Bankruptcy Process

January 6, 2021 By Jen Lee

A Lesson in Internet Headlines

Yesterday (January 5, 2021), news websites reported the following two headlines:

PANDEMIC SPURS MOST BANKRUPTCY FILINGS SINCE 2009
The sky is falling, the sky is falling!

BANKRUPTCY FILINGS HIT 35-YEAR LOW THANKS TO GOVERNMENT PANDEMIC AID

Wait, what? I thought the sky was falling.

How can both of these headlines be true? Because the reporters cherry-picked statistics to make the most sensational headlines. As far as business bankruptcies go, it’s true that bankruptcy filings were way up in 2020. However, consumer bankruptcy cases were way down in 2020. So, it was the best of times, it was the worst of times.

To explain, businesses struggled with shutdowns and lack of funding to pay leases, payrolls, and expenses with no revenue. Many businesses have held off filing for bankruptcy to see what a recovery may look like before jumping into bankruptcy, but many were not able to hold off, which resulted in high business filings compared to recent years.

However, consumers and individuals are currently struggling with how to predict the future. It did not make sense in 2020 for most people to file bankruptcy without knowing what debt and income looks like going forward. Also, the pandemic unemployment helped many people stay current on bills. Finally, the eviction and foreclosure moratoriums, along with court closures, have made it less urgent to file immediately to stop those proceedings.

So, take your headlines with a big grain of salt these days. It also helps to remember that you are not alone in facing difficulties. Get advice for your specific situation and use the tools that are available to you.

This is just a basic overview and is not legal advice specific to your situation. If you have questions about your rights when it comes to debt and credit, you should speak with an attorney in your area for legal advice. If you live in California or North Dakota and would like to speak with Jen Lee Law regarding your situation, please schedule an appointment.

March 28, 2020 By Jen Lee

The CARES Act and Chapter 13: What You Need to Know

Lots of information out there about the new CARES Act and what it purports to do. It’s a huge document and has a lot of moving parts. In an attempt to pull out useful information for the average consumer and small business owner, we are working on a series of blog posts to help answer some questions.

The CARES Act has some specific protections for debtors in Chapter 13. For background, a Chapter 13 bankruptcy is a reorganization plan where you create a plan to pay back some or all of your creditors over a period of three to five years. All of your creditors get a copy of your plan and have the chance to object towards the beginning. Once the judge confirms the plan, you continue making a monthly payment to the Chapter 13 Trustee as outlined in your plan document.

The reason for the background is that the CARES Act allows us to stretch payments up to seven years, instead of the five-year limitation under the bankruptcy code. This is to allow people to be able to catch-up on payments and to keep plans from failing when people cannot make payments during this uncertain period when incomes have significantly dropped. However, in order to take advantage of this new provision, the Chapter 13 Plan has to be a CONFIRMED plan before the date of enactment of the CARES Act. That means that anyone who has recently filed a Chapter 13 case where the plan has not been confirmed yet may still be stuck in limbo with no income, but no way to extend payments.

If your Chapter 13 plan has already been confirmed, the new Act allows for modification and the extension of payments, but no standard procedures have been implemented yet for how those modifications will be done. Under normal circumstances, we file a motion to modify, send out the plan to all creditors for review, and then if there are no objections, the modified plan is approved. Keep in mind that we probably will want to modify after income has stabilized so that we can propose a plan that you can actually keep up with for the rest of the case.

If you are in a Chapter 13 plan now, you should try and make some sort of payment towards your plan each month, even if it’s not a full payment. When we go back to reconcile total payments, that will help in keeping a reasonable monthly payment going forward.

The important part of being in a Chapter 13 case is to communicate with your attorney. The CARES Act passed yesterday, but it’s going to take several months for many to catch-up on payments, especially those who are self-employed or contractors.

January 20, 2020 By Jen Lee

More Scams – Financial Education Requirement in Bankruptcy

It is increasingly difficult to stay on top of all of the scams out there when it comes to debt, credit, and financial issues. However, this one really struck a nerve recently when a client received this notice after filing for bankruptcy:

This looks pretty official, right? If you got this in the mail after filing your bankruptcy, you would probably be concerned that there is something wrong with your case, after all it says “Warning” at the top. This is NOT an official court document. This is an advertisement. Nowhere on the form does it tell you that it’s an advertisement. And, the code section at the top really has nothing to do with the actual requirement of taking the course.

When you file for bankruptcy, you are required to take a credit counseling course before filing and a financial management (or debtor education) course after filing. If you file with our firm, we send you different options for the courses at the proper times because timing is important. However, once you file for bankruptcy, there are companies that will bombard your email and mailbox with offers for the financial management course. This is one of those offers.

The reason I hate these advertisements is because our clients are stressed enough with filing bankruptcy. They don’t need extra stress in the form of an unofficial document that makes it look like something is wrong with their case. Now, we get to send a warning to all clients to try and ease the stress before they get something like this in the mail.

Here’s what the bottom of this letter looks like (with the name of the agency redacted):

This language makes it sound like the government requires you to obtain the certificate from this particular agency, which is absolutely not true. There are many accredited providers out there who offer this course.

Also, the icing on the cake, is that it tells you not to research the company by typing the company name into a search engine. If you do type it in, you get a bunch of alternatives to this company and they don’t want you to know that there are other options.

So, please check with your lawyer when you receive things like this and please don’t panic. Our goal is to reduce stress in your life, not create it!

April 26, 2019 By Jen Lee

Wouldn’t It Be a Great Idea if I Added My Son/Daughter/Dog to the Title of My House??

There are a couple variations of this question, but if often comes up when we are talking to clients. We’ll run through a few ways this comes up and why adding people to deeds is probably not a good idea.

First example: A client comes in and has assets that she wants to protect from creditors, for example, her house. The house has a lot of equity and she does not want liens against the house. She asks, “Can’t I just transfer the title of my house to my son?”

There are a few problems with this idea. From an estate planning and tax standpoint (and I’m not an estate planning attorney, so consult an expert regarding your own situation), but there are potentially significant tax consequences to transferring property this way. From a creditor standpoint, it may be considered fraud if you transfer assets knowing that there are claims against you. That can be a complicated analysis, and depending on which statute is being used, can go back as far as 6 or 7 years to see if you transferred property to avoid creditors being able to collect.

Second example: Same situation as above with a house that the client is trying to protect from creditors, but now asks, “Can I SELL the house to my son for $1?”

Lots of issues here, especially with selling property for less than fair market value and selling to a family member. From a creditor standpoint, it is still a transfer and may be considered fraud if a creditor is able to show that it was done to hinder collections by creditors.

Third example: A client comes in and does not really have any assets, mostly unsecured credit card debt, and looks like a Chapter 7 bankruptcy would be the best option for a fresh start. Towards the end of the conversation, he says, “Oh, by the way, my parents added me to the deed of their house a few years ago for estate planning. The house is worth $1.5 million and they own it free and clear. That won’t be a problem, right?”

Wrong. In a Chapter 7, the trustee’s job is to find assets that are available to sell to pay your creditors. You now have an interest in a $1.5 million house that the trustee would be interested in selling, or at least making a deal to get your creditors paid through some sort of settlement with you and/or your parents. The case has gone from a simple Chapter 7 to a complicated analysis and some risk if you decide to move forward.

The best practice for all of these situations is to do proper estate planning, don’t transfer deeds to family members without getting advice on the consequences of that transfer, and don’t transfer assets to try to get away from creditors. Do proper planning before you need it, as that will be the most efficient (and least expensive!) option.

March 7, 2019 By Jen Lee

Couldn’t Resist – More Bad Information About Bankruptcy

Last week’s post talked about two recent articles that were really wrong about how bankruptcy works. Because there were so many things wrong with the first one, I didn’t even get a chance to write about the things wrong in the second one. So, I am taking the opportunity this week to go through the second article because I think bad information on the internet leads so many people to make decisions that are detrimental to their long-term financial future.

Here we go.

First of all, the title of this article is Chapter 11 vs. Chapter 7 Bankruptcy: What to Know. But, the article then discusses Chapter 11, Chapter 7, and Chapter 13. The biggest issue with the whole thing is that these chapters are used for very different situations. It’s not like you walk into an attorney’s office and you just pick a chapter to file. Your financial goals and situation generally determine which route you need to go down.

Let’s get to down to the dirty details:

“Chapter 11 bankruptcy is a form of bankruptcy that exists to allow businesses and corporations to follow a plan to rehabilitate or reorganize their debts so that they can remain in operation while repaying their debt.”
Partly true. Business and corporations are eligible to file for Chapter 11, but you don’t have to be a business or corporation to file for Chapter 11. Individuals can file Chapter 11.
“Shouldn’t affect your personal credit score. If you file for Chapter 11 bankruptcy as a corporation or business, it shouldn’t affect your personal credit score.”
Be very careful with this – a lot of banks and lenders require the business owner to personally guarantee credit cards, loans, lines of credits, and leases, so filing bankruptcy for a corporation can actually affect your personal credit score.
“Stays on credit report for 10 years: This can be especially discouraging if you file as an individual since your score may be hit pretty hard.”
Oh, for the love of Pete. Yes, bankruptcy stays on your credit report as a public record for 10 years. It does not affect your credit score for 10 years and many people with low credit scores actually experience their credit score going up immediately upon filing bankruptcy. With proper rebuilding strategies, you can have a 700 credit score a year after bankruptcy.
“People who file for Chapter 7 bankruptcy typically earn lower incomes and can’t repay their debts. To qualify for Chapter 7 bankruptcy, you must be earning less than your state’s median income for a family or household of your size.”
This is just wrong. One way to qualify for Chapter 7 is to be below the median income for your household size. However, I can’t remember the last time I had a client who was below median income. You can still qualify for Chapter 7, but it’s important to have a professional run the Means Test to determine eligibility. Also, there are certain categories of debts that make the Means Test not even apply. For example, if 51% of your debts are non-consumer debts (taxes, business loans, etc.), the Means Test doesn’t even apply to your situation.
“Income status requirements: Chapter 7 bankruptcy is limited to those with low income and minimal assets.”
See #4? There are often ways to qualify for Chapter 7 without being low income. And, assets have nothing to do with your eligibility requirements for Chapter 7.
“Stays on credit report for up to 10 years: Because of this, filing for Chapter 7 bankruptcy may make it difficult for you to get credit or insurance, and may even make it challenging to be hired for a new job or get approved to rent a new apartment.”
Talk to a professional in your state. In California, your credit score isn’t used in insurance unless it’s to make your premium lower (credit score can only be used to decrease, not increase or deny, insurance premiums). Also, in California, credit scores and bankruptcy can only be used in very specific situations for hiring. I have lots and lots of clients who get new apartments or houses during and after bankruptcy. It sometimes takes a bit more searching and explanation, but any smart landlord prefers someone who filed bankruptcy than someone with 20 collection accounts on their credit report.
“Chapter 13…In many cases, you’ll pay off most of your debt with monthly payments over the course of three to five years, after which time the rest of your debt is discharged.”
This is one of the biggest myths about Chapter 13 – you don’t pay off most of your debt necessarily. You do make payments for three to five years, but often we are paying back mortgage arrears, taxes, and child support for the three to five years while the credit cards and collection accounts get very little and are discharged at the end.
“Most individuals or business qualify for Chapter 13.”
Businesses that are corporations do not qualify for Chapter 13. There are two requirements for Chapter 13. You have to be an individual and you have to have regular income. You can be a sole proprietor of a business and be in Chapter 13, but if you are the owner of a corporation, the corporation cannot file Chapter 13. Quite often, the business owner took on a bunch of personal debt for the corporation and we file a Chapter 13 to reorganize those debts, but the bankruptcy is filed for the individual.
“If you’ve been discharged from Chapter 13 or another type of bankruptcy within the last two to four years, you may not qualify to file.”
Oh, where do I start. The waiting times between bankruptcies are from filing date to filing date. Your discharge date has nothing to do with the waiting times. The longest wait is 8 years and the shortest is 2 years. Please have a professional tell you what your eligibility is based on your individual situation.

Overall, please know your rights and options. Please have a professional look at your situation and please do not assume that something you read on the internet was correct, especially because a lot of these issues depend on the state you live in.

Here’s the article:
https://www.lendingtree.com/bankruptcy/chapter-11-vs-chapter-7-bankruptcy/

A Lesson in Internet Headlines

The CARES Act and Chapter 13: What You Need to Know

More Scams – Financial Education Requirement in Bankruptcy

Wouldn’t It Be a Great Idea if I Added My Son/Daughter/Dog to the Title of My House??

Couldn’t Resist – More Bad Information About Bankruptcy

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