Tag Archives: Chapter 13

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.

Image credit: stock.xchng

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.

Image credit: stock.xchng

Bankruptcy Alphabet - S is Sole Proprietorship

by Jeff Curl

What happens to my sole proprietorship in bankruptcy?

Operating a sole proprietorship is a huge topic in bankruptcy that covers a lot of ground. So let’s take a couple of smaller bites and break down what operating a sole proprietorship means in bankruptcy. We have the pleasure of working with a lot of business own ers, and sole props have their own special issues.

You Cannot “Just File for the Business”

A lot of sole prop owners in financial distress ask if they can file the business only, and not involve themselves personally. The short answer is no. Having a license from the city to operate as a DBA (doing business as) does not create a separate legal entity. Corporations and LLCs are formed as separate entities under the laws of the state where they are formed. Sole proprietorships do not obtain this legal designation. So if you are John Smith DBA John’s Auto Shop, you will be filing yourself and business as one.

Filing a Sole Prop in Chapter 7

It is really important to understand what happens when filing Chapter 7 and you are operating a business as a sole prop. Here are couple of major considerations:

When you file Chapter 7, all of your assets go into the bankruptcy estate, including the inventory and receivables of the business. Your Chapter 7 trustee is the trustee of the estate, meaning she or he controls the assets. Understanding the values of your assets is paramount because you are allowed to exempt and keep a certain amount, but it is not unlimited. If you cannot protect everything, the trustee may liquidate your unprotected assets.

The trustee is also responsible for any liabilities that arises from the business. Therefore, there’s a risk that the trustee may demand that you cease operating your business while the trustee administers your assets. This varies by trustee to trustee and varies by the business. For example, operating a restaurant as a sole prop has many inherent liability potentials, such as payroll taxes, suits by employees against the business owner, and injuries claimed by patrons. Contrast this with the person working as a consultant with his or her laptop out of their home that raises less concerns from a liability perspective. This is a factually sensitive discussion you should have with your bankruptcy attorney.

Filing a Sole Prop in Chapter 13

There are several distinction between Chapter 7 and Chapter 13 when it comes to operating a proprietorship. Here’s a couple of important ones:

The sole proprietor can continue to operate the business in Chapter 13 without the threat of shutdown by the trustee as can happen in Chapter 7. A sole proprietor can also opt to shut down the business before or during a Chapter 13 as well.

A Chapter 13 trustee does not liquidate assets like a Chapter 7 trustee.

In other words, Chapter 13 generally offers flexibilities and forgiveness that are not available in Chapter 7. But sometimes one chapter is better than the other, or sometimes you only qualify for one. Operating a business leads to a lot of complicated issues quickly in the bankruptcy world, so please consult with a bankruptcy attorney familiar with these complications.

Photo by elycefeliz

Bankruptcy Alphabet – L is for Life

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
[ois skin=”Schedule a Consultation”]

Bankruptcy Alphabet - K is For Keep

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.

Keeping assets in chapter 7 Bankruptcy

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