At the Law Offices Of Hagen & Hagen, we realize that you have plenty of questions about bankruptcy. The following are the most commonly asked questions, and our answers to those questions. If you do not find the answer to your question here, or if you wish to discuss your situation with our experienced Southern California bankruptcy lawyers, please contact us today.
There are six chapters of bankruptcy that one may file.
a. Chapter 9 is the chapter that municipal entities and railroad companies use when they file bankruptcy. You might recall that Orange County, California filed a bankruptcy in the mid-1990s. Bridgeport, Connecticut also filed a bankruptcy petition. Individuals do not use Chapter 9.
b. Chapter 12 is the chapter that family farmers use. Individuals who do not own agricultural property do not use Chapter 12.
c. Chapter 15 is the chapter used by United States courts to administer assets of companies who have filed for bankruptcy protection in foreign jurisdictions.
d. Chapter 11 is the chapter that you probably hear or read about most often in the news; it is the high-profile chapter used primarily by corporations, limited liability companies and partnerships to reorganize their financial affairs. You are probably aware of such bankruptcy filings as TWA, United Airlines, Texaco, Macy's, World Com, K-Mart, and Enron. Individuals are eligible for Chapter 11 relief, but it is a time-consuming and expensive chapter, and therefore only appropriate for individuals whose circumstances make Chapter 7 or Chapter 13 inapplicable or inappropriate. Rarely is Chapter 11 the chapter of choice for an individual; under one percent of all bankruptcy filings are Chapter 11s.
e. Chapter 7 is a "straight bankruptcy" or "liquidation bankruptcy." It is the most common chapter; approximately two-thirds of all the bankruptcies filed around the country each year are Chapter 7s. In a Chapter 7 proceeding, the debtor is seeking a discharge, which is a document mailed to the debtor by the Clerk of the Bankruptcy Court toward the end of the case. The discharge is the document which essentially states that the debtor is no longer legally responsible for repaying his or her creditors. There are a few "prices" one pays for the privilege of receiving a Chapter 7 discharge.
There are three primary components to every Chapter 7 bankruptcy proceeding: assets, liabilities, and income.
1. The asset portion of a Chapter 7 bankruptcy proceeding.
In every Chapter 7 proceeding, a judge is assigned and a trustee is assigned. In the majority of Chapter 7 cases, the debtor never sees his or her judge, but does meet his or her trustee. It is helpful to look at the Chapter 7 trustee as an independent contractor for the federal government; the government wants experienced professionals to help it do its job, but does not want to pay in-house salaries, so it contracts with local attorneys and accountants to provide the needed services. The trustee's primary responsibility is to review the bankruptcy petition, schedules, and statement of financial affairs, examine the debtor by asking some questions at a meeting of creditors approximately five weeks into the case, and determine whether the debtor owns any assets that ought to be liquidated or sold in order to generate money to pay creditors on their claims, at least in part. Accordingly, one of the prices a debtor pays for the privilege of receiving a Chapter 7 discharge is that his or her assets are subjected to scrutiny by the bankruptcy trustee and potentially liquidated for the benefit of his or her creditors.
In approximately ninety-five percent of the Chapter 7 cases filed around the United States each year, the trustee comes to the conclusion that there are no such assets worthy of liquidation, because most debtor's assets fall into four basic categories that make those assets relatively unattractive:
a. Liened assets. If the debtor owns a home worth say $200,000, but the property is mortgaged in the amount of $190,000, then there is virtually no equity for the bankruptcy trustee. The trustee is only interested in liened assets if there is substantial equity available for creditors.
b. Leased assets. If the debtor is leasing his or her vehicle, or is operating a business and leasing his or her equipment, there is rarely any equity worthy of liquidation.
c. Exempt assets. California law allows California debtors to protect certain assets from judgment creditors and bankruptcy trustees. The California Legislature has determined that if a debtor needs to start over again economically through a bankruptcy proceeding, it would rather see the debtor start over with something rather than nothing, so it allows certain assets to be protected as exempt from trustee administration.
d. Immaterial assets. Not all assets of the debtor may be liened, leased, or exempt, but often those assets which remain are not worthy of liquidation by a bankruptcy trustee because they are simply not worth enough money to warrant the time, expense, and burden to the bankruptcy trustee of liquidating the asset. For example, if the debtor owns a free and clear vehicle worth $7,000, and can only exempt the first $4,800, the likelihood of the bankruptcy trustee liquidating the vehicle just to administer the remaining $2,200 of equity is slim.
If the bankruptcy trustee concludes that all of the debtor's assets are liened, leased, exempt, or immaterial in value, he or she will file a one page document with the Clerk of the Bankruptcy Court called a "report of no assets," effectively advising the Clerk of the Bankruptcy Court that he or she reviewed the debtor's bankruptcy petition, schedules, and statement of financial affairs, examined the debtor at the meeting of creditors pursuant to 11 U.S.C. Section 341(a), and concluded that no assets are worthy of liquidation or administration.
For the three or four minutes worth of work on the part of the trustee, he or she is paid $60 from the $335 filing fee paid to the Clerk of the Bankruptcy Court at the commencement of the case.
In some instances, the bankruptcy trustee must spend significantly more than three or four minutes in order to adequately determine whether administration of assets is necessary. For example, if it appears to the trustee that the debtor's home may have greater value that represented in the bankruptcy schedules, the trustee may send an agent to the property to evaluate the property. If the debtor is operating a business, whether it be a sole proprietorship, corporation, limited liability company, or partnership, the trustee may want to review the company's books and records, bank statements, canceled checks, and/or tax returns. If the debtor is in the process of suing someone, the trustee might want to review the litigation pleadings in order to assure himself or herself that the suit has or does not have value to creditors. If the debtor has too much money in the wrong type of pension plan, the trustee may want to review the pension instruments. If the trustee spends a dozen hours examining documents and otherwise exercising his or her due diligence, and ultimately comes to the conclusion that in fact there are no assets in the case worthy of liquidation, he or she nonetheless receives as his or her compensation in the case a flat fee of $60.
In approximately five percent of the Chapter 7 cases filed in the United States each year, the trustee does in fact liquidate one or more of the debtor's assets. The trustee's job, in such cases, is to take possession of the asset, market it for sale, locate a buyer, negotiate terms, seek bankruptcy court authority to sell the asset in the form of a Court order, close the transaction and bring in dollars. In such cases, the trustee earns compensation of approximately five percent of the proceeds generated by his or her liquidation efforts which are ultimately paid to creditors. In addition to the trustee's approximately five percent fee, the trustee often employs attorneys, accountants, real estate agents, consultants, appraisers, auctioneers, and other professionals to help him or her carry out his or her duties, and such professionals are paid in full before any funds are made available to creditors of the bankruptcy estate. As one might expect, the Chapter 7 trustee has an economic incentive to generate as much money as possible from liquidation of the bankruptcy estate's assets. But keep in mind, in the vast majority of Chapter 7 bankruptcy cases, it is obvious to the bankruptcy trustee that the estate is devoid of administrable assets; it is only in approximately five percent of the cases that assets are taken from the debtor by the trustee and liquidated.
2. The liability portion of a Chapter 7 bankruptcy proceeding.
The general rule is that a debtor who files a Chapter 7 petition will be discharged of his or her obligations. That is of course the reason why one files Chapter 7--to receive the piece of paper from the bankruptcy court that states that the debtor is no longer legally obligated to repay his or her creditors. But there are exceptions, and those exceptions can be separated into two categories:
a. Those obligations which are automatically not dischargeable in a bankruptcy proceeding. Some obligations are not dischargeable regardless of whether the affected creditor takes an active interest in the case; Congress has provided that such obligations are automatically nondischargeable. The examples of obligations which are automatically nondischargeable are probably not altogether surprising: the trust fund portion of an employer's payroll taxes, recent income taxes, student loans (with some exceptions), past and future alimony and child support, liability created in a driving under the influence, unpaid fines and penalties such as traffic tickets, and criminal restitution awards.
b. Those obligations which are potentially not dischargeable in a bankruptcy proceeding if the affected creditor takes timely action to seek a determination from the Court that such an obligation ought not be dischargeable by the debtor, and the creditor ultimately prevails in such action. Examples of obligations which are potentially nondischargeable all share one thing in common: improper conduct on the part of the debtor. Perhaps the most common example of improper conduct in a bankruptcy context is credit card abuse. If a creditor can convince the bankruptcy judge that the debtor incurred or increased a debt, including a credit card, in the weeks and months prior to the filing of the bankruptcy petition knowing that he or she was never going to in fact repay the obligation and therefore lacking the intention to repay the obligation at the time the charges were incurred, the portion of the creditor's balance that was charged in those weeks and months prior to the filing will be deemed nondischargeable. If a creditor can convince the bankruptcy judge that the debtor used a materially false financial statement in order to obtain credit or to increase his or her credit limit, the debtor's obligation to that creditor will be deemed nondischargeable. Other examples of nondischargeable conduct include actual fraud, embezzlement from an employer, breach of a fiduciary obligation, and infliction of willful and malicious injury to another or another's property.
Creditors are given a window of opportunity within which to seek a determination that the debtor's obligation to the creditor ought not be discharged as a result of wrongful conduct or that as a result of a pervasive fraud upon the bankruptcy court, such as failure to disclose all assets and/or truthfully respond to all questions posed, the debtor ought not receive a discharge of any of his or her obligations. Accordingly, the opportunity of creditors to seek such a determination is another "price" the debtor pays for the privilege of receiving a discharge.
3. The income and expense portion of a Chapter 7 bankruptcy proceeding.
One of the primary changes made by Congress and the President when they enacted the Bankruptcy Abuse Prevention And Consumer Protection Act of 2005 is the implementation of a "means test". The means test focuses on the combined gross income of all members of the marital community, regardless of whether only one or both members of the marital community file bankruptcy. Income is determined based on an average over the past six months, regardless of whether the average income over the past six months reflects future earning ability. Subtracted from income are various household expenses, some based on objective standards created by the Internal Revenue Service, and some based on the debtor's actual spending history. If the net surplus is greater than the state's median level of income for a family of the debtor's size, the presumption exists that the debtor is not eligible for Chapter 7. If the debtor's net surplus is below the state's median level of income for a family of the debtor's size, but there is still sufficient income to repay a portion of the debtor's debt if forced to do so in a Chapter 13 proceeding, the debtor may nonetheless be ineligible for Chapter 7 relief. Approximately five percent of the debtors that could have successfully filed Chapter 7 prior to the 2005 law changes have been forced to either file Chapter 13 instead, or not file bankruptcy at all.
The scrutinization of the debtor's income and expenses in order to determine whether giving the debtor a Chapter 7 discharge constitutes a "substantial abuse" of the bankruptcy laws is another price one pays for the privilege of receiving a Chapter 7 discharge.
f. Chapter 13 is often referred to as the "individual debt adjustment" chapter. It is the chapter selected in approximately one-third of all the bankruptcies filed around the country each year. As in a Chapter 7, the debtor is seeking a discharge, which is the document mailed to the debtor and all creditors by the Clerk of the Bankruptcy Court toward the end of the case advising that the debtor is no longer legally responsible for repaying discharged debts. In a Chapter 13 proceeding, the debtor is essentially saying to his or her creditors that his or her household generates a certain sum, such as $5,000 per month, that it spends a certain sum, say $4,600 per month, on its normal going forward obligations such as rent or mortgage, car payments, utilities, food and groceries, insurance, medical, transportation, etc., and, accordingly, has net funds of say $400 left over at the end of each month to offer to repay to the pre-bankruptcy creditors, all of whom are put on the proverbial back burner when the bankruptcy petition is first filed. The Chapter 13 plan states that for a fixed period of time--a minimum of thirty-six months up to a maximum of sixty months--the debtor will forward the net cash surplus, $400 in the example used above, to the Chapter 13 trustee assigned to the case, and the trustee will distribute the funds on a monthly basis to creditors pursuant to the terms of the proposed "plan," which is an approximately twenty page "fill in the blanks" style document which divides creditors into certain groups or classes. For example, if the debtor is behind on his or her mortgage payments, the mortgage company will be in a certain class. Other secured creditors, such as car lenders or lessors, may be in their own class. If the debtor owes recent taxes to a governmental tax agency, the tax agency will be in a certain class. All general unsecured non priority creditors will be together in another class. If after the specified plan period, whether it be thirty-six months, sixty months, or some period of time in between, the debtor has made all of his or her plan payments, he or she will receive his or her discharge at the conclusion of the case.
Note that once in Chapter 13, the debtor must remain current on his or her going forward obligations, such as mortgage payments, vehicle payments, and current taxes. Failure to remain current on post-petition obligations constitutes grounds to either permit secured lenders to foreclose or repossess their collateral, or to dismiss the case from bankruptcy altogether.
1. A debtor must satisfy all five of the following criteria in order to be eligible for Chapter 13 relief:
a. The debtor must be an individual, or the debtors must be husband and wife. Corporations, limited liability companies, partnerships, and business trusts are ineligible for Chapter 13 relief.
b. The debtor must be generating income, whether it be employment income, proceeds generated from operation of a business, rental income, government assistance, or assistance from friends or family.
c. The debtor must be generating more income each month than he or she is spending on going forward expenses (i.e., rent or mortgage, car payments, utilities, food and groceries, insurance, medical, transportation, etc.), putting all of the pre-bankruptcy creditors on the back burner. In other words, the debtor must offer something to his or her creditors on a monthly basis. A plan cannot indicate that the debtor is generating $2,000 per month income, but incurring $2,300 per month in expenses. The debtor must have positive cashflow so that he or she can offer something to creditors.
d. The debtor's secured obligations, such as home mortgages, mortgages on other real estate, obligations secured by personal property such as business debt, and automobile liens, etc., must total less than $1,184,200.
e. The debtor's liquidated unsecured obligations must total less than $394,725.
What if the debtor is being sued by someone based upon a tort theory, such as negligence or fraud, and the plaintiff seeks $1 million? Does the plaintiff's lawsuit make the debtor ineligible for Chapter 13 relief? No. Tort-based claims are generally not capable of readily being determined as to liability and as to amount, and therefore are deemed "unliquidated." Only liquidated obligations, such as those sounding in contract, are included in the calculation of eligibility. Creditors holding unliquidated claims are entitled to claims against the bankruptcy estate just like creditors with liquidated claims, but for purposes of determining whether the debtor is eligible for Chapter 13 relief, only liquidated claims are considered.
2. What tests determine whether the debtor's plan will be approved by the bankruptcy court, and, if approved, how much the debtor will have to pay his or her creditors in that plan? The debtor's plan must satisfy all five of the following tests in order to be confirmed by the Court:
a. The debtor's plan must be proposed in good faith. In most cases, good faith is not in question, but it might be if the debtor's primary creditor asserts that as a result of improper conduct, the debt ought to be deemmed nondischargeable.
b. The debtor's plan must satisfy the "best interests of creditors/liquidation" test, i.e., the plan must propose to pay creditors at least as much as they would have received had the debtor in fact filed a Chapter 7 proceeding and administrable assets were liquidated by a bankruptcy trustee to pay the claims of creditors. For example, say the debtor owns a business as a sole proprietorship and the business has accounts receivable, inventory, and equipment, above and beyond all liens, leases, and available exemptions, worth $30,000. The debtor's Chapter 13 plan must propose to pay creditors at least $30,000 over its thirty-six to sixty month duration. A plan that fails to propose creditors at least much as they would have received had the debtor in fact filed a Chapter 7 proceeding will not be confirmed by the Court. Keep in mind, however, that how much creditors would have received in a Chapter 7 proceeding may be the subject of some dispute.
c. The debtor's plan must be feasible. The debtor is required to demonstrate that he or she is actually generating the income he or she claims in his or her bankruptcy schedules to be generating. The debtor is required to provide income tax returns, paystubs, bank statements, proof of rental income, proof of government assistance, etc.
d. The debtor's plan must devote all available disposable income to creditors. The Chapter 13 trustee will scrutinize closely the debtor's budget, in which the debtor has represented how much he or she is spending each month for rent or mortgage, utilities, food and groceries, insurance, medical, transportation, etc. If the debtor's budget includes expenses which appear to be unreasonably high, such as food and groceries of $2,000 per month for a family of three, or appear to be inappropriate, such as leasing a new Mercedes Benz vehicle for $1,200 per month rather than a Toyota Tercel for $250 per month, the trustee will likely object and urge the bankruptcy judge to either dismiss the case, or confirm the plan only if the offending expense is reduced or removed from the budget.
e. The debtor's plan must provide specific treatment for specific creditors. If the debtor is behind on his or her mortgage and wishes to keep the property, the debtor's plan must fully amortize the mortgage arrearages. For example, if a debtor is $20,000 in arrears to his or her mortgage company, and his or her plan provides that only $12,000 will be paid to the mortgage company in partial cure of the arrearages, the plan cannot be confirmed by the bankruptcy judge. If the debtor is behind on recent and therefore priority tax obligations, the plan must fully amortize such tax obligations. For example, if a debtor is $20,000 in arrears to the Internal Revenue Service for recent priority nondischargeable taxes, and his or her plan provides that only $12,000 will be paid to the Service in partial cure of the tax obligations, the plan cannot be confirmed by the bankruptcy judge.
Of the above five tests, the one that results in the highest monthly payment to creditors is the one that dictates how much the debtor will have to pay.
3. Why would a debtor choose to pay creditors something in a Chapter 13 proceeding rather than get discharged outright in a Chapter 7 proceeding?
a. To avoid liquidation of assets. In a Chapter 13 proceeding, the bankruptcy trustee assigned to the case does not have the authority to liquidate assets; the debtor may keep all of his or her assets. However, as noted above, the debtor must pay creditors the value such assets would have had to creditors had such assets in fact been liquidated by a hypothetical Chapter 7 trustee had the debtor filed Chapter 7. And the debtor is given up to sixty months within which to pay creditors for those assets. For example, say the debtor owns a business as a sole proprietorship and the business has accounts receivable, inventory, and equipment, above and beyond all liens, leases, and available exemptions, worth $30,000. If the debtor files Chapter 7, it is probable that the Chapter 7 trustee will liquidate such assets for the benefit of creditors. Not only would the Chapter 7 trustee be taking the debtor's primary asset, but is interrupting, perhaps irretrievably, the debtor's cashflow, i.e., the debtor's ability to put food on his or her table. In Chapter 13, the debtor is permitted and encouraged to keep the business' accounts receivable, inventory, and equipment and use such assets in order to continue to make a living. However, the debtor's Chapter 13 plan must propose to pay creditors at least $30,000 over its thirty-six to sixty month duration.
b. Because the debtor may have surplus income, that would make the debtor susceptible to a motion by the United States Trustee to dismiss the case based on "substantial abuse." One of the primary changes made by Congress and the President when they enacted the Bankruptcy Abuse Prevention And Consumer Protection Act of 2005 is the implementation of a "means test." The means test focuses on the combined gross income of all members of the marital community, regardless of whether only one or both members of the marital community file bankruptcy. Income is determined based on an average over the past six months, regardless of whether the average income over the past six months reflects future earning ability. Subtracted from income are various household expenses, some based on objective standards created by the Internal Revenue Service, and some based on the debtor's actual spending history. If the net surplus is greater than the state's median level of income for a family of the debtor's size, the presumption exists that the debtor is not eligible for Chapter 7. If the debtor's net surplus is below the state's median level of income for a family of the debtor's size, but there is still sufficient income to repay a portion of the debtor's debt if forced to do so in a Chapter 13 proceeding, the debtor may nonetheless be ineligible for Chapter 7 relief.
c. To force upon specific types of creditors a payment plan which would otherwise not be acceptable if not forced upon them in a Chapter 13 proceeding. The primary example is mortgage arrearages. Say the debtor owns his or her home. He or she is six months behind, or $15,000, on his or her mortgage payments. Foreclosure is coming up in just a few days. The mortgage company wants all $15,000 else it will proceed to sell the property at foreclosure. The debtor does not have $15,000 saved. Chapter 7 will typically only buy the debtor an additional month or two but will likely nonetheless result in foreclosure and loss of the property. Chapter 13, however, will force the mortgage company into accepting a thirty-six to sixty month cure of the $15,000 of arrearages while the debtor resumes payment of his or her normal monthly mortgage obligation. Another example is taxes. Say the debtor is $20,000 in arrears to the Internal Revenue Service for recent priority nondischargeable taxes. Chapter 7 will prevent the Internal Revenue Service from seizing assets, liening assets, levying against the debtor's bank account, or garnishing wages pursuant to an earnings withholding order, but only temporarily--typically only about four months. Chapter 13, however, will put the debtor on a payment plan to repay the $20,000 to the Internal Revenue Service over the thirty-six to sixty month duration of the plan, and, as long as the debtor is making his payments to the trustee of his Court-approved plan payments, the Internal Revenue Service is prohibited from seizing assets, liening assets, levying against the debtor's bank account, garnishing wages pursuant to an earnings withholding order, or making any other attempts to collect.
d. Because the debtor may not be entitled to another Chapter 7 discharge. A debtor may only obtain a Chapter 7 discharge every eight years. If the debtor has already received a Chapter 7 discharge within the past eight years, he or she is nonetheless entitled to a Chapter 13 discharge. Chapter 13 may be a debtor's only viable option if there has been a recent Chapter 7 discharge.
e. To force student loan lenders or guarantors into a long-term payment plan, despite the fact that the student loan debt will not be discharged at the conclusion of the plan. Say for example, the debtor owes $100,000 of student loan debt. Let's also assume that the student loans are in default and the debtor has already used up all available forbearances and deferments. The student loan lenders and/or guarantors are running out of patience and are perhaps now filing suit or enforcing a judgment against the debtor. If the debtor files a Chapter 13 petition, the debtor can force the student loan lenders and/or guarantors into a payment plan of up to five years in duration at what might be a very small percentage on the dollar, during which time, as long as the debtor is making payments pursuant to the Chapter 13 plan's terms, the student loan lenders and/or guarantors can take no action against the debtor or the debtor's property. At the end of the plan's terms the debtor will receive his or her discharge, but since student loan lenders and/or guarantors are generally not discharged, the debtor will still owe the portion of the student loans that were not paid during the Chapter 13 proceeding, plus the interest which accrued during the plan's duration.
f. To split a secured creditor's lien into a secured portion to be paid in full during the plan, and an undersecured portion to be paid the same percentage that other unsecured non priority creditors will receive under the Chapter 13 plan. Say for example, the debtor owns a vehicle indisputably worth $10,000, but the debtor owes the bank which holds the vehicle's title $15,000. Let's also assume that the debtor's plan proposes to pay only 05.0% to unsecured non-priority creditors. With some exceptions, chapter 13 allows the debtor to pay the secured lender the $10,000 value of the collateral over a period not to exceed the sixty month maximum length of a plan, and to pay the lender only 05.0% on its $5,000 undersecured claim.
Note that one can only "liensplit" a mortgage lender if: 1) the lender is secured not only by the residence but by other collateral as well, or 2) the lender is wholly undersecured, i.e., there is not even $1 of equity in the home available to pay the creditor's secured claim in a hypothetical liquidation.
<Back To The Top
There are two sets of exemptions provided under California law, only one of which can be selected in each case. One set is the "homestead" set of exemptions, found in the California Code Of Civil Procedure at Section 704, and the other is the "wildcard" set of exemptions, found in the California Code Of Civil Procedure at Section 703. If you own real estate in which you reside and there is equity above and beyond costs of sale, you will likely want to protect that equity by claiming the homestead set of exemptions which, in addition to protecting other items such as $3,050 worth of vehicle equity, $7,175 of jewelry equity, home furnishings, and wearing apparel, allows you to protect $75,000 of equity if you are single, $100,000 of equity if you are married or head of household, and, with certain special limitations, $175,000 of equity if you are disabled, over the age of 65, or over the age 55 and earning less than approximately $20,000 per year. If you do not own real estate in which you reside or there is no other equity in the property you own, then you will probably want to claim the wildcard set of exemptions which, in addition to protecting other items such as $5,300 worth of vehicle equity, $1,600 of jewelry equity, $12,860 of unmatured life insurance policy cash value, home furnishings and wearing apparel of up to $600 per item allows you to protect up to $28,225 of any other asset or assets. For example, say you own a vehicle worth $10,000, free and clear of any liens. You can claim the first $5,300 of equity exempt using the automobile exemption within the wildcard set. You could claim the other $4,700 of vehicle equity exempt using a portion of the wildcard exemption, and you would still have another $23,525 ($28,225 less $4,700) of the wildcard to protect other assets, such as bank account balances, stock, etc.
Back To The Top
A trustee in a Chapter 7 will only have an economic incentive to liquidate your residence if there is sufficient value to pay costs of sale of approximately eight percent including commissions to a broker, pay the mortgage or mortgages in full, pay you whatever exemption you are claiming to protect the residence whether it be the homestead exemption or the wildcard exemption, other liens of record such as unpaid county real estate taxes and/or unavoidable judgment liens, and still net for the bankruptcy estate no less than say $3,000. Although trustees don't always do so, they can be expected to independently value properties by having a real estate broker run comparable sales and listings and conduct either a drive-by valuation or a walk-through valuation, especially during periods of rising real estate values. It is therefore imperative that you have a strong handle on the value of your home and that you not guess. You should strongly consider purchasing an appraisal from a certified real estate appraiser or at least meeting with a real estate broker or agent who can provide you an approximate range of value based upon comparable recent sales and listings. In the event the trustee determines that there is administrable equity, the trustee will usually offer the debtor an opportunity to purchase the property back from the bankruptcy estate for the amount that the estate would have realized had the trustee in fact sold the property.
There may be ways to avoid having too much equity in your residence on the date of bankruptcy.
Back To The Top
Yes. All property, real and personal, must be disclosed in the bankruptcy schedules, regardless of whether located in California or elsewhere. If the property is located outside the country, or even outside the state, the likelihood that a Chapter 7 bankruptcy trustee will conclude that the property can be liquidated in a cost-effective manner decreases. Nonetheless, it must be disclosed, and there is a risk such assests are liquidated by the trustee to pay creditors.
Back To The Top
It is important to note that debts and liens are completely different animals. Debts, with some exceptions noted above and below, are discharged in bankruptcy. Liens, however, pass through bankruptcy unaffected. For that very reason, if you are financing the purchase of your home or a vehicle, you must continue to make payments during and after bankruptcy to avoid the lender foreclosing upon its lien or repossessing its collateral pursuant to its lien. But what if a previously unsecured creditor, such as a credit card company, medical creditor or trade supplier sued you and obtained a judgment against you prior to the filing of the bankruptcy petition? Judgment creditors typically attempt to enforce their judgments in one of a few ways. Judgment creditors can attempt to levy upon your bank accounts and garnish your wages. They also usually file an abstract of judgment with the county recorder in those counties in which they suspect you may own real estate, or at least hope that you may own real estate. Abstracts of judgment immediately become liens against your home and such liens also pass through bankruptcy unaffected.
However, Bankruptcy Code Section 522(f) [11 U.S.C. Section 522(f)] permits a debtor to avoid and remove involuntary liens (i.e., judgment liens) against property if such liens impair the homestead or wildcard exemption that he or she has claimed in his or her bankruptcy case. Such liens appear to expire as soon as the judgment becomes ten years old, but, with the exception of the automatic stay provisions of 11 U.S.C. Section 362(a) (which evaporates at the conclusion of the case estimated in most cases to be approximately four months from the date of the filing of the petition), there is no prohibition against the judgment lienholder enforcing its lien during that ten year period, thereby entitling the judgment lienholder to payment in the event of a sale or refinance, or, even worse, taking the debtor's home away by state court-ordered marshal or sheriff foreclosure sale despite the discharge of the underlying debt in bankruptcy.
Removal of judgment liens that impair your homestead or wildcard exemption is handled by motion. The Law Offices Of Hagen & Hagen's fees to handle your bankruptcy proceeding do not include prosecuting such a motion to avoid involuntary judicial liens. If you own a home that you wish to keep and continue paying for during and after bankruptcy and you believe there is a possibility that you may have been sued at some point in the past resulting in a judgment against you and, in turn, a judgment lien or abstract of judgment recorded by the judgment creditor in the county in which you live, it is not a bad idea to purchase a preliminary title report in order to determine whether filing a motion to remove an involuntary lien is advisable and necessary. If you do not intend to continue paying for the home, you are certain that no one other than a taxing agency has liened your home, or the balance owing to the lienholder does not warrant paying the approximately $150 to $300 to purchase a preliminary title report and the approximately $750 to $1,000 to have the Law Offices of Hagen & Hagen prepare and file a motion to remove the lien, then purchasing a preliminary title report does not appear necessary. Otherwise, the Law Offices Hagen & Hagen suggests you do so.
Only judicial liens can be avoided if there is impairment of the exemption which you have claimed against your property. Other involuntary liens, such as statutory tax liens, homeowners association liens, mechanic's liens, and lis pendens are not avoidable pursuant to Section 522(f).
Bankruptcy Code Section 522(f) is a purely bankruptcy tool, available only during bankruptcy. If the bankruptcy case is concluded and you realize months or years later that there was a judgment lien against your home, often discovered during a potential sale or refinancing, you can seek to have the bankruptcy court reopen the proceeding so that a motion to avoid a judgment creditor's lien can be filed and prosecuted, but you must realize that it may take sixty days or more to obtain the bankruptcy court order, and there is no guarantee that the bankruptcy judge will grant the motion to reopen the case.
It is your responsibility to alert Law Offices of Hagen & Hagen to the presence of judgment liens against your property so that an appropriate motion can be prepared and filed. It is not up to the Law Offices of Hagen & Hagen to determine whether there are judgment liens against your property.
If you do not own real estate on the date of bankruptcy, the fact that a creditor may have recorded an abstract of judgment will be of no import; there is no need to file a motion to avoid the judgment creditor's lien since the lien did not attach itself onto any assets.
Back To The Top
Yes. Nonpurchase money non-possessory liens against certain exempt assets can also be avoided under Bankruptcy Code Section 522(f). For example, say you already own a television, a VCR, a stereo system, and/or a computer. You need a loan. So you go to an entity like Beneficial California or American General. You borrow a certain amount, say $5,000, and as collateral, you pledge your television, your VCR, your stereo system, and/or your computer. The lender, say Beneficial California, accordingly has a lien against the collateral pledged. Since the loan was not obtained in order to purchase the collateralized goods and you, not the lender, are in possession of the collateralized goods, Beneficial California's lien is nonpurchase money non-possessory. Since household goods and furnishings are exempt in bankruptcy, under the Bankruptcy Code, Beneficial California's lien can be avoided.
As noted above, Bankruptcy Code Section 522(f) is a purely bankruptcy tool, available only during bankruptcy. If the bankruptcy case is concluded and you realize months or years later that there was a nonpurchase money non-possessory lien against your household goods and furnishings or other exempt personal property, you can seek to have the bankruptcy court reopen the proceeding so that a motion to avoid the creditor's lien can be filed and prosecuted, but you must realize that it may take sixty days or more to obtain the bankruptcy court order, and there is no guarantee that the bankruptcy judge will grant the motion to reopen the case.
It is your responsibility to alert The Law Offices Of Hagen & Hagen to the presence of nonpurchase money non-possessory liens against your property so that an appropriate motion can be prepared and filed. It is not up to The Law Offices of Hagen & Hagen to determine whether there are nonpurchase money non-possessory liens against your property.
Back To The Top
If the debtor is a corporation, limited liability company, or partnership, the debtor should cease business operations immediately upon the filing of a Chapter 7 bankruptcy petition, if the debtor has not already done so.
If the debtor is an individual or the debtors are husband and wife, and are operating a sole proprietorship, the debtor is permitted to continue operating the business unless and until the Chapter 7 trustee instructs otherwise. In most cases, the debtor's business assets are encumbered by liens in favor of creditors, are leased, are exempt from execution pursuant to California's exemption statutes, or are immaterial in value, or some combination of the four, and are therefore not considered worthy of liquidation by the bankruptcy trustee.
If the debtor is an individual or the debtors are husband and wife, and are operating a corporation or limited liability company, or are principals in a partnership or limited liability partnership, the businesses are not per se assets of the bankruptcy estate, but the shares of stock, membership interest, or partnership interest is an asset of the bankruptcy estate. The debtor is permitted to continue operating the business unless and until the Chapter 7 trustee instructs otherwise. In most cases, if the debtor is experiencing financial difficulties, so is the debtor's business. Similarly, in most cases, the business assets are encumbered by liens in favor of creditors, are leased, are immaterial in value, or some combination of the three.
A Chapter 7 trustee is more likely to permit the debtor to continue operating his or her business if the debtor has proper insurance in place. Chapter 7 trustees are often concerned that they will be liable to third parties injured on the debtor's business premises. Accordingly, the debtor is urged to maintain all appropriate business insurance, including but not limited to liability insurance, if the debtor seeks to continue operating his or her business.
As noted above, in Chapter 13, the debtor is permitted and encouraged to keep his or her business operating so that it can generate profits that can repay creditors, at least in part, over the plan's thirty-six to sixty month duration.
Back To The Top
Yes. You must list all of your obligations in the bankruptcy schedules, regardless of whether the obligation is one that you wish to continue paying, and regardless of whether the obligation is dischargeable. However, provided you remain current at all times on your payments to your lender or lessor, are insuring the collateral, and you reaffirm the obligation in your bankruptcy case, the lender or lessor is not permitted to repossess the collateral.
By way of reminder, once the bankruptcy petition is filed, secured creditors such as mortgage lenders and vehicle lenders and lessors will likely stop sending you monthly statements. Sending monthly statements can be interpreted as a violation of the automatic stay provisions of Section 362, and therefore creditors, even creditors holding secured liens that the debtor indicates he or she wishes to continue paying, are usually reluctant to send monthly statements. Accordingly, if you wish to keep your home, vehicle, or other secured collateral, you must make your payments regardless of whether you are receiving monthly statements or invoices.
Back To The Top
As noted above, once a Chapter 7 bankruptcy petition has been filed, the Chapter 7 trustee becomes the owner of all of the debtor's assets. As also noted above, the trustee is not likely to liquidate the debtor's assets, but the trustee becomes the owner of such assets nonetheless. However, in most cases it is clear that the bankruptcy trustee will have no economic incentive to liquidate or otherwise administer the debtor's bank accounts, since in most cases the balances in the debtor's accounts have been claimed exempt pursuant to California exemption statutes, or the amounts in the accounts are not material enough to warrant trustee administration. Accordingly, in most cases the debtor is entitled to continue using his or her bank accounts without interruption.
In a Chapter 13 proceeding, the debtor remains in possession and control of his or her assets, so the debtor is entitled to continue to use his or her bank accounts without interruption.
One possible exception in both Chapter 7 and Chapter 13 is a credit union account. The threat of closure comes not from the bankruptcy trustee but from the credit union. If the debtor owes his or her credit union money pursuant to a secured or unsecured obligation, it is probable that the credit union will freeze the bank accounts the debtor has at the credit union and attempt to offset the funds in the accounts against the balances owed by the debtor to the credit union. If the debtor owes his or her credit union pursuant to a secured or unsecured obligation, the debtor is advised to either close all bank accounts at the credit union or at least leave the balances low on the date of bankruptcy and discontinue using the accounts after the date of bankruptcy.
In addition, the Law Offices Of Hagen & Hagen has experienced freezing of debtors' personal and business bank accounts by Wells Fargo Bank. Wells Fargo Bank appears to interpret current bankruptcy laws as putting it in a position of custodian of the debtor's bank accounts for the benefit of the bankruptcy trustee. In such instances, Wells Fargo Bank will refuse to give the debtor access to his or her bank accounts until the bankruptcy trustee provides Wells Fargo Bank with written authorization to release the funds. Some trustees are reluctant to so instruct Wells Fargo Bank until after the trustee has had an opportunity to examine the debtor at the meeting of creditors, which is typically four to five weeks into the case. It appears Wells Fargo Bank only freezes accounts in chapter 7 cases, and only if the aggregate balances in the debtors accounts total over $2,000. However, in an excess of caution, the Law Offices Of Hagen & Hagen recommends you either close all Wells Fargo Bank deposit accounts prior to bankruptcy, or leave only a minor amount in the accounts on the date of bankruptcy and use a non-Wells Fargo Bank institution to handle your banking needs during the pendency of your bankruptcy case.
Back To The Top
Once a Chapter 7 bankruptcy petition has been filed, the Chapter 7 trustee becomes the owner of all of the debtor's assets. As noted above, the trustee is not likely to liquidate the debtor's assets, but the trustee becomes the owner of such assets nonetheless. Consequently, regardless of whether the asset is encumbered in favor of a secured lender, is leased, or is exempt pursuant to California exemption statutes, the debtor should not enter into any agreement to sell or refinance assets during the pendency of the case. If the debtor does not own the asset, the debtor lacks the authority to sell it. Entering into an agreement to sell an asset which the debtor does not own can subject the debtor to a claim by the proposed buyer for breach of contract for failure to deliver clear title if and when the proposed sale falls through. And, since the debtor would necessarily have entered into the proposed sale transaction after the filing of the bankruptcy petition, the damages incurred by the buyer arising from the debtor's breach of contract would not be dischargeable in the Chapter 7 proceeding.
The Bankruptcy Code provides a mechanism by which the debtor can move the bankruptcy court to have assets "abandoned" by the Chapter 7 trustee to the debtor from the bankruptcy estate. The motion, which must be served upon all creditors of the estate and set for hearing, will routinely be approved by the court if the debtor can demonstrate that the asset to be abandoned has no net value for the estate, i.e., is fully encumbered, leased, or is exempt pursuant to California exemption statutes.In a Chapter 13 proceeding, the debtor remains in possession and control of his or her assets, but the debtor is nonetheless prohibited from selling or encumbering assets without bankruptcy court authority. Obtaining such bankruptcy court authority may have a negative impact upon the debtor's plan to repay creditors. Accordingly, although there may be exceptions, the debtor should sell or refinance assets, if at all possible, prior to filing Chapter 13 and should not plan to do so during the pendency of the Chapter 13 proceeding.
The above issue is especially critical if the asset has a chain of title, such as real estate or a vehicle. It is not particularly important for such items as household goods and furnishings. In other words, if the debtor wishes to have a yard sale to sell clothing and some used furniture, it is not likely going to be an issue in the bankruptcy case.
Back To The Top
Generally no. The transfer of assets during the months and even years prior to the filing of a bankruptcy petition could constitute an avoidable transfer, i.e., the bankruptcy trustee has the power and authority and, depending on the facts of the situation, the economic incentive to unwind certain transfers that have occurred prior to bankruptcy.
Say for example you have a Mercedes Benz vehicle worth $50,000 above and beyond liens and exemptions. You figure that since you will likely lose the vehicle to your bankruptcy trustee if you file Chapter 7, you would rather give it to your brother-in-law, to whom you don't owe money. Giving your brother-in-law the vehicle and then filing bankruptcy anytime within four years of the transfer is highly risky. Bankruptcy trustees are granted the authority to recover "fraudulent transfers," which are defined in two ways: any transfer made with the intention of hindering, delaying and defrauding creditors, and any transfer made while the debtor was insolvent or which rendered the debtor insolvent which resulted in materially smaller consideration being received by the debtor than that transferred. Demonstrating intent to hinder, delay and defraud is often difficult but no such intent is required to be demonstrated by the trustee to avoid transfers in which the debtor simply ended up with the shorter end of the stick. In the hypothetical above, the trustee would have the right and the duty to sue the brother-in-law to recover the Mercedes Benz vehicle since the debtor received nothing for the transfer yet gave up an asset worth $50,000.
Where good pre-bankruptcy planning ends and improper avoidable transfers begin is often a gray boundary. It is best that you not make such transfers until, at the very earliest, you have first consulted with Law Offices of Hagen & Hagen.
Back To The Top
The answer depends primarily on how much money is involved. If the amount is material enough, a bankruptcy trustee may seek to recover funds paid to friends during the ninety day period prior to the date of bankruptcy and to relatives during the one year period prior to the date of bankruptcy. Bankruptcy law permits a bankruptcy trustee to recover such funds on the theory that it isn't fair that a debtor "prefer" certain creditors, especially friends and insiders, including relatives, by paying them more prior to bankruptcy than the debtor pays to other creditors. It is best that you not make such payments until, if at all, at the very earliest, you have first consulted with the Law Offices of Hagen & Hagen.
Back To The Top
In a Chapter 7, yes, you are free to use your post bankruptcy earnings in any manner you choose. In a Chapter 13, no, you are not free to use your post bankruptcy earnings in any manner you choose. In a Chapter 7, post bankruptcy earnings are not assets of the bankruptcy estate that your bankruptcy trustee can administer for creditors. Note that obligations to relatives should and likely will be discharged along with your other obligations, so there would no longer be any obligation to repay relatives after bankruptcy. However, if you choose to repay relatives, or any other creditors for that matter, you are free to do so in a Chapter 7 proceeding, provided you are using non bankruptcy estate assets to do so.
Back To The Top
In the overwhelming majority of cases, you will only have to appear once, but not in court, rather at a meeting of creditors pursuant to Bankruptcy Code Section 341(a), where your trustee will ask you a few questions about your case. If you file bankruptcy together with your spouse, you will both have to attend the meeting. Creditors are also invited to attend and ask questions of you while you are under oath, but rarely do any do so.
As a crackdown against identity theft, you will be required to present photographic identification (valid driver's license is preferable, but a passport or California identification card will also suffice) and proof of your social security number (social security cards are preferable but other official forms, such as a recent year's W-2 or 1099, or a health benefit identification card reflecting your full social security number, can suffice) at the meeting. If you do not have both forms of identification with you, the trustee will continue the meeting to a new date and you will have to appear a second time to present your identification.
The meeting usually only lasts about two minutes, but be prepared to wait an hour or two for your case to be called. Keep in mind that the trustee's duty is to determine whether you own any assets that are not liened, leased and/or exempt and therefore possibly worthy of liquidation in order to pay the claims of creditors, at least in part. Accordingly, the meeting of creditors gives your bankruptcy trustee an opportunity to ask questions of you about your assets while you are under oath. You will receive an e-letter from the Law Offices of Hagen & Hagen instructing you where to go for the meeting, what to bring, what to wear, etc. In most cases, the meeting of creditors is the only formal appearance you are required to make in your case. You will not likely ever see your judge.
Back To The Top
The filing of a bankruptcy petition operates as a restraining order against most pending or contemplated proceedings or actions by creditors or interested parties, including taxing authorities. Exceptions include actions in a marital dissolution proceeding to establish, modify or enforce child or spousal support and/or custody and visitation, and criminal proceedings against the debtor by the state or federal government. If the debtor receives a summons or notice of action taken by a party in interest, notify the Law Offices of Hagen & Hagen so that a notice of the pendency of the bankruptcy proceeding can be forwarded to the opposing party. Note that some non-bankruptcy courts, despite the clarity of the United States Bankruptcy Code, are reluctant to recognize the existence of the automatic stay. It is therefore imperative that debtor contact the Law Offices of Hagen & Hagen immediately upon receipt of a summons or a notice of a non-bankruptcy action.
Additionally, if the debtor receives any threats or harassment from prepetition creditors, he or she should calmly inform the creditor of the existence of the bankruptcy proceeding, and be prepared to provide the creditor with the bankruptcy case number, the date the case was filed, the chapter under which it was filed, and the district in which it was filed. If the creditor persists in its threats or harassment, or merely has questions about the bankruptcy which the debtor is unable to completely answer, the debtor should provide the creditor with the Law Offices of Hagen & Hagen's address and telephone number and instruct it to call the Law Offices of Hagen & Hagen for further information. The debtor is advised not to make any predictions, forecasts or guarantees to creditors or interested parties as to when creditors may expect a distribution in partial or full settlement of their claims, or how much money creditors may expect in partial or full settlement of their claims.
Note that the filing of a bankruptcy petition does not generally create a stay in actions in which the debtor is the plaintiff or moving party.
Back To The Top
For obligations that are secured by assets which the debtor intends to keep, such as the debtor's home or vehicles, the debtor must continue to make payments pursuant to the underlying contractual obligation.
For unsecured obligations, such as credit cards, medical debts, trade suppliers and vendors, professional fees, and the like, since such obligations are going to be discharged in the bankruptcy proceeding, there is no reason to continue paying such obligations once the case is filed. In fact, once the debtor decides that he or she is going to file bankruptcy, there is no longer any incentive on the part of the debtor to continue making such payments.
There is an exception to the general guideline above. Keep in mind that creditors are given a window of opportunity within which to seek a determination that the debtor's obligation to the creditor ought not be discharged as a result of wrongful conduct. As noted above, perhaps the most common example of improper conduct in a bankruptcy context is credit card abuse. If a creditor can convince the bankruptcy judge that the debtor used his or her credit card in the weeks and months prior to the filing of the bankruptcy petition knowing that he or she was never going to in fact repay the obligation and therefore lacked the intention to repay the obligation at the time the charges were being incurred, the portion of the creditor's balance that was charged in those weeks and months prior to the filing will be deemed nondischargeable. Accordingly, the debtor is advised to examine his or her credit card accounts and separate them into "high risk" and "low risk." A "high risk" account would be one on which the debtor has charged or taken cash advances of more than say $2,500 in the six to ten month period preceding the projected date of bankruptcy, and where there have been few if any payments made by the debtor in repayment of those charges or cash advances. If the debtor has such "high risk" accounts, the debtor may want to minimize the chances that the creditor will file a complaint with the bankruptcy court to determine the dischargeability of the debt by making additional payments on the account prior to the filing of the bankruptcy petition in order to give the credit card company the impression that he or she intended to pay for the charges or cash advances taken most recently.
Note that bankruptcy only protects debtors from creditors whose obligations arose prior to the date of the filing of the bankruptcy petition. Accordingly, to the extent that the debtor incurs new obligations after the date of the filing of the petition, the debtor is responsible for payment of such obligations. For example, say the debtor files bankruptcy on May 1. On May 2, the debtor gets in an automobile accident. Can the debtor amend the bankruptcy papers to include the driver of the other vehicle and discharge any liability arising from the accident? No. The debt arose after the date of the filing of the petition, and although the discharge won't be processed and received by the debtor for several months in a Chapter 7 proceeding or several years in a Chapter 13 proceeding, the debtor is nonetheless responsible for payment of the obligation.
Back To The Top
Neither. You can be current on your obligations and file bankruptcy. You can be delinquent on your obligations and file bankruptcy.
Back To The Top
Creditors are required by the operation of the automatic stay provisions of Bankruptcy Code Section 362(a) to immediately cease attempting to collect on all obligations once a bankruptcy petition is filed. The creditor may not discover the bankruptcy filing right away, but once the creditor is informed of the bankruptcy filing and provided with the basic information about the case, such as the chapter filed, the date filed, and the case number, it must take no further action, unless it obtains bankruptcy court authority to proceed with its collection efforts, and the court's granting of such authority would be very rare. Creditors holding nondischargeable obligations, such as taxing entities, must also cease their collection efforts against assets of the bankruptcy estate, at least until the date of discharge, which in most Chapter 7 cases is approximately four months after the bankruptcy petition is filed.
Back To The Top
Be ready to provide your identity, the date the case was filed, the case number, the chapter, the identity of your attorney, and the district in which you filed. If they want any additional information, they should be directed to the Law Offices of Hagen & Hagen.
Back To The Top
Generally no. If the debtor is current on his or her payment of certain monthly obligations such as utility bills, there is no point in listing the utility company as a creditor. In fact, by listing it as a creditor, it might prompt the utility company to demand a deposit for future services.
Back To The Top
When one spouse files without the other, the resulting bankruptcy discharge discharges both the filing spouse and the marital community of their obligations. Creditors may still sue the non filing spouse and obtain a judgment. However, the creditor can only seek to enforce the judgment against the non filing spouse's separate property assets. Most married people do not own separate property assets; in most cases everything they own they acquired during marriage. Accordingly, in most cases, the creditor would have a judgment against the non filing spouse worth only the paper on which it is printed.
Back To The Top
Not necessarily. There are certain types of obligations which are automatically nondischargeable in a bankruptcy case, such as recent income taxes; fiduciary taxes; past and future alimony and child support; most student loans; liability created in a driving under the influence incident; fines and penalties; and criminal restitution awards. There are other obligations which are potentially nondischargeable as a result of the debtor's conduct, such as incurring debt, often credit card charges, without the intent to repay it; actual fraud; embezzlement; breach of a fiduciary obligation; and willful and malicious injury to others.
Back To The Top
If the case is a Chapter 13 proceeding, no. In order for a Chapter 13 obligation to be discharged it must be scheduled.
If the case is a Chapter 7 proceeding, the answer depends on whether the case is an asset case or a no asset case. According to the Ninth Circuit Court Of Appeals [Beezly v. California Land Title Co. (In re Beezly), 994 F.2d 1433 (9th Cir. 1993)], if a bankruptcy case was a no asset, no claims bar date case, which most cases are, obligations which the debtor fails to list in his or her bankruptcy schedules are still discharged, unless there is fraud involved. Beezly suggests that reopening a bankruptcy for the purpose of amending the bankruptcy schedules is not necessary since 11 U.S.C. 523(a)(3) already indicates that nonfraud-based claims are discharged whether listed or not, assuming that the case was a no asset, no claims bar date case. Fraud-based claims, pursuant to 11 U.S.C. Section 523(a)(2), (a)(4), and/or (a)(6), however, are a bit less certain. The concurring opinion seems to suggest that fraud based claims are simply not discharged, but then at the end, seems to say that the issue of dischargeability of such claims is a matter still to be litigated, not necessarily in bankruptcy court despite the bankruptcy courts having exclusive jurisdiction to hear such issues.
Back To The Top
While the judge of your case ultimately decides all legal issues presented to him or her, no one "accepts" or "denies" your bankruptcy petition per se.
There are four types of problems that can arise in a Chapter 7 proceeding:
1. The bankruptcy trustee determines that one or more of your assets are worthy of liquidation and proceeds to take control of the asset or assets and market it/them for sale. In approximately 95% of all Chapter 7 bankruptcy cases, assets are not liquidated or administered by the appointed bankruptcy trustee, but in some cases, assets are indeed liquidated. Examples of assets that might be liquidated or administered by a bankruptcy trustee include the debtor's residence where there is equity above and beyond the homestead exemption allowed under California law; a second home with substantial equity; a vehicle with substantial equity; a business in which there are assets of value, such as equipment, inventory, or accounts receivable; a trust created by a relative in which the debtor is a beneficiary; a life insurance policy with substantial cash value; publicly traded stock or other investments; or a potentially valuable lawsuit in which the debtor is suing or countersuing someone. Administration of assets by the bankruptcy trustee does not mean that you won't nonetheless discharge your debts in your bankruptcy case to the extent not paid out of the pot of funds generated by the trustee's liquidation efforts.
2. One or more creditors timely challenge your attempt to discharge their obligation pursuant to Bankruptcy Code Section 523(a) based on improper pre-bankruptcy conduct. Examples include credit card companies that argue that purchases and cash advances within the weeks and months prior to the filing of the bankruptcy petition were made without any intention on the part of the debtor to repay the obligation or with reckless disregard for his or her ability to repay the obligation; creditors that argue that financial data included by the debtor in a loan or credit application or financial statement attached to a loan or credit application was materially and intentionally false or misleading; former employers that argue that the debtor embezzled funds; creditors that argue that the debtor breached a fiduciary duty; creditors that argue that the debtor committed a willful and malicious act to a person or a person's property; and creditors that argue that the debtor committed some sort of actual fraud. Challenges by creditors to the dischargeability of debt are not terribly common, and are often settled relatively inexpensively by the debtor's agreement to repay the creditor a portion of the disputed amount.
3. A party in interest, including the United States Department Of Justice's United States Trustee, the Chapter 7 trustee, or a creditor files a motion to dismiss the case from bankruptcy pursuant to Bankruptcy Code Section 707 on the ground that granting a discharge would constitute an "abuse" of the bankruptcy process. There are essentially two types of abuse arguments: that the debtor's true income less purely reasonable and necessary expenses leaves the debtor with sufficiently substantial income that he or she can afford to repay his or her creditors at least in part; and that the debtor incurred debt well beyond any reasonable expectation of ability to repay such debt under suspicious circumstances. Motions to dismiss a case pursuant to 11 U.S.C. Section 707 are somewhat rare.
4. A party in interest, including the Chapter 7 trustee, or a creditor, files a complaint to deny the debtor a discharge of all of his or her debts pursuant to Bankruptcy Code Section 727. The grounds for denying a discharge include filing materially false or misleading bankruptcy papers, testifying falsely under oath at the meeting of creditors or in a court-ordered deposition or examination, failure to maintain adequate books and records, failure to cooperate with the Chapter 7 trustee's liquidation efforts, and unauthorized disposition of assets of the bankruptcy estate. Challenges to the debtor's discharge are somewhat rare.
The primary problem that can arise in a Chapter 13 proceeding is an objection to confirmation of the Chapter 13 plan by the Chapter 13 trustee or a creditor. If the debtor cannot overcome an objection to confirmation of his or her plan, the bankruptcy proceeding will be dismissed. The grounds for objecting to a Chapter 13 plan include:
a. The plan fails the "best interests of creditors/liquidation" test that requires the debtor to pay creditors over the life of his or her plan an amount equal to or greater than that which creditors would have received had the debtor elected to file Chapter 7 and a Chapter 7 trustee liquidates the debtor's unencumbered nonexempt assets.
b. The plan fails the "feasibility" test in that the debtor has failed to demonstrate that he or she earns sufficient income each month to fund the required plan payment to the Chapter 13 trustee.
c. The plan fails the "disposable income" test in that the debtor has overstated expenses, and could in fact afford to pay more to creditors if his or her budgeted expenses were reduced to those that are purely reasonable and necessary.
d. The plan fails to treat certain types of creditors in the manner proscribed by the Bankruptcy Code. Certain creditors are entitled to be repaid in full, such as mortgage companies whose mortgages are in arrears and taxing agencies for recent tax years.
Back To The Top
Yes. Historically, Chapter 7 bankruptcy trustees focused on assets and their administrability and ignored income and expenses. Conversely, Chapter 13 trustees historically ignored asset values and focused on income, expenses, and whether or not the debtor could afford to pay more to creditors than proposed in the Chapter 13 plan. Chapter 7 trustees and their superior, the United States Trustee, now look closely at income and expenses. If it appears that the debtor has significant surplus income with which to repay his or her creditors, or if eliminating unreasonable and unnecessary expenses from the debtor's budget would leave the debtor with significant surplus income with which to repay his or her creditors, the United States Trustee may file a motion under 11 U.S.C. Section 707(b) to dismiss the case on the ground that granting the debtor a discharge might constitute an abuse of the spirit of the Bankruptcy Code. The Law Offices Of Hagen & Hagen will make every attempt to present income and expenses so that no such motion is filed by the United States Trustee. The Law Offices of Hagen & Hagen's fees to handle your bankruptcy proceeding do not include defending against a motion by the United States Trustee to dismiss your case pursuant to Section 707(b).
Back To The Top
While a bankruptcy filing damages your credit, it is by no means going to prevent you from ever borrowing again. When a lender is deciding whether to lend to a borrower in an asset-based purchase context, the lender considers three factors: the proposed loan-to-value ratio (i.e., the amount and percentage the borrower proposes to put down toward the purchase price), the proposed income ratio (i.e., the percentage of the borrower's monthly income that the new loan obligation will consume), and the borrower's credit. The higher the borrower's down payment and the higher the borrower's income, the less the lender will depend upon the borrower's credit. Admittedly, some lenders will reject a loan application based solely on the presence of a recent bankruptcy filing. Other lenders will consider the loan but will demand a higher rate of interest to compensate it for the perceived increased risk. Other lenders will virtually disregard a prior bankruptcy filing. One way to minimize the damage a bankruptcy filing has on your credit score is to avoid further credit damage in the months and years after filing bankruptcy, such as foreclosures, repossessions, lawsuits, tax liens and evictions.
Back To The Top
A bankruptcy filing generally remains on your credit report for ten years following a Chapter 7 filing, and seven years following a Chapter 13 filing. A bankruptcy filing will of course negatively impact your credit score. Credit repair will not likely remove from your credit report public record defects such as bankruptcy filings, although credit repair can remove other derogatory credit defects, such as delinquencies and charge-offs.
Back To The Top
Yes, but there are several things you ought to keep in mind. Let's say you have two Discover cards, one with a $5,000 balance and the other with a $200 balance. You have no way of repaying the $5,000 account so you plan to list it in your bankruptcy case. You figure that you will pay Discover the balance of the $200 account prior to bankruptcy so that you won't have to list that account in the bankruptcy schedules and accordingly get to keep it. Will this strategy work? No. While it is true that you don't have to list the smaller account as a creditor if the balance was paid in full prior to bankruptcy, you can assume that Discover will be sophisticated enough to realize that you have two accounts, and when it is notified of your bankruptcy for the larger account, it is likely that it will cancel the smaller account as well. Now you're out $200 and neither card survived the bankruptcy process.
Let's say you have only one Discover card, and it has a balance of $200. You figure that you will pay Discover the balance of the $200 account prior to bankruptcy so that you won't have to list that account in the bankruptcy schedules and accordingly get to keep it. Is there any guarantee that this strategy will work? While it might work, no, there is no guarantee. While it is true that you don't have to list the account as a creditor if the balance was paid in full prior to bankruptcy, and while it is true that Discover will not therefore be notified about the bankruptcy directly by the bankruptcy court, there is no guarantee that Discover won't be informed about the bankruptcy by the credit reporting entities such as Experian, TransUnion and/or Equifax, or simply review your credit on an annual basis and learn of the bankruptcy accordingly. Upon learning of the bankruptcy, Discover might leave the account open, or could close it. It is entirely within Discover's discretion.
Back To The Top
As stated above, it is important to note that debts and liens are completely different animals. Debts, with some exceptions noted above and below, are discharged in bankruptcy. Liens, however, pass through bankruptcy unaffected. For that very reason, if you are financing the purchase of your home or a vehicle you wish to keep, you must continue to make payments during and after bankruptcy to avoid the lender foreclosing upon its lien or repossessing its collateral pursuant to its lien. Secured creditors, i.e., those with collateral such as a mortgage lender, vehicle lienholder, or even a purchase money lienholder such as Good Guys/Household Retail Services, Inc., will often approach you about your intentions with respect to its collateral. You have the following options:
1. Surrender possession of the collateral to the lienholder and discharge the remaining indebtedness to the lienholder, if any, should the sale of the collateral by the lienholder fail to satisfy the account balance.
2. Redeem the collateral by paying the lienholder the alleged fair market value of the collateral in a lump sum payment, and discharge the difference between the fair market value and the remaining balance on the obligation. This option is rarely the option of choice since the parties may not agree upon the fair market value of the asset and having the bankruptcy court resolve the matter will not likely be cost effective. In addition, most debtors do not have the funds available to make the required lump sum payment.
3. Reaffirm the obligation to the lienholder on the original loan terms and keep the collateral. If the lienholder offers you a reaffirmation, you may keep the collateral by agreeing to make payments and waive your right to discharge any remaining deficiency should you default at any time in the future, lose the collateral to the lienholder's repossession, and the sale of the collateral by the lienholder fails to satisfy the remaining obligation. There is no guarantee or assurance that the lienholder will want to extend credit to you again in the future, even if you never miss a payment.
4. Reaffirm the obligation to the lienholder by proposing better terms than contained in the original contract, such as for less than the balance owed, at a lower rate of interest, and/or with an extended maturity date. The lienholder is under no obligation to acquiesce to the modified loan terms, and rarely will and lenders consider such modified loan terms.
5. Until the enactment of the Bankruptcy Abuse Prevention Consumer Protection Act on 10/17/2005 debtors could elect to "retain collateral and pay without reaffirming" the underlying debt. It appears that debtors no longer have a "retain collateral and pay without reaffirming" option.
Note that once the bankruptcy petition is filed, secured creditors such as mortgage lenders and vehicle lenders and lessors will likely stop sending you monthly statements. Sending monthly statements can be interpreted as a violation of the automatic stay provisions of Bankruptcy Code Section 362, and therefore creditors are usually reluctant to send monthly statements. Accordingly, if you wish to keep your home, vehicle, or other secured collateral, you must make your payments regardless of whether you are receiving monthly statements or invoices.
One positive attribute to a debtor's reaffirmation of a pre-bankruptcy obligation concerns the debtor's credit. The filing of a bankruptcy petition will of course make obtaining credit difficult. Reaffirming an obligation can assist the debtor in reestablishing his or her credit. However, there are other less drastic alternatives that you can choose to accomplish the same objective. If you are fortunate enough to have a credit card with no balance on the date of bankruptcy, you need not list the creditor in your bankruptcy petition and schedules, and accordingly the card may be available for use after bankruptcy. Or, the debtor is free to apply for a "secured credit card," whereby the debtor gives the credit card company a sum of money, such as $500 or $1,000, in exchange for which the debtor is given a credit line for the same amount. If the debtor fails to make payments to the credit card company, the company simply offsets the funds it is holding against the loan balance.
In case it isn't clear, the primary effect of a reaffirmation is that you are agreeing to pay back the obligation, and should you fail to make any of the payments required under the reaffirmation agreement, the creditor has the right to repossess its collateral and then pursue you for the remaining deficiency balance. It would be as if you never filed bankruptcy with respect to this one obligation. The creditor's pursuit, should there be a default at any time in the future, can include the filing of a lawsuit, the obtaining of a judgment against you, the conducting of one or more "debtor examinations" the purpose of which is to find out what assets you own and where those assets are located, the levying of your bank accounts, the garnishment of your wages, and the placing of an involuntary lien against your home or any other real estate which you own within the county in which the lien is recorded. Note that once the bankruptcy petition is filed, secured creditors such as mortgage lenders and vehicle lenders and lessors will likely stop sending you monthly statements. Sending monthly statements can be interpreted as a violation of the automatic stay provisions of Bankruptcy Code Section 362, and therefore creditors, even creditors holding secured liens that the debtor indicates he or she wishes to continue paying, are usually reluctant to send monthly statements. Accordingly, if you wish to keep your home, vehicle, or other secured collateral, you must make your payments regardless of whether you are receiving monthly statements or invoices.
With some exceptions, the debtor should not surrender assets to secured creditors and/or lessors or allow secured creditors and/or lessors to repossess assets until the creditor has been given approval by the trustee or the bankruptcy court.
Back To The Top
Not necessarily. Upon being advised of your bankruptcy filing, the credit reporting bureaus--Experian, Trans-Union and Equifax, as well as the underlying creditors, ought to be updating your credit report to reflect that the accounts, previously reflected as late or charged-off, are slated for discharge or have been discharged. But it doesn't always work out that way. It is not uncommon for a debtor to find two or three years after bankruptcy, when he or she is attempting to obtain a home loan or vehicle loan or lease, that several creditors are still reporting their account as delinquent or charged-off but not discharged as a result of bankruptcy. The Law Offices Of Hagen & Hagen suggests that you consider having your credit reviewed and possibly repaired by a credit repair specialist after you receive your discharge. It is the Law Offices Of Hagen & Hagen's responsibility to try to have your obligations discharged in your bankruptcy case. It is not the Law Offices of Hagen & Hagen's responsibility to make sure your credit reports accurately reflect the status of your accounts.
Back To The Top
The best ways to begin the process of rehabilitating your credit after bankruptcy are: 1) to avoid suffering further credit reversals, such as foreclosures, repossessions, judgments, evictions, tax liens, etc., 2) continue paying home mortgages, auto loans and leases, equipment loans and leases, etc., and 3) obtain a secured credit card. Most of the major financial institutions offer such accounts, whereby you deposit a certain sum, such as $500, and the institution gives you a $500 credit line. If you fail to pay, the institution is at no risk, as it is already holding your money as its protection. If you are making your payments each month and the institution sees that you are a worthy credit risk, it will likely eventually return the deposit to you and make the account a true credit card, or will increase your credit limit without demanding additional deposit funds.
Back To The Top
3There are several alternatives to bankruptcy, some more attractive than others.
1. Do nothing. Without filing bankruptcy, creditors are free to take all legal actions necessary to collect their debts. Some creditors will take no action at all. Some creditors will sue and obtain judgments, to be followed by the recording of abstracts of judgment which establish liens against all real estate owned by the debtor within the county in which the abstract was recorded, earnings withholdings orders (wage garnishments) and bank account levies.
2. Debt consolidation. There are numerous debt consolidation agencies. Consolidators attempt to get creditors to reduce interest rates, reduce monthly payments, and in some cases, reduce principal. If the debtor is experiencing a temporary cashflow shortage, consolidation may be productive. But for most debtors, consolidation will only provide moderate short-term relief, and is therefore an inadequate long-term solution.
3. Debt negotiation. There are numerous debt negotiation agencies. Negotiators will ask the debtor to deposit with them a sum equal to fifty to sixty percent of their debt. The negotiator will then seek from creditors an agreement to accept less than that amount. Any savings realized will belong to the negotiator as its fee. It's a win-win-win scenario. The debtor is happy because he solved his debt problems by paying only fifty to sixty percent of his debt. The creditors are happy because they were paid in part on their claims. And the negotiator is happy because it was paid for its time for its services. But not many debtors are in a position to pay fifty to sixty percent of their debt in cash. Most debtors with such cash resources would not perceive the presence of a cashflow shortage. Negotiation makes sense only for debtors with existing unsecured debt problems, usually in the form of credit cards, who anticipate a large cash infusion, such as an inheritance, work bonus, tax refund, or family assistance.
4. Settle only with problem creditors. One possible alternative to bankruptcy is to dowse only the hottest fire, i.e., don't pay creditors until they sue, and then settle with such creditors one at a time. Hopefully, only a small percentage of the creditors will ultimately file suit.
5. Move to a foreign country. Creditors are highly unlikely to pursue you in other countries.
Back To The Top
A Chapter 7 bankruptcy proceeding takes approximately four months to complete, assuming no complications such as the bankruptcy trustee administering assets, creditors challenging the dischargeability of debts pursuant to Section 523(a), the United States Trustee moving to dismiss the case based on abuse pursuant to Section 707, or the Chapter 7 Trustee or a creditor seeking to deny the debtor's discharge pursuant to Section 727. A Chapter 13 bankruptcy proceeding can be expected to take approximately six months longer than the period of time over which payments are to be made. For example, if the plan is a thirty-six month plan, the case will likely be open for approximately forty-two months.
Back To The Top
At the initial consultation, we need to explore your financial situation, so if you are able to give general information about your financial situation without resorting to documents, then it won't be necessary for you to bring documents to the initial consultation. If you are not able to provide information about your financial situation without resorting to documents, or you ultimately decide that you wish to proceed with a bankruptcy filing, we are going to want to see the following documents:
Back To The Top
1. Last year's federal and state income tax return, the year prior's federal and state income tax return, and the federal and state tax return of the year before that, including all attached W-2s, 1099s, and supporting schedules.
2. Paystubs for the past seven months.
3. If you operate your own business, whether a sole proprietorship or corporation, a profit and loss statement for the past six months and a profit and loss statement for the current calendar year-to-date.
Back To The Top
4. Copy of most recent mortgage statements from any and all mortgage lenders.
5. Copy of most recent statements from auto lenders or lessors. If you have a coupon book and don't receive monthly statements, please go on line and print a status report of your account.
6. Copy of most recent real estate property tax bill.
7. Copy of most recent statements from timeshare companies.
8. Copy of most recent statement from mobilehome lender.
9. Copies of bank statements for all bank accounts that have been open in the past six months, whether open or closed today.
10. Copy of most recent statement from retirement plan administrators, including IRAs, 401(k)s, and pension plans.
11. Copy of binders or declaration pages reflecting current insurance coverages, including life, health, dental, automobile, property, and professional liability insurance.
12. Copy of the face page from any lawsuit complaints initiated by you against others that remains pending today or has been pending at any time within the past twelve months.
Back To The Top
13. Copy of most recent statements from creditors, including credit card statements, student loan statements, medical bills, delinquent tax notices from the Internal Revenue Service, California Franchise Tax Board, or State Board Of Equalization.
14. Copy of the face page from any lawsuit complaints initiated by others against you within the past twelve months, whether pending today or reduced to judgment, dismissed, settled, on appeal or otherwise.
Back To The Top
15. Copy of all marital dissolution judgments, child or spousal support orders, and marital property division agreements to which you have been a party in the past four years.
16. Copy of valid driver's license or other form of picture identification, including state identification card.
17. Copy of your social security card.
Accordingly, if you are virtually certain even before your initial consultation that you will be proceeding with a bankruptcy filing, it wouldn't hurt to gather the above documents and bring them with you to the initial consultation.
Back To The Top
It depends on which chapter you file, the complexity of your case, within the district you live, and the number of creditors you have. Note that there is no difference in fees for both spouses to file together as it is for one spouse to file alone. The Law Offices Of Hagen & Hagen is happy to provide you with a no-cost in-person or by phone initial consultation at which we will quote you a firm figure to represent you in your bankruptcy case.
Back To The Top