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Tis the season for tax refunds.  In this season, a number of people find themselves in an odd conundrum.  Their debts are eating them alive and they are preparing to file for bankruptcy, but they have a small tax refund from the IRS coming and so they are instructed to “spend it on exempt purposes.”   This conundrum does not just apply to tax refunds.   In a surprising amount of cases, a person my find himself with more money than he is allowed to have on the date of filing shortly before filing.  The tricky part about this is that you are allowed to spend the money, but you are not exactly allowed to do with it as you wish.  For example, you can’t (read also: should not) give the money to a family member or friend in repayment of a debt (this would be considered a preferential payment), you should not give it to someone to ‘hold on to’ until your bankruptcy is over (this would be considered a fraudulent transfer, believe it or not), and you most definitely should not use it to purchase something that the trustee will consider a non-exempt asset and so take away from you.

Instead, you should use the money for exempt purposes.  This blog post will discuss what ‘exempt purposes’ mean for someone living, and filing for bankruptcy in Arizona. (NOTE: This is exclusively about Arizona exemptions, so if you have never lived in Arizona, and you don’t now, this will be an overview of how it works in Arizona, but it won’t help YOU, as all states have different exemption laws.).

So, what to do with the money, then?  Well, first of, you can pay your current monthly bills (not your creditors, but rather your utilities, mortgage, rent, car-payment, phone bill, whatever it may be).  Do NOT pre-pay anything!  Then, go shopping for groceries and supplies (think toilet paper).  In Arizona, you can have up to 6 months worth of groceries and supplies on the date of filing.  Be sure to keep receipts for everything you buy, and if you go an a grocery shopping spree within a couple of days before filing, be sure to list it on your asset schedule.  You want to be able to show the trustee that you used the money for something you are allowed to have, something that is protected.  Therefore, stay away from buying anything shiny (think jewelry), anything that uses electricity (think big old flat screen), and anything that you could sell again after your bankruptcy is done.

Now, what if you are getting a sizeable refund, more than what you could reasonably spend on groceries and supplies.  Well, there are a few options, the most basic ones are as follows:

  • Pre-pay your mortgage/pay down on your principal:  In Arizona you are allowed to have up to $136K of equity ($150K if you have had the house for more than 10 years) in your HOME.
  • Prepay you car payment: As long as the equity in your car is no more than $5K, there is no problem.  ONLY do this if you intend on keeping your car.
  • A better alternative, especially if you are currently in a position where making the monthly car payment is a struggle from month to month, is to use the money to purchase a car, free and clear.  As long as the car is not worth more than $5K, you get to keep it, no questions asked.  This will then allow you to surrender the other, financed vehicle as part of your bankruptcy, and live car-payment free.  This can be a huge burden off your back, and in light of the current market, you CAN get a pretty decent car for $5K. 

These are some of the most common examples of ‘exempt purposes’.  The most important lesson of this blog post is that there is a right way to plan for your bankruptcy, that is recognized and allowed by the law, and then there is a wrong way, and the wrong way can lead to a number of headaches down the road (including but not limited to having the trustee knock on your mom’s door telling her that she has to return the money you just paid her back).  If  you are contemplating bankruptcy, it is important to speak to an attorney as early in the process as possible, so you can be sure to avoid some of these common mistakes, and put yourself in the best possible starting position after your bankruptcy, without unwittingly defrauding your creditors.

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  The discharge, in general, operates as an injunction against any act to collect an obligation of the debtor that existed on or before the date of filing of this case, with some exceptions. The discharge does not enjoin the collection of taxes not less than three years old on the date of filing for which returns have been filed, other taxes of a shorter period, the collection of student loans for which no finding of hardship has been made, or debts as to which the court has made an order of non-dischargeability.

In plain English, it is a court order that prevents all of your creditors from ever attempting to collect the debt you owed before filing – no one can ever ask you to pay on that debt again, and if they do, they can be sanctioned.  Now, there are some exceptions, as noted above.  The most common ones are most tax debts, and pretty much any student loan debts.  Finally, any debts that you reaffirmed are excepted from the discharge.  Orders of non-dischargeability as mentioned above are fairly rare – such orders typically happen when a creditor can show that you incurred a debt with the intent to discharge the debt. 

In short, the discharge is the key to your fresh start.  It frees you from the burden of debt and allows you to focus on rebuilding your financial future.

As I previously discussed, the means test plays a major role in determining whether a person is eligible to file for relief under Chapter 7 – the liquidation bankruptcy.  However, if you are looking at filing a Chapter 13 reorganization bankruptcy for whatever reason, the means test still plays a role in your Chapter 13 bankruptcy.

The means test form used in a Chapter 13 is slightly different than the one used for a Chapter 7, but the same basic rules about determining your income and taking expenses still applies.  There are some more restrictions as to which expenses you can take, but that is what your attorney needs to worry about. 

Now, each jurisdiction uses the means test slightly differently, so if you are looking for file for bankruptcy outside of Arizona, this blog posting will likely not give you the information you need.  I help people get relief under Chapter 13 bankruptcy in Arizona only, and cannot speak to systems outside of this state.

Basically my goal when doing the means test for your Chapter 13 is to minimize your disposable income.  In Arizona, we determine your plan payment based on your Schedules I and J. Basically we take your current monthly income, minus your current monthly expenses and see what is left over.  However, there is a provision in the bankruptcy code that says, essentially, that the plan cannot be confirmed unless your unsecured creditors get at least as much as your means test shows you have left over at the end of the month.  Depending on your circumstances, that can be an unsurmountable issue.

In short, the means test can still play an important role, even in a Chapter 13 bankruptcy, and you should have a knowledgeable attorney assist you through the process.  Chapter 13 bankrutpcy filings are pretty complex, and while it may seem counter-intuitive to pay an attorney to help you ‘go bankrupt’ – we can help you avoid losses and other problems that you may not be aware of otherwise.

After determining your household income, and realizing that you ‘fail’ the means test because, unbelievably, you make ‘too much money’, not all hope is lost.  There is a very important second step to the means test, that may still allow you to get a fresh start in a Chapter 7 bankruptcy, rather than struggling through a Chapter 13 repayment plan.  In this second step, we take your gross monthly income, as determined during the first step, and take out certain expenses. For one, we get to deduct all the taxes that you pay, so we finally get to work with net income.  We then deduct living expenses.  Absent unusual circumstances,  we are unfortunately limited to what the IRS determines to be the average monthly expense for a household of your size for food, housing, transportation etc.  but sometimes special circumstance exist, and we can show the court why you need to have an additional monthly expense allowance for one of the categories. 

After we take these statutorily determined expenses, we then look at your other monthly expenses.  For example, do you have children in school under the age of 18?  Deduct $137.50 per child.  Do you have life insurance? Deduct your life insurance.  Do you pay real estate taxes?  Deduct your real estate taxes.  There are quite a few more of these categories – most of them a bit difficult to decipher even for an attorney, but they are there, and an experience attorney will get you every deduction you qualify for.  This is another reason why you should not rely on online forms to complete the means test for you, or document preparers.  Most of those guys will run the basic test, maybe check the set deduction, and then send you down the path to a Chapter 13 without even checking for any other deductions that are available for you.   Finally, if you have any secured debts (think house with a mortgage, car with a car loan) or any tax debts we also get to deduct a set monthly amount for your expenses connected to that. 

Once all that is said and done many potential clients that thought they had not options other than a Chapter 13, all of the sudden have all sorts of options… They can get their fresh start right away – stop worrying, and move on with their lives, and all because someone actually took the time to calculate their eligibility.  Or if their budget allows, they can choose to be in a Chapter 13, but how the means test works there is quite another story.  If you think you might need to file for bankruptcy relief, and you want to find out more about it, keep on reading, do your research, and then call a lawyer.

In my last post, I discussed how the beginning steps of the means test work – essentially, how your annual household income is determined in order compare it with the median household income for a household of your size in the area you live in.  Now, if you are above the median household income, you are not necessarily permanently disqualified from filing for Chapter 7 relief.  Today’s post will explore generally the available exceptions to the means test – as in situation where the means test is not looked at.  The exceptions are as follows:

  1. If you are a disabled veteran under 38 USC § 3741(1) and your debts were primarily incurred while you were on active duty,  or while you were performing a homeland defense activity;
  2. If you are a reservist or national guard member who was called to duty for at least 90 days after September 11, 2001 and meet certain requirements; and
  3. If more than 50% of your debts were NOT incurred for a primary household or family purpose. 

Now, I don’t see the first two on a regular basis, but a number of my clients do in fact qualify for Chapter 7 relief as “non-consumers”.  Basically, the law makes an exception to the means test requirement if more than half of your debt was incurred for a business purpose.  Whether that means you used a few lines of credit to float your business, or you invested in real estate – as long as all those debts added together come out to more than your home mortgage, personal credit cards and vehicle debts combined, you may just qualify for Chapter 7 relief even though your income is higher than the means test envisions.

Sometimes it is hard to determine whether you are a non-consumer under this rule, so rather than testing the waters on your own, I recommend you speak to an attorney about whether this is an option for you.  Bad things can happen if you file for bankruptcy without knowing all that is involved.  To learn more about why it is generally not recommended to file for bankruptcy without the assistance of an knowledgable attorney, please click here.

In 2005, Congress amended the Bankruptcy Code to include what is now commonly referred as the means test.  The means test is the analysis that is required to determine whether a potential debtor qualifies for Chapter 7 relief or Chapter 13 relief, and even though it is called a test, it is not as simple as filling out a questionnaire to determine the result.

That said, don’t fill out an online means test – chances are the results are wrong, and it may mislead you into thinking no relief is available for you, or that you are qualified to file, when really you are not.  This post will discuss the three step system that the means test uses.

1.  The first step is to determine your income for the last 6 months.  That is all that is relevant…. it doesn’t matter if you made 200K in 2009, if you didn’t make any money in the last 6 months… It is backwards looking, but only to an extent.  The relevant time period is the 6 months prior to filing, not including the month that you are filing in.  So, if you were to file in February, we are looking at August 2009 through January 2010. Once your total gross income for the last 6 months has been determined, you multiply it by 2, to give you a yearly average.  Then you compare your yearly average with the median household income for a household of your size in the county you live in.  This number is determined by the IRS, and the most current listing can be found at http://www.justice.gov/ust/eo/bapcpa/meanstesting.htm

2. If you are under the median household income you qualify for relief under Chapter 7.  You can still file a Chapter 13, provided you have disposable income at the end of the month to make your plan payment, and, if you do go the Chapter 13 route, you have the option of making your plan only 3 years long (instead of the otherwise mandatory 5 years).  Now, typically this is not a problem, but you also need to review your current income and expenses – the expected future numbers so to speak:  If you have a lot of money left over at the end of the month, the US Trustee may argue that you have the ability to repay some of your debts, and your slam dunk 7 gets itself in some trouble.  Your attorney will review this numbers and check the likelihood of a problem for you BEFORE filing, so you know what is ahead.  In my experience, those with an income that is less than the median household income hardly ever run into that problem.  Nevertheless, I always check.

Now, if you are OVER the median household income for a household of your size, not all is lost.  The second step of the means test comes into play, and you may still qualify for Chapter 7.  More on that in my next post.

Are thoughts like this going through your head?  What about “Which bills should I pay this month…?” or “Why won’t they stop calling me?”  If you find yourself in a financial situation that is worse than what you had hoped for in this stage of your life, and for whatever reason you find that your debts are eating you alive, bankruptcy just may be the answer to your questions. 

Here is a little step-by-step guide to follow after you have asked yourself the above question:

  1. Take a deep breath… there are options out there – and one will be right for you. Remember – sticking you head in the sand, and ignoring the problems around you never works.
  2. Start doing some research.   (If you are reading this, you are on the right track).
  3. Take another deep breath.  Come to the realization that there is A LOT of information out there – not all of it from particularly good sources, not all of it correct, and most likely none of it fitting your particular situation.
  4. Begin researching bankruptcy attorneys in your state. 

Yes, attorneys.  I realize there is a whole variety of options out there, from document preparers, to debt relief organizations, but the bottom line NEVER CHANGES: Only an attorney can give you legal advice – only an attorney can help you realize the full picture.  Also, on a side note, the guys with the sign on the side of the highway advertising $200 bankruptcies – they are, typically, document preparers.  You know what a document preparer does?  He fills out your forms, based on the information you give him.  He cannot give you legal advice, he is not qualified to give you legal advice, and guess what else?  Once he is done filling out the forms, he’ll most likely hand them back to you and send you on your merry way to figure out not only how to maneuver the bankruptcy system, all on your own. 

So, back to researching your attorneys.  Even though this rarely is the reality of things, but the price should be your least important factor in determining whether to hire an attorney.  Arizona bankruptcy attorneys all know what the other charges, in a round about way, we all have our own ways of figuring out what is fair for you, and keeps our bills paid.  The most important factor is ‘are you comfortable with the person that proposes to represent you?’.  Don’t get me wrong, you’re not going to go steady with your attorney, but you will have to work closely with him or her in preparing and planning your way to a fresh start.  Your attorney is your advocate, counselor and legal representative, and if you just don’t see eye to eye with him or her, it might not be the right fit for either one of you.

If you think you are comfortable going from an intake clerk to a paralegal – kind of passing the attorney in the hallway somewhere in between there, and having the paralegal be your main point of contact – by all means, go with one of the big guys.  Their attorneys are highly competent, and on the couple of occasions you get to talk to one of them, you’ll probably like him or her.  If, on the other hand you would prefer to have your actual attorney walk you through the process, with her support staff doing exactly that – supporting her in the data gathering and logistics, then you may be better of with a smaller firm. 

Aside from that, working style also matters greatly.  Take me for example: If you do not have email, or you only check it about once a month to see what the grandkids are up to – then I’m probably not the right fit for you.  On the other hand, if you value getting your questions answered quickly, both in writing, and if needed over the phone, then I might just be your gal.

To sum up, there are a multitude of options out there.  Even though it may feel like it right now – the world is not in fact collapsing around you.  Always remember, knowledge is power, and getting this knowledge from a licensed attorney will empower you to take your life back, and get your fresh start.

The short answer to this question is, absolutely not!  When your bankruptcy petition is filed, the automatic stay goes into effect immediately.  The automatic stay is the law that states that once someone has filed for bankruptcy protection, a creditor cannot do anything to continue trying to collect from this person.  This includes filing a lawsuit, or, if the debtor was sued prior to the lawsuit, continue the law suit. 

Credit card companies and other lenders don’t really have the resources to sue everyone that is falling behind on their payments.  But, after enough time goes by, they will bring an action against you for breach of contract.  Usually, there is no good defense to a law suit such as this:  You got a loan, you stopped repaying it, the law unfortunately does not consider the hardship that caused you to default, or the good intentions you may have for future repayment…. 

Filing for bankruptcy protection can help you stop the law suit, and prevent wage garnishment.  Even if the law suit was completed prior to filing your bankruptcy, and your wages are already being garnished, the bankruptcy laws put an end to the garnishment.  They most important aspect here is to list the plaintiff as well as their attorneys on your petition, to ensure they are notified about your bankruptcy filing.

Timing is often key to prevent garnishment altogether.  If you have gotten sued (you will have been served with a Summons and Complaint) you should speak to an attorney as soon as possible to determine the best course of action.  In this conversation with the attorney, be sure to also discuss any previous (old) law suits that may have already gone to judgment.  If such a previous lawsuit resulted in a lien on your property, your attorney, through the bankruptcy process, can likely do something about this lien – but only if she knows about it.

Remember, knowledge is power, and sticking your head in the sand after you have been served is never the best course of action.  A free consultation with a bankruptcy attorney such as myself will enable you to better understand your options.  Visit our website at www.marcowimmerlaw.com to find out more about us and our philosophy.

The word ‘short sale’ has become a bit of a buzz-word in the last year or two.   Everyone seems to be talking about it, doing it, or at the very least knowing someone who is going through a short sale.  But, in all of that talk, not everyone understands what a short sale really is (it is NOT a way to save your home, for example), how it works, and how it can affect you.

A short sale is a vehicle that allows you to sell your home in a market where your home is worth less than what you owe on it.  By it’s very definition, a short sale is the sale of real property for less than what you owe on it.  Because the bank(s) holding the mortgage(s) does not get all that they are owed, it has to approve the short sale before it can be finalized. 

A short sale can be the way to go for you, if your home loan is your only source of concern.  It will allow you to get out from under the big mortgage without having to worry about the potential consequences of a foreclosure. 

Most of the legwork in a short sale is done by you, the homeowner, and your realtor. A good realtor is probably the best asset to have in your short sale, and if you are looking for one, Marco | Wimmer PLLC can provide you with several names and numbers of some experienced realtors that may be right for you. 

The realtor will work with you in listing the property and completing the bank’s requirements for a short sale.  Remember, the short sale is a contract between you and the bank, and as such you want to make sure that the contract works for you.  The key component of the contract is whether the bank will consider your debt fully satisfied.  If not, they may try to come after you for the difference between the sales price and the amount owed at a later time.  Based on your individual situation, you may have more leverage in the negotiations than you think.  Finally, keep in mind that in a short sale, the bank typically forgives you a portion of the debt, so they will issue you a 1099(c) for the debt forgiven.  Be sure to talk to an accountant about how that can affect you. 

In conclusion, if your home is the only source of concern for you, and for whatever reason you wish to sell it without waiting for its value to increase, a short sale may be the way to go.  On the other hand, if you are struggling with other bills and cannot make ends meet even without taking into account your mortgage payment, bankruptcy may be the better approach.  Homeownership may affect your eligibility to qualify for one chapter over another, so be sure to talk to an attorney before starting on the path of a short sale.

If you live in Arizona, and you have done any kind of research about what happens if you just ‘let your house go to foreclosure’ you have probably come across the Arizona Anti-Deficiency Statutes (ADS), and you have probably walked away confused.   The Arizona legislature, back in the late 70s/early 80s enacted a couple of laws that protect consumers – people like you and me.  Unfortunately, as is the case with most laws, it is a bit complicated to understand, and depends heavily on facts.  Here is a quick overview of how it works:

Question:  Can the Bank come after me for the difference between the mortgage balance and the amount the house was sold for at auction?

Answer:

  1. If your house is a single or dual family residence; and
  2. it is on 2.5 acres or less; and
  3. you, or someone, has actually lived in the residence; then…

…the bank that holds the Trustee’s Sale (usually the first mortgage) CANNOT come after you.  (Be sure to re-read the previous blog post entitled “Foreclosure in Arizona – The Basics” to find out why I did not simply say “the bank that is foreclosing” here).   They will likely issue you a 1099(C) (which is a tax form), and there may be some tax-consequences, but they CANNOT bring a law suit against you for the difference.  In some cases, you may be able to avoid tax-consequences as well, but as I am not a tax attorney, nor an accountant, the best I can do on that is refer you to an accountant on how that works.

Pretty nice, right?  Now, the next question has to be “What about the second mortgage?”  A different statute applies to the bank that is not holding the Trustee’s Sale, and here is how it works:

  1. If your house is a single or dual family residence; and
  2. it is on 2.5 acres or less; and
  3. you, or someon0ne, has actually lived in the residence; and
  4. 100% of the debt owed to the bank was used to purchase the property, then…

…even the second mortgage CANNOT come after you for any monies owed, but the same tax rules still apply. 

The main problem I see in my practice, and the reason why short sales are often the better way to go when bankruptcy is not an option, is that the second mortgage was NOT in fact used to purchase the house.  Unfortunately, and in the bluntest terms possible (I hope you will forgive my bluntness), if you pulled any cash out of your house, chances are the ADS will not protect you.

Now, if ADS does not protect you, and your situation is such that a short sale alone will not solve your financial troubles, bankruptcy may be the answer.  If you surrender your house in the bankruptcy, then the discharge will include the difference between the sales price and what you still owe, AND as an added plus, having the debt discharged in bankruptcy is one of the exceptions to the general rule of taxation.

This is about it, in a nutshell.  Sounds pretty easy, right?  Well, chances are, your particular situation is a little more complicated, and in the spirit of ‘knowledge is power’ please do not hesitate to call or email us to talk specifics.  You can find all of our contact information on www.marcowimmerlaw.com.