10 Busted Bankruptcy myths · 2018-04-02 · SOFA Part 5 Gifts –Debtors are required to disclose...

10 BUSTED BANKRUPTCY MYTHS

Malissa L. Walden

Cassie Pfannenstiel Rodriguez

Walden & Pfannenstiel, LLC

WPLawPractice.com

Bankruptcy

Chapter 7 – 11 U.S.C. § 701-784

Chapter 13 – 11 U.S.C. § 1301-1330

Discharge

Exemptions – 11 U.S.C. § 541; K.S.A. 60-2301 – 2315

United States Trustee

Interim Trustee

BAPCPA (Bankruptcy Abuse Prevention and Consumer Protection Act)

Means Test

INTRODUCTION

MYTH #1

BANKRUPTCY WILL NEVER

BE AN OPTION FOR YOU

OR SOMEONE YOU KNOW

TRUTH: Most Everyone Knows Someone Who Has Filed

Or Needs To File For Bankruptcy Relief

Statistics per United States Courts

Total cases Total non-

business

Chapter 7 Chapter 13 KS 7 filings KS 13 filings

1/1/17 –

3/31/17

201,231 195,516 124,271 75,122 776 626

2016 833,515 808,718 523,394 302,193 3,802 2,786

2015 911,086 884,956 596,867 306,729 3,905 2,877

2014 1,038,280 1,006,609 699,982 329,256 4,429 3,041

Estimated Population of Kansas and

U.S. for 2016 per United States Census

Bureau

Kansas 2,907,289

United States 323,148,587

job loss,

medical debts,

mental issues,

physical disabilities,

supporting adult children

Debtor situations that necessitate bankruptcy:

Many consumers should

file for bankruptcy

Instead cash out or borrow from

retirement lowering their

standard of living during retirement

Take out home equity loans to

pay off unsecured debt

Continue to struggle to make

minimum payments on

credit card and medical

Stress leads to mental and

physical health issues and strained

relationships

Band-aid solutions that

are not putting debtors in

a position to participate in

the economy

MYTH #2

FILING FOR BANKRUPTCY

IS DIFFICULT AND ONLY

A FEW PEOPLE CAN QUALIFY

TRUTH: Although It Is A Process, Chapter 7 Or

Chapter 13 Bankruptcy Is Almost Always An

Option

Who can file Chapter 7 Bankruptcy?

To qualify income and expenses will be

examined to determine if income level falls

below the median income level.

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.

Chapter 7 Means Test/Median Income Test –

Form 122A

Means test figures for Kansas bankruptcy,

effective May 1, 2017. Cases by household size:

1. $47,591

2. $63,327

3. $72,981

4. $83,528

5. $91,928

Means test figures for Missouri bankruptcy,

effective May 1, 2017. Cases by household size:

1. $44,994

2. $57,288

3. $65,260

4. $81,172

5. $89,572

• Lowest 1 person household Mississippi $37,051

• Highest 1 person household Maryland $63,401

Who can file Chapter 13?

To qualify for Chapter 13

relief:

Must have a regular

source of income.

Unsecured debts must

not exceed $394,725.00

Secured debts must not

exceed $1,184,200.00.

What about BAPCPA?

Bankruptcy Abuse Prevention and Consumer Protection Act

The “New Bankruptcy Law” – it’s almost 12 years old!

People are still filing despite the fact we now:

• Have additional paperwork to fill out

• Have to run a Means Test

• Have each case reviewed for Presumption of Abuse

• Require Debtor’s to wait longer between filing another Chapter 7

• Take a Credit Counseling and Debtor Education Course

• Put a limit on exemptions and forum shopping

• Provide better service to the Creditors

• Have broadened definition of the types of educational ("student") loans that cannot be discharged - § 523(a)(8)

Any chance a Debtor will be denied

or not allowed to file?

Presumption of Abuse

•Affidavit Rebutting - 11 U.S.C. § 707(b)(2)(B)

•Convert to Chapter 13

•Dismissal

Non-presumed Abuse can still lead to dismissal in Chapter 7

•11 U.S.C. § 707(b)(3)

•“bad faith”

•“the totality of the circumstances

No.

How many times can a debtor file bankruptcy?

A Once

B Twice

C One chapter 7 & One 13

D Unlimited

Win a 100 Grand!! Win a 100 Grand!! Win a 100 Grand!! *


* 100 Grand paid in the form of a confectionery treat

How many times can a debtor file bankruptcy?

D - Unlimited

A debtor can file unlimited bankruptcy cases (within reason)

A discharge will only be granted if enough time has passed since the previous bankruptcy filing

MYTH #3

ONLY POOR PEOPLE FILE

BANKRUPTCY

TRUTH: Bankruptcy Does Not Discriminate Against

Age Or Income

FAMOUS FILERS

PT Barnum

Toni Braxton

Kim Basinger

Walt Disney

Henry Ford Merle Haggard

Michael Jackson

Donald Trump

Abraham Lincoln

Who’s Filing?

HonestHard

Working

File as a Last

Resort

Good

Possess Similar Traits

May have fallen in to debt simply because they did not know better.

Did not have the resources available to learn about budgets and managing money.

Have learned from their past mistakes, will have a fresh start and be able to contribute fully moving forward.

Our youngest clients aretypically in their 20’s

Typically spent and continue to spend months or even years struggling to pay bills after “life happened”

Job loss

Failed business

Divorce

Can’t seem to get on top of bills no matter what they do.

Interest continues to build; the minimum payment just isn’t enough.

Life continues to happen around them.

Continue to support their adult children.

Clients in their 30’s, 40’s, and 50’s

May be more likely to face issues related to their fixed income vs increased expenses.

Unexpected or prolonged illness, hospital and Dr bills

Loss of a spouse.

Clients in their 60’s, 70, or 80’s

Income matters

Truly insolvent people probably should

not be filing for bankruptcy.

• If debtors have no income or assets there is little creditors can do, so bankruptcy may not be very beneficial.

• On the other hand, if debtors are employed or own assets then bankruptcy may be an option to consider.

Qualify for a Chapter 7

Bankruptcy

Stop collection

efforts

Avoid and/or stop

garnishment

Those with lower income levels may be able to

Qualify for a Chapter 13

Stop collection efforts

Avoid and/or stop garnishment

Stop foreclosure action

Get caught up on their car and home payments

Pay off tax debt

Those with higher income levels may be able to:

MYTH #4TRANSFER PROPERTY AWAY BEFORE

FILING TO AVOID LOSING PROPERTY

TRUTH: The Trustee Can Avoid Transfers Of

Property And Payments Made Before Filing

Debtors must disclose extensive

information when filing for bankruptcy

11 U.S.C. § 521(a)(1)(iii) – “a

statement of the debtor’s financial

affairs” (Statement of Financial

Affairs (SOFA))

#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?”

11 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

SOFA Part 7 Other Transfers - Debtors required

to list any transfers of property made within the

two years before filing bankruptcy

SOFA Part 3 Payments to Creditors -

Debtors are required to disclose payments

to family or friends made within 12 months

of filing (preference payments)

#7 – “Within 1 year before you filed for bankruptcy, did you make a payment on a debt you owed anyone who was an insider?”

Trustee can demand and ultimately receive a judgment for the turnover of these preference payments to the bankruptcy estate

SOFA Part 5 Gifts – Debtors are required to

disclose gifts in the 24 months prior to filing to

charities and family members

#13/#14 – “Within 2 years before you filed for bankruptcy, did you give any gifts with a total value of more than $600 per 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?”

“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."

11 U.S.C. § 548(a)(2) – exception to

charitable contributions

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

#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?”

Claiming theft – will probably need police report

Some pre-bankruptcy planning allowed

“Pigs Get Fat – Hogs Get Slaughtered”



Which state allows a debtor to exempt 1 dead body?

A Rhode Island

B California

C Missouri

D Maine


A – Rhode Island

Which state allows a debtor to exempt 1 dead body?

§ 9-26-3 Body of deceased person exempt. – The body of a deceased person shall not be liable to be taken for debt or damages on execution or upon any process whatsoever; and if any officer shall, under color of an execution or process, seize or take the body of any deceased person for debt or damages, he or she shall be fined not exceeding five hundred dollars ($500) or be imprisoned not exceeding six (6) months.

MYTH #5

DEBTORS WILL LOSE

EVERYTHING THEY OWN IF

THEY FILE BANKRUPTCY

TRUTH: All Assets Are NOT Up For Grabs And Even

Some Pre-bankruptcy Planning May Be Possible

Bankruptcy Exemptions

Exempt property is safe during the bankruptcy.

Non-exempt property can be sold for the benefit of creditors.

Each state is allowed to decide what exemptions are available to their residents.

Kansas exemptions

If debtors have been in the state for the last 2 years.

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.

NO cap home equity (vs MO $15,000 cap)

Over 2 years, but under 3.3 = $125,000 cap on home equity

Vehicles - $20,000 in value and limited to one vehicle that debtors use regularly for transportation, generally for work. (vs MO $3,000 cap)

Kansas exemptions

If spouses are filing a joint bankruptcy, this exemption may be doubled.

If vehicle has been designed or equipped for handicapped persons the $20,000 value cap does not apply.

ASSET EXEMPTION STATUTE

Homestead No monetary limit. One acre inside city limits or 160

acres outside city limits.

60-2301

Household goods, clothing, food, and

fuel to last 1 year

No monetary limit. 60-2304

Jewelry $1,000 limit per debtor. 60-2304

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.

60-2304

Burial plot No monetary limit. 60-2304

Tools of Trade $7,500 limit per debtor. 60-2304

Life Insurance No monetary limit if purchased over one year before

filing.

60-2313; 40-414

Worker’s Compensation No monetary limit. 60-2313; 44-514

Retirement Benefits (ERISA

qualified)

No monetary limit. 60-2308

Public Employee Retirement No monetary limit. 74-4923

Public Assistance Benefits No monetary limit. 60-2313; 39-717

Unemployment Benefits No monetary limit. 60-2313

Crime Victim Compensation No monetary limit. 60-2313; 74-7313

Liquor License No limit. 60-2313; 41-326

Fraternal Benefits No monetary limit. 60-2313

Cemetery Merchandise Trust No monetary limit. 60-2313

Prepaid Funeral No monetary limit. 60-2313; 16-310

Social Security Benefit No monetary limit. 60-2312; U.S.C.

522(d)(10)

Veteran’s Benefit No monetary limit. 60-2312; U.S.C.

522(d)(10)

Disability Benefit No monetary limit. 60-2312; U.S.C.

522(d)(10)

Maintenance or child support To the extent reasonably necessary for the support of

the debtor and any dependent of the debtor.

60-2312; U.S.C.

522(d)(10)

Non-exempt Property

Pre-Planning options

• Sell for FMV (3rd car, motorcycle)

• Spend down on necessities (cash, tax refunds)

• Put in retirement funds (cash)

• Pay bankruptcy fees (cash, tax refunds)

Post-filing options

• Trustee can sell

• Trustee can abandon

• Surrender

• Make an offer

MYTH #6

TRUSTEE WILL COME TO DEBTOR’S

HOME TO INVENTORY ASSETS

TRUTH: A Trustee Will Not Come To Inventory

Property

Debtor duties are listed under 11 U.S.C. § 521

§521(a)(1)(B) requires debtors to file a schedule of assets and liabilities among other requirements

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.

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

18 U.S.C. § 157 addresses bankruptcy

fraud and allows a fine and/or sentence

up to 5 years

18 U.S.C. § 158 designates U.S.

attorneys and FBI to investigate

bankruptcy fraud

Trustee can request debtors to supply non-exempt property for valuation or have an appraiser come to the house to

value non-exempt property

Motorcycle

Vehicle

Boat

Camper

Second house

Jewelry

Antiques

Firearms

Trustee questions debtors

Evaluates responses against filed documents

Trustee receives tax returns, bank statements, registrations, insurance policies, etc

11 U.S.C. § 341

341 meeting under oath again claiming true and accurate

Do not underestimate

ex-spouses,

ex-friends,

neighbors

to report assets

for debtor



Which state has a

firearms exemption?

A Kansas

B Oklahoma

C Washington

D Alaska


Which state has a

firearms exemption?

D Alaska – pets $1,350.00

B – Oklahoma

31-1(A)(14) Guns, not to exceed Two Thousand Dollars ($2,000.00) in aggregate value, that are held primarily for the personal, family or household use of such person or a dependent of such person, provided that nothing in this subsection shall be construed to allow a person to exempt guns which are used mainly as an investment or nonpersonal, family or household use;

Various farm animal exemptions also

MYTH #7

CHAPTER 13 IS DEBT

CONSOLIDATION

TRUTH: A Chapter 13 Plan Is Not A Debt Consolidation

Program

Notable Differences From Debt Consolidation /

Debt ManagementC

hap

ter

13

• Plan payments are determined on a case by case basis usually without regard to the total debt owing in the case

• Interest rate set by court

• Creditors do not choose to opt in/out

• 36-60 months

• Unpaid debt is not taxable

Debt

Man

agem

en

t • Payments determined by creditors

• Interest rate determined by creditors

• Creditors can choose not to enter the DMP

• Usually 60 months

• Cancelled debt is taxable

Con

soli

dati

on • Payment

determined by overall debt balances

• Interest rate set by the terms of the new loan

• Creditors do not opt in/out

• Set by terms of new loan

• Debts paid in full – no unpaid debt

11 U.S.C. § 1325 sets out requirements for plan

confirmation

Accurate Means Test for applicable time period

All disposable income is contributed to plan

All tax returns filed

Post-petition child support and alimony are current

Unsecured creditors receive the same amount that they would have received in a chapter 7 if the bankruptcy estate was liquidated

Good faith

Case by case determination

A neighbor, friend, or relative are not indicators of what someone else’s

plan payment will be

Different result if:

➢One has a higher mortgage payment

➢One pays child support

➢One has a car loan

➢One has high out of pocket medical expenses

➢One contributes to a retirement account

➢One contributes regularly to charity

➢One has medical insurance

➢One has tax debt

➢One is behind on a mortgage, car loan

Any unsecured debt not paid in full at the end of the plan is discharged

Some Exceptions

❖Student loans

❖Restitution, fees, fines

❖Taxes

No tax consequences to debt discharged in bankruptcy

MYTH #8

MORTGAGES CAN BE MODIFIED

IN ALL BANKRUPTCY CASES

TRUTH: No, But Options May Be Available

Chapter 7 Mortgage Options

Surrender

Reaffirm

Retain

Chapter 13 Mortgage Options

Surrender

• Relief from Stay

Retain - 11 U.S.C. § 1325(a)(5)

• Payment inside the Plan

• Payment outside the Plan

Cure Pre-Petition Arrears

• Paid pro-rata with other similarly classed creditors over the life of the Plan

• Paid per Creditor’s Proof of Claim

• If paid per Plan, the pre-petition default will be cured and the note and other loan documents will be deemed current as of the date of filing.

• Any right of the mortgagee to recover any amount alleged to have arisen prior to the filing of the petition or to declare a default of the note, mortgage, or other loan documents based upon pre-petition events will be deemed extinguished.

Lien Stripping

• Only for wholly unsecured second (or third) mortgage

• Cannot have ANY equity in junior lien, not a single cent

• “Upside down” in home - mortgage exceeds the value of house

• Stripped lien will receive same treatment as other unsecured creditors

• § 506 acknowledges that a lien is only a secured claim to the extent there is value in the asset to which it attaches

• Requires Adversary Case to be opened

• Separate lawsuit filed within the bankruptcy case.

• Additional filing and attorney fees.

Options not available

After Sheriff sale in foreclosure action

Chapter 7 if behind on Mortgage

No lien stripping in Chapter 7



How many bankruptcy judges are in the District of Kansas?

A 2

B 4

C 5

D 6


How many bankruptcy judges are in the District of Kansas?

B – 4

Chief Judge Janice Miller Karlin

Judge Robert E. Nugent

Judge Dale L. Somers

Judge Robert D. Berger

MYTH #9

MARRIED SPOUSES MUST FILE

BANKRUPTCY TOGETHER

TRUTH: Spouses Can File A Bankruptcy Case Without

The Other Spouse Filing

11 U.S.C. § 109 – sets out who can be a debtor in bankruptcy

“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)

Living Together vs. Living Separately

If separated and residing in separate households – file without needing information from spouse

If residing in the same household – spouse will need to provide income information, monthly debts, money not going into household

Filing separately when does it make sense

Separated but have not filed for divorce

Finances separate

No joint debts

Spouse solely owns non-exempt property

No joint non-exempt property

Spouse has a business

Must be married to file joint petition

United States v. Windsor, 570 U.S. __ (2013) struck down Section 3 of the Defense of Marriage Act (DOMA) allowing same sex couples legally married to enjoy federal benefits

Obergefell v. Hodges, 576 U.S. ___ (2015) recognizing same sex marriages

MYTH #10

BANKRUPTCY SHOULD ALWAYS BE

THE LAST RESORT

TRUTH: Debtors Should Build A Fresh Start On Top Of

What They Already Have

Assets your clients have now can help them in the future

Helpful Bankruptcy Exemptions

Home

Car

Retirement

Taking out additional debt is not going to get debtors ahead

Borrowing against

retirement

Home equity loans

Borrowing from family and friends

Payday loans

What is holding debtors back from filing?

I haven’t missed any payments.

Everyone will know.

Only deadbeats file for

bankruptcy.

I can’t afford to file for

bankruptcy.

Bankruptcy Myths!

•Many will increase 65 – 125 points over 12 months when making secured payments

•Credit card offers will come soon after filing

•Pay all bills on time

•Do not apply for too much credit at one time

•Check a Credit Report to ensure accounts reported correctly

•FHA mortgage 2 years after for good credit

•Car loans after 1 year with higher interest rate

Credit Score will not

recover



What year was debtor’s

prison abolished under

Federal Law?

A 1918

B 1875

C 1833

D 1816


What year was debtor’s

prison abolished under

Federal Law?

C – 1833

A century and a half later, in 1983, the Supreme Court affirmed that incarcerating indigent debtors was unconstitutional under the Fourteenth Amendment’s Equal Protection clause.

Though de jure debtors’ prisons are a thing of the past, de factodebtors’ imprisonment is not.

Malissa L. Walden

Cassie Pfannenstiel Rodriguez

WPLawPractice.com

913.438.1112

[email protected]

10 Busted Bankruptcy myths · 2018-04-02 · SOFA Part 5 Gifts –Debtors are required to disclose...

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Transcript of 10 Busted Bankruptcy myths · 2018-04-02 · SOFA Part 5 Gifts –Debtors are required to disclose...