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Picking the right Chapter to file can be simple, or it can be a very delicate, even difficult choice. And appearances can be deceiving. A situation that seems at first to call out for an obvious choice can turn out to have a twist or two that turns the case upside down.
That twist can come in the form of an unexpected disadvantage in filing a bankruptcy under the intended Chapter, or instead an unexpected advantage in filing under the other Chapter.
Let me be clear. The majority of my clients walk into their initial consultation meeting with me with a strong idea whether they want to file a Chapter 7 or a 13. After all, there is a wealth of information available—like this blog that you’re looking at now. So lots of my clients come in having read up on their alternatives. Whether their inclination to file one or the other Chapter comes from their head or from their gut, it’s often correct.
But often it is not correct.
That shouldn’t be a surprise. Although the main differences between Chapter 7 and Chapter 13 can be outlined in a few sentences, there are in fact dozens of more subtle but often crucial differences. Many of them do not matter in most situations, but sometimes one or two of those differences can be decisive in determining what is best in your case. If you did not know about them, you would file the wrong kind of case. And pay the consequences for many years.
So that this doesn’t just sound like just a bunch of hot air, let me show you through one example. Imagine that you have a home that you have been trying to hang onto for years, but by now have pretty much given up on doing so. You’ve fallen behind on both the first and the second mortgage. Besides, with the decline in housing values the last three years or so, the home is now not even worth the amount owed on the first mortgage. And say you owe $80,000 on the second mortgage, so the home is “under water” by that amount. You have no good reason to think that the market value will climb back up enough to give you equity in the home for many years. Your family would sure like to keep living in their home, so the kids could stay in their schools and close to their friends, but it sure sounds like it makes no sense to keep trying to hang onto something worth $80,000 less than what you owe. Besides, you just can’t don’t have the money to pay both mortgages. So you figure it’s time to give up on the home, and just start fresh with a Chapter 7 “straight bankruptcy.”
But then you learn from your bankruptcy attorney that if your home is worth less than the balance on the first mortgage, through a Chapter 13 case you can “strip” the second mortgage off the title of your home. It becomes an unsecured debt which is lumped in with the rest of your unsecured debt (like credit cards, medical bills). In return for paying into your Chapter 13 Plan a designated amount each month based on your budget, and doing so for the three-to-five year length of your Chapter 13 case, you would be able to keep your home often by paying very little—and sometimes nothing—on that $80,000 balance. At the end of your case, whatever amount is left unpaid on that second mortgages will be “discharged”—legally written-off—so you own the home without that mortgage and having no debt (other than the balance on the first mortgage.
This “stripping” of the second mortgage is NOT available under the Chapter 7 that you initially thought you should file. Having Saving your home by lowering your payments on it and bringing the debt against it much closer to its value may well swing your choice in the Chapter 13 direction.
This is just one illustration of countless ways that the option you initially think is the better one might not be. So keep an open mind about your options when you first consult with your attorney. Communicate your goals to him or her, and be clear about why you think one Chapter sounds better to you than the other. In the end, after laying out your story and hearing the attorney’s advice, it IS ultimately your choice. But do yourself a favor and be flexible, because you might get a better deal by the end of your meeting than you thought was possible at the beginning of it.
Luxury Sales—Some Very Tangible Evidence of the Widening Income Gap
Rich Americans are buying again. The rest of us—not so much. The difference between the sales figures at luxury stores versus middle- and low-end ones is stark evidence showing who has been coming out of the Great Recession doing pretty well and those who have not.
An article in the business section of the New York Times a couple of weeks ago made the point that “the retail economy is locked on two tracks: one for businesses that cater to the well-to-do, and the other for everyone else.”
On the low-to-medium end, retailers such as Target and JC Penney posted modest single-digit gains for sales in July compared to a year ago, while others such as Kohl’s actually had lower sales this July than last. On the higher end, it seems like the more luxury-oriented to store, the better the improvement in sales. Nordstrom sales were up 6.6% this July, Neiman Marcus up 7.7%, and Saks Fifth Avenue up a whopping 15.6%.
The article I referred to above points out some ways that retailers see what’s going on inside the wallets of their customers, particularly the low- to average-income shopper. They see a pronounced dip in sales in the weeks or days before shoppers’ paydays. People have less discretionary income, and tend to be living paycheck to paycheck. And instead of buying clothing and other seasonal items as much for upcoming seasons, more people tend more to buy only what they need when they need it. This also enables them to take advantage of seasonal sales. In turn these retailers have to cut their prices to bring in shoppers, which lowers their gross receipts.
In contrast, luxury stores are now able to sell much more of their merchandise without discount, and have even been able to increase their prices. According to Saks Fifth Avenue’s chief executive Stephen Sadove, “There’s a dramatic decline in the amount of promotions in the luxury sector — we’re seeing higher levels of full-priced selling than we saw prerecession.” Example: their Christian Louboutin “Bianca” platform pumps just about sold out, at full price, for $775 a pair. And while three years ago his store’s most expensive Louboutin suede boots cost $1,575, the top of the line version now sells for $2,495.
But before we get out our pitchforks to storm the gated mansions of the wealthy, here’s a bit of reality to chew on: “the top 5 percent of income earners accounts for about one-third of spending, and the top 20 percent accounts for close to 60 percent of spending,” said Mark Zandi, chief economist of Moody’s Analytics. “That was key to why we suffered such a bad recession — their spending fell very sharply.”
Sounds like we need the wealthy to continue their spending.
It sure doesn’t feel like it, especially during this maddeningly slow “recovery,” but it’s true: we’re all in this together.
The two richest people in America think they are under-taxed. Do they know what they are talking about?
I noticed on the latest list of the country’s wealthiest that Bill Gates and Warren Buffett are #1 and #2. They both have been publicly arguing in favor of increased taxes for themselves and their very rich colleagues. Whether this is good policy is a matter of intense political debate. It’s a particularly important one considering what the country just went through a couple of weeks ago with the exhausting debt-ceiling battle. A central part of its last-minute compromise was to hand over responsibility for finding $1.5 trillion cuts in federal spending to a 12-person super-committee of U.S. Senators and Representatives. And to do so by the day before Thanksgiving.
With this timing clearly in mind, Warren Buffett wrote an op-ed column in last Sunday’s New York Times titled “Stop Coddling the Super-Rich.”
He makes two primary arguments:
1. The rich currently pay less in taxes as a percent of their income than the middle class:
While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks. Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as “carried interest,” thereby getting a bargain 15 percent tax rate. Others own stock index futures for 10 minutes and have 60 percent of their gain taxed at 15 percent, as if they’d been long-term investors.
… . It’s nice to have friends in high places.
… .
The mega-rich pay income taxes at a rate of 15 percent on most of their earnings but pay practically nothing in payroll taxes. It’s a different story for the middle class: typically, they fall into the 15 percent and 25 percent income tax brackets, and then are hit with heavy payroll taxes to boot.
2. Refuting the “job-killing” argument of fiscal conservatives, Buffett says that he and his fellow investors aren’t affected by higher tax rates :
I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation.
Buffett closes his piece by asking for an immediate higher income tax rate for those making more than $1 million, and an even higher rate for those making more than $10 million. He concludes:
My friends and I have been coddled long enough by a billionaire-friendly Congress. It’s time for our government to get serious about shared sacrifice.
Usually not. But in some limited situations the indirect consequences can be huge.
Considering what’s at stake, if you are either a legal or illegal immigrant considering filing bankruptcy, this is definitely an area where you need the advice of both a bankruptcy and an immigration attorney. It’s my job to give my clients advice, but sometimes the most important thing to tell them that they need the additional help of another professional. This is one of those situations.
When you go to meet with each attorney, here are some general principles that can guide your consultation with them:
1) Just as the bankruptcy documents don’t ask you anything about your citizenship status, your naturalization application will not directly ask anything about filing bankruptcy. Bankruptcy is a legally accepted method for dealing with your debt. In fact it may even help you avoid dealing with your financial circumstances in more desperate ways, ways which could jeaopardize your immigration prospects.
2) To become a lawful permanent resident or citizen, an immigrant must establish “good moral character.” It is conceivable, although not likely, that your bankruptcy filing could be seen as an issue of moral character. Immigration is considered on a case-by-case basis, so you need to talk with an immigration attorney thoroughly familiar with current practices.
3) If you have been convicted of one of a certain set of crimes, or if you reveal during your bankruptcy proceeding that you committed one of these crimes, these could adversely affect your immigration status. Certain crimes could even result in deportation. Examples include crimes of “moral turpitude” like using credit cards in other people’s names, writing fraudulent checks in more than one state, tax evasion, fraudulent transfers of assets, or providing false information to the federal government (for example, in bankruptcy petitions!).
4) Your citizenship application will ask if “you have ever failed to file a required federal, state or local tax return,” and whether you owe any overdue taxes. Bankruptcy can legally write off some taxes, but there may well be adverse immigration consequences for doing so. This is especially problematic if you have been working and getting paid “under the table,” and not having taxes withheld.
5) If you’re not legally in the U.S., you are definitely exposing yourself to the legal system by filing bankruptcy. False social security numbers—either on the bankruptcy documents themselves or even on prior credit applications—would likely lead to huge problems. In some parts of the country, U.S. Attorneys appear at the Meeting of Creditors to ask about these and other immigration related matters. You are under oath and may find yourself in a very sensitive and dangerous situation.
In my last blog I said that non-citizens—legal or not—can file bankruptcy. All they need is appropriate identification. But that begs two questions: 1) Would that non-citizen receive all the benefits from that bankruptcy that a citizen would receive? 2) And would filing the bankruptcy hurt a legal non-citizen’s efforts to become a citizen, or would it increase an illegal immigrant’s risk of deportation?
I’ll address the first of these questions now, and the second one in my next blog.
Two benefits of bankruptcy pertain here:
1. The protection of assets from the bankruptcy trustee (and thus from the creditors) through “exemptions.”
2. The granting of a discharge of debts.
The rules about what property of a debtor is exempt do not directly change with the debtor’s citizenship status, but there are potentially very important indirect effects.
Bankruptcies filed many states use that state’s own set of exemptions. So the federal bankruptcy court has to interpret that state’s definitions of those exemption definitions. Some of those definitions and the court’s interpretations of them can disqualify some immigrants. For example, Florida has a very generous homestead exemption, but In order to qualify for it, a debtor must be a permanent resident of the state with the intent to make the property in question his permanent residence. This residency requirement can be satisfied by a non-citizen only if he or she has gotten permanent resident status–a “green card”—as of the date of the filing of the bankruptcy. In a recent case, the immigrant was in the process of getting his permanent residency and in fact received that status three months after filing bankruptcy, but he was still deemed not to be a permanent resident at the time of his bankruptcy filing and so was denied a homestead exemption.
Again, the rules about what debts can be discharged and which cannot are the same regardless of citizenship. But some non-citizens have debts which were incurred in another country, leading to the question whether those debts can be discharged in their U.S. bankruptcy case.
It depends.
First, assuming that the creditor is given appropriate notice of the bankruptcy, and the debtor successfully gets a discharge of his or her debts, that creditor will no longer be able to try to collect that foreign in the U.S.
But second, there is a good chance that the U. S. bankruptcy court’s discharge of this debt does not result in the discharge of the debt under the laws of the original country. If so, then that debt can continue to be collected according to the laws of that country, presumably against the debtor’s assets in that country, and perhaps in other countries outside the U. S. This depends on complicated international issues like treaties between the U.S. and that country, and whether they have “comity”—an agreement to respect each other’s laws—specifically in the area of bankruptcy. Otherwise, if the debtor has property outside the U. S., or intends to return to the other country, even just to visit, these issues should be investigated very closely, likely with both your U. S. bankruptcy attorney and one in the other country. In some situations, it even may be necessary to file the appropriate form of bankruptcy in the other country, assuming that exists and the debtor qualifies to do so.
The answer is simple: Yes.
The Bankruptcy Code does not limit who may file based on citizenship status. It states that “only a person that resides or has a domicile, a place of business, or property in the United States… may be a debtor… .” The “person” is simply defined to include an “individual” (as well as a “partnership and corporation”). The point is that there is no requirement about needing to be a citizen, or even to being legally in the country. So everyone, citizen or non-citizens, legal or illegal, can file bankruptcy.
But the person must meet one of the above categories of who may be a “debtor.”
One often used category is to have a “domicile,” meaning simply being physically present in one location with the intention of making that place the person’s present home. Generally the longer the person has been in one place and the more he or she has put down roots—such as getting a state drivers license—the easier to show intent to establish a domicile.
Having any meaningful amount of property, such as bank or other financial accounts, or a vehicle, would itself likely be sufficient to qualify as a debtor.
Any other requirements? The bankruptcy filing documents ask for a Social Security number, but there is nothing in the Bankruptcy Code which requires that. If the person filing bankruptcy has a legal Social Security number appropriately issued by the Social Security Administration, it should be used. Otherwise, the person should get an Individual Taxpayer Identification Number (“ITIN”) from the IRS, and use that. The “IRS issues ITINs to foreign nationals and others who have federal tax reporting or filing requirements and do not qualify for SSNs.”
Anything else? In most places, the bankruptcy filer will also need to show proof of identity at the so-called Meeting of Creditors, to allow the bankruptcy to verify that the person present there answering the questions under oath is a real person and the one who filed the bankruptcy documents. This aims to prevent identity scams. Proof of identity generally requires two things: 1) a document showing your SSN or ITIN—such as the original Social Security card it that’s available, or some other paper received from the government or from an employer showing the number; plus 2) some form of photo identification—such as a driver’s license or passport.
So is that it? Well, yes, with these conditions met the non-citizen can file for bankruptcy. But two big questions remain that just can’t get swept under the rug—
1. Would a non-citizen potentially have problems qualifying for any of the benefits of bankruptcy, such as getting a “discharge” (legal write-off) of the debts, or claiming property exemptions in order to keep the property?
2. Does filing the bankruptcy harm a legal non-citizen’s efforts to become a citizen, or does it increase an illegal immigrant’s risk of deportation?
Sorry for keeping you in suspense, but I’ve covered enough for one day and so l’ll address have to these important questions in my next two blogs.
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