10 Busted Bankruptcy Myths

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1 10 Busted Bankruptcy Myths Malissa L. Walden Cassie Pfannenstiel Rodriguez Walden & Pfannenstiel, LLC W 87 th St Pkwy Ste 125 Lenexa, KS WPLawPractice.com

2 Introduction Bankruptcy - Legal declaration by an individual (or a company) stating an inability to pay creditors. United States Bankruptcy Code provides several versions of bankruptcy to offer individuals a fresh start financially after receiving a bankruptcy discharge. Chapter 7 liquidate non-exempt assets and divide amongst creditors. Case usually open 4-6 months if no liquidation of assets. 11 U.S.C Chapter 13 pay disposable income over to unsecured creditors over 3-5 years. 11 U.S.C Discharge received upon completion of a case. Notice is mailed to all creditors alerting that debtor s liability on the debt is discharged. Exemptions Property that is not included in the bankruptcy estate and not available for liquidation. 11 U.S.C. 541; K.S.A United States Trustee - Employee of the U.S. Department of Justice that administers the duties of the bankruptcy court in most Chapter 7 bankruptcy and Chapter 11 bankruptcy cases. The U.S. Trustee appoints committees, trustees and examiners and dissects court filings, among other tasks. Trustee - Agent of the court who oversees the debtor s property for the advantage of the creditors. BAPCPA (Bankruptcy Abuse Prevention and Consumer Protection Act) -Bankruptcy laws passed in October, Means Test - Part of the BACPA, the Chapter 7 means test is used to determine who qualifies for protection under Chapter 7 of the U.S. Bankruptcy Code. It s based on median income comparisons, disposable income available and unsecured debts owed.

3 1. Bankruptcy Will Never Be An Option for Someone You Know a. Truth Most everyone knows someone who has filed or needs to file for bankruptcy relief b. Statistics per United States Courts c. March, 2017 filings down 4.7% Total cases Total nonbusiness Chapter 7 Chapter 13 KS 7 filings KS 13 filings 1/1/17 201, , ,271 75, /31/ , , , ,193 3,802 2, , , , ,729 3,905 2, ,038,280 1,006, , ,256 4,429 3,041 d. Estimated Population of Kansas and U.S. for 2016 per United States Census Bureau i. Kansas 2,907,289 ii. United States 323,148,587 e. Many debtors using band-aid solutions that are not putting debtors in a position to participate in the economy 2. Filing For Bankruptcy Is Difficult And Only A Few People Can Qualify a. Truth: Although It Is A Process, Chapter 7 Or Chapter 13 Bankruptcy Is Almost Always An Option b. Who can file Chapter 7 Bankruptcy? i. To qualify income and expenses will be examined to determine if income level falls below the median income level. ii. Many debtors will still qualify for a Chapter 7 bankruptcy even if their gross income exceeds the median income level once the allowed deductions are taken into consideration. iii. Chapter 7 Means Test/Median Income Test Form 122A c. Who can file Chapter 13? i. To qualify for Chapter 13 relief: 1. Must have a regular source of income. 2. Unsecured debts must not exceed $394, Secured debts must not exceed $1,184, d. What about BAPCPA? i. Bankruptcy Abuse Prevention and Consumer Protection Act ii. The New Bankruptcy Law it s almost 12 years old! iii. People are still filing despite the fact we now: 1. Have additional paperwork to fill out 2. Have to run a Means Test 3. Have each case reviewed for Presumption of Abuse 4. Require Debtor s to wait longer between filing another Chapter 7 5. Take a Credit Counseling and Debtor Education Course

4 6. Put a limit on exemptions and forum shopping 7. Provide better service to the Creditors 8. Have broadened definition of the types of educational ("student") loans that cannot be discharged - 523(a)(8) e. Is there any chance that they are going to deny a Debtor or not let them file? i. Presumption of Abuse 1. Affidavit Rebutting - 11 U.S.C. 707(b)(2)(B) 2. Convert to Chapter Dismissal ii. Non-presumed Abuse can still lead to dismissal in Chapter U.S.C. 707(b)(3) iii. No. 3. Only Poor People File Bankruptcy a. Truth: Bankruptcy Does Not Discriminate against age or income b. Chances are someone you know will need to file bankruptcy. c. Famous filers d. Who are the people filing i. Vast majority possess similar traits ii. Our youngest clients are typically in their 20 s. iii. Why clients file in their 30 s, 40 s, and 50 s iv. Why clients file in their 60 s, 70, or 80 s v. Income matters 4. Transfer Property Away Before Filing to Avoid Losing Property a. Truth The trustee can avoid transfers of property within the two years before filing (maybe) b. 11 U.S.C. 521(a)(1)(iii) a statement of the debtor s financial affairs (Statement of Financial Affairs (SOFA)) i. SOFA Part 7: Other Transfers - Debtors required to list any transfers of property made within the two years before filing bankruptcy 1. #18 Within 2 years before you filed for bankruptcy, did you sell, trade, or otherwise transfer any property to anyone, other than property transferred in the ordinary course of your business or financial affairs? #19 Within 10 years before you filed for bankruptcy, did you transfer any property to a self-settled trust or similar device of which you are a beneficiary? U.S.C. 548(a)(1) Trustee may avoid transfers intended to hinder, delay, or defraud any entity; received less than fair market value and was insolvent at the time of the transfer or insolvent as a result of the transfer

5 ii. SOFA Part 3: Payments to Creditors - Debtors are required to disclose payments to family or friends made within 12 months of filing (preference payments) 1. #7 Within 1 year before you filed for bankruptcy, did you make a payment on a debt you owed anyone who was an insider? iii. SOFA Part 5: Gifts Debtors are required to disclose gifts in the 24 months prior to filing to charities and family members 1. #13/#14 Within 2 years before you filed for bankruptcy, did you give any gifts with a total value of more than $600 person? Within 2 years before you filed for bankruptcy, did you give any gifts or contributions with a total value of more than $600 to any charity? U.S.C. 548(a)(2) exception to charitable contributions a. A transfer of a charitable contribution to a qualified religious or charitable entity or organization shall not be considered to be a transfer covered under paragraph (1)(B) in any case in which (A) the amount of that contribution does not exceed 15 percent of the gross annual income of the debtor for the year in which the transfer of the contribution is made; or (B) the contribution made by a debtor exceeded the percentage amount of gross annual income specified in subparagraph (A), if the transfer was consistent with the practices of the debtor in making charitable contributions. iv. SOFA Part 6: Losses Debtors are required to disclose losses from fire, theft, gambling, other casualty within the 12 months prior to filing and during the case 1. #15 Within 1 year before you filed for bankruptcy OR SINCE YOU FILED FOR BANKRUPTCY, did you lose anything because of theft, fire, other disaster, or gambling? c. Some pre-bankruptcy planning allowed 5. Debtors Lose Everything They Own If They File Bankruptcy a. Truth: All Assets Are NOT Up For Grabs And Even Some Pre-Bankruptcy Planning May Be Possible b. Bankruptcy Exemptions i. Exempt property is safe during the bankruptcy. ii. Non-exempt property can be sold for the benefit of creditors. iii. Each state is allowed to decide what exemptions are available to their residents. c. Kansas exemptions i. If debtors have been in the state the better part of 2 years.

6 ii. The exception to this is for the homestead. Debtors need to have been in Kansas for 1215 days or approximately 3.3 years to use the State s homestead exemption. iii. NO cap on home equity (vs MO $15,000 cap) iv. Over 2 years, but under 3.3 = $125,000 cap on home equity v. Vehicles - $20,000 in value and debtors are limited to one vehicle that is used regularly for transportation, generally for work. (vs MO $3,000 cap) 1. If spouses are filing a joint bankruptcy, this exemption may be doubled. 2. If vehicle has been designed or equipped for handicapped persons the $20,000 value cap does not apply. vi. ASSET EXEMPTION STATUTE Homestead No monetary limit. One acre inside city limits or 160 acres outside city limits. Household goods, clothing, No monetary limit food, and fuel to last 1 year Jewelry $1,000 limit per debtor Vehicle 1 vehicle per debtor. $20,000 equity limit per vehicle used as main means of conveyance. No equity limit if equipped for disabled person. Burial plot No monetary limit Tools of Trade $7,500 limit per debtor Life Insurance No monetary limit if purchased over one ; year before filing. Worker s Compensation No monetary limit ; Retirement Benefits (ERISA No monetary limit qualified) Public Employee Retirement No monetary limit Public Assistance Benefits No monetary limit ; Unemployment Benefits No monetary limit Crime Victim Compensation No monetary limit ; Liquor License No limit ; Fraternal Benefits No monetary limit Cemetery Merchandise Trust No monetary limit Prepaid Funeral No monetary limit ; Social Security Benefit No monetary limit ; U.S.C. 522(d)(10) Veteran s Benefit No monetary limit ; U.S.C. 522(d)(10)

7 Disability Benefit No monetary limit ; U.S.C. 522(d)(10) Maintenance or child support To the extent reasonably necessary for the ; U.S.C. support of the debtor and any dependent of 522(d)(10) the debtor. d. Non-exempt Property i. Pre-Planning options ii. Post-filing options 6. Trustee Will Come to Debtor s Home to Inventory Assets a. Truth A trustee will not come to inventory property b. Debtor duties are listed under 11 U.S.C. 521 i. 521(a)(1)(B) requires debtors to file a schedule of assets and liabilities among other requirements ii. When the debtors sign, the Declaration is it under penalty of perjury - I declare under penalty of perjury that I have read the foregoing summary and schedules, consisting of sheets, and that they are true and correct to the best of my knowledge, information, and belief. c. 18 U.S.C. 152 defines who can be fined and/or imprisoned for up to 5 years for Concealment of assets; false oaths and claims; bribery in connection with a case filed under title 11 d. 18 U.S.C. 157 addresses bankruptcy fraud and allows a fine and/or sentence up to 5 years e. 18 U.S.C. 158 designates U.S. attorneys and FBI to investigate bankruptcy fraud f. 11 U.S.C. 341 meeting under oath again claiming true and accurate 7. Chapter 13 is Debt Consolidation a. Truth A Chapter 13 plan is not a Debt Consolidation program b. Notable differences i. Plan payments are determined on a case by case basis usually without regard to the total debt owing in the case 1. Below median cases often payment is what the household budget will allow not a number decided by the creditors 2. Above median cases the debtors disposable income determined by the Means Test will determine payment to unsecured creditors takes into account secured debts ii. Creditors do not have the option of opting into the chapter 13 plan iii. Any debt not paid in full in bankruptcy is not taxable as income c. 11 U.S.C sets out requirements for plan confirmation d. Case by case determination i. A neighbor, friend, or relative are not indicators of what someone else s plan payment will be

8 ii. 1 person household, same income, same county in Kansas 1. Different result if: a. One has a mortgage payment that exceeds the federal housing allowance b. One pays child support c. One has a car loan d. One has high out of pocket medical expenses e. One contributes to a retirement account f. One contributes regularly to charity g. One has medical insurance h. One has tax debt i. One is behind on a mortgage, car loan iii. One case may pay 2% to unsecured creditors, another 15%, another 100% 1. Any unsecured debt not paid in full at the end of the plan is discharged with some exceptions 8. Mortgages Can Be Modified In All Bankruptcy Cases a. Truth: Mortgages Cannot Be Modified in All Cases - But Options May Be Available. i. Chapter 7 Mortgage Options ii. Chapter 13 Mortgage Options 1. Surrender a. Relief from Stay 2. Retain - 11 U.S.C. 1325(a)(5) 3. Cure Pre-Petition Arrears 4. Lien Stripping a. Only for wholly unsecured second (or third) mortgage i. Cannot have ANY equity in junior lien, not a single cent ii. Upside down in home - mortgage exceeds the value of the homestead iii. Stripped lien will receive same treatment as other unsecured creditors iv. 506 acknowledges that a lien is only a secured claim to the extent there is value in the asset to which it attaches b. Requires Adversary Case to be opened i. Separate lawsuit filed within the bankruptcy case. ii. Additional filing and attorney fees. 5. Options not available a. After Sheriff sale in foreclosure action b. Chapter 7 if behind on Mortgage c. No lien stripping in Chapter 7

9 9. Married Spouses Must File Bankruptcy Together a. Truth Spouses can file a bankruptcy case without the other spouse filing b. 11 U.S.C. 109 sets out who can be a debtor in bankruptcy i. Notwithstanding any other provision of this section, only a person that resides or has a domicile, a place of business, or property in the United States, or a municipality, may be a debtor under this title. 11 U.S.C. 109(a) c. Living Together vs. Living Separately i. If separated and residing in separate households file without needing information from spouse ii. If residing in the same household spouse will need to provide income information, monthly debts, money not going into household d. Must be married to file joint petition i. United States v. Windsor, 570 U.S. (2013) 1. struck down Section 3 of the Defense of Marriage Act (DOMA) allowing same sex couples legally married to enjoy federal benefits ii. Obergefell v. Hodges, 576 U.s (2015) 1. Fundamental right to marry is guaranteed to same-sex couples by both the Due Process Clause and the Equal Protection Clause of the Fourteenth Amendment to the US Constitution. 10. Bankruptcy Should Always Be The Last Resort a. Truth: Debtors Should Build A Fresh Start On Top Of What They Already Own i. Assets debtors have now can help them in the future 1. Helpful Bankruptcy Exemptions a. Home b. Car c. Retirement 2. Taking out additional debt is not going to get debtors ahead a. Borrowing against retirement funds b. Home equity loans c. Borrowing from family and friends d. Payday loans 3. What is holding a debtor back from filing? a. Bankruptcy Myths! i. I haven t missed any payments. ii. Everyone will know. iii. Only deadbeats file for bankruptcy. iv. I can t afford to file for bankruptcy. v. Credit Score will not recover

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