Memphis Bar Association

Bankruptcy-Part 2

Courtesy of attorney Bruce Ralston and www.memphisbankruptcylawyer.com

What Property Can I Keep?

This may seem to be a simple question, but the answer depends on several factors, the most important of which are usually based on your needs and desires.  First of all, there is often a big difference between chapter 7 and chapter 13. In chapter 13 you can always keep everything that you want to keep as long as you can pay for it (often at a lower rate than before), so the rest of this section will only discuss chapter 7, where the danger of losing something that you would rather keep is considerably greater than in chapter 13.

In chapter 7 there are two separate entities that must be considered: secured creditors and the trustee. You already know that in the real world secured creditors, such as mortgage companies and automobile finance companies, can repossess their collateral if you default on the loan. That is also true in Bankruptcy World, but at the very least bankruptcy delays the repossession process, and it often gives you more options than you would otherwise have.  Just as in the real world, they won’t repossess your car or foreclose on your home if you are current on the payments (or if you can catch up very quickly), so don’t worry about the creditor taking away your home or your car if you are current on the payments. They want your money; not your property. They will always agree to let you keep the property if it won’t cost them any money. But the farther you are behind in the payments, the less likely it is that the creditor will let you keep something if you file chapter 7.

 Like everything else in Bankruptcy World, there are exceptions to this rule. On the one hand, there are many situations where you can keep something that serves as collateral for a debt, sometimes by paying only part of what you owe, and in some cases you don’t have to pay anything. On the other hand, there are a few illogical creditors who will take something just because they can, even though it actually costs them money.

The other person that might want to take your property is the chapter 7 trustee. The trustee is the middle man (or woman) in every bankruptcy case. In Memphis the trustees are all private attorneys who have been appointed to this position. Every chapter 7 case is randomly assigned to one of these trustees. His or her job is to review all of the paperwork and to do some basic limited investigation on their own cases. In more than 95% of all chapter 7 cases all they do is review the paperwork, ask you a few questions, and close their file. It shouldn’t be surprising that most people who file chapter 7 don’t have anything worth taking.

However, there are times when a chapter 7 debtor does have something worth taking, and there are the rare instances when a chapter 7 debtor has hidden a valuable asset, or maybe even was not aware that they had something of value, such as an inheritance or a personal injury claim. The trustee’s primary job is to look for anything that can be turned into money, and then to use that money to pay off some part of this person’s debts. The trustees gets a small percentage of the money that goes to creditors, so they have a financial incentive to look for valuable property. The things that they always look for are real estate, vehicles, lawsuits that the debtor might have a right to pursue against someone else, and of course, money in any form, such as bank deposits, large tax refunds, inheritances, and actual cash. (No, they almost never actually come to your house looking for money or valuable things, but they do ask precise questions under oath, and someone caught hiding anything or telling a lie could actually go to prison!)

So can the trustee just take anything she wants to take? Absolutely not.  More than anything, most trustees are practical people. They are private attorneys and this is how they make a living. They aren’t going to waste their time taking stuff that they can’t sell for more than it would cost to take it and sell it. In my experience, most of my clients don’t have many things that are worth enough to cover the cost of their own sale, and if they do, they are still paying for them so there is little or no equity for the trustee to take.

There is a longer discussion about equity later in this paper. In a nutshell, if the trustee takes something that serves as collateral on a loan, that creditor must be paid in full before the trustee gets anything. If a car is worth $10,000 (wholesale), but you still owe $11,000 on it, then the trustee has no reason to take it, because she’s not going to end up with any money in her hands after paying off the finance company. She could even end up owing them some money, and she’s not going to take that chance unless she’s pretty darn certain that won’t happen.

Most of your things are also protected by “exemptions.”  The next section will explain exemptions in more detail.

 What Are Exemptions, and What Do They Do?

It is important to understand that exemptions are different in every state.  The information provided in this flyer only applies to cases that are filed in Tennessee by residents of Tennessee. People who live in other states, or who recently moved from one state to another, should consult with an attorney in your area for specific answers to this question.  Whatever happens, please do not assume that you will get the same result as someone else, regardless of where they filed.

In a chapter 7 case the trustee cannot touch any property which the law says is “exempt” from the claims of creditors.  This is not usually a concern in chapter 13 cases, but having unexempt property can cause your plan payments to be higher than they otherwise would be.  For Tennessee residents who file bankruptcy in Tennessee, the basic exemptions are:

  • 4,000.00 for anything other than real estate that is in your possession. This includes cash, money in the bank, household goods, furniture, appliances, electronics, vehicles and other personal items. For a married couple filing jointly this exemption is doubled to $8,000.00.

  • 100% of all reasonable clothing, suitcases, trunks, school books, family pictures and family Bible. (Note: this does not include jewelry or expensive items such as furs.)

  • 100% of all “qualified retirement accounts,” even if there is $1 million or more set aside.  This includes all retirement accounts that are set up by city, county or state employers, all true IRA’s and 401(k) accounts; and most other retirement accounts under IRS Code sections 401 and 403. (This is one reason why it can be a big mistake to cash out or borrow from your retirement account before consulting a bankruptcy lawyer.)

  • 100% of all benefits from Social Security and/or a workers compensation award;

  • $1,900.00 for “tools of the trade” (basically anything that you use to earn money: tools; books, computers; office equipment; etc.). For a married couple filing jointly this exemption can be doubled, assuming both spouses own the tools;

  • $7,500.00 for personal injury claims. This can be doubled to $15,000 if you happen to have two separate claims, or if a husband and wife both have such claims. This exemption only applies to your share of the claim, which is typically whatever is left after your medical bills are paid and your attorney’s fees are taken out;

      * Homestead (real estate that you own and that serves as your present home):
      -  $5,000 for a single debtor
      -  $7,500 for a married couple who file jointly and who both own the house
      -  $12,500 for a single debtor who is over the age of 62 on the day that the petition is filed
      -  $25,000 for a married couple who file jointly and both of whom are over age 62
      -  $20,000 for a married couple who file jointly when one of them is over age 62 and one is under age 62
      -  $25,000 for an individual debtor with at least one minor child at home, or in their custody. (It has not yet been determined whether a married couple filing jointly would get to double this exemption to $50,000, but they probably would.)
     -  Please note that there is no exemption for real estate that is not your home on the day your case is filed. 

Some important details about exemptions:

-  For most purposes, we go by the fair market value for this item in this area in its present condition. In other words, how much you could sell it for if you had to sell it quickly?  For real estate and automobiles it is fairly easy to look up the values online, but for most other things you should think in terms of “yard sale” value. Think of it like this: If you were shopping for this particular item, and if you saw it at a stranger’s yard sale, how much would you pay for it? For most things, you probably would not pay very much, because you don’t know where it has been or how it has been used.

-  To put it another way, for bankruptcy purposes, the value of property is usually not the amount that you originally paid for it, or how much it would cost to replace it, or how much an insurance company might pay if it was lost in a fire. We have to think in terms of how much money something would turn into if we had to sell it quickly.

-  This does not mean that your things are going to be taken away from you. This is simply the thought process that we have to use. As long as you list your assets, in most cases you get to keep everything, or almost everything.

-  You only need to look at the equity in your property, and then subtract the exemption from that.  “Equity” is the money that would be left after selling your property and paying off the debt on that property. For instance, if you own a $50,000 house with a $40,000 mortgage, your equity is $10,000. As noted above, a single person under the age of 62 gets a $5,000 homestead exemption, so in this example that leaves $5,000 of equity exposed. A married couple (both under the age of 62) filing jointly gets a $7,500 exemption, so there would be $2,500 of exposed equity in that example. For anyone with minor children or anyone over the age of 62 there would be more than enough exemptions to cover all of the $10,000 equity in this example.

While your exemptions allow you to keep property even in a chapter 7 case, your exemptions do not make any difference to the right of a mortgage holder or car loan creditor to repossess their collateral.  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 mortgage as you would if you didn’t file bankruptcy (with extra time to catch up on delinquent payments). There are a few different ways to treat a car loan in chapter 13, but as a rule if you keep the car you will have to make significant payments to that creditor.

 You do not have to keep property if you don’t want to. There are times when the car is no longer worth paying for, or you simply don’t need it, or maybe you can’t afford it. We are now seeing a lot of cases where mortgage rates are adjusting upward to a point where people can no longer afford to make the payments. In those cases you can simply give the property back to the creditor after the bankruptcy is filed. They will sell the property for as much as they can get for it. In chapter 7 that will be the end of it as far as you are concerned, because even if they don’t sell it for enough to pay off the entire debt the remaining deficiency is discharged along with all of your other debt. In chapter 13 you may still have to pay all or part of the deficiency, depending on the circumstances of your case.

Can I Own Anything After Bankruptcy?

Of course!  Many people believe they can not own anything for a period of time after filing for bankruptcy.  This is not true.  You can keep your exempt property and anything you obtain after the bankruptcy is filed.  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.

Will Bankruptcy Wipe Out All My Debts?

It depends on what kinds of debts you have, and whether you want to keep certain things. The bankruptcy discharge applies to just about any kind of debt that you can imagine, but there are some exceptions.  Bankruptcy will not normally eliminate the following debts:

1. money owed for child support or alimony, court fines, and some taxes;

2. debts not listed in a chapter 13 petition (but in most chapter 7 cases unsecured debts are discharged even if they are not listed in your 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, such as injuries that arose from intentional acts, or from accidents caused by someone who was under the influence of alcohol or drugs;

5. most student loans, unless 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 repossessed or foreclosed by the creditor, or if you voluntarily surrender it to the creditor).

Will I Have to Go to Court?

In most bankruptcy cases, you only have to go to a proceeding called the “meeting of creditors” to meet with the bankruptcy trustee and any creditor who chooses to come.  Most of the time no creditors appear, in which case this meeting will be a short and simple procedure where you are asked a few questions under oath about your bankruptcy forms and your financial situation.

Occasionally, if complications arise, or if you choose to dispute a creditor’s claim, 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.

What Else Must I Do to Complete My Case?

After your case is filed, you must complete an approved course in personal finances.  This course may take as much as two hours to complete.  Your attorney can give you a list of organizations that provide approved courses, or you can check the website for the United States Trustee Program office at www.usdoj.gov/ust .  In a chapter 7 case, you should sign up for the course soon after your case is filed.  If you file a chapter 13 case, you should ask your attorney when you should take the course. 

How Will Bankruptcy Affect My Credit?

There is no clear answer to this question.  If you are already behind on your bills, your credit will be bad anyway.  Bankruptcy will probably not make things any worse, and if you can rebuild your credit within a few years on your own bankruptcy could actually give you a solid starting point for cleaning up your record. 

The fact that you’ve filed a bankruptcy can appear on your credit record for ten years.  Because bankruptcy wipes out your old debts, you are likely to be in a better position to pay your current bills, and you may be able to get new credit. But please don’t think of credit as your friend. It is not your friend, and neither are your creditors. Credit is a business relationship, and nothing more. Treat it like a business.

What Else Should I Know?

Utility services--Public utilities, such as the electric company, can not refuse or cut off service because you have filed for bankruptcy.  However, if your bankruptcy case directly affects the utility company they can require a new deposit for future service. In any event, you absolutely must pay all utility bills which arise after bankruptcy is filed, just as you would otherwise.

Discrimination--An employer or government agency can not discriminate against you because you have filed for bankruptcy. In other words, your employer cannot fire you for filing bankruptcy, and you cannot be denied government benefits.

Driver license--If you lost your license solely because you couldn’t pay court-ordered damages caused in an accident, or because you have outstanding tickets, fines and/or court costs, bankruptcy may open the door to reinstating your license.

Co-signers--If someone has co-signed a loan with you and you file for bankruptcy, the co-signer may still have to pay your debt.  If you file a chapter 13, you may be able to protect co-signers, depending upon the terms of your chapter 13 plan.

How Do I Find a Bankruptcy Attorney In My Area?

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 to 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 the case.

If you need to look farther, I suggest that you go to www.nacba.org and use the “Attorney Finder” link on the main page of that web site.  It will allow you to search by city, state, zip code or the name of a certain attorney.  Membership in NACBA is limited to attorneys who primarily represent consumers in personal bankruptcy cases.  There are members of NACBA in every state and territory, so you should be able to find an experienced attorney nearby.

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.

Document preparation services also known as “typing services” or “paralegal services” involve non-lawyers who offer to prepare bankruptcy forms for a fee.  Problems with these services often arise because non-lawyers can not 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?

  • What are your goals in filing the case?

Can I File Bankruptcy Without an Attorney?

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 in one sense, but they also involve more risk if you own (or have rights to) anything of significant value.  Very few people have been able to successfully file chapter 13 (debt adjustment) cases on their own because the plan process is complicated.

Remember:  The law often changes.  Each case is different.  This pamphlet is meant to give you general information and not to give you specific legal advice. Do not assume that this pamphlet covers your situation.

 

Additional resources for information regarding bankruptcy and other areas of consumer protection:

 National Consumer Law Center - 617/542-8010, http://www.nclc.org , www.nclc.org/advice/consumer_info.shtml

National Association of Consumer Bankruptcy Attorneys - www.nacba.org/tips.php

 National Association of Consumer Advocates - www.naca.net/know-your-consumer-rights/

Nolo Press - www.nolo.com

Bankruptcy Law Network - http://www.bankruptcylawnetwork.com/

Return to Bankruptcy Questions Part 1 

 DISCLAIMER:  The preceding appears courtesy of Bruce Ralston and www.memphisbankruptcylawyer.com, whose contributions toward its content are greatly appreciated.  However, the summary explanations above are for general informational purposes only and are not intended as legal advice.  No attorney-client relationship is created herein.  As each is unique, specific legal advice should be sought for each situation in which legal advice may be warranted.

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Debtor/ Creditor Rights

 The below is courtesy of attorney Bruce Ralston and www.memphisbankruptcylawyer.com

If you receive a suit for a debt, I understand it is civil, but if a judgement is issued, can your Social Security check be attached for payment of the debt? If it is a credit card debt, does the judge ever find in favor of the original debt or will he/she go with the full amount with all the extra interest and late fees?

In the first place, if you are being sued by anyone other than the actual credit card company then there is a very good chance that you can win the lawsuit, or at least have it dismissed (which is not as good as winning, but it’s a lot better than losing). There are many companies who buy defaulted accounts from credit card banks, or car finance companies, or other lenders, and then try to collect. They often sue the wrong person, or sue someone whose debt has already been paid off, or discharged in bankruptcy, or settled in compromise, or is beyond the statute of limitations. In some cases if you can prove one or more of those facts then not only can you win the lawsuit, but you can turn around and file suit against them.  Even if you are being sued by the actual credit card bank or a local finance company there is still a good chance that you can compromise on the amount owed, rather than just agreeing to the amount that they are claiming.

To look for an attorney near you who handles this sort of thing, go to www.naca.net (National Association of Consumer Advocates) and click on the link labeled “Find an Attorney.”  Then click of the folder labeled “Debt Collection,” and check any boxes which seem to apply to your situation. Then pull down the menu on the left to find attorneys in your state who match your selections. Many private attorneys charge little or nothing for dealing with debt collectors, but most will require a fee to defend an actual lawsuit.

If that doesn’t work, or if you believe that you might qualify for free legal services, you should contact your local Legal Service or Legal Aid office. In Memphis and West Tennessee, you can contact Memphis Area Legal Services (www.malsi.org ) at 901-523-8822 or the Community Legal Center at 901-543-3395.

To answer your specific questions:

  1. Social Security benefits can never be directly garnished for anything except child support and certain kinds of taxes. Social Security funds are protected from creditors even after you receive them as long as you can prove that it came from Social Security, and nothing else. If you keep your Social Security money in a bank account you must be careful to NEVER deposit anything else into that account. If a creditor tries to garnish that account you can stop them or get the money back. But if there is one cent of money from anything other than Social Security in that account then there is no protection for any of it, so don’t cash anyone else’s checks from them out of that bank account, and if you have any other source of income, or if your spouse, parent or child has any other source of income, open up a separate bank account for those other purposes. (Note: you only need to open a separate account if there is a danger of someone garnishing your account.)

  2. It is possible to persuade a judge to reduce the amount, but unless you have your own attorney I wouldn’t count on that happening. Most of the time you either win or lose. If you win you owe nothing. If you lose, they get a judgment for the full amount. If the case is dismissed, you win in the short run, but there is a very good chance that they will start bothering you again, or that they (or another debt buyer) will sue you again, or both.

 DISCLAIMER:  The preceding appears courtesy of Bruce Ralston and www.memphisbankruptcylawyer.com, whose contributions toward its content are greatly appreciated.  However, the summary explanations above are for general informational purposes only and are not intended as legal advice.  No attorney-client relationship is created herein.  As each is unique, specific legal advice should be sought for each situation in which legal advice may be warranted.

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