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“Automatic” Protection from Your Creditors

Many bankruptcy attorney ads say: “Stop garnishments.” “Stop foreclosures.” “Stop repossessions.” So bankruptcy stops all those bad things. But is it as good as it sounds? How does it really work?

 

In my last blog I said that in keeping with getting a fresh start for the new year, I’d get down to basics.  There’s nothing more basic than getting immediate protection for you, your paycheck, your home, and your possessions. You get this protection the minute a bankruptcy is filed for you, either a “straight” Chapter 7 case or an “adjustment of debts” Chapter 13 one. Other than some very rare exceptions, all efforts by creditors against you or your property must come to an immediate stop. You’ll hear this referred to as the “automatic stay.”

“Stay” is just a legal word for “stop” or “freeze.” “Automatic” means that this “stay” goes into effect simultaneously with the filing of your bankruptcy petition. That filing itself, by virtue of the federal Bankruptcy Code, “operates as a stay” of virtually all creditors’ actions to pursue a debt or grab collateral. It doesn’t take a judge signing an order or even any further action by you or your attorney to impose the stay.

But although the automatic stay is instantaneous, practically speaking the creditors need to know about the filing of your case so that they can abide by the stay. Assuming your creditors are all listed in your schedules of creditors, they should all get informed by the bankruptcy court within about a week or so after your case is filed, without any additional action by either you or your attorney. If you are not anticipating any action against you by any of your creditors sooner than that, usually letting them all be informed by the court is appropriate. But if do expect some quick creditor action, be sure to talk with your attorney about it so you’re both on the same page about informing that creditor.

But what if a creditor unexpectedly takes some action in the days after your bankruptcy is filed but before it finds out about it? The automatic stay is so powerful that if this does happen, the creditor must undo whatever action it took against you, even if it did not know about your bankruptcy filing. So if after your bankruptcy is filed, a creditor, for example, files a lawsuit against you or turns its earlier lawsuit into a judgment, that lawsuit must be dismissed or the judgment must be set aside.

In my next blog I’ll tell you about how long this automatic stay protection lasts. If you can’t wait until that blog, give me a call or set up an appointment to see me. I’ll tell you all about it personally.

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Keeping the Vehicle You Owe On in a Chapter 7 Bankruptcy

Chapter 7 is the take-it-or-leave-it bankruptcy when it comes to your vehicle with a loan against it. In most cases you either keep on making the payments or you surrender the vehicle, nothing much in between.

To be clear I’m talking here about a vehicle that you owe on, with the lender as a lienholder on your vehicle title, and with no more equity (value beyond the debt) than is covered by your available vehicle exemption. In other words, this is not a vehicle that your Chapter 7 trustee is going to be interested in, either because it has no equity—it’s worth less than the debt against it—or the amount of equity is protected by the exemption.

But if your trustee wont’ be interested, your vehicle creditor will be very interested, in the vehicle and in your bankruptcy.

So back to the take-it-or-leave-it part. Here are the two straightforward choices.

First, even f you don’t want to or need to keep your vehicle, you can surrender it to your creditor after your bankruptcy is filed. (Or you can surrender it before you file, but that gets risky—be sure you have talked to your bankruptcy attorney and have a clear game plan beforehand.) You likely know that if you just surrendered your vehicle without a bankruptcy, you’ll very likely owe and be sued for the “deficiency balance”—the amount you would owe after your vehicle is sold, its sale price is credited to your account, and all the repo and other costs are added. (You can usually count on that deficiency balance to be shockingly high.) The bankruptcy will write off that deficiency balance, which could well be one of the reasons you decided to file bankruptcy.

Second, if you want to keep your vehicle, in most cases you have to be current on your loan, or quite quickly get current. You will almost for sure be required to sign a reaffirmation agreement legally excluding the vehicle loan from the discharge (the legal write-off) of the rest of your debts. And you have to sign that reaffirmation agreement and get it filed at the bankruptcy court within quite a short period of time—usually within 60 days after your bankruptcy hearing. Then you have to stay current if you want to keep the car, just as if you had not filed a bankruptcy. And also just as if you had not filed bankruptcy, if that vehicle later gets repossessed or surrendered, you could very well be hit with a deficiency balance.

When I say take-it-or-leave-it, I mean there usually aren’t any other more flexible options. Almost always—especially with conventional, national vehicle loan creditors—you are stuck with the terms of your original loan contract—no reducing the balance of the loan or the interest rate. If you’re behind, almost always you must pay up the arrearage and be current within a month or two. There can be exceptions, especially with local finance companies and other smaller players who would rather minimize their losses by being flexible. So be sure to ask your attorney whether your vehicle creditor has that kind of history. And if you do need more flexibility—if you must hang onto your vehicle, and owe more than it is worth, and you can’t afford the payments—ask about Chapter 13 as a possible solution to your dilemma.

In general, “straight bankruptcy”—Chapter 7—can be the best way to go if your vehicle situation is pretty straightforward: you either want to surrender a vehicle, or else you want to hang onto it and are current or can get current within a month or two of your bankruptcy filing.


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Get a “Fresh Start” in Bankruptcy for Your Assets, Not Just Your Debts

Bankruptcy helps both sides of your balance sheet. Getting a financial fresh start means not just getting relieved of your debts, but also protecting your essential assets. You can preserve this crucial benefit of bankruptcy by not selling, using up, or borrowing against your protected assets BEFORE the filing of your bankruptcy case.

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 usually protects most or all of your assets. On the one hand, Chapter 7 protects all “exempt” assets, so that a very high percentage of people who file under Chapter 7 lose nothing. And if you have assets which are worth more than the applicable exemptions, Chapter 13 usually protects those additional or higher-value assets as well.

But bankruptcy cannot protect what you’ve already squandered. It saddens me when just about every day new clients tell me how in the months or year or two before coming in to file bankruptcy they depleted their assets in a desperate attempt at avoiding bankruptcy. Most of the time, the assets they sold, spent, or borrowed against would have been completely protected had they filed bankruptcy while they still had them.

I recognize that it’s easy being a Monday morning quarterback—to say, after a client comes in needing to file bankruptcy, that they should not have used up assets in an effort to avoid filing. After all there undoubtedly are some people who were able avoid bankruptcy by selling their assets, and I don’t see them because they don’t need my services.

But I challenge you—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?

What concerns me are decisions with serious long-term consequences made without any legal advice about the alternatives. If a person in her 50s cashes in a substantial amount of a 401(k) retirement plan to pay creditors who would be written off, that can significantly harm the quality of her retirement lifetime.  Or if a husband and wife sell a free-and-clear vehicle that’s in good condition on the assumption that they’ll lose it once they file bankruptcy, only to be left with a single older vehicle that cannot reliably get them to work, that decision would lead to anything but a fresh start.

For a bunch of reasons, people tend to get legal advice when at the absolute end of their rope, well after these kinds of dangerous decisions have been made.  Let me help you avoid that. You have the capacity to get a better fresh start by getting the necessary advice on time in order to to preserve your assets.

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Don’t Give Up Your Vehicle Before Knowing Your Options

Why? Because you may be able to keep a vehicle you thought you couldn’t afford to pay for. Chapter 13 allows you to pay smaller monthly vehicle loan payments, under certain conditions. You may be able to pay off the debt and own the vehicle free and clear for a lot less than the loan balance.

This blog is one of a series on the mistakes people make before seeing an attorney about filing bankruptcy. These decisions often seem sensible from a certain angle. But almost always they are made without knowing all the options.

If you need a vehicle but just can’t afford the monthly payments, you probably figure that you are going to lose the vehicle and don’t have any choice about it. You know the contract requires you to make the payments or you lose the vehicle. You may have been trying hard for months to keep or get the payments current, putting up with late fees and constant notices or phone calls from the creditor threatening repossession. You would have already let the vehicle go except you’ve got to have a vehicle for work and/or other family obligations, and have no way to replace it. You feel stuck, with no good options.

On top of everything else, you might have heard that a bankruptcy can’t help much, at least for hanging onto the vehicle—that you still have to either make the payments, and catch up if you’re behind, or else lose the vehicle.

That’s true, in a “straight bankruptcy,” a Chapter 7.

But it’s not necessarily true in a Chapter 13 case. If you meet two conditions, you can likely do a “cramdown” on the vehicle loan: lower your payments and likely pay less overall for the vehicle. You may well also be able to lower your interest rate.

The two conditions to be able to do a “cramdown”:

1) Your vehicle loan was entered into more than 910 days before your Chapter 13 case is filed (that’s just about two and a half years before); and

2) At the time your case is filed, the value of your vehicle is less than the balance on your loan.

If your vehicle loan meets these two conditions, we can essentially re-write your loan.  We can reduce the total amount you must pay down to the value of the vehicle, “cramming it down” to that lower amount. That’s called the “secured portion” of the debt. We then calculate a new monthly payment—the amount needed to pay off that smaller balance, often at a lower interest rate, and often on a longer remaining term, resulting often in a radically reduced monthly payment.

What happens to the “unsecured portion”—the part of the debt beyond the value of the vehicle? It gets lumped in with the rest of your unsecured debts, usually not requiring you to pay anything more to all your unsecured creditors regardless of your vehicle loan.

And what if you’re behind on your vehicle loan at the time you file your Chapter 13 case—when do you have to pay that arrearage? You don’t. It’s just part of the re-written, new “crammed down” obligation.

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 while immediately having it cost you much less to do so. 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 me to find out your options.

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“If Only I’d Gone to See My Bankruptcy Attorney Sooner . . . “

Those are the words I hate to hear from a new client.

Bankruptcy attorneys are in the business because we truly want to help people. It’s an emotionally tough area of law, dealing all the time with clients who are financially hurting. Usually my client are also hurting in other ways, related to what caused or contributed to their financial problems—an illness or injury, the end of a marriage or of a business, the loss of a job or, these days for many people, the loss of an entire career. What makes my day—which it does virtually every day—is to give great news to a client, that they will now get relief from their debts, or that there is a feasible plan to save their home, or to deal with their child support arrearage or their income tax debt. Every day we see people transformed in front of our eyes as impossible burdens are lifted from their fatigued shoulders.

But of course the information I share with clients is not always good news, and the advice I give is not always what my clients want to hear. Tough choices have to be made, and some goals turn out to be unrealistic. That’s all part of life.

But the most frustrating situations for both me and my clients are when we find out that they have self-inflicted some of their own wounds. The easily-preventable-but-now-it’s-too-late bad decisions they’ve made, often just a few months or weeks earlier, without getting legal advice beforehand. The goal of my next few blogs is to help you avoid those.

Here’s a taste of some of what we will be covering.

1) Preferences:  If you pay a creditor any significant amount before filing a bankrutpcy—especially a relative you hope not to involve in that bankruptcy—the bankruptcy trustee may well be able to force that relative—through a lawsuit if necessary—to  pay to the trustee whatever amount you paid to that relative.

2) Surrendering a “cramdownable” vehicle:  If you really needed a vehicle but you owed on it more than it was worth and figured you couldn’t afford the payments anyway, so you either voluntarily surrendered it, or did not file a bankruptcy until after it was repossessed, you may well have been able to keep that vehicle in a Chapter 13 case with much lower payments and total amount paid

3) Squandering exempt assets:  Just about every day it seems clients tell me how they’ve borrowed against or cashed in retirement funds in a desperate effort to pay their debts, using precious assets that would have been completely protected in the bankruptcy case they later file, used to pay debts that would have simply been “discharged” (legally written off) in that bankruptcy.

4) Rushing to sell a home:  Bankruptcy provides some extraordinary tools for dealing with debts that have attached as liens against your home, such as judgments and 2nd mortgages. If you hurriedly sell your home to avoid involving it in your bankruptcy case, or some other reason, you could lose out on opportunities to save tens of thousands of dollars.

5) Allowing a judgment against you: If you are sued by a creditor, you may assume that the debt or claim from that lawsuit would be discharged in your anticipated bankruptcy case.  But in some cases, the judgment from that lawsuit can effectively result in exactly the opposite, a determination which results in the debt NOT being able to be written off in your bankruptcy case.  

As you look at this list, notice that the legally and financially wrong choice is often what seems to be 1) the morally right one, and 2) common-sense one. Doing what seems right and sensible can really backfire. In the next few blogs I explain these so they make sense to you, along with other avoidable mistakes.  But by now it should be clear—nothing takes the place of actual legal advice about your own unique situation from an experienced attorney. So, make your day and mine by coming in to see me. Avoid ever having to say “if only I had gone in sooner.”

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The Amazingly Powerful “Automatic Stay”

Don’t take for granted the extraordinariness of bankruptcy’s automatic stay. That’s the federal law that stops creditors from pursuing you, your money, and your other possessions the moment your bankruptcy case is filed.

In my last two blogs, I told you about the relatively rare situations in which the automatic stay does not apply—situations in which certain special creditors, or sometimes even all creditors, can continue collecting their debts. But let me emphasize again–the vast majority of the time, as soon as your bankruptcy case is filed, all creditor efforts against you and your property come to an immediate stop.

The automatic stay is so powerful because it is 1) fast and 2) very broad in what it covers.

Very Fast

Very few legal procedures work as quickly and efficiently as the automatic stay. To get anything done in just about any court usually takes weeks, months or even years. A complaint or motion of some sort needs to be filed, the other side usually has the opportunity to respond, then often there is a hearing of some sort, and finally a judge makes a decision.

But not with the automatic stay. It operates as a one-sided and immediate court order, made effective by the very act of filing the bankruptcy case.  A judge isn’t even involved. The creditors have no immediate say about it. There IS a procedure for creditors to object and ask the judge for “relief from the automatic stay,” in other words, for permission to continue or start pursuing you or your money or property, but that’s after the fact. The automatic stay gives you an immediate breathing spell, whether your creditors like it or not.

Broad Coverage

This breathing spell protects you in just about every possible way from your creditors. It stops all phone calls and letters—“any act to collect, assess, or recover” a debt. The automatic stay stops all court and administrative proceedings against you from starting or continuing. Doesn’t matter if your bankruptcy is filed two minutes before the start of a civil lawsuit trial or the foreclosure of your house, the trial or foreclosure does not happen. If a judgment was entered against you in the past and the creditor is about to garnish your wages or checking account, these garnishments are stopped. If you’ve fallen a couple months behind on your vehicle loan payment and the repo man is looking for your car in the employee parking lot, the automatic stay sends him away empty-handed. If the IRS is about to record a lien against your home and vehicle to collect an income tax debt, the automatic stay stops the tax lien. Or if you already have a recorded tax lien and the IRS is about to grab your vehicle to pay the debt, your bankruptcy filing stops this enforcement of the tax lien.

This IS powerful medicine. 

As with other strong medicine, it should be administered with the right guidance, and with help for dealing with any potential side effects. Stopping your creditors with a bankruptcy would essentially be the end of the story for many of them. But for other creditors—those with rights against your home or vehicles, or with special kinds of debts such as taxes and student loans—the breathing space gives us the opportunity to address each of these special creditors.

Contact me to get the immediate protection you need, along with the long-term financial solution for dealing with all of your creditors.  

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