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Recent Blog Posts
Choosing Between Bankruptcy and Foreclosure
The decision between filing for bankruptcy or foreclosing on your home is stressful. Neither is optimal when it comes to the immediate financial impact to your credit score, however, neither are late payments. Bankruptcy stays on your credit report for 10 years, while foreclosure typically rolls off in seven years. But, before you give in to losing your home, there are a few details worth considering.
Saving the Home
First, you must decide if you want to save the home. If you are behind by a month or two, contact your lender. The foreclosure process is expensive for banks. In many cases, your lender will work with you. Options to consider include:
- Make up the late payments;
- Restructure the loan; or
- Request a forbearance.
The Foreclosure Option
First, consider that foreclosure is very serious to future mortgage lenders, more than a bankruptcy that did not include the house. Additionally, foreclosure will drop your credit score by 200 or 300 points. Discuss the option of a short sale instead of foreclosure with your lender. With this option, the house is worth less than the principal balance of the loan, in which case, you may owe the remaining balance. In many situations, banks waive this difference. If a short sale is not an option, some banks accept “deed in lieu of foreclosure,” where you turn the house over to the lender and owe nothing. Explore these opportunities with your lender
The Surprising Benefits: Resolving the "Preference" Problem through Negotiation
Prevent your Chapter 7 trustee from requiring a relative or friend to return your pre-bankruptcy payment by paying the trustee yourself.
Our blog post two weeks ago introduced an uncomfortable problem: preference payments to a friendly creditor. (Please read that blog post before reading this one.) Then last week we discussed two possible solutions to this problem. Today we discuss the first of two other solutions.
The First Two Solutions
One way to avoid this problem is simply to wait long enough so that enough time passes from the time of your payment to your favored creditor to the time you file your Chapter 7 bankruptcy case. That’s because a payment is considered preferential only if you paid it within a specific time period before your bankruptcy filing. That time period is only 90 days, or one year if the payment was to an “insider.” If you file your case after the pertinent time period has passed, the payment is no longer a preference. You’ve avoided the problem altogether.
Reclaiming Your Texas Driver’s License through Bankruptcy
Creditors can take the issue of unresolved debt to court and have a judge issue a judgment against the debtor. In most states, judgments do not severely impact the life of a debtor thanks to existing exemptions that protect against losing homes and other possessions. However, in Texas, an unpaid judgement authorizes loss of driving privileges by suspending a driver’s license. The suspension goes on often indefinitely until there is a proof of repayment, or until the issuance of an automatic stay. Such a blow to one’s independence can wreak havoc on any life. Fortunately, reclaiming your license is one of the many surprising benefits of filing for bankruptcy.
How The Loss of Driving Privileges Turns Into A Catastrophe
Although for some the loss of legal driving privileges is a slight inconvenience, the set back is devastating for many others. Having driving abilities is not just about getting to work on time, it is also family availability and other daily life requirements. Furthermore, many employers require a valid driver’s license to maintain employment, such as in positions requiring travel. The next steps are up to the employer. Sometimes, an employer can choose to relocate an employee to an area that does not necessitate a license (or the handling of money, since financial instability creates a liability for many business operations). If termination of employment is the ultimate decision, the loss of income may affect the following payments:
The Surprising Benefits: A "Preference" Payment to a Relative or Friend
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.
The Surprising Benefits: Use "Preference" Money to Pay a Favored Debt
When a creditor is forced to pay back recently received money through “preference” law, that money can go to pay a debt you want to be paid.
Last week we introduced 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. There are some complicated conditions that may apply, but in many situations the creditor does need to pay it back. See Section 547 of the Bankruptcy Code.
We ended last week by asking where this returned money goes. What good does it do you if that money just goes to your Chapter 7 trustee? After all, this liquidating trustee’s job is to distribute that money among all your other creditors. So how does that help you?
Chapter 7 Trustee’s Collection of Bankruptcy Assets
Surprising Bankruptcy Benefits: Make Creditors Return Your Money
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.
Giving a Creditor "Adequate Protection"
To be able to keep your property that’s collateral or security on a secured debt, you must give that secured creditor “adequate protection.”
In the bankruptcy system, debtors and creditors each get certain protections.
“Automatic Stay” Protection for You
A major protection that you as a debtor filing bankruptcy get is the “automatic stay.” That’s the part of bankruptcy law which stops creditors’ collection actions against you. That includes stopping a secured creditor from repossessing or foreclosing its collateral or its security. (See Section 362(a) of the U.S. Bankruptcy Code.)
The automatic stay protection goes into effect immediately upon your filing of bankruptcy. But it doesn’t necessarily keep the collateral protected for the long term. The creditor can challenge that protection.
“Adequate Protection” Protection for Secured Creditors
What the IRS/State Can and Can't Do After You File Bankruptcy
Filing bankruptcy stops tax collection just like it stops other debt collection by more conventional creditors. But there are exceptions.
The last several weeks of blog posts have been about bankruptcy’s “automatic stay” protection from creditor collections. We’ve also gotten into many of the exceptions to that protection—when certain creditors CAN take certain actions.
Today we focus on some very limited exceptions to the automatic stay protection, those which apply specifically to income taxes. In bankruptcy you don’t want surprises, especially from a tax collector. These limited exceptions are reasonable. But it’ll still help you to understand them in order to not be surprised by them.
Tax Determination is Allowed, Tax Collection is Not
Simply put, the exceptions to the automatic stay protections are about determining the amount of tax owed. The IRS and the state tax authorities can take steps during bankruptcy to figure out how much you owe. They can make you do what the law requires along these lines. For example, they can require you to file your tax returns, regardless that you’ve filed bankruptcy. But then they can’t take any action beyond that to collect any taxes owed.
No Automatic Stay after Multiple Prior Bankruptcy Filings
If you’ve had more than 1 case filed and dismissed within the last year, you’ll need to show “good faith” to get automatic stay protection.
The Effect of ONE Prior Dismissed Bankruptcy Case
Our last blog post was about losing the automatic stay protection from debt collection, 30 days after filing bankruptcy. This loss of protection could happen as to ALL of your creditors, not just one particular one. It could happen if you had filed a bankruptcy case within 1 year before the filing of your present case, and that prior case got dismissed (thrown out and closed).
You could prevent losing this protection from debt collection by showing the new case is being filed “in good faith.” There are specific considerations laid out in the law for demonstrating “good faith.” See Section 362(c)(3) of the U.S. Bankruptcy Code.
Does Hiring a Bankruptcy Lawyer Stop Collection Actions?
Hiring a bankruptcy lawyer can stop creditor phone calls and some other potentially very important collection actions against you.
What relief can you get when you get a bankruptcy lawyer?
Relief After vs. Before Filing Bankruptcy
The moment you file a bankruptcy case, all or most of your creditors must legally stop collecting their debts. The law that accomplishes this is called the “automatic stay.” This is what prevents a home foreclosure or vehicle repossession from going through. It also stops a lawsuit from turning into a wage garnishment, and ends an ongoing garnishment. See Section 362 of the U.S. Bankruptcy Code.
However, if you are just now looking into bankruptcy as an option you may be several weeks, or more, from actually filing your case. In very urgent situations you may be able to file a bankruptcy case quite quickly. But to be practical, it can take some time for you to understand and choose among your options. You may need some time to gather information or documents. It’s sometimes much better tactically to delay filing for a few days or weeks. In all these situations it can be really helpful if you could get some relief sooner than the bankruptcy filing itself.
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