Bankruptcy
LEGAL EXPERIENCE AND BACKGROUND
The Law Office of Gregory S. Hood has been representing clients for over 20 years. He understands that filing for bankruptcy protection is a difficult decision, and he will lead you through the process PERSONALLY. You will consult with only Mr. Hood and he will be the attorney to represent you at ALL stages of the process. Mr. Hood received his undergraduate degree at the University of Washington (Seattle) and his doctorate degree in law at the University of San Diego School of Law.
COMMONLY ASKED QUESTIONS:
What is a Bankruptcy?
A bankruptcy is a legal declaration by a person (or business entity that qualifies), that they/it cannot pay all or a portion of their existing debt to their creditors and need protection from the creditors remedies to enforce payment.
In California, and throughout the United States, this often means that a person cannot meet their contractual obligations to make their home, car, credit card and/or other monthly expense statements.
The law allows you to seek protection from your creditors by filing a “Petition” in the United States Bankruptcy Court. The filing of the “Petition” automatically “stays” (stops for a period of time) your creditors from trying to collect the debt. It also stays any pending civil legal action against you and/or your property (e.g. civil court lawsuits, foreclosures, repossessions, etc.).
There are different types of bankruptcies that apply to different types of circumstances. For purposes of the following articles we will be dealing exclusively with those designed for most people (“consumers”) and small businesses, Chapter 7 and 13.
In order to determine whether or not you qualify for protection the Court must be informed of your complete holdings including your income, expenses, assets, liabilities and property holdings (personal property, real property, life insurance policies, securities accounts, trusts, holdings in foreign countries of any kind, etc.).
In a Chapter 7 a “trustee” is assigned to your individual case to evaluate and determine what assets you can protect (keep) and what property may be sold to pay off your existing creditors. Property that you are allowed to keep is classified as “exempt” property. “Non-exempt” property can be taken by the U.S. Trustee to be sold to pay off your creditors.
What is a Chapter 7 Bankruptcy?
A Chapter 7 Bankruptcy allows you to completely eliminate certain debt and either “surrender” or “reaffirm” other debt. Debt is categorized as Secured, Unsecured Priority. Secured debt is something that is tangible like a car or home that can be repossessed or foreclosed on and the lender can physically take it back if you fail to make your payments. Examples of “unsecured debt” are credit cards and personal loans where if you fail to make your payments the lender’s only recourse is usually limited to filling a lawsuit and obtaining a judgment in order to collect on the debt. Common “Unsecured Priority” debt is usually tied to student loans or taxes that, by law are given special treatment and quite often not dischargeable in a bankruptcy.
In Chapter 7 Bankruptcy your debt is categorized into one of the three areas described above. Your unsecured debt is eliminated in its entirety. Your secured debt is either surrendered (i.e. given back to the creditor) or “reaffirmed”, which means that you can keep the property under the same terms and conditions as you had when you purchased the item, or in some instances creditors will negotiate a settlement with you. Unsecured Priority debt can be either dischargeable or non-dischargeable depending on the nature of the debt and when the debt was incurred. For instance, under certain circumstances tax obligations over three years old can be eliminated, whereas student loans cannot.
Do I qualify for a Chapter 7 Bankruptcy?
You "presumptively" qualify for a Chapter 7 bankruptcy if your income is lower than the Median Income in the State of California based on the number of "dependents" in your family. Where your income exceeds the Median Income it is determined by whether or not your debt is so great that you do not have sufficient disposable income to qualify under a Chapter 13 bankruptcy. If your, income exceeds the Median Income then you must take the “Means Test.”
What is the Chapter 7 “Means Test”?
The “Means Test” is used to determine whether nor not you qualify for a Chapter 7 bankruptcy if your income exceeds the median income in the State of California based on the number of members in your family that are dependent upon your income and your necessary monthly expenses such as a mortgage payment. If your income exceeds California States median income then a formula is used to determine whether you have enough income left over, after subtracting certain expenses, to repay some of your debt, in which case you may have to opt for a Chapter 13. If not, then you may qualify for a Chapter 7 Bankruptcy. This formula is called the “means test.”
Is Bankruptcy my only choice?
No. Just because you qualify for a Chapter 7 bankruptcy doesn’t mean that you should file for that kind of protection. There are many downsides to filing bankruptcy. Some of which include the negative effect on your credit score, and the fact that you can only file for Chapter 7 bankruptcy protection every 8 years, which would prevent you from exercising this option if your situation worsens after filing. Please contact the “Law Office of Gregory S. Hood,” to find out which option is best for you – Call (877) 378-7000 OR “Bankruptcy Center of North County” – Call (760) 434-5200.
What happens if I don’t pass the Chapter 7 Means Test?
If you don’t pass the means test, you have other options available to you. You can file a Chapter 13 Bankruptcy, which requires you to make monthly payments over a three to five-year period according to a strict budget monitored by the court. Most people who file for bankruptcy prefer Chapter 7, because it requires no payment to unsecured creditors and allows you to elect “ unsecured” portion is treated as the other “unsecured” debt, of which a portion of it may or may not repaid under the “plan.”
This should be contrasted with the Lien Avoidance procedure permissible under Section 522 of the Bankruptcy Code where judicial liens, such as judgment liens and voluntary liens on household goods, can be avoided if the property is otherwise exempt.
What is “Lien Avoidance”?
Lien avoidance is a procedure under 522 of the US Bankruptcy Code that allows judicial liens, such as judgment liens and voluntary liens on household goods can avoided if the property is otherwise exempt. Once a bankruptcy is filed not all governmental agencies (e.g. County Clerk) will be notified of the filing, only those you list on your bankruptcy papers. Therefore, presentation of the bankruptcy filing and discharge will not automatically result in the lien being removed. For that you will need a court order. In order to obtain a lien avoidance a “motion” must be made to the bankruptcy court and will ordinarily cost more money in terms of attorney fees and costs.
What is “exempt property” (exemptions)?
When filing a Chapter 7 bankruptcy there is certain property that is exempt form the bankruptcy court. This is property that you can keep as long as its value does not exceed a certain monetary figure. Initially, every debtor must choose between two different exemption statutes, what attorney’s in California often refer to as the 703’s or 704’s.
WARNING: *The following is not a complete list of all exemptions and are subject to change. They are not to be used as a means of determining whether or not you will or will not be able to protect certain property. They are used only as examples for a better understanding as to what an “exemption” is.
For those who elect the “703’s” the most commonly used exemptions, as of the date of this publication, are as follows:* Up to $23,250.00 in any property (this includes cash and real property); Up to $3,525.00 in one motor vehicle; Up to $1,425.00 in jewelry; Up to $2,200.00 in tools of the trade; 100% of any qualified Retirement Account; etc.
For those who elect the “704’s” the most commonly used exemptions are as follows:* Up to $75,000 (for a single person); $100,000 (for a married couple); $175,00 (for persons 65 years or older OR is mentally or physically disabled OR is 55 years or older and is single and makes not more than $15,000 gross annual income - $20,000 if married). All require the property to be debtor’s primary residence. Up to $2,550 in any one motor vehicle.
* This is not a complete list of all exemptions and is subject to change. They are not to be used as a means of determining whether or not you will or will not be able to protect certain property. They are used only as examples for a better understanding as to what an “exemption” is.
Can I eliminate a student loan obligation through bankruptcy?
Under both a Chapter 7 & 13 Bankruptcy you cannot eliminate student loans unless you can show “undue hardship.” This standard is extremely difficult to meet and usually requires a showing that you are so disabled that you cannot work and your chances for obtaining future employment are almost non-existent. Under the Bankruptcy Abuse prevention and Consumer Protection Act of 2005 privately funded student loans are treated the same as federally guaranteed student loans. In a Chapter 13, you may not be able to totally eliminate student loans in bankruptcy, but you can consolidate them with your other bills. Under this chapter, you can propose a repayment plan in which to pay your creditors over three to five years. If you include your student loans in a Chapter 13 repayment plan, you might be able to reduce balance over the life of your other debts, and the amount of your disposable income. However, you will still owe whatever student loan debt remains when you complete your plan.
Can I eliminate a second or subsequent mortgage or an "equity line of credit" (HELOC) in a Chapter 7 Bankruptcy?
The issue is whether or not you can eliminate (discharge) the debt associated with a second or subsequent mortgage or HELOC where the value of the real property is equal to or less than the amount owed to senior lienholders (e.g. first mortgage) leaving the second mortgage (or other lienholders) completely unprotected based on prevailing market prices. The answer is no in Chapter 7. However, it is possible to eliminate them through a Chapter 13 bankruptcy. It is called “lien stripping.”
What is “Lien Stripping”?
In a Chapter 13, under Section 506 of the Bankruptcy Code, liens can be “stripped off’ of the debtor’s assets when there is not enough equity in the asset, after deduction senior liens from the property’s current market value, to secure the unsecured portion is the amount that the claim exceeds the value of the collateral. For example, where the property’s value is $350,000 and the first mortgage is $400,000, and the second mortgage is $100,000 then the second mortgage is completely is unprotected and may be “stripped’. Historically, the most common type of lien stripping involved motor vehicles. For example, where $15,000 is owed on an auto loan, but the vehicle is only worth $10,000, then $5,000 may be “stripped”, and the debtor’s obligation is only $10,000 is characterized as “secured’ debt, and the $5,000 is characterized as “unsecured” debt. So, in a Chapter 13, the “plan” must provide for the 100% repayment of the secured debt over a period of time, and the repayment or the surrender of property on secured debt.
However, Chapter 13 bankruptcy is usually the best way to handle specific types of problems, like curing a default on a mortgage or potentially eliminating a second mortgage entirely, which is know as “lien stripping”.
Another option is to negotiate a settlement with your creditors at a reduced amount of existing principal owed. However, negotiated settlements often times require a lump sum payment and the creditor may file an IRS Form 1099 on the unpaid balance against you.
What is the difference between a Chapter 7 and a Chapter 13 Bankruptcy?
The simplest explanation is that a Chapter 7 allows you to eliminate all of your unsecured debt, and elect to keep or return your secured debt, and allows you to eliminate those creditors cannot attempt to collect on the debt without violating the law, and you are not legally obligated to repay the debt. A Chapter 13 requires the debtor to make monthly payments to a trustee who in turn pays off all or a portion of your debt over a period of 3 to 5 years.
What is a Chapter 13 bankruptcy?
A Chapter 13 bankruptcy is designed for those individuals who either cannot qualify under a Chapter 7 or have an asset(s) that cannot be protected in a Chapter 7 (usually a home). In a Chapter 13 debtor is required to propose a “plan” whereby they make an affordable monthly payment to a trustee with the goal of repaying all or a portion of their debt.
Do I qualify for a Chapter 13?
For a Chapter 13 bankruptcy, you must have a stable income with sufficient disposable income to make monthly payments to reduce your debt; you must have no more than $1,010,650 in secured debt, and no more than #336,900 in unsecured debt. These amounts are adjusted periodically to reflect changes in the consumer price index. Chapter 13 will also stop collection action against you.
How long does bankruptcy last?
Typically, a Chapter 7 bankruptcy will have a very adverse effect on your credit score. The good news is that a Chapter 7 ordinarily does not take more than 6 months to complete, and usually only 90 days. Afterward your income to debt ratio is almost certainly much improved and you can start to re-establish your credit sooner. Having a house payment or installment payment (e.g. car) that is reported to credit bureaus. For the most part a bankruptcy is a bankruptcy and as long as it is still open your ability to obtain credit will be much harder. Consequently, a Chapter 13 which lasts from 3 to 5 years will likely inhibit your ability to obtain credit for the entire time your case is open.
Am I prevented from filing Chapter 7 after filing a Chapter 13?
Generally speaking, there is no bar to filing a Chapter 7 after a Chapter 13. Exceptions to this rule are when (1) the prior cases was dismissed due to a willful failure to abide by orders of the court and (2) there was a voluntary dismissal following the filing of a request for relief from stay. In these cases, there is a 6 month bar (mandatory waiting period). A person cannot obtain a discharge in a Chapter 7 for six years after obtaining a discharge in a Chapter 13, unless the person in the chapter 13 paid 100% of the unsecured creditors OR at least 70% if the debt is repaid and it is found that the plan was filed in good faith and was the person’s best effort.
Can I file a chapter 13 after having filed a Chapter 7?
Yes, you can. In fact, you may be able to file a Chapter 7 and eliminate all of your unsecured debt, then later file a Chapter 13 and eliminate a second mortgage, which is called “lien stripping.” Contact us at (877) 378-7000 and find out how.
Can I protect my retirement account in a Chapter 7 bankruptcy?
For the most part, yes you can protect 100% of your retirement account. Ask your attorney if your plan qualifies. Call us today at (877) 378-7000.
Can I eliminate tax obligations in a Chapter 7 Bankruptcy?
Yes, if you meet the following requirements: The debt obligation is at least 3 years olds; You filed a tax return for the year you are seeking to discharge; up to $6,75.00 in jewelry; 1005 of any qualified retirement Account; etc.
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