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.
1. How often can I file a Chapter 13?
2. What is the discharge in bankruptcy?
3. How will I receive my discharge?
4. What debts are not discharged in a chapter 13 bankruptcy?
5. A Discharge may be revoked
6. Are my out-of-state debts discharged in bankruptcy?
Only individuals, who have complied with the Bankruptcy laws and completed their chapter 13 Plan, can receive a chapter 13 discharge. An individual cannot receive a discharge in the 13 if they received a discharge in 7, 11 or 12 in the past 4 years before filing the current case, or in a chapter 13 in the last 2 years before filing the current case. 1328(f).
A discharge is the court’s order stating that you do not have to pay your debts to the creditors that were listed in your bankruptcy documents, so long as the court did not entered a non-dischargeability order. Other debts that are not discharged under the current laws include student loans, child support, alimony/maintenance, government fines or penalties, most taxes and a few others.
If a debtor is required to pay child support or alimony/maintenance, then, after all Plan payments are completed, they must file a certification with the Court that all payments are current, otherwise they will not receive a discharge. (1328(a))
The effect of a discharge is that debtors are released from personal liability for all dischargeable debts, and all creditors, whose debts are discharged, are prohibited from performing any act to collect such debts from the debtors. This is known as a permanent, federal injunction. In a chapter 13 the discharge is not entered until all your plan payments are made and the terms of the Plan completed in full. If the debtor commits fraud, or fails to perform as required by law, the discharge can be revoked.
Even after a discharge, generally a creditor that has a valid lien on property belonging to a debtor (such as: house, car, furniture, jewelry) may recover the property or its value. However, if the debtor possesses certain property that is encumbered by a judicial lien or a non-purchase—money security interest, the Debtor will have to bring this issue to the Court for an order which will remove the effect of the lien. This action is called a Motion to Avoid a Lien.
If the debtor wants to keep assets that have secured liens (such as a house or car) the debtor can either continue making the same payments as before the bankruptcy, or pay the lender one lump-sum payment equal to the fair market value of the item (redemption).
While the discharge stays on your credit record for 10 years from the discharge, it becomes less and less significant in a creditor’s decision to grant new credit with every year that passes.
Usually by mail, unless you have asked for electronic notification. In some states there may be a court hearing, which you must attend, where the court will explain the meaning of the discharge, or the reasons for denying your discharge, if it is not granted. Arizona does not have this discharge hearing, unless yours is a very unique situation.
If your discharge in bankruptcy is granted, in most circumstances all of your debts will be discharged except the following list, which is intended to be only an outline of most debts that are not discharged by operation of law or by a court order:
1. Certain taxes, including trust fund taxes. But these are normally paid as part of the chapter 13 plan.
2. If the bankruptcy court so rules, debts for obtaining money, property, services, or an extension, renewal, or refinancing of credit by means of false pretenses, fraud, or a false financial statement used with intent to deceive.
3. Debts not listed in the bankruptcy papers, unless the creditor had knowledge of the case in time to file a claim.
4. Debts for domestic support obligations (alimony, maintenance or support).
5. Interest on non-dischargeable debts.
6. If the bankruptcy court so rules, debts for intentional injury.
7. Debts for certain fines and penalties payable to governmental units.
8. Debts for student loans, unless not discharging the debt would impose an severe undue hardship. This undue hardship must be properly plead to the Court and the judge will decide based on your unique situation. This is a very difficult burden for the debtor to prove.
9. Debts that were or could have been listed in a prior bankruptcy case in which the debtor either waived their discharge or the discharge was denied.
10. Debt for personal injury judgments against you resulting from car accidents in which the debtor was a drunk driver.
11. Post-petition homeowner’s association fees (but this issue is disputed).
A Discharge may be revoked in the case of bad faith or fraud.
Yes. Bankruptcy is a federal proceeding and the bankruptcy court has the jurisdiction and power to discharge debts contracted anywhere in the Country, whether in or out of your state of residence. Of course, there are certain debts that cannot be discharged in bankruptcy.