Choose between Your Prior and Present State’s Property Exemptions When You Have Timing Flexibility

If you moved to your present state less than two years ago, when you file bankruptcy can affect how much of your property is protected.

 

Even though bankruptcy is a federal procedure, the state where you are “domiciled” can greatly affect how much of your property you can protect in bankruptcy. In a Chapter 7 “straight bankruptcy” case, this can determine whether you have to surrender any of your property to the bankruptcy trustee. In a Chapter 13 “adjustment of debts” case, this can determine how much you need to pay to your creditors during your payment plan.

Property Exemptions Can Be Very Different State to State

The property exemption laws of one state can be radically different from those of another state, even if that state is right next door.

Take the example of the exemptions available to a person who lives in Mobile, on the southern tip of Alabama, and those available to someone who lives an hour drive to the east in Pensacola, on the Florida Panhandle.

First one similarity: both Alabama and Florida, like a majority of the states, require their residents to use their state property exemptions instead of a federal set of exemptions in the Bankruptcy Code. So a long-time resident of Mobile must use the Alabama exemptions in her bankruptcy filing, while a long-time resident of Pensacola must use the Florida exemptions.

These two states’ homestead exemptions—the amount of value in your home that you can protect from creditors—are a stark example how exemptions can be radically different. Alabama has one of the least generous homestead exemption amounts—$5,000 in value or equity, or $10,000 for a couple—while Florida has one of the most generous—unlimited value or equity. Simply put, if a person owned a $150,000 free and clear home in Mobile (or one with that much equity) and filed a Chapter 7 case, the Chapter 7 trustee would take that home, sell it to pay creditors, and give the person the $5,000 exemption amount (and possibly any left over after paying the creditors in full). That same valued house in Pensacola (or one with that much equity) would be completely protected, the trustee could not touch it, and the creditors would get nothing from it.

(Note that if you “acquired” your present homestead within 1,215 days (about 40 months) before filing bankruptcy—and the equity for it did not come from a prior principal residence in that same state—then your homestead exemption is limited to a maximum of $155,675, even if your present state’s exemption is more generous. (See Section 522(p) of the Bankruptcy Code.) The point of this law is to discourage people from moving to and buying a house in a state with a high or unlimited homestead exemption in order to shield their assets from bankruptcy.)

Choosing between Your Prior and Present States’ Exemptions

You may have an opportunity to take advantage of the difference in exemptions between your prior and present state because of the bankruptcy law that determines which state’s laws you must use. If you have lived in your present state for the last 730 days (2 times 365 days), then the property exemptions which will apply to your bankruptcy case are the ones allowed in your state. However, if you moved during these last 730 days from another state, then the exemptions of your prior state will apply.

(To be picky, you follow the law of the state where you had your domicile—generally, where you were living—“during the 180 days immediately preceding the 730-day period.” See Section 522(b)(3)(A) of the Bankruptcy Code for all the gory details.)

So if you moved from another state to your present state in less than two years, and you file a bankruptcy before the 730-day period expires, than you must use the exemptions of your prior state. But if you wait until immediately after that 730-day period expires, you must use the exemptions of your present state.

Find Out If the Different States’ Exemptions Matter to You

It is definitely possible that all of your property is protected by the exemptions available in EITHER state. The contrast in homestead exemptions above between Alabama and Florida is an extreme one. Most people who file bankruptcy do NOT lose any of their property. So the first thing you need to do if you have moved in the last two years from another state and are in financial trouble is talk to a local bankruptcy attorney. Find out if you have any assets which would be protected better by either of your two states. And if so, see if it is worthwhile in your particular situation to pick when you file your bankruptcy case based on which state’s exemptions are better for you. You certainly don’t want to be in the situation when you find out too late that you could have protected your property better by filing a few months or even a few days earlier. 

 

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Be Able to Write Off More Debts by Not Being Rushed into Filing Bankruptcy Too Quickly

More income taxes and credit card debts can be discharged (written off) by tactically delaying bankruptcy. See an attorney to do this right.

 

Last week we introduced the idea that many of the laws about bankruptcy are time-sensitive. When your case is filed can have significant consequences. Last week we focused on the how timing can affect whether you can file a Chapter 7 case or are forced to do a Chapter 13 one. Today we address how timing of a bankruptcy filing can effect what debts can be discharged.

1. Most Income Taxes Can Be Discharged, with the Right Timing

Federal and state income taxes are forever discharged if you meet a number of conditions. Two of the most important of these conditions are met by just waiting long enough before filing your bankruptcy case:

  • Three years must have passed since the time that the tax return for that tax was due (plus any extension if you asked for one).
  • Two years must have passed since you actually filed the pertinent tax return.

For example, assume a taxpayer owes $10,000 to the IRS for the 2009 tax year. She had asked for an extension to file that year to October 15, 2010, but then did not actually file that tax return until October 31, 2011. The above 3-year condition is met after October 15, 2013, because that is three years after the tax return was due. But the 2-year condition has to be met as well, which would not occur until after October 31, 2013, two years after the actual tax return filing date. So filing a bankruptcy case on or before October 31, 2013 would leave that $10,000 tax debt still owing; filing on November 1, 2013 or after would result in it being discharged forever. Simply waiting this one day makes a difference of $10,000.

2. Recent Credit Card Purchases and Cash Advances More Easily Challenged

If a person incurs a debt without intending to repay it, that creditor can challenge the person’s ability to discharge that debt. It’s considered fraudulent—incurred with the intent to cheat the creditor.

Along the same lines, a debt that was entered into a very short time before the person files bankruptcy understandably leads the creditor to wonder if the person already intended to file bankruptcy at the time of that debt. The law takes this situation and creates a “presumption”: under very specific facts, recent credit card purchases and cash advances are “presumed” to be fraudulent. This presumption does not necessarily mean that that particular portion of the debt is not discharged, but that the creditor has a much easier time making that happen.

Here are the specific facts creating the presumptions. The law says that purchases on a single credit card totaling more than $650 made within 90 days before filing bankruptcy are “presumed” not to be dischargeable. Same thing with cash advances on a single account totaling more than $925 made within 70 days before filing bankruptcy.

As shown in our discussion about income taxes above, a delay in filing the bankruptcy case can also work to your advantage with these presumptions. We can avoid giving a creditor the benefit of these presumptions two ways. First, if possible do not use any credit or make any cash advances in the few months before filing bankruptcy—or certainly no more than the stated threshold dollar amounts on any single credit card. Or second, if you’ve already made such purchases and/or cash advances, we could simply hold off filing bankruptcy until the indicated 70-day and 90-day presumption periods have passed.

Be aware that while doing these would solve the presumption problem, a creditor could still challenge the debt’s discharge. But it needs to have evidence that you incurred a debt which you did not intend to pay, or that there was some other kind of fraud or misrepresentation. But because proving such bad intentions is difficult, such challenges without the benefit of a presumption are relatively rare.

So as long as you avoid filing bankruptcy within the 70/90 day presumption periods, you will significantly reduce the chance that the creditor will challenge the discharge of its debt.

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Advantages of Being in Control of the Timing of Your Bankruptcy Filing

Don’t get rushed into filing bankruptcy when the timing’s not right. Filing at the right time could save you thousands of dollars.

 

Timing Does Not Always Matter Much, But It CAN Be Huge

Many laws about bankruptcy are time-sensitive. And those time-sensitive laws involve the most important issues—what debts can be discharged (written off), what assets you can keep, how much you pay to certain creditors, and even whether you file a Chapter 7 case or a Chapter 13 one.

It is possible that the timing of your bankruptcy filing does not matter in your particular circumstances. But given how many of the laws are affected by timing, that’s not very likely. It’s wiser to give yourself some flexibility about when your case will be filed. If you wait until you’ve lost that flexibility—because you have to stop a creditor’s garnishment or foreclosure—you could lose out on some significant advantages.

Today’s blog post covers the first one of those potential timing advantages.

Being Able to Choose between Chapter 7 and Chapter 13

Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” are two very different methods of solving your debt problems. There are dozens and dozens of differences. You want to be able to choose between them based on what’s best for you, not because of some chance timing event.

To be able to file a Chapter 7 requires you to pass the “means test.” This test largely turns on your income. If you have too much income—more than the published median income for your family size and state—you can be disqualified from doing the get-a-fresh-start-in-four-months Chapter 7 option and be forced instead into the pay-all-you-can-afford-for-three-to-five-years Chapter 13 one.

The “Means Test” Income Calculation

What’s critical here is that income for purposes of the means test has a very special, timing-based definition. It is money that you received from virtually all sources—not just from employment or operating a business—during the six full calendar months before your case is filed, and then doubling it to come up with an annual income amount. For example, if your bankruptcy case is filed on September 30 of this year, what is considered income for this purpose is money from all sources you received precisely from March 1 through August 31 of this year. Note that if you waited to file just one day later, on October 1, then the period of pertinent income shifts a month later to April 1 through September 30.

So if you received an unusual chunk of money on March 15, that would be counted in the means test calculations if you filed anytime in September, but not if you filed anytime in October. If that chunk of money pushed you over your applicable median income amount, you may be forced to file a Chapter 13 case if your bankruptcy case is filed in September. But not if you filed in October because that particular chunk of money arrived in the month before the 6-month income period applicable if you waited to file until October.

Conclusion

Being able to delay filing your bankruptcy in this situation—here literally by one day from September 30 to October 1—allows you to pass the means test and therefore very likely not be forced to file a Chapter 13 case. Being in a Chapter 13 case when it doesn’t benefit you otherwise would cost you many thousands of dollars in “plan” payments made over the course of the required three to five years. Clearly, filing your case at the tactically most opportune time can be critical.

The sooner you meet with a competent attorney who can figure out these and similar kinds of considerations, the sooner you will become aware of them and the more likely problems like the one outlined here can be avoided. 

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Why You Should Not Allow a Creditor to Get a Default Judgment against You

Not responding to a lawsuit by a creditor can harm you in more ways than you think.

 

Three Different Sets of Reasons

Judgments can harm you in three distinct ways:

1) Give the creditor powerful collection tools against you to collect the debt.

2) Force you into filing bankruptcy when it’s not to your best advantage.

3) Makes it harder sometimes to discharge (write off) the debt later in bankruptcy.  

Today’s blog addresses the first one of these. The other two will be covered in my next blogs.

The Temptation to Let a Lawsuit Turn into a Default Judgment

Most lawsuits filed by creditors and collection agencies to collect debts result in judgments against the people being sued. That’s because the main allegations in most of these lawsuits simple argue that the debt at issue is legally owed. And that’s usually not in dispute. So the people being sued understandably figure that there’s no point in responding to allegations that appear to be true.

Practically speaking, most of the time the people being sued are at the end of their financial rope. So they believe that they can’t afford to hire an attorney to find out what their options are, or the consequences of doing nothing.

What ARE the Consequences of Doing Nothing?

You may know that a judgment gives a creditor the right to garnish your wages and bank accounts. You may believe that you can prevent such garnishments from happening to you by keeping your money out of bank accounts and by being paid other than a regular wage or salary (although even those are not practical options for most people).  Perhaps, but the “judgment creditor” usually has other rights against you once it gets that judgment.

The laws differ state by state, but generally a judgment becomes a lien against any real estate you own, or will own in the future. Depending on the facts and applicable law, the creditor may then be able to foreclose on that real estate to get its debt paid. Think about not only property under only your own name, but also your rights to property held jointly with a spouse, parent, or through a trust or estate.

An aggressive creditor usually has other tools available. In most states it can get a judge to order you to go to court to answer questions under oath about what you own so that the creditor can find out what it can take from you. The creditor may be able to get a court order sending a sheriff’s deputy to your home or business to seize some of your possessions for payment of the debt. If someone owes you any money (or anything else), that person can be ordered to pay that debt to the creditor instead of to you.

Similarly, if you own a business, the creditor can force your customers to pay it instead of you. This can be devastating both to your cash flow and to your business reputation. Your business could even be subjected to a “till tap”: a sheriff’s deputy arriving at your place of business to take money directly out of the cash register to pay towards the judgment debt.

Will These Happen to You?

We don’t want to give the impression that these kinds of aggressive collection procedures are used in most cases, or will necessarily be used in yours. Some of these are unusual, taking a fair amount of extra work and fees for the creditor or its attorney, and so likely won’t happen in most simple collection cases. The point is that once creditors have a judgment against you, they have many powerful options against you. We meet all the time with distressed new clients who have been shocked at how creditors with judgments against them have been able to financially hurt them.

Why See an Attorney If You Have No Defense to the Debt?

Flying blind is scary and dangerous. Getting sued and not knowing the potential consequences of just letting the creditor win is like flying blind. Besides potentially finding out about possible defenses to the lawsuit, consulting an attorney gives you the opportunity to consider your broader financial situation, and your options for addressing it. A lawsuit by a creditor is usually a symptom of a broader problem. By consulting with a knowledgeable attorney, you may learn about potential solutions to both the lawsuit AND the rest of your financial problems.

 

Please visit our website again for the next two blogs about the other very important reasons why you should not allow a creditor to take a default judgment against you. 

 

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The Final and Best Reason to Get Bankruptcy Advice Before Selling Your Home

If you’re under financial pressure to sell your home, first get legal advice about your options. Because you need it. And it’s free.

 

When it comes to selling your home, it is only sensible to know all your available options before you act. That’s especially true if you’d rather not sell the home, but are doing so because you believe you have no choice.

This is the last in a series of blogs about why you should get advice from a bankruptcy attorney before rushing to sell your home. Review the last several blogs to see how the bankruptcy laws can save you tremendous amounts of money and give you tools to do what would otherwise be impossible, with you house and otherwise.

So maybe there ARE some better options. You may be able to keep your home, or to sell it when it’s better for you and your family to do so.

Not Being Able to Afford an Attorney

If you are under serious pressure from creditors, you would be quite sensible to assume that you could not afford to pay for an attorney to get legal advice about your options. But that is not true, because, as you may have seen in this website and others, many attorneys provide a free consultation meeting just for that purpose.

But Isn’t There a Catch?

You may also sensibly figure that you don’t get something for nothing. So you think there’s got to be a catch. You may wonder if you’ll be forced to hire the attorney you meet with, and to do what he or she tells you to do, such as to file bankruptcy.

But the truth is that all licensed attorneys are ethically and legally bound to provide accurate legal advice to their clients. What is often misunderstood is that this is true regardless whether or not you are paying the attorney for that advice. For an attorney to advise you to take some action—such as to file a certain type of bankruptcy—if that is not in your own best interest could both jeopardize that attorney’s license to practice law and expose him to a malpractice lawsuit.

Similarly, the decision whether or not you should file bankruptcy, or pursue any other legal option, is one that an attorney cannot legally or ethically make for you. He or she can make recommendations, and show the benefits and detriments of certain options, but in the end it’s your decision. If you ever feel pushed against your will into any decision by any attorney, stop working with him or her.  

Still, How Can Attorneys Not Charge for the Consultation Meeting?

The reason that attorneys find it worthwhile to provide free initial consultations is that, because of the population of people who see bankruptcy attorneys, and the benefits provided by bankruptcy law, a certain percentage of these consultations WILL result in the client deciding to hire them, soon or later, for filing bankruptcy or some other purpose. For the attorneys it’s a combination of sensible marketing and public service.

The Good Result for You

The bottom line for you is that this gives you the opportunity to get valuable legal advice for free.

You DO need to be a careful consumer, as with any important purchase decision. Use the initial meeting to gauge whether the attorney appears knowledgeable, trustworthy, and approachable. Does the attorney take the time to understand your situation, and are your questions answered clearly? Is the attorney respectful of you? Do you feel comfortable with the attorney and others in his or her office?

If you are very comfortable with the first attorney you meet with, fine, but otherwise be prepared to take the time to meet with one or even two others. Your time is valuable, but this effort is worthwhile considering what is at stake. Besides likely being your biggest asset, your home also your biggest debt. Instead of making decisions about it in the dark, you deserve to have the best possible game plan for it.

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