In 2005 the bankruptcy laws changed and affected anyone who filed for bankruptcy protection after October 2005.
Announcement from the Consumer Financial Protection Bureau: WASHINGTON, D.C. — Today the Consumer Financial Protection Bureau (CFPB) is launching a public inquiry into student loan servicing practices that can make paying back loans a stressful or harmful process for borrowers.
Ten years after the passage of the “new” bankruptcy law we find a new class of Americans “the permanently insolvent”. You won’t find reference to this group in any financial magazine. But, hundreds of thousands of Americans are in a position of being hounded mercilessly by debt collectors, but unable to afford to file for […]
The following is an excellent article by another attorney. I like to give credit where credit is due – so I offer to you Mr. Blades insights. These also are true for Arizona residents.
Written by Rock Hill Bankruptcy Lawyer, Showell Blades
A client who has a good bankruptcy lawyer usually has a calm experience once the case is filed. The idea is to, as my mentor explained to me twenty years ago, disclose everything and fly under the radar. You do not want to do anything which draws unnecessary attention to your file or your fact situation so that your creditors or the United States Trustee’s office decides to take a closer look at the file. Even if nothing comes of that closer look, the process can be stressful for the clients.
Recently I had a woman storm out of my Rock Hill bankruptcy office after a free thirty-minute consultation which she ended by calling me an unpleasant orifice. My crime: I told her she had to wait four months to file bankruptcy and she wanted to file right then. She would best be served by remembering Ovid’s quote: “Bear patiently with a rival.”
The reason a client with a good bankruptcy attorney usually has a calm experience once the case is filed is because that attorney knows of the pitfalls that can come from taking simple actions, or by not taking them, before the case is filed. If all the bases are covered properly, there is nothing for anyone to scrutinize, or the client is at least prepared for those items which will come under closer scrutiny.
Be advised: the bankruptcy system can be a system where you encounter strong, well-funded and well-prepared rivals. Ovid’s advice can come in handy.
First, Debtors need to make sure that they do not have any deposits in any banks to which they owe money, whether in the form of CDs, checking or savings accounts, or other forms of deposits. This is because a bank has the right of setoff. If you file bankruptcy and owe a bank any money, then that bank has the right to administratively freeze the account and take the funds to pay the loan which you are not likely to pay in bankruptcy. For that reason, most good bankruptcy attorneys will make sure that you move your accounts to which you owe no funds so that you do not file bankruptcy and have your checking account frozen and all of the money that you would have going to pay bills that month disappear. You will not get it back. Also, keep in mind that many clients have automatic payroll deposits which need to be moved and drafts to pay important things like life and health insurance which need to be moved (both of which often take thirty days to change) .
Second, your attorney will ask you to whom you’ve paid payments on debts within the ninety days prior to filing bankruptcy and to whom you’ve paid payments on debts within the one year prior to filing bankruptcy if the lender was a family member. Take time to think about your answers. If you say “No one” and the bankruptcy trustee finds out that you have, then you have not told the truth which means you’ve committed at least three federal crimes. Additionally, any payment on a debt which qualifies as one of the above payment can be taken back by the trustee (preferential treatment) and given to the rest of your creditors. In other words, if you gave Aunt Zelda the $15,000 you owed her eight months ago and then you file bankruptcy, your bankruptcy trustee can sue Aunt Zelda to get all of the money back and will win causing her great concern because she probably doesn’t have it. Christmas will never be the same.
Also, if you paid the four mortgage payments you were behind all at once a month before you file bankruptcy and do not wait ninety-one days after that check clears, then the trustee may be able to get all of that money back from the mortgage company. You would find yourself in bankruptcy and still four mortgage payments behind which could put you in foreclosure. Tell your attorney about these things and expect to have to wait to file bankruptcy.
Third, if you are remotely thinking about filing bankruptcy or feel overwhelmed, but you have a 401(k) or IRA or a similar investment vehicle, and are thinking about solving your problems by cashing it in, DON’T. Go talk to a bankruptcy attorney and get some advice. This is for several reasons. Initially, you need to understand that your creditors cannot take that investment from you no matter how broke you are. It is exempt, protected from the reach of creditors or the bankruptcy trustee. So leave it alone. Don’t cave to the creditors’ threats and take what may be your last or only safe asset.
Another reason to consider disposing of this asset very carefully is this: I cannot tell you how many people I have seen who have cashed in their 401(k) and paid their credit cards down only to find themselves overwhelmed and now without their 401(k) still needing to file bankruptcy. Get advice before you try to pay off your debts with your 401(k). The only way I would advise that would be if you could pay off all of your debts in full, be able to handle any tax ramifications of cashing it in early, and be able to make it on your family budget after the debts are gone so that you do not find yourself upside down very soon so that cashing in the 401(k) was a waste.
Finally, if you cash in your 401(k) within the six months prior to filing bankruptcy, this could cause you to fail the Means Test. This is one of the things that the Court looks at to see if you qualify for bankruptcy and, if so, which type and what a payment would be if you filed a chapter 13. (This reason MAY have been negated by a Supreme Court decision that came out this week, but I wouldn’t want to be the first person to try to make sure of that). So talk to your attorney before you do it.
A fourth trap for the unwary is to renew loans or taking out loans prior to filing bankruptcy. You need to tell your attorney what you’ve done with your credit in the last six months or so. This is because creditors have the right to object to your discharging, or getting rid of, their debts. There are a number of reasons creditors can use to do this but one of them involves your borrowing money right before you file bankruptcy. What IS “right before filing bankruptcy” is not defined. I have had a creditor object to charges that were made four and a half months prior to my client filing bankruptcy. If this happens you have to pay me extra money to defend that lawsuit or you have to settle it by paying back the creditor. It can be avoided by figuring out when you last used credit, telling your attorney, and waiting to file. Renewals of loans before filing count also.
The fifth and final trap involves not making sure you know what your assets (your property) is worth. Your attorney is going to be asking you all kinds of questions. Many of them deal with the value of your house, your cars, your furniture, antiques, an other property. The Court expects you to know what they are worth. If you do not it could have bad results for you for several reasons.
Most of the reasons involve the trustee’s selling your stuff because he can make money by selling them, paying off the liens on them, paying you your share of the money (your exemption) and, if he still can make more money after all of that, it is his to use pay to your creditors. If you make sure that you have an accurate value for your assets, then it will be close to what a trustee could get by selling them and your attorney can claim the correct exemptions and protect your assets. Since sometimes you have to make choices about what you want to protect and what you don’t, knowing a good value is important.
Also, a recent U.S. Supreme Court opinion (“Schwab” exemption case) says that, if a debtor undervalued his assets when he claimed his exemptions and a trustee can sell them for more, the Debtor cannot get the money that the trustee made over the debtor’s exemption amount even if he could have claimed more but did not. Thus, you need to know the value so you can claim the full amount of protection.
Another reason value is important is that, in some cases, if your collateral is worth less than you owe, you can pay the value of the collateral to the creditor and not the larger amount that you owe. If you undervalue your stuff and file a motion to value and the property turns out to be worth close to what you owe, then you wasted everyone’s time and you and your attorney look stupid.
Finally, if you undervalue your assets and they turn out to be worth significantly more, not only could you lose them but you could find yourself being criminally prosecuted for bankruptcy fraud. This could happen even if you did not intentionally undervalue them; rather, you were too lazy or irresponsible to try to find out a good value. Debtors have the burden of investigating their affairs and reporting everything truthfully and completely to the Court.
In summary, there are many considerations which must be addressed before you file bankruptcy. Attorneys know that everyone who needs to file bankruptcy wants it done as soon as possible. However, it also is their job to help Debtors make the best decisions. Debtors must understand that sometimes they must fully apprise their attorneys of the facts and think about what they are telling their attorneys (and of what their attorneys are telling them). They also need to understand that, sometimes, they are going to have to be patient before they enter Bankruptcy World because the wolves are at the door.
Many people assume that their business will not be affected when they file bankruptcy. They may be very wrong in that assumption. Why? The answer is “it depends on the type of bankruptcy filed”.
A Chapter 7 bankruptcy is a tool to help individuals start over. Some of the information in this article is specific to cases filed in Arizona, but the majority is bankruptcy law and applies to all Chapter 7 bankruptcy. This basic information should assist you in understanding how bankruptcy works, but please understand that the information on this website is not all you need to know to file Chapter 7 bankruptcy. Video explaining chapter 7 basics.
Chapter 7 bankruptcy is designed to give an individual a “fresh start”. This includes eliminating or discharging all your unsecured debts after you have liquidated and paid to your creditors all of your non-exempt assets. Certain unsecured debts cannot be discharged in Chapter 7. Chapter 7 bankruptcy has no effect on secured debts. That means if you want to keep your home or car, and there are debts owing on that home or car, you need to keep the payments current.
A permanent resident of Arizona can file bankruptcy in the Arizona bankruptcy court. But, you must have lived in Arizona for at least half of the last 180 days (6 months) in order to file in Arizona.
An important concept in both Chapter 7 and Chapter 13 bankruptcy is “exemptions” or “exempt property.” When you file a Chapter 7 bankruptcy, the Chapter 7 Trustee takes all of your “non-exempt” property and sells it for the benefit of your unsecured creditors. The Trustee cannot take your exempt property and you may keep all of your exempt property regardless of its value and amount. What property is “exempt” and what property is “non-exempt” depends on the exemption laws of the applicable state. Each state has its own exemptions for bankruptcy purposes. For a link to Arizona exemptions go to the primary menu, Bankruptcy, Arizona Exemptions. There is a download PDF of the exemptions. Only Arizona residents are able to use Arizona exemptions (YouTube video).
Just because you are an Arizona resident when you file for bankruptcy does not mean you are entitled to Arizona exemptions in bankruptcy. Therefore, before you file bankruptcy you and your bankruptcy attorney must determine which state laws will determine your exempt assets. The state exemption law applicable to your bankruptcy is determined by the state in which you have been domiciled for the 730 days (two years) immediately prior to filing your bankruptcy. If you have not been a resident of Arizona for the two-year period before filing your bankruptcy, then your bankruptcy exemptions will be those allowed by the state in which you lived for 180 (6 months) days immediately before the two year period, or the state in which you lived for the longer portion of that 180-day period. Confused yet? I recommend making a diagram of where you lived and when.
For example: a person filing bankruptcy in Arizona today may use the Arizona property exemptions if he or she lived in Arizona for more than two years. But, if that person did not live in Arizona for two full years, then that person will need to look to the exemptions of the state where he or she lived in that last two years. It is possible that the exemptions of the prior state are limited to residents only. Therefore, the person filing for bankruptcy will need to use federal exemptions. In many cases, the state where the person moved from will provide better bankruptcy exemptions than Arizona law.
Consider John. John sells his residence in Georgia for $100,000 and moves to Arizona in January. In March of that year John purchases an Arizona homestead for $100,000; he gets an Arizona drivers license and registers to vote in Arizona. Then, 14 months after moving to Arizona, John loses his job and files bankruptcy. Under the bankruptcy law, Georgia’s relatively limited exemption laws would apply to John’s bankruptcy, and John would not have the benefit of Arizona $150,000 homestead protection.
The means test is a formula established by Congress to determine who may be eligible to file Chapter 7 bankruptcy. People under their state’s median income and people whose debts are primarily not consumer debts are exempt from means test qualification. This means if 51% or greater of the debts are related to business obligations then the potential debtor does not need to worry about the means test.
In the bankruptcy documents you list secured debts separately from unsecured debts. Unsecured debts include personal loans and credit cards issued by banks, such as Visa, MasterCard, American Express, or Discover, and other credit cards used to purchase consumable items. Vehicle leases, medical bills, and personal loans are also unsecured debts. Secured debts include those debts where the creditor has a security interest in your property to guarantee payment. Examples of secured debts include mortgages, car loans, loans from finance companies (usually secured by household items), furniture, computers or electronics. If you purchased goods at a store using a store credit card, such as a card from Home Depot, Best Buy, etc., the store probably has a security interest in certain items purchased, which makes the store a secured creditor.
After filing a Chapter 7 bankruptcy, you will have to choose to either reaffirm or redeem secured debts or surrender the secured items to the creditor. You are entitled to keep any secured property as long as you continue to pay the loan for that property in a timely manner. If, however, you elect to surrender secured property, the secured creditor may not sue you for and try to collect any money from you. Some mortgage companies recently have required borrowers to sign cross-collateralizated agreements. This means that the borrower agreed to allow their bank or savings union to seize their bank accounts in order to pay delinquent payments for the vehicle. If you are unsure whether you signed this type of documents, you should review the papers you signed when you purchased your vehicle and/or when you opened your account. You may want to move your money to a new bank before defaulting on a vehicle loan. Do not bank at Wells Fargo — they will freeze your account even if you did not sign a cross-collateralized agreement.
Your bankruptcy estate refers to your non-exempt assets that are subject to administration by the bankruptcy trustee. Exempt assets, such as your homestead and IRA, are not part of your bankruptcy estate.
The creditor (or you) must file a reaffirmation agreement for all secured personal property you want to retain within 60 days of the first scheduled meeting with the trustee (the meeting of creditors or 341 meeting). If you do not sign the reaffirmation agreement or redeem the property within 60 days, the automatic stay is lifted as to that property and the creditor is permitted to take all legal action allowable under the law to repossess the property. Signing a reaffirmation agreement means that you will be personally liable to pay the debts after your bankruptcy is over.
Your attorney may choose whether or not to sign your reaffirmation agreement. Issues such as negative disposable income, no concessions by the creditor as to principal or interest or the attorney believes there is a presumption of undue hardship. If your attorney does not “approve” reaffirmation, you must prepare and sign a Reaffirmation Agreement Explanation explaining why you now have the financial ability to pay a reaffirmed debt. The bankruptcy judge will review your explanation and either deny or approve the reaffirmation. The bankruptcy judge will deny reaffirmation if he believes that reaffirmation is not in your best interest for a “fresh start.”
If the reaffirmation is denied you still may be able to keep your property if payments are current, or you could request a hearing with the judge. If the court refuses to approve your reaffirmation many creditors will let you keep your property if maintain current payments. (A creditor usually will not provide a reaffirmation agreement if you are delinquent in your payments.)
The bankruptcy stay is the bankruptcy tool that stops creditors from contacting you in any way after you file bankruptcy. This could be a problem because the lender o your home or car may stop sending monthly statements. It is your responsibility to make sure you pay these debts on time, otherwise the lender may ask the court for permission to take your home or vehicle.
An executory contract is a legal term referring to an agreement between parties and an obligation due by at least one of the parties (such as a car lease or a residential lease). The most common example is a lease agreement for a car or a residence.
Chapter 7 bankruptcy permits the debtor, or the trustee, to assume or reject an executory contract. A debtor has to decide what to do about an executory contract before the court issues a bankruptcy discharge which usually happens about 90 days after filing.
An example of an executory contract is a vehicle lease. If the debtor does not want to keep the leased vehicle then he can surrender the vehicle to the leasing company and has no further liability. If the debtor wants to keep the vehicle then will need to assume the lease and keep the payments current. The debtor and creditor must sign the lease assumption, but it is not necessary for the judge to approve the lease assumption. If the debtor cannot make the lease payments the leasing company can repossess the car, but cannot sue the debtor for any deficiency.
A debtor’s tool in bankruptcy is to “redeem” secured personal property such as furniture, computers, automobiles, or other property purchased on credit. To redeem means to purchase the property from the secured lender at its current fair market value considering its age and condition. If the property is worth less than the secured debt then this may be a good option. The problem is that most redemptions require payment in full at the time the redemption is accepted or approved by the court..
Start with the understanding that student loans will not be discharged in a bankruptcy. But, there are always exceptions to every rule. In some circumstances student loans can be dischargeable if you can show that your loan payments impose “undue hardship.” This issue must be filed as a separate action within the bankruptcy. This separate action is called a adversary. You must appear before the bankruptcy judge with proof of your hardship. Most likely this will be hotly litigated by the student loan creditor. It is wise not to assume you will be one of the very few who receive a partial or full discharge for their student loan. Each bankruptcy judge, in each bankruptcy district, in each federal court has a different opinion what is an “undue hardship”.
Make certain you provide your attorney information about all liabilities, no matter how remote. List any claim that anyone might have against you even if you are certain that claim will never arise. If you are a co-debtor on a note, have personally guaranteed any debt, or are liable on any mortgage, the debt should be listed and explained in the bankruptcy. You also must list debts you dispute. This includes any past obligations to any mortgage companies for a foreclosed home or even a short sale, make sure to include any mortgage insurance company (such as a VA loan). You should also include any obligations that someone promised to pay for you, such as selling your home to someone who promised to pay you, but the sale was done without paying off the entire debt.
The discharge is the legal process that eliminates most of your legal liability to your creditors. Creditors who have been discharged in bankruptcy can never again try to collect debts that you incurred prior to filing bankruptcy. There are certain debts that remain even after the discharge is entered. These debts include child support, alimony, student loans, most taxes, and several other obligations. A good bankruptcy attorney can guide you as to what debts are discharged and what are not. Video explaining the discharge.
By Jon Alper, as edited by Diane L. Drain
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