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Recent Blog Posts
No Means Test If You Fit within a Military Exemption
There are two military-related exemptions from the Chapter 7 means test. They are narrow but if you qualify that can be a major advantage.
The Benefit of Avoiding the Means Test
We introduced the “means test” two blog posts ago. This test determines whether you qualify for a Chapter 7 “straight bankruptcy” or instead must do a Chapter 13 “adjustment of debts” case. It’s based on your income, or if your income is not low enough your expenses play a part as well.
Although most people who want to file under Chapter 7 could pass the means test, not everybody could. For them being able to skip the means test can be a very big deal. A Chapter 13 case requires you to pay your debts to the extent your budget allows for a period of 3 to 5 years. In great contrast, a Chapter 7 case usually “discharges” (legally writes off) most debts without you paying anything. And the cases usually only last about 4 months.
Example of a Simple Chapter 7 "Asset Case"
Chapter 7 "asset" cases may sound scary. They needn’t be. We walk you through a very straightforward example to demystify this.
Asset and No-Asset Chapter 7 Cases
Our last blog post discussed the difference between a no-asset and asset Chapter 7 case. Simply put, in a no-asset case everything you own is covered and protected by available property exemptions. So your trustee takes nothing from you. In contrast, in an asset case, something you own is not covered by a property exemption. So the trustee takes it, sells ("liquidates") it, and distributes the proceeds to your creditors.
We ended our last blog post with a short example of what happens in an asset case if you happen to owe certain kinds of debt that you’d still have to pay after bankruptcy, such as accrued child support or recent income taxes. The Chapter 7 trustee pays such special "priority" debts in full before paying anything on ordinary debts. That way most of your asset proceeds go to a debt that you have to pay anyway.
When a Chapter 7 Trustee Doesn't Liquidate Non-Exempt Property
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?
"Property of the Estate" May Include Life Insurance Proceeds
The 180-day rule applies to life insurance proceeds in a Chapter 7 case. But life insurance proceeds are often exempt, or protected.
Last time, we explained the 180-day rule about inheritances. If within 180 days after you file bankruptcy you “acquire or become entitled to acquire” an inheritance, then the property being inherited is “property of your bankruptcy estate.” It’s counted as if it was your property at the time you filed, even though it wasn’t. (See Section 541(a)(5)(A) of the Bankruptcy Code.)
That means to whatever extent the inherited property isn’t covered by a property exemption, or protected some other way, the Chapter 7 trustee can take and liquidate it to pay your creditors.
That 180-day rule also applies to life insurance proceeds, our topic today. (See Section 541(a)(5)(C) of the Bankruptcy Code.)
"Property of the Estate" Includes an Inheritance
If you are expecting an inheritance, or even if you are not, the special rules about them are worth your attention to prevent bad surprises.
Most people thinking about filing bankruptcy aren’t expecting an inheritance.
But if you are, there are some very important timing rules that can affect whether and when you’ll file bankruptcy.
And even if you are not expecting an inheritance, these rules are helpful to know in case you unexpectedly do receive one.
Fixation on Property Owned at the Moment of Filing Bankruptcy
When we introduced “property of the estate” a week ago we emphasized that it’s comprised of everything you own at the “commencement of the case.”
The timing is crucial. Usually any property you acquire in the days and months after filing a Chapter 7 case is not “property of the estate.” It doesn’t fall within the jurisdiction of the bankruptcy court or the reach of the liquidating Chapter 7 trustee. You don’t have to protect that property with exemptions. It’s simply yours.
The Chapter 7 Trustee Challenging an Asset's Value
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.
Introducing Fraudulent Transfers
“Fraudulent transfers” have similarities to “preferences.” They are both worth understanding because they can cause unnecessary hassles.
Asset Timing in Bankruptcy
Your Chapter 7 trustee usually mostly focuses attention on determining whether any of your assets are not “exempt.” You get to keep all exempt assets. If there are any assets that are not exempt, the trustee has the right to take them, liquidate them, and pay the proceeds to your creditors. However, in most consumer Chapter 7 cases all the assets are exempt so the trustee takes nothing. The debtor gets to keep everything.
In this process, the trustee is only interested in what you own at the moment you file your bankruptcy case. This timing gets quite precise. For example, what counts is the amount of actual cash you have on hand at that moment of bankruptcy filing. Same thing with the balance in your checking account(s) at that moment, and all your other assets. The amount of cash or money in your accounts the day before or the day after usually doesn’t matter. What matters is what you had at the moment of filing, with these and all your other assets.
The Judge's Ruling in a Dischargeability Proceeding: an Example
In our example of the adversary proceeding about whether a debt gets discharged, here is the bankruptcy court’s ruling on the matter.
This is the last of six blog posts in a series showing how a dischargeability dispute gets resolved in bankruptcy court. Check out the last five posts about all the steps in the “adversary proceeding” so far, including the trial itself. In the last one, lawyers for the creditor and the debtor gave their closing arguments. Today the judge announces and explains her ruling.
The Judge’s Opening Remarks
At issue in this adversary proceeding is whether the debtor, Marshall, can discharge his debt to the creditor, Heather. The loan was made five years ago for $35,000; its current balance is about $21,000. The purpose of the loan was for Marshall to start a car repair business. Heather is Marshall’s aunt. At Heather’s request, Marshall completed a loan application and signed a promissory note. As she instructed, after completing and signing these documents Marshall delivered them to Heather’s lawyer. The loan was not secured by any collateral.
"Discovery" during a Nondischargeability Dispute with a Creditor
“Discovery” covers all the methods used to get at all the relevant facts in a dispute with a creditor about the discharge of a debt.
Our last blog post was about the beginning of the “adversary procedure” for deciding whether a disputed debt gets discharged. Like many other legal procedures, it starts with a formal summons and complaint, here usually filed by a creditor.
(Either a creditor or debtor can file a complaint. But since we are focusing on debts that get discharged unless a creditor objects, for our purposes we assume that it’s the creditor filing the complaint and the debtor responding to it.)
The debtor responds to the complaint with either a motion to dismiss or an answer. The motion to dismiss is appropriate when the creditor’s complaint does not make an argument clear enough to respond to. An answer states step by step what, if any, parts of the complaint the debtor agrees with and what parts the debtor does not.
A Challenge to the Discharge of All Debts
A creditor or a bankruptcy trustee could potentially object to the discharge—legal write-off—of ALL your debts. Very rare, and preventable.
Challenging the Discharge of One Debt vs. All Debts
Ten days ago (on March 3, 2017) our blog post was about a creditor challenging the discharge of its debt. Certain special kinds of debts are never discharged—for example, child and spousal support. Other specific kinds are not discharged unless meeting certain conditions—for example, income taxes. But a creditor can challenge the discharge of virtually ANY debt if that debt was created through a debtor’s fraud or misrepresentation, or through “willful and malicious injury” to person or property. Those kinds of debt-discharge challenges are relatively rare. Most people incur debts honorably, and just can’t pay them back later.
If challenges to the discharge of a single debt are unusual, much rarer are challenges to the discharge of ALL debts. Under certain very limited circumstances a creditor or bankruptcy trustee can object to the discharge of all your debts. Usually such an objection is based on fraud or some other illegal activity by the debtor in connection with the bankruptcy case itself.
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