Bankruptcy: Is there ever a right time?
When your liabilities exceed your assets - that is the time to file bankruptcy.
We fully understand that bankruptcy should be the choice when all else fails -- only then do we recommend bankruptcy. The prevailing reason for filing a bankruptcy petition is when your liabilities exceed your assets.
Often when a client is in consultation with us, the discussion revolves around real estate - what to do when there has been loss of income and mounting bills. We explore what the client most desires and what are the best solutions. Sometimes a decision involves a loan modification or a short sale for real estate before the decision leads to a bankruptcy filing.
Coming to the choice to file bankruptcy is a difficult and emotional decision and we understand that.
- What about credit repair companies?
- We do not recommend credit repair companies because most are scams. Please read more at this link at CreditRepair.org - "Why Credit Repair Companies Have Such a Bad Reputation".
- Also in the New York Times, 11/13/2011, In an article titled, "A Difficult Journey to a Mortgage Modification," there is a detailed first hand story of how a company persuaded a home owner who was had missed one mortgage payment to stop paying and the tragedy that began.
One solution offered by these credit repair companies is a technique called file segregation. The following information about file segregation is from creditrepair.org --- "File Segregation, A Popular New Trend":
....Consumers jump at the chance to have the bad marks [on their credit report] erased so they can secure financing. There are many ways a company says they can improve your credit and one of the newer trends in credit repair scams refers to file segregation.
- File segregation involves establishing a new credit identity. This may sound like the ideal solution for someone with bad credit but the reality is file segregation is illegal. (For further information and also how to reach the three major credit reporting agencies, please use this link which will bring you to the Better Business Bureau's website on the subject of credit repair.)
- Does filing bankruptcy automatically remove liens?
The automatic stay ceases all collection activities from the time of the initial filing of the Petition. Secured creditors get extraordinary rights in a bankruptcy case. Bankruptcy may temporarily delay secured creditors, but most voluntary liens (those granted by agreement on houses, cars, and household goods) have to be satisfied one way or another. The Bankruptcy amendment which went into affect in 2005, among other changes, gave more rights to credit card companies which allows them to collect on the debt that has been accrued.
However, you have some opportunities to remove (or what is called "avoid") involuntary liens and a small category of voluntary liens. The term "avoid" is used in the Bankruptcy Code for removing liens.
THE MEANS TEST
Your attorney is going to ask you to complete the "means test" which is a financial analysis required in every bankruptcy filing, to determine if you qualify. This is a link to the US Trustee - Department of Justice's website where
you will be directed to the "multipliers" that will need to be used to
calculate whether or not you can qualify for Chapter 7 or Chapter 13.
Calculations
are based on your current income and also on numbers used by the
government, such as the cost of living in your community. The numbers
are updated frequently so check to be sure you are using the most recent
numbers.
If you are contemplating bankruptcy without an attorney this link will bring you directly to the US Courts' information and forms outside of this website.
Chapter 7 - liquidation
Simply
stated, a Chapter 7 bankruptcy is the sale of a debtor's nonexempt
property and the distribution of the proceeds to creditors.
Each
state has a list of what is "exempt property" which can be kept. Some
states create their own lists or use the federal exemptions.
- You can avoid some liens
(a lien is an encumbrance on one person's property to secure a debt the
property owner owes to another person).
- Student loan debt is not
dischargeable (eliminated) as well as damages found in some criminal and
civil proceedings - as well as child care, maintenance or alimony
payments.
In a Chapter 7 bankruptcy, the court will cancel (discharge) all of your unsecured debt.
- Unsecured debt means there is no collateral for the debt such as credit card debt. On the other hand, mortgages are secured debt. You promised the mortgage company that your home is collateral for the debt and that it can be sold (through court action) if you do not pay your mortgage debt. Therefore, mortgage debt will not be cancelled in a Chapter 7 bankruptcy (a liquidation).
Chapter 13 - wage-earner's repayment plan
If you have had a temporary
setback (such as a temporary job loss), a Chapter 13 bankruptcy (or
what is referred to as a wage-earner's repayment plan) can help get you
back on track.
In
order to qualify for a Chapter 13 bankruptcy, you
must be able to afford to make your mortgage payments and/or other
payments with enough extra
income to pay off the arrears a little bit over time (3 - 5 years)
according to a plan which will be approved by the U.S. Trustee and the
court (the "Plan").
In
some cases, the Plan will reduce the amount that you must pay your
creditor(s) over the time. In the case of homes and cars, the ability to
change the payment terms is limited.
- (Regarding
maintenance/alimony payments -- When you have "changed circumstances"
you will need to make application to the appropriate family law court
for reduced payments related to the divorce decree.)
- How long does a bankruptcy remain on my credit report?
Although
the Federal Fair Credit Reporting Act provides that bankruptcy entries
will remain for 10 years on your credit history, some creditors may
leave a Chapter 13 on your record for only 7 years as an incentive for
persons to pay at least partial amounts of their debt rather than
obtaining a full discharge of debt under Chapter 7.
- Should I reaffirm my debts in bankruptcy?
"As
a general rule for consumers, the presumption should be that it's never
a good idea to reaffirm debt, particularly in bankruptcy," says Jack
Williams, resident scholar for the American Bankruptcy Institute.
Assuming
you have income, you should be more credit worthy after a bankruptcy
than you were before, since your old debts no longer have a claim on
your future income.
After the discharge (the legal elimination
of debt through bankruptcy), you are entitled under federal law to have
the balance of each discharged debt reported as "O". The history of
delinquencies can be reported, but the balance must be zero. If it is
not so reported, dispute the debt.
Note: The Commentary to the
Fair Credit Reporting Act affirms that a debt discharged in bankruptcy
must be listed as having a 0 balance. 15 U.S.C. § 1681(§§ 601-625) - § 607,
item 6 states: "A consumer report may include an account that was
discharged in bankruptcy (as well as the bankruptcy itself), as long as
it reports a zero balance due to reflect the fact that the consumer is
no longer liable for the discharged debt."
Dismissed
garnishments, judgments, and tax liens are not reportable. A consumer
can request a copy of their credit report from the three credit bureaus.
Under the Fair Credit Reporting Act, you can challenge information that
you believe is inaccurate. If the reporting agency can't verify the
accuracy of the information, they must remove it.
Credit Counseling
Credit
clinics need to be distinguished from court approved credit counseling
services. Court approved credit counseling companies can assist persons
whether or not they are filing bankruptcy. They can not offer legal
advice.
If you find yourself contemplating filing bankruptcy,
it is required that you speak with a court approved credit counseling
service and receive a certification of completion of the financial
course. The companies charge a nominal fee (about $50.00) and in some
cases the fee can be waived.
The following link directs you to the U.S. Trustee's Credit Counseling Program - the Department of Justice - where you can search for a court approved company by State.
One example is a firm, Greenpath, which offers bankruptcy and non-bankruptcy credit counseling. This is a link to Greenpath's website where you can gather further information.
A
copy of your certification that you successfully completed the
counseling required, will need to be be attached to your bankruptcy
Petition. There are very rare exceptions to this rule.
- If I file bankruptcy, can I keep my bank accounts?
Many
people believe that if they file bankruptcy, their bank accounts will
no longer exist. If you don’t owe the bank money, (for instance in the
form of overdraft protection accounts, personal loans, or mortgages)
the bank is not a “creditor”. A bankruptcy will not affect your
accounts. if your accounts are with a bank that is also a creditor
(you have borrowed money from the bank) the money in the account may be
subject to a bank claim to pay any debt you owe. But that is true even
if you have not filed bankruptcy.
- Where do I file my bankruptcy petition?
Where you live - the address where you file your income tax returns - that will be the bankruptcy court where you will file your bankruptcy petition.
- This is the link to the Bankruptcy Court forms.
There
is much information available for you on the web and we always
recommend going to the specific court website located where you live.
The information below details exempt property for New Jersey and New York residents.
New Jersey Exempt Property:
Federal exemptions are available for New Jersey filers but you can only use the federal or the State exemptions, not a combination.
Homestead
Personal Property
The following personal property may be exempt, either wholly or up to the dollar amount given:
$1,000 of furniture and household goods
$1,000 of personal property and possessions of any kind, stock, or interest in corporations
Clothing
Burial plots
Insurance
$500 per month of annuity contract proceeds
Life, endowment or annuity proceeds, if policy includes a clause
prohibiting proceeds from being used to pay the creditors of the
beneficiary
Life insurance proceeds or available if filer is not the insured
Disability benefits for any filer
Health benefits
Group life or health policy or proceeds
Disability or death benefits for members of the military
Disability, death, medical or hospital benefits for civil defense workers
Pensions
(note: tax-exempt retirement accounts such as 401(k)s, 403(b)s, defined
benefit plans, and traditional and Roth IRAs up to $1,095,000 are
exempt under federal law)
IRAs
ERISA-qualified benefits for city employees
Trust containing personal property created pursuant to federal tax law,
including IRAs, Roth IRAs, 401(k) plans & higher education (529)
savings plans.
Pensions for the following occupations are exempt under NJ law:
Alcohol beverage control officers
City boards of health employees
Civil defense workers
County employees
Firefighters, police officers, traffic officers
Judges
Municipal employees
Prison employees
Public employees
School district employees
State police
Street and water department employees
Teachers
Public Benefits
Permanent disability or old age assistance
Unemployment benefits
Workers’ compensation
Miscellaneous
Wages:
90% of earned, unpaid wages if annual income is less than 250% of
federal poverty level; 75% of earned, unpaid wages if annual income is
more
Wages or allowances received by military personnel are exempt
--------------------------------------------------------------------------------------------------------------------------------
New York Exempt Property:
Homestead
$50,000 of real property, including co-op, condo or mobile home.
Personal Property
The following personal property may be exempt, either wholly or up to the dollar amount given:
$2,500 of cash (including savings bonds, tax refunds, band and
credit union deposits), or $5,000 after exemptions for personal property
claimed, whichever amount is less (for filers who do not claim
homestead exemption)
$2,400 for vehicle
$600 of savings & loan savings
Burial plot without structure, up to ¼-acre
College tuition savings program trust fund
Health aids, including service animals (such as seeing-eye dogs) with food
Lost future earnings lawsuit awards needed for support
Personal injury lawsuit awards up to 1 year after receiving
Lawsuit awards for injury to exempt property for 1 year after receiving
Lawsuit awards for wrongful death of person filer depended on
Security deposit to landlord and/or utility company
Spendthrift trust fund principal and 90% of income if trust wasn’t created by the filer
The
following personal property exemptions may total no more than $5,000
(including annuity claim and claims for farm implements, tools,
instruments and military paraphernalia):
$450 of pet food to last 60 days
$35 of watch
Bible, schoolbooks, other books to $50
Pictures
Clothing
Church pew or seat
Sewing machine, refrigerator, TV, radio
Furniture, cooking utensils, tablewear, dishes
Food to last 60 days
Stoves with fuel to last 60 days
Wedding ring
Insurance
$400 per month of disability or illness benefits
Life insurance proceeds and avails if beneficiary is not the filer, or if filer’s spouse took out the policy
Life insurance proceeds left with insurance company at death, if
policy includes a clause prohibiting proceeds from being used to pay the
creditors of the beneficiary
Annuity contract benefits owed to the filer, if filer paid for the
contract; $5,000 limit if annuity bought within 6 months before filing
and not tax-deferred
Pensions (note: tax-exempt retirement accounts such as 401(k)s, 403(b)s,
defined benefit plans, and traditional and Roth IRAs up to $1,095,000
are exempt under federal law)
ERISA-qualified benefits, IRAs, Roth IRAs, Keoghs & income needed for support
Public retirement benefits
Pensions for the following occupations are exempt under NY law:
State employees
Teachers
Village police officers
Volunteer ambulance workers’ benefits
Volunteer firefighters benefits
Public Benefits
Aid to blind, elderly and disabled
Crime victims’ compensation
Home relief, local public assistance
Public assistance
Social Security
Unemployment benefits
Veterans’ benefits
Workers’ compensation
Miscellaneous
Wages:
90% of earned but unpaid wages received 60 days before bankruptcy filing and anytime after
90% of earnings of dairy farmer sales to milk dealers
Pay from non-commissioned officer, private or musician in U.S. or New York state armed forces is wholly (100%) exempt
$600 total of professional furniture, books and instruments
Farm machinery, team (oxen, horses, etc.) & food for 60 days
Alimony and child support
Property of business partnership
Uniforms, medal, emblem, equipment, horse, arms, sword of member of military
