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Archive for the ‘Bankruptcy Advice’ Category

Does Hiring a Bankruptcy Lawyer Stop Collection Actions?

January 24th, 2018 at 8:00 am

Hiring a bankruptcy lawyer can stop creditor phone calls and some other potentially very important collection actions against you.


What relief can you get when you get a bankruptcy lawyer?

Relief After vs. Before Filing Bankruptcy

The moment you file a bankruptcy case, all or most of your creditors must legally stop collecting their debts. The law that accomplishes this is called the “automatic stay.” This is what prevents a home foreclosure or vehicle repossession from going through. It also stops a lawsuit from turning into a wage garnishment, and ends an ongoing garnishment. See Section 362 of the U.S. Bankruptcy Code.

However, if you are just now looking into bankruptcy as an option you may be several weeks, or more, from actually filing your case. In very urgent situations you may be able to file a bankruptcy case quite quickly. But to be practical, it can take some time for you to understand and choose among your options. You may need some time to gather information or documents. It’s sometimes much better tactically to delay filing for a few days or weeks. In all these situations it can be really helpful if you could get some relief sooner than the bankruptcy filing itself.

The Immediate Benefits of Being Represented by a Lawyer

You can often get some immediate relief right after (or sometimes even during) your first meeting with your lawyer. That’s because the lawyer can stop certain things from happening before you actually file your bankruptcy case.

When you become represented by a lawyer and your creditors are informed of this:

  • Creditors and debt collectors can usually no longer call you.
  • Their collection letters have to be sent to your lawyer.
  • They are not legally prevented from starting a lawsuit against you. But they often don’t do so (for at least a certain amount of time). Why not? Because:
    • When creditors sue, they are hoping to get a “default judgment” against you. That’s a quick judgment that happens when you don’t respond to a lawsuit on time. Creditors know that getting an easy judgment is much less likely if you have a lawyer.
    • When a creditor has good reason to think that you are about to file a bankruptcy case, they will be less willing to pay the court filing fee and other costs of suing you.
  • If a creditor has already sued you, your lawyer can likely buy some time before a judgment is entered. That gives you more time to file your bankruptcy case and stop that judgment from being entered.

Why This Kind of Immediate Lawyer Help Can Be Very Important

When we talk about immediate relief, partly we’re talking about emotional relief. In our experience THAT kind of relief almost always happens even at your first meeting with your lawyer. You find out that there ARE practical solutions, that there IS a light at the end of the tunnel.

But we’re also talking about even more tangible relief. Getting a lawyer on your side can make an immediate and huge difference in the outcome. Here’s an example.

Example: Preventing a Judgment Lien from Creating a Non-dischargeable Debt

A creditor’s judgment usually turns into a judgment lien against your home. Sometimes a judgment lien can be “voided”—undone—in your bankruptcy case. But depending on factors such as the value of your home, the amount of debt(s) against it, and the amount of your homestead exemption, that judgment lien may NOT be voidable.  That could turn a debt that would have been able to discharge (legally write off) into one that you would have to pay in full. That could cost you thousands of dollars.

Had you instead met with and retained a lawyer before that judgment was entered, the judgment could likely have been prevented.

Conclusion

See a lawyer as soon as possible. Your situation may or may not be that urgent. But the lawyer will be able to tell you what bad events he or she may be able to stop from happening. From that you can decide whether it’s worthwhile retain the lawyer quickly. If so, then you’ll avoid having bad things happen to you that could have been prevented. 

 

Get a New Financial Start with this New Year

January 1st, 2018 at 8:00 am

Get a new financial start for 2018. Stop creditor pressures immediately, write off all or most debts, and responsibly deal with the rest.

 

An Overall New Financial Start

Get a new start by discharging (permanently, legally writing off) all or most of your debts. If you have mostly consumer or small business debts you have two main choices about how to make this happen.

A New Start with Chapter 7

With Chapter 7 “straight bankruptcy” you get a new start very fast. As soon as your case is filed most of your creditors can’t collect their debts against you. They can’t go after your money or your property. Then usually about 3-4 months later the bankruptcy court enters an order discharging your debts. As quick as that you become debt-free. The only exceptions would possibly be debts you want to keep and special debts you can’t discharge. Debts you might want to keep could include a vehicle loan or home mortgage. Debts you can’t discharge include recent income taxes, unpaid child and spousal support, and criminal fines.

Imagine if you filed a Chapter 7 case this month. Immediately your creditors could no longer chase you or anything of yours. All or most of your debts would forever be gone by April or May. The remaining critical debt or two you’d be able to handle sensibly. That quickly you’d have a new financial start.

A New Start with Chapter 13

With Chapter 13 “adjustment of debts” the new start is more nuanced, but sometimes much better.

Just as with Chapter 7 your creditors can’t take any action to collect their debts as of the moment you file your case. But under Chapter 13 that protection from creditors lasts not just a few months but for years. The final discharge of debts happens much later but in the meantime you can get many benefits unavailable under Chapter 7. You can deal in creative ways with special debts. You often have much more flexibility with secured debts like home mortgages and car loans. Same thing with income taxes and child support arrearages, among others, that can’t be discharged. Plus you get protection from collection actions against any co-signers that you don’t get under Chapter 7.

You finish your Chapter 13 payment plan in usually 3 to 5 years. Whatever debts you have not paid off get discharged. You are debt-free with limited exceptions like a home mortgage you want to still pay.

Under Chapter 13 you get immediate relief and a new start through a reasonable payment plan based on your budget. Then when that plan is done it’s followed by a full new start with (virtually) no remaining debts.

So, if you filed a Chapter 13 case this month, immediately your creditors could not chase you or any co-signers. You’d enter into a doable payment plan to handle your special debts in ways much better than Chapter 7. And when that plan is paid off you’ll have a full new financial start.

 

Unsecured Debts in Bankruptcy

December 8th, 2017 at 8:00 am

Your debts are either secured by something you own, or they are unsecured. Unsecured debts are either “priority” or “general unsecured.”  


Unsecured Debts

Debts that are unsecured are those which are not legally tied to anything you own. The creditor has no “security” attached to the debt, no “security interest” in anything. It has no right to repossess or seize anything of yours if you don’t pay the debt.  It can only pursue the debt itself.

It’s usually easier to deal with unsecured debts than secured ones in bankruptcy. Most unsecured debts can be discharged—legally written off—through either Chapter 7 “straight bankruptcy” or Chapter 13 “adjustment of debts.”

An Unsecured Debt Can Sometimes Turn into a Secured One

Under some circumstances an unsecured debts can become secured if you don’t pay it.

For example, you could be sued by the creditor on a debt, resulting in a judgment against you. The creditor may be able to turn that judgment into a lien against your home and other possessions. The debt would then be secured by your home and/or other possessions. (The details of this depend on your state’s laws.)

Another example: if you get behind on income taxes the IRS can record a tax lien against your real estate and personal property. It does not need to sue you.

Filing bankruptcy can stop a lawsuit from turning into a judgment lien. It can often stop the recording of an IRS tax lien. In these and similar situations it’s much better to file bankruptcy before creditors can turn unsecured debts into secured ones.

Also, Sometimes a Secured Debts Can Turn into an Unsecured One

After a secured creditor repossesses or seizes its “security,” and sells it, any remaining debt would then be unsecured.

 A secured debt could become unsecured in various other ways. The “security” could be lost or destroyed, leaving the creditor with nothing to seize. Another secured creditor with prior rights could seize the “security,” leaving the creditor with the “junior” position no longer secured. There are various tools in bankruptcy for turning secured debts into unsecured ones.

Seemingly Secured Debts May Actually Be Unsecured

Creating a “security interest”—a creditor’s rights over its “security—takes specific legal steps. If the creditor fails to take those steps appropriately, a debt that seemed to be secured actually isn’t. Your bankruptcy lawyer may ask you (or the creditor) for documentation to find out if a certain debt is really secured.                                   

Two Kinds of Unsecured Debts

There are two kinds of unsecured debts: “priority” and “general unsecured.”

“Priority” debts are those that the law treats as special for various reasons. Past-due child support and unpaid recent income taxes are “priority” debts. The law treats them as special, mostly by putting them ahead of other unsecured debts. Generally, “priority” debts have to be paid in full in bankruptcy before other unsecured debts receive anything.

“General unsecured” debts are simply the rest of the unsecured debts, those that aren’t “priority.”  “General unsecured” debts include most unsecured ones. Examples are almost all medical and credit card debts, retail accounts, personal loans, many payday and internet loans, unpaid utilities and other similar bills, claims against you arising out accidents or other bodily injuries, damages arising from contracts and business disputes, overdrawn checking accounts, bounced checks, the remaining debt after a vehicle repossession or real estate foreclosure, and countless other kinds. If the debt is not secured, and isn’t “priority,” then its “general unsecured.”

Unsecured Debts in Bankruptcy

In the next blog posts we’ll look at how Chapter 7 and Chapter 13 treat “priority” and “general unsecured” debts. Depending on which kinds of debts you have, these will help you understand and choose between these two options.

 

Chapter 7 with a Judgment Lien, HOA Debt, or Support Obligations

December 1st, 2017 at 8:00 am

Here are 3 more scenarios for when you are current on your mortgage, where Chapter 7 works well in dealing with other home-related debts.


Our last blog post was about situations in which Chapter 7 works well enough in the following 3 debt situations:

  1. Second or third mortgages
  2. Property taxes
  3. Income tax with a lien recorded on your home

In general, if you are current on your first mortgage but have any of these 3 debts, sometimes Chapter 13 helps much more than Chapter 7. But last time we showed scenarios when you don’t need the extra time and expense of Chapter 13.

We do the same today with the following 3 other home-related types of debts:

1. Judgment with a lien attached to your home

2. Homeowner association debt with a lien

3. Child/spousal support unpaid with a lien

Judgment Liens

In bankruptcy you can often remove a lien on your home arising from a creditor’s judgment against you. That’s important because otherwise the lien would continue on your home’s title even after you discharge (legally write off) the underlying debt.

Whether you can remove, or “avoid,” the judgment lien depends on the value of your home, the amount of its equity, and amount of your applicable homestead exemption. If all of the judgment lien “impairs,” or cuts into, your homestead exemption, you can remove that lien.

For example, assume your home is worth $200,000, you owe $175,000 on the mortgage, so you have $25,000 in equity. Your state’s homestead exemption is $30,000, covering all of your equity and more. You have a judgment lien on your home’s title in the amount of $10,000. All of that $10,000 cuts into the equity that’s protected by your $30,000 homestead exemption. So you can “avoid,” or remove the entire judgment lien in bankruptcy.

There are some tools affecting liens that are available only in Chapter 13, not in Chapter 7. This is not one of them. You can “avoid” a judgment lien under the same rules in either Chapter 7 or 13. So this is not a deciding factor between these two bankruptcy options.

Homeowner Association Lien

State laws differ on homeowner association liens. But in general not being current on your HOA dues and/or assessments can be a significant problem. It can catch you by surprise. So be sure to tell your bankruptcy lawyer if you are paying HOA dues or assessments. Of course be sure to tell if you are not current on them.

One of the reasons these liens are dangerous is that under some circumstances they are superior to your mortgage on your title. Falling behind is likely an independent basis for foreclosure by your mortgage lender—even if you’re current on the mortgage itself. Also, the timetable for action by your HOA may be quick compared to a home lender’s foreclosure.

If you have monthly HOA dues and you’re current on them, and intend to stay in the home, filing a Chapter 7 case should be fine.

But if you’re at all behind with your HOA and don’t have an agreed payment plan to catch up, talk with your lawyer about your options, including Chapter 13. You’d very likely have more time and flexibility in catching up and keeping your home protected while doing so.

Child/Spousal Support

Often, being behind on support creates a lien against your home. That may even happen when you’re current (through the judgment arising out of your divorce decree).

Filling a Chapter 7 case should be fine if you are current on all support obligations at time of filing. If you are not current but expect to be very shortly thereafter, be aware that filing a Chapter 7 case does NOT freeze the collection actions of any support obligations—neither ongoing monthly ones nor those in arrears.

However, Chapter 13 CAN stop the collection of support obligations that are in arrears. Those collections can be unusually aggressive—sometimes resulting in even the loss of your driver’s license, or possibly your occupational or professional license. So knowing that Chapter 13 can freeze collections and buy you time to catch up is important. If this debt is causing you serious problems this may be reason enough to choose Chapter 13.

 

Chapter 7 Prevents Judgment Liens on Your Home

November 13th, 2017 at 8:00 am

Filing a Chapter 7 case stops foreclosure of your home temporarily, helping you gather funds for your transition to your next housing. 


Recently we went through a list of ways Chapter 7 buys you time when dealing with debts affecting your home. Included was that filing a Chapter 7 case can “stop a lawsuit from turning into a judgment lien.” That judgment lien could turn a debt that you wouldn’t have to pay after bankruptcy into one you would. That’s certainly a result you want to avoid.

Some judgment liens against your home can be “avoided”—or undone– in bankruptcy. Then maybe you wouldn’t have to pay the underlying debt. But some judgment liens can’t be “avoided.” The debt behind such a lien would therefore have to be paid, even after filing bankruptcy. Again, that’s a result you really want to avoid.

In those situations filing a Chapter 7 case before there’s a judgment usually prevents that bad result. Let’s dig into this more to better understand it.

Lawsuits by Conventional Creditors

If you’re thinking about bankruptcy the judgments you mostly likely need to be worrying about are those by creditors. By “creditors” we mean conventional ones like those you might owe for credit cards, medical bills, a repossessed vehicle, personal loans, and such.

Lawsuits by such creditors often don’t leave you with much defense. You concede owing the money you’ve contracted to pay, haven’t paid, so usually (but not always) you have no defense. The creditor will get a judgment by default against you if you don’t respond to the lawsuit in time.

Less Conventional Creditors

But you might also be involved in other kinds of legal disputes potentially resulting in a judgment against you. That could arise from just about anything. A few examples would be:

  • a vehicle accident with a dispute about fault, damages, or insurance coverage
  • an injury to someone on your property that for some reason isn’t covered by your homeowner’s or renter’s insurance
  • a disagreement with a contractor or other service provider on repairs to your home
  • a dispute with family members about the proceeds of a deceased relative’s estate
  • a disagreement with your business’ investor, co-founder, employee, supplier, or its commercial landlord

It’s not unusual for people involved in such disputes to file bankruptcy if such litigation is not going well. They have much financially riding on wining the lawsuit. Then when it becomes clear that’s not happening they desparately need to cut their losses.

Filing Bankruptcy Prevents a Judgment against You

Whether with conventional creditor lawsuits or these other kinds of disputes, the timing of your bankruptcy filing is crucial. It has to be filed in time to prevent the lawsuit from turning into a judgment, and then into a judgment lien against your home.

So when dealing with a conventional creditor lawsuit, your bankruptcy lawyer generally needs to file your Chapter 7 case in bankruptcy court before your deadline to file the formal answer to the creditor’s complaint in the state court. (There are also likely other more expensive ways to prevent a default judgment from being entered against you.)

When dealing with ongoing litigation, talk with your lawyer about when you’d have to file bankruptcy to prevent entry of a judgment.

Judgments and Judgment Liens

State laws differ about what it takes for a creditor who gets a judgment against you to turn that into a judgment lien against your home. This may take an extra procedure. Or it may happen simultaneously with the court’s entry of the judgment. Again, talk with your lawyer. But in most situations, the judgment lien can happen very fast after the judgment, if not at the same time. So, for practical purposes, you’re going to want to file bankruptcy before the entry of the judgment.

Next: Avoidable vs. Unavoidable Judgment Liens

If you already have a judgment lien against your home, don’t despair. As we said in the first couple paragraphs, bankruptcy allows you to “avoid” some judgment liens against your home. In our next blog post we’ll distinguish between judgments that can and can’t be “avoided”—or undone—in bankruptcy.

 

Two Examples of Bankruptcy Timing with Medical Debts

September 20th, 2017 at 7:00 am

How to know whether to delay filing bankruptcy when you’re expecting new medical services and their medical debts?  Here are two examples.   


Our last blog post was about the importance of timing your bankruptcy filing to include more of your debts.

One example we used was of a person with unresolved medical issues requiring ongoing medical care. That person could be overwhelmed by medical and other debts already owed. But he or she may wonder whether it would be wise to hold off on filing bankruptcy until the anticipated medical debts were incurred and so could be included.

We’ll now present two examples of this situation, each with different facts. We’ll show how these different facts resulted in these two people getting quite different legal advice.

Jeremy’s Facts

Jeremy is 30 years old, and single. He was in a car accident a year ago, resulting in serious injuries and huge medical bills. He’s not yet medically stable. He was underinsured, so that a big chunk of his medical expenses were covered but a lot were not. Because he’s maxed out his vehicle insurance coverage he’ll be liable for most of his future medical expenses.

Jeremy currently owes $50,000 in medical debts, plus another $60,000 in credit cards and various other unsecured debts. In the next year or so he expects to add on another $30,000 to $40,000 in medical bills.

Jeremy does not have much in assets. His current income is low, as are his immediate prospects. That’s largely because he’s working a limited schedule as a result of his injuries, medical appointments and surgeries. He was in the military and so didn’t finish college until a couple of years ago. His future income prospects are quite good.

Should Jeremy File Bankruptcy Now or Wait?

If Jeremy would file bankruptcy now, it wouldn’t write off (“discharge”) his upcoming $30-40,000 in medical bills. A year from now he’ll be back in the hole that much.

He could then try to negotiate his way to paying reduced amounts. And if his income increases he may end up being able to pay off his debts, eventually. But that is not a satisfactory solution.

His bankruptcy lawyer instead advises that he wait to file a Chapter 7 “straight bankruptcy” until he became medically stable and had incurred most or all of his medical debts.

Jeremy has limited exposure to harm by his creditors in the meantime. All of his assets are “exempt”—worth little enough to be fully protected from his creditors, even outside bankruptcy. His income is sporadic and low enough that he’d lose little if his wages were garnished. Jeremy hasn’t been sued yet. That may be in part because his creditors don’t see him as a good prospect for forced collection.

So Jeremy does wait, finishes his surgeries and other medical procedures, racking up another $35,000 in medical bills, and then files a Chapter 7 case to discharge all of his debts.

Mary’s Facts

Mary is 65 years old, also single. She had a heart attack two years ago. Like Jeremy she owes $50,000 in medical debts, plus another $60,000 in credit cards and various other unsecured debts. Her heart ailment is a chronic condition which will definitely require medical attention the rest of Mary’s life.

She works full time in the same job she’s had for a decade. Her income is modest but high enough so that if her wages were garnished she would lose a significant amount.

Indeed she just got served with a lawsuit by her largest medical creditor for $10,000. This creditor likely sued knowing that it could likely get paid through wage garnishments.

Should Mary File Bankruptcy Now or Wait?

Because Mary just turned 65 years old she now qualifies for Medicare. She expects to have both Medicare Part A (hospital insurance) and Part B (medical insurance). She understands that these will pay for most of her anticipated medical costs.

So with her future medical expenses largely taken care of, there is no reason for Mary to wait to file bankruptcy. The just-filed lawsuit for $10,000 is good reason not to wait. If she files a Chapter 7 case through her bankruptcy lawyer before her deadline to respond to the lawsuit, she will prevent it from turning into a judgment and then a garnishment.

So Mary does just that. She files the Chapter 7 case, stops the lawsuit in its tracks, and within about 100 days discharges that $10,000 and all the rest of her debts. She gets a fresh financial start heading into her retirement years.

A Moral and Legal Note

Note that incurring a debt, medical or otherwise, when you intend not to pay it is questionable, legally and morally.

The moral question is a personal one. If it’s a matter of your life and death, or even just of your health more broadly, it’s likely defensible to have a surgery or other medical procedure done even if you knew you couldn’t pay for it and intended to discharge the resulting debt in bankruptcy.

The legal question is clearer but still murky. The law does not approve of incurring a debt when you don’t intend to pay it. That can be considered fraud on the creditor. It may turn on the facts of the case. If you’re in the midst of a medical emergency you may not be conscious and able to give your consent for medical services.  Also, most medical creditors don’t raise objections base on issues of fraud in bankruptcy. And when they don’t raise this issue by a quick deadline, they lose the opportunity to do so in the future. So this legal problem usually resolves itself in this practical way.

Talk with your bankruptcy lawyer about these moral and legal issues if you are considering delaying your bankruptcy filing in order to include future debts.

 

Timing: Including Debts in Bankruptcy

September 18th, 2017 at 7:00 am

A bankruptcy covers the debts that exist as of the time your case is filed, not future debts. So how do you know when to file your case? 

 

If you’re feeling overwhelmed by your present debts so much that you’re considering bankruptcy, you’re not likely worrying much about future debts.

Or maybe you are.

Maybe you’re dealing with a medical issue and are very concerned about how you’re going to pay for future medical expenses. You’re already feeling overwhelmed by your present debts. But you’re wondering if you should wait to file bankruptcy until after you’ve finished incurring new medical debts.

Or maybe you’ve been relying on credit cards, cash advances, or other credit to get by day to day. You owe a lot of money and don’t see how you could ever pay it all. So you know you need some relief from these debts. But right now you’re afraid of being cut off from these sources of credit. So you wonder whether and when you should file bankruptcy.

Bankruptcy Only Includes Present Debts

In these and many other situations a good starting point is to recognize that the timing of your bankruptcy case is crucial. Debts that legally exist at the time you and your lawyer file your bankruptcy case are included in that case. Future debts are not. So in a Chapter 7 “straight bankruptcy” case, only the existing debts can be discharged (legally written off). In a Chapter 13 “adjustment of debts” case usually only those existing debts can be included in your payment plan.

The Best Advice? Get Some Good Advice

The two situations mentioned above—the medical and relying-on-credit ones—are not easy to resolve.

Sometimes knowing when to file bankruptcy IS pretty straightforward. Somebody needs relief from a lawsuit or wage garnishment or vehicle repo or home foreclosure, and needs it now.  

But it’s not so simple in these two situations. If you can’t pay your present medical and other debts, but want to wait to file bankruptcy to include those upcoming medical debts, what do you do about the debt collectors in the meantime? If you can’t pay your living expenses without using new credit, how do you get out of that vicious cycle?

The honest truth is that it depends on your unique situation. Because you are unique, the solution will be unique to you.

There is no cookie-cutter answer because you’re not a cookie, a gingerbread man. You’re an individual with individual circumstances needing individual advice.

For that advice to be worthwhile it needs to come from someone who understands you and your situation, who is competent about your legal options, and who can sensibly match your unique situation to the best option.

That “someone” is your bankruptcy lawyer. He or she is legally and ethically required to strictly serve only you and your interests. Your lawyer has likely helped hundreds if not thousands of people, with everything from relatively simple to extremely complicated situations. He or she has not seen a situation exactly like yours but has seen many very similar ones. Your lawyer has spent a career wrestling through tough situations like yours.

Thorough Knowledge and Good Judgment

A competent lawyer gives you not just knowledge about legal options; you should also get the benefit of good judgment. You need somebody who will help you find the best way out what may feel like an impossible situation. In fact you may have a serious Catch-22. Maybe (as in the medical example above) you simultaneously need bankruptcy protection now AND need to wait to file later. It takes someone who knows the law intimately and understands your situation fully to craft that unique best path forward for you.

In our next blog post we’ll demonstrate some good judgment by a bankruptcy lawyer. We’ll show how two similar medical-debt timing situations result in very different legal advice.

 

Protect Yourself from Your Co-Signer

August 7th, 2017 at 7:00 am

If you can’t or won’t pay a co-signed debt, or pay a co-signer, you need to protect yourself from that debt and from your co-signer. 

 

What if you owe a co-signed debt and need bankruptcy relief from all your debts?

In the last two blog posts we explained how bankruptcy helps you pay a co-signed debt and protect your co-signer. A Chapter 7 “straight bankruptcy” may free up enough cash flow so you can afford to pay the co-signed debt. Or the special “co-debtor stay” may protect your co-signer as you catch up on and pay off the co-signed debt over a longer span of time.

But what if—even with the help of bankruptcy:

  • you can’t afford to pay the co-signed debt now or at any time in the foreseeable future?
  • you no longer want to pay your co-signer because your relationship has changed?
  • your co-signer got the money or other benefit of the debt and so should pay it back?
  • you still want pay it eventually but have no idea when you’ll be able to?

In all these situations you need legal protection from your co-signer.

Your Legal Obligations to the Co-Signer

You need legal protection from your co-signer because you have a legal obligation to the person or may have one. You either have a clear obligation, or at least a significant risk of one. This actual or possible obligation means you should cover it in your bankruptcy case.

You likely have an actual legal obligation to your co-signer if the two of you were clear about its terms. You wrote it down, or maybe just talked about it but clearly agreed on the main terms.  Those basic terms would include who would pay the debt and what would happen if that person did not pay. For example, you agreed that you would pay the debt, and would pay back the co-signer if he or she had to pay any part of it.

Or sometimes when two people jointly sign on a debt they are not clear about the obligations between them. The terms of that obligation are not made clear. Then the co-signer less likely has a legally enforceable claim against the other, but may still try to assert one.

Include Your Co-Signer in Your Bankruptcy

Either way, cover yourself in your bankruptcy case. Whether or not your obligation to your co-signer is legally enforceable, you should act to discharge (permanently write off) whatever obligation to that person you may have. You do this by listing your co-signer as a potential creditor in your bankruptcy schedules.

Do this even if you think you don’t really owe the co-signer anything. You may remember the co-signer agreeing to make the payments if you couldn’t. You may remember the co-signer treating the whole arrangement as a gift. But now he or she may remember it differently. So err on the side of caution and cover whatever legal liability you may have to the co-signer.

How You’re Protected from Your Co-Signer

If you list your co-signer when you file bankruptcy, he or she can’t contact you to collect the debt. The “automatic stay” that prevents virtually all creditors from collecting on their debts applies to your co-signer. He or she can’t pressure you to pay the co-signed debt, or to pay him or her directly.  

If your co-signer violates the “automatic stay” by trying to make you pay, he or she could be punished. Similarly, once your debts have been discharged (including your obligation to your co-signer), his or her attempt to make you pay would be illegal, a violation of the injunction against attempting to collect on a discharged debt. These are both serious violations of federal law.

You CAN Still Pay

Including your co-signer as a creditor in your bankruptcy documents takes away your legal obligation. But then it’s still totally up to you whether to pay anything to the co-signer. The advantage is that if you do pay your co-signer or the co-signed debt, you do so without legal pressure. You pay whenever and as much as you can or want to.

Conclusion

Talk with your bankruptcy lawyer about how you would like to deal with your co-signer. To the extent that you have a sense of personal obligation, there are safe ways to satisfy it.

 

Protecting Your Co-Signer in Bankruptcy

August 2nd, 2017 at 7:00 am

Don’t be afraid to file bankruptcy because of how it would affect a co-signer. Your bankruptcy often actually helps that co-signer.

 

Practical Protection for Your Co-Signer

You may not want to file bankruptcy because you don’t want to hurt a co-signer. You may not want to write off your obligation on the debt and leave your co-signer owing it alone.

If so you’ll be relieved to hear that by filing bankruptcy you can often get both financial relief for yourself and the best practical protection for your co-signer.

Today we’ll show how filing a Chapter 7 “straight bankruptcy” case could provide that relief and that protection. Next time we’ll show how a Chapter 13 “adjustment of debts” case could protect your co-signer when Chapter 7 cannot.

Assumptions

We’re making a couple assumptions here:

  • Between you and your co-signer, you were the one who benefitted from the co-signed credit. (You co-signer was helping you out, not the other way around.)
  • You care enough about your co-signer and feel responsible enough that you’d be willing to pay the debt if you were able to.

Protect Your Co-Signer from Having to Pay Your Debt

Here is how filing Chapter 7 can protect your co-signer.

“Discharging” (legally writing off) all or most of your other debts may enable you to pay the co-signed debt. It may free up enough of your monthly cash flow so that you could afford its monthly payments. That would of course prevent your co-signer from being required to make those payments.

But what if your co-signer has already paid the debt in part or in full? Discharging your other debts would make it easier to pay back your co-signer, if you want to do so.

Allowed to Pay the Co-Signed Debt, Allowed to Pay the Co-Signer

Filing a Chapter 7 case would legally allow you to stop paying all or most of your debts immediately. This includes the co-signed debt. Then about 3 or 4 months later your legal obligation to pay that co-signed debt would likely be forever discharged. In addition any legal obligation to your co-signer would very likely also be discharged.

However, bankruptcy law clearly allows you to pay any debt afterwards if you want to. This is a way that the law respects you feelings of moral obligation towards a debt. So, you could decide to pay the co-signed debt even if you’d have no legal obligation to pay it.

Similarly, if your co-signer already paid all or part of a debt, you could decide to pay the co-signer back.

Get Your Lawyer’s Advice

Is it really wise to pay the co-signed debt, or to reimburse the co-signer? Are you acting out of an oversized sense of guilt that maybe you should just let go? Are there better places to put your after-bankruptcy resources?

Talk these questions and concerns over very carefully with your bankruptcy lawyer. He or she will not make these kinds of decisions for you, or take them away from you. But it’s likely healthy for you to express your intentions to someone who’s not personally involved. It’s wise to at least listen to the counsel of someone who is legally and ethically bound to serve you.

Plus there’s a very concrete purpose for discussing this with your lawyer. As part of the bankruptcy documentation, the two of you would have prepared a monthly budget. Relatedly, you’d have been informed about the debts that’ll likely be discharged and those that you’ll continue to pay. (These would be your mortgage, vehicle loan, recent income taxes, and such, if applicable.)

From this information you’ll be able to make a better decision about your co-signed obligation. You’ll see whether you could realistically start making the payments on a co-signed debt, or to the co-signor.

Why This Is Better for Your Co-signer than Not Filing Bankruptcy

You’ve got to be very practical about your alternatives. If you are in serious financial hurt, how likely is it that you are going to be able to reliably pay the co-signed debt without some bankruptcy help? So, not filing bankruptcy may be the worst thing for your co-signer. And if you want to protect that person, your Chapter 7 bankruptcy may be the best thing for him or her.

 

“Property of the Estate” Excludes Powers You Exercise for Another’s Benefit

May 26th, 2017 at 7:00 am

If you have a power of attorney over someone’s assets, or any similar power, those assets are not affected by your bankruptcy case.

 

“Property of the Estate”

Last time we emphasized that when you file a bankruptcy case everything you own becomes “property of the estate.” That’s what the bankruptcy trustee has jurisdiction over.

Once you know what property of yours the trustee has jurisdiction over, then you can see whether all that property all fits within your available “property exemptions.” Most of the time all of your “property of the estate” does fit within your exemptions. But the first step is knowing what’s included in the “property of the estate.”

Includes Just about Everything

Courts have consistently held that the scope of that term is very broad. “Property of the estate” includes “all legal and equitable interests of the debtor in property,” “wherever located and by whomever held.” See Section 541(a)(1) of the U.S. Bankruptcy Code.

This includes not just tangible property, things that can be touched or held. Property of the estate includes any intangible property—anything of value that’s not physical in nature. If someone owes you money, if you hold a patent or a copyright, or if you own corporate stocks or municipal bonds, these are all intangible property that would be property of your bankruptcy estate.

But There Are Exceptions

The Bankruptcy Code carves out some exceptions, certain narrow kinds of property that aren’t included as “property of the estate.” Examples include:

  • Funds withheld by or paid to your employer as contributions to an employee benefit, deferred compensation, annuity, or health insurance plan (Section 541(b)(7))
  • Property held in a spendthrift trust (Section 541(c)(2))
  • A commercial lease that terminated before the bankruptcy filing (Section 541(b)(2))
  • Funds in an educational individual retirement account (Section 541(b)(5))
  • A “power that the debtor may exercise solely for [another’s] benefit” (Section 541(b)(1))

Powers Exercised Solely for Another’s Benefit

Focusing on the last one of these, imagine a situation in which you controlled some property for someone else’s benefit. The most common example is probably a power of attorney for a relative, such as a parent. Through the power of attorney document, you do not own your elderly parent’s property; you just control it because the parent needs your help using that property on his or her behalf.

For bankruptcy purposes, even though you have legal control over the property it’s not treated as yours. As long as that power of attorney makes clear that the power can only be exercised on the other person’s behalf, the property included in the power of attorney would not be property of your bankruptcy estate

What would happen if instead that parent had given you all his or her property? Let’s say he or she trusted you to use that property to care for him or her. If that’s all there was to it, when you filed bankruptcy that gifted property would be treated as yours. It would become property of your bankruptcy estate. To whatever extent that property would not be protected by property exemptions, the Chapter 7 trustee would take and liquidate the property to pay your creditors. It would no longer be available to care for your parent.

This big distinction should make it clear that you’ve got to get the advice of a competent bankruptcy lawyer here. It may make sense for various personal reasons for a parent simply to gift property to a trustworthy adult child. But what may appear to make common sense could be disastrous for legal reasons. Get good advice in order to meet your goals.

 

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