Chapter 7 Bankruptcy

Bankruptcy Options When You Are Behind On Your Mortgage

Many individuals end up in my office when they fall behind on their mortgage. It is a common problem. The most frequent cause is a temporary lose or reduction in employment. Several months of unemployment can quickly lead to a family facing a foreclosure, which are sometimes filed within 3 months of the first missed payment. Fortunately, the Bankruptcy Code can help, whether you want to save the home you have fallen behind on, or if you simply want to walk away from it.

What if you are behind on your mortgage, and you don't want to stay in the home? Chapter 7 bankruptcy can help. When a debtor falls several or more months behind on a mortgage, a foreclosure proceeding will often commence. A foreclosure allows the lender (usually a bank or mortgage company) after a series of court filings, to seize the home, sell it at auction, and then go after you personally if the sale price does not cover all of the mortgage and expenses. Certain lenders and law firms specialize in doing just this.

Homes often sell for very low prices in these sales, and if the mortgage was large, this could lead to a huge "deficiency judgment" against you. The lender will be able to put liens on your property (or future property) or even freeze your bank account. And these deficiency judgments do not go away. However, Chapter 7 bankruptcy can wipe out these deficiency judgments, no matter how large they become. When there is a large deficiency, bankruptcy may be the only option allowing you to go on with your financial life. The process is very straightforward, and you can even continue to live in the home until it is sold at auction. This is often months down the line. As long as you are willing to ultimately surrender the home, Chapter 7 bankruptcy is the perfect option.

On the other hand, what if you are behind on your mortgage and you want to save your home? You will need to file a Chapter 13 bankruptcy. Chapter 13 bankruptcy is more complicated, but it has many benefits. You can catch up on mortgage arrears by paying them back over 3 to 5 years, without interest or further penalties. Spreading out the amount owed over a period of 60 months can make repaying even large arrears feasible. For instance, if you are one year behind on a $1,000/month mortgage, you can catch up the arrears for $200 over 5 years. While this may not be possible if you have not started working, it is often very workable when full employment returns.

Another important feature of using Chapter 13 bankruptcy when you are behind on your mortgage is that it can stop a sheriff sale up until the very moment the gavel goes down, and it does not require negotiation with the lender. Loan modifications are often endless (and useless) endeavors. However, under Chapter 13 bankruptcy, there is no such negotiations. As long as the lender is paid under the terms of the mortgage, and all arrears are accounted for, they must accept the filing. Chapter 13 bankruptcy can help in all but the most hopeless situations.

Contact us if you have fallen behind on your mortgage and you wish to discuss your options. Whether you want to save your home, or surrender it, bankruptcy has an option for you.

Small Business Debts and Chapter 7 Bankruptcy

The bankruptcy code provides for large business debt relief with Chapter 11 bankruptcy. When Westinghouse, or the Penguins, or Donald Trump, filed for bankruptcy, it was a Chapter 11 bankruptcy. This is a very expensive and very complicated bankruptcy that allows for the restructuring of debts and/or liquidation of assets. With smaller businesses, Chapter 11 is unnecessary, and a normal consumer Chapter 7 bankruptcy can be filed instead.

Chapter 7 bankruptcy is normally filed on consumer debt (such as credit cards, medical bills, mortgages, and car payments). However, it can also be used to eliminate business debts that were personally accrued during the operation of the business. This is important because these debts are often quite large, larger than most personal debts. Fortunately, Chapter 7 bankruptcy can be used to eliminate these business debts once you decide to shut down the business.

What types of business debts can be discharged in Chapter 7 bankruptcy? Almost all types related to a small business. The most important type of debt is the remaining time on a business lease. Landlords can go after the entire remaining lease once you stop paying, and considering that commercial leases are normally for multiple years and tens-of-thousands of dollars, this can be quite significant. In most small business cases, the debtor is personally obligated on the lease, which allows the landlord to sue both the company and individual. Given the large amounts of money at stake with these leases, Chapter 7 bankruptcy may almost be a necessity. The lease can be eliminated whether there are 3 months or 3 years remaining, so there is no need to continue the business once you have decide it is best to shut it down.

Business loans and debts personally backed by debtor are also dischargeable. The range of these types of debts is as broad as the range of different types of businesses. It can include (but is not limited to) debts to vendors, service providers, or leased property. Loans used for equipment or products can be wiped out (though the items themselves could be property of the bankruptcy). It can also discharge loans that are part of a lawsuit.

Personal credit cards used in purchases related to the business can also be discharged. Debtors will often use their personal credit cards to keep a business going, often racking up tens-of-thousands of dollars of debt. These debts will be treated the same as business loans, and unless they were used to pay taxes, they will be dischargeable. These can be discharged along with personal credit card debt on consumer purchases.

Business vehicle loans can also be wiped out. A vehicle used in the business, but secured by a loan signed by the debtor can be surrendered and discharged. This is even the case if the vehicle was (or wasn't) used for personal reasons. Of course, the vehicle will need to be returned to the creditor.

One final point about Chapter 7 bankruptcies filed on business debts is that there is no means test. The means test (which looks at the last 6 months of income for a debtor looking to file bankruptcy to determine the type of bankruptcy they can file) does not apply when the debts listed are "primarily business in nature". This will be helpful for filers with higher incomes at the time of filing.

Contact us if your small business is facing large debts and you are considering bankruptcy. The bankruptcy code may allow you to avoid personal obligation and move on with your life. The end of your business doesn't need to be the end of your financial future.

What Happens After The Bankruptcy Meeting of Creditors?

I have discussed the bankruptcy Meeting of Creditors in some previous posts, including it's purposes and procedure. The Meeting of Creditors is very straightforward. The trustee assigned to your case reviews your petition, your income and expenses, and your property and debts. He or she verifies you are being truthful and thorough, and they also recommend (or object to) your case being discharged. But, your case is not quite complete when the Meeting of Creditors is over. There are still a few things to keep in mind.

I will mostly discuss what happens after the Meeting of Creditors in a Chapter 7 case. The Chapter 13 case typically lasts 3 to 5 years, so the time after the meeting is much greater, and the continued case is more complex. A Chapter 13 Meeting of Creditors is more of a beginning to your case than an end. There is still a lot to do.

The Chapter 7 Meeting of Creditors, on the other hand, signifies that your case is almost complete. The Chapter 7 discharge is usually official 60 days after the Meeting of Creditors. While you do not need to do anything yourself to bring about the discharge, you should keep an eye out for the notice in the mail. If you have not received it within 90 days, give your attorney a call. You should keep your discharge notice on file in case a creditor ever attempts to collect in the future. You may also need the notice of discharge in order to get student loan companies to accept your payments after bankruptcy (creditors are not allowed to attempt to collect from you while you are in bankruptcy, and some will want proof). So, keep an eye out for this discharge notice.

A responsibility you will need to remember after the Meeting of Creditors is to complete the second course, also known as the Financial Management Course. My office will order this course for you, but you will need to complete it over the phone or internet within 60 days of the Meeting of Creditors. Your case will be dismissed if you fail to do so, and you will be required to re-file EVERYTHING, with additional legal fees and costs. It's easy enough to complete, so there is no reason to take any chances... get it done as soon as possible. The consequences of not doing it are too great.

One final thing to keep in mind after the Meeting of Creditors is that you must notify your attorney of any inheritances, lawsuits settlements, insurance claims, or lottery winnings in the 6 months after your case is discharged. In some rare situations, creditors can make claims for a piece of this windfall. These situations are rare, but keep your attorney updated.

In every case, you should not transfer any property or take out any loans until your case is discharged. Your creditors will have the option of objecting to your discharge until 60 days after the Meeting of the Creditors, so it is safest to take no actions during this period, at least without consulting your attorney. I always tell my clients not to do anything there were told not to do in the months leading up to bankruptcy. Better safe than sorry.

Contact us if you have any questions about the Meeting of Creditors, or the period afterwards. There isn't much to do, but you should still be vigilant. Your case will almost be complete, there is no reason to needlessly raise an issue.

Do I Qualify For Chapter 7 Bankruptcy: Part 2

In my most recent post, I discussed the importance of income in determining if you qualify for Chapter 7 bankruptcy. In this post, I will discuss the importance of your mortgage in determining if you qualify. I always inquire into a potential client's mortgage situation after asking about income.

If you rent and do not own a home, you can skip this post. However, if you are considering filing a Chapter 7 bankruptcy and you do have a mortgage, read on. The particulars of your mortgage will be the second thing I discuss with any potential new client. This is because the current status of your mortgage payment, and the equity you have in your home, help determine if you qualify for a Chapter 7 bankruptcy.

"Equity" quite simply is the value of your home, minus all the liens on the home (mortgages, home equity loans, tax liens, etc.). So, if your home is worth $150,000, but you have a $100,000 mortgage, and a $30,000 home equity loan, your equity is only $20,000. If you owe more on your home than it is worth, you have "negative equity". This is sometimes know as being "underwater" on a loan.

Why is equity so important to Chapter 7 bankruptcy? Because the federal exemptions available to protect the equity in your home from your creditors is limited. It is roughly $26,000 per filer (about $52,000 if the home is jointly owned with a co-filing spouse). Exemptions are very useful, but they are limited. If the equity in your home exceeds the exemptions, you have only two options. First, you can surrender the home, with the equity being liquidated to pay your creditors (not a great option!) Or, you can file a Chapter 13 bankruptcy and repay the unexempt equity, dollar-for-dollar, to your unsecured creditors (such as credit cards).

So, one of the first questions I ask a prospective client is, "How much is your home worth, and what do you owe on it?" Your first consultation will be more useful if you do a little research on the value of your home (checking online real estate websites such as Zillow) and find a most recent mortgage statement. If your equity is too great, we will need to look at a Chapter 13 bankruptcy, but if not you still may qualify for a Chapter 7 bankruptcy. Try to know the value and amounts owed on your home when meeting for your first consultation with your attorney,

A second important issue regarding mortgages and filing Chapter 7 bankruptcy is whether or not you are current on the mortgage. If you are behind on the mortgage, and you want to keep the home, you must file a Chapter 13 bankruptcy and catch up the arrears over a three to five year repayment plan. The Court will not let you file Chapter 7 and keep a home with arrears or while in foreclosure. However, you can file a Chapter 7 if you wish to surrender a home with arrears, and those arrears will be wiped out.

When I ask a prospective client about their mortgage payment, the current status of the payments is also important. If you are only a month or two behind, you can possibly catch up the payments and file Chapter 7. However, if you are three or more months behind, you will need to consider filing Chapter 13, or surrendering the home. Make sure you arrive at your initial consultation with this information.

(As a quick side note- the same holds true for car payments. If you are behind on your car at the time of filing, and want to keep the car, you will need to file a Chapter 13 bankruptcy, or surrender the car.)

So, after looking at your income, we must look at your mortgage situation to determine whether the equity in your home is fully exempt, and whether you are current on your payment. The third and final part of this blog post will discuss some miscellaneous issues that determine Chapter 7 bankruptcy eligibility. These issues will be discussed in my final post on the subject.

Contact us if you have any questions regarding your eligibility to file a Chapter 7 bankruptcy. I am an experienced Pittsburgh bankruptcy attorney who will be happy to discuss your situation at a free consultation. 

Do I Qualify For Chapter 7 Bankruptcy: Part 1

Chapter 7 bankruptcy is a great option for many individuals facing large debt burdens, especially for credit cards, medical bills, and repossessed cars. Chapter 7 bankruptcy can wipe out these debts, and any related lawsuits. It helps individuals get back on their feet and on with their lives. Chapter 7 bankruptcy is a one-time filing, and unlike Chapter 13 bankruptcy, does not require any money to be repaid to unsecured creditors.

Not all debtors, however, qualify for a Chapter 7 bankruptcy. This and the next two posts will discuss the issues which determine whether an individual qualifies for a Chapter 7 bankruptcy. I go through these questions and issues any time I meet with a new client who is considering bankruptcy. Most of these issues deal with income, property, and debts, and sometimes with timing. The initial issue I always discuss first is household income. This is the most frequent determinate of whether or not an individual qualifies for Chapter 7 bankruptcy.

Bankruptcy petition filers must, in most cases, complete a financial determination called the "means test". This is a six-month look-back of all household income. It includes non-filing spouses, and it includes a very broad definition of "income", with nearly all types of income besides Social Security income counting. This includes bonuses, unemployment compensation, one-time windfalls, retirement accounts, and even child support. It includes income that is both taxable and exempt from taxation.

This broad definition often frustrates potential filers. "Why does my spouse's income count, even if they will not be filing?" "Why is a one-time bonus considered income?" I can sympathize with these questions, but the reality is they count because Congress says they do. We have to deal with the law as it is, not as we wish it would be. However, there are a few things that can help push towards Chapter 7.

First, the amount you are allowed to earn increases with household size, which includes spouses and non-earning children. A household of one can gross (earnings before taxes) about $25,500 in the six months before filing. The allowable amount increases with each household member. For instance, a household of four can earn roughly $45,000 for the same look-back period. The more members of your family, the more you can earn and still file Chapter 7 bankruptcy. The means test is described in greater detail elsewhere on this blog, but for now it suffices to say that recent income is the initial factor in determining Chapter 7 eligibility.

What if you are above this threshold? There are a couple options. First, you can wait to file. If your income will be decreasing in the next several months, or you had a large one-time windfall in the last six months, it may be worth waiting in order to fall below the allowable income limit. Planning of this type is an important part of my job. Second, it is possible to file a Chapter 13 bankruptcy if your income is too great for a Chapter 7 bankruptcy. Chapter 13 bankruptcy is discussed in detail elsewhere on this website and in this blog. While Chapter 13 does require at least some repayment to creditors, it eliminates interest, freezes the amount owed, and stops any lawsuits. So, it is often a useful tool.

So, the first thing I will need to determine if you qualify for Chapter 7 bankruptcy is six months of pay stubs (for you and your spouse) or bank statements if you do not receive pay stubs. If you are near the threshold, having this information can make the initial consultation a lot more useful.

Contact us if you are considering Chapter 7 bankruptcy, but are not sure if your income disqualifies you. I will be happy to review your earnings and advise you on the best plan going forward.

In my next post (Part 2), I will discuss the importance of your mortgage in filing Chapter 7 bankruptcy.