|
When you fall into significant debt, whether it be missed
payments on your mortgage, rent, automobile loans, credit cards, medical bills,
judgments or other such debt, it is always helpful to attempt to negotiate with
your creditors for an extended grace or forbearance period. Many people fall into this situation as a
result of an accident requiring medical treatment, taxes that come due, loss of
a job, unexpected expenses for your dependants or a divorce. If you find yourself in this situation,
contact your creditors and try to explain your situation. Many creditors will gladly work with you to
either reduce or forgive your debt or in the alternative, work with you to set
up a feasible payment plan.
have already attempted to negotiate with your
creditors to either grant you additional time to pay your debt back or settle
your debt for a reduced amount and your creditors either failed or refused to
respond in a helpful manner to your pleas, then bankruptcy coupled with
professional negotiation may be a viable alternative for you.
Deciding to file bankruptcy can be a tough decision. There is no magic formula that informs you
whether bankruptcy is the best choice for you. An experienced
bankruptcy lawyer is a great resource.
With the forgoing said, the following report may shed some light on the
bankruptcy process, how it can help you and if it is the right legal mechanism
for you.
In the most basic terms, bankruptcy is a
Federal system of laws and special courts which permit both individual and
corporate insolvent debtors or those facing potential insolvency, to place
his/her/its financial affairs under the control of the bankruptcy court, in
order to gain financial relief.
The major benefits of bankruptcy are not only financial but
also provide for a healthier life. You
will be able to end the harassing phone calls and letters from your
creditors. With your debts being
discharged, not only will you be financially free, in addition you are
emotionally free from the stress and torment regarding how you will take care
of your family.
Who can file for bankruptcy?
In most situations individuals who incur debt as a result of
consumer small business and real estate purchases qualify to file for
bankruptcy protection pursuant to Title 11 of the United States Code. In order to be eligible to file bankruptcy
you must meet the following criteria:
- You must live in the United States, own a business in the United
States or own some real property in the United States;
- You must not have filed a bankruptcy case with in the last six (6)
months of your current bankruptcy petition;
- You must not have received, during the prior six (6) months, a
briefing from an approved nonprofit budget and credit counseling agency
- You must not have received
a discharge of a chapter 7 bankruptcy with in the last eight (8) years (if
you wish to file for another chapter 7, chapter 13 filers need not concern
themselves with this requirement)
- You will need to complete
an online or phone credit counseling session, which takes approximately
thirty (30) minutes.
- You meet certain income
requirements to file either chapter 7 or 13 discussed in greater detail
below.
How
much debt can be discharged in a bankruptcy:
You
can only file for bankruptcy if your debts are primarily consumer debt in
nature. The maximum amount of debt that
you can owe and still file for personal bankruptcy under chapter 13 is $336,900
in unsecured debt and $1,010,650 in secured debt.
If
you plan to file for a chapter 7 bankruptcy, (a pure liquidation) then you must
either demonstrate your household income is less then your state's median
income level, or that you can pass what is called, "the means test".
Median income Chart:
The following table provides median family income data
reproduced in a format designed for ease of use in completing Bankruptcy Forms,
as of March 26, 2008:
|
State
|
1
person
|
2
member family
|
2
MEMBER FAMILY
|
4
MEMBER FAMILY
|
|
Massachusetts
|
$52,633
|
$63,039
|
$77,960
|
$91,892
|
|
New
Hampshire
|
$51,512
|
$63,505
|
$72,736
|
$89,885
|
|
Maine
|
$38,090
|
$47,699
|
$59,883
|
$65,310
|
|
Vermont
|
$42,344
|
$53,622
|
$61,825
|
$69,817
|
|
Rhode
Island
|
$47,080
|
$59,763
|
$64,933
|
$80,416
|
|
Connecticut
|
$55,410
|
$68,879
|
$78,973
|
$96,493
|
What is the Means test?
If your household income exceeds your state median income,
as indicated in the chart above, you will need to demonstrate that your
disposable income (your income after making all of your monthly minimum
payments and incurred living expenses, such as food, mortgage/rent, clothing,
utilities, etc.) is less then $166 per month.
In the alternative, you will need to prove to a bankruptcy court judge
that your situation warrants special consideration.
Documents you need to file with your bankruptcy
In order to get passed the first hurdle in filing for
bankruptcy, you will need to meet with a U.S. trustee, at a meeting of the
creditors, or what is commonly called, a "341 meetings". At this meeting, any of your creditors who
wish to object to your bankruptcy filing, can appear and attempt to pursaude
the bankrtupcy trustee to dismiss your case.
It should be noted though that very rarely do creditors outside of the
IRS or your state's department of revenue appear. In addition, at that meeting, the trustee can dismiss your case
if you have failed to provide certain documents. Those documents are:
- Proof
of your income over the past two months
- Proof
of the value of your home (if you own it)
- Copy
of your homestead document (if you own your home)
- Copy
of home insurance binder (if you own the home)
- Copy
of your last two years of tax returns
- Copy
of your drivers license or some other picture ID
- Copy
of any life insurance policy (if it has a cash value)
Types of debt:
Prior to determining if you can file for bankruptcy or even
if you should, it is important to learn the difference in the various types of
debt you may have incurred. When
looking at the debt you owe, it is important to distinguish between the various
types of debt, which are classified by the type of person or company to whom
you owe money. There are three (3)
general types of creditors (those who you owe money), secured creditors,
unsecured creditors, and creditors holding priority unsecured claims.
Secured debt
Secured debt is any debt in which the
borrower pledges some asset (such as a house or boat) as collateral in exchange
for a loan, which then becomes a secured debt owed to the creditor who gives
the loan. The debt is thus secured against the collateral. If you fail to pay back the loan, the
creditor may take possession of the asset used as collateral and may sell it to
satisfy the debt by regaining the amount originally lent to the borrower. For example, a mortgage on your home is
considered secured debt, as a result of the bank's security interest in the home. If you do not pay the debt, then the bank
can secure (or take possession) of the collateral, the house and sell it at a
foreclosure sale.
Unsecured debt
Unsecured
debt refers to any debt or obligation to pay back a loan, which is not secured
by collateral. Some of the most common
forms of unsecured debt include: credit
cards,
Personal
loans from friends and family, unsecured bank loans, medical bills, judgments
to pay money obtained against you in court, and rent.
Priority claims
There is another form of unsecured debt called priority
claims. This debt is also not secured
by collateral, but payment for this debt takes priority over general unsecured
debt. In addition, if you own a home,
or other valuable personal property, a priority creditor can obtain a lien
against your property and even take possession and sell that property to obtain
payment. The most common types of
priority debt include, student loans, child support and taxes.
What is a Chapter 7 Bankruptcy?
Under the bankruptcy code, a chapter 7 bankruptcy is what
most people think of when they consider bankruptcy. In the traditional sense, it is a true liquidation of your
assets, where all of your unsecured debt will be wiped out. You will have the ability to receive a discharge from certain debts. The biggest disadvantage to a chapter 7, is
that the bankruptcy trustee may take away any assets you have that is not
protected as an "exempt" asset pursuant to the bankruptcy code. The trustee will then sell those assets in
order to help satisfy your unsecured creditors. One major aspect to keep in mind is that most people, who
qualify to file a chapter 7, typically do not have many if any items that are
not protected from the trustee.
Filing a chapter 7 bankruptcy is usually a good idea if you
have an income that is less than the
"median family income"; If you are facing overwhelming obligations
and want to get a "fresh start" without debt; If you have little or
no nonexempt assets; and if you do not own a home, or own a home and are current
with your monthly mortgage payments.
What many debtors do not realize is that they may not be
able to file a chapter 7 bankruptcy. As
a result of the 2005 amendments to the bankruptcy code, very strict income
requirements have been imposed on debtors who which to file. As discussed in the previous section, a
debtor's income level must either be below their state's median income for
their family size, or they must pass the means test.
What is discharged and what you need to pay
Under Federal law, specific items can not be
seized by the trustee to be included in the bankruptcy estate. These items are considered exempt property.
This property is protected from all unsecured creditor claims. However, it is not protected from claims by
the IRS, default on your mortgage or child support claims.
Though many assets may qualify for exemption status, the
following are the most commonly claimed exceptions in Massachusetts:
- Your
primary house is protected up to $500,000 in equity.
- Certain
equity in your motor vehicle.
- Money
from alimony or child support
- Certain
Jewelry
- Furniture
up to $3,000 (computed as the value if sold at a yard sale)
- Clothing
- An annuity, pension, profit sharing or
other retirement plan
- Social
Security Payments
- Certain life insurance policies
- Workers' compensation benefits
- Disability benefits.
What
is a Chapter 13 bankruptcy?
In many non-lawyer's eyes, a chapter 13 bankruptcy is not a
"real bankruptcy" in the truest sense of the general publics perception and
understanding of the bankruptcy concept.
Under chapter 13, in the bankruptcy code, this section provides an
opportunity to pay off your secured debts in arrears coupled with a small
percent of your unsecured debt interest free over a period of three (3) to five
(5) years. In essence, you will have
the opportunity for a financial Reorganization. The two biggest difference between a chapter 13 bankruptcy and a
chapter 7 is (1) a planned payment that you propose with your petition to the court
and (2) Your assets are generally protected from the trustee.
For example, if you owe $5,000 in arrears on your mortgage,
and $50,000 in credit card debt. You
may suggest a planned payment of your secured debt, coupled with 20% of your
credit card debt for a total payment of $15,000, interest free over five years.
You may however only need to make your planned payment for a
fraction of the time you plan on, based on whether or not your creditors file
what is called, "proof of cliam". This
is a court form that your creditors must fill out when they are provided notice
by the bankruptcy court that they indeed do hold such a claim against you. If your creditor fails to file such a claim,
then, you will not need to satisfy that debt as part of your planned
payment. As such, if only 30% of your
creditors file, then you will only need to pay your plan until their 30% is
covered.
Perhaps the biggest benefit of a chapter 13 bankruptcy is
the ability to immediately stop a home foreclosure dead in its tracks. Even if a bank has a court order to
foreclose, and a sale date of your home is set for tomorrow, if you file a
chapter 13 petition today, the sale will be put off for the foreseeable future,
assuming of course that you can pay off the missing payments, interest free
over a period of 60 months, pursuant to your chapter 13 plan and stay current
on your mortgage moving forward.
Do I qualify to file for chapter 13?
Generally, it is much easier to qualify for a chapter 13
then a chapter 7. There is no maximum
income level or "means test" to file a chapter 13 petition. The biggest issue to overcome in filing a
chapter 13, is demonstrating your ability to pay your planned payment by your
using your projected income.
The requirements are fairly straightforward to file a
chapter 13. You must either be a
citizen of the United States, own property or a business in the United States;
The maximum amount of debt that you can owe is $336,900 in unsecured debt and
$1,010,650 in secured debt.; You must not have been a debtor in a
bankruptcy case at any time during the past six (6) months; and conducted a
pre-petition credit counseling session.
What is discharged and what you need to pay?
If you are successful in making all of your proposed planned
payments over a period of either three (3) or five (5) years, then all of your
pre-petition debts (debts you incurred prior to filing for bankruptcy) will be
discharged.
Benefits of bankruptcy:
As stated previously, the major benefits of bankruptcy are
not only financial but also provide for a healthier lifestyle. The following list details several of the
key benefits you may realize through a bankruptcy filing:
Automatic Stay
The legal mechanism that is used to stop the collections and
foreclosure is called the automatic stay.
Once you file your bankruptcy petition, all interest and collection
attempts on any debt, regardless of the type must be stopped. The duration of the period depends on the
type of bankruptcy. In a chapter 7, the
automatic stay is in place for approximately 90 days, while in a chapter 13; it
is in place for three (3) to (5) years.
Although the automatic stay is in place, once you or your
attorney files your bankruptcy petition, your creditors can file a motion for
to lift or remove the automatic stay.
However, the creditor will need to prove to a bankruptcy judge that the
stay will create a undue burden on them, and in most cases, creditors do not
file this motion, with the exception of Mortgage companies, in a chapter 7
case, if you are behind on payments.
Stop foreclosure
As indicated previously, perhaps the most
significant benefit to filing a chapter 13 bankruptcy is the ability to stop a
home foreclosure, or repossession of your car dead in its tracks. The automatic stay will take affect and your
property will be saved for the duration of your bankruptcy.
Eliminate unsecured debt
Regardless of which chapter of bankruptcy you file, you will
be able to discharge all of your unsecured debt by either paying nothing or
very little of that debt back. This is
particularly helpful if you have large credit card bills, medical bills or
court ordered judgments.
Pay back secured debt (in arrears) over 5 years interest free
If you have missed payments on loans secured by collateral,
not only can you save the property through a bankruptcy filing, but also you
will be able to pay back the missed payments without incurring any interest
over a long period of time (in most cases over 60 months).
In Conjunction with Negotiation
In addition to filing for bankruptcy to gain relief from
debt, there are also specific types of negotiation you can conduct with your
creditors or motion a bankruptcy court to approve, that will help reduce your
chapter 13 planned payment. The three
most common examples of the forgoing is a cram down, short sale refinance, or a
debt reaffirmation.
Cram down
The legal theory of a cram down, allows you to only pay for
the value of the property or asset.
This is particularly useful if you owe a secured creditor more money on
a secured item then it is actually worth.
More specifically, you can pay the actual value (or fair market value)
of the property in full rather than the amount you owe.
Short Sale Refinance
If your mortgage balance exceeds your home's value, you may
want to consider a cram down. However,
many bankruptcy courts will not allow you to "cram down" your home. As a result, you can attempt to negotiate
with the bank that owns your mortgage and refinance only the fair market value
of your property. You would then
negotiate to have the remaining balance forgiven by the bank. The former downside to this practice was
that you would then need to declare the amount forgiven as taxable income. Recently, congress passed a law, which
limits your tax liability on these types of transactions.
Reaffirm Debts to save your account
If you would like to keep
a certain credit account open, or simply don't want an account to be
discharged, you can reaffirm the debt.
This is accomplished by forming an agreement with your creditor after
you file your bankruptcy petition to repay all or a part of the debt subsequent
to the conclusion of your bankruptcy.
This is typically done with loans on cars, TV's, and other items you may
want to keep.
ACTIONS TO AVOID:
Fraudulent Transfers
Prior to filing your bankruptcy, if you transfer any
property to another person for less money then the asset is worth for the
purpose of hiding the asset from the bankruptcy court, your bankruptcy petition
will be denied, and you may face possible criminal charges. This type of transfer typically takes place
where you may sell your car, boat, home etc to a relative for $1 with the
understanding they will sell it back to you after your bankruptcy.
Purchasing luxury items
For 90 days prior to filing for a bankruptcy, you cannot
purchase items that would be considered luxury items. These items are generally classified as non-essential goods or
services in excess of $600.00. In
addition, you should not put more then $600 on your credit card for the 90-day
period prior to filing for bankruptcy.
Preferential payments
The bankruptcy court pays special attention to debts that
you have paid back with in 90 days of filing your petition, which would require
you to not pay other creditors as a result.
The reason is that the bankruptcy court treats all creditors the
same. Because a preference gives an
advantage to one creditor over the other, the bankruptcy trustee can demand the
creditor pay back the money to the bankruptcy estate, and then divide the funds
to all your creditors equally.
Withhold information about assets or legal claims
Each year millions of Americans file for chapter 7 or 13
bankruptcy protection in order to eliminate unsecured debt, including large
credit card balances, personal loans and court ordered awards or secured debt
in order to stop a foreclosure on their home or car. What these debtor's don't
realize, is that not only do they need to put the bankruptcy trustee on notice
of their possessions, bank accounts, taxes and liability to creditors, but
these debtors are also required to include notice of any potential law suits,
including likely suits in the near future in their schedules and statements.
One such example of a contingent suit that many debtors may bring is for a
violation of their employee rights.
For example, if a plaintiff fails to list any contingent
claims of value, the claim can be dismissed. A Federal court recently held in Cannon-Stokes
v. Potter, an employee is prohibited from omitting a discrimination claim
from her bankruptcy petition and then trying to bring it after having her debts
discharged. The courts reasoning was that if debtors with possible employment
claims might be encouraged to "scam" their creditors by keeping those claims
hidden.
The forgoing article was drafted by the Law Office of Goldstein and Clegg, LLC. For more information on Bankrutpcy, please read their Massachusetts Bankruptcy Blog
|
tweet this!