How bankruptcy works Archives - Northern California Bankruptcy Lawyer

Bankruptcy Discharge vs. Dismissal

By Cathy Moran

Dismissed and discharged.

In a bankruptcy case, these two terms are at the opposite ends of the scale of results in bankruptcy.

Yet they are often confused.

A discharge is a win! The bankruptcy discharge order wipes out your personal legal liability to pay a debt.

A dismissal is usually a loss. It means the bankruptcy case was closed before a discharge was entered.

When cases are dismissed

A dismissal could be at the request of the debtor when bankruptcy protection or a discharge is no longer needed.

Sometimes, we file a Chapter 13 to buy enough time to complete the sale of an endangered home. Once the sale is complete, there may be no further need for the automatic stay.

Generally a debtor can’t voluntarily dismiss a Chapter 7 case. The debtor can convert the case to another chapter, but the debtor can’t usually change his mind and escape bankruptcy.

By contrast, the debtor has an almost absolute right to dismiss a Chapter 13 case. That’s why Chapter 13 is my go-to chapter when the situation is fluid or there are major unknowns. If things go really sideways, we can dismiss the case.

Why I love Chapter 13

More often, dismissal comes on the motion of the trustee or the court, often for failure to timely file a document or for abuse of the system.

But dismissed means that the case has been closed without a discharge.

Closed without a discharge

There’s a third outcome for cases that involves neither discharge nor dismissal: closed without a discharge.

Chapter 13 cases that follow a Chapter 7 too close in time to be entitled to a discharged are “closed” at the completion of the plan. That’s a Chapter 20.

Cases are also closed without a discharge when the debtor fails to complete the required debtor education course that is a condition to a discharge.

The bankruptcy ticket to ride

Sometimes, having your case closed without a discharge represents a failure: all that effort to file and you failed the last little step to getting rid of your debts.

Sometimes, however, it’s a deliberate strategy to get out of an bankruptcy that was filed untimely, without using up one’s right to a discharge. But that’s a story for another day.

Choosing the bankruptcy chapter for you

Why Chapter 13 cases fail

Can you change lawyers mid stream

Image courtesy of Nemo and Pixabay.

How To Spend Money Before Filing Bankruptcy

By Cathy Moran

Trying to spend down cash before filing bankruptcy?

It’s time to talk about the float.

Not the root beer float, though that would be more fun.

The bank “float”: the period between writing a check and it clearing your bank.

(We’ll talk about what to spend on before filing bankruptcy, too).

When you file bankruptcy, your schedules are supposed to show what you own on that day. For checking accounts, that’s the balance that the bank shows.

If you’ve written a bunch of checks right before filing, checks still floating out there on their way to the bank make your bank balance higher than the balance in your checkbook.

Why does the float matter

The money in your bank account on the day you file belongs to your bankruptcy estate.

Now, it may be fully exempt or it may be too little to interest a trustee in administering it, but that’s another story.

In the eyes of the law, the money in the bank is yours, even though you’ve written directions to the bank to pay some of it out to the holders of your checks. Those directions (your checks) just haven’t arrived at the bank.

A bankruptcy trustee can demand that you pay him that balance for the benefit of your creditors, even though the money has long since been paid out by the bank, who knew nothing of the bankruptcy case when it honored your check.

Bummer.

Spending before bankruptcy

If you are in the lucky position of having more cash on hand than you can exempt in your bankruptcy case, you may want to spend that money on things you’ll need after bankruptcy.

Can you sell assets before filing?

My list of purchases/expenditures that generally pass muster with bankruptcy trustees include

Stocking your kitchen
Repairing your car
Paying insurance premiums
Refilling prescriptions
Getting needed health or dental care
Replacing aged appliances

But if you pay for them with a check, right on the eve of bankruptcy, you run the risk that the checks haven’t cleared the bank when your case is filed.

More on cleaning up your finances before bankruptcy

Eliminate the float

Instead of paying by personal check, you can pay cash for your purchases. Be sure to keep a record of what you bought so you can trace the money for the trustee.

Or, you can buy cashier’s checks from the bank, and make your purchases with certified funds. The funds to buy a cashier’s check come immediately from your account at the bank.

A cashier’s check is a check on the bank’s checking account, not yours.

By using cashier’s checks, you spend down your funds and eliminate the risk that your bank balance will be artificially high on the day you file your bankruptcy case. And that’s good.

More on planning for bankruptcy

What about the tax refund?

Do you know about the secret bankruptcy exemptions?

What belongs in your bankruptcy schedules

Interviewing a bankruptcy lawyer

Image courtesy of Flickr & boo_licious.

Pay Off Credit Cards Without Interest And Be Debt Free

By Cathy Moran

The sixtyish client sitting in my office had assets worth 10 times his credit card debt.

What could bankruptcy possibly do for someone who was solvent?

His problem was liquidity and an income that was certain to decline in the next few years.

His generous disability income would end at 65, leaving him with only Social Security and the income from the illiquid annuities to live on.

Minimum payments on $50,000 of credit card debt took 40% of his current income. It would take 42 years to pay it off at contract terms.

Like so many clients, he wanted desperately to pay off the debt, yet the credit card interest rates made it impossible without selling off the assets on which he relied for a stable future.

Care to guess what saved the day? The Federal Reserve!

The interest rate on federal funds was at .18%. Less than one percent.

It’s the federal funds rate that defines the interest rate on federal judgments, and therefore the interest a solvent debtor must pay creditors in Chapter 13.

In a Chapter 13 plan, he could keep his house, preserve the annuities he’d need for his support at 65, and pay the face amount of the debt plus minuscule interest.

All that Chapter 13 requires is that creditors do at least as well under the Chapter 13 plan as they would in a Chapter 7 where the trustee would sell the assets of the trustee’s choice to pay creditors.

So, by reducing the interest rate from credit card rates to the federal judgment rate, my client’s $50,000 in credit card debt could be paid off in a 100% Chapter 13 plan, with less than $300 of interest paid on the debt over the entire 60 months of the plan.

Payments to the plan will be less than the current debt service and in five years, he’ll be debt free.

When we talk about saving, we talk about the power of compound interest. Savor the reverse, the power of a minuscule interest rate on debts paid through Chapter 13.

Bankruptcy terms, simplified

How Chapter 13 works

Image courtesy of Leo Reynolds.

How to Screw Up Your Bankruptcy

By Cathy Moran

If an asset isn’t titled to you, it does not have to be disclosed in a bankruptcy filing.

I hear it and see it in action again and again.

If it isn’t titled to you, it will be “safe” from the bankruptcy trustee and from creditors.

And yet it is wrong.

Wrong, wrong, wrong.

Still, people transfer titles to cars and cash and quitclaim their homes to friends before bankruptcy, thinking that’s smart.

No. It’s both dumb and dangerous.

Not only does putting your assets in the names of friends and family expose them to a lawsuit to recover the property, in extreme situations it puts your bankruptcy discharge at risk.

Actions taken to “hinder, delay or defraud” creditors are grounds for denial of discharge under 11 U.S.C. 727.

What could delay your creditors more than shedding assets without getting anything in return?

Transferring asset unlawful since Elizabeth I

For well more than four hundred years, the law has contained prohibitions on fraudulent transfers.

A transfer of an asset by one who has debts constitutes a fraud on creditors if

1) the transfer is for less that fair consideration; or

2) was made for the purpose of putting the asset beyond the reach of creditors; or

3) leaves the person transferring the asset with less capital than reasonably necessary to conduct their business.

So, a transfer is actionable even if it’s a gift to charity; you intended to hide the asset; or the transfer left you broke.

Consequences of fraudulent transfer

The usual remedy against the person who gets the asset is an order requiring the return of the asset or a money judgment in the amount of its value.

The bankruptcy code has a statute empowering the recapture of transfers made within two years of filing.

In addition, the bankruptcy trustee has the rights of the debtor’s creditors under state law to recovery any property that the debtor wrongfully transferred. In California, creditors have four years to recover fraudulent transfers.

Putting your assets in someone else’s name

So, a really quick and effective way to screw up your bankruptcy is to put your assets in the name of your mother, your kids, or your buddy, and conceal the fact from your attorney.

Sign the statement of affairs under penalty of perjury, hiding the transfer, and you are a long way toward making a real muck of things.

Yet people again and again ask “what if I put it in someone else’s name?”.

As long as they ask me, I get a chance to say “Don’t do it”.

And they have a chance to get a discharge.

What your bankruptcy lawyer can’t tell you

Bankruptcy’s 90 day rule

Do it yourself bankruptcy

Queen E. The First courtesy of Wellcome and Wikimedia.

Six Tips For A Worry-Free Bankruptcy

By Cathy Moran

Your bankruptcy case is filed.

But what happens after your bankruptcy is filed?

After you’ve assembled all the paper, after you’ve answered endless lawyer questions, and after you’ve filed all the bankruptcy schedules in your case with the court, what do you need to do now?

Actually, relatively little happens after you’ve filed your bankruptcy. The heavy lifting is done.

But for a successful outcome to your case, you need to stay engaged. Bankruptcy is not the kind of law you just hand to your lawyer and bow out.

Here’s what you need to do to as a member of your bankruptcy team.

1. Open your mail

Read what the court and I send you. I sent you a copy so you can see what is going on and what I have done on your behalf.

Much of a bankruptcy case plays out in paper generated by my office and the court. Stay up on the latest.

Make arrangements to appear at the first meeting of creditors.

2. Review what you have signed

It takes a lot of paper to file a bankruptcy case and you undoubtedly signed lots of schedules.

Go back and review what you signed. Read the question and your answer. Is your answer true and complete?

Point out any errors or omissions. Innocent mistakes that the debtor identifies and corrects are seldom a problem in a case.

Mistakes are common and harmless if fixed.

3. Keep me posted

I need to know about major events in your life: have you moved, changed jobs, become entitled to an inheritance, gotten too sick to work for a while.

Each of these things bears on bankruptcy issues.

4. Ask me questions

Let me know about things you don’t understand. I can’t tell that you are confused unless you tell me.

There is no reason you should understand bankruptcy the first time through. I’m still seeing subltities in the law after three decades of doing this.

So let me know when you are lost.

At bottom, there are decisions in a bankruptcy case that only the client can make, so you have to have some understanding of the issue to make a good decision.

5. Respond promptly

When I ask for documents or information, please move quickly.

A bankruptcy case moves on a short timeline and delay can be harmful.

6. Don’t fret unnecessarily.

Bankruptcy may be new and strange to you, but my staff and I are experienced. Most bankruptcies are routine.

There is no reason to lay awake nights terrified of some horror you’ve dreamed up. If it worries you, ask me about it.

There is more on the statutory duties of a debtor on Bankruptcy in Brief.

Going to court in your bankruptcy

Creditors you must pay after bankruptcy

Are discharged debts gone forever?

Bankruptcy terms you need to know

Image courtesy of Pixabay and Geralt.

4 Rules For Testifying At Your Bankruptcy Hearing

By Cathy Moran

Going to court for your first meeting of creditors?

What are they going to ask me?, you wonder.

My bankruptcy clients imagine a quiz on the contents of their bankruptcy papers.

Or worse, an inquisition on why they needed to file bankruptcy.

That’s not likely. The first meeting of creditors is much more likely to be a snooze.

Jay Fleischman set out a very comprehensive list of questions a Chapter 7 trustee might ask at your bankruptcy hearing.

Let me add my rules for answering those questions.

1. Listen to the question

Just because you’ve read Jay’s list and think you know what’s coming, listen to the trustee’s question, all the way to the end.

First of all, it’s only polite. Second, you want to make sure that you know what the trustee wants to know.

Your answer is being recorded. You want to make sure you are answering the question that the trustee asked.

2. Answer truthfully

Honest disclosure is the price of getting a bankruptcy discharge. This is not the time to be cute or tell anything less than the truth.

You are answering under oath. You are subject to the penalties of perjury if you are intentionally are less than honest.

3. Be brief

Answer the question that the trustee has asked, truthfully, in as few words as possible.

Don’t explain, don’t justify, don’t ramble.

Just answer the question.

If the trustee needs to know more, he can ask a follow up question.

Usually, the trustee is just trying to make a record that he has done his job.

He has a list of cases he has complete. Don’t make his day any longer by volunteering more than he wants to know.

4. Don’t guess

If you don’t know the answer to a question, say so. If the answer is honest, it’s perfectly OK.

Perhaps your counsel can help. Maybe there are documents that provide the information.

Don’t pretend to a level of certainty if you don’t really know.

All’s well

If you’ve been diligent about getting your attorney all the requested information, chances are the first meeting of creditors will be the last, and you’ll be on your way to a fresh start.

How to review your bankruptcy papers

What happens to your car in bankruptcy

Who to pay after you’ve filed bankruptcy

Image: © Innovated Captures – Fotolia.com

Filling Out The Bankruptcy Papers

By Cathy Moran

Filing bankruptcy can make you feel like you are drowning in paper.

There’s your paper; there’s the paper your lawyer needs. And there’s the paper the court insists on.

It’s easy to try to skate. To cut corners. To shut down.

But that paper is critical.

Nearly every question, benefit, or dispute in an individual’s bankruptcy case starts with the bankruptcy papers.

Those papers are called the schedules. The schedules form the heart of a bankruptcy case. They lay out what the person filing the case owns, owes, and spends.

And most debtors (those who file bankruptcy) have little idea how much paper is involved til they see the schedules and sign them in their lawyer’s office.

Before they get to the signing, debtors chafe at the endless questions from their attorney about the nature of the debt, who is liable, and whether the debt is disputed.

Is all this effort really needed?

Bankruptcy schedules matter

Your schedules constitute the trustee’s first look at you. Well-done schedules project engagement with the process and they tend to limit digging by the trustee.

The creditor schedules control who gets notice of your case and notice of the automatic stay.

Notice to all affected assures that anyone with a right to challenge the discharge of your debt to them is bound by the timelines of the Bankruptcy Code.

Creditors who don’t get notice may reopen the bankruptcy case later to assert that their debt isn’t dischargeable.

Omit assets and you may lose them, as case law limits your right to claim an exemption in an asset you didn’t disclose in the first place.

List it or lose it

Leave out a legal right or pending lawsuit and the defendant in that suit can have your lawsuit dismissed.

Then, there’s the matter of perjury: the law provides for fines and imprisonment for deliberate untruths on the bankruptcy schedules. Not something you want to expose yourself to.

What the schedules contain

Seen broadly, bankruptcy schedules list the debtor’s assets; debts; projected budget; and recent financial history.

Asset forms

Secured creditor form

Priority & unsecured creditor form

Since 2005, there’s a schedule for the means test.

You file proof of having taken prebankruptcy credit counseling and statement of your intentions with respect to debts secured by personal property, like your car.

Helping you get them right is part of the job of a bankruptcy attorney.

New bankruptcy forms

The courts are rolling out new versions of the bankruptcy forms which claim to be more “modern” and user friendly.

I find them verbose and impossible to scan easily to get the big picture in a bankruptcy filing.

The new forms read like tax forms and they suggest that you could competently file bankruptcy without a lawyer. My experience is that, since 2005, it is the rare individual who can correctly file out the forms, much less understand the implications of those forms.

Enlist a professional to assess whether bankruptcy is right for you and whether now is the right time, before you file. Afterward, it may be too late.

How to find the right bankruptcy lawyer

Understand exemptions

What debts don’t get wiped out

Image: weatbix

How Chapter 13 Cuts Car Loan Down To Size

By Cathy Moran

Car lenders who make new car loans with an underwater trade-in will face the music in Chapter 13.

The Supreme Court declined to review a 9th Circuit decision that stripped car loans of their protected specially protected status in bankruptcy; as a result, Californians will continue to benefit from the debtor-friendly decision in Penrod, rising out of a San Francisco bankruptcy case.

The question in Penrod

At issue was whether the prohibition on cramming down the debt on a vehicle purchased within 910 days of a bankruptcy filing protected “negative equity” financed in the car purchase.

“Negative equity” is the debt in excess of the trade in’s value. That left-over debt is added to the total of the new car loan and is unrelated to the value of the purchased vehicle.

And BAPCPA, the bankruptcy “reform” act of 2005 prohibited reducing a secured claim on a vehicle purchased within 910 days of the bankruptcy. But did it similarly protect that part of the loan that wasn’t really related to the cost of the vehicle purchased?

Penrod facts

In Penrod, the Redwood City resident had traded in a car worth $6,000 on which she owed $13,000. The new car loan included $7000 necessary to pay off the debt on the trade in.

The legal issue is whether that left over debt should enjoy the projections extended car sellers in BAPCPA for purchase money loans on the debtor’s car.

Every other circuit that addressed the question has given purchase money protection to the entire debt including the negative equity portion of the new loan.

The 9th Circuit held the negative equity was not purchase money as to the current car. The appeals court remanded the case for the bankruptcy court to figure out how to apportion the payments made before bankruptcy between the purchase money element and the leftover debt element.

It’s surprising to me that SCOTUS didn’t accept cert on Penrod, since there is clearly a split among the circuits and it seems to this California bankruptcy lawyer that the Supremes take great pleasure in overturning the 9th Circuit.

But I’ll take a victory however it presents itself and await a decision on how to calculate what can be trimmed from a debtor’s car loan in bankruptcy.

How Chapter 13 thwarts repossession

Keeping your car after Chapter 7

10 ways bankruptcy makes you better off

Image Snackariah under a Creative Commons license

4 Essential Tips To Get Ready For Bankruptcy

By Cathy Moran

Ready for life after bankruptcy?

Even before your case is filed, you can start preparing for your life after bankruptcy.

These four steps will probably make the bankruptcy case be smoother, too.

Change banks

Your money on deposit in “your” bank may not be solely yours.

If you have a loan or other debt to your bank, the bank can help itself to funds in your deposit account to apply to what you owe it.

That’s called set off: the amount the bank owes you (your account balance) is set off against what you owe it. Trust me, you’ll lose if that happens.

Since you usually stop making payments on dischargeable debts once you’ve made the decision to file bankruptcy, don’t leave your cash sitting in the bank, waiting to to be snatched by the bank who didn’t get paid this month.

Open a banking relationship elsewhere with an institution you don’t owe money. Move your money, and any automatic deposits, to the new bank or credit union.

You don’t need to close the existing account. Just keep no more money there than you’re willing to lose if the bank does a set off.

Review automatic bill payments

If money is automatically taken from your account to pay recurring bills, ask yourself if each of those withdrawals are bills you want to pay if you are filing bankruptcy.

If not, stop the bleeding.

Cancel payments on old debts, debt settlement arrangements, and things you can do without in your new financial life.

Sometimes, it seems the only way to stop such things is to close the bank account. I’ve seen any number of cases where my client may stop the withdrawal for this month, but it pops back up next month.

On the other hand, if you end up changing banks to avoid an offset, as I talked about above, think about whether the automatic payments are for services you want to continue post bankruptcy.

If so, set them up at your new bank.

Can the cards

Stop using your credit cards.

Once you’ve decided to file bankruptcy, any charges to your credit cards may be considered fraudulent. After all, you don’t expect to pay off that card after bankruptcy.

Since you’ve stopped paying on the dischargeable credit card debt, use the cash freed up to pay for purchases with cash.

A debit card is fine, since it just draws on your own money. It isn’t a loan to be repaid.

Just like automatic bill pay, if you have ongoing and necessary expenses regularly billed to your credit card, you need to make a new arrangement to pay those bills monthly. You can expect your credit cards to be terminated upon filing.

Remember the checking account float

The balance in your account on the day your bankruptcy case is filed is the number important to you and the bankruptcy trustee. It is not the balance as shown on your check register.

The balance on the day you file is property of the estate. That’s the amount that may need to be protected by claiming an exemption, or turned over to the trustee.

Watch out, if you write checks on the eve of filing. If they haven’t cleared the bank when your case is filed, they may never clear, as the trustee may demand the balance shown on the bank’s books on the day you file.

If you have things you have to pay before filing or if you are counting on spending down the bank account, get cashier’s checks.

The funds to buy a cashier’s check are immediately taken from your account; there is no float.

Smooth sailing

Get these four things done before you file your case, and things in your financial life in general will go more smoothly.

Then you can graduate to my list of 8 must do tasks after you get your discharge.

Who to pay after filing bankruptcy

Pay less for your car in Chapter 7

Who is discharged in my bankruptcy

Image courtesy of Carmen Jost and Flickr

V Is For Value In Bankruptcy Alphabet

By Cathy Moran

The Letter V is for Value in my bankruptcy alphabet.

The value of one’s assets drives exemptions and the question of what you get to keep through bankruptcy.

The value of your assets that are subject to liens also determines whether you can void liens on those assets.

I’m fond of saying that bankruptcy is a snapshot of what you own and what you owe on the day you file bankruptcy. The workings of a bankruptcy case revolve around what your assets were worth on the day you filed bankruptcy.

It’s sometimes hard for families to realize (and write down on their bankruptcy schedules) that the value of their personal property is very little, since value for these purposes is what you could sell the stuff in question for. Particularly in today’s distressed economy, that may be a disappointing number.

What’s it worth

I have strange conversations with clients about the value of their assets.

Asked what their household goods are worth, they give me a substantial number. Skeptical, I ask “Could you sell them now for that?”. “Oh, no,” comes the reply, “but that’s what they’re worth.”

Sorry to say, but the value of assets in bankruptcy is what they can be sold for, today.

Value critical to exemption law

Many exemptions are capped at a certain dollar value.

In California, for instance, you can exempt $7,175 in jewelry, heirlooms and works of art. So the fact that things you bought for much more are saleable today for far less works in your favor if you want to keep the asset.

Your treasures are more likely to fit within the exemption at the lower value.

Another way a lower value at filing works in the client’s favor involves assets that are encumbered by voluntary or involuntary liens. The lower the value of home, business, or timeshares, the greater the chance the debtor can strip off liens that don’t really attach to equity in the asset.

A lien that is stripped off is gone forever, so you reap dividends into the future because of that lower value.

This valuable stuff has been brought to you by the letter V.

V can also stand for Vehicles in bankruptcy and for Vesting,

Image courtesy of Leo Reynolds.

When cases are dismissed

Closed without a discharge

More

Why does the float matter

Spending before bankruptcy

Eliminate the float

More on planning for bankruptcy

More

Transferring asset unlawful since Elizabeth I

Consequences of fraudulent transfer

Putting your assets in someone else’s name

More

1. Open your mail

2. Review what you have signed

3. Keep me posted

4. Ask me questions

5. Respond promptly

6. Don’t fret unnecessarily.

More

1. Listen to the question

2. Answer truthfully

3. Be brief

4. Don’t guess

All’s well

More

Bankruptcy schedules matter

What the schedules contain

New bankruptcy forms

More

The question in Penrod

Penrod facts

More

Change banks

Review automatic bill payments

Can the cards

Remember the checking account float

Smooth sailing

More

What’s it worth

Value critical to exemption law

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