Category Archives: Chapter 7

Should I File for Chapter 7 or Chapter 13 Bankruptcy?

moneyBy Jeena Cho

There are pros and cons to most decisions. Bankruptcy is no exception. We have many different types of bankruptcy because the law recognizes that there are many different types of debt problems.

When does Chapter 7 make sense?

Chapter 7 is best suited for debt problems where you’ve had enough and you’re ready to walk away. Both individuals and corporations can file for Chapter 7 bankruptcy. It’s known as “liquidation bankruptcy” because the trustee will liquidate non-exempt assets. Whatever money the trustee can recover from liquidation will be used to pay your creditors.

What is liquidation? Will I lose everything?

The word “liquidation” sounds scary. You might be asking “but how will I survive if the trustee takes everything?” In a personal bankruptcy, also known as “individual bankruptcy” there are exemptions that allow you to protect a certain amount of assets. California has very generous exemptions and in most Chapter 7 cases, the debtor (person filing bankruptcy) gets to keep all of his or her assets and walk away from the debt.

What’s the difference between a personal and corporate Chapter 7 bankruptcy?

In a corporate Chapter 7, there are no exemptions and the trustee will step in to liquidate the assets of the company (if any) in an orderly fashion. This can be beneficial in situations where the owner(s) of the corporation do not want to liquidate the assets themselves. It can also protect the owners from claims of fraudulent transfer from its creditors.

What if there aren’t enough exemptions to protect all of my assets?

If we can’t protect all of your assets, there are three options. 1. File for Chapter 7 bankruptcy and let the trustee sell the unexempt asset. 2. File for Chapter 7 and work out a deal with the trustee for you to buy back the unexempt asset. 3. File for Chapter 13 bankruptcy.

How does Chapter 13 work?

In a Chapter 13 bankruptcy, instead of the trustee taking the asset, you make a monthly payment that’s equivalent to the unexempt asset. So, let’s suppose you have a vehicle that’s worth $12,000. Let’s also assume that in a Chapter 7, the trustee would be entitled to sell or “liquidate” the vehicle. Instead of having the trustee take the car, you can file for Chapter 13 and pay $200 per month for 60 months ($200×60=$12,000).

Chapter 13 monthly payments can also be determined by taking your current income and subtracting your expenses.

Do I earn too much money to file for Chapter 7?

The other circumstances where you may need to file for Chapter 13 bankruptcy is if your income is too high. How much income is too high? That depends on your particular situation and what expenses we can use to offset your income.

Some examples of offsets:

1. Your family size - the more people that depend on your income, the higher the allowance

2. Mortgage - mortgage payments can be used to offset your income. So, in many circumstances, it’s possible to have a fairly high income and still qualify for Chapter 7 due to mortgage payments

3. Car payments - similar to mortgage payments, your car payments and operation expenses can be used to offset your income

4. Medical expenses - medical and dental expenses can help qualify you for Chapter 7 bankruptcy

5. Insurance - term life insurance, medical insurance and some other insurances

6. Charitable contribution - being generous can actually help you qualify for Chapter 7

7. Taxes - owe back taxes? Owing Uncle Sam may make it easier to qualify for bankruptcy

There are many others. So, as you can see, it’s not enough to know how much you earn but we also need to carefully evaluate your situation to determine what offsets we can use to qualify you for Chapter 7 bankruptcy. These same offsets may be used to reduce your Chapter 13 payments.

Some strategic reasons for filing Chapter 13

In some cases, it makes more sense to file for Chapter 13 (even if you qualify for Chapter 7) for strategic reasons. Here are some circumstances:

1. You’re behind on car/mortgage payments - If you want to keep your car and/or home and you’re behind on payments, Chapter 13 gives you up to 60 months to make up or “cure” the missed payments.

2. Reduce interest rate on your car - If you have very high interest rate on your vehicle, Chapter 13 may be advantageous since we can usually reduce the interest rate to around 4 - 5%.

3. Taxes - similar to missed mortgage payments, you’ll be given up to 60 months to repay the IRS/FTB.

4. Student loans - in general, you’ll still be responsible for your student loans even after bankruptcy. However, in a Chapter 13, we can propose a monthly payment that you can reasonably afford for the duration of the Chapter 13. This can be a strategic way to deal with aggressive collection efforts.

5. Continue operation of a business - this is a very complicated area but in some circumstances, the trustee may demand that you stop operating our business if you file for Chapter 7 bankruptcy. If continuing to operate your business is critical, it may make sense to file for Chapter 13.

The word “bankruptcy” can feel very scary and overwhelming. However, bankruptcy law is designed to give good people a second chance at living debt free. There are many strategic ways to use the bankruptcy law to achieve your goals - living debt free, saving your assets from creditors, and of course, gain some peace of mind. Chapter 7 of Chapter 13 may provide this much needed relief.

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Bankruptcy Alphabet: V is for Valuation

By Jeff Curl, San Mateo bankruptcy attorney

In bankruptcy, we talk a lot about valuing assets. How do you value your home in bankruptcy? How about your car? How about your personal property or the “stuff” you own?

Valuation is the price assigned to something. This can be critical for determining whether you can exempt and protect certain assets like homes and cars.

Valuation of Homes

letter vThe valuation of homes matters for a couple of reasons. First, we want to know the value of your home, minus the mortgage liens to determine its equity, if any, for purposes of exempting the home. For example, if your home is worth $700,000 and you have $600,000 in mortgages, you have $100,000 in ostensible equity. I say ostensible because expenses such as a realtor’s commission count against the equity. A full appraisal by a neutral party that understands the market is usually the best choice.

In California, a family can exempt $100,000 in equity in their home. Therefore, if the home has $100,000 in ostensible equity, and really around $50,000 in equity if you calculate the realtor and trustee commissions, we know that we can exempt and protect the home

A second reason for determining these values is for determining a possible lien strip in Chapter 13. Assume your home is worth $500,000 and has two loans. The first loan is a mortgage for $550,000. The second loan is a home equity line of credit (HELOC) for $75,000. Since the first loan absorbs all of the equity and then some, the HELCO is unsecured. A proper valuation of the home let’s us know that we can “strip” the mortgage in a Chapter 13 bankruptcy.

Valuation of Vehicles

A valuation of vehicles is similar to that of home. We want to know what it is worth, subtract the liens, and determine its value. Cars are trickier in some regards because there is the market itself, appraisers, and the different guides such as Kelly Blue Book (KBB) or NADA that will each assign different values to the same vehicles. Even our local judges have differed on what is most reliable. It does seem, however, that judges all carefully evaluate the credibility of an appraiser. If it is someone with experience, who actually examined the vehicle, such appraisers are given more credence for their valuations.

Valuation of Personal Property

Vehicles are a type of personal property, but what about your other stuff? You have clothes, kitchenware, art, jewelry, electronics and other items found in your house. You have to make a good faith effort to determine what your personal belongings are worth in their used condition. Frankly, most of our common household goods just aren’t worth much. But, maybe you collected something like art or jewelry, or your great aunt gave you a potentially valuable family heirloom. Such items should be investigated and appraised where necessary. You do not want to find a trustee attempting to take something or accusing you of concealing an asset’s value because you did not take the time to properly determine its value.

Valuation is really about disclosure, and disclosure is how you make sure you have the smoothest ride through the bankruptcy process.

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Can I Keep My House in Chapter 7?

Keep My House in Chapter 7

Keep My House in Chapter 7? | JC Law Group PC

Can I Keep My House in Chapter 7?

Frequently, I get calls from clients who has a “quick question” - Can I keep my house in Chapter 7? What I find to be curious is that for most folks, their home is their most significant asset. It’s where you live, sleep at night, your children grow up, yet, they want to resolve whether they can keep the house in Chapter 7 over a 2 minute telephone call.

Will I Lose My Home in Chapter 7? Short Question - Long Answer

In bankruptcy, you are entitled to keep certain amount of assets known as “exemptions.” Any property that is not exempted is subject to liquidation in Chapter 7. Liquidation means that the trustee can take unexempt property, sell it to pay your creditors.

You may have heard that you can keep one house in bankruptcy. Not true! Each state has its own exemptions and in California, you are entitled to keep the following amount of equity.

$75,000 for single person
$100,000 for family unit
$175,000 for senior, disabled or over 55 years old with limited income.

It’s important to remember that these amounts are equity in your home. So, if your home is worth $700,000 and you have a mortgage of $650,000, there is ostensibly $50,000 in equity. However, costs associated with the sale such realtor commissions and capital gains can deplete all or part of the equity.

The housing market is picking up in the Bay Area, and because of the high value of most Bay Area homes, the equity exemption doesn’t always go very far.

How Does the Trustee Value My House?

I always cringe whenever a client tells me that their home is worth $x based on zillow.com. Don’t get me wrong, zillow.com is fine for an estimate but incorrectly valuing your home can lead to the trustee selling your house! So, it’s important to get a recent full appraisal for your home from a reputable appraiser who is familiar with your area.

Even if your appraiser values your home at a certain dollar amount, the trustee is not bound by that number. The trustee will frequently send out his or her own real estate agent to your house to value it.

How Does the Trustee Decide if There’s Excess Equity?

The important thing to know is that the trustee can list your home for sale and let the market dictate the value.

Let’s take an example:

Suppose your appraiser says your home is worth $900,000. You have $800,000 in mortgage, leaving $100,000 in equity, which you protect using your exemption.

However, the trustee’s real estate agent thinks he can sell your home for $1,100,000. The trustee can simply list your home for sale and see what the going rate is! He can market the house, sit on it for 6 months, wait for the right buyer and sell it. If the trustee does sell your home, you would be entitled to the first $100,000 (the exemption amount), the mortgage lender gets its $800,000, and the realtor and trustee get their expenses/commission. Anything left over goes to the unsecured creditors.

Ways to Protect Your Home in Bankruptcy

There are several things you can do to protect your home through bankruptcy.

1. Only file Chapter 7 if your home is well under exemption amount. Don’t file for Chapter 7 if [mortgage + exemption] is too close to the fair market value. Home values are rising so quickly that it’s not unusual for the home to appreciate significantly over a short period of time.

2. File Chapter 13. If the numbers are close or if there’s any concern about the trustee selling the home, file Chapter 13. In Chapter 13, instead of the trustee liquidating (selling) your unexempt assets, you repay that amount over 60 months. So, for example, if there’s $30,000 of unexempt equity, you would repay $500 per month for 60 months ($500 x 60 = $30,000). *
*For the purposes of this post, I am totally oversimplifying this but that’s the general idea.

Final Thoughts

Unfortunately, in the past 6 months or so, I’ve been getting calls from panicked debtors who filed for Chapter 7 without realizing that they may lose the home in bankruptcy! Some were represented by inexperienced counsel, others were pro per. It’s always easier to plan for ways to protect the home before filing for bankruptcy. Imagine Chapter 7 like a door that you walk through. The door closes and locks behind you. There’s no un-do or reset button in Chapter 7.

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Going Up! Chapter 13 debt limits and exemptions

By: Jeff Curl

Numbers are going up in bankruptcy, in a good way.

Chapter 13 Debt Limits

Chapter 13 imposes a maximum amount of debt you are permitted to have on the date of filing. Every three years the debts limits for filing Chapter 13 increase on April 1. The new numbers for the 2013 adjustment:
Unsecured debt: $383,175
Secured debt: $1,149,525

This adjustment is a welcome increase, particularly for those in the Bay Area. A one million dollar mortgage is just not that uncommon around here, so the increase is not only welcome, but needed. In fact, I have a client with $373,000 in debt who is not eligible for Chapter 13 bankruptcy, but will be in a couple of weeks thanks to this increase.

Exemptions

The beginning of 2013 saw another increase that has already taken place: exemptions. Exemptions allow someone to protect and keep a certain amount of property in bankruptcy.

The most flexible and commonly used exemption — the wildcard — increased to $24,060. The wildcard can be used on item, or divided to cover many. Have $10,000 in your bank account and want to keep it? You can. And you can use that other $14,060 to protect other things as well. Other exemptions were increased as well, and we as bankruptcy attorneys are in a better position to protect our clients’ interests.

Number increasing in bankruptcy is sometimes a good thing.

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Is Chapter 7 or Chapter 13 better?

Is Chapter 7 or Chapter 13 better?

If you’ve been reading this blog for awhile, you can probably guess the answer to this question - “it depends.”

To say that either chapter is better than the other would be like saying oranges are better than apples. Like apples and oranges, Chapter 7 and Chapter 13 are different. One chapter may be better for your situation but there is no “better” bankruptcy. Let’s explore the differences and see what each chapter can or can’t do.

 

Pros & cons of Chapter 7

Chapter 7 pros:

  • You can be in and out of Chapter 7 in about 3-4 months.
  • Most debts can be discharged (forgiven). See the list of non-dischargable debts.
  • There’s no debt limit.

Chapter 7 cons:

  • You can’t file for Chapter 7 if your income is too high (unless your debts are non-consumer debts).
  • If you have too many assets, you may lose some.
  • There’s no opportunity to make-up missed payments on property you want to retain, such as your home or car.
  • Once you file the Chapter 7, there’s no right to dismiss the case. It’s like walking through a door and locking it behind you.

Pros & cons of Chapter 13

Chapter 13 pros:

  • Offers the possibility of lien stripping second mortgages from underwater homes.
  • Can make-up missed mortgage payments and tax payments during Chapter 13 repayment period.
  • Can make-up missed car payments and avoid repossession.
  • Can get up to 5 years to repay non-dischargeable tax debt.
  • Can keep student loans from taking collection efforts against you for 5 years.
  • Can keep unexempt assets, meaning you can keep all of your assets.

Chapter 13 cons:

  • Requires a 3 or 5 year commitment (though it can be a pro to live within a financially structured environment).
  • You must get permission from the Trustee and/or the Court to get new loans for car, home, etc.
  • You must earn enough income to be able to pay your living expenses and make your Chapter 13 payments.
  • Debt limit may disqualify some people from filing Chapter 13.


As you can see, there are many differences between Chapter 7 and Chapter 13 bankruptcy. And this list is just a short example as there are many other pros and cons to each Chapter. It’s important to meet with a competent bankruptcy to discuss your situation and determine which chapter is right for you.

If you’re wondering if Chapter 7 or Chapter 13 is better for your situation, call us at (415) 963-4004 or schedule online.

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