Recent Blog Posts
Bankruptcy Timing and the Holidays: Filing in December May Shorten Chapter 13 Case by 2 Years
We show how filing bankruptcy before the end of December could result in a much shorter Chapter 13 “adjustment of debts.”
Two weeks ago we showed how filing bankruptcy by December 31 could enable certain people to file a Chapter 7 case instead of being forced into a Chapter 13 one. They could have their debts discharged (legally written off) within 3 or 4 months under Chapter 7. Otherwise under Chapter 13 they would be required to go through a 3-to-5-year payment plan. And they would only get a discharge of their remaining debts if they’d successfully make it to the end of that payment plan.
If You Need a Chapter 13 Case
But getting to file a Chapter 7 case wouldn’t be any motivation to file your bankruptcy this month if you already knew that you needed a Chapter 13 case anyway. Although Chapter 13 takes so much longer, and is riskier, it can accomplish many things that Chapter 7 simply can’t. Chapter 13 can give you incredible help if you are behind on your mortgage and want to keep your home. It can buy you time and protection and save you a lot of money if you owe tons of income taxes and especially if they span more than one tax year. Chapter 13 can enable you to catch up on child or spousal support better than anything. These are just some of the many ways that Chapter 13 is a great tool for dealing with your creditors.
Bankruptcy Timing and the Holidays: Gift-Giving and "Fraudulent Transfers"
Gift-giving, or selling for much less than actual value, can cause problems ahead of bankruptcy, but only if it’s a large gift.
“Fraudulent Transfers” Usually Not an Issue
This blog post is about a topic to be aware of but one that’s seldom an issue for consumers or small business owners filing bankruptcy. However, in part because “fraudulent transfers” often involve some version of gift-giving, it’s particularly worth getting an understanding of this during the holiday season.
We’ll briefly explain here what a “fraudulent transfer” is, its two different forms, why neither are a problem for most people, and when you should be concerned.
What’s a “Fraudulent Transfer”?
Basically, it’s a debtor’s giving away (transferring) an asset to avoiding paying creditors the value of that asset.
This legal concept was first addressed more than 400 years ago in English law, which we adopted, so this is an issue that’s been around for a long time.
Bankruptcy Timing and the Holidays: "Preferenceâ Payments
You may have extra motivation and greater ability to repay a personally important debt this time of year. But maybe you shouldn’t.
Careful about Paying a Favored Creditor
Around the holidays you may be extra motivated to pay back a personal loan. The relative or friend may be in real need of the money and pressuring you to pay it. Or if you are considering bankruptcy you may not want it to involve this person, or to have him or her know about it.
You might feel be better able to pay this debt. You may have gotten an annual bonus from work, or more income from working extra hours or a side job during the holidays. You might have even stopped paying other creditors so you have more money to pay who you want.
But when you know the possible consequences you might not want to pay that special debt after all. At least not yet.
The Rare, Dangerous, but Avoidable “Preference”
Bankruptcy Timing and the Holidays: The "Cash Advances" Presumption of Fraud
If you can, don’t do cash advances during the holidays if you’re contemplating filing bankruptcy. If you do, understand the rules about them.
In our last blog post we explained the “luxury” presumption of fraud. This provision in bankruptcy law increases the risk that you would not be able to “discharge” (legally write off) a very particular kind of debt. That kind of debt would be one that resulted from a purchase or a set of purchases totaling more than $650 made during the 90 days before filing bankruptcy.
The “cash advances” presumption of fraud is closely related to the “luxury” one. The dollar amounts and timeframe are just a little different. This “cash advances” presumption increases the risk that you would have to pay a debt tied to a cash advance or set of cash advances totaling more than $925 made during the 70 days before filing bankruptcy. (Notice that for this presumption to kick in, you incur somewhat more credit in a somewhat shorter period of time than with the “luxury” presumption of fraud.)
Bankruptcy Timing and the Holidays: The "Luxury" Presumption of Fraud
If you’re considering filing bankruptcy, try to avoid using credit cards to finance the holidays. But if you do, there are some extra risks.
Using Credit Shortly Before Filing Bankruptcy
Using credit during the holidays if you’re contemplating bankruptcy is dangerous. It could be considered fraud if you run up debt that you don’t intend to honor.
What is "Fraud" in Bankruptcy?
The bankruptcy system rewards honesty. One of the core principles in bankruptcy is that debts which are entered into honestly can later be written off, while debts entered into through cheating cannot.
When you incur a debt, you are agreeing to pay the debt. If at the time you are incurring a debt you actually don’t intend to pay it, that would be cheating. Falsely saying or implying that you intend to pay the debt would be a misrepresentation and likely a fraud. There is a risk that such a debt would not be written off ("discharged") in bankruptcy.
Chapter 7 and Chapter 13--Unsecured Debts
Which of the two consumer bankruptcy options is better for you if you have lots of unsecured debts depends on the kind of unsecured debts.
Unsecured Debts
Debts that are unsecured are those which are not secured by anything you own. The creditor has no “security interest” in anything, no right to repossess anything if you don’t pay the debt.
In general it’s easier to deal with unsecured debt than secured ones in bankruptcy.
Unsecured Debts Turning into Secured Ones
Unsecured debts can turn into secured ones if you don’t pay them. A credit card holder or medical provider can sue you for the balance owed, get a judgment against you, and usually can record that judgment as a lien against your home and other possessions. If you don’t pay your federal income taxes the IRS can record a tax lien against your real estate and personal property without suing you.
Chapter 7 and Chapter 13--Delayed Sale of Your Home
In a Chapter 13 case you can schedule to sell your home as part of the court-approved plan, or leave it more flexible.
In our last blog post we described briefly how Chapter 13 can often give you tremendous flexibility about the timing of the sale of your home. Here we expand on your options.
A Scheduled Home Sale
If you definitely plan on selling your home and you know when you want to do so, you can build your Chapter 13 plan around that sale. Depending on your situation, you may be able to schedule selling your home anytime during the following 5 years, the maximum length of a Chapter 13 payment plan.
The main benefit of incorporating your intended sale into your formal plan is that doing so allows you to pay certain creditors out of the expected proceeds of the sale. That usually allows you to pay less to creditors during the rest of your case.
For example, if at the time you file your case you are $10,000 behind on the first mortgage and filed the Chapter 13 case to prevent a foreclosure, you would normally have to catch up on all of that $10,000 through monthly payments during the 3-to-5-year case. But if you schedule the intended home sale for, say, two and a half years after the case is filed, you would often be able to pay all or most of that $10,000 out of the proceeds of the sale. This assumes that there is good indication that you will have sufficient equity in the home at the time of the sale to pay that $10,000 or so then.
Chapter 7 and Chapter 13--Selling Your Home in the Near Future and Protecting Its Increased Equity
Have the flexibility to sell your home when you want, giving time for it to add equity, while keeping creditors away from that equity.
If you are feeling overwhelmed by debts and wondering if you should file bankruptcy, and if in the midst of this you own a home, you might also be wondering whether you should be selling it. Let’s assume that you’d rather not sell right now, because it’s not the right time for personal or family reasons. Or maybe the home doesn’t have much equity now but its value is increasing and so you think it will likely have significantly more equity two, three years from now.
But the problem is that you have creditors threatening to sue you, get judgments and put liens on your home, eating up any equity that’s there now and any future equity as well. How can bankruptcy help here?
The Chapter 7 Solution
Our last blog post was about the advantages under Chapter 7 “straight bankruptcy” if you currently have some equity in your home but no more than is protected by the homestead exemption. Assuming you were current or close to current on the home’s mortgage(s), you could keep your home and its equity would be protected from your creditors. Pending lawsuits would be stopped and future ones would be prevented, avoiding judgment liens against your home. Judgment liens that were already on your home would likely be removed. All that would happen within about 3 or 4 months after your Chapter 7 case was filed. Then you could sell your home immediately afterwards, or later if you wanted to wait for a better time or after the home’s value increased.
Chapter 7 and Chapter 13--Selling Your Home with Equity but Have Lots of Other Debts
Protect the equity in your home from your creditors through either of the consumer bankruptcy options.
If you have some equity in your home bankruptcy may enable you to keep that equity—to help your transition into a rental, to buy another home, or to put it into retirement.
Today we’ll look at how that works under a Chapter 7 “straight bankruptcy” and then next time under Chapter 13 “adjustment of debts.”
Without Bankruptcy
If you have some equity in your home and you owe more other debts than you can handle, that equity is likely in jeopardy. Your creditors and debt collectors can easily find out about that equity and are all the more quick to sue you in order to latch onto it. In most states a lawsuit that turns into a judgment becomes a lien on your home. That means that once the lien is recorded, when you sell your home the debt has to be paid in full, usually with a large amount of additional fees added to it.
Chapter 7 and Chapter 13--Too Much Equity in Your Home
Most homeowners contemplating bankruptcy have their home equity protected by their homestead exemption. If not, consider Chapter 13.
The Homestead Exemption
Throughout the U.S. people filing bankruptcy have the equity in their homes protected by homestead exemptions.
A property exemption in general is the extent to which the law protects something you own, or protects the equity in something you own, from your creditors. Equity is the value of something beyond what you owe on it. If you own a home worth $200,000 and you owe $180,000 on a mortgage, and have no other debts which are liens on your home’s title, then you have equity of $20,000 in the home. As long as the homestead exemption applicable to you is $20,000 or more, you can file bankruptcy and your creditors will have no right to your home or your equity in that home.
Different Homestead Exemptions
Each state has a set of property exemptions, including a homestead exemption. There is also a set of federal exemptions. Whether you can use the federal exemptions or instead are required to use your state’s exemptions depends on the laws of your state.