What is bankruptcy?
Bankruptcy is a process under federal law allowing debts to be discharged (eliminated) or restructured. Bankruptcy is not a new concept. It’s in the U.S. Constitution and the idea of debt elimination goes back to the Old Testament.
What is the automatic stay?
When a bankruptcy is filed the stay (an order issued by the court) stops any acts to collect debts—suing, executions against property, garnishment, just to name a few. There are important exceptions, however, such as the exception related to domestic support enforcement. For more information about the automatic stay, see “What is the Automatic Stay” on our Bankruptcy Blog.
What is Chapter 7 bankruptcy?
Chapter 7 bankruptcy is called a “liquidation bankruptcy” where all non-exempt property of the debtor is sold. I prefer to call Chapter 7 “straight bankruptcy” because in consumer cases property is only rarely sold. Most debtors can protect all their property?
What do you mean by “exempt” property?
The law allows debtors to keep a certain amount of property—so much equity in a home, car, jewelry, household good, tools of the trade, and other property—without having the bankruptcy trustee sell the property to pay creditors. Exemption may be provided under state law, or under the Bankruptcy Code, depending on whether a state has “opted out” of the federal exemptions in the Bankruptcy Code. South Carolina has opted out, so most debtors filing in South Carolina will use the exemptions found in S.C. Code Ann. §15-41-30. There are also many other exemptions found in other parts of the South Carolina Code. If you moved to South Carolina less than two years prior to your bankruptcy filing, you will not be able to use South Carolina exemptions. Instead, you’ll use the exemptions in the state you lived in prior to the move, or federal exemptions, or either, depending on the state from which you moved. Knowing what exemptions to use can be complicated. For more information on exemptions, see “Exemptions in Bankruptcy.”
What is Chapter 13 bankruptcy?
Chapter 13 bankruptcy is referred to as “reorganization bankruptcy,” a “payment plan bankruptcy,” or a “wage earner bankruptcy.” It lasts from three to five years (five years if you’re over median income or need more time to repay creditors). Each bankruptcy district has divisions and Chapter 13 trustees are appointed to administer cases and make payments to creditors according to the debtor’s Chapter 13 plan.
Will I lose my car if I file bankruptcy?
Usually not. You are allowed to exempt equity in your vehicle. You are also allowed a “wildcard” exemption under both South Carolina law and the federal bankruptcy exemptions. Generally speaking, if you make your payments, you won’t lose your car. This can be done directly to the lender in Chapter 7 or by making your Chapter 13 plan payments.
Will I lose my house if I file bankruptcy?
Almost never. And we would discuss any issues with your home with you prior to filing bankruptcy. Under current (effective July 31, 2012) South Carolina law, you are allowed to exempt $56,150 in equity in your home. If you’re married, that amount doubles. South Carolina exemptions are adjusted every other July to keep pace with the costs of living. The South Carolina Budget and Control Board determines the amount of the increase.
What’s a “Reaffirmation Agreement?”
As I tell my clients: go read my four-part post on my bankruptcy blog. Our current Bankruptcy Code (“BAPCPA”) was enacted in 2005. The new Code changed section 524, which deals with reaffirmation agreements (among other things). The law is now so messed up in this area that most clients don’t believe me when I explain it to them. For this reason, I tried to write the most simple, step-by-step, plain English explanation of reaffirmation agreements found anywhere. Click here to read my four-part series, along with another blog post explaining why you do NOT reaffirm your mortgage note.
How much does it cost to file bankruptcy?
Cost depends on many factors, including the chapter under which you file–typically 7 or 13–and how much attention your case requires. We don’t handle cases in “cookie cutter” fashion, nor does any good lawyer. Some cases are straightforward, and some are highly complicated. Calling attorneys and asking “how much” is like calling car dealers and asking “how much is a car?” Of course, it depends. In most cases, we’re helping clients discharge or restructure tens of thousands of dollars of debt. It’s also not uncommon for clients to have several hundreds of thousands of dollars of debt. It makes sense to treat more involved cases with the care and attention they deserve. And even if you’re trying to discharge a much smaller amount of debt, you’re discharging debt far (far, far!) in excess of any attorney fee charged. The main thing is to get it done right, not to pay the very least.
What’s a “redemption”?
To redeem means “to buy back. ” In Chapter 7 bankruptcy, debtors may pay the value of personal property to the secured creditor, rather than the amount owning on the loan. For example, if a debtor has a vehicle which is worth (using retail prices) $5,000, but he owes $10,000 on the vehicle, he can file a motion to redeem the vehicle for its retail value–the $5,000. The obvious problem with this is that most debtors don’t have the money to redeem collateral. However, there are lenders which will lend in these situations. Also, it may make sense to withdraw money from an IRA or 401(k) if the savings is significant enough. Debtors may also be able to obtain funds from relatives. As with so much of what we advise, each case is unique and heavily dependent on the facts of that case.
Can I lower my mortgage payments in bankruptcy?
Not in Chapter 7 bankruptcy. However, in Chapter 13 bankruptcy the rules are different. You can’t lower your payment, but you may be able to eliminate your second mortgage altogether. We call this “stripping” the second mortgage or “valuing it” at zero. You can do this if you can prove the second mortgage is wholly unsecured. For example, if your home is worth $200,000, and you owe $210,000 on your first mortgage and $40,000 on your second mortgage, the second mortgage is wholly unsecured. There is no equity to which the second mortgage can attach. In that situation, you can strip off the second mortgage. Note, if the home were worth $201,000 ( a thousand dollars more than you owe on the first mortgage) you would NOT be able to modify the second mortgage. The second mortgage must be wholly unsecured. For more information on this, see “Mortgage Stripping in Bankruptcy.”
I have a judgment against me. Will bankruptcy remove it?
Judgments are called “judicial liens” if they are recorded in the county in which you own real estate. A “lien” just means some claim on property to secure payment of a debt. A mortgage is a lien. So is a car loan. If you have a judgment lien on your property, we can usually avoid it in bankruptcy. To “avoid” something in bankruptcy is to wipe it out, cancel it, terminate it. Section 522(f) of the Bankruptcy Code allows debtors to avoid judgments impairing their exemption in the property. That’s a mouthful, but what it means is that if you can otherwise protect your equity in property (see the discussion of exemptions above) then you can avoid the judgment lien if it “impairs” that exemption. For example, if you have a home worth $150,000 with a mortgage of $100,000, you have $50,000 of equity. If you are able to claim South Carolina exemptions, you can protect $56,150 in equity. If you have a judgment lien on the property, you’d be able to “avoid” it–that is, remove that lien from your property. Your bankruptcy attorney will have to file a motion with the court to do this. For more information on avoiding judicial liens, see “Judgments in Bankruptcy.”
Can Chapter 13 stop foreclosure?
Yes. Chapter 13 is a payment plan bankruptcy. In the plan, you can propose to “cure” (catch up) on any mortgage payments you’ve missed. For example, if you’ve missed six payments of $1,000 each, your plan would propose to repay those missed payments over the life of your bankruptcy plan–usually five years. The big issue with folks who want to file Chapter 13 to save their homes is “feasibility.” That is, does the client have the ability to propose a workable plan? We need to determine if the client’s income is high enough and if expenses are low enough. For example if the plan requires $1500 per month to accomplish what it needs to (pay off cars, priority taxes, child support arrears, mortgage arrears, etc.) can they make that payment and have enough left to live on? For more information on Chapter 13, check out my “Chapter 13 bankruptcy” on my bankruptcy site by clicking here.
Does bankruptcy stop garnishment?
Yes. If your wages are being garnished, the automatic stay prohibits any further garnishment. For more information about the automatic stay, see “What is the Automatic Stay” on our Bankruptcy Blog.
In South Carolina, there is no wage garnishment for consumer debts. (See “Wage Garnishment in South Carolina (or Not?)”) Note that there is garnishment for family court support (alimony and child support), federal student loans, taxes, and judgments entered out of state when you were a resident of another state.
Can I lower my home mortgage payments by filing a Chapter 13 bankruptcy?
No. But there’s a bit more to it than that. You can’t modify the terms of your first (or only) mortgage. However, you can “strip off” a wholly unsecured second mortgage in Chapter 13. For example, if your home is worth $200,000, but you owe $225,000 on your first mortgage and $50,000 on your second mortgage, you can “value” the second mortgage at zero in your Chapter 13 plan. In other words, you remove the second mortgage from your property. As long as you complete your Chapter 13 plan, the second mortgage would be removed and your second mortgage lender would be required to record a satisfaction of your mortgage after your plan completed. For a more detailed discussion of this, see “Mortgage Stripping in Bankruptcy.”
When must I make my first payment in a Chapter 13 bankruptcy?
Your first payment is due 30 days after you file your bankruptcy petition. The most important thing to remember with Chapter 13 bankruptcy is to, as I say, “pay early, pay often.” If you fail to make payments, your case will get dismissed. Also, keep in mind that just because you’re paying through a payroll order (in which your employer sends in the payments) or via ACH (where payments are withdrawn from your bank account) doesn’t change this. YOU and YOU ALONE are responsible for making all your required Chapter 13 payments. Some clients spend money not taken from their wages and believe this is an excuse for not paying. It’s not. If your employer doesn’t send in the money or the ACH doesn’t work, then do it 1959 style. Write a check out to the trustee, stick a stamp on it, and place it in the mail box.
What if I can’t make my Chapter 13 plan payment?
Life happens. If your transmission went out, or you had to fix your HVAC system in the middle of Winter, then you might not be able to make your plan payments. Call your attorney immediately! The odd thing about these situations is that I’m usually the last one to find out about the problem. When I get the notice of dismissal, I call the clients, and they finally tell me. Had I known when the situation happened, I could have helped them by filing a motion for moratorium (where we ask to skip payments). With legitimate reasons, these motions are routinely granted by the bankruptcy court. But don’t hide from your attorney!
How are creditors’ claims handled in Chapter 13?
Creditors may file claims in your case. They have a limited amount of time in which to do this. You may object to any claim for a variety of reasons. For example, maybe the amount of the claim is now documented. Maybe the statute of limitations has run on the claim. The point is that if you don’t believe you owe it, you may object. If the creditor responds to your objection, the court will schedule a hearing on the matter.
Keep this in mind, however. Unless you’re paying 100% to your creditors, or there is some special irregularity to the claim, there’s usually no incentive to object. For example, if you’re paying unsecured creditors 56% of the claims listed on your schedules, there’s no reason to really care if, by objecting to that claim, the amount increases to 62%. You would care if you were in a plan paying 100% because it’s much easier to pay 100% of $50,000 than, say, $70,000.
Can bankruptcy help with homeowners association or condominium association owners dues and liens?
When you purchase property in a neighborhood with a homeowners or condominium owners association, there may be covenants and restrictions that require you to do certain things and to refrain from doing other things. One thing you may be required to do is to pay your association dues. Those covenants will also provide that unpaid dues are a lien on your property. Regardless of whether the association records a document called a “lien,” there will still be a lien automatically if you have unpaid dues. You will also have personal liability for unpaid dues. Chapter 7 bankruptcy will discharge (wipe out, terminate) your liability for the unpaid dues. However, the lien will remain. Also, under section 523(a)(16) of the Bankruptcy Code, you will remain liable for any dues “due and payable” after you file your bankruptcy as long as you own the property. So getting a Chapter 7 discharge will address liability for dues you owe at the time of filing but not dues arising after that point in time. Also, Chapter 7 bankruptcy will not remove the lien on your property for upaid dues. Of course, if you are surrendering (giving up) the property, you would not care about the lien—only the liability.
In Chapter 13, you can “cure” (catch up) unpaid dues and maintain ongoing payments for the dues during your Chapter 13, payment plan, bankruptcy. In some cases, you may also be able to avoid (remove) the association’s lien for unpaid dues. This depends on the value of your property and the outstanding balances you have on your mortgages at the time you file your bankruptcy.
Understanding these concepts is important and also a bit complicated. But keep in mind that homeowners and condominium associations can foreclose if you don’t pay your dues. Get help before the problem gets worse.
For more information about this topic, check out our blog post, Homeowners Association Dues and Bankruptcy.