Keeping your property through a bankruptcy

It is a pretty common misconception that folks have that they can “bankrupt” only certain debts or include only certain items of property they have in a Chapter 7 or Chapter 13 bankruptcy. The truth is that every single debt, even the one to Aunt May for the bookshelf you bought from her, and all your property, even the rickety old bookshelf that you got from Aunt May, must be included. All that you owe and all that you own goes into an estate. The trustee is the party responsible for handling the estate in such a way that maximizes what the creditors in the case get. Exemptions are your way of holding onto property and are detailed in 11 U.S.C. Section 522.

Now, obviously people thinking of filing bankruptcy want to keep their stuff. I am often asked whether the trustee will come into their home and take things from them. Except for an incredibly unusual circumstance, the answer to that is “no”. The bankruptcy code gives you exemptions which allow you to keep a lot of property. Some states, such as Kentucky, allow you to choose between state law exemptions or federal law exemptions. For most situations, the federal exemptions are more generous than the Kentucky exemptions. Under the federal exemptions, the vast majority of debtors are able to keep all of their property.

A recent Supreme Court of the United States case decided on June 17th, 2010, Schwab v. Reilly, 130 S.Ct. 2652, clarified exactly how the exemption works. While this clarification will not impact you, the average debtor, in any noticeable way, it is an important distinction for your attorney to know. When you claim an exemption you are actually exempting a dollar value of your interest in the property and not the property itself. The property remains in the bankruptcy estate until the trustee abandons the property or the case is closed.

The fact that you are exempting a dollar value interest in the property has some practical implications. For example, you should not dispose of (sell, destroy, give away) any property that you had when you filed the bankruptcy without checking with your attorney. Now, no one cares if you throw away your old skivvies, but you should check before getting rid of anything of substantial value. Another implication is that if you have a piece of property or asset that is likely to increase in value quickly, your attorney may need to move to have the trustee abandon the estates interest if it appears your case will be open for an extended time.

Bankruptcy consultations and services

I wrote about attorney fees in a Chapter 13 and attorney fees in bankruptcy in general several months ago and I would like to now touch on the issue of the initial consultation.

Since I have not been a consumer of a bankruptcy attorney’s services, I do not know how other attorneys handle initial consultations. From what I have heard, though, some law firms tell callers to just gather up certain documents, come on in, and they will get their bankruptcy filed. My practice, in contrast, has been to meet with folks and talk over their entire financial picture and then lay out their options. I have noticed that most of my initial consultations run about 1 hour and 10 to 15 minutes long. I have had some that were longer and some shorter. However, even though it might mean the loss of a fee for a bankruptcy filing, I take time to spell out all the options and some of the consequences of each. Sometimes the facts are such that I dissuade the client from filing bankruptcy.

My hope is that if you are facing a possible bankruptcy, that you do not end up feeling shuttled quickly into filing. Rather, my hope is that you are able to meet with the attorney that would handle your matter and get all of your questions answered so you can make the best decision for your life.

Save your home from foreclosure: the rest of the story

I wrote recently about how one might save their home from foreclosure through a Chapter 13 bankruptcy. There is another side to that story. Chapter 13 will not help everyone keep their home. One of the issues I spend considerable time talking to my clients about is whether they can actually afford to keep their home no matter what they do regarding debt relief.

One’s home is nearly always the single largest expense that one has. Nearly everyone I know who buys a home purchases one that is the most they can possibly afford and then some. I know when my wife and I purchased our first home several (don’t ask how many) years ago, our realtor pointed out how our earning capacity would only increase and how we would get a tax break by deducting the interest paid. He was wrong about the tax break because the interest paid was so little, but that is beside the point. He was right about the earning capacity part, but it sure made for some really tight early years. Anyway, most people overreach a little when they buy a house.

So, the question becomes how much of an overreach are we looking at. To answer this, it is important to give your bankruptcy attorney a really good idea of what your monthly expenses are and definite numbers on what your income has been. I say a good idea of expenses because I have found that no one really knows how much they spend on things and most people tend to underestimate their expenses. Also, there are many annual expenses, such as taxes on cars and tax preparation costs, that many people forget to divide by 12 and put down as an expense in their monthly budget. The income part should be readily traceable though.

Anyway, if after crunching these numbers you still do not have enough to both maintain your ongoing monthly house payment, pay your monthly bills and expenses, and make a Chapter 13 payment, then you are better off surrendering your home from the very beginning. I know this is incredibly hard for people because owning their own home represented a dream and holding onto it gives a sense of security. Unfortunately, that sense of security may end up being incredibly expensive and ultimately elusive.

I have seen folks try desperately to hold onto their house by dipping into retirement reserves and cutting other expenses down to the miserable point to make the monthly house payment, only to see those payments disappear into the bank’s vault and their home still end up on the auction block. That is indeed too high a price. So, even though they do not like to hear it, I sometimes must tell folks that keeping their home just is not in their budget. And that is the rest of the story.

One way to save your house from foreclosure

I talk a lot about Chapter 13 bankruptcy in this blog, so much so that some might think I prefer them. The truth is, I file more Chapter 7 bankruptcies thanChapter 13s but the latter require a bit more explanation. Chapter 13s are more flexible in many ways than a Chapter 7. One of the primary benefits of the Chapter 13 is the ability to propose a plan that saves one’s house from foreclosure.

You see, pursuant to 11 U.S.C. Section 1322, a debtor can propose a plan that allows for the cure of a default on a secured loan. That is the fancy way of saying that if you have missed payments on your home loan (defaulted) then the plan can fix it.

This is especially good for folks who took out one of those “balloon” payment loans as a home equity line of credit. These loans had a lot to do with the economic downturn of recent years because most of them were interest only payments and then the principal would come due after 10 or 15 years. The loans were undersecured in that the houses were not worth as much as the amount loaned and people who could afford the interest only part could not afford to pay principal. This left them facing foreclosure.

So, in a Chapter 13 you can propose a plan to stretches that principal payment out for an additional five years. This is no miracle ‘cure’ of the debt. The creditor may oppose the plan, though that it unlikely if they believe they can be made whole rather than getting only a portion repaid through a master commissioner’s auction. Also, you still have to show that you have sufficient income to pay the entire loan during that time, but for many, it may give just the breathing room they needed to save their home from foreclosure.