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Well, there are any myriad of reasons why an individual might file bankruptcy. The first is they just have fallen too far behind whether because of illness or a job loss or just feeling overwhelmed and they need a fresh start. They will often take advantage of a Chapter 7 bankruptcy. Chapter 7 bankruptcy is going to improve your life in a lot of ways. One way is it’s going to eliminate a lot of stress. We all know how hard it is to deal with debt that you just don’t know how you’re going to pay back. Dealing with constant creditor calls, constant harassment from creditors, constant letters and a constant feeling of swimming around in a circle and never really getting anywhere.
Other reasons that people file Chapter 7 bankruptcy are to save assets and protect assets. For instance, if you were to become sick and fall several payments behind on your mortgage, you could file Chapter 13 bankruptcy and catch up from what you are behind on your mortgage over five years as well as paying the mortgage going forward. This is often a powerful tool with cars as well where if you fall behind on a car and it gets repossessed, you are able to catch up on the car, even sometimes extending the loan and getting a better interest rate on that car.
There are two basic programs that are available for consumers who are looking to file bankruptcy. The first is called Chapter 7 bankruptcy which is complete, fresh start bankruptcy. Basically what a Chapter 7 bankruptcy will do for you is eliminate all credit card debt, medical debt, personal loans, cash advances and payday loans and some tax debt for individuals. Some of the things that Chapter 7 will not eliminate are student loans and recent income tax debt.
Also available for consumers are a Chapter 13 reorganization of your debt; Chapter 13 is a good tool for someone who has fallen behind but now has the ability to catch up but needs to hold off creditors while they are allowed to do so.
This is the case of Guermo Gomez who comes to me from Franklin Park, Illinois seeking debt relief. Mr. Gomez has never filed a bankruptcy before. He does not own any real estate and he currently lives with his family. He rents from his father on a month to month lease. He does not own or operate a vehicle. He has a checking and savings account with very little in it, minor household goods and very little in the way of clothing. He does have a 401(k) which is protected in the amount of $20,000.
He is currently single but he does have for dependent children ages nine, five, four and three. He has been working the past seven years as a driver for a grocery store earning approximately $77,000 per year; when we break that down per month, that’s about $3900 net in pocket per month.
In terms of monthly expenses, he’s got approximately $3900 as well. That between the $800 in rent, $220 and cell phone, $1300 for food, $600 for clothing, $120 for laundry, $600 for transportation and $180 for auto insurance. You have to remember, his food budget is very high because he has a lot of mouths to feed in his house with his minor children.
In terms of a Statement of Financial Affairs, he did have an auto that was repossessed a couple years back. He did have a small business that he has no equity in and he’s not going to move forward with. And he has not received any kind of unemployment or workers compensation. There are no co-debtors. He owes for no student loans and he owes no income tax debt.
Let’s talk about what Mr. Gomez does have and that is Pay Day loan s and credit cards of approximately $15,000. Based on this situation, even though Mr. Gomez is making a fair amount of money, I would recommend a Chapter 7 fresh start to eliminate the credit card, stop the Pay Day loan harassment and get back on his feet. So Chapter 7, Mr. Gomez, that’s what I recommend for you in your particular situation.
This is the case of Darva Simmons who comes from Elmhurst, Illinois seeking debt relief. Ms. Simmons file a Chapter 7 bankruptcy over eight years ago so she is eligible for another Chapter 7 should that be necessary. She owns no real estate. She is renting a month-to-month lease and the landlord lives in Elmhurst, Illinois. She has a 2010 Kia Soul that is co-owned and she would like to keep paying for that vehicle. She is currently up to date. Her monthly payment is $425 and she owes about $12,000 on that vehicle.
In terms of personal property, she has a checking account at Chase Bank with a very nominal value. She has minor household goods and minor clothing. She does have a security deposit on hand with her landlord $1045. She did get a tax refund in 2011 but the refund was not significant. She does not have the ability to sue anybody for personal injury or workers compensation and she does not expect to inherit any money in the next six months.
She is married and she does have one minor child, an 18-year-old daughter who is still living in the house. She works as an office administrator at the University of Illinois and her husband is a laborer with Aramark.
In terms of monthly income, she and her non-filing spouse have approximately $3600 coming in per month between the two of them. When we look at her monthly expenses, there is $1045 for rent, $225 for electric and gas, $250 for telephone, $30 for Internet access, $400 to $500 for transportation, $100 for recreation, $150 per month for charity, $143 per month for auto insurance and $425 per month for an auto payment. Joe also helps contribute to the college cost of her daughter who still lives at home for her living expenses.
In terms of the Statement of Financial Affairs, Ms. Simmons makes approximately $25,000-$30,000 per year depending on overtime. She was recently garnished for a dental bill and she did have a prior address from 2008 to 2010 in Elmhurst, Illinois. The only co-debtor is on her vehicle with her spouse she owes no student loans and she does not owe any tax debt, state or federal. She does have a Comcast bill and she does have a personal loan and a credit card bill.
The debt is not excessive and I do feel she has a couple options here. First, Ms. Simmons could try to work out installment payment plans with the creditors and pay for it on her own without needing to file for bankruptcy. If, however, she feels she cannot be successful with those creditors or they won’t work out any kind of deal, then Ms. Simmons can avail herself of Chapter 7 bankruptcy protection. She can continue to make her car payment; that is called reaffirming a debt. And she can eliminate the rest of her miscellaneous debt. So Chapter 7 is a possibility for Ms. Simmons from Elmhurst, Illinois.
This is the case of Dan and Emily Rady who come to me from Chicago, Illinois. They are here to talk to me about Chapter 7 or Chapter 13 bankruptcy.
In terms of information concerning their debt, they have real estate with an approximate equity of $25,000. They each have a vehicle but there’s very little in the way of equity in the vehicle. The husband is up-to-date on his car payments; wife is not up-to-date on her car payment. In terms of income and expenses, there seems to be a little bit of excess income if we eliminate the amount that they are paying for credit cards which is $650 in minimum payments per month. Since neither person has filed bankruptcy before, they are still eligible for either Chapter, whether it is a Chapter 7 or a Chapter 13.
However, we want to do what’s best by the clients. We want to make sure that if there is disposable income per month that the clients submit to a Chapter 13 repayment plan which could effectively lower the amount that they are paying for their cars and all of their remaining debt. We are going to do this by looking at their paycheck stubs and scrutinizing their expenses. Once we put that information into the bankruptcy software, I will be able to determine whether or not the Chapter 13 plan is feasible and more importantly or equally importantly, what is the amount that they are going to have to pay per month and what is the percentage that the unsecured creditors are going to receive under their plan.
An experienced bankruptcy attorney will be able to manipulate the numbers, enter the proper numbers and make the proper adjustments so that the clients will be paying the proper amount to the Chapter 13 trustee over the course of 3 to 5 years.
Just on my vision of the paperwork in front of me, I do believe that a Chapter 13 would be in their best interest. I simply don’t know at this point what the exact dollar figure that I would propose to the Chapter 13 trustee. However, once we do a Chapter 13, these clients will no longer have to make a car payment directly and since wife was behind on her car payment and subject to repossession, the Chapter 13 will stop any risk whatsoever of the vehicle being repossessed. Provided the clients can make their trustee payment on time each month, the creditors will have to accept that plan payment and they will be prohibited from contacting the debtors, trying to collect on the debtors and most importantly, prohibited from trying to repossess the vehicle. So my strong recommendation is a Chapter 13 for Mr. and Mrs. Rady from Chicago.
The hottest topic in South Florida is the real estate "short sale." Actually a short sale is nothing new, but it now quite the vogue. A short sale basically means that the mortgage lender (or lenders) agree to satisfy its mortgage lien and allow the transfer of the real estate in exchange for receipt of less than the full amount of the amount due on its mortgage loan. In a short sale, the real estate is sold to a buyer who obtains a new mortgage. As the net proceeds of the sales price is less than the full amount due on the mortgage lien(s), the mortgage holder(s) must agree to accept a "short" payoff in exchange for release of its mortgage lien.
Despite this basic definition, there is more involved with the short sale and whether it is actually beneficial to the homeowner facing foreclosure. The fact that the internet is full of courses, books, and seminars offering to turn out "short sale experts" should in and of itself advise caution.
It is been my experience so far that many homeowners facing foreclosure seek out the "short sale", but do not entirely understand the process or many of its implications. Some do not even seem to understand where they stand on various issues even after a "short sale" supposedly took place. Apparently, one of the short sale's greatest boosters, at least at present, is the real estate broker or other "third party negotiator" who would earn a commission upon the closing of a short sale.
At this time, it seems that substantially more are failing to achieve a short sale than are those who have achieved one. Many seem to seek out the short sale as almost a holy grail and advise that they are in the "process of a short sale", but few have actually advised that they have completed one. Many seem to indicate frustration in the attempt to communicate with the mortgage lender(s) and/or actually complete a short sale.
Apparently the most difficult item in the short sale process is communicating with the lender and any second mortgage holder, such as a "home equity loan." In addition to the agreement of the first mortgage holder, the agreement of any junior mortgage holders must also be obtained. Outstanding judgment or tax liens may also be an issue as the buyer would need to receive clear title.
One of the most important issues in the short sale is whether the homeowner is actually released from liability for the "short" or unpaid amount. If the mortgage company and/or the second mortgage company do not release a person from liability for the unpaid portion, the benefit of a short sale to a homeowner may be questioned.
Another important issue is the federal income tax consequences. If the unpaid mortgage debt is forgiven, "discharge of indebtedness income" may be implicated. Discharge of indebtedness income basically involves the recognition as income for federal income tax purposes of the discharged mortgage debt. But there are various exceptions to the recognition of discharge of indebtedness income, such as the insolvency exception or discharge in bankruptcy. Although a form 1099 may be issued as to the homeowner/seller to the IRS, one of the various exceptions to the rule may apply and income taxation on the discharge amount may not be due. A complete analysis of this issue should be completed before one commits to undertake a "short sale."
Many seem to seek out the short sale to "save their credit." One should try to get the best understand possible of whether a short save will actually save or protect one's credit from the reporting of a foreclosure. In general, a credit reporting agency may report accurate information on your credit report. Although a "foreclosure" may not be reported on one's credit, a mortgage delinquency may. One may question the effective difference.
A short sale may be in the mortgage lender's supposed "best interest." But one should realize that many lenders may be under contractual or regulatory restrictions that may not permit them to agree to a short sale. Furthermore, one may actually be communicating with the lender's loan servicer and not the actual mortgage lender.
The apparent word on the street is that a short sale takes many weeks to pursue and that you need to furnish substantial documentation. One may need to furnish personal financial information such as paycheck stubs, bank statements, 401(k) statements, and tax returns. One may also need to further information about a hardship.Jordan E. Bublick, Miami and Palm Beach, Florida, Attorney at Law, Practice Limited to Bankruptcy Law, Member of the Florida Bar since 1983
Be careful if you are contemplating a bankruptcy and you hold title to real property. Even if you don’t believe you have any equitable interest in the home, a bankruptcy trustee may disagree with you.
A common scenario is where you take title to a residence your relative owns. Imagine your parents want to leave their home to you as a probate avoidance device. Well, perhaps they should have executed a trust or will, but they didn’t. They transferred title to you. You never paid the mortgage, you never lived there at the home, you never had anything to do with it. You believe you just hold bare legal title.
Now imagine you file chapter 7 bankruptcy. All your assets get put into the bankruptcy estate. Does your parent’s home go into the estate? That’s a tough question to answer. Perhaps if you can prove your parents transferred title as a probate avoidance device (resulting trust anyone?), you can convince the trustee you have no equitable interest in the property. However, are you certain you will be able to convince the trustee? If you aren’t sure, it is probably unwise to file chapter 7 bankruptcy where you can’t risk the uncertainty of having your parent’s lose their home.
The bankruptcy trustee has the status of a hypothetical bona fide purchaser for value under 11 U.S.C. § 544(a) (3) – this says that a bankruptcy trustee takes free of any interest in real property that could be avoided by a hypothetical bona fide purchaser. In California, a prudent purchaser analysis is required whereby it is critical to determine who is in possession of the property, among other things. So where the persons living in the property are not the same as the title holder, this could be construed in some cases as constructive knowledge on the part of a hypothetical purchaser, and in turn, the bankruptcy trustee. However, if you are contemplating bankruptcy and live in a home in which you claim you only hold bare legal title, this could represent an insurmountable issue for one to overcome.
Bare Legal Title arguments are complicated and fact intensive. Each case turns on the facts and laws of each state. Be careful when filing bankruptcy if you hold legal title to real property or any property that you do not actually believe is yours. If you hold bare legal title, work with a knowledgeable attorney to ensure you have a chance of keeping such property out of the estate. Otherwise, prepare for trouble if you don’t do so.
In all chapter 7 individual cases where consumer debts are at issue, the persons filing for chapter 7 bankruptcy are subject to the Chapter 7 Means Test within official Bankruptcy Form 22. Again the means test, in short, determines whether or not you have too much disposable income for purposes of filing for chapter 7 bankruptcy.
What happens though if you do not pass the means test? Is all hope lost? Well, the answer is not always. You can file at another time, typically in the future, if your household income will decrease or face significant reduction for whatever appropriate reason. But if you must file the bankruptcy case now, and you don’t otherwise qualify under the Means Test, then a presumption of abuse under Form 22 must be checked. In other words, someone who files chapter 7 bankruptcy and shows too much discretionary income is subject to the presumption of abuse. Thus, the United States Trustee must determine whether they will dismiss or convert the chapter 7 case to chapter 13 or another chapter of bankruptcy.
Now, it is possible to overcome the presumption – Section 707(b)(2)(B)(i) of the Bankruptcy Code says it is. Persons filing bankruptcy would have to demonstrate special circumstances that rebut the presumption of abuse, such as a serious medical condition, loss of income, retirement, etc. There must be an explanation to the US Trustee’s satisfaction that the debtors’ income and/or expenses have changed and there is no reasonable alternative to it. In essence, debtors must show that any such disposable income that is reflected on the Means Test pursuant to Form 22 is no longer the case, that it is no longer an accurate or realistic reflection of household income for the debtors.
In such limited circumstances, it is possible to establish that debtors are entitled to file chapter 7 bankruptcy even though they do not initially appear to qualify. The California Chapter 7 Bankruptcy Means Test can be complex and requires the analysis of a knowledgeable bankruptcy attorney. With the help of the right attorney, it is possible to overcome the presumption of abuse, and it is more than possible to successfully file for California chapter 7 Bankruptcy.
Should I Get a Debt Consolidation Loan to Pay Off My Credit Cards? Alan Henry Dear Lifehacker,
I've racked up a good bit of credit card debt, and while I'm slowly paying it down, it's a pain wrangling multiple bills with different interest rates. My credit union is offering debt consolidation loans with a lower rate than any of my cards—should I take that, use it to pay off all of my cards, and only have one, low-interest bill to pay every month?
Sincerely,
Trying to Dig Out
Dear Trying to Dig Out,
It's tempting, isn't it? Getting rid of all of your credit card bills, no more annoying multiple payment to multiple creditors, just one, automatic loan payment every month that comes out of your account automatically and you're back on the road to being debt free, right? Well sure—but it comes with a couple of pretty big caveats that might sour the milk for you. Let's explain, and then you can decide whether it's a good idea in your case.
When Debt Consolidation Loans Don't Make SenseFull sizeIn more cases than not, debt consolidation loans don't make sense. They're certainly attractive: the lure of being able to pay off all of your credit cards is a strong one, especially in exchange for a single monthly payment to your bank or credit union at a lower interest rate. It's definitely a tantalizing opportunity, but it's not perfect. Remember, debt consolidation loans are financial products, which means financial institutions wouldn't offer them to you if they didn't make money from them. Here are a few tips to make sure you're not falling into a trap:
- Do the math on your credit cards and their interest rates, and figure out how long it would take you to pay them all off at your current payment rate. Compare that to the length of the consolidation loan you're looking at taking out. Your average 5 year (60 mo) debt consolidation loan, even at a lower interest rate than your credit card, may cost more over the long haul than if you just paid your cards down faster. Photo by 401(k) 2012.
- Check what your monthly payment on a debt consolidation loan would be. Are you at least paying that much towards your credit cards now? If the loan payment is more than you pay towards your debts (and it fits into your budget), it might be time to up the ante and just put more money to your credit cards. If the loan payment is less than you pay to your cards, you'll likely wind up paying way more interest over time, since your loan term will probably be long.
- Once your cards and debts are paid off, will you cancel the credit cards? Sure, you get credit cards with zero balances and no bills out of the loan, but one of the biggest problems with debt consolidation loans is that they do nothing to change the behaviors that got you into debt in the first place. Instead, they add another creditor to your pile, and fan the flames of going into debt to pay off more debt. If you even think you might be tempted to use those cards again after paying them off, or if you're using debt consolidation as an easy out or way to avoid really looking at your budget, it's not right for you. The last thing you want is to take out a loan, pay off your cards, and then charge up your cards again—now you've done nothing but dig your hole twice as deep.
When Debt Consolidation Loans Make SenseFull sizeIf you're hopelessly drowning in debt, know that you can't negotiate any lower interest rates with your credit card companies or creditors, or if the math works out, a debt consolidation loan may be a good decision for you. Similarly, if you're in serious trouble with high interest rates, high monthly payments (that you're having trouble with already), and too many bills, a debt consolidation loan might help. Combined with a debt repayment plan or credit counseling, it can be used to pay off all of your debt at a fraction of their original cost. If it may be a good time to strike, pay it all off, and walk away debt-free. Photo by erules123. Of course, those situations aren't the norm, and most of us with credit card bills looking to get rid of them aren't in that position. That's not to say there aren't situations where debt consolidation loans can offer people who really need them the breathing room to get out of debt and organize their finances. ReadyForZero has a great post on this topic, and showcases some examples of when debt consolidation can be a good choice—and even save you money on interest while getting you out of debt faster.
It All Comes Down to Mathematics and BehaviorFull sizeIt may seem attractive to just take out a nice big loan, pay everyone off, and only deal with that one monthly loan payment—one you can even have automatically taken from your checking account every month—but all you're really doing is paying a financial institution to do something for you that you can do on your own. It feels great not to get a bunch of bills in the mail or fret over who you pay when and how much, but you can do the same thing on your own:
- Start by creating a realistic budget.
- Then decide whether you want to pay highest interest cards first or lowest balance cards first.
- Set up auto-pay so you're paying more than the minimum payments every month, paperless billing so you don't get the bills in the mail (although you should still review them every month), and let your money manage itself.
Still, even if the math of a debt consolidation loan works out in your favor, your behavior may be the real problem. Paying off all of your credit cards and debts with a loan only shuffles the deck chairs around—you still owe money you have to pay, and if you go charging up those freshly paid-off credit cards again, those deck chairs may as well be on the Titanic.
Make no mistake: if you want help with your debt, you should get it. Don't let social stigma or ego get in the way—there are plenty of ways to get on the right track that go further than blog posts and stop short of putting you back in debt to someone else. Debt repayment and credit counseling programs can negotiate lower interest rates on your behalf, or help you do it yourself. They can help you with your budget, and help you plan a route out of debt that turns your credit into a tool you control, as opposed to a monster than controls you. If you need the help, get it—and definitely do that before you take out a loan. Photo by Media Bakery13 (Shutterstock).
Good luck,
Lifehacker
Copyright 2013 Gawker Media. All rights reserved.
I. Introduction
a. Why do people file for bankruptcy today?
1. Credit card debt2. Unemployment3. Business reversals 4. Real estate foreclosures5. High housing costs 6. Student loans 7. Divorce 8. Medical bills and illness
b. The Bankruptcy Code and New York State Debtor and Creditor Law provide many remedies to real estate issues and other debtor/creditor problems facing individuals in 2013 in New York State.
· Chapter 7 bankruptcy constitutes the vast majority of individual filings, and can be very helpful in dealing with many debtor/creditor problems that individuals have these days.
c. For the first three quarters of 2012, there were slightly less than 947,000 bankruptcy filings nationwide, and slightly less than 33,000 bankruptcy filings in New York State.
d. The goal of this outline is to explain contemporary issues facing debtor’s in New York State in 2013 and strategies for dealing with those issues.
∙The goal in personal bankruptcy is to obtain the “fresh start” for a debtor-discharge as many of the debtor’s debts as possible and allow them to retain as much property as possible ∙Pre-bankruptcy planning is allowed under the law and often times necessary to obtain the “fresh start” or an optimal result for the client
e. Current Developments: Rent Controlled and Rent Stabilized Leases are not exempt property under New York State law
· A recent case in the Southern District of New York, In re Goldman, Case No. 11-11371 (SHL), involved an attempt by a Bankruptcy Trustee to sell the rent stabilized co-op unit of a long-time resident at 420 Riverside Drive in the Morningside Heights neighborhood of Manhattan. The case was a Chapter 7 bankruptcy filing assigned to Judge Lane, who entered a consent order permitting the Bankruptcy Trustee to have the U.S. Marshals Service evict Mr. Goldman from his apartment, and then the rights to the lease on the co-op unit would be sold back to the landlord, who would pay the Bankruptcy Trustee $60,000 when the apartment was delivered free and clear of all tenancies, including that of Mr. Goldman, the rent-stabilized tenant.· This is the third decision permitting a rent-stabilized apartment to be sold by a Bankruptcy Trustee to a landlord in the Southern District of New York. The other two cases are In re Stein, 281 B.R. 845 (Bankr. S.D.N.Y. 2002) and In re Toledano, 299 B.R. 284 (Bankr. S.D.N.Y. 2003). In both of these cases, the debtors lived in luxury apartments just south of Central Park–171 West 57th Street, Apartment 3C and 230 Central Park South, Apartment 9/10B.· Many people will be surprised by these decisions; however, the Bankruptcy Code and Rules seem to allow the result. Section 541 of the Bankruptcy Code states that when a debtor files for bankruptcy, a hypothetical estate is created, and all property of the debtor (with certain exemptions created by state and federal statute) is owned by the Bankruptcy Trustee. Section 365 of the Bankruptcy Code allows a debtor or a Bankruptcy Trustee to assume and assign (sell) a lease to a third party. Additionally, bankruptcy is federal law, and federal law generally primes (supersedes) state law. When you put this all together, the transaction looks as follows:· A Bankruptcy Trustee will review a bankruptcy petition and determine how many years the debtor has lived in the apartment, the rent that the debtor is presently paying under the rent-stabilized lease and the market value rent if the apartment was not rent-stabilized. The Bankruptcy Trustee will then contact the landlord or owner of the unit and offer to evict the tenant and deliver the apartment broom clean for a certain sum of money.· In the Goldman case, the landlord and the Bankruptcy Trustee entered into a stipulation that was “so ordered” by the Bankruptcy Court, which provided that the landlord would pay the Bankruptcy Trustee $60,000, which would be held in escrow until the Bankruptcy Trustee had the U.S. Marshals Service evict or remove the debtor from the apartment and delivered possession of the apartment to the landlord. The Bankruptcy Trustee receives a commission and legal fees are paid to the Bankruptcy Trustee’s counsel. The balance of the monies is distributed to the debtor’s unsecured creditors. While the result may seem harsh and surprising to many, three Bankruptcy Judges have ruled that these sales are allowed. None of these cases have been appealed to the Second Circuit Court of Appeals or the Supreme Court.· An individual who is contemplating filing for bankruptcy and lives in a rent-stabilized unit must go through the following analysis:· 1. How many years has the debtor lived in the apartment?· 2. What rent are they paying under the rent-stabilized lease and what is the market value rent if the apartment was vacant and not rent-stabilized?· 3. Is the apartment in a gentrifying area or a high income area, such as the Upper East Side, Central Park West or Central Park South?· 4. Has the apartment building recently undergone a condo or co-op conversion? And did the debtor decline to buy the unit, and therefore become a non-purchasing tenant?· There is one recourse for the debtor. The Bankruptcy Code allows the debtor to match the offer (in this case, $60,000) and pay that money to the Bankruptcy trustee to keep the apartment unit. Few individuals filing for bankruptcy have that type of money; however, they may be able to borrow that money from friends or family to keep the unit. · Additionally, if a husband and wife are married and only one elects to file for bankruptcy, or two people who are unmarried live in the apartment and both names are on the lease, since the Bankruptcy Trustee would only be able to assign the unit for the individual who filed for bankruptcy, the result may be that a landlord would be unwilling to pay a significant sum of money in that scenario, because the other party remaining in the unit would still be rent-stabilized. However, other than those two scenarios, this situation is a significant risk, and we are seeing more and more of these cases.· It would seem that either the New York State legislature or Congress needs to address this issue, and create some type of a safe harbor. Again, debtors in rent stabilized apartments must proceed with caution and consult an experienced bankruptcy attorney before filing for bankruptcy.
II. Chapter 7 Personal Bankruptcy-“BAPCPA” ∙ Pre-BAPCPA there were no income limitations or restrictions on the ability of a debtor to file chapter 7 personal bankruptcy
∙ The goal of BAPCPA was to prevent many debtors from filing for chapter 7 bankruptcy and forcing them to file for chapter 13 bankruptcy
A. In 2005, Congress radically revised and amended Chapter 7 personal bankruptcy laws. These changes include median income and means testing, where if an individual (single, married or with children) has income that exceeds a certain dollar amount, then the bankruptcy filing is considered an abuse of the system and facially they are not permitted to file Chapter 7 bankruptcy.
B. The first test under the revised code is whether a debtor exceeds the median income for their family size based on their state of residence. Pursuant to the 2005 amendments, a case where the debtor makes less than the median is presumed to be a non-abusive filing, and a below-median debtor may file for Chapter 7 bankruptcy. Effective November 1st, 2012, the median income of a single person in New York State is $46,821. For a family of two, the income threshold for the Median Income Test is $58,106, for a family of three it is $67,652 and for a family of four it is $81,522. Add $7,500 for each individual in excess of four. Median income figures are periodically revised by the Census Bureau. C. However, all is not lost for a debtor who exceeds his or her state median income threshold. If an individual’s income exceeds the median income for their respective state and family size, they may still be allowed to file for Chapter 7 bankruptcy if they pass the so-called “Means Test,” i.e. the results show that the bankruptcy filing is not a presumption of abuse under § 707(b)(7) of the Bankruptcy Code. The Means Test (officially known as Form 22A, “Chapter 7 Statement of Current Monthly Income and Means-Test Calculation”) is one of the most complicated calculations in the law. It consists of eight pages, and is similar to doing a 1040 tax return for an individual. The Means Test incorporates the debts that an individual has (both unsecured and secured (i.e. mortgages and car loans), taxes that they owe, and expenses specified by the IRS in its financial analysis standards–food, clothing, household supplies, personal care, out-of-pocket health care and miscellaneous(National Standards); housing and utilities (non-mortgage expenses), housing and utilities (mortgage/rental expense), with adjustments, transportation(vehicle operation/public transportation/transportation ownership or lease expenses)(you are entitled to an expense allowance in this category regardless of whether you pay the expenses of operating a vehicle and regardless of whether you use public transportation)–as well as many other factors.
∙ The expense limitations in the Means Test are based on the IRS offer in compromise standards
D. However, with proper planning, most individuals or couples whose income exceeds the median income can still pass the Means Test and will be allowed to file for Chapter 7 bankruptcy, notwithstanding the legislative intent of the changes under BAPCPA, which was to try and minimize the number of individuals who could file for Chapter 7 bankruptcy and force them to either not file for bankruptcy or to file for Chapter 13 bankruptcy.
E. Means Test Planning Opportunities:
1. If an individual’s debts are primarily business debts, then the debtor is not required to take the Means Test. 2. The data that is used to calculate the Means Test is a six-month rolling look back at the debtor’s income and expenses. Accordingly, if a debtor is self-employed or is an independent contractor, they may be able to arrange their financial affairs so that they have less income for the months included in the Means Test, and therefore pass the Means Test. This is known as pre-bankruptcy planning.3. Our experience is that 90-95% of all debtors pass the means test and qualify for Chapter 7 personal bankruptcy.
III. Why do the vast majority of Americans who file for bankruptcy file for Chapter 7 bankruptcy?
A. Chapter 7 bankruptcy provides individuals who qualify to file under this chapter with a “discharge,” which can wipe out a significant amount of an individual’s debt. B. What debts are discharged in a Chapter 7 personal bankruptcy? i. Credit card debt ii. Personal, business, automobile and real estate loans iii. Lines of credit iv. Medical bills v. Utility bills vi. Personal and “good guy” guaranties–“good guy” guaranties are guaranties created for the leasing of commercial space
C. Certain “old income taxes” may be dischargeable if:i. The tax return was filed more than two years prior to the bankruptcy filing; ii. The taxes are more than three years old;iii. The taxes were assessed more than 240 days before the filing of the petition;iv. There was no attempt to avoid or evade the taxes.
If all of these conditions are met, the taxes are dischargeable in bankruptcy.
D. The IRS has heightened its scrutiny of the discharge of income taxes in bankruptcy, and their position (based on case law) is that if you spend too much money on luxury items and/or pay other creditors ahead of the IRS, then according to the IRS, those tax debts would not be dischargeable, and the IRS will commence an adversary proceeding (litigation in a bankruptcy case) to object to the discharge of these taxes. See Wright v. Internal Revenue Service, 191 B.R. 291 (S.D.N.Y. 1995); Haesloop v. U.S. (In re Haesloop), 2000 Bankr. LEXIS 1104, 2000 WL 1607316 (Bankr. E.D.N.Y. Aug. 30, 2000); Lynch v. United States, 299 B.R. 62 (Bankr. S.D.N.Y. 2003); Epstein v. United States, 303 B.R. 280 (Bankr. E.D.N.Y. 2004)
E. What is not dischargeable in a Chapter 7 bankruptcy filing?
i. Recent income taxes (2-3 years old)ii. “Trust fund” taxes (i.e. sales or employment taxes)iii. Student loans (including private student loans):
· Section 523(a)(8) of the Bankruptcy Code, concerning educational debt says:
“A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt - unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents, for - an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or an obligation to repay funds received as an educational benefit, scholarship, or stipend; or any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.”
· The courts have devised several tests for “undue hardship”, but the most frequently used test was articulated by the Second Circuit Court of Appeals in Brunner v. New York State Higher Education Services Corp. The Brunner test for undue hardship requires a three-part showing: (1) that the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for herself and her dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the loans.
· Failure to by the debtor to prove any of these factors can result in denial of discharge of the educational debt.
iv. Domestic support obligations (i.e. alimony and child support payments) v. Debts incurred within 90 days of a bankruptcy filing that aggregate at least $600 for luxury goods or services and cash advances aggregating more than $875 within 70 days.
Chapter 7 bankruptcy is a very effective tool for the right debtor!
F. New BAPCPA (2005) requirements in Chapter 7 bankruptcy
i. Under BAPCPA, in addition to the list of creditors, schedules of assets, liabilities, income and expenses debtors must now provide:a. A certificate of credit counseling-Part I done prior to the bankruptcy filing and Part II done after the 341 meeting of creditors;b. Payment advices from employers received 60 days before filing (if any);c. A statement of monthly net income and any anticipated increase in income or expenses after filing;d. Tax returns or transcripts filed in the most recent tax year; f. Photo ID; and g. Social Security card
ii. Failure to provide the documents within 45 days after the petition has been filed (with a possibility of a 45-day extension) results in automatic dismissal of the case.
iii. Also new under BAPCPA, a debtor must have received pre-petition credit counseling (in person, by phone or internet) from an approved non-profit entity that outlined opportunities for credit counseling and assisted the Debtor in performing a personal budget analysis in the 180 days before filing a petition. Debtorwise (http://www.debtorwise.org/website/index.aspx), one of the approved credit counseling agencies, charges $25 for the online course or $34.95 for the telephonic course.
vi. Additionally, within 60 days after the first Meeting of Creditors, the debtor must also take a post-petition financial management course and file a certificate of completion with the Bankruptcy Court. The cost of this course from Debtorwise is $15 for the online course or $24.95 for the telephonic course.
iv. The Bankruptcy Court may grant a waiver based on the Debtor’s sworn statement that they were unable to obtain the counseling services within five days of making the request and had to file immediately, but the waiver expires 30 days after the petition is filed.
v. The briefing is not required if the Bankruptcy Court determines that the Debtor is mentally incapacitated, physically disabled, or is an active member of the military in a combat zone.
G. What are the negatives of filing for Chapter 7 bankruptcy?
i. The filing stays on a person’s credit report for seven to 10 years-however Debtor’s are able to rehabilitate their credit by obtaining and using credit responsibly, savings as much as possible and spending as little as possible ii. A debtor may only file for Chapter 7 bankruptcy every eight years (however, if a debtor files for Chapter 7, receives a discharge, and then gets into further financial trouble, they can file under Chapter 11 or 13 of the Bankruptcy Code).
H. Property of the Bankruptcy Estate:-this property collected by the Bankruptcy Trustee and distributed to unsecured creditors
i. This includes tax refunds ii. Lawsuits (usually personal injury cases) commenced by the debtor prior to the bankruptcy filing iii. Inheritances received by the debtor within 180 days of the bankruptcy filing.
IV. Chapter 7 bankruptcy can be very effective for individuals with real estate in which they live that is “underwater” (where the fair market value of the property is less than the value of the mortgages to which the property is subject)
A. When we talk about real estate, we’re talking about houses, townhouses, co-ops and condos. In order to qualify for the homestead exemption, a debtor must reside in the property at the time the bankruptcy is filed.
In 2011, New York State increased the homestead exemption (for debtors residing in the counties of Kings, New York, Queens, Bronx, Richmond, Nassau, Suffolk, Rockland, Westchester, and Putnam) to $150,000 per Debtor, so a married couple living in those counties can exempt $300,000 of equity in a residence. Let’s look at a few examples of how residential real estate issues play out in a Chapter 7 bankruptcy filing.
Real Estate Scenarios:
For example, let’s take a look at a married couple considering filing for bankruptcy and the value of their property and mortgage(s) on their property.
FMV $600,000Mortgage ($500,000)Equity $100,000
In this scenario, the couple could file for Chapter 7 bankruptcy, discharge their unsecured debts, and keep their house, provided that they continue to make mortgage payments.
FMV $1,000,000Mortgage ($500,000)Equity $500,000
NYS Homestead Exemption ($300,000)Non-Exempt Equity $200,000
In this scenario in a Chapter 7 bankruptcy, the Chapter 7 Trustee would sell the house and receive $200,000 for the equity above the homestead exemption (less costs and expenses), and that money would be used to pay the couple’s creditors. The Trustee would pay $300,000 (Homestead Exemption amount) to the Debtors at the end of their case as a result of their homestead exemption. Alternatively, the debtors could repurchase the house from the Trustee by buying the equity from the Trustee (redemption).
FMV $400,000Mortgage ($500,000)Negative Equity ($100,000)
In this scenario, the house has a negative equity of $100,000 and is “underwater” and would not be sold by the Chapter 7 Trustee. However, in order to keep the house, the debtor must reaffirm the debt to the mortgagee before the case is discharged and continue to make the payments on the mortgage, notwithstanding the fact that the value of the house is less than the amount of the mortgage. Reaffirmation is governed by §524(c) and 524(k) of the Bankruptcy Code, and requires that the debtor file an agreement with the court stating that he or she agrees to be legally bound to repay the otherwise dischargeable debt. The reaffirmation agreement must be filed 60 days after the meeting of creditors. The debtor’s attorney must file an affidavit stating that such an agreement will not be a hardship for the debtor. In the case of a pro se debtor, the bankruptcy judge will interview the debtor to ensure the agreement is voluntary and that it does not present a hardship for the debtor. In any event, the debtor may rescind the agreement up to 60 days after the agreement is filed with the court, or the case is discharged, whichever is later.
Under these circumstances why would the couple want to retain the house?
Wouldn’t they be better off economically to file for Chapter 7 bankruptcy and let the bank make a motion for relief from the automatic stay so they can foreclose and obtain title to the house? This is a personal decision the debtors would have to make, which may include non–economic considerations that would lead them to want to keep a house that is $100,000 “underwater.”
Scenario: One spouse files for bankruptcy, the other spouse does not and the house has equity-this is the “In re Persky” scenario
In a Chapter 7 bankruptcy, the Trustee may be able to sell the house. However, under New York State law due to “tenancy-by-the-entirety” protection, the house cannot be sold. The creditor can docket a judgment against the property, which is good for 20 years, and the home cannot be sold or refinanced.
Under this scenario, NYS law may provide more protection to the non–filing spouse than bankruptcy law. See §§ 363(h), (i), and (j) of the Bankruptcy Code when dealing with a scenario where one spouse files for bankruptcy, the other spouse does not and the house has equity.
Note that if the home is transferred from one spouse to the other without consideration, this a fraudulent conveyance.
Planning opportunity: However, if the couple divorces, the house may be transferred from one spouse to the other for no consideration, pursuant to New York State equitable distribution law.
In Chapter 7 bankruptcy, the factors to be considered as to whether the Chapter 7 bankruptcy trustee can sell the house are: (i) the equity in the property; (ii) the respective ages of the debtor and the spouse; and (iii) the burden to the non-filing spouse of having to leave the house (i.e. the impact on minor children).
Section 363(h)of the Bankruptcy Code deals with the conditions which must be met for a Trustee to sell a co-owner’s interest in property (whether owned as tenants in common, joint tenants or tenants by the entirety), which include:
1. Partition of the property between the bankruptcy estate and the co-owners is impracticable;
2. Sale of the bankruptcy estate’s undivided interest in the property would realize significantly less for the estate than the sale of the property free of the interests of the co-owners;
3. The benefit to the bankruptcy estate of a sale of the property free of the interests of the co-owners outweighs the detriment, if any, to the co-owners.
In Community Natl. Bank and Trust Co. of New York v. Persky (In re Persky), 893 F.2d 15 (2d. Cir. 1989), the Second Circuit Court of Appeals reviewed a bankruptcy filing in which only one of the co-owners was indebted to the bank and filed for bankruptcy relief. The Court found that:
- The Bankruptcy Court had the power to review the Trustee’s discretion to sell the property.
- The benefit to the bankruptcy estate should be analyzed from the standpoint of the sale of the non–debtor spouse’s entire interest in the property, including their possessory and survivorship interests, in determining whether the property should be sold.
- Noneconomic factors should be considered when analyzing the detriment to the non–debtor spouse of a sale of the property.
Section 363(i)of the Bankruptcy Code provides that in a Chapter 7 bankruptcy, if the property is to be sold, the debtor’s spouse may purchase the estate’s share of the property.
Pursuant to § 363(j)of the Bankruptcy Code, the Chapter 7 Trustee must distribute to the debtor’s spouse the proceeds of the sale (less costs and expenses), but not including any compensation of the Trustee, in accordance with the ownership interests of the non–filing spouse and the bankruptcy estate.
Pursuant to § 363(k)of the Bankruptcy Code, the mortgagee may also bid on the house and, if they’re successful, they may offset their secured claim against the purchase price of the house.
How does one sell real estate in bankruptcy? 1. Pursuant to a section 363 motion to sell real estate in a chapter 11 case, 2. Pursuant to a confirmed chapter 11 Plan of Reorganization and 3. By a chapter 7 bankruptcy trustee in a chapter 7 case
B. The alternative way to sell real estate (or other assets) in bankruptcy is via a confirmed bankruptcy Plan. While Section 363 is the quicker way to sell assets, there is a benefit to selling real estate through a confirmed bankruptcy plan, due to the fact that the seller (the bankrupt entity or individual) will not have to pay city or state real estate transfer taxes, based on the U.S. Supreme Court case Florida Department of Revenue v. Piccadilly Cafeterias, Inc., 554 U.S. 33 (2008). Accordingly, it may be beneficial to all parties for the debtor to file a simple, boilerplate Plan and Disclosure Statement and then sell the real estate pursuant to that Plan.
C. A few years ago, my firm represented a lender who was foreclosing on a property on which the borrower’s principal had guaranteed the debt. The borrower filed for Chapter 11 bankruptcy to stay the foreclosure. A deal was reached in which the property would be conveyed to the secured lender pursuant to a confirmed Chapter 11 Plan. The transaction was a win-win situation for all parties. The debtor was able to transfer property that was “underwater,” the debtor’s principal was relieved of liability under his personal guaranty and the secured creditor obtained title to property, without paying city and state transfer taxes.
Mortgage Arrears and Chapter 7 Bankruptcy
The above scenarios assume that the debtors are current on their mortgage. If the debtors were not current, then the mortgage arrears would need to be cured in order to keep the house during Chapter 7 bankruptcy. A. How does a debtor deal with mortgage arrears?
i. Negotiate with the lender prior to the bankruptcy filing. ii. Negotiate with the lender after the bankruptcy filing for payment plan for the arrears. Pursuant to Bankruptcy Code § 524, a debtor must reaffirm within 60 days from the date of the first scheduled meeting of creditors. Once the reaffirmation is executed, unless the agreement is rescinded, the debtor is liable; if they default on the mortgage in the future after reaffirmation, the mortgage debt is not dischargeable. iii. Loss mitigation in the Southern and Eastern Districts of New York (see Section V below) ∙ Three benefits to Bankruptcy Court ordered mediation: 1. Settlement with the Bank, 2. Delay and 3. File goes to the “top of pile” in the Bank iv. Conversion of a Chapter 7 case to a Chapter 13 case, pursuant to Bankruptcy Code § 706. v. Abandon the house to the mortgageepursuant to the Chapter 7 filing, if you can’t work out a payment plan with the lender.
V. Short Sales
- A short sale is a sale of the property which will net less than the amount required to pay off the principal amount of the loan(s) on the property. In these difficult times for real estate, many banks are more amenable to approving short sales than they used to be.
- The first step in this process is to find a buyer for the property, then enter into a contract of sale with a special rider provision that discloses to the purchaser that the property will only be sold if the short sale is consented to by the seller’s bank.
- The bank will also require an appraisal of the property (the Bank will order their own appraisal), as well as preapproval of a HUD-1 Settlement Statement, a form which is required under the Real Estate Settlement Procedures Act (RESPA) and used to itemize services and fees charged to the borrower by the lender or broker when applying for a loan for the purpose of purchasing or refinancing real estate.
- Another issue that must be addressed in the short sale is relief of indebtedness income (discussed further in Section X, below). There are tax consequences when the property is sold for less than the balance of the mortgage, which must be discussed with the owner/borrower’s accountant and/or attorney.
- If the bank will approve the short sale, then this will allow the seller to sell the property, with some impact on his or her credit report and tax consequences; however, the net result is that the seller no longer has to worry about a property that is underwater.
VI. The Southern and Eastern Districts of New York’s Loss-Mitigation Programs
- In response to a growing number of mortgage defaults and foreclosures, the U.S. Bankruptcy Court for the Southern District of New York adopted Loss Mitigation Program Procedures in January 2009. A full description of the Southern District’s Program is at: http://www.nysb.uscourts.gov/pdf/lossmit/RevisedLossMitigationProcedures.pdf
- The U.S. Bankruptcy Court for the Eastern District of New York followed suit in December 2009. A full description of the Eastern District’s Program is at: http://www.nyeb.uscourts.gov/admin_orders/ord_582.pdf
- “Loss Mitigation” includes the full range of solutions that can prevent either the loss of a Debtor’s property to foreclosure, increased costs to the lender, or both. Loss mitigation commonly consists of the following general types of agreements, or a combination of them: loan modification, loan refinance, forbearance, short sale, or surrender of the property in full satisfaction of the mortgage. It is available in cases filed under Chapter 7, 11 or 13 of the Bankruptcy Code.
- Loss mitigation can only be requested for an individual’s primary residence.
E. Parties are encouraged to request loss mitigation as early in the case as possible, but loss mitigation may be initiated at any time, by any of the following methods:
i. By the Debtor
a. In the Chapter 13 Plan, a Chapter 13 Debtor may request loss mitigation with a creditor. When requesting Loss Mitigation in the Chapter 13 Plan, the Debtor must serve the Plan on the creditor and file proof of service via the Electronic Case Filing System (“ECF”). If the creditor fails to object within 21 days of service of the plan, the Debtor must submit a Loss Mitigation Order and the Bankruptcy Court may enter the Loss Mitigation Order. b. A Debtor may file a request for Loss Mitigation with a creditor. The creditor has 14 days to object. If no objection is filed, the Debtor must submit a Loss Mitigation Order and the Bankruptcy Court may enter the Loss Mitigation Order. c. Upon entry of the Loss Mitigation Order, the Debtor must serve it on the creditor and file proof of service on ECF. d. If a creditor has filed a motion requesting relief from the automatic stay pursuant to Section 362 of the Bankruptcy Code (a “Lift-Stay Motion”), at any time prior to the conclusion of the hearing on the Lift-Stay Motion, the Debtor may file a request for Loss Mitigation. The Debtor and creditor shall appear at the scheduled hearing on the Lift-Stay Motion, and the Bankruptcy Court will consider the Loss Mitigation request and any opposition by the creditor.
ii. By a creditor- A creditor may file a request for Loss Mitigation. The creditor must serve the request on the Debtor and Debtor’s counsel and file proof of service on ECF. The Debtor shall have seven days after service of the request to object. If no objection is filed, the creditor must submit a Loss Mitigation Order and the Bankruptcy Court may enter the Loss Mitigation Order. Upon entry of the Order, the creditor must serve it upon the Debtor and Debtor’s counsel and file proof of same on ECF.
iii. By the Bankruptcy Court.
The Bankruptcy Court may enter a Loss Mitigation Order at any time, provided that the parties that will be bound by the Loss Mitigation Order have had notice and an opportunity to object.
- Upon entry of a Loss-Mitigation Order:
- The Loss Mitigation Parties shall negotiate in good faith. A party that fails to participate
in Loss Mitigation in good faith may be subject to sanctions.
- The Debtor: Unless the Debtor has already done so in the Chapter 13 Plan or as part of
a request for Loss Mitigation, the Debtor shall provide written notice to each creditor, indicating the manner in which the creditor should contact the Debtor.
- The creditor: Unless a creditor has already done so as part of a request for Loss
Mitigation, each creditor shall provide written notice to the Debtor, identifying the name, address and direct telephone number of the contact person who has full settlement authority.
- The creditor shall serve upon the Debtor and Debtor’s attorney a request for
information using the “Creditor Loss Mitigation Affidavit” form within seven days of service of the Order. The creditor shall file same on ECF.
- The Debtor shall serve upon the creditor a response to the creditor’s request for
information using the “Debtor Loss Mitigation Affidavit” form within 21 days of service of the Creditor Loss Mitigation Affidavit. The Debtor shall file only the Debtor Loss Mitigation Affidavit on ECF.
G. The Loss Mitigation Parties shall provide either a written or verbal report to the bankruptcy court regarding the status of loss mitigation within the time set by thebankruptcy court in the Loss Mitigation Order. The status report shall state whether oneor more loss mitigation sessions have been conducted, whether a resolution was reached,and whether one or more of the Loss Mitigation Parties believe that additional lossmitigation sessions would be likely to result in either a partial or complete resolution. Astatus report may include a request for an extension of the loss mitigation period.
H. The Bankruptcy Court will consider any settlement reached duringloss mitigation. A settlement may be noticed and implemented in any mannerpermitted by the Bankruptcy Code and Federal Rules of Bankruptcy Procedure, including, but not limited to, a stipulation, sale, plan of reorganization or amended plan of reorganization; and a motion to approve Loan Modification and terminate Loss Mitigation.
I. Loss Mitigation will delay a motion to lift stay (filed by a mortgagee) to commence or continue a foreclosure action, and delay a foreclosure action as well. A creditor may not file a motion to lift stay during the Loss Mitigation period, except where necessary to prevent irreparable injury.
VII. Exemptions in Chapter 7 Bankruptcy for a New York State Resident
∙If you are married, and you and your spouse file for bankruptcy then your exemptions are doubled
∙If you do not own real estate and you have a lot of cash, or money in a bank account, then you can choose the federal exemptions and exempt $10,825.00
A. IRA. The maximum amount of a qualified IRAthat may be exempted is $1,000,000.
B. Under New York Debtor and Creditor Law § 283(2), an individual debtor may exempt up to $5,000 of personal property and a joint debtor may exempt up to $10,000 of personal property.
C. Homestead exemption-As discussed in Section IV above, in the counties of Kings, New York, Queens, Bronx, Richmond, Nassau, Suffolk, Rockland, Westchester, and Putnam, an individual debtor may exempt up $150,000 of equity in a residence, and a joint debtor may exempt up to $300,000 of equity in a residence.
D. An unlimited amount of rental or utility security deposits.
E. 60 days of food.
F. $7,500 (for an individual debtor) or $15,000 (for a joint debtor) of monies recovered for a personal injury.
VIII. Remedies for Dealing with Judgments
A. Under New York Debtor and Creditor Law, a judgment is good for 20 years. A judgment docketed against a property would prevent the owner from selling or refinancing the property without satisfying the judgment. ∙ One strategy for dealing with a judgment is to let the “judgment get old and cold” and then reach out to the creditor and negotiate an “out of court workout”
B. If a married couple owns property as tenants by the entirety (deed must say as “husband and wife” or similar language”), a creditor can docket the judgment against the property, but can’t force a sale of the property. This is to prevent the innocent spouse from the consequences of the judgment debtor’s actions.
C. Debtor’s may file a motion to avoid a judicial lien under section 522(f) of the Bankruptcy Code. Section 522(f) of the Bankruptcy Code protects Debtors’ exemptions and discharge, and thus their fresh start, by allowing them to avoid certain liens on exempt property (but not consensual mortgages). A Debtor may avoid a judicial lien on any property to the extent that the property could have been exempted in the absence of the lien. a. The formula for calculating avoidance of a lien is:i. Add the lien being tested for avoidance, all other liens and the maximum exemption allowable in the absence of liens (in the counties of Kings, New York, Queens, Bronx, Richmond, Nassau, Suffolk, Rockland, Westchester, and Putnam, $150,000 for an individual Debtor, $300,000 for joint Debtors).ii. From the above sum, subtract the value of the property in the absence of the lien to determine the extent of the impairment.iii. If the extent of the impairment of the exemption exceeds the entire value of the Debtor’s lien, the entire lien is avoidable.b. If the extent of impairment is less than the entire value of the Debtor’s lien, the lien can be avoided only to the extent of the impairment of the exemption and the rest remains as a lien.c. If the property has increased in value, there may now be too much equity for § 522(f) to apply if the current date is used as the date of valuation. The Debtor will want to use the date the bankruptcy petition was originally filed as the date of valuation. D. Judgments entered within 90 days of a bankruptcy filing are a voidable preference.
E. Cancellation of Record of Judgment Discharged in Bankruptcy under New York State Debtor and Creditor Law § 150
1. Under this section of New York State law, at any time after a year has elapsedsince a Debtor is discharged from their debts in bankruptcy, a Debtor may apply, upon proof of their discharge of debts, to the court in which a judgment was rendered against the Debtor, or to the court in which the judgment was docketed, for an order directing that a discharge or a qualified discharge of record be marked upon the docket of the judgment. 2. If it appears after a hearing that the Debtor has been discharged from the payment of a judgment or the debt upon which it was recovered, the court must enter an order directing that a discharge or qualified discharge be marked on the docket of the judgment. 3. If it appears that any lien of the judgment upon real property owned by the Debtor prior to the commencement of the bankruptcy was invalidated or surrendered in the bankruptcy or set aside in an action brought by the receiver or trustee, the order shall direct that a discharge be marked on the docket of the judgment.4. If (a) it does not appear whether the judgment was a lien on real property owned by the Debtor prior to the commencement of the bankruptcy, or (b) if it appears that the judgment was a lien on such real property, and it is not established to the satisfaction of the court that the lien was invalidated or surrendered in the bankruptcy or set aside in an action brought by the receiver or trustee, the order shall direct that a qualified discharge be marked on the docket of the judgment. If the court directs that a qualified discharge be marked on the docket of the judgment, it must specify in its order which of the two grounds stated above was the basis of its order.
IX. Relief of Indebtedness Income
A. Under § 108 of the Internal Revenue Code, debt relief is considered income.
B. The Mortgage Forgiveness Debt Relief Act of 2007 (which was scheduled to expire on Dec. 31, 2012) generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.i. This provision originally applied to debt forgiven in calendar years 2007 through 2012. As part of the negotiations to avoid the “fiscal cliff,” Congress extended its provisions to debt forgiven in 2013.ii. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately).iii. The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.iv. This provision does not apply to credit card debt or non-residential property. But a Chapter 7 bankruptcy filing eliminates relief of indebtedness debt.
X. Chapter 13 -Planning Opportunity/Strategy-if the Debtor has equity in the property and a creditor is foreclosing, file the chapter 13 bankruptcy to stop the foreclosure sale and give the Debtor time to sell the property
A. What are the pros and cons?
i. Consa. The debtor is placed on an austerity budget and must pay their disposable income to the Chapter 13 Trustee on a monthly basis.b. If the debtor is over the “median income,” then they must prepare a five year, 60 month plan. The shortest plans are generally three years.c. The filing fee is $281 (which is $25 less than the filing fee for a Chapter 7 filing).d. However, legal fees are greater than those for a Chapter 7 filing, since there are fees for preparing the plan, the hearing on plan confirmation, and the plan must be served on creditors and must be confirmable.e. In the Southern District of New York, historically only 30% of Chapter 13 plans pay out over time.f. Pursuant to §1322 of the Bankruptcy Code, first mortgages cannot be modified in Chapter 13. However, second mortgages can be modified and mortgages on investment properties and vacation homes can be modified.g. The Chapter 13 Trustee receives a commission of 10% of the monies paid into a Chapter 13 plan.h. Since 2005, when New York State increased the homestead exemption to $50,000 (before increasing it again in 2011), Chapter 7 can accomplish much of what can be accomplished with a Chapter 13 filing at a lesser cost to the Debtor.
ii. Prosa. Chapter 13 allows the debtor to retain property that he or she would otherwise lose in Chapter 7 liquidation (e.g. a car or a house with substantial equity)b. A Chapter 13 debtor remains under bankruptcy court protection for the duration of the repayment plan (3-5 years)
XII. Alternatives to Chapter 7 bankruptcy
A. Do nothingB. File for Chapter 13 bankruptcyC. File for Chapter 11 bankruptcy (which is an extremely expensive and time consuming process). A debtor would only file under this chapter if they didn’t fit within the confines of the Chapter 7 or Chapter 13 requirements, had a very unique problem or had an extremely high net worth. D. Out of court workout with creditors
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