The Automatic Stay: What is it and what can it do for you?
The automatic stay is one of the most powerful weapons in a bankruptcy arsenal to protect a debtor from his or her creditors. Its impact is immediate upon the filing of the bankruptcy petition with the court, and provides instant relief from creditor collections, harassment, lawsuits, wage garnishments, bank levy's, liens etc. Once a bankruptcy case is filed, creditors are put on notice and advised that all collection efforts against the debtor are stayed during the pendency of the bankruptcy filing. Provided a discharge is entered in the case and the creditors claim is one that is eligible to be discharged in a bankruptcy proceeding, the debt will be permanently eliminated. Certain actions are not "stayed" upon the filing of a bankruptcy, meaning they can proceed along their normal course despite the fact that a bankruptcy has been filed. They include:criminal proceedings against a debtor, a civil proceedings for paternity, or domestic support proceedings.
Reaffirmation Agreement: What is it and what are the pro's and con's of signing one?
This option has legal consequences that should be considered carefully before a decision is made. A reaffirmation agreement is a contract that puts the debtor "back on the hook" for the debt despite the bankruptcy. This is the downside of reaffirming a debt. If you default in the future at any time, the creditor can repossess the collateral AND sue you for any deficiency balance you may owe. It is the rare exception that a debtor should agree to reaffirm a debt, and it is not an option recommended by The Larkin Law Firm absent special circumstances (ie. lower interest rate or principal balance reduction). The only benefit of reaffirming a debt is that the payments made after the debt is reaffirmed are reflected on your credit report to help you begin to reestablish credit. That being said, there are many other things you can do to reestablish credit after a bankruptcy without reaffirming, and this alone should not be the sole consideration in making a decision to reaffirm.
Bankruptcy law allows debtors to "redeem," or buy out personal property secured by liens for the market value of the property rather than what's owed on it. The downside here is that you must pay the lender the market value in a lump sum which is difficult for most. There are lenders who will finance a loan for the market value of the property, however the interest rates are high and should be factored into the overall net benefit to the debtor.
Retain and Pay
Most secured lenders will continue to accept your monthly payments and allow you to keep the collateral even if you haven't indicated intent to reaffirm your debt. This is known as the "retain and pay" option. It is an informal option not specifically recognized by the Bankruptcy Code. Retain and Pay is an attractive option if the lender will accept it. However, debtor's choosing this option must be comfortable with a lack of certainty or predictability. Some lenders like Ford Motor Credit, GMAC and Daimler Chrysler state they will repossess vehicles unless the debt is timely reaffirmed. Other lenders like Toyota typically feel that it is better to receive monthly payments under the informal "retain and pay" option rather than lose money by selling repossessed vehicles at auction prices. It is possible, however, that you think your lender has decided to continue to accept your payments only to wake up one morning and find your vehicle gone.
The collateral may be surrendered back to the lender who will sell the property and apply the proceeds to the outstanding balance of your loan. Assuming your case completes and you receive a discharge, any deficiency balance owed on the property will be eliminated in the bankruptcy. This is a good option if you are unsure you will be able to make the payments moving forward, or if the collateral is damaged and you owe more than the property is worth.
I received a "Notice of Abandonment" from the Trustee! What does that mean?
When a debtor receives a "Notice of Abandonment" from the trustee, they should not be alarmed. The title of the document oftentimes scares debtors into thinking they are going to lose the property listed in the notice, which is not the case. Basically, a notice of abandonment is the trustee's way of saying that for one reason or another, the listed property cannot be liquidated for the benefit of your creditors. When a bankruptcy case is filed, real and personal property become part of a "bankruptcy estate" which the trustee is in control of. Once the trustee reviews the case and determines he cannot make any money for creditors by liquidating specific assets, they will file an abandonment notice on these items. This usually happens when a property's debt is more than it's worth.
Keeping the car you love despite owing much more than it's worth. How can bankruptcy help?
It is the exception rather than the rule that a person financing a vehicle owes less than or equal to the cars value. Unless you put at least 20% down, chances are you are upside down. Bankruptcy not only can eliminate unsecured debts like credit cards, it can also drastically reduce what you owe on your vehicle. In a chapter 7 bankruptcy, debtors can take advantage of section 722 of the Bankruptcy Code, also known as redemption. You may redeem personal property if you pay in full to the original lender, a value equal to the price a retail merchant would charge for property in like condition. The upside of redemption is that it essentially converts secured debt to unsecured debt to the extent the value exceeds what you owe. The downside is that you have to come up with a lump sum to pay the original lender. The lump sum required will be defined as the price a retail merchant would charge.
Chapter 13 Cramdown
Chapter 13 involves a monthly payment plan and also offers benefits for those who find themselves upside down on their vehicles. Generally speaking, if your car was purchased for you and your family's use more than 910 days before the bankruptcy is filed, you repay only what the car is worth and not what you owe. This is called "cramdown." The upside here is that your loan is recast up to a 5 year period reducing your monthly payment. The downside is you need to have bought your vehicle more than 910 days, or 2.5 years before the filing, unless the vehicle is primarily for business use. If that is the case then that 910 day rule does not apply. Check with a knowledgeable attorney to determine the best strategy for you.
Is there a minimum amount of debt required to file bankruptcy?
This is a question I hear quite often as people contemplate filing for bankruptcy. The answer is no. The decision to file for bankruptcy relief is relative to the debtor's financial situation. For example, it is not uncommon for someone who is living on social security or other fixed income to file for bankruptcy only owing a few thousand dollars in credit card debt. The problem here is ridiculous interest rates coupled with people who, because of their limited incomes, are unable to make anything more than the minimum monthly payment on these debts. It creates a vicious, never-ending cycle which a bankruptcy snaps. This again comes back to the importance of seeking out and hiring an attorney who is able to competently analyze your options and help you determine the best course of action to take.
A judgment has been entered against me. What happens now?
Once a creditor has obtained a judgment against you, chances are they will likely attempt to enforce it. There are many collection tools available in this regard depending on whether collection is sought against a business or individual. The following are the most common ways a judgment creditor will seek to satisfy a judgment:wage garnishment, bank account levy, or liens.
If you are employed as a W-2 employee, a judgment creditor can attempt to garnish your wages to pay off the judgment amount. Under a wage garnishment, your employer is served an order to withhold your pay. The creditor is generally limited to 25% of gross wages per pay period. Wage garnishments are not very effective on self-employed individuals since it is difficult to force someone to withhold and turnover their own wages.
Bank Account Levy
If a creditor has obtained a judgment against you and knows where you bank, a bank levy can be an effective tool. Unlike a wage garnishment where your employer is served and you are provided notice, with a bank levy, you aren't notified until after the levy has already taken place. The reason is obvious. Many judgment debtors would remove the money from the account if they were notified beforehand. Additionally, wage garnishments are ongoing orders to withhold wages, whereas a levy order is a "one time shot" taking whatever is in the account at the time of the levy. Each subsequent levy requires a separate order.
The purpose of a lien is to secure payment by attaching or linking it to property. It is the best chance of guaranteeing payment on a judgment at some point in time. The most common example is a lien placed against real estate. The lien attaches to the real estate and collects interest at 10% per year. Once the property is sold, foreclosed or refinanced, the liens are paid off in the order they were placed against the property.
My credit will be ruined for 7-10 years once I file for bankruptcy and I won't be able to get credit, right?
One of the common myths about filing for bankruptcy is that it ruins your credit for many years. The answer is "it depends." It depends on a number of factors including your current credit score, your debt load, and your previous credit history. As surprising as it sounds and contrary to mainstream beliefs on the subject, a bankruptcy can actually improve your credit. Let me say that again: A BANKRUPTCY CAN ACTUALLY IMPROVE YOUR CREDIT. Once your case is discharged, you will likely begin to receive new offers of credit. The reason is twofold. First, the credit card company knows you have already filed for bankruptcy so that if you default in the future, you will be unable to claim bankruptcy protection for a number of years. Second, you are more likely to repay your bills moving forward because of your desire to make the best of the fresh start the bankruptcy has provided. You are a better credit risk at that point.
I don't want to file for bankruptcy or am not sure it is the best decision for me. Are there other options available to address my unsecured debt?
Yes, however it is imperative that you discuss the pro's and con's of these other options with a qualified consumer attorney before jumping into anything. While there are many ways to address unsecured debt absent a bankruptcy filing, the following 2 options are the most common: debt consolidation and debt settlement.
Debt consolidation is a process whereby creditor's generally agree to reduce interest rates and accept a smaller monthly payment so that all creditors can be dealt with in a single payment. The benefit here is obviously a consolidated debt load and reduced interest. The downside is that in order for this to be an effective tool, all of your creditors must agree to participate or else you could be left having to deal with individual creditors outside the consolidation process. Many of these consolidation companies are extensions of the credit card companies designed to squeeze out of you your last few dollars. It is recommended that anyone seeking the services of a debt consolidator who is not an attorney, ensure that they are a non-profit organization.
Debt settlement is a process where each creditor is contacted individually in an attempt to settle the account for less that the full balance. In order to participate in debt settlement, you must have access to lump sums of cash. The best settlement offers you will receive involve lump sum offers. While payment plans here maybe an option, they will uniformly require a higher overall percentage of the balance. It is also recommended that your accounts be delinquent before pursuing this option because if money is being paid to the creditor on a monthly basis, the less incentive they will have to settle. Debt settlement may be a better option than bankruptcy in the situation where you would lose significant property by filing bankruptcy or if there income is such that filing bankruptcy would force you to pay a higher dividend to creditors. You'll pay less than you owe, but your credit report will be affected, and you'll pay tax on the forgiven amount.
How much property will I lose if I file for bankruptcy?
In the vast majority of bankruptcy cases, debtors are able to keep all of their real and personal property. It is the rare exception that property is taken. Bankruptcy law allows debtors to use certain exemptions to protect property, both real and personal. Most debtors are able to keep the property they own because its value or available equity in the property falls within available exemption limits. The exemptions available to a debtor are determined by a number of factors including what state you live in, and how long you have resided there.
State or Federal Exemptions?
Debtors who file for bankruptcy protection use either the federal exemptions or their own states exemptions, depending on whether a particular state has "opted out" of the federal exemption scheme. Some states that have opted out of the federal exemption scheme limit the use of their states exemptions to residents only, while other states allow use of their exemptions if they have lived in the state for a certain period of time prior to the bankruptcy filing. Exemption amounts vary by state and some states have more liberal exemption amounts than others. An excellent resource to determine which bankruptcy exemptions should be used in your particular case can be found at www.exemptionexpress.com
Will My Retirement Accounts Be Taken?
The answer in almost every case is no, either because the accounts are exempt in the first place or are not even part of the bankruptcy estate! Among the many changes in the law in 2005 way was the addition of 11 USC 522(d)12 which permits the debtor to exempt retirement funds to the extent they are in a fund or account that is exempt from taxation under sections 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code ("IRC"). These IRC sections practically encompass all retirement plans out there (pension plans, profit sharing plans, stock bonus plans, employee annuities, IRAs, Roth IRAs, government deferred compensation plans, plans of tax exempt organizations and certain trusts). These accounts are exempt up to $1,095,000 for each spouse. While these are federal protections, also keep in mind that your state may also have state exemptions that also protect such retirement funds.
What About Asset Liquidation?
The Bankruptcy Code establishes the order in which claims are paid from the proceeds of sale of non exempt assets. All claims in a higher priority must be paid in full before claims with a lower priority receive anything. All claims with the same priority share pro rata. Claims are paid in this order: 1) costs of administration (trustee fees) 2) priority claims (ie. tax debts, fines/restitution, child/spousal support obligations) and 3) general unsecured claims (credit cards, medical bills etc.). Secured claims are paid from the proceeds of liquidating the collateral which secured the claim.
What is the difference between chapter 7 and chapter 13 and what is the timeline associated with each?
Chapter 7: Also called a "straight bankruptcy", chapter 7 involves the liquidation of non-exempt assets for the benefit of creditors. Most chapter 7 cases are considered "no asset" cases meaning there will be no liquidation or distribution of assets to unsecured creditors. Absent liquidated assets, creditors do not receive any payment on their claims. Chapter 7 generally involves a 3-4 month process. Chapter 13: Sometimes called a "wage earner plan" chapter 13 involves the consolidation of debts and repayment of a certain percentage of those debts to unsecured creditors over a period of time. Generally speaking, the repayment term is anywhere from 3-5 years. The amount required to be repaid is determined using a formula that includes your income, current debt and other factors.
Chapter 7 Bankruptcy
Also called a "straight bankruptcy", chapter 7 involves the liquidation of non-exempt assets for the benefit of creditors. Most chapter 7 cases are considered "no asset" cases meaning there will be no liquidation or distribution of assets to unsecured creditors. Chapter 7 generally involves a 3-4 month process. Approximately 30 days from the date the bankruptcy is filed, a hearing is held where a trustee asks specific questions to the debtor under penalty of perjury to ensure the information is complete and accurate. After the hearing, the trustee reports back to the court about the status of your case. Assuming there are no issues, the trustee informs the court that the case is in proper form and that a discharge can be processed. Once the deadlines pass for parties in interest to object to your case, the court will enter the order discharging your debts and closing the file. This usually happens 2-3 months after the hearing.
Chapter 13 Bankruptcy
Sometimes called a "wage earner plan" chapter 13 involves the consolidation of debts and repayment of a certain percentage of those debts to unsecured creditors over a period of time. Generally speaking, the repayment term is anywhere from 3-5 years. The amount required to be repaid is determined using a formula that includes your income, current debt and other factors. If the trustee has no issues with your case he will approve it on the spot and the debtor simply makes the monthly payment pursuant to the plans specific terms. Once all payments have been make pursuant to the court approved plan, discharge is entered and the remaining debts are eliminated forever.
What is a bankruptcy Trustee and what is his/her role in the bankruptcy process?
A bankruptcy Trustee is a court appointed officer. He or she is not a judge. A bankruptcy Trustee is not required to be an attorney, however many are. Those that are not attorneys typically have some kind of financial background. Generally speaking, the role of the Trustee in a Chapter 7 case is to review the bankruptcy schedules to determine whether there is any property available to be liquidated for the benefit of creditors. If there is property available, the Trustee's job is to quickly and efficiently liquidate the property to create a pool of income for creditors. Once there are assets to liquidate, a notice is sent to all creditors advising them that there will likely be a pro-rata distribution in the case. While the Chapter 7 Trustee looks for assets to liquidate, it is the rare exception when property is taken and sold in a Chapter 13 proceeding. Once approved, the Chapter 13 Trustee's function is to administer the plan according to its terms.