If you are thinking about filing for bankruptcy, do not accumulate any credit card debt for holiday gifts. Otherwise you may run into trouble over what debts are dischargeable in your case.  Instead, come up with thoughtful ways to express your love and appreciation for your loved ones that do not involve spending a lot of money on gifts this holiday season.

When money is tight, financial anxiety can cloud the holidays, making the temptation to use credit cards nearly irresistible. We live in a rather materialistic culture, so when we express our love and affection through gifts we tend to let price carry too much meaning, often by allowing the gifts we give to define our worth. That is particularly true with our close loved ones, whom we are reluctant to disappoint.

The feelings about expressing love through pricey gifts may be especially intense if there is tension in the marriage, or within the household, which is often the case when there are financial pressures.  But we all know that the price of a gift is not a true measure of our love and that gifts do not buy love. To help you follow your wiser impulses, here are three suggestions.

1.  Give gifts appropriate to your financial circumstances, no matter how modest they may be.  That is the only responsible way, and in fact shows your love—especially to family members—more than if you gave gifts you could not afford.

2.  Direct your energy toward coming up with a gift idea that reflects the connection between you and the intended recipient.  Make it a gift that the person will enjoy but also one that shows you really put thought into it.

3.  Communicate honestly with your loved ones about your financial circumstances.  Do this in a way that is appropriate for the relationship, which will be different for extended family, your significant other, and/or your children. This communication need not be negative.  Instead, it can be a constructive conversation about priorities, honesty, and your love for the other person.

Following these tips can be difficult, but sometimes it needs to be done.

Photo by Billy Halsey.

Anyone considering filing bankruptcy should be aware that court filing fees are increasing on Nov. 1, 2011.  While it is not a large fee increase for filing a Chapter 7 or a 13, it is notable for being the first increase in a long time.  A disclosure form containing general information about the different chapters of bankruptcy, including details on the filing fees, will have to change.  The fee changes come as a bit of a surprise, considering the short notice that the Bankruptcy Court provided on October 17, 2011.

That said, the changes in the fees to file a Chapter 7 and a Chapter 13 are small.  The Chapter 7 filing fee will go up from $299 to $306 and the Chapter 13 filing fee will rise from $274 to $281.  As you can see, the Chapter 7 filing fee crosses that psychological $300 barrier.  It’s only $7 more, but the fact that it’s over $300 now makes it seem like a whole lot more.  Numbers are funny that way.

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In New Jersey, it will be a little easier or a little harder to qualify for a Chapter 7 as of November 1, 2011. Whether it’ll be easier or harder for you depends on your family size.

The bankruptcy system looks to the U.S. Census to calculate each state’s median income, as applied to family size. If your income is below your state’s median income for your family size, then in most situations you would be eligible for a Chapter 7. But if your income is above the median and you still want to file a Chapter 7 case, then you have to fill out a long and rather complicated form detailing your allowed expenses to determine whether or not your filing of a Chapter 7 would be “abusive.” So if you want to file a Chapter 7 bankruptcy, it’s a lot easier if you’re below the median.

On November 1, new median income amounts become applicable. In New Jersey, for a household of 1, the median income level will rise slightly from $59,060 to $60,322.  For a household of 2, it will drop from $70, 680 to $67, 503.  The new figures for all states can be seen here. Remember, if the median income goes up, that makes it a little more likely that your income will fall below that median, and you’ll have smoother sailing qualifying for Chapter 7.  New Jersey has some of the highest median income levels in the U.S.

So, if your income is close to the applicable median amount, and the median is increasing for your family size in your state on November 1, then you have a better chance at falling under the median if you file on or after that date.

Please understand that the meaning of “income” in the bankruptcy context is different from conventional meanings of that word. Bankruptcy “income” is calculated using a six-calendar-month look-back period that is doubled and then divided by 12 for an average monthly income. It includes all sources of income from all family members other than social security and does not only include taxable income.

Because of this and many other complicated issues, you should consult with a bankruptcy attorney about median income questions.

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Sometimes the timing of your bankruptcy filing hardly matters, but other times it’s huge. The two examples in this post should convince you that you do not want to be rushed to file because a creditor got a judgment against you is now garnishing your wages. Since the timing of your bankruptcy filing can be a strategic decision, you should preserve the ability to file bankruptcy at a time that’s best for you.

1. Choosing between Chapter 7 and 13:  Being able to file a Chapter 7 generally requires you to pass the means test. This test largely turns on a very special definition of “income.” For many people, means test income can change every month. So you may not qualify to file a Chapter 7 one month but maybe you can the next month. Being able to delay filing means being able to file when you are likelier to pass the means test and not be forced into a Chapter 13. Chapter 7 cases are usually shorter and normally cost less than Chapter 13 cases.

2. Discharging debts:  Getting certain debts discharged can be more difficult if you incurred them within a certain amount of time before your bankruptcy case was filed. Delaying the filing of your case makes it less likely that the dischargeability of one of these debts would be successfully challenged. If a creditor is successful in challenging the dischargeability of a debt, you would still owe the debt, possibly along with the creditor’s costs and attorney fees and your attorney’s fees.

If you get sued, what do you do to avoid getting a judgment against you, so that you’re not rushed into filing bankruptcy at a bad time? See a bankruptcy attorney as soon as possible. The earlier you get advice, the more options you will have.

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If you have a judgement against you from a creditor, it can hurt you. Judgments can hurt in three ways:  1) They allow the creditor to use powerful collection tools against you; 2) A judgment can make you rush into bankruptcy at a bad time; and 3) Under some circumstances, a judgment can make it harder to discharge the debt in your bankruptcy.  This post addresses only the first of these three.

Most creditor and collection-agency lawsuits for debt collection result in judgments against those who owe the debts. That’s because the reason for debt collection suits is to legally establish that the debt is owed, which is usually not in dispute. Also, much of the time the debtors are at the ends of their financial ropes and can’t afford an attorney to find out their options or to defend the lawsuit. So judgments are entered “by default”—meaning the deadline for the debtors to respond passed without any action by them, allowing the creditor to get a judgment. Sometimes debtors do not receive notice that a judgment has been entered against them or they receive notice and do not recognize it for what it is. Thus, many debtors do not realize there are judgments against them, especially when nothing apparently happens for months or even years afterwards. And very few people are fully aware of the possible consequences.

Most people know that a judgment gives a creditor the power to garnish wages and/or to levy against bank accounts. But preventing garnishments by keeping your bank account empty and by not being paid a regular wage often are not enough to make you “judgment proof.” For example, a judgment usually becomes a lien against any real estate you own now or will own in the future. That includes not only property held in your own name but also your rights to property held jointly with a spouse, parent, or through a trust or estate. A creditor has other tools available, including getting a judge to order you to answer questions under oath, in writing, about what you own – in New Jersey, this is called an “information subpoena”.

Beyond the direct damage a creditor with a judgment can do to you before you file your case, such a creditor can cause you problems in your bankruptcy case.

If you file bankruptcy quickly to stop a garnishment or other collection activity, you lose one of your most important advantages: the timing of your bankruptcy filing. Much of what happens in your bankruptcy case turns on exactly when it was filed. Not having the flexibility to pick the best timing can, among other things, turn a Chapter 7 into a Chapter 13, can mean a difference of many thousands of dollars, and can turn a straightforward case that meets your goals into a more complicated matter.

The lesson here is, whenever possible, take the time to see a bankruptcy attorney if you have overall financial problems, particularly if you are being sued. Try not to wait until after a judgment has been entered against you.

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Bankruptcy can help both sides of your balance sheet. Getting a fresh start means not just being relieved of debt, but also protecting essential assets. You can preserve this  benefit by not selling, using up, or borrowing against your protected assets BEFORE your  case is filed. In order to regain your financial footing, you will need housing, basic household goods, clothes and – where appropriate – tools of the trade, unemployment or disability benefits and retirement savings. Bankruptcy usually protects these things. Specifically, Chapter 7 protects all “exempt” assets. And if the applicable exemptions do not protect all of your property, Chapter 13 usually provides protection. But bankruptcy cannot protect what you’ve sold, given away or used up. Clients often recount how, within the year or so before deciding to file their case, they depleted their retirement account or sold off household goods in an attempt to avoid bankruptcy. But those things usually would have been protected had they filed their case when they still had the assets. As they say, hindsight is 20/20, but if you are one of those trying to avoid bankruptcy and you are thinking of spending, selling, or borrowing against any of your assets, do you know whether it would be protected in bankruptcy? This type of decision has long-term consequences and is often made without any legal advice about the alternatives. If someone in her 50s cashes in a 401(k) retirement account to pay credit-card companies, that decision can hurt her retirement years.  Or if a couple sell a debt-free car that is in good condition, believing that they’ll lose it in a bankruptcy, that decision could adversely impact their ability to get to work. People tend to wait until they are at the end of their rope before getting legal advice, well after they have made these types of adverse decisions.  But you can obtain a better fresh start by going for legal advice early enough to preserve your assets.

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Why not? Because you may be able to keep a vehicle you thought you couldn’t afford. Under certain conditions, a Chapter 13 bankruptcy might allow you to pay smaller monthly car loan payments. You may be able to pay off the debt and own the it free and clear for less than the loan balance.

It may very well be a good decision for you to give up an unaffordable car, but you should consider all of your options first.

If you need a car but cannot afford the monthly payments, you probably figure that you don’t have any choice but to lose it. You know the contract requires you to make the payments or else the vehicle gets repossessed. You may have been trying hard for months to keep or to get the payments current, putting up with late fees and constant notices or phone calls from the creditor threatening repossession. You would have already let the car go except you’ve got to have it for work and/or other family obligations, and you have no way to replace it. You feel stuck, with no good options.

On top of everything else, you might have heard that a bankruptcy can’t help much, at least for hanging onto the car—that you still have to either make the payments, and catch up if you’re behind, or else lose it.

That’s true, in a “straight bankruptcy,” a Chapter 7.

But it’s not necessarily true in a Chapter 13 case. If you meet two conditions, you may be able to do a “cramdown” on the vehicle loan: lower your payments and likely pay less overall on the loan. You may well also be able to lower your interest rate.

The two conditions to be able to do a “cramdown”:

1) Your vehicle loan was entered into more than 910 days before your Chapter 13 case is filed (that’s just about two and a half years before); and

2) At the time your case is filed, the value of your vehicle is less than the balance on your loan.

If your car loan meets these two conditions, your loan could be essentially re-written through a Chapter 13.  The total amount you must pay down could be reduced to the value of the car, which is known as a “cramdown”. That’s called the “secured portion” of the debt. Also, a new monthly payment is calculated—representing the amount needed to pay off the smaller balance, often at a lower interest rate, and often on a longer remaining term.

What happens to the “unsecured portion”—the part of the debt beyond the value of the vehicle? It gets lumped in with the rest of your unsecured debts, usually not requiring you to pay anything more to all your unsecured creditors regardless of your vehicle loan.

And what if you’re behind on your vehicle loan when you file your Chapter 13 case—when do you have to pay that arrearage? You don’t. It’s just part of the re-written, new “crammed down” obligation.

As you can see, you may not want to surrender a car or allow it to be repossessed if you could keep it while having it cost you much less to do so. Sometimes having a reliable vehicle is essential to achieving a successful re-start of your financial life.  Before you lose that essential part of your financial plan, carefully consider all of your options.

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Both Chapter 7 and Chapter 13 stop a foreclosure of your home. One or the other COULD be better for you, but which one is it?

Many considerations come into play in deciding whether a Chapter 7 or 13 is better for you.  I could list literally dozens of possible ones. Focusing here just on factors involved in saving your house, there are many advantages and disadvantages to each. The answer turns on your individual circumstances. Lawyers are sometimes given a bad time for seemingly answering every question with “it depends.” But when it comes to your home and your financial well-being, the fact is that you need what is best for you in your circumstances. You don’t want a cookie-cutter answer; instead, you need an answer that “depends” on your individual facts and on your personal financial goals and needs.

Say that after examining all the other aspects of your financial life, the choice between the two chapters comes down to how that choice impacts your house. And let’s also assume that this is a house in distress, where a foreclosure is already scheduled or is just around the corner.

One difference between Chapter 7 and Chapter 13 is that the first one generally buys you a relatively short time while the second one buys you a much longer time.

So that leaves the question of whether—in your situation—a Chapter 7 would buy you enough time, or if you need the much stronger assistance of a Chapter 13.

Chapter 13 deservedly has the reputation of being the home-saving chapter of bankruptcy. But every day of the week Chapter 7 bankruptcies are filed which save people’s homes. If you have a sale pending on your house but you’ve run out of time with a scheduled foreclosure; if you have some money coming to cure the arrearage but again have run out of time; if you are very close to getting a mortgage modification approved or are more likely get it approved after discharging you debts in bankruptcy; or if you’ve decided to surrender the house but need a little more time to get into another home—these are possible circumstances where Chapter 7 could well buy you enough time to do what you need to do for your home.

Admittedly, these are relatively rare situations, especially in New Jersey, where foreclosure sales have fairly long time lines. The more common situation is that you lost some income or had emergency expenses, making it impossible to keep up the mortgage payments. And then you regained that income, but maybe not all of it, and now you owe a whole lot in missed payments, late charges and other fees. There’s no way can you catch up on all that in just a few months. Chapter 13 can give you as much as five years to do so. Chapter 13 can also buy you much more time to sell your home, such as to get to a better selling season, or even maybe to allow a child to finish high school. Chapter 13 can also be much better at dealing with other house-related debts, such as property taxes, second mortgages and income tax liens. These choices depend on your unique set of circumstances.

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Both Chapter 7 and Chapter 13 can help you save your home. But how does a bankruptcy stop foreclosure?

You have undoubtedly heard that the filing of a bankruptcy stops a foreclosure. You may have also heard that Chapter 13—the repayment version of bankruptcy—can be a good tool for saving your home in the long run. Both of these are true, but are only the beginning of the story. This post tells you more about how bankruptcy stops a foreclosure.

The “automatic stay” is the part of the federal bankruptcy law which immediately blocks a foreclosure from happening. The very act of filing your case “operates as a stay,” as a court order stopping “any act to… enforce [any lien] against any property of the debtor…  .”

But what if your bankruptcy case is filed and the mortgage lender or its agent can’t be reached in time so that the foreclosure sale still occurs? Or if there’s some miscommunication between the lender and its agent or attorney, with the same result? Or if the lender just goes ahead and forecloses anyway?

As long as your bankruptcy is filed at the court BEFORE the foreclosure sale, then that sale is not legally valid, whether it occurred by mistake or intentionally. (This filing “at the court” is usually actually done electronically from my office, with a date and time-stamped record proving when the court filing took place.)

IF a sale happens by mistake after the filing of your bankruptcy, lenders are usually very cooperative in legally undoing the foreclosure sale and its documentation. If your lender would fail to undo such a sale after becoming aware of your bankruptcy filing, it would be in ongoing violation of the automatic stay, exposing itself to significant financial penalties. That would be rare.

Does it matter whether your case is a Chapter 7 or Chapter 13 one for purposes of the automatic stay?

No, the automatic stay is the same under both chapters, and would have the same immediate effect.

On the other hand, how long the protection of the automatic stay lasts can depend on which chapter you file. That’s because even though you get the same automatic stay, the other tools each chapter provides for protecting your home are very different. So your mortgage lender or servicer may very well react quite differently depending on the chapter you file, as well as on what you propose to do about your home and your mortgage within that chapter.

Isn’t a bankruptcy filing supposed to stop all your creditors’ collection efforts against you and your property? Yes, and in fact in many cases a bankruptcy filing does exactly that. Stopping collection efforts is a benefit of filing bankruptcy called the “automatic stay,” because at the moment of the bankruptcy filing, a legal injunction automatically goes into effect “staying,” or stopping, most creditors’ actions against you. But because the automatic stay is something we count on, we had better know its exceptions.

Today I’m just going to list some of the most important exceptions. Then in the next couple of posts I will explain in practical terms these and other important aspects of the automatic stay.

So creditors CAN do the following in spite of your bankruptcy filing:

1) A district attorney or other governmental authority can begin or continue a criminal case against you, such as an indictment, a criminal trial, or a sentencing hearing. This includes not just felonies and misdemeanors, but also lesser matters like traffic infractions that you might not think of as “criminal.”

2) Your ex-spouse, or about-to-be ex-spouse, or somebody on his or her behalf, can start or continue a variety of divorce and family court proceedings. These include legal procedures to establish paternity of a child, determine or change the amount of child or spousal support to be paid, settle child custody or visitation issues, address domestic violence disputes, and even dissolve the marriage. (Although a marriage dissolution usually cannot include a determination about how assets or debts would be divided between the spouses.)

3) Specifically about child or spousal support, the person owed ongoing support can continue collecting it. If there is back support owed, then in spite of a Chapter 7 filing, the person who is owed the support can in most cases start or continue collecting it. This includes not only collection through wage withholdings and garnishment of bank accounts, but also through seizure of a tax refund and suspension of a driver’s license, an occupational or professional license, or even a hunting or other recreational license. In contrast, a Chapter 13 filing can stop these aggressive methods of collecting back support.

4) Taxing authorities can start or finish a tax audit, can send you a notice that you owe taxes, can demand you to file your tax returns, can assess your taxes and demand you to pay them, and in some situations can even file tax liens against you and your property.

Notice that each of these exceptions involves a special kind of creditor. As I said, the automatic stay stops actions against you by most creditors. But if you are involved in a court proceeding or collection efforts by the criminal or taxing authorities, or by an ex-spouse, be especially aware of these exceptions.

 
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