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.

Why Go Out of State When The Mortgage Modification Expertise You Need Is Here In Connecticut?

    It disappoints me to still hear from prospective foreclosure and mortgage modification clients who have paid out of state mortgage modification companies or so called "national law firms" that have failed to obtain mortgage modifications for them. These companies are usually not properly licensed with the Connecticut Department of Banking and these law firms are not authorized to practice law in this state and woefully uninformed as to foreclosure law in Connecticut. Most are also unaware of the existence and benefit of the court's foreclosure mediation program. I have to admit I was initially skeptical about the foreclosure mediation program; however I now see it as a very effective tool to negotiate with lenders and their foreclosure counsel for acceptable resolutions of my clients' foreclosure cases including mortgage modifications, short sales and deeds in lieu of foreclosure. These companies and law firms blanket the internet with their advertisements and promises of great results for homeowners desperately seeking to save their homes. They take advantage of these homeowners' desperation with promises of unrealistic modifications to obtain payment of their fees before even seeing all of their clients' financials. In these situations the phrase " If it sounds too good to be true than it is not true" comes to mind when it comes to these advertisements and promises. These modification companies and national law firms are ripping people off and using their ill gotten profits to lure in more victims with their misleading and false advertising tactics. If you need help in Connecticut with a foreclosure or a mortgage modification contact an experienced Connecticut attorney to help you. A Connecticut attorney can represent you throughout the whole process including filing an appearance for you in a foreclosure action or file bankruptcy as needed which these out of state companies and law firms cannot do. Don't waste your money with any of these out of state charlatans and compound your problems by having to contact our Attorney General and Department of Banking in an attempt to get back the fees you wasted by hiring them.

What Property Can I Keep if I file Chapter 7 Bankruptcy in Connecticut?

      When I meet with prospective Chapter 7 clients a common concern they have is what property can they keep if they file bankruptcy. I will attempt to provide a general explanation with this post and will not provide detailed bankruptcy code and state statutory references to avoid over complicating this topic. In order to properly review how these exemptions apply to your situation you should always consult with an experienced bankruptcy attorney. When you file bankruptcy all of your property becomes property of the bankruptcy estate and you are allowed to keep the property you can exempt out from this estate based on the federal or state exemptions. Under the bankruptcy code you must choose one or the other and are not allowed to mix and match the federal and state exemptions to best suit your situation. This discussion only applies to the bankruptcies filed in the state of Connecticut since each state has their own state exemptions.  If you are a homeowner who wants to file Chapter 7 to get rid of your credit card debt, but keep your home, which at all times in this post means your principal residence, your number one concern is which homestead exemptions should you apply to the equity in your home. First, if your mortgage debt exceeds the value of your home than you have no equity and there is nothing to exempt and assuming you are current with your mortgage payments you can keep your home. Second, if you do have equity than the exemptions you choose depends how much equity you have in your home. For example, for a married couple with a house worth $250,000 and mortgage debt of $150,000 they would need to use the Connecticut state exemptions which provide $75,000 per homeowner to exempt the $100,000 in equity they have. The current federal exemptions only allow $21,625 per homeowner which would not work in this situation since any property of value which is not properly exempted at the time of the bankruptcy filing will be sold by the Chapter 7 trustee and after payment of his fees and expenses and any secured debt the remaining proceeds will go to unsecured creditors. In most of my current cases due to the economic downturn and mortgage crisis most of the homeowners have little or no equity in their home and therefore they file with the federal exemptions for the reasons discussed below.

     

The next most common exemption concern is what exemptions are available for motor vehicles especially newer cars which were purchased without auto financing. The current federal and state exemption amounts for motor vehicles are almost identical with $3,500 for the state and $3,450 for the federal. The federal exemptions usually offer the best option in cases where the debtors do not own any real estate or their have no or little equity in their home. The federal exemptions currently provide up to $11,975.00 for a "wild card exemption" which includes $10,825.00 of any unused portion of the federal homestead exemption as opposed to only a $1,000.00 state wild card exemption. For example, if an individual owns a car worth $10,000 he can first use the $3,450 federal car exemption and than the "wild card" exemption for the balance of $6,550.00 to keep his car. The wild card exemption can be applied to any property even $11,000.00 in a savings account. There are other variations between the federal and state exemptions, but the advantage of the federal wild card exemption usually dictates that most cases be filed using the federal exemptions unless you need the $75,000.00 state exemption discussed above. I have only tapped the surface with this post of the proper application of bankruptcy exemptions and there are many other specific exemptions which exempt in whole or in part 401Ks, IRAs, life insurance policies, tools of trade among many other types of personal property. Suffice it to say that in order to protect your property in conjunction with filing a Chapter 7 bankruptcy it is extremely important that you review all of your assets with an experienced bankruptcy attorney. You do not want to be in a situation that I have unfortunately witnessed at creditors meeting where an asset is disclosed for the first time and cannot be properly exempted and taken by the trustee. An experienced bankruptcy attorney will use the appropriate exemptions for your filing or in some cases tell you that you cannot exempt all of your assets so you can make an informed choice whether filing Chapter 7 bankruptcy is your best option.

Connecticut Short Sales and Deeds In Lieu of Foreclosures in a Nutshell

     In situations where homeowners with relatively small amount of unsecured debt are faced with foreclosure and who do not want to keep their homes Chapter 7 bankruptcy may not be the best first option. Chapter 7 Bankruptcy may not also be an option due to the income/asset situation of the homeowner. Other options to consider are a short sale or deed in lieu of foreclosure. A short sale is where the mortgage lender(s) approves a sale for less than the debt due it and depending on the homeowner's income and asset status the homeowner is released from their mortgage obligation without any or with some contribution and/or unsecured promissory note to the lender. Deed in lieu of foreclosure is where property is deeded back to lender with same analysis whether or not homeowner's release from the debt includes some contribution from them. In both situations the mortgage lenders require financial documents similar to mortgage modification applications. Lenders prefer short sales so they generally require the property be listed for a short sale first for a minimum of 3 to 6 months before considering a deed in lieu. Both of these options are available under the HAFA program for loans that are eligible for HAMP loan modification process which covers all Fannie Mae and Freddie Mac owned or guaranteed loans and loans serviced by HAMP participating loan servicers issued prior to Janaury 1, 2009. The advantage to pursuing a HAFA short sale or deed in lieu is that if you are approved for either the mortgage lender is required to waive any potential deficiency.
     The approval process of either of these options can take some time and for short sales you need to have a buyer that is willing to wait for the lender to come to a decision. The same holds true for a deed in lieu especially since you have to usually start the short sale process first before converting to a deed in lieu application. In many cases a foreclosure will be commenced before the lender has made a decision.   The good news is that both of these options are considered as suitable matters for the court's foreclosure mediation program. You can apply for this program and with the recommended assistance of a qualified attorney use the mediator to help negotiate either the short sale or deed in lieu. While in your in mediation the mortgage lender cannot proceed with its foreclosure so there is added incentive for them to accelerate their approval process. There are important tax considerations with the forgiveness of debt from a short sale or deed in lieu. Through December 31, 2012 any imputed debt from this forgiveness is exempted from Federal income taxation. Clearly if Congress does not act to extend this tax exemption the attractiveness of a short sale or deed in lieu will be greatly diminished.  Consequently, anyone considering a short sale now would be encouraged to make that decision quickly since as indicated above the process will take time and the clock on the federal tax exemption is ticking away.
UPDATE: GOOD NEWS FOR POTENTIAL SHORT SELLERS IN 2016 THIS FEDERAL TAX EXEMPTION WAS EXTENDED THROUGH JANUARY 1, 2016.

It's Not Too Late To File Bankruptcy Just Because Judgments Have Been Entered Against You

     I have found that some of my clients with debt problems have the common misconception that once a judgment is entered against them they cannot seek relief with a bankruptcy filing. They unfortunately suffer through wage garnishments and bank executions without realizing that the filing of a Chapter 7 bankruptcy will stay all judgments and all related collection attempts by the judgment creditor. Furthermore, once the Chapter 7 discharge is entered these judgments are voided and debtors are free from future creditor collection efforts. I take great satisfaction in providing my bankruptcy clients with the serenity that they no longer have to be fearful that their wages will be garnished or their bank accounts cleaned out. There is no reason to lose hope just because judgments have been entered against you. Bankruptcy does still offer the relief you need to obtain a fresh start.