10 Steps to Filing a Bankruptcy Case

Filing a case with the Bankruptcy Court can seem complicated and daunting, but it doesn’t need to be that way.   Here are 10 steps to filing a bankruptcy case to help you know what to expect.  I’m providing this list in the hope that if you know what’s in store for you, it’ll be less confusing and stressful.  Of course, this list is no substitute for being represented by a lawyer.  (I would never, ever recommend that you consider that you try filing bankruptcy without a lawyer, and so that is #1 below.)  As you review this list, you’ll see that there are one or two “heavy lifting” items that your lawyer has to do, but that most of it is comprised of information that you have to provide.  Fortunately, providing the information is not too difficult: pulling a few documents from your bank or employer, plus a few online searches, should do it.

Also, be aware that this is just a list of PRE-filing items.  Once the case is filed, there will be a few more things for you to do.  Fortunately, in a consumer bankruptcy case, most of the “big picture” decisions are made before the case is filed.

Here are the basic pre-filing steps:

  1. Get a Lawyer: This is absolutely the first step.  Please don’t try to file a bankruptcy case without a lawyer.  There are many documents to be filed with the Court, and if you fail to do so, your case will be dismissed.  If your case is dismissed, a subsequent case becomes much more difficult.  Moreover, the documents you file with the Court should present a coherent picture to the judge and the trustee.   What are you trying to accomplish with your case? Are your assets protected from liquidation?  How much are your creditors entitled to receive? These are all basic questions that should be very clear from a well-drafted bankruptcy petition.
  2. Determine Your Income: How much money do you make?  From what sources? (e.g. employment, business, social security, retirement, rental, etc.)  How much money did you make in each of the past 6 months? Is there going to be a change in the immediate future?  The answers to these questions are used in the Means Test, which determines whether you are eligible to file a Chapter 7 case, or how much creditors must receive in a Chapter 13 case.
  3. Break Down Where Your Money Goes: You have the same ordinary & typical expenses that everybody has: housing, groceries, cell phone, gas, car insurance, things like that. But you also have expenses that are unique to you.  Are you making payments on student loans?  A payment plan to the IRS?  Domestic support?  Medical expenses? Care and support of a family member? The answers to these questions are also taken into consideration in the Means Test.
  4. List your assets: Do you own any real estate? A business?  Vehicles? Retirement accounts? These are the big items a person usually thinks of as assets, but there are other, easily overlooked items: Does anyone owe you money? Are you the beneficiary of any trust? Do you have life insurance with a cash value? A security deposit with your landlord? An anticipated tax refund?
  5. List and categorize your debts: Who are all the people in the world who say you owe them money?  I think of them as falling into 4 categories: 1) General unsecured debt: credit cards, personal loans, medical bills, deficiencies on repossessed vehicles, etc. 2) Secured debt: generally, mortgages and car loans. 3) “Priority” debt: Debts owed to the government, such as recent taxes, domestic support arrears, fines and penalties. 4) Student loans.
  6. Be aware of potential pitfalls: Are you a married person filing without your spouse? Do you own a business? Have you incurred any new debt recently? Is anyone suing you, alleging fraud?  Have you transferred any property to, or have you paid off, any family members or business partners?  Have you filed previous cases in the past?  These are examples of the kind of thing that can very quickly make a bankruptcy case very complicated.
  7. Figure out what kind of case is right for you: This is a very big decision, and one you probably can’t make without the help of a lawyer. This is probably the first thing any lawyer you speak with is trying to figure out, and it should probably be #2 in this list, except that no lawyer will be able to give you an answer until the answers to numbers 2-6 have been fleshed out.  Just be aware that for most people, there are two kinds of cases, Chapter 7 and Chapter 13.  If you have modest income and modest assets and entirely unsecured debt, Chapter 7 is almost certainly better for you.  If you are trying to stop a foreclosure, Chapter 13 is almost certainly better for you.  However, most people are in between, and there are pros and cons to each kind of case, and you need a lawyer to help you figure it out.
  8. Take your pre-filing class: Everyone who files a bankruptcy case has to take 2 classes, one before you file, one after. People typically take them online.  They take about 2 hours each.  If you don’t take the pre-filing class, your case gets dismissed.  If you don’t take the post-filing class, you don’t get a discharge.  The certificate showing you took the pre-filing class must be attached to the petition when you file your case.
  9. Prepare the petition, schedules, and other documents: A typical consumer bankruptcy filing consists of around 40 to 60 pages.   Much of the information contained therein is comprised of the income, assets, expense, and debt information discussed above.  You have to swear under penalty of perjury that it is all true and accurate.  As mentioned above, it is especially important that the documents present a coherent picture.
  10. Pay the filing fee and file the case: As of today, filing fees for a Chapter 7 case are $335, and $310 for Chapter 13.  Most bankruptcy lawyers will file your case electronically, although it is possible to go to the clerk and file paper documents.  In my practice, I do not file “skeleton petitions” (just a couple basic documents, with the rest needing to be filed later) unless it is absolutely necessary.  And if you have done all the preparatory work listed above, it generally will not be necessary.

That’s it.  Filing a bankruptcy case shouldn’t be confusing or scary.  The hardest parts will probably be meeting with, paying, and getting documents to your lawyer.  Don’t worry; most bankruptcy lawyers do this kind of work because they want to help people.  They won’t bite.  Perhaps more importantly, as lawyers, they have ethical obligations to you that other people don’t (such as debt consolidators and “foreclosure prevention” realtors).  In my practice, initial consultations are free.  If you need help, call or email me today.

Fremont Main Library Presentation (Tues., April 11 at 7:00 PM) – Filing Bankruptcy: What It Really Means and How It Helps

Please join me at the Fremont Main Library on Tuesday, April 11, 2017 at 7:00 PM for a presentation I’ll be giving on “Filing Bankruptcy: What It Really Means and How It Helps.”

This presentation is part of the library’s Smart Money Week. It’s designed to inform, answer questions, and dispel myths about the bankruptcy process. I really love doing programs like these because they’re a chance to connect with people who might be unsure about calling to schedule a consultation. Topics to be covered include:

Using income, assets, expenses, and debts to predict your case’s outcome
The differences between Chapter 7 and Chapter 13
What can disqualify you from filing a case
What the Court’s protection covers
What assets you can keep
When not to file (or wait)
The Fremont Main Library is at 2400 Stevenson Blvd Fremont, CA 94538. Presentation will last 90 minutes.

Link to program announcement: http://bit.ly/2mTIwIj

In re Rosa: Chapter 20 Stripped Liens Are Not Allowed Unsecured Claims

As discussed on this site, “lien stripping” is a common occurrence in Chapter 13 cases, and can provide an enormous benefit to Debtors. The idea is that if there is more than one lien against a piece of real estate, and that piece of real estate is worth less than the amount owed on the first lien, there is no equity remaining to secure the junior lien(s). It is therefore “stripped” and treated like general unsecured debt (i.e. it is dischargeable).

As also previously discussed, a “Chapter 20” case is when a person files a Chapter 7 case, shortly followed by a Chapter 13 case. There are many reasons why a person might do this, but usually it’s because he or she has too much unsecured debt to qualify for Chapter 13. You file a Chapter 7 case, get rid of all the unsecured debt, and then file the Chapter case, often to strip a junior lien (which is not available in Chapter 7 under the Supreme Court’s Dewsnup decision).

Back in 2012, the North case became the local precedent establishing that a Debtor in a Chapter 20 case could indeed strip junior liens, even though there was no discharge in the second, Chapter 13 case. Now in 2015, In re Rosa has become the local precedent establishing that stripped liens are not allowed unsecured claims.

Are Chapter 20 stripped liens allowed claims?
Diana Rosa filed a Chapter 7 case in 2012. After receiving her discharge, the only debt she had left was a $700,000 mortgage against a house worth $350,000 ($44,000 in arrears), a $84,000 second mortgage to EMC, $8,500 owed to the IRS, and $300 in general unsecured debt. She then filed a Chapter 13 case, in which she stripped the second mortgage and proposed a Plan that would pay the IRS and the unsecured debt in full. As to the arrears on the first mortgage, the Plan stated that she was seeking a loan modification.

All parties agreed that Rosa’s personal liability on the second mortgage had been discharged in the Chapter 7 case, and that EMC’s in rem rights were extinguished when the lien was stripped. However, the Chapter 13 Trustee objected to the Plan, contending that EMC held an unsecured claim that needed to be paid in full.

The Chapter 13 Trustee cited Akram from out of the Central District (259 B.R. 371, 2001) and Gounder from out of the Eastern District (266 B.R. 879, 2001) to support the position that EMC held an allowed unsecured claim. As to Akram, the Court rejected what it called that decision’s “attempt to circumscribe the power of the discharge injunction.” As to Gounder, the Court rejected that decision’s conversion of the discharged junior mortgage into an unsecured claim against the Chapter 13 estate: if there is no claim against the debtor, there can be no claim against the estate. Additionally, the is no language in §506(a)(1) converting a nonrecourse claim into a recourse obligation. As to both decisions’ argument that holding otherwise would create a back door around Dewsnup’s prohibition on Chapter 7 lien strips, the Court held that such arguments are better suited for bad faith objections.

Ms Rosa case was allowed to proceed and her Plan was confirmed with EMC receiving anything. If she completes her Plan, that second mortgage will be gone forever. A very technical case indeed, but very good for debtors: the upshot is that Chapter 20 lien strips continue to be alive and well here in the Northern District of California.

Lien Stripping in Chapter 13 (Bankruptcy Basics)

What Does It Mean to “Strip” a Lien in a Chapter 13 Case?
Simply put, if you own a piece of real estate, and there’s more than one mortgage on that real estate, and the value of the property is less than the amount owed on the first mortgage, and you file a Chapter 13 bankruptcy case, the idea is that there is no equity present to secure the second mortgage. Therefore, the second lien is “stripped,” and the second mortgage is treated like unsecured debt (like credit cards and medical bills). The benefit of having that mortgage treated like unsecured debt is that it becomes subject to discharge and allowing you to pay less than 100% of the amount owed. It’s important to note that the principle applies to all subsequent liens, e.g. HELOCs and HOA liens.

Lien Stripping in Chapter 13 in More Detail
Many homeowners have more than one mortgage on their homes. And depending on the vicissitudes of the residential real estate market, many homes are worth less than what the homeowners owe on them. That means that if a lender foreclosed on a house and sold the house at auction, there wouldn’t be enough money to pay off all of the lenders. Bankruptcy law has a process where homeowners who owe more on their home than it is worth can have a second mortgage striped away or wiped out by the order of a bankruptcy court.

Not all debts are considered equal in bankruptcy. Some debts are given a higher priority than other debts. In the case of real estate the earliest recorded lien is given the highest priority by the court. For most homeowners this means that a first mortgage will be a higher priority debt than a second or third mortgage. Because there are never enough assets to pay all creditors back in full, the court gives priority debts the first chance at getting paid back. Debts with lower priority are often completely erased, with the creditor not getting anything.

A mortgage is the most common type of lien that can be entered against real estate, but there are other types of liens such as from a court judgment or an HOA lien. Lien striping works for more than just mortgages, but may be limited in certain situations such as cases where a divorce judgment has created a lien.

The Difference Between Secured and Unsecured
Debt can either by secured or unsecured. Secured debt means the debt is attached to something particular. A mortgage is a secured debt because it is backed by the real estate. The creditor has the right to foreclose if they are not paid. But, when there are multiple mortgages on a home and the fair market value of the home is less than the amount owed on the mortgages, some of the mortgages are not secured by the house. The rule for these mortgages is that if the house were sold and there would not be enough money to pay off the first mortgage, all the other junior mortgages are wholly unsecured.

Lien stripping allows a court to erase the wholly unsecured mortgage.

Not All Bankruptcies Work the Same
If you are behind in your house payments or are facing foreclosure the only way to protect your house in most circumstances is to file for a Chapter 13 bankruptcy. A Chapter 13 bankruptcy allows the court to restructure your debts so that you can pay off the highest priority debts, such as a first mortgage, while lower priority unsecured debts are often erased.

Usually a Chapter 7 bankruptcy will not work to save a house because Chapter 7 is not about restructuring your debt and is instead about liquidating certain assets and paying off as many creditors as possible before erasing the rest of the debts.

However, every case is unique. If you are having difficulty staying current with your house payments, you need to get expert advice. You may be able to benefit from a bankruptcy that lets you keep your home and strips off other liens. Don’t wait to get good legal advice until its too late. Contact a bankruptcy lawyer today.

Considering Converting from Chapter 13 to Chapter 7 with Appreciated Real Estate? Think VERY Carefully

This is an extremely timely and relevant issue here in the Bay Area/Northern District of California, where I practice. If you filed a Chapter 13 bankruptcy case more than a year or two ago, and owned any real estate, the value of that real estate was probably very low at the time; the market hit bottom somewhere around early 2012. But what a difference a couple of years makes! The last couple of years has seen an enormous explosion in the local residential real estate market. So enormous in fact, that housing values are now at or above their pre-crash peak. Your home is probably worth significantly more now than it was back then.

So let’s say you filed a Chapter 13 case back in 2013. Your house was worth significantly less back then, and maybe you were “underwater.” If that was so, had you filed a Chapter 7 case, a Chapter 7 trustee wouldn’t have been very interested in your house. (Chapter 7 trustees make their money by liquidating valuable assets for the benefit of creditors.) Let’s also say that now you want to get out of court Chapter 13 case, sell your house, and reap your profits. Can you do that? Can you convert to Chapter 7, get a discharge, and move on? The answer to that question depends on the answer to another question: If you convert, who gets that appreciated value, you or the Chapter 7 trustee?

Prior to the 2005 changes to the Bankruptcy Code, the answer to that question was very clear: On conversion, post-filing appreciation is yours. And in the years since then, few had even bothered to ask the question of whether that rule was altered by the 2005 changes. (In a down market, there was no point.) But now, with a hot real estate market, Chapter 7 trustees are starting to look into it.

The theory being put forward in certain quarters revolves around the interpretation of § 348(f)(1) of the Bankruptcy Code. § 348(f)(1)(A) says that “property of the estate in the converted case shall consist of property of the estate, as of the date of filing of the petition, that remains in the possession of or is under the control of the debtor on the date of conversion.” In other words, whatever interest the debtor had in the property on the date of filing, that’s what the Chapter 7 trustee gets on conversion. That was the rule pre-2005, and it’s still the rule as most courts understand it.

However, proponents of this new theory argue that § 348(f)(1)(A) has to be read in conjunction with § 348(f)(1)(B), which was substantially altered by the 2005 changes. It used to read: “valuations of property … in the Chapter 13 case shall apply in the converted case”. However, post-2005, it now reads: “valuations of property … in the Chapter 13 case shall apply only in a case converted to [Chapter 11 or 12], but not a case under Chapter 7.” The proponents argue that the Chapter 7 trustee doesn’t get whatever interest the debtor had at the time of filing; she gets the thing itself, and the value of her interest is that of the conversion date. It basically turns the existing rule on its head.

This is by no means an accepted position; as of the date of writing (June 30, 2015), I know of no caselaw clearly and cleanly adopting this position. (Indeed, one court, the Bankruptcy Court for the Eastern District of Tennessee, in In re Hodges, 518 B.R. 445, declined to directly accept this theory.) A Chapter 7 trustee may well face an uphill battle convincing a court to reverse current interpretations of law. But this is not a frivolous argument, and at least one of the Oakland Chapter 7 trustees has stated that she intends to use this theory to pursue the asset if a case with this situation is assigned to her. If one of the trustees is looking into it, you can bet the others are, too.

Where does that leave you if you’re in such a situation? Simply put, don’t convert. Not now anyway. You don’t want to be a test case. Yes, the trustee may have an uphill battle in making this argument, but if she wins, your house will be liquidated and your appreciated value will be taken too. The risk is just too great.

If you are a homeowner in a Chapter 13 case and are considering converting to Chapter 7, be very careful, and be sure to ask your attorney if he or she is familiar with this issue.

What Happens to My Property if I File a Bankruptcy Case?

When you file for any kind of bankruptcy a bankruptcy estate is created. This is a legal concept that means some of the property you own is under the control of the bankruptcy court while your case is processed. In a Chapter 7 bankruptcy typically almost all of your property or assets are part of the bankruptcy estate. Different chapters of bankruptcy have different effects.

Does that mean if I file bankruptcy I lose everything?
The bankruptcy court administers the property in the bankruptcy estate, but you remain the owner of all of the property unless the court enters an order for you to sell or turnover some property. All of the property in the bankruptcy estate is also sheltered from creditor actions by the automatic stay.

If you owned a car, but were behind on the payments and you filed for bankruptcy the creditor would not be allowed to repossess the car because of the automatic stay. The car would be a part of the bankruptcy estate. But, the court would ultimately decide whether or not you got to keep the car based on a variety of factors.

Most people who file for bankruptcy find that they do not lose anything because the value of their assets is so low.

Can I sell my property during a bankruptcy?
While you remain the owner of the property during a bankruptcy, the bankruptcy court controls all of the property that is part of the bankruptcy estate. You are not allowed to sell any of the property that is part of the bankruptcy estate without the prior approval of the bankruptcy court. Usually, the bankruptcy court appoints a trustee to monitor the administration of the bankruptcy estate. The bankruptcy trustee is charged with making sure the creditors get what they are legally entitled to.

This means that if you own a car and file for bankruptcy, and you own the car outright, you cannot sell the car or even give the car away, without first getting the permission of the bankruptcy trustee. This also applies to stocks, jewelry, or any other kind of property.
Property can be removed from the bankruptcy estate if certain conditions and procedures are met.

Is there ever anything not part of the bankruptcy estate?
The law excludes some property from being a part of the bankruptcy estate. Social Security payments, generally any property received after the filing of the bankruptcy, and certain pension or retirement benefits are not a part of the bankruptcy estate and are not subject to any control from the bankruptcy court.

What happens once the bankruptcy is over?
Once the bankruptcy has been completed the bankruptcy estate disappears. Any property that was not ordered to be sold or turned over to a creditor is back under your control. For most people almost nothing ends of being sold. Once the bankruptcy is completed you can sell or gift your property as you see fit.

Bankruptcy is a highly technical area of law with many complicated rules and procedures. If you are thinking about filing a bankruptcy, you need to consult with an experienced bankruptcy lawyer right away. Sometimes the rules of the bankruptcy estate apply to what you do with property before you even file for bankruptcy.

100% Chapter 13 Plans: What Are They?

What is a 100% Chapter 13 Plan? When you file a Chapter 13 Bankruptcy case, you present the court with a plan. That plan in most cases is 5 years long, and it essentially says: “For the next 60 months, I’m going to pay X dollars per month to a trustee, and here are the instructions on how that money is to be distributed.” While you’re in your plan, you are under the court’s protection, and no one can attempt to collect on a debt from you without getting special permission.

There are certain parties that need to be paid in full through your Chapter 13 Plan. Your attorney may be getting part of his or her fees paid through the plan. The trustee takes a portion for administering the plan. Car loans are usually paid in full through the plan, as are recent income taxes. Most importantly, if you’re behind on your mortgage and want to keep the house, those arrears are usually paid in full through the plan, too.

All your other creditors (your general unsecured creditors, such as credit cards, personal loans, and medical bills) get paid something somewhere between 0% and 100% of what they’re owed. How much they get is largely based on two factors: your income and your assets.

On the income side, there’s a document called the Chapter 13 Means Test. It’s a complicated calculation that basically comes down to: Based on your last 6 months’ income, minus necessary expenses, how much can you afford to pay your unsecured creditors per month? Whatever that number is, your unsecured creditors have to get at least that much per month from your plan.

As to assets, the question is: Are your assets so valuable that, if you were in a Chapter 7 case, some of those assets would be subject to liquidation? If so, your unsecured creditors need to get at least as much through your Chapter 13 Plan as they would in that hypothetical Chapter 7 case.

Which brings me to the point of this post: A 100% Chapter 13 Plan is one where, based on income or assets, you have to pay back to your unsecured creditors 100% of what they’re owed.

I’m seeing more and more 100% Chapter 13 Plans these days, and they’re almost always due to one thing: assets. From 2008 through 2012, it was very rare to see 100% Chapter 13 Plans. That was because, due to the housing market crash, hardly anybody had any equity in their homes during that time.

These days however, are an entirely different matter: I practice in the San Francisco Bay Area, where the housing market is very hot. Home values are higher now than their pre-bubble peaks. As a result, almost everyone I see now who owns a home has equity in their home. That’s good, right? Absolutely. But the consequence is that if you have to file a Chapter 13 case, you’re going to have to pay more to your unsecured creditors. And most of the time, we’re talking about amounts that are high enough to trigger 100% Plans.

Here’s the common situation: Married couple own a home. For whatever reason (everyone’s exact situation is unique), they’ve fallen behind on their mortgage, and now there’s a foreclosure date. To stop the foreclosure, they file a Chapter 13 case to enjoy the court’s protection while they catch up on the arrears over 5 years. But because their house is so valuable now, they have to pay off 100% of their other debts through the plan, too.

So that’s the upshot: In the current market, your house is worth a lot more than it was worth 2 years ago. While that’s great, it also means that if you have to file a Chapter 13 case, you’re going to have to pay back a lot more to your unsecured creditors. However, you can’t let the prospect of being in a 100% plan stop you from filing a Chapter 13 case if you need to. Foreclosures are still happening, and if you’re being threatened with one, a Chapter 13 case remains one of the best legal tools for keeping your home.

“Bar Study” Loan Determined to be Dischargeable

Not to sing my own praises, but I’m quite proud of this one: On October 3, 2012, Judge Carlson in San Francisco issued an order in the adversary proceeding, McGinnis v. Citibank (Bankr. N.D. Cal, Case No. 12-03111), where I represented the Debtor/Plaintiff.

The Debtor is a relatively newly admitted attorney who filed a Chapter 13 case. Among her debt s was approximately $15, 000 in a “bar study loan.” Taking out bar study loans is quite common among lawyers-to-be; such loans cover their bar exam tutoring and living expenses while they’re preparing and awaiting their results. The lender filed a claim in the Debtor’s Chapter 13 case, claiming the loan was a “student loan” and therefore not subject to discharge.

The Debtor initiated the adversary proceeding, claiming that the loan was not a “student loan” as defined by law. It was not intended to cover the costs of attending a Title IV institution; Indeed, there was no “institution” at all; she was engaged in self-study and had tutoring from private “bar prep” companies. Moreover, she was pursuing a professional license, not an academic degree.

Though it had adequate notice, the lender failed to respond to the Debtor’s complaint. Judge Carlson’s Order on October 3 was therefore a “default judgment” and so has little if any value as precedent.

However, I think there’s a lesson here: If you have a bar study loan and are filing a bankruptcy case, be sure to talk to your lawyer about whether or not that’s really a student loan. Also, if you’re in a non-law profession but still took out some kind of loan while you studied for a professional license, that debt may not be a student loan, either.

Unfortunately, under current law, there’s not much I or any other debtors’ attorney can do about student loans. However, there are things at the margins, such as this, where we can make significant inroads.