In previous posts I’ve written about bankruptcy exemptions and what they are. Generally speaking the exemptions are what protect certain bits of your property from seizure by the bankruptcy trustee. These exemptions vary from state-to-state. Some states, like Nevada, have very good exemptions, and some states, like Utah, have not-so-good exemptions. (For example, a debtor may keep a vehicle with $15,000 in equity in Nevada, but only $3,000 in equity in Utah).

Because of these varying exemptions, some debtors may think it attractive to move to a state with good exemptions just before filing a bankruptcy so they can get maximum protection for their property. However, the law is ahead of these debtors, and has already created rules that govern these situations.

Debtors are generally required to file their bankruptcy in the state in which they have lived for the majority of the last 6 months. Hearing this, an enterprising debtor now residing in Utah might be thinking, “Well, I’ll just move to Nevada, live there for 3-6 months, and then file! That way I can get the higher exemptions.” That debtor should STOP and consider the following: the law has considered this as well. Debtors are generally only allowed to claim exemptions from a state they’ve lived in continuously for the last 2 years before filing. This means that they must establish a residency in Nevada and then live there for 2 years before filing bankruptcy if they want to get the Nevada bankruptcy exemptions. Bottom line: where you file and which exemptions you can claim are two separate determinations. It is possible to file in one state but have to claim another state’s exemptions.

There are a slew of more complicated rules for unorthodox situations, such as when a debtor hasn’t lived anywhere for 2 years at a time, etc. An experienced bankruptcy attorney can assist a debtor with determining 1) where they can file a bankruptcy, and 2) which exemptions they qualify for. These determinations may have great ramifications for debtors and their families.

A potential client called me the other day. He and his family were in a financial situation where they were being forced to consider filing for bankruptcy relief. They were in a situation that many find themselves in these days: their job situation had changed and they could no longer afford their mortgage payment. Their payment had fallen 4 or 5 payments behind. They had credit card debt that used to be manageable, but now that all their income was going towards paying basic living expenses, they were delinquent and their interest rate had shot to 27%, creating an insurmountable hole of debt that they had no idea how they’d ever get out of.

As I continued to speak with him, it became more and more clear that bankruptcy was an option that he and his family needed to consider. After speaking to him about their debts, I began to question him about his assets to determine whether he had any property at risk of seizure. My heart sank as he proudly told me that, in preparation for the financial changes  that his family needed to make, he had made it a priority to pay off his vehicles. Unbeknownst to him at the time, by creating equity in the property he desired to keep after filing a bankruptcy, he was putting them severely at risk of seizure by the bankruptcy trustee.

A bankruptcy trustee is appointed by the bankruptcy judge to manage and oversee the administration of a bankruptcy estate. It is his or her job to analyze the debtor’s situation and to determine if there are any non-exempt assets that he is able to take from the debtor, sell, and distribute the money to the creditors (as well as taking a percentage of what he liquidates for himself). A “non-exempt asset” at risk of seizure is 1) an asset that falls outside of the protection of Nevada’s exemption laws, and 2) an asset with equity.

In Nevada, debtors are allowed to file for bankruptcy relief and keep certain property, including a primary residence with up to $550,000 in equity, a vehicle for each debtor worth up to $15,000 in equity, etc. There are many exemptions that protect things like household goods, IRAs, 401ks, and other assets. Notice the term “in equity”.  Let’s compare two scenarios:

Michael wants to file for bankruptcy. He lives in a home worth $800,000, and he owes one mortgage of $400,000 on it, therefore he has equity in his home in an amount of $400,000. He also owns one vehicle: a truck worth $30,000, which he owes $22,000 on, meaning he has $8,000 in equity in his vehicle.

Kendra wants to file for bankruptcy. She lives in a home worth $600,000, and it’s paid off in full, so she has $600,000 in equity in her home. She also drives a vehicle worth $20,000, and it’s paid in full as well, meaning that she has the full $20,000 in equity in her vehicle.

If Michael and Kendra were both to file a Nevada bankruptcy, Michael would get to keep both his home and his vehicle, while Kendra’s home and vehicle would be seized by the bankruptcy trustee and sold for the benefit of her creditors. Why? Because the equity in Michael’s property is protected by the Nevada exemptions, and Kendra’s equity exceeds the allowable amount. This is so even though Kendra was essentially a “more responsible” debtor, who paid her mortgage and vehicle creditors in full, and Michael has more valuable assets and owes large amounts on them.

So, when you and your family are considering bankruptcy, before you decide to pay off an asset you should make a determination of whether that will ultimately help or hurt your family’s situation in bankruptcy. An experienced bankruptcy attorney can assist you in this process and inform you of the risks involved with any financial move prior to bankruptcy.

Knowing when you need to file a bankruptcy is tough. Even if you’ve spent months or even years trying to make things work out, you may still be unsure about taking that last step. Please know that you’re not alone. I see clients every day who have waged this same battle with themselves.

Use the following questions to evaluate whether you may be in need of bankruptcy relief:

1) Are you able to pay all of your debts in a timely manner? If so, you are not in need of bankruptcy relief.

2) Are you only able to pay some of your debts in a timely manner? Let’s discuss this briefly. If this is the case, ask yourself which debts you are paying. If you are able to pay your mortgage payment and your car payments, but are unable to make payments towards your credit cards, lines of credit, doctors, or other debts, you may want to consider bankruptcy. This is because assets like vehicles and your home can be kept, in certain situations, even after filing bankruptcy. Whether or not they can be kept will depend on the amount of equity in them and your state’s bankruptcy exemptions. If you are going to file in Nevada, so long as your home has less than $550,000 in equity and your vehicles (one for each spouse, or just one for a single filer) have less than $15,000 in equity in each of them, you may keep them. Therefore, you may be able to keep your house and cars and keep paying on them after bankruptcy, but your other debts won’t disappear without some assistance from the bankruptcy code. If you’re in a situation where you feel like you’re unable to pay your debts, save for your home and cars, you may want to consult with an attorney to decide if bankruptcy will help your situation.

3) Have your creditors sued you? If so, you need to be aware that they will be able to obtain a judgment against you, which they will likely be able to collect upon by way of a wage garnishment or a property lien. They can take up to 25% of your paycheck. This may become burdensome to you. In most cases, a bankruptcy will discharge your responsibility under those judgments and extinguish any lien or garnishment. Bankruptcy may be the only way you have to rid yourself of a burdensome judgment.

4) Have you had a home or car repossessed, or is your home currently in the process of foreclosure? If so, a bankruptcy could help you discharge any liability you have on a deficiency that remains outstanding to an past or present mortgage holder or lender. It may also postpone a current foreclosure sale, giving you time to plan for your family.

If your answer to any of these questions indicate that bankruptcy relief might help your situation, please contact me today and schedule a free bankruptcy consultation.

It seems counter-intuitive that bankruptcy can be a tool for financial recovery, but it’s true. Just the other day I met with a client who, like so many others, had fallen victim to the economy: he had lost his job and his home had severely depreciated in value. As a result, his house payment was delinquent and he was unable to make any payments on his credit cards; he was even using them to pay his day-to-day expenses. He was being faced with the possibility of foreclosure and the resulting deficiency judgment from a house that was upside-down by $150,000. His credit card companies had raised his interest rates to a whopping 27%, making repayment impossible.

Before he lost his job he was current on everything. He was a responsible borrower who had the intention of paying his debts. However, due to circumstances beyond his control he was facing a life of impossible repayment and answering to ever-looming creditors.

For him, filing for bankruptcy was a good option. Obviously, it’s nobody’s first choice. However, put yourself in his shoes. His options were 1) do nothing, 2) hope to get another job, only to be faced with the nearly insurmountable task of paying off $12,000 in back mortgage arrearages and his now minimum monthly credit card payments of $450, or 3) file for bankruptcy and start over.

He ended up choosing option number 3. As a result of filing a chapter 7 bankruptcy his credit card debts were forgiven, and he was able to surrender his home without the threat of a potential lawsuit to collect the $150,000 of resulting deficiency from him. It was truly a fresh start.

The physical demeanor and appearance of my client from the first day I met with him and the day he filed his bankruptcy were dramatically different. He came to my office an over-burdened man with little to no hope, and left with a renewed spirit who, though he had to make the tough decision to file for bankruptcy, now had the fresh start he needed to get back on his feet.

If you feel that bankruptcy might be an option that can give you relief, please give me a call and I would be happy to offer you a free consultation to discuss your options.

There are essentially two chapters of bankruptcy available to individual consumer debtors: Chapter 7, and Chapter 13. Both chapters obtain the same goal: that of discharge from your debt. However, the way they go about obtaining that goal are drastically different.

Chapter 7 bankruptcy is a “liquidation” process, whereas Chapter 13 bankruptcy is a “reorganization” process. Basically, what this means is in a Chapter 7 you disclose all your debts and assets, you get to keep all your exempt assets, and the trustee gets to take and sell your non-exempt assets. It’s typically as straightforward as that. At the end of this “liquidation” process (typically 3-4 months), you receive a discharge of your debt. Conversely, the reorganization process of Chapter 13 is different and more complex because instead of this quick liquidation process, you are put in a 3-5 year repayment plan, where, at the end of each month, you make a pre-determined payment to the trustee. Only at the end of your completed plan do you receive your discharge.

You might be asking why anyone would file a Chapter 13 instead of a Chapter 7. The reason is because there are some restrictions on who can file a Chapter 7. For one thing, there are income restrictions on who can file a Chapter 7. The amount you’re allowed to make depends on your household size and the state you live in. In Utah, for example, a single person must make less than roughly $48,000 a year (gross) to qualify for a Chapter 7. For a married couple the limit is around $55,000. These amounts are changed periodically due to changes with the economy. The amounts continue to go up depending on the amount of dependent children you have in your household. If you make more than the prescribed limit, you will be ineligible for a Chapter 7 and must instead file a Chapter 13.

Another reason you might want to file a Chapter 13 instead of a 7 is for one of the benefits that a 13 offers. For example, if you are delinquent on your mortgage payments a Chapter 7 will do nothing to help you with that. But in a Chapter 13, as long as you have the means to make a sufficient enough payment every month, you can become current on your mortgage through your Chapter 13 plan payments. Many debtors who would otherwise qualify for a Chapter 7 bankruptcy choose to enter Chapter 13 to help with their mortgage situation. Other financial situations might similarly be able to be solved by way of the reorganization plan.

Though both Chapter 7 and Chapter 13 bankruptcies will accomplish a discharge of your debt, they will do it in severely different ways. It is a good idea to consult an experienced professional who can guide you to the best fit for your family’s situation.

Bankruptcy is a reality for many individuals, especially these days. But how will filing for bankruptcy affect or be affected by your estate planning? There are two main contexts that will be considered in this post: that of you, yourself, filing for bankruptcy, and that of one of your beneficiaries filing for bankruptcy. In both situations there are ramifications that may affect your estate.

If you are facing financial difficulties, it may be necessary for you to file for bankruptcy. Before this point, you may have invested the money and effort to establish an estate plan for your family. If you established a trust, you may have already transferred property out of your individual name and into the name of your trust. Typical family trusts are revocable trusts that hold property until your death, whereupon the property is distributed according to the trust’s terms to your beneficiaries. If you have one of these trusts, you should be aware that any property that you transferred into it will be viewed as your own individual property in bankruptcy, just as if you never created the trust at all. In other words, revocable trusts will not protect your otherwise non-exempt property simply by virtue of the fact that the trust is the record owner of the property. The trust is essentially treated as invisible, and the bankruptcy proceeds as if it is not there. If you have an atypical trust, such as an irrevocable, self-settled, or A/B trust with one deceased trustor, there may be some additional considerations. You should speak to a bankruptcy attorney about your individual circumstances in those cases.

One context where the terms of your trust will make a difference is when one of your beneficiaries is the one filing the bankruptcy. Theoretically, when this happens their interest in your estate, because it is an asset of value, becomes part of the bankruptcy estate and is subject to seizure by the bankruptcy trustee. However, the bankruptcy code, 11 U.S.C. § 541(c), provides that any restrictions on the transfer of a beneficial interest of the debtor in a trust that is enforceable in non-bankruptcy law is also enforceable in a bankruptcy. In other words, if your trust contains a “spendthrift clause”, which is typical in most trusts, then the trustee cannot seize your beneficiary’s share of your estate. A spendthrift clause prevents creditors from seizing non-disbursed portions of the trust. Therefore, as you might guess, if your beneficiary has already received the funds from your trust before he files for bankruptcy, those assets can be seized. But if the trustee of your trust is aware of the financial crisis of the beneficiary, she can withhold distribution to him for a period of time, utilizing the provisions of the spendthrift clause, and prevent the bankruptcy trustee from seizing the assets.

If you are still alive when your beneficiary files for bankruptcy, there is no risk of interference with your estate unless you have set up your trust to make mandatory distributions to your beneficiaries while you are still living. But if you are elderly or expecting to experience health problems in the near future, you may want to consider amending your estate planning documents to remove the bankrupt beneficiary from being named in your estate plan at all, so as to avoid altogether the risk of any of your estate becoming part of the bankruptcy trustee’s pot of money to be given to the debtor’s creditors.

It is important to understand that a typical family trust is not going to provide your assets with any sort of bankruptcy protection in the case of your own bankruptcy. If it is written properly, it may provide protection in the case of a beneficiary’s bankruptcy, but there are strategies that may want to be used in that circumstance. An experienced bankruptcy attorney can assist you in planning for whatever lay ahead.

The decision to file for bankruptcy can be a scary one. It’s hard emotionally for many people because they have tried for so long to make things work financially and haven’t been able to succeed. Bankruptcy, to them, feels like failure. I try to convince my clients to look at bankruptcy not as failure, but as relief. Another scary thing about bankruptcy is that the process is foreign and unknown. How do I file? What do I have to do after I file? Will I have to go to court and speak to a judge? These questions and others can bring stress and fear to debtors. The purpose of this post is to outline what the process of filing for bankruptcy is like, so as to take away some of the “scariness” of the process.

The focus of this post will be on Chapter 7 and Chapter 13 filings. The process is largely the same for both, initially, but there are some large differences between the two that will be noted. Also, note that although you do not need to hire an attorney to file for bankruptcy, the process is much more navigable and straightforward if you do. This post will assume that you are working with an attorney during your filing.

1. You’ve been thinking about bankruptcy. The first thing you should do is have a consultation with an experienced bankruptcy attorney. Many experienced attorneys offer free initial bankruptcy consultations, so do not feel that you need to pay a consultation fee to consult with a good attorney. You should ask for referrals from others who have gone through the bankruptcy process because incompetent bankruptcy counsel can make your life miserable and potentially result in your debts not being discharged. Although there can be issues that come up during the pendency of a bankruptcy, a competent bankruptcy attorney should be able to predict where potential issues may arise, warn you beforehand, and counsel you as to the best way to avoid those pitfalls. At the consultation, you should inform your potential counsel of all your debts and all your assets. The attorney should ask you about your income, expenses, and specific questions with regards to your assets. All this information will be important for the attorney to formulate a full picture of the ramifications a bankruptcy will have on your life. After the consultation, you should have a good idea of how bankruptcy will affect you and your family, and you should leave with a quote for what the bankruptcy will cost you in attorney’s fees. The typical flat upfront fee for a Chapter 7 and Chapter 13 will be between $1,000 and $2,500, with Chapter 13s being more expensive because of the increased complexity involved.

2. Once you have hired an attorney, you will develop a timeline with the attorney for when you filing date will be. Your attorney will likely have you fill out some detailed paperwork describing all your debts, assets, income, and expenses, along with a questionnaire asking you many questions about your financial status. Your attorney will use this information to write your bankruptcy petition, which is a document about 35 pages long that will be filed in the bankruptcy court to start your case. The timing of this filing is important for many reasons because it must take into account certain things, including what balance your bank accounts are at the file date, if you are expecting a flux in income, or if you are going to start a new job. The day you file your bankruptcy petition is the day your bankruptcy case starts, and is also the day that your creditors must stop contacting you. Any further collection efforts must be approved by the bankruptcy court.

3. About 4-6 weeks after your file date, you will have to personally appear at the “341 meeting of creditors”. This meeting happens in every bankruptcy case filed. Despite the name, creditors are almost never there, and it is used more as a chance for the bankruptcy trustee to gather information, check the identity of the debtor, and allow any rare creditors to appear and ask questions. The bankruptcy trustee is not a judge, and a judge is not present at this meeting. The trustee is an individual appointed to administer the bankruptcy case, and is typically a lawyer who does this administration as his full-time job. The trustee will put you under oath, require you to prove your identity and social security number (usually with driver license and social security card), and proceed to ask you any questions he has about the petition. Your attorney will appear with you at this meeting.

4. After the 341 meeting, unless there is an issue that needs to be litigated, you will not have to make any further appearances in court or elsewhere. For chapter 7 debtors, they will receive their discharge of debt approximately 60 days after the meeting. For chapter 13 debtors, their attorney will have a few additional steps to complete, including achieving a confirmation of the chapter 13 plan. Once a confirmed chapter 13 plan is achieved, chapter 13 debtors will have the obligation of faithfully making their monthly payments, or else their bankruptcy will be dismissed. Chapter 13 debtors will only achieve a discharge of debt if they successfully make every single plan payment over the course of 3-5 years, typically.

5. After the discharge of debt is achieved, the debtor has no other responsibilities in the bankruptcy except to fulfill requirements of the trustee, which may include turning over the next year’s tax refund or working with the trustee to surrender non-exempt assets. The debtor’s responsibilities will depend on his own financial situation, so you should work with your attorney to achieve an expectation of what you’ll need to do.

6. Finally, once all outstanding issues have been taken care of, your bankruptcy case will be closed by the trustee and there will be no further action.

As you can see, the typical debtor never has to appear in front of a judge. The process can be extremely simple, depending upon the competency of your counsel and the complexity of your financial situation.

If you’re thinking about filing for bankruptcy, you may be concerned about what might happen to your house during the process. How your home will be treated will depend on a few different things: 1) what chapter of bankruptcy you are filing, 2) whether you have equity in your home, 3) if you do have equity in your home, whether the laws of your state fully protect that equity, and 4) whether you desire to keep or surrender your home during the bankruptcy process.

To begin with, the laws of each state allow a debtor to “keep” his or her primary residence as long as the equity in that house can be claimed as exempt. “Exempt” means the state legislature has decided that debtors who file for bankruptcy should be able to keep certain assets, so long as the value of those assets falls within the limits set by the legislature. Each state allows a debtor to keep some portion of equity in their home, and each state’s exemptions vary. For example, in Nevada a debtor can protect up to $550,000 in equity in their home, but in Utah a debtor can only protect up to $30,000 in equity in their home. So, Debbie, a Utah resident, owns a home that has a fair market value of $200,000, and she still owes $180,000 on it. This means she has equity of $20,000 and she will be able to claim that equity as exempt in her bankruptcy, and keep her home. However, if she only owed $50,000 on her house, that would mean she had $150,000 in equity in it, and she would lose her home in a bankruptcy because the Utah equity exemption is too small to cover her equity. However, if Debbie had no equity in the house, such as if her house was upside-down and she owed more than the house was worth, she would definitely be able to keep her house.

The above “exemption” analysis will apply whether you file a Chapter 7 or a Chapter 13 bankruptcy. If your house has a lot of equity in it, you will likely have to surrender it in a bankruptcy unless your home’s equity falls below your state’s exemption. One thing a Chapter 13 bankruptcy offers that a Chapter 7 does not is assistance to debtors who have become tardy in making their mortgage payments. In this case, the debtor’s attorney can build the tardy mortgage arrearages into the debtor’s Chapter 13 plan payments. So long as the debtor can afford his monthly plan payments, the mortgage is essentially brought current through the Chapter 13 plan, and the debtor continues paying his mortgage payments as usual, without the threat of foreclosure constantly looming. A Chapter 7 does not offer any such benefit.

Potential debtors should note that, even if your home has a low enough equity to be exempt, if you are filing a Chapter 7 and are in default on your mortgage, your lender may elect to foreclose on you anyway. A Chapter 7 does not “fix” a delinquent mortgage situation like a Chapter 13 can, no matter what the equity situation looks like.

You will also have an option in your bankruptcy petition to declare whether or not you want to keep your house. For some, a bankruptcy is a good opportunity to rid themselves of a bad mortgage situation. One of the protections bankruptcy offers is that a debtor can absolve themselves of any present and future liability to a mortgage lender. In their bankruptcy, a debtor can simply declare that he is surrendering his home, and he can walk away from the mortgage debt, even if his home is underwater.

If you are concerned about your mortgage situation and you are considering filing for bankruptcy, you should consult an experienced bankruptcy attorney. They can help you understand the potential consequences a bankruptcy filing will have on your home.