Q. Is Bankruptcy right for me?
Here are some red flags which indicate filing bankruptcy is a good choice for you.
- You have or are considering raiding your retirement account to pay your debts. You can file a bankruptcy petition and keep 100% of your retirement money.
- It is going to take longer than five years to become debt free by paying off your debts. The worst case scenario in any personal bankruptcy case is that you are debt free in five years. Most people qualify for Chapter 7 protection which means you will be debt free in less than six months. So if you have fifteen thousand dollars or more in credit card debt you are a good candidate for declaring bankruptcy.
- Your wages are being garnished. Creditors can request up to 25% of your wages. Declaring bankruptcy will stop any wage garnishment even if it has already begun.
- A lawsuit has been filed against you. Lawsuits lead up to judgments and judgments lead to wage garnishments. By the way, employers dislike wage garnishments because it is an accounting nightmare. Sometimes employers will find a way to terminate an employee just so they don’t have to deal with all the bookkeeping requirements placed on them due to garnishments.
- Your drivers license is suspended because of a judgment that stems from a motor vehicle accident. Declaring bankruptcy will eliminate that judgment and you will be able to have your driving privileges reinstated.
- If the fair market value of your house is less than what you owe on the first mortgage then you can strip any second mortgage off your home. Many of our clients have a home equity line of credit of twenty thousand dollars or more. Declaring Chapter 13 bankruptcy in this instance has huge benefits because the second mortgage holder will lose his status of a secured creditor, usually that means he does not get paid.
- You want to save your house from foreclosure. Declaring Chapter 13 bankruptcy will allow you to save your house by repaying the past due portion of the debt over a five year period.
- Your car has been repossessed and you want it back. You must act quickly in this situation. We only have ten days from the date of repossession to file a Chapter 13 bankruptcy petition which will get your automobile back and allow you up to five years to repay the past due balance.
- You have income tax debt that is more than three years old. The legal analysis on this issue is multi-layered but the general rule of thumb is that if the tax debt is more than three years old, you filed the tax return more than two years ago, any assessment by the IRS is more than 240 days ago and you have not done anything to stop the time period from running like the filing of an offer in compromise or a request for a collection due process hearing, then the tax debt is dischargeable.
- You are close to retirement but are saddled with unmanageable debt. Many of our clients don’t want to struggle during their retirement years. They know their income will be fixed and don’t see the possibility of paying off their debt so declaring bankruptcy is a good option.
Q. Which Chapter is right for me?
That depends on a few factors some of which are your income, the number of people in your household, your assets and your goals. Most bankruptcy petitions are filed under Chapter 7 of the United States Code. Chapter 7 is a liquidation of your non-exempt assets in exchange for a discharge order. Most people do not have non-exempt assets so they keep all of their property and still obtain a discharge. It is the discharge order which protects you from your creditors. Usually if someone qualifies to file a Chapter 7 petition then that is what gets filed. Generally, if Chapter 13 is selected it is due to a particular reason like saving a house from foreclosure, stripping a second mortgage from a home, a non-exempt asset, high income, and some others. Chapter 13 offers more flexibility than Chapter 7 so debtors sometimes select Chapter 13 just for this reason. Chapter 13 always includes a payment to the trustee. The payment is composed of several different components and for at least 36 months and possibly up to 60 months.
Q. Which chapter of bankruptcy is easier to recover from?
Chapter 7 is easier to recover from for a few reasons. The day after you file a Chapter 7 bankruptcy petition you can begin the recovery process. The best way to rebuild credit is to first obtain a loan or a line of credit and second, to use it responsibly. The easiest and fastest way to accomplish these two milestones is to obtain a credit card, even if it’s a secured credit card. Go to creditcard.com and get a credit card and use it responsibly. Do not ever let the balance go over 50% of the credit limit and pay it off every month. You are permitted to obtain a credit card the day after you file your Chapter 7 petition. So the road to recovery can begin immediately. Recovery from a Chapter 13 petition does not begin until the case ends which is three to five years after the petition is filed.
Q. What is the difference between Chapter 7 and Chapter 13?
Chapter 7 includes the immediate liquidation of your non-exempt assets while Chapter 13 allows for the value of your non-exempt assets to be paid to your creditors over a period of three to five years.
Q. How long will the bankruptcy filing stay on my credit report?
Seven to ten years depending on who you ask.
Q. Will I lose my assets? My home? My car?
Arizona has a list of assets that are exempt from attachment, that means you get to keep them. Here is a general list of assets that can not be taken away from you.
- Your home so long as it has less than $150,000 of equity value.
- Your automobile as long as it has less than $6000 of equity value, two autos if you are married, and $12,000 if you are physically disabled.
- Your retirement benefits.
- Your everyday household items. If you have an item that is non-exempt then I may be able to offer a solution that will allow you to either keep the item or to at least receive a benefit from the value of that item. Remember, most bankruptcy cases are “no-asset” cases meaning that the filer keeps all of his/her property and still obtains a discharge of debt.
Q. Can I keep my house?
If there is less than $150,000 of equity in the house then yes you can keep it so long as you continue to make the payments. Equity is the fair market value of the home less any debts owed on the home.
Q. Can I keep my car/truck?
You are entitled to a $6,000 exemption for one vehicle if you file individually. Married couples filing jointly are granted two $6,000 exemptions that may be used on two vehicles only. One exemption of $6000 can be used on each vehicle. Remember if you owe more than the vehicle is worth then there is no equity in it and so long as you make the payment you can keep it.
Q. Can I keep my work truck?
Arizona law provides a $6,000.00 tools of the trade exemption that can be applied to a work vehicle so long as that vehicle is used exclusively for work. If you are married and your spouse works in the business then a $12,000.00 exemption is available. If this vehicle has no equity than so long as you make the payment you can always keep the vehicle.
Q. What are Non-Exempt assets?
First, a brief history lesson. Prior to 1870 if a creditor obtained a judgment he was entitled to take everything the debtor owned right down to the knives, forks and spoons. The government did not want creditors to have the ability to make debtors destitute so laws were enacted making certain property exempt from attachment. This means that creditors are prohibited by law from taking anything on the list of exempt property. Click here to see a list of exempt property in Arizona.
Q. What if I have property that is non-exempt and will provide a meaningful amount of money to my creditors?
You have options. First, you can sell the property yourself prior to declaring bankruptcy. Second, you can keep the property and pay your creditors the market value over the course of three to five years in a chapter 13 bankruptcy. Third, you can keep the property and pay your creditors the fair market value over a period of four months in a chapter 7 bankruptcy.
Q. Selling non-exempt property prior to filing bankruptcy
It is best not to sell the property to a friend or family member because that transaction will be scrutinized by the trustee. Remember the trustee has a duty to represent the interests of your creditors and they are paid to be suspicious. So when you sell something to your relative the trustee will wonder if it was a bonafide sale or an attempt to hinder and delay the creditor’s right to receive the fair market value of that property. Don’t mess around with this. List the item on Craigslist or some other portal and sell the item to a stranger. Make sure to use a written bill of sale and to deposit the money received into one of your bank accounts.
Q. Can I keep the money I receive from selling my non-exempt property?
Not if you file chapter 7 bankruptcy. Cash is non-exempt so you should spend it on reasonable and necessary expenses for the benefit of you and your dependent family members. Keep a receipt for any transaction over $200.00. If you are going to file chapter 13 then you don’t have to sell non exempt property but you can and if you do then you can keep it as a cushion and payoff your creditors over the life of the case which will be three to five years.
Q. What is an automatic stay?
The instant a bankruptcy petition is filed a court ordered “time out” goes into effect. The “time out” is called the automatic stay. It precludes creditors from any type of repossession, foreclosure, trustee sale, garnishment etc. The automatic stay is a temporary injunction that is eventually replaced with a permanent injunction known as a discharge.
Q. What is a reaffirmation agreement?
First, you need to realize when you purchased the vehicle you signed a contract stating that the filing of a bankruptcy petition is a breech of contract. When you breach a contract the other party is entitled to exercise their legal remedies including the repossession of the vehicle. A reaffirmation agreement is a new contract. The terms and conditions of which should be reviewed by your attorney. One advantage of signing a reaffirmation agreement is that the creditor is agreeing not to repossess your vehicle so long as you continue to make the payments. Another advantage is that your payments will be reported to the credit bureaus. A disadvantage of a reaffirmation agreement is that it is post bankruptcy debt. So if you fail to make the payment and the car is repossessed then you will be responsible for any debt due after the vehicle is sold at auction.
Q. Should I sign a reaffirmation agreement?
That depends upon your individual circumstances. After reviewing a client’s entire financial position post bankruptcy I am able to advise them based upon the advantages and disadvantages of the agreement. Some of the advantages included eliminating the possibility of repossession so long as the payments are made and the reporting of payments to the credit bureaus so your credit score improves. One disadvantage is that the contract is a post bankruptcy debt which is not subject to the discharge injunction so if the payments are not made then the debtor is liable for any deficiency balance due after repossession.
Q. Who is the Trustee?
The Trustee is appointed by the bankruptcy court. He/she has many accountabilities including imposing the rules on you and the creditors. When you file for bankruptcy protection, creditors lose some or all of their rights to collect debts. So one of the trustee’s duties is to make sure your creditors receive anything they are entitled to receive based upon the bankruptcy laws. The trustee is a very experienced bankruptcy attorney and he/she will use their power against you if they can. An experienced bankruptcy attorney representing you will be able to anticipate the trustee’s moves, create and help you execute a plan to minimize the impact the trustee can have on you and your family.
Q. What are the components of a Chapter 13 plan payment?
- Your disposable income multiplied by the applicable plan length or the value of your non-exempt assets, whichever is greater.
- Your automobile payment, which can often times be reduced.
- Attorney fees.
- Trustee fees.
- If you are saving your house then your house payment plus an additional amount to catch up the past due amount.
Here is some additional explanation.
Component #1 is known as the “best interests of the creditors test.” It means that your unsecured creditors are entitled to receive either your disposable monthly income or the value of your non-exempt assets whichever is greater. Your disposable monthly income in calculated based upon bankruptcy laws and is known as the “means test.” If your disposable monthly income is $200/month then that figure multiplied by 60 (usually) is the number compared to the value of your non-exempt assets. So if you own a business worth $10,000 then you must pay the trustee $12,000 over the course of sixty months (the length of the plan) because your disposable income of $200/mo. multiplied by 60 months equals $12,000 which is greater than the value of the business, $10,000.
By rule your car payment, component #2, must go through the plan. Many times car payments are reduced simply because of the length of the plan. If on the day of filing you owe $10,000 on a vehicle which has a $400/mo. payment at 10% interest then that payment will be reduced to approximately $215/mo ($10,000 paid over 60 months at 5%interest). If the vehicle is worth less than the amount due and the loan was acquired more than 910 days ago then the payment will equal to the fair market value of the vehicle divided by 60, which is usually less than the current payment amount.
The attorney fee component, #3, is usually $33/mo which is $2000 divided by 60.
The trustee is entitled to a 10% monthly commission, #4, so if the other components equal $500 then your monthly plan payment is 550 (500+10%commission). If you are not utilizing Chapter 13 to save your house from foreclosure then your house payment does not go through the plan.
If you are saving your house by using Chapter 13 then your house payment plus an additional payment to catch up the past due amount is paid to the trustee, which is component #5.
Q. How Do I Make My Chapter 13 Plan Payment?
Here is a “set it and forget it” option: https://www.tfsbillpay.com/
Here is a “bill pay” option if you need it: http://www.dcktrustee.com/ePay.html
Q. How do I save my house?
In a nut shell, Chapter 13 allows you to repay the past due amount overtime. Here is an example. If your house payment is $1000/mo. and you are 10 months behind then $10,000 is past due. In Chapter 13 bankruptcy your house payment will be $1166 derived as follows, $1000 + (10,000/60) = $1166. The $10,000 past due amount is divided by the length of the Chapter 13 plan (usually 60 months), and that amount is added to the payment. The bankruptcy court does not have the authority to modify the terms and conditions of the promissory note on your residence but you are permitted to pursue a loan modification even while you are in Chapter 13 bankruptcy.
Q. Can I get my car back if it has already been repossessed?
Yes, but we have to move really fast. A Chapter 13 bankruptcy petition must be filed within ten days of the date of repossession. Then you must pay the debt on the vehicle through the trustee.
Q. What is a lien strip?
This term usually refers to eliminating your legal obligation to pay a second mortgage on your home. It applies to home equity lines of credit too. Here is an example. If your home is worth $200,000 and there is a first mortgage of $200,000 or more then any second mortgage or home equity line of credit is strippable. That means you will not have to pay it. This is a great tool that gives our clients big benefits.
Q. What is a discharge?
A discharge is a permanent injunction against creditors from attempting to collect debts. It applies to most unsecured debts like credit cards, medical bills, personal loans, deficiency balances on a vehicle after repossession, home equity lines of credit, some tax debt and others.