Posts

8 Ways to Stay Out of Bankruptcy

I am a bankruptcy attorney. From my point of view here are the things that most often push people into bankruptcy._1130814

1)  Never ever co-sign a loan for a friend. Some of the most tragic bankruptcies occur when the client has otherwise sterling credit but his “friend” doesn’t pay.

2)  Avoid ruinous debts with ridiculous interest rates. These include payday loans, used car loans, even mortgages with 30, 90 or even 200% annual interest, or more. They are roads to disaster.

3)  Always, pay more than the minimum on credit card debt. If you can only afford the minimum payment than you are carrying too much debt. The interest will eat you up.

4)  Carry health insurance.

5)  Student loans are not free money.  Be very careful with student loans. They are non-dischargeable debts in a bankruptcy.

6)  What follows is very hard advice.  People hate to hear it, but, if your economic circumstances change adjust. If through divorce or unemployment you can’t afford your lifestyle — downsize.

7)  Contact your mortgage company and apply for a home loan modification. Then, think twice before signing it. You are often pushing costs to the end of the loan where you will eventually have to pay them back.  But on the other hand you may be lowering your interest rate. So consider the terms and your alternatives, like selling and moving somewhere cheaper.

8)  Don’t refinance your home or take money out of a 401K to pay unsecured debts.

The Dreaded Means Test in Chapter 7 Bankruptcy

The Means Test is the fierce hurdle Chapter 7 bankruptcy filers have to clear to avoid having the Court dismiss or convert their cases. Sound important? It is.When Congress reformed the bankruptcy law it felt that too many people were filing Chapter 7 liquidations, who could otherwise repay their creditors. To understand the complex rules of the Means Test it helps if you keep the lawmaker’s objective in the back of your mind.

JohnMenszer-0732What is income? Income is the current monthly income of the debtor as based historically on the last six months before filing. It includes all sources of income with the exception of social security benefits and tax refunds. It includes gross wages, pensions, sole proprietor income, dividends, unemployment benefits, payments made on behalf of the debtor by others and child support actually received.

If the Debtor’s income is below the median household income for his state and the size of his family, then there is no need to fill out the rest of the Means Test. You can stop there. The presumption of abuse does not apply. It is OK to file a Chapter 7.

What are expenses? While the income calculation is based on the personal circumstances of the debtor, the expense calculation begins with figures published by the IRS, which are national standards. The IRS has determined allowances for food, clothing, housing expenses, transportation and medical expenses based on family size for different areas of the country. These national standards are adjusted for remaining debt payments on houses and vehicles, payroll taxes, education expenses for minors (but only within strict limits), court ordered support payments, mandatory retirement payments, necessary and provable healthcare payments that exceed the national standards and past-due priority claims, like taxes and child support.

What is the amount proportional to the debtor’s total unsecured debt? In determining abuse Congress looked to how much a debtor could repay every month and also to what percentage of his total unsecured debt he could repay in the maximum of 60 months of a Chapter 13 bankruptcy. Then Congress indexed these figures for inflation.*

As of the writing of this blog*, if a debtor’s Means Tested income minus expenses is less than $130.37 per month, there is no abuse and the debtor can go on and file a Chapter 7. If a debtor’s Means Tested income minus expenses is greater than $207.92 per month, there is always a presumption of abuse and the debtor should consider filing a Chapter 13 or not at all, unless there are special circumstances like the Debtor took a lower paying job during the 6 months prior to filing. If the debtor’s Means Tested income minus expenses falls between these figures, then it is necessary to look to the total of the unsecured debts. If the Means Tested net income shows the debtor can repay more than 25% of these debts in 60 months then abuse will be presumed and the debtor had better consider filing a Chapter 13 or not at all. If the ratio of monthly net income times 60 months to unsecured debts is 25% or less of the debts, then Congress deemed this to be a negligible amount and it is OK to file a Chapter 7.

The Means Test is dreaded not only because it prevents certain people from filing a Chapter 7 bankruptcy, but because it is such a darned hard test to take.

Are my income taxes dischargeable in a bankruptcy?

Income tax issues in bankruptcy are a can of worms.  In only limited cases are taxes or tax penalties dischargeable in bankruptcy.  The primary issue is timing and a separate analysis must be done for eachCanWorms- year’s taxes, interest and penalties.

In bankruptcy each tax debt or claim will fall into one or more of the following categories:

1)  Allowed secured claims include taxes, interest and penalties for which the IRS has filed a lien.  To the extent that the lien is not under-secured, they are probably not dischargeable.  However, in a Chapter 7 the penalties for late payment may be.

2)  Unsecured priority claims are usually paid in full in a Chapter 13, including interest but not penalties.  But the interest does not continue to accrue once the Chapter 13 is filed.  They are not dischargeable in a Chapter 7.

3)  Unsecured claims that are dischargeable in a Chapter 13 or a Chapter 7.  To qualify the tax return must have been filed on time, or in some cases if late must have been filed more than 2 years before filing bankruptcy.  It must have been more than 3 years since the tax return was due before filing the bankruptcy.  Also, the IRS must have notified the debtor of the taxes due (the assessment date) more than 240 days before filing.

Taxes are never dischageable if a return has not been filed, if a fraudulent return was filed or if the debtor willfully attempted to evade paying the tax.

The analysis of each year’s taxes begins with requesting a transcript from the IRS.  The debtor should file a Form 4506-T  Request for Transcript with the IRS (available on their website http://www.irs.gov/Forms-&-Pubs) for each year that may be dischargeable.  The transcript will show if the return was filed on time, or if it was late when it was filed, if the return was due within 3 years of filing bankruptcy and if the taxes were assessed within 240 days of filing bankruptcy.  Short take is that the tax return has to have been filed and the taxes have to be old.  Tax debts are the most frequently nondischargeable debts in bankruptcy.

I have a financial question about my Chapter 13 bankruptcy case?

NationalDataCenter

The National Data Center website may have just the information you are seeking.  In a new development the National Data Center has coordinated with the New Orleans Chapter 13 Trustee’s Office.

At the Data Center’s website a debtor can view the latest financial information about their case: On the Case Summary page the debtor can see the total payments they have made and the dates their last three payments were received by the Trustee. On Claim Summary page each creditor is listed with the amount of the claim and how much has been paid to that creditor. You can also note how much your attorney has been paid. On the Account Ledger page each receipt of funds and disbursement is listed by date.

The address of the National Data Center’s website is www.ndc.org. If you can’t find the answer to your question on the site, you can call the Trustee’s office directly at 504-831-1313. You will be directed to punch in the last digit of your case number, so have it handy. If your case administrator does not answer, leave a message. She will call you back within 24 hours. And you can always call your attorney for answers.

In a bankruptcy what happens to debts between a divorced husband and wife?

Unfortunately, divorce and bankruptcy often go together.  What happens to the debts that spouses owe to each other when one files for bankruptcy?  The bankruptcy code distinguishes between two kinds of marital debts and limits the dischargeabilty of both.

1)  The domestic support obligation refers to alimony and child support, but includes payments coming due before, during or after the bankruptcy, if they are subject to a separation  JohnMenszer-9385agreement, divorce decree or court order.  If they are in the nature of alimony, maintenance or support the court looks to the true nature of the payments, despite what they are called in the agreement or order.  Not only can these debts not be discharged in a Chapter 7 or in Chapter 13 bankruptcy, they are deemed priority debts and paid in preference to unsecured debts, like school loans and credit cards.  Furthermore, a Chapter 13 debtor with domestic support obligations must keep his support payments current or his bankruptcy is liable to be discharged.

Domestic support obligations can include attorney fees paid by one spouse to the other spouse’s attorney, when the second spouse is awarded alimony or child support.  They can include agreements to pay utilities, mortgage payments and insurance when they are deemed necessary to support the non-filing spouse.  The burden is on the creditor to prove that the debt is non-dischargeable.

2)  The other category of marital obligations are marital property settlement debts.   These encompass all debts to a spouse or child incurred by the debtor in the course of a divorce or separation, which are not otherwise domestic support obligations (category 1, above).  In other words, everything else.  They can include credit card debt, student loan payments, uncompensated labor, anything that is not deemed a support payment.  They are also not dischargeable in a Chapter 7, but are dischargeable in a completed Chapter 13 bankruptcy, after the debtor has made all the payments and fulfilled all the other requirements for discharge.

The only game in town for a debtor seeking to be rid of marital property settlement debts is to make Chapter 13 payments for either the 3 or 5 year required period.  The debtor’s resultant Chapter 13 discharge will absolve the debtor of the obligation to pay any outstanding marital property settlement debts that did not get paid through the bankruptcy.

Will bankruptcy improve my credit score?

It might seem counterintuitive, but filing bankruptcy usually improves a credit score. The estimated 12 month post-filing credit score typically shows increases of from 25 to 100 points. Expect still greater improvement if post-filing credit is applied for, used wisely and bills are paid promptly.

This is for several reasons. The bankruptcy liquidates most debts and although the old debts are still listed on the credit report, they are indexed as discharged,. The debtor has been legally relieved of the obligation to repay the unmanageable burden. Another reason is that Chapter 7 discharge means that the debtor will not be able to re-file another Chapter 7 for 8 years from the date of discharge.

The credit score improvement is reflected in the fact that a post-bankruptcy creditor will not be competing with the old creditors for a share of the JohnMenszer-3496 debtor’s income to service the debt. Then new creditor takes comfort that the Chapter 7 debtor will not be able to re-file and liquidate his debt for at least 8 years. This removes one of the risks to the creditor for the next 8 years. Also, the bankruptcy debtor has taken, and benefitted from, the required consumer credit and financial management educational courses.

My clients want to know when they will be able to apply for new credit to buy a car or purchase a home. I tell them your bankruptcy is a public record and each creditor may interpret it differently as they weigh your financial strength. An auto finance firm may be willing to take your application as soon as your bankruptcy discharge is issued by the court. A company making home loans may want to wait until 2 years have passed since your bankruptcy before considering your application.

The right to bankruptcy is enshrined in the U.S. Constitution at Article 1, Section 8, Clause 4. The founding fathers wanted you to have the advantage of being able to make a fresh start and to be a productive member of the economy free of overwhelming debts. After filing bankruptcy it is likely that you can anticipate your credit score to improve after your discharge is issued.

Why do Chapter 13 bankruptcies fail?

JohnMenszer-9365A successful Chapter 13 bankruptcy concludes with the completion of the payments and the discharge of the debts. Less than half of Chapter 13’s end this way. Why?

The most common reason for failure is that the debtor falls behind on his or her payments to the trustee. As a rule of thumb, after there have been three missed payments the Chapter 13 trustee will set a hearing date on a Motion to Dismiss for non-payment.

The best insurance against missing payments is having them made automatically. Your attorney can set up a wage order for you. With a wage order your payments are taken out of your paychecks. If you get paid bi-monthly, half will be taken out of each check. A newer option is to have the funds deducted from your bank account, then verified by a company who charges a small fee to send the payments to the trustee.

Having a Motion to Dismiss filed against you isin’t the end of the world. You will still have a chance to catch up by the hearing date. Or, if you can only partially pay up your attorney may be able to ask for a continuance. Sometimes debtors, for sickness or other reasons, fall so far behind on their payments that their best option is to let the bankruptcy be dismissed and have their attorney re-file another Chapter 13.

Another reason for cases to fail concerns outside payments. Outside payments are made directly to a secured creditor, like on a house or a car. They are for installments that mature after the date of the filing of the bankruptcy. If you fail to make these installments, even just one month, the creditor on your house or car may set a hearing date on a Motion for Relief of Stay. If you can’t catch up by the hearing date, again your attorney may be able to work something out.

The moral of this is that if you can see that your bankruptcy is running into trouble call your attorney right away, in advance, before a Motion is filed against you.

How can I face filing bankruptcy? I feel ashamed.

Edited-Photo-iStock_000001692734SmallcopyFor most of my clients the realization that they might need to file bankruptcy happens slowly, after much deliberation. The fact is people want to pay their bills. But over a lifetime things happen. Filing bankruptcy should be reserved for those once or twice in a lifetime situations when it is absolutely necessary.

The bankruptcy laws are meant to give a person a fresh start. The alternative is to remain trapped beneath an ever increasing tangle of debts. The founding fathers of our country did not want this. They wrote into our Constitution that the Congress shall write the bankruptcy laws. What could be more American than that?

I have seen the relief that people feel after their first office visit. At last, they have made a decision to do something about a troubling situation. Someone is on their side, who can advise them about the pro’s and con’s of bankruptcy relief.

The bankruptcy laws do not fit everybody’s case, and more times that I can count, I have advised people to take a different path. But bankruptcy has the virtue of being Federal law.  The creditor who wilfully disregards the bankruptcy stay does so at extreme risk.

I see my job as helping people, who are in trouble. Making an appointment with a bankruptcy attorney is the an important first step toward taking control of an unmanageable situation.

What happens in the Meeting of Creditors? What should I expect?

341MeetingCrop

Within 2 weeks of your filing Chapter 7 or a Chapter 13 bankruptcy you will receive a notice in the mail scheduling your “Meeting of Creditors.” You are required to attend. At the meeting you will be sworn under oath and examined by your case Trustee. Your attorney will be sitting next to you and your creditors have the right to ask you questions, however, in the vast majority of cases the creditors do not show up.

The agenda of the Meeting of Creditors includes the following:

You must identify yourself by presenting a picture ID and Social Security card. Tip: As you approach the Trustee place you ID and SS card on the desk when you sit down.

After you are sworn in:

You must affirm that you read your bankruptcy petition, signed it and that the information it contains is true and correct.

You must affirm that you listed all of your assets and your debts.

You must affirm that you read the “Bankruptcy Information Sheet.” This is part of your Bankruptcy Petition that informs you of the various chapters you can file under, the effect and consequences of receiving a bankruptcy discharge and warns you about bankruptcy fraud. Your Attorney will have given you a copy.

At this point the Trustee may ask additional questions to find out if there are non-exempt assets of sufficient value to justify his administering them for the benefit of your unsecured creditors.

Your attorney will have provided the Trustee with a copy of your latest Income Tax Return and Bank Statements covering the date you filed bankruptcy. The Trustee may have questions about them or may have questions about inheritance property, the value of your automobiles or your home.

The Trustee will then call out to see if there are any of your Creditors in the room who wish to question you. Usually, there are none.

Then the Trustee will “announce his intentions,” that is whether he or she will disclaim, provisionally disclaim, or administer any interest in your property.

With that the Trustee concludes the meeting. If the Trustee asks for more documents he or she will give you 10 days to provide them. Afterwards, your attorney will be available to answer any questions you may have about the meeting.

Your examination by the Trustee usually takes no longer than 5 minutes and if the Trustee is not running late you should be free to go within a half hour of the scheduled time of your meeting.

 

What papers should I bring when I see my attorney?

JohnMenszer-8123For your initial visit with your bankruptcy attorney you may not need to bring any papers because he or she will be getting the general overview of your financial picture. That said, to file your Chapter 7 or Chapter 13 bankruptcy the following documents will eventually be required.

I’ve listed them by category.

Read more