The filed suit will then discharge the debt that the creditor is attempting to collect. For more information on how to deal with a creditor who files a lawsuit and/or filing for bankruptcy, contact the experienced attorneys at Fears | Nachawati Law Firm.  

                                 

 

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. 

                                                                                                                   

Setoff in Bankruptcy

 One area of bankruptcy law that can be a surprise to some debtors, especially pro se debtors, is the concept of “setoff”. Section 553 of the Bankruptcy Code allows creditors to offset debts owed to the creditor with debts that the creditor owes back to the debtor. The most common example of this would be a debtor’s bank account at an institution where they carry credit card debt. For example, Joe banks at Federal Bank where he has a checking account. That checking account has $2,500.00 in it the day Joe files bankruptcy. Prior to filing, Joe had a credit card with Federal Bank that he owed $5,000 on. Once Joe files bankruptcy, Federal Bank would be entitled to freeze Joe’s bank account and take his $2,500.00 to “setoff” the debt owed to them.

To enforce a setoff, the creditor has to have the right to do so under state law; Texas happens to be a state that allows setoff.  Once a debtor files bankruptcy, the creditor can administratively freeze any bank account the debtor has with them. Before the creditor can actually “take” the funds in the bank account, the creditor will have to file a Motion to Lift the Automatic Stay.

However, it is important to remember that a setoff only affects PRE-petition debts and PRE-petition credits. Here’s an example: Joe files bankruptcy on Wednesday. At the time of filing, Joe owed Federal Bank $5,000. At the time of filing, Joe did not have any money in his Federal Bank checking account. On Friday, Joe gets his paycheck direct deposited into his account for $2,000. Can Federal Bank take that money? Absolutely not. Joe filed on Wednesday and the money was not in his account until Friday, therefore Federal Bank would not be able to touch that money.

Setoff is a hidden pitfall that debtors can encounter if they don’t have an attorney. It is just one of the many instances where having an attorney can actually end up saving you a great deal of money and frustration. If you’re looking into filing bankruptcy and have questions, contact the knowledgeable attorneys at Fears Nachawati who will set you on the right path. 

                                

The Trustee's Avoidance Powers, Preferential Transfers, and Fraudulent Transfers in Bankruptcy

 It is almost always a bad idea to transfer assets prior to filing a bankruptcy. Usually this will raise red flags for the Trustee and the Court and lead them to believe that a debtor is attempting to hide assets. The Trustee can undo or “avoid” certain transfers made prior to the filing of a bankruptcy case. These transfers are usually called “preferential transfers” or “fraudulent transfers”.

A preferential transfer is basically a payment or transfer of property to a creditor prior to filing a bankruptcy case. In order to be “preferential”, the transfer must benefit a creditor (someone you owe money to), must be made while the debtor is insolvent, and is made within 90 days of filing a case, or one year if the transfer is to an “insider”. An “insider” is basically someone closely associated with the debtor, whether that is a friend, parent, sibling, or business partner. If the transfer meets these criteria, the bankruptcy Trustee can undo these transactions.

The best way to illustrate this is through an example. Say Joe borrowed $5,000 from his father in May of 2013. In April of 2013, Joe received his tax refund from the IRS for $6,000. In May, Joe takes the money from the refund and uses it to pay off his debt to his father. If Joe were to file bankruptcy in July 2013, the Trustee would be able to do undo that transfer. Essentially the Trustee would sue Joe’s father to get that money back into the estate; an unpleasant experience for both Joe and his father. The preference would expire in May of 2014, because the transfer was to an insider.

It also important to remember that, while the “preference period” is limited to 90 days or one year, the Trustee has a longer reach-back period to go after “fraudulent” transfers. Under the bankruptcy code, the Trustee has two years to go back and undo a fraudulent transfer. The Trustee can also use state fraudulent transfer law which usually has a reach-back of four years. A “fraudulent” transfer is usually defined as an action to hinder, delay, or defraud creditors. It is usually one where a debtor receives less than reasonably equivalent value for the property transferred and is either: 1) made while the Debtor is insolvent and/or 2) made for the benefit of an insider.

A typical example of this would be:  In January 2012, Joe’s debts far outweigh his assets and he hasn’t been paying his bills. Acme, Inc. got a judgment against Joe for $10,000 in April of 2012. In May of 2012, Joe decides to transfer his 1969 Ford Mustang (worth $20,000) to his son, Junior, for $1.00 to protect it from Acme taking the vehicle. In July of 2013, Joe decides to file bankruptcy.  First off, Junior is definitely an insider. The car at the time of the transfer was worth $20,000 and Joe only received $1.00 for it. Joe knew that he had a judgment against him from Acme at the time of the transfer. This would constitute a fraudulent transfer in the eyes of the Trustee. The Trustee could sue Junior to recover the vehicle, as May 2012 is clearly within the bankruptcy code’s two year window.

The moral of the story is: do not transfer assets prior to filing bankruptcy. Transferring assets can hurt your case and hurt the people you transfer your property to. Don’t consider transferring assets prior to filing bankruptcy without at least talking to a knowledgeable attorney. The attorneys at Fears | Nachawati would be happy to guide you and advise you what your best course of action.

                                                                                                                   

If I file a Chapter 7 Bankruptcy will my Business Interests be Protected?

 Like so many other legal answers, the answer to whether your business will be protected when you file a Chapter 7 is “it depends.” The idea behind Chapter 7 is that by law you are able to protect a certain amount of property; any amount of property over what you can protect goes to the Trustee to satisfy your debts. So the question is really whether you will be able to “exempt,” or in other words, protect your business assets.

The first question in addressing whether a business will be protected, oddly enough, has nothing to do with your business. The first question is really how much equity you have in your “big ticket” items, like your homestead and vehicles. The reason the amount of equity matters is because it determines what set of property exemptions you will be using. There are two sets of property exemptions available to Texas residents: the Texas exemptions and the Federal exemptions (you can read about the different exemptions further here: http://www.txbankruptcyblog.com/2013/07/articles/bankruptcy-news/property-exemptions-available-to-texas-residents-in-bankruptcy/).
Under Texas law, as an individual, you are allowed to protect up to $30,000.00 worth of business equipment under the Texas “Tools of the Trade” property exemption. This will include things like tools and equipment (including motor vehicles). However, the value of this exemption is reduced by the equity in other property you have; including vehicles, household goods, guns, jewelry, etc.
Under the Federal exemptions, you are able to protect up to $2,300.00 in tools of the trade.
However, under Federal law you also have access to what is called the “Wild Card” exemption, which can provide up to an additional $12,000.00 in property protection for an individual. This is a flexible exemption; which can protect bank accounts, business equipment, furniture, etc.
The set of property exemptions you choose is largely going to depend on the amount of equity in your homestead and vehicles. If you have a large amount of equity in your homestead and vehicles, most of the time the Texas property exemptions will be your best bet. If you have limited equity, usually the Federal exemptions will serve you best.

Once you determine what set of exemptions is best for you based on the valuation of your homestead and vehicles, the next question is, what is the value of your business interest? The value of a business interest is usually analyzed based on several factors, including: your ownership percentage, the business’ income versus expenses, and business assets. For most Chapter 7 debtors, the value of the business is primarily determined by the business’ assets. Typical assets of businesses include: accounts receivable, bank balances, inventory, intellectual property, customer lists, equipment, and machinery. This numerical valuation will be the principal determination of whether your business interests would be protected in a Chapter 7. For most of our clients, we are able to walk them through the bankruptcy process without them having to  surrender any interest in their businesses.  

Determining whether your business interests are exempt under the law can be very complicated and every business is different, with different needs. If you are operating a business and considering bankruptcy for yourself or the business entity, you would be well served to consult with an attorney regarding your options. The attorneys at Fears | Nachawati would be happy to guide you and advise you what your best course of action is. 

  

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.

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.