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. 

Independence Day

The 4th of July is a great opportunity to relax, spend time with family and friends, and enjoy the heart of summer. It is also (sometimes) used to reflect on the birth and history of the United States. The revered "Founding Fathers" established a federal systems of checks and balances that still is the envy of much of the world, more than 250 years later.

Thomas Jefferson, in addition to being the third president of the United States, was the primary drafter of the Declaration of Independence. What is less well known is that he struggled with creditors throughout his life, including during and after his presidency. Jefferson died with debts in excess of $100,000, an amount more akin to several million dollars in current debt. While much of his debt was inherited, and it was not uncommon for farmer-planters of his era, it greatly troubled Jefferson during his life. Many of the voluminous letters of the champion of self-sufficiency referred to financial concerns and stress. Jefferson was no different that many Americans in being unable to meet his financial burdens, even with his inherited wealth and advantage.

It is also little-known that Abraham Lincoln suffered financial problems early in his professional life. When a partner is a dry goods (general store) partnership disappeared, Lincoln was stuck with the bills. Like Jefferson, Lincoln struggled with the debt burden and was greatly troubled by his situation. It took many years, and a successful law practice, to overcome the debt, but Lincoln never forgot the feeling. His frugality continued throughout his entire life.

Other presidents felt the financial crunch. Ulysses S. Grant struggled with debt after bad investments throughout his life, and was forced to sell his autobiography (written while extremely ill) to pay his basic bills. And of course, Donald Trump filed 4 bankruptcies, though these were Chapter 11 business bankruptcies. Other presidents, such as Lyndon Johnson and Bill Clinton grew up incredibly poor. Johnson grew up in extreme poverty when his father's ranch failed. Many historians believe it drove his desire to create the "Great Society" and the "War on Poverty".

The United States bankruptcy code is established under federal law, and bankruptcy itself is recognized in the United States Constitution. So, while you are reflecting on United States history this week (between beers and hot dogs) remember that not only is it a part of our federal system, it was established and maintain because even some of the best among us need the help. 

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.

Employee Income Records

Every Western District of Pennsylvania bankruptcy requires the filing of "employee income records". The exact requirements, which I will discuss below, varies from trustee to trustee. But, in every case these records are intended to provide important information that is used by the trustee to verify your eligibility to file bankruptcy.

Income is important in bankruptcy. It determines how much, if anything, you are required to repay your creditors. I always tell my clients, "we don't TELL the court anything, we have to SHOW them." Employee Income Records are no different. We can't just tell the court and the trustee how much money you have earned, we need to show them with pay stubs, bank statements, and tax returns. In all cases we will need to provide the trustee with proof of income from ALL sources for the 60 days before filing bankruptcy. This will obviously include income form work, and we will need to provide pay stubs for this period. It also includes income from sources such as Social Security, unemployment, child support, alimony, pensions, or even household contributions. If you do not have tangible proof of these payments, I will draft a verified statement for you to sign which basically attests that you received the payment.

It should also be pointed out that if you are married, we must provide proof of income for your spouse as well, even if your spouse is not filing. The court looks at "household income", which will include a working spouse's pay. There is an important exception... if you and your spouse are legally separated, you are not required to provide their income. In these cases, their income is not "household income."

There are additional requirements for employee income records beyond proof of income for the last 60 days, though the exact requirements vary by trustee. All trustees will want to see your most recent tax returns and W2s. This is so they can verify your income for the last year. If it was very high, they will want an explanation (for instance, say you made $250,000 the year before filing bankruptcy) as to where the money went. Some trustees will want to see the last two years before filing. Tax returns will allow the trustee to see all sources of income for the last year or two, and compare it against the rest of your statements. If your tax return shows a disbursement from a retirement account, it better be accounted for in your petition.

Trustees sometimes also want to have proof of any retirement accounts or life insurance policies. They want to verify that no large deductions have recently been taken from these accounts. If you are self-employed, the Chapter 13 trustee will want to verify one year of business income and expense statements, and you will need to complete a business questionnaire (this is a topic for another blog post). Some trustees also wish to be provided a copy of the voluntary petition filed with the case.

I will know exactly what information is necessary to provide when your trustee is assigned. I collect all of this information before filing in anticipation of providing the employee income records. I forward all of the information from my office, so you will not need to worry about any of this, but it is good to understand why you need to provide it. When the employee income records are properly compiled, there are rarely issues with the case.

Contact us if you have any questions about bankruptcy and wish to set up a free consultation.

What Is A Bankruptcy Claim?

Bankruptcy claims are an important part of Chapter 13 bankruptcy (and to a much lesser extent in Chapter 7 bankruptcy), and worth an explanation. Chapter 13 bankruptcies involves payments being made to creditors, via the US Trustee's office. At the beginning of the case, the debtor estimates how much each creditor should be paid. The exact amount, however, is not determined until the creditor files a bankruptcy claim.

A bankruptcy claim is submitted by the creditors to the bankruptcy court using Official Form 410. Upon receiving notice of the case filing, creditors have a deadline to submit the claim (the longer deadline for government agencies is within 6 months of the filing of the case). If the creditor fails to file a claim, the creditor does not get paid. So, if an unsecured credit card does not file a claim on time, they will not receive any distributions from the bankruptcy plan. Failure to file a claim by a creditor will sometimes be a problem for the bankruptcy debtor. If the debtor wants or needs to make a payment through the bankruptcy plan (for instance, to pay arrears on a mortgage) the lack of a filed claim could be a problem. Fortunately, in these situations, the debtor's attorney can file on behalf of the creditor. This is not a frequent occurrence.

Assuming all claims are filed on time, they will determine how much money must be paid into the plan and disbursed. These claims can be reviewed by the debtor's attorney and objected to if they are inaccurate, unsubstantiated, or false. Objections to claims can be the subject of another post, but for now it is worth pointing out that filed claims are not the final say. In fact, the US Trustee can also object to a claim if they believe it will be harmful or unfair to other creditors. Therefore, it is important to review every claim filed.

The most important claims to review are typically claims for mortgages and car payments. They will normally be the largest claims, and they are both "secured" claims, which means they must be paid in full if the property is to be retained and the plan successfully completed. They should also provide interest rates, arrears owed, and total balances. These secured claims should always be reviewed extra closely. If the estimates of secured claims at the beginning of the case are inaccurate, the case will likely need to be amended. It is also important that these claims are accurately accounted for so that the case can be closed properly at the end of the payments.

Another important, and frequent, type of claim is for taxes and municipal liens. These are often not accurately known by my clients at the beginning of the case, and sometimes estimated quite loosely. I closely review these claims (usually filed by local municipalities and the IRS), discussing the amounts claimed with my clients. For one thing, I want to make sure they are accurate. Also, if they are, I need to determine how much the plan payment must be increased to account for the claim. Once again, these claims must be entirely accounted for if the case is to be discharged at the end.

A final important type of claim to discuss is the post-petition claim. These are claims filed for debts incurred after filing. These post-petition claims usually involve unpaid utilities, such as gas service. If the debtor fails to pay these post-petition utilities, the bankruptcy court will allow the lifting of the automatic stay, allowing the utility company to file a claim and be paid through the bankruptcy plan. Therefore, it is important to keep these payments current.

Bankruptcy claims are an important part of the bankruptcy process. My office closely reviews filed claims to determine how they will effect our clients cases. Contact us if you have any questions about bankruptcy claims.