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Getting Excused From Bankruptcy’s Means Test

You can get a pass on the means test without claiming your dog ate your homework.

If your debt is not “primarily consumer debt”, you don’t have to pass the means test to file bankruptcy.

So, you need to total up the consumer debt you have and compare it to the rest of your debts.

Don’t miss the fact that tort claims aren’t “consumer debts” under the means test.

So if tort judgments or even unliquidated tort claims total more than your consumer debt, you don’t have to take the means test.

Check the box, and come on in and file the bankruptcy chapter of your choice.

Tort explained

Let’s start by defining a “tort”. A tort is a civil wrong, other than a breach of contract, that causes injury or damage to another without excuse.

Automobile accidents make up the largest group of torts. The law requires everyone to conduct themselves so that others are not hurt. One who negligently fails to use appropriate care such that someone else is hurt has committed a tort.

Whereas people choose to enter into contracts, and the contract can specify the remedy if one breaches the contract, tort liability is imposed by law.

It is that imposition of liability that courts have looked to in finding that tort damages are not consumer debts for the purposes of bankruptcy law.

Means test controls access to bankruptcy

Virtually everyone who comes into my office has heard about, and obsesses over, the means test.

Often they assume that merely making more than the median income disqualifies them from bankruptcy relief.

Cheat sheet to pass the means test

I remind even bankruptcy lawyers that debt incurred for business or investment purposes and tax debt is not “consumer debt”. If non-consumer debt predominates, the means test does not apply.

Now, the logic of giving a pass in bankruptcy to those who don’t pay their taxes eludes me, but that’s Congress for you.

Not consumer debt

But there is a little discussed additional category of debt that is not debt “incurred for personal, family or household” purposes (§ 101(8)) : tort claims. The reported cases hold that these sorts of debts aren’t incurred in the manner of contract debts like credit cards and medical bills.

The client in my office had no contractual debt, other than a tiny student loan. But the pending lawsuit accused him of harboring a dangerous dog.

Now mind you, the dog didn’t weigh 5 pounds and the wound it inflicted was objectively insignificant. The suit, nonetheless, was expensive to defend, stressful, and could blight an otherwise sound financial life.

The bankruptcy case became just that much simpler when I recognized that we could bypass the means test.

Tort claims aren’t consumer debts; since the dog bite claim dominated the client’s list of debts, it became irrelevant how much money the client made.

The best way to ace the means test is to avoid it altogether.

Even High Income Families Pass The Means Test

The Problem Even A Good Bankruptcy Lawyer Can’t Fix

Discharging Taxes In Bankruptcy

Image courtesy of Wikimedia Commons.

How To Wipe Out Tax Penalties In Bankruptcy

By Cathy Moran

Tax penalties seem like a further insult when you’re having trouble paying the tax itself.

Everything seems subject to an additional penalty: failure to file timely; failure to pre pay sufficiently; failure to be accurate.

They mount up quickly, often equaling the unpaid tax.

Bankruptcy can not only eliminate your liability for certain taxes, it can wipe out the tax penalties as well.

Here’s how it works.

Three rules for discharging tax penalties

Penalties for dischargeable taxes are dischargeable

Tax penalties are tied to a particular tax year. If the tax for that year is dischargeable in bankruptcy, the discharge wipes out the penalties too.

The formula for a dischargeable tax, roughly speaking, says you can get rid of an unsecured tax if 1) the return for that year was due more than three years before the bankruptcy was filed; 2) if the return wasn’t filed on time, it’s been on file for at least two years; and 3) the tax for that year was assessed at least 240 days before bankruptcy.

Discharge the tax, discharge the penalty.

Penalties tied to events more than three years before filing are dischargeable

If the failure that triggered the penalty happened more than three years before filing, the penalty is dischargeable.

It’s dischargeable even if the the tax for that year isn’t dischargeable, for instance, because the returns weren’t filed on time. see 11 U.S.C. 523(a)(7).

All tax penalties wiped out in Chapter 13

That’s right: all tax penalties are discharged by a Chapter 13 discharge. Hard to beat, right?

Chapter 13 requires that you pay in full the priority taxes and the interest that accrued up to the date the bankruptcy case was filed. But at the end of the case, all tax penalties are wiped out, even on the priority taxes. More on taxes in Chapter 13.

Fraught with rules

So much of discharging taxes depends on knowing the maze of rules that apply to taxes in bankruptcy. It’s critical to get a tax transcript to verify the dates of all the important transactions.

Get experienced legal help if you want to discharge taxes and tax penalties. This is not the time or place for the cheapest or closest bankruptcy lawyer in town.

Image courtesy Flickr and Sharon Drummond

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.

When another bankruptcy case doesn’t protect you

Steps before you meet a bankruptcy lawyer

Why I love Chapter 13

Image courtesy of Flickr and Hichako.

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How Long Does Bankruptcy Take?

By Cathy Moran

Every client filing bankruptcy asks that question: how long will bankruptcy take?

Probably, the real question is “when will this be over?”

Like so many questions in the law, the answer is “it depends.”

From filing bankruptcy to discharge

In a Chapter 7, filing to discharge is about four months; in Chapter 13 it’s three to five years.

But, too often, the real gating issue is getting ready to file.

How long will it take you to get your attorney all the needed information.

And that’s a timeline that you, the client, control.

The source of delay

The real slow-down in most cases is getting the raw information to us.

Cases stall when the client

fills out as much of our questionnaire as they find convenient;
provides most of the paystubs;
promises the tax return; and
has to search for information on the insurance policy.

We hustle to get the schedules done, and the client then doesn’t have all the necessary funds to finish paying us.

After the case is filed

Once filed, a Chapter 7 marches fairly predictably to discharge. Most cases get a discharge in 3-4 months.

The debtor’s obligations after filing are few: show up at the 341 meeting, and complete the post bankruptcy education class.

Chapter 13 is different: 13 is a payment plan stretching over 3-5 years. The discharge comes when the plan payments are complete.

But in most districts, Chapter 13 debtors have few action items: make the payments to the trustee, provide requested updated information, and take the debtor education class.

What if I can’t make the plan payments

But back to the original question: how long does bankruptcy take?

The time required for the debtor to empower the attorney with a full deck of cards is unknowable, to the attorney, and is within the control of the client.

It seems to depend on how committed the debtor is to get out from under the financial problem.

Understanding your bankruptcy schedules

Interviewing a bankruptcy lawyer

After your case is filed

Image courtesy of Pixabay.

Right To Support When Your Ex Files Bankruptcy

By Cathy Moran

Outrage is the usual reaction when a former spouse who owes you child support or alimony files bankruptcy.

It reinforces all those less-than-flattering thoughts you harbor about your ex.

But maybe that’s not the right reaction for two reasons, one old, one new.

One is old: support debts can’t be wiped out in bankruptcy.

The second reason is new: failure to pay support is grounds for dismissal of a bankruptcy case.

You may have levers that weren’t available to you before as a former spouse.

Unpaid support dooms reorganization

Chapter 11 and Chapter 13 are reorganization chapters of bankruptcy. The person filing for relief stays in possession of their assets and proposes a plan to solve their financial problems.

If you’re in financial trouble, it seems to offer the best of both worlds: you keep your stuff and get immediate protection from your creditors.

But there’s a condition. The debtor needs to stay current on support obligations that come due after he files the bankruptcy case.

Failure to pay domestic support obligations (the Bankruptcy Code’s catch phrase for alimony, spousal support, child support or family support) is ground for dismissal of the reorganization case, or conversion to Chapter 7, where a bankruptcy trustee takes control with an eye to liquidating assets.

That is just what happened in a case where I represented a spouse with an order for temporary support.

Husband had never paid on the support order before or after the the bankruptcy was filed.

Consequence: husband’s Chapter 11 case was converted to Chapter 7 because he failed to meet the terms of the family court support order. Section 1112 (b)(4)(P) lists failure to pay a domestic support obligation cause for conversion or dismissal of the case.

For this client, conversion has a second benefit: husband’s wages earned after conversion are not protected by the bankruptcy code. My client will be able to get an earnings withholding order to direct his future earning toward the unpaid support.

Support debts never dischargeable

No matter what chapter of bankruptcy is selected, the debtor cannot wipe out support obligations. Support is expressly made non dischargeable by 11 USC 523(a)(5).

If the bankruptcy case is one where payment is going to be made to creditors, support is the very first debt in line for payment. The distribution scheme in bankruptcy provides that a debt with priority gets paid in full before debts with lesser priority are paid.

You need to file a proof of claim, however, in order to be paid.

Property that the debtor is able to exempt from the claims of other creditors is not protected from claims for a domestic support obligation. 11 USC 522(c)(1).

The unanticipated benefit of a bankruptcy of the spouse ordered to pay support is that other, non support debts may get discharged. That leaves fewer creditors competing for payment with the support order.

So, things may not be so bad as they first seemed.

If you have an unpaid domestic support order and your ex files bankruptcy, get help from an experienced bankruptcy lawyer. You may have cards to play in this game.

How to make your divorce bankruptcy-proof

Dividing debts in divorce

Bankruptcy myths

High Income Earners Pass Bankruptcy’s Means Test

By Cathy Moran

ALERT: Being above the median income on the means test 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.

Only half must take the means test

Median income only determines whether you have to take the means test to qualify for Chapter 7.

Families with income below the median income in their state automatically are allowed to file.
Families with income above the median have to take the test. Pass the test, and you are free to file Chapter 7.

In almost 10 years of dealing with the means test, I’d guess less than a dozen of my clients have been kept from filing Chapter 7 by the means test. Median income by state.

The means test is ugly, obscure, time consuming, and still subject to a lot of uncertainty. But if it was designed to keep people out of bankruptcy, it hasn’t worked very well.

What’s on the means test

In broad strokes, the means test looks at your average monthly household income and deducts from it

some kinds of expenses at the rates provided by the IRS collection standards
some kinds of expenses in amounts that you actually expect to spend
the secured debt payments and non dischargeable taxes you will owe in the next 5 years

While some parts of the formula are rigid and disconnected from the reality of day-to-day living, it presents many ways to qualify a family to file bankruptcy.

The cruelest part of the means test is it seems to favor people with big mortgages, car loans, unpaid child support and back taxes. Those debts are all deductible on the means test.

It’s the folks with upper middle class incomes who pay their taxes, rent, and drive paid-for cars that are disadvantaged by the means test.

So where ever the misconception that the means test just looks at gross family income got started, I want it stopped, you hear<g>.

If you’re above median

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

It just means you need sophisticated bankruptcy counsel and some additional work to crunch the numbers so that you have a choice about your choice of bankruptcy chapter.

Remember that the supposed purpose of the means test was to funnel consumers into Chapter 13. And most of the Chapter 13 cases we file pay little or nothing to unsecured creditors. The money paid into the plan goes to creditors my clients want to pay, like delinquent mortgages, car loans, and recent taxes.

Not a bad deal.

Why I love Chapter 13

Means test is meaningless in Bay Area

Getting excused from the means test

Doing the means test yourself

Image courtesy of photobunny.

Chapter 13 To The Rescue In Ruinous Business Lawsuit

By Cathy Moran

Twice in the last six months, Chapter 13 bankruptcy has saved clients facing catastrophic lawsuits arising out of business.

And because the targets of these lawsuits filed bankruptcy before they’d spent a fortune on lawyers and before the court had a chance to award huge damages, they fit beneath the Chapter 13 debt limits.

We think of Chapter 13 as a consumer tool. It’s designed for those with a regular income. It’s sometimes called a wage earner plan. The amount of debt involved has to be below certain limits.

So, Chapter 13’s application to business lawsuits isn’t obvious.

But it works like a charm.

Here’s how Chapter 13 rescued one client sued about a business dispute.

Chapter 13 filed before judgment

Chapter 13 is not available to everyone. Only individuals can file. Their debts must fall below certain amounts.

But, critically, the debt limits in Chapter 13 apply to debts that are liquidated. That means that the amount of money owing is fixed.

Liquidate: to determine the amount of indebtedness or damages.

The lawsuit my client faced asked for “damages according to proof”. The former business associate claimed many measures of harm, all of which was disputed. The claim was unliquidated; you couldn’t see or calculate the claim from the face of the complaint.

The suit could not be ignored. And given the attitude of the plaintiff, the seriousness of the allegations, and the complexity of the case, it was going to be expensive to try. And ruinous if the plaintiff won.

By filing Chapter 13 before trial, the claim was UNliquidated when the bankruptcy was filed.

No matter how much the plaintiff claimed was owed, because no amount of damages had been determined before the bankruptcy was filed, the unliquidated debt didn’t count against the Chapter 13 debt caps. [For context, when the plaintiff later filed a claim, he sought $15,000,000!]

Why Chapter 13 rocks

Chapter 13 offers eyepopping advantages over other forms of bankruptcy that my client could have chosen. The first advantage is that a debtor in Chapter 13 stays in possession and control of his assets during the case.

By contrast, in Chapter 7, a court appointed trustee takes legal control of the debtor’s assets. The trustee is tasked with turning non exempt assets into cash for the benefit of creditors.

My client could have seen his home sold in a Chapter 7, long before it was determined if he really owed the former business associate anything.

In a Chapter 11, which has no debt caps, he could have stayed in possession of his assets. But to confirm a Chapter 11 plan, he would have to get the votes of his creditors in favor of a plan. An angry creditor with a large claim is unlikely to vote for a plan the debtor sees as desireable.

In Chapter 13, the role of creditors in approving a plan is much smaller. A creditor can object only on certain grounds found in the bankruptcy code. Being unhappy with the amount being paid to creditors is not one of the permissible objections.

Confirmation tests for Chapter 13

Not to mention that the legal fees in Chapter 11 are invariably much larger than in Chapter 13.

Plan confirmation limits the damage

When the Chapter 13 plan proposed by my client was confirmed, that plan effectively limited for all time the amount he’d have to pay to put all of his debts behind him.

Where a creditor with a California judgment can collect that judgment for 10 years, and renew it for another 10 years, confirmation of a Chapter 13 plan limits what creditors get. The pot of money the debtor will create through the plan equals the amount that would have been paid to creditors if the bankruptcy case had been Chapter 7 instead of Chapter 13.

Importantly, the amount a Chapter 7 trustee would distribute is what’s left when the trustee’s expenses have been paid, any capital gains taxes have been paid, and any claims with priority over unsecured creditors have been paid.

Instead of his wages and his acquisitions for the next 10 or 20 years being exposed to levy to pay a judgment, now the client has a 5 year payment plan based on the value of his assets on the day he filed bankruptcy.

Appreciation in value and improvement in financial circumstances all remain with the debtor.

What plaintiff gets if he wins

Confirmation of a Chapter 13 plan which fixes the total amount that unsecured creditors get on their claims limits the up-side to the vicious plaintiff.

The dispute about whether my client owes this guy anything is ongoing; since we objected to the $15 M claim, the dispute has to be decided somewhere.

If the debtor wins, his other creditors don’t have to share the pot of money created by the plan with plaintiff.

If plaintiff wins and fixes the amount that the debtor owes him, he gets only a larger slice of the same “pie”. Whether he is owed fifteen dollars or $15, 000,000, plaintiff’s recovery is limited to a share of the money going through the Chapter 13.

At the end of the Chapter 13, any part of the judgment that hasn’t been paid is discharged.

Some pain remains

It’s not going to be a free ride. My client has been forced to file bankruptcy and still has to pay for representation in the bankruptcy case and for his trial lawyers.

The litigation over plaintiff’s claim won’t be pleasant.

He faces five years of plan payments to fund the Chapter 13 plan.

But even an adverse result at trial will not blot his life for the foreseeable future.

That’s why our legal system favors a fresh start through bankruptcy. And why I’m a huge fan of Chapter 13.

Debts You Can’t Wipe Out In Bankruptcy

By Cathy Moran

Nineteen kinds of debt survive a bankruptcy discharge: but three stand out from the rest.

Those three exceptions to discharge look, not at the kind of debt such as taxes, or support or student loans. Rather the exceptions look at how the debt arose.

These exceptions prevent bad actors from escaping the consequences in bankruptcy. Bankruptcy is supposed to help the honest but unfortunate person.

There’s another, significant difference: a creditor who holds one of these claims has to act, promptly, to except his claim from discharge.

The creditor has to file a timely challenge to the discharge of its debt.

And then, carry the burden of proof at trial. The debtor gets a presumption that the debt is dischargeable.

So, what kind of bad behavior may keep a debt from being discharged?

Fraud is first

Debts that are created as a result of fraud, misrepresentation or false pretenses aren’t subject to being wiped out. That’s §523(a)(2).

Note that the exception looks at the transaction at its begining. The statute focuses on money, property, services to the extent obtained by fraud.

While the debtor may have behaved badly after a debt was created. that bad behavior doesn’t exclude the debt from discharge.

There’s another wrinkle. If the alleged false statement is one about the debtor’s financial condition, that statement must be in writing to preclude discharge.

Breach of fiduciary duty survives

The second clutch of bad behaviors that can’t be discharged involve breach of fiduciary duty, embezzlement and larceny. §523(a)(4).

Embezzlement and larceny, which is a kind of theft, are easy to understand. But not so, fiduciary duty. Bankruptcy law has a narrow definition of who is a fiduciary.

For breach of fiduciary duty to be nondischargeable, the duty must arise under an express trust. So trusts that are created by law to further equity or prevent undue enrichment don’t fall under this subsection.

One of the first judges I practiced before used to say that under California law, everyone is a fiduciary for everyone else. But not in his federal court.

Willful and malicious injury gets no discharge

Debts grounded in intentional injury to person or property live on after bankruptcy. Section 523(a)(6)makes non dischargeable debts for willful and malicious injury by the debtor to another entity or to the property of another entity;

There’s a huge body of law tussling with the meaning of “willful” and “malicious”. And the plot thickens when you realize that the protections for creditors created by this subsection is greater in Chapter 13 than in Chapter 7.

In Chapter 13 a debt for damages for personal injury is non dischargeable if it results from either willfulness or malice! Damage property willfully or maliciously and you’re OK in Chapter 13.

Timing is everything

There’s a timing issue for both creditors and debtors in these three discharge exception cases.

Debtors facing state court litigation may want to file bankruptcy before trial of the matter. Findings of fact made in a state court trial will be entitled to finality in a bankruptcy trial.

So, suffer an adverse finding in state court and you’re stuck with that finding in bankruptcy.

But since the standards of what is fraud or false representations is slightly different in federal law than in state law, you may have a dispute about whether the finding is really on the same issue that the bankruptcy court is focused on.

It may be cheaper to try the issue once, in bankruptcy court, than risk having to defend yourself twice in state court, then bankruptcy court.

Creditors must be diligent once a bankruptcy case is filed, to meet the filing deadline for challenging the discharge of their debt. Generally, the bankruptcy court sets a deadline 60 days after the date set for the first meeting of creditors by which challenges to dischargeability must be filed.

Miss that deadline for one of these kinds of debts and you’re out of luck. The debt will be discharged regardless of the merits of the challenge you could have brought to exclude it from discharge.

How bankruptcy treats debts to the government

What happens to judgment liens in bankruptcy

Does a bankruptcy discharge last forever?

Speak Fluent Bankruptcy

By Cathy Moran

Bankruptcy has its own language. If you are considering filing bankruptcy, it helps to know the language spoken there.

Master just a couple of words and phrases, and input from a bankruptcy lawyer starts to make sense.

So, in our continuing campaign for better understanding of bankruptcy, here’s a dozen phrases from the language of Bankruptcy for your meeting with a bankruptcy lawyer.

Essential bankruptcy terms

Petition – the first paper filed in a bankruptcy case that initiates the case. It invokes the automatic stay.

Automatic stay – an injunction against creditors that halts collection and foreclosure just because the petition has been filed.

Schedules = the balance of the papers filed after the petition to flesh out your bankruptcy case.

Trustee – the individual appointed by the Department of Justice to oversee your filing and to represent the interests of creditors as a whole.

U.S. Trustee – an employee of the Department of Justice who supervises trustees and monitors Chapter 11 cases with no creditors committee

Means test – a form and a formula added to consumer bankruptcy cases supposedly to ferret out bankruptcy filers who are really able to pay creditors without bankruptcy.

Discharge – the court order that makes your dischargeable unsecured debts unenforceable

Dischargeable – debts that may be wiped out in bankruptcy

Non dischargeable debts that are excluded from the discharge by the terms of the Bankruptcy Code.

Reaffirm – an agreement made after filing to waive the discharge as to a particular debt. Reaffirmation requires court approval

Transfer – any act that changes ownership or title to an asset, or creates a lien on an asset.

Post petition – events that happen after the petition for bankruptcy is filed.

Add some numbers to your list

Because bankruptcy is based on the Bankruptcy Code, bankruptcy types tend to use the number of some important statutes as shorthand.

341 – Section 341 requires a first meeting of creditors in every bankruptcy case. We call that the 341 meeting.

523 – This is the section that lists the debts that are non-dischargeable. Several subsections require an affected creditor to prove his debt is non dischargeable.

727 – This section sets out the circumstances when a discharge can be denied altogether. It can be brought by a creditor or the trustee for the benefit of all creditors.

Bankruptcy chapters come next

Different chapters of the Bankruptcy Code provide for different kinds of bankruptcy cases that may be filed.

Chapter 7 – a liquidation bankruptcy case available to individuals and business entities, but not trusts or estates.

Chapter 13 – a reorganization case for individuals with debts under certain limits.

Chapter 11 – a more complex reorganization case for individuals and business entities without debt limits

Chapter 12 – a simplified reorganization proceeding for family farmers

Use your words

Now that you have a working bankruptcy vocabulary, start talking to a bankruptcy lawyer to find out how these concepts work in real life.

Don’t be afraid to ask questions. There is no reason why you should immediately understand this very specialized area of law.

Even when you understand the concepts, how those concepts apply to your situation, and how they interact with each other is what’s really important.

Make sure you pick a bankruptcy lawyer willing to take your questions and to deliver answers that you can understand.

Questions to ask a bankruptcy lawyer

What makes a bankruptcy lawyer great

What should bankruptcy cost?

The Secret Bankruptcy Exemptions

By Cathy Moran

Exemptions in bankruptcy are all about what you keep.

Exemptions define the collection of assets and rights that are safe from the reach of a bankruptcy trustee or your creditors.

But planning exemptions in a bankruptcy case is more than just the looking down the list of things you keep through bankruptcy and the dollar amount that is protected.

Jay Fleichman suggested that if the value of your assets exceeded the exemptions available, Chapter 13 needed to be your chapter of choice.

Actually, your exemptions in bankrupty swell beyond the stated amount for reasons not printed in the law books.

Subtract transaction costs from asset value

The unwritten enhancement to exemptions are the transaction costs, those expenses incurred to turn an asset into cash.

A Chapter 7 trustee can sell assets that are not exempt or that have an exemption that covers only some part of its value only if the sale produces money he can distribute to creditors.

To turn some assets into cash, he has to sell them.

There may be an auctioneer or realtor’s commission involved. The sale may trigger taxes.

And the trustee gets paid for his work from a fraction of the money he distributes to creditors. Gotta subtract his commission before paying creditors.

So, add to the exemption value the estimated costs of the trustee’s sale and his commission. Trustees are only supposed to take the debtor’s things for sale if the sale produces a meaningful distributions to creditors.

Why debtors keep their homes

The simplest example of transaction costs at work is a house with more equity than the exemption.

After you’ve taken the sale value of the home and subtracted the liens on the property and the homeowner’s exemption, subtract the realtor’s commission and any other sales expenses to see if there is really equity for creditors available upon a sale.

Take out the trustee’s commission and any capital gains taxes too.

In order to sell an asset, the trustee must show the court that after all the expenses, there will be a meaningful distribution to creditors. If there’s little or nothing left after this calculation, the trustee should not sell the home.

Rearrange your holdings

If you have an asset that can’t be exempted, consider selling it and putting the sale proceeds into an asset that can be exempted.

Sure, you lose the particular asset, but you don’t lose its value, if you can put the money into an exempt form.

There are some limits: you need to get fair market value for the asset you’re selling. No bargain sales to your brother. Arms length transaction for whatever the asset is worth today.

It’s no problem if the asset isn’t worth what it once was, or that the market is depressed.

You just need to realize what the world is paying today for things like it.

Make good use of cash

My favorite use of “extra” cash is to fund an IRA for every bankruptcy filer with available, non exempt money. It is universally regarded as a meritorious move.

IRA’s, after all, now have a federal bankruptcy exemption in excess of $1 million.

Another exemption-expanding stategy is to spend non exempt income and save exempt income. Social Security income is exempt from creditors and from bankruptcy trustees.

In California, retirement income is also exempt.

If that’s your situation, consider spending the proceeds from the sale of something that isn’t exempt, and saving the exempt money.

It’s critical that you segregate the exempt income in its own bank account. You want to be able to trace the money on deposit to an exempt source.

More ideas on what to do with non exempt cash.

Get good legal advice

Exemption planning is a tricky subject. Some trustees and some regions of the country take huge offense if a debtor has rearranged things to keep more than he might otherwise have kept.

The larger the sums of money in motion, the more likely you are to hear the dreaded phrase: pigs get fat and hogs get slaughtered.

An experienced bankruptcy attorney can help you find the line between the two.

Tax refunds and bankruptcy planning

What happens to my house after bankruptcy

Tort explained

Means test controls access to bankruptcy

Not consumer debt

More

Three rules for discharging tax penalties

Penalties for dischargeable taxes are dischargeable

Penalties tied to events more than three years before filing are dischargeable

All tax penalties wiped out in Chapter 13

Fraught with rules

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

More

From filing bankruptcy to discharge

The source of delay

After the case is filed

More

Unpaid support dooms reorganization

Support debts never dischargeable

More

Only half must take the means test

What’s on the means test

If you’re above median

More

Chapter 13 filed before judgment

Why Chapter 13 rocks

Plan confirmation limits the damage

What plaintiff gets if he wins

Some pain remains

Fraud is first

Breach of fiduciary duty survives

Willful and malicious injury gets no discharge

Timing is everything

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Essential bankruptcy terms

Add some numbers to your list

Bankruptcy chapters come next

Use your words

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Subtract transaction costs from asset value

Why debtors keep their homes

Rearrange your holdings

Make good use of cash

Get good legal advice

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