Debtors Beware of Debt Relief Companies

     As a Connecticut Chapter 7 Bankurptcy Attorney with over 30 years of experience I have seen clients make the mistake of contracting with Debt Relief Companies only to come see me months/years later after they discover they have incurred high fees and received no debt relief. There are some legitimate debt relief companies and in some circumstances they may offer the best option for debtors. There are also many companies which promise results they cannot achieve for their customers and these debtors only find out after they had money deducted from their checking accounts without significant reduction of their debt. Anyone having debt issues looking for relief options should first consult with a Chapter 7 bankruptcy attorney. When I sit down with clients to review their financail situation I can determine if the fresh start from a Chapter 7 filing is the best option for them. If they qualify which  mainly is determined by the fact there are no means test income and non-exempt asset issues than Chapter 7 bankruptcy is a better option than a debt repayment plan. First, debtors generally can receive a Chapter 7 discharge of their debts close to 3 months after they file their bankruptcy. A debt repayment plan can take years to complete. Second, in most cases filing for Chapter 7 will allow debtors to rebuild their credit quicker than a debt repayemnt plan.Third, the costs of filing Chapter 7 are consideraly less than a costs of a debt repayment plan. One time flat legal fee plus filing fee cost versus signifiant monthly fees over period of years. Fourth, all eligible debts discharged in Chapter 7. For a debt repayment plan to be successsful all debts must be paid thru the plan if the plan is not completed debtors left with remainig unpaid debt and bad credit.. This unfortunately is a very common result. There may be still the stigma attached to filfing bankrupcty which may prevent debtors from filing. As part of my job as a bankruptcy attorney I counsel my clients that there is no reason they should not file if eligible. Iin practtically all the cases I have hasd in my long carreer my clients have experienced serious financial hardship and I tell them there is no shame to receive the relief bankruptcy offers them.

Filing Bankruptcy in Connecticut During COVID19 Pandemic

                 COVID19 has affected all of our lives in so many ways including how my bankruptcy clients interact with me for filing their bankruptcies in Connecticut. With the emphasis on safety first I have developped a completely remote process to telephone or zoom conference with my bankruptcy clients with effective use of email to deliver the requisite notices and requirments and receive back the documents I need for their filings. After the initial client inquiry I schedule either a tele-conference or zoom conference depending on the client's preference and their computer capabilities to review with them the information and documents I need for their filing. In preparation for this conference I email to my clients my retainer letter with required Debt Relief Agency disclosures and other relevant documents for this conference. During the conference I review these documents with them including the credit report authorization form they need to return and credit counseling courses required; ask them questions to complete the bankruptcy worksheet and bankruptcy documents required checklist and review the timelines and process for Chapter 7 or 13 depending on which chapter is appropriate for them.  I send them followup email(s) based on the results of this conference with forms and the list of diocuments needed to complete their bankruptcy filing including an authorization to e-file their bankruptcy without their actual signatures on the bankruptcy petition and schedules. The Bankruptcy Court for the District of Connecticut has issued an order allowing the use of this form in lieu of actual signatures due to the impact of COVID19. Once the bankrutpcy petiton and schedules are ready for filing I email my clients these documents for their review to confirm their accuracy before filing them. After they are filed the bankrutpcy court will schedule a telephonic creditors meeting which the Unites States Trustee has adopted as a safe method to conduct these meetings due to COVID19. After the creditors meeting the process continues to be conducted remotely including any court hearings, if scheduled, which the Bankruptcy Court now holds on the zoom.gov platform. In conclusion, if you need to file bankruptcy, but are concerned about doing it safely my remote procedures in conjunction with those adopted by the Bankruptcy Court allows you to do so safely with no threat to your health from COVID19.

Cram Down of First Mortgage in Chapter 13 Bankruptcy

     I have posted before about the more common strategy of stripping completely unsecured second mortgages in Chapter 13 bankruptcies to treat them as unsecured debts with the positive results in many cases that little to none of this now unsecured debt needs to be paid by debtors through their Chapter 13 plans.  There is also the less common, but very beneficial option to cram down first mortgages in Chapter 13 when the facts support it. I will not try to get too technical with code cites and case law that supports it other than it is based on the interworkings of Sections 1322(c)(2) and 1325(a)(5) of the Bankruptcy Code and for Connecticut residents In Re Latimer, 395 B. R. 304 (Bankr. W. D. N. Y. 2008) a widely respected decision in the Second Circuit which Connecticut is a part of. The term "cram down" means reducing the total amount of the mortgage debt paid thru the Chapter 13 plan. This option is available to debtors whose first mortgage debt has either matured already or matures and is payable in full during the the three to five year term of their plan. The debtor may owe a first mortgage debt well in excess of the market value of their home and this option would let them reduce the total mortgage debt due to the value of their property to be established by an appraisal. This cram down will not work for all debtors since it will depend upon the value of their property and the ability of a particular debtor to payoff this debt in equal monthly installments over the term of their plan. For example, let's take homeowners who did a mortgage modification with a short term balloon payment coming due at maturity during their plan which together with the existing mortgage debt is well in excess of the value of their property:

       Regular Mortgage Debt: $200,000.00
       Balloon Payment:               75,000.00
       Total Due:                        $275,000.00
   
      Property Market Value: $150,000.00

      Mortgage Debt reduced by $125,000.00 to $150,000.00 by cram down motion

    $150,000.00  =  $2,500.00 monthly plan payment toward mortgage for 5 year plan
         60

     In this example the $125,000.00 reduction will be treated as unsecured debt so best case scenario is  a debtor who has enough  monthly income to pay the reduced mortgage debt thru their plan with little to nothing else left to pay unsecured creditors thereby discharging unsecured claims upon completion of their plan. Another point to keep in mind is that with this cram down plan the debtor is only making their plan payments to completely pay off the mortgage debt unlike the more common Chapter 13 plans where debtors make their plan payments toward the mortgage arrearages due at time of filing combined with their regular montlhy post-petition mortgage payments going forward outside of their plans. In summary, if you have an underwater property you want to try and keep with a mortgage maturity date coming due in close to 5 years the exploration of this cram down option with an experienced bankruptcy attorney in your area is advisable.

How to Avoid Unwanted Surprises at Chapter 7 Bankruptcy Creditor Meetings?

            It continues to surprise and dismay me what I observe at creditors meetings in Connecticut while I wait for my clients' cases to be called. This is not meant to be an attack on my fellow consumer bankruptcy attorneys in this state most of which are diligent and thorough in the protection of their clients' interests. However, there is a minority which I have noted over the years are less thorough to the detriment of their clients. Case in point recently I was at a creditors meeting where an elderly woman debtor was being questioned by the Chapter 7 trustee. It was clear the debtor’s attorney was meeting the debtor for the first time at this meeting and based on the interchange between the debtor, trustee and this attorney she had little to no prior knowledge what was listed on the debtor's petition and schedules. As has been described before in this blog there are limited bankruptcy exemptions available for a debtor's property which controls what they can keep and what the trustee may take to sell for the benefit of creditors. At this creditors meeting it became clear the debtor's personal property schedules did not match some financial documents she provided to the trustee prior to the meeting. In fact, the debtor at the time of her filing had twice the amount listed in both her bank account and brokerage account more than her wild card exemption. In my view, this error is inexcusable and avoidable. Also, when questioned about other items of value she disclosed she had an indeterminate number of gold coins not listed on her schedules, but could not provide any real details to the trustee requiring further investigation. These errors and omissions makes me question how thorough an investigation was done by the debtor’s law firm prior to filing. Did they just have her complete a bankruptcy questionnaire with no follow-up or questioning by an attorney? Does the debtor’s law firm routinely let their staff meet with clients for the execution of their bankruptcy petition and schedules? Some debtors are more sophisticated than others and this elderly woman clearly needed some extra guidance to help her. I felt particularly bad for her since she indicated to the trustee she had been withdrawing funds monthly from her brokerage account to live off of and now she will have to turn over a good portion of these funds to the trustee. This all could have been avoided with a thorough and diligent pre-filing review of her assets by her lawyer.

        Does this failure rise to the level of malpractice or an ethical violation? Both may be true, but that is not the point of this post. My concern is the proper handling by bankruptcy lawyers of client intakes and filings to avoid these types of surprises. The unfortunate consequences described in my example could have been avoided first by a careful examination of the financial documents provided by the debtor and not filing without verification of all asset values at time of filing. This is a basic and extremely important duty of any bankruptcy attorney. Also, I personally never rely on a client's self-completed worksheet no matter how financially sophisticated they may be. I personally go over and have the clients answer every question with me pre-filing with follow up documentation provided as needed. Based on my experience I know what a trustee will focus at a creditors meeting and ask the same questions. It is during these client conferences that the debtor will disclose a collectible like the above debtor's gold coins, a payment to an insider creditor within the past year, the fact they received an interest in their parent's home for estate planning purposes etc. All problematic issues which could affect their ability to file or in many cases the timing of their filing which likely was the case in my example above. If her attorney had done his job she could have used her liquid funds to live off of till her assets reached a level where she could exempt what she had. Instead her bankruptcy was filed prematurely to her detriment. I advocate a hands-on approach as a bankruptcy attorney and counsel against delegating too much responsibility to staff or the client/debtor to avoid surprises at creditors meetings.

New Bill to Allow Bankruptcy Discharge of Student Loans Submitted to Congress

     H.R. 2366, the  Discharge Student loans in Bankruptcy Act was submitted by lead Congressman John Delaney (D-MD) this month. It is heralded as a bi-partisan effort, but only one republican John Katko(R-NY) has signed on so far as a co-sponsor. It is also an ambitious proposed amendment since it completely eliminates the subsection in 11 USC 523 referencing student loans as an exception to discharge. Therefore, no more need for proof of undue hardship or time limitations applied to discharge of student loans which will be treated like any other dischargeable debt. The ability to discharge student loans will be based on the existing limitation to qualify for discharge in Bankruptcy including the Chapter 7 means test for example. Also no distinction between federally insured  and private student loans which I anticipate will incur some blowback and possible changes if this amendment  even makes it way through Congress. The need for this amendment has been well documented in the press with the student loan crisis reaching epic proportions. The question is whether a Republican controlled Congress very much beholden to a strong bank lobby will approve it. This is especially true with regard to private student loans the biggest problem for debtors since unlike federal student loans there are no payment programs in place to provide any relief to debtors.
     It may take until 2018 with the possible control of the House and/or Senate being transferred to the Democrats. Also the undpredictability of the current occupant of the White House and how long he may stay there also will come into play. The need for reform is clearly there. Will this current government take the necessary action to address it is unclear at best. I encourage anyone concerned with this issue to reach out to their Congressperson to advocate for the passage of this amendment to bring the relief needed to those debtors suffering from the burden of excessive student loan debt. This crisis affects all of us not just these debtors since it a major drag on our economy and once these debtors especially young struggling adults are freed from this debt they will be able to start families, buy homes and related items to help grow our economy for the benefit of all.

Do I Need to Reaffirm my Car Loan if I File Chapter 7 Bankruptcy in Connecticut?

       In 2005 in an attempt to favor auto loan lenders Section 362 of  the bankruptcy code was amended to make redemption or reaffirmation of auto loans a necessary requirement for debtors filing Chapter 7 for those debtors that want to retain their cars. Suffice it to say redemption which means payment in full of the auto loan at time of filing is not a realistic option so the focus of this post is on the reaffirmation requirement. Before this amendment the preferred and common approach to auto loans for cars intended to be kept post-filing was the retain and pay approach. In order to discuss this approach I need to first make the distinction between the effect of the discharge of a secured debt versus an unsecured debt. It is relatively easy to understand the discharge of an unsecured debt like a credit card. Upon the successful completion of the Chapter 7 the debtor's obligation to pay this credit card debt is terminated. For a secured debt like a car loan it is not as simple to understand. It is true that the actual debt is discharged, but the security agreement survives the bankruptcy requiring the debtor to continue to pay the monthly payment in order to keep the car. If the debtor takes the retain and pay approach without reaffirmation they continue to pay, but can stop paying at any time and surrender the car without any deficiency due. This is clearly the preferred approach in most cases where debtors' budgets are tight if not negative at  the time of filing and the fact that cars generally after a few years depreciate quickly resulting in loan balances in excess of these cars' values. This is especially the case with debtors who have high interest rate car loans when they file bankruptcy which is quite common. Reaffirmation of an auto loan leaves the debtor in the same position prior to filing with the auto loan debt not discharged and reported on their credit report. In order to reaffirm under the current code the auto loan payment cannot impose an undue hardship on the debtor. In other words the debtor's budget must show they can afford it at time of filing and debtor's bankruptcy counsel must affirm this fact with the filing of the reaffirmation agreement for court approval. Herein lies the problem of this requirement as indicated above many debtors' budgets do not show they can afford their car payments not to mention the fact many of their cars are not worth what they owe. They're not eligible to reaffirm due to the code's hardship requirement. Also it is clearly not in their best interests anyways to reaffirm a debt on a car that is currently underwater. In Connecticut as well as other states throughout the country this placed debtors in a very difficult position since in almost all cases debtors at the time of filing do not want to surrender their cars that they need to get to work and live their lives. Despite the fact their budgets may show they may not be able to afford their auto loans they do what they have to do to keep their cars.
       I am pleased to tell Connecticut debtors that our legislature enacted a solution to the problem created by the 2005 amendment to Section 362 of the Bankruptcy Code which allows debtors to continue to use the preferred retain and pay approach and still keep their cars. In 2009  the Connecticut legislature repealed and replaced Section 36a-785 of the Connecticut General Statutes with a provision that specifically states the filing of bankruptcy in itself does not constitute a default under the terms of an auto loan security agreement. The practical effect of this new statute was that car loan lenders could not refuse to continue to receive loan payments from Chapter 7 debtors despite the fact they did not reaffirm their car loans. Therefore, the loans that are being paid are not in default and auto loan lenders are not able to take any action to repossess these vehicles. This change essentially restored the right to retain and pay without reaffirmation for Connecticut Chapter 7 debtors and was accepted by auto loan lenders once they were educated by debtors' attorneys like myself as to this new Connecticut statute. In conclusion, the answer to the question posed as the title to this post is no! Furthermore, when considering reaffirmation of a car loan where you may have equity in your car you need to review in depth with your attorney the advantages and disadvantages before going forward with reaffirmation.

Fair Market Value Exemptions in Chapter 7 Bankruptcy

 In  Schwab v. Reilly, 130 S. Ct. 2652 (2010) the United States Supreme Court made an important ruling effecting the treatment of exemptions for debtors' assets. The debtor in that case valued and exempted under the federal exemptions her business equipment at $10,718.00. Her clear intention was to exempt all of her business equipment to retain her ownership post-bankruptcy. The Chapter 7 trustee did not object to her exemption within the requisite 30 day period. Nevertheless the trustee did file an application with the court to appoint an auctioneer to sell this business equipment to net any proceeds above the exemption amount after fees and costs involved. The bankruptcy court denied the trustee's motion to sell based on the premise the assets were fully exempted., This ruling was upheld by the Third Circuit on appeal. Judge Thomas wrote a majority decision for the Supreme Court which reversed and remanded this decision ruling in part that with a facially valid exemption claimed by the debtor it is too burdensome to require a Chapter 7 trustee to object to the exemption. The court further clarified that a debtor can signal it intends to exempt the entire asset by listing the exempt value as either "fair market value (FMV)" or "100 percent of FMV". One can certainly argue that the Third Circuit's reasoning that the debtor intended to exempt the 100% of FMV by valuing and exempting the equipment assets at $10,718.00 was enough. The Supreme Court has added this extra requirement to make it more than clear when a debtor is exempting the full value of an asset. The result of the subject case is telling since by avoiding an objection to exemption hearing re: valuation of the equipment assets the trustee clearly placed the debtor in a difficult position. One can presume she exempted this business equipment to continue to use it in her business to generate income, The trustee now had the ability to seize this property to sell it. The likely result is that debtor would settle with the trustee and possibly pay even more than what the trustee would recover at auction to maintain possession of this business equipment to keep her business running.
     Therefore, in exempting assets like business equipment where a debtor provides a value that may be subject to question claiming 100% of FMV is a necessity based on ruling in Schwab v. Reilly.

United States Supreme Court Decision Not to Allow Strip Down of Wholly Unsecured Second Mortgages in Chapter 7 Provides No Relief to Homeowners and No Practical Benefit to Secured Lenders

      The United States Supreme Court in the consolidated cases "Bank of Amer. v. Toledo-Cardona," and "Bank of Amer. v. Caulkett" decided on June 1, 2015 that wholly unsecured mortgages cannot be stripped down essentially turning them into discharged unsecured debt. This decision leaves unchanged the existing law that partially unsecured second mortgages cannot be stripped down. This decision reversed the lower court's decisions in these cases upheld by the Eleventh Circuit which gave consumer bankruptcy attorneys and their clients hope throughout the country that real relief could be provided to homeowners in situations similar to the debtors in these cases. The court relied heavily on the previous case dealing with this issue “Dewsnup v. Tims” and like many court decisions not the practical and societal effect on debtors. The reality is that after filing a Chapter 7 with two mortgages with the first mortgage debt exceeding the value of the property the second mortgage holder will not likely recover any funds from the debtor. The debtor homeowner will either surrender their property in the Chapter 7 or wait till they are forced to give up their property post-discharge after the bank forecloses. In many cases these second mortgage debts have been charged off by lender even before the debtors file bankruptcy. One would have hoped the Supreme Court had the foresight to recognize the practical effects of their decision. The result is that more homeowners will lose their homes with no practical benefit to the overwhelming majority of underwater second mortgage holders. Since these mortgage holders’ debts are discharged they will not receive any funds from a foreclosure. Also this decision hurts first mortgage holders as well because even though their debt may exceed the value of the debtors' homes the large majority of these debtors want to stay in their homes and will continue to pay down these mortgages and hold onto their homes for the long run. Also these homeowners would be more inclined to seek acceptable mortgage modifications with first mortgage holders if the second mortgages could be stripped. This would mean less foreclosures and less bank owned properties. Therefore, this is not only a loss for debtors, but for banks as well and the plaintiff lender here may ultimately regret the continuing negative impact this decision will have on the housing market.

Supreme Court to Hear Case Allowing Strip-Down of Wholly Unsecured Mortgage in Chapter 7 Case

      The  United States Supreme Court granted certiorari yeterday in two of the three Chapter 7 lien-strip-off cases challenging the Eleventh Circuit decision in McNeal. Bank of Amer. v. Toledo-Cardona, No. 14-163 and Bank of Amer. v. Caulkett, No. 13-1421 (petition granted Nov. 17, 2014) (consolidated for argument) (Bank of Amer. v. Bello, No. 14-235 is still pending). In McNeal v. GMAC Mortg., 735 F.3d 1263 (11th Cir. 2012) pet. den. (May 20, 2014), the court bucked the trend to find that Dewsnup v. Timm, 502 U.S. 410 (1992), which held that a partially secured lien could not be stripped-down in chapter 7, did not apply to wholly unsecured liens. These are liens including second mortgages for which based on the value of the property there is no equity after the first lien on the property which usually in these cases is the first mortgage.  There are more than a dozen cases currently pending in the Eleventh Circuit challenging this decision, but, after an early unsuccessful attempt to bring the issue before the Supreme Court (Bank of America v. Sinkfield, No. 13-700 (cert. denied, March 31, 2014)) the issue is now on track for final resolution. Briefing should be completed by March and argument is likely to be scheduled for the last week of March, with decision projected sometime in June. 
        Currently debtors can only strip down, which means convert a secured debt to an unsecured debt, wholly unsecured liens including mortgages in Chapter 13 cases. Chapter 13 debtors depending on their income may still have to pay some of this debt of as unsecured debt in their plans. If the Supreme Court does allow this type of strip downs in Chapter 7 cases it will help many debtors who own underwater homes with wholly unsecured second mortgages. If these debtors qualify for a Chapter 7 and can still afford to pay the first mortgages on their homes they can strip down their wholly unsecured second mortgages and discharge this debt along with their other unsecured debt. This will allow more homeowners to keep their homes and obtain a better fresh start from their Chapter 7 bankruptcy filings, Stay tuned to future posts to my blog and I will let you know when this decision comes down from the court.

Common Bankruptcy Terms

           Although I try to write the posts to this blog in understandable terms since bankruptcy is a complex area of law it can be difficult at times not to use terms that may not be readily understandable by the average consumer. I have listed below some common terms used in bankruptcy with their simple definitions to help resolve this issue.

Debt- monetary obligation owed to another individual or entity. Common examples are credit card, mortgage, car loan and medical debt

Debtor-individual or entity that owes debts and debtor is primary term used to describe individual or entity filing bankruptcy.

Creditor-individual or entity who is owed a debt by debtor.

Secured Creditor- this creditor is owed a debt which is secured by collateral which they can take action to take possession of and sell to satisfy debt owed if debtor fails to pay debt. One common example is lender holding secured mortgage on home, which is the collateral and lender has right to foreclose if debtor defaults on mortgage. Another example is auto loan where vehicle is collateral which lender can repossess and auction of if debtor defaults.

Unsecured Creditor-there is no collateral securing this creditor's debt- most common example credit card debt.

Real Property- land with or without home or other building located on it.

Asset-personal or real property owned by debtor. In bankruptcy assets that need to be disclosed can take many forms from the obvious like bank accounts and homes to less obvious like potential tax refunds and law suits brought by debtors against other parties.

Bankruptcy Estate-upon filing bankruptcy all of the debtor's property becomes property of the bankruptcy estate

Exemptions-certain property of the debtor can be exempted out of the bankruptcy estate using state or federal exemptions allowing debtor to keep exempt personal and real property. Common examples are homestead exemption for a debtor's principal residences and motor vehicle exemptions. A debtor must choose at the time of filing to use either the federal exemptions which are uniform in all states or state exemptions which vary by state.

Chapter 7 Trustee-attorney assigned by court from local panel of trustees whose main function is to determine if Chapter 7 debtor has non-exempt assets he can sell for the benefit of unsecured creditors. This trustee conducts the Meeting of Creditors prior to which he will have reviewed requisite financial documents provided by debtor's counsel and at the meeting question the debtor under oath with his counsel present to determine the accuracy and completeness of the information listed in their bankruptcy schedules. It is very unusual for actual creditors to attend the meeting of creditors since bankruptcy has evolved to have the Chapter 7 trustee represent their best interests at this meeting.

Discharge-this describes the goal sought by the debtor by filing bankruptcy. The issuance of the notice of discharge which occurs 60 days after the meeting of creditors terminates all debts owed by the debtor which are subject to discharge. For example this includes unsecured debt like credit cards and medical bills. There are exceptions to discharge and distinctions to be made by the effect of discharge on unsecured vs. secured debt which I shall make a topic of a future post to this blog.

     This post was an attempt to help consumers understand some common bankruptcy terms and only scratches the service of this complex area of law. I hope you found it helpful and will continue to try to provide more helpful information with future posts to this blog.

When Considering Filing Bankruptcy Should I Use My Retirement Funds to Pay My Debts Instead?

        I heard it again from a prospective bankruptcy client that he cleaned out his retirement funds to pay his high medical bills despite having been just laid off from his job. He still has $40,000 in other debts and needs to file bankruptcy. When he comes in for his consultation next week I will have to tell him the disheartening news that he could have kept his retirement funds and included his medical bills in his Chapter 7 Bankruptcy. 401ks, 403bs, IRAs and similar retirement plans are all exempt assets which Debtors can keep and the bankruptcy trustee cannot seize these funds for the benefit of creditors. The laudable public policy decision behind this exemption is that debtors should not be stripped of their retirement savings when filing bankruptcy. If debtors were to lose their retirement savings by filing bankruptcy the whole idea of a fresh start would be defeated since they would be left with nothing to fall back on during their retirement years. So I cannot stress enough to anyone with debt problems please consult with a bankruptcy attorney before using retirement funds to pay debt. Not only may Chapter 7 Bankruptcy be the answer, but in addition to depleting your retirement funds by paying delinquent bills you will also incur the income tax liability for redeeming these funds prior to your retirement age.

Can I Keep My Car if I File Chapter 7 Bankruptcy in Connecticut?

                   Most of my Chapter 7 Bankruptcy clients own a car and one of the first questions they ask me is can they keep their car if they file bankruptcy.  In most cases the answer is yes whether they own their vehicles outright or they are secured by auto loans. Debtors in Connecticut are entitled to use either the Federal or Connecticut asset exemptions in Connecticut.  The Federal exemptions under the Bankruptcy Code which are the most common exemptions my clients use provide a motor vehicle exemption up to $3,675 of the car’s value which by itself may appear to pose a problem to some debtors who own their vehicles outright. This problem of excess value above the $3,675 figure is usually solved by application of the "wild card" exemption which provides an additional $1,225 plus up to $11,500 of the unused portion of the $22,975.00 federal homestead exemption. This automatically means that for all renters they have $16,400.00 to apply to their vehicle(s) and bank accounts with their household items, jewelry and retirement assets(if any) covered by other asset exemptions. Most homeowners who consult with me to file bankruptcy either have no or so little equity in their homes that there are sufficient exemptions available to them to allow them to keep their cars as well.

For those clients with car loans most vehicles are under secured and no exemptions are needed and if there is some equity there are more than enough exemptions to cover same. In most cases this holds true whether they rent or own their homes. For individual homeowners with equity in excess of $22,975 or joint homeowners in excess of $45,950 who wish to retain their homes they have to use the Connecticut exemptions which provides an exemption up to $75,000 for the equity in their homes. Unfortunately the motor vehicle exemption is only $3,500 with a wild card exemption of only $1,000. They are instances when faced with this situation and a client who owns a car with a value in excess of the $3,500 to $4,500 filing bankruptcy puts the car's equity at risk. When it's close I have had clients file and negotiate a buy out of the difference above the exemption with the trustee. With cars that have more significant value this may not be an option.

         

The second issue concerning the retention of your motor vehicle has to do with the reaffirmation of auto loans. In 2005 the Bankruptcy Code was amended in an attempt to remove what is known as the "ride through" or "retain and pay" option with regard to car loans in bankruptcy. Per the amended code your options were limited to surrendering  your vehicle or retaining via redemption(payoff) or reaffirmation as listed on a form entitled "Statement of Intention" to be filed with the court for service on your creditors with your Chapter 7 bankruptcy filing. I have yet to meet with a bankruptcy client who is in a position to redeem their vehicle. For those who want to retain their vehicles the issue of reaffirmation usually must be addressed. In simple terms when a reaffirmation agreement is signed by the debtor and lender it is filed with court and the auto loan debt is not discharged by the bankruptcy and is paid and reported on debtor's credit report as if no bankruptcy were filed. For auto loans other than those from credit unions the reaffirmation agreement form requires that the debtor's attorney to sign off that the reaffirmation agreement does not impose an undue hardship on the debtor. In most cases this is not possible due to the fact the secured debt exceeds the value of the vehicle and/or the debtors' current income and expenses. In recognition of this dilemma the Connecticut legislature in 2009 came to the rescue with a revision of CGS section 36a-785 clearly stating the filing of a Chapter 7 by itself does not constitute a default of an auto loan allowing a lender to repossess a secured vehicle. The practical effect of this revision was to take the teeth out of the 2005 code amendment and allow for the continuance of the “retain and pay” option without reaffirmation of car loans in Connecticut. This fact seems to have been acknowledged by all auto lenders who have been educated about this state statute by the bankruptcy attorneys in this state. Therefore, in practically all my cases my clients keep their cars with the debts discharged and have the option to continue to pay their car loans and keep their cars. If their loans become too difficult to pay in the future or their cars break down they can stop paying and let the lender take back their cars without any liability for the loan balance due. At this point this post is already longer than I intended and I will leave the issue of leased cars in bankruptcy which is less cut and dry for a future post to my blog.

I Want To File Chapter 7 Bankruptcy My Spouse Does Not What Should I Do?

     As a Connecticut bankruptcy attorney I sometimes meet with prospective married clients who seek to file Chapter 7 bankruptcy individually. Initially I have to bring to their attention that despite their request to file on their own their spouse's income has to be taken into consideration to determine their ability to file both under the means test which has been discussed in prior posts on this blog as well their joint income compared to their joint expenses. Assuming the non-filing spouse's income does not pose a roadblock to filing a Chapter 7 bankruptcy the next issue I address with these clients is the advisability of filing jointly with their spouse instead of individually. The whole idea of the fresh start from a Chapter 7 filing is defeated if only one spouse files and receives a discharge of their debts, but the other spouse is still left with his own burdensome debt that could have been discharged in a joint filing. In these cases there is usually an initial reluctance on the part of the spouse who wants to avoid filing bankruptcy which requires my meeting with them and stressing the advantages of filing jointly to remove all of the family debts not just their spouse's. The fees and costs are almost the same for filing together so that does not pose a barrier to a joint filing. Each situation is unique and in some cases where it may be advisable for the benefit of both spouses to file jointly one spouse may just be philosophically or emotionally opposed to filing bankruptcy. In such cases I do my best to convince the reluctant spouse that their family will truly benefit from the Chapter 7 filing by filing jointly and sometimes I am successful. In other cases when I am not and one spouse still wants to proceed they can as long the other spouse is willing to cooperate to the extent of providing the necessary income and expense information for their spouse's Chapter 7 filing.

     There are clearly situations where it does make sense for only one spouse to file. One common situation is a recently married couple where one spouse has accumulated debt prior to their marriage, but the other spouse is in relatively good financial shape and their combined income still allows for a Chapter 7  filing by the one spouse. This allows the non-filing spouse to preserve their good credit. It also makes even more sense for the spouse with the problem debt to file Chapter 7 before getting married especially in cases where there may be a means test issue due to the prospective spouse's income once they are married. Another fact scenario where it is advisable for only one spouse to file Chapter 7 is where the other spouse may possess non-exempt assets that would be taken or sold for the benefit of creditors if they file jointly. There also may be situations where delaying one spouse's Chapter 7 filing to allow for a joint filing is advisable. One example of this situation is where one spouse may have tax debt that will become dischargeable if the filing is delayed. Another example is where one spouse may have made a preferential transfer payment for a debt due to a relative within the past year. When the appropriate time has expired to allow both spouses with problem debt to file it definitely makes sense to do so. Again as stated above each situation is unique based on the particular facts involved and stresses the need for any spouse considering filing bankruptcy to meet with an experienced bankruptcy attorney to determine how and when to file.

Chapter 13 Bankruptcy or Mortgage Modification What is My Best Option?

            In a perfect world every delinquent homeowner borrower would receive a timely mortgage modification from their lender which neatly fits their current financial situation to save their home. Unfortunately many homeowners who have applied for mortgage modifications have found out that the process moves incredibly slowly especially with the major lenders with the most delinquent loans. Furthermore, when and if a mortgage modification is finally offered it does not offer the relief needed for them to keep their home for the long term. One of the problems is the size of the mortgage arrearage that has accrued during the drawn out mortgage modification process. With government programs like HAMP that  generally do not provide mortgage principal balance reduction the size of these arrearages can offset the effect of  the interest rate deduction and extension of maturity date on the new monthly mortgage payment being offered to homeowners. The problem is when the mortgage arrearage is added to the current principal balance this increase in the principal balance negates the potential reduction offered by the lowered interest rate and extended maturity date. The net result is the borrower being offered a new loan with a principal balance well in excess of the current value of their home with a slightly reduced new mortgage payment. This type of modified loan does not offer any real true benefit to a delinquent homeowner borrower. Therefore, before starting the mortgage modification process with a lender a borrower needs to find out the potential modification programs available for their loan and approval timelines if at all possible. The borrower than should next consult with a bankruptcy attorney to  determine if a Chapter 13 filing is a better option for them than pursuing what may turn out to be a dead end modification.

          The best candidate for a Chapter 13 is a debtor who has suffered a temporary income setback that caused their default, but has now returned to work and said default was not directly attributable to the terms of loan itself. That is it was not an 80/20 high interest loan combination, but instead a loan with a reasonable fixed rate of interest with a monthly payment that now that the borrower is working again is a reasonable amount to pay. The borrower must also have the current ability to pay the extra monthly amount required into a Chapter 13 plan to at least bring the mortgage arrearage current upon completion of the plan. This is an extremely important point. If a borrower does not have sufficient income to fund a plan than a mortgage modification with the necessary lowering of the mortgage payment, if attainable, is the only real option they can pursue to save their home.  However, a borrower who has the current ability to fund a Chapter 13 plan needs to make an important decision. Do they risk applying for a mortgage modification only to be rejected or offered an unacceptable modification and forgo their opportunity to file a Chapter 13 later due to the increase in the mortgage arrearage making it not feasible for them to fund a Chapter 13 plan.  Realistically I have not seen delinquent homeowner borrowers demonstrate the ability to set aside the necessary monthly mortgage payments while applying for a modification to offset the increase in the mortgage arrearage to keep their ability to file Chapter 13 viable. This decision of Chapter 13 versus mortgage modification needs to be made with the advice of bankruptcy counsel who can review the debtor's financials and provide them with a realistic opinion as to the feasibility and success of filing a Chapter 13. The advantage of a Chapter 13 bankruptcy versus a mortgage modification is that the only real party in interest you have to satisfy is the Chapter 13 trustee and the debtor is not subject to the whims of the mortgage lender. If the debtor has sufficient income to support their plan as determined by debtor's counsel and provided to the Chapter 13 trustee the plan will be confirmed. Additional benefits of a Chapter 13 include the possibility of discharging some or all of a debtor's unsecured debt dependent on their assets and income. If a plan is going to include the discharge of unsecured debt wholly unsecured second mortgages can be deemed unsecured by the plan as well judgment liens which impair a debtor's homestead exemption. I have written this blog article based on my experience with debtors over the past several years since the mortgage crisis first started who after one or more years of unsuccessful attempts to obtain a mortgage modification contacted me regarding Chapter 13 as an option only to be told it was no longer feasible due to the amount of their mortgage arrearage. It is my hope that any borrower who is not too delinquent and is weighing their options will consult with a bankruptcy attorney first before blindly applying for a mortgage modification so they can make an informed decision what option best fits their situation.

What Should I file Chapter 7 or Chapter 13 Bankruptcy?

               An initial question that needs to be addressed when a consumer debtor wants to file bankruptcy is what Chapter they should file under. In practically all consumer cases Chapter 7 or Chapter 13 are the two options that may be available. Chapter 7 is usually the preferred alternative for debtors with significant unsecured debt. In Connecticut qualified debtors can file a Chapter 7 bankruptcy and have their discharge entered within sixty days of the 341 creditors meeting. This usually results in a discharge being entered less than four months from the date of filing. From that point forward the debtor’s credit will start to improve as long as they do not incur delinquent debt going forward. In most consumer cases debtors can retain their property in a Chapter 7 including even homeowners’ current with their mortgage payments by applying the appropriate exemption to said property.

Chapter 13 is a payment plan bankruptcy that is most commonly used by homeowners to save their homes from foreclosure. Homeowners who have had a disruption in their income or medical crisis causing them to default on their mortgage can file a three to five year payment plan to catch up on their mortgage and stop the loss of their home by foreclosure if they have sufficient income to fund a plan. Depending on the amount of non-exempt assets, if any, and the debtors' income and expenses a debtor may be required to pay from zero to one hundred percent of their unsecured creditors under their plan. For debtors with high unsecured debt who do not qualify for Chapter 7 due to the means test or possible asset issues Chapter 13 may be their only bankruptcy option. In their Chapter 13 they will usually be required to pay some or all of their unsecured debts over a five year period and the discharge of any debt is delayed until the completion of their plan. The Chapter 13 trustee’s goal is to maximize the recovery for creditors so the monthly plan payments may stretch the debtor’s budget thin for that five year period and it may require some belt tightening for the successful completion of their plan. Chapter 13 involves more work than a Chapter 7 and consequently the legal fees are higher. This does not mean Chapter 13 is not a good option for debtors. As indicated above it clearly serves the homeowners best who have suffered an interruption in their income and fallen behind on their mortgages allowing them stop foreclosure and catch up. For those with unsecured debt who do not qualify for Chapter 7 a Chapter 13 does provide an ordered plan to pay back this debt while stopping the accumulation of high penalty interest and late charges with the benefit of the bankruptcy stay preventing and stopping any collection litigation and any post judgment wage garnishments and bank executions. Any debt not paid through the plan is discharged including debts from unsecured creditors who fail to file proofs of claim by the court appointed deadline.  The key difference in the two Chapters is that Chapter 7 debtors’ fresh start will begin approximately four months from their filing date while Chapter 13 debtors are looking at a minimum of three years of plan payments before they can put their financial problems behind them.

                                         

Bankruptcy Allows You to Keep Your 401k and IRAs so Don't Liquidate to Pay Your Creditors

   The conversion of a 401k or ira to pay creditors can be avoided by filing Chapter 7 Bankruptcy. These types of retirement accounts are exempt assets and can be kept for their  future intended usage as retirement income. It is a mistake to convert an exempt asset like a 401k into a non-exempt asset by taking a 401k advance and deposit it into a personal bank account. The fact the funds can be traced back to the exempt 401k does not change the fact that they are no longer exempt. This mistake can be compounded by paying creditors with it if you could instead qualify for a discharge of your debts under Chapter 7 Bankruptcy. Also even if you do not pay creditors with these funds what may appear to be a logical decision to deposit these funds into a relative's bank account to avoid any bank executions from outstanding judgments is a problem since the asset is now now longer exempt and has been transferred to an insider which under the Bankruptcy Code the Chapter 7 trustees can treat as an avoidable transfer for two years prior to the bankruptcy filing. Even if these funds have been paid back to the debtor prior to filing that does not cure the fraudulent conveyance under the terms of the Code and the relative who was doing the debtor a favor is subject to suit by a bankruptcy trustee for the amount transferred.  Whenever faced with overwhelming debts before you liquidate your retirement accounts you should consult with a bankruptcy attorney to review your options to see if you can keep these accounts and discharge the debts with a bankruptcy filing.

Tax Exemption for Mortgage Debt Relief is Extended for 2017

   2017 Update-

"On February 9, 2018 the President signed into law a one-year extension of the exclusion. The retroactive extension was buried in the 652 page Bipartisan Budget Act of 2018, Public Law No. 115-123 § 40201....The Act revives the exclusion from taxable income for qualifying principal residence indebtedness discharged before January 1, 2018 and to written discharge agreements executed before January 1, 2018. This will enable individual taxpayers to claim the exclusion for returns they file for their 2017 calendar year income. Given that Congress has rejected prior attempts to make the exclusion permanent, the likelihood of future extensions is doubtful." see full article @ https://library.nclc.org/last-minute-relief-foreclosed-and-struggling-homeowners-now-filing-their-taxes 

  Update for 2014-As of January 1, 2014 the tax relief act was not extended. There is a bill sponsored by two CT congressman to extend pending, but with our gridlocked Congress no guarantee that any extension is forthcoming. There is still a way for many sellers with pending short sales or in need of short sales to avoid negative tax consequences in 2014. If the seller is insolvent at time of sale the forgiven debt will not be considered as income if their liabilities exceed their assets in an amount equal to or in excess of the forgiven amount. IRS Publication 4681 provides examples of the application of this exception and a worksheet to calculate personal assets and liabilities to use for individuals tax returns. Although unusual some bankrupt homeowners seek to short sell after receiving a bankruptcy discharge. In these situations the mortgage debt  discharged by the bankruptcy does not constitute taxable income and there is no debt cancelled by the bank's acceptance of a short sale just the release of the mortgage securing the home.

      In 2007 to avoid hitting distressed homeowners with the double whammy of foreclosure and tax debt from uncollected foreclosure deficiencies The Mortgage Forgiveness Debt Relief Act was enacted. This Act is set to expire on December 31, 2012 and based on the current political climate in Congress things do not look good for the extension of this Act. This Act applies not only to foreclosure deficiencies forgiven, but to short sales, deeds in lieu of foreclosure and mortgage modifications with principal forgiveness.  It has allowed underwater financially strapped homeowners to take advantage of government and lender mortgage relief efforts without the consequence of receiving a 1099 with phantom income and related high tax liability. Short sales have become an attractive option for many homeowners and lenders since the homeowner is relieved of the underwater property and mortgage debt and the lender receives an acceptable payment from the sale without having to incur the costs and delays involved with the foreclosure, maintenance and sale of the property. Short sales have also been fueled by the National Mortgage Settlement stemming from the litigation brought by the State Attorney Generals against mortgage lenders. This Settlement has also spawned mortgage modifications with actual principal forgiveness which I have personally seen increase this year. Before this settlement act my clients that received debt forgiveness were in contested foreclosure cases that I had filed special defenses and counterclaims. The impact of the loss of the tax forgiveness in 2012 will take the teeth out of this settlement leaving distressed homeowners without the relief it was intended to provide them. They will not benefit from a short sale or mortgage modification with forgiven debt if they are faced with a large tax liability.  Unfortunately these tax liabilities will be large since many of these mortgages have been in default for years combined with properties that are significantly underwater so phantom income in excess of $100,000.00 or more will not be an unusual consequence. Also since the IRS is provided with such extraordinary collection powers and income tax debt is treated as a priority debt in bankruptcy there is no debt more frightening to any U.S. citizen than delinquent income tax debt.

What the loss of this tax relief will mean is that more distressed homeowners who cannot afford their underwater homes will simply walk away from them. Homeowners who would have originally viewed a mortgage modification with principal forgiveness as a godsend will not accept these offers due to the accompanying tax burden. These facts will in turn lead to more foreclosures and more borrowers may have to file bankruptcy to discharge foreclosure deficiencies that could have been avoided with the Act in place with a short sale or mortgage modification. Another sad consequence is that for distressed homeowners who really want to hold onto there homes they may be forced to accept a mortgage modification with no debt forgiveness despite being eligible for it just to avoid the negative tax consequences. This would negate the intended benefit of the attorney general’s settlement act and provide an unintended benefit to lenders. There is little more than a month for Congress to act and there are even larger issues being debated in Washington that overshadow the need to extend this mortgage debt relief act. One can only hope that as the year closes the vital need for the extension of this act is recognized for the sake of not only distressed homeowners, but for the entire housing market since the negative effects of increased foreclosures will continue to drag the U.S. economy down into 2013 and beyond.
UPDATE: THIS TAX EXEMPTION WAS EXTENDED TILL JANUARY 1, 2015 WHICH IS PROJECTED TO BE THE LAST EXTENSION DUE TO POLITICAL REASONS.

When is The Appropriate Time to File Chapter 7 Bankruptcy? Part 2 Income Issues

       Although income considerations were always a factor in determining when and if to file a Chapter 7 bankruptcy the creation of the Mean Test by the amendments to the Bankruptcy Code in 2005 added more to consider in making this decision. In simple terms the Chapter 7 means test uses the IRS median income based on household size and applicable state to first determine if a debtor has to satisfy the means test in order to qualify for Chapter 7. For example for a three person family in Connecticut the current median income is $82,797.00. If the debtors' combined income for the six-month period immediately preceding a bankruptcy filing calculated on an annual basis equals less than the $82,797.00 there is no “presumption of abuse" and no need to complete the means test. If the opposite is true than the means test needs to be completed which makes the filing more difficult due to the arbitrary means test expense calculations and the strong likelihood of a United States trustee audit of the file to determine eligibility for discharge. This means in cases where debtors' incomes are close to the median income and fluctuate from month to month the timing of the filing can determine whether the means test comes into play or not.  Clearly all other factors aside the appropriate time to file is when the six month income brings the debtor below the median income to avoid the means test. This by itself will not determine whether debtors may file Chapter 7.  There are still the income and expenses schedules that need to be completed for which the income and monthly expenses for the next 12 months are projected. These schedules are based on actual figures and allow debtors to take into account recurring expenses like student loans which the means test does not.  I find that in most cases if a debtor has reached their financial bottom and reached out to me to help them that if their income falls below the means test median income they usually qualify for a Chapter 7 discharge. 

     Another factor to look at when reviewing income and the means test is the household size of the debtors. The definition of household size is not necessarily just the nuclear family. If an elderly relative or sibling with little or no income contribution to the debtors' household income lives with the debtors' family for the six month period prior to filing they can be included in household size. In some cases this increase in household size can make the difference whether the debtors have to pass the means test or not.  Finally, if it turns out that the debtors have to pass the means test it does not mean they automatically will not qualify for a Chapter 7 bankruptcy. Each case is unique and in cases where the debtors have large secured debts due to mortgages and car loans and they intend to keep these assets there is a stronger likelihood that they will pass the means test. This may also be the case where a debtor has high recurring medical costs due to a medical condition which can be viewed as a special circumstance under the means test. I had a case like this and after providing the necessary doctor reports and proof of medical expenses to the US Trustee my client obtained her discharge. These audits are not easy, but if debtors can provide the requisite documents to the US trustee to satisfy their audit they can obtain a discharge.

No Shame If You Need to File Bankruptcy to Obtain a Fresh Start

The emotional reaction that my clients have toward filing bankruptcy is always an important consideration that I take into account during my initial consultations with them. There are very few clients that I have met with that do not possess some degree of shame or sadness due to the fact they have reached their financial bottom and need to file bankruptcy. Certainly back in 2005 when creditors were able to have the bankruptcy code rewritten in their favor there was a concentrated publicity campaign to depict all bankruptcy filers as gaming the system. The language added to the code included terms like "presumption of abuse" and "abusive filing." This initially created the mistaken belief that bankruptcy was no longer an option for most people suffering financial difficulties. A result that the creditors behind the changes to the Code were no doubt quite pleased with. Over time this misplaced belief has dissipated, however, I still see that my clients are affected by the stigma that creditors wanted to attach to bankruptcy filers. I am not advocating that anyone take a cavalier and irresponsible attitude toward their debt obligations by filing bankruptcy. My point is that if someone without the income and assets needed to pay off their debts has reached their financial bottom there is no shame obtaining a fresh start by filing bankruptcy. Understandably it may not be the option all people want to take and it is not a decision to be made lightly without proper advice and counsel. During my consultations I not only have to address the legal issues that may be involved, but help counsel clients with the emotional baggage that has built up over time and cannot be overlooked at these meetings. They made need to vent or cry and that is okay since it is all part of working through their emotions. My holistic view of a fresh start is that it is not only a financial one, but an emotional one that allows clients to move forward positively to rebuild their lives.

When is the Appropriate Time to File Chapter 7 Bankruptcy? Part One:Preferential Transfers

    After the initial determination that a Chapter 7 bankruptcy is the best option for a client one of the next issues that needs to addressed is when should they file? There are a number of factors that determine the appropriate time to file some of which can have significant consequences if not handled properly. The discussion below focuses on the effect of preferential transfers and the appropriate time to file bankruptcy. First, assuming there are no other reasons to hold off filing the existence of a judgment with wage and bank executions makes filing as soon as possible necessary to avoid and decrease any future losses. This need to file right away may be countered, however, with the existence of a preferential transfer which may mean the client needs to delay their filing till the relevant preference period expires. If a loan is repaid to an insider relative within one year of a bankruptcy filing this automatically is considered an avoidable transfer by the bankruptcy code. What this means is that the bankruptcy trustee can go after poor mom and dad for the money that was repaid to them and disburse that to the debtor's creditors. Certainly not a result any client wants his parents or siblings to have to go through as a consequence of their bankruptcy filing. The remedy of course is to wait till the year has expired before filing bankruptcy. Also it is important that the payment back to mom and dad was a valid repayment of a loan and not a fraudulent conveyance to hide assets from creditors. I will leave the discussion of fraudulent conveyances for another post, but suffice it to say that the look back period is at least 4 years for these types of transfers and even then depending on what, when and how much was transferred bankruptcy may never be an option.   

During the pre-filing ninety day preference period any payment in excess of $600 to any creditor of an antecedent debt can be avoided by the trustee. An antecedent debt, for example, is an old credit card bill or medical bill as opposed to a monthly mortgage, utility or car payment. Now in many cases unlike a transfer to an insider relative a client may not care if a trustee were to go after Bank of America to get back a $1,000 preferential credit card payment and still file within the ninety days. This may and usually is not the case when the payment is to the family dentist for some recent dental work who the client wishes to remain on good terms with. Again the remedy is very simple just wait for the 90 days to expire to file bankruptcy and Doctor Goodteeth will not hear from the trustee and will continue to treat the family. This post only touches upon the timing of a bankruptcy filing in relation to possible preferential transfers and there are several other factors including asset issues, foreclosure and/or loan modification status and income fluctuations among others that need to be considered before filing bankruptcy. I will address these issues in future posts so stay tuned for Part Two.