I remember working in the banking industry over a decade ago when the Roth IRA was first introduced. For months after the Roth came out I was approached by clients about how the Roth worked and whether they should roll their money into the Roth from their traditional IRA's. Although brand new at the time, it was clear to me that the Roth might work well for my younger clients, but not necessarily for those nearing retirement age.
As the Roth v. Traditional IRA issue has recently come up with a client of mine, I thought I would take a moment to briefly outline the tax advantages of each.
Traditional IRA Tax Advantages
The real benefit to a Traditional IRA is that any money you deposit into the IRA each year (up to the legal limit) can be deducted from your taxes.
Wednesday
Bankruptcy For The Individual Under The Newly Revised Bankruptcy Code
An individual person can currently file bankruptcy under one of two Federal Bankruptcy Chapters: Chapter 7 (clean slate/start over) and Chapter 13 (restructure of indebtedness). Chapter 7 Bankruptcy is used to discharge the individual from his or her debts. Chapter 13 Bankruptcy is used to restructure a person’s debts and allow him or her to keep certain assets under a revised payment plan.
Recent Changes in the Bankruptcy Code
Until a few years ago just about everyone who had not filed bankruptcy within the preceding six years and had no disposable income to pay the bills was eligible for Chapter 7 bankruptcy.
Recent Changes in the Bankruptcy Code
Until a few years ago just about everyone who had not filed bankruptcy within the preceding six years and had no disposable income to pay the bills was eligible for Chapter 7 bankruptcy.
Tuesday
What is a Short Sale?
A Short Sale is when the owner of a home sells the home for less than what he owes on his mortgage. To do this, the owner is required to get permission from the mortgage holder (usually a bank) to sell the home at a loss to the bank. Since 2008, Short Sales have become more common as the value of houses have dropped in the United States.
Why Would a Bank Agree to a Short Sale?
Banks have a strong incentive to agree to a Short Sale when (1) it has become clear to the bank that the current owner of the home can no longer make his mortgage payments; and (2) foreclosing on the home and selling it at auction will likely bring less for the home than the proposed Short Sale.
Why Would a Bank Agree to a Short Sale?
Banks have a strong incentive to agree to a Short Sale when (1) it has become clear to the bank that the current owner of the home can no longer make his mortgage payments; and (2) foreclosing on the home and selling it at auction will likely bring less for the home than the proposed Short Sale.
Friday
Bankruptcy: Postpetition Income Part I
The Question Presented
If I file bankruptcy what happens to my postpetion income? That issue was faced by a debtor doctor who filed a bankruptcy petition some time ago, but continued to practice medicine from consulting rooms she owned prior to the petition. She also continued to use equipment and supplies purchased before her bankruptcy. Is her postpetition income property of the bankruptcy estate? (Answer to follow)
The Bankruptcy Code
The Bankruptcy Code states that a petition for bankruptcy creates a new legal entity separate and apart from the debtor's prepetition estate. The debtor`s property prior to the date of bankruptcy goes into the bankruptcy estate. In due course, all the prepetition property is liquidated and its proceeds distributed to creditors. At the same time as the bankruptcy estate is created, the individual Ch. 7 debtor begins to accumulate a new estate. This new estate consists of earnings and property acquired after the filing as well as property that has been released to the debtor from the estate as exempt or abandoned by the trustee has having no economic value. These postpetition assets of the debtor are the basis of his or her fresh start. Petition creditors cannot reach them because they are stayed from doing so pending the debtor’s discharge, and are thereafter permanently enjoined from collecting prepetition debts.
So What About the Postpetition Income?
Where the debtor is in the business of rendering personal services (eg., as a doctor, lawyer, or other professional), the doctor's earnings must be apportioned between the bankruptcy estate and the new estate. The doctor is not entitled to all the postpetition income derived from the business. The part attributable to the debtor’s own services does not fall into the bankruptcy estate, but the remainder deriving from the capital, assets, goodwill, or employees’ labor is property of the estate.
For more bankruptcy information read: Bankruptcy: Postpetition Income Part II, Bankruptcy: Automatic Stay, and What is Bankruptcy, Bankruptcy: Fresh Start, Bankruptcy: Student Loans, Bankruptcy: Means Test, Bankruptcy: Income Eligibility, Bankruptcy: New Asset Evaluation
If I file bankruptcy what happens to my postpetion income? That issue was faced by a debtor doctor who filed a bankruptcy petition some time ago, but continued to practice medicine from consulting rooms she owned prior to the petition. She also continued to use equipment and supplies purchased before her bankruptcy. Is her postpetition income property of the bankruptcy estate? (Answer to follow)
The Bankruptcy Code
The Bankruptcy Code states that a petition for bankruptcy creates a new legal entity separate and apart from the debtor's prepetition estate. The debtor`s property prior to the date of bankruptcy goes into the bankruptcy estate. In due course, all the prepetition property is liquidated and its proceeds distributed to creditors. At the same time as the bankruptcy estate is created, the individual Ch. 7 debtor begins to accumulate a new estate. This new estate consists of earnings and property acquired after the filing as well as property that has been released to the debtor from the estate as exempt or abandoned by the trustee has having no economic value. These postpetition assets of the debtor are the basis of his or her fresh start. Petition creditors cannot reach them because they are stayed from doing so pending the debtor’s discharge, and are thereafter permanently enjoined from collecting prepetition debts.
So What About the Postpetition Income?
Where the debtor is in the business of rendering personal services (eg., as a doctor, lawyer, or other professional), the doctor's earnings must be apportioned between the bankruptcy estate and the new estate. The doctor is not entitled to all the postpetition income derived from the business. The part attributable to the debtor’s own services does not fall into the bankruptcy estate, but the remainder deriving from the capital, assets, goodwill, or employees’ labor is property of the estate.
For more bankruptcy information read: Bankruptcy: Postpetition Income Part II, Bankruptcy: Automatic Stay, and What is Bankruptcy, Bankruptcy: Fresh Start, Bankruptcy: Student Loans, Bankruptcy: Means Test, Bankruptcy: Income Eligibility, Bankruptcy: New Asset Evaluation
Thursday
Bankruptcy: Postpetition Income Part II
Post Petition Income from Sale of BusinessA debtor sold her business about ll months before filing her bankruptcy petition. At the time of the sale, the debtor entered into a non-competition agreement with the purchaser under which the debtor agreed, for a consideration of $150,000 per year, not to compete with the business in a specified area for a period of five years. This type of non-compete is not uncommon. The annual payments were to be made at the end of each of the five years. About a month after the petition, the debtor received the first payment. The question became whether the payment is property of the bankrutpcy estate?
The Bankruptcy Code
The Bankruptcy Code states that a petition for bankruptcy creates a new legal entity separate and apart from the debtor's prepetition estate. The debtor`s property prior to the date of bankruptcy goes into the bankruptcy estate. In due course, all the prepetition property is liquidated and its proceeds distributed to creditors. At the same time as the bankruptcy estate is created, the individual Ch. 7 debtor begins to accumulate a new estate. This new estate consists of earnings and property acquired after the filing as well as property that has been released to the debtor from the estate as exempt or abandoned by the trustee has having no economic value. These postpetition assets of the debtor are the basis of his or her fresh start. Petition creditors cannot reach them because they are stayed from doing so pending the debtor’s discharge, and are thereafter permanently enjoined from collecting prepetition debts.
So What About the Sale of the Business?
Although the earnings from the non-competition agreement accrue postpetition, the agreement creating the right to the earnings was entered into prepetition. The proceeds from the non-competition agreement were derived from the debtor’s prepetition activities, and are likely proceeds
of the bankruptcy estate property.
For more bankruptcy information read: Bankruptcy: Postpetition Income Part I, Bankruptcy: Automatic Stay, and What is Bankruptcy, Bankruptcy: Fresh Start, Bankruptcy: Student Loans, Bankruptcy: Means Test, Bankruptcy: Income Eligibility, Bankruptcy: New Asset Evaluation
The Bankruptcy Code
The Bankruptcy Code states that a petition for bankruptcy creates a new legal entity separate and apart from the debtor's prepetition estate. The debtor`s property prior to the date of bankruptcy goes into the bankruptcy estate. In due course, all the prepetition property is liquidated and its proceeds distributed to creditors. At the same time as the bankruptcy estate is created, the individual Ch. 7 debtor begins to accumulate a new estate. This new estate consists of earnings and property acquired after the filing as well as property that has been released to the debtor from the estate as exempt or abandoned by the trustee has having no economic value. These postpetition assets of the debtor are the basis of his or her fresh start. Petition creditors cannot reach them because they are stayed from doing so pending the debtor’s discharge, and are thereafter permanently enjoined from collecting prepetition debts.
So What About the Sale of the Business?
Although the earnings from the non-competition agreement accrue postpetition, the agreement creating the right to the earnings was entered into prepetition. The proceeds from the non-competition agreement were derived from the debtor’s prepetition activities, and are likely proceeds
of the bankruptcy estate property.
For more bankruptcy information read: Bankruptcy: Postpetition Income Part I, Bankruptcy: Automatic Stay, and What is Bankruptcy, Bankruptcy: Fresh Start, Bankruptcy: Student Loans, Bankruptcy: Means Test, Bankruptcy: Income Eligibility, Bankruptcy: New Asset Evaluation
Bankruptcy: Debtor's New Estate
The Question Presented
If I file bankruptcy can I keep my cat? That may seem like a strange question, but that was just the situation faced by a debtor in a recent Chapter 7 filing. At the time of the petition the debtor owned a pregnant Persian cat. The cat produced a litter three weeks after the filing. So who owns the cat and who owns the kittens? (Answer to follow)
The Bankruptcy Code
The Bankruptcy Code states that a petition for bankruptcy creates a new legal entity separate and apart from the debtor's prepetition estate. The debtor`s property prior to the date of bankruptcy goes into the bankruptcy estate. In due course, all the prepetition property is liquidated and its proceeds distributed to creditors. At the same time as the bankruptcy estate is created, the individual Ch. 7 debtor begins to accumulate a new estate. This new estate consists of earnings and property acquired after the filing as well as property that has been released to the debtor from the estate as exempt or abandoned by the trustee has having no economic value. These postpetition assets of the debtor are the basis of his or her fresh start. Petition creditors cannot reach them because they are stayed from doing so pending the debtor’s discharge, and are thereafter permanently enjoined from collecting prepetition debts.
So Who Owns the Cat and Kittens?
Although property acquired by a Ch. 7 debtor after the petition is generally part of the debtor’s new estate, the Bankruptcy Code includes certain postpetition receipts in the estate if they have an appropriate connection with prepetition property. The Persian cat became property of the bankruptcy estate upon the debtor’s petition filing. Although the litter was born after the petition, it is property of the bankruptcy estate which includes in the estate all proceeds, product, offspring, rents or profits of or derived from estate property. It should be noted that if the cat or kittens had no economic value the bankruptcy estate would ultimately abandon them to the debtor.
For more bankruptcy information read: Bankruptcy: Automatic Stay, and What is Bankruptcy, Bankruptcy: Fresh Start, Bankruptcy: Student Loans, Bankruptcy: Means Test, Bankruptcy: Income Eligibility, Bankruptcy: New Asset Evaluation, Bankruptcy: Postpetition Income
If I file bankruptcy can I keep my cat? That may seem like a strange question, but that was just the situation faced by a debtor in a recent Chapter 7 filing. At the time of the petition the debtor owned a pregnant Persian cat. The cat produced a litter three weeks after the filing. So who owns the cat and who owns the kittens? (Answer to follow)
The Bankruptcy Code
The Bankruptcy Code states that a petition for bankruptcy creates a new legal entity separate and apart from the debtor's prepetition estate. The debtor`s property prior to the date of bankruptcy goes into the bankruptcy estate. In due course, all the prepetition property is liquidated and its proceeds distributed to creditors. At the same time as the bankruptcy estate is created, the individual Ch. 7 debtor begins to accumulate a new estate. This new estate consists of earnings and property acquired after the filing as well as property that has been released to the debtor from the estate as exempt or abandoned by the trustee has having no economic value. These postpetition assets of the debtor are the basis of his or her fresh start. Petition creditors cannot reach them because they are stayed from doing so pending the debtor’s discharge, and are thereafter permanently enjoined from collecting prepetition debts.
So Who Owns the Cat and Kittens?
Although property acquired by a Ch. 7 debtor after the petition is generally part of the debtor’s new estate, the Bankruptcy Code includes certain postpetition receipts in the estate if they have an appropriate connection with prepetition property. The Persian cat became property of the bankruptcy estate upon the debtor’s petition filing. Although the litter was born after the petition, it is property of the bankruptcy estate which includes in the estate all proceeds, product, offspring, rents or profits of or derived from estate property. It should be noted that if the cat or kittens had no economic value the bankruptcy estate would ultimately abandon them to the debtor.
For more bankruptcy information read: Bankruptcy: Automatic Stay, and What is Bankruptcy, Bankruptcy: Fresh Start, Bankruptcy: Student Loans, Bankruptcy: Means Test, Bankruptcy: Income Eligibility, Bankruptcy: New Asset Evaluation, Bankruptcy: Postpetition Income
Bankruptcy: Fresh Start Policy
One of the cases heard in Bankruptcy Court today involved a twenty something who graduated from college 3 or 4 years ago. After graduation he got a job with the State of Florida which pays him an annual salary of around $40k per year. He apparently thinks he makes $80k as he lives in a $2,000 per month appartment, drives a brand new BMW and has $35,000 in an unsecured loan. He has fallen behind on his car payments and on the loan. With few real assets and unable to pay his debts he has filed a petition to have his debts discharged in bankruptcy. The Bankruptcy Court will have to decide whether he is deserving of a "Fresh Start." In doing so, the Court will be taking into account the following considerations:
Why Give the Debtor a Fresh Start?
One goal of the Bankruptcy Code's long-term debtor rehabilitation is to give the debtor a "fresh start." Assuming the debtor has complied with the Code’s requirements and has surrendered executable assets or sufficient future income for distribution to creditors, the debtor is entitled to a new beginning, unburdened by the unpaid balance of prebanktuptcy debts. The fresh start is intended not only to serve the interests of the debtor but also the public good. A rehabilitated individual debtor may become self-sufiicient once again, rather than a public charge. The rehabilitation of a corporate or business debtor may preserve jobs and add to the general well-being of the economy.
Cons of the Fresh Start Policy
In determining who may receive a bankruptcy discharge, bankrupcty courts have to balance the above considerations against the harm individual debtor may fail to learn from the bankruptcy and may simply slide again into debt, or, where a business is failing, attempting to save it may ultimately be less economically advantageous than selling its assets to a more effective user. Furthermore, the debtor’s fresh start comes at the expense of its creditors, who are forced to forgive a portion of the debt to which they would otherwise have been entitled. In addition to the direct effect that this has on the creditors themselves, the discharge of debt adds to the cost of giving credit and, therefore, affects the market as a whole. That is, borrowers in general are likely to pay more for their credit because lenders factor into their interest rates the predicted percentage of loans that will be uncollectible because of bankruptcies.
So What Decision Will the Court Make?
It is a longstanding policy of bankruptcy law that relief is intended to help the honest debtor who has encountered serious financial difficulty. Bankruptcy is not supposed to enable prodigals to evade payment of their debts. This does not mean that a prodigal should never be placed in bankruptcy. Sometimes the bankruptcy of a dishonest or manipulative debtor serves the best interests of creditors. It does mean, however, that when bankruptcy has the effect of allowing a dishonest debtor to take advantage of creditors, it should be denied to the debtor. To draw the line between a deserving and undeserving debtor requires a moral judgment which is not always self-evident or easy to make. Nevertheless, many provisions in the Code require the court to take into account the debtor’s good faith or sincerity in determining the availability and form of relief. Sometimes an undeserving debtor may be denied relief altogether, and sometimes limits may be imposed on the advantages to be obtained by the debtor. In the end, the Code generally favors rehabilitation over liquidation, on the theory that creditors are usually likely to do better under a plan of payment. The Bankruptcy Court will likely grant a discharge.
For more bankruptcy information read: Bankruptcy: Automatic Stay, and What is Bankruptcy, Bankruptcy: Fresh Start, Bankruptcy: Student Loans, Bankruptcy: Means Test, Bankruptcy: Income Eligibility, Bankruptcy: New Asset Evaluation,
Why Give the Debtor a Fresh Start?
One goal of the Bankruptcy Code's long-term debtor rehabilitation is to give the debtor a "fresh start." Assuming the debtor has complied with the Code’s requirements and has surrendered executable assets or sufficient future income for distribution to creditors, the debtor is entitled to a new beginning, unburdened by the unpaid balance of prebanktuptcy debts. The fresh start is intended not only to serve the interests of the debtor but also the public good. A rehabilitated individual debtor may become self-sufiicient once again, rather than a public charge. The rehabilitation of a corporate or business debtor may preserve jobs and add to the general well-being of the economy.
Cons of the Fresh Start Policy
In determining who may receive a bankruptcy discharge, bankrupcty courts have to balance the above considerations against the harm individual debtor may fail to learn from the bankruptcy and may simply slide again into debt, or, where a business is failing, attempting to save it may ultimately be less economically advantageous than selling its assets to a more effective user. Furthermore, the debtor’s fresh start comes at the expense of its creditors, who are forced to forgive a portion of the debt to which they would otherwise have been entitled. In addition to the direct effect that this has on the creditors themselves, the discharge of debt adds to the cost of giving credit and, therefore, affects the market as a whole. That is, borrowers in general are likely to pay more for their credit because lenders factor into their interest rates the predicted percentage of loans that will be uncollectible because of bankruptcies.
So What Decision Will the Court Make?
It is a longstanding policy of bankruptcy law that relief is intended to help the honest debtor who has encountered serious financial difficulty. Bankruptcy is not supposed to enable prodigals to evade payment of their debts. This does not mean that a prodigal should never be placed in bankruptcy. Sometimes the bankruptcy of a dishonest or manipulative debtor serves the best interests of creditors. It does mean, however, that when bankruptcy has the effect of allowing a dishonest debtor to take advantage of creditors, it should be denied to the debtor. To draw the line between a deserving and undeserving debtor requires a moral judgment which is not always self-evident or easy to make. Nevertheless, many provisions in the Code require the court to take into account the debtor’s good faith or sincerity in determining the availability and form of relief. Sometimes an undeserving debtor may be denied relief altogether, and sometimes limits may be imposed on the advantages to be obtained by the debtor. In the end, the Code generally favors rehabilitation over liquidation, on the theory that creditors are usually likely to do better under a plan of payment. The Bankruptcy Court will likely grant a discharge.
For more bankruptcy information read: Bankruptcy: Automatic Stay, and What is Bankruptcy, Bankruptcy: Fresh Start, Bankruptcy: Student Loans, Bankruptcy: Means Test, Bankruptcy: Income Eligibility, Bankruptcy: New Asset Evaluation,
What Is Bankruptcy?
When a debtor files bankruptcy in a Federal Bankruptcy Court the federal and state debt collection procedures that are otherwise available to creditors are replaced by a powerful and wide-ranging system of federal laws and procedures. Bankruptcy takes different forms and is flexible enough to accomplish different goals. Two of the distinctive characteristics that make bankruptcy so different from collection remedies under state law are: (1) Bankruptcy encompasses all of the debtor’s assets and debts; and
(2) Bankruptcy is designed to afford relief to the debtor by resolving and settling current debts, while at the same time protecting creditors and guarding their interests.
For more articles on Bankruptcy see: Bankruptcy: Automatic Stay,
For more articles on Bankruptcy see: Bankruptcy: Automatic Stay,
Bankruptcy: Don't Violate the Automatic Stay
What happens when a major banking institution decides to proceed with the sale of levied property even though the property owner has filed bankruptcy and an Automatic Stay is in effect? That issue came up last week in Bankruptcy Court. The debtor had defaulted on a loan from her bank. The bank filed a collection suit against her, obtained a default judgment, and issued a writ of execution. The sheriff then levied on her personal property creating a lien on the property. An execution sale was subsequently scheduled, but before the sale date the bank received notice from the clerk of the bankruptcy court that the debtor had filed a Chapter 7 Bankruptcy petition. Because the collection suit was so close to its conclusion, the bank decided to proceed with the sale, thereby avoiding the need to become involved in the debtor’s bankruptcy proceedings. Was the bank's decision to proceed with the sale legal? Short answer: absolutely not.
Automatic Stay
Under Section 302 of the Bankruptcy Reform Act, filing a petition for bankruptcy automatically provides a debtor with protection from creditor harassment. In simple terms, the automatic stay is an injunction that arises by operation of law immediately upon the commencement of the bankruptcy case. It is described as automatic because the act of filing the bankruptcy petition is all that is required to bring it into effect. No application for the injunction is made, and no court order is needed. Its effect is to impose a wide-ranging prohibition on all collection activity against the debtor. Any action by a creditor after the Automatic Stay is in effect is void even if the creditor did not know about the Stay when the action was taken.
So What Happened to the Bank?
The Bankruptcy Court concluded that the bank sale was a violation of the Bankrupcty Code's Automatic Stay provisions. The fact that the bank continued with the sale even after receiving notice of the bankrupcty made the bank a willful transgressor of the Stay. The Court tonguelashed the bank's representative and reserved ruling on additional sanctions. The bank could be held in contempt of court or be held liable for the debtor's actual damages, including costs, attorney’s fees, and punitive damages. The Bankruptcy Court determined that the bank had committed a "willful violation" which means its actions were intentional, even if the creditor believed it had a right to proceed.
Automatic Stay
Under Section 302 of the Bankruptcy Reform Act, filing a petition for bankruptcy automatically provides a debtor with protection from creditor harassment. In simple terms, the automatic stay is an injunction that arises by operation of law immediately upon the commencement of the bankruptcy case. It is described as automatic because the act of filing the bankruptcy petition is all that is required to bring it into effect. No application for the injunction is made, and no court order is needed. Its effect is to impose a wide-ranging prohibition on all collection activity against the debtor. Any action by a creditor after the Automatic Stay is in effect is void even if the creditor did not know about the Stay when the action was taken.
So What Happened to the Bank?
The Bankruptcy Court concluded that the bank sale was a violation of the Bankrupcty Code's Automatic Stay provisions. The fact that the bank continued with the sale even after receiving notice of the bankrupcty made the bank a willful transgressor of the Stay. The Court tonguelashed the bank's representative and reserved ruling on additional sanctions. The bank could be held in contempt of court or be held liable for the debtor's actual damages, including costs, attorney’s fees, and punitive damages. The Bankruptcy Court determined that the bank had committed a "willful violation" which means its actions were intentional, even if the creditor believed it had a right to proceed.
Bankruptcy: Obtaining an Inheritance After Filing the Petition
Bankruptcy and Inheritance
If I file bankruptcy and then receive and inheritance, does the inheritance become part of my bankruptcy estate?
Answer
The Bankruptcy Code includes in the bankruptcy estate any property that the debtor acquires or becomes entitled to by bequest, devise, or inheritance within 180 days after the petition is filed, if such property would have been property of the estate if the debtor had an interest in it at the time of the petition. The inheritance is estate property.
The Bankruptcy Code
The Bankruptcy Code states that a petition for bankruptcy creates a new legal entity separate and apart from the debtor's prepetition estate. The debtor`s property prior to the date of bankruptcy goes into the bankruptcy estate. In due course, all the prepetition property is liquidated and its proceeds distributed to creditors. At the same time as the bankruptcy estate is created, the individual Ch. 7 debtor begins to accumulate a new estate. This new estate consists of earnings and property acquired after the filing as well as property that has been released to the debtor from the estate as exempt or abandoned by the trustee has having no economic value. These postpetition assets of the debtor are the basis of his or her fresh start. Petition creditors cannot reach them because they are stayed from doing so pending the debtor’s discharge, and are thereafter permanently enjoined from collecting prepetition debts.
For more bankruptcy information read: Bankruptcy: Postpetition Income Part I, Bankruptcy: Postpetition Income Part II, Bankruptcy: Automatic Stay, and What is Bankruptcy, Bankruptcy: Fresh Start, Bankruptcy: Student Loans, Bankruptcy: Means Test, Bankruptcy: Income Eligibility, Bankruptcy: New Asset Evaluation
If I file bankruptcy and then receive and inheritance, does the inheritance become part of my bankruptcy estate?
Answer
The Bankruptcy Code includes in the bankruptcy estate any property that the debtor acquires or becomes entitled to by bequest, devise, or inheritance within 180 days after the petition is filed, if such property would have been property of the estate if the debtor had an interest in it at the time of the petition. The inheritance is estate property.
The Bankruptcy Code
The Bankruptcy Code states that a petition for bankruptcy creates a new legal entity separate and apart from the debtor's prepetition estate. The debtor`s property prior to the date of bankruptcy goes into the bankruptcy estate. In due course, all the prepetition property is liquidated and its proceeds distributed to creditors. At the same time as the bankruptcy estate is created, the individual Ch. 7 debtor begins to accumulate a new estate. This new estate consists of earnings and property acquired after the filing as well as property that has been released to the debtor from the estate as exempt or abandoned by the trustee has having no economic value. These postpetition assets of the debtor are the basis of his or her fresh start. Petition creditors cannot reach them because they are stayed from doing so pending the debtor’s discharge, and are thereafter permanently enjoined from collecting prepetition debts.
For more bankruptcy information read: Bankruptcy: Postpetition Income Part I, Bankruptcy: Postpetition Income Part II, Bankruptcy: Automatic Stay, and What is Bankruptcy, Bankruptcy: Fresh Start, Bankruptcy: Student Loans, Bankruptcy: Means Test, Bankruptcy: Income Eligibility, Bankruptcy: New Asset Evaluation
Tuesday
Bankruptcy: The New Asset Valuation Method
As you may know, some of the legal work I perform is for clients seeking to collect against debtors. I often advise my creditor clients that the real work of collecting on a bad debt does not begin until after a judgment has been entered against the debtor. It is not until after a judgment is entered that the collection attorney is able to begin the formal post judgment discovery process.One of the tools used in post judgment collections is a set of interrogatories (questions) regarding the debtor's finances. The debtor is asked under oath to list all of his or her assets and to give a value for each asset. The value usually listed by a debtor is what the debtor would receive for the asset if it were sold at an auction or "fire sale."
Bankruptcy and the Old Asset Valuation Method
Until recently, bankruptcy debtors have also been able to list their assets at the "auction value." This has been an incredible benefit to bankruptcy debtors trying to hold onto assets. If the value of an asset is less than the cost it would take to sell the asset at auction, bankruptcy trustee prudence dictated allowing the debtor to retain the asset. On the other hand, the higher the value of an asset the greater the likelihood the bankruptcy trustee would take the asset and sell it to pay back creditors.
The difference between the auction value and replacement value of vehicles, furniture, boats, clothing, etc. is usually significant.
Bankruptcy Assets Now Must Be Valued at Replacement Cost
The new bankruptcy laws require that a bankruptcy debtor now value his or her assets at what it would cost to repurchase the assets at a retail store. The debtor is allowed to account for the asset's age and condition. In almost every instance, (even accounting for age and condition of an asset) the value of the asset will go up and the likelihood of the asset being taken and sold by the trustee increased.
For more information on the new bankruptcy law changes see my articles on whether bankruptcy is right for you, the income eligibility requirement, the means test and bankrupcty and student loans.
Wednesday
Bankruptcy: The Means Test
This is a follow up to my post on the new bankruptcy income eligibility requirement. If you have not read that post I would advise that you read it as it explains when and why Congress included a "Means Test" prior to filing bankruptcy under Chapter 7.Most of my clients have an income greater than the median income allowed by the bankruptcy rules. This does not automatically exempt them from being able to file bankruptcy under Chapter 7 (debt discharge without any repayment) . Instead, it requires that my clients satisfy a "Means Test" to be eligible for filing under Chapter 7.
The "Means Test"
The Means Test is designed to determine whether you have enough disposable income to make payments to your creditors under a Chapter 13 (creditor repayment) plan. Congress included this test to address the situation where a debtor with no real valuable asset but substantial income files bankruptcy and gets discharged from his debts. One situation I have heard about involved a young man in his early 20's who lived in a modest apartment he rented, drove an older model car and made almost $50,000 per year on an online business selling medical uniforms. He used a credit card to pay off his student loan debts and his income to pay for trips to Europe, Asia, Hawaii, etc. Because he had an online business he was able to work from almost anywhere in the world. He filed bankruptcy prior to the new laws going into effect and was discharged of nearly $60,000 worth of credit card and other installment loan debt. Congress has attempted to "fix" this situation with the Means Test.
To determine whether you qualify for a Chapter 7 discharge under the Means Test, you subtract from your currenty monthly income: (1) certain allowable expenses (determined by the IRS); and (2) the monthly payments you will have to make on secured and priority debts. These debts include items such as a mortgage or car loan, child support, alimony, tax debts, and wages owed to employees.
If your total monthly disposable income after subtracting these amounts is less than $100, you are eligible to file Chapter 7 bankruptcy to receive a discharge of your debts. If your total remaining monthly disposable income is more than $166.66, you are ineligible to file Chapter 7 bankruptcy.
If your total monthly dispsable income is between $100.00 and $166.66, you must determine whether the remaining disposable income is enough to pay more than 25% of your unsecured, nonpriority debts (i.e. credit card bills, student loans, medical bills, etc.) over a five-year period. If so, you are ineligible for filing bankruptcy under Chapter 7.
Tuesday
Bankruptcy: The Income Eligibility Requirement
You may be surprised to learn that most people who file bankruptcy didn't plan on racking up a bunch of debt, living the high life for a little while and then filing bankruptcy to avoid having to pay back the debt. Instead, most people who file bankruptcy have done so because of unexpected medical bills, divorce or some other life changing event that has turned themselves and their families upside down financially. Most of these people have tried months and even years of "subsistence living" using credit cards and other loans to get hoping that things would get better. The problem is, things didn't get better.
That being said, the new bankruptcy laws have redefined (translation: tightened up on) who is eligible to file bankruptcy and the procedures for filing bankruptcy. This post deals with one of the more prominent changes affecting who can file bankruptcy.
The New Bankruptcy Changes
Among other things, the new bankruptcy rules require that: (1) all debtors get credit counseling before they can file a bankruptcy case (more on this in a future post); (2) debtors with higher incomes won't be allowed to file Chapter 7 (liquidation) but will instead have to repay at least some of their debt under Chapter 13 (addressed in this post); and (3) lawyers must comply with new bankruptcy standards (also to be addressed in a future post).
To determine whether you are eligible for filing Chapter 7 (debt discharge without any repayment), the new rules require that you balance your current monthly income against the median income for a family of your size in your state. Your current monthly income is determined by looking at your average income over the six months leading up to the date you filed bankruptcy. For most people, especially those filing bankruptcy because they recently lost a job, their current monthly income will be much more than they actually earn monthly at the time they file bankruptcy.
Once you've calculated your income, compare it to the median income for your state. You can find median income tables, by state and family size, at the United States Trustee. If your income is less than or equal to the median, you can file for Chapter 7. If it is more than the median, however, you must pass the "Means Test" in order to file for Chapter 7. The means test will also be addressed in a future post.
Other Related Bankruptcy Posts
Bankruptcy: Is it right for you? Bankruptcy: The income eligibility requirement Bankruptcy: The means test Bankruptcy and student loans
Thursday
Bankruptcy Does Not Discharge Student Loans
I met a guy in law school who had an interesting approach to reducing his student loan debt. He told me during our second semester at Florida State that he had already borrowed some $70,000 in student aid and intended to borrow an additional $120,000 by the time he graduated. He drove a brand new Mercedes, lived in the most expensive apartment complex and had already paid for an expensive off campus summer semester program at Oxford which he planned to attend. All of this was funded with student loans.
I contrast his law school lifestyle with mine. My wife and I lived in a shoebox with our three year old son. I ran an early morning paper route to make ends meet and watched our son at night when she went to work as a nurse. I drove a beat up 10 year old Ford Ranger I bought for $1,500. The truck was in such bad shape and so rusted out that the front left brake caliper punched through the rotor one morning while on my paper route causing the wheel to lock up and the truck to come to a screeching halt. Thank goodness I was the only person on the road at the time. But I digress.
It took one semester for my friend to realize that he was not going to finish in the top 30% of our class and that he may be looking at a starting pay of $30,000 when he graduated. He didn't seem concerned. I asked him how he was going to handle all of the student loan debt he was racking up while in law school. He told me he wasn't. His plan was that once he graduated from law school his first stop would be to the U.S. Bankruptcy Court in Tallahassee to file for bankruptcy and start over with a clean slate. It sounded like a pretty solid, well thought out plan; at least until our second year of law school when we enrolled in Bankruptcy 101.
Bankruptcy Does Not Discharge Most Student Loans
I learned a number of interesting things during my second year of law school, not the least of which is that bankruptcy does not discharge student loans unless certain very limited factors are present (none of which applied in my friend's case). As you can imagine this came as quite the surprise to both of us. Since then I have learned that there are other debts (known as "priority debts") that bankruptcy does not discharge. Among these debts are child support, recent federal, state and local taxes, DUI related debts, government imposed fines, and debts not listed on the original bankruptcy notice.
Factors For Granting Discharge of Student Loan Debt
If you are wondering what factors can lead to the discharge of a student loan debt in bankruptcy for hardship it is important to note that the Bankruptcy Code does not specifically define such requirements. One absolute discharge is death and you don't even need bankruptcy for that. I often tell my wife that among other things she can be thankful for when I die is that we will no longer have to pay on my student loan debt. The earlier the better, right.
If death is not the discharge you are looking for, most courts will apply a three-part test to determine eligibility for hardship discharge:
1) Income -- if the debtor is forced to pay off the student loan, the debtor will not be able to maintain a minimum standard of living for himself or herself and his or her dependents;
2) Duration -- the financial circumstances that satisfy the income test in (1) will continue for a significant portion of the repayment period; and
3) Good Faith -- the debtor must have made a good-faith effort to repay the loan prior to the bankruptcy.
As for my friend, he is now buried under a mountain of student loan debt. If you ask him, though, he will tell you it was worth every penny. My advice: Don't ask him.
Wednesday
Is Bankruptcy Right For You?
I have friends who have spent most of their working lives treading water when it comes to finances. Everytime their income increases (raise, new job, etc.) they add another debt. Everytime their income decreases they begin racking up credit card debt to make their monthly payments. The latter is so common there is even a term for it; it's called "subsistence living."
Most people who tread this financial water are able to dig themselves out if given enough time. But what happens when the income takes too big a hit or debt grows too high (unforseen medical expenses, etc.). That is when you might consider taking advantage of the Bankruptcy Code. Bankruptcy is a process under federal law designed to provide financial relief to the debtor by resolving and settling debts, and provide protection to creditors. There are special courts set up for administering the bankruptcy laws under the Bankruptcy Code. Bankruptcy is not designed to give creditors everything they would have been entitled to had bankruptcy not been filed. Instead, bankruptcy is intended to provide the debtor with a fresh start in his or her financial affairs while allowing creditors to recover at least a portion of what is owed.
The Rules Under Liquidation
The Bankruptcy Code allows anyone who is a resident, domiciled, conducting business, or owns property in the United States to file bankruptcy. This applies to those who are U.S. citizens or have a greencard. Recent legislation has severely restricted the ease with which a debtor may file bankruptcy so you may want to consult a bankruptcy lawyer before filing. The debtor does not have to show that he or she is insolvent (i.e. can't pay the bills) to qualify for bankruptcy, but if the debtor has had a case dismissed for lack of cooperation the debtor is prohibited from filing again for a period of 180 days. This provision is designed to prevent debtor's from stringing out creditors by having a case dismissed multiple times.
Automatic Stay
Once the debtor files for bankruptcy protection an "Automatic Stay" goes into effect. This means that all collection actions taken by a creditor must immediately cease. The Automatic Stay applies to all creditors whether they know about the bankruptcy or not.
One common scenario is when a home is foreclosed on and set for auction. I have been at the courthouse steps on more than one occasion to bid on a foreclosed home when the court clerk received a telephone call from the bankruptcy court instructing that the auction be cancelled due to bankruptcy filing. Many debtors, in fact, wait until the day and hour of the foreclosure auction before filing bankruptcy realizing the filing will prevent sale of the home. Even at this late hour the Automatic Stay goes into effect.
Order of Adequate Protection
This does not mean that the debtor does not have to pay for the home. To the contrary, the bankruptcy court will draft an order of adequate protection to protect the creditor. If the debtor wants to keep the home, the order will direct that the debtor bring all arrearages current and continue monthly payments during the course of the bankruptcy proceedings. If the debtor fails to make the payments as provided in the order the credior can apply for a default and have the Automatic Stay lifted to pursue the foreclosure action.
If you are planning on filing bankrupcty, you may first want to contact an estate planning attorney. Ask him about the Enhanced Life Estate Deed a/k/a the Lady Bird Deed.
Financial Documents
If you file for bankruptcy protection you will be required to provide financial and legal forms showing your assets and liabilites. Do not try to hide assets. If you are found to have obtained a bankruptcy discharge while hiding assets, the court will reopen the case and severly penalize you for your fraudulent misrepresentations.
Tuesday
Why You Should Consolidate Student Loans
When I was in law school I applied for and was given in excess of $70,000 in various student loans.
The interest rates on the loans ranged from 7% to 9% with several different repayment options.
Most of the loans allowed me to defer payments until after I graduated but continued to accrue interest on the outstanding balance.
After graduation the time came to repay the loans. I tried for almost a year to keep track of the different loan payments; their terms, payment dates, etc.
I knew that if I missed a payment or made a late payment the lender could accelerate the loan, increase the interest rate and sue me if I did not pay the loan off after acceleration.
I had managed to avoid real life for awhile while living under the bubble that is law school and had little experience dealing with real finances. By the way, bankruptcy does not discharge student loans.
Take Advantage Of The Offer To Consolidate
About a year after I graduated from law school I received an offer in the mail to consolidate my student loans and cut my interest rate in half.
About a year after I graduated from law school I received an offer in the mail to consolidate my student loans and cut my interest rate in half.
I was initially sceptical of the offer as it seemed too good to be true. I checked into it a little more and discovered that the Federal Government was in fact offering interest rate reductions for consolidation (I guess it makes it easier for them to keep up with your loan).
I also discovered that, in most cases, the Federal Government offers interest rate reductions for those who sign up right after graduation or at other eligible grace periods.
Other reductions occur when you have your payment automatically deducted from your checking account and when you timely pay on your loan for more than 6 months.
In addition to cutting my interest rate in half (7% to 3.5%) I was able to take advantage of the other incentives. My interest rate is currently around 2.25% on a loan that was originally 7% to 9%.
Remember, interest never sleeps, goes on vacation or takes a day off.
The best you can do is to pay the loan off in full or lower your rate until you can pay it in full.
Don't Throw The Offer Away
So when you get an offer in the mail to consolidate your loans at a reduced interest rate Don't Throw It Away!
It is most likely legitimate and will allow you to fix your interest in at a low rate and more easily manage your loan. Something else to keep in mind is that student loans cannot be discharged in bankruptcy.
That means you and your loan need to get along because you will more than likely be spending a lot of time with each other.
Thursday
How To Get Out Of Debt
In a country where so much time and energy is spent "defending our freedoms," many people are readily willing to shackle themselves to credit card, car payment and other consumer debt.
I wish I could say that I was not one of the inmates; but that would not be true.
When my wife and I were first married I worked at a fish market and she worked as a travel nurse.
We had just enough credit to buy a house (I consider this a legitimate debt) and rack up a few other small debts (less than $1,000.00).
When our first child was about to be born we decided we needed to purchase a camcorder on credit to record the anticpated event.
That was really the beginning of now more than a decade of ever increasing consumer debt in our family.
We have finally found some help. I hope you can appreciate this advice as we do.
The following is taken from a magazine article titled "Debt Addiction: You Can Break The Habit" by Jerry Mason.
The Credit Addiction Test
Have you become addicted to using credit? Answer the following questions to find out.
1) Do you make only the minimum payment due on credit card statements?
2) Do you have past-due bills for items bought on credit?
3) Are you tempted to consolidate your debts by taking out a home equity loan?
4) Do you find it impossible to save for long-term goals like education?
5) Do you and your spouse fight about borrowing money?
6) Is your budget tight because so much of your income goes to creditors?
Overcoming Debt Addiction
Step 1: Admit you have a debt problem.
Step 2: Get your spouse and children involved in your plan to get out of debt.
Step 3: Determine why you are in debt. Medical Bills? Lifestyle? Car/home repairs?
Step 4: Stop creating debt. Destroy credit cards and payoff home equity loans. I actually know someone who froze her credit card in a block of ice.
To use her credit card she had to thaw the ice. This gave her time to "cool off" before making a purchase she could not pay cash for.
Step 5: Use a budget. My wife and I spent one month writing down everything we bought in a ledger.
This helped us determine where all of our money went each month. I didn't realize I spent so much time at McDonalds.
Step 6: Develop a plan to eliminate consumer debt.
If you need help with getting out of debt and want to avoid bankruptcy, you may also want to contact a debt relief company. They can help you implement the steps outlined above.
I wish I could say that I was not one of the inmates; but that would not be true.
When my wife and I were first married I worked at a fish market and she worked as a travel nurse.
We had just enough credit to buy a house (I consider this a legitimate debt) and rack up a few other small debts (less than $1,000.00).
When our first child was about to be born we decided we needed to purchase a camcorder on credit to record the anticpated event.
That was really the beginning of now more than a decade of ever increasing consumer debt in our family.
We have finally found some help. I hope you can appreciate this advice as we do.
The following is taken from a magazine article titled "Debt Addiction: You Can Break The Habit" by Jerry Mason.
The Credit Addiction Test
Have you become addicted to using credit? Answer the following questions to find out.
1) Do you make only the minimum payment due on credit card statements?
2) Do you have past-due bills for items bought on credit?
3) Are you tempted to consolidate your debts by taking out a home equity loan?
4) Do you find it impossible to save for long-term goals like education?
5) Do you and your spouse fight about borrowing money?
6) Is your budget tight because so much of your income goes to creditors?
Overcoming Debt Addiction
Step 1: Admit you have a debt problem.
Step 2: Get your spouse and children involved in your plan to get out of debt.
Step 3: Determine why you are in debt. Medical Bills? Lifestyle? Car/home repairs?
Step 4: Stop creating debt. Destroy credit cards and payoff home equity loans. I actually know someone who froze her credit card in a block of ice.
To use her credit card she had to thaw the ice. This gave her time to "cool off" before making a purchase she could not pay cash for.
Step 5: Use a budget. My wife and I spent one month writing down everything we bought in a ledger.
This helped us determine where all of our money went each month. I didn't realize I spent so much time at McDonalds.
Step 6: Develop a plan to eliminate consumer debt.
If you need help with getting out of debt and want to avoid bankruptcy, you may also want to contact a debt relief company. They can help you implement the steps outlined above.
How To Stop Foreclosure
As a practicing real estate attorney I have attended numerous real estate foreclosure auctions.
More often than not I have attended the auctions representing the foreclosing bank.
In most instances, the person losing his or her home has recently lost a job and experienced a temporary "dip" in income.
Don't let the temporary dip in income cause you to lose your home; especially if there is equity in the home.
ACT QUICKLY
When facing foreclosure, time is of the essence.
The first thing you should do is contact your lender to see if you can defer certain payments until the end of the loan.
Many local lenders are willing to do this due to the costs associated with foreclosing on property.
Lenders face court costs, attorney's fees and potential loss of principal and interest should your home not sell at auction to cover these amounts.
REMAIN CALM
Remain calm if your lender is not willing to defer payments and insists on continuing with a foreclosure lawsuit.
In most states, a homeowner has at least three months once a case is turned over to a lawyer before the property is scheduled for auction.
Do not ignore paperwork sent to you by the bank's attorney hoping a judge will accept the explanation "I never received it."
It has been my experience that this excuse fails 99 times out of 100 and makes the homeowner lose credibility. Continue your job search.
Once a lawsuit is filed you have a certain number of days to respond. In most states that number is 20 days.
Be sure to respond to the lawsuit with any meritorious defenses you may have on the last possible date.
Once you respond, the bank's attorney can no longer file for a default judgment.
It will take the bank's attorney at least 30 days from the date of your response to obtain a judgment.
In most states, an auction on the property cannot occur less than one month after judgment is obtained.
BANKRUPTCY
Once the property is finally set for auction consult a bankruptcy attorney about filing bankruptcy.
Filing bankruptcy at any time prior to the auction will automatically stay the auction until the bankruptcy court has had an opportunity to review the matter.
More often than not, a bankruptcy attorney will allow you to catch up the delinquent payments over time. This will be done in an Order of Adequate Protection.
Post Judgment Discovery
If you decide not to take the Bankruptcy route and a judgment is entered against you, make sure you respond to all of the post-judgment discovery.
Failure to do so could end up in additional attorney's fees and costs.
More often than not I have attended the auctions representing the foreclosing bank.
In most instances, the person losing his or her home has recently lost a job and experienced a temporary "dip" in income.
Don't let the temporary dip in income cause you to lose your home; especially if there is equity in the home.
ACT QUICKLY
The first thing you should do is contact your lender to see if you can defer certain payments until the end of the loan.
Many local lenders are willing to do this due to the costs associated with foreclosing on property.
Lenders face court costs, attorney's fees and potential loss of principal and interest should your home not sell at auction to cover these amounts.
REMAIN CALM
Remain calm if your lender is not willing to defer payments and insists on continuing with a foreclosure lawsuit.
In most states, a homeowner has at least three months once a case is turned over to a lawyer before the property is scheduled for auction.
Do not ignore paperwork sent to you by the bank's attorney hoping a judge will accept the explanation "I never received it."
It has been my experience that this excuse fails 99 times out of 100 and makes the homeowner lose credibility. Continue your job search.
Once a lawsuit is filed you have a certain number of days to respond. In most states that number is 20 days.
Be sure to respond to the lawsuit with any meritorious defenses you may have on the last possible date.
Once you respond, the bank's attorney can no longer file for a default judgment.
It will take the bank's attorney at least 30 days from the date of your response to obtain a judgment.
In most states, an auction on the property cannot occur less than one month after judgment is obtained.
BANKRUPTCY
Once the property is finally set for auction consult a bankruptcy attorney about filing bankruptcy.
Filing bankruptcy at any time prior to the auction will automatically stay the auction until the bankruptcy court has had an opportunity to review the matter.
More often than not, a bankruptcy attorney will allow you to catch up the delinquent payments over time. This will be done in an Order of Adequate Protection.
Post Judgment Discovery
If you decide not to take the Bankruptcy route and a judgment is entered against you, make sure you respond to all of the post-judgment discovery.
Failure to do so could end up in additional attorney's fees and costs.
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