St. Louis Bankruptcy Lawyers Blog

When a debtor becomes eligible to inherit property from someone who dies within 180 days of the date the debtor filed bankruptcy that property becomes part of the debtor’s bankruptcy estate. This means that the property, when received, must be turned over to the bankruptcy Trustee. This is true even if you have received a discharge and your Chapter 7 bankruptcy case has been closed. Trust me, the Trustee will be more than happy to reopen your bankruptcy case.

Once the property is obtained by the Trustee, notices will be sent to creditors. Property other than money, such as jewelry and vehicles, will be liquidated to obtain cash to pay out. The creditors will file claims and the Trustee will begin to disburse the funds. In some cases, there may be money left over after all the filed claims are paid. This can happen if the inheritance is in excess of the debt you actually owe or if some of your creditors fail to file claims by the bar date. Occasionally some or all of the value of the inheritance can be exempted, and sometimes the Trustee will not require turnover of the inheritance because it is considered too small to be worth the work associated with distribution.

Some debtors think they will avoid this issue by failing to disclose their inheritance. Do not make this mistake! Concealing assets is bankruptcy fraud, which is a federal crime punishable by up to five years in prison and/or a $250,000.00 fine. At the very least, you will likely lose your discharge if the Trustee finds out which means you will still owe all the debt you filed to eliminate.

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Please forgive the length of the title for this entry. But I think it illustrates why there is so much misinformation out there about what happens when you file a bankruptcy (either a Chapter 7 or Chapter 13). I can’t tell you the number of times I’ve had someone tell me with complete conviction that they know for a fact that if they file a Chapter 7, the government will take their house. Why? Because someone, somewhere said so, and they heard about it from a friend of a friend.

First of all, let me just say that my response to someone who says, ‘I don’t want to lose my house!’, is always the same: ‘I don’t want you to lose your house either!’ My goal is simple. I want to discharge as much debt as I can, and allow my clients to keep every asset they want. I want you to save your house, and your car, and your personal property.

Here’s how it works: when you file a bankruptcy, there is a duty to disclose all of your assets (in other words, you have to let the government know about all your real estate, automobiles, and other personal property like clothes and jewelry). Usually, if someone owns a home, there is a mortgage loan between yourself and the bank. Let’s say the total balance of your mortgage is $150,000.00.

The next question is, how much do you think your house is worth (the so-called Fair Market Value). Now this is the part that gets a little hairy. Figuring out the value of anything (your house included) is not an exact science. There are a lot of variables involved: like what kind of work needs to be done on it (does it need a new roof, does the ceiling leak, does the front porch need repair?); what are other houses in the area selling for (not the price they list on the For Sale sign, but rather what the house actually sold for); what kind of area you live in (is the area considered ‘nice,’ or is it considered ‘bad’); and what does the housing market look like right now (I don’t know if you’ve noticed, but the value of homes has dropped like a rock all over the country).

I know that sounds straight forward enough, but you would be surprised at the number of times people overvalue their home. They tell me a value that is sometimes fifty or seventy-five thousand more than what it really is. Why? Well, it kind of makes sense on one level. Most people want to believe that the value of their assets is high. They want to believe that they own things that are worth a lot of money. Think about it: how much better would you feel if you tell your friend that you could easily sell your house for $300,000.00? When the look of envy spreads across your friend’s face, you can stand back and beam with pride. That feeling you get is a lot better than if you told your friend, ‘Well, it needs a ton of repairs. It’s not in that great of a neighborhood. And there are three other houses around us that have been foreclosed on. So I’d be lucky to get $100,000.00.’

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The Supreme Court of the United States recently issued it’s 8-1 decision in the case of Ransom v. FIA Card Services. The question before the Court was whether an above-median debtor in a Chapter 13 case should be allowed to take a $471.00 vehicle ownership deduction on form B22C when calculating his disposable income. The B22C, also known as the Means Test, is one of the determining factors in how much money must be paid for the benefit of general unsecured creditors (think credit cards, payday loans, etc). The specific issue up for consideration was whether a debtor should be able to take a vehicle ownership expense when the car is owned free and clear, meaning there is no lien against it.

The circuits have been split on this issue. Here in the 8^th circuit, we have been following the decision handed down in the Washburn case, which held that a debtor can take a vehicle ownership expense even when the vehicle is owned free and clear. That decision was a huge win for above-median debtors in this jurisdiction. However, the Supreme Court’s decision has reversed that line of cases by stating that the deduction is not available to debtor’s who do not have ownership expenses.

What actual effect does this have on St. Louis debtors? In layman’s terms, this means that a person filing bankruptcy under Chapter 13 cannot reduce his payments to unsecured creditors by claiming “ownership costs” for a car on which he owes no money. If you are an above-median debtor with a vehicle that is paid off, meaning there is no lien against it, you just lost out on a $496.00 per month deduction. Over a five year Chapter 13 bankruptcy, that amounts to $29,760.00. Without this deduction, many debtors who might have been able to discharge their unsecured debts will now have to pay back a percentage of that debt.

For obvious reasons, this is a very controversial decisions, which has bankruptcy attorneys across the nation shaking their heads in disbelief. Anyone with common sense knows that loan and lease payments are not the only expenses associated with owning a vehicle. What about the cost of general maintenance, insurance, and gas? Unfortunately, the Justices of the most powerful Court in the land seem to be out of touch with the day to day realities of the average debtor.

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This is a common tactic used by creditors. They basically tell you that regardless of your bankruptcy filing, the collection agency can still come after you for your credit card debt (or medical bills, or payday loan, or whatever).

This is not true (but then, most creditors aren’t really interested in telling you anything true about bankruptcy; their only goal is get as much money out of you as they can). When you file a bankruptcy (either a Chapter 7 or Chapter 13), there is legal device that is immediately put into place called the ‘Automatic Stay’. The automatic stay stops all the bad stuff that is currently happening to you (like harassing phone calls, garnishments, repossession, foreclosures, lawsuits, etc). Think of it as a protective shield that the federal courts put around you. It prevents your creditors from coming after you anymore.

Regardless of which type of bankruptcy you file, the end result is almost always the same: your debts are discharged (in other words, wiped out). It’s true that there are a few cases where someone has to file a Chapter 13 and pay back some of their debts. But for the vast majority of cases, the unsecured debt (like credit cards) is knocked out.

Most people I meet with come in saying that they want to file a Chapter 7 bankruptcy. This is because Chapter 7 bankruptcies are much shorter than Chapter 13 bankruptcies, averaging about four months before the debtor receives his or her discharge. Chapter 13 bankruptcies last from three to five years and require monthly plan payments to a bankruptcy Trustee. So why would anyone want to file a Chapter 13 bankruptcy? Below are the top five reasons to choose Chapter 13 bankruptcy.

Cram Down
In some cases, a vehicle or other secured loan can be reduced to the value of the collateral. This means that if the loan qualifies, the debtor can pay reduced fees and interest. The catch here is that the vehicle had to be purchased more than 910 days prior to the filing of the bankruptcy case in order to qualify, and you have to actually finish the case and receive a discharge in order for the cram down to be effective.

Protect Non-exempt Property from Liquidation
Sometimes debtors own property with equity that cannot be protected with the available exemptions. For example, let’s say debtor owns a car worth $10,000.00 with no lien. Let’s say that the debtor has a vehicle exemption he can apply towards that equity in the amount of $3,000.00. This leaves $7,000.00 of unprotected equity. In a Chapter 7 bankruptcy, the Trustee would ask the debtor to pay the $7,000.00 in order to retain the car, or in the alternative, would sell the vehicle to obtain money to pay creditors. In Chapter 13 bankruptcy, the debtor is allowed to retain the vehicle, but will pay that $7,000.00 to general unsecured creditors over a period of three to five years.

This is easily the biggest misperception about bankruptcy that I hear from people. The idea that if you file a bankruptcy (either a Chapter 7 or Chapter 13), your ability to regain or reestablish credit is completely gone.

Undoubtedly, this misperception stems from all the misinformation that creditors give out. When a collection agency or a creditor calls you in the middle of the day (or early in the morning, late afternoon, just after dinner, a little bit before you put the kids to bed; I’m sure many of you have noticed that they never stop calling), and you tell them that you are contemplating bankruptcy, the creditor will start telling you every horror story that they can think of in an attempt to discourage you from filing. That you’ll lose your car, that you’ll lose your job, and the biggest zinger of all: that if you file for bankruptcy, you’ll never have a decent credit score for the rest of your life.

That last zinger (“that you’ll never have a decent credit score for the rest of your life”) is by far the biggest concern for most of the people I see. And it makes sense. I mean, if you are going to file a bankruptcy (either a Chapter 7 or Chapter 13), what good is it going to do if you can’t at some point get a decent credit rating?

The simple answer is no. But it never fails to amaze me how often I receive questions like this from people. The amount of misinformation that people receive is astonishing.

And if you think about it, it makes sense that there’s so much confusion. When you begin to go into debt (whether its in the form of credit cards, medical bills, paydays loans, overdraft fees on a bank account, or whatever), and you are on a limited budget, its easy to fall behind on payments to your creditors. The next thing you know, collection agencies are calling you day and night. At this point, people start to panic, lose sleep, and begin to feel their stress levels go through the roof. When you are in this state of mind, when it feels like the world is falling apart and you are losing control, you get scared. Your creditors know this. In fact, they are counting on this very thing happening.

Why? Because if you are already in this state of fear and panic (about your finances, your ability to pay for basic utilities, or making sure you have food on the table), then all the creditor has to do is feed into that fear and panic by making you believe that if you don’t pay on your credit card, your life will be even worse.

Coming to terms with the fact that you need to file for bankruptcy is very difficult for many individuals. Sometimes the emotions surrounding such a decision can make it difficult to accurately assess your financial situation. If you have already tried to fix your financial situation by reducing spending, attempting to increase income and selling assets, then it is time to consider a bankruptcy filing.

Most people consider filing bankruptcy to be their last option. However, it is more accurate to say that bankruptcy is your last good option. Bankruptcy attorneys regularly meet with individuals who have made some very bad decisions trying to avoid a bankruptcy filing. These decisions just make their problems worse. Such decisions include:

• Liquidating retirement accounts to pay bills.
• Borrowing money from payday loan companies.
• Borrowing money from family members or friends.
• Taking cash advances from credit cards.
• Writing bad checks.
• Selling assets that are protected from creditors.
• Engaging in fraudulent or otherwise illegal activity.

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A co-signer is someone who has guaranteed a debt on your behalf. This means that if you fail to pay the debt the co-signer is personally responsible. In bankruptcy, co-signers are referred to as co-debtors. Many of my clients have reservations about filing for bankruptcy because they do not want to negatively affect their co-signers.

There is a way to file for bankruptcy without negatively affecting co-debtors. A Chapter 13 bankruptcy has a feature known as the “Co-Debtor Automatic Stay.” This powerful tool was designed to protect bankruptcy filers by preventing creditors from taking collection action against any individual who is obligated on a consumer debt owed by the debtor (See 11 U.S.C. 1301). According to 11 U.S.C. 101(8) a consumer debt is a debt “incurred by an individual primarily for a personal, family, or household purpose.”

While the stay protects the co-debtor during the bankruptcy, it does not discharge the co-debtor’s liability to pay the debt. It will, however, prevent collection action by the creditor against the co-debtor such as obtaining a judgment, lien perfection, or reporting negative information to the credit bureaus during the pendency of the case.

Unfortunately, there are exceptions to the protection of the co-debtor stay. The stay does not prohibit collection of debts incurred in the ordinary course of business. Additionally, since tax debts are generally not considered consumer debts, the tax authorities can continue their collection efforts while the bankruptcy is pending. Further, the co-debtor stay does not apply to Chapter 7 bankruptcy cases. This means that if the debtor converts the Chapter 13 to a Chapter 7 the stay will terminate.

Finally, the co-debtor stay can be modified by the Bankruptcy Court upon request of the creditor. A creditor can file a motion with the Court asking for the stay to be “lifted”, meaning that the creditor would then have permission to begin collection action against the co-debtor. These types of motions are generally successful when the co-debtor is the one who actually received the benefit of the debt (e.g. you co-signed a car loan for your friend and she actually drives the car), if the debtor’s Chapter 13 plan does not provide for payment of the debt, or if the creditor can prove its interest would be irreparably harmed by the continuation of the stay.

A knowing violation of the stay is illegal and is punishable by court imposed sanctions, and any action taken by the creditor in violation of the stay is void. Any such violation should be reported to the debtor’s attorney immediately so that the appropriate motions can be filed with the Bankruptcy Court.

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My clients are always very concerned about how filing for bankruptcy is going to affect their credit. While it is true that bankruptcy will negatively impact your credit, and that it can appear on your credit report for up to ten years, chances are if you are filing for bankruptcy relief your credit was not all that great to begin with. Late or missed payments, high credit card balances, and a high debt to income ratio all work to destroy your credit score.

Instead of dwelling on the negative consequences of filing for bankruptcy, try to focus on the benefits. Yes, there are benefits to filing a bankruptcy. For starters, receiving a bankruptcy discharge can actually improve your credit over time. A bankruptcy discharge wipes out your debt, thereby extinguishing your liability. Eliminating most, if not all, of your debt improves your debt to income ratio. Additionally, it prevents creditors from reporting delinquency to the credit bureaus.

So what can you do to make the most of your fresh start and rebuild your credit?