Tag Archives: Chapter 7

Tips for Getting a Great Reaffirmation Agreement in Bankruptcy

Would you like to negotiate a reaffirmation agreement in Chapter 7 bankruptcy so you can keep secured personal property for less? Below are my tips for getting a great deal when reaffirming car loans and debts for jewelry, furniture, major appliances, and electronics.

What Is a Reaffirmation Agreement in Bankruptcy?

Most folks who file Chapter 7 bankruptcy have secured personal property debts they want to reaffirm. (Personal property is anything that is not real estate.) Secured debts are those for which you pledge an item of property to guarantee payment of the debt. If you don’t make the loan payments, the creditor can repossess the property. Common examples include car loans, and loans money you owe for the purchase of furniture, large appliances, expensive electronics, and jewelry. (Here’s a more detailed definition of what secured debts are and how they work.)

In bankruptcy, if you have a debt that is secured by personal property you must either give up the property, redeem the property (pay market value for it), or reaffirm the debt (that is, agree to be responsible for the debt even after you get the bankruptcy discharge).  (Learn more about options for dealing with secured debts in bankruptcy.)

Reaffirming a debt is not to be taken lightly, so be sure you understand what it is and why you might want to do it.  You can learn about the pros, cons, procedures, and reasons for making a reaffirmation agreement here.

If you decide you do want to reaffirm a debt in Chapter 7 bankruptcy, you may be able to get a better deal by negotiating with the creditor. Here’s how.

Negotiating the Reaffirmation of a Car Loan

When you reaffirm a car loan in order to keep your car, you might be able to get loan terms than the ones you currently have. First, you need to know what kind of loan you have. Money you owe on a motor vehicle will fall into one of two categories: “purchase money” loan or “non-purchase money loan.” If you have a purchase money loan, you have a slim chance to get only a slightly better deal than you already have. If you have a non-purchase money loan, your chances of saving a bucket of money are quite good.

Purchase Money Car Loans

With a purchase money car loan, the debt is the original financing you obtained when you first bought the vehicle (you used the loan money to buy the car). Typical purchase money lenders include Ford Motor Credit, GMAC, Toyota Motor Credit, etc. It doesn’t matter if you bought your vehicle new or used – the loan is a purchase money loan if the vehicle was new to you, and the same, original financing is still in place.

Lenders holding a purchase money loan rarely offer you better terms in a reaffirmation agreement.

  • Loans offered by vehicle manufacturers. If the lender is connected to a vehicle manufacturer like GM or Ford, I find they will not budge. You can ask, but it will probably tell you to keep the original contract terms or else surrender the vehicle.
  • Major bank loans. Major banks rarely drop the amount you owe, but sometimes will agree to cut the interest rate which will, in turn, reduce your payment amount. According to recent experiences, if you have a vehicle loan with Wells Fargo Bank you stand a great chance of getting a decent reduction in the rate of interest. Other major banks may give you little or no relief.
  • Loans by small banks. The smaller the bank, the better your chances are to save money (the exception being Wells Fargo).

Keep in mind with all of these lenders: It costs nothing to ask.

Non-Purchase Money Vehicle Loans

Any other vehicle loan is a non-purchase money loan.  A person might take out a non-purchase money loan if he or she owns the vehicle “free and clear” (meaning the person doesn’t have a car loan). If you need fast money, you can take a loan out against your car. Typical non-purchase money lenders include companies that offer “title loans,” credit unions, small finance companies, and loan sharks.

Lenders with a non-purchase money agreement are likely to give you a good deal. This is because such loans are usually on older vehicles. The older the car and the higher the mileage, the better will be your chance to save a lot of money. It just makes sense. The lenders know they can’t sell an old car for very much money.

What to Ask For

When making an offer on a reaffirmation agreement, ask the lender to reduce the loan balance and the interest rate. Remember, this is a negotiation. You can expect the lender to come back with a counter offer. So, make your starting offer lower than the amount you are really willing to pay.

Tips for Getting What You Want

Now, here’s the inside super tip you have been waiting for. The non-purchase money lender does not want to repo your car unless you leave it with no other reasonable choice. When I negotiate, I like to tell the lender that the car is an awful mess. I say I am doing the lender a big favor by advising my client to pay something for it instead of giving it up. If my client has young kids, I tell the lender there are Cheerios jammed into all the seats, the kids have vomited or urinated on the upholstery, and that the interior does not smell “fresh as a daisy.” I remind the lender that my client will get a ton of new car offers from every new car dealer in the county as soon as the discharge is granted. And, to persuade my client to reaffirm the loan, I have to bring to my client a very good offer. I think you get the idea.

⇒⇒⇒ TIP: One more big tip: The more willing you are to surrender the item, the better deal you’ll get. This is true for cars, jewelry, and any other kind of personal property. It is especially effective on electronics and furniture, which have virtually no used resale value in the hands of a lender.)

Negotiating a Good Deal When Reaffirming Jewelry Debts

You can get great reaffirmation deals on jewelry. Did you buy your jewelry from a store in big shopping mall? If so, the $4,000 diamond you bought will probably only fetch around $500 at a pawn shop. (Don’t believe me? Take your jewelry to a pawn shop or two, and see what they offer. This will give you a starting point for negotiating with the lender.) Armed with knowledge of the street value of your jewelry, you should have no trouble getting a reaffirmation agreement for about half the amount you still owe on it.

Negotiating Reaffirmation Agreements on Furniture

To get a great reaffirmation deal on furniture, use the same negotiating tactics described above for non-purchase money car loans. The older the furniture, the cheaper you can get it for.

Would you like to keep your furniture for free? Here’s how. Tell the lender you are willing to surrender it because it’s not in good condition. (If you have kids who have beaten up your furniture, don’t be shy about revealing the details.) If you can tolerate the risk of actually losing the stuff, you will probably get to keep it. It has been decades since I have seen a lender repossess household furniture. It has no street value to the lender, and it actually will cost the lender money to haul it away. What if the lender schedules a time to pick the stuff up? Don’t panic – it doesn’t mean it actually will show up. More likely, the lender is just trying to scare you into paying for it.

Negotiating Reaffirmation Agreements on Major Appliances

Major appliances do have some street value, unlike furniture. You should expect to get your stuff for about half the amount you still owe. The older your items are, the more you will save. If you have an appliance that is more than three years old, there is a good likelihood the lender won’t ever pick it up, even if it schedules a pick-up date.

Negotiating Reaffirmation Agreements on Electronics

You can often get good reaffirmation agreements on electronics. Old computer equipment is worth nothing. However, if your items are less than one year old, the lender probably does want them.

As with other types of items though, you can take a chance and tell the lender to come pick the stuff up. The lender will tell you (or order you) to bring the electronics back to the store. Nope. Tell them “no.” Bankruptcy requires you to offer to surrender the secured item to the lender if you don’t work out a reaffirmation agreement.  But it does not require you to bring the items to the lender. If the lender wants it, it has to come get it. And, like anything else, it costs the lender money to come to your home and haul the item away. Chances are, the lender won’t show up — unless you recently bought the items.

by Leon Bayer

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

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Bankruptcy Means Test Median Income Figures to Change on November 1

The United States Census Bureau recently published new statistics on the median income for individuals and families in each of the 50 states, plus the District of Columbia.  On November 1, 2014, the median income numbers that you must use when filing for bankruptcy will reflect the recent Census Bureau changes.

Why Does the State Median Income Matter in Bankruptcy?

The median income amounts for each state play an important role in bankruptcy – they determine whether a person filing for Chapter 7 bankruptcy has to pass the means test, or not.  The means test looks at your income and expenses and determines if you can repay a certain amount to your creditors. If you can, you cannot file for Chapter 7 bankruptcy and instead must file for Chapter 13. (Learn more about how the bankruptcy means test works.)

However, if your income is lower than the median income for your family size in your state, you don’t have to take the means test at all – you automatically qualify for Chapter 7 bankruptcy (assuming you meet other Chapter 7 eligibility criteria).

The Median Income Chart for Bankruptcy

On the U.S. Trustee’s website, you can find a chart listing the median incomes in each state for individuals, families of two, families of three,  and families of four (if your family is large than four, you simply add another $8,100 per person to the 4-person figure). Use the figure that corresponds to your family size.

If you file for bankruptcy on or after November 1, 2014, you will use the figures based on the new Census Bureau statistics.  You can find those numbers here:  http://www.justice.gov/ust/eo/bapcpa/20141101/bci_data/median_income_table.htm.

Will I Lose Everything I Bought With Credit Cards If I File for Bankruptcy?

bankruptASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

I am getting ready to file bankruptcy. What happens to all the stuff I bought using my credit cards? Every single thing I own was bought during the past ten years using credit cards and department store cards. I mean, the shirt on my back down to the socks on my feet, to this computer, the tires on my car, the bed I sleep in, and the desk and chair I’m sitting in. Does all of it get taken away? 

I have this silly cartoon image of myself left standing in a barrel because everything, including my clothes, gets taken away when I get to court.   

Yours truly, 

Larry

Larry, My Good Man,

I have awesome news for you. There is a hardware store close to the bankruptcy court and they’re having a big sale on barrels. On your way to court, buy the one you like. But don’t pay with a credit card.

Seriously, the image of people walking out of bankruptcy court wearing barrels is something we won’t ever see. In most cases you don’t have to give up the things you bought on credit. Although there are some exceptions.

Credit Card Security Agreements

When you “buy” something with a credit card, when do you actually own it? It all depends on whether or not the credit card agreement contains a “security agreement.”

A security agreement is the same thing you have when you get a car loan. Your debt is “secured” by the item you owe the money for. The item you buy serves as collateral for the debt (it’s as if legal title on the item is being held hostage until you finish paying for the item). If you don’t pay as agreed, the creditor can repossess the item because you don’t yet own it.

To see what you might have to give up, you need to check your credit card contracts for security agreements. Here’s what’s typical:

  • Major credit card issuer. Ordinarily, there won’t be a security agreement if the lender is a major credit card issuer like Visa, Mastercard, or American Express.
  • Store cards. Usually, there will be a security agreement if the lender is a department store, like Best Buy or Macy’s, or a jewelry store.

What Happens to Items Subject to a Security Agreement?

When you file bankruptcy, the creditors with security interests are entitled to either get paid or get the property back. But often you can keep the property, for several reasons.

  • You can usually negotiate very good settlement terms on personal property items that you still want to keep. (Learn more in Reaffirming Secured Debt in Chapter 7 Bankruptcy and Redeeming Property in Chapter 7 Bankruptcy.)
  • Creditors rarely repossess items that are old or obsolete.
  • Department stores typically exercise their security interest only against major purchases, what they call “white goods,” like washers and refrigerators. (In the old days, major appliances came in any color you wanted, so long as you only wanted white.) Department stores are not interested in taking back your clothing, mattresses, and inexpensive items like video games and dvds, which are called “soft goods.”

For practical information on negotiating a good deal on property you want to keep in bankruptcy, see Tips for Getting a Great Reaffirmation Agreement in Bankruptcy.

When Do You Own an Item You Charged?

When you make a payment towards your department store account, the store credits the payment against the oldest unpaid balance. When you have paid off the oldest item, you own it. The store then applies your next payments to the next oldest balance, and so on.

Items you charged on your major credit cards belong to you, not the store, because the major credit card bank has already paid the store for you. Your major credit card debts will normally be discharged in bankruptcy, and all the stuff like ordinary appliances, furniture, barrels, and clothing will be your “exempt” property.

Losing Nonexempt Property That You Charged on Your Credit Card

Even if you own an item, however, you might still lose it in bankruptcy. If the item is not “exempt,” the bankruptcy trustee in a Chapter 7 bankruptcy can sell the property and use the proceeds to repay your creditors. Most everyday items (like clothing, furniture, and the like) will be exempt. But if you have expensive jewelry or something else that is not exempt through your state laws, you may have to give it up. (Learn more about how bankruptcy exemptions work.)

-Leon

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

Find Leon on Google+

Worried About Losing Your Wedding Ring or Other Jewelry If You File for Bankruptcy?

ringsMost people who file for Chapter 7 bankruptcy don’t have a lot of expensive jewelry. But many own a wedding or engagement ring, or perhaps another special jewelry item, like great grandma’s ruby ring or grandpa’s cufflinks. And while bankruptcy is often fraught with more pressing concerns (Will I lose my home? Can I get that debt collector to stop hounding me?  What about that huge tax bill?), the possibility of losing your wedding ring, heirloom jewelry, or even just a special watch, necklace, bracelet, or pair of earrings can add more mental stress to the process.

Nolo’s New 50-State Series on Your Jewelry in Bankruptcy

So what does happen to those jewelry items when you file for Chapter 7 bankruptcy? As you’ll see below, the answer depends on where you live (or more accurately, which state bankruptcy exemptions you can use).  We outline some of the common ways that states allow you to keep some, or all, of your jewelry. But even more helpful is Nolo’s recently published 50-state (plus the District of Columbia) series on what happens to jewelry in your state.

Exemptions and Jewelry in Bankruptcy

In Chapter 7 bankruptcy you must give up certain items of property. The bankruptcy trustee sells this property and uses the proceeds to repay (at least in part) your unsecured creditors.

Not all of your property is up for grabs, however. (In fact, most Chapter 7 bankruptcy filers give up little or no property.) Each state plus the District of Columbia has enacted laws that protect certain types of property. These laws are called exemptions. Some property is exempt no matter what the value, and other property is exempt only up to a dollar amount. The idea behind exemptions is that someone filing for bankruptcy should not be stripped of basic things needed for living – like shelter, clothing, furniture, a car, and the like. (Learn more about how bankruptcy exemptions work.)

Some states allow you to choose between a set of state exemptions and the federal bankruptcy exemptions. Others only allow you to use state exemptions.  (Find out which bankruptcy exemptions you can use.)

Common Exemptions That You Can Use to Protect Jewelry

The exemptions that are available to you vary by state. Below are some of the types of exemptions that your state might have that you can use to protect jewelry.

Wedding and anniversary ring exemption. Many states allow you to keep wedding and engagement rings, no matter their value. Others put a dollar limit on your wedding ring. Still others don’t have a special exemption for wedding rings.

Jewelry exemption. Some states have a specific exemption that allows you to exempt jewelry up to a certain dollar amount. Some states can be quite generous in this exemption.

Heirloom exemption. Some states have an exemption for family heirlooms – sometimes to an unlimited value and sometimes up to a certain dollar amount. You may be able to use an heirloom exemption to keep jewelry that has been passed down to you from family members.

Wearing apparel exemption. Many states specifically state that you can keep your wearing apparel, often to an unlimited value. Some state bankruptcy courts have ruled that a debtor can exempt a moderately-priced watch, cufflinks, or other modest jewelry item under the wearing apparel exemption.

Wildcard exemption. A wildcard exemption allows you to apply a certain dollar amount to any type of property. If your state has a wildcard exemption (such exemptions can range from as little as $200 to as much as $25,000), you most likely can apply some or all of it to your jewelry.

Find the Jewelry Exemptions in Your State

To find the specific exemptions that relate to jewelry in your state, go to Nolo’s State Bankruptcy Information page and choose the link to your state. You’ll see a list of articles related to bankruptcy in your state, including an article on keeping jewelry.

Can Student Loans Help You Qualify for Chapter 7 Bankruptcy?

StudentLoans_iStockIf you plan to file for bankruptcy and have a bundle of student loan debt, those loans might make it easier for you to be eligible for Chapter 7 bankruptcy.  A Texas bankruptcy court recently ruled that because a bankruptcy debtor’s substantial dentistry school loans were not consumer debts, he did not have to take the means test in order to file for Chapter 7 bankruptcy.

What Is the Chapter 7 Means Test?

In order to qualify for Chapter 7 bankruptcy, you must pass the means test. The Chapter 7 means test looks at your income and expenses and determines if you have enough money left over to repay your unsecured creditors a portion of what you owe.

The means test often prevents high earners from filing for Chapter 7 bankruptcy. For many debtors, Chapter 7 is preferable to Chapter 13 because it allows you to discharge most or all of your debts, and you don’t have to make payments to a plan for three to five years. (Of course, there are many situations when Chapter 13 is better than Chapter 7.)

Exceptions to the Means Test Requirement

There are several situations when debtors do not have to pass the means test in order to file for Chapter 7 bankruptcy. One of those is referred to as the business debt exception:  If the majority of your debts are not consumer debts, you don’t have to take the means test.

Texas Court:  Dentist School Loans Are Not Consumer Debts

In In re De Cunae, No. 12-37424 (Bkcy S.D. TX 2013), Mr. De Cunae, a dentist, filed for bankruptcy. He lost his dental practice after a difficult divorce, was a single father, and couldn’t work for a time because of a stroke. At the time of his bankruptcy filing, he was once again working as a dentist on a contract basis. He filed for Chapter 7 bankruptcy.

Mr. De Cunae argued that he did not have to pass the means test (his income was high enough that if he did have to pass it, he would have failed) because his student loans from dentistry school were nonconsumer debts, and therefore the majority of his debts were nonconsumer.  The Texas bankruptcy judge agreed, ruling that the portion of his dentist school loans (about $200,000) that was used for tuition, books, and fees, was not a consumer debt. On the other hand, the portion of the student loans that he used for household expenses (about $30,000) was consumer debt.

Loans Incurred With an “Eye Towards Profit” Are Not Consumer Debts

Bankruptcy courts often struggle to distinguish consumer and nonconsumer debts. The Fifth Circuit Court of Appeals (Texas is in this circuit) has come up with the following definition: A nonconsumer debt is one that the debtor takes out “with an eye toward profit.”

The Texas bankruptcy court found that Mr. De Cunae did not attend dentist school, nor incur loans to attend dentist school, only for self-improvement or self-esteem, as the United States Trustee argued. Instead, the court found that Mr. Cunae’s intent was to enhance his ability to earn a future living.  To the court, that seemed to fit squarely within the profit motive category — and therefore they were not consumer debts. The portion of student loans that Mr. De Cunae used for household expenses, however, were consumer debts.

Because he could classify most of his dentist school student loans as nonconsumer debt, Mr. De Cunea’s  total nonconsumer debt load outweighed his consumer debt load – and he was allowed to file for Chapter 7 bankruptcy without passing the means test.

Law v. Siegel: Did the U.S. Supreme Court Let a Conniving Bankruptcy Debtor Off the Hook?

US Supreme CourtIn a recent case, Law v. Siegel, the U.S. Supreme Court said that a bankruptcy trustee cannot “surcharge” (redirect funds from) a bankruptcy debtor’s exempt property to pay for the trustee’s attorney’s fees — even if the debtor defrauded the court. The decision was a blow to bankruptcy trustees. But it certainly doesn’t mean that debtors who lie and cheat will get off without penalty.

The Facts of Law v. Siegel

In 2004 Mr. Law filed for Chapter 7 bankruptcy in California.  His home was worth $363,348 and he claimed the full $75,000 of California’s homestead exemption. He also listed two liens against his home that, taken together, exceeded the value of his home. Because these three liens meant that he had no equity in his home, there was nothing left for creditors and he proposed to keep his home in the bankruptcy.

The bankruptcy trustee, Mr. Siegel, questioned the existence of one of the junior liens – that of Lin’s Mortgage and Associates. Long story short: After five years of litigation, the bankruptcy court ruled that the Lin’s Mortgage loan was fictitious. Law had made it up just so he could keep his home. The bankruptcy court ruled that Mr. Law defrauded his creditors and the court.

At this point, Mr. Siegel was in the hole for attorney’s fees to the tune of a whopping $500,000. Bankruptcy law allowed Mr. Siegel to take his fees out of the proceeds of the home sale, after paying off Mr. Law’s first mortgage. But that amount didn’t make a dent in Mr. Siegel’s fees. So, Mr. Siegel asked the court to “surcharge” Mr. Law’s $75,000 homestead exemption. Essentially, he asked the court deny the exemption, and allow Mr. Siegel to use the $75,000 to defray his attorney’s fees.

Needless to say, Mr. Law was not a sympathetic character and the bankruptcy court did not have a problem giving the $75,000 to Mr. Siegel. When Mr. Siegel appealed to the Bankruptcy Appellate Panel of the Ninth Circuit, those judges agreed with the bankruptcy court. He then appealed to the Ninth Circuit, which also agreed with the bankruptcy court.

Split in the Circuit Courts Over Surcharging

Although the bankruptcy court’s ruling seems like a no-brainer, there has been a split between the circuit courts over surcharging – and for good reason. The federal bankruptcy law (§522) which allowed Mr. Law to exempt $75,000 in his home specifically states that the exempted amount “is not liable for” administrative expenses, including attorney’s fees.  And that’s exactly what Mr. Siegel proposed – to use the $75,000 to pay his attorney’s fees.

But here’s the rub. The Ninth Circuit and a few others have ruled over the years that surcharging is allowed because:

  • §105(a) of the bankruptcy code gives the bankruptcy court the authority to do what is necessary to carry out the provisions of the bankruptcy code, and
  • the bankruptcy court has “inherent power”  to sanction litigation practices.

Enter the Supreme Court

The bankruptcy bar awaited the result with baited breath. On the one hand was the group of lawyers who serve as bankruptcy trustees. They were hoping the U.S. Supreme Court would allow the surcharge.

On the other side was the group of lawyers who regularly represent debtors. Those lawyers didn’t want a decision which gave bankruptcy courts more power to take away debtors’ exemptions. And this case was worrisome because “bad facts often make bad law.”

The Supreme Court Says No to the Surcharge

In the end, the Supreme Court held its nose and ruled for Mr. Law.

Its reasoning was fairly simple: A bankruptcy court cannot take an action that is specifically prohibited by another section of the bankruptcy code.

The Supreme Court said that while the bankruptcy court does have inherent power to sanction fraudulent debtors, and §105(a) does give it power to make orders to carry out the code, nonetheless, the bankruptcy court cannot do so if it contravenes another provision of the code. Here, the bankruptcy court’s actions overrode §522, which allows a debtor to exempt certain property. To be sure, §522 does allow a bankruptcy court to deny an exemption, but only for a reason specifically outlined in that section. To that end, §522 lists quite an array of exceptions and limitations to a debtor’s use of exemptions. In what has quickly become a popular quote among bankruptcy attorneys, the Supremes said:

“The Code’s meticulous – not to say mind-numbingly detailed – enumeration of exemptions and exceptions to those exemptions confirms that courts are not authorized to created additional exceptions.”

(Anyone who has dealt with bankruptcy exemptions, both attorneys and debtors alike, will agree that they are mind-numbing. It was nice to have that fact recognized by the highest court in the country.)

What Does This Mean for Bankruptcy Trustees?

The decision is not a good one for bankruptcy trustees. Mr. Siegel labored for five years to prove that Mr. Law had defrauded the court and his creditors. And now he can’t even touch the $75,000 exemption. Yes, there are consequences for Mr. Law (see below), but they don’t necessarily help Mr. Siegel recover his attorney’s fees.

What Does This Mean for Debtors?

This decision certainly doesn’t give free reign to debtors to play fast and loose with the bankruptcy code, or worse, to defraud the court.

The U.S. Supreme Court was very careful to point out the many sanctions that are available to deal with debtors like Mr. Law.

  • The bankruptcy court can deny Mr. Law’s discharge, so that he’d still be on the hook for his debts. (The Court recognized that in this case, because of a settlement, Mr. Law didn’t have any debts to discharge. In most bankruptcy cases, however, this would be a big stick.)
  • The bankruptcy court can impose sanctions on a debtor for bad faith litigation tactics. It won’t take much to put Mr. Law in this category.
  • A debtor who commits fraud can be subject to criminal prosecution, and possibly go to jail for up to five years.

Bankruptcy v. Debt Settlement

Leon Bayer PhotoASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

I’ve got trouble. I just got sued by a credit card company for around $9,000. I have one other delinquent credit card debt for about $15,000. I make around $32,000 per year. It takes all my money just to live. Those are my debt issues, but here’s the real trouble. I have leukemia again, after being in remission for almost five years. I live in California. 

I will be starting chemotherapy soon. I am physically reaching the point where I have to go on disability. My life savings is about $7,000 in an IRA account. That’s all I’ve got, plus really excellent health coverage from my job. I would like to settle with my two creditors, provided they remove anything derogatory from my credit report. I can get a letter from my doctor to show the creditors if that will help me get settlements. I understand that if I make settlements, I might owe some extra income taxes? 

So, what in the world do I do? Any insights from you would be a huge help to me right now. 

Thanks, 

Keith C.

Dear Keith,

Thank you for reading our bankruptcy blog. I understand what a pernicious disease you have. I hope you will knock it down and get back into remission. You have asked if I can explain your legal options. I know you don’t expect a perfect answer to such tough questions, but I’ll do my best to help.

Debt settlement is certainly an option for you. Bankruptcy is another option. Let’s analyze them both.

Bankruptcy

Based on what you mention, bankruptcy is probably an option. You have just a couple of old debts that should be dischargeable, you have no assets to lose, (your IRA account will be protected) and you already live pay check to pay check. You sound like a perfect candidate for Chapter 7 bankruptcy.

My only hesitancy over bankruptcy is that you might be stuck with large future medical debts if you lose your insurance. Also, the best of medical plans could leave a person owing a lot of money under some circumstances. Hopefully that won’t happen to you. However, a lawyer should be able to point out all possible outcomes that are reasonably foreseeable.

Debt Settlement

Now, let’s analyze debt settlement. My law partner Jeffrey Wishman is an absolute wizard at settling debts. He feels that given your financial and medical circumstances, settlements as low as 25% of the total owed may be possible, especially if your doctor provides a diagnosis letter with a grim prognosis. Sharing a letter like that with your creditors can be extremely helpful during the negotiation process. If successful, debt settlement will free you from your present debt worries.

However, even a 25% debt settlement is going to use up all the money that you have. I really don’t want you losing all your savings to pay for debt settlements, especially since you have no present ability to replace your savings. Also, you will soon be on disability which may provide less income than your normal salary.

Taxes Owed on Forgiven Amounts in Debt Settlement

Let’s examine the possibility of you owing income taxes on the amount of debt that gets forgiven. Forgiven debt is counted as income, and normally you would owe incomes taxes on that money, just the same if it had been earned in that amount at your job. Fortunately, there is an exception to that rule, and the exception is in your favor.

An individual will not owe any income tax on the forgiven portion of debt, provided that you were financially insolvent. Insolvency is measured by the value of all your assets and comparing that to the total of your debts. If you owe more money than the value of all your assets, you are insolvent. Based on what you said in your question, you are insolvent unless you own something of value that you haven’t mentioned. I am assuming that all of your personal property such as clothing, furniture, appliances and personal effects have no real value. You do have $7,000 in your IRA, but that is less than the total of all your debts. Hence, you are probably insolvent.

(To learn more, see Nolo’s article Tax Consequences When a Creditor Writes Off or Settles a Debt.)

Can You Get Derogatory Information Removed From Your Credit Report?

Now let’s examine your request that any settlement include a deletion of negative information from your credit reports. That will not happen. Here’s why that is.

Credit reporting is a big business. Credit bureaus sell your credit report to financial institutions. Those banks and other institutions rely on the accuracy of the reports in making decisions to extend credit to you. You can’t manipulate your report by deleting true but derogatory information. To learn more, see our articles on Credit Repair.

The Best Option for Now:  Do Nothing

Now, for the BIG question:  What should you do? My advice – do nothing right now. Absolutely nothing. Here is my thinking. If you file for bankruptcy now, you might have more debt from medical bills later. And if you settle your debts, you won’t have any money left.

Both your disability income and your IRA can’t be touched by creditors. In the meantime, the creditors can all have fun going to court, but you don’t have anything they can take from you. When you are out of the woods and back to work, it will probably be the right time for you to file bankruptcy.

I hope you are well soon. Consult bankruptcy lawyers whenever questions arise.

-Leon

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

Find Leon on Google+

 

California Bankruptcy Exemption Amounts Increase

Changes to California bankruptcy exemption laws, effective January 1, 2013, have increased some of the exemption amounts available to people filing for bankruptcy in California.

What Are Bankruptcy Exemptions?

Most people who file for Chapter 7 bankruptcy in California are able to discharge most or all of their debts. In return, they must turn over certain property to the bankruptcy trustee, which the trustee will use to repay creditors. However, California law allows you to protect certain types of property in bankruptcy — meaning you don’t have to give the property to the bankruptcy trustee. These laws are called exemptions. Exemptions play a role in Chapter 13 bankruptcy as well.

To learn more about how exemptions work in bankruptcy and the exemption amounts in each of the 50 states, visit Nolo’s  Bankruptcy Exemptions topic area.

2013 Changes to California Bankruptcy Exemptions

California Assembly Bill 929, which took effect on January 1, 2013, made some changes to California bankruptcy exemptions.  Here are some of the highlights of those changes:

  • the motor vehicle exemption increased to $4,800 and you can now exempt more than one vehicle (previously you could only exempt the equity in one vehicle)
  • the homestead exemption amount increased to $24,060
  • the tools of the trade exemption amount increased to $7,175
  • the wildcard exemption increased to $1,280, and
  • you can now exempt personal injury recoveries for pain, suffering, and actual pecuniary loss (before these types of damages were excluded from the personal injury recovery exemption) and the total exemption amount increased to $24, 060.

To learn more about the California bankruptcy exemptions, as well as a list of other common exemption amounts, see Nolo’s article California Bankruptcy Exemptions.

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Can I Get Rid of HOA Dues in Chapter 7 Bankruptcy?

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Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon,

I would like to file for Chapter 7 bankruptcy to get rid of credit card debt and past due home owners association (HOA) dues. I currently live in my home. Can I discharge past due HOA dues in chapter 7 bankruptcy?

— Michael

Dear Michael:

The subject of past due HOA dues is tricky for many lawyers and bankruptcy clients, because there is so much misinformation about it.

Here is what you need to know about HOA dues and filing Chapter 7 bankruptcy. As you will see, it makes a big difference whether or not you are keeping the property.

If You Keep Your Home, You Must Pay HOA Dues 

If you are going to keep the property, you will have to pay the past due HOA dues. This requirement is no different than paying any past due mortgage payments as a condition of keeping your property. You must also pay all of the future dues and assessments for as long as you own the property.

Your HOA articles are a “covenant running with the land,” which means that it is sort of like a zoning regulation. Everybody in your home owner’s association has to obey the rules. For example, if you buy a piece of property that is zoned only for single family residences, you will be violating the zoning ordinance if you suddenly turn your house into a gas station.

In your case, you bought your home subject to the requirement that you would abide by the terms and conditions contained in the HOA articles. This includes paying all dues and special assessments.

If You Don’t Keep Your Home 

Things will turn out somewhat different if you plan to walk  away from the property, either by selling it or allowing a foreclosure sale to occur.  Here’s what happens to past and future dues:

  • You may be able to discharge your past HOA dues in your bankruptcy. (Learn more about the bankruptcy discharge.)
  • However, the bankruptcy law specifically provides that HOA dues that accrue after you file for bankruptcy will not be discharged. So, if you continue to own the property after your bankruptcy filing, you will still be liable for ongoing HOA dues. If you don’t pay the dues, the homeowner’s association can collect by: suing you for the money or even foreclosing on your property.

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

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Borrowing From a Retirement Plan During Chapter 7 Bankruptcy

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Bankruptcy expert Leon Bayer answers real-life questions.

Dear Mr. Bayer,

I recently filed for Chapter 7 bankruptcy and have a hearing date set.  I work for the State of California and have a §457 Retirement Plan.  I want to borrow money from the plan to pay for a divorce attorney. Will borrowing from my §457 plan affect my bankruptcy? According to the plan, this would be a refinance since I borrowed money from it last year.

Thanks for your help.

—  Lenore  

Dear Lenore,

I am sorry that you have to deal with a bankruptcy and a divorce all in the same year. On the other hand, maybe it’s best to get both of these over with at the same time, so you can start out next year with a new beginning.

Here is the answer to your question. If your §457 plan is willing to let you take this loan, I believe that you can go ahead and do so. If you are represented by a lawyer in your bankruptcy case, I recommend that you show this to your own lawyer for an opinion before acting on this.

Here is the reasoning behind my answer.

 §457 Retirement Plan Funds Are Not Part of the Bankruptcy Estate

Your California State Employee’s IRS Code §457 Retirement Plan is not property of your bankruptcy estate. Even if it was, it would qualify for an exemption. (To learn how exemptions help you protect property in Chapter 7 bankruptcy, see Nolo’s  area on Bankruptcy Exemptions.)  Since the money in your Plan is protected, if your Plan administration will allow you to take the loan, you can do so.

(Learn more about what property is not in your bankruptcy estate, and what that means for you.)

Money Earned Since Your Chapter 7 Filing Is Not Part of the Bankruptcy Estate

The money that you earn after the date you filed your Chapter 7 case is likewise not property of the bankruptcy estate. Therefore you are entitled to spend your current earnings to make the required loan payments.

Court Approval Required in Chapter 13 Bankruptcy

However, if this was a Chapter 13 case, my answer would be different. The required loan payments would reduce the disposable income of someone in a Chapter 13 case, and thus court approval would be required. (Learn more about  Chapter 13 bankruptcy and disposable income in Chapter 13.)

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

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