Category Archives: Chapter 7

Can you keep all of your stuff in bankruptcy?

Can you really keep everything you own all the way through bankruptcy?  You can usually keep items that you own outright (on which you do not owe any money) and you can usually keep those items on which you are making payments to a creditor (like your home or car), IF you can meet certain conditions. Most people who file for Ch. 7 bankruptcy can keep what they own because of laws known as “exemptions.”

Most people know that a they can get a discharge of debts in exchange for liquidating their assets – in other words, selling off your stuff.  BUT, don’t forget that you can keep whatever that the law protects. And MOST of the time, the law protects ALL of your stuff! So most people who file a Chapter 7 get a bankruptcy discharge without forking over any of their stuff.

“Exemptions” are listings of the types of stuff that the law protects from your creditors – these listings generally are found in statutes and they are generally limited by certain dollar amounts.  Exempt items are protected from the Chapter 7 trustee, who acts for the benefit of your creditors.

Exemptions can be complicated.  The Bankruptcy Code contains a set of federal exemptions and each state also has its own listings.  Some states, such as New Jersey, give you the choice to use either the federal or the state exemptions.  Other states only allow you to use the exemptions provided under state law.  If you have moved from another state fairly recently, you may have to use the exemption rules of your prior state.  Because each state’s rules can differ from one another, quite a bit of money might be at issue, depending on what day your bankruptcy is filed.

Once you know which set of exemptions you are going to use, it may not be crystal clear whether all of your stuff is protected. So deciding whether an item is exempt – protected – is often more complicated than scanning a list of exemptions and fitting all your assets in.  And what if you own one or more items that don’t fit any of the listed exemptions? Can the items be protected? These are all issues that you should discuss with a bankruptcy attorney before making any major decisions about your stuff.

Call (201) 676-0722 for a free New Jersey bankruptcy consultation.

Are you eligible for Ch. 7 or Ch. 13 bankruptcy?

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Eligibility for Ch. 7 or Ch. 13 bankruptcy can turn on who is filing the bankruptcy, the type and amount of debt, the amount of income, and the amount of expenses.

Who is filing the bankruptcy:

Only a human being (or a human being and his or her spouse) can file a Chapter 13 case. Neither a partnership nor a corporation can file a Chapter 13 case, but it can file a Chapter 7, whether or not the business owner also files one individually.

The type and amount of debt:

If your debt is primarily consumer debt (a dollar amount of more than 50%), then you have to pass the means test to qualify for a Chapter 7. Under Chapter 7, there is no restriction on the amount of debt you can have in order to qualify. But, Chapter 13 is restricted to cases where the person filing has a maximum of $383,175 in total unsecured debt and $1,149,525 in total secured debt.

Amount of income:

If your income is no more than the median income for your family size and state, then you can easily pass the means test to qualify for a Ch. 7. Chapter 13 requires regular income, which the Bankruptcy Code defines as income that is “sufficiently stable and regular” to enable you to “make payments under a [Chapter 13] plan.” This makes sense because you will be making regular monthly payments for the duration of your Ch. 13 case. A Ch. 13 case will last three years if the income is less than the median income applicable to your family size and state; if the income is at the applicable median income amount or more, the Ch. 13 case will last five years.

The amount of expenses:

In Ch. 7, if your income is not below the median for your state, then you must complete a highly technical test involving some, but not necessarily all, of your expenses to see whether you pass the means test and thus whether you are eligible for a Ch. 7. In Ch. 13, a similar, but often more complicated, calculation largely determines the amount you must pay monthly into your plan to satisfy the requirements of Ch. 13.

Choosing between Ch. 7 and 13 can be simple. But there are at least a dozen major differences among them, differences of which you may not be aware. So when you come in to see me or another attorney, be clear about your goals but also be open-minded about how to reach them. You may well have tools available that you didn’t know about.

For bankruptcy in Northern New Jersey, call: (201) 676-0722 or schedule a consultation at my Setmore page.

Business debt can allow you to qualify for Ch. 7

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If you owe more business/non-consumer debt than consumer debt, then you avoid not only the “means test” but also some other roadblocks to a successful post-business Chapter 7 bankruptcy case.

What’s the “Means Test” and Why Does It Matter?

Bankruptcy law says that if your income is more than a certain amount, you have to pass a means test to be able to go through a Chapter 7 case successfully. One way to avoid this means test is by having less income than the permitted median family income for the state in which you live. But the median family income amounts are relatively low. If your income is above the applicable median amount, you have to go through the entire means test at the risk of being forced into a 3-to-5-year Chapter 13 payment plan instead of a three-month Chapter 7 liquidation.

Debtors with More Non-Consumer Debts than Consumer Debts

You can skip the means test altogether if your debts are not primarily consumer debts. This way you could be eligible for a Chapter 7 case even if your income is above the median level. Indeed, you avoid other kinds of “presumptions of abuse” as well, not just the formulaic means test, but also the broader “totality of circumstances” challenges. Congress decided that if most of your debts are from a failed business venture, you should be allowed a fresh start through Chapter 7, regardless of your current income and expenses.

What is a “Consumer Debt”?

The Bankruptcy Code defines a “consumer debt” as one “incurred by an individual primarily for a personal, family, or household purpose.”

The focus is on the reason why you incurred the debt. If you made a credit purchase or took out the loan for your business, then it may not be a “consumer debt.” That is a factual question that must be decided separately for each one of your debts.

“Primarily Consumer Debts”?

The Bankruptcy Code does not make this crystal clear, but generally, if the total amount of consumer debt is less than the total amount of non-consumer debts, your debts are not primarily consumer debts. And then you do not have to mess with the means test.

Seemingly Consumer Debts May Not Be

Small business owners often finance the start-up and operation of their businesses with what would otherwise appear to be consumer credit—credit cards, home equity lines of credit and such. These may qualify as non-consumer debts in calculating whether you have primarily consumer debts. Your use of various forms of personal credit to fund your business is something to discuss with your attorney.

Unexpectedly High Business Debts Can Help

Sometimes business owners end up with business debts larger than they thought they would have when their business closed. For example, if you had to break a commercial lease when you closed your business, the unpaid lease payments you owe could be huge. Or your business closure may have left you with other unexpected debts, such as obligations to business partners or litigation resulting in damages owed. The good side of larger-than-expected business debts is that they may allow you to skip the means test and other grounds for dismissal or conversion to Chapter 13, allowing you to discharge your debts through Chapter 7.

For bankruptcy in Northern New Jersey, call: (201) 676-0722.

What happens to general unsecured debt in Chapter 7?

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Examples of general unsecured debts include credit card debt and medical debt.  If you are thinking about filing for bankruptcy, you should know how these general unsecured debts are handled.

Secured debt usually is tied to your most important possessions, such as your home or your car. So it’s understandable that being able to keep these types of collateral will drive your bankruptcy decisions.  Likewise, your “priority” debts tend to involve your most aggressive creditors and often can’t be discharged in bankruptcy, so these also grab our attention. But it’s more likely that you owe more in general unsecured debt than in secured and priority debts combined.

What happens to general unsecured debt in a Chapter 7? It depends on 2 things: 1) “dischargeability,” and 2) asset distribution.

Dischargeability

Dischargeability refers to whether you are able to get a discharge of that debt in bankruptcy. The dischargeability of most general unsecured debt is not challenged. In the rare case that your discharge of general unsecured debt is challenged, you may have to pay back some or all of that particular debt. But this would depend on whether the creditor is able to show that the debt fits within some narrow grounds for non-dischargeability, such as fraud, misrepresentation, or other similar bad behavior on your part.

Asset Distribution

If everything you own is exempt, or protected, then your Chapter 7 trustee will not take any of it from you – this is called a “no asset” case. But if you have an “asset case,” where the trustee takes some of your assets for distribution to your creditors, your general unsecured creditors will not necessarily receive any of those assets. The trustee must first pay off any priority debts and must pay the trustee’s own fees and that of any other professionals who were hired. Only if any funds remain will the unsecured creditors get to share in the leftovers.

To summarize, in most Chapter 7 cases your general unsecured debts will be discharged, preventing those creditors from ever being able to pursue you for them. Also, these creditors will receive nothing from you, so long as all your assets are exempt. Relatively rarely, a creditor may challenge the discharge of its debt. And if you have an asset case, the trustee may pay a part or—very rarely—all of the “general unsecured debts,” but only if the priority debts and trustee fees do not exhaust all the funds being distributed.

 

Options with Your Vehicle Loan under Chapter 7

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Your car loan may be your most important debt. Chapter 7 gives you the control you need to handle it.

When you think about secured debts—those tied to collateral like a vehicle—it helps to look at these kinds of debts as two deals in one. You made a commitment to repay the car loan and then you agreed to back up that commitment by giving the creditor certain rights to your collateral.

The first deal—to repay the money—can almost always be discharged (erased) in bankruptcy. But the second deal—the rights in the collateral that the creditor has, known as a “lien” on the vehicle title—is not affected by your bankruptcy. So, you can wipe out the debt, but the creditor stays on the title and can get your vehicle if you stop paying. Your options in Chapter 7, and the creditor’s options, are tied to these two realities.

Keep or Surrender?

As long as you file your Chapter 7 case before your vehicle gets repossessed, the ball is in your court regarding whether to keep or surrender it.

Surrender the Vehicle

In most situations, if you want to surrender the vehicle, then a Chapter 7 bankruptcy is the time to do it. That’s because in the vast majority of vehicle loans, you would still owe part of the debt after the surrender— the “deficiency balance”—often a shockingly large amount. The reason for the large deficiency balance is because you usually owe more than the vehicle is worth, but also because the contract lets the creditor charge you for its repossession and resale costs. Surrendering your vehicle during your Chapter 7 case allows you to discharge that whole debt and not owe your lender any of those costs.

There is a theoretical possibility that the vehicle loan creditor could challenge your discharge of the “deficiency balance,” based on fraud or misrepresentation when you entered into the loan. These are rare, especially with vehicle loans.

Keep It

Whether you are current on the loan payments does not matter if you are surrendering the vehicle. But if you want to keep it, whether you are current and if not, how far behind you are, makes a big difference.

Keep the Vehicle When Current

As you can guess, it’s best if you are current on your car payments. Then you would just keep making the payments on time and you might sign a “reaffirmation agreement” to exclude the vehicle loan from the discharge of debts at the end of your Chapter 7 case. But whether you would sign such an agreement depends heavily on the advice of your bankruptcy attorney, an issue you should discuss thoroughly with them.

Some vehicle loan creditors insist on a reaffirmation agreement, at the full balance of the loan—it’s a take-it-or-leave-it proposition. In that case, if you want to keep the car or truck, you need to “reaffirm” the original debt, even if by this time the debt is larger than the value of the vehicle. But reaffirmation can be dangerous because if you don’t keep up the payments, you could still end up with a repossession and a hefty debt owed—AFTER having passed up the opportunity to discharge the debt during your bankruptcy case. So be sure to understand this clearly before reaffirming, especially if the balance is already more than the vehicle is worth.

Some creditors are willing to allow you to reaffirm for less than the full balance, so that the creditor avoids taking an even bigger loss if you surrender the vehicle. Talk to your attorney whether this is a possibility in your situation.

Keep the Vehicle When Not Current

If you are not current on the vehicle loan at the time your Chapter 7 case is filed, most of the time you will have to get current quickly to be able to keep the vehicle—usually within a month or two. That’s in part because for a “reaffirmation agreement” to be enforceable, it must be filed at the bankruptcy court before the discharge order is entered. Since that happens usually about three months after the case is filed, the creditor needs to decide quickly whether you will be able to catch up on the payments and reaffirm the debt.

Some vehicle creditors may be more flexible, such as by giving you more time to cure the arrearage. Your attorney will be able to discuss this issue with your creditor, if it arises.

Woman with Autism Gets Student Loans Discharged

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I wrote a post for the blog of fellow New Jersey attorney Matthew Stoloff, who represents clients in the areas of disability rights and special education rights.  That post appears on Mr. Stoloff’s blog here.  You can also read the full text of my post right as follows:

In the past, I have mentioned the difficulty of getting student loans discharged in bankruptcy. But I have yet to discuss why it is so difficult to get a bankruptcy court to discharge student loans.

In this post, I’ll examine the process through a recent case from Maryland where student loans were actually discharged in a bankruptcy and discuss why that case might be anomalous.

In a nutshell, the Bankruptcy Code states that student loans are not dischargeable unless the debtor can show that repayment of the debt will cause an “undue hardship” on the debtor and his or her dependents. The famous Brunner case set the test followed in most of the country, including New Jersey, for what constitutes an “undue hardship”:

1. Whether the debtor will be unable to maintain a minimal standard of living, based on current income and expenses, if forced to repay the student loans;

2. Whether additional circumstances exist indicating that this state of affairs is likely to persist for a significant part of the repayment period for the student loans; and

3. Whether the debtor has made a good faith effort to repay the student loans.

Pa. Higher Educ. Assistance Agency v. Faish (In re Faish), 72 F.3d 298, 304-305 (3d Cir. 1995) (quoting In re Brunner, 831 F.2d at 396 (2nd Cir. 1987)).

In case you are thinking to yourself, “It’s an undue hardship for me to pay my student loans,” pause to consider the bankruptcy case, In re Brightful. There, Ms. Brightful filed for bankruptcy, asking the court to discharge her student loans. The bankruptcy court found that she had “glaring psychiatric problems” and was “emotionally unstable” to the point that she had attempted suicide twice. The court said she could not maintain a “minimal” standard of living and still pay her student loans.

But this was not enough – the court found that, under the Brunner case, Ms. Brightful must prove “a total incapacity…in the future to pay [her] debts for reasons not within [her] control.” So, the current inability to pay student loans is notthe standard. Instead, a discharge of student loans must be based on “the certainty of hopelessness… [emphasis added].”

Recently, a Maryland court considered whether a person on the autism spectrum could get her student loans discharged. See In re Todd. The debtor, Carol Todd, has a form of autism calledAsperger’s Syndrome, in addition to post-traumatic stress disorder (PTSD) and osteoporosis. Ms. Todd had a total of about $340,000 in student loan debt and sought to get these loans discharged.

Right away, we know this case is different because the judge quotes the Webster’s dictionary definitions of “undue” and “hardship,” adding that these terms do not suggest a standard that “no debtor can ever meet.” The court went on to describe how Ms. Todd was unable to function normally due to her diagnoses of Asperger’s, PTSD, and osteoporosis – but the court focused primarily on Asperger’s.

Despite her inability to function normally, Ms. Todd obtained 5 different higher education degrees and attended 5 different colleges, plus one online college. The court, however, was influenced by Ms. Todd’s belief that she did not earn her degrees, but that they were “negotiated” for her by the Department of Education, which she said helped her to obtain accommodations. In fact, the court questioned the academic rigor of the programs that she attended.

Following graduation, Ms. Todd worked as an adjunct professor teaching classes for several years, but she was not employed after that time.

In its analysis, the court determined that Ms. Todd’s situation met the “certainty of hopelessness” test due primarily to her autism/Asperger’s. Persuading the court was a doctor’s testimony showing that Ms. Todd could be a successful student, even be able to earn a Ph.D., but that she could not be a “productive” employee in the working world as we know it. In the court’s own words:

… Autism – or Asperger’s – is a permanent condition that will not permit [Ms. Todd] to function “normally” in almost any sense of the word. Because of Autism Ms. Todd has not been able, for the vast majority of her life, to gain or hold a job, let alone fashion a career, and there is no chance that state of affairs will ever change.

Reading the opinion I got the feeling that if only some basic supports were available to disabled, working adults, Carol Todd might have lost her student loan discharge case. But the court was convinced of Ms. Todd’s inability to successfully hold employment, mainly because of her autism, which, ironically, is the same condition that gave her the ability to focus on topics of interest for long enough to help her earn 5 college degrees.

Most bankruptcy student loan discharge cases are like the first case, In re Brightful – the courts apply a harsh standard to the most difficult of circumstances, usually determining that the student loans in question are not dischargeable.

But Carol Todd’s case is an outlier because the judge was willing to focus on the long-term disabling aspects of autism/Asperger’s while at the same time discounting the debtor’s obvious abilities (a metaphor for how our working world as a whole often treats disabled adults).

Will other bankruptcy courts follow the judge’s lead in In re Todd? Is it possible that in the future more people with disabilities who are unable to successfully hold employment will be able to get their student loans discharged more easily? Only time will tell.

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How to keep an income tax refund in your Chapter 7 bankruptcy

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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.

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Bankruptcy filing fees will increase Nov. 1, 2011

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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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How to file bankruptcy and keep your assets

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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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Stopping the foreclosure of your home through bankruptcy

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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.