Old fashioned 401k plan

Borrowing against one’s retirement is bad for a number of reasons.

Depleting your retirement will not help your future

You spent a lot of hours earning the money that is in your retirement and took the advantage of a retirement account to do so.  These accounts have many benefits, including that they are not taxed until you withdraw the money.  You also, in many cases, get a tax deduction for contributing to them as it reduces your gross income.  To take out a 401k or retirement loan, you must pay a fee to do so, making it even less attractive from a financial standpoint.

Failure to repay a 401k or other retirement loan will result in tax consequences.

If a retirement loan is not repaid, not only do you lose the fees you have to pay to take out the loan in the first place, but the loan then becomes taxable income to you.   Depending on your other income and financial situation, this can result in a significant tax debt.

Payments on retirement loans do not count towards bankruptcy eligibility

People think that a 401k loan is the same as a loan against their car, or house.  It is not.  You are simply repaying yourself.   As such, most (if not all) bankruptcy courts will not include the amount being repaid when analyzing your budget to see if you have income available to pay your creditors.   Thus, if you have net income of $3,000 per month, and necessary living expenses (such as rent, mortgage, car payment, food, clothing) of $3,000 per month, but $700 of that $3,000 is your retirement loan deduction from your paycheck, you will likely not be eligible for a Chapter 7 case, and would have to do a repayment plan in a Chapter 13 (or Chapter 11) instead.

This is one of the biggest obstacles clients of mine face.  They finally run out of options, and money, and decide they need a fresh start and want to file a bankruptcy but because of the 401k loan (which they think they MUST pay), they don’t have any surplus income, yet also may not qualify for a Chapter 7  (which requires no repayment to creditors).

Know the Risks Before Borrowing

I’m not saying that it never makes sense to borrow against your retirement.  Sometimes using it to save your home can be as important as the future benefit from the retirement funds themselves.   But be sure to understand the problems you are getting yourself into by doing so, and use that when weighing your decision.

This article is part of my bankruptcy alphabet series.  For others writing on the letter “K” see:

1. 401k    Marin County Bankruptcy Attorney, Catherine Eranthe
2. Keep    Northern California Bankruptcy Lawyer, Cathy Moran
3. Keep your retirement accounts    Taylor, Michigan Bankruptcy Attorney, Christopher McAvoy
4. Keeping Secured Loans    Hawaii Bankruptcy Lawyer, Stuart T. Ing
5. Keeping your business     Dorota Trzeciecka Bankruptcy Blog
6. Keys    New York Bankruptcy Lawyer, Jay S. Fleischman
7. Kids    Colorado Springs Bankruptcy Attorney Bob Doig
8. Knowledge    Omaha and Lincoln, Nebraska Bankruptcy Attorney, Ryan D. Caldwell
9. Knowledge    Metro Richmond Consumer and Bankruptcy Attorney, Mitchell Goldstein
10. Know    Cleveland Area Bankruptcy Lawyer, Bill Balena
11. Keep    San Francisco Bankruptcy Attorney, Jeena Cho    

Image Courtesy of Kenteegardin

and www.SeniorLiving.Org

-Burt Bacharach and Hal David

If there’s anything that is a centerpiece of an individuals’ bankruptcy case, it’s their house and whether they can keep and, if so, how?  I have many clients who call up and think that they automatically lose their home when they file a bankruptcy case.  I have others who believe that they get to keep their house under any circumstance.   The truth lies in between.

There are different options available regarding retaining property depending on which bankruptcy chapter is filed.

Keeping Your House in Chapter 7

In a Chapter 7 liquidation case, whether one gets to keep their house, or any other property for that matter, depends on how much equity is in it, and whether they have sufficient exemptions under applicable law to protect that equity value.    Exemptions are “protections” for value you have in certain assets such that they are “exempt” from collections.  Every state has different exemptions amounts available. Exemption laws are based on the state where you resided for the 2 years prior to filing your bankruptcy case or, if you lived in more than 1 state during that period, in the state where you resided for the greater part of the 180 days prior to that 2 year period.

How to Calculate Equity

How is equity calculated?  This is for some reason a big hurdle for many.  Calculating equity is simple.  You take the fair market value of the property (preferably from an appraisal, or at least a broker’s written opinion) and then subtract out the amounts owed to any mortgages or other liens¹ against the property, and that’s the equity.   In most courts, you can also subtract out another 8% of the fair market value for “costs of sale” of the property.

Assuming there is no equity, or you have sufficient exemptions to cover whatever equity exists, then the bankruptcy trustee will not sell (liquidate) the house.  However, there is still the obvious requirement that you must stay current with your contractually due mortgage payments in order to prevent foreclosure.

Keeping Your House in Chapter 13

Chapter 13 is very different.  You will not lose your house in a Chapter 13 regardless of how much equity there is in it.  However, any non-exempt equity will need to be paid to your creditors over the term of your repayment plan (36-60 months).  ²

Lien Stripping in Chapter 13 (and Chapter 11)

Another nifty feature of Chapter 13, not available (at least not yet) in a Chapter 7 bankruptcy case, is the ability to remove certain liens against real estate.   How and to what extent this can be done depends on a number of factors, including whether the house is the principal residence of the debtor.  If it is, then a junior mortgage can be “stripped” (i.e. removed) if the value of the property is less than the amount owed to any senior mortgages (e.g. the 1st mortgage). ³  For non-principal residences (such as a rental property),  even partially secured liens can be stripped down to the value of their lien.

Catch up on payments in Chapter 13 (and Chapter 11)

Another great feature of Chapter 13 is the ability to use your 36-60 month plan payments to catch up on past due amounts on your mortgage(s).  Frequently one files a Chapter 13 to gain the benefit of the automatic stay to stop a foreclosure, and then propose a repayment plan to catch up on the past due arrearages and reinstate the loan over a period of time.

But whether one gets to keep their house or not, they can always make another place their home because as the great songwriting team quoted at the top of this article point out, a house is not a home.

__________

¹ This excludes liens, such as judgment liens, when they are able to be removed in a bankruptcy case.  This will be discussed more in my Letter “L” blog.

² This isn’t precisely accurate.  Technically, in a Chapter 13 the debtor must pay more than the creditors would receive in a Chapter 7 case, so one gets to deduct anticipated Chapter 7 Trustee administration fees from the equation.

³ This may not be available in all bankruptcy courts, but is allowed in the Central District of California.

This article is part of my bankruptcy alphabet series

Others playing the Alphabet Game:

Jay Fleischman believes that H is for Household

Cathy Moran agrees that H is for House

Cate Eranthe finds H to be about HOA  Dues

Stuart Ing explains about Household Size

Cleveland Attorney Bill Balena talks about Honesty

Christopher McAvoy discusses Harassment

Mitchell Goldstein examines Households

Daniel Winter looks at Harrassment

Image courtesy of james.thompson

Filing fees for all fee-required documents to the bankruptcy court are increasing effective November 1, 2011.    In particular, the following are the new fees to be required for commencing cases under the “main” chapters:

Chapter 7-$306

Chapter 11-$1,046

Chapter 13-$281

The above are only a $7 increase from the existing fees, but an increase nonetheless.

Other fees, such as filing an adversary complaint, Motions regarding the Automatic Stay, and others, will also be increasing by differing amounts.

COURT FILING FEES ARE SEPARATE FROM ATTORNEY’S FEES

The above fees are paid to the court clerk.  They are always IN ADDITION to any attorney’s fees for representation in a case.

Image courtesy of Eric Steuer

Once you get to the promised land in a bankruptcy case–the date your discharge is granted–there is frequently confusion among many as to which of their debts were in fact discharged.   The confusion stems from expectations that there is some official specific ruling as to each debt.   That would be nice, but it’s not the way it works.

The Discharge Notice

When the discharge is entered in a bankruptcy case (for purposes of this article, I am referring to Chapter 7 or Chapter 13 cases; Chapter 11 is somewhat different) the only document that is sent out by the court is a 2-page document that generically states that “the debtor is granted a discharge”.  The second page lists, again generically, which types of debts are usually discharged, and which are not, but does not specify which debts in this case are discharged.

Figuring Out Which Debts Are Discharged

The reason it does not state which debts are discharged is that it is simply impossible.  The bankruptcy code provides numerous exceptions to which debts are discharged.   These exceptions are codified in section 523 of the Bankruptcy Code.¹   Some of these exceptions, such as debts incurred through fraud require the creditor to actively object  within a very specific time frame,  and prevail at trial, in order for the debts to not be discharged.  But many others are automatically not discharged if certain (and in many cases very complicated) conditions are met, and those conditions frequently have many exceptions of their own.  A good example of this is tax obligations.   For a quick look at how income tax dischargeability is determined, click here.

A lot of the criteria for determining whether a debt is discharged is subject to argument and can only be decided by a Judge if brought in front of the judge by one of the parties specifically.  Without that, the best the court can do is issue a general discharge that applies to all those debts which do not have a specific exception from discharge in the bankruptcy code.

Ask Your Attorney!

The bottom line is that most debts, such as credit card, medical, repossession and foreclosure deficiencies,  are in fact discharged.   But you need an attorney to really analyze your facts, preferably before you filed your case,  to let you know which debts might not have been discharged (yet another reason to have a bankruptcy attorney for your case–see more).  Ultimately, if there is a dispute, it will need to be decided by a Judge at trial.

¹ To further complicate matters, each bankruptcy chapter (7, 13, 11) incorporates various parts of section 523 differently, so a debt that is discharged in a Chapter 13 case, for example, may not be discharged in a Chapter 7 or 11, etc. )

Image courtesy of  kangotraveler

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Credit card and student loan payments do not factor in to the analysis for determining Chapter 7 eligibility.  It seems not a day goes by that I’m not trying to explain to a potential client why their payments to debts owed to unsecured creditors do not count in their budget in determining eligibility to file under Chapter 7 of the Bankruptcy Code.    They certainly aren’t an allowed expense on the dreaded “means test“, which uses specific expenses allowed by the IRS.   But it also doesn’t “count” as part of an ordinary current income/expense analysis, which is also used for determining eligibility.  If such an analysis shows a surplus of income, then one may not be eligible for Chapter 7 and may need to do a Chapter 13 or Chapter 11 (if too much debt for Chapter 13) repayment plan instead.

A typical scenario is where the client has income of, let’s say $5,000 per month; $3,800 after taxes.   Their monthly expenses–as they see them–are $5,000 per month, so there’s no way they cannot qualify for a Chapter 7 case in their minds because they have a monthly deficit of $1,200.    But of that $5,000 per month in expenses,  $1,500 are minimum payments on credit cards,  and $600 for student loan payments, neither of which qualify as “necessary living expenses” in a bankruptcy case.   So when those are subtracted out, the client has almost $900 per month they can afford to pay to their creditors, according to their budget.    This is probably way too much of a surplus to do a Chapter 7 case.  The court, instead, would want them to repay that amount to their creditors over 36-60 months in a Chapter 13 case.

Doing so may repay anywhere from approximately 10%-100% of their unsecured debts depending on what they owe (with any unpaid portion being discharged in the Chapter 13 or 11 case), but the point is their creditors will be receiving something and that is the criteria.

Except for certain taxes, domestic support obligations and other debts designated as “priority” debts under the bankruptcy code (11 U.S.C. 507), you can’t use credit card payments, student loan payments, or payments on any unsecured debts you owe as an expense in your budget to determine what you can afford to pay to your credit card, student loan, or other unsecured lenders!  That would be nonsensical.   One stated purpose of the bankruptcy law is to have those that can afford to make payments on their debts do so, and those who can’t don’t.   If your budget shows you have the ability to make some meaningful payments on your debts as shown above, you will likely not be eligible for Chapter 7 but will need to take advantage of a different bankruptcy chapter.

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The key for this lies in a common misconception people have about what bankruptcy does.    Bankruptcy discharges the  party filing bankruptcy from the legal obligation of paying on a given debt;  it does not eliminate the debt itself.  The debt still exists  and the party who is owed the debt cannot pursue recovery of that debt from a party discharged in bankruptcy.

The entire reason for having a co-signer on a loan or credit card application, for example,  is so that if the primary obligor defaults on the debt (such as by filing bankruptcy), they can recover against the co-signer.

If filing bankruptcy could discharge the debts of people other than the party filing the bankruptcy, we could all benefit by having one person in the United States file a bankruptcy case, and we’d all be discharged from our debts.   That obviously doesn’t make any sense (fun though it may be to imagine).

Many debtors who file bankruptcy cases without the assistance of a bankruptcy attorney eventually receive a shocking notice in the mail which states: “Case closed without discharge.  Debtor has not filed a Financial
Management Course Certificate proving compliance with the required instructional course requirement for discharge.” However, they’ve done everything else required of them except for taking the required financial management course and filing the required Form 23.   All that time and work, and no discharge?

YOU CAN FIX THIS:  IT’S NOT TOO LATE

Fortunately, there is usually a solution if this happens in your case.  Pursuant to 11 U.S.C. 350,  and Federal Rule of Bankruptcy Procedure  5010 you can file a motion to reopen your case and, if granted, take and file the required financial management course certificate. The best way to accomplish this is to hire a bankruptcy attorney for this purpose to make sure the facts of your case are presented properly and maximize your chances to have the Motion granted and to get your discharge entered.

There is a court mandated filing fee for the Motion to Reopen for the purpose of filing official form 23 (presently $260) and attorney’s fees vary, but this is not the time to skimp and save.  You have now discovered one of the reasons why you should have hired a bankruptcy attorney in the first place; now is the time to do so and obtain your discharge.

**If your case was filed in the Southern California Area and you need assistance, please click here and explain your situation.

The basic concept of the automatic stay is well-settled in bankruptcy law. But the precise scope of the stay is a matter of some dispute, and bankruptcy courts have issued numerous opinions attempting to clarify the types of creditor activities that the stay does and does not allow.

The Bankruptcy Appellate Panel for the Ninth Circuit (BAP) recently added to this body of case law in In re Zotow,  2010 Bankr. Lexis 2178 (9th Cir. BAP 2010).  The case involved a married couple whose assets included a home mortgage that required monthly payments of principal, interest, and approximately $185 in escrow items such as taxes and homeowners’ insurance. The couple fell behind on their payments and eventually filed for bankruptcy under Chapter 13. After receiving notice of the bankruptcy, the mortgage lender calculated a new escrow payment of approximately $300 per month. The lender then notified the couple in writing to explain the higher amount and its effect on the total monthly mortgage payment. The Chapter 13 trustee later made post-petition installment payments to the lender based on the new escrow amount.

The couple argued that the lender violated the automatic stay in two ways: (1) by increasing the required amount of the post-petition escrow deposits as a ruse to collect pre-bankruptcy escrow arrears, and then sending notice of this increase; and (2) by receiving the increased post-petition mortgage payments from the Chapter 13 trustee.

Before addressing these arguments, the court explained that a creditor communication generally violates an automatic stay where direct or circumstantial evidence shows that the communication was geared toward collection of a pre-bankruptcy debt, was accompanied by coercion or harassment, or otherwise put pressure on the debtor to pay. On the other hand, “mere requests for payment,” or statements providing information about a debt where the debtor has an interest in receiving the information to formulate a confirmable Chapter 13 plan, are generally permissible.

Applying these guidelines, the court rejected both of the couple’s arguments and held that the lender did not violate the automatic stay. The lender’s notice was permissible because it was not an invoice, merely set forth the facts of the debt, and was not accompanied by a payment coupon or envelope. The couple, moreover, had an interest in receiving the information in the notice to formulate an appropriate Chapter 13 plan, and neglected to challenge the higher escrow amount soon after receiving the notice.

The lender’s act of receiving the higher escrow payments was also acceptable under the stay because it did not involve any act to collect a pre-bankruptcy debt. Indeed, the lender did not act at all; the Chapter 13 trustee simply made the payments as required under a local rule for post-petition contract installment payments.

In re Zotow involves a fairly technical issue, but is an important case nevertheless. If you are contemplating bankruptcy, you should know your rights, and what creditors can and cannot do during the bankruptcy process. An experienced bankruptcy attorney can help you understand the types of relief you can expect from an automatic stay and take action to enforce the stay where necessary.

This is a guest post written by Brandon Moreno, Vice President of the Utah Bankruptcy Hotline. The Utah Bankruptcy Hotline maintains a network of unaffiliated Utah bankruptcy attorneys who provide debt relief and consumer bankruptcy counsel.

It seems to be human nature to procrastinate, particularly when faced with doing something as unappealing as filing a bankruptcy case.  Lately, however, I have seen an increase in people waiting too long to file.

It is understandable: Filing bankruptcy is not free and it’s not a fun path to take. People often need to save up money to file, and there may be other reasons to wait to file.   People also like to be hopeful that things are going to change and they won’t need to file.  However, there can be consequences, sometimes dire, if you wait too long.  I’ve had several such cases in the past few weeks.

One client had a consultation with me over a year ago, at which time I advised he should file a bankruptcy case, but should probably wait a couple of months to let more time go by since the last time charges were made on his credit cards (which is sometimes advisable to avoid possible objections).    But eligibility to file bankruptcy, particularly chapter 7, depends on both your income for the 6 months prior to filing, as well as your current income when your case is filed.

So, this client who was more or less unemployed for over a year,  received a job offer that paid a decent amount.  He hadn’t started the job yet.  One of his creditors finally  filed a lawsuit and at that point he contacted me back about filing the Chapter 7 case.  However,  due to the new job, he no longer qualified for Chapter 7, and was looking at doing a substantial repayment plan in a Chapter 13 bankruptcy case instead.     Now this, of course, is not a disaster, but it ended up costing him more in attorneys fees, plus about $30,000 in payments towards his credit cards,(which he could now afford, but if he had filed when I advised, he’d be able to save that money instead!

There are a lot more examples I could provide, but it is important to understand the consequences of waiting and be realistic in your assessment of those risks and to discuss them with your attorney.   This, of course, assumes one has already had a consultation with an attorney.   I could write a whole separate article for people who wait too long to even seek an initial consultation about their financial situation!

In the 9th Circuit (which includes California, Oregon, Arizona, Washington and Nevada, Idaho, Alaska, Hawaii and Guam) if your case was a Chapter 7 bankruptcy in which no assets were liquidated and sold by the Trustee, and you receive your discharge, there is no consequence for unintentionally failing to list a creditor.   Thus, if you get your discharge, you are discharged from ALL dischargeable debts regardless of whether they were listed or received notice of the bankruptcy.   The two main cases on this are In re Neilsen, 383 F.2d 922 (9th Cir. 2004) and In re Beezley, 994 F.2d 1433 (9th Cir. 1993).   (If the creditor in question has grounds to object to the discharge of the debt– for example, if the debt was incurred through fraud– they can still move to reopen the Chapter 7 case and litigate their nondischargeability claim if they received no notice of the original bankruptcy).

In a Chapter 11, Chapter 13 case or in a Chapter 7 case where assets are being distributed by the Trustee, the failure to list a creditor is more serious and can result in that debt not being discharged.

If your case is filed outside the 9th Circuit, you should consult with a bankruptcy attorney in your area regarding the law in your jurisdiction.