Life after bankruptcy – what does it look like?

Frequently, I’ll meet with clients who are (understandably) worried about life after bankruptcy. How bad is the worst case scenario? Will I have to live without credit for 10 years? Will I ever be able to rent again? Get a car loan? How about a mortgage?

Clients often associate bankruptcy with being thrown out on the street, all of his or her assets taken away, and picture printed on the front page of the newspaper announcing to the world that he or she filed for bankruptcy. It’s so easy to think  that you’ll be branded and you’ll have to wear a scarlet letter around your neck announcing to the world that you’ve filed.

I have news for you. Bankruptcy is about preservation of assets and discharge (forgiveness) of debt. Even though there are a lot of stereotypes and stigmas tied to bankruptcy, it is a perfectly legal and legitimate way for people (and businesses) to get out of overwhelming debt.

Shame, guilt and other emotions about debt

Some of the most common things I hear from my clients are:

I feel so guilty. I feel ashamed.
I am a responsible person.
I never thought I’d end up in this situation.

Being under crushing debt is emotionally draining, puts a lot of pressure on you, your marriage, and your family. (Not to mention, your wallet.) Debt brings up a lot of emotions, and whatever you feel – it’s perfectly normal!

After discharge, you’ll be able to continue to live your life – debt free. All of your future earnings or assets are yours to keep, free from creditors’ claims.

The downside of bankruptcy?

The bankruptcy will be reported on your credit report for up to 10 years. Despite popular belief, this does not mean you cannot acquire new credit for 10 years. Some of the negative impacts of bankruptcy start to diminish as your debt-to-income ratio is improved and your credit score begins to recover.

Most of our clients report being able to get new credit cards shortly after discharge, and in general, you can qualify for FHA mortgage after 2 years.

You may also experience difficulty trying to rent a new apartment immediately after bankruptcy. You can avoid this problem by moving prior to filing. In addition, many landlords will consider overlooking the bankruptcy if you increase your deposit or offer to pay for several months of rent up front. (Read more about renting after bankruptcy here.)

There will be adjustments and challenges. But the point of the fresh start principle that underlies bankruptcy is that there is life after bankruptcy.

Image credit: chrisinplymouth

The dictionary defines bankruptcy as utter ruin, failure, depletion, or the like. With such definition, it’s not surprising that most people associate bankruptcy with being tossed out on the street, stripped of all of his or her belongings. I think of it as a strategic decision about one’s debts, ability to pay those debts and preservation of assets.

We are very fortunate to live in a country with bankruptcy laws that allows individuals as well as corporations to survive by getting rid of debt it cannot afford to pay. Our bankruptcy system is unique in that it allows individuals and corporations to do this without any punishment.

So, let’s review exemption relating to bankruptcy. Each State can set its own exemptions or it can also opt in to the Federal exemption. California has opted out of the Federal exemption and has its own generous set of exemptions. There is two systems of exemptions in California. The first system (CCP 703) uses “Wildcard” which can be applied towards any property. The second system (CCP 704) uses the home equity exemption, which can only be applied towards equity in a home. There are other differences, but these are usually the two driving forces of selecting 703 or 704.

Keeping Home Through Bankruptcy

The threshold question when it comes to keeping homes through bankruptcy is equity. Equity is determined by taking the fair market value of your home and subtracting all liens against the home such mortgages, taxes, HOA liens, etc. Assuming you actually have equity in your home, you can protect:

(1) $75,000 if single debtor.
(2) $100,000 if debtor is family unit.
(3) $175,000 if debtor or spouse is at least 65 years old, or disabled, or if you are 55 years or older with an annual income less than $15,000 or $20,000 if married.

In many cases, the home is underwater, hence no equity.

Keeping Cars Through Bankruptcy

Under system 1 (CCP 703), we can protect up to $3,525 of equity in one vehicle. If your vehicle has more equity than the allowed amount, you can apply some of the Wildcard exemption of $23,250.

For example, if your car is worth $10,000 and you own it free of any loans, we would take:

$10,000
$3,525 (vehicle exemption)
$6,475 (Wildcard exemption)

Under system 2 (CCP 704), we can protect up to $2,725 in a personal vehicle and $7,175 in a business vehicle.

Keeping Retirements, Pensions, etc Through Bankruptcy

In most circumstances, all qualified retirement funds and pensions are protected through bankruptcy. This is one reason we advise against borrowing from or liquidating retirement funds to satisfy creditors. In effect, you are taking fully exempt (protected) funds and applying it towards dischargeable debt. (Discharge is another way of saying forgiven in bankruptcy.) Don’t throw away your hard-earned retirement money.

Keeping Household Items Through Bankruptcy

In general, most normal, everyday household items, clothing, appliances, etc. are fully protected through bankruptcy.

Under system 1 (CCP703), each item is protected up to $550. It is important to keep in mind that in valuing household items, it is not the new value but replacement value used to determine the value of each item. Think of what you could get for it on craigslist or eBay.

Under system 2 (CCP 704), household furnishings and personal effects are protected to the extent reasonably necessary.

Another common concern is keeping pets through bankruptcy. Most household pets are not worth anything unless they are “show” dogs. They are priceless to you – worthless to everyone else.

Keeping Jewelry Through Bankruptcy

Similar to household items, jewelry is also protected through bankruptcy. One common misconception is that the amount exempted should be the same as what you paid for the item. This is not an accurate value of the item. The value we use for the bankruptcy petition is replacement value, taking into consideration the condition of the item.

Under system 1 (CCP 703), we can protect up to $1,425 of jewelry. Similar to cars, if you have more jewelry than the exempted amount, we can apply some of the Wildcard.

Under system 2 (CCP 704), the protected amount is $7,175.

Keeping Cash Through Bankruptcy

When I say “cash” I am including money in bank accounts, stock account (not retirement account), and coin jars in  your home.

Under system 1 (CCP 703), Wildcard is used to protect cash up to $23,250.

System 2 (CCP 704) does not provide protections for cash.

Image credit: Leo Reynolds

“Judgment debtor” is a term of art referring a party against whom a creditor obtained a judgment. I frequently get questions about lawsuits and judgments. Common questions includes:

• What happens if I ignore a lawsuit?
• Can I file for bankruptcy before or after judgment?
• Can I discharge a debt even after judgment has been entered?
• If there is a judgment, can they take my house?

Here is my general short answer.

The longer you wait, the more difficult it will be to fix your problems and the fewer your options will be.

How does the creditor get a Judgment?

First, let’s start with a basic scenario.

You owe Discover $15,000. You fall behind and at some point, Discover (or a debt collector) brings a lawsuit against you. A lawsuit is initiated by filing a summons and complaint with the county court. You must also be served with the summons and complaint. (In case you are wondering, in general, a “process server” will come to your home or work and hand you the summons and complaint.)

After you’ve been served, you have 30 days to respond to the complaint by filing an answer or attacking the complaint for defects. Let’s suppose you decide to ignore the lawsuit, and pretend that you didn’t see it. After the 30 days are up, Discover can move for a default judgment. The court will then enter or “order” a judgment against you.

What happens after the Judgment is entered?

Once Discover has the order in its hands, it can exercise several rights to satisfy its judgment. Most common methods include:

Wage garnishment – this is the most common. By law, your employer is required to withhold and remit up to 25% of your income.

• Judgment lien – Discover can also place a lien on your home or other property you own.
• Levy bank accounts

How do I fix this?

The short answer is that wage garnishments may be fixed in or outside of bankruptcy. A lawyer may be able to set aside the default judgment in State court and stop the wage garnishment. A judgment debtor can also request the wage garnishment amount be adjusted. But, ALL of this will cost you additional attorney fees and court costs.

If you do decide bankruptcy (either Chapter 7 or Chapter 13)  is the way to go, we can also “avoid” a judicial lien. It may also be possible to get some of the garnished or levied funds returned in bankruptcy. But only for funds were taken within 90 days prior to filing your bankruptcy. Bankruptcy also had the added advantage of the Automatic Stay (we have a link to something for this?), which stops all collection activities including wage garnishment the moment you file for bankruptcy.

So, if you are facing a lawsuit or a judgment, it is time to get off the internet and get a good lawyer. I mean run, do not walk and get some help!

Image credit: Leo Reynolds

Free Workshop at the San Francisco Law Library on February 6, 2012.

San Francisco Bankruptcy Lawyers Jeena Cho and Jeff Curl will address various ways to deal with your debt including:

• Debt settlement
• Chapter 7 or Chapter 13
• Dealing with underwater homes
• Consequences of doing nothing

San Francisco Law Library
401 Van Ness Ave, Room 400
San Francisco, CA 94102

Instant – I want it NOW!

We have a tendency to want (and expect) things to happen instantly. And we want those instant solutions to be without any negative consequences.

Frequently, I’ll meet with clients who will sit down and tell me (a) they do not want to file for bankruptcy and (b) they want to get out of debt instantly.

Here’s the thing. Despite what the lotto commercials say, for most people, getting out of debt and accumulating savings requires one simple formula:

Spend less than you earn.

But, here’s the problem – if you are like most of my clients, after all the bills are paid each month, you are at a negative number requiring you to use credit cards to make up the difference. Next month, you are even further behind and the cycle continues.

There comes a point where you’ve accumulated so much debt that no amount of belt tightening, reduction in expenses and instant ramen will get you out of debt. Bankruptcy laws exists so that you won’t be enslaved to your debt forever and gives you a chance to live a productive, successful, debt-free life.

Is bankruptcy an instant solution? No. But it’s probably as close to an instant solution as one can find with Chapter 7 taking about 3 – 4 months and Chapter 13 taking 3 – 5 years.

By the way, if your debt free strategy involves winning the lotto, you might want to read this article from Freakonomics. 

Image credit: Leo Reynolds

Home – Should you stay or go?

We all know the saying – “home is where the heart is” but what if I told you that your home is costing you, your family, and your heart nothing but heartaches?

The Problem – Overextended on home

If you were like many homeowners, you thought you had equity in your home and tapped into that equity by taking out a Home Equity Line of Credit (HELOC) or a second mortgage. Now you find yourself struggling to make your mortgage payments and your home is upside down. All of your efforts to negotiate a loan modification is falling on deaf ears and each time you speak with customer service they have a different story. (Or your mortgage company has lost the paperwork for the 9th time.)

Maybe you’ve already started to fall behind and now all the late charges and other fees are mounting up to something unthinkable. Maybe you’ve started to take on credit card debt so you can stay afloat. Maybe you’ve started liquidating your retirement.

The Solution

So, now what? This would be a good time to have a frank discussion with yourself. Chances are, your mortgage payments are only going to continue to increase. (Let’s face it, the interest rates can’t go any lower.) And the possibility of making more money isn’t looking that great. (Besides, aren’t you working enough as is?)

Consider the following:

How much is your home worth? This should be an obvious starting point. If your home is significantly underwater, it might be time to cut your losses.

How much is the principal & interest payment on your home? During the housing boom, many people purchased homes that they should have never qualified for because they don’t have the income to support the payments. One good example of this are people who had negative amortized loans who are now struggling to make the adjusted payments. Crunch the numbers to see how much your monthly payment should be. You can use a mortgage calculator to do this.

Can you get rid of the second mortgage with Chapter 13?

If your home is upside down leaving the second mortgage completely unsecured, you may be able to get rid of your second mortgage in a Chapter 13. This is better than any loan modification out there because the banks don’t have a say in the matter. If the value of your home is worth less than the first mortgage, we can get rid of the second mortgage – for good.

Who’s in charge?

It’s time to let your brain sit in the driver’s seat and take a hard look at your numbers. I’ve met with many clients who will insist a loan modification is the answer to their problems but when looking at the numbers, even at 0% interest, the client could not afford their home. Remember, your home should not only provide a place for you and your family to live, but should also be a good investment. Don’t let your home ruin you and your family’s financial future.

There is one comment I hear on a regular basis from clients that has always baffled me. It’s when a client says something like “Oh, but I don’t want to file bankruptcy on Chase because it has been so GOOD to me.” It’s usually followed by “I get money back, I get points, gave me free checking, I know the teller, the branch manager”, etc.

I don’t think I’m breaking any news story here but just for the record, Chase doesn’t care about you. Neither does AMEX (even if you have a Platinum card), or Discover, or Bank of America or… you get the idea. They DO care about taking your money. No doubt. However, they don’t care about you.

As eloquently put by Seth Godin on Caring:

“No organization cares about you. Organizations aren’t capable of this. Your bank, certainly, doesn’t care. Neither does your HMO or even your car dealer. It’s amazing to me that people are surprised to discover this fact.”

They don’t care that you’ve lost your job or that you’ve gone through medical issues. They don’t care that you can’t repay credit card debt with 32% interest or come up with $500,000 in one lump sum to repay a balloon payment on your home.

If they cared about you, they wouldn’t charge you 33% interest rate or triple your monthly mortgage payment. They wouldn’t hire Linda Green to robosign fake mortgage documents. They wouldn’t charge outrageous late fees, bounced check fees, ATM fees, annual fees, and other junk fees.

They bribe you with bonus points, miles, cash back bonuses, and platinum status. If I had a dollar for every time a client told me “well, {evil bank} has really been good to me” or “I feel guilty about filing bankruptcy against {bank}” or “I’ve had that account for __ years” I’d be a rich woman.

So, please stop telling me how Chase really cares. Banks are in the business of making money. They are pretty good at faking it and pretending they care but they really just want your money.

Other G’s from Bankruptcy Attorneys

Garnishment
Garnishment
Garnishment
General Unsecured Creditor
Gifts
Goals
Good Manners
Guaranty
Guilt

Image Credit: Leo Reynolds

Moving down the alphabet list, we’ll discuss the Do’s and Don’ts of bankruptcy in this post. 

DO’S and DON’TS of Bankruptcy

THE DO’s

DO take bankruptcy seriously. It is a privilege and courts take a very dim view of abuse of that right.

DO be honest. It is against the law to lie in bankruptcy proceedings. You are sacrificing a small portion of your privacy to get a discharge of your debts. If you lie on your petition, or if you conceal assets, you could get in very serious trouble.

DO be forthcoming with your attorney. Even if it is embarrassing, even if it makes you look like an idiot or a crook, it is better if your attorney knows. Giving your attorney insufficient information is like hiring a chauffeur and not telling him or her that your brakes don’t work.

DO give your attorney EVERYTHING in your relevant financial files, again even if it is embarrassing or incriminating. If you have the document, the odds are someone else does too.

DO inform your bankruptcy attorney EVERYONE you owe money to. This includes family and friends.

DO continue making payments on vehicles which you intend to keep. Creditors secured by a car or truck can usually repossess the vehicle without notice to you anytime you are in default in your payments.

DO adjust the amount withheld from your pay for taxes to get to as close as possible to getting no refund or owing.  You want to be as close to zero as possible. A tax refund is an asset in Chapter 7, and your tax withholding can affect plan payments in a Chapter 13.

DO close or keep minimal the amount in your checking and saving accounts at any banks where you also have a credit card or line of credit. If you stop paying on your credit card or line of credit, the bank may actually go into your checking and savings account and pay your credit card/line of credit.

THE DON’TS

DON’T repay loans to friends, relatives, family or business associates who have lent you money. Payment to an “insider” (which includes relatives, friends and business associates) within one year before you file bankruptcy is a “preference.” The trustee may recover preferences from the person that was paid and divide the money between all of your creditors. You can pay back anyone you like after the bankruptcy.  If you have already repaid such a person, we’ll discuss how to handle the situation.

DON’T talk to your creditors or bankruptcy trustee directly after you have filed for bankruptcy. Tell them to talk directly to your bankruptcy lawyer. If you receive mail from them, forward it to your attorney immediately.

DON’T keep a creditor off your petition for any reason. If you intend to pay them back, you can after the bankruptcy, but you must list them.

DON’T run up a lot of bills immediately before you file. If you max out your credit cards or take out a loan before you file, the court could find your petition was filed in bad faith and dismiss it, or except those debts from discharge.

DON’T borrow or withdraw money from your 401k, IRA, and ERISA qualified savings and retirement plans to pay bills. Early withdrawal of these funds makes you liable for penalties and taxes which may not be discharged in bankruptcy, and you may be able to exempt and keep all funds maintained in these accounts.

DON’T borrow money on your home to pay unsecured (i.e. credit card, utility or medical) bills. If you take out a second mortgage on your home, you may be converting debt which would have been discharged in bankruptcy into debt which you will still have to pay in order to keep your home. These additional payments could be high enough to cause you to lose your home.

DON’T put property you own into someone else’s name to avoid it being taken by creditors or the trustee. That kind of transfer is a fraud on creditors and can result in your discharge being denied. In addition, the trustee can take the property from the person to whom it was transferred.

DON’T attempt to sell your property for less than what it’s worth. This will not reduce the amount you eventually have to repay — and you or whoever you sold it to may end up stuck with the difference.

DON’T buy any luxury items prior to filing for bankruptcy.

DON’T use your credit card.

Other D’s from Bankruptcy Attorneys

Debtor
Debtor
Deconsolidate
Discharge
discharge
Discharge
Disclosures
Divorce
Documents
Domestic Support 
DUI, DWI, OVI

Will I lose my car if I file for bankruptcy?

This is probably one of the most common question and concerns I address for clients contemplating bankruptcy. (I’ll also add Harley’s but that should go into its own separate category.) So, what happens to a car in bankruptcy? The answer to this seemly simple question is “it depends.” (I know. We lawyers give this answer a lot.)

Is there equity?

The first thing we need to look at is if there is any equity in the car. Obviously, if the car is owned outright, without any loans, it has equity. In this situation, whether you can keep the vehicle or not depends on what other assets you have.

Let’s assume your vehicle is worth $10,000. Assuming you don’t have a home with equity, we are going to use the 703 exemption. First, we use the vehicle exemption to protect the first $3,300. Then the remaining $6,700 would have to come from the “wild card.”

What if you have too much value in other assets to be able to protect your vehicle? In this situation, we would file a Chapter 13 to protect the vehicle. The other alternatives are to work out some sort of a buy back deal with the Chapter 7 trustee or allow the trustee to sell the vehicle and give you cash for the amount you were able to exempt.

The next situation is where you have a vehicle but there is a loan securing the vehicle. In this situation, we also look to see if there is equity. For example, if your vehicle is worth $13,000 but there is a car loan against it for $10,000, you have $3,000 in equity.

Just like in the example above, we need to use an exemption to protect the $3,000 in equity. Oftentimes, the loan balance is greater than the vehicle value, so there is no equity to protect.

In such situations, the next thing we look at is if you are current on your loan payment. Frequently, you can keep your vehicle after Chapter 7 bankruptcy by staying current your loan – before, during and after bankruptcy.

Protecting your car through Chapter 13

Chapter 13 has additional tools which allows you to keep your vehicle. If you have too much  equity in the car, you can repay the unexempt value over a 3-5 years and keep the car. For example, if we can protect everything but $3,000 in equity, that would be approximately $50/month ($3,000/60 months*)

*This is an oversimplified calculations. There are other factors that go into the calculation such as liquidation value and trustee commission.

Additional benefits in Chapter 13

In Chapter 13, there are three additional benefits that doesn’t exist in bankruptcy.

1. Reduction in interest rate. If you have a high interest loan, we can reduce it down to about 5%. Obviously, this can lead to significant savings.

2. Lengthen the repayment term. Chapter 13 allows you to stretch the repayment term to 60 months, hence reducing the monthly repayment amount.

3. Cram down. If you have a vehicle that is worth less than the loan balance, we may be able to “cram down” the loan, provided the loan is more than 910 days old.

Other C’s from Bankruptcy Attorneys

Chapter of Relief
Collection Agencies
Competence and Compassion
Conversion
Cosigner
Counseling
Cramdown
Cramdown
Credit counseling
Credit counseling
Creditor
Creditor
Creditors Meeting

Image credit: Leo Reynolds

According to a recent article in US Today, student loans will exceed $1 trillion this year. Unlike most other unsecured debts, student loans have a special status in bankruptcy in that it cannot be discharged (forgiven) through bankruptcy.

I meet with a lot of clients who have a ton of student loans and struggling to make the monthly payments. So, what can be done with student loans? Here are a few options to consider.

1. Go back to school

I know this may sound counterintuitive. After all, the last thing you probably want to do is go back to school after having just graduated. But, by going back to school, you may be able to put your student loans into deferment. Generally, you must take 6 or more credits. Community colleges are very inexpensive and you can take 1 credit for around $40. For example, San Mateo Community College will run you $354 for 6 credits including fees and parking.

Be sure to check with your student loan on this. Some private loans cannot be deferred even if you return to school.

2. Contact student loan for different repayment option

This one is obvious but worth mentioning. Most student loans have various repayment options designed to fit your income. Call your student loan company and ask.

3. File Chapter 13

While bankruptcy can’t get rid of your student loan debt, Chapter 13 can keep the student loan company  at bay for 5 years at a time. This is how it works. Once your Chapter 13 is filed, an Automatic Stay goes into effect, which prohibits further collection activities – including student loan debt.

In Chapter 13, your monthly payment is determined by your “disposable income” which is calculated by taking your income minus your expenses. This is the amount you are required to pay on a monthly basis in Chapter 13. So, by filing Chapter 13, you can keep the payments at a level you can afford.

Here’s the catch though. This may actually lead to an increase in the amount you owe because if you pay less than the actual monthly minimum payments, the difference will be recapitalized.

The idea is that at the end of the 5 year period, you’ll be in a better financial position to be able to repay the student loan. Chapter 13 is also ideal if you have other debts such as credit cards and personal loan, which will be discharged at the end of Chapter 13.

None of these solutions are perfect but there are options out there for dealing with student loan debt.