By Paul Hollender
DID YOU KNOW?
1. Most people who file bankruptcy:
- Owe approximately $30,000 in consumer debt
- Always intended to pay their bills, but due to either credit card creep or loss of family income, came to realize that they didn't have the ability to pay more than interest only
2. Interest on $30,000 is approximately $500 per month.
3. It takes 6 years at $500 per month to pay off $20,000 in credit cards
4. If your car is worth only $5,000, but you still owe $10,000 on it, you can keep the car by making a lump sum $5,000 payment.
5. Income taxes over 3 years old may be dischargeable
6. Chapter 13 Bankruptcy is available to force a bank to
- accept mortgage arrears over 5 years
- accept current payments even though you owe arrears
7. You can usually establish good credit again within two years after filing bankruptcy
8. Bankruptcy doesn't have the stigma it used to have
9. You probably know 5 people who have filed bankruptcy, even though they never told you about it.
10. Among our clients who have sought bankruptcy protection are doctors, lawyers, chiropractors, government officials (elected and appointed), bankers, real estate brokers, stock brokers, bond brokers, firemen, police officers, corrections officers, parole officers, mailmen, bus drivers, mechanics, plumbers, carpenters, electricians, sanitation men, secretaries, beauticians, small business owners, and large business owners.
Bankruptcy is like AIDS: you are uncomfortable asking about it but you need to know the facts.
In the 29 years since our modern Bankruptcy Laws went into effect, much of the stigma of bankruptcy has been lifted. It is not uncommon for people from all walks of life to call upon the Bankruptcy Court to provide them relief from a financially and emotionally devastating situation.
It is, however, still embarrassing to disclose a personal bankruptcy filing even to friends and relatives; and those in need of such assistance are reluctant to discuss this with others to obtain even basic factual information from which to make a decision. Accordingly, much of the bankruptcy process still remains a mystery to the ordinary person, and misconceptions still prevail.
The purpose of this article is to provide such basic information to the general public, so they don't have to go through the embarrassment of asking others, and so they don't have to endure needless worry due to misconceptions passed on to them by persons without sufficient knowledge.
Types of Bankruptcy
There are three types of bankruptcy cases. Chapter 7 involves "liquidation" in which any non-exempt property is sold by the Trustee, and the Debtor is excused from making any further payments on his debts. In the ordinary case, the Chapter 7 Debtor has no assets (or his remaining assets are "exempt") and his credit card and other unsecured debt is discharged.
Chapter 13 involves payment of all or a percentage of debts over a period of three to five years. Interest stops on unsecured debts and tax debts, and creditors are prevented from harassing you or your co-signers. This type of bankruptcy is generally used by people who have homes or other assets that they don't want to lose. Under new rules, you can now be eligible for Chapter 13 even if you have unsecured debts (including tax liabilities) as high as $336,000, and secured debts (including mortgages and liens) of up to $1,010,000.
Chapter 11 is used for businesses or individuals with large amounts of debt. Unlike Chapter 13 (which does not give creditors much say) Chapter 11 usually involves creditors committees and voting on a plan of reorganization. Under chapter 11, tax obligations can be stretched out to six years, mortgages can be re-structured, and repayment terms can be radically altered. It tends to be expensive, and is not usually invoked by consumers.
From the day bankruptcy is filed it is illegal for creditors to call you to attempt to get paid. If you own a house and want to keep paying the mortgage, the bank is required to accept your mortgage payments.
Typical Chapter 7 Cases
Contrary to popular misconceptions, the ordinary chapter 7 Debtor is not a "wise-guy" seeking to run up his credit cards and then wipe them out.
Over the past few years this office has experienced a dramatic upsurge in Chapter 7 filings. Most of these individuals never wanted to file bankruptcy. They had been struggling with their bills for two or three years and finally came to the realization that it was impossible to dig themselves out of the hole they were in.
Chapter 7 candidates often are families which have experienced a personal catastrophe: loss of a job, a devastating illness, a gambling problem that now has to be dealt with.
Another common situation is what can be called "credit card creep:" a gradual accumulation of credit card debt over many years. It starts with a $2,500 credit line; that card gets increased; other cards come unsolicited in the mail; the consumer uses one card to pay another, so minimum monthly payments are always made; then credit lines are increased and more cards arrive in the mail because of a "good credit history." Before you know it, you have $30,000 in credit card debt. Interest alone could be costing you $500 per month!
In a variation on the previous fact pattern, a business owner uses cash advance credit lines to augment the business. In such a situation, it is not unusual to see $100,000 to $200,000 in unsecured debt, from which the business owner never is able to extricate himself.
Then, there is the "matrimonial bankruptcy." It is hard enough these days to maintain one residence. Maintaining two is often impossible. Sometimes it is the financial stress which causes the marriage to break down. In these situations, it is sometimes possible to save the marriage by eliminating the money worries. Bankruptcy can play an important role. Even if the marriage can no longer be saved, maximizing the cash available for support can be accomplished by a chapter 7 bankruptcy which eliminates old unsecured debt.
Typical Chapter 13 Cases
It is not uncommon for a short-term financial crisis to cause mortgage payments to become late. After two or three months of arrears, it is usually impossible to ever catch up. The bank will normally not accept part payments, and accumulation of the whole amount is an elusive endeavor. Furthermore, any payment which the bank does accept will be applied to the oldest amount due, thus every single month is now treated as being late, with appropriate late charges assessed. This is a cycle which is hard to escape.
A simple solution is to file chapter 13. Although you must now make current mortgage payments every month, each post-petition payment is applied as a current payment, and does not give rise to a late charge. All prior charges, including legal fees, and other costs, can be paid with interest in even monthly payments over three to five years. The bank must accept current payments from the date of filing.
Chapter 13 is also useful to prevent creditors from proceeding against co-debtors, while allowing you to make payments to catch up on defaulted loans.
What property is protected
You are allowed to keep pension and retirement benefits, as well as IRAs. You can usually keep all your household furnishings and clothing. Insurance is exempt, unless it is payable to your "estate" (in which case the cash-surrender value belongs to the trustee). You can keep your car, unless it is worth more than $2,400 in excess of any loan (but in that event a cash payment to the trustee of a compromise amount could still allow you to keep the car). Leased cars are protected.
Each person in bankruptcy is allowed to keep $50,000 in equity in a home. Thus, if a husband and wife file bankruptcy, they can keep a home worth $20,000 more than outstanding mortgages. Sometimes, it is possible to justify even a higher value, when considering the costs of sale and tax consequences the trustee would have to incur if he sold the house. Furthermore, if a house is owned by a husband and wife, and only one person files bankruptcy, it is very hard for a trustee to force a sale of their marital residence.
If real estate equity is higher than what is allowed, then the house could be saved by filing chapter 13 bankruptcy, paying off the amount of that equity to creditors in monthly payments over five years.
If you have a personal injury lawsuit against someone else, the first $7,500 you recover is protected. Next, your creditors would have to get paid, and you would only receive the balance after such payments.
What debts survive
Most people would be surprised to learn that income taxes, if filed, can get wiped out in bankruptcy after three years. Current income taxes, payroll taxes, and sales taxes, however, cannot be discharged in bankruptcy (but they could be paid without interest over five years in a chapter 13 plan).
If you use a credit card or take a cash advance of $1,000 or more within two months prior to filing bankruptcy, that debt would survive, as would any credit card or bank debt based upon a false credit application which you provided.
Support and alimony payments can't get discharged in bankruptcy, however matrimonial property settlements are candidates for discharge (but that issue could be litigated in the bankruptcy court).
If you committed fraud while in a position of trust, or embezzlement, the debt would not be discharged (but you could be give a second chance to litigate that issue in the bankruptcy court).
Any liability you may have for causing intentional harm to another, for criminal fines or restitution, or for an accident caused while under the influence of alcohol or drugs, is not excused in bankruptcy.
The Bankruptcy Process
Shortly after providing the attorney with all requested information, including tax returns (which must be prepared but not necessarily paid), the bankruptcy papers are filed with the Court.
Creditors are not allowed to call you after the papers have been filed.
About six weeks later, you and your attorney will appear at the first hearing. The Trustee (a lawyer assigned by the Court to represent the interests of your unsecured creditors) will ask you questions relating to the schedules of assets and liabilities you have filed.
In chapter 7 cases, the Trustee will evaluate whether he believes there are assets for him to collect and reduce to cash. If there are none (which is usually the case), the Trustee will "close" the hearing. A creditor who believes that an obligation listed in the bankruptcy fits into a category of debts which cannot be discharged has two months within which to start an action against you to have their claim survive bankruptcy. Likewise, during that period, if someone can prove you are hiding assets, or have lied in the case, they can ask that all your debt survive. If no such action has been commenced, then about four months from your first court appearance you will get a notice from the Court indicating that you have received your "Discharge."
In chapter 13 cases, the Trustee evaluates your prospective income and expenses to determine if your repayment plan is realistic, and if you are proposing to pay all your available funds to your creditors. If the Trustee approves to your plan, you will come back several months later (after you have developed a track record of making timely monthly payments to the Trustee), for court approval. If you intend to keep your house, you must also make current mortgage payments from the day your case is filed. The Trustee will then distribute to money you provide to your creditors according to the terms of the plan. You will have to turn over any income tax refunds to the Trustee on account of the amount you commit to pay (which may speed up the term of the plan). If you later decide to sell your house, you will be allowed to, so long as the Trustee receives the balance of the payments promised to be made.
Timing is important
If you want to save a house or other real estate from foreclosure you must file bankruptcy before the foreclosure sale.
If you intend to let the property go in foreclosure is also important to file bankruptcy first. Lately, banks have been taking advantage of a tax law provision allowing them to give you a "1099" form for the amount of any mortgage deficiency (i.e. the difference between the amount you owe and the fair market value of the property at the time of the foreclosure sale). You will have to pay taxes on this amount as if you had earned it as income, unless you file bankruptcy before the bank decides to send you a 1099!
Another timing issue relates to payments you have made to others, or dates of deeds. If you repay any large debt, you should not file bankruptcy for at least three months. If the debt was to a relative, you must wait an entire year!
If you put a deed into someone else's name or transferred any other property, it might be a good idea to wait one year. In fact, the transfer can be reviewed for six years.
If you expect to receive an inheritance within six months, it is not a good idea to file bankruptcy either, since the proceeds can be taken by the bankruptcy Trustee to pay your creditors.
On the other hand, if you expect to be opening up a business or acquiring assets in the future through your own efforts, it is best to file bankruptcy when you have hit bottom; otherwise your future successes will only serve to benefit your creditors.
With a proper understanding, and care in avoiding potential pitfalls, the Bankruptcy process should not be frightening one, but rather should be considered an opportunity to put past mistakes behind you and to start your life again.
IRA'S, PENSION OR RETIREMENT PLANS, AND TAX REFUNDS
New York law designates certain assets exempt in bankruptcy. Among these exempt assets are IRA's, and pension or retirement plans (including tax deferred savings plans, annuities, and the like).
Individuals may also exempt up to $2,500 in cash (if they haven't availed themselves of the $10,000 per person homestead exemption). Since exemptions are to the individual, a couple can exempt up to$5,000. An anticipated tax refund falls into this category. If the refund, however, will exceed this amount, certain pre-bankruptcy planning may be appropriate. It may be necessary to defer filing bankruptcy until after receipt of the refund. The last thing the refund should be use for, however, is to repay the mother-in-law that long-outstanding loan: an obvious voidable preference which would result in a lawsuit by the bankruptcy trustee against mother-in-law!.
Paul M. Hollender, a Board Certified Consumer and Business Bankruptcy Attorney (Amer. Bd. of Certif.), has practiced bankruptcy law for 32 years, is a member of the Business and Consumer Bankruptcy Committees of the New York County Lawyers Association; editor of Bankruptcy Notes for Attorneys and Accountants; a member of the Brooklyn Bar Association Bankruptcy Committee; former Editor in chief of the Bankruptcy Bar Bulletin; and former member of the Board of Governors of the Bankruptcy Lawyers' Bar Ass'n. His articles have appeared in the NYS Bar Journal, the NY Law Journal, the Brooklyn Barrister, and the Richmond County Bar Bulletin.
CORASH AND HOLLENDER, P.C.
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