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Archive for the ‘Chapter 7’ Category

A Chapter 7 “Asset Case”

June 19th, 2017 at 7:00 am

Most Chapter 7 cases are “no-asset” ones. So, what’s an “asset case,” and is it good or bad for you?  

 

The More Common No-Asset Case

The Chapter 7 bankruptcy option is sometimes confusingly called “liquidation” bankruptcy. That implies that something you own gets “liquidated”—sold.  But in most consumer Chapter 7 cases that’s not what happens.

Under Chapter 7 you get a discharge (legal write-off) of most or all of your debts you want to discharged. In return only those things that you own, IF ANY, that do NOT fit within a set of property exemptions must be turned over to your bankruptcy trustee, who then sells them and distributes the proceeds to your creditors.

The reality is that in most Chapter 7 cases everything DOES fit within the set of applicable property exemptions.  So most consumer debtors do NOT turn ANYTHING over to the trustee, and get to keep everything.  Nothing is actually “liquidated.”  Because the trustee takes no assets for distribution to the creditors, this is called a “no asset” case.

Asset Case

So naturally, if you file a Chapter 7 case and own some assets which do NOT fit within the applicable exemption, that’s called an “asset case.” The trustee has assets to take and sell, and distributes their proceeds to creditors.

Reasons Non-Exempt Assets May Not Result in an Asset Case

Just because you have assets that do not fit the applicable property exemptions does not necessarily mean you have an asset case. The trustee is not necessarily obligated to take non-exempt assets, for the following reasons: 

1. The value of the non-exempt assets may be too small to justify the effort. The trustee has to go through quite a few steps in collecting and distributing assets in a Chapter 7 case. If the anticipated amount of collected assets is small, the effort going through all the steps may not be worthwhile.  Talk with your bankruptcy lawyer about what your trustee may consider “too small,” because that varies with different trustees and on your circumstances.

2. The cost and risk involved in collecting or liquidating the asset(s) may not be worthwhile.  You may have an asset in the form of a claim against somebody which may be worth some money. But it may cost a lot in attorney fees to pursue it, and there may not be a positive result.  The trustee may decide that the odds of winning the lawsuit or claim do not justify paying the attorney fees.  

3. An asset can be “burdensome” and not worth collecting for a various practical reasons.  Examples include real estate tainted by hazardous waste, and a pedigree show dog that has a serious temperament problem.

Not Want an “Asset Case”?

Don’t you want to avoid having an “asset case,” avoid having the trustee take something from you?

Sure, in most cases you want to keep everything you own and not have it go to your creditors. But, sometimes you don’t mind giving up something, especially if doing so is the best alternative for you.  

You may not mind giving up an asset if you don’t need it any more. You especially many not mind giving up the asset if the trustee pays the proceeds to creditors you want to be paid anyway.

Paying Your Important Creditor(s) Through Chapter 7 Liquidation

Let’s say you’re a small business owner with leftover business assets after you’ve shut down the business. (Assume these asset are not “tools of your trade” you need for earning your future living). You don’t need or want the business assets. You’d rather give the trustee the headache of divvying them up among the creditors. Surrendering those former business assets to the trustee may well be much better than going through a 3-to-5 year Chapter 13 payment plan just to keep those assets. 

How could the proceeds from those assets possibly go to pay creditors you want to be paid?  This can happen because of the priority rules which determine which debts get paid first. Those priority rules yield results that are often consistent with your own priorities.

For example, the trustee pays any accrued child or spousal support, some tax obligations, and various other categories of “priority” debts in full before paying anything to the conventional “general unsecured” creditors. These special debts are often the ones you want to pay, because they are often not discharged in bankruptcy. So you are simply using the law’s priority rules to your advantage.

Easier Said Than Done

To be clear, things have to fall into place correctly for this to happen. A number of considerations have to be met in order for your assets to flow through a Chapter 7 trustee to the debts you want or need to be paid.

The point is that there are circumstances in which a Chapter 7 “asset case” is not such a bad thing. Indeed it can be your best alternative.

 

Chapter 7 Trustee’s Abandonment of Property

June 16th, 2017 at 7:00 am

Just because you own something that’s not exempt doesn’t always mean that the Chapter 7 trustee will take it. The trustee could abandon it. 

 

Our last blog post discussed factors that a trustee would consider in deciding whether to liquidate one of your assets. In most consumer Chapter 7 cases the trustee liquidates nothing because everything the debtor owns is “exempt,” or protected.  That’s called a “no asset” case because the trustee does not claim anything for the “bankruptcy estate.”

The trustee can get interested in something a debtor owns only if it is not exempt—not protected.  But even when something isn’t exempt, the trustee may still decide it’s not worth liquidating. If that’s the trustee’s decision, he or she could then “abandon” the property.                

Reasons to Abandon

The United States Bankruptcy Code says that

the trustee may abandon any property of the [bankruptcy] estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate.

See Section 554(a) of the Bankruptcy Code.

The Chapter 7 trustee’s main job is to “collect and reduce to money the property of the estate” (to the extent the property is not exempt). Section 704(a)(1). After the trustee liquidates any non-exempt property, he or she distributes that money to the creditors.

The point is to pay creditors a part of the debts owed (or, rarely, pay those in full). So it makes sense for the trustee to not have to mess with property that won’t help in that. It makes sense for the trustee to abandon property that is either “burdensome” or “of inconsequential value and benefit.”

“Burdensome”

“Burdensome” essentially means more trouble than it’s worth. An asset can be burdensome by being a liability—for example, real estate that has a severe hazardous waste problem. And it can be burdensome by costing more to liquidate than the asset is worth—for example, a modest boat worth $1,000 but which is in such of a remote location that it would cost more than that to retrieve, market, and sell it. And the asset could be both a potential liability and cost too much to liquidate. An example would be a questionable debt owed to the debtor, which would take attorney and court fees to collect, and may also result in counterclaims against the trustee.

“Of Inconsequential Value and Benefit”

A trustee has to consider whether something is worth so little that it’s not worth the trouble to collect and sell it. The usual considerations come into play about accounting for liquidation costs in arriving at the net cash proceeds.

But there’s another overarching consideration. The net cash proceeds need to be large enough to justify the trustee’s efforts involved in an asset case. Trustees get paid a maximum of 25% of the first $5,000 collected and 10% of the next $45,000. There is more to administering an asset-distribution case than you might think. Many trustees won’t bother chasing even $1,000 net cash proceeds because the $250 fee would not be worth all their trouble administering the case. Talk with your bankruptcy lawyer to find out your local trustees’ practices. At what threshold dollar amount do your panel of trustees consider that an asset is beyond “inconsequential value”?

Deemed Abandoned

A Chapter 7 trustee can do a formal abandonment procedure through a motion to the bankruptcy court. Otherwise, everything listed on your bankruptcy asset schedules “at the time of the closing of a case is abandoned to the debtor.” Section 554(c).

Practically speaking, trustees usually don’t bother to do a formal abandonment unless they want to quickly avoid the risk of liability from a detrimental asset. Most consumer no asset cases are closed within about 100 days after filing. So at that point all your assets are deemed to be abandoned by the trustee to you.

 

A “No Asset” Chapter 7 Case

June 12th, 2017 at 7:00 am

Most individual consumer Chapter 7 cases are “no asset” ones. This means that the Chapter 7 trustee doesn’t liquidate any debtor assets.

 

Chapter 7 Is a Liquidation Form of Bankruptcy

When think “liquidation,” this is what you may come to mind. A business decides to close down and files a Chapter 7 “liquidation” bankruptcy. A bankruptcy trustee gathers and sells all of the business’ assets and pays its creditors as much as it can out of the proceeds.

When you as an individual file under Chapter 7 it’s still a so-called “liquidation” bankruptcy, but it’s usually completely different. Nothing of yours is liquated by your Chapter 7 trustee. The reason is that, unlike a corporation, you are entitled to many property exemptions. These are provisions in the law which protect what you own from your creditors. They protect your property from your Chapter 7 trustee, who acts on behalf of your creditors. Usually everything you own fits within the exemptions that apply to you, protecting everything.

That is called ano asset Chapter 7 case.” The trustee does not liquidate anything.

But in some Chapter 7 cases, everything is not exempt. This is called an “asset Chapter 7 case.”

In this blog post we’ll look at some practical aspects of “no asset” cases.

Anticipating a “No Asset Chapter 7 Case”

After deciding with your bankruptcy lawyer to file under Chapter 7, together you prepare your property and exemption schedules. See Schedule A/B and Schedule C.

In less than half the states, you will have the option of using your state’s property exemptions or a set of federal ones. The federal ones are in the Bankruptcy Code. (See Section 522(d).) In the rest of the states you must use the exemptions provided by the state.

In many situations it will be clear that everything you own fits within the exemptions available to you. Everything fits reasonably neatly into exemption categories. For example, you own a vehicle, and there is an available vehicle exemption. And everything you own is worth no more than the maximum value allowed. For example, your vehicle is worth $4,500 and the exemption maximum is $5,000.  

So your lawyer informs you that based on the information you’ve provided, you should have a “no asset case.” The trustee is not likely to decide that anything you own is not exempt and therefore considering taking and liquidating.

The “Meeting of Creditors”

Then about a month after filing your case, you and your lawyer attend a so-called “meeting of creditors.” Although your creditors are invited, usually none, or maybe only one or two, attend. The meeting is presided over by the assigned Chapter 7 trustee. Usually the main thing that happens is that the trustee verifies that everything you own is exempt and protected. The trustee asks you a few questions under oath verifying the accuracy of what you put on your asset schedules.

Then, depending on the personal practices of the individual trustee, he or she may announce towards the end of the meeting that it’s a “no asset case.” If you do not hear that announcement, your lawyer will likely tell you right after the meeting that that’s effectively the situation. That’s because your schedules show that everything you own is exempt, and the trustee is not asking for further information.

The Trustee’s “No-Asset Report”

Whether or not the trustee announces it at the hearing, if the trustee determines that the case is a no asset case he or she files a “no-asset/no-distribution report.” Here’s a sample of that simple report from the Handbook for Chapter 7 Trustees. At the heart of it is the following statement: “I… report that… I have made a diligent inquiry… and that there is no property available for distribution from the estate over and above that exempted by law.”

 

Next time we’ll get into what happens when things don’t go quite as smoothly as this.

 

“Property of the Estate” in Chapter 7 Bankruptcy

May 24th, 2017 at 7:00 am

To find out if you can keep everything you own in a Chapter 7 case, the first step is finding out what’s in your bankruptcy estate.

 

In most consumer Chapter 7 bankruptcy cases, the person filing the case (the debtor”) gets to keep everything they own. But getting to that point is a process. The first step in that process is understanding “property of the estate.” (The later step is to determine whether all of the property of your estate is protected, or “exempt.”)

An “Estate” in Bankruptcy

We normally think of an estate as the property owned by a person at the time he or she dies. But more broadly it’s “all the property and money that belongs to someone.” In bankruptcy it has an even broader meaning, including a number of categories of property.

When you file a Chapter 7 case, doing so automatically creates an estate. That estate includes a different categories of property. Today we’ll focus on what for most people is the main category. In most simple cases it is the only category of property involved in your Chapter 7 case.

“All Legal and Equitable Interests of the Debtor”

This first category iincludes “all legal or equitable interests of the debtor in property as of the commencement of the case.” This essentially means everything you own at the moment you file your case. See Section 541(a)(1) of the U.S. Bankruptcy Code.

Property “Wherever Located and by Whomever Held”

Whether or not you have possession of something, or where it happens to be located, do not matter. See Section 541(a) of the Bankruptcy Code.

If it’s legally yours, then even if it’s not in your possession when you file your Chapter 7 case, it becomes property of the estate.

If it is not legally yours although it’s in your possession, it does not become property of your Chapter 7 estate.

Here are a couple examples. If you borrow your sister’s rifle for a hunting trip and just haven’t returned it at the point you file your case, that’s NOT part of the property of the estate. However, if your dad gifts you his rifle, which you keep in his gun safe away from your kids, that rifle IS property of the estate.

At “the Commencement of the Case”

Timing is crucial and precise.

The “commencement of a case… creates an estate. Such estate is comprised of…  all… interests of the debtor in property as of the commencement of the case.” 

This means that the property of the estate excludes something you owned the day before filing but no longer do. It means that the property of the estate excludes something you didn’t own until the day after filing.

For example, if, on the day before filing bankruptcy, you spend $1,000 on food and a vehicle repair, that $1,000 is not property of your bankruptcy estate. Or if, on the day after you file, a relative gives you $500 to buy school clothes for your kids, that $500 is not property of your estate.  

Important Timing Exceptions to the “Commencement of a Case”

There are exceptions. Property of the estate can sometimes include certain possessions and money you owned before filing bankruptcy. It can also include possessions and money you got after filing. We’ll get into these in our next few blog posts.

 

The Chapter 7 Trustee Challenging an Asset’s Value

May 12th, 2017 at 7:00 am

What happens when your bankruptcy trustee thinks you undervalued an asset? How does the trustee determine what you own and its value? 

 

Last time, we got into what happens when your asset (“property) and exemption schedules show you have an unprotected asset. In that scenario you own something that is not covered by an allowed exemption. So it is not exempt from the Chapter 7 trustee’s reach.

We mentioned two other scenarios. What happens if:

  • the trustee believes you may have undervalued an asset, or
  • the trustee disputes that an exemption you claimed applies to your asset?

We’ll cover the first of these two today, and the second in our next blog post.

Your Valuation of Assets

The starting point for what your assets are worth is the value you give to them in your asset schedule. That form asks for the “current value” of the property.

You put your signature on a “Declaration” page right below the following sentence:

Under penalty of perjury, I declare that I have read the… schedules filed with this declaration and that they are true and correct.

So the values you give for what you own need to be “true and correct.” That essentially means that you need to be honest and reasonably accurate. You are not an appraiser and are not expected to provide expert valuations. So follow your lawyer’s lead about the valuation standards. For example, the “fair market value” of your household goods can be thought of as what somebody would pay for them in a garage sale. Also, you can get reasonably objective information on the values of larger items like homes and vehicles. Occasionally a professional appraisal may be worthwhile with unusual and more valuable items.

The Trustee’s Sources of Information about Value

Besides looking at your bankruptcy schedules, the trustee can:

1. Ask you about particular items at the “Meeting of Creditors” about a month after you file your bankruptcy case. He or she could ask how you came up with the stated value, and for details about the item. These “Meetings” usually take less than 10 minutes so there isn’t much time for extensive questioning, and often the trustee finds nothing of interest to ask about. But this is where he or she will usually signal a concern about the value you assigned to something.

2. Arrange to have a valuation expert see it and provide an opinion of its value. Occasionally the trustee will have you take something to an appropriate expert, or have the expert come to see it.

3. See the item him- or herself to assess its value. The trustee has a right to inspect anything you own. To be clear, in the vast majority of cases the trustee does not bother to look at ANYTHING of yours. But it’s always a possibility.

If the Trustee Believes the Value Is Higher

If after all this, the trustee believes that the item is worth more than you disclosed, here’s what may happen:

1. The allowed property exemption amount may still exceed and cover the trustee’s value. Then the trustee still has no right to the item.

2. You and your lawyer usually have the right to change the assigned exemption if there is one that covers it better. If one or two items are worth more than you expected, sometimes your lawyer can come up with a different set of exemptions that are now better for you.

3. The trustee’s increased value may be larger than the exemption but still not large enough to be worthwhile for the trustee to liquidate. The trustee would have to pay you the exempt portion if it took and sold the item. Only the amount in excess of that would be available for the trustee to distribute to your creditors. For reasons outlined in our last blog post, there are practical reasons why a trustee may simply not bother to do so.

4. If after all this the trustee and you are still in disagreement about value, the bankruptcy judge can decide the matter. He or she would weigh the evidence and come to a determination about the value. Usually it doesn’t come to this, because it’s a relatively expensive way to decide the matter.

Conclusion

The value you give to your assets is usually accepted as accurate. But your Chapter 7 trustee can get other information to challenge your valuation. Sometimes that can result in the trustee wanting to take something from you that you thought was exempt. Work carefully with your bankruptcy lawyer when preparing your asset and exemption schedules to prevent such problems.

 

The Chapter 7 Trustee Looking into an Asset

May 10th, 2017 at 7:00 am

What happens when something you own is not or may not be exempt (protected)? What does the trustee do about this and what is the end result?

 

Chapter 7 is the “liquidation” form of bankruptcy. But in our last blog post we introduced the bankruptcy trustee as an only sometimes liquidator. That’s because in most Chapter 7 cases nothing gets liquidated. Nothing gets taken from you and sold to pay your creditors. And that’s because most of the time everything you have is “exempt,” protected.

But what happens when you own something that is not covered by your allowed property exemptions?

One of two things will happen. The trustee looks into it and decides your asset is not worth liquidating after all. Or he or she may decide it is worth liquidating. We cover the first situation today, the second one in an upcoming blog post.

Three Scenarios

Your trustee may get interested in an asset of yours under these three scenarios:

  • You disclose on your asset and exemption schedules that you own an asset not covered by an exemption.
  • The trustee believes you may have undervalued an asset.
  • The trustee disputes that an exemption you claimed applies to your asset.

We get into the first of these scenarios today.

Disclosed as Not Exempt

When filing a bankruptcy case you list your assets, or property, on Schedule A/B. Then on Schedule C you list the “Property You Claim as Exempt.”

Again, often you show that everything on Schedule A/B is completely exempt on Schedule C. But let’s say there’s something that’s shown not to be exempt. Let’s say you own a second vehicle, and your first vehicle’s value exhausts the amount of vehicle exemption available in your state. So in this scenario your second vehicle is not exempt.

So the trustee sees that and wants to check out this non-exempt asset, to see if it worth liquidating. Assume you’ve valued it at $1,000 based on the fact that it’s old, needs brakes and maybe some transmission work.

The trustee may or may not decide it’s worth taking this vehicle from you to sell and pay its proceeds to your creditors.  The trustee has a lot of discretion of deciding this.

So in this scenario he or she may ask to have you take it to a particular vehicle repair shop for an independent assessment about the seriousness of the required repairs, and the likely saleable value of the vehicle. Let’s say the repair shop verifies that your vehicle needs new brakes and has a definite transmission problem. The trustee finds out that in light of this your $1,000 valuation was fair, or maybe even a little generous.

Factors in the Trustee’s Decision

You may think that for sure the trustee will take the vehicle. After all, getting $1,000 to your creditors is better than them getting nothing, right?

But the creditors wouldn’t likely get anywhere close to $1,000, even if the vehicle sells for that much. The trustee knows that there are liquidation costs that would offset any sale proceeds. These likely include towing and storage fees, and auction or advertising costs. Plus the trustee gets paid a fee—usually about 25% of the first $5,000 collected. (See Section 326 of the U.S. Bankruptcy Code.)

The trustee will likely look at the number, amount, and the nature of the debts. If there are a lot of debts adding up to a relatively large amount, so that a very small percentage of the debts would get paid out of the vehicle sale proceeds, the trustee would be less inclined to take and sell the vehicle.

If you owe a “priority debt”—such as recent income taxes, the trustee may be less inclined as well. That’s because that tax debt gets paid before anything goes to the other debts. So if the tax debt is more than the amount available to pay out to all the creditors, all the money would go to the tax debt. No other debts would be paid. Since this kind of tax debt survives Chapter 7 bankruptcy, you would have to pay it anyway. So there’s very little practical benefit to the trustee paying part of it by selling your second vehicle.

The Relatively Detailed Distribution Procedure

Finally, there’s a fair amount of effort for the trustee involved in the distributing of funds to creditors. All creditors are given an opportunity to file “proofs of claim.”  The trustee has to review each of them to see if they are valid, objecting to those that appear not to be or that need more documentation. Then the trustee may prepare and the court sends out a notice about the proposed sale of the vehicle. Creditors and other interested parties could object to it. Then there’s a notice about the proposed distribution of the funds to creditors, which could also be objected to. Same thing with the trustee’s proposed fee (although some of these notices may be consolidated into one).

This is a lot of paperwork, over the course of several months, all of which takes effort by the trustee. Most trustees are not going to go through all that for a couple hundred dollars.

“Insufficient Assets for a Meaningful Distribution”

So, there is a good chance that in this situation the trustee would decline to take that second vehicle. He or she would formally report that there are “insufficient assets for a meaningful distribution to the creditors.” The trustee would declare the case to be a “no-asset” Chapter 7 case—there are no assets worth liquidating and distributing.

 

Leaving My Rental after Filing Chapter 7 Bankruptcy

February 13th, 2017 at 8:00 am

Chapter 7 bankruptcy gives you serious advantages for getting out of a residential lease—advantages in money, time, and peace of mind. 


Getting Out During Bankruptcy

Your financial problems may be unrelated to your rental home or apartment. You may be reasonably happy with where you are and be current on your obligations there.

On the other hand your rental place may be a big part of your problems. It may be too expensive, and/or leave you stuck with a long lease term you wish you could break. You may have gotten a new job and need to move closer to it. You may be behind on your rent and wish you could just move and not have to pay the arrearage. Your landlord may have already started an eviction proceeding.

Whether you were or weren’t considering it, bankruptcy gives you a great opportunity to get out of your lease. Think about whether it might be advantageous once you’re filing bankruptcy regardless of your prior intentions about it.

Today’s blog post covers how Chapter 7 “straight bankruptcy” helps you leave your rental. The next post gets into how Chapter 13 “adjustment of debts” can do so.

Advantage—Buys You Immediate Time

Your landlord may have just started an eviction proceeding. These proceedings move very quickly so it’s crucial to take action immediately.

Under the U.S. Bankruptcy Code, an eviction is NOT stopped if the landlord “has obtained before the date of the filing of the bankruptcy petition, a judgment for possession of such property against the debtor.” (See Section 362(b)(22).

So as long as your landlord hasn’t yet gotten a judgment for possession, your bankruptcy filing will stop that proceeding. It’ll stop the landlord from removing you, at least for a few weeks and possibly for a couple months. It gives you the time to catch your breath financially and emotionally.

Advantage—Buys You More Time to Move

Even if an eviction hasn’t been filed, you may know that you need or want to end your lease. Doing so during a Chapter 7 case usually gives you more time to move.

The landlord can’t start an eviction case without first getting special permission from the bankruptcy court. You are protected from your landlord just like any other creditor. See Section 362(a) of the Bankruptcy Code. Preventing an eviction proceeding buys you time because otherwise you would have gotten evicted within a short couple of weeks.

The landlord likely won’t bother to try to get permission to start an eviction proceeds during your Chapter 7 case. That’s because it’s usually less expensive for your landlord instead to contact your bankruptcy lawyer to make reasonable move-out arrangements. Usually that can include allowing you to stay longer, possibly for a reduced rent. Landlords sometime even pay their tenants some of their moving costs in exchange for a definite move-out date. They may do that to avoid their costs and uncertainties involved in an eviction.

Advantage—A Calmer Way to Leave

Under most circumstances it’s calmer to leave a rental that you’re behind on or terminating early when you do so under bankruptcy.

You have your bankruptcy lawyer representing you and available to help. You have the protection of the bankruptcy court if necessary. Your landlord can’t pursue you for unpaid rent or other financial obligation as you’re trying to leave. You are protected from other immediate creditor pressures as well.

 So it’s usually easier on you to leave your lease behind when you have this kind of help than when you’re just doing it on your own.  

Advantage—Gets You Out of an Expensive Lease

Just as important as time and peace of mind, bankruptcy saves you money.

If you are not current on your monthly apartment or home rental payments when you file your Chapter 7 bankruptcy case, those payment obligations will be discharged a few months after filing. If you are breaking a lease before the end of its term, you could owe substantial penalties for doing so. Those could potentially include many months of future rental payments. Those are all discharged as well.

Advantage—Avoid Eviction Proceeding

You have a rental credit record separate from your general credit record. For obvious reasons you want to keep your rental credit record as strong as you can. Depending on your circumstances, bankruptcy can help with that.

One way it can do that is to prevent an eviction proceeding. Understandably that’s one of the worse things possible on a rental credit record. With the right timing, your Chapter 7 filing could prevent an election proceeding from being filed.

More generally, your Chapter 7 filing helps you end your lease in a more structured and predictable way. That’s often significantly better for your landlord, which can be reflected in how it discloses the event on your rental credit report.  

 

What If I’m Behind on My Rent But Want to Stay in My Rental?

February 8th, 2017 at 8:00 am

In a Chapter 7 “straight bankruptcy” you can usually “assume” your lease agreement. But you have to get current fast and keep current. 

 

In our last blog post we established that your landlord can’t end your lease just because you file bankruptcy. That’s true even if your lease agreement clearly says that filing bankruptcy itself constitutes a breach of the agreement. But what if you are in breach of your lease agreement in other ways, such as being late on rent payments? Can bankruptcy still help you stay in your rental?

Both Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” CAN help. Today we cover how Chapter 7 helps; tomorrow we’ll get to Chapter 13.

Chapter 7’s Short Breathing Spell

The moment you file your Chapter 7 case you get a limited break from your creditors, including your landlord. That break is called the “automatic stay.”

It doesn’t just stop creditors and landlords from making you pay what you owe. It also stops them from taking action against you or your property, such as to evict you if you’re behind. Your right to the leased home—your leasehold—is a form of property. Your leasehold is protected once you file a Chapter 7 case.

But that “automatic stay” protection has limitations.

For one, that protection is limited in time. Most consumer Chapter 7 cases take between 3 to 4 months to complete. The automatic stay kicks in when your bankruptcy lawyer files your petition to start your case. See Section 362(a) of the U.S. Bankruptcy Code. But it automatically ends when the bankruptcy court discharges your debts or closes the case (which usually happen almost simultaneously). Section 362(c) of the Bankruptcy Code.

You Must Act If You Want to Stay in Your Rental

Even during that 3-4 month period, you have to take action if you’re behind on rent and want to stay. The purpose of the automatic stay is to give you a bit of immediate relief from creditor and landlord pressure. It gives you time to consider whether you can and should keep the lease or leave it. Keeping the lease is called “assuming” it.

“Assuming” a Residential Lease in Default

If you decide that you want to stay in your rental, you start by formally stating that intention. Usually you do this at the same time as you file your initial petition that starts your Chapter 7 case. Through your bankruptcy lawyer, you complete and file a “Statement of Intention” indicating that you want to “assume” the lease.

By doing this you assert that you want to be bound by all the terms of your lease agreement. Naturally that includes your obligation to pay your monthly lease payments, including any missed ones. But it also includes all the other terms, such as keeping current on renter’s insurance, utilities, and such.

Although you need to be honest in your Statement of Intentions when you file your bankruptcy case, you don’t have to make a final decision until later in the case. In a Chapter 7 you generally have 60 days from the date you filed your bankruptcy case to decide for sure whether you want to keep the lease.

Curing the Default

In the meantime, you need to satisfy three requirements.

  1. Cure all of your prior monetary defaults. Again this includes any late monthly rent, but also potentially other obligations in the lease agreement. However, you may be able to discharge (write off) some obligations like unpaid utilities.
  2. Show that you can afford the lease obligations and will not likely default again. Your landlord may have some discretion about agreeing to you assuming the lease. Talk to your bankruptcy lawyer about local practices about this.
  3. Pay all monthly rental and other payments as they become due going forward.

In a Chapter 7 case you have to cure the unpaid rent and any other monetary defaults before you can assume the lease. You only have a month or two after filing to do this and meet the other two requirements.

The Landlord’s Motion for Relief from Stay

In the meantime the landlord will usually just wait to see if you will perform. But it can push the issue by filing a motion asking the court for permission to evict you. See Section 362(d) of the Bankruptcy Code. That’s more likely to happen if you don’t actively show that you are meeting the “assumption” requirements.

Just because a landlord files such a motion does not mean that you can’t stay in the home. It means that you and your lawyer have to respond to the motion and meet the “assumption” requirements. But you may need to do so somewhat more quickly than you would have otherwise.

What If You Can’t Catch up Fast Enough?

Especially if you’re only a month or two late on your rent, filing Chapter 7 and stopping paying all or most of your other debts can often free up enough money so that you can cure the default quickly.

But if you can’t get current on your payments and any other obligations fast enough, consider the Chapter 13 option. It can often give you much more time to catch up. That’ll be the topic of our next blog post.

 

Statutory Liens in Chapter 7

January 18th, 2017 at 8:00 am

Statutory liens survive bankruptcy. Chapter 7 may still be able to help in various ways and be your best solution.  

 

In our last blog post we introduced statutory liens as a less common but still potentially important kind of lien. A statutory lien on your home is one that is usually imposed on your home without court action. It’s imposed when you meet certain conditions specified in a written law—a statute. The most common examples are income tax liens, contractor and mechanic’s liens, and homeowners’ association liens.

The most important practical concern about statutory liens is that they cannot be removed from your home in bankruptcy like judgment liens often can. Nevertheless, bankruptcy can often help solve your financial problems if you have a statutory lien. Today we show how that can happen under Chapter 7 “straight bankruptcy,” tomorrow in a Chapter 13 “adjustment of debts.”

Chapter 7 Discharge of Personal Liability

Although Chapter 7 does not remove a statutory lien, it may take away your personal liability on the underlying debt. Bankruptcy may “discharge” the debt. This is an important and possibly confusing distinction.

There’s the debt—your personal liability to pay the money owed. And then there’s the lien on your home imposed because you didn’t pay the debt.

Some debts that result in statutory liens can be discharged and some cannot. It depends on the type of debt and often the circumstances of each case.

With income taxes, you can discharge the tax debt if it meets certain conditions, usually based on its age. But you can’t discharge more recent income taxes.

You can usually discharge debts underlying contractor/mechanic’s liens for work done on or materials supplied for your home. But sometimes the contractor or supplier might try to challenge the discharge based on allegation of fraud or misrepresentation.

Bankruptcy may discharge homeowners’ association fees and assessments, but they continue to be assessed as long as you own the property, even after you file your Chapter 7 case. They present special issue which we’ll address in a separate upcoming blog post.

The Benefit of Discharge

If you can discharge the debt underlying your statutory lien, that may give you major advantages.

First, if you are surrendering your home, the lien stays on the home but your debt goes away.

Let’s say you put a huge amount of money into trying to fix up a fixer-upper home. That resulted in major bills to a couple subcontractors and suppliers. The house has turned into a major liability and you’re throwing in the towel, surrendering it to your mortgage lender.  You would likely be able to discharge those debts to the subcontractors and suppliers. The contractor/mechanic’s liens would stay with the surrendered house, and be out of your life.

Second, sometimes you can keep the home and the lien goes away, eventually.

Let’s say you owe an income tax that is old enough that it qualifies for discharge. But the IRS or state has recorded a tax lien. Also assume that your home is seriously underwater—the first mortgage is lots more than the home is worth. There is effectively no equity for the tax lien to attach to. After your Chapter 7 case discharges the underlying tax debt the tax lien survives. But the IRS/state may recognize that its lien has no equity backing it up. It may do nothing until the lien expires. The home may increase in value sufficiently in the meantime to give them more leverage. They may even try to enforce their lien in spite of the tax debt being gone. So be sure to talk with your bankruptcy lawyer directly about this.  

The Big Indirect Benefit of Chapter 7

You may not be willing to give up your home to get away from the statutory lien. You may not be able to discharge the underlying debt. Or either way you may need to pay to get rid of the lien regardless. That’s where the indirect benefit of Chapter 7 comes in. Sometimes it’s worth filing a Chapter 7 case to get rid of all or most of your other debts so that afterwards you can concentrate all your financial energy on one debt. It may make sense to file bankruptcy on your other debts so that you can pay the one with the statutory lien on your home. That may be best solution for your overall situation.

 

Creditor Claims and Proofs of Claim

November 16th, 2016 at 8:00 am

In most Chapter 7 cases, there is not much practical effect to what creditors put on their proofs of claim.

 

Bankruptcy Debts, Claims, and Proofs of Claim

Filing bankruptcy is of course about dealing with your debts. A debt is what you owe to a creditor on its claim against you. A creditor files a “proof of claim” in your bankruptcy case, stating how much you owe and its basis for that. See Section 501 of the U.S. Bankruptcy Code.

Objecting to a Proof of Claim

You as the debtor can accept that proof of claim or you can object to it. You can object that you owe the debt altogether or that the amount is wrong. If you don’t object, the claim “is deemed allowed.” The bankruptcy court assumes that whatever the creditor put into its proof of claim is accurate. See Section 502(a).

If you do object, the bankruptcy “court, after notice and hearing” shall determine the amount of such claim…. and shall allow such claim in such amount… .” See Section 502(b).

What Difference Do Creditor’s Proofs of Claim Make?

The proofs of claim filed by creditors can make all the practical difference in the world. Or they can make no difference at all. It depends on the circumstances of your case.

First of all, in many, probably most, bankruptcy cases there is little or no dispute about how much the debtor owes on his or her debts. So in a case like that you would have no grounds to object to your creditors’ proofs of claim.

Second, in many cases some of the creditors, or even all of them, don’t receive any money through the process. So it doesn’t matter what they put on their proofs of claim. Whatever they claim does not change that they are getting nothing.

Third, even when the creditors are receiving something, often their proofs of claim make no practical difference. They do not affect the amount you pay. That’s because in many consumer bankruptcies there is only a set amount of money available. The amounts of debts reflected in the proofs of claim don’t change what you have to do. There is a limited pot of assets or money that the creditors must share. The amounts in each proof of claim at most just affect how that pot is distributed among the creditors.

And yet, in some cases what the creditors put on their proofs of claim can make all the difference. Let’s look at this in Chapter 7 cases today, and then in Chapter 13s in our next blog post.

What Difference to Proofs of Claim Make in Chapter 7 Cases?

Chapter 7 “straight bankruptcy”—the most common form of consumer bankruptcy—usually does not involve proofs of claim at all. That’s because most of the time there is no money to distribute to creditors at all. That’s because most cases are “no asset” cases—everything the debtor owns is “exempt,” protected from the creditors. The Chapter 7 trustee has no right to take anything to “liquidate” on behalf of the creditors. With nothing to liquidate, there’s nothing for the trustee to distribute, and no reason for the creditors to file proofs of claim. Indeed, at the beginning of a consumer Chapter 7 case creditors are often told not to file proofs of claim. They’re told that if the trustee does find assets to distribute creditors will then be asked to submit their claims.

And even in the small minority of Chapter 7s that are “asset” cases, the proofs of claim make little difference. That’s because there is a very limited pool of money distributed—the proceeds of the trustee’s sale of non-exempt assets. The amount generated from that sale is puny compared to the amount of the debts. And the amount available for the creditors is fixed. So, as mentioned above, there is a limited pot of assets or money that the creditors must share. The amounts in each proof of claim at most just affect how that pot is distributed among the creditors. It doesn’t increase or affect what you have to do.

Let’s make this clearer with a simple example. You have one of those somewhat unusual Chapter 7 cases in which you have a non-exempt asset. You closed a business and have some leftover business equipment. Or a boat you no longer want to maintain. Either way let’s say the trustee sells whatever is not exempt for $5,000. You owe $3,000 in “priority” income taxes to the IRS, plus $100,000 to all your other creditors. The trustee is required to pay the taxes in full before paying anything to the other creditors. He or she also receives a fee of as much as 25% the $5,000 for doing the liquidation and distribution. There is less than $1,000 left over for the other creditors, who are paid pro rata based on their proofs of claim.

So you can see that, with that limited amount to distribute, it hardly ever makes any practical difference what all the other creditors put on their proofs of claim in most Chapter 7 cases.

 

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