What sort of paperwork do I need to file for bankruptcy?

This answer will vary from jurisdiction to jurisdiction and from trustee to trustee. First, there are standard forms which need to be filed with the court - the petition, your schedules, your Statement of Financial Affairs, and the Means Test. Each jurisdiction may have some supplemental forms, and your attorney should know which forms you will need to complete based on the district you are filing in.

In addition to those forms, there is ordinarily a packet of supplemental supporting documentation you will need to provide the trustee prior to your hearing. Your attorney should have enough experience with the trustees in your district to have a pretty good idea of which documents will be required. Below is a list of some of the most common documents that trustees have requested from me from each of the districts I practice in, from the not-so-demanding Eastern District of Wisconsin, to the very demanding Western District of Michigan. These are just examples - your particular list might be shorter or longer than this.

1. Recorded Deed(s) for real estate
2. Recorded Mortgages for real estate
3. Property Tax Bills and/or Appraisals
   
4. Titles for vehicles (or Confirmation of Security Interest or UCC Financing Statements)
5. Homeowner's Insurance and Auto Insurance Policies
6. Copies of orders for domestic support
   
7. Federal and State Income Tax Returns going as far back as 4 years
8. Pay-stubs (or other evidence of income) for the previous six months
9. Bank Statements
10. Whole Life Insurance and Retirement Account statements
11. Credit Reports, and perhaps certain billing statements
    

Wisconsin residents could soon enjoy much larger property exemptions.

Exemption statutes are what we as bankruptcy attorneys use to protect property (real estate, vehicles, and other personal property) with positive equity from liquidation by a Chapter 7 Trustee.

Wisconsin is an opt-in state, which means that qualified residents may choose between either the federal exemptions or Wisconsin's state exemptions. For the last several years, I have found federal exemptions to be superior to state exemptions in every way. Joint filers get $40,400 in federal homestead exemptions whereas they only get $40,000 if they elect state exemptions. Further, almost every other common exemption is greater in federal than its state counterpart. Generally, the only way that state exemptions were superior were for individual filers who were only entitled to a $20,200 exemption for their homestead under federal law - they were still entitled to the full $40,000 under state law.

However, rumors have circulated that legislation was in the state assembly and senate to increase a variety of exemptions, including exemptions for motor vehicles, depository accounts, and tools of the trade. Most notably, though, is that the homestead exemption would be raised to $75,000 and the "marriage penalty" would be removed, allowing each spouse to each take $75,000, thereby increasing the maximum for a joint couple from $40,000 to $150,000.

It appears that SB-259 passed late last night. A cursory read of the bill confirms that the marriage penalty is now indeed removed, but the $75,000 number might have been an exaggeration. The bill directs the exemption to be increased every 3 years, beginning in 2011, in accordance with the Consumer Price Index. Still, at minimum, it looks like state exemptions have suddenly become the favored set of exemptions for bankruptcy. Assuming all of the information is correct, all that should remain is the governor's signature.

U.S. Supreme Court to decide Means Test Issue, In re: Lanning

Before I get to the heart of the story, allow me to give you a quick refresher about the Means Test and what it means for a bankruptcy petitioner. To grossly over-simplify the Means Test, it is basically Congress' attempt to create a mathematical formula to objectively determine how much money, if any, a debtor can afford to pay to creditors holding unsecured claims. It (Form B22) determines whether you qualify for a Chapter 7, in which all of your unsecured creditors are discharged. And if you don't qualify for Chapter 7, the same form determines how much income is available to those creditors.

A number of statutory deficiencies exist which have given rise to disputes and some bizarre interpretations to several aspects of the Means Test, often resulting in gross inequities. One example is whether a Chapter 13 debtor can take deductions on the Means Test for payments on a secured debt which the debtor intends to surrender because the payments are contractually due at the time of filing. In re: Dionne, in the Eastern District of Wisconsin says they can. I feel awkward writing about that decision because for one thing - this decision is favorable to debtors, and I am a debtors' counsel. Also, I have nothing but respect for the judge who rendered the decision. But I respectfully disagree that a debtor should be allowed to deduct payments on a loan that the debtor knows full well they will not pay again in the future. Fortunately for me, the 7th Circuit took the conflict out of my control with In re: Turner and ruled the opposite.

But, the bigger issue we have had with the Means Test is that - in Chapter 13, the Means Test spells out what the debtor can afford to pay over the next sixty months after the case is filed. And it does so by calculating the debtor's income from the six months prior to filing. Relying solely on the Means Test results in inequities. Debtors pay less than they can afford if they experience a decrease in expenses or an increase in income. Debtors pay more than they can afford if they experience an increase in expenses or a decrease in income. Fortunately, the bankruptcy code allows for post-confirmation amendments based on these changes in circumstances. However in my case (In re: Hilton; 08-25440), the debtors' change in circumstances occurred simultaneously with the filing of the bankruptcy petition, and so they were not eligible for a post-confirmation amendment, because we hadn't gotten the case to confirmation. Furthermore, the plan could not be confirmed because it was not feasible, since the debtor's budget did not show they could afford what the Means Test required. We took this to hearing, and after briefs were filed, the Judge rendered a decision indicating that the Means Test is merely the starting point, and that other factors may be determined in computing disposable monthly income.

However, courts across the country have been split over whether the Means Test should be strictly applied or whether other factors may be considered. And again, this generally arises from lack of clear definition of disposable income in the bankruptcy code.

On Monday, November 2, 2009, the United States Supreme Court granted certiorari in the case of Jan Hamilton v. Stephanie Kay Lanning (08-998). So, come next June, we might finally have a universal answer as to whether we should be strictly applying the Means Test or if other factors may be considered.

How the court will rule, I have no clue. But I will make the following observations and predictions. Any ruling that indicates that Form B22C is the alpha and omega of calculating plan payments - will sometimes work in the debtor's favor and sometimes work against the debtor. In only a very small fraction of cases will the debtor be paying what they can afford - no more and no less, because it is very rare that the six months prior to filing will mirror or otherwise be indicative of the debtor's income in the sixty months after filing. Furthermore, continued strict adherence to the forms will continue to result in a lopsided amount of Chapter 13 failures, which seems contrary to what Congress hoped for when it passed BAPCPA (Bankruptcy Abuse Prevention and Consumer Protection Act of 2005), as it was quite clear that they wanted to encourage people to file Chapter 13 over Chapter 7.

I advocate, as I did in Hilton, for the Means Test to be a starting point, but allowing other factors to be considered in computing disposable monthly income. This will help increase the success rate of Chapter 13s, and ensure that debtors are paying what they can afford - not more, and not less. However, one must acknowledge the inherent danger that deviating from Form B22C will open the door to creative budgeting by debtors and their lawyers, which will lead to certain abusive practices.

Can bankruptcy stop my utilities from being shut-off?

January 1 through April 15 of every year tends to be the busiest time of year for bankruptcy attorneys due to an alignment of financial events. First, we're coming off of the holiday season and people are finding out just how bad a spot they've put themselves in with their credit cards from Christmas shopping. Second, this is the time of year when most of your recurring annual expenses come due, such as licenses, memberships, subscriptions, and most notably - income and property taxes.

Third, as we approach April 15, more and more consumers are realizing that they are on the chopping block to have their utility services shut-off. Wisconsin's winter moratorium prevents utilities from being shut-off between November 1 through April 15. In recent years, the three major utility providers in this state - WE Energies, Wisconsin Power & Light, and Wisconsin Public Service - report rising numbers exceeding 100,000 customers who are at risk for losing their power after April 15. Many families struggling to make ends meet take advantage of the moratorium to divert funds to other necessary living expenses such as food and health care, but other customers merely free-load during the moratorium, and often find themselves unable to get caught back up before it ends.

Like wage garnishments, utility shut-offs can be prevented or service reinstated by filing a bankruptcy petition (see my previous post to learn some of the caveats to the automatic stay). However, the bankruptcy code permits utility companies to demand a security deposit, which is often equal to two or three months' worth of peak service bills, to be paid within 20 days of filing for bankruptcy. Failure to pay that deposit can result in your power being shut-off anyway. The deposit is not applied to your past-due utility bills which are discharged in the bankruptcy, but are held as credit and generally refunded after you terminate your service or have established a record of paying your bills on-time after bankruptcy (usually about 12 months).

Can bankruptcy stop a wage garnishment?

If your wages are being garnished for a judgment entered against you on behalf of a creditor that you owe, yes, filing for bankruptcy will prevent that. If the garnishment has not begun before your case is filed, then the bankruptcy will prevent the garnishment from beginning at all; if the garnishment starts before your case is filed, then the garnishment will stop immediately after your case is filed. To ensure that the proper parties are notified to stop the garnishment in a timely manner, you should give your attorney contact information (such as an e-mail or fax number) for your employer's payroll department, or alternatively, obtain a copy of the notice of filing from your attorney and present it to your payroll department yourself.

There are a few exceptions to all of this. Bankruptcy will not stop withholdings for income taxes nor child support. If you do not receive a discharge for any reason, the garnishment will only be suspended for so long as the stay applies in your pending bankruptcy case, after which time, the creditor can reapply for the garnishment to resume. Finally, if you have filed multiple bankruptcy petitions within 12 months, the stay might only be temporary or it might not kick in at all unless your attorney files a successful motion with the court to extend or implement the stay.

What was the fuss I had been hearing about a "mortgage cramdown" bill?

In recent years, various incarnations of a bill have been submitted into Congress, died, and revived. One such version that came close to passing earlier this year was the "Helping Families Save Their Homes in Bankruptcy Act".

The common theme lobbied for in these bills by consumer right's groups was the inclusion of mortgage cramdown provisions. Under current law, Chapter 13 bankruptcy cases (under certain circumstances) can reduce the principal balance of a secured loan to the fair market value of the collateral securing the loan, having the effect of eliminating loans that are "upside down" or "under water". The biggest caveat to the cramdown provision is that it does not apply to a secured loan which is secured by the debtor's primary residence.

This legislation, which was passed by the House of Representatives last spring, but defeated in the Senate, would have allowed some mortgages on primary homes to modified.

Can bankruptcy stop foreclosure?

Yes, filing bankruptcy can stop your home from going into foreclosure, if you file under Chapter 13.

The bankruptcy code allows for the curing of arrears (past-due amounts owed on secured debts) under Chapter 13. This provides the creditor with adequate protection - meaning that they can rely on the arrears being paid without the need to recover their losses by foreclosing. Chapter 7 does not offer this protection, and so you risk foreclosure if you have arrears and file under Chapter 7, even if the foreclosure action has not begun.

To save your home from foreclosure, your bankruptcy case needs to be filed ideally before the sheriff's sale, but if you miss that deadline, there is still a small window of opportunity if you can file before the confirmation of sale. In Wisconsin, creditors typically file foreclosure actions in state court after about two months of missed mortgage payments. After the case is filed, it takes about 4-6 weeks before a judgment of foreclosure is entered. In the current housing market crisis, a backlog of foreclosures has created an even longer time before the foreclosure judgment is entered, and that's assuming the matter is uncontested. After the judgment is entered, there is a statutory six month redemption period (12 months if the creditor elects to not waive a deficiency judgment) in which time you can attempt to catch-up on your payments, renegotiate the mortgage, refinance, or file Chapter 13 to save your home. Sometime after the redemption period, the sheriff's auction is held. Two weeks later is the confirmation of sale.

Each state's foreclosure process is different, so be sure you check with your attorney. For example, in Michigan, where I also practice, the redemption period is only two weeks, not six months.

Technically, a Chapter 13 bankruptcy can also prevent a vehicle from being repossessed or other secured collateral, such as furniture, appliances, and jewelry. However, I discourage clients from filing under Chapter 13 solely to prevent auto or other small repossessions. Chapter 13s require a strict and disciplined budget, and can be volatile for a number of reasons. Cars and other small property are relatively disposable items in our society and are frequently replaced in the course of a three to five year bankruptcy plan. Also, repossessions occur much faster in Wisconsin than foreclosures do, with very little notice. In short, if you have multiple reasons to file under Chapter 13, preventing a repossession makes sense. But it is rarely worth the hassle of filing Chapter 13 solely for that purpose.

Can I be fired from my job for filing for bankruptcy?

No. The bankruptcy code provides that no governmental entity may discriminate against you for filing for bankruptcy. Therefore, they cannot terminate you from present employment or refuse to hire you for new employment based on having filed for bankruptcy. Neither are they allowed to deny licenses of any kind.

Private entities are also prohibited from terminating present employees on account of their bankruptcy, but they are permitted to deny new employment based on bankruptcy. In my experience, this practice is rare. In fact, I've had some extreme examples of people not only being hired immediately after bankruptcy, but even promoted because of it - and both instances were in the banking industry.

It is important, however, that you understand that most people are at-will employees, and can be terminated at any time for any reason, or really no reason at all. While you can't be discriminated against because of bankruptcy, race, gender, religion, etc., the employer hardly needs a reason to terminate employment. For this reason, proving that you were terminated for illegal discriminatory reasons is difficult.

These discrimination statutes are also the basis of why utilities and hospitals cannot deny you service after bankruptcy, because they are regarded as public entities (even though they are usually privately owned). Utility companies have their own statutes which permit them to collect a security deposit from debtors and then refuse future services based on the security deposit.

Similarly, private entities such as individual doctors can refuse future service, except of course, to the extent that they are prohibited by their own professional rules from denying emergency medical care.

Foreclosures Still on the Rise

Preliminary numbers suggest that the number of foreclosures filed in September (compared to August) in the 20-county region of northeast Wisconsin rose by over 18%. There is a slight margin of error, as the numbers each month exclude foreclosures filed against business entities, the estates of a decedent, and property owners who reside in other states.

Who will know I filed for bankruptcy?

Naturally, all of your creditors will receive notice that you filed for bankruptcy. Otherwise, they wouldn't know you discharged your debt. Employers are not notified unless (a) you owe a debt to your employer, (b) you are currently being garnished and your attorney has to send your employer a notice to stop the garnishment, (c) you file Chapter 13 and your plan payments are taken out as a payroll deduction.

Bankruptcy is a matter of public record, but I am not aware of any region that publishes them in the newspaper anymore. Quite frankly, there are far too many bankruptcies being filed. Based on current filings, I would estimate that the state of Wisconsin will bear somewhere between 20-25,000 filings in 2009. You are far from alone, particularly given the nature of the current economy.

Pretty much the only people who bother searching for bankruptcy cases in public records are debtor attorneys and creditors. Most people think that they don't know anyone else who has filed for bankruptcy. In reality, the average debtor (unbeknownst to them) has several close family and friends who have filed.

Do I have to take classes?

Yes. Under BAPCPA, all debtors are required to take a course in Credit Counseling before your bankruptcy case is filed. The course must be taken within 180 days of the day you file for bankruptcy. After your case is filed, you are required to take a second course in Financial Management (also known as Debtor Education). Failure to complete the second course can result in the denial of discharge.

There are plenty of companies nationwide that offer these counseling courses. Your attorney will often have an arrangement with a certified vendor so that you don't have to hunt for one yourself. Most companies offer these courses over the phone or on the internet, and these courses usually take an hour or two.

Should I reaffirm my secured debts?

Before we discuss the financial prudence of reaffirming on the debt, we should first establish whether the court will allow you to reaffirm on a secured debt. We first look to whether the reaffirmaiton would be an abuse. Expect that each jurisdiction has different levels of scrutiny. In my home district, the court is relatively relaxed on the subject. In Chapter 7, most of my clients can reaffirm on any debt they choose without much hassle. Where it gets sticky is when debtors choose to reaffirm unusually expensive debts and/or debts for "toys". If the debtor could conceivably afford to pay their unsecured debt by ditching luxury items, then the trustee could certainly object that there is some abuse going on. In Chapter 13, the analysis is much the same, but a little more restrictive. Secured debts squeeze out money available for unsecured creditors. My trustees tend to disallow secured debts for luxury or recreational items (including more than one vehicle per debtor) unless the debtor is willing to match the secured payment for the unsecured creditors - which gets expensive in a jiffy!

Once it has been established that the reaffirmation is not an abuse, the next question is whether it is financially wise for you to reaffirm. You will need to make a prudent decision as to whether the reaffirmation is in your best financial interest. Here, the court will largely defer to your decision, but they will often step in to evaluate your decision and in some cases, override your decision. The basic factors to consider:

1. Is the debt necessary? Usually yes if it is your home or primary vehicle. Less so if it is for a timeshare, your third vehicle, or big-screen TV.
2. Is the collateral over-financed? It might be time to cut your losses if you are paying $18,000 for a 1994 Geo Metro, even if you can afford it.
   
3. Can you afford the payment? Analyze the principal balance, the interest rate, length of the loan, and monthly payment. If you're living on $20,000 per year, you probably can't afford a $300,000 mortgage.
4. Can you get a new loan for new collateral at a better deal after bankruptcy? Reaffirming on secured debts that existed before filing for bankruptcy is an excellent and easy way to rebuild your credit. But don't discount the possibility of finding a new loan after bankruptcy that will have better terms.

In Chapter 7, many of your secured creditors will send you a reaffirmation agreement to sign. Even if you have decided to reaffirm the debt, you might not necessarily want to sign the agreement. First and foremost, if you default on your loan payment after you have entered into a reaffirmation agreement - you will be liable for the whole amount of the debt. Your bankruptcy discharge will not protect you from collection efforts. Second, although failure to sign a reaffirmation agreement can be interpreted as a technical default and invite repossession, the odds are next to nihl that a creditor would repossess your property despite you remaining current on payments.

In short - reaffirming secured debts can help rebuild your credit, but you should only reaffirm on what you need and can afford.

What happens to my tax refund if I file for bankruptcy?

Your tax refunds are treated as an asset just like all of the other property that you own, and ordinarily it can be exempted. In Chapter 7, this basically boils down to you keeping your tax refunds.

In Chapter 13, your tax refunds for the years while you are in the Plan may also play a role in your plan payments. The reason for this is because in Chapter 13, all of your projected disposable income is supposed to come into the Chapter 13 Plan. Tax refunds are an indication that you have over-withheld. In theory, if your withholdings had been adjusted properly, there would be no refund and more money would have been available throughout the year. For below median debtors, your Plan is calculated based on your budget, for which taxes are based on your withholdings. Therefore, in the Eastern District of Wisconsin, the Trustee takes one half of all state and federal tax refunds. For above median debtors, their taxes are calculated on the Means Test, which is based on actual tax liability, so withholdings are irrelevant. For this reason, above median debtors do not have to pay in half of their tax refunds. However, if their withholdings are too high, they may find they have a hard time affording their regular Plan payments.

There are, of course, exceptions to each rule under special circumstances. One of the common misconceptions is that tax refunds help pay off a Chapter 13 Plan faster. Unless you are scheduled for a 100% Plan (meaning all creditors are repaid in full), this is not the case. Tax refunds are additional funds allocated to creditors in excess of what they are entitled to under the original plan calculations. I will discuss the effect of floor amounts and buying your way out of Chapter 13 early at a later time.

And now, for something completely different...

It's a bird... It's a plane... No! It's BAPCPA Man! Bankruptcy doesn't have to be gloomy. Take a look at the lighter side with Steven Horowitz and Gideon Kendall's creation, BAPCPA Man here: http://bankruptcybill.us/category/cartoons/bapcpa-man/. Last Saturday, they posted this excellent cartoon illustrating the foibles of the Means Test.

Before you panic, do be aware that case law across the country is beginning to change. The bankruptcy code is being interpreted to have the Means Test be the starting point for calculating the ability to repay, but it is not the Alpha/Omega. Other factors can be considered. We have a few cases on point here in the Eastern District of Wisconsin - one of them being my case, In re: Hilton, 08-25440, which is the crown jewel of my career, so far.

Do I have to disclose all of my income?

Yes. Your income is required not only to determine which chapter of bankruptcy you qualify under, but also to determine how much of your debt you must repay, if any. Most often, clients understand that ordinary employment is income that they must report. Some of the other sources have a tendency to slip their minds. Remember that you must disclose all of your income to your attorney from the six months prior to when you file your bankruptcy. This may include:

• Business Income
• Rental Income
• Child Support, Alimony, and Maintenance
• Gambling Winnings
• Regular Retirement Disbursements
• Retirement Withdrawals
• Life Insurance Policy Withdrawals
  
• Inheritences
• Social Security / SSDI Benefits
• Short-Term or Long-Term Disability Payments
• Unemployment
• Workman's Compensation
• Public Benefits (food stamps, rental or utility assistance, etc.)
• Per Capitas
• Annuities
• Contributions from others in the household

Not all of these sources of income are reportable on the Means Test. Nevertheless, all sources must be disclosed so that the Trustee can form an overall picture of your financial situation. Failure to disclose your income could result in a dismissal of your bankruptcy case.

Do I make too much money to file for bankruptcy?

One of the major reforms that the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) introduced was the Means Test. Debtors filing under Chapter 7 bankruptcy must be below their state's median income level for their household size. If the debtor is above the median income level, they must complete the rest of the form, which offers a variety of deductions - some based on IRS standards, and others based on the debtor's actual (and reasonable) expenses. The remainder of the form is the debtor's last chance to beat the presumption of abuse. If the debtor cannot overcome the presumption, they should file under Chapter 13.

In Chapter 13, the Means Test operates in much the same way, but the main goal is to determine how much you are required to pay back to your unsecured creditors during the term of your repayment plan. Being below or above median will trigger certain requirements, some of which vary by jurisdiction.

As BAPCPA is still relatively new to the legal community, so is the Means Test. Judges, Trustees, creditors, and debtors are still debating how to interpret and how to calculate many lines on the form. The law is constantly changing with each judicial ruling, and the law varies from district to district. One of the major flaws of the means test, particularly in Chapter 13, is that it extrapolates your income from the past six months out for the next 36-60 months. The Means Test is a snapshot of your current financial situation, and operates on the basic presumption that your financial situation will not change, when in fact, change is often what triggers people into filing bankruptcy in the first place. The law has developed in a number of ways to account for some of these changes, and your attorney can best guide you in your options to address them.

Do I have to disclose all of my assets?

Yes, all of your assets must be disclosed to the bankruptcy court. The concept here is simple: if you are sitting on a proverbial gold mine, there is no reason you shouldn't sell that gold mine to pay off your debts, rather than receive the benefit of a bankruptcy discharge.

In your bankruptcy case, you will be entitled to use a set of property exemptions. These are allowances of the amount of property that you are entitled to keep. In the state of Wisconsin, you are allowed to use either the Wisconsin state set of exemptions or the federal set of exemptions. Federal exemptions are fairly generous and can protect all of the assets in the vast majority of cases. State exemptions are used less frequently, but have a benefit for single debtors who have more than $20k equity in their home.

If you have property with a value that exceeds the allowed exemptions, then a Chapter 7 Trustee may seize that asset, and sell it for the benefit of your unsecured creditors (this is called an Asset Case). Alternatively, you can file Chapter 13 to keep your property, but you buy out the Chapter 13 trustee's interest in un-exempt assets over the course of a 3 or 5 year plan. This money is earmarked for your unsecured creditors, and they are thus made as whole as they would have been if your property had been liquidated under Chapter 7.

Some people, believing that their property is going to be taken, try to hide assets from their attorney and the bankruptcy court. They erroneously think that if they don't disclose what they have that it can be protected. This is a huge mistake. Your attorney cannot apply exemptions and protect property that he doesn't know about. Trustees and creditors have some clever ways of finding out if you've hidden anything. You might get away with it, but if you get caught, I can just about guarantee the consequences would be far worse than if you had disclosed your property to begin with and let your attorney find the best way to deal with it.

Placing a value on your property can be confusing. For simple cash and baking assets, the value is quite obvious. Vehicles have standard values that can be determined via Kelly Blue Book or NADA. For real estate, we look at a combination of municipal assessments, appraisals, comparable markets, and overall housing market conditions. For household goods, we are putting ourselves in the trustee's shoes (when he liquidates) and the question becomes: what would a disinterested third party would pay?

Finally, we get to the question of what constitutes an asset. An asset is anything of value that you have a legal ownership interest in. Many people hear the words "property" or "asset" and think real estate. Real estate is certainly property, but it is not the only thing that counts. The following list will give you an idea of how diverse property can be, but it is certainly not an exhaustive list.

1. Real Estate (residence, business property, rental property, hunting land, timeshares, etc.)
   
2. Vehicles (automobiles, boats, motorcycles, ATVs, snowmobiles, campers, aircraft, etc.)
   
3. Household Goods (Furniture, Appliances, Electronics, Clothing, Books, CDs, DVDs, hobby equipment, firearms, hunting equipment, sporting equipment, tools, photos, art, jewelry, office supplies, etc., etc., etc.)
4. Cash
5. Bank Accounts
6. Life Insurance Policies
7. Retirement Accounts
8. Security Deposits
9. Stocks and Bonds
   
10. Tax Refunds
11. Potential Claims / Lawsuits
12. Potential Inheritances
    
13. Pets / Animals / Crops
    
14. Trusts
15. Business Assets, if you own or have a partial interest in the business
    
16. Patents, Licenses, Copyrights
    

Everything that you own constitutes an asset that is property of the bankruptcy estate, down to the last paper clip in your desk drawer. Of course, as a practical matter, we don't list every single pen, pencil, and thumbtack down to that level of nauseating detail. Most attorneys will list something to the effect of "Miscellaneous Knicknacks" to cover the aggregate value of all of your property that is of negligible individual value. But do not try to decide for yourself that something is too insignificant to disclose.

As you may have noticed from the list above, property can be tangible (e.g. vehicle) or intangible (e.g. copyright). It can be cash or something with a same-as-cash value (e.g. retirement account), or it can be something of varying or subjective value (e.g. real estate). Perhaps you only have a partial interest in the property (e.g. you and a friend each own one-half of an interest in some hunting land). Perhaps you have a future interest, which means you cannot access the asset or you do not yet have possession, although you are legally entitled to it (e.g. tax refund, inheritance).

Think of everything, and tell your attorney about it immediately. Your attorney cannot protect what he doesn't know exists. Remeber this mantra: Surprises are for birthday parties. It is considerably easier for your attorney to fix problems before your case is filed than it is after.

Will anyone take my house, car, or other personal property?

Generally, no. In bankruptcy, there are only two reasons that you would lose the property that you own, and both problems can be resolved in Chapter 13 so that you don't lose anything.

The first problem is if the property that you own exceeds the allowable exemptions in your district. In each bankruptcy case, you are required to list all of your property and its value, meaning real estate, vehicles, cash, bank accounts, insurance policies with cash value, retirement accounts, expected tax refunds, household goods, etc., etc., etc. Your attorney will then claim the value of your property as exempt using the applicable exemption set allowed in your jurisdiction. In Wisconsin, we have the choice of using the federal set of exemptions or the Wisconsin exemptions (provided you meet certain residency requirements). I find that in almost all cases, the federal exemptions offer the best coverage, and in the vast majority of cases, we can easily protect all of your property. In some cases, however, the value of the debtor's property exceeds the exemption limits. In Chapter 7, the Trustee can take any un-exempt property and sell it, using the proceeds to compensate your unsecured creditors. You could attempt to negotiate with the Chapter 7 Trustee to buy out his interest in your property, but given that you're filing for bankruptcy, and the short lifespan of Chapter 7, it is unlikely that you will be able to afford this option. Alternatively, you can file a Chapter 13, buying-out the Trustee's interest in your property and spreading that obligation out over the term of your repayment plan.

The second problem is if your property is subject to a lien (e.g. a mortgage or auto loan) and you are in default of the terms of repayment. Default on a secured debt is termed "arrearage." Even if your intent is to continue paying the secured debt and retaining the collateral, the creditor has inadequate protection for the arrearage, and could repossess the property. Provisions in Chapter 13 of the bankruptcy code allow for the curing of arrears as part of the repayment plan. If you are going to file Chapter 13 to stop foreclosure or repossession, be certain that your bankruptcy case is filed before your property is taken!

Can I pick and choose which debts to include in bankruptcy?

Generally no. In bankruptcy, all creditors of a certain class must be treated equally. To do otherwise shows an unfair preference to a group of creditors at the expense of other creditors. There are, of course, distinctions by class. You can't file against non-dischargeable debts like taxes, child support, and student loans. You will notice that your attorney will still list these debts on your bankruptcy schedules, and this is done for mandatory disclosure requirements.

In chapter 7, your unsecured debts - credit cards, medical bills, personal loans, and the like - will all be discharged. In Wisconsin, we have case law (In re: Guseck) which indicates that debts are discharged, even if they are left off of your schedules. This works to the debtor's advantage when they simply lose track of all their bills and neglect to add one before they file.

The only real picking and choosing you get to do in Chapter 7 is on secured debts. You can choose to retain property and reaffirm on the debt. Alternatively, you can surrender property and have the deficiency balance discharged. In Chapter 13, we can be slightly more creative and treat creditors differently for a variety of reasons - but only to a limited extent. The rules in Chapter 7 generally apply to Chapter 13 as well.

Many debtors complain that they don't want to include certain debts. Usually, this is because it is a debt owed to a professional that the debtor wishes to maintain a future business relationship with - most commonly doctors, attorneys, and auto mechanics. However, these creditors are ordinarily unsecured creditors, just like credit cards. They must be listed on schedules and given notice of the bankruptcy, and their debts legally discharged. If you make payments to these creditors prior to filing for bankruptcy, they will constitute a preferential payment which can be recovered by the Trustee by lawsuit and re-distributed to all unsecured creditors.

Although these creditors have no legal right to pursue you for the debts you discharged, you are permitted by statute to pay the debt back voluntarily after your discharge has been issued.

How is debt classified?

As a practical matter, I classify debt differently depending on whether I am explaining the effect of Chapter 7 or Chapter 13 to my clients.

Chapter 7

1. Secured Debts - debts that are secured to property that you own. Examples include mortgages, auto loans, and sometimes loans for furniture, appliances, or jewelry. In Chapter 7, you have the option of keeping the property and reaffirming the debt. Alternatively, you can surrender the property and discharge the debt.
2. Non-Dischargeable Debts - debts that will not be discharged in bankruptcy. Examples include tax debts, other debts owed to a government unit (including fines, tickets, and criminal restitution), student loans, and domestic support (alimony, maintenance, or child support).
3. Unsecured Debts - these are debts that are generally presumed to be discharged, and retain no lien against your property. Examples include credit cards, medical bills, personal loans, payday loans, civil judgments, past-due utility bills, and deficiencies resulting from repossessions. An unsecured creditor could object to discharge by alleging and proving fraud, abuse, or bad faith.

Chapter 13

1. Secured Debts - these debts are as I described them above. In this district, debtors continue to make their regular mortgage payments as they come due, but any arrearage is paid within the Plan with no interest. Auto loans, whether in default or not, are paid in full within the plan with we call "Till Interest". Till Interest varies from time to time and is calculated based on the current prime rate. If the auto is a lease (or if you rent your home), those lease payments are paid separately as they come due like mortgages, and any arrearage is also paid in the Plan with no interest. Other secured debts (furniture, appliance, or jewelry loans) are like auto loans - paid in full within the Plan at Till Interest. Depending on how old the debt is, your secured loan balances (except for mortgages) could be reduced down to the replacement value of the property securing the loan in a process we refer to as cramdown.
2. Priority Debts - these are a special class of non-dischargeable debts that must ordinarily be paid in full in the Plan, but with no interest. These debts chiefly consist of tax debts from the past four years and domestic support obligations.
3. Non-Priority Debts - a grab-bag of other non-dischargeable debts and unsecured debts. These debts will be paid at a percentage, ranging from 0% to 100%, depending primarily on your income and ability to pay. They also share in any "floor amount" (these are amounts that are not based on income, but represent a buy-out of what would be a problem in Chapter 7). At the end of your Chapter 13 Plan, the portion of your non-priority debts that are non-dischargeable (student loans, for example) will survive your bankruptcy. All other unsecured debts will be discharged.

What is Bankruptcy? What are the differences between Chapter 7 & Chapter 13?

Bankruptcy is a legally enforceable form of debt relief. The vast majority of cases involve both a stay and a discharge. The stay, which suspends creditor collection efforts and legal actions, goes into effect after your case is filed with the court and remains in effect while your case is pending (barring a motion for relief). A discharge is then issued by the court which will eliminate certain types of debt.

The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was adopted into law in October 2005, and established a number of requirements intended to reduce abuse of the bankruptcy system. The key changes resulting from BAPCPA include the requirement of a pre-filing credit counseling course and a post-filing financial management course. In addition, debtors whose gross annual income is computed to exceed the state’s median income level must complete the “Means Test” to calculate their ability to repay debts.

In Chapter 7, the vast majority of your unsecured debts (credit cards, medical bills, payday loans, other personal loans, delinquent utility bills, civil judgments, etc.) are discharged - meaning you are no longer liable for repaying the debt. Certain debts cannot be discharged (like taxes, child support, and student loans). Secured debts, such as mortgages and auto loans, can only be discharged if you are willing to surrender the collateral.

In Chapter 13, your debts are consolidated and a structured repayment plan is proposed over the course of three to five years. Based on the different classifications of debt, some will be paid in full and others will be paid a percentage based on your ability to repay the debt. Interest may be reduced or eliminated completely depending on the class of debt.

Generally, I advise people to file Chapter 7 when possible. Chapter 7s are cheaper, easier, and faster. Chapter 13s are a long-term commitment and require adherence to a strict budget, and because of this, they tend to have a high failure rate relative to Chapter 7s. Nonetheless, some people need to file Chapter 13. Some make too much money, some are attempting to save their home from foreclosure, some filed bankruptcy too recently in the past., and others have too much property that could potentially be seized and sold by the Trustee. For these people, Chapter 13 offers better alternatives to the consequences that would result from a filing under Chapter 7.

Free Budget Management Seminars

The Law Office of Gregory A. Holbus, L.L.C. will be offering free budget management seminars as part of its "Stop the Bleeding Project".

The purpose of these seminars is to help people learn how to manage a budget, the importance of savings, improve their financial literacy, understand credit, and to be aware of marketing gimmicks.

A dress-rehearsal seminar will be held on August 18, 2009, from 7:00 p.m. - 9:00 p.m. at the University of Wisconsin - Green Bay; Mary Ann Cofrin Hall, room 204.

Regular courses are expected to resume in December 2009 or January 2010 on the third Tuesday of each month.

To reserve your spot for the August seminar, please call (920) 490-6160. Check back at http://www.holbuslaw.com for future seminar dates.

Grand Opening

Though I've only been practicing bankruptcy law for about three years, the first two years of my career were spent with a high-volume law firm based out of Chicago. In a short period of time, I gained a considerable amount of experience and expertise, helping literally thousands of people with their financial troubles.

And so, it has come time to hang my own shingle. To create an office where I can be in control of customer service. To no longer be subject to someone else's questionable business practices and questionable ethics. A place where an individual can get high quality work for a reasonable price from an attorney with integrity. Ladies and gentlemen, I present to you now, the Law Office of Gregory A. Holbus, L.L.C.:

926 Willard Dr., Ste. 126
Green Bay, Wisconsin 54304
(920) 490-6160
http://www.holbuslaw.com/

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