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When should you consider converting to a Chapter 7?

Many people who file personal bankruptcy do so because they are behind on their mortgages or car payments.  Others file simply for debt relief from significant unsecured debt such as massive credit card bills.  Regardless of why you might have filed, many Debtors are forced based upon their circumstances to file a Chapter 13 case.  This is not the typical liquidation where you simply walk away from your unsecured debt without paying anything, but rather, it is a form of bankruptcy where you as the Debtor reorganize your finances and pay back a portion of the unsecured debt and all of your secured and priority debt in arrears over a period of time, generally 5 years.

As a bankruptcy lawyer, I have represented many consumers in Chapter 13 cases, where their financial circumstances have changes and they are asked me if it would be possible to stop making payments and convert their case to a Chapter 7.  Others have simply asked me if they can get out of the bankruptcy all together.  When the later question is asked of me, I often respond by analyzing their case to determine if it might in fact be possible to convert to Chapter 7.

When a Debtor is going to look at their options and determine if they can in fact convert their case, it is often a good starting point to review three key questions: (1) Will they loose any assets in a Chapter 7 case; (2) Do they qualify under the means test to be in a Chapter 7 case; (3) Do they qualify for a reduced payment plan in Chapter 13?

First, if someone converts to a Chapter 7 case, we must determine if they are behind on any secured debt, such as mortgage or car payments.  This is especially important to note if those payments were in arrears prior to filing the bankruptcy.  If they were, then the Creditor may move for relief from the automatic stay once the case is converted in order to foreclose or repossess the property as a result of the Debtor having no adequate protection.  The next part of this first question is whether the Debtor has an asset that may not be protected in the Chapter 7 case, based upon their liquidation analysis.  If for example, you had a classic car, valued at $15,000, you may only be able to protect the first $3,450 of that car.  In this scenario, the Chapter 7 Trustee would try to liquidate the car and provide the first $3,450 back to the Debtor, while retaining the surplus to pay creditors and the Trustee’s own legal fees.

The next question is whether the Debtor qualifies to be in a Chapter 7 case.  Under the Federal rules, a Debtor must first have no disposable income over $166 a month in order to be in a chapter 7 case.  Additionally, their gross annual income must be less then the median income for their state based upon their family size.  For example, in Massachusetts, a single Debtor must make less then $54,475 a year.

The final question which in part has to do with whether any assets may be lost in a Chapter 7, is if after reviewing the Debtor’s disposable income, can they simply reduced their payment in a Chapter 13 case.  In some situations the payment can be as low as $75 per month.  So long as your chapter 13 payment totals more then your creditors would get in a Chapter 7 after liquidation, your disposable income will control the payment.

The questions of converting a Chapter 13 case are obviously a complex one that requires an understanding and analysis of the bankruptcy code and its procedures.  As such, this is not the type of situation a pro se debtor should try to do, but it is recommended that if you are considering converting and you do not have an attorney, you should at least retain someone to review your situation before doing anything.

Why reaffirming a mortgage is a very bad idea

A common question that I am asked by my clients who file Chapter 7 bankruptcy is, “will I be able to keep my house”.  This question is one that is a bit loaded, in that the answer really depends upon two critical factors.  One: are you current on your payments; two: Do you want to keep you house.  Presuming that a Debtor is current, they have two choices.  First a Debtor can reaffirm their mortgage.  In simple English, this means to file a request that the mortgage not be discharged and not subject to the protections of the bankruptcy.  Secondly, a Debtor can simply continue to pay on the property pursuant to the contract, but discharge the financial obligation to pay back if they want to leave in the future.

So what is the benefit of reaffirming a debt?  There are several reasons why a Chapter 7 filer might consider this.  In some situations, you may not be able to make the payments on your mortgage, but the bank will offer you a loan modification under the terms that you reaffirm the debt.  Additionally, you may indeed believe that you will be able to make your payments moving forward and want your credit report to show your payments.  When debts are discharged in bankruptcy without a reaffirmation there is no requirement for the bank to report you timely payments.

The choice to simply pay and stay is generally the one that most bankruptcy attorneys will recommend.  Additionally, if you want to reaffirm the debt, you must convince a Bankruptcy Court Judge that it is in your best interest to do so.  There is generally no real incentive to reaffirm a mortgage and quite frankly, the potential negative consequences of reaffirming a debt outweigh the benefits.  When you reaffirm your mortgage, you are asking the bankruptcy court to ignore the fact that you have filed for the fresh start protections received from a Chapter 7 case and would like to continue to be held responsible for your payments to the mortgage company.  If you fail to make your payments, and the mortgage company decides to foreclose upon you in the future, they have the right then to sue you for the difference between what you still owe and what they sell the house for at the foreclosure sale.  It should be noted that so long as you continue to pay your mortgage pursuant to the terms of the promissory note and mortgage, you will be able to stay in your property, without the risk of foreclosure, even though the debt has been officially discharged.

Have a Creditor suing you? Go to the court date!

If you are reading this article, you probably were served with court papers demonstrating the fact that you are being sued and that a hearing date is set.   In your head several ideas are floating around and you are trying to figure out what to do.  A couple ideas are very common to be thinking about with these types of situations.  I am writing this article to address those ideas and explain why you need to ignore those ideas and go to the court date!

First idea is always, I do not have the money to pay the debt in full anyway—so why should I take the time from work and lose money.  They are not going to get any money from me.

Why this idea is wrong is that if you do not show up to the hearing, the creditor will get money from you one way or another.  The whole amount is often not expected to be paid by the debtor nor does the court expect the full amount to be paid right away.  Instead, the court date allows you to explain your financial circumstances and set up a payment arrangement that you can afford.  Often, a court and the creditor will accept payments as low as $50.00 a month.  In some cases, even lower amounts are approved if your circumstances allow for lower payments.

However, if you do not show up for this type of hearing, your creditor can move the court for a default judgment against you and move the court to allow them to garnish both your wages and your bank accounts.  The problem with a garnishment is that they can take somewhere from 15% to 25%, depending on your jurisdiction, from your wages and bank accounts.  For example, if you earn $400.00 a week and the garnishment is 20%, the creditor will be receiving $80.00 each week from your pay.  So at the end of a month, you will have paid in this situation nearly $320.00.  If you had only gone to the hearing, you might have had to deal with $320.00 a month but an amount that you honestly could pay. 

Second idea is always, I do not have the time to show up.  I am too busy with life.

Why this idea is wrong is because as an American you are required to make time to show up at the hearing set forth by a legal court.  In thinking this way, you are breaking the promise that you make as an American citizen to uphold the laws of this country.  I know that blowing off a hearing may not initially throw you into jail but a warrant will be issued sooner rather than later.  The warrant will not be whether this is a $2000.00 debt or $20,000.00 debt.  The warrant is not for the amount you owe but the fact that you disregarded the court system and the requirement for you to appear in court.

In other words, you cannot hide and run from this hearing.  You will be forced at some point to show up and be responsible.  I am too busy or if I go no one to watch my kids excuse will not work.  Bring the kids, it might even help you if you show how many kids you are trying to raise.  Not only will a judgment be entered but that a warrant will be issued which is an entirely different issue than owing money to a creditor.

Third idea is that if I do not show up it will show that I did not get served. 

Why this idea is wrong is because the creditor only needs to demonstrate that they served you at the hearing and a judgment will be issued against you.  You see you cannot play games with the court.  They will give the creditor the benefit of the doubt if they demonstrate appropriate service upon you.   You can say I never got it or that you moved.  In both of these stories, you are responsible to get your mail open it and to ensure you get your mail forwarded if you moved. 

The real issue is that a judgment will be entered against you.  The problem with a judgment, besides the garnishment issues we talked about already, is that it is permanent on your record.  Even if you file a bankruptcy case, you will always have to answer; “yes” I had a judgment against me on an application for finance for the rest of your life.  Also, if you own real property with or without a homestead exemption in your state, the creditor will attach this judgment against your property.  Therefore, you will never get rid of the lien until it is paid in full, or strip it in a bankruptcy case.  Noting that a homestead exemption does not remove the lien, it only allows a debtor to safe guard equity in their home when filing a bankruptcy case or prevents a foreclosure sale of the property.  It is not an automatic protection from judgments. 

In other words, you will have to deal with a judgment for your entire life.  The court system is set up to provide you a formula to defend yourself and work out the differences.  Creditor’s counsels want their clients to get paid.  Creditors’ counsels do not want to destroy your life.  They give you notice so that you can do something about your situation before you get to the level of a judgment. 

So what should you do if you get a notice of hearing or complaint against you?  You should immediately reach out to the other side and see if you can agree to a payment arrangement without judgment being entered as long as you make the payments.  If you cannot get a hold of the creditor’s counsel, you need to show up to the hearing and ask at your hearing for a settlement arrangement. 

However, let us be brutally honest here.  If you had the money to pay for the debt you would have already done so.  If this is truly the case, you need to immediately seek bankruptcy counsel once you receive the notice from the creditor.  You should seriously consider filing a bankruptcy case for it will eliminate your need to go to the hearing as well as protect you from a judgment from being entered.  A bankruptcy case will prevent a judgment from being entered and a lifelong tag on both your credit as well as lien on your property.  Yes, a bankruptcy is also noted on your credit but it eventually will be eliminated entirely from your credit report and it will not attach to your home.

Never Put Off Dealing with Your Past Due Taxes Otherwise You Could Have Them For Life

Tax calculatorI was compelled to write about pass due taxes because of recent tragic situations that our firm has had to deal with.  The sad truth is that the only reason the situations were tragic was due only to simple delay by the taxpayer.  I am hopeful that at the end of this article that I will stop another tragic ending from occurring.

What am I talking about?  I am talking about a taxpayer owing past due taxes to either the IRS or a State. The taxpayer decides to ignore the threating letters and the request for contact from either the IRS or State.  I know it is not pleasant to review the paperwork or deal with the fact that you owe these taxes.

Some of the taxpayers in these situations may not even understand why they are getting the letters for they used an accountant or a company such as H&R Block to file their taxes.  Taxpayers think that the law is that their accountant or H&R Block type company need to deal with this issue for these guys filed the tax forms not the taxpayers.  Should they not be responsible?  In some ways, the taxpayer is right.  The accountant or the filing company may be responsible for some errors and will take responsibility and pay for those errors made.  However, taxpayers do not be mistaken about taxes that you ultimately owe.  If it is found that you owe the taxes, you are going to have to deal with them irrespective of your accountant or your filing company.  The IRS and the State taxing agencies do not care about your accountant or your filing company, they care about the taxpayer and the past due amount owed. So, they are coming after the taxpayers and do not be mistaken about that fact.  Yes, they can by law.

Another situation that leads to the tragic end is the communication problem with the IRS and State taxing agencies about pass due taxes.  Now, I totally understand why taxpayers often just forget about communicating with the IRS and State.  I tried calling the IRS and State about taxes owed by our clients and got nothing but voicemail.  Sometimes, I even got a voicemail saying that “we do not accept voicemails and no one will call you back if you leave one, you have to go to your nearest office to discuss your notice you received.”  Like, why would you even try to get an answer or contact them to deal with your tax issue?  It as if they want you to fail.  The problem with this system it feeds into the attitude of avoidance.  It allows the taxpayer to put this matter aside and ignore the issue.  I frankly do not blame the taxpayer if they do so.  It is frustrating but the taxpayer needs to take the time to go to your local IRS or State tax agency to deal with the issue.

The next situation is not really a situation but a feeling and an idea.  It is the feeling that the taxpayer cannot afford to pay taxes and why should they?  This is disastrous way of thinking.  Yes, taxes suck to pay but it’s the law.  No one is above the law.  I know that some millionaires pay a lessor tax rate than the average Joe but they still pay them.  Think about it someone makes 1 million a year and pays 14% tax rate, the millionaire is still paying $140,000 in taxes.  Therefore, the $2000 or so taxes that might be pass due is nothing in comparison to the amount a millionaire is actually paying.  I am writing this not to get into a political debate on the fairness of rates paid.  Instead, I am writing this to demonstrate that the theory of why should I pay taxes and not pay them is just stupid.  Everyone pays taxes so to use that argue to convince the taxpayer to avoid dealing with their taxes is again just stupid because it will not work.

So what happens if a taxpayer feeds into one of these ways of thinking?  As I began this article with a tragic situation, the tragic situation is what will occur.  The tragic situation is that the IRS and State taxing agencies will work with a taxpayer for only so long.  Both the IRS and State will get fed up with not receiving any response or no payments from the taxpayer and will move to levy the taxpayer.  What is a levy?  It is the tragedy for hesitation in dealing with your taxes.

A Levy is a tool for both the IRS and State taxing agency to garnish wages, social security income, retirements, bank accounts and anything else you have that yields money.  The IRS and State taxing agencies unlike other creditors do not need to go to court to take your money.  The other issue with a levy is that the IRS and State taxing agency will issue a full lien against the taxpayer.  What is this lien?  It is unlike any other lien, it a lien against All of the taxpayer right, title and interest to property.  See 26 U.S.C. §6321.  In other words, it is a full body attachment of anything and everything you own.  Again, the IRS and State taxing agency do not have to go to court to prove their case in order to attach these liens.

You say, “so what,” I got nothing for them to take.  The problem with that theory is that these liens and levies are good for at least 10 years.  What this means that if you win the lottery or begin working at a good job making more money at any time during this 10 years period, you will pay the IRS or State taxing agency.  Additionally, if you own any real property with equity, these liens can attach to the property and never be released until the taxpayer pays the taxes in full. These liens then would with the taxpayer for life.

The tragic part of all this is that these liens and levies can be avoided by the taxpayer, if the taxpayer deals with their tax problem immediately and not ignore the issue. Do not wait and do not think you can handle all of these problems on your own.  A good legal counsel will be able to help you avoid these issues and also resolve these tax issues before they get to this level.

The forgoing article was written by Attorney Jill Phillips.  For more information or to contact Attorney Phillips call her toll free at 855-874-9989.

Why a Chapter 13 bankruptcy case is the answer if you have student loans in default or a judgment.

Many clients call our office and seek help with dealing with student loans.  I always advise clients to pick up the phone and speak with your student loan agency and see if you can start making an income base payment arrangement.  However, you are beyond the ability to make this type of payment arrangement you have to seek alternative options.  I am talking about those who are in default or have a judgment against them with respect to their student loans.

If these apply to you, the best option on the market is a Chapter 13 bankruptcy case.  You might “why?” I give you three reasons to consider filing a Chapter 13 case to deal with your student loans issues. 

1. Control

If you are in a default state or a judgment is issued against you, you probably are feeling out of control with respect to dealing with these loans.  A Chapter 13 case will give you control back.  It will allow you to deal with these loans in a playing field of your choice.  You can stop the relentless calls and the pressure to pay outrageous amounts that you simply cannot pay.  A Chapter 13 case with the power of the automatic stay provided by 11 U.S.C. 362(a) prevents your student loans agency from calling you or pressuring you.  With control in your court, you can now think clearly how to deal with these loans.

2. No interest

Once of the most hidden fact of student a loan is that once you are in default or judgments are entered you are looking at double interest rates.  What this means is that a loan can go from $10,000.00 owed to $20, 000.00 in just a couple of years.  Most people would call this a hard money loan but the Federal government calls this an opportunity.  The good news is that a Chapter 13 case will end the interest while you are in the case.  It will allow you an opportunity to start paying on the amount owed without the interest accruing during the term of your plan which is normally 60 months.  Therefore, you have a chance of paying off the loans.

3. A Chance To Pay Off Your Loans

If Student loans are the only debt that you have, a Chapter 13 case could allow you an opportunity to actually payoff your student loans.  Especially if your loans are in default or a judgment is issued against you.  With the interest stopped and with the fact that your student loans agency can no longer demand full payment, you can submit a plan payment that your student loans agency must accept even if it is less than what is own in full.  In other words, you have the ability to submit a plan payment that you can afford and the student loan agency must accept it.  No games or no denials only what you honestly can pay.  If you cannot pay the full amount within the 60 month plan allowed in a Chapter 13 case, you can file a second case right after your first case and still get the protection of the bankruptcy automatic stay which means no interest and a payment that you can afford.

A Chapter 13 case is the best option for someone who is in default or faces a judgment for student loans.  You should seek an attorney’s help in dealing with your student loan situation.

The Three Real Truths Not To Ignore About Student Loans:

Our firm has received a lot of phone calls from people seeking help on how to deal with Student Loans. The inquiries are from total default of the loans to facing the last forbearance time frame and cannot pay the loans.  The reality is that these are real issues that a lot of people are facing with Student Loans.

The trouble that I find with these inquiries is the total blindsided nature of these inquiries and the lack of options for these people.  I find that most of the people inquiring with our firm know that they cannot run from their student loans but they are not sure why.  I also find that most people find it difficult to know that there really are not any options for them to consider. Therefore, I want to discuss the three real truths not to ignore about student loans so to help shed some light on the circumstances that people with student loans are facing.

1. Source of non dischargeability of student loans:

Student loans are unlike any other type of exception to discharge pursuant to 11 U.S.C. §523.   Specifically, 11 U.S.C. §523(8) states,

“(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for—


(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or

(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or

(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual;”

This code section is why you cannot discharge student loans in a bankruptcy case and it also is the code section that gives your student loan agencies the power to pursue you relentless.

2. Student loans in default means that “all is due”

Ignoring paying Student loans can be a fatal event in your life.  Once student loans go to default, the entire amount is due and owning.  The hard reality is that the student loan agency will not work with you at this time.  Forbearances or deferments are not an option.  So, if you go to default, you will owe the entire amount.


3. Student loans judgment can garnish your wages for life as well as your social security benefits.

Once you go to default, the student loan agency i.e. bank, nonprofit financing corporation and etc. will file a complaint in state court to seek a judgment against you.   If you are in default, the agency will win.  Once the agency has a judgment, they will seek to garnish your wages for life and then when you stop working your social security benefits.  Yes, they can do this. The Supreme Court ruled in Lockhart v. United States (December 8, 2005) that social security benefits can be garnished to pay student loan obligations.  In the ruling also, it reaffirmed that there is no statute of limitations for collecting these loans.

So what does all this mean?  You got to deal with Student Loans.  They are not going away.  These three points are real and should be considered before you think you can run from student loans.  If you have student loan issues, you should contact your student loan agency to get on an income base payment or seek and attorney assistance in dealing with defaults and complaints against you.

Should you file a bankruptcy on your own?

Bankruptcy TestMany people who are considering filing for personal bankruptcy do so because money is tight and they can’t afford to pay their bills. So, if you can’t afford to pay your bills, why should you pay good money for an attorney to file a bankruptcy? Well, the real question that I would ask is, “can you afford not to pay an attorney?”

In some cases, a simple Chapter 7 can be filed on your own. If you only owe credit card debt and don’t own any real estate, automobiles, or have money in the bank you may be able to file on your own. However, even a simple case requires strategy and precise planning. There are income limits which need to be met, and forms that require an understanding of Title 11 of the United States Code which need to be filled out. You also need to ask yourself, “will anybody object to my bankruptcy?” “Is there anyone I owe money to that will create problems, and even show up at my hearing?” If the answer to this question is yes, then you should never file a pro se (on your own) bankruptcy.

There are many considerations that an average debtor will likely not fully grasp. For example, if your income is too high over a period of time, you may find that you are not allowed to file a Chapter 7 case. Or, if you have equity in property either real or personal, you may lose assets to the Trustee, which can then stem additional hearings before a Bankruptcy Court Judge.

A recent study by the Bankruptcy Court in California demonstrated some atrocious statistics with respect the success of pro se bankruptcy filers. For those who tried to file a Chapter 13 case on their own, less then 1% of those Debtors actually reached the confirmation of their plan. In the less complex Chapter 7 cases only 61% of Debtors were able to receive a discharge of their debt and, of those 61%, many filers had assets taken away from them and sold by the Trustee, due to improper filing and planning. Additionally, when Debtors file without an attorney, they often fail to file the required paperwork. When this happens, the bankruptcy case can be dismissed, usually for failure to file or follow a court order. In this case, the bankruptcy is dismissed with prejudice and the Debtors cannot re-file their case for six months without a Judge’s permission. Further, Debtors who file a Chapter 13 case without an attorney, often times don’t realize certain expenses they can deduct from their plan payment or exemptions that can be taken to limit their liquidation value. As a result of this, many pro se Debtor’s Chapter 13 plan payments are significantly higher than what is required under the law.

The bottom line is that bankruptcy and Title XI is a very complex area of law. A pro se Debtor may be able to navigate in the most basic of cases; however, the risk in doing so is that it may cost you a heck of a lot more money than a $1,500 or so fee, paid to an attorney to ensure your rights are protected and the correct process is followed.