The Presidents and Bankruptcy

It's pretty common knowledge that the current president, Donald Trump, has filed for bankruptcy multiple times. These were each business bankruptcies, not consumer. Chapter 11 bankruptcy allows businesses to reorganize their debts, and sometimes keep functioning. Trump filed bankruptcy on several failed developments and a casino in Atlantic City.

What is not common knowledge is that several other presidents had huge financial difficulties, and filed bankruptcy, as well. The greatest and most famous of all to do so was Abraham Lincoln, who had to file bankruptcy on a failed business. Lincoln assumed debts from a partner in a failed general store, which required years of difficult  repayments. Bankruptcy in the 19th century was a different burden, and Lincoln struggled for years without the benefit of modern bankruptcy laws, even as his political career rapidly ascended.

Another Civil War-era hero who faced financial difficulties: Ulysses S. Grant. Grant made numerous poor investments, and was destitute into old age. His excellent autobiography was written largely to raise money to live and pay bills. Grant, like Lincoln, was a great and humble man, but his skills as a general and writer far exceeded his acumen as an investor. Often manipulated by business cronies while in office, Grant's financed fell into disarray.

Thomas Jefferson also faced financial difficulties throughout his adult life. Jefferson was a profligate spender, sparing no expense in building his estate, Monticello. Jefferson lived a lavish lifestyle, importing goods from England while preaching American self-sufficiency. He often borrowed money and avoided creditors. At his death, Jefferson's estate was what would amount to millions of dollars in modern debt, which necessitated the sale of his estate for the benefit of creditors.

Bankruptcy is a difficult decision for many of my clients, who may feel shame and a sense of failure. But, the brief anecdotes above should be a reminder that incredible men, and Donald Trump, have faced the same burdens while enjoying immense success in their fields. The drafter of the Declaration of Independence, The Great Emancipator, and the ultimately victorious Union general each overcame financial problems, without the benefit of more generous, modern, bankruptcy laws. There is no reason to feel shame or hopelessness about your situation. 

Bankruptcy and Valentine's Day

What do bankruptcy and Valentine's Day have in common!?

Absolutely nothing!

That being the case, here are a couple far-flung things to keep in mind:

• If you are preparing to file an individual bankruptcy, don't elope right before filing. The bankruptcy court will look at joint marital income in determining how much, if anything, you must repay your creditors. The amount is adjusted for household size, but a married couple may only earn $10,007.00 more than an individual (assuming it is a household of two). So, if your dear Valentine has a job, it could push you out of a Chapter 7 bankruptcy into a Chapter 13 bankruptcy, which would result in you repaying your creditors. On the other hand, if they do NOT have a job, it could get you below the threshold. Let true love (and the median income charts) be your guide!
• Large credit card purchases in the 90 days before filing bankruptcy can also cause a problem. A large Valentine's Day gift of over $500 may be an issue, and could prevent you from filing immediately. These purchases could be challenged as "abusive". If the generosity of true love cannot wait another moment, by all means... But, if it can wait, you should!
• Valentine's Day jewelry is exemptable under the Bankruptcy Code! There is a $1,600.00 Federal exemption per filer for jewelry, which should  cover all but the most lavish Valentine's Day gifts. Seeing as the value of jewelry drops quickly once purchased, and sentimental value is not taken into account, few gifts should present a problem.
• Cheaper, less thoughtful gifts are fully exempted! Cards, flowers, candy, edible arrangements, etc., are all worthless from a bankruptcy perspective... but not for your heart! Gift away!

Have a great Valentine's Day!

How Much Is Enough (To File Bankruptcy)?

I am commonly asked what is the minimum amount of debt to file a bankruptcy. Technically, there is no "minimum". The Bankruptcy Code does not require a minimum amount of debt before filing (though there is a maximum amount in Chapter 13 that rarely applies). In practice, the amount where bankruptcy becomes worthwhile is determined by the circumstances of the case. It is different for each individual, and it is worth some time to examine.

First off, the filing fees and costs (for classes and credit reports) are normally in the neighborhood of $400. So, right off the bat, it's not going to make sense to file for less than that. Not that many people are asking to file a bankruptcy on a $300 credit card. But, it is worth remembering this is the base-line cost. With legal fees added, the amount of debt necessary to make bankruptcy make sense is a bit higher. Normally at least several thousand dollars.

I usually do not recommend filing bankruptcy for less than $5,000, though that is really just an arbitrary number. If there is a creditor lawsuit, and my client has no other way of paying the underlying debt, it could be worth filing on less. Lawsuit judgments are extremely damaging to credit, and they potentially threaten your interest in your home, car, and bank accounts. Bankruptcy can also stop wage garnishments, which can be highly destructive to those on a tight budget, even if the amount owed is modest. If bankruptcy is the only way out, the amount owed isn't of much significance. A debt of only several thousand dollars could result in you losing your car or savings, believe it or not.

If your income is very low, as is the case for individuals on Social Security, filing on less debt can make sense. $4,000 or $5,000 can be a huge burden if you only bring home $800 or $900 per month. I will reduce legal fees in these cases as much as possible, though there will still be filing fees in the range of $400. Once again, the circumstances are much different if you are making $50,000 a year.

Foreclosures and repossessions change the situation. Chapter 13 bankruptcies can be used to stop foreclosure, reorganize the debt, and keep your home. If you need to stop a sheriff sale, the underlying amount is not important. The sheriff sale needs to be stopped regardless. If you don't have all the money to catch up on the missed payments, interest, and fees, bankruptcy might be the only option. The same applies to retrieving a vehicle that has been repossessed. If you need the car, you will need to file, even if the amount owed is minimal.

Bankruptcy sometimes does not make sense when you owe more than $5,000, or even significantly more. If your income is very high, or you have large amounts in savings, paying the money back directly to the creditor may be cheaper and simpler. If you want to get a mortgage in the next few years, you may also want to avoid bankruptcy if possible. While getting credit cards and car loans are fairly easy coming out of bankruptcy, mortgage standards have tightened. If you owe a large amount of money on credit cards, getting a mortgage is unlikely, and you should probably file anyways, to start rebuilding your credit. But, if the amount you owe is modest, avoid bankruptcy is something to consider.

I am happy to meet and discuss if your debts are significant enough to file bankruptcy. I frequently negotiate with creditors to reduce the amount owed and avoid bankruptcy. If this is not possible, I will look at things on a case-by-case basis. Contact us to schedule a free consultation.

What Will I Need to Know for My Meeting of Creditors?

The Meeting of Creditors is a required step in the bankruptcy process. At this meeting, a Trustee assigned to your case will review your petition and ask you a series of questions relevant to your case. It can be very stressful for bankruptcy filers. But, it shouldn't be. As your attorney, I will review the entire process with you beforehand and make sure you are completely prepared. Here are a few things that will be helpful to know.

One of the primary purposes of the Meeting of Creditors is to determine if you have any property that can be used to pay your creditors. This information should be provided in you bankruptcy petition, as a list of your property in Schedules A and B. The Trustee will verify this information under the penalty of perjury (this means if you lie, you could be arrested!) The most important piece of property the Trustee will want to know about is your home, if you have one. Therefore, it is important to know the value of your home, and how you came to the amount with your bankruptcy attorney. Typically, this will be determined by comparable homes in the neighborhood, or an appraisal. In either case, you will want to be knowledgeable about the value when testifying at your meeting of creditors.

The Trustee may also ask about other pieces of valuable property, such as a car you own outright, valuable collectibles and jewelry, or large deposits of cash. You will have discussed this with your attorney while filing the petition, but it will be helpful to review the values and how they were determined. For instance, Kelly Blue Book values are used for cars. Valuable collectibles may be appraised by a professional. Whatever the case, you will not be left unprepared by my office.

You will also want to be knowledgeable about your bankruptcy petition. You will be asked by the Trustee if you read your petition, if you signed it, and if you are familiar with the contents. You will not be expected to know every small detail in its exact amount. And you certainly are not expected to know bankruptcy law. But, you should know some important general information. You should know about your debts (who you owe, and how much) and your assets (your property). You should also be familiar with your income and expenses. Once again, you don't need to remember the exact amount you owe to Visa, or the exact amount you spend on your light bill. But, you should know the overall picture.

Since the Trustee is interested in your property, you should also be aware of any property you expect to receive, such as a tax refund, a lawsuit, or an insurance claim. Of course, your attorney should be made aware of such property before filing. But, you will need to be prepared to explain what you are expecting to receive to the Trustee.

The Trustee will also ask your reason for filing, but don't worry, there isn't really a wrong answer. The question is only asked for survey purposes, and a short answer such as "overspending" or "loss of income" should suffice.

If a detail slips your mind, the Trustee will let you review your petition, but it always looks better if you don't need to!

An experienced bankruptcy attorney such as myself will know the exact questions a specific Trustee will ask in each case. I will spend some time before your hearing to make sure you are prepared. While it is important to be thorough and honest at this hearing, you should not be stressed about it. Your creditors are very unlikely to participate. The Trustee is not looking to trick or embarrass you. You will be prepared, and there is nothing to lose sleep over.

If you have any questions about the meeting of creditors, contact us and I will be happy to address your fears.

Tax Refunds and Bankruptcy

The next few months are known as "tax season". Organizing, completing, and filing income taxes is no treat, but the positive is that you may get a nice tax refund. Some people use it to splurge. Some save it. Some live off it. But, regardless of what you do with your tax refund, it is important that you understand its significance in bankruptcy.

First, you will need to exempt your tax refund this time of year. Exemptions in bankruptcy allow you to protect your personal property from your creditors. Your income tax refund is considered "property" in bankruptcy, so it must be protected. The federal "wildcard" exemption can be used to exempt your tax refund, so it shouldn't be a problem unless you have other significant savings or cash (which often eat up much of the "wildcard" exemption). If need be, your refund can be used for living expenses over a period of time, but if the amount is too significant, you will need to discuss the situation with your bankruptcy attorney. Bankruptcy trustees are all aware of tax season and tax refunds, so they will ask about yours.

You will need to file your taxes this time of year before filing your bankruptcy so that the amount of the return can be determined and exempted. If your taxes are not filed, the bankruptcy trustee may hold open your case to see if the refund will provide money for the bankruptcy estate. This won't stop your case from being completed, but it will be a major hassle, and believe me, you'll be happy to have everything wrapped up. If the trustee is going to want to see your tax returns, you may as well do them beforehand.

Particularly large refunds can also be an issue in Chapter 13 bankruptcy. The Chapter 13 trustee may insist that very large refunds be applied to the payment to creditors. This is an unlikely scenario, but it is best to let your bankruptcy attorney know of any large refund. Typically, it is best to save your refund in a Chapter 13 bankruptcy to account for emergencies and unforeseen expenses. It is difficult to get credit in Chapter 13, and you are not allowed to use credit cards, so it is wise to keep a safety net in the bank. Keep your bankruptcy attorney informed about unusually large refunds during the course of your case.

Your tax refund may be applied to your legal fees and costs in both Chapter 7 and Chapter 13 bankruptcy. This makes it a good time of year to file. Spending your refund on a large non-essential purchase can potentially cause problems. But, using it to pay your bankruptcy fees can mean you do not need to set up a payment plan, and you can stop your creditors from contacting or suing you, or foreclosing/repossessing your property. It makes wrapping up your case quickly possible.

One final note... if you are facing the possibility of losing your federal tax refund due to a federal garnishment, let your attorney know. This situation will be the subject of another post, but it suffices to say bankruptcy may protect your refund in some of these situations.

If you are considering bankruptcy, and are expecting a large tax refund this spring, contact us to make sure you maximize what you get to keep.