There are a lot of myths surrounding bankruptcy, about what it can or can't do, who can file, who can't, that you can except certain debts, etc. Two of the more pervasive myths are (1) that you need a minimum amount of debt in order to file and (2) that you have to repay all your debts in Chapter 13. Both are false.
Anyone can file bankruptcy with any amount of debt. In theory if you owe someone $25 you can file, though you'd probably be committed because the filing fee is $306. But the truth is, there is no minimum amount of debt required. Whether you file is a personal decision. For some people, $5,000 is too much debt. For others, $500,000 is not too much. It all depends on the individual.
When it comes to Chapter 13, you do not have to repay all your debt. It would be a foolish program if it required full repayment. Think about it. If someone can't repay their debts NOW, how are they going to be able to repay them in only 60 months, the maximum time allowed under Chapter 13? What Chapter 13 does is look at what you can afford to pay and require you to pay that for the length of the plan, which is 36 or 60 months, depending on a number of factors. At the end of the plan, any remaining debt is discharged, just like in a Chapter 7. But Chapter 13 has advantages over Chapter 7: There is no means test, which disqualifies some debtors from Chapter 7; you get to keep assets that you might otherwise lose in Chapter 7 (such as cars, houses, stocks, etc.); and some debts that can't be discharged in Chapter 7 can be discharged in Chapter 13.
Showing posts with label Chapter 7. Show all posts
Showing posts with label Chapter 7. Show all posts
Tuesday, February 7, 2012
Monday, September 19, 2011
Surrendering Real Property
A question that has come up a few times recently is a variation of "how do I surrender my house in bankruptcy?" When someone files bankruptcy, she can surrender any property that secures a debt. To "surrender" means to turn the property over to the secured creditor and walk away, receiving a discharge for whatever is owed above the value of the property surrendered. This often happens when the debtor owes more on the loan that the property is worth (a condition known as being "under water"). With personal property, such as cars, boats, home furnishings, electronics, etc., surrender is usually a matter of giving the items to the bank.
A house or any real estate is more difficult. You can't just drop it off at the bank. Even sending the bank the keys to the house isn't good enough because title to the real estate is still in your name in the county recorder's office. If you're still the owner, you could be liable if someone slips and falls on the property. You will be liable for unpaid property taxes and assessments, and you could be fined for not maintaining the property, such as by shoveling the snow in winter or mowing the lawn in the summer.
Some people have tried signing a quitclaim deed and recording it. That might work, but there is a concept in real estate law that requires a deed to be accepted to be valid. Acceptance means the grantee (the bank in this case) willingly takes the deed. Simply recording the deed may not be valid acceptance.
As banks become overwhelmed with properties that are under water, many of them simply don't know what to do. As a result, they might not start and complete foreclosure in a timely manner. This leaves the surrendering borrower in limbo. She has said she doesn't want the property, but she can't get rid of it. The only solution might be to file a motion with the bankruptcy court to force the creditor to accept a deed, thereby getting it out of the debtor's name. The worst thing to do is ignore the situation.
A house or any real estate is more difficult. You can't just drop it off at the bank. Even sending the bank the keys to the house isn't good enough because title to the real estate is still in your name in the county recorder's office. If you're still the owner, you could be liable if someone slips and falls on the property. You will be liable for unpaid property taxes and assessments, and you could be fined for not maintaining the property, such as by shoveling the snow in winter or mowing the lawn in the summer.
Some people have tried signing a quitclaim deed and recording it. That might work, but there is a concept in real estate law that requires a deed to be accepted to be valid. Acceptance means the grantee (the bank in this case) willingly takes the deed. Simply recording the deed may not be valid acceptance.
As banks become overwhelmed with properties that are under water, many of them simply don't know what to do. As a result, they might not start and complete foreclosure in a timely manner. This leaves the surrendering borrower in limbo. She has said she doesn't want the property, but she can't get rid of it. The only solution might be to file a motion with the bankruptcy court to force the creditor to accept a deed, thereby getting it out of the debtor's name. The worst thing to do is ignore the situation.
Tuesday, August 30, 2011
Bankruptcy Exemptions
I was faced with an interesting question from a client this week. Up until recently ago he lived in California. For six years he has owned a condo in Utah. Four months ago he moved to Utah and now lives in the condo. He needs to file bankruptcy and wants to know which state's exemptions, Utah or California, he can use. He wants to use California because their homestead exemption is $75,000 whereas Utah's is $20,000.
Section 522 of the Bankruptcy Code says that a person uses the exemptions in the state where he has had his domicile for the past 730 days (two years), unless the person hasn't lived in a single state for that time. If, like this person, a debtor has lived in two or more states in the past two years, then he uses the exemptions in the state where he lived the longest portion of the 180 days immediately preceding the two year period. This convoluted and confusing statute is part of the BAPCPA enacted in 2005 and its purpose is to prevent debtors from moving to states with more liberal exemption laws and then filing bankruptcy.
In this case, section 522 helps my potential client because he lived in California for the full 180 days prior to the two year period back to August 2009. So he will get to claim the California exemption even on his condo in Utah.
Section 522 of the Bankruptcy Code says that a person uses the exemptions in the state where he has had his domicile for the past 730 days (two years), unless the person hasn't lived in a single state for that time. If, like this person, a debtor has lived in two or more states in the past two years, then he uses the exemptions in the state where he lived the longest portion of the 180 days immediately preceding the two year period. This convoluted and confusing statute is part of the BAPCPA enacted in 2005 and its purpose is to prevent debtors from moving to states with more liberal exemption laws and then filing bankruptcy.
In this case, section 522 helps my potential client because he lived in California for the full 180 days prior to the two year period back to August 2009. So he will get to claim the California exemption even on his condo in Utah.
Thursday, March 24, 2011
What Should a Bankruptcy Cost?
Whenever I speak with a potential client, one of the questions always asked, often one of the first, is "how much will it cost?" This is a legitimate question, but, upon hearing my estimate (which varies from case to case) some potential clients never become clients. I am sure that in many cases they find someone willing to do the work cheaper.
Consumer bankruptcy attorneys all seem to compete on price. It's understandable that someone facing bankruptcy needs the lowest cost possible, but what clients often don't understand is that bankruptcies aren't like potatoes. In most cases, a pound of potatoes from one grocer is as good as a pound from another, so it makes sense to find the grocer with the lowest cost. But everybody's financial situation is different. It doesn't make sense to shop for a bankruptcy attorney solely on the basis of cost.
Many large-volume bankruptcy attorneys (or bankruptcy mills) churn out dozens of cases a week. In a consumer bankruptcy, about the only thing an attorney can't delegate to a paralegal is appearing in court, so those high volume attorneys spend their time in court and leave the rest to secretaries and paralegals. That means except for the few minutes when the client is actually in court or at the meeting of creditors, he or she doesn't speak directly to the attorney. Secretaries and paralegals can't give legal advice, which means they can't answer a client's questions in many cases. Is that what clients want, to pay the lowest fee and be run through a processor?
Bankruptcy is a serious step. It's a confusing process that goes on for months and, in Chapter 13, years. Clients should be willing to pay enough to get the attention they deserve.
Consumer bankruptcy attorneys all seem to compete on price. It's understandable that someone facing bankruptcy needs the lowest cost possible, but what clients often don't understand is that bankruptcies aren't like potatoes. In most cases, a pound of potatoes from one grocer is as good as a pound from another, so it makes sense to find the grocer with the lowest cost. But everybody's financial situation is different. It doesn't make sense to shop for a bankruptcy attorney solely on the basis of cost.
Many large-volume bankruptcy attorneys (or bankruptcy mills) churn out dozens of cases a week. In a consumer bankruptcy, about the only thing an attorney can't delegate to a paralegal is appearing in court, so those high volume attorneys spend their time in court and leave the rest to secretaries and paralegals. That means except for the few minutes when the client is actually in court or at the meeting of creditors, he or she doesn't speak directly to the attorney. Secretaries and paralegals can't give legal advice, which means they can't answer a client's questions in many cases. Is that what clients want, to pay the lowest fee and be run through a processor?
Bankruptcy is a serious step. It's a confusing process that goes on for months and, in Chapter 13, years. Clients should be willing to pay enough to get the attention they deserve.
Thursday, June 10, 2010
Help! I don't qualify for Chapter 7 OR Chapter 13
More people are being caught between the rock of the means test under Chapter 7 and the hard place of the debt limitations under Chapter 13, finding that they can't qualify for either.
The means test under Chapter 7 says, basically, if you make above a certain income (the state median income for a family of your size), you can't file Chapter 7. There are exceptions and other tests, but the bulk of Chapter 7s are filed by people who "pass the means test" by having income under the state median, or whose debts are not primarily consumer debts, in which case the means test doesn't apply. The means test was designed to force more people into Chapter 13 so they repaid at least some of their debt.
Less known are the debt limitations of Chapter 13. Under section 109 of the Bankruptcy Code, if a debtor (and spouse, if filing jointly) owes more than $360,475 in unsecured debt, or more than $1,081,400 in secured debt, they do not qualify for Chapter 13. What this means is that for a high debt, high income debtor, she cannot file for either Chapter 7 or Chapter 13.
Consider a debtor earning $100,000/year, single, who bought a house in 2007, at the height of the real estate market. In today's market that house is worth $400,000 and she owes $750,000. Since the house is only worth $400,000, $350,000 of that debt is unsecured. If she has in excess of $10,475 in other unsecured debt, such as credit cards, doctor bills, student loans, etc. this person doesn't qualify for Chapter 13. But due to her income, she can't file Chapter 7, either (and she might not want to for various reasons). Her only option is to file a consumer Chapter 11, a very expensive and time consuming proposition.
The means test under Chapter 7 says, basically, if you make above a certain income (the state median income for a family of your size), you can't file Chapter 7. There are exceptions and other tests, but the bulk of Chapter 7s are filed by people who "pass the means test" by having income under the state median, or whose debts are not primarily consumer debts, in which case the means test doesn't apply. The means test was designed to force more people into Chapter 13 so they repaid at least some of their debt.
Less known are the debt limitations of Chapter 13. Under section 109 of the Bankruptcy Code, if a debtor (and spouse, if filing jointly) owes more than $360,475 in unsecured debt, or more than $1,081,400 in secured debt, they do not qualify for Chapter 13. What this means is that for a high debt, high income debtor, she cannot file for either Chapter 7 or Chapter 13.
Consider a debtor earning $100,000/year, single, who bought a house in 2007, at the height of the real estate market. In today's market that house is worth $400,000 and she owes $750,000. Since the house is only worth $400,000, $350,000 of that debt is unsecured. If she has in excess of $10,475 in other unsecured debt, such as credit cards, doctor bills, student loans, etc. this person doesn't qualify for Chapter 13. But due to her income, she can't file Chapter 7, either (and she might not want to for various reasons). Her only option is to file a consumer Chapter 11, a very expensive and time consuming proposition.
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