What is Bankruptcy?
Bankruptcy is a legal method of eliminating debt and providing a means for debt-oppressed people to obtain a “fresh start.” In many cases, bankruptcy means the elimination of the debt that you owe to your creditors. There are two primary forms of bankruptcy, Chapter 7 and Chapter 13.
What Is The “Means Test” And How Does It Work?
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 requires a debtor to demonstrate their eligibility to file Chapter 7 through the implementation of a “means test.” The means test examines the combined gross income of both the husband and wife, regardless if only one them files for bankruptcy. Income is determined based on an average over the past six month, regardless of whether the average income over the past six months reflects future earning ability. Subtracted from income are various household expenses, some based on objective standards created by the Internal Revenue Service, and some based on the debtor’s actual spending history. If the net surplus is greater than the state’s median level of income for a family of the debtor’s size, the presumption exists that the debtor is not eligible for Chapter 7. If the debtor’s net surplus is below the state’s median level of income for a family of the debtor’s size, but there is still sufficient income to repay a portion of the debtor’s debt if forced to do so in a Chapter 13 proceeding, the debtor may nonetheless be ineligible for Chapter 7 relief.
Will My Bankruptcy Discharge All Of My Obligations?
As with most issues in bankruptcy, it depends. Certain types of obligations are not automatically dischargeable in a bankruptcy case, such as income taxes due within the past three years; fiduciary taxes; certain past and future alimony and child support; most student loans; liability created in a driving under the influence incident; government fines and penalties; and criminal restitution awards. There are other obligations which are potentially nondischargeable as a result of the debtor’s conduct, such as incurring debt, often credit card charges, without the intent to repay it; actual fraud; embezzlement; breach of a fiduciary obligation; and willful and malicious injury to others.
Can I Keep My Home If I File Bankruptcy?
Again, it depends. If your house is worth less than what you owe on it, in general, the answer is yes – as long as you keep paying on it. The bankruptcy court will appoint someone called the bankruptcy trustee; he or she will be delegated the administration of your case. They actually get paid by how much non-exempt property they have you surrender. A trustee in a Chapter 7 will only have an economic incentive to liquidate your residence if there is sufficient value to pay costs of sale, pay the mortgage or mortgages in full, pay you whatever exemption you are claiming to protect the residence whether it be the homestead exemption or the wildcard exemption, other liens of record such as unpaid county real estate taxes and/or unavoidable judgment liens, and still net for the bankruptcy estate no less than approximately $5,000.
Although trustees don’t always do so, they can be expected to independently value properties by having a real estate broker run comparable sales and listings and conduct either a drive-by valuation or a walk-through valuation, especially during periods of rising real estate values. It is therefore imperative that you have a strong handle on the value of your home and that you not guess. If you believe your home is worth more than what you owe on it, you should strongly consider purchasing an appraisal from a certified real estate appraiser or at least meeting with a real estate broker or agent who can provide you an approximate range of value based upon comparable recent sales and listings. In the event the trustee determines that there is administrable equity, the trustee will usually offer the debtor an opportunity to purchase the property back from the bankruptcy estate for the amount that the estate would have realized had the trustee in fact sold the property.
If I Am Operating A Business And File Bankruptcy, Must I Stop Operating The Business And Will the Business Assets Be Liquidated?
If the debtor is a corporation, limited liability company, or partnership, the debtor should cease business operations immediately upon the filing of a Chapter 7 bankruptcy petition, if the debtor has not already done so.
If the debtor is an individual or the debtors are husband and wife, and are operating a sole proprietorship, the debtor is permitted to continue operating the business unless and until the Chapter 7 trustee instructs otherwise. In most cases, the debtor’s business assets are encumbered by liens in favor or creditors, are leased, are exempt from execution pursuant to California’s exemption statutes, or are immaterial in value, or some combination of the four, and are therefore not considered worthy of liquidation by the bankruptcy trustee.
If the debtor is an individual or the debtors are husband and wife, and are operating a corporation or limited liability company, or are principals in a partnership or limited liability partnership, the businesses are not per se assets of the bankruptcy estate, but the shares of stock, membership interest, or partnership interest in an asset of the bankruptcy estate. The debtor is permitted to continue operating the business unless and until the Chapter 7 trustee instructs otherwise. In most cases, if the debtor is experiencing financial difficulties, so is the debtor’s business. Similarly, in most cases, the business assets are encumbered by liens in favor of creditors, are leased, are immaterial in value, or some combination or the three.
A Chapter 7 trustee is more likely to permit the debtor to continue operating his or her business if the debtor has proper insurance in the place. Chapter 7 trustees are often concerned that they will be liable to third parties injured on the debtor’s business premises. Accordingly, the debtor is urged to maintain all appropriate business insurance, including but not limited to liability insurance, if the debtor seeks to continue operating his or her business.
If I Intend To Keep My Vehicle And Am Accordingly Willing To Continue Making Payments To The Lienholder Or Lessor, Do I Have To List The Lienholder Or Lessor As A Creditor In My Bankruptcy Schedules?
Yes. You must list all of your obligations in the bankruptcy schedules, regardless of whether the obligation is one that you wish to continue paying, and regardless of whether the obligations is dischargeable. However, provided you remain current at all times on your payments to your lender or lessor, are insuring the collateral, and you reaffirm the obligation in your bankruptcy case, the lender or lessor is not permitted to repossess the collateral.
By way of reminder, once the bankruptcy petition is filed, secured creditors such as mortgage lenders and vehicle lenders and lessors will likely stop sending you monthly statements. Sending monthly statements can be interpreted as a violation of the automatic stay provisions of Section 362, and therefore creditors, even creditors holding secured liens that the debtor indicates he or she wishes to continue paying, are usually reluctant to send monthly statement. Accordingly, if you wish to keep your home, vehicle or other secured collateral, you must make your payments regardless of whether you are receiving monthly statements or invoices.
Am I Permitted To Continue Using My Bank Accounts Once I File Bankruptcy?
As noted above, once a Chapter 7 bankruptcy petition has been filed, the Chapter 7 trustee becomes the owner of all of the debtor’s assets. As also noted above, the trustee is not likely to liquidate the debtor’s assets, but the trustee becomes the owner of such assets nonetheless. However, in most cases it is clear that the bankruptcy trustee will have no economic incentive to liquidate or otherwise administer the debtor’s bank accounts, since in most cases the balances in the debtor’s accounts have been claimed exempt pursuant to California exemption statutes, or the amounts in the accounts are not material enough to warrant trustee administration. Accordingly, in most cases the debtor is entitled to continue using his or her bank accounts without interruption.
Should I Dispose Of Any Of My Assets In Contemplation Of Bankruptcy?
Generally no. The transfer of assets during the month and even years prior to the filing of a bankruptcy petition could constitute an avoidable transfer, i.e., the bankruptcy trustee has the power and authority and, depending on the facts of the situation, the economic incentive to unwind certain transfers that have occurred prior to bankruptcy.
I Have Been Borrowing Money From Friends And Relatives For The Past Several Years. Is It Acceptable For Me To Repay Them As Bankruptcy Approaches?
The answer depends primarily on how much money is involved. If the amount is material enough, a bankruptcy trustee may seek to recover funds paid to friends during the ninety day period prior to the date of the bankruptcy and to relatives during the one year period prior to the date of bankruptcy. Bankruptcy law permit’s a bankruptcy trustee to recover such funds on the theory that it isn’t fair that a debtor “prefer” certain creditors, especially friends and insiders, including relatives, by paying them more prior to bankruptcy that the debtor pays to other creditors.
If I Want To Pay Relatives Back After My Bankruptcy Petition Is Filed, May I Do So?
In a Chapter 7, yes, you are free to use your post-bankruptcy earnings in any manner you choose. In a Chapter 13, no, you are not free to use your pose-bankruptcy earnings in any manner you choose. In a Chapter 7, post-bankruptcy earnings are not assets of the bankruptcy estate that your bankruptcy trustee can administer for creditors. Note that obligations to relatives should and likely will be discharged along with your other obligations, so there would no longer be any obligation to repay relatives after bankruptcy. However, if you choose to repay relatives, or any other creditors for that matter, you are free to do so in a Chapter 7 proceeding, provided you are using no bankruptcy estate assets to do so.
Am I Going To Have To Appear In Court, And If So, How Many Times?
In the overwhelming majority of cases, you will only have to appear once, but not in court, rather at a meeting of creditors pursuant to Bankruptcy Code Section 341(a), where your trustee will ask you a few questions about your case. If you file bankruptcy together with your spouse, you will both have to attend the meeting. Creditors are also invited to attend and ask questions of you while you are under oath, but rarely any do so.
At What Point Is It Acceptable That I Stop Paying My Creditors?
For obligations that are secured by assets which the debtor intends to keep, such as the debtor’s home or vehicles, the debtor must continue to make payments pursuant to the underlying contractual obligation.
For unsecured obligations, such as credit cards, medical debts, trade suppliers and vendors, professional fees, and the like, since such obligations are going to be discharged in the bankruptcy proceeding, there is no reason to continue paying such obligations once the case is filed. In fact, once the debtor decides that he or she is going to file bankruptcy, there is no longer any incentive on the part of the debtor to continue making such payments.
Will Creditors Stop Calling Me And Demanding Payment Once I File Bankruptcy?
Creditors are required by the operation of the automatic stay provisions of Bankruptcy Code Section 362(a) to immediately cease attempting to collect on all obligations once a bankruptcy petition is filed. The creditor may not discover the bankruptcy filing right away, but once the creditor is informed of the bankruptcy filing and provided with the basic information about the case, such as the chapter filed, the date filed, and the case number, it must take no further action, unless it obtains bankruptcy court authority to proceed with its collection efforts, and the court’s granting of such authority would be very rare. Creditors holding no dischargeable obligations, such as taxing entities, must also cease their collection efforts against assets of the bankruptcy estate, at least until the date of discharge, which in most Chapter 7 cases is approximately five months after the bankruptcy petition is filed.
Can I File Bankruptcy Without My Spouse Filing As Well?
If I File Bankruptcy Without My Spouse, Can Our Creditors Continue To Attempt To Collect From The Spouse?
When one spouse files without the other, the resulting bankruptcy discharge discharges both the filing spouse and the marital community of their obligations. Creditors may still sue the nonfiling spouse and obtain a judgment. However, the creditor can only seek to enforce the judgment against the nonfiling spouse’s separate property assets. Most married people do not own separate property assets; in most cases everything they own they acquired during marriage. Accordingly, in most cases, the creditor would have a judgment against the nonfiling spouse worth only the paper on which it is printed.
If I File A Bankruptcy Petition, Will I Ever Be Able To Obtain Credit Again So That I Can Buy A Home Or A Vehicle?
While a bankruptcy filing damages your credit, it is by no means going to prevent you from ever borrowing again. When a lender is deciding whether to lend to a borrower in an asset-based purchase context, the lender considers three factors: the proposed loan-to-value ratio (i.e. the amount and percentage the borrower proposes to put down toward the purchase price), the proposed income ratio (i.e. the percentage of the borrower’s monthly income that the new loan obligation will consume), and the borrower’s credit. The higher the borrower’s down payment and the higher the borrower’s income, the less the lender will depend upon the borrower’s credit. Admittedly, some lenders will reject a loan application based solely on the presence of a recent bankruptcy filing. Other lenders will consider the loan but will demand a higher rate of interest to compensate it for the perceived increased risk. Other lenders will virtually disregard a prior bankruptcy filing. One way to minimize the damage a bankruptcy filing has on your credit score is to avoid further credit damage in the months and several years after filing bankruptcy, such as foreclosures, repossessions, lawsuits, tax liens and evictions.
What Impact Will My Filing Bankruptcy Have Upon My Credit Report And Credit Score?
A bankruptcy filing generally remains on your credit report for ten years following a Chapter 7 filing, and seven years following a Chapter 13 filing. A bankruptcy filing will of course negatively impact your credit score. Credit repair will not likely remove from your credit report public record credit defects such as bankruptcy filings, although credit repair can remove other derogatory credit defects, such as delinquencies and charge-offs.
I Have Heard About “Reaffirmation Of Debts”; Should I Reaffirm Any Of My Debts?
As stated above, it is important to note that debts and liens are completely different animals. Debts, with some exceptions noted above and below, are discharged in bankruptcy. Liens, however, pass through bankruptcy unaffected. For that very reason, if you are financing the purchase of your home or a vehicle you wish to keep, you must continue to make payments during and after bankruptcy to avoid the lender foreclosing upon its lien or repossessing it collateral pursuant to its lien. Secured creditors, i.e., those with collateral such as a mortgage lender, vehicle lienholder, or even a purchase money lienholder, will often approach you about your intentions with respect to it collateral. You have the following options:
Surrender possession of the collateral to the lienholder and discharge the remaining indebtedness to the lienholder, if any, should the sale of the collateral by the lienholder fail to satisfy the account balance.
Redeem the collateral by paying the lienholder the alleged fair market value of the collateral in a lump sum payment, and discharge the difference between the fair market value and the remaining balance on the obligation. This option is rarely the option of choice since the parties may not agree upon the fair market value of the asset and having the Court resolve the matter will not likely be cost effective. In addition, most debtors do not have the funds available to make the required lump sum payments.
Reaffirm the obligation to the lienholder on the original loan terms and keep the collateral. If the lienholder offers you a reaffirmation, you may keep the collateral by agreeing to make payments and waive your right to discharge any remaining deficiency should you default at any time in the future, lost the collateral to the lienholder’s repossession, and the sale of the collateral by the lienholder fails to satisfy the remaining obligation. There is no guarantee or assurance that the lienholder will want to extend credit to you again in the future, even if you never miss a payment.
Reaffirm the obligation to the lienholder by proposing better terms than contained in the original contract, such as for less than the balance owed, at a lower rate of interest, and/or with an extended maturity date. The lienholder is under no obligation to acquiesce to the modified loan terms.
If I Want To Schedule An Initial Consultation, Should I Bring Any Documents With Me?
At the initial consultation, we need to explore your financial situation, so if you are able to give general information about your financial situation without resorting to documents, then it won’t be necessary for you to bring documents to the initial consultation. If you are not able to provide information about your financial situation without resorting to documents, or you ultimately decide that you wish to proceed with a bankruptcy filing, we are going to want to see the following documents:
1. Last year’s federal and state income tax return, the year prior’s federal and state income tax return, and the federal and state tax return of the year before that, including all attached W-2’s, 1099’s, and supporting schedules.
2. All pay stubs for the past six months.
3. If you operate your own business, whether a sole proprietorship or corporation, a profit and loss statement for the last six months.
4. Copy of most recent mortgage statements from any and all mortgage lenders.
5. Copy of most recent statements from auto lenders or lessors. If you have a coupon book and don’t receive monthly statements, please go on line and print a status report of your account.
6. Copy of most recent real estate property tax bill.
7. Copy of most recent statements from timeshare companies.
8. Copy of most recent statement from mobile home lender.
9. Copies of bank statements for all bank accounts that have been open in the past six months whether open or closed today.
10. Copy of most recent statement from retirement plan administrators, including IRA’s, 401(k)’s, and pension plans.
11. Copy of binders or declaration pages reflecting current insurance coverages, including life, health, dental, automobile, property, and professional liability insurance.
12. Copy of any lawsuit complaints initiated by you against others that remains pending today or has been pending at any time within the past twelve months.
13. Copy of most recent statements from creditors, including credit card statements, student loan statements, medical bills, delinquent tax notice from the Internal Revenue Service, California Franchise Tax Board, or State Board of Equalization.
14. Copy of the face page from any lawsuit complaints initiated by others against you within the past twelve month, whether pending today or reduced to judgment, dismissed, settled, on appeal or otherwise.