With inflation hitting record highs, people are looking to cash out the equity in their homes, sell their vehicles, and liquidate their retirement accounts to pay off their debts. This can be problematic for a few reasons.
First, if home values go down then you are stuck with a debt that exceeds the value of your home. If you run into a situation where you now have a higher payment that you cannot afford due to a loss of job, divorce, or medical issues the lender would foreclose on the property and potentially make you responsible for the deficiency. Property values fluctuate up and down.
Second, it’s not advisable to pay off unsecured debts with secured property. If you can eliminate 100% of your unsecured debt in a bankruptcy, while still having the ability to keep your home, that is going to be a better option than increasing or extending your mortgage payment for years and risking a future default on the mortgage loan.
Similarly, it’s always best to preserve your exempt assets such a 401k, rather than liquidate them to pay debts. The bankruptcy would allow you to eliminate your unsecured debt while still preserving the money in your 401K for your retirement without an adverse tax consequence. Furthermore, there are also costs associated with the refinance such a mortgage origination fees, appraisals, recording fees associated that can be up to 3-5% of the loan which you are paying for years. This cost typically far exceeds the cost of filing for bankruptcy.
A “conversion” is when you change the bankruptcy chapter type after you file your original bankruptcy petition. For example, at the time you file your case, you are over the median threshold to file for a Chapter 7 bankruptcy, so you file a Chapter 13 case. Months or even years later, your income declines and you now meet the income threshold to file a Chapter 7. In that situation, you can convert your Chapter 13 case to a Chapter 7 case. It’s a moving target so if your situation changes, there are solutions to change your situation so you are not stuck staying in a Chapter 13 or being forced to have your case dismissed if you can no longer afford the Chapter 13 payment.
Its uncommon to convert a Chapter 7 case to a Chapter 13 . That would be a rare instance if the trustee believes you did not file your Chapter 7 case in “good faith”. In order words, if the trustee’s office believes you have ability to repay your creditors by not reporting your income or expenses correctly. If you cannot pay the amount of your non-exempt assets in a Chapter 7, then you might need to convert to a Chapter 13 to have extended time to pay the trustee. That is why it is so important to have an attorney prepare your bankruptcy petition to ensure you don’t have an unexpected issue about not qualifying for the Chapter type your filing.
When you file a bankruptcy case, there is a hearing called a “341 meeting of creditors”.
The meeting of creditors takes place whether you file a Chapter 7 or a Chapter 13. It occurs thirty days after your bankruptcy petition is filed. The meeting lasts about 10 minutes, and it is telephonic not over zoom.
There is a conference bridge so when you call in, everyone (you, your attorney, and the trustee) will be on the phone line. You will be prepared for the hearing because we thoroughly review all the documents the trustee will ask you about when we prepare the petition. Since everything is disclosed on the bankruptcy petition and your documents are provided to the trustee in advance of the meeting, your attendance at the hearing should really be a formality to getting your discharge.
If there is anything special about your case, such as being over the exemption amount you would know that in advance of filing your case so there should be no surprises. Many people ask if all their creditors show up for the meeting. It’s a bit misleading that it’s’ called a meeting of creditors because it is extremely rare that any creditors appear for the meeting.
Creditors appear in probably in less than 1% of cases. There would likely have to be a special issue such as a lender asking where the debtor’s car might be located if they are surrendering it or a creditor that the debtor personally knows. Typically, the meetings run very smoothly and on time.
There are several ways to commingle funds. The first way to commingling funds is sharing bank accounts with a non-filer. Generally, its best to keep all bank accounts separate and have all your income and expenses going out of one checking account.
Otherwise, it could be perceived by the trustee, as a gift if any money is going into someone else’s bank account. The second way to co-mingle funds is to keep your business income and personal income in the same checking account.
It is always best if you operate a business to keep all income and expenses of the business coming out of a designated, separate bank account. Only transfer to the personal account your payroll or distributions to pay your personal expenses. The third way to commingle funds is to put money from a variety of sources into the same bank account.
It’s possible for different sources of income to have different exemptions. For example, wages from a job can be exempted up to 75%. Social security income is 100% exempt. Pension income, depending on the type, have different exemptions. Alimony has a separate exemption, as does VA disability.
Ideally, it is best to keep each in a separate account so it’s being exempted correctly when the bankruptcy petition is filed, and you are not commingling exempt funds with non-exempt funds. Another example is putting in a tax refund, or personal injury settlement, into the same account as wages.
In that case, that money might have to be spent down reasonably so we know the source of any money left in the account is wages that would be exempt. The lesson is to keep everything transparent and separate so it’s easy to see the source of the deposits and any expenses coming out of the account.
In today’s current market business owners are faced with numerous challenges from finding employees to drastically increased costs. They are faced with the question of whether they will be able to continue their business or whether it’s better to close it.
That is a very personal decision since so much goes into starting and sustaining a business. There are several factors we look at in making that determination.
Are there any business assets such a commercial building, inventory, or equipment that should be liquidated to pay your creditors? Your assets cannot be sold or transferred for your benefit at the expense of paying your creditors. Even transferring assets to a new business venture can disqualify you from filing bankruptcy so its very important to consult with an attorney before making any decisions on the proper steps to close your business. Another issue is whether the debt is exclusively in the business name, did you personally guarantee the business debt, or did you use your personal credit lines to fund your business?
In most cases, there is a personal guarantee on business debt and personal credit cards are used to keep the business afloat. If the majority of your debt, is non-consumer or business-related then you would qualify for a Chapter 7. Again, it is important to seek the advice of an attorney to determine which Chapter type you would qualify for under the bankruptcy code.
Many times, if the business has no assets and will be closed then it can just be administratively dissolved without the need to file for bankruptcy. Another issue also is whether there are any outstanding account receivables, do you reasonably expect payments in the future, or expect any reoccurring income? There is also a potential that that could be collectable by the trustee if you are filing a business bankruptcy.
All of these factors need to be considered whether determining whether to file a business bankruptcy or a personal Chapter 7 or 13 bankruptcy.
