Mistakes to Avoid: Selling or Borrowing against Assets Protected in Bankruptcy

Give both you, AND your assets, a fresh financial start.

 

Getting the Most Out of Your Bankruptcy

When you’re considering bankruptcy your mind is likely mostly on how to deal with your debts. You’re focused on getting a handle on the negative side of your balance sheet. But getting a financial fresh start also means protecting your assets—the positive side of your balance sheet. You can get much more benefit out of bankruptcy by not selling, using up, or borrowing against what you own BEFORE filing your bankruptcy case.

It’s certainly understandable that you might sell some stuff to pay essential debts or expenses. And it may make sense at the time to use savings or some other precious funds set aside for retirement or some other long-term purpose in order to make debt payments. And who hasn’t been tempted to borrow against their home or life insurance or retirement fund to keep their heads above water?

But it’s much more difficult to get a realistic and sustainable fresh financial start after you’ve sold, used up, or borrowed against those assets that are valuable to you. It’s so much saner when you have a stable roof over your head, reliable transportation, and, where appropriate, your tools of trade, your retirement savings.  It’s much easier to regain your financial footing if you still have your assets to stand on.

Bankruptcy Protects Your Assets

If your circumstances are like most people’s, bankruptcy will protect all of your assets.

First, Chapter 7 “straight bankruptcy” protects all “exempt” assets. If you’re like most people who file under Chapter 7, everything you own is likely legally “exempt.” So there’s a good chance you could keep everything, too.

Second, if you do have assets that are worth more than the “exempt” amounts provided by law, filing a Chapter 13 “adjustment of debts” can almost always protect those “non-exempt” assets as well.

And third, if you do have assets that are not “exempt,” those assets can often also be better protected with wise pre-bankruptcy planning with a knowledgeable bankruptcy attorney. That planning can often allow you to file a Chapter 7 case when you might not have been able to. Or you may be able to pay less to your creditors in a Chapter 13 case.

Practical Reasons to Get Legal Advice Early

If you sell, spend, or borrow against your assets before filing bankruptcy, most of the time those assets would have been completely protected if you’d kept them and then filed. Bankruptcy cannot protect what’s already gone.

Here’s a common sense question to consider: if you’re thinking about spending, selling, or borrowing against any of your assets, do you know whether that asset is one which would be protected in bankruptcy?  Might it not make more sense to preserve that asset instead of in effect giving it to your creditors?

Consider a couple scenarios.

A person who’s spent a decade or two or more building up a retirement fund cashes in or borrows against that fund to keep paying creditors when those creditors could be—and eventually are–written off in bankruptcy. That decision would likely significantly harm the quality of his or her entire retirement years, with no tangible benefit to show for it. 

Or consider a husband and wife selling one of their vehicles on the assumption that they’ll lose it once they file bankruptcy, in order to use the proceeds to pay creditors that could be—and eventually are written off in bankruptcy. They may be left with one vehicle when their family really needs two, and that vehicle may start breaking down so that it won’t reliably get them to work. The decision to sell one vehicle would have led to anything but a fresh start for them.

The retirement plan above, and the sold vehicle, both could have almost certainly been protected through either Chapter 7 or Chapter 13, possibly assisted by some asset protection planning beforehand.

Conclusion

Decisions about whether to use up assets can have serious long-term consequences, so they clearly shouldn’t be made without legal advice about the alternatives. But for understandable reasons and sometimes less sensible ones, people tend to get legal advice only when they are in serious trouble, and after they have made some harmful decisions. Please avoid this. Get a better fresh start by getting the necessary advice so that you can preserve your important assets before they are gone.

 

Big Mistakes to Avoid When Considering Bankruptcy

Decisions that seem to make sense at the time can end up being against your best interest. Here’s what to look out for.  

 

Giving Our Clients Good News

As bankruptcy attorneys, we chose this kind of law to work in because we really want to help people. We have the privilege of listening to people’s tough stories and then giving them good news about how they can greatly improve their lives. We show how they can now get immediate relief from their debts, create a workable plan to save their home, or a great way to solve a seemingly impossible situation involving unpaid child support or a wage garnishment for income taxes. On a good day we help anxious people learn about solutions they did not realize they had.

On a tougher day we find out that we could have helped someone much more if only they would have not have made some seemingly sensible-at-the-time decision.

The goal of our next few blog posts is to help you avoid these self-inflicted wounds.

Here’s a quick preview.

1) Wasting assets:  New clients often tell us how they’ve borrowed against or cashed in their retirement funds in a desperate effort to pay their debts. Or they’ve taken out a second (or third) mortgage on their home. Or they’ve sold a vehicle or some other precious asset to scrape up some money to pay necessary expenses. Then they learn that this sale, or borrowing, would have been unnecessary. They find out that whatever they’ve sold or borrowed against would have been completely protected in their subsequent bankruptcy case. They learn that the debts they paid with the proceeds would simply have been “discharged” (legally written off) in that bankruptcy. They gave up something, or gave up significant equity in it, for what turned out to be no real benefit.

2) Preferences:  If you make payments on a personal or some other special debt within a certain amount of time before filing bankruptcy, months later the person you paid may be required to give that money back. And that money would not be paid pack to you but rather to a bankruptcy trustee. These payments are called “preferences.” The person you paid could be a relative or friend who had lent you money when you needed it, or some other creditor you really wanted to pay like your doctor or some local merchant. You may have been motivated to pay the obligation before filing bankruptcy to avoid getting the person mixed up in your case. You may have even not wanted that person to find out about you filing bankruptcy. There are safe ways to deal with this situation and avoid the frustrations of a “preference.”

3) Losing a vehicle that could have been saved:  People often really need a vehicle but they can’t afford the payments. And they may owe on it more than it’s worth. So they either voluntarily surrender it to the creditor, or wait until after it gets repossessed to file bankruptcy. If they would have acted sooner they could likely have kept the vehicle. Getting rid of other debts could make the payments (and insurance and gas and repairs) affordable. Or with a “cramdown,” the monthly payments may be significantly reduced, along with the total amount to be paid on the vehicle’s balance.

4) Letting a creditor sue and get a judgment: If get sued by a creditor and know you owe the debt but have no way of paying it, you may think that there’s nothing much you can do about it. You may even think that there’s not much harm in doing nothing. But what happens next is that the creditor gets a “default judgment,” a court’s determination that as a matter of law you do owe the debt (usually with a big bunch of fees added on top of it).  Besides opening you up for garnishment of your paychecks and bank accounts, in certain situations that judgment could make the debt harder to discharge in a later bankruptcy case.  It’s much more sensible to get legal advice before getting sued, or certainly right away once you do get sued. Doing so would likely avoid you painting yourself into a corner.

5) Selling a home out of desperation:  Bankruptcy—and especially Chapter 13—gives you some powerful tools for dealing with debts related to your home. Not only does bankruptcy often help you afford your mortgage payment. Chapter 13 in particular provides a way to pay any accrued first mortgage arrearage, possibly “strip” the second mortgage lien, get rid of judgment liens, and favorably address income tax and child support liens and then get them released from your home’s title. You may otherwise be tempted to hurriedly sell your home (or just give it up to your mortgage lender) because of financial pressures specifically from such home-based debts, and/or from all your other debts. But if you rush to sell your home (or surrender it) you could lose out on the opportunity to keep it through the tools of bankruptcy. Some of those tools may even create equity in your home, thus making it economically more worthwhile to save. Or maybe you could still sell it, but do so later (even a couple years later) at a higher price, when the timing is better for you.

Conclusion

With these examples you can see that doing what seems right and sensible can really backfire if you don’t get legal advice about the possible unexpected consequences of your decisions. The next few blog posts will explain these 5 situations more clearly so that they will make more sense to you and you can avoid making these mistakes.

 

Making Sense of Bankruptcy: How to Pay for Your Bankruptcy Lawyer

There are usually ways to pay for the legal representation you need for dealing with your debt problems. First find a lawyer you can trust.

 

Here’s the sentence that we’re explaining today:

Being able to afford the costs of filing bankruptcy involves 1) acknowledging that you need legal advice, 2) accepting the reality that you have a very serious financial situation 3) for which you need help fixing, 4) you must also acknowledge that most other people find a way to pay for their bankruptcies, 5) that the free initial consultation meeting is a crucial first step in finding out both your legal options and how to pay for them, 6) both of which will be unique to your situation, and 7) will reflect the trust that is essential to your lawyer-client relationship.

Getting Solid Advice about How to Treat Your Financial Trauma

A financial trauma is not all that different from a medical one. Both can be the result of years of unwise decisions, or can arise suddenly, or be a combination of both. A heart attack can be the result of a lifetime of insufficient exercise and unhealthy eating, and then be brought on by a particularly stressful day. Financial insolvency can be the result of a long period of insufficient income and overspending, but made inevitable by an illness or accident.

The analogy continues in how to deal with both kinds of traumas.  You would of course never consider doing surgery on yourself or treating your own heart attack. In the same way don’t think that you can treat your financial trauma on your own. Trying to do so is almost always very unwise.

Fine, you may say, but then ask how you are supposed to pay for a bankruptcy lawyer if you can’t even afford to pay your creditors? Consider the following.

Accept Financial Reality

The first step is to be honest with yourself. If you’ve been dodging the truth of your financial situation, you can’t get anywhere without dealing with it head-on. Accept the practical truth that you have too much at stake to allow yourself to continue avoiding it. Your day-to-day peace of mind, your financial life-goals, the well-being of those who depend on you—all of these are in jeopardy if you don’t find a way—the best way—to resolve your financial dilemma.

Accept the Need for Help

Back to our analogy to medical trauma, with a financial trauma it is virtually impossible to understand on your own the various legal options and how each would work in your financial situation. So you must accept that you need help in making all the right decisions, preparing the required paperwork, dealing with your creditors, and working the bankruptcy system (if a bankruptcy option is indeed the best for you).

Most of the Time There IS a Way

Most people who file bankruptcy do so while being represented by a lawyer. Commonsensically, that means that if most of the million or so people who file bankruptcy each year manage to pay for their attorney, there must be ways to do so, ways that may well apply to you as well.

A Free Consultation Meeting is a Real Service

Reputable bankruptcy lawyers provide a free initial consultation meeting with new clients for various reasons, some self-serving, but it is a valuable service. These lawyers are willing to provide at least the beginning of the tangible advice you need in return for the intangible possibility that you will chose them to represent you. They help you break the vicious cycle in which you don’t really know which way to turn and don’t know how to pay for it.

You are always in charge. Your lawyer does not tell you what to do, but rather provides you advice about your options. Even if you have not paid him or her anything, the lawyer is ethically obligated to serve you with accurate information and advice about what’s best for you. After your initial consultation meeting you have no financial obligation to the lawyer unless and until you agree to have him or her work further on your behalf.

How to Pay for the Bankruptcy is Part of Your Unique Solution

In that free initial meeting, you get advice and guidance unique to your situation about your options. Then you usually also learn how you would be able to afford to pursue your various options, which may well also be unique to your situation. It is part of your lawyer’s job to help you figure out both a practical and legally appropriate way to pay for the costs of filing bankruptcy.

If bankruptcy is the right solution for you, then just as your financial situation is unique, your lawyer will help you determine a way to pay for it in a way that works for you.

Trust Your Attorney for Good Advice, Including about How to Pay for It

Your relationship with your lawyer is very much about trust. You are putting your financial life—past, present, and future—into the hands of your lawyer. One of the purposes of your initial consultation meeting is for you to see whether you can have a relationship of trust with him or her. If in that first meeting you don’t quickly feel the right chemistry, confidence in his or her competence and understanding, and at least the potential for mutual trust, don’t continue with that lawyer but rather find one with whom you do you feel those attributes.

And when you find the lawyer that feel that you can trust with your financial life, you will also be able to trust him or her to give you good advice about how to pay to get that financial life heading in the right direction.

 

Making Sense of Bankruptcy: Potential Concerns about Recent Sales, Transfers and Gifts

To discourage disposing of assets before bankruptcy, a trustee can potentially undo a prior transaction in order to benefit all creditors.

 

Here’s the sentence that we’re exploring today:

Because the bankruptcy process really cares about assets, if you sell, transfer or gift an asset during a certain period of time before filing bankruptcy, that transaction may be a “fraudulent transfer,” with the result that the bankruptcy trustee may “avoid” (undo) that transaction, whether there was or there was not anything fraudulent about it.

Bankruptcy is about fairness between debtors and creditors. Part of that fairness is about debtors’ assets. Debtors are allowed to keep all “exempt” assets they own as of the time their bankruptcy case is filed. Assets that are not “exempt”—if any—are sold by the trustee and the proceeds paid to creditors towards the debts owed.

Accordingly, bankruptcy fairness has come to mean that if a debtor has an asset that he or she transfers away during a certain period of time BEFORE filing bankruptcy, thus preventing that asset from later being sold by the trustee and its proceeds distributed among creditors, the trustee would be able to undo that “fraudulent transfer” of the asset, and sell and distribute it after all.

Bankruptcy Focuses on Assets

When you file a bankruptcy case everything you own at that moment in time comes under the jurisdiction of the bankruptcy court. The law has to pick a point in time—when your case is filed—to look at your financial situation, especially at what assets you own at that time.

This practical need to focus on the date of filing for asset purposes has a twist designed to discourage debtors from giving away their assets or selling them for less than fair value in order to prevent them going to creditors. This twist is the concept of “fraudulent transfers.”

“Avoidable” “Fraudulent Transfers”

Under certain circumstances the bankruptcy court has jurisdiction not only over assets that the debtor owns when the case is filed but also over assets previously owned by the debtor but sold or given away during a period of time before the filing date. The practical purpose for this is, as just mentioned, to discourage debtors from disposing of assets before filing bankruptcy.

So the law provides that under certain circumstances if a debtor transfers an asset during the two years before the bankruptcy filing, that transfer can be undone—“avoided.” As a result, the transferred asset reverts back to the debtor, the individual or business filing bankruptcy. Then the bankruptcy trustee can sell the assets and distribute the proceeds of sale to the creditors.

Intentional “Fraudulent Transfers”

One kind of “fraudulent transfer” involves assets sold or given away “with actual intent to hinder, delay, or defraud” the debtor’s creditors. The debtor is purposely hiding assets from its creditors. That’s called an intentionally fraudulent transfer. These are not common.

Constructive “Fraudulent Transfers”

A constructively “fraudulent transfer” occurs when the debtor filing bankruptcy simply gets ‘less than a reasonably equivalent value in exchange for such transfer or obligation.” There isn’t necessarily any evidence that this was done to hide anything from the creditors, but the debtor didn’t get paid what the asset being transferred was worth. The transfer was either a gift—in which the debtor received no consideration at all—or a sale for less than full value. Constructive “fraudulent transfers” are presumably much more common than intentional ones.

So under certain very specific circumstances of financial exposure laid out in “fraudulent transfer” law, if a debtor transfers an asset without getting paid adequately for it—in money or for some other fair exchange—and files bankruptcy within two years thereafter, the bankruptcy trustee can undo that transfer and/or get paid the proceeds of the sale of that asset on behalf of the creditors.

In bankruptcy law there are four very specific circumstances in which constructively fraudulent transfers can occur. Detailing all of these is beyond the scope of this already long blog post. But to give you a better idea about this, one of these four circumstances is if the debtor is insolvent when the transfer was made, or the transfer itself made the debtor insolvent. The point is that businesses and individuals should generally be able to sell or gift away their assets without worrying about those sales or gifts being undone in the future. But if that business or individual is selling or giving away assets while it is insolvent, and then ends up filing bankruptcy, then those transfers are seen as having “constructively” defrauded the business’ or individual’s creditors out of the value of that asset.

Conclusion

“Fraudulent transfers” are among the more complicated aspects of bankruptcy. This has been no more than a short introduction. “Fraudulent transfers” are not often involved in consumer cases—more so in small business cases. Either way, one of the benefits of having a highly competent bankruptcy attorney in your corner is that these kinds of potential problems can be discovered, perhaps prevented, and resolved in a way serving your best interests.

 

What Could Complicate Your Otherwise Simple Bankruptcy Case?

What about your financial life could result in a not so simple bankruptcy case?

 

Bankruptcy can be very flexible. If your finances are complicated, bankruptcy likely has a decent way to deal with all the messes. My new clients are almost always amazed and relieved how well a bankruptcy game plan can solve all their financial problems. As in life, sometimes there are trade-offs and important choices to be made. But usually, whether your life is straightforward or complex, bankruptcy can adjust.

To demonstrate this in a practical way, here are some differences between a simple and not so simple bankruptcy case.

1. No non-exempt assets vs. owning non-exempt assets:  In the vast majority of Chapter 7 and Chapter 13 cases, you get to keep everything that you own. But even if you do own assets that are not protected (“non-exempt”), there are usually decent ways of holding on to them even within Chapter 7, and if necessary by filing a Chapter 13 to do so.

2. Under median income vs. over median income:  If your income is below a certain amount for your state and family size, you have the freedom to file either Chapter 7 or 13. But even if you are above that amount, you still may be able to file under either Chapter, depending on a series of other calculations. Again, Chapter 13 is there if necessary, and sometimes that may be the better choice anyway.

3. Not behind on real estate mortgage vs. you are behind:  If you don’t have a home mortgage or are current on it, that makes for a simpler case. But bankruptcy has many ways to help you save your house. Sometimes that can be done through Chapter 7, although Chapter 13 has a whole chest full of good tools if Chapter 7 doesn’t help you enough.

4. No debts with collateral vs. have such debts:  The utterly simplest cases have no secured debts, that is, those with collateral that the creditor has rights to. But most people have some secured debt. Both Chapter 7 and 13 have various ways to help you with these debts, whether you want to surrender the collateral or instead need to keep it.

5. No income tax debt/student loans/child or spousal support arrearage vs. have these debts:  Bankruptcy treats certain special kinds of debts in ways that are more favorable for those creditors, so life is easier in bankruptcy if you don’t have any of them. But if you do, you might be surprised how sometimes you have more power over these otherwise favored creditors than you think. You can write off or at least reduce some taxes in either Chapter 7 or 13, stop collections for back support through Chapter 13, and in certain circumstances gain some temporary or permanent advantages over student loans.

6. No challenge expected by a creditor to the discharge of its debt vs. expecting a challenge:  In most cases, no creditors raise challenges to your ability to write off their debts. Even when they threaten to do so, they often don’t within the short timeframe they must do so. But if a creditor does raise a challenge, bankruptcy procedures can resolve these kinds of disputes relatively efficiently.

7. No debts from a business vs. have such debts:  Although there is nothing about business debts that necessarily makes for a more complex case, that still tends to happen. These cases often have more unprotected assets, more troublesome kinds of debts, and often larger amounts of debts for creditors to get excited about. However, bankruptcy has ways to deal with all of this.

8. Don’t operate an ongoing business vs. do operate one:  A dead business is usually easier to deal with in a bankruptcy than a live one. Although you can continue operating a business while going through bankruptcy, that can be difficult to do under Chapter 7, and very likely will add some complications to a Chapter 13 case.

9. Lived in your present state for the last 2 years v. lived there less than 2 years:  For you to use the asset protections—exemptions—which are available to debtors filing bankruptcy in the state in which you are now living, you must have lived there for at least 2 years. Otherwise you must usually use the exemptions available to residents of the state where you lived previously. That can complicate your case because of a potential dispute with the trustee about which state’s exemptions actually apply, and then possibly disputes about how to apply an unfamiliar state’s exemptions.

10. Never filed bankruptcy vs. filed prior bankruptcy:  Actually, if you filed a prior bankruptcy, or even more than one, it may well make no difference whatsoever. But depending on the exact timing, a prior bankruptcy filing can not only limit which Chapter you can file under, it can even sometimes affect how much protection you get from your creditors under your new case.

We’ll dig into some of these differences in upcoming blogs. In the meantime remember that even though your financial life may seem messy in a bunch of ways, there’s a good chance that bankruptcy can clean it up and tie up those loose ends. It’s called a fresh start.

 

Don’t People Have a Moral Obligation to Pay Their Debts?

Yes, paying your debts is often the right thing to do. But sometimes you have a higher moral obligation to release yourself from those debts.

 

The Immediate Benefits of Bankruptcy

Is the decision whether or not to file bankruptcy simply a weighing of its financial costs and benefits? How about if you go beyond just the immediate dollars and cents and include less tangible but still very important factors like the impact on your credit record short-term (possibly hurt it) and long-term (probably improve it)? These questions focus on what’s in your best interest.

That’s fine. You need to find out what’s best for you financially and in other respects that serve your self-interest. It’s why, for example, corporations of all sizes file strategic bankruptcies because their smart and well-advised managers figure out that bankruptcy is the best way to reduce their debt and streamline their operations. That way the business has the best chance of surviving and hopefully thriving into the future.

And that’s a good thing, right?

The Human Dimension

But you are more than a business or corporation. For you the human costs and benefits have to be weighed as well. 

That includes things like the detriments and benefits to your emotional and even physical health. The impact of crushing debt on your relationships, with your children, with your spouse and others close to you. And the decision includes morality as well.

The Moral Element

Why morality? Because as human beings we have a need to do what is right. Not necessarily just what is right for you, but also what is right for those around you. What is right for your place in the world.  

We humans are moral creatures. Our most important choices often include choosing between doing what’s right and doing what’s wrong. To strip this out of our decision about whether or not to file bankruptcy is to dehumanize us. We need to engage in the moral component of this choice in order to make a deeply good and satisfying decision. Otherwise we’ll likely feel unsettled afterward, no matter what choice we make.

How to Make a Good Moral Decision  

1. Accept—own–the choices that you made so far, whether they were good or bad, sensible or short-sighted, intentional or forced—and the circumstances that got you where you are now.

Accept that you have used credit and made purchases which each included at the time a legal commitment to pay those debts. But also consider how much choice you had at the time about those uses of credit/purchases. Consider whether in hindsight you could have or would have done differently. What has changed so that you are now not able to keep those commitments?

2. Consider both the moral costs and benefits of continuing to try to meet those financial commitments.

The main moral benefit would be in keeping the promises you had made to pay those debts. That commitment to pay may be more or less strong depending on the circumstances, especially on how much choice you had at the time (an impulse purchase beyond your means vs. a necessary medical procedure), and what you could or could not realistically anticipate in the future (such as a sudden job loss or illness).

The costs of keeping prior commitments include the potential detriments to your emotional health and even to your physical health from the stress and anxiety. There may also be health effects from the need to work more hours or multiple jobs to try to make enough to pay your bills.

What’s the potential detriment to your marriage and family relationships, and to your relationship with your kid(s)? This includes not just the impact of your stress on these relationships, but also the impact on your ability to meet your financial responsibilities to them. Plus the effect of your debt on your ability to spend the time that these loving relationships require.

Ask yourself: do you have a realistic chance of successfully paying off your debts, and even if so, what would be the likely human costs to do so? And if you really don’t have a realistic chance of succeeding, is it time to stop fighting so that you are not just hurting yourself and those you love as you delay the inevitable, out of embarrassment, pride, or misplaced fear?

3. Recognize that you now, today, have both the opportunity and obligation to make a good decision about whether to continue trying to meet those commitments.

The past and its decisions are in the past. You can now make a decision to do the right thing for yourself and your loved ones.

Recognize that to just go along with the status quo without facing the situation honestly and bravely is to make a decision by default, a decision that likely not your morally best decision.

4. Get advice so that you know your legal options.

You might not think you have a moral obligation specifically to get good advice. But think about it: you can’t make a morally good choice about how to deal with your debts without knowing your legal alternatives about those debts. You cannot know whether there are more morally acceptable ways to deal with your creditors—such as to file a Chapter 13 payment plan instead of a “straight” Chapter 7—if you don’t know your legal options. When you understand the structure within which your choices have to be made, that often helps make the moral choices clearer.

5. Look at each of your legal options, and weigh them in light of your different moral obligations—to each of your creditors, to yourself, your spouse, your family, and anyone else affected. 

On one hand, this is an entirely personal decision. You need to look yourself in the mirror and be satisfied that you are doing the right thing. But as with any important decision, you can and most of the time should get help from the right people and resources. Also, consider talking to your closest friend, a family member, a church or spiritual mentor or leader, your accountant. Consider writing in a journal, or praying or meditating about it–doing whatever you think may help you make a good decision.

And although your bankruptcy attorney is primarily just your legal advisor, who will respect that the final decisions are up to you, because he or she has counseled many, many people wrestling with these kinds of decisions he or she may be able to help you with the human element of your decision.

Conclusion:

Henry David Thoreau said that the “price of anything is the amount of life you exchange for it.” What is “the amount of life” you are paying for letting yourself continue to be saddled with debt? What crucial parts of being human are you giving up while you avoid figuring out what to do?

It’s time for you to make a good and wise decision. Go get the legal advice so you can do so.

 

Will Any Creditors Challenge the Discharge of the Debts in My Bankruptcy Case

You seldom need to worry about any creditor objecting to the discharge of your debt to it. They very seldom have the grounds to do so.

 

If you file bankruptcy, every debt you have a right to write off will almost always be written off. Unexpected challenges in the discharge (write-off) of debts do not happen often.

The Two Categories of Debts that Aren’t Discharged

The first category of not-discharged debts includes those that Congress has decided for some special reason should not be allowed to be discharged in bankruptcy. Among the most common ones of these are spousal and child support, most student loans, many tax obligations, and criminal fines and restitution. If you are being represented by a competent bankruptcy attorney, you will be informed before your case is filed if any of your debts fall into this category.

The second category of debts are those that are subject to not being discharged IF, and only if, the creditor files a formal challenge to the discharge, which can be done only under certain narrow grounds.  

Reasons Creditors Tend Not to Challenge Your Discharge of Their Debts

Creditors only raise challenges very seldom because:

1. As mentioned above, creditors have only narrow grounds to challenge the discharge of its debts. They would have to prove in court that you acted inappropriately in certain very specific ways–in essence, that you cheated the creditor in incurring the debt. The inappropriate behavior would have to involve fraud or misrepresentation in applying for or otherwise acquiring the debt, embezzlement, and such. This kind of behavior simply does not apply to most people and their debts.  So a creditor would just be wasting its time, and reputation, to challenge the discharge of its debt when it did not have any legal grounds for doing so.

2. The creditor would also be wasting its money. The creditor’s challenge is required to be in the form of a lawsuit filed in bankruptcy court, involving paying a filing fee and at least hundreds of dollars—and potentially thousands–in attorney fees. Most creditors wouldn’t waste their money on a lawsuit in which they had little or no chance to win.

3. Under bankruptcy law in general debts are presumed to be dischargeable if they are not one of the special nondischargeable types of debts in the first category referred to above (child support, taxes, etc.). So the creditor has the burden of providing the necessary evidence—your alleged fraud, for example—to establish that the debt is not dischargeable.

4. Bankruptcy law also provides that creditors risk being ordered to pay for your costs and attorney fees if you defend its discharge challenge and you win—you defeat the challenge. This is one more disincentive for creditors to raise a challenge, especially if its evidence against you is not solid.  

So, creditors will usually not challenge the discharge of its debts because they usually don’t have legal grounds to do so. And even a creditor thinks it has some grounds for raising a challenge, it takes significant financial risks doing so.

But What If a Creditor Does Believe It Has Grounds

First, creditors sometimes do really think that the way you incurred its debt gives them grounds for challenging that debt’s discharge. Also the law can favor them when it comes to certain actions by you such as incurring credit card debt or cash advances in the months before filing bankruptcy, writing bad checks even inadvertently, and similar actions which might not seem very egregious.

Second, you may have a creditor who is motivated less by economic good sense than by a desire to cause you trouble, say an ex-spouse or former business partner.

The best way to deal with these situations is:

  • be completely honest with your attorney in answering every question he or she asks you, whether during a meeting or when providing information in writing
  • if you have any concerns along these lines, make a point of voicing your concerns, and do so early in the process.

If you wonder whether you’ve acted inappropriately with any of your creditors, or if you have any personal creditors who are carrying a grudge, discuss it with your attorney. Not only will you be much better protected from rude surprises. Often you’ll feel the relief of learning that you have much less to worry about than you had feared.

 

New Year Resolution #1: Get Informed about Your Options

You’re stuck. Very unhappy about your financial predicament but don’t know where to turn. So, resolve to get help in finding a solution.

 

Where You Now Stand

You’re scared and not feeling very hopeful. Your financial problems are overwhelming you. They have taken over your life, worrying you constantly. You may be feeling mad at yourself, feeling guilty for having messed up, frustrated, angry and at times just sick and tired of it all.

You have probably been trying to improve your situation for many months, more likely for years. It’s impacted your personal relationships. The anxiety is affecting your health.  It’s battering your self-esteem. It’s challenging to take care of your basic daily needs. It hurts to think about the long-term responsibilities that you aren’t making progress on, like retirement savings.

What You’d Like

Financial peace. A “normal” life, one in which you can afford what’s important to you. One in which you are not worrying constantly. One you can be hopeful about. One in which there is joy in each day, and a future to look forward to.

Take the First Step

You may be feeling the truth that, as Franklin Roosevelt famously said to America in the midst of the Great Depression, “the only thing we have to fear is fear itself.” You may have heard about some possible ways out of your dilemma, ways of negotiating down your debts or getting rid of some or all of them through bankruptcy. And part of you wants to look into these options. But for various reasons you’ve avoided doing so.

The next part of the quote above from Roosevelt about fear refers to it as a “nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.” You need to get around this paralyzing fear by taking the first simple but crucial step: ask for help.

From Fear to Knowledge

Ask for help from an attorney who is dedicated to helping you solve your financial problems. And asking for this help is usually free, at least for the initial meeting.

Most attorneys who help people deal with their overwhelming debts do not charge for their initial meeting with you. At this meeting you will usually have the opportunity to tell the attorney about your situation, your concerns, your hopes and goals. The attorney will usually be able to outline your most likely legal options, along with each of their main advantages and disadvantages. You will sometimes be able to decide which option is best for you within that first meeting, or at least will get a much better understanding of some of your better options.

But Don’t You Just “Get What You’re Paying For” with a FREE Initial Consultation?

Most attorneys who help consumers and small businesses with debt problems do not charge for their initial meeting simply because the market demands that they don’t.

Sure, it’s partly a marketing tactic: attorneys bank on the likelihood that once somebody takes the trouble to meet with them that person will get comfortable with them and will more likely hire them if they need an attorney.

Then there’s the reality that when you are in financial trouble you don’t have money to spend on shopping for an attorney. So you’re fortunate that most attorneys don’t charge for that chance for you to check them out and get advice from them.

Furthermore, most of these attorneys really care about you. Most attorneys who get into the field of helping consumers deal with their debts care about people and want to help them. They spend their working days doing this, and are actually motivated at finding the best solution for every client that they are hired by.

What to Look For and to Look Out For

Just because you have an initial consultation with an attorney, you have absolutely no obligation to continue working with that attorney. Be very clear in your own mind that you are shopping for information, and maybe for an attorney to help you. And you’re doing so with high objective and subjective standards.

On the objective side, did the attorney listen carefully to you to get the facts about you and your finances? Did he or she present your options clearly, and answer your questions about them in an understandable way? Do any of the options presented appear to meet your goals?

On the subjective side, was the attorney considerate, treating you like a human being and not just a “case”? Did you feel like your concerns were heard and addressed directly, that your goals were respected? Did the attorney seem very knowledgeable and confident, but not overbearingly so? Were you comfortable with him or her? Did you feel you could trust him or her? Did you feel like you and the attorney were a good fit?

But Aren’t Attorneys Just Going to Make You File a Bankruptcy Case?

No, that’s not their job.

First, attorneys are legally and ethically required to represent YOU, to advise you of your options, and their advantages and disadvantages to you, regardless of any financial self-interest of the attorney. They can be sued for malpractice for giving bad advice, or could lose their law license. And that’s true even for free initial consultations.

Second, an attorney’s job is to lay out the options so that YOU can make an informed decision. The attorney doesn’t tell you what to do; that’s your choice. Sure, he or she is to  advise you, and usually to make recommendations, strongly or otherwise. But not to make you do anything. If any attorney were to put any uncomfortable pressure on you, stop working with that attorney and find one who respects your role as the decision-maker.

The First Step

If we are in your part of the world, give us a call to meet with us. If you live somewhere else, do some quick research on the internet to find one or two local attorneys who seem appealing to you, and arrange meet with one or more of them. You can find out a fair amount on attorneys’ own websites and on their profiles in internet attorney directories.

You will almost certainly come away from your initial meeting infinitely better informed about your options, and very likely feeling much better about being able to find the relief that you need.

Crucial Question: Will My Employer Be Informed If I File Bankruptcy?

Not under Chapter 7; more likely under Chapter 13. But it’s illegal to be fired or discriminated against in your job for filing bankruptcy.

 

Chapter 7 “Straight Bankruptcy”

The majority of bankruptcies are filed under Chapter 7. These cases usually last less than four months. Normally only your creditors are informed about your case. There is no reason for your employer to be told about it, and in most situations employers are not informed and do not find out.

The most likely exception is if your wages are being garnished by a creditor. Your attorney may need to notify your employer’s payroll office about your bankruptcy to stop the garnishment, especially if the matter is very urgent. However the employer may not need to be told because the creditor itself must release the garnishment upon being informed about the bankruptcy filing. Regardless, your employer may still find out that is why the garnishment stopped.

But think about this practically. If your wages are being garnished, that means that your employer is already aware that a creditor has sued you, you could not pay, and so it has gotten a judgment against you. So your employer (or at least its payroll department) is already aware that you are having financial problems. You are putting your employer through the extra work of processing the garnishment every payday. Once you file bankruptcy, that will stop the wage garnishment, which means the employer does not have to mess with it any longer. And to the extent your employer is actually aware of your bankruptcy, it will see that you are taking responsible steps to put your finances in order.

Chapter 13 “Adjustment of Debts”

The three-to-five-year Chapter 13 option can be a tremendously good way to deal with a host of debt problems—saving a home from foreclosure, resolving serious income tax debts, paying off a vehicle for less, catching up on back child support, writing off non-support divorce debts, and more. At the heart of this type of bankruptcy is a Chapter 13 “plan” that you and your attorney propose and the bankruptcy judge approves, requiring you to pay a certain single amount each month to all of your creditors.

If you are employed, it’s standard practice in many parts of the country for the bankruptcy judge to require that your Chapter 13 payments be automatically deducted from your wages and sent to your “Chapter 13 trustee” for distribution to your creditors under the terms of your “plan.” This is done through a “wage order” or “income deduction order.” Note that this order is usually much easier for the employer to process than a garnishment because it tends to be the same every month, like an automatic deduction out of your paycheck. Also note that in some jurisdictions such “wage orders” are not imposed as long as you consistently make the plan payment on your own.

Federal Legal Protection for Employees

It is illegal for ANY employer—governmental or nongovernmental—to fire you because you filed for bankruptcy. An employer also cannot discriminate against you regarding other terms and conditions of employment, such as reducing your salary or demoting you, because of your bankruptcy.

The federal Bankruptcy Code specifically states that no “governmental unit” or “private employer” “may terminate the employment of, or discriminate with respect to employment against” “an individual who is or has been a debtor” in bankruptcy.

However, the Code makes clear that such termination or discrimination is only illegal if done“solely” because of the bankruptcy filing. So don’t go so far as to think that bankruptcy might prevent such action by your employer if it has other valid reasons to take the action—such as tardiness, dishonesty, or incompetence.

 

Good Reason to Delay Bankruptcy until Now: Accumulate Exempt Assets

Financial wisdom says you should set aside money for 3-to-6 months of living expenses. You can do so even before filing bankruptcy.

 

Bankruptcy’s Fresh Financial Start

The point of bankruptcy is to relieve you of crushing debt that saps your motivation. The idea is that once those debts are discharged (legally written off) or handled in a reasonable way, you will have fighting chance at getting ahead without being forced to rely on new debts.

The point of property exemptions is that you can’t really get a fresh financial start by starting over with absolutely nothing. If you have nothing—no vehicle, no roof over your head, no furniture, no reliable access to your full paycheck, no savings—most likely your fresh start will be dead on arrival. Property exemptions are a practical realization that in today’s economy to have a reasonable chance at climbing out of a financial hole you usually need a vehicle to commute to work, the ability to retain your paycheck, and other things, including some money set aside for the emergencies of life.

On this last point, using the rough estimate of a 3-to-6-months-of-living-expenses reserve, that means if your annual income is $50,000, the reserve would be $9,000 to $18,000. If you are currently considering filing bankruptcy, accumulating savings of that amount may well seem preposterous. But it’s not, necessarily.

Accumulation Exempt Assets is Often Paired with Depleting Non-Exempt Assets

Sure, it’s hard—or more like impossible—to accumulate a significant “rainy-day fund” when you’re living paycheck to paycheck, and even falling behind while doing so.

Often the only practical way to have the money to build such a fund is by getting money for your day-by-day living expenses from another source. If you can, a great way to do this before filing bankruptcy is to live off any unprotected, non-exempt assets so that you have the means to accumulate protected, exempt assets.

Our last blog post was about how to use up or otherwise dispense with non-exempt assets. Non-exempt assets are those that could be taken from you by a bankruptcy trustee to sell and pay the sale proceeds to your creditors. If you use up such unprotected assets for your reasonable living expenses before filing bankruptcy then they won’t be available to your creditors once you do file bankruptcy. Use up non-exempt assets by tapping a cash-convertible fund, selling them, or borrowing against them. That in turn gives you the opportunity to accumulate OTHER incoming assets to build up a living-expenses reserve.

Exempt Assets that Can Be Accumulated

Most state exemption laws allow you to accumulate certain income streams in a separate account, not mingled with any other type of income. Often a certain portion of your wage/salary income can be protected in this way, as well as certain kinds of annuities and such. Social Security and Veterans benefits can be accumulated without dollar limit under federal law.

Such pre-bankruptcy accumulations of assets should absolutely be done only with the right advice. That’s because these kinds of strategies are delicate and dangerous without the thorough guidance of a competent and careful bankruptcy lawyer.