Mistakes to Avoid–Don’t Sell or Borrow Against Assets Protected in Bankruptcy

Give yourself a fresh financial start not just with your debts, but also with your assets.

 

How to How to Get the Most Out of Your Bankruptcy

The focus in bankruptcy is on dealing with your debts, wiping out and getting a handle on the negative side of your balance sheet. But getting a financial fresh start means not just getting relieved of your debts, but also protecting your essential assets—the positive side of your balance sheet. You can maximize this crucial benefit of bankruptcy by not selling, using up, or borrowing against your protected assets BEFORE filing your bankruptcy case.

In my daily work as a bankruptcy attorney, I constantly meet with new clients who have sold, spent, or borrowed against important assets in desperate attempts to keep their heads above water. Some of them have even done so thinking that they would just lose that asset once they file a bankruptcy so why hang onto it. But it is much more difficult to get your financial footing if you have nothing to stand on—if you don’t have at least basic housing, household goods, clothing, transportation, and, where appropriate, tools of trade, unemployment or disability benefits, and retirement savings. 

Bankruptcy Protects Assets

If you are like most people, bankruptcy will protect all of your assets. First, Chapter 7 “straight bankruptcy” protects all “exempt” assets, so that a very high percentage of people who file under Chapter 7 keep everything they own. Second, if you have assets which are worth more than the applicable “exempt” amounts provided by law, Chapter 13 “adjustment of debts” can almost always protect those “non-exempt” assets as well. And third, if you do have assets that are not “exempt,” with wise pre-bankruptcy planning with a knowledgeable bankruptcy attorney those assets can be all the better protected once your bankruptcy case is filed.

Get Legal Advice BEFORE Wasting Your Assets

Bankruptcy cannot protect what you’ve already squandered. When people sell, spend, or borrow against their assets before filing bankruptcy, most of the time those assets would have been completely protected had they filed bankruptcy while they still had them.

Think about this: if you are considering spending, selling, or borrowing against any of your assets, do you know whether that asset is one which would be protected in bankruptcy?  Do you know the full consequences of whatever you are planning on doing, either in your effort to avoid filing bankruptcy or to position yourself for filing?

These kinds of decisions can have serious long-term consequences, so they shouldn’t be made without legal advice about the alternatives. Consider a person in her late-50s cashing in a substantial amount of her 401(k) retirement plan to keep paying creditors when those creditors could be—and eventually are–written off in bankruptcy. That decision would likely significantly harm the quality of her retirement lifetime, with no tangible benefit to show for it.  Or consider a husband and wife selling a free-and-clear vehicle that’s in good condition on the assumption that they’ll lose it once they file bankruptcy, using the money to pay creditors that could be—and eventually are written off in bankruptcy—only to be left with a single older vehicle that won’t reliably get them to work. That decision would lead to anything but a fresh start for them. Of course they would have been better off to find out if their reliable vehicle could have been protected, which it almost certainly could have through either Chapter 7 or Chapter 13, possibly assisted by some asset protection planning beforehand.

For understandable reasons and some not so sensible ones, people tend to get legal advice only when they are in serious trouble, and after they have made and acted on these kinds of harmful decisions. Please avoid this. You can get a better fresh start by getting the necessary advice so that you can preserve your important assets before they are gone. 

/by

Mistakes to Avoid–Don’t Surrender Your Vehicle or Get it Repossessed

What if you could pay less per month, lower the interest, and pay less until you owned your vehicle free and clear?

 

Bankruptcy as a Game-Changer

Bankruptcy is full of surprises, mostly pleasant ones. The most important reason to see a bankruptcy attorney sooner rather than later is that you will then more likely be able to take advantage of those pleasant surprises.

Vehicle Surrender or Repossession Almost Never Good

Whether or not bankruptcy can save your car or truck, surrendering it without having a well-informed plan about what you are going to do next is almost never a good idea. And putting yourself into a situation in which it gets repossessed can really hurt, both immediately and long-term.

Almost always, if you surrender your vehicle, you will owe money on the debt after your creditor sells the vehicle and credits your account the sale’s proceeds. And you will usually owe much more than you think you will. Sometimes shockingly more.

That’s partly because the vehicle will likely be sold for less than it is worth. The creditor is not trying to be unfair about this, but it’s usually efficient for it to sell repossessed vehicles at an auto auction, where most of the purchasers tend to be used car dealers who can only pay enough for the vehicle to be able to make a profit when they re-sell it. On top of a low selling price, your creditor will tack onto your balance all of its repossession and sale costs, which can really add up. The end result is that you will likely owe a lot of money, and will likely get sued to make you pay it. Once wage and bank account garnishments start, you will probably be forced to consider bankruptcy. As you will see, it’s much better to consider it BEFORE surrendering or losing your vehicle to repossession.

Escaping Your Catch-22

If you need your vehicle, but just can’t afford the monthly payments, you could very sensibly believe you don’t have much choice but to let the vehicle go. You know your contract requires you to make the payments or lose the vehicle. You may have been struggling for months to keep the payments current, putting up with late fees and constant notices or phone calls from the creditor. You might even be thinking about how you can do without this vehicle, especially if you have already fallen behind.

How Chapter 7 Can Help

The main way Chapter 7 “straight bankruptcy” can help is by discharging (legally writing off) all or most of your other debts so that you can more easily afford your vehicle payment. If you are a month or two behind on your payments, filing the bankruptcy case would put an immediate stop to any approaching repossession. You would then have a month or two, sometimes more, to catch up. Chapter 7 allows you to focus your financial energies on your most important debts. If for you that’s your vehicle loan, and if getting rid of your debts would help enough, filing Chapter 7 BEFORE losing your vehicle could well be your best move.

How Chapter 13 Can Help

But admittedly that may not be enough help. You may be able to afford the monthly payments if you had no longer had any other debts, but have no way to make up the missed payments that quickly. Or you might have other important debts that you’re behind on, like taxes or child support, and can’t see hanging on to your vehicle in the midst of all these financial pressures. And you might not even be able to quite afford the monthly vehicle payments even with no other debt obligations.

Chapter 13 may be able to cut through ALL of these problems.

First, Chapter 13 can give up to 5 years to catch up on the back payments. Under some circumstances, you might never even need to catch up on them.

Second, Chapter 13 often allows you to pay your vehicle payment first, before other important debts like taxes and support.

And third, if your vehicle loan was entered into more than 910 days before your Chapter 13 case is filed (that’s about two and a half years), you can do a “cramdown” on the vehicle loan: lower your monthly payment, and likely pay less overall for the vehicle before owning it free and clear. How much the monthly payment can be reduced depends on a bunch of factors, but especially if your vehicle is worth significantly less than you owe on it, the payment can often be made much lower.

And if you qualify for a “cramdown” and you’re behind on your vehicle loan at the time you file your Chapter 13 case, you don’t ever have to catch up on those missed payments.  They are just part of the re-written, new “crammed down” obligation.

Take Charge and Choose Your Best Option 

So you can see that you might NOT want to surrender a vehicle or allow it to be repossessed, if instead you could keep that vehicle through either Chapter 7 or 13. That may be especially true if you qualified for a lower monthly payment under the Chapter 13 “cramdown.”

Often, having a reliable vehicle is essential to achieving a successful re-start of your financial life.  Before you lose that essential part of your financial plan, come see us to find out your options. 

/by

Easily Preventable Mistakes to Avoid–Don’t Be Nice to Special Creditors

Acting honorably towards a favorite creditor or two before filing bankruptcy can make you anything but their favorite.

 

Paying Your Favorite Creditor Before Filing Bankruptcy

Although bankruptcy law fixates on what you own and who you owe at the moment your bankruptcy case is filed, there are some important ways that the law can look into the past. “Preferences” are an example where the bankruptcy system can potentially look into and upset a certain limited piece of your past.

If during the 365 days before you file a bankruptcy you pay a creditor more than you are paying at that time to your other creditors, then after you file bankruptcy that favored creditor could be required to give to your bankruptcy trustee the money that you had paid to this creditor. So for example, if you paid your mother $1,000 to pay off a debt you owed her, and then six months later filed a bankruptcy case, your trustee could likely require her to pay that $1,000 to the trustee. That $1,000 would then be divided by the trustee among your creditors as prescribed by law (with your mother likely getting just a tiny portion of it, based on her pro rata share of all your debts).

That $1,000 is called a “preference” or a “preferential payment,” which the trustee can undo, or “avoid.” You are considered to have paid that creditor in “preference” to your other creditors.  

The Harsh Practicalities of Preferences

The result is that your good intentions backfire. You want to be considerate to a special creditor—often a family member, your long-time family doctor, or some other kind of favored creditor–by paying off that debt and keeping it out of your bankruptcy case. You may have wanted this creditor not to know about you filing bankruptcy. Or you may have just wanted to take care of your moral obligation.

But the result becomes the opposite. Your favored creditor gets mixed up in the bankruptcy case, and in a way more embarrassing than would have been otherwise. He or she has to give up the money you paid—and may have to scramble to come up with it somehow after having spent it. After that, you may well continue to feel that you have a family or moral obligation to make good on that debt, so you end up paying that debt to your favored creditor a second time, after your bankruptcy is over. And finally, if your bankruptcy is a Chapter 13 case then you would not even be allowed to do that until the case was over 3 to 5 years later. A mess all around.

The Good News—It’s Preventable

This mess can be avoided altogether if you get legal advice from an experienced bankruptcy attorney before you make the preferential payment(s) to your favored creditor. Or even if you’ve already made the payment(s) by the time you see your attorney for the first time, there are often ways to get around it.

Careful, though, because the law about preferences is complicated. Section 547 of the Bankruptcy Code on preferences is a head-scratcher. It’s about 1,300 words long, containing 56 sub-sections and sub-sub-sections. Take a look at it and you’ll see it’s certainly not clear.

What is clear that if there is any chance that you may be filing a bankruptcy case within a year, before paying anything to a relative, friend, or any other special creditor that you feel obligated to pay, talk first to an experienced bankruptcy attorney. Especially do so if you figure this does not apply to you because you don’t consider the person you are paying to be a “real” creditor—because it’s a “personal debt,” was never put into writing, or nobody knows about it.

And most importantly, if you’ve already made such a payment before you see your attorney, absolutely be sure that you disclose that to him or her, and do so right away, early at the first meeting. It could well affect your game plan, and maybe the timing of your bankruptcy filing.

Preferences are mostly a problem when they only come to light AFTER your bankruptcy is filed. Be sure to be candid with your attorney so that does not happen to you. Avoid that and most likely preferences will not be a problem for you. 

/by

Easily Preventable Mistakes to Avoid While Considering Bankruptcy

Words I hate to tell new clients: “If only you’d come to talk with me sooner.”


Bankruptcy attorneys are in this area of law because we really want to help people. What makes me want to come to the office every day is the privilege of listening to people’s tough stories and then giving them good news about how I can help make their life much better—how they can now get relief from their debts or a feasible plan to save their home, or a way to solve some other seemingly impossible situation, like a back child support or income tax garnishment. Every day I get to help intensely anxious people suddenly become hopeful as they learn about solutions they did not realize they had.

Not that it’s always so pleasant. Some goals are beyond reach even with the strong medicine of bankruptcy. Difficult choices sometimes have to be made. Life can be tough.

But the toughest situations are those in which the person took some action—usually not long before seeing me—which may have made some sense at the time but ended up being a mistake, a self-inflicted wound.

The goal of my next few blogs is to help you avoid these.

Here’s what we will be covering.

1) Preferences:  If within a certain amount of time before filing bankruptcy, a debtor pays any significant amount of money (or anything else of value) to someone she owes, the bankruptcy trustee could under certain conditions force that creditor to pay to the trustee whatever amount the debtor paid to the creditor. That creditor could be a relative or friend who had lent the debtor money, and the debtor felt a deep obligation to repay it before filing bankruptcy. This relative or friend could be sued by the trustee to make him or her “return” the money (but to the trustee, not to the debtor).

2) Wasting exempt assets:  New clients constantly tell me how they’ve borrowed against or cashed in their retirement funds in a desperate effort to pay their debts. Or they’ve sold a vehicle or some other precious asset. Then they learn that whatever they’ve sold or borrowed against would have been completely protected in their subsequent bankruptcy case. And the debts they paid with the proceeds would simply have been “discharged” (legally written off) in that bankruptcy. They have lost something of significant value in effect for no real benefit.

3) Surrendering a vehicle that could have been saved:  People often really need a vehicle but owe on it more than it is worth and can’t afford the payments. So they either voluntarily surrender it to the creditor, or wait to file bankruptcy until after it gets repossessed. Instead with a “cramdown,” they could well have been able to keep that vehicle by paying much lower monthly payments and paying much less for it overall.

4) Letting a creditor sue and take a judgment: If a debtor is sued by a creditor and waits until after a judgment is entered, in some situations, that judgment could make the debt harder to discharge in a subsequent bankruptcy case. 

5) Selling a home out of desperation:  Bankruptcy—and especially Chapter 13—provides some amazing tools for dealing with debts related to a home, including  the first mortgage arrearage, the second mortgage lien, judgment liens, income tax and child support liens, and other liens of all sorts. Homeowners may hurriedly sell their home because of pressure from any of these kinds of creditors. But if they do so, they could lose out on the opportunity to hold onto their home by saving tens of thousands—or possibly even hundreds of thousands—of dollars. Or at least they could likely sell it at a higher price with more market exposure and/or sell it when the timing is better for their family.

As you can see, doing what seems right and sensible can really backfire if you don’t get legal advice about these kinds of unexpected consequences. In the next few blogs I explain these in more detail so that these mistakes will make sense to you and you can avoid them.  

/by

Which is Better for Saving Your Home, Chapter 7 or 13?

Although either type of consumer bankruptcy will temporarily stop a foreclosure of your home, which is better for you in the long run?

 

The Simplistic Answer

If you are behind on your mortgage, and definitely want to keep your home, then the simple guideline is: file a Chapter 7 “straight bankruptcy” case if that allows you to catch up on your arrears as fast as you need to, otherwise file a Chapter 13 “adjustment of debts” to give you more time.

A Truly Unique Decision

Many considerations can come into play in deciding whether a Chapter 7 or 13 is better for you overall. Even if we focus only on considerations related to saving your house, the decision still turns on your unique circumstances.

For example, following up on the “simplistic answer” stated above, a vague rule of thumb is that mortgage holders will tend to allow Chapter 7 debtors who are behind on their mortgage about a year to catch up. The mortgage holders will generally negotiate a “forbearance agreement” with large enough monthly catch-up payments (beyond the regular monthly mortgage payment amount) to bring the account current in a year or so.

But some specific mortgage holders may have a policy of allowing a longer or shorter period, and some may lengthen or shorten the length based on the particular facts.

The situation can be complicated by the reality that a Chapter 7 filing may make you eligible for a mortgage modification, but you may well not know until after you’ve filed the bankruptcy case and applied for the modification.

Another twist is that Chapter 13 allows for the potential “stripping” of a second mortgage, which Chapter 7 does not. If so, then even if you might have been able to cure the mortgage arrearage fast enough to pull off a Chapter 7 case, the tens of thousands of dollars saved through the “stripping” would very likely make Chapter 13 the better option.

Might Chapter 7 Be Enough?

So would—in your unique situation—a Chapter 7 buy you enough time, or would you instead need the much stronger medicine of Chapter 13?

Chapter 13 deservedly is known as being the home-saving bankruptcy option. But here are some examples where Chapter 7 may be enough to save your home:

  • you have a sale pending on your house but you’ve run out of time with a scheduled foreclosure;
  • you have some money coming to cure the arrearage but again have run out of time;
  • you are very close to getting a mortgage modification approved, or are more likely get it approved after discharging you debts in bankruptcy; or
  • you have decided to surrender the house but need a little more time to get into another home.

Chapter 13 Is Great If You Need It

Admittedly, these are relatively rare situations. Much more common is if your income went down through unemployment or a lower paying job, so that keeping up with the home mortgage payments became impossible. And then you regained that income, or maybe not all of it, and now owe a huge amount of missed mortgage payments, late charges and other fees. It does not take long for that arrearage amount to become so large that there’s no way that you could catch up on it within a year or so.

So Chapter 13 can give you as much as five years to catch up.

It can also buy you much more time to sell your home, until you are in a better time of year for home sales, have reached a point in your family’s life when moving makes more sense, or maybe even want to wait a couple of years for the home’s value to rise.

Chapter 13 can also be much better at dealing with other house-related debts, such as property taxes, second mortgages, and income tax, support or homeowners’ association liens.

Conclusion

There is much that goes into the decision whether to file a Chapter 7 or Chapter 13 case. This blog should convince you that, while both have advantages, you really need an experienced bankruptcy attorney to help you make the right choice for your unique circumstances. 

/by