Monthly Archives: January 2009

Am I Eligible for a Chapter 13 Bankruptcy?

Posted on January 23, 2009 | 1 Comment

I receive many calls from potential clients who say, straight off, that they want to file a Chapter 13 bankruptcy. Often, as it turns out, these folks are either not actually eligible for Chapter 13 under the specific requirements of the Bankruptcy Code or it is simply not in their best interest. As the question of whether it is the best tool in bankruptcy for a consumer to make a realistic fresh start, that is a very situation-specific discussion, so I will discuss only the question of basic eligibility here.

The threshold criteria for Chapter 13 eligibility are fairly simple.

First, you have to meet the definition of an eligible debtor as described in Section 109(e) of the US Bankruptcy Code. To be an “eligible debtor,” you must:

  • Be an individual (i.e., not a business) or an individual and spouse
  • With regular income
  • Owing less than $336,900 (as of this writing) in debt that is non-contingent, liquidated, and unsecured
  • Owing less $1,010,650 (as of this writing) in debt that is non-contingent, liquidated, and secured 

 ”Non-contingent” debt is debt that is not dependent upon some future event happening in order to exist. This future even may never happen, so the debt cannot be realistically calculated at the present time. “Liquidated” debt is debt that is of an agreed-upon and fixed amount. A legal claim that has not been fully adjudicated and awarded is not liquidated, for example. “Unsecured” debt is debt such as credit-card debt that is not guaranteed by the debtor with collateral or other property, while “secured” debt is debt, such as a car-loan or home mortgage, that is guaranteed by collateral or property (usually the item in question itself).

The threshold for qualifying as having “regular income” is fairly low. In the Section 101(30) of the Bankruptcy Code, a peson with “regular income” is described as having “… income sufficiently stable and regular to enable [that person] to make payments under a plan under Chapter 13.” In other words, you have to be able to guarantee that you can fulfill the terms of the payment plan that is submitted with your Chapter 13 bankruptcy petition. The Code’s definition is intended to include Social Security, welfare, pension, and alimony recipients, among other non-wage-earning debtors. Simply, you must prove that you have an income of some sort and that it is regular enough to support a 3- or 5-year plan.

As to the debt limitations, there are a few more complications here. First, you must determine whether each individual debt you have is “secured” or “unsecured.” In most cases, this is simple enough, but it becomes complicated in such cases as when a secured debt is under-secured to the extent that it may actually be classified as unsecured or when a debt held by the debtor wishing to file bankruptcy is actually secured through property held or owned by someone else. Each debt must also, as indicated above, be individually determined to be either liquidated or un-liquidated and contingent or non-contingent. Each of these determinations carries its own questions that are best explored with the help of an attorney.

These are the basic points of eligibility for a Chapter 13 bankruptcy.  However, any previous bankruptcies you may have filed may also impact your eligibility. If you have never filed bankruptcy before, there is no problem, naturally. But, if you have filed for and received a Chapter 7 bankruptcy discharge within 4 years before you would file the new Chapter 13 petition, you are not eligible. Likewise, if you have filed for and received a Chapter 13 discharge within 2 years of the date you would file the new Chapter 13 petition, you are not eligible.

If you have any questions about whether or not you’re eligible for Chapter 13 or Chapter 7 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 Basics, Bankruptcy Planning, Chapter 13, Home Mortgages and Bankruptcy, Joint-Filing

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Can I Reaffirm My Car in a Chapter 7 Bankruptcy?

Posted on January 19, 2009 | 3 Comments

This question seems to have been on a lot of people’s minds recently. Nearly every potential client who has contacted me in the past week has had a question about whether or not they could retain secured property such as a home or car if they filed a Chapter 7 rather than a Chapter 13 bankruptcy and, if so, how they could do it. As I’ve discussed previously on this blog, it’s a particularly pertinent question here in the metro Detroit area of southeast Michigan because of the area’s lack of viable public transportation. Fortunately, there are a few different ways to retain possession of one’s vehicle through the Chapter 7 process, although not all of them may be for the ultimate good of the debtor.

First, in a Chapter 7 bankruptcy, it is possible to keep a car without striking a reaffirmation agreement with the loan lender. This is possible if you own the car outright and are not currently making payments to an auto loan lender on the vehicle. If that is the case, it may wholly or partially fit into either the state or Federal exemptions available.  Under the Michigan state exemptions, currently, $2775.00 may be exempted for an automobile. (Note that ”exempted” means that this property or that dollar-value’s worth of property may be “exempted” from the bankruptcy estate that is created legally when a bankruptcy petition is filed and which contains all of your property except that property that is “exempted.”) So, if you own your car outright and its fair-market value is $2775.00 or less (as of this writing), it is simply property wholly owned by you that you may exempt. Under the Federal exemptions, which are used alternatively to state exemptions, the vehicle exemption limit is currently only $2440.00.

Second, a car may be “redeemed” in a Chapter 7 bankruptcy. In redeeming property during a Chapter 7 filing, the debtor makes a lump-sum payment to the creditor for the total fair-market value of the property. This allows the debtor to retain the vehicle free and clear of the obligation to make any future payments, during or after the bankruptcy process. However, many prospective Chapter 7 debtors do not have a sufficient lump-sum available at the time that the bankruptcy petition is filed, and, thus, redemption is not always a viable option.

Third, if you do not own your car outright and are currently making payments on it, it may indeed be reaffirmed in a Chapter 7 filing—but with some caveats.

A “reaffirmation agreement,” first, is an agreement that is struck between the debtor filing for bankruptcy and the automobile loan-provider (or home-loan mortgagee) stating that you are reaffirming the debt you owe to that loan-provider and that you intend to continue paying it either as-is or with modified terms. The reaffirmation agreement keeps the property in question and the terms of payment surrounding it out of the bankruptcy estate.  The agreement, essentially, stipulates that the debtor agrees to continue to be held liable for the full amount of the agreement, even after the bankruptcy discharge occurs, while the creditor agrees to refrain from repossessing the vehicle.

The reaffirmation agreement must be signed before the discharge takes place, and it must be filed with the bankruptcy court. If the debtor is represented by an attorney in his or her bankruptcy filing, the attorney must also sign the agreement, stating that he or she believes that the agreement will not pose an undue hardship to the debtor, and the attorney must further attest that the agreement was signed by the debtor voluntarily and free of any undue influence. If the debtor is not represented by an attorney, the bankruptcy judge must approve the agreement. Additionally, the debtor must file with the court a statement of income showing that remaining disposable income, after the bankruptcy, is sufficient to make the payments required by the reaffirmation agreement.

As to the caveats, there are many. Many attorneys will not sign a reaffirmation agreement for their clients—ever. The primary reason for this is that, when you sign a reaffirmation agreement, you deprive yourself of the opportunity to fully enjoy the protections provided by bankruptcy. It is possible that, at the time you sign a reaffirmation agreement, you feel that you are fully able to handle the continued payments after the bankruptcy discharge. However, hard times may roll around a second time, and you may find yourself unable to continue making those payments at some point after the discharge (and well before the 8 year time-span required between Chapter 7 bankruptcies lapses). At that point, the creditor may not simply repossess the vehicle but will also be able to pursue you to collect the entire amount of the loan—all of which would have been discharged in the bankruptcy without the reaffirmation agreement.

There are ways around this sticky system, however, that an experienced bankruptcy attorney can guide you through to the best possible result. If you are considering filing for bankruptcy and would like to discuss the possibility of retaining your vehicle or other secured property, please contact me at jhilla@aronofflinnell.com or (248) 977-4182 to schedule a free, initial consultation.

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Posted in Automobiles in Bankruptcy, Bankruptcy, Bankruptcy Planning, Chapter 7, Home Mortgages and Bankruptcy, Judicial Decisions, Michigan, Reaffirmation Agreements

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What Happens to Alimony or Child-Support Payments in Bankruptcy in Michigan?

Posted on January 15, 2009 | 1 Comment

Divorce-rates are higher than ever in the United States, and, while opinions vary as to the cause of this phenomenon or even whether it is actually a problem at all, it is clear that it at least poses complications of various sorts. Not least among these complications is the question of alimony and child-support. During a divorce proceeding, courts often assign a duty to maintain the living-standard of one of the divorcing spouses to the other in the form of alimony payments or a duty to maintain the living-standards and expenses of any children of the marriage to one divorcing spouse in the form of child-support payments. Or both. In some states, the amount of support or alimony is tied to the fault of one of the divorcing spouses for the divorce. Michigan, where I practice, is a “no-fault” divorce state, and these duties are more often simply based in the needs of the parties involved. Regardless, the amount of the alimony or child-support payment may have been a reasonable decision on the part of the court at the time of the divorce, but, later, these payments can pose problems when the financial circumstances of the paying spouse change for the worse.

Bankruptcy very specifically, however, does not discharge the obligation to pay alimony or child-support payments. These “debts” are required to be accounted for as “priority” Domestic Support Obligations on Schedule E of the bankruptcy petition. Domestic support obligations are not dischargeable in either a Chapter 7 or Chapter 13 bankruptcy, and, since they are a “priority” debt, they must be prioritized among the debts paid in any Chapter 13 payment plan. Further, in bankruptcy law, “domestic support obligations” include both pre-(bankruptcy) petition and post-petition obligations. This is one of the more cut-and-dry provisions in bankruptcy law. It does not include, however, debts resulting from divorce or separation that may be classified as “property settlement debts” rather than domestic support obligations. There are various factors that enter into a determination that an obligation is one or the other, including whether the required payments are to cease upon the death or re-marriage of the recieving spouse, whether they’re based on future earning abilities of that spouse, whether the payments are periodically paid rather than paid once in a lump-sum, and whether the payments are directed specifically for medical needs, a mortgage, or other such ends.

Here in Michigan, we are part of the Sixth Circuit Court of Appeals in the Federal Court system, which, along with other federal cases, handles appeals arising from Federal bankruptcy courts. The Sixth Circuit has its own test for making this determination: if the intent of the family law court that oversaw the divorce or of the parties themselves was that the payments were “support,” the court then decides whether the effect of the payments is “supporting” and whether that “support” is actually necessary for the spouse and children’s daily needs. No other Circuit handles this question quite in this manner.

Slightly less cut-and-dry is the question of what happens to the recipient of alimony or child-support payments if they need to file bankruptcy? Sadly, this is not a rare occurrence, especially for divorcees caring for children, the costs of which have increased drastically over the past eight or so years as costs-of-living for middle- and lower-class Americans have shot through the roof while wages have remained stagnant at best. The question of whether alimony or child-support payments being received may be exempted from the “bankruptcy estate” which is created when a debtor files a petition for bankruptcy differs depending on whether the petition is filed using the Federal exemptions defined under the Bankruptcy Code or the state exemptions allowed under individual states’ own laws. Each individual state (and the District of Columbia) determines whether filing debtors may choose or not between these two separate sets of exemptions. Michigan allows debtors to choose either its state exemptions or the Federal exemptions. No combining of the individual provisions of each set is allowed.

Under the Federal Bankruptcy Code, a debtor’s right to receive various future benefits is subject to the claims of creditors. To counter this, the Code allows for the exemption of several specific types of future benefits. Among them, alimony and child-support payments are specifically exempted—but only to the extent that they are actually necessary for the daily support of the debtor him or herself and any dependents. The burden of proof is on creditors to claim that any amount of this sort of payment claimed as exempt by a filing debtor is above and beyond the daily needs of the debtor, however.

Under Michigan’s law, no exemption is specifically granted for the right to receive domestic support obligations of this sort. It clearly indicates that a stock-option or other retirement plan is not exempt to the extent that it is subject to a court-order pursuing an obligation to pay alimony or child-support, but it says nothing about the right of a debtor to receive that payment. Thus, if you are a debtor considering filing for bankruptcy in Michigan and are worried about protecting alimony or child-support payments that you depend upon, the question of whether to choose between the Michigan or Federal exemptions becomes a balancing between the other differences between the two, such as the benefit of the Federal “wildcard” exemption in protecting other personal property or the specifics of the homestead exemptions in both sets of exemptions with regard to your own real property. It may be that, for reasons unrelated to domestic support payments, a Michigan debtor may still be better off choosing Michigan’s exemptions.

Or not. In short, if you are a Michigan debtor considering bankruptcy under these circumstances, you will want to speak to an experienced bankruptcy attorney about the specific application of both the Michigan and the Federal exemptions to your specific circumstances.

If you would like to discuss how either would best fit your needs, please contact me at jhilla@aronofflinnell.com or (248) 977-4182 to schedule a free, initial consultation. Together, we can work together to protect both your property and your daily standard of living.

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Posted in Bankruptcy Basics, Chapter 7, Chapter 13, Home Mortgages and Bankruptcy, Bankruptcy, Michigan, Judicial Decisions, Child-Support, Alimony

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Is Debt Consolidation a Good Alternative to Bankruptcy?

Posted on January 8, 2009 | 1 Comment

Many consumers question whether “debt elimination,” which would occur under, for example, a Chapter 7 bankruptcy filing, is a better or worse option with regard to their future credit-scores than “debt consolidation,” a non-bankruptcy-related procedure. The answer is that it depends.

What it depends upon is, first, your current credit standing. A bankruptcy will always be detrimental to your credit-score and will remain on your credit-report for 10 years. However, there comes a point for consumers who have suffered financial set-backs where the impact of a bankruptcy upon their credit-score is not as harmful as lingering in a state of financial decline. This occurs when they have already missed multiple payments, are in arrears on home or auto payments, or possibly have been foreclosed upon or had a vehicle repossessed. At this point, the bankruptcy filing is actually, effectively, an improvement. That is, when you file for bankruptcy and your debt is discharged, you are at least in a state of rebuilding your financial well-being and credit-score rather than treading water in a state of steady decline and suffering incessant collection attempts and late-fee charge application.

Even more to the point, whether debt consolidation is a good option, depends greatly upon the means by which you are consolidating your debt. For the most part, however, debt consolidation is not a good deal for the consumer in need.

There are legitimate credit counseling agencies who provide the pre-bankruptcy petition credit counseling that is required by bankruptcy law. These agencies sometimes recommend a debt management plan, which, for some debtors, may provide a non-bankruptcy solution to their debt management problems. Often, however, such plans are not a good idea as they usually do not reduce the principal owed by the debtor and don’t help with secured debt, such as home mortgages or auto loans.

Worse, there the other “debt consolidators” that debtors considering bankruptcy tend to run into. These are for-profit companies that claim to be able to negotiate with a debtor’s creditors. These companies do not have any legal means of convincing a credit card issuer or other creditor to reduce a debtor’s debt, and, often, they simply take the debtor’s money in the form of a monthly “lump” payment and hold onto it. Very few debtors end up completing the “consolidation” programs offered by these companies, and, in my experience, they often end up being just another creditor listed in the bankruptcy petition when the debtor ends up filing for bankruptcy anyway.

In short, be very careful of which company is offering you a “debt consolidation” plan. For the most part, it is not a good deal and may even be harmful to many consumers, regardless of whether they go on to consider filing for bankruptcy as an option. If you have any questions about which option is the right one for you, 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, Bankruptcy Planning, Chapter 7, Debt Consolidation, Home Mortgages and Bankruptcy

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How Do Gambling Debts and Losses Affect My Ability to File Bankruptcy?

Posted on January 7, 2009 | Leave a comment

Gambling is a form of entertainment for some, an addiction for others, and, for others still, a last resort when they are feeling financial pressure. The extent to which it affects lower-income people in larger proportion than higher-income people may be a root cause of an increased rate of bankruptcy filing, among many other causes, but the exact impact that gambling losses have upon the ability of a debtor who has decided to file bankruptcy to successfully have those losses discharged along with other debt is another matter entirely.

To begin with, all gambling losses in the previous year must be reported on the Statement of Financial Affairs which accompanies every bankruptcy petition that is filed. The bankruptcy trustee and court request this information, among other things, so that they can determine whether any fraudulent transfers have occurred. In bankruptcy, creditors are paid in an established, preferential order, and any attempt to pay a particular creditor out of that order may result in the trustee avoiding the transfer. That is, undoing it and requiring the funds be returned from the transferee. In the case of gambling losses, such debt is “unsecured debt,” which is paid after secured debt, such as that owed to home mortgage and auto loan providers. Moreover, trustees have the power to avoid transfers which appear fraudulent because they are transfers for which the debtor received “less than reasonably equivalent value,” which is the basic benchmark for determining fraud under the Bankruptcy Code. 

Beyond the initial filing of the petition and these powers of the trustee to undo transfers of funds that appear fraudulent, it is also highly probable that gambling losses, if not avoided by the trustee at the outset, will be found nondischargeable as the bankruptcy proceeds. This is particularly true when it comes to credit card cash advances received by the debtor wishing to file bankruptcy for the purpose of paying off or incurring gambling debts. When this is the case, the credit card issuer may file a complaint to object to the discharge of the debt, and, when that occurs, it is resolved through a process known as an “adversary proceeding,” which is like a mini-trial on that specific issue within the bankruptcy court. It requires extra time and work for the debtor’s attorney, and, thus, it raises the cost of what could have been a simple bankruptcy filing for a given flat-fee to a point that is less manageable for the debtor.

Some courts have also found gambling debts to qualify as “luxury goods or services,” which would, especially if incurred very near the date that the bankruptcy petition was filed, also likely render the debt nondischargeable.

However, other courts, under very specific facts of the debtors’ personal circumstances, have allowed gambling debt to procced to discharge. This occurred, in one case, when a debtor was found by the court to be suffering from a bona fide, diagnosed gambling addiction. In another case, this occurred when the credit card company failed to perform even the most rudimentary investigation into whether the debtor it was issuing a credit card to would be able—or willing—to pay the debt back. In general, this question generally turns on an examination of whether a debtor truly intended to pay the debt back or not.

Clearly, proving this intent is not always easy. It is easier for a debtor wishing to file bankruptcy to avoid having such debt in the first place, but the same could be said for virtually any of the types of debt which drive individuals toward bankruptcy. More and more states and other localities are allowing casinos to be built in their jurisdictions and approving other forms of legalized gambling. States, cities, and counties, like the individuals who reside within them, look toward gambling as a quick way out of difficult financial circumstances. For individuals, the flip-side of this coin is deeper debt and a greater likelihood of filing for bankruptcy. For states and other municipalities, the flip-side is, among the many social problems attributed to the presence of casinos and gambling in their areas, that, when a debtor files for bankruptcy, it becomes more difficult to argue that the debt they have incurred through gambling is simply wrong and should be nondischargeable.

However, this is still a tricky proposition, and making that argument to a bankruptcy trustee or judge requires a skilled and experienced attorney familiar with the legal terrain surrounding the issue. If you have gambling debt and are 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 Basics, Bankruptcy Planning, Chapter 13, Chapter 7, Gambling and Bankruptcy, Judicial Decisions

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New Year, New Solutions?

Posted on January 1, 2009 | Leave a comment

The passing of a year is always an optimistic time for most of us. It’s a little arbitrary, probably, to stand on the threshold of a new year and expect that much will change when, usually, January 1st is never all that much different from the day before it, but we all have that expectation regardless. We formulate New Year resolutions or decide steadfastly that we don’t require them, and we step forward into another year with the notion of change set firmly in mind. “This year,” we tell ourselves, “it’s all going to come together for me.”

That’s as true for me as it is for anyone else. I have great hopes and expectations for 2009 that may or may not be borne out as events unfold. Like everyone else, I have no guarantees that anything will work out particularly well for me, but, like absolutely everyone else, I move forward with my fingers crossed, doing what needs to be done. It’s simply human nature to retain at least enough optimism to keep going forward regardless of whatever it is that may be weighing us down. The New Year holiday represents that optimistic side of our nature as human beings, and it is that side of our nature that does bring us our greatest successes, even when the odds are against us.

It does happen that the odds are against many of us at this particular time in our history. Particularly here in Detroit and the greater southeast Michigan area, many are having a tough time right now. Regardless, just as our political leaders must adapt to new circumstances and develop new strategies for our state and our nation’s economic well-being, we must, individually, do the same. Nobody needs to be told to tighten their belt when the going gets rough, but the details of how to do it are sometimes easier said than done. And, when it comes to dealing with overwhelming amounts of debt in the face of job-loss, medical issues, or other serious matters, there’s nothing easy about it.

In particular, if your belt has been tightened and tightened again and you are considering filing for bankruptcy in the coming year, there are a few basic precautions you can take to improve the odds for yourself—and for your coming year.

Stop Using Credit-Cards

This is one of those “easier said than done” things, especially if your situation has become so strained that you are, to some extent, living off of your credit-card right now. But credit-card debt is expensive in the long-term. It isn’t always to focus on the long-term when the short-term has become difficult, but interest-rate changes, the inflated rates on cash-advances on a credit card, and the ability of the card issuers to alter the terms of your agreement with them at virtually any time throughout the length of your relationship means that, unless you’re careful, you could make a short-term difficulty into a very long-term one.

Further, if you are considering bankruptcy anytime in the coming year, you don’t want to give your creditors any justifiable reason to claim that your bankruptcy petition is fraudulent and should be dismissed. Use of a credit-card when you know you will be filing for bankruptcy is fraud.

Stay Current on Your Car and Mortgage Payments

Again, if you’re in trouble, this may be a very difficult thing to accomplish. It may, in fact, be the primary reason you consider filing for bankruptcy. In general, especially here in Metro Detroit, where the public transportation options are slim to none, it is important to have a reliable vehicle before, during, and after a financial crisis. Losing a car or, especially, a home will obviously worsen the odds that you will emerge from the crisis. But, if you are planning to file bankruptcy and hope to save a home or vehicle, it is also important to continue demonstrating your ability to make payments on the property so that your Chapter 13 plan will appear effective to the Bankruptcy Trustee who will oversee your case.

Close Unnecessary Bank-Accounts

If you have accounts that you don’t use or rarely use, transfer the funds to other accounts and close them out. It just makes things easier.

Keep Good Records

Complete and accurate records of your financial history will enable a bankruptcy attorney to do the best job for you that he or she can.

These are just a few of several steps you can take to make not only the short-term possibility of a Happy New Year alive but also the long-term possibility. If it is not possible for you to take at least the first two steps I’ve discussed above, it is possible that a bankruptcy may be the best financial course of action for you in the New Year. Even that, however, is still cause for optimism. A bankruptcy is, after all, not an ending but a new beginning, like the New Year holiday itself, and, if your situation requires that drastic step, it should be viewed as an optimistic move forward.

If you are considering filing for bankruptcy or would like to discuss your financial options, please contact me at jhilla@aronofflinnell.com or (248) 977-4182 to schedule a free, initial consultation.

Meanwhile, a very Happy New Year to all of you!

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

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