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A means of resolving debt problems The Law Office of Julian Roberts.

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1 A means of resolving debt problems The Law Office of Julian Roberts

2 An Ancient Tradition Bankruptcy is an ancient tradition. Many centuries ago, the Israelites established the custom of the “Jubilee Year.” This special year occurred every fifty years and resulted in all debts incurred prior to that year being forgiven. (It was pretty hard to borrow money just before a Jubilee Year.)

3 Bankruptcy in England The laws of England form a basis for many of our laws in the United States. This is also true of our bankruptcy laws. England had a bankruptcy court on Carey Street in London to which many impoverished Britons applied. Penalties ranged from incarceration in debtors prison to the death penalty.

4 Bankruptcy Chapters Individuals –Chapter 7—Liquidation –Chapter 13—Adjustment of debts of an individual with regular income. Businesses (sometimes individuals also) –Chapter 11—Reorganization Municipalities –Chapter 9 Farmers –Chapter 12

5 Bankruptcy Roles Debtor: The entity (person, corporation) seeking relief. Trustees –U.S. Trustee. DoJ employee. Overseer. –Local Trustees. Chapter 7. Appointed by U.S. Trustee Chapter 13. Appointed by U.S. Trustee –Chapter 11. The Debtor is the Trustee Judge –Federal court judge specializing in bankruptcy.

6 Trustee Duties Chapter 7: Convert the non-exempt assets of the estate to money and pay creditors fairly. Chapter 13: Collect the Debtor’s plan payments and distribute them to the creditors. Be accountable for the property of the estate. Investigate the financial affairs of the Debtor. Examine proofs of claim and reject any that are improper. Object to the discharge of the Debtor if it is determined that there are irregularities.

7 Types of Debts Secured: Mortgages, etc., secured by the property. You can usually reaffirm secured debt and keep the property. Part may be unsecured. Priority: Debts to Government. IRS debts more than three years old and FTB debts more than 4 years old are unsecured. Tax returns must have been filed within two years. Part may be unsecured. Unsecured: Debts to unsecured creditors. Eliminated or paid partially (depends on ability, chapter).

8 Chapter 7 Most common type of bankruptcy proceeding. Trustee collects the non-exempt property of the Debtor, sells it and distributes the proceeds to the creditors. Exempt Property: –Under California Law, about $18,500 of the debtor’s property is exempt. –Retirement assets are exempted by the ERISA. Includes 401(k), etc. –There are a number of other exemptions.

9 Chapter 13 Allows debtor to use future earnings to pay off creditors. Trustee is appointed to supervise the assets of the debtor. Pay all secured and priority debts, and a percentage of unsecured debt. Allowed three to five years to pay. Debtor keeps all or most assets

10 Chapter 11 Not necessarily just for businesses Some non-business Debtors required to file Chapter 11 (effective April 1, 2010) –Gross assets greater than $1,081, –Gross unsecured debt greater than $360, More expensive to file than Chapters 7 or 13 Requires monthly operating reports, plan, etc. Debtor is in charge of assets but coordinates with Trustee May provide greater flexibility

11 Benefits of Bankruptcy Initiated voluntarily by a debtor or by creditors. Creditors, for the most part, may not seek to collect their debts outside of the proceeding. Creditors cannot call or otherwise harass the debtor. Court takes over any other legal proceedings. Eliminates Debt (7), gives you time to repay (13), or provides more creative solutions where needed (11).

12 Responsibilities of Debtor Debtor is not allowed to transfer property that has been declared part of the estate subject to proceedings. Certain pre-proceeding transfers of property, secured interests, and liens may be delayed or invalidated. In Chapter 13, make monthly payments beginning when filed. Chapter 11 responsibilities are extensive.

13 Some Effects of Bankruptcy How can bankruptcy hurt me? Obviously, bankruptcy is not easy or everyone would do it. Some of the worst negatives will be your inability to get new credit. Because a bankruptcy may stay on your credit report for up to ten years, if you are able to secure a new loan or credit card it will probably be at an extremely high interest rate. Lenders will see you as a bad credit risk and, until you can prove otherwise, you will have to pay for the privilege of getting and using credit. Can Bankruptcy affect my insurance rates? It could raise your insurance rates – some agencies factor in your credit rating when determining your rates Can Bankruptcy affect my job? It may affect being hired for a new job or promoted although it is illegal to discriminate against someone because of bankruptcy, you may be viewed as an irresponsible person and be passed over for promotion to someone who is equally qualified. These factors are especially important when the job involves handling someone else’s money.

14 (Not so) New Law (2005) The 2005 Bankruptcy Act requires all individual debtors who file bankruptcy on or after October 17, 2005, to undergo credit counseling within six months oif filing for bankruptcy relief and to complete a financial management instructional course after filing bankruptcy. This is usually accomplished by contacting an approved counseling agency. The process takes about thirty minutes.

15 The Means Test The idea was that Debtors who can pay some of their debts should do so. National standards are established by the US Trustee and identified by state of residence. Standards for California (March 15, 2010): (Add $7,500 for each individual in excess of 4) If income is greater than the standard, specific income and expenses must be evaluated. Doesn’t mean that eligibility is lost, just that other factors must be taken into account. 1 Person2 PEOPLE 3 PEOPLE 4 PEOPLE $47,969$64,647$70,638$79,194

16 Other Provisions Proof of Income: The Trustee must be provided with the Debtor’s most recent tax return. Must be for prior year unless an extension has been applied for and the filing is before October 15 th. State Exemptions: Two year residency is required to take advantage of state exemptions. Child Support and Alimony: Child support and Alimony payments first priority when dividing excess income.

17 Bankruptcy Fees (Paid to Court) Filing Fees –Chapter 7 $ –Chapter –Chapter 11 1, –Chapter 13 Conversion to Chapter –Amended Schedule D, E, F, Matrix –Reopening Chapter –Reopening Chapter Some other fees may apply.

18 Bankruptcy Fees (Paid to Attorney) Chapter 7(Paid in advance) $1, (Evaluation fee $ applied to overall fee) Chapter 13 (Local standards, Paid in installments) –Basic Fee $ –Additional Fees specific to case Compromise Plan Real Property Additional real property Motion to commence or extend automatic stay Federal or State Taxes Vehicle loans or leases Operating Business 1, Support Arrearages Student Loans More than 25 creditors

19 Effect on Credit Generally A bankruptcy stays on your credit record forever because a loan application asks “Have you ever filed bankruptcy?” Chapter 7 People who file Chapter 7 are considered to be a much more of a credit risk then those who file Chapter 13. Credit report: up to 10 years. Chapter 13 Less damaging. Five to seven years. Chapter 11 Most lenders don’t understand.

20 California Exemptions Homestead Exemption (CCP ) $75,000 basic exemption. $100,000 if debtor who resides in the homestead is a member of family unit, and one member of family unit owns no interest in the homestead or only interest is community property interest with judgment debtor. $175,000 if judgment debtor or spouse is: –A person 65 years of age or older. –Physically or mentally disabled, unable to engage in substantial gainful employment. Usually qualified if receiving SSI disability payments.. –55 years of age or older with income of not more than fifteen thousand dollars or married, income, including spouse, of not more than twenty thousand dollars. Combined exemptions can’t exceed applicable separate exemptions. If both spouses are entitled to exemption, the exemption of proceeds of the homestead apportioned between spouses on the basis of their proportionate interests in the homestead. Applies to leaseholds with less than two years remaining (CCP )

21 California Exemptions (CCP ) $17,425 real or personal property, cooperative, or burial plot debtor or dependent uses as a residence. $2,775 in one motor vehicle. $450 in any particular item primarily for personal, family, or household use of debtor or dependent. $1,150 jewelry. $925 plus any unused amount of the $17,400 exemption in any property. $1,750 in implements, professional books, or tools of the trade of the debtor or dependent. Unmetered life insurance contract owned by the debtor, other than a credit life insurance contract. $9,300 accrued dividends, interest, or loan value of unmatured life insurance owned by debtor where insured is debtor or owned by individual of whom the debtor is a dependent. Professionally prescribed health aids for the debtor or a dependent of the debtor.

22 California Exemptions (CCP ) Debtor's right to receive any of the following: –Social security, unemployment compensation, or local public assistance benefit. –Veterans' benefit. –Disability, illness, or unemployment benefit. –Alimony, support, or separate maintenance, reasonably necessary for the support of debtor and dependents Debtor's right to receive, or property traceable to, any of the following: –Award under a crime victim's reparation law. –Payment on account of wrongful death of an individual of whom debtor was dependent reasonably necessary for support of debtor and dependents of debtor. –Payment under a life insurance contract on life of an individual of whom debtor was dependent on the date of individual's death, reasonably necessary for the support of the debtor and dependents of debtor. –$17,425 personal bodily injury, excluding pain and suffering or compensation for actual loss, of debtor or an individual of whom the debtor is a dependent.

23 California Exemptions (CCP Debtor's right to receive: (continued): –Payment under stock bonus, pension, profit-sharing, annuity, or similar plan or contract on account of illness, disability, death, age, or length of service, reasonably necessary for the support of the debtor and dependents unless: Plan or contract was established by or under the auspices of an insider that employed the debtor at the time the debtor's rights under the plan or contract arose. Payment is on account of age or length of service. Plan or contract does not qualify under Section 401(a), 403(a), 403(b), 408, or 408A of the Internal Revenue Code of Compensation of loss of future earnings of the debtor or individual of whom the debtor is or was a dependent, to the extent reasonably necessary for the support of the debtor and dependents of the debtor.

24 Special Considerations Concerning real property –Relief from stay (filed by creditor) –Motion to value (filed by debtor) –Motion to dismiss (filed by trustee) Failure to make payments (chapter 13) Failure to file documents Failure to comply with court orders Failure to get credit counseling after filing

25 Relief from Stay Motion filed by a creditor. Typically applies to home or automobile loans. Asks court to release the automatic stay so the creditor can take the property. Important Factors: − Pre-petition arrearage. − Post-petition deficiencies. − Ability to make payments. − Equity in collateral

26 Summary Bankruptcy is set of laws passed by the U.S. Congress to help people get out of debt problems. A “fresh start.” The automatic stay applies to all creditors. The idea is to get some breathing time to work out financial difficulties. Creditors also have certain rights. Bankruptcy is not for everyone, but can help in many circumstances.

27 Expectations Attorney and staff –Help in working out details of filing. –Accurate completion of bankruptcy forms. –Representation at meeting of creditors and court as required. –Timely status. Debtor –Complete and truthful information even if unflattering. –Quick response to requests for information. –Timely payment of fees.


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