Monthly Archives: December 2008

How Will My Bankruptcy Filing Affect the Co-Signers on My Loans?

Posted on December 30, 2008 | Leave a comment

It is inevitable that filing for bankruptcy can have an impact beyond the sphere of our own personal finances. Many people (including myself) have co-signed loans for others, had loans co-signed by others, or both. Frequently, those who have co-signed loans for us are our family or friends. Likewise, those we have co-signed for are frequently personal acquaintances. In either case, the filing of a bankruptcy petition can ripple across this financial support network, and rarely is it likely to endear us to one another.

Filing for bankruptcy when you have debts the loans for which were co-signed by family or friends is indeed likely to affect them adversely. If you file for bankruptcy, any co-signers on debts affected by the automatic stay that goes into effect against creditors when a bankruptcy petition is filed may suffer collection attempts against them. The automatic stay prevents creditors from pursuing you for payment, but it does not—except as I will describe below—prevent them from pursuing your co-signers. Obviously, although it may make for an uncomfortable conversation with your co-signing friends and family-members, etiquette, if not the law, may require a little fair warning about what you are planning.

However, in Chapter 13 bankruptcy filings, there is an additional stay that goes into effect when the petition is filed: the Co-Debtor Stay. This stay prohibits any attempt by the debtor’s creditors to collect the affected debt from any co-signers. For this stay to operate, the co-debtor need only have provided some security for the loan and need not even be personally liable for the debt. It is limited, though, to consumer debts (i.e., not business debts, some forms of legal and tax liability, and other obligations not incurred for a personal, family, or household purpose) and to co-debtors who did not become obligated through “the ordinary course of business.” Further, this stay is vulnerable to some significant limitations: it automatically ends if the bankruptcy is closed or dismissed or converted to another Chapter (other than 12), and the court may lift it for various reasons, including a sufficient level of harm to the creditor or it the Chapter 13 plan does not provide for payment in full of the creditor’s claim.

Regardless, on the up-side, many of the limitations to the automatic stay instituted in the 2005 amendments to the Bankruptcy Code do not apply to the Chapter 13 Co-Debtor Stay. Thus, it remains a viable reason for the selection of a Chapter 13 bankruptcy rather than a Chapter 7. It is certainly something to keep in mind if you have suffered a job-loss, medical problem, or other issue leading you to consider filing for bankruptcy, but you do not wish to endanger the financial well-being of those who have helped you in the past.

If you are considering filing for bankruptcy and are concerned about the impact it may have up co-signers, please contact me at jhilla@aronofflinnell.com or (248) 977-4182 to schedule a free, initial consultation.

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Posted in Bankruptcy Basics, Chapter 13, Chapter 7

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What Happens to Gifts that I Make under Bankruptcy?

Posted on December 26, 2008 | 1 Comment

gift‘Tis the Season, or so I hear, in which many of us are not only receiving gifts of one sort or another from others but in which we are likely to make gifts to others. Some of us make gifts or tithe all year long or are even required (or encouraged) to do so by stricture of our faith. With regards to bankruptcy, there is both good and bad news when it comes to gift-giving.

As far as the Bankruptcy Code is concerned, there is gift-giving and then there is gift-giving. That is, there is gifting between individuals on a simply personal level—between spouses, family-members, friends—and, then, there is gifting for religious, charitable purposes. The first sort of gifting is problematic. This is the “bad news” of giving. Conveyances or transfers between a debtor considering bankruptcy and another individual he or she is personally acquainted with can appear fraudulent to the bankruptcy trustee, judge, or creditors who, after a bankruptcy petition is filed, may not be receiving the full amount that they believe they are owed.

Specifically, if a transfer or conveyance of property is made within two years of the filing of a Chapter 7 bankruptcy petition by an insolvent debtor, a creditor or trustee may object to a discharge. The trustee may also attempt to recover the transferred property, which means that he or she may take the property from the party is has been transferred to. For any of these things to occur, the objecting creditor or trustee must prove that the transfer was made with the intent to “hinder, delay or defraud creditors.” An honest gift within two years of the filing of a petition, when events which can force a person into considering bankruptcy can and do happen so much faster than that, may not have been accompanied by any intent to defraud and may not, logically, look like it was, but, nevertheless, if the possibility exists that an objection may be raised which could endanger the entire petition, it may be best to wait until the year has passed to file the petition. This is the sort of “pre-petition planning,” however, that it is best to discuss with an experienced bankruptcy attorney.

Additionally, especially in a Chapter 13 bankruptcy, some creditors are “priority” creditors who are entitled to be paid first and foremost. These “priority” creditors include those owed child support or other domestic obligations, the trustee who requires a 10% or so fee from a Chapter 13 plan, and others. Transfers and conveyances can raise questions with regard to the “preferences” owed certain creditors, which, in addition to “priority” creditors, also includes the preferential status of secured creditors such as a home loan mortgagor over unsecured creditors such as credit-card issuers. A transfer of property worth more than $600 within 90 days of the filing of a petition from a debtor that allows a creditor (which could include a family-member or friend owed money to) to receive more than they would have received in a Chapter 7 liquidation may be set aside by the trustee. Again, these sorts of considerations prior to filing a bankruptcy petition are best discussed with an attorney.

On the “good news” side of gift-giving, there is an exception in place for certain charitable contributions. The Religious Liberty and Charitable Donation Protection Act of 1998 amended the Bankruptcy Code to protect contributions made to protected organizations. They must not have exceeded 15% of the debtor’s gross income  the year they were made, and, if they were, must have been consistent with the debtor’s history of such giving. The 15% limit applies to each individual transfer, also, not the entire year’s worth of charitable contribution, even if it exceeds 15% in total (courts have ruled that no part is protected, however, if a total15% is exceeded without any past giving history). The specifics of the unavoidable nature of such gifts and whether a receiving organization is a protected organization are complicated and should be discussed with a bankruptcy attorney.

Additionally, there are similar considerations to post-petition transfers and conveyances.

If you have any questions about transfers or conveyances of cash or property you have made while considering filing for bankruptcy, please contact me at jhilla@aronofflinnell.com or (248) 977-4182 to schedule a free, initial consultation.

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Posted in Bankruptcy, Bankruptcy & My Credit-Score, Bankruptcy Basics, Chapter 13, Chapter 7

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Can I Discharge Traffic Tickets in Bankruptcy?

Posted on December 23, 2008 | Leave a comment

This is probably one of the common questions I receive from potential bankruptcy clients. And the short-answer is no, you cannot discharge traffic tickets in bankruptcy. This is what you will generally find in the “FAQ” section of many bankruptcy attorneys’ websites. However, there is a little more to it than that.

That short-answer really applies to Chapter 7 bankruptcy in particular. Under Chapter 7, traffic tickets are non-dischargeable under Section 523(a)(7) of the Bankruptcy Code, which specifically states that fines and penalties owed to and for the benefit of governmental units are non-dischargeable. This includes traffic tickets and other criminal (or punitive) fines.

Under  Chapter 13, however, some of these debts may be effectively dischargeable. Some restitution debts imposed by courts—those included in a sentence for the conviction of a crime—are non-dischargeable, but other restitution debts may be discharged. Fines imposed directly (not as a condition of probation or imposed in pre-trial hearings, etc.) as a criminal penalty are non-dischargeable. The question here is whether the fine is imposed as part of a sentence for the conviction of a crime. The definition of and associated penalties for traffic (and most other non-Federal) crimes is a matter of state law. Thus, it is largely a question of state law where the offense occurs whether a traffic fine can be discharged in a Chapter 13 bankruptcy. Some states define “crimes” as only misdemeanors and felonies and not civil infractions, moving-violations, and other categories of offense for which run-of-the-mill traffic tickets may be issued.

In Michigan, where I practice, this is the case. Traffic offenses in Michigan are divided into 2 categories: crimes and civil infractions. Crimes are misdemeanors and felonies only. Criminal traffic offenses are, as one would expect, serious violations such as reckless driving, leaving the scene of an accident, driving with a suspended license, fleeing and eluding police, operating while intoxicated, and “felonious driving.” (Reckless and felonious driving are often charged as lesser-included offenses of other misdemeanor or felony charges.) Additionally, even if charged with a civil infraction only, failing to answer a summons or to follow the directives of the ticket received can incur a more serious criminal penalty.

When such fines are dischargeable under Chapter 13, they may be allocated a category of debt in the Chapter 13 payment plan along with other unsecured debt, which is generally paid secondarily to secured debt and other priority debts, although this is not always a certainty. Some governmental debt may be entitled to priority payment status. However, even non-dischargeable criminal fines or governmental penalties may still be provided for in a Chapter 13 plan, although they will not be able to be discharged through the plan. Otherwise, general unsecured debt which may include dischargeable traffic fines, is afforded a lower priority payment status than other types of debt, and the priority debt and secured debt must be paid first, allowing the unsecured, non-priority debt to be discharged.

If you have any questions about traffic penalties in bankruptcy, please contact me at jhilla@aronofflinnell.com or (248) 977-4182 to schedule a free, initial consultation.

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Posted in Bankruptcy Basics, Chapter 13, Chapter 7, Michigan, Traffic Tickets and Criminal Fines in Bankruptcy

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Can Your Attorney Advise You to Incur More Debt Prior to Filing Bankruptcy?

Posted on December 20, 2008 | Leave a comment

It depends where you live.

This week, the Fifth Circuit decided that a provision of the Bankruptcy Code added by the 2005 BAPCPA amendments (which were largely drafted by financial industry lobbyists), Section 526(a)(4), prohibits attorneys from advising their clients to incur more debt prior to filing for bankruptcy.

Section 526(a)(4) reads: “A debt relief agency shall not … advise an assisted person or prospective assisted person to incur more debt in contemplation of such person filing a case under this title or to pay an attorney or bankruptcy petition preparer fee or charge for services performed as part of preparing for or representing a debtor in a case under this title.”

As reported by CreditSlips, the Fifth Circuit decided, contrary to a decision on the same language by the 8th Circuit, that this was not an unconstitutional restriction on the free speech of attorneys under the First Amendment. The court made this decision, despite the clear language of the statute, which broadly prohibits the proffering of this legal advice, period, using a technique of judicial statutory interpretation called the “doctrine of constitutional avoidance.” This so-called “doctrine” states, basically, that, if a given interpretation of a statute would cause Constitutional problems, it would be interpreted differently, unless Congress clearly determined it should not.

In the case of Section 526(a)(4), according to the Fifth Circuit, apparently that means that, since a plain reading of the statute appears to include an unconstitutional prohibition on the free speech of attorneys, it should just be interpreted as not prohibiting free speech. Uh, right. The Fifth accomplished this by reading into the statute’s use of the phrase “in contemplation of” an intent to abuse the bankruptcy system. So, basically, in the Fifth Circuit, if a debtor’s attorney intends to abuse the bankruptcy system by advising a debtor to incur more debt prior to filing, that’s not a First Amendment violation. But, if they don’t intend to abuse the system in doing so, it is. Good luck figuring out where the intent exists and where it doesn’t, Fifth Circuit Trustees and Judges!

The Eighth Circuit decided the same issue quite differently. The Eighth Circuit found that the statute was indeed unconstitutionally overbroad in its plain language. It noted that there are many cases where it is indeed appropriate for a debtor’s attorney to advise a client to take on more debt prior to filing bankruptcy. 

In my opinion, in these cases, not only is it appropriate to give this advice but not giving it would be irresponsible on my part as an attorney. For example,  a debtor who, due to job-loss or overwhelming medical expenses, is on the verge of losing his or her home in foreclosure may consider filing a Chapter 13 bankruptcy to make up the payment arrearages and save the home while, also, getting unsecured debt like medical expenses under control. At the same time, the debtor’s car may be on the verge of break-down, requiring a new one imminently. To maintain his or her employment, the debtor may genuinely need a reliable automobile, and, to make the payments under the Chapter 13 plan, the debtor definitely needs to maintain a certain level of income (under Chapter 13, there is an “ability to pay” test for a proposed payment plan). After the filing of the bankruptcy, it may be very difficult for the debtor to obtain financing for a new car. Under Chapter 13, in particular, it is quite possible to pay a secured debt like an automobile loan outside the plan, or, depending on the price of the car, in full or in part inside the plan. (The purchase of a very expensive, luxury car would likely be disallowed by the trustee or judge,  but 526(a)(4) doesn’t say, “Don’t advise a client to take on too much debt,” it says, “Don’t advise a client to take on any debt.”) It is therefore in the debtor’s interest and with no intent to defraud anybody to obtain that new car prior to filing.

The Sixth Circuit, which governs here in Michigan, has not made a similar ruling. Only the Fifth and Eighth Circuits have, so there is a split at the appellate level on this issue. Until (and if) this issue reaches the Supreme Court or the Sixth Circuit makes a similar decision one way or the other, the proffering of such advice and pre-bankruptcy planning in general will continue to be a tricky business in Michigan.

If you are considering filing bankruptcy and have any questions about how to handle such situations, please contact me at jhilla@aronofflinnell.com or (248) 977-4182 to schedule a free, initial consultation.

UPDATE:

Since this post was first drafted, the US Supreme Court has, in a case titled Milavetz, Gallop & Milavetz v. United States, that, in short, it is permissible for a bankruptcy attorney to advise a client to incur more debt so long as the “impelling reason” for the advice is not the client’s prospective bankruptcy. This is just as confusing as it sounds. See here for an excellent analysis and further explanation.

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Posted in Bankruptcy, Bankruptcy Basics, Chapter 13, Chapter 7, Judicial Decisions, Michigan

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If I File Bankruptcy, What Happens to Stuff That I’ve Pawned?

Posted on December 18, 2008 | Leave a comment

If you file either a Chapter 7 or Chapter 13 bankruptcy, nearly everything you own becomes part of the “bankruptcy estate,” subject to the oversight of the bankruptcy Trustee. All of your debts, at least initially, are subject to the Automatic Stay that goes into effect against all of your debts immediately upon filing the bankruptcy petition. For much of a debtor’s personal property, these factors do not permit such credit actions as repossession, foreclosure, or other collection attempts.

For pawned personal property, however, the 2005 BAPCA amendments to the Bankruptcy Code, in Section 541(b)(8), specificially excluded from the bankruptcy estate that is created by the filing of a petition:

  • “Tangible” personal property in the possession of the pawnbroker
  • When the debtor has no obligation to repay the money, redeem the collateral, or buy back the property at a stipulated price … 
  • And neither the debtor nor the trustee have exercised any right to redeem provided under the contract or State law, in a “timely” manner (as provided under State law and Section 108(b) of the Code)

What this means is that property you’ve pawned—given to a pawnbroker in exchange for a certain amount of cash with no obligation to return the money and reclaim the property—does not become part of the bankrupty estate unless you or the Trustee has, within the time-constraints of applicable state law and Section 108(b) of the Bankruptcy Code, acted to redeem the property through the bankruptcy process. In that case, the pawnbroker is not required to return the property to the debtor when the bankruptcy petition is filed the way, say, an automobile dealer must return a repossessed vehicle when a bankruptcy petition is filed.

The pawnbroker may not be free and clear to sell the property, on the other hand. The amended Code leaves that unclear. If the selling of the property can be characterized as an act to collect on a debt that existed prior to the filing of the petition, it is subject to the Automatic Stay against such debts that goes into effect when the petition is filed. Further, the pawned property may be required to be turned over to the Trustee if the property is property that the Trustee may “use, sell, or lease” or that the debtor may exempt. Also, there is nothing stopping a debtor for providing for the disposition of the property and its associated debt in a Chapter 13 payment plan.

State law, then, governs several aspects of this situation. In Michigan, the title to the pawned property vests with the pawnbroker after 3 months. The pawnbroker may not sell the property until that 3 months has passed. Therefore, the debtor and Trustee’s right to redeem the property (recovering it for a given lump-sum of cash) is “timely” within 90 or so days of the pawning of the property. Therefore, a debtor considering bankruptcy, especially Chapter 7, who has pawned property that he or she wishes to recover, should keep this time-frame in mind. After the 3 month deadline has passed, under Michigan law, the title of the pawned property vests with the pawnbroker, allowing him or her full right to re-sell or otherwise use the property, and it may not be recovered by the debtor.

If you are considering filing for bankruptcy and have concerns about your pawned or other personal property, please contact me at jhilla@aronofflinnell.com or (248) 977-4182 to schedule a free, initial consultation.

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Posted in Bankruptcy, Bankruptcy Basics, Chapter 13, Chapter 7, Michigan

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Why Does a Chapter 7 Cost So Much?

Posted on December 16, 2008 | 4 Comments

I saw this question posted on an online discussion board, and, possibly because it was rather blunt, it had gone unanswered for several days. Personally, I thought it was a good, basic question that deserved an honest answer. I have known many people in my life who have half-seriously “joked” that they would file for bankruptcy “if only they could afford it.” It is a question that many people have, and it is worth discussing.

Most attorneys in my area of southeastern Michigan are currently charging approximately $1000 to file a basic Chapter 7 bankruptcy petition. Depending on the geographic and the attorney, this might or might not include the Court’s filing fees. And, although I have seen a few attorneys and, especially, non-attorney “bankruptcy petition preparers” charging less than this in my area, this is generally also a starting-point price rather than a ceiling. It can rise with the level of complexity, in other words. Some attorneys—although not myself—charge much more than this as a starting-point.

The filing fees for a Chapter 7 bankruptcy filing are currently $299. Debtors may file pro se (file the petition themselves, without an attorney’s assistance or representation, that is), paying only these filing-fees and avoiding anywhere from $700-$1000 (or more) in attorney fees, but, unless the property of such debtors is very limited, they run the risk of misunderstanding the available exemptions and other complexities of the bankruptcy process and missing out on utilizing the process to its best effect. In any case, even without an attorney’s assistance, a Chapter 7 still costs roughly $300.

Most people who have a certain amount of property that they wish to protect do wish to take advantage of the expertise of a bankruptcy attorney, however, and, at that point, the question remains: why does that expertise cost so much?

The pat answer is the same that any service-provider in any industry, from automotive to medical and onward, would give: “I charge $X per hour, and the work will take X hours.” In the case of an attorney, that is certainly true. Attorneys in Michigan charge in hourly rates anywhere from around $150/hour upward, depending on experience and the legal areas they specialize in. The “flat fees” that attorneys charge for something like a Chapter 7 bankruptcy filing do approximate an attorney’s hourly rate billed for the approximate number of hours it usually takes to meet with the client several times, collect their information and paperwork, and prepare the exceedingly lengthy bankruptcy petition and attached schedules and other documents. And that paperwork, since the 2005 BAPCPA (“Bankruptcy Abuse Prevention and Consumer Protection Act”), has grown much more complex and, therefore, more time-consuming and with more legal obligations for the attorney and, thus, more expensive for the debtor.

But the real answer, I maintain, is not that attorneys simply deserve an hourly rate that boggles the minds of most working-people. Rather, the answer is that, whatever an attorney is charging for a Chapter 7, it is a small price to pay for the value you receive. For a mere $1000 + filing-fees, you can save a $200,000 home from foreclosure, stop night-and-day collection call harassment, and eliminate many thousands of dollars’ worth of credit-card debt. Making all of this happen properly is hard work for the attorney filing the petition, but the real reason a Chapter 7—or any legal service—costs what it does is that that is what the end-result is worth.

If you have any questions about Chapter 7 or Chapter 13 bankruptcy or any other legal matter, please contact me at jhilla@aronofflinnell.com or (248) 977-4182 to schedule a free, initial consultation.

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Posted in Bankruptcy, Bankruptcy Basics, Chapter 7, Michigan

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How Much Will I Have to Pay Each Month if I File Chapter 13?

Posted on December 11, 2008 | 1 Comment

istock_000006364141mediumThere are many variables which determine how much a monthly payment under Chapter 13 will be. Filing for bankruptcy under Chapter 13, which is a reorganization of your finances rather than a liquidation as under Chapter 7, is a complicated process. In a Chapter 13 filing, you work with your attorney to develop a payment plan which will allow you to catch-up the amount you are in arrears on one or more debts—generally secured debts, such as home or car loans. The amount that you pay each month to the Chapter 13 Plan is primarily driven by your ability to pay—that is, the amount of money you have each month after certain basic expenses are deducted from your monthly income.

Chapter 13 is the primary means by which homeowners, for one, are able to save homes subject to foreclosure through bankruptcy. A home loan is a “secured loan,” which means that the loan is guaranteed to the provider of the loan by some property. In the case of a home loan, it is generally the home itself. Likewise with a car loan or a boat loan. Through a Chapter 13 bankrutpcy, a debtor may strip secondary liens from properties, “cramdown” the value of automobile or other secured loans, and take other steps that are not possible in a Chapter 7 bankruptcy.

The purpose of a Chapter 13 is to allow the debtor to emerge at the end of the payment period in better financial shape, hopefully not having lost their home, car, or other property in the meantime. However, a Chapter 13 is not complete and underway until it is “confirmed” by the Bankruptcy Court, and the process of confirmation may, in the back and forth that occurs between the filing debtor’s attorney and the US Trustee assigned by the court to the case, result in the plan payment moving higher and lower depending on the resolution to whatever objections to confirmation the Trustee may have.

If you are considering filing bankruptcy and, especially, if you are considering taking that step to rescue a home facing foreclosure or some other property facing repossession, your best bet is too make an appointment with a bankruptcy attorney as soon as possible. Only after a plan is fully drafted according to your particular circumstances, filed, and confirmed will it be possible to know what the exact amount you will pay each month under the plan is and, indeed, what the length of the plan even may be.

To get the best results possible, please contact me at jhilla@aronofflinnell.com or (248) 977-4182 to schedule a free, initial consultation.

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Posted in Michigan

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Do I Need to List Overseas Property in my Bankruptcy Petition?

Posted on December 8, 2008 | Leave a comment

I’ll start right off with the short-answer to this question: YES. You definitely need to include overseas property in your bankruptcy petition schedules.

My advice to debtors is the same that most consumer bankruptcy attorneys would give their clients: list everything. Always. If you’re not sure if it needs to be listed, list it anyway. Finding a way to list hard-to-classify, value, or locate property is really the primary task of the debtor’s attorney, however. But attorneys can only work with the information that is given with them, and, in my experience, debtors often neglect to inform their attorneys about property that doesn’t seem like it would be within the jurisdiction of the bankruptcy trustee governing the case. It is perfectly logical to assume that a United States bankruptcy trustee would not be able to reach extraterritorial property.

That is, however, an incorrect assumption. Depending on the location and value of the property, it is possible that the trustee will not want to take the trouble to deal with property located outside the United States. But this should not be assumed from the start. Occasionally, a trustee may simply happen to have professional or family connections in a foreign country, making it a simpler (and cheaper) matter for him or her to assess, reach, and, possibly, liquidate the property. You never know!

Given the fluctuation of the US dollar at the moment, it is important to be cognizant of the rising value of foreign currency in relation to our own. Property that might not have been worth the trustee’s while to liquidate may now be a more tempting prospect. That said, debtors considering bankruptcy should not be afraid to list overseas property, particularly if the property is located in a country whose currency has not risen past the US dollar in dramatic fashion, as many have. Such property is still, generally, quite easy to exempt.

The bottom-line: be sure to list all of your property for your bankruptcy attorney so that he or she may deal with it in the most efficient manner possible. The Bankruptcy Code requires  that all property be disclosed, not merely US property, and any failure to disclose property, here or elsewhere, may result in the property’s liquidation, foreclosure, or invalidation of the bankruptcy itself.

If you are in southeast Michigan and are considering filing for bankruptcy but are concerned about the implications of your foreign property, please contact me at jhilla@aronofflinnell.com or (248) 977-4182 to schedule a free, initial consultation.

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Posted in Bankruptcy, Bankruptcy Basics, Chapter 13, Chapter 7, Home Mortgages and Bankruptcy

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