Basics of Bankruptcy

What happens if they deny my loan modification?

If you are serious about keeping your house, you have to be able to answer this question. You can’t rely on a lender approving a loan modification, you need to have a back up plan. Only a bankruptcy will stop a foreclosure auction without the mortgage company’s consent. Nothing else you can do will ensure that a scheduled foreclosure auction will not go forward.

A bankruptcy can also assist in getting a loan modification in two ways. One way it can help is by eliminating other debts, the freeing up more money to pay more towards your modified mortgage. The other advantage is the bankruptcy will give you additional time to complete the loan modification process even if there is a pending foreclosure auction date. You can get a loan modification approved while you are in a bankruptcy.

Bring your last two filed federal tax returns, 6 months of pay statements for you and your spouse (if applicable) and copies of all credit card bills, loan statements, mortgage statements, car loan statements, court papers, collection letters and anything else showing what you owe and anything else you want me to look at.

Although my practice is based in Honolulu, I can do bankruptcies on the other islands. I generally charge $300 extra for travel expenses. Residents of Molokai and Lanai need to attend their 341 meeting on Maui or Oahu. I am normally in Hilo, Kona, Kahului and Lihue at least once a month.

Although it may be possible for some people to file a bankruptcy case without an attorney, it is not a step to be taken lightly. The process is difficult and you may lose property or other rights if you do not know the law. It takes patience and careful preparation. Chapter 7 (straight bankruptcy) cases are easier. Very few people have been able to successfully file chapter 13 (debt adjustment) cases on their own. Remember: The law often changes. Each case is different.

A decision to file for bankruptcy should be made only after determining that bankruptcy is the best way to deal with your financial problems. If you decide to try filing on your own, all the bankruptcy forms necessary to file a bankruptcy are available here.

As with any area of the law, it is important to carefully select an attorney who will respond to your personal situation. The attorney should not be too busy to meet you individually and answer questions as necessary. The best way to find a trustworthy bankruptcy attorney is to seek recommendations from family, friends or other members of the community, especially any attorney you know and respect. You should carefully read retainers and other documents the attorney asks you to sign. You should not hire an attorney unless he or she agrees to represent you throughout your case. In bankruptcy, as in all areas of life, remember that the person advertising the cheapest rate is not necessarily the best. Many of the best bankruptcy lawyers do not advertise at all. Paying for debt consolidation is rarely a good idea. There is almost nothing that a paid debt counselor can offer other that a bankruptcy attorney can not do. There is no good reason to pay someone for this service.

A reputable attorney will generally provide counseling on whether bankruptcy is the best option. This avoids the double charge of having to pay a counselor and then an attorney. If bankruptcy is not the right answer for you, a good attorney will offer a range of other suggestions.

Document preparation services also known as “bankruptcy petition preparers” or “paralegal services” involve non-lawyers who offer to prepare bankruptcy forms for a fee. Problems with these services often arise because non-lawyers cannot offer advice on difficult bankruptcy cases and they offer no services once a bankruptcy case has begun. There are also many shady operators in this field, who give bad advice and defraud consumers.

When first meeting a bankruptcy attorney, you should be prepared to answer the following questions: What types of debt are causing you the most trouble? What are your significant assets? How did your debts arise and are they secured? Is any action about to occur to foreclose or repossess property or to shut off utility service? Re you currently involved in any litigation? What is your annual gross income? What are your goals in filing the case?

Utility services: Public utilities, such as the electric company, cannot refuse or cut off service because you have filed for bankruptcy. However, the utility can require a deposit (usually 2 months worth of normal useage) for future service and you do have to pay bills which arise after bankruptcy is filed. Discrimination: A government agency cannot discriminate against you because you have filed for bankruptcy. Driver’s license: If you lost your license solely because you couldn’t pay court-ordered damages caused in an accident, bankruptcy will allow you to get your license back. Cosigners: If someone has cosigned a loan with you and you file for bankruptcy, the cosigner may have to pay your debt.

A 1099-C is a federal (IRS) tax form for cancellation of debts. A 1099-A is similar but is issued after a foreclosure. Sometimes a creditor, after trying to collect from you, will decide that the debt is uncollectible and will “charge off” the debt in order to get a tax break. The IRS normally counts debts forgiven that you receive a 1099-C for as income, thus requiring you to pay taxes on it. However, if the debt is discharged in bankruptcy before the 1099-C is issued or if you were “insolvent” when the 1099-C/1099-A was issued, the “charged-off” debt is not counted as income for income tax purposes. If either reason applies to you, there are specific IRS forms to be submitted with your taxes to not count it as income. You accountant or tax preparer should be able to guide you to the correct forms to complete.

From the U.S. Air Force Academy website:

The status of your security clearance can be affected, but it is not automatic. The outcome depends on the circumstances that led up to the bankruptcy and a number of other factors, such as your job performance and relationship with your chain of command. The security section will weigh whether the bankruptcy was caused primarily by an unexpected event, such as medical bills following a serious accident, or by financial irresponsibility. The security section may also consider the recommendations and comments of your chain of command and co-workers. This is an issue that can be argued both ways, so as a practical matter, your security clearance probably should not be a significant factor in making your decision about whether to file bankruptcy. The amount of your unpaid debts, by itself, may jeopardize your clearance, even if you don’t file bankruptcy. In that sense, not filing for bankruptcy may make you more of a security risk due to the size of your outstanding debts. By the same token, using a government-approved means of dealing with your debts may actually be viewed as an indication of financial responsibility. Eliminating your debts through bankruptcy may make you less of a security risk. There is no hard and fast answer here, with one exception: it never hurts to have a good reputation with your co-workers and your chain of command.

Basically, if you superiors want to get rid of you, they will use either the bankruptcy or your debt as a reason to pull your clearance. If your superiors want to keep you, they will use the bankruptcy as a reason to keep you, especially if the debt was caused by a one time event.

Also check out this article about security clearances from an attorney who specializes in it.

Yes. You are eliminating tens of thousands maybe even hundreds of thousands of dollars of debt; it doesn’t come for free. Anyone claiming otherwise is lying. If you are already behind on your bills, your credit is already bad; bankruptcy will probably not make things any worse. The fact that you’ve filed a bankruptcy can appear on your credit record for eight years. But since bankruptcy wipes out your old debts, you are likely to be in a better position to pay your current bills and you can get credit immediately after filing (although fees and interest will be higher).

In all bankruptcy cases, you only have to go to a proceeding called the “meeting of creditors” (also called a “341 meeting”) to meet with the bankruptcy trustee and any creditor who chooses to come. Most of the time, this meeting will be a short and simple procedure where you are asked a few questions about your bankruptcy forms and your financial situation. Rarely will any creditors appear at the meeting. Your attorney should be able to warn you before the 341 meeting if there are going to be any fireworks.

341 meetings are held on Oahu, Maui, Kauai and Hawaii (Hilo). Molokai and Lanai debtor can choose between Maui or Oahu for their 341 meeting.

Occasionally, if complications arise or if you choose to dispute a debt, you may have to appear before a judge at a hearing. If you need to go to court, you will receive notice of the court date and time from the court and/or from your attorney.

Within a week of the filing of your petition, the bankruptcy court clerk mails your creditors notice of the filing and the imposition of the automatic stay. Until the creditors get notice, it may be necessary for you supply the creditor with the case number and date of your bankruptcy. Once they have been given notice, they must stop collection efforts against you or they may be liable for court sanctions. Many large creditors subscribe to services that will notify them within seconds of your filing. Thankfully, for the vast majority of people, once their bankruptcy petition is filed, that is the last they hear from their unsecured creditors.

Yes. When you file bankruptcy, federal law imposes an “automatic stay” which prohibits your creditors from taking any action (including phone calls) to collect debts from you including court judgments and tax debts during the pendency of the bankruptcy. For instance, if you have been served by one of your creditors to appear in court over a debt, the bankruptcy filing will stop this lawsuit in its tracks. Any wage garnishments or repossession efforts are also halted, no appearances necessary. However, once the bankruptcy is over, a creditor holding a claim that was not discharged may proceed to collect on the debt.

Also, under some circumstances, a secured creditor may proceed to collect on the property securing a lien during the bankruptcy proceeding, but may only do so by filing a court motion and by getting the approval of the bankruptcy court first.

Any violation the automatic stay may give rise to a complaint for damages against the collection party.

Bankruptcy may make it possible for you to:

• Eliminate the legal obligation to pay most or all of your debts. This is called a ”discharge” of debts. It is designed to give you a fresh financial start.
• Stop foreclosure on your house or mobile home and allow you an opportunity to catch up on missed payments. (Bankruptcy does not, however, automatically eliminate mortgages and other liens on your property without payment.)
• Prevent repossession of a car or other property, or force the creditor to return property even after it has been repossessed.
• Modify your car loan or other secured loans (except mortgages on your principal residence) to lower the interest rate, change the length of the loan, and, in some instances, reduce the principal.
• Stop wage garnishment (sometimes we can recover recently garnished money), debt collection harassment, and similar creditor actions to collect a debt. Restore or prevent termination of utility service.
• Allow you to challenge the claims of creditors who have committed fraud or who are otherwise trying to collect more than you really owe.
• Sue creditors for violations of bankruptcy rules once the case is filed.

A bankruptcy can stop a foreclosure all the way up until the foreclosure auction date. A bankruptcy can help you in 4 different ways in a foreclosure situations:

1. If you are in the process of getting a loan mod or want to try and get a loan mod, a bankruptcy can give you time to complete the loan modification process. HAMP specifically requires that lenders consider borrowers in active bankruptcy.
2. If you can afford your regular monthly mortgage payments, the bankruptcy can impose a repayment plan to cure your arrears that, if approved by the court, the lender MUST accept. Generally, you must be able to catch up on all your back mortgage payments within 5 years and maintain your regular monthly mortgage payments.
3. If you have equity in your home and want to refinance or sell your property, a bankruptcy can give you additional time to obtain refinancing or sell your home under the supervision of the bankruptcy court. Being in Chapter 13 bankruptcy will put you back in control of the marketing and sale of your home and allow you to recover some equity, unlike a foreclosure where you will typically get nothing. Homeowners over 62 may be able to use a reverse mortgage as part of their bankruptcy plan.
4. If you just can’t afford the mortgage, due to a change in income, a rise in interest rates, or other factors beyond your control, a bankruptcy can allow you to walk away from your mortgage. The bank gets your house but in exchange, your mortgage debt is discharged. If you choose this option, you will normally have 3-6 months of no mortgage payment before you need to move out (sometimes longer, depending how long it takes the mortgage company to complete its foreclosure). Think of it as free rent in exchange for all those mortgage payments you did make.

Yes, with some exceptions. Bankruptcy will not normally wipe out: (1) money owed for child support or alimony, fines, and some taxes; (2) debts not listed on your bankruptcy petition; (3) loans you got by knowingly giving false information to a creditor, who reasonably relied on it in making you the loan; (4) debts resulting from “willful and malicious” harm; (5) student loans owed to a school or government body, except if the court decides that payment would be an undue hardship; (6) mortgages and other liens which are not paid in the bankruptcy case (but bankruptcy will wipe out your obligation to pay any additional money if the property is taken back by the creditor).

Yes! Many people believe they cannot own anything for a period of time after filing for bankruptcy. This is not true. Bankruptcy is best used to preserve what you do have rather than filing after everything is gone. You can keep your exempt property and anything you obtain after the bankruptcy is filed. DO NOT use your retirement to try and pay off your debts before talking to us.

However, if you receive an inheritance, a property settlement or life insurance benefits within 180 days after filing for bankruptcy, that money or property may have to be paid to your creditors if the property or money is not exempt.

In most cases you will not lose your home or car during your bankruptcy case as long as your equity in the property is fully exempt and you make your mortgage/car loan payments. Even if your property is not fully exempt, you will be able to keep it if you pay its non-exempt value to creditors in chapter 13. However, some of your creditors may have a “security interest” in your home, automobile or other personal property. This means that you gave that creditor a mortgage on the home or put your other property up as collateral for the debt. Bankruptcy does not make these security interests go away. If you don’t make your payments on that debt, the creditor may be able to take and sell the home or the property during or after the bankruptcy case.

There are several ways that you can keep collateral or mortgaged property after you file bankruptcy. In a chapter 7, you can agree to keep making your payments on the debt until it is paid in full. Or you can pay the creditor the fair market value that the property you want to keep is worth (This can be a major savings for cars as it allows you to pay the Blue Book value rather than the loan value). In some cases involving fraud or other improper conduct by the creditor, you may be able to challenge the debt. If you put up your household goods as collateral for a loan (other than a loan to purchase the goods), you can usually keep your property without making any more payments on that debt.

In a chapter 7 case, you can keep all property which the law says is ”exempt” from the claims of creditors.

Federal exemptions permit you to retain as “exempt” up to $23,675 of equity in your residence and up to $3,675 in value in your car. If you don’t own real estate, you are allowed a $12,850 “wildcard” exemption that can be used on anything. In addition, you may keep up to $12,625 in personal property such as furniture and all your necessary clothing, books and family pictures. You may also keep up to $2,375 in any implements, professional books or tools of the trade, as well as all professionally prescribed health aids for you or your family. You may keep most retirement accounts (TSP, IRA, 401k, Roth IRA, 403B, Deferred compensation, Retirement annuities). Exemptions under the Federal exemptions are doubled for joint filings. Additional exemptions are available and the amounts of these exemptions may change from time to time. However, to avail yourself of these “exemptions”, you must properly request them in your bankruptcy case.

There are other exemptions that may apply. You should discuss with your attorney any assets you believe are not exempt. For the vast majority of chapter 7 cases, there are no non-exempt assets.

In determining whether property is exempt, you must keep a few things in mind. The value of property is not the amount you paid for it, but what it is worth now. Especially for furniture and cars, this may be a lot less than what you paid or what it would cost to buy a replacement. You also only need to look at the equity of your property. This means that you count your exemptions against the full value of the property minus any money that you owe on mortgages or liens. For example, if you own a $500,000 house with a $400,000 mortgage, you count your exemptions against the $100,000 which is your equity if you sell it. While your exemptions allow you to keep property even in a chapter 7 case, your exemptions do not effect the right of a mortgage holder or car loan creditor to take the property to cover the debt if you are behind or do not make future payments. In a chapter 13 case, you can keep all of your property if your plan meets the requirements of the bankruptcy law. In most cases you will have to pay the mortgages or liens as you would if you didn’t file bankruptcy.

You must receive budget and credit counseling from an approved credit counseling agency within 180 days before your bankruptcy case is filed. The agency will review possible options available to you in credit counseling and assist you in reviewing your budget. Different agencies provide the counseling in-person, by telephone or over the internet. If you decide to file bankruptcy, you will need to file with the bankruptcy petition, a certificate from the agency stating that you received the credit counseling. If you file bankruptcy with this office, we will instruct you who to take the credit counseling from and give you specific instruction for completing your credit counseling.

The filing fees are as follows: Chapter 7- $335.00; Chapter 13- $310.00, whether for one person or a married couple. The court may allow you to pay this filing fee in installments if you cannot pay all at once. If you are unable to pay the filing fee in installments, you may request that the court waive the filing fee. If you hire an attorney you will also have to pay the attorney’s fees you agree to.

My fees for single person, basic Chapter 7 bankruptcy start at $2,000, married $2,500 (all fees inclusive including filing fee, credit counseling and credit report). Chapter 13 cases start at $3,500 (normally $1,000 down, balance through the plan). Neighbor island clients are charged an extra $300 for travel expenses. Prices will vary depending on the complexity of your bankruptcy. High income, real estate, business operations and tax issues are some of the factors that will tend to increase the price. Fixed income or extended unemployment with little to no assets will tend to reduce the price.

In a chapter 13 case you file a “plan” showing how you will pay off some of your past-due and current debts over three to five years. The most important thing about a chapter 13 case is that it will allow you to keep valuable property, especially your home and car, which might otherwise be lost, if you can make the payments which the bankruptcy law requires to be made to your creditors. In most cases, these payments will be at least as much as your regular monthly payments on your mortgage or car loan, with some extra payment to get caught up on the amount you have fallen behind.

You should consider filing a chapter 13 plan if you:

1. Own your home and are in danger of losing it because of money problems
2. Are behind on debt payments, but can catch up if given some time
3. Have valuable property which is not exempt, but you can afford to pay creditors from your income over time.
4. Have filed and received a chapter 7 discharge in the last 8 years

You will need to have enough income in chapter 13 to pay for your necessities and to keep up with the required plan payments as they come due.

There are several situations where a chapter 13 is preferable to a chapter 7. A chapter 13 bankruptcy is normally for people who have too much income to file a chapter 7 bankruptcy or have the kind of debt that is non-dischargeable in a chapter 7 (e.g. certain taxes). Also, people file chapter 13 because they are behind on their mortgage, car loans, or business payments and are trying to avoid foreclosure or repossession. A chapter 13 bankruptcy allows them to make up their overdue payments over time and to reinstate the original agreement. Chapter 13 can also modify your car loan to allow you to pay the fair market value (as opposed to the loan value) of the car at the “Till rate” of interest (currently 4.75%) for up to 5 years.

However, for the vast majority of individuals who simply want to eliminate their heavy debt burden without paying any of it back, chapter 7 provides the most attractive choice.

An individual who files a voluntary chapter 7 bankruptcy petition must, first of all, either have a “domicile” (that is, a place of official or legal residence) in the U.S., have a place of business in the U.S. or own property in the U.S.

An “alien” — that is, a non-U.S. citizen — can file a bankruptcy petition, as long as he or she satisfies at least one of those requirements. Under the law, minor children and insane people can also file petitions, usually through a guardian or trustee. You must not have been granted a Chapter 7 discharge within the last 8 years or completed a chapter 13 plan in the last 6 years. (If you think you have filed a previous bankruptcy within these time periods, call us. There are exceptions to the rules.) You must not have had a bankruptcy filing dismissed for cause within the last 180 days. It must not be a “substantial abuse” of bankruptcy to grant the debtor relief. Last, it would not be fundamentally unfair to grant the debtor relief under chapter 7 or chapter 13. You may be employed, self-employed or even unemployed, and you do not have to be insolvent. There’s no limitation on the total amount of debt you owe in order to qualify for chapter 7 relief. Generally speaking, if after you pay the monthly expenses for necessities there is not enough money to pay the remaining monthly debts, then granting a discharge would not be an abuse of chapter 7.  If you have secured loans (mortgage or car loans) and want to keep them, you must be current and be able to maintain the contract monthly payments.

Small-business owners who file chapter 7 can continue to stay in business if they do not have employees and have necessary insurance on their business activities. For most sole proprietorships, the trustee is not inrtrested in taking over your business unless there are significant assets (A/R, inventory, equipment, money in the bank, etc.)

There are four types of bankruptcy cases provided under the law:

Chapter 7 is known as “straight” bankruptcy or “liquidation.” It requires a debtor to give up property which exceeds certain limits called “exemptions,” so the property can be sold to pay creditors.

Chapter 11, known as “reorganization,” is used by businesses and a few individual debtors whose debts are very large.

Chapter 12 is reserved for family farmers.

Chapter 13 is called “debt adjustment.” It requires a debtor to file a plan to pay debts (or parts of debts).

Most people filing bankruptcy will want to file under either chapter 7 or chapter 13. Either type of case may be filed individually or by a married couple filing jointly.

If your income is above the median income for the family your size of your household in your state, you may have to file a chapter 13 bankruptcy. A higher income consumer must fill out a “means test” requiring detailed information about income and expenses. If, under the standards in the law, the consumer is found to have a certain amount left over that could be paid to unsecured creditors, the bankruptcy court may decide that the consumer cannot file a chapter 7 case, unless there are special extenuating circumstances.

There is no minimum dollar amount of debt required before you are allowed to file bankruptcy. There are, in fact, many reasons that a person with little to moderate debt may still want file bankruptcy. If you’d like to try credit counseling first, I recommend Consumer Credit Counseling Services of Hawaii. (I have no affiliation or connection with this organization)

The basic idea in a chapter 7 bankruptcy is to wipe out (discharge) your debts in exchange for your giving up property, except for “exempt” property which the law allows you to keep. In most cases, all of your property will be exempt. But property which is not exempt is sold, with the money distributed to creditors. If you want to keep property like a home or a car and are behind on the payments on a mortgage or car loan, a chapter 7 case probably will not be the right choice for you. That is because chapter 7 bankruptcy does not eliminate the right of mortgage holders or car loan creditors to take your property to cover your debt.

Bankruptcy cannot, however, cure every financial problem. Nor is it the right step for every individual. In bankruptcy, it is usually not possible to:

• Eliminate certain rights of ”secured” creditors. A ”secured” creditor has taken a mortgage or other lien on property as collateral for the loan. Common examples are car loans and home mortgages. You can force secured creditors to take payments over time in the bankruptcy process and bankruptcy can eliminate your obligation to pay any additional money if your property is taken. Nevertheless, you generally cannot keep the collateral unless you continue to pay the debt.
• Discharge types of debts singled out by the bankruptcy law for special treatment, such as child support and alimony (known as Domestic Support Obligations), student loans (but tuition is dischargable), court restitution orders, criminal fines, and some taxes.
• Discharge cosigners on your debts. If a relative or friend has cosigned a loan, and the debtor discharges the debt in bankruptcy, the cosigner may still be liable to repay all or part of the loan.
• Discharge debts that arise after bankruptcy has been filed.