The Power of Chapter 13

One of the most overlooked financial tools available to individuals including small business owners today is Chapter 13 of the Bankruptcy Code.  Unlike a Chapter 7 which can require liquidation of assets and has very strict eligibility requirements, a Chapter 13 has greater flexibility in eligibility and allows individuals to retain their assets while paying back something to their creditors from future income.  Some of the powers of a Chapter 13 Bankruptcy include:

1.     Availability of Bankruptcy to High Income Debtors - A Chapter 13 allows individuals who would otherwise not be eligible for Chapter 7 bankruptcy to repay debts to the extent of their ability through a 3-5 year plan.  In most cases, Debtors repay between 5-10% of their unsecured debts.

2.     Continuing Business Operation- Unlike a Chapter 7 where a trustee can close down a Debtor’s business, a Chapter 13 Debtor has the right to continue operation of the business and has the exclusive right to sell, lease or otherwise use the business assets, in the normal course of operation.

3.     Chapter 13 Plan May Modify Secured Creditor Rights -  One of the great advantages of a Chapter 13 bankruptcy at this time is ability to strip a lien on your principal residence that does not attach to any equity.  Here is a common example:  Principal residence has current fair market value of $300,000.  The first mortgage has a balance of $400,000 and the second mortgage has a balance of $100,000.  Because the second mortgage does not attach to any equity in the property, the lien can be avoided or “stripped” in a Chapter 13 thereby removing the balance of $100,000 at the completion of the Chapter 13 case.  In addition, if you have other real property which is not your personal residence, you may reduce the secured claims to the current fair market value if you can pay the fair market value of the real property with the contract rate of interest over the terms of the Chapter 13 Plan which cannot exceed 5 years.  Where this makes most sense is on the small rental property.  On cars, the Debtor can reduce a loan balance to the fair market value except that a reduction is not allowed on cars used by the Debtor for his personal use if it was obtained within 910 days of the bankruptcy filing i.e. you need to have had the car loan for 910 days prior to bankruptcy filing. 

4.     Curing a Default -  A Chapter 13 Plan can cure a default on a loan with no interest being paid in most cases.

5.     Discharge greater than Chapter 7 -  A Chapter 13 discharge can encompass many other types of debts which cannot be discharge in a Chapter 7 including criminal matters and taxes.  However, the most frequently used provision is to eliminate debts to a spouse, former spouse or child incurred by the Debtor in the course of marriage dissolution or separation except to the extent those debts constitute “domestic support.”  What this means is that “hold harmless” provisions on real estate obligations and community property settlements obligations can be discharged.     

The above are just some of the advantages of a Chapter 13 bankruptcy case.   While it may not be as quick and easy as a Chapter 7, it may provide the debt relief which cannot be obtained with a debt consolidation or repayment plan.  If you are considering a default on your home or other debts, I urge you to seek legal counsel as soon as possible to fully understand the consequences of the decision and the options available.  I see people for a free 30 minute consultation at  my offices located in Walnut Creek, Antioch and Brentwood.

WE ARE DEBT RELIEF AGENCY AND HELP PEOPLE FILE FOR BANKRUPTCY. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UP IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY.  THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION. 

GRIMESBKLAW.COMPHONE 925-323-7772 © 2011 Joan Grimes

Should You File for Bankruptcy?

A common question people ask me is whether they should file for bankruptcy. They don’t want to file, but they also know that they cannot continue with the status quo. Here is what I ask them:

1.     Can you pay your bills as they come due and owing?

2.     Can you pay off your credit card bills in full in the next 12 months?

3.     If you own a house, do you have a fixed rate mortgage that you can payoff by the time you retire? Is your house worth what you owe against it?

If you have answered “no” to any of these questions, you should be considering whether a fresh start through bankruptcy maybe the right decision for you.

A fresh start has been provided to the Banks, the Investment Companies, and the Insurance Companies and a fresh start is available to consumers. Most home loan made between 2001-2007 could not be paid off on a person income. More than anyone, the banks knew that a person can only pay off in home loan debt of 2-21/2 times their gross household income in this lifetime and save for retirement and raise a child or two.

A fresh start for a consumer is usually a Chapter 7 bankruptcy. A Chapter 7 is a straight bankruptcy also known as a liquidation case. In a Chapter 7 case, all assets and liabilities are included and the Chapter 7 Trustee will have the right to liquidate non-exempt assets for the benefit of creditors. In exchange for including all assets and liabilities, an individual’s promise to pay on most debts are forgiven through a discharge.

In most cases, there are no assets available to creditors because all of the assets are exempt or encumbered by liens to the full extent of their value. Exempt assets that the Chapter 7 Trustee cannot reach include 401k, IRA, Annuity, retirement plan, equity in a car up to $3,525, most household goods and furnishing, life insurance, most personal injury actions, and then $23,250 in other assets such as motorcycles, boats, RV or additional equity in cars or other items.

Most people who are having problems paying their bills qualify for Chapter 7 Bankruptcy either because their income is low or because their mortgage payments and other secured loans such as car loans are too high in relation to their income. However, a person should not delay in seeking legal advice. The loss of a home prior to a bankruptcy filing either through a short sale or foreclosure may make an individual’s income too high for a Chapter 7 and the only option will be Chapter 13 repayment plan which will last between 3-5 years. In addition, there may be personal liability and tax consequences which could have been eliminated in a bankruptcy.

In conclusion, if you are having financial problems, seek legal counsel. You did not make this real estate and credit card meltdown. There are serious personal liability and tax consequence of a short sale and foreclosure. Make sure you understand your legal rights prior to undertaking either a short sale or allowing your property to be foreclosed. Do not lose sleep and your sanity worrying about financial problems. Help is available to you just like it was to the Bank, Investment Companies and the Insurance Companies.

WE ARE A DEBT RELIEF AGENCY. WE HELP PEOPLE FILE BANKRUPTCY RELIEF UNDER THE BANKRUPTCY CODE. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY. THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION. © 2010

Advice From People Who Filed Bankruptcy

I have been asking people who come into my office if they have any advice/regrets about their actions prior to filing bankruptcy.  Here is their advice:

1. Seek Legal Counsel.  Don’t wait to find out your options.  Almost every person said they wish they had come in sooner.  Many have said they would have done things differently had they known the law and available options.

2. Don’t borrow or take money from your 401k, IRA, Savings Account, Children’s Saving Account, Deferred Compensation to cure to the default.  So many people regret borrowing or taking a distribution from their retirement plan.  Unfortunately, many people don’t know that this money, if borrowed, must be repaid in full or it will be considered income and taxed accordingly.  In addition, this tax cannot be discharge in bankruptcy.  It is heart breaking to see people take money out of their retirement to stay current on the mortgage, to only lose the house at the later time, but are still responsible for tax liability of the distribution.  

3. Don’t borrow money from family or friends to stay current on mortgage or other bills.    Family and friends want/expect to be repaid irrespective of whether you file bankruptcy.   In the eyes of the bankruptcy code, your family and friends are just another lender and will not receive preferential treatment.  

4. Don’t juggle credit cards to pay mortgage.  Cash advances and balance transfers may cause problems in a bankruptcy.  In addition, depending on the type of real estate debt you have, a short sale or foreclosure may be possible without a bankruptcy.  However, if you run up your credit cards trying to keep the house, a bankruptcy may be evitable.

5.  Don’t leave house until property forecloses or short sale is complete.  Almost every person that has left their home prior to the foreclosure or short sale being completed regrets the decision.  Once you stop paying on the mortgage, your rent is “free” with the exception of paying the Homeowners Dues and keeping insurance on the property.  Further, since you are still responsible for the maintenanceof the property until the foreclosure or short sale, you might as well enjoy it and save some money.  No reason to pay rent any soon than necessary.

6.  Don’t let your cultural pride stand in the way of you making sound financial decisions.  There is nothing to be ashamed of.  You did not make this economic meltdown.  You are not responsible for the economic collapse facing the Bay Area.  The economy of your parents’ generation is not the same as today.   

7.  Don’t co-sign for anyone.  No one can promise the future.  So many clients regret co-signing for a friend or relative. Co-signing for cars,furniture, Time-Shares and homes seemed like a good idea, but times change and suddenly there is a default.  Worst of all, don’t co-sign on Student Loans.  The defaultrate by students who have had a friend or family member co-sign is much higher and YOU CANNOT DISCHARGE CO-SIGNED STUDENT LOANS IN BANKRUPTCY!

If you do not have sufficient income to pay your bills as they come due and owing, you should seek legal counsel before withdrawing any monies from a retirement account, savings account or taking a loan against your home or car.  These are difficult times, but do not miss the help and protection provided by the Bankruptcy Code and California law by waiting too long.  Just because this ship is underwater does not mean that you should give up your life vests that you will need to keep you afloat!

WE ARE A DEBT RELIEF AGENCY.  WE HELP PEOPLE FILE BANKRUPTCY.  THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY.  THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.              

© 2011 Joan Grimes