In my bankruptcy alphabet, Z is for zillion. 

Zillion is a real word but a made-up number.   For certain, it’s lots and lots.

It takes a zillion pieces of information, it seems, to file a bankruptcy case.

• Your last six months of income, business expenses, unemployment benefits.
• Your last three years of income from work and from any other source.
• The correct address for anyone who thinks you owe them money.
• Your projection of how much you’ll make and spend in the next year.

And it goes on.

Guess what?  The 2005 Congress who passed the bankruptcy reform act wanted to make it daunting.

Some of those voting for the bill did so out of a moral stance:  everyone should pay their bills.  Some voted for it to benefit their backers, the banks and car lenders.

The stated aim was to increase the level of detail required to discourage people from getting relief and starting fresh.

Bankruptcy relief works

First of all, those trying to discourage bankruptcy  don’t understand the dynamics of debt. a hopelessly indebted population is not more productive than a solvent workforce engaged in the above ground economy.

But second, who cares?  We can do paper.  The goal of bankruptcy, a fresh start, is worth the annoyance of finding those zillion bits of information.

The actual legal barriers to filing bankruptcy are relatively few.  The deterrent of the new,  detail driven approach to filing is largely psychological:  make it seem like  too much work or not likely to succeed, and those needing bankruptcy relief will procrastinate and make more minimum payments until they hit the wall.

A zillion is a fictional number.  The relief offered by a bankruptcy discharge is real.

It will take some real effort to find all zillion bits of info;  an experienced bankruptcy lawyer can help you determine the level of detail that is required to comply with the law.  How to interview a bankruptcy lawyer.

There are probably a zillion reasons to make the push, and become debt free.

This message was brought to you by the letter Z.  Some of my cohorts in the Bankruptcy Alphabet exercise think Z is for Zero Percent Plan or for just plain Zero.

Image courtesy of Leo Reynolds.

W is for Wait  in my Bankruptcy Alphabet.

As in “Wait! Wait! Don’t file yet.”

Sometimes, the bankruptcy journey begins, not with a mad dash to the courthouse, but with a short wait.

Having made the decision to get out of debt, why would you wait?

Many reasons, most of which revolve around how much of your assets you get to keep, or how much trouble you can avoid by letting time pass before filing.

Reasons to wait to file bankruptcy:

1. Put time between you and heavy use of credit cards
2. Allow taxes to age to point of dischargeability
3. Let preferential transfers to insiders become a non issue
4. Take time to maximize exemptions
5. Wait out the end of the tax year to include current year in Chapter 13

Sometimes, the issue is the running of time between an event in your financial past and the bankruptcy filing.

Transfers to ordinary creditors can be recaptured by the bankruptcy trustee if made within 90 days of the filing. The recapture period is one year, if the transfer is to a family member.

Taxes assessed within 240 days of filing bankruptcy are non dischargeable; you don’t want to file until at least 241 days have passed.

In other circumstances, you need time to gather facts, spend money, open new accounts, terminate automatic transfers.

Non bankruptcy deadlines

Some other deadlines operate independently of the bankruptcy filing.

• The statute of limitations determines when a debt is no longer collectable; wait out the statute and the debt can be excluded from the Chapter 13 debt limits. 
• Taxes are due the first day of the new year, even though the return isn’t due until April 15th.  You may want the taxes to be a debt to be paid through the Chapter 13 debt limits.
• Homeowners in California who are 65 or older get a homestead exemption that is almost double that of a younger married couple.  Good reason to wait for that 65th birthday.

File now

There are times when waiting has a greater cost than you can afford:  the foreclosure looms, the car may be repossessed, or your wages are being garnished.

Good bankruptcy counsel can spot the pro’s and con’s in the timing issues.  Don’t wait to consult an experienced bankruptcy attorney.

This message has been brought to you by the letter W.

My writing partner Jay Fleischman maintains W is for Wage.

Image courtesy of Leo Reynolds.

U stands for Unsecured in my Bankruptcy Alphabet.  Unsecured describes a  bankruptcy creditor who has no collateral to secure his debt.

The world is full of pivotal distinctions:  male/female;  apples/oranges;  cold/hot.  The distinction between unsecured and secured creditors is huge in bankruptcy.

A secured creditor has a lien on the debtor’s assets.  That lien is an interest in property:  it isn’t ownership, but it gives certain rights to the lien holder. Anglo Saxon law has accorded special deference to property holders  for as far back as we can trace the beginnings of our law.

At the conclusion of a Chapter 7 bankruptcy case, a lien continues to exist on the assets to which it attached.  In contrast, the claim of most unsecured creditors is extinguished, erased, discharged.  The unsecured creditor, who has no lien to support his claim, is toast.  (That’s another T word in my bankruptcy alphabet. <g>)

Credit cards are the most typical unsecured creditors in a bankruptcy case.  When you use most bank credit cards, you get absolute ownership of the goods you buy with the card.  The seller retains no interest in the goods, nor does the credit card issuer who makes the money available to pay the seller get a lien on the goods.  They belong outright to the buyer.  The credit card issuer is then at risk should you not pay, because its claim is unsecured.

The division between secured and unsecured gets another level of importance in Chapter 13.  Eligibility to file Chapter 13 is pegged to having unsecured debts below $360,475.  An added twist in Chapter 13 is that creditors who have a lien but the lien doesn’t attach to any asset with value available to support the claim, is counted among the unsecureds.

Therein lies a real challenge for homeowners in the San Francisco Bay Area, where the drop in home prices has left many HELOC’s actually unsecured in the bankruptcy sense.  It also creates an opportunity for lien stripping.

This post has been brought to you, as they say on Sesame Street, by the letter U.

U can also stand for Underwater, and United States Trustee

Image courtesy of Leo Reynolds

Priority is the P word in my Bankruptcy Alphabet.

Priority is the order in which claims of creditors are paid in a bankruptcy case.

While all people may be created equal, not so for claims.  Recent income taxes and unpaid child support are among the  priority claims that get paid first and in full before other creditors receive any money from the bankruptcy estate.

Priorities are set out in Section 507 of the bankruptcy code.  All the claims in each priority are paid in full before the claims with the next highest priority get anything.

This ordering of payment usually works to the debtor’s advantage because the most common priority claims, taxes and support, are also non dischargeable.

So in Chapter 7, if the support claim isn’t brought current, the unpaid balance remains an enforceable debt.  In Chapter 13, to be confirmed, a plan has to provide for payment in full for priority claims.

In my view, the biggest shortcoming in this system is the treatment of student loans.  Student loans do not have a priority for payment, but they are generally non dischargeable.

One of the few reasons to file a Chapter 7 bankruptcy for a corporation is grounded in claim priorities.  I may recommend a Chapter 7 when a corporation’s unsecured, non priority creditor employs the law to get payment for itself, ahead of tax claims that would have a priority for payment in bankruptcy.

This becomes important to the officers of the corporation when the unpaid taxes are trust fund taxes.  The individuals who run a corporation may be personally liable for paying the trust fund tax portion of payroll taxes, though they aren’t liable for the rest of the corporation’s debts.  A bankruptcy filing makes sure that the priority tax claims get paid first.

On the non statutory side of things, as a bankruptcy lawyer, I am looking for ways to make it a priority for clients to get me all of the information I need to do their bankruptcy papers well.

This post was brought to you by the letter P.

The instigator of this alphabet madness, Jay Fleischman, thinks P is for Pay Advice.

Image courtesy of Leo Reynolds.

The letter N, in my Bankruptcy Alphabet, stands for Nondischargeable.  These are the debts that simply don’t go away, even when you get a bankruptcy discharge.

Family support heads the list of nondischargeable debts, at least figuratively.  Whether it’s called child support, alimony, maintenance, or a domestic support obligation, the debtor’s obligation to pay on court ordered support survives bankruptcy.  That’s the case in every chapter of the Bankruptcy Code.

There’s a different rule about other financial obligations that are created in a divorce.  These debts might be equalizing payments for a division of property or an obligation to indemnify your ex from debts to others you are expected to pay.  Those obligations are nondischargeable in Chapter 7, but dischargeable in Chapter 13.

Famously, student loans are nondischargeable in bankruptcy, unless you bring an adversary proceeding in the bankruptcy and prove that repayment of the student loan imposes an “undue hardship” on you and your dependents.

Some taxes are nondischargeable: recent income taxes and the trust fund portion of payroll taxes.

Then, there is a group of debts that may survive bankruptcy if the creditor files a non dischargeability action in the bankruptcy and proves that the debt is the result of some listed kinds of “bad behavior” on the debtor’s part:

• fraud,
• misrepresentation,
• conversion, embezzlement,
• breach of fiduciary duty, and
• intentionally inflicted harm

If the creditor can prove that the debt was created by any of these kinds of conduct on the debtor’s part, the debt will survive a discharge in any chapter.

Credit card usage provokes the most nondischargeability litigation. The lender typically claims that the debtor used the card without the intention to repay the charges. Courts vary on how much real evidence the creditor has to offer to prove his contention. That’s why I ask each client about their recent credit card usage; I want to assess whether the credit card company is likely to challenge the discharge of the debt.

The rest of the non dischargeable debts are found in Section 523.

So there you have nondischargeable, brought to you by the letter N.

My friend and bankruptcy attorney Jay Fleischman thinks N is for Naked.  He certainly looks at bankruptcy differently.

Image courtesy of takomabibelot.

M is for Modify in my Bankruptcy Alphabet. The Bankruptcy Code provides that a borrower can modify the terms of some secured debts, like car loans, judgment liens, and some mortgages. And in the midst of the mortgage mess, the automatic stay can prevent foreclosure while a homeowner seeks a mortgage modification on their principal residence.

Generally creditors with liens on a person’s assets fare better in bankruptcy than creditors who have simple unsecured claims like credit card debts. Absent some specific court order, liens pass through bankruptcy unchanged.

Here are some of the ways that a lien can be modified in bankruptcy.

• In Chapter 13, the interest rate on a car loan can be changed to today’s interest rate.
• Some car loans can be reduced to the value of the car today.
• Judgment liens that interfere with exemptions can be reduced or eliminated alltogether.
• Tax liens can be voided or paid to the extent the lien attaches to actual value in some asset of the debtor.

That adds up to a whole lot of modification.

But the modification that is usually at the forefront of thinking after the housing collapse is the modification of home mortgages. A provision of bankruptcy law prevents the modification of home loans on the debtor’s home, so long as there is any equity in the property for the lien to attach to.

With the plunge in property values, many junior liens are now, in fact, totally unsecured. An unsecured lien, even on a home, can be stripped in Chapter 13. Welcome to the world of bankruptcy, where change is everywhere.

Today’s post has been brought to you by the letter M.

M also stands for Means Test, in bankruptcy lawyer Jay Fleischman’s world.

Image courtesy of takomabibelot.