Should I Stay of Should I Go?

Deciding on whether or not you should keep a home in bankruptcy

Bankruptcy provides the option of keeping your home or walking away from it, whether you are current on the payment, or months behind. Sometimes this is an easy decision. If you love your home and want to live there the rest of your life, and you are current on the payment... of course you will stay. If you are six months behind on a home that you only purchased to make your ex-husband happy... you can go. But, sometimes there are situations that fall between these two extremes that are not so clear cut.

The bankruptcy discharge can eliminate your personal obligation on your mortgage loan. The "mortgage" is your obligation to pay, while the "deed" lists who has ownership rights. By wiping out your personal obligation, you eliminate the possibility of the mortgage company suing you for any deficiencies and penalties. This is very important if your home is going up for sheriff sale auction. Homes often sell far below their normal value in a sheriff sale, and this can leave you with a huge deficiency on what is owed. Bankruptcy is a great way to get out from under this obligation.

At the same time, Chapter 13 bankruptcy can be used to catch up on arrears on your home when you have fallen behind on the payments. The arrears are caught up over three-to-five years, and paid without interest. This can even save a home on the brink of a sheriff sale. As long as you have the income to save it, you can catch up on large arrears.

The dilemma arises when you are somewhere in between these extremes. For instance, you may be 6 months behind on a house you like, but you were having difficulty making the payment to begin with. Or maybe your payment is current, but the home needs major repairs. Deciding whether or not you want to keep the home in these situations can be a difficult decision. Here are some things to consider:

• How much equity do you have in the home? If your home is "under water" (that is, you owe more than it is worth), you should consider surrendered more that if you have a lot of equity. If you have equity, you should be everything you can to salvage the home, even if you just want to resell it yourself (remember, sheriff auctions often fetch ridiculously low bids)
• Can you realistically afford the payment going forward? You have to think long and hard about whether making the monthly payment will be feasible over the coming decades. This can be a hard reality to face, but living in a less expensive home can make life a lot easier. You don't want to be "house poor".
• Do you have other living options? Have you considered moving back with your parents or a roommate? Do you have a good rental lined up? It is easier to walk away when your next move is planned.
• How much do you love your home? If you really love it, and you can afford it going forward, you should stay! Sometimes people fall behind their mortgage because of a temporary loss of income. Once you are earning again, you can often afford to keep your home in Chapter 13.
• Does the home need major repairs? If repairs for foundation or structural damage are too great to finance, it is often times to walk away.

Keeping their home is often a first priority for my clients. If you have the income to afford the payment, you can always keep it in bankruptcy. But, if you are questioning whether it is worthwhile, contact us to discuss your options.

Jewelry and Bankruptcy

A common concern for my clients is whether or not they will get to keep their property. Homes, cars, and retirement accounts are the primary concerns. To a lesser degree, but still of importance, is jewelry. Jewelry can have both significant sentimental and actual value. From engagement rings and wedding bands, to family heirlooms, jewelry can have significant importance.

The good news is, the federal bankruptcy exemption laws directly address jewelry. 11 U.S.C Section 522(d)(4) allows debtors to exempt $1,600.00 in value for jewelry. If the filing is joint, each spouse may use the $1,600.00. In addition, you can also use the bankruptcy "wildcard" exemption if the value of the jewelry exceeds $1,600.00. This amount can be anywhere between $1,250.00 and $12,100.00 more in exemptions depending on how much of the "homestead" exemption you use (this is discussed in other posts). Suffice it to say now, in most cases, jewelry is sufficiently protected.

How is the value of your jewelry determined? Fortunately, the value is NOT the purchase price. Instead, it is the much lower resale price of your jewelry. Jewelry quickly depreciates, and jewelry re-sellers and "cash for gold" buyers typically pay around 1/3 of the purchase price. This method of valuation makes it much more likely that the exemptions will be sufficient to protect your jewelry, especially with the "wildcard" exemptions included.

Some types of jewelry, however, may have a high resale value. Some antique  and luxury watches, such as Rolex or Breitling, may actually INCREASE in value over time. It will be important to discuss these circumstances with your lawyer, and possibly even receive an appraisal to determine the current value. This may also be the situation for some heirloom jewelry. Of course, these situations are rare.

It will also be important to discuss any possible inheritances of jewelry or heirlooms. If you are currently inheriting, or will soon inherit a large jewelry collection, or a particularly valuable piece, let your attorney know when listing your personal property. This will potentially be considered property of the bankruptcy, and will need to be exempted. You will also want to avoid any transfers of jewelry before filing, as the Court may view this as an attempt to hide assets from your creditors. Speak with your attorney before doing anything involving a transfer.

If the value of your jewelry is very large, and exceeds the bankruptcy exemptions, it is still possible to keep it through a Chapter 13 bankruptcy. This would allow you to keep the jewelry by paying your unsecured creditors dollar-for-dollar the unexempt value of your jewelry. Once again, this is a very rare situation, but it is always an option to discuss with your attorney.

Contact us if you have any questions about bankruptcy and protecting your assets. We will be happy to look at your situation in a free consultation.

The Importance Of Being Honest With Your Attorney

I don't think very many of my clients set out to be outright dishonest with me. However, sometimes I do believe they give less than the whole story while we are preparing their case. They may be nervous that a certain fact will disqualify them from filing. They may believe something isn't very relevant, and that they would be wasting my time. Or, they may just be embarrassed. Whatever the reason, it is best to be completely honest with your attorney throughout the bankruptcy process.

When my clients ask me what can go wrong in a bankruptcy, my answer is always, "nothing... as long as you tell the truth." This may sound simple, but it is true. As long as you disclose everything about your assets, debts, and recent financial situation, your attorney can act accordingly, and the Court will have no problems with your case. It is when filers omit facts, or outright lie, that problems arise.

All bankruptcy petitions are filed under Federal law, in the Federal Court system, under the penalty of perjury. This means that lying could literally lead to jail time. The Trustee may investigate your finances in the course of processing your case, or your case can be audited by the Court. Either way, material dishonesty can have huge penalties, not the least of which would be having your case dismissed. This doesn't mean that if you forget about a $50 savings bond sitting in a desk at home that you are going to jail. But, if you leave out the fact that you have a vacation home, or a second income, big problems can result.

You must disclose all of your assets to the Court when filing any bankruptcy. "Asset" has a very broad definition under bankruptcy. It is basically anything tangible or intangible of any value that you own. In most cases, your property can be "exempted" and protected from your creditors. But, you must disclose ALL of your property. You must also disclose ALL household income, and once again, the definition of income is broad. Without going into too much detail about what is an asset or what is income, it is only important right now to say that you should not omit anything.

When you do not disclose all of your property, income, and recent financial transactions to the Court, the assumption will be that you are lying about other things, and this can lead to major headaches. Beyond the penalties for perjury, your case can be dismissed with prejudice, which means you will not be able to file bankruptcy on your debts in the future. If you are honest in all the details, there won't be any problems.

When reviewing your bankruptcy petition, just be honest and everything will take care of itself. An experienced bankruptcy attorney will ask all the relevant questions, and if you provide the answers honestly and thoroughly, there will not be any issues with your case.

What are common situations that come up? My clients will sometimes not want to disclose income paid under the table, or property owned with other family members (thinking it will affect their property rights). Sometimes my clients will be embarrassed to disclose the cause of their debts is gambling or some other addiction. Clients may also tell less than the full truth about recent financial transactions, such as money paid to family or property transferred to family.

Once again, the reasons are almost never malicious. But, little omissions can lead to big problems later. Answer your attorneys questions to the best of your ability, and he or she can file your petition accordingly. In some cases, the fact that a client was omitting has been much less important than they think.

If you have any bankruptcy questions, please contact us!

Charitable Contributions and Bankruptcy

Many of my clients are extremely generous people. They manage to help their children, other family members, friends, and even strangers despite their own financial problem. Some have possibly exacerbated their financial situation by being too generous. But, generosity towards others should never be seen as a fault. The Bankruptcy Code recognizes this and provides some room for filers to maintain regular charitable contributions.

The Bankruptcy petition anticipates the possibility of charitable contributions. The Statement of Financial Affairs, part 14, asks if the debtor, within the past two years has, "give(n) any gifts or contributions with a total value of more than $600 to any charity." Any such large contribution must be disclosed to the Court. Frankly, contributions this large are rare in the bankruptcy context, as most people facing financial difficulties are not able to make such contributions. However, even if a large contribution was made, it should be deemed acceptable unless the Court has reason to believe it was made to hide assets. So, it should always be disclosed to your attorney so he or she can determine if it will be an issue.

Schedule J of the Bankruptcy petition, which is a list of monthly expenses for the debtor, asks in part 14 for "charitable contributions and religious donations". This should be used to disclose regular, ongoing contributions, such as weekly contributions to a church. Even tithing, the practice of giving 10% of your income to your church, should be permissible. However, in that case, or with any larger charitable contributions, you should be prepared to show that these contributions have actually occurred (in reality, not just in your heart), and have occurred regularly in the past, not just in the weeks leading up to filing bankruptcy. Once again, contributions must be regular, and not seen as an attempt to hide assets that could be used to pay your creditor.

The Chapter 13 means test also asks about charitable contributions, and allows for charitable contributions to be deducted from "disposable monthly income". This disposable monthly income determines how much money must be paid to unsecure creditors such as credit cards and medical bills. You may deduct regular contributions made to "qualified religious or charitable entities or organizations."

So, payments made to pay your lazy cousin's rent does not count as charity. Payments , to your church, or an organization such as The United Way will qualify, once again, assuming they are regular. Payments made to political candidates or campaigns may not be deducted, an important distinction in an election year (given the state of the current election, it sure FEELS like charity).

A final point to make is that charitable contributions must be in the form or money. Contributions of clothes or goods cannot be made from your disposable monthly income. Keep clear records of your charitable contributions and be ready to present them to your attorney.

Ongoing, regular charitable contributions should not prevent you from filing for bankruptcy, and assuming they have been regular in the months leading up to filing, they could even reduce the amount you must pay. Contact us if you want to discuss your situation. There are certain limits to charitable contributions the Court may not allow, you should discuss yours with an experienced bankruptcy attorney.

Calculating Your "Income" For Bankruptcy Purposes

The definition of "income" is pretty straightforward in most contexts. It's generally somewhere along the lines of, "the money I make at work" or the money received from regular benefits such as Social Security or a pension. It seems simple enough.

However, things get a bit more confusing in the bankruptcy context, as they normally do. Income is important in bankruptcy because it determines whether you can file a Chapter 7 bankruptcy, or whether you must file a Chapter 13 bankruptcy (and if so, how much you must pay). The bankruptcy "means test" looks back at the six months before filing to determine your income during that period. So, you just need to look at your paystubs or benefit statements, right?

Nope... not that simple. "Income" as determined by the bankruptcy means test has a very broad definition. Yes, you will need to look at your traditional income, and your paystubs are a good start. But, "income" also includes one time payments, commissions, and bonuses. Income includes household contributions from friends or family members (something few people would think of as "income"). It includes lottery and gambling winnings. It also includes rent, dividends, interest, and royalties, or one time distributions. Most confusingly, it can include alimony or child support (which is normally not taxable), or even inheritances! The definition is so broad it occasionally precludes people in great need of debt relief from filing.

Another confusing aspect of this look back period is that the money is considered earned when it goes into your bank account, not when you actually do the work. So, if you perform a service in December, but are not paid the commission until the next April,  it would be considered "income" in the look back period from August (for which April is in the six month look-back period). The means test can be counter-intuitive, so it is very important your attorney explains it and carefully reviews all income. If in doubt as to whether something is income, tell your attorney!

There are a few exceptions to what is considered income that can work to your favor. Social Security payments are not considered income. Loans are also not income, and neither is your tax refund. But, once again, assume any money coming into your possession in the last six months to be income. An experienced bankruptcy attorney will not lead you astray.

So, what can be done if a one time bonus or windfall is included in your look back period, preventing you from filing Chapter 7 bankruptcy, or artificially distorting your Chapter 13 payment? Wait! No... I don't mean wait for my answer. I mean wait to file!

Proper bankruptcy planning is an important part of my job. Sometimes it is necessary to wait before filing. If you wait a few months, these distorting payments will no longer be part of your look-back period. It's just good planning.

On the other end of the spectrum, sometimes you need to hurry up! If you know that you will soon receive a large bonus at work, you will want to file before it becomes your "income". Remember, it's not when you do the work, it is when you receive the payment. You can use that distinction to your advantage.

Contact us if you want to discuss whether or not your income (or your "bankruptcy income") prevents you from filing. I'd be happy to walk you through this sometimes confusing world!