How to Value Household Property in Bankruptcy

During bankruptcy a debtor is required to reveal all assets and give an estimated value of the property.  When the asset is cash money or an investment, figuring its value is easy.  In other cases nailing down a value can be very elusive.  This is especially true when dealing with a unique or expensive household item.  So how does the bankruptcy trustee expect the debtor to come up with a value for household property? 

To understand how to value household property for bankruptcy purposes, it is important to understand the bankruptcy process.  One of the chief functions of the bankruptcy trustee is to uncover assets for the benefit of creditors.  Federal and state laws allow the debtor to keep certain modest items of household property that are considered “necessary,” like clothing and household items, but only up to a certain dollar amount.  That amount is called an “exemption,” and that property is considered “exempt” and protected from a creditor’s collection remedies.  Any property that is worth more than the allowed exemption amount is subject to be liquidated, usually at auction. 

So the easy answer to how household property should be valued is, “At auction prices.”  Since auction prices can vary, that doesn’t really answer the question at all.  Instead, what most bankruptcy trustees suggest is to set a price like you would at a yard sale.  Additionally, internet resources like eBay can be helpful to determine the quick-sale market value of a unique item.  Using one of these on-line resources can provide good evidence that your new-in-box Barack Obama Chia Pet is only worth $20.00. 

Many used household items, like common dinner dishes or bedding, have little or no value.  On the other hand, a grandfather clock, piano, or gun safe usually has some value. A bankruptcy trustee is not in the used furniture business, and will usually incur significant costs in selling a debtor’s property. Consequently, the trustee will not be interested in your household property unless you own a non-exempt item that can be sold for a substantial profit to the bankruptcy estate.  

As owner of your property, you are entitled to give an opinion regarding its value.  It is important not to under-value or over-value your household property, but instead give a fair and reasonable estimate.  If you own an expensive household, do some research and speak to your bankruptcy attorney.  There are many ways to protect property in bankruptcy and your bankruptcy attorney can help you decide on the best course of action.

Will I Lose My Tax Refund by Filing Chapter 13 Bankruptcy?

A Chapter 13 bankruptcy is a repayment plan that lasts three to five years.  During that time the debtor is required to devote all disposable income to the repayment of debt.  Most bankruptcy trustees and courts consider tax refunds part of the debtor’s disposable income that is over-withheld and should be paid into the Chapter 13 plan.  However, instead of reducing the amount payable under the debtor’s plan, tax refund money is paid to unsecured creditors that would otherwise not be paid.  If the debtor is paying a 100% repayment plan, the trustee will not request turnover of any tax refunds.

Some courts have approved a provision in the Chapter 13 plan that requires the Internal Revenue Service to forward any tax refund to the trustee’s office.  However, at least one bankruptcy court has found this practice to be unlawful.  In United States v. Carroll, No. 2:09-cv-13505 (E.D.Mich. Jan. 20, 2010), the bankruptcy court concluded that the IRS was not a party to the debtor’s chapter 13 case and did not have an opportunity to object to the plan.  Additionally, as a part of the United States government the IRS possesses sovereign immunity that it did not waive. 

Keeping your money and avoiding an income tax turnover may be as simple as adjusting your paycheck withholding.  By speaking to a tax professional you may be able to predict your tax liability and put more money in your pocket each payday.  However, be careful to avoid a situation where you do not withhold enough taxes and end up with a large tax bill at the end of the year. 

If your tax refund is largely due to an Earned Income Tax Credit (EITC), the IRS allows tax payers to request an advance payment of the EITC.  Information regarding this advance payment program can be found on the IRS website.   If you qualify, your employer will add additional money to your take-home pay each paycheck. 

If you want to avoiding surprises during your Chapter 13 bankruptcy, seek out and hire an experienced bankruptcy attorney.  An experienced bankruptcy attorney can discuss your financial situation with you and help you keep your hard-earned money for your family.

Buying a Home After Bankruptcy

Sometimes a young couple who has struggled for years will finally decide to file bankruptcy.  For a young family the financial difficulty is often a combination of unstable income, medical bills and overextended credit.  While desperate to buy their first home, they have resigned themselves to the belief that the bankruptcy will prevent home ownership for the foreseeable future. 

Not so. 

Most debtors emerge from bankruptcy financially stronger and determined to not repeat past mistakes.  Many debtors who receive bankruptcy discharges have steady jobs, no unsecured debt, and low debt-to-income ratios.  Additionally, a bankruptcy debtor cannot receive a second discharge for several years.  That actually sounds like a good credit risk combination, right?  

The federal government recognizes that a person who has recently discharged unsecured debt through bankruptcy has little debt, but must demonstrate a commitment to managing credit in a responsible manner.  That is why the FHA credit guidelines require the debtor to show two years of responsible credit management after the bankruptcy discharge before it will issue a federal guarantee on a home loan.  It is also possible to obtain a federal guarantee after twelve months, if the debtor can show that the bankruptcy was caused by extenuating circumstances beyond his or her control.  An FHA guarantee means that the lender is guaranteed money if the borrower defaults on the loan.  This federal guarantee makes your loan application more appealing to banks and other lenders. 

Rebuilding your credit report and safeguarding your credit score is very important if you want to buy a house after bankruptcy.  Your bankruptcy attorney can provide helpful tips regarding the rebuilding process and help you on the path to home ownership.

What Is A Reaffirmation Agreement?

A reaffirmation agreement is a new contract between a debtor in bankruptcy and a creditor in which the debtor agrees to continue personal liability on a secured loan and the creditor agrees to not repossess the property.  Reaffirmation agreements are only available to Chapter 7 debtors and the agreement must be executed before the bankruptcy discharge is entered.  The debtor can revoke the agreement with 60 days after the agreement is signed. 

Reaffirmation agreements are typically used to continue payments on secured property the debtor wishes to retain, like a car or house. A debtor that reaffirms a debt is personally liable for any subsequent default on the loan, and can be sued by the lender and the property may be repossessed.  This is a serious consideration since the debtor is not eligible for another Chapter 7 bankruptcy discharge for eight years, and is not eligible for a Chapter 13 discharge for 4 years. 

The Bankruptcy Code requires that the agreement contain many disclosures concerning the contract terms.  The debtor must also file a statement of current income and expenses.  If the debtor’s income after expenses is not enough to pay the monthly loan, the court may decide to not approve the reaffirmation agreement. The debtor’s attorney must also certify to the bankruptcy court that the debtor was advised of the legal effect and consequences of the reaffirmation agreement, and that the reaffirmed debt will not create an undue hardship for the debtor or the debtor’s family.

Since reaffirmation agreements are new contracts, the parties are able to change the terms of the original agreement. This could mean a reduction of principal, interest, or a change in payment length in order to make the monthly payments more affordable to the debtor.  While the reaffirmation process is a voluntary process, the creditor is generally not anxious to repossess the property, and the debtor usually has more leverage in bankruptcy to negotiate a better deal with the creditor. 

If you are considering a bankruptcy and a secured car or house loan, discuss your individual situation with an experienced bankruptcy attorney.  There are many options to retain property both during and after bankruptcy.  Your bankruptcy attorney can help you select the best course of action.

The Consequences of Ignoring Your Debts

I recently read a newspaper advice column written by a Certified Financial Planner who suggested that, as a practical matter, there is no difference between ignoring your credit card debt and filing bankruptcy. Well, let’s look at the “practical effects” of ignoring your credit card debt: 

First, ignoring credit card obligations will cause a persistent series of harassing telephone calls and letters from credit card companies, collection agencies, and finally law firms. Phone calls are systematically made to the debtor’s home and work, and sometimes to third parties including neighbors, extended family, and your employer. The agencies that collect credit card debt are experts at telephone harassment – it is one of their most important weapons. 

Bankruptcy, on the other hand, stops all collection calls. 

Second, your credit score will be ruined on a continuing basis. For each month that a credit card goes unpaid, the creditor will report negatively to the credit reporting bureau. Additionally, collection agencies will often further harm your credit score by “resetting” the date of last activity when the account is transferred to a new collector. 

Bankruptcy stops all negative reporting. Discharged debts should be identified as “Discharged in Bankruptcy” with a zero balance. The debtor’s credit report and score can begin to recover from the date of the bankruptcy discharge. 

Third, you can (and will) be sued. The typical consumer will undoubtedly lose a lawsuit over a legitimate debt. The resulting judgment may include substantial penalties, interest, court fees, and attorney fees. A judgment creditor can collect from your wages, your property, and your bank account. While there are some people who are judgment proof, they are the exception and not the norm. Most people have assets that a judgment creditor can attack. 

Bankruptcy prevents all lawsuits and even stops collection actions from judgment creditors.

Many consumer advocates have likened credit card debt to an illness. Like any illness, the cure is not found in ignoring the problem, which will only make things worse. If you are sick from credit cards and are unable to pay your debts, consult with a bankruptcy attorney and find the cure!

Options When You Have More Month Than Money

Many professionals, including bankruptcy attorneys, will advise a debtor who is unable to pay monthly debts to “investigate your options.” So how many “options” does a person have when there is not enough money to pay the bills?  The answer is: three.  

The first is the “Do Nothing” option.  Debtors who engage in this option hope that by avoiding phone calls and collection letters the debt will somehow just disappear.  That is the same magic that makes a two year old become invisible when she closes her eyes.  Obviously if you won’t see it, the collection companies can’t see it. 

The “Do Nothing” option is the worst option of all because the debt does not disappear. In fact, the debt becomes bigger with increased fees and interest.  Additionally, the debt collection efforts become more aggressive and may result in harassing telephone calls to family, neighbors, or your employer.  Finally, you will likely be sued, your property seized or your income garnished. 

The second option is “Negotiation.”  Many debtors have had positive experience with this option which may include direct negotiation with the creditor for better terms, or help through a third party like a credit counselor or an attorney.  Unfortunately, many people do not realize the consequences of negotiation which may include a resulting tax debt, negative items on a credit report, increased debt through fees and default interest rates, and substantial third party fees. It is well documented by the media and state attorney generals that many debtors that attempt the Negotiation option (e.g. credit counseling, debt settlement, debt negotiation, etc.) end up in worse financial shape because they opted for debt negotiation. If you elect the Negotiation option, hire a qualified and experienced professional. 

The final option is “Bankruptcy.”  Many professionals describe Bankruptcy as the “final option,” but in truth it may be the best option when you cannot pay your bills. Bankruptcy can give an honest debtor breathing room to reorganize debt without the pressures from collection agencies.  Bankruptcy can also legally discharge debt without increased fees or tax consequences.  At the end of a bankruptcy case the debtor can go forward with a “fresh start” and new financial beginning. 

If your family is struggling with more month than money, it is time to examine your options. In the end, choose the option that is best for your family. Speaking with a qualified bankruptcy attorney can answer many of your debt questions.

Discharging Student Loans In Bankruptcy

Recently the House of Representatives Judiciary Subcommittee on Commercial and Administrative Law held a hearing to initiate legislation to change provisions of the federal bankruptcy law that give student loan lenders an advantage over other consumer loans.  Current bankruptcy law provides that student loans are generally not dischargeable under any chapter of the bankruptcy code unless the debtor can show that repayment of the loan creates an “undue hardship.”  Unfortunately, Congress did not define “undue hardship” in the bankruptcy code, so this interpretation has been left to the individual bankruptcy court judges. 

During the Committee hearing Rafael I. Pardo, an associate professor at the Seattle University School of Law who has studied the discharge of student loans in bankruptcy, challenged Congress “to clarify the undue hardship standard.”  Many courts view “undue hardship” as a high bar that is only met by a showing of exceptional circumstances (like physical or mental disabilities, or poor or no future earning potential) that result in an inability to both repay the student loans and provide a minimum standard of living for the debtor and the debtor’s family.  This is a very difficult burden for most debtors to meet, and consequently bars the discharge of student loans in most cases – even while other consumer debts like auto loans, credit cards, medical debts, mortgages, and even taxes are discharged in the debtor’s bankruptcy. 

Consumer bankruptcy attorney Brett Weiss, who testified on behalf of the National Association of Consumer Bankruptcy Attorneys and the National Consumer Law Center, called the situation “unfair” when other consumer loans are forgiven in bankruptcy proceedings while student loans are not.  As a result of these hearings, Rep. Steve Cohen (D-Tenn.) announced his plans to file legislation to “give private student loan borrowers more equitable treatment during the bankruptcy process.” 

For the time being it remains extremely difficult to discharge student loans.  However, there are other non-bankruptcy programs for debtors unable to repay their loans.  In some cases debtors may qualify for reduced payments, deferment, forgiveness or cancellation.  Chapter 13 bankruptcy can also provide a way to cure defaulted student loans, or pay them off during the bankruptcy.  If you have student loan debt, discuss your situation and options with a qualified bankruptcy attorney.

Happy Holidays From Mortgage Lenders

The Associate Press is reporting that Citigroup Inc. will suspend foreclosures and evictions for 30 days.  This moratorium will provide temporary relief for about 4,000 borrowers during the holiday season.  Other lenders are expected to follow suit continuing a tradition that began last year for suspending foreclosures during the holiday season. 

Thanks a lot. 

A report release earlier this month by the U.S. Department of the Treasury indicates that many of the nation’s largest mortgage lenders are not doing enough to lower the numbers of home foreclosures.  In one case the report found that after eight months of participating in the Home Affordable Modification Program (HAMP) Bank of America had registered a dismal 15 percent of the more than 1 million delinquent borrowers who are potentially eligible. 

The HAMP, introduced in March 2009, provided guidelines for lenders to modify a home mortgage, such as capitalizing arrearages, extending a mortgage to 40 years and reducing the interest rate, until the payments get down to 31 percent of a borrower’s income. 

One reason for the low numbers of loan modifications is that it is labor-intensive, according to John Rao, an attorney with the National Consumer Law Center.  Mr. Rao testified to Congress earlier this year that lenders are not compensated for the labor-intensive process of a modification, whereas they are compensated for the extra work in foreclosing on a home.  In other words, there is no real incentive to help the homeowner.  Some lenders have delayed the loan modification process until the homeowner is forced to file bankruptcy and then add thousands of dollars in interest and costs to their home loans. 

For homeowners that would benefit from a loan modification and a chapter 7 bankruptcy, lenders are especially reluctant to give permanent loan modifications, often offering interim loan modifications that last only two to three months.  If the homeowner files for bankruptcy, the lender will often withdraw any workout plan leaving the homeowners further in debt. 

The road to saving your home and easing your monthly debt obligation can be a perilous journey.  It is best to use an experienced bankruptcy attorney to guide you through this difficult path.  Until Congress decides to offer an effective program that offers real relief, bankruptcy can be a powerful option for saving your family’s home.

Surrendering A Home In Bankruptcy: What Is Your Responsibility Until The House Sells?

Our office often gets questions from clients about what responsibilities they have, if any, when they are surrendering their home in a bankruptcy.  The simple answer is this: until the house is sold at a foreclosure sale, you own it and are responsible for the upkeep of the home.

These days, most mortgage companies and banks are in no hurry to have you move out of the home you are surrendering. There are always exceptions.  However, the majority of mortgage companies would rather the house be occupied and taken care of than for it to sit empty and deteriorate or be vandalized. Many of our clients opt to stay in the home up until a week or so before the sale date in order to save money on rent. However, whether your intent is to stay until the sale or move out sooner, you need to continue to take care of the home as its owner.  That means you continue to cut the grass, pay the utilities, pay your homeowner’s insurance, etc.  In other words, you treat the real estate like you did before you filed bankruptcy and decided to give up the property.  The difference is that you will no longer make mortgage payments.  

There are exceptions where clients make arrangements with a mortgage company to turn over the keys and the mortgage company agrees to take possession of the property before the sale.  If you can work out such an agreement, get it in writing!!! You want to make sure that the mortgage company will be paying the insurance and taking care of maintenance before you cancel your insurance policy, turn off utilities or stop cutting the grass.

DO NOT take light fixtures, appliances that came with the home, plumbing fixtures or any other item that is attached to the real estate.  Also, avoid causing damage to the house when moving.  You want to walk away as cleanly as possible to avoid issues that may be non-dischargable in the bankruptcy.  If you have questions, you can always call us for advice!

The Perils of a “Do It Yourself” Bankruptcy

Federal law guarantees open access to the courts and permits self representation in lawsuits, including bankruptcy proceedings.  However, the most important question is not “can you,” but “should you” represent yourself in a bankruptcy case. 

Proceeding pro se (Latin meaning “for himself”) in a bankruptcy case is like navigating a mine field while blindfolded.  Is it possible to be successful?  Sure!  Will your bankruptcy case blow up?  Probably.  Books and internet resources simply cannot substitute for competent legal advice.  Below are a few reasons why a pro se bankruptcy is a bad idea: 

Reason 1:  The Federal Bankruptcy Code is complex. 

Reason 2:  The Federal Rules of Bankruptcy Procedure are complex (and changing as of December 1, 2009). 

Reason 3:  The bankruptcy court’s local rules are complex. 

Reason 4:  The applicability of state law to federal bankruptcy law is complex, including state exemption laws, state criminal laws, and state collection laws.

Reason 5:  The bankruptcy trustee will examine your case more closely since you are not represented by counsel.  The trustee will likely put you at the end of the 341 meeting docket to have extra time to review your bankruptcy case and ask questions. 

Reason 6:  Most skilled bankruptcy attorneys will not step into the middle of a pro se case when things go wrong. 

Reason 7:  Are you really qualified to answer important questions, like: “When should you file?” “What chapter should you file?” 

Reason 8:  Most courts will not allow a pro se bankruptcy debtor to file documents electronically through the court’s internet ECF system. 

Reason 9:  You can be audited by a CPA firm selected by the Department of Justice. 

Reason 10:  Occasionally the pro se case is such a chaotic mess that the debtor is forced to dismiss the bankruptcy and later re-file with the assistance of an attorney.  That’s two bankruptcies on your credit report for the price of one! 

Reason 11:  If you are reaffirming a debt, you must appear in open court and answer the bankruptcy judge’s questions. 

The upside of representing yourself is saving a few dollars.  The downside is a considerable risk to your property, your future finances, and, in extreme cases, your liberty.  Don’t risk your families’ well-being!  Let an experienced bankruptcy attorney guide you through your bankruptcy case.

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