Tag Archives: bankruptcy

Chapter 13 Does Not Require You to be Naked and Bored

By Jeff Curl, San Mateo Bankruptcy Attorney

If you have been reading up on Chapter 13 bankruptcy, you know that you have to make a monthly payment for a period of time. Once you complete your plan payments, the remaining amount owed to your unsecured creditors is discharged. Sometimes you pay them 0%, 100% or usually something in between. This number varies by each case.

The number one question I am asked about filing for Chapter 13 is “How much will my monthly payment be?”

This depends on a lot of things, including your income, expenses and assets for starters. The most common way a Chapter 13 payment is calculated is by taking your income and subtracting your expenses, yielding a monthly payment. It’s actually much more complex than that, but that is the gist of it.

This leads to the implied question in Chapter 13 and your monthly payment, i.e., what expenses are allowed and appropriate. Most of my clients will understate expenses, often stating little to zero is spent on clothing and entertainment. While there is some sense of austerity that comes with filing Chapter 13, you are not expected to go without clothing and catching a movie or visiting a museum.

That’s right, Chapter 13 does not make nudity and boredom mandatory.

There is a concern by my clients that they will be placed on the stand in the courtroom and crucified for every dollar they spent. It just does not work that way. That said, your budget must be reasonable. $1,000 a month for entertainment is not going to fly. And there are conventional truisms such as never driving a car nicer than the judge. I don’t know which car most judges drive, so that’s difficult to measure. But you get the idea.

But if you have a housecleaner, a nanny, a finely manicured topiary, weekly haircuts, and you are not willing to sacrifice any of these costs, Chapter 13 may not be for you. While you are not required to eat rice and beans, eating at Michelin rated restaurants with regularity is probably not going to happen.

The sacrifice you have to make is actually pretty reasonable: live within your means. Chapter 13 is essentially a structured economic environment designed to keep your finances in order so that you succeed.

So while some reasonableness is required to file and succeed in Chapter 13, starvation and nudity is not.

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Divorce, Family Law, Child Support and Discharging Debts

There must be something in the air with the recent plight of family law and bankruptcy matters that have arisen. I represent both debtors and creditors in these cases. That means I have clients that are divorced and wish to get rid of some debts related to their divorces in bankruptcy. And I have clients who are the ex-spouses and want to prevent the debtor from discharging their debts in bankruptcy.

Sometimes it’s child support, an equalization payment, community reimbursement, attorney’s fees from the divorce or other similar debts. The interesting thing is that in some ways I should not be needed because either the debt is dischargeable or it is not as matter of law.

The law, however, evolves as it is amended and interpreted. This sometimes makes it necessary to get it before the court for a determination of dischargeability, and sometimes the court struggles with finding the right answer itself.

The bankruptcy code provides two provisions that make certain family debts non-dischargeable in certain circumstances (meaning even if the debtor files, the debtor will still owe that particular debt after the bankruptcy process is completed).

First, “domestic support obligations (DSO)” are not dischargeable, i.e., child support and alimony. While that is fairly straightforward, things can get tricky. For example, when the family law court orders debts divided in a certain manner, and one spouse responsible, sometimes the order for the spouse responsible for paying the debt is in the nature of support, sometimes not. A DSO is not dischargeable in either Chapter 7 or Chapter 13.

Second, debts “incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record” are not dischargeable. Taken together with DSO, not a lot is dischargeable. Note, however, that a non-DSO debt arising in the course of a divorce or separation is dischargeable in Chapter 13 (it’s sometime referred to the Chapter 13 super discharge). So a debtor can get rid of some family law obligations in Chapter 13, just not DSO.

This second one involving separation and divorce can get tricky quickly. What about a debt to a third party such as an attorney that represented the debtor in a family law proceeding? What if the case was converted from a 7 to a 13? What if the divorce pre-dates the 2005 amendments to the Bankruptcy Code? It gets sticky quickly, and there is not always a straightforward answer.

If you are a creditor or debtor dealing with these kinds of debts, seek advice of counsel. Some things that may appear crystal clear, may cause you problems in the long run.

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Should I File for Chapter 7 or Chapter 13 Bankruptcy?

By 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: W is for Waiting Too Long

By Jeff Curl, San Mateo Bankruptcy Attorney

Waiting too long.

This is close to, if not my number one enemy in bankruptcy practice. If you have a toothache you may take Aspirin to make it go away. If it still hurts the next day, it’s a probably a good idea to make an appointment with the dentist. If you wait and start getting the throbbing pain and headaches, you’re in trouble. If you wait until there is a nice abscess, you can actually die from that initial toothache. Was it better to get the cavity examined and filled at the outset, or better to wait until the end when you needed full surgery? Which cost more, and which one was more traumatic?

You’re smart, and you can see where I am going with this. People in financial distress don’t typically visit a bankruptcy attorney the first time they miss a payment or realize something is wrong with the money situation. But as things get progressively worse, they often still won’t reach out for help because of a feeling of paralysis, fear or good old fashioned denial. You’re not alone in just hoping that things will get better. But if you are unemployed or chronically underemployed - or your wages are being garnished or some other invasive action has been taken against you, stop the suffering.

I don’t have a way to accurately reconstruct the exact amount of assets my clients unnecessarily lost by waiting too long to decide to file. But I am confident that it is in the millions, if not tens of millions. Between losing homes to foreclosure and draining retirement accounts they could have kept, the amount of lost assets that could have been preserved is staggering. To be frank, it’s a little sad as well. And the suffering that people endure in the form of lost sleep, health and well being, family stress and other indicators is quite alarming.

This is not to say that you should call the doctor, dentist or, in my case, the bankruptcy lawyer every time you feel a scratch in your throat, a sensation in your tooth, or you lost your job. Maybe an Aspirin is the right response, and maybe you will find a job soon and scrape by just fine. But you should have some awareness of your situation and get the courage to respond accordingly. If you do find yourself fearing the phone because of creditor calls, or there is an unspoken but understood anger between you and your significant other over the money situation, things like this need to be addressed.

It may not even be that bankruptcy is the correct route at the end of the day. We’ll help you find a resource if we’re not the right solution. But I cannot emphasize enough how many times our clients have said after our first meeting, and at the end of the bankruptcy process, that they wished they had done it sooner, and that they now feel better.

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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

The 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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