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The Amazing but True Evolution of Bankruptcy Law

You’ve heard of debtors’ prisons. But that’s only one hideous part of the very colorful history of bankruptcy law.

American bankruptcy law was of course based on the law of England at the time of the colonies. Today’s blog tells how incredibly different pre-Revolutionary War bankruptcy laws were from current law.

  • The first bankruptcy law in England was enacted more than 450 years ago during the reign of Henry the Eighth, the one who had a habit of decapitating his former wives. Debtors were called “offenders” under this first law, essentially as perpetrators of a property crime.  The purpose of this law, and as if was expanded during the following hundred and fifty years, was not to give relief to debtors but rather to give creditors a more effective way to collect on the debts owed by their debtors.
  • Consistent with that, the law included no discharge of debts. After a bankruptcy was finished—with the assets of the “offender” seized and sold and distributed to creditors—separate creditors could still continue chasing the individual for any remaining balance.
  • Only creditors could start a bankruptcy proceeding. Creditors had to allege an “act of bankruptcy” by the debtor. Physically hiding from creditors was “an act of bankruptcy,” as was hiding assets by conveying them to others. Today’s very seldom used “involuntary bankruptcy” is a throwback to this.
  • Since credit was seen as immoral, only merchants were allowed to use credit, for whom it was seen as a necessary evil. So only merchants could become bankrupt.
  • For the following century and a half, Parliament made the law even stronger for creditors, allowing bankruptcy “commissioners” to break into the homes of “offenders” for their assets, put them into pillories (those wooden structures with holes for head and hands used for public shaming), and even cut off their ears.
  • The discharge of debts was finally introduced in the early 1700s for cooperative debtors, but was given only upon consent of the creditors. Furthermore, to induce cooperation, fraudulent debtors were subject to the death penalty (although it was very seldom used).
  • Cooperative debtors received an allowance from their own assets, a bit of a foreshadowing of Chapter 13 payment plans.

This was the English bankruptcy law in effect that the U.S. Constitution was adopted, with its Bankruptcy Clause giving Congress power to “pass uniform laws on the subject of bankruptcies.” More on that and the very rocky history of U.S. bankruptcy laws in my next blog.

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The Simplest Save-Your-Business Chapter 13 Case

Here’s how to focus on running your business, by stopping your creditors from taking the wind out of your sails.

In the last few blogs I’ve been talking about some of the extra considerations that come into play when you own a business, are having financial troubles, and wonder if bankruptcy can help. No question—most of the time, having a business adds an extra layer of issues for me to help you work through in deciding whether bankruptcy is the best option, and then putting your case together if it is. But a business Chapter 13 case does not have to be complicated. Let’s take a very simple business situation, and walk it through a Chapter 13 case, to get a practical feel for how it works.

So let’s say Mark, a single 30-year old, started a handyman business when he lost his job three years ago. Before that he’d done about ten years of all kinds of construction and maintenance work, already owned all the tools he needed, and had even taken a few courses at the local community college in small business management because he’d always wanted to run his own business. He had good credit at the time, owed nothing but about $3,000 on some credit cards, plus had never been late on his modest mortgage. Mark had lived all his life in the same city, was the kind of guy who knew tons of people, and had well-earned reputation that he could fix anything. He put a lot of time into putting together a detailed and realistic business plan. He knew he should have some money saved up to get him past the start-up phase, but then the recession hit, he was out of work, and decided it was now or never. Besides, he had $7,000 of credit available on his credit cards if he got desperate.

His business started off slowly, partly because he didn’t have any money for advertizing. But he was creative and worked very hard building a customer base and a good business reputation. His income was creeping steadily upwards, but way too slowly. Over the course of the first year Mark maxed out his credit cards, and simply didn’t have enough money to pay income taxes to the IRS, falling behind $7,000 to them. Then during the second year he managed to service the credit card debt but couldn’t pay it down any, and fell behind another $7,000 to Uncle Sam. Then this last year, the IRS forced him to start making $500 monthly payments on his $14,000 debt, plus the estimated payments for the current year so that he didn’t continue falling further behind with them. As a result he’d gotten spotty on his credit card payments, which jacked up the interest rates and pushed him over the credit limits, piling on all kinds of fees. And now he’s missed a total of 4 payments on his mortgage, putting him $6,000 in arrears.

In the midst of all this his business now has steady—and still slowly increasing—income, Mark enjoys his work in spite of all the financial pressures, and believes he can keep growing it, especially if/when the economy improves. But the IRS has him in a vice, the credit cards creditors are sending their accounts to collection agencies, and his home is heading sooner or later to foreclosure.

A Chapter 13 case filed now for Mark would:

  • Stop the pressure by the IRS on the $14,000 debt, by cancelling the $500 payments, and giving him much longer—3-to-5 years—to pay that debt, usually with NO additional ongoing interest or “failure to pay” penalties, thus reducing the total amount to be paid to the IRS.
  • Stop collection efforts by the credit card creditors and collection agencies, who would only receive money AFTER he caught up on the house arrearage AND paid off all the taxes, with the amount received depending on what Mark could afford and how much in assets he needed to protect.
  • Immediately and consistently protect all his business and personal assets—tools and supplies, his business truck and/or personal vehicle, receivables owed by customers for prior work, and his business and personal bank and/or credit union accounts.
  • Allow him to focus on his business instead of his creditors, giving that business much more of a chance at success.
  • Get him debt-free–at the end of the 3-to-5 years Chapter 13 Plan, his mortgage would be current, he would owe nothing more to Uncle Sam, and he would have paid as much as he could afford on the credit cards, with the rest written off.

And the business that he loves, and in which he invested so much hope and dedication, would be alive and well.

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Basic Rules about Business Bankruptcy

If your business needs bankruptcy help, getting it done might not be much harder than a personal bankruptcy. But it depends on how your business is set up and how much you owe.

A couple blogs ago I said that I would soon explain some of the most important benefits of filing a business Chapter 13 case. And I said we’d start by assuming that your business is a sole proprietorship. In other words, the business and you are together legally as a single entity. That is, you have NOT set up your business as a separate legal entity–a corporation or limited liability company (LLC), or a formal or informal partnership.

But first, what if your business IS NOT a simple sole proprietorship, but instead is in one of these other forms?

If so, and you want to preserve your business through some kind of bankruptcy solution, I’ve got no choice but to start by telling you that it’s time (probably past the time) to have a meeting with a competent business bankruptcy attorney.  There are advantages and disadvantages of every form of doing business. But one practical disadvantage of running your business as a corporation/LLC/partnership is that this tends to make things significantly more complicated in the bankruptcy world.

That being said, here are a few straightforward things I can tell you that will make you just a bit more prepared when you visit me or another attorney:

1. Only an “individual” can file Chapter 13. Meaning that you and your sole proprietorship can together file a Chapter 13. But a corporation, or LLC, or partnership can’t.

2. Chapter 13s are sometimes called “wage-earner plans,” probably because one legal requirement is that you have a “regular income.” But that just means “income sufficiently stable and regular to… make payments under a plan under Chapter 13.” So if your sole proprietorship business income—combined with any other income—is even somewhat stable, you may well qualify under this requirement.

3.  But even if your business IS a sole proprietorship, you and your business together CAN’T file a Chapter 13 case if your total unsecured debt is $360,475 or more, or your total secured debt is $1,010,650 or more. These may seem like relatively high amounts but remember they include BOTH personal and business debts. Also the unsecured debt amounts can include less obvious ones such as the portions of your mortgages and other secured debts in excess of the value of the collateral. So a $750,000 debt secured by real estate now worth $550,000 equates to $200,000 in unsecured debt. And that’s before even looking at your regular unsecured debts.

4. If you are over one of the above debt limits, you can still file a Chapter 7 case, but that is almost never a way to save a business. Otherwise, your option is a Chapter 11, which is a hugely more complicated repayment procedure than Chapter 13.

5. A business corporation, LLC, or partnership can file a Chapter 11 case to keep the business afloat. But because of the very high attorney fees (easily 10 times the cost of a Chapter 13), and high filing fee plus ongoing court and U.S. Trustee fees, Chapter 11 is unfortunately not a practical solution for most small businesses. One of the biggest shortcomings in the bankruptcy world is the lack of a cost-effective method to deal with small business reorganizations. Many local bankruptcy courts have tried to address this with streamlined “fast-track” Chapter 11s, but the cost is often still prohibitively high.

As I said, if you are trying to save your financially struggling business, it is very important that you get competent business bankruptcy advice, and as soon as possible. You have likely been working extremely hard at trying to keep your business alive. Now you need a game plan to start directing your energies in a constructive direction.

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Can an Individual Chapter 7 Case Ever Save Your Business?

Chapter 13 can be a great way to keep certain small businesses afloat, but how about Chapter 7? Can’t it ever be a simpler and cheaper way to do so?

In my last blog I said that Chapter 7 is “seldom the right option if you own a business that you want to keep operating.”  The reason I gave for this is that Chapter 7 is a “liquidating bankruptcy,” so the bankruptcy trustee could make you surrender any valuable components of your business. These comments deserve more of an explanation.

At the moment a Chapter 7 bankruptcy is filed, all of the assets of the debtor (the person on whose behalf the case is filed) are automatically transferred to a new legal entity called the bankruptcy “estate.” A trustee is assigned to oversee this estate, which in most cases means that the trustee focuses on whether or not there are any estate assets worth collecting and distributing to creditors. The debtor can protect, or “exempt,” certain categories and amounts of assets, which remain the debtor’s and can’t be taken by the trustee. The idea is that people filing bankruptcy should be allowed to keep a minimum threshold of assets upon which to base their fresh financial start. In the vast majority of consumer Chapter 7 cases, the debtor can “exempt from property of the estate” all of the assets, leaving nothing for the trustee to collect.  This is called a “no-asset” estate.

If you own a business, can you file a Chapter 7 case and still continue operating the business?  That breaks down into two questions.

The first question is whether you can exempt all of the value of the business from the property of the bankruptcy estate, with the business either as a “going concern” or broken up into its asset components.

Many very small businesses are operated by and are completely reliant for their survival on the services of its one or two owners.  IF so, they cannot be sold as a “going concern”—an operating business—separate from their owners. So when faced with this kind of situation, a Chapter 7 trustee must consider whether he or she can sell any of the various assets that make up the business, or whether instead the debtor can exempt all of these business assets.

The assets of a very small business can include tools and equipment, receivables (money owed by customers for goods or services previously provided), supplies, inventory, and cash on hand or in an account. Sometimes the business will have some value in a brand name or trademark, a below-market lease, or in some other unusual asset.  

Whether a business’ assets are exempt depends on the nature and value of those assets, and on the particular exemptions that apply to them. By way of examples, it is not unusual for a small business to own nothing more than a modest amount of business equipment, and in such cases the applicable state or federal “tool of trade” exemption may well cover all that equipment. So indeed, it is possible for a debtor who owns a business to have a no-asset Chapter 7 estate.

But that’s when we get to the second question: is the trustee willing to let the business continue operating in spite of its potential liability risks for the estate?

What’s this about “liability risks”? Remember that everything you own, including your business, immediately becomes part of the bankruptcy estate when your bankruptcy case is file. So in effect, your business becomes the trustee’s to operate. And that means that the estate becomes potentially liable for damages caused by the business. The classic example: a debtor who is a residential roofing subcontractor, drops a load of shingles on someone the day after filing a Chapter 7 case, and is then sued by the injured party. The bankruptcy estate, and arguably the trustee, may well be liable. That is why the Chapter 7 trustees’ mantra about an ongoing business is “shut it down.”

There may be exceptions. It depends on the trustee, the nature of the business, and whether the business has sufficient liability insurance. It is their judgment call, and so this is very much area where you want to be represented by an attorney who knows all of the trustees on the local Chapter 7 trustee panel and how they will respond to this issue.

 So, there’s no question that it is risky to file a Chapter 7 case when you want to continue operating a business. You need to be confident that the business assets are exempt from the bankruptcy estate, and that the trustee will not require the closing of the business to avoid any potential business liability.

And that’s without even getting into details such as your potential loss of control of the business to the trustee, and the potential loss of business’ ongoing income to the estate.

I might well have not stated it strongly enough when I said that Chapter 7 is “seldom the right option if you own a business that you want to keep operating.”  It would take a rare set of circumstances for Chapter 7 to be the best way to go.

 

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Bankruptcy Can Save Your Business

Bankruptcy isn’t just for cleaning up after the death of a business. It can keep your business alive.

Bankruptcy saved General Motors. That business got out of a lot of it debt and restructured its operations, and ended up saving a lot of jobs. If you operate your own small business, bankruptcy may be able to save your job, too.

Let’s assume you have a very small, very simple business. One so simple that you did not form a corporation or any other kind of legal entity when you set up the business. And to keep this blog simple, assume you don’t have any partners.  You own and operate your business by yourself for yourself, in what the law calls a sole proprietorship.

There are advantages and disadvantages of operating your business this way. For better or worse you and your business are legally treated pretty much as a single unit—unlike a corporation which owns its own assets and has its own debts distinct from the owner(s). In the right circumstances, a sole proprietorship is a much easier type of business to deal with in a bankruptcy.

Chapter 7, “straight bankruptcy,” is seldom the right option if you own a business that you want to keep operating during and after the bankruptcy. Chapter 7 is also called “liquidating bankruptcy.” You can write off (“discharge”) your debts in return for liquidation—the surrender of your assets to the trustee to sell and distribute to your creditors. Except that in most Chapter 7 cases everything you own is protected–“exempt”—so that you lose nothing or very little. But if you own an ongoing business, although some of the assets of an ongoing business may be exempt, usually not all of them are.  So the Chapter 13 trustee could require you to give crucial parts of your business to him or her to liquidate.

Instead, a Chapter 13 case—ironically sometimes misnamed a “wage-earner plan”—is much better designed to enable you keep your personal and business assets. You get immediate relief from your creditors, and for a much longer period of time, usually along with a significant reduction in the amount of debt to be repaid.  So Chapter 13 helps both your immediate cash flow and the business’ long-term prospects. It is also an excellent way to address tax debts, often a major issue for struggling businesses. Overall, it is a relatively inexpensive tool that combines the discipline of a court-approved plan of payments to creditors with the flexibility of allowing you to continue operating your business.

In the next few blogs I’ll explain some of the most important benefits of filing a business Chapter 13 case. But in the meantime, please understand that when you own ANY kind of business, solving your financial problems will be more complicated.  Sometimes only a little more complicated, other times much more so. Because we’re not just dealing with the size and timing of a paycheck, but rather with all the financial and practical aspects of running a business. Plus, issues of timing are often important in business bankruptcy cases, requiring more pre-bankruptcy planning to chart the best path for you. So, no matter how small your business, be sure to get competent legal advice, and do so as soon as possible. You have a lot at stake.

 

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Chapter 13 Conquers Both Older and Newer Income Taxes

If you owe a number of years of income tax debt, Chapter 13 allows you to favor those taxes that have to be favored, while dumping the taxes that can be dumped.

In my last blog I gave an example showing how Chapter 13 can be an extremely good way to handle income tax debts particularly when you owe multiple years of taxes. In that hypothetical case, without a bankruptcy a couple would have had to pay about $30,000 to the IRS for back taxes, plus about another $45,000 in medical bills and credit cards, a total of $75,000. And paying this huge sum of money on their income would have taken them many, many years of pressure and uncertainty. In huge contrast, in a Chapter 13 case this same couple would only need to pay about $17,500, less than 1/4th the amount. And they would be allowed to do so through pre-arranged affordable monthly payments, for three years, all the while not having to worry about aggressive actions by any of their creditors, including the IRS.

How does Chapter 13 pull this off?

1) Tax debts that are old enough are lumped in with the lowest priority “general unsecured” creditors—like medical bills and credit cards—and so in many cases do not need to be paid anything unless there is enough “disposable income” to do so. This means that often those taxes are paid either nothing—as in the example—or  only a few pennies on the dollar.

2) The more recent “priority” taxes DO have to be paid in full in a Chapter 13 case, along with interest accrued until the filing of the case, but a) penalties—which can be a large part of the debt—are treated like “general unsecured” debts rather than “priority” ones, and 2) usually interest or penalties stop when the Chapter 13 is filed. These can significantly reduce the amount of tax that has to be paid.

3) “Priority” taxes are paid in a Chapter 13 case before and instead of “general unsecured” debts. This often means that having these taxes to pay simply reduces the amount of money which would otherwise have gone to those “general unsecured” creditors. So sometimes, amazingly, having tax debt does not increase the amount paid in a Chapter 13 case. In our example, the couple paid about $500 per month for three years, which is the same amount they would have paid even if they did not owe a dime to the IRS! They met their obligations under Chapter 13 by paying the IRS instead of their other creditors.

4) The bankruptcy law that stops creditors from trying to collect their debts while a bankruptcy case is active—the “automatic stay”—is just as binding on the IRS as on any other creditor. The IRS can continue to do some very limited and sensible things like demand the filing of a tax return or conduct an audit, but it can’t use the aggressive collection tools that the law otherwise grants to it. Gaining relief from collection pressure from the IRS AND all the rest of the creditors is one of the biggest benefits of Chapter 13.

I confess that I put this example together in a way that would showcase the advantages of Chapter 13 in dealing with income tax debts. If the facts were different, the advantages could easily be less. If, for instance, more of the taxes were “priority” debts that had to be paid, the debtors would have to pay more, either through larger monthly payments or for a longer period of time. There are definitely situations where it is a close call choosing between Chapter 7 or Chapter 13, or possibly even not filing bankruptcy at all but doing an offer in compromise with the IRS. To decide what is best for you, you need the independent advice of an experienced bankruptcy attorney, who is ethically and legally bound to look out for your best interests. Regardless whether your tax debts and other circumstances point strongly in one direction or it’s a closer call, you need a professional qualified both to help you make an informed decision and then to execute on it.  

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Chapter 13 Tames Your Income Tax Monster

A “straight” Chapter 7 can write off some income taxes. But if you owe recent taxes, or multiple years of taxes, Chapter 13 is usually a much better way to go. It often provides tremendous advantages over both Chapter 7 and dealing with the IRS on your own.

I’ll illustrate this with an example, and then explain it in my next blog.

Let’s say a husband and wife owe $35,000 in a combination of medical bills and credit cards, requiring monthly payments of $800. After the husband lost his long-time job back in 2006, he followed his dream of starting a business, which was starting to make progress when it got hammered in the Great Recession. He closed it in 2010 and found a reliable job a number of months later, although one where he earns 30% less than he did at the one lost years earlier. His business had generated some income, but barely enough for the couple to meet their bare essentials. So there was no money to pay the quarterly estimated taxes, and they had no money to pay the amount due when they filed their joint tax returns for 2006, 2007, 2008, 2009 and 2010. They expect to come out even for the 2011 tax year because of tax withholdings from their wages. To try to simplify the facts, assume they owe the IRS $4,000 in taxes, $750 in penalties, and $250 in interest for each of those five years. So their total IRS debt for those years is $25,000—including $20,000 in the original taxes, $3,750 in penalties, and $1,250 in interest. The wife has had consistent employment throughout this time, with pay raises only enough to keep up with inflation. They filed each of the tax returns in mid-April when they were due, and have been making modest payments when they have been able to, but those have not even been keeping up with the penalties and interest. Assume they have no secured debts—no mortgage or vehicle loans. They can realistically afford to pay about $500 a month to all of their creditors, not enough to pay their regular creditors much less the IRS.

Outside of bankruptcy, the IRS would likely require payment in full of the entire tax obligation, with interest and sometimes penalties continuing to accrue until everything was paid in full. Their payments would be imposed without regard to the other debts they owe. And if the couple failed to make their payments, the IRS would likely try to collect through garnishments and tax liens. Depending how long repayment would take, the couple could easily end up paying $30,000 or more with additional interest and penalties. This would be in addition to their $35,000 medical and credit card debts, which could easily increase to $45,000 or more, especially if these other debts went to collections or lawsuits. That’s likely because the couple would be paying all available money to the IRS. So likely the couple would eventually end up paying at least $75,000 to their creditors.  

In a Chapter 13 case, the 2006 and 2007 taxes, interest and penalties would very likely be paid nothing and discharged at the end of the case. So would the penalties for 2008, 2009, and 2010. That takes care of $11,500 of the $25,000 present tax debt. The remaining $13,500 of taxes and interest for 2008, 2009, and 2010 would have to be paid as a “priority” debt, although without any additional interest or penalties once the Chapter 13 case is filed. Adding in some “administrative expenses” (the Chapter 13 trustee and our attorney fees), and assuming that their income qualified them for a three-year Chapter 13 plan, this couple would likely be allowed to pay about $500 per month to ALL of their creditors—credit cards and medical, AND the IRS. Then after three years, they’d be done. The “priority” portion of the IRS debt would have been paid in full, but the older IRS debt and all the penalties would be discharged likely without any payment. So would the credit card and medical debts. After the three years, the couple would have paid a total of around $17,500 (including the “administrative expenses”), instead of about $75,000 without the Chapter 13. They’d be done instead of barely starting to pay their mountain of debt. And they would have not spent the last three years worrying about IRS garnishments and tax liens, lawsuits and harassing phone calls, and the constant lack of money for necessities.

As I said, in my next blog I’ll explain how all this works.

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Writing Off Income Taxes with a “Straight Bankruptcy”

You don’t always need to file a Chapter 13 case—with its 3-to-5-year payment plan–to deal with income tax debts. Thinking that you do is a myth, alongside the broader myth that “you can’t write off taxes in a bankruptcy.” Both have a kernel of truth, which is why they persist. It’s true: some taxes cannot be discharged (legally written off) in bankruptcy. But some can. And it’s true: Chapter 13 is often an excellent way to solve tax problems. But that does not necessarily mean it is the best for you. Instead Chapter 7 might be.

Chapter 13 tends to be the better tool if you owe a string of income tax debts including relatively recent ones. Why? Because in this situation Chapter 13 gives you the best of both worlds. First, if you owe recent income taxes which cannot be discharged, you get lots of advantages under Chapter 13, including paying less by avoiding most penalties and interest. That can be a huge savings, especially if you can afford only relatively small payments. Second, if you have older back taxes, these are also wrapped into the Chapter 13 plan, often without you paying any more into your plan, then they are discharged at the end of your case.

But you DON’T NEED the best of both worlds if all or most of your income tax debts are dischargeable. Then Chapter 7, the straightforward “straight” bankruptcy is enough.

So, WHAT ARE the conditions for a specific income tax debt to be discharged in Chapter 7? How are you going to know if Chapter 7 will discharge all or most of your taxes so that it is the right option for you?

Some of the conditions for discharge of taxes are quite straightforward. Some are more complicated. And as you’ll see, some are even purposely vague. So unfortunately it’s not as simple as plugging a particular tax debt into a clear formula to see if it is dischargeable. Determining whether a particular tax debt will be discharged requires the careful judgment of an experienced attorney.

I’ll just list these conditions for discharging income taxes here, and then explain them in my next blog. Don’t be surprised if they sound confusing in this list. It’s true: anything having to do with taxes tends to be complicated!

To discharge an income tax debt in a Chapter 7 bankruptcy case, it must meet these conditions:

1) Three years since tax return due: The applicable tax return must have been due more than three years before you file your Chapter 7 case. And if you requested any extensions for filing the applicable tax returns, you have to add that extra time to this three-year period.

2) Two years since tax return actually filed: Regardless when the tax return was due, you must have filed at least two years before your bankruptcy is filed in court.

3) 240 days since assessment: The taxing authority must have assessed the tax more than 240 days before the bankruptcy filing.

4) Fraudulent tax returns and tax evasion: You cannot have filed a “fraudulent return” or “willfully attempted in any manner to evade or defeat such tax.”

You can see that these are begging for some clarification. For that please come back to read my next blog. Or else call to set up a consultation with me. If you have substantial tax debts, you should definitely get some thorough personal advice. Know your options so you can make an informed choice, about bankruptcy and otherwise.

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Preserve Your Ability to File Bankruptcy at the Time You Want

Sometimes the timing of your bankruptcy filing hardly matters, but other times it’s huge.  The three examples in this blog should convince you that you want to avoid being rushed to file your case because a creditor sued you earlier and is now garnishing your wages. Instead you want to preserve the ability to file bankruptcy at a time that is tactically the best for you.

1. Choosing between Chapter 7 and 13:  Being able to file a Chapter 7 generally requires you to pass the “means test.” This test largely turns on a very special definition of “income.” For many people, their “income” under that definition can change every month, sometime by quite a lot. This means that you may not qualify to file a Chapter 7 case one month but then do so the next month. Being able to delay filing your case means being able to file when you will pass the “means test,” or at least more likely would do so, and therefore not be forced to file a Chapter 13 case. This means usually finishing your case in three or four months instead of three to five years, and almost always saving many thousands of dollars.

2. Discharging—writing off—debts:  Getting certain debts discharged is harder if those debts were incurred within a certain amount of time before the filing of your bankruptcy case. So being able to delay the filing of your bankruptcy case makes it less likely the creditor on one of these debts would challenge your ability to discharge that debt. Or if such a creditor would still raise such a challenge, defeating it would be easier.  The amount at stake is the amount of that debt, plus often the creditor’s costs and attorney fees, and your own attorney’s fees.  Avoid or reduce the risk of continuing to owe that after your bankruptcy is over by avoiding getting creditor judgments against you.

3. Choosing property exemptions:  The possessions you are allowed to keep in a bankruptcy depend on which state’s exemption laws apply to your case. If you moved to your present state of residence within two years before your bankruptcy is filed, you will not be able to use that state’s exemptions but rather your former state’s. Especially if you are getting close to the two-year mark, having flexibility about when to file would allow you to pick whichever state’s exemptions were better for you. Otherwise, you may either lose an asset in a Chapter 7 case, have to pay the trustee to be able to keep it, or else even be compelled to file a Chapter 13 case to keep it.

You may sensibly ask: if you do get sued, what are you supposed to do to avoid getting a judgment against you, so that you’re not later rushed into filling bankruptcy at an unfavorable time?  The answer: see a bankruptcy attorney as soon as you get sued to figure out how to deal with that law suit and with your entire financial circumstances. The earlier you get advice, the more options you will have.

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Stopping the Foreclosure of Your Home Temporarily and Permanently through Bankruptcy

Both Chapter 7 and Chapter 13 can help you save your home. Which one is better for YOU?

You have almost for sure heard that the filing of a bankruptcy stops a foreclosure. You may have also heard that Chapter 13—the repayment version of bankruptcy—can be a good tool for saving your home in the long run. Both of these are true, but are only the beginning of the story. This blog today tells you more about stopping a foreclosure. My next blog will get into longer term solutions.

The “automatic stay” is the part of the federal bankruptcy law which immediately blocks a foreclosure from happening. The very act of filing your bankruptcy case “operates as a stay,” as a court order stopping “any act to… enforce [any lien] against any property of the debtor…  .”

But what if your bankruptcy case is filed and the mortgage lender or its agent can’t be reached in time so that the foreclosure sale still occurs? Or if there’s some miscommunication between the lender and its agent or attorney, with the same result? Or if the lender just goes ahead and forecloses anyway?

As long as your bankruptcy is in fact filed at the bankruptcy court BEFORE the foreclosure event, then that foreclosure is not legally valid, whether it occurred by mistake or intentionally. (This filing “at the bankruptcy court” is usually actually done electronically from my office, with a date and time-stamped record proving when the court filing took place.)

IF a foreclosure happens by mistake after the filing of your bankruptcy, lenders are usually very cooperative in legally undoing the foreclosure and its documentation. If your lender would fail to undo such a foreclosure after becoming aware of your bankruptcy filing, it would be in ongoing violation of the automatic stay, exposing itself to significant financial penalties. That would be rare.

Does it matter whether your bankruptcy case is a Chapter 7 or Chapter 13 one for purposes of the automatic stay?

No, the automatic stay is the same under both Chapters, and would have the same immediate effect.

On the other hand, how long the protection of the automatic stay lasts can definitely depend on which Chapter you file. That’s because even though you get the same automatic stay, the other tools each Chapter gives you for protecting your home are very different. So your mortgage lender may very well react quite differently depending on the Chapter you file, as well as on what you propose to do about your home and your mortgage within that Chapter. I’ll write about those options  in my next blog.

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