Monthly Archives: January 2013

Short Answers to Complicated Questions

Frequently when I get a call from someone considering a bankruptcy filing, the first question I’m asked is — complicated.  Here are a few examples.

Are taxes dischargeable in Bankruptcy?

That depends.  Some taxes, like sales taxes and some withholding taxes are never dischargeable.  More commonly I am asked about income taxes, and not surprisingly the rules are complicated.   The most important thing I can tell you in brief is that when you see tax problems developing (and they usually snowball on you), file your returns on time.  Extensions are fine, as long as you file before theyexpire.  If you can’t pay, well, you can’t pay; but file the return.  There are three time frames that must be met before income taxes can become dischargeable, and one of them runs from the time that the tax return was filed.  There is also some troubling case law developing in other parts of the Country limiting dischargeability for late-filed returns.  Of course, if the IRS has filed a substitute for return, that is a whole different ball game.  Yes, I know, this doesn’t make a lot of sense.  It is a short answer to a very complicated question.  Just remember to file your returns timely, and if you wind up way over your head with tax debt, contact a qualified Bankruptcy attorney in your jurisdiction for a consultation.

If I file for Bankruptcy, can I keep my car?

Well, that depends on a lot of things — is it paid for, are you current on it, how much equity do you have in it, have you maintained insurance, can you afford to make the payments?

Think about this one for a minute.  There were over 6300 people who filed for Bankruptcy in the Western half of Oklahoma last year.  If they were all hitchhiking to work, don’t you think you would have noticed? Generally, the impetus for this question is a deep seated sense of shame and a fear that you have been bad and are going to be punished.  I don’t mean to belittle this, it is very real; and most of us have a voice in the back of our heads that says things like this to us, but bankruptcy isn’t about punishment; and most people who file for Bankruptcy keep their cars.   Are there exceptions?   Yes, but that is a whole different blog post.

I’m married, does my spouse have to file with me?

Probably not.  Now, are there reasons why you may want to file jointly?  Yes.  Are there times when you both need to file in order to get a particular result that you want?  Yes.  If your spouse doesn’t file with you, will your filing affect your spouse?  That really depends, and that is one of many reasons why I require that non-filing spouses attend the initial appointment with the filing spouse.

Is the Trustee going to come to my house?

Well, I don’t know.  Are you inviting him for dinner?  Seriously, now, the Chapter 7 panel trustees are highly compensated professionals who get paid a very small amount of money to administer cases.  They make their money administering non-exempt assets.  No one is paying them to go through your sock drawer.  Now, if a Trustee has reason to believe that you are concealing valuable assets, can a Trustee get a search warrant for your home or office?  Well, yes; and in 22-years of practice, I have seen that happen once.  The Debtor went to prison for a number of years for all kinds of fraudulent behavior.  So, don’t hide uncashed royalty checks; and the Trustee will not be paying you a visit.


Judgment Liens, Bankruptcy and Getting What You Pay For

By the time people file for Bankruptcy,  they can have a wide variety of liens attached to their homes — judgment liens, tax liens, m & m liens just to name a few.  The Bankruptcy Code allows for judgment liens to be removed from the Debtor’s homestead to the extent it impairs an exemption.  Obviously, what this means is going to vary by State; but in Oklahoma this means that a judgment lien owed by the Debtor can be removed from the Debtor’s homestead assuming certain things are done during the course of the Bankruptcy.

A judgment lien is avoided, or removed, by filing a motion, serving the motion on the proper parties, dealing with any responses that may come in; and then, assuming that all was as expected, submitting an Order finding that the lien should be avoided.  This is generally a fairly simple and straightforward process.  (I said generally, there are tons of fact specific exceptions to this rule.)  From the attorney’s perspective the trick is knowing when this needs to be done.

It is certainly fairly common for an attorney to identify that avoidable liens are either present or might be present while preparing the case for filing.  Of course, there may be liens that don’t come to light during that process.  There is also the problem that most attorneys charge more to do a Bankruptcy if they will be avoiding liens than if they don’t; and there may be times when avoiding a lien is really not necessary.  Then, of course, there is the problem of seeing something that indicates there might be a lien while preparing the case, the case doesn’t get filed for months (for whatever reason) and now the attorney is supposed to remember that he needs to investigate this possible lien and then file the motion.

The solution to that is that most attorneys put in our engagement agreement with our clients what they must do if they want us to avoid a judgment lien.  My engagement agreement requires that my clients provide me with a file-stamped copy of the Statement of Judgment.  I also build a little extra money into my flat fee for doing the Bankruptcy for avoiding the lien.  If that doesn’t happen, then I have not been hired to avoid that lien.

Here is why that is important.  It is fairly simple (generally) to avoid a judgment lien in the bankruptcy.  It is a pain in the backside to do it if the case has already closed and must be reopened.  You can pretty well bet that if a client hired me to avoid a judgment lien, and for some reason I didn’t do it and the case closes when I figure this out, I will be moving very quickly to reopen the case and get it done — and on my own dime.

However, what happens more frequently is that I get a call from someone who filed  a Bankruptcy with another attorney.  A lien wasn’t avoided, the person is trying to sell or refinance the house and now there is a problem.  They call their former attorney who discovers that for whatever reason the client didn’t hire them to avoid the lien in the first place.  The attorney tells them he will charge them almost as much to avoid the line as he did to file the bankruptcy.  So, they decide to shop around.  Just last week I quoted a fee to reopen a case and avoid a lien for someone who had filed with someone else.  The figure I quoted was substantial.  There was a long pause, and the woman on the phone said that was the same figure her lawyer had quoted her.

The moral of this story is make sure you know what you need to do to get the result you want, make sure you know what you are paying for  and what you aren’t paying for.  It should all be in your engagement agreement with your Bankruptcy attorney, and if you have any questions, ask sooner rather than later.  If you are reading this and you have been sued before filing for Bankruptcy, you should know that you need to ask specifically about you find out if a line has attached to your house, if it has, what you can do about it; and what your attorney expects from you to make it happen.


Bankruptcy and Secured Debt — the Car Edition

I can’t count the number of times I have answered the phone, and the first words out of the caller’s mouth (before Hello, my name is. . . , etc.) are, “If I file for Bankruptcy can I keep my car?”

If everyone who filed for Bankruptcy automatically lost their cars, don’t you think you’d have heard about it by now?   Do you really think car dealers would ignore advertising to  this large a market?  So, when was the last time you saw an ad for a car lot that went like this.

So, you need to file for Bankruptcy.  You’re going to lose your car, of course; but we all know you can’t live in Oklahoma without a car!  So, you just come on down and pick out a replacement.  We will hold it until your Bankruptcy is safely filed.  Don’t you worry, we’ve got ways to get you into that car as soon as you lose your old one. After all, you don’t want to be one of those thousands of bankruptcy filers out hitch hiking to work!

Doesn’t sound too familiar to me either, but it was kind of fun to write.

The fact is that when it comes to secured debt in a Chapter 7 Bankruptcy you generally have four options:

  • Reaffirm;
  • Retain;
  • Surrender; or
  • Redeem.

A reaffirmation agreement recreates the debt post-petition.  That sentence is fraught with meaning.  First of all, it is an AGREEMENT.  That means that you must agree to it, but the Creditor must agree to it as well.  So, if the creditor is sick of you, you cannot force them to let you sign a reaffirmation agreement.  Also, the agreement terms may well require that you be current on your payments as of the time of the Bankruptcy filing.

Second, the reaffirmation recreates the debt post-petition.  That means it is effectively after the bankruptcy.  If you subsequently default, the creditor will have all of the rights that they would have had if you had never filed.  This means you lose the benefit of the Bankruptcy discharge with respect to the reaffirmed debt.

Retain and pay is an option that varies dramatically by jurisdiction.  The 2005 Bankruptcy Reform Act tried to do away with this option, but like many parts of the Act, it wasn’t quite as well drafted as it could have been.  The long and the short of it is that depending on a number of factors including:  where you live, the terms of your loan, the relevant State law and even the identity of your lender; you may be able to simply keep making your payments.

Surrender is pretty self-explanatory.  If you don’t want the car or can’t afford to keep the car, you can give it back to the lender and discharge any remaining obligation for the loan.  Wash your hands of it, be done, over.

Finally, there is redemption.  Redemption is really kind of cool and deserves its own post — which it is going to get.  However, in a nutshell the right to redeem property is the right to pay the lesser of the value of the property or the amount owed in a lump sum to the lender and get a lien release.  So, owe $2,500 on a laptop now worth $300?  Pay the $300 and keep the laptop.  Owe $36,000 on a pickup worth $13,000?  (Why, no, I did not just make up those numbers.)  If you can find a way to pay the $13,000 in a lump sum, you can keep the truck and be done with the $36,000 loan.

As usual, the devil is in the details; and that is nowhere as true as it is with the concept of redemption.  So, check back for a post on how to make it happen — or not.



Bankruptcy is Not Defined by How Much Money You Make

Easily the most frequent search that leads people to this blog is, “Do I make too much money to file for bankruptcy?”  Bankruptcy relief is not limited to poor people.

Generally, people who ask this question, or ones like it, know enough to have figured out that there is something generally called THE MEANS TEST; and it is scary.  Well, yes.

In reality, the Means Test is a lot like a tax return; and you don’t have to have paid taxes for very many years to figure out that some people who make a lot of money don’t pay a whole lot in taxes.  It sucks.  It’s not fair.  It is real.  Welcome to the Means Test.

The Means Test sucks.  It isn’t fair, and it is very real.  Oh, and it is a LOT like a tax return.  Yes, the Means Test starts with income — so does a tax return.  Then, you get into the deductions — just like a tax return.  That is where you need a CPA or a good bankruptcy lawyer.

Sure, there are lots of Means Test calculators available online.  There are plenty of online tax calculators too.  Neither of them is a substitute for someone who has spent real time studying the rules.

So, don’t call a bankruptcy lawyer and say, I know I make too much to file for bankruptcy.  Call and say, I have more debt than I can pay; and I need to talk to someone who understands the Means Test.


Bankruptcy, the Fiscal Cliff and Tax Refunds

Evidently, we have a deal on the fiscal cliff — well, sort of.  We have a deal for two months, and then all bets are off.  So, I’m not completely sure that what I have read so far accurately describes the contents of this deal (so double-check my facts before relying on them, please); but even better, anything that does (or doesn’t) change today might in 60 days or so.  I’m sorry, but Congress needs to grow up.

What does this have to do with Bankruptcy and Tax Refunds?  Well, first of all, it appears that the tax exemption for forgiveness of debt income on a principal residence has been extended for a year — or at least until March.  So, if your primary reason for filing for bankruptcy was to avoid tax consequences from a foreclosure or short sale; now, you may not need to.  The emphasis there is on MAY.  Do pay the relatively trivial amount of money to check this with a qualified tax expert — which I am not, and this tax exemption is deceptively complicated.

Now, for the bad news, your pay check will get smaller.  Tax withholding rates are going up 2%.  Most people who file for Bankruptcy have been living pay check to pay check  for many months.  A 2% withholding hit can make all the difference in the world between keeping the heat on and not.  Of course, the problem is that filing for bankruptcy isn’t cheap; and if you are living close to the edge, you probably don’t have the cash laid by for attorneys fees and filing fees.  So, before you spend your 2012 tax refund getting current on bills (like credit cards) and then realizing that you’ve blown your refund and still owe more than you can pay; consider whether you will be better served using that money to pay for a bankruptcy filing.

Every year people call me in late April or May who got back several thousand dollars in March or early April.  They spent that getting current on a bunch of debt and then realize a month later, that their balances aren’t going down and their income isn’t going up.  If your tax refund is enough to get you out of trouble, enough that you won’t need to file, enough that you will then be in a position to take care of yourself and your kids instead of Chase and Discover; then, by all means, use it to pay the bills — but do the math first.  Then, take a look at your retirement accounts and your kids’ college funds.  J.P. Morgan Chase made record profits in the 3rd quarter of 2012.  Did you?