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.

You Can Keep Your Car In Bankruptcy... But Should You?

Bankruptcy affords numerous opportunities to keep your vehicle. This is important, because you need your car to get to work, pick up your kids, and in general get around a town that doesn't have great public transportation. However, just because you can keep your car in bankruptcy doesn't mean that you necessarily should.

Bankruptcy allows you to keep your vehicle as long as you can show that you can afford the payment. In Chapter 13 bankruptcy, you can even catch up on arrears owed and/or stop a repossession. The arrears can be made current over the three-to-five year repayment. So, in most cases, a car can be retained. However, there are situations when you should consider surrendering it through the bankruptcy.

The most common situation for surrender is when the arrears are too great to pay. If you qualify for a Chapter 7, and there are arrears on your vehicle, you would need to file a Chapter 13 bankruptcy to keep it. Chapter 13 bankruptcy is more expensive and time consuming that Chapter 7 bankruptcy, and it just might not be worth it. You can walk away from your obligation in Chapter 7, which may be an attractive option. When you walk away from a car in Chapter 7 bankruptcy, surrendering it to the creditor, your financial obligation is wiped away. You will not owe any deficiency.

An important point will be how much you owe versus what your car is worth. If you owe $20,000 and an additional $5,000 in arrears, but your car only has a Blue Book value of $15,000, it might not make sense to keep such a high payment for such a low-value car. If it is your only vehicle, and you absolutely need it to get to work, and there will be no other way to finance a vehicle in the future, you may need to bite the bullet and keep it. But, if you can use a spouse's or parent's vehicle, or take public transportation, bankruptcy might be a good opportunity to get away from the payment. It will depend on your particular circumstances.

I meet with many clients struggling with large car payments who, upon learning they can get away from the vehicle obligation, are happy to do so. Large car payment weigh my clients down. And cars only depreciate in value. It will not be very difficult to get financing on a more modest vehicle after filing your bankruptcy.

One situation where it probably makes sense to keep the car is when you must file a Chapter 13 bankruptcy that repays your unsecured creditors in full. In these cases, if you surrender a car, you will have to repay the deficiency on the car loan (unlike in a Chapter 7 bankruptcy). It doesn't make much sense to pay for a car you no longer possess, so keeping it is more likely your best option.

So what should you do? Contact us to set up a free consultation to discuss your automobile situation. I will be happy to sit down and review your case in detail. The monthly payment, your future prospects, and the condition of the vehicle should be considered. Your circumstances will probably dictate what you should do, but the decision will always be yours.

Why Are There No Creditors At The "Meeting of Creditors"?

The prospect of the Meeting of Creditors causes a lot of anxiety for many of my clients. While this is understandable (the process is new to them), it is unfounded. There is very little to worry about during the Meeting of Creditors as long as you are honest and prepared.

A major cause of anxiety is the belief that your creditors will be present, and will cross-examine and grill you. People picture a courtroom setting with a judge and prosecuting attorney. Given the aggressiveness of collection agencies that have hounded them for months and sometimes years, debtors understandably believe a similar attorney will appear in an attempt to intimidate and belittle them. In reality, nothing could be further from the truth.

First of all, there is no judge and no courtroom. The Meeting of Creditors is conducted in a normal office room, in front of a "trustee", who is an attorney appointed to review the case. While there are bankruptcy judges and courtrooms, these only become necessary in complicated and disputed cases. The Meeting of Creditors is a much less formal affair. The trustee sits in the place of the creditors who are owed money, reviews the filing, and asks the debtor some simple questions. Your attorney will be at your side to assist you.

And this brings me to the point of there being no creditors at the Meeting of Creditors. As crazy as it sounds, there is normally no reason for them to show up. First of all, they would need to either hire and attorney or in-house council to appear, which is costly and time consuming. Given the fact that they have little hope of recovering any money in a Chapter 7 bankruptcy, this would be a waste of money for most creditors.

Second, the trustee acts in their place. If the debtor appears to have assets or income sufficient to pay their creditors, the trustee will take action. The trustee will object to the bankruptcy filing if there is anything improper about it. The trustee receives a cut of the recovery, and would thus be motivated to act on their behalf if something is available. With little in the way of rights, and very little chance of recovery, and the trustee sitting in their place, it is extremely rare when a creditor shows up. 

There is also little reason for the creditors to show up in Chapter 13 cases. Once again, there is a trustee sitting in their place. Also, the amount of money there are to be repaid is determined by the claim they file, not by a personal appearance.

The only situation when creditors may (rarely) appear is when they are "unsophisticated creditors". This means they are not a credit card or finance company. An example would be someone included on a personal loan, or an ex-landlord. These individuals know very little about the process, and when they receive a notice saying their rights may be affected, they will sometimes show up. Even then, not knowing anything about the process, they normally have very little to add.

The prospect of the Meeting of Creditors is daunting to many bankruptcy filers, but it should not be! The process is very straightforward, you will be very well prepared by my office, and most importantly, you creditors will likely not be at the meeting of their very name!

Contact us if you have any questions about the Meeting of Creditors in particular, or the bankruptcy process in general.

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!