Why "Liquidaton" Is Not Always A Concern

A common fear expressed by new callers when asking about bankruptcy is that all of their property will be liquidated. Or sometimes they believe they will lose their home, their car, or retirement or savings accounts. In most cases, this could not be further from the truth.

The problem arises because individuals do a good thing… they look for information about their problem! But, in doing so, when researching bankruptcy law you will sometimes come across references for a “liquidation” bankruptcy in Chapter 7. Even bankruptcy attorneys will sometimes use this title in shorthand. However, this can cause great confusion and misunderstanding. The reality is that very few bankruptcy cases end up involving liquidation of assets.

The only time this occurs is when you have assets that are not exempt from your creditors. Under bankruptcy law, there are exemptions that are used to protect your personal property. These exemptions are not unlimited, but they are normally sufficient for most people looking to file bankruptcy. In some cases the exemptions actually ARE unlimited. Qualified retirement accounts have an unlimited exemption. Personal injury settlements that are needed to support the debtor are also unlimited. For most other types of property there are limitations. This includes the homestead exemption for your home, the vehicle exemption for your car, in the wildcard exemption that is normally used to protect cash or savings. In most cases, at least in Pennsylvania where the federal exemption are allowed, there is enough to protect everything. So, when people call me up and say, “I don’t want to file bankruptcy because I know I’ll lose my car”, in reality it is just not a problem. Liquidation bankruptcy is an issue that normally does not come in to play.

However, what happens when the exemptions are not sufficient to protect your property? In that case there are two options. One, you can allow the property to be liquidated. Oftentimes, unless the property is of significant value, it is not even worth the time of the trustee to liquidate the asset, and they will abandon it.

The second option is to file Chapter 13 Bankruptcy and pay back your unsecured creditors dollar-for-dollar for the unexempt amount. This sometimes occurs when a debtor has too much equity in a home. Whether or not this makes sense will depend on how much you owe to your creditors and how much you will need to repay. In some cases it will still save you tens of thousands of dollars .

Call me at 412-414-9366 if you have questions about whether or not your property will be fully exempt or will need to be liquidated. As discussed above, in many cases where debtors are concerned about liquidation, in reality they will not lose anything. I would be happy to discuss your situation with a free consultation! Don’t let the word “liquidation” scare you. It is rarely a result.

Some Random Thought on the Bankruptcy Means Test

The bankruptcy means test income thresholds have changed as of April 1, 2022. I discussed this change in my last blog post. Now is a good time to post a few things to remember while dealing with the bankruptcy means test. Just some random thoughts and information…

-Household size is generally determined by your federal income tax dependent claims and your marriage status. If you claim a kid on your taxes, you can likely claim them as a dependent in bankruptcy.

-The means test has a very broad definition of income. It includes things such as bonuses, commissions, gambling winnings, unemployment, second jobs, and the even one time windfalls such as lottery winnings. It does not include Social Security and VA benefits.

-While the means test thresholds are expressed in yearly amounts, it is actually only the six months previous to the month of filing that are considered.

-You may be exempt from the means test if either your debts were accrued while you were on active duty in the military, or your debts are primarily business in nature.

-The means test includes the income of both spouses, even if only one spouse is intending to file. This can be a little confusing for bankruptcy filers, but the fact you must disclose your non-filing spouse’s income will have no impact on them. They are not a part of the bankruptcy filing.

-The means test income threshold‘s are updated every year on April 1st.

-Means test deductions are generally based off of IRS standards, but actual taxes paid and insurance costs can be used.

These are just a few things to keep in mind if you are considering filing bankruptcy and you don’t know whether or not you will pass the means test. If you have any questions about Bankruptcy or the means test, please reach out to us at 412-414-9366. I would be happy to set up a free consultation and discuss your situation!

Updated Means Test Income

The US Census Bureau Family Medium Income chart will be updated once again on April 1st, 2022. This is important because it helps determine whether or not you can file for Chapter 7 Bankruptcy. Incomes above the threshold (annualized on the chart) are not eligible to for a Chapter 7 bankruptcy, but instead must file a five-year Chapter 13 Bankruptcy plan.

The actual look back period is six months, though the chart as provided by the US Census Bureau is in annualized amounts. Therefore, these numbers can be divided by two to give you an idea of whether or not your gross income for the six months before filing is too much to file Chapter 7 Bankruptcy. The new amounts are as followed:

• Household of one: $60,640.00

• Household of two: $74,805.00

• Household of three: $92,441.00

• Household of four: $110,077.00

• Add $9,900.00 for each individual in excess of 4
  

  Call us at 412-414-9366 to set up a free consultation if you want to know whether or not you qualify for the Chapter 7 Bankruptcy. Many issues go into determining whether or not you qualify, but understanding the means test is a good start.

The Bankruptcy Litmus Test

When a potential client is considering whether or not to file Chapter 7 bankruptcy, I will often tell them about my Chapter 7 bankruptcy “litmus test”. Should you file Chapter 7 bankruptcy, or should you not?

Or, in the most simple form this is the question: can you pay off all of your debt by continuing to do what you are currently doing?

Now, I understand that this seems hopelessly simplistic! And sometimes the answer lies somewhere in the middle, so it’s not completely helpful. But, it really is the best way to go about looking at your situation.

Let’s consider if you answer “yes”. You believe if you continue to do what you were doing, you will get out of your debt. This means that your debt load is manageable given the balance amount and interest rates. In this situation you are paying down the balances on your unsecured debt, and you are able to make your home mortgage and car payments. You’re not falling behind on your taxes, and all of your utilities should be current. If you see your credit card debt balances going down every month, you are well on your way to getting out of your debt!

Now, this does not mean you cannot, or should not, file Chapter 7 bankruptcy if you qualify. If you qualify, it is an option for getting your debt balances back to zero possibly much quicker. Also, even though you are paying your debt down now, you may know that your income will decrease in the future, possibly due to retirement or being laid off. Just because you are paying your debts down does not mean that you are required to NOT file bankruptcy. But, it is a consideration if you wish to avoid it.

Let’s look at the opposite answer to the litmus test. What if you are not paying down your debts? In this scenario you may or may not be paying on your credit cards, but either way the debt balances are not going down. Because of interest and penalties, or because you are only making minimum payments, your total balance due every month is essentially the same. In this scenario you should strongly consider filing Chapter 7 bankruptcy if you qualify. If you’re paying towards your debts and they’re not going anywhere, I call it the “hamster wheel”. Just like a hamster, no matter how fast you move your feet, you end up in the same place at the end of the month. Whatever money you are paying is essentially wasted because it is only covering interest and penalties.

If you believe your income will go up in the near future, or you stand to make a windfall from a lawsuit or an inheritance, you may be able to avoid bankruptcy in this situation. But, if your income looks to be the same going into the future, there probably is no realistic way to pay off your debts. Bankruptcy is always voluntary, of course. But, this is a situation where you should at least strongly consider it, especially if you currently qualify.

If you are not paying your debts down every month and want to consider filing Chapter 7 bankruptcy, contact us at 412-414-9366. I will be happy to go through a free consultation with you to discuss your situation. In many situations the answer will not be clear-cut. You may be lowering your debt balances by small amounts every month, but not eliminating them. I would be happy to talk over the option with you and answer any of your questions!

Leases and Bankruptcy

Any leases you have must be accounted for when filing for bankruptcy. You must either assume or reject your lease in your bankruptcy petition. This includes leases for cars, but also for things such as furniture and real estate.

You must declare your intention so that your creditor knows what you were doing, and know what their rights are. If you’re in Chapter 7 bankruptcy and you wish to continue paying on a lease obligation, you simply assume the lease and continue to make the payments. The bankruptcy automatic stay stops creditors from taking back property. However, if you fall behind on the lease payments after the bankruptcy discharge, they can take the property back. Also, at the end of an assumed auto lease in either chapter 7 bankruptcy or Chapter 13 bankruptcy, you may still be liable for any damage to the vehicle or other fees associated with returning the vehicle. Bankruptcy will not discharge this obligation.

If you wish to get away from a lease in chapter 7 bankruptcy, you simply reject the lease and return the property. You will not owe anything else to the leasing company, including any remaining fees.

In Chapter 13 bankruptcy you must also declare what you want to do with your leased property . The Chapter 13 bankruptcy plan must account for it and pay the lease throughout the duration of the bankruptcy. The lease will otherwise not be affected.

Leased property need not be lost or returned in bankruptcy, but it must be accounted for either by paying the contract terms or returning the property. If you were having trouble with a lease or have general questions about your financial situation, call us at 412-414-9366 to set up a free consultation. I would be happy to discuss these issues with you!