Can I Keep a Credit Card in Bankruptcy?

Clients will often ask if they can keep one or two credit cards in bankruptcy. Usually, bankruptcy clients will want to keep at least one credit card to cover emergencies or to help bridge the gap between pay periods. Sometimes, the client will have a long-standing account they don't want to close, or a favorite retail card used frequently.

Whatever the circumstances, unfortunately you will not be able to keep and maintain a credit card through bankruptcy. This is true in both Chapter 7 and Chapter 13 bankruptcies, and it doesn't matter whether or not the credit card has a large balance or no balance at all.

Why is the Bankruptcy Code so adamant about all credit card debts being disclosed and eliminated? Wouldn't a credit card company want the account to remain open rather than be discharged? The Bankruptcy Code has other ideas, and it revolves around the theory that creditors of the same type should all receive the same treatment.

This logic prevents creditors from rushing to file lawsuits and make the first or earliest claim on the debtor. It also promotes fairness in general. The debtor is not permitted to pick and choose which credit card will get paid. The credit card companies know this, and accept the treatment. This reduces adversarial motive throughout the bankruptcy process.

In practice, all credit cards are eliminated in a Chapter 7 bankruptcy (with some rare exceptions, such as credit cards used to pay taxes). In a Chapter 13 repayment plan, all credit cards are paid at the same rate, which can range anywhere from zero cents on the dollar, to full repayment.

Debtors filing a Chapter 13 bankruptcy will need to acclimate themselves to not using credit cards for the duration of the 3 to 5 year plan. This may be difficult, but it is certainly not impossible. But, more to the point, it is necessary. All credit cards will be closed out.

Once the bankruptcy is discharged, the debtor will have the opportunity to apply for new credit. Getting new credit cards may be easier than you think. It is highly recommended to get one credit card coming out of bankruptcy, paying the full balance every month. This will rebuild your credit without leading to old debt problems. 

Can I Keep My Car In Bankruptcy?

Yes!

Now, that short, emphatic answer will need to be qualified in a bit, as you must be able to afford your car and continue making payments. But, as long as you can make the payments, you can keep a car in Chapter 7 and Chapter 13 bankruptcy.

The Bankruptcy Code is premised on the idea of giving debtors a "fresh start". This means giving bankruptcy filers the opportunity to go on with their lives and work as normal, and get back on their feet. Having a car is vital for many filers, so the Code protects their ability to keep their car. You need your car to go to work, pick up your kids from school, and run day-to-day errands. The law recognizes this, and makes it fairly easy to protect your vehicle.

The Federal bankruptcy exemptions allows debtors to protect $3,675 in equity for one car (two cars if the bankruptcy is a joint, marital filing). This $3,675 need only be applied to the amount of equity you possess, that is, the value of the car minus what is owed on it. Since cars depreciate so quickly, equity is normally quite small in a car. This is good news for bankruptcy purposes, as it allows most debtors to exempt their car.

A problem may arise if the debtor has multiple vehicles in their name. However, even this should not be an issue if the "wildcard" exemption is available to protect the second vehicle. The wildcard exemption can also be used if the automobile exemption is exhausted. An experienced bankruptcy attorney will be able to help you properly exemption plan.

The second issue in keeping your car is whether you can afford to continue making payments. When filing a Chapter 7 bankruptcy, you must be completely current on your payment at the time of filing if you wish to keep your car. Otherwise, the finance company can (and will) repossess the vehicle. If you are behind and want to file a Chapter 7 bankruptcy, it will normally be advisable to wait to file until after your payment is caught up. If you are behind on the payment and wish to abandon the car, Chapter 7 bankruptcy allows you to do so, while your obligation on the remaining payment will be dismissed. It is something to consider if your car payment is prohibitively high, or your car is a "lemon".

Chapter 13 bankruptcy allows you to not only keep your car if you are current on your payment, but also to catch up on arrears over the course of the bankruptcy plan. This is extremely important if your car payments are past-due and you are facing repossession. The Chapter 13 plan allows you to catch up over the course of the 3 to 5 year plan, and at its conclusion you will receive the title of the car. The Chapter 13 plan allows the arrears to be spread out over the full term of the plan, so even if you are multiple months behind, it is possible to catch up.

Misinformed debtors often believe they will lose their car in bankruptcy, but as long as it can be exempted (and it normally will be) and your payment is current, you can keep your car in bankruptcy. 

If you have fallen behind on payments and want to consider filing a Chapter 13 bankruptcy, contact us to set up a free consultation.

The Importance of Pay Stubs in Bankruptcy

When you hire a bankruptcy attorney (I would humbly recommend myself for your consideration) he or she will certainly ask to review your pay stubs, and will continue to do so throughout your case.

Why the obsession with pay stubs?

Exact income information is very important in bankruptcy for a number of reasons. First, pay stubs are used to complete your bankruptcy means test calculation. This is a 6 month look-back (from the month of filing) at all sources of income. The means test will often determine if you will be a Chapter 7 bankruptcy or a Chapter 13 bankruptcy repayment plan (higher income debtors are required to file a Chapter 13). These numbers cannot be estimated, hence the request for pay stubs.

Second, two months of pay stubs are required for a required filing known as "employee income records" or "pay advices". These allow the trustee assigned to your bankruptcy to review your recent income and verify it is consistent with your bankruptcy petition. 

Finally, pay stubs help your attorney to accurately report income in Schedule I of your bankruptcy petition. This is reviewed by the trustee along with the monthly expenses you report in Schedule J.

If you are in a Chapter 13 bankruptcy, it is not required that you keep and submit all pay stubs throughout the duration of the plan. However, it cannot hurt to keep them in case your attorney needs to file an amended plan. Keep your pay stubs in a Chapter 13 bankruptcy at least until you have attended the Meeting of Creditors.

If you are scheduled to consult with an attorney, make sure you gather up all pay stubs for you and your spouse, at least going back several pay periods. This will make it more likely the first consultation will provide useful advice and information. If you do not keep your pay stubs, consult your payroll or human resources department. If you are self-employed, you will need to bring an accurate accounting of your recent business income and expenses.

Pay stubs provide important proof of your income that is need to file and verify a bankruptcy petition. Make sure your bankruptcy attorney is provided with the updated pay stubs needed for your case.

Car Accidents and Bankruptcy, Part II

As discussed in my previous post, there are three major questions that must be answered when considering whether to include an auto accident lawsuit in a bankruptcy for potential discharge.

• Was the debtor under the influence of drugs and alcohol at the time of the accident?
• Was there bodily injury to the victim, or just property damage?
• Were the actions of the debtor willful or malicious (intentional)?

These three questions will determine if the lawsuit filed (most likely by the insurance company) will be discharged, or whether it will survive the bankruptcy.

The United States Bankruptcy Code addresses bankruptcy discharge under Title 11, Sections 523, 727, and 1328, and these are the sources for most of the information to follow.

Congress has embraced a policy that personal injury and death damages caused by a driver intoxicated or under the influence of drugs should not be eligible for a discharge in either a Chapter 7 or a Chapter 13 bankruptcy.

Section 523(a)(9) prevents the discharge of a debt related to, "death or personal injury caused by the debtor's operation of a motor vehicle, vessel, or aircraft if such operation was unlawful because the debtor was intoxicated from using alcohol, a drug, or another substance."

This section applies to both Chapter 7 and Chapter 13 bankruptcies. It is most important to note what this section does NOT apply to... property damage caused while under the influence of drugs and alcohol. If an individual causes only property damage while intoxicated, for instance by running into a parked car or destroying a fence, the purely property damage claim can be discharged in either a Chapter 7 or Chapter 13 bankruptcy.

If, on the other hand, the damage claim relates to a bodily injury or death, the claim cannot be discharged, even if it was not willful or malicious. The claim and the debt will survive or "pass-through" the bankruptcy. It will be important to review the details of the lawsuit with your bankruptcy attorney to determine how section 523 will apply to your bankruptcy petition. It is entirely possible that filing a bankruptcy will remain worthwhile, if the debtor has large amounts of other debt. Filing a bankruptcy on the remaining debt may make it possible to pay damages related to an accident.

Congress has taken a hard stand against discharging debts related to driving under the influence when someone has been injured. As an experienced Pittsburgh bankruptcy attorney, I can help you determine if you are eligible for a discharge of an accident related debt.

In my next post, I will write about damages related to willful or malicious conduct of the debtor, and the (sometime) differing results in Chapter 7 and Chapter 13 bankruptcy. Willful and malicious acts will prove to be the most difficult to discharge.

Credit Card Lawsuits, Part IV: What Happens if I Don't Respond

I have already discussed what constitutes a "response" to a credit card lawsuit, in general how to file one, and whether you should respond.

Even if you don't formally respond to the complaint, you should NOT ignore it. Negotiating a debt settlement or filing a bankruptcy will probably be your best options. Why should you not ignore the lawsuit?

First, when you do not respond, the complaint will become a "default judgment" roughly 30 days after it was served. That means the Court will find for the law firm of the credit card company suing you without you ever appearing in Court. The default judgment happens automatically. Does this seem unfair? Of course! But, it's a fact, so act accordingly.

A holder of a default judgment will have 20 years to "execute" on the judgment. This means they can take the default judgment and place a lien on a bank account, a car, your personal property, or even your home. Once this happens, you cannot transfer your home without the judgment holder getting paid. A lien on your bank account can occur at any time without your prior notice. You can literally lose an entire pay check (or two) before you realize what happened (hint: if there is a default judgment against you, stop your automatic deposit). You will receive service from the Court if a judgment holder attempts to put a lien on your home. If this happens, contact us immediately.

The lawsuit will not go away, so even if you don't have property now, it can be placed on after-acquired property. It can also prevent you from passing on property unencumbered to your children and heirs if you do not take action.

Another thing to point out briefly (to be discussed further in another set of posts)... the statute of limitations for collecting on a debt (4 years in Pennsylvania) does NOT apply to default judgments. Even if you had a proper statute of limitations defense, it must be raised BEFORE the deadline to answer the original complaint.

A second issue, even if you don't have any property to lien (right now) this default judgment will most likely destroy your credit. Clients I meet with are often concerned about the effects of bankruptcy on their credit score. I tell them a default judgment does FAR worse to their credit. They are like a malignant growth that constantly harms your credit by sending negative reports that don't go away.

So, if you do not respond, bad things happen. Liens and damaged credit are sure to follow. Contact us to determine if you are a candidate for bankruptcy or a debt negotiation. I frequently meet with clients in this situation. I can help.

Next, I will look at how bankruptcy deals with creditor lawsuits that have become, or will become, a default judgment.