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Recent Blog Posts
Surrendering Your Vehicle in a Chapter 7 Case
If you’re buying a vehicle, sometimes getting out of the contract is your best option. Chapter 7 lets you do that, owing nothing.
“Reaffirming” Your Vehicle Loan
Our last blog post was about keeping your vehicle in a Chapter 7 “straight bankruptcy” by reaffirming the vehicle loan. If you are current on the loan/lease and can afford the payments after bankruptcy, reaffirming may make sense.
But sometimes it isn’t your best option. Bankruptcy also gives you an extraordinary opportunity to get out of your vehicle contract and its debt.
Even if you think you should keep your vehicle, consider the advantages of surrendering your vehicle during a Chapter 7 case.
Your Opportunity to Escape the Debt on the Vehicle Loan
Consider 3 scenarios:
- You may regret having made the purchase. You might have been talked into it by a pushy salesperson. You may have been surprised when you qualified for the credit and figured that you should grab the opportunity. But you’ve known for a while that it was a mistake. Bankruptcy is your chance to undo the mistake.
Household Size Really Matters for Passing the Means Test
You can have more income for the purpose of passing the means test as your household size increases. But what IS your household’s size?
Household Size in the Means Test
When introducing the means test a week ago we showed how passing that test often depends on your income. You start by comparing your income to the median income amount for your family size in your state. As your family size increases you can have more income and still pass the means test.
For many people the size of their household is obvious. But not for everybody. Today’s blog post gets into how to figure out the size of your household when it isn’t obvious.
Where to Find the Definition of Household
The federal Bankruptcy Code does not provide a definition of household or how to determine its size.
The U.S. Trustee points us in the right direction. (That’s part of the U.S. Department of Justice which Congress tasked with enforcing the means test.) The U.S. Trustee has put out a "Statement of the U.S. Trustee’s Position on Legal Issues Arising under the Chapter 7 Means Test." This Statement states:
No Means Test If You Fit within a Military Exemption
There are two military-related exemptions from the Chapter 7 means test. They are narrow but if you qualify that can be a major advantage.
The Benefit of Avoiding the Means Test
We introduced the "means test" two blog posts ago. This test determines whether you qualify for a Chapter 7 "straight bankruptcy" or instead must do a Chapter 13 "adjustment of debts" case. It’s based on your income, or if your income is not low enough your expenses play a part as well.
Although most people who want to file under Chapter 7 could pass the means test, not everybody could. For them being able to skip the means test can be a very big deal. A Chapter 13 case requires you to pay your debts to the extent your budget allows for a period of 3 to 5 years. In great contrast, a Chapter 7 case usually "discharges" (legally writes off) most debts without you paying anything. And the cases usually only last about 4 months.
So if Chapter 7 is what you need, you can see why skipping the means test could be very important.
Example of a Simple Chapter 7 "Asset Case"
Chapter 7 "asset" cases may sound scary. They needn’t be. We walk you through a very straightforward example to demystify this.
Asset and No-Asset Chapter 7 Cases
Our last blog post discussed the difference between a no-asset and asset Chapter 7 case. Simply put, in a no-asset case everything you own is covered and protected by available property exemptions. So your trustee takes nothing from you. In contrast, in an asset case, something you own is not covered by a property exemption. So the trustee takes it, sells ("liquidates") it, and distributes the proceeds to your creditors.
We ended our last blog post with a short example of what happens in an asset case if you happen to owe certain kinds of debt that you’d still have to pay after bankruptcy, such as accrued child support or recent income taxes. The Chapter 7 trustee pays such special "priority" debts in full before paying anything on ordinary debts. That way most of your asset proceeds go to a debt that you have to pay anyway.
When a Chapter 7 Trustee Doesn't Liquidate Non-Exempt Property
Just because you own something that isn’t exempt does not necessarily mean that your Chapter 7 trustee will liquidate it. Maybe not.
Our last blog post was about the most straightforward kind of no asset” Chapter 7 case. That’s when it’s clear that everything you own is “exempt”—fully protected. The property and exemption schedules that you and your bankruptcy lawyer prepare and file at court show this. Your trustee asks a few confirming questions at the “meeting of creditors” and announces that your case is a “no asset” one. That means that there’s nothing you own that the trustee wants to liquidate and pay its proceeds to your creditors.
But if you do own something that isn’t exempt. What happens then?
"Property of the Estate" May Include Life Insurance Proceeds
The 180-day rule applies to life insurance proceeds in a Chapter 7 case. But life insurance proceeds are often exempt, or protected.
Last time, we explained the 180-day rule about inheritances. If within 180 days after you file bankruptcy you "acquire or become entitled to acquire" an inheritance, then the property being inherited is "property of your bankruptcy estate." It’s counted as if it was your property at the time you filed, even though it wasn’t. (See Section 541(a)(5)(A) of the Bankruptcy Code.)
That means to whatever extent the inherited property isn’t covered by a property exemption, or protected some other way, the Chapter 7 trustee can take and liquidate it to pay your creditors.
That 180-day rule also applies to life insurance proceeds, our topic today. (See Section 541(a)(5)(C) of the Bankruptcy Code.)
Introducing Fraudulent Transfers
"Fraudulent transfers" have similarities to "preferences." They are both worth understanding because they can cause unnecessary hassles.
Asset Timing in Bankruptcy
Your Chapter 7 trustee usually mostly focuses attention on determining whether any of your assets are not "exempt." You get to keep all exempt assets. If there are any assets that are not exempt, the trustee has the right to take them, liquidate them, and pay the proceeds to your creditors. However, in most consumer Chapter 7 cases all the assets are exempt so the trustee takes nothing. The debtor gets to keep everything.
In this process, the trustee is only interested in what you own at the moment you file your bankruptcy case. This timing gets quite precise. For example, what counts is the amount of actual cash you have on hand at that moment of bankruptcy filing. Same thing with the balance in your checking account(s) at that moment, and all your other assets. The amount of cash or money in your accounts the day before or the day after usually doesn’t matter. What matters is what you had at the moment of filing, with these and all your other assets.
The Judge's Ruling in a Dischargeability Proceeding: an Example
In our example of the adversary proceeding about whether a debt gets discharged, here is the bankruptcy court’s ruling on the matter.
This is the last of six blog posts in a series showing how a dischargeability dispute gets resolved in bankruptcy court. Check out the last five posts about all the steps in the "adversary proceeding" so far, including the trial itself. In the last one, lawyers for the creditor and the debtor gave their closing arguments. Today the judge announces and explains her ruling.
The Judge’s Opening Remarks
At issue in this adversary proceeding is whether the debtor, Marshall, can discharge his debt to the creditor, Heather. The loan was made five years ago for $35,000; its current balance is about $21,000. The purpose of the loan was for Marshall to start a car repair business. Heather is Marshall’s aunt. At Heather’s request, Marshall completed a loan application and signed a promissory note. As she instructed, after completing and signing these documents Marshall delivered them to Heather’s lawyer. The loan was not secured by any collateral.
Unexpired Leases and Other Executory Contracts in Bankruptcy
Unexpired leases and executory contracts can continue on after you file your bankruptcy case. What are they and what makes them special?
Debt Contracts
Most debts arise out of a written contract. You sign a credit card application agreeing to pay according to the stated terms. Go to a new doctor and you sign a form agreeing to pay for all services to be provided. Buy furniture, appliances, or electronics at a retail chain store after agreeing in writing to pay for the goods purchased. Buy a vehicle and sign the lender’s loan document. Buy a home and sign dozens of mortgage documents.
In all these situations the creditor provides you money, goods, or services which you agree to pay for. At that point the creditor has finished performing its obligation. Now you are supposed to perform your side of the bargain—to pay the debt.
Executory Contracts and Unexpired Leases
Statutory Liens
Statutory liens on your home cannot be gotten rid of in bankruptcy like judgment liens often can. So it’s important to know what they are.
Statutory Liens Are Rare, Sort of
There’s a good chance you don’t have any statutory liens on your home. But you may.
- Has the IRS or your state recorded a tax lien against your home for unpaid income taxes?
- Have you had a dispute with a roofer or some other kind of building contractor resulting in a contractor’s or mechanic’s lien?
- Are you late on monthly dues or special assessments to your homeowner association, resulting in a lien against your condo?
These are the most common kinds of statutory liens on your home.
What Is a Statutory Lien?
The U.S. Bankruptcy Code says that “the term ‘statutory lien’ means [a] lien arising solely by force of a statute on specified circumstances or conditions.” (Section 101(53).) A statutory lien is essentially created automatically, by operation of a statute, without further action by a court.
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