Bankruptcy is the forgiveness of debt and the planning of a new budget. After filing bankruptcy, debt collectors are barred from collection temporarily by the stay. The stay is a temporary court order which only lasts while the case is open. If you do not maintain insurance and payments on a car or home during your case, a creditor may file a motion to terminate the stay and repossess or foreclose. Most debtors obtain the permanent court order called a discharge at the end of the case, making collection illegal permanently.
An Introduction to Bankruptcy Common Issues
A bankruptcy does not discharge all of your debts. Priority debts include child support, alimony, and income taxes less than three years old. These debts survive bankruptcy. In Chapter 13, priority debts get paid first even before secured debts, and catch up before the end of the case. Collections do not even temporarily stop in the case of child support and alimony. An eviction can be stopped by putting the amount of back rent into a trust account with the court. But few people ever do that. A Chapter 13 can repay or manage priority debts that survive the discharge, such as child support and income taxes less than three years old.
Bankruptcy is a fresh start on a new budget where the debtor keeps property necessary to start over. The debtor will probably lose and luxury property but he also loses debt he doesn’t need. With the discharge, the debtor starts over fresh with a second chance at life. In some cases, like a foreclosure, you may not need the discharge. It may be you only needed to catch up on a mortgage in Chapter 13, which can take up to five years to cure a mortgage in default. Our Bankruptcy Court is primarily the Western District of Kentucky, but we file in Eastern Kentucky and Southern Indiana.
⎆ What is in a Bankruptcy petition?
No one needs to be a slave to debts. With bankruptcy, you should be able to keep enough necessary property to start over. Then, if you follow the rules, you get the discharge. If you don’t follow the rules, you don’t get the forgiveness of debt and you often cause extra work and expense.
Everyone takes risks and makes mistakes. When you make mistakes, you should learn from the experience, be able to start over, and move on. Bankruptcy is just a financial tool that allows this. Overnight you can have more net worth and better credit. Credit normally improves because your debt to income ratio improves. The record of your debt being in default also goes away. Net worth improves because you eliminate debt. Shame, blame, guilt, manipulation, and fear have no place in making a financial decision that is in the best interests of you, your family, and society.
If you review the petition, a bankruptcy petition includes what is basically:
- A Cash flow statement, which shows your family budget of monthly income and expenses.
- A Balance sheet with a list of assets and liabilities and;
- A statement of your past transactions and financial affairs, supported by documentation.
However, bankruptcy is not like ordering a pizza. As the debtor, you share some tasks and responsibilities for filing a case accurately with your attorney. The petition, supporting documentation, and your testimony determine the success of the case. Make errors or don’t plan it well or know the rules, and you may lose property or overpay. It is better to hire the best attorney you can afford. In Chapter 13, the court sets the fee for the attorney. Choosing a bad attorney only gets you a bad attorney.
⎆ The Debtor’s Bankruptcy. Common issues and responsibilities.
The debtor is responsible for the following:
- Producing documents.
- Making timely payments into any Chapter 13 plan.
- Making the mortgage and car payments on time, if you don’t pay them through the plan.
- Completing the debtor education class,
- Preparing a budget with your attorney.
- Filing taxes up to date.
- Testifying to a trustee or judge.
Without the proper preparation, bankruptcy can look something like a train wreck. I see it all the time with younger attorneys who are still learning the rules. All too often taxes and other debts are not modified or discharged. Bankruptcy should be like a tool in the hands of the master craftsman. If a bankruptcy petition has the proper preparation, planning, and accuracy, the trustee and judge will understand your financial situation in minutes. Then, the judge and trustee can give you an affordable budget, and the case is over as a Chapter 7. In Chapter 13 it begins properly. If you have a Chapter 13 plan, your plan should include a feasible budget.
⎆ Which to choose a Large law firm or a small boutique firm.
With a large law firm or low-cost attorney, there is little planning or preparation. They spend most of their time on advertising and generating profit instead of petition preparation. They simply do not take pride and the time to prepare the petition properly. Student loan debts are not discussed. They don’t even begin to know how to consolidate or rehabilitate student loans. Lowering your tax debt is not discussed or glossed over.
To lower costs, you are often handed off to a paralegal. In other words, the large law firms and cheap attorneys don’t spend time custom fitting the bankruptcy to your needs. You don’t speak to the senior attorney. Often it has to be filed twice, which makes the larger offices very profitable, charging twice for what should have been filed once. That way they earn two fees and blame the mess on you. What’s troubling is there may be no way to undo this kind of damage. More troubling is this system of doing a case multiple times wrong happens more to minorities, who can least afford it.
On the other hand, a great attorney asks about your goals. Be prepared to tell your attorney what your goals, wishes, and needs are. Remember, your attorney’s primary job is properly preparing the bankruptcy petition. If he knows your dreams, he will develop a great plan.
⎆ The low-cost bankruptcy mills and law firms.
The low-cost bankruptcy mills and attorneys will often prepare a petition that causes problems instead of curing them. They charge for problems they caused. They will also tend to shove clients into Chapter 13 cases just because that generates the highest fees for the law firm. In this scenario, the low-cost attorney goes home to his TV dinner while you might not have a house to go home to.
When you file a petition improperly, below are some of the things that might happen:
- Hours of extra work for corrections resulting in unnecessary expense and wasted time.
- You might lose property because your attorney fails to remove the judicial lien, use exemptions properly, miss deadlines to discharge a debt, strip a second mortgage, etc.
- The Debtor ends up can spending years following the wrong strategy to eliminate debt. This often happens by filing a Chapter 13 when Chapter 7 would have done the job cheaper and faster. This often is because Chapter 13 makes the Attorney more money in a 13.
- The budget doesn’t develop a feasible and affordable budget.
- Their errors can also prevent you from filing again for years.
⎆ The bankruptcy common issues in preparing an accurate and complete petition.
You are rewarded if you file an accurate well-planned petition, take the classes, appear in court on time, and uphold your responsibilities. On the other hand, filing too soon or too late can allow some debts like income taxes to survive and prevents a fresh start. Missing the timing or not filing motions to strip a judgment lien will also cost you or may allow a judgment lien to survive like a second mortgage. If time is not taken to prepare the petition, it will cost hundreds more if you have to amend the petition or add debts after the case is filed.
In Chapter 13, it is often possible to strip second mortgages with no equity in Chapter 13. In Chapter 7 or 13, you might also manage, modify, discharge, or eliminate taxes, foreclosures, and student loans. A Debtor must have a budget they can manage reasonably with affordable home and car payments. You can be debt-free from unsecured debts at the end of Chapter 7 or 13 and only keep the property you need and can afford.
⎆ Bankruptcy Common issues and our free online manual.
Pre-filing is a time for making logical, unemotional decisions that may require you to buy, sell, convert, or surrender some property. Adding a car payment may mean you can file as a Chapter 7 instead of Chapter 13. Or it may allow you to pay less back in Chapter 13 and have an auto that will last for the 5 years you may be in Chapter 13. Be careful about doing this before you file without the advice of an attorney, or you might cause a fraudulent or preferential transfer. Fraudulent transfers are when you transfer property to someone, often a relative or insider, for less than it is worth.
Do not confuse preferential transfers with a fraudulent transfer of property. A preferential transfer focuses on creditors who receive property before filing, resulting in better treatment than other creditors after filing bankruptcy. I encourage you to take advantage of exemptions that allow you to keep your necessary property. If you use up an exemption, you might need to sell excess property and buy other forms of property to take advantage of all the exemptions.
⎆ Why you need to read the entire manual.
I wrote our manual to help you understand the issues and principles to work with your attorney to prepare and process an effective bankruptcy petition. On average, you will increase the amount of debt you discharge and the property you save by 8,000 to 10,000 dollars if you understand what you are doing. The goal is to supply the family needs and strip away the wants or debts which suck the life out of your financial health. The law is a seamless web of rules. The foreclosure section includes the rules on how to keep your auto. So please read the entire manual. I understand it is boring but you should know the difference between reaffirmation and redemption if you have a car loan. One saves you money if you have negative equity.
Turn to specific chapters such as the foreclosure, student loan, or our tax section for help on how to manage a foreclosure, student loan, or taxes. Each section has lessons in it relating to and teaching principles of other sections. The second part is after the maps in our manual. It is a reference section with common questions and a short glossary. This book is short enough to read in half a day! Filing bankruptcy is like following the directions for baking a cake. If you follow the rules and use proper ingredients, it turns out perfect, and with a budget, you can afford.
⎆ Chapter 7 Bankruptcy Common Issues
Whether you file a Chapter 7 or Chapter 13, and when you file, it is essential to get back on track with a budget. The list below spells out some important points to keep in mind.
Transfers to friends or family members are proper if the property is sold for a reasonable price. However, it might be a disastrous mistake if you attempt to sell or transfer items for a bargain to mom and dad or repay a loan to them before filing. Remember this — your exemptions allow you to keep a car. Once you transfer the auto, you lose these exemptions that enable you to keep a home, funds in a bank account, or auto. Additionally, if mom and dad put you on their checking account, car title, or deed, any transfer between parties may need fixing.
Timing is often an issue. Did the bank properly file the mortgage or car lien? The bankruptcy court trustee takes property when liens were filed late or improperly. Will your attorney check this before he files? Does he file an improper bankruptcy because he feels he isn’t paid enough to check items? That is what too often happens to minorities and others at some offices.
⎆ Chapter 13 or a 7
Placing poor people into Chapter 13 when they should be in Chapter 7 is a problem in bankruptcy. You can often start Chapter 13 for less money. But, repaying unsecured debts over five years is usually a much higher cost than a Chapter 7. The attorney fee for a Chapter 13 increased to 4,100 dollars in 2021. The national average attorney fee for a Chapter 7 is now 1400 for a single filer and 1600 for a couple in 2021, plus the 338 filing fee. It is about the cost of an average refrigerator.
⎆ Chapter 13 Bankruptcy Common Issues
A lot of advertising and marketing takes place to sell Chapter 13 to debtors. Some offices offer it as a no-money-down option. But, filing Chapter 13 should be based on whether you need the added tools of Chapter 13. Chapter 13 protects property that you might have lost in a 7. It allows you to manage student loans, mortgages, protect cosigners, strip second mortgages with no equity, and protect comakers.
Chapter 13 might cost you more or save you more. Either way, you must carefully choose depending on the costs and benefits. Moreover, you must consult with an attorney who knows what he’s doing.
If a property was taken or attached before filing bankruptcy can you get it back? That is a matter of timing and dependent on whether you file Chapter 7 or 13. If you have had property attached by a judicial lien, now is the time to remove that judicial lien. If you have had wages garnished, you must exempt those wages as an asset and get them back. Property in Kentucky that was sold in a foreclosure sale can not be recovered by bankruptcy. You have waited too long. Once a home sells it no longer belongs to you. If a home sells for 66% or less of its value you may redeem the property and get it back. However, very few people have the cash to redeem a foreclosed home.
⎆ Chapter 13 and mortgages
Is there a mortgage that needs modification in bankruptcy? You can modify a commercial mortgage or second mortgage on your residence or a vacation home mortgage. But you can’t modify your primary residential mortgage. Bankruptcy or fighting foreclosure in state court sometimes gives you time to obtain a modification or to sell the home. But there are no free homes. The longer you wait to have an attorney defend the foreclosure the fewer options you have. If you are sued in state court and fail to file an answer within 20 days you lose many of your rights.
Many people propose catching up on a mortgage in Chapter 13 plans. Debtors must make Chapter 13 payments to the trustee and lender on time. Paying the mortgage lender late allows him to file a motion to terminate the stay and to foreclose the home. To stop this motion to remove the stay, you will have to pay their filing fees, attorney fees and catch up on the missed payments. If you don’t, you will be back in foreclosure court.
We already spoke about if you owe more for your auto than what it is worth, you can redeem it. Redemption is purchasing personal property for less than what you owe for it with a new loan or cash. In Chapter 13, you can modify auto loan down to the value of the car if you bought your car more than 910 days ago, refinanced the car, or used the auto commercially.
There are too many rules for you to learn all the answers. In 2005 when the code became much more complex, half of all attorneys gave up filing bankruptcy cases. A bankruptcy petition usually is 70-80 pages long and includes complex math formulas. However, reading this manual will educate you enough to prepare a list of questions to discuss your essential issues with your attorney.
I start every session with clients by asking them, “What is your goal in filing bankruptcy?” Sometimes, a Debtor wants to save a home. In other cases, the debtor is seeking to start life over on a new budget they can afford by getting rid of credit cards and medical debts. Your case will not be successful if you don’t get your goals done. Do not hire an attorney who doesn’t know how to do it, over-promises, or doesn’t want to do the work.
I try to educate clients about all the parts of a bankruptcy petition. In the following pages, you will learn how to get your fresh start. You will also learn how to safely file to keep the maximum property, pay out the least amount of money, and do it with the least amount of effort.
Introduction to Bankruptcy Common Issues Nick Thompson
If you are thinking about filing bankruptcy, don’t delay because timing is crucial. I am here to help you. So, contact my office right away to start the conversation. Nick C. Thompson, Bankruptcy Lawyer: 502-625-0905.