One of the most basic principles of bankruptcy is that it treats all creditors in each legal category the same as all the other creditors in that category. There are three main categories of debts. Not everyone has debts in each of the three categories, but many people do. You should be able to start dividing your debts among the three categories. Then bankruptcy and how it deals with each of your creditors will begin to make more sense.

The three categories of debts are: Secured debt; general unsecured debt; and priority debt.

Secured debt

All debts are either secured by collateral or not. Whether a debt is secured is often straightforward, such as with a vehicle loan in which the vehicle’s title specifies your lender as the lienholder. The lien on that title, together with the documents you signed with the lender, gives that lender certain rights as to that collateral, such as the right to repossess it if you fail to make payments as agreed.

In the case of every secured debt, there is a legally prescribed way to attach the debt’s collateral to the debt. In the case of the vehicle loan, the lender and you have to jump through certain hoops for the lender to become a lienholder on the title. If those aren’t done right, the vehicle might not attach as collateral to your loan.

Debts can be fully secured or only partially secured. If you owe $10,000 on a vehicle worth only $8,000, the debt is only partially secured—secured as to $8,000, and unsecured as to the remaining $2,000.

Debts can be voluntarily or involuntarily secured. Examples of the latter are judgment liens on your home, IRS income tax liens on all your personal property, and a mechanic’s or repairman’s lien on a vehicle that’s been repaired and the repair bill not paid.

General unsecured debts

All debts that are not legally secured by collateral are unsecured. And “general” unsecured debts are those that don’t belong to any of the categories of “priority” debts, discussed below. General unsecured debt is a default category—it applies if a debt is unsecured and non-priority. This includes every imaginable type of debt or claim. Common ones include most credit cards, medical bills, personal loans with no collateral, bounced checks, most payday loans (although those sometimes have collateral), unpaid back rent and utilities, balances left over after a vehicle is repossessed, many personal loans, and uninsured or underinsured motor accident claims against you.

Sometimes debts that used to be secured can become unsecured, and vice versa. An example of the first: once you’ve surrendered all the collateral—such as a car on a car loan—any leftover debt is unsecured. And an example of the second: an unsecured medical bill can become secured after a lawsuit is filed against you and a judgment is entered that results in a judgment lien attached to your real estate.

Priority debts

Priority debts are special because the law treats them as better than general unsecured debts. There are specific levels of priority among all the priority debts.

It’s all about who gets paid first (which often means who gets paid at all), which comes up in two main ways:

First, most Chapter 7 cases don’t involve the trustee receiving any of your assets for distribution to your creditors (known as “no-asset cases”). But in those cases where there are non-exempt assets (known as “asset cases”), the priority creditors are paid in full before the general unsecured ones receive anything. And the higher priority creditors are paid in full before the lower priority ones.

Second, in a Chapter 13 case, your plan must show that you will pay all priority debts before the completion of your case and then you must actually do so before you are allowed to complete the plan.

The most common priority debts for consumers or small business owners are the following, in order starting from the highest priority:

• Child and spousal support—amounts owed as of the time of the filing of the bankruptcy case;

• The administrative costs of the bankruptcy case—trustee fees and costs, and in some cases attorney fees;

• Wages and other forms of compensation owed to employees—maximum of $10,000 per employee, for work done in the final 180 days before the bankruptcy filing or close of business, whichever was first; and

• Certain income taxes, and some other kinds of taxes—some are priority but others are general unsecured if they are old enough and meet some other conditions.

Reading over and thinking about these categories of debts can give you a good sense of where your debts fall in the grand scheme of things if you were to file for bankruptcy.

Related posts:

1. Don’t Give Up Your Vehicle Before Knowing Your Options Why? Because you may be able to keep a vehicle...

Related posts brought to you by Yet Another Related Posts Plugin.

Can you keep your tax refund through a Chapter 7 bankruptcy?  Maybe.

Everything you own when your Chapter 7 is filed makes up your “bankruptcy estate.”  Usually, most or all of that “estate” stays in your possession and you can keep it because it’s exempt (protected).  The bankruptcy estate includes not only your tangible, physical possessions, but also intangible ones—assets you own that you can’t physically touch—such as money owed, but not yet paid, to you.  A tax refund can be an intangible asset that is part of your bankruptcy estate.  Whether you can keep the tax refund depends on whether it is exempt.

Because an income tax refund usually comes from the overpayment of payroll withholding, the full amount of that refund has accrued by the time of your last payroll withholding of the tax year. So even though nobody knows the amount of your refund until your tax return is prepared a few weeks or months later, for bankruptcy purposes it is an asset of yours by January 1 of the next year.  If you file a Chapter 7 case after the beginning of the next year and before you have received your tax refund, it is part of your bankruptcy estate and the trustee can keep however much of it that’s not exempt. This is also true if you have received the refund and not done anything with it (like if you haven’t deposited the check).

You can avoid possibly having a non-exempt tax refund by filing your tax return, receiving the refund, and appropriately spending it before your Chapter 7 case is filed.  But first, you should seek advice from a bankruptcy attorney.  Your bankruptcy trustee will be interested in what money you receive and spend before bankruptcy, which can be a source of problems if it is not done carefully.

Whether or not your tax refund is exempt depends on how much it is and whether you have room to exempt it.  In some cases, using all or part of an exemption for your tax refund may reduce the availability of the exemption for other assets.  Even if the refund, or a portion of it, is not exempt, the Chapter 7 trustee might not claim it if he or she decides the amount is not enough to open an asset case.  That would be a case where the amount of refund is so small that the benefit of distributing it to the creditors is outweighed by the administrative cost involved.  This threshold amount can vary from one court and/or one trustee to another so be sure to discuss this with your attorney.  But if the trustee is collecting any of your other assets, then he or she will want every dollar of a non-exempt tax refunds.

There is a risk that you will not be able to claim an exemption if you don’t list the tax refund in your bankruptcy papers.  Be sure to always list any tax refund to which you may be entitled.

These same principles apply year-round.  By of July 1, you have had half a year of income-tax withholding deducted from your paychecks.  A bankruptcy filed on on or after July 1 should take that into account, even though some trustees don’t push this issue much until closer to the end of the year, when of the potential tax refunds has accrued.  Nevertheless, you should tell your bankruptcy attorney about income tax refunds expected in the next year, especially if you have a history of fairly large tax refunds.

Photo by 401K.

Related posts:

1. Must I report illegal or previously unreported income in my bankruptcy? It sometimes comes up that a person who wants to...
2. Can a Chapter 7 save your business? Chapter 13 can be a great way to keep certain...

Related posts brought to you by Yet Another Related Posts Plugin.

Chapter 13 can help keep certain small businesses afloat, but what about Chapter 7?  Can it be used to save a small business?

Generally, Chapter 7 is seldom a good option if you own a business that you want to keep operating.  This is because Chapter 7 is a liquidation in which the bankruptcy trustee could make you give up any valuable parts of your business.

Once a Chapter 7 bankruptcy is filed, all of the debtor’s assets are automatically transferred to a new legal entity called the “bankruptcy estate”.  A trustee is assigned to oversee this estate, which usually means that the trustee is looking for assets in the estate that are worth taking and giving to creditors.  The debtor can protect, or “exempt,” certain assets, which remain the debtor’s and cannot be taken by the trustee.  The reasoning behind exemptions is that bankruptcy filers should be allowed to keep a minimum amount assets to live on while obtaining a fresh start. In most consumer Chapter 7 cases, the debtor can exempt all their assets, leaving nothing for the trustee to take.  This type of bankruptcy is called a “no-asset” case.

Can you file a Chapter 7 and continue to operate a business?  The answer requires responses to two other questions:

First, can you exempt the entire value of the business from the bankruptcy estate?

Many small businesses are would not exist but for the services of one or two owners.  In that case, they could not be sold as a going concern separate from their owners.  When faced with this type of case, a Chapter 7 trustee must decide whether he or she can sell any of the various assets that make up the business, or whether the debtor can exempt all of its assets.

The assets of a small business can include tools and equipment, receivables (money owed by customers for goods or services already provided), supplies, inventory, and cash.  There may also be value in a brand name, a below-market lease, or some other unusual asset.

If all of a business’ assets can be exempted in bankruptcy, it is possible for the owner/debtor to have a no-asset Chapter 7 case.

The second question is whether the trustee is willing to allow the business to operate in spite of its potential liability risks for the estate?

Recall that everything you own immediately becomes part of the bankruptcy estate once your case is filed.  One result of this is that your business becomes the trustee’s to operate.  Thus, the estate is potentially liable for damages caused by the business.  The trustee may also be liable for such damages.  That is why many Chapter 7 trustees’ want to shut down ongoing businesses where the owner is in an active bankruptcy.  The exceptions to this depend on the trustee, the nature of the business, and whether it has sufficient liability insurance.

Photo by Peter Blanchard.

Related posts:

1. How bankruptcy can help save your small business Bankruptcy isn't just for cleaning up after the death of...
2. Choosing the Right Chapter to Save Your Home through Bankruptcy Both Chapter 7 and Chapter 13 stop a foreclosure of...

Related posts brought to you by Yet Another Related Posts Plugin.

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.

Related posts:

1. When a bankruptcy filing does NOT stop collection actions Your bankruptcy filing can stop all your creditors’ collection actions...

Related posts brought to you by Yet Another Related Posts Plugin.

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.

Photo by 00dann.

No related posts.

Related posts brought to you by Yet Another Related Posts Plugin.

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.

Photo by Rafa.Garcés.

Related posts:

1. Must I report illegal or previously unreported income in my bankruptcy? It sometimes comes up that a person who wants to...

Related posts brought to you by Yet Another Related Posts Plugin.

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.

Photo by: mao_lini.

Related posts:

1. How to file bankruptcy and keep your assets Bankruptcy helps both sides of your balance sheet....

Related posts brought to you by Yet Another Related Posts Plugin.

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.

Photo by Dennis Wong.

No related posts.

Related posts brought to you by Yet Another Related Posts Plugin.

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.

Photo by e.t.

No related posts.

Related posts brought to you by Yet Another Related Posts Plugin.

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.

Photo by m.gifford.

No related posts.

Related posts brought to you by Yet Another Related Posts Plugin.