Frequently Asked Questions
The Law Offices Of Hagen & Hagen is happy to provide you with a no-cost in-person, by-phone, or by-video initial consultation at which we will quote you a firm figure to represent you in your bankruptcy case.
How Much Will It Cost for Me to File Bankruptcy?
It depends on which chapter you file, the complexity of your case, where within the district you live, and the number of creditors you have. Note that there is no difference in fees for both spouses to file together as it is for one spouse to file alone.
If I Want to Schedule an Initial Consultation, Should I Bring Any Documents with Me?
At the initial consultation, whether in-person, by-phone, or by-video, we need to explore your financial situation, so if you can give us general information about your financial situation without resorting to documents, it won't be necessary for you to bring documents to the initial consultation.
If you are unable to provide information about your financial situation without resorting to documents, please have available the financial information we’ll need in order to get a general understanding of your financial circumstances.
If you wish to proceed with a bankruptcy filing, we are going to want to be provided the following documents:
Income And Expenses:
- Your three most recently filed federal and state tax returns, all schedules, all pages, including if available all attached W-2s and 1099s. If you operate your own business, whether corporation, limited liability company, or partnership, please provide copies of its tax returns for the same years.
- Paystubs, if applicable, for the past sixty days (required), and as much of the past seven months (preferable) as possible. Please continue to send copies of paystubs until the bankruptcy case is filed.
- If you operate your own business, whether corporation, limited liability company, partnership or sole proprietorship, we’ll need a profit and loss statement for the past six months ending on the last day of last month, and we’ll need a profit and loss statement for the current calendar year to date.
- A rough draft of monthly budget:
- $____ Compensation from employment - spouse 1
- $____ Compensation from employment - spouse 2
- $____ Renting out a room to tenant #1
- $____ Renting out a room to tenant #2
- $____ Unemployment
- $____ Social Security
- $____ Disability
- $____ Government assistance
- $____ Income from tenant
- $____ Rental property mortgage payments
- $____ Rental property taxes paid directly
- $____ Rental property insurance
- $____ Rental property homeowners association fees
- $____ Rental property maintenance
- $____ Mortgage/rent
- $____ Homeowners association fees/dues
- $____ Utilities--Electricity
- $____ Natural gas
- $____ Water
- $____ Telephone-landline
- $____ Telephone-cell
- $____ Cable or satellite
- $____ Internet
- $____ Trash removal
- $____ Alarm
- $____ Pest control
- $____ Landscaping/gardening
- $____ Pool cleaning/maintenance
- $____ Other home maintenance/repairs
- $____ Groceries/food including meals out
- $____ Clothing purchases
- $____ Laundry/dry cleaning
- $____ Recreation/newspapers/magazines
- $____ Insurance--Life paid directly, not via payroll
- $____ Health paid directly, not by payroll
- $____ Dental paid directly, not by payroll
- $____ Vision paid directly, not by payroll
- $____ Disability paid directly
- $____ Long-term care paid directly
- $____ Auto
- $____ Property
- $____ Home warranty
- $____ Pet
- $____ Umbrella
- $____ Other:
- $____ Automobile (gas/parking/renewals/repairs)
- $____ Medical/dental out of pocket (not by insurance)
- $____ Monthly portion of quarterly tax estimates
- $____ Auto installment payment - vehicle 1
- $____ Auto installment payment - vehicle 2
- $____ Auto installment payment - vehicle 3
- $____ Spousal and/or child support payments
- $____ School tuition
- $____ Child daycare
- $____ Housekeeping services
- $____ Pet food and care
- $____ Storage
- $____ Gym membership
- $____ Income tax preparation
- $____ Other (describe)
- Copy of most recent month's mortgage statement from any and all mortgage lenders regardless of whether you intend to continue paying the mortgage.
- Copy of most recent month's statement from auto lenders or lessors regardless of whether you intend to continue paying for such vehicles.
- Copy of most recent real estate property tax bill if paid directly (unnecessary if paid via mortgage impound).
- Copy of most recent month's statement from timeshare companies.
- Copy of most recent month's statement from mobilehome lender.
- Copies of the most recent six month's bank statements for all bank accounts that have been open in the past six months, whether open or closed today.
- Copies of most recent month's statement from retirement plan administrators, including IRAs, 401(k)s, and pension plans.
- Copies of binders or declaration pages reflecting current insurance coverages, including life, health, dental, vision, automobile, homeowners, earthquake, professional liability, home warranty, pet, and umbrella insurance.
- Copies of the face pages from any and all lawsuit complaints initiated by you against others that remain pending today or have been pending at any time within the past twelve months.
- Copy of most recent month's statement from creditors, including credit card statements, student loan statements, medical bills, delinquent tax notices from the Internal Revenue Service, California Franchise Tax Board, or California Department Of Tax And Fee Administration (formerly the State Board Of Equalization). Include most recent correspondence from collection agencies and attorneys. Do NOT include utility bills unless you want to include them as creditors in your case. If you are still receiving services from such utility companies, it is generally wise to NOT include them as creditors in your case.
- Copies of the face pages from any and all lawsuit complaints initiated by others against you within the past twelve months, whether pending today or reduced to judgment, dismissed, settled, on appeal or otherwise.
- Copy of valid driver's license(s) or other form of photo identification, such as state identification card, or valid passport. Please provide a color version in pdf format (no screenshots please).
- Copy of social security card, if available, or if unavailable, a copy of a W-2, 1099, or 1098, provided it reflects all nine digits of your social security number. Please provide a color version in pdf format (no screenshots please).
- Copies of all escrow closing statements from the sale of real property in the past four years.
- Copies of all escrow closing statements from the refinancing of any real estate loans in the past four years, even if the property was subsequently sold or lost to foreclosure.
- Copies of all marital dissolution judgments, child or spousal support orders, and marital property division agreements to which you have been a party in the past four years.
Are There Any Viable Alternatives to Chapter 7 Bankruptcy?
There are several alternatives to bankruptcy, some more attractive than others.
1. Pay the creditors, whether it be by liquidating assets, borrowing the funds from relatives and/or friends, withdrawing funds from retirement, or by inheritance. Of course, paying creditors in full is easier said than done; usually not very realistic and rarely the desired option.
2. Try and work out settlements with creditors whereby you pay them a lump sum discount. Our experience is that it will take around 50 cents on the dollar to make settlements with credit card companies happen, but every case is a bit different. If you haven't paid the creditor in two to three years, they might be a bit more willing to accept 20% or 30%. If you're still current on your payments, or only recently defaulted for the first time, creditors are likely going to want considerably more, perhaps 80% or 90%. Note that settling at a discounted payoff is not a viable option at all for student loans. And of course, paying around 50% of the balance owed to creditors is still not a terribly realistic option either. Keep in mind as well that when you settle with creditors, they're supposed to issue you, and usually do issue you, a 1099-C, so you may well be required to declare as income the forgiven portion of the settled debt.
3. Try and work out settlements with creditors whereby you pay them over time. The problem with this option is that creditors, if they're going to offer two, three, four, or more years to repay the debt, are likely going to want to be paid 100 cents on the dollar. Debt consolidation and debt negotiation companies may be able to help you with such settlements but be careful and watch very closely how such a company completes the task.
4. Status quo. Bring creditors current, if applicable, and keep paying them on a current basis. If you're current on your payments, creditors cannot sue you and they cannot even report you negatively to the credit bureaus. The problem of course is that it's quite difficult to repay 100 cents on the dollar with interest accruing on the debt.
5. Do nothing, stop paying creditors, and let them or their collection agents sue you. Of course, that's not a very attractive option. Creditors will sue, win judgments, lien any real estate that might be in your name (if applicable), garnish wages (if applicable), levy bank accounts, and possibly even conduct debtor examinations to locate additional assets to pursue. If you're elderly, own no real estate or other assets of significant value, and receive only Social Security, this option might not be the worst of these options, but otherwise not a very attractive option.
6. Do nothing, stop paying, let creditors sue you, and fight the resulting lawsuit or lawsuits. This option makes some sense if there's only a small handful of obligations and you have a legitimate argument for why you should not be held responsible, such as that the debt is so old that statute of limitation has expired, that you are a victim of identity theft and that it's therefore not really your debt, or that you have offsetting counterclaims against the creditor. But unless you have valid defenses and/or counterclaims, this option is not going to work in the long run and paying attorneys to advance such arguments can get costly.
7. Sell all your assets and move to Australia, or some other country where creditors, although technically allowed to chase you, are highly unlikely to pursue you further. Not a very appealing option to most people.
8. Chapter 13
How Can I Expedite the Process of Rehabilitating My Credit After Bankruptcy?
The best ways to begin the process of rehabilitating your credit after bankruptcy are:
- to avoid suffering further credit reversals, such as foreclosures, repossessions, judgments, evictions, tax liens, etc.,
- continue paying home mortgages, auto loans and leases, equipment loans and leases, etc., and
- obtain a secured credit card.
Will the Derogatory Items on My Credit Report Disappear as a Result of My Bankruptcy Filing?Not necessarily. Upon being advised of your bankruptcy filing, the credit reporting bureaus--Experian, Trans-Union, and Equifax, as well as the underlying creditors, ought to be updating your credit report to reflect that the accounts, previously reflected as late or charged-off, are slated for discharge or have been discharged. But it doesn't always work out that way. It is not uncommon for a debtor to find two or three years after bankruptcy, when he or she is attempting to obtain a home loan or vehicle loan or lease, that several creditors are still reporting their account as delinquent or charged-off but not discharged as a result of bankruptcy. The Law Offices Of Hagen & Hagen suggests that you consider having your credit reviewed and possibly repaired by a credit repair specialist after you receive your discharge. It is the Law Offices Of Hagen & Hagen's responsibility to try to have your obligations discharged in your bankruptcy case. It is not the Law Offices of Hagen & Hagen's responsibility to make sure your credit reports accurately reflect the status of your accounts.
I Have Heard About 'Reaffirmation of Debts'; Should I Reaffirm Any of My Debts?
It is important to note that debts and liens are completely different animals. Debts, with some exceptions noted above and below, are discharged in bankruptcy. Liens, however, pass through bankruptcy unaffected. For that very reason, if you are financing the purchase of your home or a vehicle you wish to keep, you must continue to make payments during and after bankruptcy to avoid the lender foreclosing upon its lien or repossessing its collateral pursuant to its lien.Secured creditors, i.e., those with collateral such as a mortgage lender, vehicle lienholder, or even a purchase money lienholder such as Good Guys/Household Retail Services, Inc., will often approach you about your intentions with respect to its collateral. You have the following options:
1. Surrender possession of the collateral to the lienholder and discharge the remaining indebtedness to the lienholder, if any, should the sale of the collateral by the lienholder fail to satisfy the account balance.
2. Redeem the collateral by paying the lienholder the alleged fair market value of the collateral in a lump sum payment and discharge the difference between the fair market value and the remaining balance on the obligation. This option is rarely the option of choice since the parties may not agree upon the fair market value of the asset and having the bankruptcy court resolve the matter will not likely be cost effective. In addition, most debtors do not have the funds available to make the required lump sum payment.
3. Reaffirm the obligation to the lienholder on the original loan terms and keep the collateral. If the lienholder offers you a reaffirmation, you may keep the collateral by agreeing to make payments and waive your right to discharge any remaining deficiency should you default at any time in the future, lose the collateral to the lienholder's repossession, and the sale of the collateral by the lienholder fails to satisfy the remaining obligation. There is no guarantee or assurance that the lienholder will want to extend credit to you again in the future, even if you never miss a payment.
4. Reaffirm the obligation to the lienholder by proposing better terms than contained in the original contract, such as for less than the balance owed, at a lower rate of interest, and/or with an extended maturity date. The lienholder is under no obligation to acquiesce to the modified loan terms, and rarely will lenders consider such modified loan terms.
5. Retain collateral and pay without reaffirming the underlying debt. Although the ‘retain and pay without reaffirming’ option was removed as an option between 2005 and 2022, the California legislature has restored this option.
Note that once the bankruptcy petition is filed, secured creditors such as mortgage lenders and vehicle lenders and lessors will likely stop sending you monthly statements. Sending monthly statements can be interpreted as a violation of the automatic stay provisions of Bankruptcy Code Section 362, and therefore creditors are usually reluctant to send monthly statements. Accordingly, if you wish to keep your home, vehicle, or other secured collateral, you must make your payments regardless of whether you are receiving monthly statements or invoices.
Is It Possible for Me to Get Through The Bankruptcy Process With One Or Two Credit Cards?Yes, but there are several things you ought to keep in mind. Let's say you have two Discover cards, one with a $5,000 balance and the other with a $200 balance. You have no way of repaying the $5,000 account so you plan to list it in your bankruptcy case. You figure that you will pay Discover the balance of the $200 account prior to bankruptcy so that you won't have to list that account in the bankruptcy schedules and accordingly get to keep it. Will this strategy work? No. While it is true that you don't have to list the smaller account as a creditor if the balance was paid in full prior to bankruptcy, you can assume that Discover will be sophisticated enough to realize that you have two accounts, and when it is notified of your bankruptcy for the larger account, it is likely that it will cancel the smaller account as well. Now you're out $200 and neither card survived the bankruptcy process.
Let's say you have only one Discover card, and it has a balance of $200. You figure that you will pay Discover the balance of the $200 account prior to bankruptcy so that you won't have to list that account in the bankruptcy schedules and accordingly get to keep it. Is there any guarantee that this strategy will work? While it might work, no, there is no guarantee. While it is true that you don't have to list the account as a creditor if the balance was paid in full prior to bankruptcy, and while it is true that Discover will not therefore be notified about the bankruptcy directly by the bankruptcy court, there is no guarantee that Discover won't be informed about the bankruptcy by the credit reporting entities such as Experian, TransUnion and/or Equifax, or simply review your credit on an annual basis and learn of the bankruptcy accordingly. Upon learning of the bankruptcy, Discover might leave the account open, or could close it. It is entirely within Discover's discretion.
What Impact Will My Filing Bankruptcy Have Upon My Credit Report and Credit Score?
A bankruptcy filing generally remains on your credit report for ten years following a Chapter 7 filing, and seven years following a Chapter 13 filing. A bankruptcy filing will of course negatively impact your credit score. Credit repair will not likely remove from your credit report public record defects such as bankruptcy filings, although credit repair can remove other derogatory credit defects, such as delinquencies and charge-offs.
If I File a Bankruptcy Petition, Will I Ever Be Able to Obtain Credit Again So I Can Buy a Home or a Vehicle?
While a bankruptcy filing damages your credit, it is by no means going to prevent you from ever borrowing again. When a lender is deciding whether to lend to a borrower in an asset-based purchase context, the lender considers three factors: the proposed loan-to-value ratio (i.e., the amount and percentage the borrower proposes to put down toward the purchase price), the proposed income ratio (i.e., the percentage of the borrower's monthly income that the new loan obligation will consume), and the borrower's credit. The higher the borrower's down payment and the higher the borrower's income, the less the lender will depend upon the borrower's credit. Admittedly, some lenders will reject a loan application based solely on the presence of a recent bankruptcy filing. Other lenders will consider the loan but will demand a higher rate of interest to compensate it for the perceived increased risk. Other lenders will virtually disregard a prior bankruptcy filing. One way to minimize the damage a bankruptcy filing has on your credit score is to avoid further credit damage in the months and years after filing bankruptcy, such as foreclosures, repossessions, lawsuits, tax liens and evictions.
Is My Annual Income Relevant If I File Bankruptcy?
Yes. Historically, Chapter 7 bankruptcy trustees focused on assets and their administrability and ignored income and expenses. Conversely, Chapter 13 trustees historically ignored asset values and focused on income, expenses, and whether the debtor could afford to pay more to creditors than proposed in the Chapter 13 plan. Chapter 7 trustees and their superior, the United States Trustee, now look closely at income and expenses. If it appears that the debtor has significant surplus income with which to repay his or her creditors, or if eliminating unreasonable and unnecessary expenses from the debtor's budget would leave the debtor with significant surplus income with which to repay his or her creditors, the United States Trustee may file a motion under 11 U.S.C. Section 707(b) to dismiss the case on the ground that granting the debtor a discharge might constitute an abuse of the spirit of the Bankruptcy Code. The Law Offices Of Hagen & Hagen will make every attempt to present income and expenses so that no such motion is filed by the United States Trustee. The Law Offices of Hagen & Hagen's fees to handle your bankruptcy proceeding do not include defending against a motion by the United States Trustee to dismiss your case pursuant to Section 707(b).
Who Decides Whether My Bankruptcy Petition Is 'Accepted'?
While the judge of your case ultimately decides all legal issues presented to him or her, no one 'accepts' or 'denies' your bankruptcy petition per se.
There are four types of problems that can arise in a Chapter 7 proceeding:
1. The bankruptcy trustee determines that one or more of your assets are worthy of liquidation and proceeds to take control of the asset or assets and market it/them for sale. In approximately 95% of all Chapter 7 bankruptcy cases, assets are not liquidated or administered by the appointed bankruptcy trustee, but in some cases, assets are indeed liquidated. Examples of assets that might be liquidated or administered by a bankruptcy trustee include the debtor's residence where there is equity above and beyond the homestead exemption allowed under California law; a second home or other real estate with substantial equity; a vehicle with substantial equity; a business in which there are assets of value, such as equipment, inventory, or accounts receivable; a trust created by a relative in which the debtor is a beneficiary; a life insurance policy with substantial cash value; publicly traded stock or other investments; or a potentially valuable lawsuit in which the debtor is suing or countersuing someone. Administration of assets by the bankruptcy trustee does not mean that you won't nonetheless discharge your debts in your bankruptcy case to the extent not paid out of the pot of funds generated by the trustee's liquidation efforts.
2. One or more creditors timely challenge your attempt to discharge their obligation pursuant to Bankruptcy Code Section 523(a) based on improper prebankruptcy conduct. Examples include credit card companies who argue that purchases and cash advances within the weeks and months prior to the filing of the bankruptcy petition were made without any intention on the part of the debtor to repay the obligation or with reckless disregard for his or her ability to repay the obligation; creditors who argue that financial data included by the debtor in a loan or credit application or financial statement attached to a loan or credit application was materially and intentionally false or misleading; former employers who argue that the debtor embezzled funds; creditors who argue that the debtor breached a fiduciary duty; creditors who argue that the debtor committed a willful and malicious act to a person or a person's property; and creditors who argue that the debtor committed some sort of actual fraud. Challenges by creditors to the dischargeability of debt are not terribly common, and are often settled relatively inexpensively by the debtor's agreement to repay the creditor a portion of the disputed amount.
3. A party in interest or a creditor files a motion to dismiss the case from bankruptcy pursuant to Bankruptcy Code Section 707 on the ground that granting a discharge would constitute an 'abuse' of the bankruptcy process. There are essentially two types of abuse arguments: that the debtor's true income less purely reasonable and necessary expenses leave the debtor with sufficiently substantial income that he or she can afford to repay his or her creditors at least in part; and that the debtor incurred debt well beyond any reasonable expectation of ability to repay such debt under suspicious circumstances. Motions to dismiss a case pursuant to 11 U.S.C. Section 707 are somewhat rare.
4. A party in interest, including the Chapter 7 trustee, or a creditor, files a complaint to deny the debtor a discharge of all his or her debts pursuant to Bankruptcy Code Section 727. The grounds for denying a discharge include filing materially false or misleading bankruptcy papers, testifying falsely under oath at the meeting of creditors or in a court-ordered deposition or examination, failure to maintain adequate books and records, failure to cooperate with the Chapter 7 trustee's liquidation efforts, and unauthorized disposition of assets of the bankruptcy estate. Challenges to the debtor's discharge are somewhat rare.
The primary problem that can arise in a Chapter 13 proceeding is an objection to confirmation of the Chapter 13 plan by the Chapter 13 trustee or a creditor. If the debtor cannot overcome an objection to confirmation of his or her plan, the bankruptcy proceeding will be dismissed.
- The grounds for objecting to a Chapter 13 plan include:
a. The plan fails the 'best interests of creditors/liquidation' test that requires the debtor to pay creditors over the life of his or her plan an amount equal to or greater than that which creditors would have received had the debtor elected to file Chapter 7 and a Chapter 7 trustee liquidates the debtor's unencumbered nonexempt assets.
b. The plan fails the 'feasibility' test in that the debtor has failed to demonstrate that he or she earns sufficient income each month to fund the required plan payment to the Chapter 13 trustee.
c. The plan fails the 'disposable income' test in that the debtor has overstated expenses and could in fact afford to pay more to creditors if his or her budgeted expenses were reduced to those that are purely reasonable and necessary.
d. The plan fails to treat certain types of creditors in the manner proscribed by the Bankruptcy Code. Certain creditors are entitled to be repaid in full, such as mortgage companies whose mortgages are in arrears and taxing agencies for recent tax years.
- The grounds for objecting to a Chapter 13 plan include:
If I Inadvertently Fail to List a Creditor in My Bankruptcy Schedules, Will the Debt Nonetheless Be Discharged?If the case is a Chapter 13 proceeding, no. For a Chapter 13 obligation to be discharged it must be scheduled.
If the case is a Chapter 7 proceeding, the answer depends on whether the case is an asset case or a no asset case. According to the Ninth Circuit Court of Appeals [Beezly v. California Land Title Co. (In re Beezly), 994 F.2d 1433 (9th Cir. 1993)], if a bankruptcy case was a no asset, no claims bar date case, which most cases are, obligations which the debtor fails to list in his or her bankruptcy schedules are still discharged, unless there is fraud involved. Beezly suggests that reopening a bankruptcy for the purpose of amending the bankruptcy schedules is not necessary since 11 U.S.C. 523(a)(3) already indicates that nonfraud-based claims are discharged whether listed or not, assuming that the case was a no asset, no claims bar date case. Fraud-based claims, pursuant to 11 U.S.C. Section 523(a)(2), (a)(4), and/or (a)(6), however, are a bit less certain. The concurring opinion seems to suggest that fraud-based claims are simply not discharged, but then at the end, seems to say that the issue of dischargeability of such claims is a matter still to be litigated, not necessarily in bankruptcy court despite the bankruptcy courts having exclusive jurisdiction to hear such issues.
Will My Bankruptcy Discharge All of My Obligations?Not necessarily. There are certain types of obligations which are automatically nondischargeable in a bankruptcy case, such as recent income taxes; fiduciary taxes; past and future alimony and child support; most student loans; liability created in a driving under the influence incident; fines and penalties; traffic tickets and parking tickets; and criminal restitution awards. There are other obligations which are potentially nondischargeable as a result of the debtor's conduct, such as incurring debt, often credit card charges, without the intent to repay it; actual fraud; embezzlement; breach of a fiduciary obligation; and willful and malicious injury to others.
If I File Bankruptcy Without My Spouse, Can Our Creditors Continue to Attempt to Collect from the Spouse?
When one spouse files without the other, the resulting bankruptcy discharge discharges both the filing spouse and the marital community of their obligations. Creditors may still sue the non-filing spouse and obtain a judgment. However, the creditor can only seek to enforce the judgment against the non-filing spouse's separate property assets. Most married people do not own separate property assets; in most cases everything they own they acquired during marriage. Accordingly, in most cases, the creditor would have a judgment against the non-filing spouse worth only the paper on which it is printed.
Should I List My Monthly Obligations, Like My Utility Bills, In My Bankruptcy Case If I Am Current on Such Payments?
Generally, no. If the debtor is current on his or her payment of certain monthly obligations such as utility bills, there is no point in listing the utility company as a creditor. In fact, by listing it as a creditor, it might prompt the utility company to demand a deposit for future services.
If Creditors Do Call Me After the Filing of the Petition, What Should I Tell Them?
Be ready to provide your identity, the date the case was filed, the case number, the chapter, the identity of your attorney, and the district in which you filed. If they want any additional information, they should be directed to the Law Offices of Hagen & Hagen.
Will Creditors Stop Calling Me and Demanding Payment Once I File Bankruptcy?Creditors are required by the operation of the automatic stay provisions of Bankruptcy Code Section 362(a) to immediately cease attempting to collect on all obligations once a bankruptcy petition is filed. The creditor may not discover the bankruptcy filing right away, but once the creditor is informed of the bankruptcy filing and provided with the basic information about the case, such as the chapter filed, the date filed, and the case number, it must take no further action, unless it obtains bankruptcy court authority to proceed with its collection efforts, and the court's granting of such authority would be very rare. Creditors holding nondischargeable obligations, such as taxing entities, must also cease their collection efforts against assets of the bankruptcy estate, at least until the date of discharge, which in most Chapter 7 cases is approximately four months after the bankruptcy petition is filed.
Do I Have to Be Delinquent on My Obligations to File Bankruptcy?
You can be current on your obligations and file bankruptcy. You can be delinquent on your obligations and file bankruptcy.
At What Point Is It Acceptable That I Stop Paying My Creditors?For obligations that are secured by assets which the debtor intends to keep, such as the debtor's home or vehicles, the debtor should continue to make payments pursuant to the underlying contractual obligation.
For unsecured obligations, such as credit cards, medical debts, trade suppliers and vendors, professional fees, and the like, since such obligations are going to be discharged in the bankruptcy proceeding, there is no reason to continue paying such obligations once the case is filed. In fact, once the debtor decides that he or she is going to file bankruptcy, there is no longer any incentive on the part of the debtor to continue making such payments.
There is an exception to the general guideline above. Keep in mind that creditors are given a window of opportunity within which to seek a determination that the debtor's obligation to the creditor ought not be discharged as a result of wrongful conduct. As noted above, perhaps the most common example of improper conduct in a bankruptcy context is credit card abuse. If a creditor can convince the bankruptcy judge that the debtor used his or her credit card in the weeks and months prior to the filing of the bankruptcy petition knowing that he or she was never going to in fact repay the obligation and therefore lacked the intention to repay the obligation at the time the charges were being incurred, the portion of the creditor's balance that was charged in those weeks and months prior to the filing will be deemed nondischargeable. Accordingly, the debtor is advised to examine his or her credit card accounts and separate them into 'high risk' and 'low risk'. A high-risk account would be one on which the debtor has charged or taken cash advances of more than say $2,500 in the six-to-ten-month period preceding the projected date of bankruptcy, and where there have been few if any payments made by the debtor in repayment of those charges or cash advances. If the debtor has such 'high risk' accounts, the debtor may want to minimize the chances that the creditor will file a complaint with the bankruptcy court to determine the dischargeability of the debt by making additional payments on the account prior to the filing of the bankruptcy petition in order to give the credit card company the impression that he or she intended to pay for the charges or cash advances taken most recently.
Note that bankruptcy only protects debtors from creditors whose obligations arose prior to the date of the filing of the bankruptcy petition. Accordingly, to the extent that the debtor incurs new obligations after the date of the filing of the petition, the debtor is responsible for payment of such obligations. For example, say the debtor files bankruptcy on May 1. On May 2, the debtor gets in an automobile accident. Can the debtor amend the bankruptcy papers to include the driver of the other vehicle and discharge any liability arising from the accident? No. The debt arose after the date of the filing of the petition, and although the discharge won't be processed and received by the debtor for several months in a Chapter 7 proceeding or several years in a Chapter 13 proceeding, the debtor is nonetheless responsible for payment of the obligation.
I Have Heard of Something Called An 'Automatic Stay'. What Is It?The filing of a bankruptcy petition operates as a restraining order against most pending or contemplated proceedings or actions by creditors or interested parties, including taxing authorities. Exceptions include actions in a marital dissolution proceeding to establish, modify or enforce child or spousal support and/or custody and visitation, and criminal proceedings against the debtor by the state or federal government. If the debtor receives a summons or notice of action taken by a party in interest, notify The Law Offices Of Hagen & Hagen so that a notice of the pendency of the bankruptcy proceeding can be forwarded to the opposing party. Note that some nonbankruptcy courts, despite the clarity of the United States Bankruptcy Code, are reluctant to recognize the existence of the automatic stay. It is therefore imperative that the debtor contact The Law Offices Of Hagen & Hagen immediately upon receipt of a summons or a notice of a nonbankruptcy action.
Additionally, if the debtor receives any threats or harassment from prepetition creditors, he or she should calmly inform the creditor of the existence of the bankruptcy proceeding, and be prepared to provide the creditor with the bankruptcy case number, the date the case was filed, the chapter under which it was filed, and the district in which it was filed. If the creditor persists in its threats or harassment, or merely has questions about the bankruptcy which the debtor is unable to completely answer, the debtor should provide the creditor with The Law Offices Of Hagen & Hagen's address, telephone number and e-mail address and instruct it to call The Law Offices Of Hagen & Hagen for further information. The debtor is advised not to make any predictions, forecasts or guarantees to creditors or interested parties as to when creditors may expect a distribution in partial or full settlement of their claims, or how much money creditors may expect in partial or full settlement of their claims.
Note that the filing of a bankruptcy petition does not generally create a stay in actions in which the debtor is the plaintiff or moving party.
Am I Going to Have to Appear in Court, And If So, How Many Times?
You will likely only have to ‘appear’ once, but not in-person, but rather by-video, and not in court, but rather at a meeting of creditors pursuant to Bankruptcy Code Section 341(a), where your trustee will ask you a few questions about your case. If you file bankruptcy together with your spouse, you will both have to attend the meeting. Creditors are also invited to attend and ask questions of you while you are under oath, but rarely do any do so.
As a crackdown against identity theft, you will be required to present photographic identification (valid driver's license is preferable, but a passport or California identification card will also suffice) and proof of your social security number (social security cards are preferable but other official forms, such as a recent year's W-2 or 1099, or a health benefit identification card reflecting your full social security number, can suffice) in electronic form in advance of the meeting.
The meeting usually only lasts about two minutes but be prepared to wait an hour or more for your case to be called. Keep in mind that the trustee's duty is to determine whether you own any assets that are not liened, leased and/or exempt and therefore possibly worthy of liquidation in order to pay the claims of creditors, at least in part. Accordingly, the meeting of creditors gives your bankruptcy trustee an opportunity to ask questions of you about your assets while you are under oath. You will receive an e-letter from The Law Offices Of Hagen & Hagen several days prior to the meeting preparing you with instructions for the meeting, including the types of questions you can expect to be asked. In most cases, the meeting of creditors is the only formal appearance you are required to make in your case. You will not likely ever see your judge.
Can I Pay My Relatives Back After I File for Bankruptcy?
In a Chapter 7, yes, you are free to use your postbankruptcy earnings in any manner you choose. In a Chapter 13, no, you are not free to use your postbankruptcy earnings in any manner you choose. In a Chapter 7, postbankruptcy earnings are not assets of the bankruptcy estate that your bankruptcy trustee can administer for creditors. Note that obligations to relatives should and likely will be discharged along with your other obligations, so there would no longer be any obligation to repay relatives after bankruptcy. However, if you choose to repay relatives, or any other creditors for that matter, you are free to do so in a Chapter 7 proceeding, provided you are using nonbankruptcy estate assets to do so.
I Have Been Borrowing Money from Friends and Relatives for the Past Several Years. Can I Pay Them as Bankruptcy Approaches?
The answer depends primarily on how much money is involved. If the amount is material enough, a bankruptcy trustee may seek to recover funds paid to friends during the ninety-day period prior to the date of bankruptcy and to relatives during the one-year period prior to the date of bankruptcy. Bankruptcy law permits a bankruptcy trustee to recover such funds on the theory that it isn't fair that a debtor 'prefer' certain creditors, especially friends and insiders, including relatives, by paying them more prior to bankruptcy than the debtor pays to other creditors. It is best that you not make such payments until, if at all, at the very earliest, you have first consulted with the Law Offices of Hagen & Hagen.
Should I Dispose of Any of My Assets in Contemplation of Bankruptcy?Generally, no. The transfer of assets during the months and even years prior to the filing of a bankruptcy petition could constitute an avoidable transfer, i.e., the bankruptcy trustee has the power and authority and, depending on the facts of the situation, the economic incentive to unwind certain transfers that have occurred prior to bankruptcy.
Say for example you have a Mercedes Benz vehicle worth $50,000 above and beyond liens and exemptions. You figure that since you will likely lose the vehicle to your bankruptcy trustee if you file Chapter 7, you will rather give it to your brother-in-law, to whom you don't owe money. Giving your brother-in-law the vehicle and then filing bankruptcy anytime within four years of the transfer is highly risky. Bankruptcy trustees are granted the authority to recover 'fraudulent transfers', which are defined in two ways: any transfer made with the intention of hindering, delaying and defrauding creditors, and any transfer made while the debtor was insolvent, or which rendered the debtor insolvent which resulted in materially smaller consideration being received by the debtor than that transferred. Demonstrating intent to hinder, delay and defraud is often difficult but no such intent is required to be demonstrated by the trustee to avoid transfers in which the debtor simply ended up with the shorter end of the stick. In the hypothetical above, the trustee would have the right and the duty to sue the brother-in-law to recover the Mercedes Benz vehicle since the debtor received nothing for the transfer yet gave up an asset worth $50,000.
Where good prebankruptcy planning ends and improper avoidable transfers begin is often a gray boundary. It is best that you not make such transfers until, at the very earliest, you have first consulted with The Law Offices Of Hagen & Hagen.
Am I Permitted to Sell Or Encumber My Assets Once I File Bankruptcy?Once a Chapter 7 bankruptcy petition has been filed, the Chapter 7 trustee becomes the owner of all the debtor's assets. As noted above, the trustee is not likely to liquidate the debtor's assets, but the trustee becomes the owner of such assets nonetheless. Consequently, regardless of whether the asset is encumbered in favor of a secured lender, is leased, or is exempt pursuant to California exemption statutes, the debtor should not enter into any agreement to sell or refinance assets during the pendency of the case. If the debtor does not own the asset, the debtor lacks the authority to sell it. Entering into an agreement to sell an asset which the debtor does not own can subject the debtor to a claim by the proposed buyer for breach of contract for failure to deliver clear title if and when the proposed sale falls through. And, since the debtor would necessarily have entered into the proposed sale transaction after the filing of the bankruptcy petition, the damages incurred by the buyer arising from the debtor's breach of contract would not be dischargeable in the Chapter 7 proceeding.
The Bankruptcy Code provides a mechanism by which the debtor can move the bankruptcy court to have assets 'abandoned' by the Chapter 7 trustee to the debtor from the bankruptcy estate. The motion, which must be served upon all creditors of the estate and set for hearing, will routinely be approved by the court if the debtor can demonstrate that the asset to be abandoned has no net value for the estate, i.e., is fully encumbered, leased, or is exempt pursuant to California exemption statutes. In a Chapter 13 proceeding, the debtor remains in possession and control of his or her assets, but the debtor is nonetheless prohibited from selling or encumbering assets without bankruptcy court authority. Obtaining such bankruptcy court authority may have a negative impact upon the debtor's plan to repay creditors. Accordingly, although there may be exceptions, the debtor should sell or refinance assets, if possible, prior to filing Chapter 13 and should not plan to do so during the pendency of the Chapter 13 proceeding.
The above issue is especially critical if the asset has a chain of title, such as real estate or a vehicle. It is not particularly important for such items as household goods and furnishings. In other words, if the debtor wishes to have a yard sale to sell clothing and some used furniture, it is not likely going to be an issue in the bankruptcy case.
Am I Permitted to Continue Using My Bank Accounts Once I File Bankruptcy?As noted above, once a Chapter 7 bankruptcy petition has been filed, the Chapter 7 trustee becomes the owner of all the debtor's assets. As also noted above, the trustee is not likely to liquidate the debtor's assets, but the trustee becomes the owner of such assets nonetheless. However, in most cases the bankruptcy trustee will have no economic incentive to liquidate or otherwise administer the debtor's bank accounts, since in most cases the balances in the debtor's accounts have been claimed exempt pursuant to California exemption statutes, or the amounts in the accounts are not material enough to warrant trustee administration. Accordingly, in most cases the debtor is entitled to continue using his or her bank accounts without interruption.
In a Chapter 13 proceeding, the debtor remains in possession and control of his or her assets, so the debtor is entitled to continue to use his or her bank accounts without interruption.
One possible exception in both Chapter 7 and Chapter 13 is a credit union account. The threat of closure comes not from the bankruptcy trustee but from the credit union. If the debtor owes his or her credit union money pursuant to a secured or unsecured obligation, it is probable that the credit union will freeze the bank accounts the debtor has at the credit union and attempt to offset the funds in the accounts against the balances owed by the debtor to the credit union. If the debtor owes his or her credit union pursuant to a secured or unsecured obligation, the debtor is advised to either close all bank accounts at the credit union or at least leave the balances low on the date of bankruptcy and discontinue using the accounts after the date of bankruptcy.
In addition, The Law Offices Of Hagen & Hagen has experienced freezing of debtors' personal and business bank accounts by Wells Fargo Bank. Wells Fargo Bank appears to interpret current bankruptcy laws as putting it in a position of custodian of the debtor's bank accounts for the benefit of the bankruptcy trustee. In such instances, Wells Fargo Bank will refuse to give the debtor access to his or her bank accounts until the bankruptcy trustee provides Wells Fargo Bank with written authorization to release the funds. Some trustees are reluctant to so instruct Wells Fargo Bank until after the trustee has had an opportunity to examine the debtor at the meeting of creditors, which is typically four to five weeks into the case. It appears Wells Fargo Bank only freezes accounts in Chapter 7 cases, and only if the aggregate balances in the debtors’ accounts total over $2,000. However, in an excess of caution, The Law Offices Of Hagen & Hagen recommends you either close all Wells Fargo Bank deposit accounts prior to bankruptcy, or leave only a minor amount in the accounts on the date of bankruptcy and use a non-Wells Fargo Bank institution to handle your banking needs during the pendency of your bankruptcy case.
Do I Have to List the Lienholder or Lessor as a Creditor in My Bankruptcy Schedules?Yes. You must list all your obligations in the bankruptcy schedules, regardless of whether the obligation is one that you wish to continue paying, and regardless of whether the obligation is dischargeable. However, provided you always remain current on your payments to your lender or lessor, are insuring the collateral, and you reaffirm the obligation in your bankruptcy case, the lender or lessor is not permitted to repossess the collateral.
By way of reminder, once the bankruptcy petition is filed, secured creditors such as mortgage lenders and vehicle lenders and lessors will likely stop sending you monthly statements. Sending monthly statements can be interpreted as a violation of the automatic stay provisions of Section 362, and therefore creditors, even creditors holding secured liens that the debtor indicates he or she wishes to continue paying, are usually reluctant to send monthly statements. Accordingly, if you wish to keep your home, vehicle, or other secured collateral, you must make your payments regardless of whether you are receiving monthly statements or invoices.
If I Am Operating a Business and File Bankruptcy, Must I Stop Operating the Business and Will the Business Assets Be Liquidated?If the debtor is a corporation, limited liability company, or partnership, the debtor should cease business operations immediately upon the filing of a Chapter 7 bankruptcy petition, if the debtor has not already done so.
If the debtor is an individual or the debtors are husband and wife, and are operating a sole proprietorship, the debtor is permitted to continue operating the business unless and until the Chapter 7 trustee instructs otherwise. In most cases, the debtor's business assets are encumbered by liens in favor of creditors, are leased, are exempt from execution pursuant to California's exemption statutes, or are immaterial in value, or some combination of the four, and are therefore not considered worthy of liquidation by the bankruptcy trustee.
If the debtor is an individual or the debtors are husband and wife, and are operating a corporation or limited liability company, or are principals in a partnership or limited liability partnership, the businesses are not per se assets of the bankruptcy estate, but the shares of stock, membership interest, or partnership interest is an asset of the bankruptcy estate. The debtor is permitted to continue operating the business unless and until the Chapter 7 trustee instructs otherwise. In most cases, if the debtor is experiencing financial difficulties, so is the debtor's business. Similarly, in most cases, the business assets are encumbered by liens in favor of creditors, are leased, are immaterial in value, or some combination of the three.
Are There Any Other Types of Liens Against My Assets That Can Be Avoided in Bankruptcy?Yes. Nonpurchase money nonpossessory liens against certain exempt assets can also be avoided under Bankruptcy Code Section 522(f). For example, say you already own a television, a DVR, a stereo system, and/or a computer. You need a loan. So you go to an entity like Beneficial California or American General. You borrow a certain amount, say $5,000, and as collateral, you pledge your television, your DVR, your stereo system, and/or your computer. The lender, say Beneficial California, accordingly, has a lien against the collateral pledged. Since the loan was not obtained to purchase the collateralized goods and you, not the lender, are in possession of the collateralized goods, Beneficial California's lien is nonpurchase money nonpossessory. Since household goods and furnishings are exempt in bankruptcy, under the Bankruptcy Code, Beneficial California's lien can be avoided.
As noted above, Bankruptcy Code Section 522(f) is a purely bankruptcy tool, available only during bankruptcy. If the bankruptcy case is concluded and you realize months or years later that there was a nonpurchase money nonpossessory lien against your household goods and furnishings or other exempt personal property, you can seek to have the bankruptcy court reopen the proceeding so that a motion to avoid the creditor's lien can be filed and prosecuted, but you must realize that it may take sixty days or more to obtain the bankruptcy court order, and there is no guarantee that the bankruptcy judge will grant the motion to reopen the case.
What Happens to Judgment Liens Against My House?It is important to note that debts and liens are completely different animals. Debts, with some exceptions noted above and below, are discharged in bankruptcy. Liens, however, pass through bankruptcy unaffected. For that very reason, if you are financing the purchase of your home or a vehicle, you must continue to make payments during and after bankruptcy to avoid the lender foreclosing upon its lien or repossessing its collateral pursuant to its lien. But what if a previously unsecured creditor, such as a credit card company, medical creditor or trade supplier sued you and obtained a judgment against you prior to the filing of the bankruptcy petition? Judgment creditors typically attempt to enforce their judgments in one of a few ways. Judgment creditors can attempt to levy upon your bank accounts and garnish your wages. They also usually file an abstract of judgment with the county recorder in those counties in which they suspect you may own real estate, or at least hope that you may own real estate. Abstracts of judgment immediately become liens against your home and such liens also pass through bankruptcy unaffected.
However, Bankruptcy Code Section 522(f) [11 U.S.C. Section 522(f)] permits a debtor to avoid and remove involuntary liens (i.e., judgment liens) against property if such liens impair the homestead or wildcard exemption that he or she has claimed in his or her bankruptcy case. Such liens appear to expire as soon as the judgment becomes ten years old, but, with the exception of the automatic stay provisions of 11 U.S.C. Section 362(a) (which evaporate at the conclusion of the case estimated in most cases to be approximately four months from the date of the filing of the petition), there is no prohibition against the judgment lienholder enforcing its lien during that ten year period, thereby entitling the judgment lienholder to payment in the event of a sale or refinance, or, even worse, taking the debtor's home away by state court-ordered marshal or sheriff foreclosure sale despite the discharge of the underlying debt in bankruptcy.
Removal of judgment liens that impair your homestead or wildcard exemption is handled by motion. The Law Offices Of Hagen & Hagen's fees to handle your bankruptcy proceeding do not include prosecuting such a motion to avoid involuntary judicial liens. If you own a home that you wish to keep and continue paying for during and after bankruptcy and you believe there is a possibility that you may have been sued at some point in the past resulting in a judgment against you and, in turn, a judgment lien or abstract of judgment recorded by the judgment creditor in the county in which you live, it is not a bad idea to purchase a preliminary title report in order to determine whether filing a motion to remove an involuntary lien is advisable and necessary. If you do not intend to continue paying for the home, you are certain that no one other than a taxing agency has liened your home, or the balance owing to the lienholder does not warrant paying the approximately $150 to $300 to purchase a preliminary title report and the approximately $750 to $1,000 to have The Law Offices Of Hagen & Hagen prepare and file a motion to remove the lien, then purchasing a preliminary title report does not appear necessary. Otherwise, The Law Offices Of Hagen & Hagen suggests you do so.
Only judicial liens can be avoided if there is impairment of the exemption which you have claimed against your property. Other involuntary liens, such as statutory tax liens, homeowners association liens, mechanic's liens, and lis pendens are not avoidable pursuant to Section 522(f).
Bankruptcy Code Section 522(f) is a purely bankruptcy tool, available only during bankruptcy. If the bankruptcy case is concluded and you realize months or years later that there was a judgment lien against your home, often discovered during a potential sale or refinancing, you can seek to have the bankruptcy court reopen the proceeding so that a motion to avoid a judgment creditor's lien can be filed and prosecuted, but you must realize that it may take sixty days or more to obtain the bankruptcy court order, and there is no guarantee that the bankruptcy judge will grant the motion to reopen the case.
It is your responsibility to alert The Law Offices Of Hagen & Hagen to the presence of judgment liens against your property so that an appropriate motion can be prepared and filed. It is not up to our firm to determine whether there are judgment liens against your property.
If you do not own real estate on the date of bankruptcy, the fact that a creditor may have recorded an abstract of judgment will be of no import; there is no need to file a motion to avoid the judgment creditor's lien since the lien did not attach itself onto any assets.
Do I Have to List as An Asset in My Bankruptcy Case the House I Own in Another State or a Foreign Country?Yes. All property, real and personal, must be disclosed in the bankruptcy schedules, regardless of whether located in California or elsewhere. If the property is located outside the country, or even outside the state, the likelihood that a Chapter 7 bankruptcy trustee will conclude that the property can be liquidated in a cost-effective manner decreases. Nonetheless, it must be disclosed, and there is a risk such assets will be liquidated by the trustee to pay creditors.
Can I Keep My Home If I File Bankruptcy?
A trustee in a Chapter 7 will only have an economic incentive to liquidate your residence if there is sufficient value to pay costs of sale of approximately eight percent including commissions to a broker, pay the mortgage or mortgages in full, pay you whatever exemption you are claiming to protect the residence whether it be the homestead exemption or the wildcard exemption, other liens of record such as unpaid county real estate taxes and/or unavoidable judgment liens, and still net for the bankruptcy estate no less than say $3,000. Although trustees don't always do so, they can be expected to independently value properties by having a real estate broker run comparable sales and listings and conduct either a drive-by valuation or a walk-through valuation, especially during periods of rising real estate values. It is therefore imperative that you have a strong handle on the value of your home and that you not guess.You should strongly consider purchasing an appraisal from a certified real estate appraiser or at least meeting with a real estate broker or agent who can provide you an approximate range of value based upon comparable recent sales and listings. In the event the trustee determines that there is administrable equity, the trustee will usually offer the debtor an opportunity to purchase the property back from the bankruptcy estate for the amount that the estate would have realized had the trustee in fact sold the property. There may be ways to avoid having too much equity in your residence on the date of bankruptcy.
Which Assets Can I Protect from Liquidation by a Bankruptcy Trustee?
There are two sets of exemptions provided under California law, only of which can be selected in each case. One set is the ‘homestead’ set of exemptions found in the California Code Of Civil Procedure at Section 704, and the other is the ‘wildcard’ set of exemptions found in the California Code Of Civil Procedure at Section 703. If you own real estate in which you reside and there is equity above and beyond costs of sale, you will likely want to protect that equity by claiming the homestead set of exemptions which, in addition to protecting other items such as $7,500 worth of vehicle equity, $9,525 worth of jewelry equity, $15,250 of life insurance cash value, pension plans, home furnishings, and wearing apparel, allows you to protect $626,400 of equity in your residence in most Central District Of California counties.
If you do not own real estate in which you reside or there is no equity in the property you own, you will probably want to claim the wildcard set of exemptions which, in addition to protecting other items such as $7,500 worth of vehicle equity, $1,900 worth of jewelry equity, $17,075 of life insurance cash value, pension plans, home furnishings, and wearing apparel, allows you to protect $33,650 of whatever else you own, such as tax refund, bank balances, investments, or excess equity in a vehicle.
Why Would a Debtor Choose to Pay Creditors Something in a Chapter 13 Proceeding?a. To avoid liquidation of assets. In a Chapter 13 proceeding, the bankruptcy trustee assigned to the case does not have the authority to liquidate assets; the debtor may keep all his or her assets. However, as noted above, the debtor must pay creditors the value such assets would have had to creditors had such assets in fact been liquidated by a hypothetical Chapter 7 trustee had the debtor filed Chapter 7. And the debtor is given up to sixty months within which to pay creditors for those assets. For example, say the debtor owns a business as a sole proprietorship and the business has accounts receivable, inventory, and equipment, above and beyond all liens, leases, and available exemptions, worth $30,000. If the debtor files Chapter 7, it is probable that the Chapter 7 trustee will liquidate such assets for the benefit of creditors. Not only would the Chapter 7 trustee be taking the debtor's primary asset, but is interrupting, perhaps irretrievably, the debtor's cashflow, i.e., the debtor's ability to put food on his or her table. In Chapter 13, the debtor is permitted and encouraged to keep the business's accounts receivable, inventory, and equipment and use such assets to continue to make a living. However, the debtor's Chapter 13 plan must propose to pay creditors at least $30,000 over its thirty-six-to-sixty-month duration.
b. Because the debtor may have surplus income, that would make the debtor susceptible to a motion by the United States Trustee to dismiss the case based on 'substantial abuse'. One of the primary changes made by Congress and the President when they enacted the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 is the implementation of a 'means test'. The means test focuses on the combined gross income of all members of the marital community, regardless of whether only one or both members of the marital community file bankruptcy. Income is determined based on an average over the past six months, regardless of whether the average income over the past six months reflects future earning ability. Subtracted from income are various household expenses, some based on objective standards created by the Internal Revenue Service, and some based on the debtor's actual spending history. If the net surplus is greater than the state's median level of income for a family of the debtor's size, the presumption exists that the debtor is not eligible for Chapter 7. If the debtor's net surplus is below the state's median level of income for a family of the debtor's size, but there is still sufficient income to repay a portion of the debtor's debt if forced to do so in a Chapter 13 proceeding, the debtor may nonetheless be ineligible for Chapter 7 relief.
c. To force upon specific types of creditors a payment plan which would otherwise not be acceptable if not forced upon them in a Chapter 13 proceeding. The primary example is mortgage arrearages. Say the debtor owns his or her home. He or she is six months behind, or $15,000, on his or her mortgage payments. Foreclosure is coming up in just a few days. The mortgage company wants all $15,000 else it will proceed to sell the property at foreclosure. The debtor does not have $15,000 saved. Chapter 7 will typically only buy the debtor an additional month or two but will likely nonetheless result in foreclosure and loss of the property. Chapter 13, however, will force the mortgage company into accepting a thirty-six-to-sixty-month cure of the $15,000 of arrearages while the debtor resumes payment of his or her normal monthly mortgage obligation. Another example is taxes. Say the debtor is $20,000 in arrears to the Internal Revenue Service for recent priority nondischargeable taxes. Chapter 7 will prevent the Internal Revenue Service from seizing assets, liening assets, levying against the debtor's bank account, or garnishing wages pursuant to an earnings withholding order, but only temporarily--typically only about four months. Chapter 13, however, will put the debtor on a payment plan to repay the $20,000 to the Internal Revenue Service over the thirty-six to sixty month duration of the plan, and, as long as the debtor is making his payments to the trustee of his court-approved plan payments, the Internal Revenue Service is prohibited from seizing assets, liening assets, levying against the debtor's bank account, garnishing wages pursuant to an earnings withholding order, or making any other attempts to collect.
d. Because the debtor may not be entitled to another Chapter 7 discharge. A debtor may only obtain a Chapter 7 discharge every eight years. If the debtor has already received a Chapter 7 discharge within the past eight years, he or she is nonetheless entitled to a Chapter 13 discharge. Chapter 13 may be a debtor's only viable option if there has been a recent Chapter 7 discharge.
e. To force student loan lenders or guarantors into a long-term payment plan, even though the student loan debt will not be discharged at the conclusion of the plan. Say for example, the debtor owes $100,000 of student loan debt. Let's also assume that the student loans are in default and the debtor has already used up all available forbearances and deferments. The student loan lenders and/or guarantors are running out of patience and are perhaps now filing suit or enforcing a judgment against the debtor. If the debtor files a Chapter 13 petition, the debtor can force the student loan lenders and/or guarantors into a payment plan of up to five years in duration at what might be a very small percentage on the dollar, during which time, as long as the debtor is making payments pursuant to the Chapter 13 plan's terms, the student loan lenders and/or guarantors can take no action against the debtor or the debtor's property. At the end of the plan's terms the debtor will receive his or her discharge, but since student loan lenders and/or guarantors are generally not discharged, the debtor will still owe the portion of the student loans that were not paid during the Chapter 13 proceeding, plus the interest which accrued during the plan's duration.
f. To split a secured creditor's lien into a secured portion to be paid in full during the plan, and an under secured portion to be paid the same percentage that other unsecured nonpriority creditors will receive under the Chapter 13 plan. Say for example, the debtor owns a vehicle indisputably worth $10,000, but the debtor owes the bank which holds the vehicle's title $15,000. Let's also assume that the debtor's plan proposes to pay only 05.0% to unsecured nonpriority creditors. With some exceptions, Chapter 13 allows the debtor to pay the secured lender the $10,000 value of the collateral over a period not to exceed the sixty month maximum length of a plan, and to pay the lender only 05.0% on its $5,000 under secured claim.
What Are the Primary Differences Between the Various Chapters of Bankruptcy?
There are six chapters of bankruptcy that one may file:
a. Chapter 9 is the chapter that municipal entities and railroad companies use when they file bankruptcy. You might recall that Orange County, California filed a bankruptcy in the mid-1990s. Bridgeport, Connecticut also filed a bankruptcy petition. Individuals do not use Chapter 9.
b. Chapter 12 is the chapter that family farmers use. Individuals who do not own agricultural property do not use Chapter 12.
c. Chapter 15 is the chapter used by United States courts to administer assets of companies who have filed for bankruptcy protection in foreign jurisdictions.
d. Chapter 11 is the chapter that you probably hear or read about most often in the news; it is the high-profile chapter used primarily by corporations, limited liability companies and partnerships to reorganize their financial affairs. Individuals are eligible for Chapter 11 relief, but it is a time-consuming and expensive chapter, and therefore only appropriate for individuals whose circumstances make Chapter 7 or Chapter 13 inapplicable or inappropriate.
e. Chapter 7 is a 'straight bankruptcy' or 'liquidation bankruptcy.' It is the most common chapter; approximately two-thirds of all the bankruptcies filed around the country each year are Chapter 7s. In a Chapter 7 proceeding, the debtor is seeking a discharge, which is a document mailed to the debtor by the Clerk of the Bankruptcy Court toward the end of the case. The discharge is the document which essentially states that the debtor is no longer legally responsible for repaying his or her creditors. There are a few 'prices' one pays for the privilege of receiving a Chapter 7 discharge.
There are three primary components to every Chapter 7 bankruptcy proceeding: assets, liabilities, and income:
1. The asset portion of a Chapter 7 bankruptcy proceeding.
In every Chapter 7 proceeding, a judge is assigned, and a trustee is assigned. In most Chapter 7 cases, the debtor never sees his or her judge, but does meet his or her trustee. It is helpful to look at the Chapter 7 trustee as an independent contractor for the federal government; the government wants experienced professionals to help it do its job, but does not want to pay in-house salaries, so it contracts with local attorneys and accountants to provide the needed services. The trustee's primary responsibility is to review the bankruptcy petition, schedules, and statement of financial affairs, examine the debtor by asking some questions at a meeting of creditors approximately five weeks into the case, and determine whether the debtor owns any assets that ought to be liquidated or sold to generate money to pay creditors on their claims, at least in part.
In approximately ninety-five percent of the Chapter 7 cases filed around the United States each year, the trustee comes to the conclusion that there are no such assets worthy of liquidation, because most debtor's assets fall into four basic categories that make those assets relatively unattractive:
a. Liened assets. If the debtor owns a home worth say $200,000, but the property is mortgaged in the amount of $190,000, then there is virtually no equity for the bankruptcy trustee. The trustee is only interested in liened assets if there is substantial equity available for creditors.
b. Leased assets. If the debtor is leasing his or her vehicle or is operating a business and leasing his or her equipment, there is rarely any equity worthy of liquidation.
c. Exempt assets. California law allows California debtors to protect certain assets from judgment creditors and bankruptcy trustees. The California Legislature has determined that if a debtor needs to start over again economically through a bankruptcy proceeding, it would rather see the debtor start over with something rather than nothing, so it allows certain assets to be protected as exempt from trustee administration.
d. Immaterial assets. Not all assets of the debtor may be liened, leased, or exempt, but often those assets which remain are not worthy of liquidation by a bankruptcy trustee because they are simply not worth enough money to warrant the time, expense, and burden to the bankruptcy trustee of liquidating the asset. For example, if the debtor owns a free and clear vehicle worth $7,000, and can only exempt the first $4,800, the likelihood of the bankruptcy trustee liquidating the vehicle just to administer the remaining $2,200 of equity is slim.
If the bankruptcy trustee concludes that all of the debtor's assets are liened, leased, exempt, or immaterial in value, he or she will file a one page document with the Clerk of the Bankruptcy Court called a 'report of no assets,' effectively advising the Clerk of the Bankruptcy Court that he or she reviewed the debtor's bankruptcy petition, schedules, and statement of financial affairs, examined the debtor at the meeting of creditors pursuant to 11 U.S.C. Section 341(a), and concluded that no assets are worthy of liquidation or administration.
For the three or four minutes worth of work on the part of the trustee, he or she is paid $120 from the $338 filing fee paid to the Clerk of the Bankruptcy Court at the commencement of the case.
2. The liability portion of a Chapter 7 bankruptcy proceeding.
The general rule is that a debtor who files a Chapter 7 petition will be discharged of his or her obligations. That is of course the reason why one files Chapter 7 - to receive the piece of paper from the bankruptcy court that states that the debtor is no longer legally obligated to repay his or her creditors.
But there are exceptions, and those exceptions can be separated into two categories:
a. Those obligations which are automatically not dischargeable in a bankruptcy proceeding. Some obligations are not dischargeable regardless of whether the affected creditor takes an active interest in the case; Congress has provided that such obligations are automatically nondischargeable. The examples of obligations which are automatically nondischargeable are probably not altogether surprising: the trust fund portion of an employer's payroll taxes, recent income taxes, student loans (with some exceptions), past and future alimony and child support, liability created in a driving under the influence incident, unpaid fines, penalties, traffic tickets, parking tickets, and criminal restitution awards.
b. Those obligations which are potentially not dischargeable in a bankruptcy proceeding if the affected creditor takes timely action to seek a determination from the court that such an obligation ought not be dischargeable by the debtor, and the creditor ultimately prevails in such action. Examples of obligations which are potentially nondischargeable all share one thing in common: improper conduct on the part of the debtor. Perhaps the most common example of improper conduct in a bankruptcy context is credit card abuse. If a creditor can convince the bankruptcy judge that the debtor incurred or increased a debt, including a credit card, in the weeks and months prior to the filing of the bankruptcy petition knowing that he or she was never going to in fact repay the obligation and therefore lacking the intention to repay the obligation at the time the charges were incurred, the portion of the creditor's balance that was charged in those weeks and months prior to the filing will be deemed nondischargeable. If a creditor can convince the bankruptcy judge that the debtor used a materially false financial statement in order to obtain credit or to increase his or her credit limit, the debtor's obligation to that creditor will be deemed nondischargeable. Other examples of nondischargeable conduct include actual fraud, embezzlement from an employer, breach of a fiduciary obligation, and infliction of willful and malicious injury to another or another's property.
Creditors are given a window of opportunity within which to seek a determination that the debtor's obligation to the creditor ought not be discharged as a result of wrongful conduct or that as a result of a pervasive fraud upon the bankruptcy court, such as failure to disclose all assets and/or truthfully respond to all questions posed, the debtor ought not receive a discharge of any of his or her obligations. Accordingly, the opportunity of creditors to seek such a determination is another 'price' the debtor pays for the privilege of receiving a discharge.
3. The income and expense portion of a Chapter 7 bankruptcy proceeding.
One of the primary changes made by Congress and the President when they enacted the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 is the implementation of a 'means test'. The means test focuses on the combined gross income of all members of the marital community, regardless of whether only one or both members of the marital community file bankruptcy. Income is determined based on an average over the past six months, regardless of whether the average income over the past six months reflects future earning ability. Subtracted from income are various household expenses, some based on objective standards created by the Internal Revenue Service, and some based on the debtor's actual spending history. If the net surplus is greater than the state's median level of income for a family of the debtor's size, the presumption exists that the debtor is not eligible for Chapter 7. If the debtor's net surplus is below the state's median level of income for a family of the debtor's size, but there is still sufficient income to repay a portion of the debtor's debt if forced to do so in a Chapter 13 proceeding, the debtor may nonetheless be ineligible for Chapter 7 relief. Approximately five percent of the debtors that could have successfully filed Chapter 7 prior to the 2005 law changes have been forced to either file Chapter 13 instead, or not file bankruptcy at all.
The scrutinization of the debtor's income and expenses in order to determine whether giving the debtor a Chapter 7 discharge constitutes a 'substantial abuse' of the bankruptcy laws is another 'price' one pays for the privilege of receiving a Chapter 7 discharge.
Chapter 13 is often referred to as the individual debt adjustment chapter. It is the chapter selected in approximately one-third of all the bankruptcies filed around the country each year. As in a Chapter 7, the debtor is seeking a discharge, which is the document mailed to the debtor and all creditors by the clerk of the bankruptcy court toward the end of the case advising that the debtor is no longer legally responsible for repaying discharged debts. In a Chapter 13 proceeding, the debtor is essentially saying to his or her creditors that his or her household generates a certain sum, such as $5,000 per month, that it spends a certain sum, say $4,600 per month, on its normal going forward obligations such as rent or mortgage, car payments, utilities, food and groceries, insurance, medical, transportation, etc., and, accordingly, has net funds of say $400 left over at the end of each month to offer to repay to the prebankruptcy creditors, all of whom are put on the proverbial back burner when the bankruptcy petition is first filed.
The Chapter 13 plan states that for a fixed period of time--a minimum of thirty-six months up to a maximum of sixty months--the debtor will forward the net cash surplus, $400 in the example used above, to the Chapter 13 trustee assigned to the case, and the trustee will distribute the funds on a monthly basis to creditors pursuant to the terms of the proposed 'plan', which is an approximately twenty page 'fill in the blanks style' document which divides creditors into certain groups or classes. For example, if the debtor is behind on his or her mortgage payments, the mortgage company will be in a certain class. Other secured creditors, such as car lenders or lessors, may be in their own class. If the debtor owes recent taxes to a governmental tax agency, the tax agency will be in a certain class. All general unsecured nonpriority creditors will be together in another class. If after the specified plan period, whether it be thirty-six months, sixty months, or some period of time in between, the debtor has made all of his or her plan payments, he or she will receive his or her discharge at the conclusion of the case.The debtor's plan must satisfy all five of the following tests to be confirmed by the court:
Note that once in Chapter 13, the debtor must remain current on his or her going forward obligations, such as mortgage payments, vehicle payments, and current taxes. Failure to remain current on post-petition obligations constitutes grounds to either permit secured lenders to foreclose or repossess their collateral, or to dismiss the case from bankruptcy altogether.
A debtor must satisfy all five of the following criteria to be eligible for Chapter 13 relief:
a. The debtor must be an individual, or the debtors must be husband and wife. Corporations, limited liability companies, partnerships, and business trusts are ineligible for Chapter 13 relief.
b. The debtor must be generating income, whether it be employment income, proceeds generated from operation of a business, rental income, government assistance, or assistance from friends or family.
c. The debtor must be generating more income each month than he or she is spending on going forward expenses (i.e., rent or mortgage, car payments, utilities, food and groceries, insurance, medical, transportation, etc.), putting all the prebankruptcy creditors on the back burner. In other words, the debtor must offer something to his or her creditors on a monthly basis. A plan cannot indicate that the debtor is generating $2,000 per month income but incurring $2,300 per month in expenses. The debtor must have positive cashflow so that he or she can offer something to creditors.
d. The debtor’s debts, secured and unsecured together, must total less than $2,750,000.
What if the debtor is being sued by someone based upon a tort theory, such as negligence or fraud, and the plaintiff seeks $1 million? Does the plaintiff's lawsuit make the debtor ineligible for Chapter 13 relief? No. Tort-based claims are generally not capable of readily being determined as to liability and as to amount, and therefore are deemed 'unliquidated'. Only liquidated obligations are included in the calculation of eligibility. Creditors holding unliquidated claims are entitled to claims against the bankruptcy estate just like creditors with liquidated claims, but for purposes of determining whether the debtor is eligible for Chapter 13 relief, only liquidated claims are considered.
What tests determine whether the debtor's plan will be approved by the bankruptcy court, and, if approved, how much the debtor will have to pay his or her creditors in that plan?
a. The debtor's plan must be proposed in good faith. In most cases, good faith is not in question, but it might be if the debtor's primary creditor asserts that because of improper conduct, the debt ought to be deemed nondischargeable.
b. The debtor's plan must satisfy the 'best interests of creditors/liquidation test', i.e., the plan must propose to pay creditors at least as much as they would have received had the debtor in fact filed a Chapter 7 proceeding and administrable assets were liquidated by a bankruptcy trustee to pay the claims of creditors.
c. The debtor's plan must be feasible. The debtor is required to demonstrate that he or she is actually generating the income he or she claims in his or her bankruptcy schedules to be generating. The debtor is required to provide income tax returns, paystubs, bank statements, proof of rental income, proof of government assistance, etc.
d. The debtor's plan must devote all available disposable income to creditors. The Chapter 13 trustee will scrutinize closely the debtor's budget, in which the debtor has represented how much he or she is spending each month for rent or mortgage, utilities, food and groceries, insurance, medical, transportation, etc. If the debtor's budget includes expenses which appear to be unreasonably high, such as food and groceries of $2,000 per month for a family of three, or appear to be inappropriate, such as leasing a new Mercedes Benz vehicle for $1,200 per month rather than a Toyota Tercel for $250 per month, the trustee will likely object and urge the bankruptcy judge to either dismiss the case, or confirm the plan only if the offending expense is reduced or removed from the budget.
e. The debtor's plan must provide specific treatment for specific creditors. If the debtor is behind on his or her mortgage and wishes to keep the property, the debtor's plan must fully amortize the mortgage arrearages. For example, if a debtor is $20,000 in arrears to his or her mortgage company, and his or her plan provides that only $12,000 will be paid to the mortgage company in partial cure of the arrearages, the bankruptcy judge cannot confirm the plan. If the debtor is behind on recent and therefore priority tax obligations, the plan must fully amortize such tax obligations. For example, if a debtor is $20,000 in arrears to the Internal Revenue Service for recent priority nondischargeable taxes, and his or her plan provides that only $12,000 will be paid to the Service in partial cure of the tax obligations, the plan cannot be confirmed by the bankruptcy judge.