Well, I am here again – what are my options?

I began looking a the time between Chapter 7s if one wishes to receive a discharge. The time frame is different when the subsequent case is a Chapter 13 showing the favored status of Chapter 13 bankruptcy. If the preceding bankruptcy was a Chapter 7 (or Chapter 11 or 12), then you cannot receive a discharge in a subsequent Chapter 13 if is filed four (4) years or less of when the Chapter 7 was filed. See 11 USC Sect. 1328(f)(1).

If  one gets a discharge of unsecured debt in a Chapter 7 but still has some non-dischargeable priority debt in income taxes, they may want to turn right around and file a Chapter 13 without waiting the four years because they will be paying the debt in full over the length of the plan. So, there is no need for the discharge. This is a strategy discussion to have with your attorney.

Never thought I’d be here again…

First, the vast majority of people who end up in such a bind that they must file bankruptcy to get a fresh start never face that dilemma again. However, there are some people who face a second filing (or a third). The bankruptcy reform enacted in 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), changed the rules on when that subsequent case can be filed. There are different rules depending on what the preceding and subsequent chapters were in the bankruptcies and these rules are found in different places of the code.

Actually, the code does not determine when one can file but when they will be eligible to receive a discharge based on the time between filings. This presents the possibility of filing bankruptcies where no discharge is expected.  If the preceding bankruptcy was a Chapter 7 (or Chapter 11), then you cannot receive a discharge in a subsequent Chapter 7 if it is filed eight (8) years or less from when the prior one was filed. The dates run from filing to filing. See 11 USC Sect. 727(a)(8).

Balloon or Bust!

A number of people took out balloon payment loans (interest only loans) prior to the whole mortgage mess and economic downturn. They seemed like a great idea at the time because it allowed folks to buy more of a house than they could actually afford at the time with the notion that they would either have turned around and sold the home for a profit in a few years or they anticipated greater incomes. Of course, the economic crevasse we fell into precluded sales for profit and kept salaries from rising.

So now, many people are either facing that final payment in a few months or that balloon has already popped leaving them with massive arrears. There is a remedy IF your income can sustain it: Chapter 13. Let’s say you have $50,000.00 in arrears on one of these loans and your income would support a plan payment of $900 or $1,000 per month (about what you would pay in rent anyway), then you could save your home.

In the Eastern District of Kentucky, the entire arrears can be paid through the plan at 0% interest. Obviously there are other factors that can be considered, but if you have a balloon house payment that has already come due or about to come due, then it would be worth consulting with a bankruptcy attorney to see if saving the house can work.

As a side note, even if a judgment has been issued in a foreclosure action, you can still filed a Chapter 13 and turn things around. So long as the house has not sold at auction, then a Chapter 13 can stop the litigation and give you a chance to work out a plan to save your home. Frankly, this works best for lenders as well, because they will get 100% principal rather than the 2/3 that would come through a Master Commissioner sale.

When “abandonment” is a good thing

Despite my reassurances, debtors always have anxiety about the meeting of creditors. When the 5 to 10 minutes that the meeting takes have passed, they are invariably relieved. Bu, then the trustee often says something that perplexes them. He or she says, “I am going to abandon the estate’s interest in…”.

Abandonment sounds like a bad thing and usually it is. But, in bankruptcy it is a good thing. When the bankruptcy is filed, all the property of the debtor goes into an estate. The trustee has control over that estate. He or she can liquidate non-exempt assets of the estate; sell them and distribute the cash to creditors. For nearly all of my clients, all assets are exempted under the more generous Federal exemptions. When this is the case, then the trustee has nothing they can liquidate which would realize money for the creditors.

For any asset that is fully exempt or of no value to the estate, then the trustee will abandon that asset. That means he or she relinquished the ability to control or sell the property. So, in bankruptcy abandonment is a good thing.

Another way to keep your car in Chapter 7 bankruptcy

A common question when looking at filing for Chapter 7 bankruptcy is whether a debtor can keep their car. If the car has equity, then to keep the car it must be covered by an exemption. There is a specific exemption for a vehicle under Federal law, but one may also use any excess “wild card” exemption. The Federal exemption is at least $3,675.00 in equity (it goes up most years).

If the car has a secured loan against it then to keep it in a Chapter 7 one typically will have to reaffirm the debt. This means that the debtor will have to agree to remain personally liable on the loan as it existed when the bankruptcy was filed. Sometimes creditors will not insist on the reaffirmation so long as the loan is not past due and the debtor keeps making payments on time. However, many of these loans are for much more than the car is worth and have exceedingly high interest rates.

Another way to keep your car in the Chapter 7 is to file a Motion to Redeem Personal Property under 11 USC Sect. 722 of the bankruptcy code. Essentially, the debtor is moving to court to let them pay fair market value of the car in one lump sum as opposed to the full amount of the loan. If granted, then the creditor must release the lien on the car for the lump sum payment.

You may have enough exempted funds in a bank account to pay the lump sum, or you may have to seek a “722 loan” from another source.  Either way, this is a good option for a vehicle that is upside down on its loan or has a high interest rate.

Chapter 13 Plan: Take care with income and expenses

A couple of days ago I wrote about ways income and expenses influence your Chapter 13 plan payments. Today I want to encourage people preparing for bankruptcy to invest time into a careful look at your income and expenses. Because your plan payment in a Chapter 13 must be at least the amount of your disposable income, then accuracy matters in figuring out what that is. Once you have put the amounts in your Schedules (Schedule I is income an Schedule J for expenses), you are locked into them unless you can verify changes with documentation.

It is incredibly common, though, that people really do not know what they spend on expenses. Sometimes, people do not have an accurate idea of income either. This is less of an issue if all your income show up on pay advices (pay stubs) from wages. It is a bigger challenge for independent contractors and business owners. Almost no one, though, accurately tracks all personal expenses.

Despite the challenge presented by the lack of tracking, it is crucial to be as accurate as possible with expenses. If you underestimate your expenses, your plan payment may end up being too high to maintain resulting ultimately in dismissal of your case. Over-estimating your expenses may keep you from being able to show a plan payment of a certain amount (an amount required to pay arrears on a house, priority tax debt, or other mandatory items) to be feasible.

So, it is worth spending a few hours going back over bank statements or other documents that can help show average monthly expenses. If you have time before filing, it would be helpful to do a detailed tracking of expenses for a month. This can be very revealing and may also help you figure where things can be cut.

This accuracy, though, in determining income and expenses can mean the difference between a successful Chapter 13 bankruptcy and one that is dismissed or converted to a Chapter 7.

Quick Note: Income, expenses and; Chapter 13 plan

The major driving force in determining what your Chapter 13 bankruptcy plan payment will be are your household income minus reasonable and necessary expenses, at least in the Eastern District of Kentucky. I encounter two general situations when looking at household income and expenses to determine what a debtor’s plan payment will likely be in a Chapter 13: 1) people who have constrained their expenses to an unsustainable point in order to try to stave off bankruptcy, and 2) people who find it very challenging to tighten their belt.

The first scenario can show up different ways. They may have stopped paying into voluntary retirement plans in hopes to make things work. Or, perhaps they went against personal convictions and stopped tithing to their church believing it would be a short-term constraint. With these two approaches, they are essentially locking themselves in to being unable to go back to tithing or retirement funding for the three to five-year duration of their Chapter 13. This is because the Chapter 13 trustee will expect documentation of consistent and ongoing tithing or payments into retirement. This is to preclude people who suddenly decide to do these things just to help their own bottom line as opposed to a conviction or long-held practice. The remedy for this requires very early bankruptcy planning and is not easily fixed; it often must be lived with for the term of the bankruptcy.

The second scenario is easier to fix, but tougher for debtor’s to swallow. Those who most often find themselves in this situation have had a healthy income for a long time and unforeseen circumstances, like job loss, drop them into a very constrained income. Most people expand their spending to fill up their income. This is not wise, but it is terribly common. Once certain “luxuries” become routine expenses, it is incredibly hard to reverse them. I see this with higher food expenses for top-of the line organics and fresh food, health supplements, or personal training expenses. Other ways it manifests are in high-end clothing or nice (“dependable”) cars. The remedy is simple: cut expenses. However, it is tough to swallow the idea of trading in the expensive SUV for an old economy car. It is hard to cut food costs without buying processed food. Hard won fitness is hard through personal training is hard to exchange for a modest gym membership and self-training.

However, to get the discharge of debt and relief from foreclosure that Chapter 13 offers, tough decisions and sacrifices must be made.

Last Bankruptcy Related Tweet – you can find me in LinkedIn

If you follow my bankruptcy blog posts through twitter, you may want to go to www.lexingtonlawyer.wordpress.com and subscribe. I decided to keep my work related items separate from my Twitter feed. You will be able to find me on LinkedIn also. Join me in a couple of days for my next post.

Say it, claim it – Chapter 13

Claims play a major role in Chapter 13 bankruptcies. They are essentially superfluous in a “no-asset” Chapter 7 so they are often not filed in such cases except for certain secured creditors. If there are non-exempt assets that will be liquidated (reduced to a monetary value by being sold) in a Chapter 7, then it is an “asset” Chapter 7 and claims serve a similar function as I’ll describe for the Chapter 13.

In a Chapter 13, a plan is proposed by the Debtor that spells out what the Debtor will pay in over time. The plan also describes how various creditors will be treated.  The categories of creditors typically include unsecured, priority unsecured (such as recent tax debt), administrative costs (such as attorney fees), and secured debt. Each category receives different treatment.

For a creditor to actually receive what is owed to them per the plan’s provisions, they must file a claim. There is a form available just for this purpose and the creditor can either send it in to the court clerk to be electronically filed or, if they have set up an account, they can file it electronically. The claims for most creditors (other than governmental agencies) must be filed by a deadline specified in the Notice that is sent out to all creditors when a bankruptcy is filed. If they miss the deadline, their claim will likely be denied and the full debt discharged (depending on the category of debt) as to the Debtor.

The claim also puts the Debtor on notice of any additional fees and penalties that the creditor may be entitled to receive under the loan contract or by law. It is up to the Debtor to review the claims and object to anything that is erroneous or to excessive fees. If a plan proposes to pay even unsecured debts at 100% of the claim, then it is even more important to scrutinize the claims and object to them if they are wrong. This could reduce the overall plan payment. However, there are hefty penalties to filing false claims so most of the ones I review are accurate.

Exempting alimony in bankruptcy

Alimony, or maintenance as it is called here in Kentucky, is an interesting topic because how state law defines and treats alimony does not necessary mesh with the bankruptcy code. In this post, I am talking about when a non-debtor ex-spouse owes the person filing bankruptcy (the debtor) alimony or maintenance (the two terms are interchangeable and I’ll stick with alimony since it is the most recognized). The scenario is a divorced debtor filing a bankruptcy (it can be either a chapter 7 or a chapter 13) because their ex has failed to pay the alimony as ordered as is now in a world of hurt. So, the debtor has to list the alimony owed to him or her because it comes into the bankruptcy estate through 11 USC Sect. 541. There is even a “clawback” provision in 11 USC 541(a)(5)(C) that reaches 180 days beyond the filing date of the petition in cases where a divorce has not yet been finalized.

To be sure, 11 USC Sect. 522(d)(10)(D) appears to exempt alimony (“the right to receive”) so that the debtor gets to hold on to it. However, appearances can be deceiving because the bankruptcy courts do not have to accept the determination of the parties or the state court in deciding if a certain asset is alimony. The debtor may have a court order that calls what the ex owes them alimony and he or she may believe it is alimony, but the bankruptcy court can decide differently. If the bankruptcy court deems the awarded monies to actually be a property settlement, then it is not exempt beyond any available “wild card” exemption from 11 USC 522(d)(5).

The bankruptcy court makes its determination as to whether or not an award of alimony is truly alimony or if it is actually a property settlement mechanism by looking at what actually transpired. There are different aspects that the court may focus on and so it is more likely to be alimony if: 1) it ends at death or remarriage, 2) it can be modified based on need, 3) the debtor did not have property or resources to meet their basic needs, 4) it is subject to the tax treatment for alimony in the tax code (taxable to recipient; deductible by payor), and 5) the payments go directly to the debtor. If, on the other hand, the award of monies was in lieu of other property or debt, then it may not be deemed alimony. These are not necessarily exclusive factors, but they give an idea of how the courts analyze an alimony claim of exemption. The bottom line is that the court wants to be sure that the monies are actually for the support and sustenance of the recipient. This is consistent with the other items in Sect. 522(d)(10)(D) because each is a replacement for wages.

Be careful entering into a bankruptcy if you are the recipient of alimony or maintenance. When you interview your prospective attorney, but sure they understand the nuance behind the stated words of the law. They need to be able to analyze how likely the court is to see the award as alimony. If the award is sizable, then you can expect to have an objection to the exemption be filed by the trustee. If you win by convincing the court that it is indeed alimony, you will still have to show that all of it is “reasonably necessary” to live on – and that does not mean living in style or luxury.