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Archive for the ‘Chapter 7 trustee’ tag

The Surprising Benefits: Solving an Uncomfortable “Preference” Problem

April 16th, 2018 at 7:00 am

A preferential payment to a relative or friend can turn very uncomfortable. But there are some good solutions. One should work for you.

 

Last week’s blog post introduced an uncomfortable problem: preference payments to a friendly creditor. (If you haven’t already please read that one before reading further here.)

The Solutions

We ended that blog post by listing and giving short descriptions of 4 likely practical solutions. We explain the first two of them today and the other two next week.

1. Wait to File Until after the 1-Year or 90-Day Preference Look-Back Period:

There’s one very simple way to avoid having money you paid to a favored creditor turn into a problematic preference.  Wait to file your bankruptcy case long enough so that enough time passes since that payment. Then it’s no longer a preferential payment that the trustee can cause you problems with.

The preference period is only 90 days with most creditors, but a full year with “insider” creditors. Without getting unnecessarily technical, there’s a good chance that anybody you’d have a personal reason for paying is an insider. See Section 101(31) of the U.S. Bankruptcy Code for the statutory definition of insider. But note that this is not a complete list. It says what the term “includes,” but courts have made clear that others not on the list could be insiders. For example, also included could be friends or others who’d you’d have a personal reason to favor over other creditors.

Whether the creditor is an insider or not, the payment you made is not a preference if more than 90 day/1 year has passed when your bankruptcy lawyer files your case. Then your bankruptcy trustee would have no power to require your payee to pay back your payment.

We are well aware that waiting is not a simple solution if you are in a big hurry to file your bankruptcy case.  Waiting even a few days may not be at all easy if your paychecks are being garnished or you’re under other similar collection pressure. Or waiting may even be totally inappropriate if your home would be foreclosed or your vehicle repossessed in the meantime.  

However, there are many situations where you would not be a huge hurry to file your case. Then waiting would be worthwhile. This may especially make sense if you are getting close to 90 day or 1-year mark since your preferential payment. So, at least look into whether you should just wait long enough to avoid the problem altogether.

2. Persuade Trustee Not to Pursue the Preferential Payment:

Just because there was a preferential payment within the look-back period, doesn’t mean it’s worth for the trustee to pursue. There are many circumstances in which you could help convince him or her to let it alone.

First, the simplest situation is if so little money is at issue that it’s not worth the bother. It takes some effort for a trustee to force a preferential payee to pay back the money. There is also a certain amount of paperwork and effort to divvy up the money among your creditors.  If the payment you made is no more than several hundred dollars most likely your trustee will shrug it off. (This is similar to trustees generally not chasing an unprotected (“nonexempt”) asset: if it’s only worth a few hundred dollars it’s usually not worth collecting and distributing.) Talk with your bankruptcy lawyer about what that unstated threshold dollar amount would  be in your area.

Caution: IF the trustee is already collecting assets in any form in your case, this threshold amount consideration likely goes out the window. If the trustee already has to liquidate anything and distribute money to creditors, he or she will usually be inclined to add to that amount by chasing down your preferential payee.

Second, there are many circumstances where forcing a preferential payee to repay the money would be difficult for the trustee. Your payee may have very little in assets or income reachable by the trustee, so it would likely take a very long time to collect it. Or the payee may have a valid defense. Especially if the amount at issue is relatively small (although above the above threshold), the trustee may decide such preferential payments are not worth chasing.

Third, there are other circumstances where the trustee simply could not collect from your payee at all. Your payee may have disappeared and can’t be located. Or your payee may be legally “judgment-proof”—have no assets or income reachable by the trustee. Helping the trustee learn the true facts along these lines could induce him or her make a sensible decision to abandon the preferential payment.

 

The Surprising Benefits: A “Preference” Payment to a Relative or Friend

April 9th, 2018 at 7:00 am

A preferential payment to a favored creditor—a relative or friend—can be a problem, but one which usually has a workable solution. 

 

Our last two blog posts have been about one of the more confusing parts of bankruptcy: the law of preferences. This law says that if a creditor takes or receives money from you within the 90 days before you file your bankruptcy case, the creditor may need to pay it back. A creditor would not pay that money to you but rather to your Chapter 7 bankruptcy trustee. The trustee would then pay out that money to creditors based on a priorities schedule in bankruptcy law.

Our last blog post was about how that priority schedule could result in most of that money going to a creditor you need and want to be paid. One example we used was a recent income tax debt. That can’t be discharged (written off) in bankruptcy. So preference law could result in the trustee getting some money back from a creditor you don’t care about to pay the tax debt so you don’t have to.

Preference Payments You DON’T Want Undone

But preference payments don’t just involve creditors you don’t care about. You may well not lose sleep over a trustee forcing a credit card company to return $1,000 it garnished from you on the eve of your bankruptcy filing. But what if you’d paid $1,000 on a personal loan to your brother or grandmother 6 months before filing bankruptcy? You’d promised to pay him or her back as soon as you got your tax refund, for example. So you did pay the $1,000. He or she really needed the money, and you felt huge emotional and ethical pressure to pay it. It was the right thing to do.

But now you hear from your bankruptcy lawyer that a Chapter 7 trustee could force your brother or grandmother to pay back that money. You feel that would be crazy, and wrong. Your brother or grandmother has long ago spent the $1,000 you paid on the loan. It would really be hard on them to now turn around and pay $1,000 to your trustee. In fact maybe one reason you paid off this debt was so that he or she would not be involved in your anticipated bankruptcy case. You may prefer that your relative not find out about you having to file bankruptcy. You can’t think of anything worse than he or she getting a demand from the trustee to pay the $1,000. This prospect may well turn you off about filing bankruptcy altogether.

The Solutions

However, this problem has a number of likely practical solutions. We’ll list them here and give brief explanations. Then next week we’ll expand on them to make sure they make sense.

1. Wait to File Until after the Preference Look-Back Period: With “insiders”—relatives and potentially anybody close to you–the look-back period is a full year before filing. It’s not just 90 days back, as it is with non-insiders. Regardless, especially if you are getting close to a year since your preferential payment, consider waiting long enough to avoid the problem altogether.

2. Persuade Trustee Not to Pursue the Preferential Payment: Your relative or other favored person that you paid may genuinely be unable to pay the $1,000 or whatever you paid. He or she may have no legally reachable income or assets. The trustee won’t want to waste money to pay his or her lawyer to fruitlessly pursue a preferential payment.  

3. Offer to Pay the Trustee a Reduced Amount Yourself: The trustee will usually not care where the preference money comes from—from the relative or other creditor who got your money, or anywhere else. So you could offer to pay that $1,000 or whatever that sum of money yourself. The trustee may even take monthly payments from you. Also, he or she may accept less than the full preference payment amount, subtracting what it would have cost in attorney fees and other costs for him or her to get it from your relative.

4. File a Chapter 13 Case to Prevent Pursuit of the Preferential Payment: Chapter 13 “adjustment of debts” often provides a very good solution. It works particularly if 1) you need to do a Chapter 13 anyway, 2) the preferential payment is large, and/or 3) none of the above solutions will work.

Next Time…

We’ll explain these four in our next blog post. The bottom line until then: a preferential payment to a relative and other favored creditor can be a scary problem, but it’s one that usually has a very sensible practical solution.

Surprising Bankruptcy Benefits: Make Creditors Return Your Money

March 26th, 2018 at 7:00 am

Bankruptcy doesn’t just stop garnishments and other collections. Sometimes you can make a creditor return money it recently took from you.

 

Bankruptcy’s “automatic stay” is one of the most immediate and powerful benefits of bankruptcy. It immediately stops almost all creditor collection actions against you, your income, and your assets. See Section 362 of the U.S. Bankruptcy Code.  

But it does not go into effect until the moment you file your bankruptcy case. What if a creditor garnishes or otherwise gets your money right BEFORE you file bankruptcy?

Sometimes the creditor can be forced to give up such recently received money as well.

The Law of Preferences

This happens through the surprising and easily misunderstood law of “preferences.”

This law says that if a creditor takes money (or some other asset) from you within the 90 days before you file your bankruptcy case, the creditor may need to pay it back. It has to do so if keeping that money results in that creditor receiving a greater share of its debt than the rest of your creditors would get out of your bankruptcy case. See Section 547(b) of the Bankruptcy Code.

That second condition would often be met, especially in a consumer Chapter 7 “straight bankruptcy case.” So, most money grabbed by an unsecured creditor within 90 days before your bankruptcy filing can be “avoided.” The creditor can be forced to return it.

For example, let’s say an aggressive unsecured medical debt collector garnishes your checking account. You’ve just deposited your paycheck and the creditor grabs $2,000. You owed $5,000 so this creditor just got paid 40% of its debt. Then you file your Chapter 7 case a day after the creditor garnished your money. Assume you owe a total of $75,000 in general unsecured debts. If in that Chapter 7 case—as in most—all your assets were “exempt” (protected), those debts would receive nothing. So, the garnished $2,000 would be a preferential payment that could be reversed. That’s because it happened within 90 days before filing and resulted in the creditor getting 40% instead of nothing.

(There are a number of other conditions and exceptions to a preference, but they often don’t apply to consumer cases. However, preference law can sometimes get quite complicated. You need to talk with your bankruptcy lawyer to find out if you really have an avoidable “preferential payment.”)

The Principles behind Preference Law

Preference law serves two principles important to bankruptcy.

First, bankruptcy law tries to discourage overaggressive creditors. The risk that a creditor would have to return money grabbed just before the debtor files bankruptcy is supposed to be a disincentive for such a money grab.

Second, a lot of bankruptcy law focuses on maintaining fairness among creditors. Similarly situated creditors should be treated the same. No playing favorites unless there is a legally appropriate reason to do so.  (On such reason would be if the debt is secured by collateral).

This fairness means that legally similar creditors need to be treated the same not just during your bankruptcy case but also shortly before the filing of your case. The period of fairness extends a bit before the bankruptcy filing so that overly aggressive creditors aren’t favored. Any available money or assets are spread among all the creditors more evenly and thus more fairly.

A Preference Benefitting You

It’s all well and good to punish a creditor for grabbing money from you shortly before you file bankruptcy. But what good does it do you if that money just goes to your Chapter 7 trustee?  The trustee would just distribute that money among your other creditors, right?

Generally, yes. But in many circumstances this preference money helps you very directly. Next time we’ll show you how.

 

The Means Test is Based on Timing

October 6th, 2017 at 7:00 am

Most people easily pass the means test based on their relatively low income. Timing plays a huge role in calculating your income.   


The Means Test

To file and complete a Chapter 7 “straight bankruptcy” case you have to qualify for it. The main hurdle in qualifying is what’s called the “means test.”  That is, to qualify for Chapter 7 you have to show that you don’t have too much “means.”

You do that mostly through your income. The start, and for most people the end, of the means test involves comparing your income to a set median income amount. If your income is no more than median income amount for your family size in your state, you pass the means test.                  

Being able to file a Chapter 7 case by passing the means test is usually very important. That’s because if you have more “means” (income) than you’re allowed, you usually have to file a Chapter 13 case instead. That involves a 3-to-5-year payment plan, instead of the 3-4-month Chapter 7 procedure. Chapter 13 is great in the right circumstances. It has great tools unavailable under Chapter 7. But if you just need the quick relief of Chapter 7 being forced instead into a Chapter 13 case is a serious setback.

The Timing Focus of the Means Test

As we said above, the easiest way to pay the means test is for your income to be no larger than the published “median income” amount for a family of your size in your state. If your income is no more than that then right away you’ve passed the test. You’ve overcome the biggest qualification for filing a Chapter 7 case.

But your income for purposes of the means test is not calculated in any way you might think. In particular the timing aspect of how your income is calculated is unusual.

Your income for purposes of the means test is not based on your income for the previous calendar year, or prior 365 days or 12 months. It’s not based on any kind of annual basis. Instead it’s based on your income of the six full calendar months prior to the filing of your case.

  • For example, if you and your bankruptcy lawyer file your case during any day in October 2017, the pertinent prior-six-full-calendar-month period is from April 1 through September 30, 2017. After adding up the income received during that six-month period multiply it by two for the annual amount.
  • Your income for the means test is not just your “taxable income.” Instead include just about every bit of income or money you receive from all sources during that period of time. This includes irregular sources of money such as child and spousal support payments, insurance settlements, unemployment benefits, and bonuses. However, exclude all types of social security-based income.

The Median Income Amount for Your Family Size and State

The last step is to compare your income amount as you just calculated to the median income for your state and your size of family. You can find that median income amount in the table that you can access through this website. (This median income information gets updated every few months so be sure to use the current table.)

Conclusion

If your income, as calculated in this distinct way, is no more than the median income for your state and family size, then you’ve cleared the means test hurdle! You can very likely proceed through Chapter 7 bankruptcy.

Next time we’ll focus on the opportunities presented by this quirky way of calculating income for the means test.

 

Timing: Avoiding “Fraudulent Transfers”

October 4th, 2017 at 7:00 am

Giving a gift, or selling for less than true value, can cause problems when done before bankruptcy, but usually only if the amount is large. 

 

“Fraudulent Transfers” Are Uncommon

So-called “fraudulent transfers” do not come up in most consumer or small business bankruptcy cases. But they can sneak up on you. And if one does, it can be a real headache. So it’s important to know what it is, its crucial timing factors, and how to avoid it.

What’s a “Fraudulent Transfer”?

A fraudulent transfer is a reflection of human nature. If someone in financial trouble has an asset or money she wants to keep from her creditors she may be tempted to give it to someone so the creditors can’t reach it. Or she may be tempted to sell it for lots less than its worth.

The gift or sale may be to someone who would give it back later. Or the gift or sale may be to a friend or relative, keeping it within the debtor’s circle. The point is that the asset would no longer be available for her creditors to seize to pay the debts.

It’s human nature that if you have something valuable and are afraid of losing it, you hide it. You keep it from those who could take it. But that doesn’t mean this impulse is legal or moral. Because it’s an understandable impulse, there have been laws against it for at least 400 years in the English law we inherited.

The Results of a Fraudulent Transfer

So, a fraudulent transfer is a debtor’s giving away of an asset to avoiding paying creditors the value of that asset.

Under both federal and state fraudulent transfer laws if you give away something of value within the last two years, then your creditors could require the person to whom you gave that gift to surrender it to the creditors.

Legal proceedings to undo fraudulent transfers can happen both in state courts and in bankruptcy court. In a bankruptcy case, a bankruptcy trustee acts on behalf of the creditors to undo the transfer.

Actual and Constructive Fraudulent Transfers

There are two kinds of fraudulent transfers, based on either “actual fraud” or “constructive fraud.”

The one based on “actual fraud” happens when a debtor gives a gift or makes a transfer “with actual intent to hinder, delay, or defraud” a particular creditor, or his or her creditors in general. (See Section 548(a)(1)(A) of the Bankruptcy Code.) The debtor is acting with the direct intent to keep the asset or its value away from creditor(s).

Fraudulent transfers based on “constructive fraud” happen in consumer situations most often when a debtor gives a gift or makes a transfer receiving “less than a reasonably equivalent value in exchange,” AND the debtor “was insolvent on the date that such transfer was made.  . .  , or became insolvent as a result of such transfer.” (See Section 548(a)(1)(A) of the Bankruptcy Code.) With a constructive fraudulent transfer the debtor does NOT need to intend to defraud anybody. Yet the transfer can be undone if the right conditions are met.

Why Fraudulent Transfers Are Uncommon

There are three practical reasons why most people filing bankruptcy don’t have to worry about fraudulent transfers.

First, most people in financial trouble simply don’t give away their things before filing bankruptcy. They usually need what they have. Plus most of the time everything they do own is protected in bankruptcy through property “exemptions.” So there’s usually no reason to give away or sell anything.

Modest Gifts Are OK

Second, the bankruptcy system doesn’t care about relatively modest gifts. And most people considering bankruptcy don’t have the means to give anything but modest gifts.

By “modest” the bankruptcy system generally means a gift or gifts given over the course of two years to any particular person with a value of more than $600. The Bankruptcy Code does not refer to that threshold amount. But the pertinent official form that you sign “under penalty of perjury” does so.

The Statement of Financial Affairs for Individuals (effective 12/1/15) includes the following question (#13):

Within 2 years before you filed for bankruptcy, did you give any gifts with a total value of more than $600 per person?

The next question (#14) is very similar:                                            

Within 2 years before you filed for bankruptcy, did you give any gifts or contributions with a total value of more than $600 to any charity?

The Trustee Has to Consider Collection Costs

The third practical reason there usually isn’t a fraudulent transfer problem is what it costs the trustee to pursue one. The trustee has to pay attorney fees and other expenses to try to undo a gift or transfer. Or the trustee has to use his or her time or pay staff to do this. So the practical threshold value of the transferred asset is likely many hundreds of dollars. The trustee is not going to pay a lawyer or use his or her time when the likely benefits outweigh the costs.

This is important because there is a question in the Statement of Financial Affairs without a stated threshold dollar amount. This question (#18) asks:

Within 2 years before you filed for bankruptcy, did you sell, trade, or otherwise transfer any property to anyone, other than property transferred in the ordinary course of your business or financial affairs?

Notice the lack of a $600 minimum threshold found in the two questions referred to above. So, every applicable transfer must be listed here regardless of value.  But again, the bankruptcy trustee would likely not do anything about this unless the asset transferred was valuable enough to make the effort to undo the transfer worthwhile.

Caution

The trustee may be more inclined to try to undo a gift or transfer in one situation. If the trustee already has non-exempt (unprotected) assets to liquidate and distribute among the creditors, he or she may be more inclined to pursue a fraudulent transfer. That’s because then the trustee is not risking using his or her own money for the collection costs. The trustee knows there will likely be some money from liquidation of the non-exempt assets to pay those costs.

 

A Sample Completed Chapter 7 Case

September 15th, 2017 at 7:00 am

What does the completion of a successful Chapter 7 “straight bankruptcy” case look like? What happens to your debts?

 

A Sample Chapter 7 Case

In our last blog post we wrote about completing a Chapter 13 “adjustment of debts” case. Today we’re doing the same thing with a Chapter 7 case.

And like last time we’ll show what a finished Chapter 7 case looks like through tangible facts.

So imagine Jennifer filing a Chapter 7 case through the help of her bankruptcy lawyer to stop a lawsuit by a collection company, write off some old income taxes she’d been struggling to make monthly payments on, hang onto a vehicle whose loan she’d started falling behind on, and write off a bunch of medical, credit card and other personal debts.

The Facts

Jennifer had fallen behind on virtually all of her debts 18 months ago. She’d lost her job and it took her 3 months to find a new one.

She couldn’t pay a $1,200 medical bill, so a few months later it was sent to collections. For 12 months Jennifer disregarded collection letter and phone calls because she had absolutely no money to pay this debt. Then the collector sued her. She was justifiably very concerned about getting her paycheck garnished. She’s a bookkeeper. Her employer made clear that employees in her position better not have their wages garnished. Stopping that lawsuit from turning into a judgment pushed her into filing a Chapter 7 case.

In 2012 she’d started a side business to try to get ahead in life. It made some money for a while but then the income fell off and she had to close it down. She couldn’t afford to pay federal income taxes on that income, so she owed $8,000. In 2015 she’d arranged with the IRS to make $150 monthly payments, and struggled to pay those. She was really afraid what would happen if she stopped paying. She still owed $5,000 in income taxes, interest and penalties.

In the midst of all these financial pressures she struggled to pay her $390 vehicle loan payments. She was often late on the payments, racking up late charges. The last month or two before filing bankruptcy she’d gotten right to the brink of getting her car repossessed. She had absolutely no way to get to work or doctor appointments without her car. So being able to pay for her car was another big reason for filing bankruptcy.

The Filing of Her Case

When Jennifer’s case was filed that immediately stopped the collection lawsuit. She could also stop paying the $150 monthly installments on her income tax debt. That’s because the tax was old enough and otherwise qualified for discharge—legal write-off. She no longer had to pay on any of the $75,000 in other unsecured debts—other medical bills, credit cards, and various other obligations. So she was able to quickly catch up on her car loan and be able to pay it without distress.

The End of the Chapter 7 Case

Jennifer filed her case 100 days ago. That’s about how long most consumer Chapter 7 cases take to finish. Completing her case successfully is crucial because otherwise she’d lose the benefits of her case.

Regarding her vehicle loan, a few weeks earlier she had entered into a reaffirmation agreement with her lender. That agreement formally excluded the loan from the discharge of the rest of her debts. She agreed to remain liable on that loan in return for being able to keep her car. She was happy to continue owing on this debt, now that she had no trouble making the payments. Reaffirming the debt also allowed her to quickly start re-establishing her credit.

So now Jennifer receives a copy of a Discharge Order from the bankruptcy court. Her creditors all also receive copies. This court order prevents any of her creditors—other than the vehicle lender—from pursuing her or her assets. From the time her Chapter 7 case was filed until now the debts were on hold. The “automatic stay” prevented any of her creditors from taking any collection action against her. But Jennifer still owed the debts. Now the Discharge Order makes her debts permanently uncollectible.

All of her creditors—again with the exception of the vehicle lender lender—now each write off her debt from their books. This includes the IRS. It becomes illegal for any of these creditors to do anything to collect its debt. They must report to credit reporting agencies that the debt has been written off and is no longer owed.

Conclusion

So Jennifer can get on with her life in financial peace. She doesn’t worry about lawsuits and garnishments. She doesn’t fear what the IRS will do to her if she misses an installment payment. And she can comfortably pay her vehicle loan payment and looks forward to paying it off. Other than that manageable single payment she is debt-free, and appreciating her fresh financial start.

 

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.

 

The Chapter 13 Plan

July 24th, 2017 at 7:00 am

Chapter 13 revolves around your payment plan, which you propose based on your budget, and possibly negotiate with creditors and the trustee. 

 

In our last two blog posts we introduced Chapter 13 “adjustment of debts” bankruptcy. We explained how to qualify for it and how it can buy you extremely valuable time. Today we get to the heart of this option: the Chapter 13 payment plan.

The Length of the Plan

A Chapter 13 case almost always requires a 3-to-5-year payment plan. That may sound like a long time, but the length itself is often an advantage. That’s because your Chapter 13 plan often has you paying special debts that you want or need to pay, and the more time you have the less you have to pay each month. That makes achieving your plan goals easier and more realistic.

Whether a plan has to be at least 3 years long vs. 5 years depends on two main factors. First, your income plays a major role. Without explaining this in detail here, relatively lower income results in a minimum 3-year plan. Higher income results in a 5-year plan. 

Second, even if your minimum plan length is 3 years, you may want to stretch it out longer. You’d do that to reduce how much you pay each month into the plan. 

Your Chapter 13 Plan

Your plan is a blueprint for how you will deal with your debts for the 3 to 5 years of your Chapter 13 case. It must meet a list of requirements. See Section 1322, “Contents of plan,” of the U.S. Bankruptcy Code.

The core of the plan states how much you will pay to ALL of your creditors each month, and who gets paid from that amount. There are other provisions in the plan that don’t directly involve money. We’ll cover these in more detail in upcoming blog posts.

The Plan Approval Procedure

You and your bankruptcy lawyer prepare and then present your Chapter 13 plan to the bankruptcy court. This is usually done at the same time as your lawyer electronically files your case. But sometimes the plan is filed a week or two later, especially if your case was filed in a hurry.

Your creditors receive a copy of your plan and are allowed limited kinds of objections to it. If your plan follows the legal requirements the creditors usually don’t have much room for objection.

The Chapter 13 trustee also has a role in determining whether the plan meets the appropriate rules. The trustee suggests changes, usually in the form of objections. Usually these are resolved informally between the trustee and your lawyer. They often involve only minor tweaks in the plan terms, so that it’s still meeting your intended goals.

The bankruptcy judge resolves any disagreements about the plan between you and your creditors, or between you and the trustee, as needed. This usually happen quite quickly, although can delay the approval of your plan for several weeks.

The approval of a plan is called its confirmation, and usually takes place at a confirmation hearing. Your lawyer usually attends, but you almost never need to. The confirmation hearing usually happens about two months after your lawyer files your case. But it can be postponed (“adjourned”) once or even more often if there are objections which take time to resolve.

The judge approves your plan by signing a confirmation order. Your confirmed plan plus the confirmation order together largely govern your relationships with your creditors throughout the rest of your Chapter 13 case.

Next…

In our next blog post we’ll cover how a Chapter 13 plan deals with the different categories of your debts.

 

Timing Can Be Crucial for Passing the Means Test

July 10th, 2017 at 7:00 am

With smart timing you can take advantage of the unusual way that your “income” is calculated for the Chapter 7 means test.  

Passing the Means Test

We introduced the means test a couple of weeks ago and said that many people pass this test simply by having low enough income.  Their income is no larger than the published median income for their state and family size.

We also explained that income for this purpose has an unusual definition. It includes:

  • not just employment income but virtually all funds received from all sources—including from irregular ones like child and spousal support payments, insurance settlements, cash gifts from relatives, and unemployment benefits (but excluding Social Security);
  • funds received ONLY during the 6 FULL CALENDAR months before the date of filing, multiplied by two for the annual amount.

In other words, if you file a Chapter 7 case on any day of July, you count all funds received during the period January 1 through June 30. Then you double it and compare that to the applicable median income amount.

This very broad definition of “income” received within this very definite time period has some important tactical consequences for you. Under the right facts your “income” for the means test could shift significantly if you file your Chapter 7 case one month vs. the next. It could increase or reduce your “income” by enough to qualify or not qualify under Chapter 7.

We’ll show how this is possible through the following example.

An Example

Assume the following facts:

  • You have employment income grossing $3,750 per month that you consistently earned and received through the last several years.
  • Back in January you also received a modest auto insurance settlement of $2,500 from an insurance company.
  • The median annual income for your state and family size is $46,412.

Your “income” for means test purposes in July is:

  • 6 times $3,750 employment income = $22,500.
  • $22,500 plus $2,500 insurance proceeds = $25,000 total income from January 1 through June 30.
  • $25,000 times 2 = $50,000 annually.

Since $50,000 is more than the applicable median annual income amount of $46,412, you don’t pass the means test. (At least you don’t on the first income-only step. You may still pass by going through the expenses part of the test, but that’s beyond today’s blog post.)

So what happens if you don’t file your Chapter 7 case in July but rather wait until August? Here is the new income calculation:

  • 6 times $3,750 employment income = $22,500.
  • There’s no additional $2,500 from the insurance settlement because you received it in January while the pertinent 6-month period now is February 1 through July 31.
  • So $22,500 times 2 = $45,000 annually.

Since $45,000 is less than the applicable median annual income amount of $46,412, you now pass the means test. You qualify for Chapter 7. 

 

Example of a Simple Chapter 7 “Asset Case”

June 21st, 2017 at 7:00 am

Chapter 7 “asset” cases may sound scary. They needn’t be. We walk you through a very straightforward example to demystify this.  

 

Asset and No-Asset Chapter 7 Cases

Our last blog post discussed the difference between a no-asset and asset Chapter 7 case. Simply put, in a no-asset case everything you own is covered and protected by available property exemptions. So your trustee takes nothing from you. In contrast, in an asset case, something you own is not covered by a property exemption. So the trustee takes it, sells (“liquidates”) it, and distributes the proceeds to your creditors.

We ended our last blog post with a short example of what happens in an asset case if you happen to owe certain kinds of debt that you’d still have to pay after bankruptcy, such as accrued child support or recent income taxes. The Chapter 7 trustee pays such special “priority” debts in full before paying anything on ordinary debts. That way most of your asset proceeds go to a debt that you have to pay anyway.

But what if you don’t have any such priority debts? What happens in an otherwise simple Chapter 7 case in which you to have an asset that the trustee gets and liquidates?

Our Simple Example

Assume someone named Hannah owes $80,000 in a combination of personal loans, credit cards, and medical bills. Her income qualifies her for a Chapter 7 case under the “means test” in her state with her family size. Under the property exemptions that the law provides to her, everything she owns is exempt except for one thing. She owns, free and clear, a sailboat with a fair market value of $8,000. (Such a boat may be exempt in some states, probably depending on what else she owns, but let’s assume it’s not exempt here.)

Hannah would partly like to keep the boat, because her kids enjoy sailing with her. But it is quite expensive to maintain, draining money she needs for much  more important expenses. So she doesn’t terribly mind losing the boat.

Keeping the Boat

Her bankruptcy lawyer tells Hannah she does have two possible ways to keep the boat. One is under Chapter 7 “straight bankruptcy” and another under Chapter 13 “adjustment of debts.”

She could likely keep the boat by essentially paying for the right to keep it, in a different way with these two options.

Chapter 7 Option for Keeping the Boat

In a Chapter 7 case, if she could come up with around $8,000 she could offer it to the trustee. The trustee would almost certainly accept the money instead of taking the boat. In fact the trustee would likely accept somewhat less because Hannah would be saving the trustee the costs involved in liquidating the boat. The trustee may even allow Hannah to pay off the boat over the course of several months. Then after receiving Hannah’s money, the trustee would distribute it out to her creditors.

Assuming that Hannah doesn’t have ready access to $8,000, either immediately or over the next several months, this is not a very practical option. And even if she could borrow or otherwise raise the money, she’d likely decide that that much effort wasn’t worthwhile. Again, she doesn’t really want the boat anymore.

Chapter 13 Option for Keeping the Boat

Chapter 13 makes hanging onto the boat easier. Hannah would likely have 3 to 5 years to make payments into a Chapter 13 payment plan. Those payments would reflect how much she could afford to pay, and would have to be enough over time to pay at least the $8,000 value of the boat.

So she’d have much more time to pay than under Chapter 7. But she’d be stuck in a bankruptcy case for years, simply to be able to keep something she no longer thinks is wise to keep.

The Best Option Here—the Asset Chapter 7 Case

Hannah decides that simply giving the boat to the Chapter 7 trustee would be the best for her here.

So, with the help of her lawyer she files a Chapter 7 case. A few weeks later she signs over the boat to her assigned trustee. The trustee sells the boat, and after expenses (for the boat broker’s commission, storage fees and such), has a net amount of $7,000.

The trustee is entitled to a fee. It’s generally calculated to be no more than 25% of the first $5,000 distributed, plus 10% of the next $45,000. (See Section 326(a) of the U.S. Bankruptcy Code.) That amounts to a $1,950 fee here, which would come out of the $7,000.

That leaves $5,050 for the creditors. Since Hannah owes no “priority debts,” the $5,050 is divided pro rata among the $80,000 of debts. This means that her creditors would all receive a little more than 6 cents on the dollar.

Although Hannah is losing the boat to her creditors, under her circumstances this is her best option. She gets rid of something that she doesn’t need, finishes her case in a matter of a few months, and gets a fresh financial start by being debt-free.

 

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