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How Are Monthly Payments Calculated in a Chapter 13 Repayment Plan?

May 29th, 2020 at 6:05 pm

TX bankrutpcy attorney, Texas chapter 13 lawyer, Being unable to meet your monthly debt obligations can be a serious source of stress. Many people in this situation turn to bankruptcy as a possible solution. For some people who have a steady income, a Chapter 13 repayment plan may be the best option. Often referred to as the “wage earner’s plan,” this type of bankruptcy allows individuals to repay all or a portion of their debts over a period of three or five years. Each month, a single payment is made to the bankruptcy trustee, who then distributes the appropriate amount to each creditor.

Chapter 13 bankruptcies are popular with individuals who have secured debt attached to certain items that they want to keep, like a house or a car. This is because a Chapter 13 bankruptcy allows individuals to distribute any past due payments into the repayment plan so they can get caught up. While the draw of a Chapter 13 bankruptcy is present, most peoples’ first question is, “How much will my payments be?”

Factors Affecting Your Payment

When you enter into a Chapter 13 repayment plan, you agree to pay a specified monthly amount to your trustee who will then pay your creditors. Your monthly payment amount depends on a variety of factors including your income, expenses, the amount of debt you owe, the types of debt you have, and the value of your property.

  • Income and expenses: Two of the biggest factors that affect the amount of your monthly payment are your income and your expenses. You must have a steady and reliable income to qualify for a Chapter 13 plan and provide the bankruptcy court with a record of your income from the past six months. You must also supply the court with your actual monthly expenses.
  • Amount of disposable income: Once you have your income and your expenses, your expenses will be subtracted from your income. The amount that remains is considered to be your disposable income. For many people, the amount of their disposable income is usually the amount that their payments are based on.
  • Value of Non-Exempt Assets: If you have assets that you want to keep, rather than liquidate, you have to factor in that cost as well. For example, a mortgage or a car payment would be added to your monthly payment amount. You also must factor in the amount of any other non-exempt assets that creditors would have received if you had filed for a Chapter 7 bankruptcy.

A San Antonio, TX Chapter 13 Bankruptcy Lawyer Can Walk You Through the Calculations

Bankruptcy can be confusing, no matter which process you choose. During a Chapter 13 bankruptcy, your monthly calculations will likely be calculated using a computer, but a skilled Boerne, TX Chapter 13 bankruptcy attorney can guide you through the process. At the Law Offices of Chance M. McGhee, we have been helping clients file for bankruptcy for more than 18 years. To schedule your free consultation, call our office today at 210-342-3400.

 

Sources:

https://www.thebalance.com/how-much-will-my-chapter-13-plan-payment-be-316209

https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-13-bankruptcy-basics

 

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.

 

When a Chapter 7 Trustee Doesn’t Liquidate Non-Exempt Property

June 14th, 2017 at 7:00 am

Just because you own something that isn’t exempt does not necessarily mean that your Chapter 7 trustee will liquidate it. Maybe not.


Our last blog post was about the most straightforward kind of no asset” Chapter 7 case. That’s when it’s clear that everything you own is “exempt”—fully protected. The property and exemption schedules that you and your bankruptcy lawyer prepare and file at court show this. Your trustee asks a few confirming questions at the “meeting of creditors” and announces that your case is a “no asset” one. That means that there’s nothing you own that the trustee wants to liquidate and pay its proceeds to your creditors.

But if you do own something that isn’t exempt. What happens then?                                     

The Chapter 7 Trustee’s Task

If you have an asset which isn’t exempt from the trustee’s liquidation, he or she doesn’t necessarily liquidate it. According to the Handbook for Chapter 7 Trustees:

The trustee should consider the likelihood that sufficient funds will be generated to make a meaningful distribution to creditors prior to administering a case as an asset case.

In other words, before liquidating anything the trustee needs to decide whether it’s practical to do so. The trustee needs to consider whether enough money would come from the liquidation for a “meaningful distribution” to your creditors.

Considerations about Whether to Liquidate

The following are some of the considerations for the trustee about whether to liquidate an asset of the debtor:

  1. accessibility—is it readily available or not?
  2. liquidation costs—do those costs eat up a substantial amount of the anticipated proceeds?
  3. marketability—is there a risk that the asset cannot be liquidated for a worthwhile price?
  4. burdensome—does the asset have attributes that make is potentially detrimental to the trustee?
  5. “meaningful distribution”—given the number and nature of your debts, will the creditors receive an amount worth the administrative effort involved?

Examples
 
1. Accessibility:

You own a boat that is worth about a $1,000. It was located 1,000 miles away in a remote area on lakeside land that got foreclosed last year. You have not seen it in two years and so are not even sure if it’s still there. Its accessibility is questionable.

2. Liquidation Costs:

Assume that you’ve had a relative verify that this boat is still in the boat shed on the property. But because of the remote and rustic location, the trustee would have to pay a substantial amount to have an agent retrieve, transport, and sell the boat. Those costs could be more than the boat is worth.

3. Marketability:

Under the same facts the boat is not readily marketable at its present location because of its remoteness. The lake is very small, with only very few other landowners who might be interested in buying the boat. There’s no marina or boat broker for a couple hundred miles, with the the nearest local newspaper nearly as far.

4. Burdensome:

The new owner of the foreclosed property does not want the boat and indeed is threatening to charge storage fees. The boat not only has no net liquidation value, it is turning into a burdensome liability.

5. “Meaningful Distribution:

Even if the facts were different so that a trustee believed the boat could net $800 after some relatively modest costs of sale, most likely the trustee would not bother. The trustee is entitled to a 25% fee, or $200 here, leaving only $600 for the creditors. If, for example, you have any “priority” debts (recent income taxes or child/spousal support arrearage), those would be paid first out of that $600 before your other debts would receive anything. Since you’d have to pay these tax/support debts anyway, there’s no practical benefit to going through all the administrative effort of liquidating the boat and distributing the proceeds. The creditors would not receive a “meaningful distribution”—nothing or close to nothing, in this example.

Next

So what happens next, once the trustee decides not to liquidate your otherwise non-exempt asset? We cover that in our next blog post about “abandonment.”

 

5 More Things to Know to Protect Your Property through Exemptions

May 19th, 2017 at 7:00 am

There’s a lot more to using property exemptions than just matching them to your assets. There are benefits worth taking advantage of.  

 

Here are some other important ways that property exemptions work in bankruptcy to protect what you own:

#6.  The difference in exemptions under Chapter 7 and Chapter 13: 

Your available property exemptions are the same in either Chapter 7 “straight bankruptcy” or Chapter 13 “adjustment of debts.” But the exemptions are used very differently in each.

Under Chapter 7, the exemptions determine whether you can keep everything you own. Chapter 7 is a “liquidation” form of bankruptcy. The bankruptcy trustee’s job is to determine whether you own anything that can be liquidated on behalf of your creditors. (See Section 704(a) of the U.S. Bankruptcy Code.) Usually you don’t because everything you own is covered by the available exemptions. But that’s why all your assets need to be matched up with exemptions to protect those assets.

Under Chapter 13, your assets are matched up with the available exemptions essentially the same way. The difference is that any of your assets not covered by exemptions are usually not taken from you. Instead the existence and value of any such non-exempt assets usually merely affects how much (if any) you have to pay to your creditors during the life of your Chapter 13 plan. (See Section 1325(a)(4) of the Bankruptcy Code.) In this way Chapter 13 can provide better protection of your assets.

#7.  Be thorough in listing assets and exemptions: 

Follow the guidance of your bankruptcy lawyer when listing your assets in your bankruptcy documents. Most important: be thorough. When in doubt, talk with your lawyer. (See this sample court Schedule A/B for the form used for this purpose.)

Not including a meaningful asset can jeopardize your whole case.

In extreme cases it can potentially even lead to criminal charges against you by the U.S. Attorney for bankruptcy fraud.

Even in less serious situations, if you don’t include an asset that would have been exempt you would likely lose the right to claim that exemption later. This could result in the trustee taking that asset from you even if it could have been protected earlier.

#8.  The Chapter 7 Trustees Have a Lot of Discretion

In most jurisdictions the Chapter 7 trustee assigned to your case will be come from a “panel” of approved trustees. Usually your lawyer has little or no ability to effect which trustee you get.

This may matter because some trustees tend to be more aggressive about claiming your assets than others. The law gives them a fair amount of discretion about this.

Plus, the value of assets can be debatable, especially unusual assets. Examples are a partially restored classic vehicle, shares of stock in an operating but troubled business, or a partial ownership interest in real estate.

So in some cases there can be more uncertainly and unpredictability about how well one’s assets will be protected in a Chapter 7 case.

#9.  This discretion can often go in your favor.

The trustee will often not seize an asset even it is likely worth more than the allowed exempt amount. Here are some of the reasons why not:

a) The asset is worth more than the exemption but by an amount not enough to “result in a meaningful distribution to the creditors.” Ask your lawyer what your trustee considers enough extra to justify the trustee’s liquidation efforts.

b) The trustee is unwilling to front the costs of collecting or liquidating an asset. For example, if you own a debt (someone owes you money) your trustee may sensibly decide that paying the court costs and attorney fees to get a judgment against your debtor is not worthwhile if that debtor could not be forced to pay the judgment.

c) The asset may come with risks that outweigh its potential value. The classic example is a parcel of land polluted by hazardous waste. The trustee has a clear right to abandon anything that is “burdensome.” (See Section 554 of the Bankruptcy Code about trustee abandonment.)

#10:  Sometimes if can be to your advantage for the trustee take an asset: 

Under certain circumstances you may actually want the trustee to take a certain asset or two that are not exempt. Or you may not mind surrendering something that you don’t need in return for the benefit of discharging your debts.

It could be to your advantage for the trustee to liquidate something you’d rather not mess with. For example, if you’ve been struggling to keep a business running, don’t know who should you pay ahead of others, it may be a relief to hand the liquation task over to a bankruptcy trustee.

It could also be to your advantage to have a trustee liquidate an asset if as a result a debt you want paid would be paid. This could happen if you owe a “priority debt,” which the trustee would pay ahead of other debts. “Priority” debts include recent unpaid income taxes and child/spousal support arrearage. Those are debts you would have to pay anyway. And if you operated a business, a priority debt could be a former employee’s unpaid wages, which you may want paid out of a sense of moral obligation.

 

As these last two blog posts have shown, there’s a lot involved in protecting your assets in a bankruptcy case. 

 

Using the Right Set of Property Exemptions

May 15th, 2017 at 7:00 am

Usually you use the property exemptions available for the residents of your state. But not if you haven’t lived there long enough.

 

Property Exemptions in Chapter 7 Bankruptcy

In most consumer Chapter 7 “straight bankruptcy” cases you get to keep everything you own. That’s because everything you have fits within the property exemptions that are available for you to use.

To make sure that happens you need to:

  1. know what set of exemptions you are allowed to use
  2. apply the right exemption to each asset
  3. determine whether the dollar values of your assets fit within the maximum allowed values of the applicable exemptions

For example, if you own a guitar which has a fair market value of $500 you need to:

  1. know which set of exemptions are available to you as a residents of your state
  2. see whether that set of exemptions includes one specifically for musical instruments, or for some broader category such as “personal effects” which could include your guitar
  3. determine whether that exemption category fully covers your $500 value (including any other assets must also fit within that exemption category)

The rest of this blog post focuses on the first of these—using the right set of exemptions.

Using the Right Exemptions

Doing this takes two steps.

First step: there is a federal set of bankruptcy exemptions, and each state has its own set of exemptions. If you live in one of 19 states, you can use either that state’s exemptions or the federal ones. These 19 states are:

Alaska, Arkansas, Connecticut, Hawaii, Kentucky, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Texas, Vermont, Washington, and Wisconsin.

If you live in any other state the federal exemptions are not available. You must use that state’s exemptions when you file bankruptcy.

Obviously, you’ll be in trouble if you try to use the federal exemptions if you live in any of the other 31 states, or if you use a different state’s exemptions. The trustee would object, and you’d have to change to the right set of exemptions. And then you might no longer be able to protect something of yours you thought you could.

Second step: you must qualify to use the exemptions available to those in the state where you live by living there long enough. The rule is generally simple enough. You can use the exemptions available in the state where you’ve been living if you’ve been there for two years.

More precisely, the Bankruptcy Code says it’s where your “domicile has been located for the 730 days immediately preceding the date of the filing of the petition.” (2 times 365 days = 730 days.)  See Section 522(b)(3)(A).

And if you haven’t been living in the state for a full two years, then you use the exemptions for the state where your “domicile was located for 180 days immediately preceding the 730-day period.”

An Example

So let’s say you moved 18 month ago from Pennsylvania to Arizona, after living in Pennsylvania for 6 months, and before that in Massachusetts for 10 years.

Since you haven’t lived in Arizona for two full years, you can’t use the exemptions usually available there. You don’t use exemptions available in Pennsylvania either since you were living there during the last two years not right before. Massachusetts is where you were living during the 6 months just before two years, so you use the exemptions available there.

Massachusetts is one of the 21 states giving you a choice between the federal and state’s sets of exemptions. So you file your bankruptcy case where you are living in Arizona. But you use the exemptions available in the state you lived in two states ago. And that gives you the option of the Massachusetts and federal sets of exemptions

Two Quick Practicalities

One: This two-year rule could work to your advantage as well as possible disadvantage. If you’ve moved from a state with better exemptions for the assets you own, being required to use that prior state’s exemptions could protect your assets better.

Two: To the extent that you have the flexibility to speed up or delay your bankruptcy filing, you may want to time your filing to take advantage of the more favorable set of exemptions.  

 

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.

 

Special Assets–An Inheritance

November 28th, 2016 at 8:00 am

Inheritances and life insurance proceeds have a special rule when it comes to the timing of your bankruptcy filing.

 

Your Assets in Bankruptcy

Most people who file bankruptcy can keep everything they own that they want to keep. That’s usually because all of their assets are “exempt”—protected from their creditors under bankruptcy.

If all your assets aren’t exempt, they can often be protected through other means. As just one example, Chapter 13 “adjustment of debts” can often shield assets that aren’t exempt. It’s important to know whether you have any assets that aren’t protected so that the right steps can be taken.

Today we look at one special kind of asset that you might not usually think of: an inheritance. An inheritance would usually not be exempt. Plus, there are some special rules about inheritances that are worth knowing, even if you’re not expecting to get one.  

“Pre-Petition” and “Post-Petition” Assets?

We put up a blog post on November 9 about the difference between “pre-petition” and “post-petition” assets. Essentially, everything you own as of the moment your bankruptcy case is filed are considered pre-petition assets. Everything you earn or acquire after that moment are post-petition assets.

This is important especially in Chapter 7 “straight bankruptcy” because normally only pre-petition assets are part of your case. Post-petition asset don’t need to fit into any exemption because they are not part of your case. That’s an important part of your “fresh financial start”—after the point in time when you file, you are generally free to earn and acquire income and assets beyond the reach of your creditors.

But inheritances are an important exception to this.

Possession of Assets

Here’s one last point before getting to the special rule about inheritances. It’s a seemingly simple but very important point. Your pre-petition assets include not just what you are in immediate possession of but also what you have a right to even if not in your possession.

Your pre-petition assets include “all legal or equitable interests of the debtor in property as of the commencement of the case.” (Section 541(a)(1) of the U.S. Bankruptcy Code.) Doesn’t matter where that property or asset is located or whose possession it’s in.

Take the example of a classic car that you and your uncle are restoring in his garage. If it’s your car, if you’re on the title, of course it’s your asset. When you file a Chapter 7 bankruptcy it’s a pre-petition asset regardless where it happens to be located. So if you want to keep the car it needs to be covered by an exemption, or be protected in some other way.

But now let’s say your uncle actually owns that car—he bought it and only he’s on the title. What if his will says that you’ll inherit it from him? He’s still the owner and you’re not. Just because his will says you’ll get it when he dies does not give you any right to it now. He could change his will to give the car to somebody else. You simply have no “legal or equitable interest” in the car now, or when you file your Chapter 7 case. It’s not a pre-petition asset.

An Inheritance as Part of Your Chapter 7 Case

That is, that car is not a pre-petition asset, not part of your Chapter 7 case, if your uncle is alive when you file your bankruptcy case. It’s totally different if you file bankruptcy after he has died. Then whatever you are to receive through his will would be considered yours for bankruptcy purposes.

That’s true regardless if the car is still in your deceased uncle’s garage and/or still titled in his name. Doesn’t matter that his will still has to go through the probate process before the title transfers to you and you can take possession of the car.

By the way, this is also true if you don’t know that your will says he left the car to you. In fact it’s true even if you don’t know that your uncle has died as of the time you file your bankruptcy case. Whatever assets you have rights to by law are yours for bankruptcy purposes regardless of your knowledge about them.

Special 180-Day Inheritance Rule

So a potential inheritance is not considered yours if you file bankruptcy when your uncle is alive.  But bankruptcy law throws a very important curve here. If within 180 DAYS AFTER you file bankruptcy you “acquire or become entitled to acquire” an inheritance—through the death of the person from whom you are inheriting—then the property being inherited is counted as if it was your property at the time you filed. (Section 541(a)(5) of the Bankruptcy Code.)

In other words, if your uncle in our example dies within 180 days after you file bankruptcy, the car would be part of your bankruptcy case. It would have to be protected through an exemption, a Chapter 13 case, or in some other way. Otherwise the Chapter 7 trustee (on behalf of your creditors) could take it from you to sell and pay the proceeds towards your debts.

Includes “Bequests,” “Devises,” “Life Insurance,” and “Death Benefits”

This 180-day-after bankruptcy-filing rule applies not only to property received by inheritance. It also applies to what you acquire “by bequest” and “devise,” plus “as a beneficiary of a life insurance policy or of a death benefit plan.” (Section 541(a)(5)(A) and (C).)

So, these include property you receive through another’s death, whether or not the person had a will. It includes what you receive by “intestate succession”—by the laws which distribute a decedent’s assets when there’s no will.

Awkward but Crucial Timing

This 180-day rule can give you some awkward timing problems.

What if you have a relative who you know is leaving something to you and who is not in good health? What if the amount being left to you is big enough to pay off your debts? You may be hoping to avoid filing bankruptcy by using the expected inheritance to pay off those creditors. If so you’re probably trying to hold off your creditors in the meantime as you’re holding off on filing bankruptcy.  

But of course you have no control over the time of death. And even after that who knows how long after that you would actually receive the money. You also probably don’t know how much you’re getting and whether it’s enough to take care of your creditors.

So simply filing bankruptcy now may make more sense.  It would increase the likelihood that it would be filed more than 180 days before the death. If so, it’s considered a post-petition asset, outside the jurisdiction of your bankruptcy case.

Or what if you are expecting to inherit a relatively small amount, not nearly enough to pay off your debts? You would understandably prefer that it all not go to your creditors. If so, you want to file your case more than 180 days before that person dies. In general you want to file sooner rather than later to increase those odds.

Conclusion

This is clearly a delicate area. It’s especially so if it’s likely that the person will die within the next 180 days. There may be ways of protecting that inheritance or life insurance if it’s received before filing bankruptcy. A Chapter 13 case may be more appropriate than a Chapter 7 one.

But please be aware that asset protection methods and procedures are potentially dangerous, filled with traps for the unwary. That’s especially true of efforts made to shield asset before filing bankruptcy. All of this really should be done only with detailed advice from an experienced bankruptcy lawyer who knows your whole 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.

 

Keeping Non-Home Real Estate through Bankruptcy

June 10th, 2016 at 7:00 am

Whether you can keep other real estate depends first on whether it’s “exempt.”

                                       

Most people thinking about filing bankruptcy either don’t have any real estate or if they do it’s their home. But if you own real estate other than your home you’re really not that unusual. You may have property you bought as an investment or as part of operating a business. Or you may have received it in an inheritance or through divorce. You’re in financial trouble and need help, but if you go through bankruptcy you’d like to keep this property. Can you?

Real Estate with or without Equity

The first issue is whether the real estate is protected from being liquidated for the benefit of your creditors.

Outside of bankruptcy if you fall behind with any one of your general creditors it can sue you, likely get a judgment against you, put a judgment lien on all your real estate, and force its sale to pay the debt. Filing bankruptcy would stop that process at any point. But what happens next depends on 1) whether the real estate has any equity (any value beyond the amount of debt(s) secured by this real estate); 2) if it does have any equity whether that equity is “exempt” or protected; and 3) whether you file a Chapter 7 or Chapter 13 case.

1) No Equity or Very Low Equity: If the real estate has no equity, a Chapter 7 or 13 trustee will understandably not be interested in liquidating it to pay the proceeds to the creditors. Same thing if there is so little equity that the costs of sale would eat up that equity without a meaningful amount left over for creditor distribution to make the effort worthwhile.

2) Exempt Equity: Even if there is some equity, it may be “exempt”—covered by any property exemption that applies. Exemptions are categories of assets, usually up to a certain dollar limit, that are protected from creditors and from the bankruptcy trustees. Exemption amounts can vary widely from state to state. So you need to discuss this with your local experienced bankruptcy lawyer.

In addition, often there are “wild card” exemptions that can be applied to anything you own, such as to your real estate equity even if that real estate isn’t your home and you don’t need that “wild card” exemption for other assets. Also, if you don’t use your homestead exemption on your home—either because you don’t own a home or it has no equity needing protection—you may be able to apply all or part of that homestead exemption to your real estate.

3) Protecting Non-Exempt Equity through Chapter 13:  Even if there is equity in your non-home real estate that is NOT “exempt,” you can often protect that equity through Chapter 13. You do this by paying enough into through your Chapter 13 payment plan over its 3-to-5-year lifespan so that your creditors get paid enough. That often requires paying more over time than if you were not keeping and protecting the real estate. But sometimes this does NOT require you to pay any more than otherwise. Again, talk to an experienced bankruptcy lawyer to learn how this would work in your situation.

Surrendering Your Real Estate

If after all this you’re instead inclined to surrender your non-home real estate, there is more to this decision than you might think. We’ll cover this in our next blog post in a couple days.  

 

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