Christmas and Bankruptcy

Christmas gift asset bankruptcy transfer


One of my more detail-oriented clients asked me an excellent question today about Christmas and bankruptcy, and I want to share some of my thoughts in this forum.

The client is planning to file for bankruptcy in January, or possibly February, and his biggest concern was about how this was going to affect Christmas.  You see, one of the questions asked in the bankruptcy process is whether you have given anything away to family members or friends in the months before you file.  She was concerned that this meant she could not give any gifts for Christmas!

To examine how this works, we need to look at the rule about “fraudulent transfers” and the role it plays in bankruptcy.  The purpose is simple and straightforward: we don’t want people with big assets being able to simply give those assets away, and then file for bankruptcy.  This would be unfair to creditors, who might be entitled to money if the assets hadn’t been given away.

The purpose is NOT to interfere with ordinary, everyday aspects of living, and this can include holiday gifts.  While a strict, technical reading of the code implies that even the smallest gift can be “avoided” by the trustee (essentially, the trustee takes it back from the recipient), in practice, as long as the gift is reasonably small and typical, that simply doesn’t happen.

This is for two reasons.  First, the amount of time and money the trustee would spend to get a small gift back is simply not worth it in administrative expenses alone.  Second, trustees are real people!  They have families, often have children, and most of them celebrate some December holiday involving gift exchange.  They understand, as long as you aren’t being abusive about it.

When we run into problems is when the gift is exceptionally large, like a vehicle or a transfer of over a thousand dollars.  It is not okay to give away large amounts of money or assets when you can’t repay your creditors; if you are heading for a potential bankruptcy filing, that doesn’t mean you can’t give gifts, but those gifts should be modest, with an emphasis on personal rather than price-tag.

One additional note: charitable giving is exempt from this analysis.  The code specifically allows you to make charitable donations.

This is one of those situations that calls for common sense.  Don’t buy things you can’t really afford, and don’t go overboard if you will be embarrassed explaining the transaction later to a trustee.  That said, a looming bankruptcy is no reason to cancel Christmas.



Assets, Hidden in Plain Sight

hidden assets property bankruptcy


Almost every discussion about your financial situation boils down to two important questions:  what do you own, and what do you owe?  While most of us can answer the second question fairly easily (with a little help from a credit report), I am yet to see anybody make a comprehensive list of their assets- the stuff they own- on the first try.

The reason for this is that some assets are obvious- money in your bank account, valuable coin collections, vehicles, real estate- and others are not.  For example, if you have written a story, or invented a process or product, or have a catchy trade-name used in the community, those are assets.  Specifically, those are “intellectual property,” and while it is difficult to figure out how much they are worth, they are worth something.

“The right to sue” is another oft-overlooked asset.  If you can sue somebody, that right has value, and can even (in some situations) be sold.  It definitely can be settled!

Accounts receivable, future tax refunds, and earned but unpaid wages (the money you have already earned, but haven’t yet gotten a check for) are also usually forgotten by my asset-listing clients.  In many states, like California, your vacation time is an asset, since it has cash value.

Knowing how to identify your assets in a comprehensive, detailed way is important in several contexts.  When you are looking to settle debts or assess your net worth, overlooking assets may mean missing opportunities.  When crafting an estate plan, you want to account for all things of value, or else they may be left out of your trust or will.  Finally, when filing a bankruptcy or responding to a judgment debtor’s examination, you need to be complete when listing things that you own.

This is one area where practicing consumer debt law has taught me a thing or two.  “Assets” includes not just the things we see and the things we have, but dozens of different categories of rights, items, and even ideas that, while not obvious, definitely have value.


How to Save a Home in Chapter 13

chapter 13 save home mortgage foreclosure

Most people struggling to keep their home know that bankruptcy is one way to avoid foreclosure.  In this post, I will explain the nuts-and-bolts of how you can save your home- and cure your mortgage delinquency- through a Chapter 13 bankruptcy reorganization.

First, let me briefly explain what a reorganization is all about.  It is NOT a bankruptcy in which you are simply walking away from your debts.  Rather, you are proposing a plan, usually lasting three or five years, in which you will repay a portion of your debts based on your ability to repay them.  Each month, you make a single payment to a bankruptcy trustee, and they pay your debts on your behalf according a plan you draft with your attorney.  That plan, when approved by the Court, is binding on all your creditors.

Now, not every district is the same when it comes to mortgage delinquency.  In some areas, including the Sacramento area, the trustee makes your mortgage payment, as well as repaying your arrears.  This is known as a “conduit” jurisdiction, since the trustee is a conduit for your regular monthly payments.  In other areas, you continue to pay your monthly mortgage payment, and the trustee only pays the portion needed to cure your arrears.

The payment is calculated as follows:  First, your regular, ongoing mortgage payment remains the same.  It must be paid each month.  Second, your total amount of mortgage arrears must be provided for, though usually without interest or further penalties.  For example, if you have a $1,000 per month mortgage payment, are $15,000 in arrears, and propose a five-year reorganization plan, your new payment to your mortgage lender will be $1,250.  That is the ongoing amount, plus just enough to “cure” the arrears over five years (sixty months).

As you can see, the Chapter 13 plan operates as a kind of “reverse modification,” in that your payment is likely to go up, not down.  However, being in a Chapter 13 does NOT mean you cannot apply for a loan modification.  Several of my clients have entered Chapter 13 to save their homes from foreclosure, and have later gotten modifications that deal with the arrears and lower the monthly payments.  If that happens, the court will usually approve a modified plan that allows you to pay the modified amount to your mortgage creditor, so you are not locked in to the higher payments of your plan.

Chapter 13 plans are not “fire and forget.”  They can be modified at any time.  While you are in the plan, however, your mortgage creditor cannot foreclose on you, as long as you keep making your payments according to the terms of the plan.  It is a solid defensive strategy to avoid foreclosure.

One additional note about Chapter 13: if you have a second mortgage that is entirely underwater (i.e. your home would be underwater even if you didn’t have a second mortgage, but you do), most courts will allow you to “strip off” the second mortgage, and treat it as unsecured debt.

If you have taxes, car loans, or other secured debts, those might also affect your Chapter 13 plan, so you should talk to your attorney to see what the broader plan will look like in your situation. However, the basics of saving a home through Chapter 13 will be consistent with the explanation above.

Chapter 13 is usually the best solution if you are seriously delinquent due to an interruption in income or a major life event, but you have enough money to resume making your mortgage payments, plus pay a small part of your arrears each month.  It is not for everyone, but in many cases, it is exactly what a homeowner needs to avoid foreclosure and keep their home.


The Bizarre World of Reaffirmation

reaffirmation car loan


One of the most difficult tasks attorneys often face is explaining aspects of the law that, when you come right down to it, don’t make any sense.  As my friend and colleague Kenneth Sanders often says, “It’s not logical, it’s not ethical, and it’s not fair: it’s just bankruptcy!”

Reaffirmation agreements, and the legal significance of signing or refusing to sign the agreement, is one of the best examples of the disconnect between common sense, and the law.

I wrote an earlier post about the automatic stay, and why car statements often stop coming.  The automatic stay is a powerful tool, and during your bankruptcy case, it will stop creditors from taking actions to collect the debt.  This includes repossessing your car.  They might, however, send your attorney a reaffirmation agreement, and you should understand the legal consequences of signing- or refusing to sign- this document.

A reaffirmation, simply put, is an agreement to keep your obligation to repay the loan, despite the bankruptcy.  To illustrate the potential risk, let’s use the following example:  You have a car worth $5,000, and you owe $7,500 on it.  After the bankruptcy, you can’t afford to keep making payments.  The car company can repossess the car, and sell it.

If the court approved a reaffirmation agreement, you are still on the hook for the remaining balance.  If there was no reaffirmation, the car company cannot come after you, since you no longer owe the remaining debt.

There is also a risk to NOT signing a reaffirmation agreement.  If you do not sign, the car company can repossess the vehicle after bankruptcy, even if you remain current.  Most vehicle lenders do not exercise this option, but some do.

There is, however, a middle ground that provides the best of both worlds.  For a reaffirmation agreement to become effective, two things need to happen.  The debtor needs to sign it, and the court has to approve it.  Courts generally either defer to the debtor’s attorney, or hold a hearing to let the debtor explain why they want to reaffirm the loan.

As an attorney, I cannot sign off on a car loan if I don’t think it is in your best interest, or if it presents an undue hardship. If your bankruptcy schedules show that you do not have enough money to afford the payment, I cannot in good conscience sign off on the reaffirmation, since we have already shown the court that the payment is an undue hardship.

And THAT is where logic ends and the vagaries of the law take over.  Under an emerging line of cases, if the debtor signs the reaffirmation but the court does not approve it, the debtor gets to have their cake, and eat it, too: they can keep the car as long as they stay current on payments, but if the vehicle is repossessed, the lender cannot pursue the remaining balance.

This “best of both worlds” approach is called a “ride through,” and used to be the norm. The reasoning is that the debtor has done everything they were required to do under the code, and should not be punished because the mean ol’ attorney or the mean ol’ judge refused to ratify the agreement.

As with any emerging issue of the law, your mileage may vary depending on how your district’s judges view the issue. You should definitely talk to your attorney before agreeing to sign- or refusing to sign- any reaffirmation agreement.  In our district, very few reaffirmation agreements are approved by the court, and we see precious few repossessions for debtors who remain current on their payments.


Why did my car payment bills stop coming?

car vehicle payment reaffirmation

For many of my clients, filing bankruptcy is designed to wipe out personal debt, deal with lawsuits or medical bills, or to stave off foreclosure.  It is seldom because of their car payments.

However, many of them do have loans on their cars, loans for which they are current, and for vehicles they intend to keep.  I will post a future entry on reaffirmation, the strange and confusing process by which car loans can be “ridden through” (pardon the pun) the bankruptcy.

It is very surprising for these clients when their monthly car loan statements simply…stop. It is as though the vehicle lender is no longer interested in receiving payment!

Of course, if you want to keep your car, you will need to keep making payments.  The reason the finance companies stop sending statements is not because they don’t want to get paid; it is because of a special bankruptcy rule called the Automatic Stay.

This rule is the powerful shield provided by a bankruptcy.  It provides that creditors may take no action to collect a pre-petition debt during the bankruptcy process.  A dunning letter (like collection demands), a billing statement, or a phone call from a creditor may violate this rule, and can lead to hefty sanctions.

To avoid violating the Automatic Stay, lenders usually cease sending statements, or send special statements reading “for informational purposes only.”  As a corollary to this, automatic debits often stop.

To avoid delinquency on the car loan, you should contact the lender and arrange to continue making “voluntary” payments.  The payments are “voluntary” because they have no right to bill you or to collect money.  However, if you do not make the payments, as soon as the bankruptcy ends the lender can repossess the vehicle.

If you file for bankruptcy protection and want to keep your car, you should talk to your attorney.  You may qualify to redeem the vehicle, or it might be in your best interest to reaffirm the debt.  In most cases, you will need to make arrangements with the finance company to continue making payments, or you may find yourself without transportation when your bankruptcy ends.