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4 Essential Tips To Get Ready For Bankruptcy

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.

What You Left Out Of Your Bankruptcy Schedules

By Cathy Moran

One of the first questions a bankruptcy trustee will ask you at the hearing in your bankruptcy case is: did you read the schedules before you signed them?

The obvious, and expected, answer is YES.

And if your answer is “yes”, then the trustee can conclude that you stand behind the information that the schedules contain.

You signed them under penalty of perjury, after all.

But did you really read them?

Let’s talk about it.

Get your schedules right

Schedules is bankruptcy lingo for the lists of assets, creditors, budgets and financial history that make up the initial bankruptcy papers.

Quick guide to bankruptcy lingo

Your right to a discharge of dischargeable debts is based on making full disclosure about your financial situation in those schedules.

That disclosure starts with the official forms that make up the schedules. They are one-size-fits-all. So the questions include inquiries about your airplanes and the livestock you own, things that don’t often appear on my clients’ bankruptcy schedules.

The schedule of personal property assets, Schedule_B , asks 35 questions about what you own. Unless you read each question carefully and give thought to your answer, it’s all too easy to carelessly omit assets.

Assets are more than things with a physical presence: assets include rights in a probate estate, participation in a class action suit, and rights to a tax refund.

“Don’t count your chickens” is bad bankruptcy advice

The most frequently omitted asset in my experience is legal claims. For bankruptcy purposes, a legal claim isn’t just the lawsuit that you’ve already filed. It’s the right to assert a claim based on events that have already happened.

Whether your attorney asks you to fill out a questionnaire or interviews you for the information necessary to fill out the forms, the exercise merits your best efforts.

How to review schedules before signing

Unless you are keen on spending some extended time as a guest of Uncle Sam on a conviction for perjury, or losing your bankruptcy discharge for recklessly filing untruthful schedules, it pays to know how to review the draft schedules your attorney has prepared.

Don’t limit yourself to reviewing the information that has been typed into the form. Look for what isn’t there, too.

That’s a lot harder, because it requires that you read the questions on the form and consider whether you really have nothing to report in response to the question.

Believe me, though, it’s worth the effort. You can catch things you forgot to tell your attorney. You may catch creditors or assets that were somehow omitted from the schedules.

You want to catch any mistakes before the schedules are filed. Careless mistakes on the papers casts doubt on the accuracy of the rest of your schedules.

Making corrections at the first meeting of creditors

All is not lost if you remember something after your schedules are filed that should have been included.

Another one of the trustee’s standard questions at the first meeting of creditors is “are there any errors or omissions in your schedules you want to bring to my attention”.

Take up the trustee’s invitation to make any additional disclosures needed to make the information in the trustee’s possession complete.

You want to take the initiative to correct the record.

Give it your best effort

The effort required of you to get a bankruptcy discharge isn’t very great. The most important of the things you must do is file accurate schedules.

After that, most bankruptcy cases are a piece of cake.

Rules for appearing at the first meeting of creditors

What if you skipped a creditor

List it or lose it: the price of nondisclosure

How exemptions work

Image courtesy of openclipart.Find

List It Or Lose It: Why It’s Critical To Tell All

By Cathy Moran

Transparency is the essential ingredient in bankruptcy. The name of the game is disclosure.

In exchange for full disclosure in your bankruptcy papers of assets , debts, and financial history, you get a discharge.

Do it right, everyone with notice of your case is bound by the discharge.

Disclosure costs you nothing and it insulates you from charges that you’ve has concealed property of value or otherwise been less than candid with the court.

That lack of candor can cost you big time, from the loss of confidence in your filings by judge and trustee; to charges of perjury or criminal fraud; to loss of the discharge.

This is serious stuff.

Pay attention

My questionnaire for clients says repeatedly that you must disclose all of your assets, yet I get back questionnaires showing no clothing (did they come to my office in a barrel?), no bank accounts, no furniture, no car, etc.

Sometimes, the client doesn’t have the kind of property in question.

But more often, they made assumptions. They assumed that 1) if the account was overdrawn, they didn’t have to list it; 2) if the clothing was worth little, they didn’t have to list it; 3) if the bank had a lien on it, they didn’t have to list it.

The erroneous assumptions go on.

A is for Assumptions

I declined representation in a case this week that promised a five figure retainer in large part because I believed that I could not get the prospective client to take seriously the need to be open and candid with the court.

If you want to keep any asset, tangible or intangible, after the bankruptcy, list it in your schedules.

Throwing away assets

My colleague lawyer Jay Fleischman wrote about the consequences of failing to disclose the right to sue for a violation of consumer law in the bankruptcy schedules.

There’s a sneaky legal doctrine used by lawyers on the other side of your lawsuit: judicial estoppel. It boils down to this:

if you said in the bankruptcy schedules that you didn’t have such an asset, you are barred later from claiming you have a legal right that you didn’t list.

It usually doesn’t matter if the omission was innocent or calculating. The result is too often forfeiture of the claim.

List everything

That way, you also get to keep the discharge, the real prize in this exercise.

What’s included in bankruptcy

Find what’s missing from your schedules

What to do if you missed something

High Income Earners Pass Bankruptcy’s Means Test

By Cathy Moran

ALERT: Being over the median income is not an automatic bar to filing bankruptcy

I’m so used to railing against deliberate campaigns of misinformation about bankruptcy that I forget that there’s a lot of innocent ignorance out there.

Start with “qualifying” for bankruptcy.

A very earnest and ethical financial counselor was telling me about a client of hers trying to find the right moment in time to file bankruptcy.

She was targeting the point in time after the job loss, but before the new business got established. After the severance pay ran out and before the child left for college.

Yet the story involved a home with a mortgage and tax debts.

I couldn’t get my head around why, on those facts, the means test was a bar to filing a Chapter 7.

Til something she said tipped me off. She thought the means test barred families with incomes over the median from Chapter 7.

Wrong, wrong, WRONG. [Read more…]

$7000 Off The Price Of The Car In Chapter 13

By Cathy Moran

When the client finally got me a copy of the car finance contract, it saved them $7000 on the price of the car.

They’d tried just giving me the monthly statement.

But that statement on the car loan didn’t show the bombshell that I found when I finally examined the contract:

Included in the loan for the new car was the unpaid balance on their old trade in!

In bankruptcy-speak, that’s negative equity, and negative equity isn’t entitled to payment in full in Chapter 13.

So in our Chapter 13 plan, we can reduce what they pay for the car by the $7000 of the loan that paid off the trade-in. It really was worth the effort to find the contract.

Sleuthing in bankruptcy

I know, the amount of paper a diligent bankruptcy lawyer wants from you is daunting.

There’s loan documents, deeds, IRA statements, bank balances, insurance policies, pay stubs, and tax returns.

It can seem overwhelming and sometimes pointless. I get it.

Some of what we’re gathering is defensive: to show that the information in your bankruptcy schedules is correct. After all, disclosure is the price of getting a bankruptcy discharge.

But some of the paper we need supports our offense: having found the portion of the car loan that related to the trade in rather than the new car, we can slice $7000 off of the debt.

Same thing about getting payroll tax returns. Not everything a small-business employer owes the IRS is a must-pay. But we’ve got to get the right paper to figure that out.

Just believe that we are asking for documents for a real reason. Like reducing the loan by $7000.

Car loans in bankruptcy

The auto side of this story is worth the telling, too. The ability to manipulate car loans is one of the appealing features of Chapter 13.

Only purchase-money: After the 2005 bankruptcy amendments, car lenders got a windfall on cars purchased in the three years, more or less, before the bankruptcy. “Reform” entitled car lenders to more than their collateral was worth. (The lenders had a bigger lobbying budget than consumers when the law was passed).

But the 9th Circuit judges have held that the negative-equity part of a car finance transaction isn’t part of the purchase money loan. Thus we can strip out the payoff of the trade-in from the loan balance that must be paid.

Likewise, a debtor can reject gap insurance, maintenance contracts and other add-ons that aren’t part of the value of the car itself.

Interest rate changes: Regardless of when a car loan was made, Chapter 13 can alter the interest rate that the lender gets on the loan through Chapter 13. So the 10-15% car loan may pay something closer to 4-5% under the Chapter 13 plan.

Term extended: A Chapter 13 plan can extend the remaining term of a car loan to match the length of the bankruptcy case. Spread over more months, the monthly bite of a car loan in your budget can be reduced.

And that’s just a part of the reason that I love Chapter 13.

Car loans in Chapter 7

Expert tips on buying a car

Speak fluent bankruptcy

What Debts Were Discharged In My Bankruptcy?

By Cathy Moran

After your bankruptcy, one of the hardest questions is figuring out just which debts were discharged.

Eliminating debts was the whole point of filing bankruptcy. You’ve got a court order, but no list.

You and your creditors understandably expect to find a single document telling them what debts are no longer enforceable and which survive the bankruptcy.

No such luck.

Bankruptcy discharge order

The official form used by most bankruptcy courts merely states that the debtor is granted a discharge. The general information on the second page of the form suggests that you might need an attorney to understand the application of the discharge in a particular case.

That’s because, while the bankruptcy schedules require you to list all of your debts, not all of your debts are dischargeable.

Some debts automatically survive the bankruptcy filing. Survivors include family support, recent taxes, and criminal restitution.

Debts a creditor can challenge

Other debts may be non dischargeable if the creditor challenges the dischargeability of its debt and wins at trial.

Student loans may be discharged only if the person filing bankruptcy brings an adversary proceeding to establish that repayment creates an undue hardship.

And then, liens generally survive as a charge on the debtor’s property but not a personal liability.

So, it’s complicated.

And the court doesn’t work out all the intricacies before issuing the discharge order.

Who was included in bankruptcy

The basic rule about discharging debts provides that debts are discharged unless there is a statutory exception to discharge listed in the Bankruptcy Code.

The concept of due process (and a provision of the Bankruptcy Code) says creditors get their debt discharged only if they get notice of the bankruptcy.

That’s why saving your bankruptcy papers is so on point. The schedules and the mailing matrix in your case (and any amendments to them) show who was listed in your case.

Listed creditors are most likely discharged.

Californians get broader discharge

In California, where 9th Circuit decisions are controlling, the Beezley opinion (994 F.2d 1433 1993) tells us that even a creditor who wasn’t listed is discharged in a no asset bankruptcy.

The caveat is that if the creditor has a claim to non dischargeability because of the debtor’s bad acts, the claim survives until the creditor has a chance to challenge the discharge of his debt.

Beezley stands for the proposition that even creditors not listed are discharged in a no asset case.

If everything you owned when you filed bankruptcy was exempt or not worth the trustee’s time to administer, you don’t need to amend your bankruptcy schedules to add creditors that you forgot when you filed. If there are no assets, they didn’t miss anything financial by being omitted.

Other circuits have similar case law, too.

When creditors call after bankruptcy

In this era of debt buyers and zombie debt, most debtors can expect to get a collection letter on a debt that was discharged in their bankruptcy.

Usually what it takes to make a zombie debt collector go away is a copy of the discharge order and a copy of the schedules showing that the original creditor was listed in the bankruptcy.

A creditor who sold off bad debt can’t give the buyer anything more than the seller had; in this case, the creditor had an unenforceable debt.

So, save your bankruptcy documents. If giving the collector a copy of the schedules doesn’t make the creditor go away, contact a bankruptcy lawyer.

The bankruptcy court stands ready to sanction creditors who blow off the discharge order.

Enforcing the discharge

Can discharged debt come back

Maximize your bankruptcy discharge

Chapter 13: Know Who Gets Paid First Under Your Plan

By Cathy Moran

Reality exists outside of television shows.

And when real-world reality hits some debtors, it’s a trainwreck.

It comes up for me when Chapter 13 clients and I sit down to write the plan for the case.

The plan will set out which classes of creditors get paid over the five year life of the plan.

Too often, my ever-optimistic client wants to keep all of his assets with secured debts AND pay off the must-pay back support or non dishchargeable taxes.

The Problem

Secured debts are things like car loans, home mortgages , and property taxes.

If you don’t pay a secured debt, the creditor has the right to take the asset that is the collateral.

Over optimism

So here’s the dilemma. It’s hard to decide to give up houses and cars. You’ve usually got some part of yourself invested in the choice.

Even if the car is a gas guzzler or the house burdened with a bad loan or too little value, it’s tempting to assume you can gut it out. Make up the back payments over five years and have something at the end.

When the collateral is a toy, a boat or bike, or a rental home, you spin yourself messages of entitlement or future appreciation.

You commit in your plan to pay both the secured claims and the priority claims within the five year limit of a chapter 13 plan.

You look at your budget and it works, barely. You can project enough money to do it all within five years.

Hit a bump

But then, mid plan, life intervenes. Your work hours are reduced. The car breaks down. A family member gets sick.

And all of a sudden, there isn’t enough money to make the plan payments that get you everything.

Worse, what you’ve paid into the plan has gone for things you didn’t have to pay for: the Harley, the underwater rental, the house that’s too expensive. The trustee’s order of distribution puts the debts that won’t go away behind the options you chose.

Depending on how significant the loss of income or increased expenses, you may be able to recover.

But maybe not.

Plan for the unexpected

When making choices at the beginning of a Chapter 13, don’t assume that everything in your financial life going forward will be uniformly stable or improving.

Where you will be if there is a major negative event in your life? Have you taken care of the most important debts first?

Or does the overly optimistic plan you propose have you continuing to live on the financial edge?

Image courtesy of Flickr and bwats2.

When Can I File Bankruptcy Again

By Cathy Moran

You can file bankruptcy tomorrow, so long as you don’t currently have a bankruptcy case pending.

When you can get a discharge in that case is a different story.

The Bankruptcy Code limits the frequency of getting a discharge, not the filing and completion of the bankruptcy case.

My friend Gene Melchionne wrote a marvelous piece about the timing of the bankruptcy discharge that conjures up the old high school cheer: 2, 4, 6, 8, who do we appreciate.

The waiting period between cases, if you want a discharge, can be 2 years, 4 years, 6 years or 8 years, depending on what kind of case you filed before and what kind of case you want to file now.

You count those years from the filing of the first case to the filing of the second case.

But, contrary to the usual thinking, the discharge isn’t everything.

Sounds like heresy from a bankruptcy lawyer, doesn’t it, but let me tell you a couple of stories.

The no discharge Chapter 7

My client had a house with equity, a recent bankruptcy discharge, and a criminal conviction that had him heading to prison, soon.

He faced a future with no income and no way to pay the mortgage. And at the point he didn’t live in the property, his right to claim a California homestead in the property was in doubt.

But the recent bankruptcy case meant he couldn’t get a discharge in a new Chapter 7 case; and prison wages were not going to support a Chapter 13.

But what we wanted was the automatic stay, the sale of the house, and the homestead paid to the client.

The balance of the equity was beyond saving, on these facts. We were content to have the balance go to pay toward the restitution judgment.

So, we filed a Chapter 7. The fact that my client wasn’t eligible for a discharge wasn’t important . What we needed was a sale managed by the trustee while my client was behind bars and the homestead carved out and paid to the debtor.

No discharge Chapter 13

Much more common than prison-bound debtors are no-discharge Chapter 13 cases. When they follow hard on a Chapter 7, we sometimes call them Chapter 20 cases: 7 + 13=20.

After BAPCPA’s changes to the bankruptcy code in 2005, the four year rule applies to getting a Chapter 13 discharge after a Chapter 7. There must be four years between the filing of the 7 and the filing of the 13 in order to get a discharge of your debts in the Chapter 13.

But the discharge isn’t everything.

Pay debts that survived

Often what you need in a Chapter 20 is the automatic stay and time to pay debts that didn’t get discharged in the Chapter 7. Those debts might be priority taxes, back family support, or even student loans.

It is the payment plan and the predictability that you need, not necessarily the discharge.

Catch up mortgage

Chapter 13 works to give you time and protection to bring a mortgage current. Because the mortgage is a lien and wasn’t wiped out in the Chapter 7, failure to get right with the lender will lead to foreclosure.

Liens that survive the discharge

File a Chapter 13, and you’ve got time to get current.

Strip off the worthless lien

While you can’t strip off liens in Chapter 7 unless they impair an exemption, in Chapter 13 you can void an utterly underwater mortgage AND strip or bifurcate a tax lien.

Two recent 9th Circuit decisions make it clear that it is completion of the Chapter 13 plan, not the discharge, that entitles you to strip a lien, and that the balance on a lien that survived the Chapter 7 doesn’t count for the Chapter 13 debt limits.

When can you file

So, like lots of legal questions, it depends. It depends on whether you can achieve your goal without getting a discharge.

Image courtesy of Flickr and Hichako.

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What To Disclose In Bankruptcy Papers

By Cathy Moran

If the headline drew you in, like the Geico gecko, you can complain you’ve been duped.

In bankruptcy, you disclose everything. Period.

Disclosure is the price of the bankruptcy discharge.

Shortchange the system by leaving out inconvenient facts and you risk both the omitted asset and the discharge.

Understand the difference between discharge and dismissal.

A false oath on the bankruptcy papers or transfers intended to conceal assets from creditors are each grounds on which the discharge of all of your debts can be denied, while the trustee recovers and sells the assets.

It’s nasty and comes at a very high price.

Tell the whole truth

The reason for incomplete bankruptcy schedules is seldom an intention to conceal. It’s the filer’s failure to take disclosure seriously.

People ready to file bankruptcy don’t want to read the questionnaire that prompts them for various kinds of assets they might have. They don’t commit to thinking about how this question might apply to their situation.

Or they assume because an asset has little market value, it’s excluded from the schedules.

Not so. The schedules don’t ask for your significant assets or things you have with value; they ask that you list what you own.

You would not believe the number of clients whose completed questionnaires tell me they have no clothes.

Yet I’ve never met with a naked client. They just perform some sort of mental shortcut when we ask about what they own.

Transparent assets

The hardest kind of things for laypeople to “see” as assets are those that are just legal rights, or even, possible legal rights:

the worker’s compensation claim,
the claim against the landlord,
the participation in a class action.

All of those are assets that need to be listed.

Often a trustee will elect not to administer even non exempt assets, because the effort to pursue them is too great compared to the possible return.

But even if the trustee were to administer the claim for the benefit of creditors, the loss to the debtor is usually far less than the value of the discharge of debts you get in bankruptcy.

What your signature on your bankruptcy papers says about you

Your court appearance in bankruptcy

Who you need to pay after bankruptcy

Image courtesy of Wikimedia and Frank Wouters.

Woman without clothes: Gisela Glardino and Flickr

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

Get your schedules right

How to review schedules before signing

Making corrections at the first meeting of creditors

Give it your best effort

More

Pay attention

Throwing away assets

List everything

More

Sleuthing in bankruptcy

Car loans in bankruptcy

More

Bankruptcy discharge order

Who was included in bankruptcy

Californians get broader discharge

When creditors call after bankruptcy

The Problem

Over optimism

Hit a bump

Plan for the unexpected

The no discharge Chapter 7

No discharge Chapter 13

Pay debts that survived

Catch up mortgage

Strip off the worthless lien

When can you file

Tell the whole truth

Transparent assets

More

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