Ch 7, 13

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When you sign a reaffirmation agreement, you make a promise to your creditors to pay your debt that would normally be discharged in a chapter 7 bankruptcy filing.

The most common circumstances, in which a reaffirmation agreement is negotiated, are for vehicle loans. If you want to keep your vehicle and continue to make payments for it, a reaffirmation agreement with your creditor can be discussed.

However, a creditor can reject an offer for reaffirmation if the debtor’s financial situation is indicative of the likelihood that the debtor will not be able to make payments or if the debtor is delinquent on the account. A judge can also reject a reaffirmation agreement if, for example, the amount of the debt exceeds the current value of the property, even if it is a voluntary reaffirmation by the debtor.

Sometimes new terms can be negotiated in a reaffirmation agreement if the current value of property is significantly less than what was paid for it. The debtor has the right to cancel a reaffirmation agreement within a grace period of 60 days for any reason after the agreement has been filed with the court and approved by the judge.

Retirement accounts are protected by the Employee Retirement Income Security Act (ERISA) both in a bankruptcy filing Chapter 7 or 13 and are therefore not considered a collateral when creditors come after your assets. Specific exemptions for IRS qualified plans fall in this category: Pensions, 401(k) and 403 (b) are exempt regardless of its value whereas traditional or Roth IRA’s are only exempt up to $1,095,000 per person.

If you have lost your job and need to roll over your 401(k) or 403 (b) into an IRA, you may do so regardless of the amount you are rolling over. The new IRA will then be protected under bankruptcy law.

However, any new funds you add to your retirement account within six months of filing for bankruptcy will not be protected by law from creditors. This is also true for any sum of money you may receive such as lottery winnings or a lawsuit settlement. Since these moneys are normally considered to be non exempt assets, the law will not allow you to contribute them to your retirement account so to protect from creditors.

Having made the difficult decision to file bankruptcy, many questions remain about how it will affect the property that you are still making payments for, such as your car. In a Chapter 7 Bankruptcy you will need to decide whether you can afford to continue making payments or whether you will surrender the car. Once you have decided you will need to file an official form called the Statement of Intention (SOI) with your bankruptcy papers and mail a separate copy of the SOI to your vehicle lender, that will then either confirm or reject the lease.

Surrendering the car

If you state on your SOI that you reject the lease on your vehicle, you can get out of the lease and are cleared of any further debt obligation to the lender after your bankruptcy discharge. You will then need to find another vehicle to use and hand over the car.

Keeping the car

If you decide to keep your car and have a security in place within 3 years on your vehicle, you must pay the full amount owed or you lose the vehicle. If you are current on your car payments you typically can keep the car if you continue making payments. Sometimes you can ask for a so-called “redemption” procedure. With the redemption process you can make a lump sum payment of the current value of the car or enter into a new contract, a so-called reaffirmation agreement, which lets your keep your car under similar terms as your original car’s promissory note. If the lender has been accepting your payments, the lender will most likely let you retain and make payments for the vehicle without entering into a new reaffirmation agreement (ride-through option).

Details of the Reaffirmation Agreement

Be sure to know what the lender’s requirements are and whether the lender requires a new contract, a reaffirmation agreement that is. Call your lender and explain your situation and your intent to file for bankruptcy. Understand that in the case that you do not need a new reaffirmation agreement, the lender will still have a lien and can repossess the car if you default on your payments. If the lender does require you to reaffirm the promissory note and you agree, the lender will have a right to repossess the car if you default on your payment and you will owe any deficiency that remains on your loan. This is the big difference between not requiring a reaffirmation agreement, where you do not owe a deficiency on the car in the case of repossession.

Carefully consider the advantages and disadvantages of a) keeping your car and b) how you will negotiate the terms with your lender.

If you work with a good bankruptcy attorney, the attorney will go over your options and therefore help you make informed decisions.

The process of filing bankruptcy can be very quick, but if there are issues with your petition, creditors file claims or objections, or you have a lot of property, your bankruptcy discharge could take longer. Let’s take a look at a timeline of what happens when you file a bankruptcy petition.

1-6 Months Before Filing Bankruptcy

You will want to discuss your options with a bankruptcy attorney to determine if chapter 7 bankruptcy or chapter 13 bankruptcy is the right choice for your financial situation. Once you determine you are definitely going to file you will need to complete the prebankruptcy credit counseling course online, over the phone or in person. The credit counseling course and attorney will help you protect your personal property and create a budget to get you through the bankruptcy and onto recovery.

Filing the Petition

If you are using an attorney they will most likely electronically file the petition for you. That means once the petition is completed, it will be filed and the automatic stay will go into affect as soon as the court stamps your petition. Total time is 1-3 weeks depending on how often you can meet with your attorney and complete the paperwork. If you are filing by completing the forms yourself, as soon as they are completed you will drop them off at the courthouse with your filing fee and the process will begin immediately.

Meeting of the Creditors

Once your petition is filed the court will schedule your 341 meeting of the creditors in 30-60 days. At the 341 meeting the bankruptcy trustee will review your petition and ask you and/or your attorney any questions they need answered. Your creditors may also appear at this meeting to ask any questions they have about your debts and ability to pay.

Bankruptcy Discharge

After the 341 meeting your creditors have 60 days to file a claim or objection to your debt being included in the bankruptcy discharge. If they file a claim the trustee will review it and it may go onto a hearing to determine if the claim is valid. If there are no claims and the trustee determines your bankruptcy should be discharged your debts will be forgiven.

The average amount of time it takes to file a chapter 7 and get your debts discharged is 3-6 months.

One of the biggest misconceptions in bankruptcy is that idea that the majority of people that file are taking advantage of the system, they really can pay their debts, they just don’t want to. Under pressure from credit card companies the new bankruptcy laws were passed in 2005 creating the bankruptcy means test which compares bankruptcy filers income and expenses to averages in their area. The means test was supposed to weed out those filers that were trying to take advantage of the system, or “abuse” the use of bankruptcy.

Presumption of Abuse

When you complete the chapter 7 bankruptcy means test, the file outcome will be whether the presumption of abuse arises or not. The presumption of abuse is simply a determination of whether you have disposable income left over after taking care of your living expenses. If you have too much income then the presumption of abuse arises and the court may force you into a chapter 13 bankruptcy.

The presumption of abuse doesn’t necessarily mean you are actually trying to abuse the bankruptcy system. The presumption can be triggered even if you can only afford to pay 25% of your debts, which obviously your debtors aren’t going to be very happy with, and is of course one of the reasons you probably needed to file bankruptcy in the first place. Luckily in a ch 13 you don’t have to pay off all of your debts in the payment plan, you can be approved to pay as little as 25% and then have the rest of the debt discharged at the end of the plan.

If you are completing the bankruptcy forms on your own, planning on filing pro se bankruptcy, and find out that the presumption of abuse arises on your means test you may want to speak with a bankruptcy attorney to find out how this will affect your ch 7 filing.

One of the biggest fears people have about filing chapter 7 bankruptcy is that the court will liquidate their assets in order to pay off their creditors. Fortunately this is only partly true, for the most part your personal belongings are exempt from being included in the bankruptcy estate and can not be taken by your creditors. Let’s look at this a little further.

When you complete your bankruptcy forms you must list all of your property on Schedules A and B. Sch A includes your real property such as your home. Sch B includes your personal property such as your clothing, furniture, books, cars, investments, basically anything that is not attached to the earth that you own.

After your have listed your personal belongings, you then complete Schedule C which is a list of your bankruptcy exemptions. These exemptions tell the court that you are choosing to not have this property included in your bankruptcy estate. Each state has their own list of exemptions, and some states allow you to choose from the federal bankruptcy exemptions. Each exemption has an amount defined, if your property is worth more than the exemption amount it could be subject to being liquidated in the bankruptcy. If the property is important you can often pay the unexempted amount in order to keep the property.

The value of your personal property is rarely worth enough for the bankruptcy court to liquidate it. Especially personal belongings such as clothing, kitchen utensils, and furniture. If you have a lot of high worth personal property that you are worried about you discuss this with a bankruptcy attorney and get a free bankruptcy review.

One of the biggest reasons people file bankruptcy is that they are unable to pay their mortgage due to losing a job, medical issues, or other financial problems. If you are facing foreclosure you might be wondering if filing will stop the foreclosure proceedings and save your home.

Chapter 7 bankruptcy is liquidation where your non-exempt assets are sold to pay off your creditors. Any debts that are left are forgiven in the bankruptcy discharge and you get a fresh start. Ch 7 cannot help you makeup back payments on your mortgage however. When you file Ch 7 the automatic stay will go into affect and stop any foreclosure proceedings that are currently underway. This will give you time to negotiate with your mortgage lender to refinance your loan in order to save your home from foreclosure. If your lender is unwilling to negotiate unfortunately, you will lose the home if you cannot make up the overdue payments.

If you do what to save your home you should consider chapter 13 bankruptcy as missed mortgage payments can be included in the repayment plan. If the bankruptcy trustee approves the plan, your home will no longer be in foreclosure and you don’t have to come up with the missed payments all at once, they will be paid off over the next 2-5 years.

Tax season is in full swing, and with that comes the questions from people considering filing bankruptcy: If I file, will the bankruptcy court take my tax refund. Your tax refund could be subject to being used to pay your creditors when you file chapter 7 bankruptcy, so let’s take a closer look at your options.

Your federal or state bankruptcy exemptions could cover any tax refund you are owed. If you use a bankruptcy exemption to cover your tax refund, the bankruptcy trustee will not be able to touch it. There are states that also consider child care and earned income to be public benefits, and so the trustee would not be able to touch that portion of your tax refund.

If you are owed a large tax refund and must file right now, it’s best to speak to a bankruptcy attorney to determine if your refund is at risk. They can help you do some pre-bankruptcy planning to avoid losing your refund or show you some other options.

If you don’t need to file right away you can complete your taxes, get your refund, wait until you have spent it, and then file. You may need to wait 6 months in order for the bankruptcy court to not be able to consider the refund as part of your estate however. Either way, you should get a professional’s opinion to make sure you don’t forfeit thousands of dollars.

The bankruptcy code has set rules to allow you to keep certain personal property in order to continue to earn a living after you file bankruptcy. They do this through the use of bankruptcy exemptions. There are Federal and state exemptions which tell the bankruptcy trustee and court that you can keep this property if it is worth up to a certain amount.

Your car or other personal automobile is included in these exemptions. You will be able to keep your car after you file bankruptcy if you car is worth less than, or equal to the exemption amount. So if you have an old car that is only worth $500 and the car exemption is $2500 you can keep the car. If your car is worth $3000 you will have to cover the $500 that is not exempt in order to keep the car.

If you are leasing a car, or making payments on a car you will have to decide what you want to do on the Statement of Intention when you file chapter 7 bankruptcy, letting the trustee know if you want to hand it in or continue paying by signing a reaffirmation agreement. The bankruptcy trustee will have to approve the reaffirmation in order for you to keep your car, and that is typically done by assessing your ability to pay the debt.

If you have a car that is worth a lot of money, or multiple cars, you will want to consult with a bankruptcy attorney in order to see what will likely happen when you file. A good attorney can help you prepare before filing in order to keep as much property as possible.

When you file a chapter 7 bankruptcy, one of the most important things you will do is complete Schedule C which lists your bankruptcy exemptions. Exemptions allow you to keep certain personal property away from your creditors. There are federal exemptions and state exemptions, some states allow you to choose which list of exemptions you want to use.

In those bankruptcy exemptions there is a Pensions exemption which will include any 401k, IRA, Roth IRA, company pension, public retirement benefits such as SSA, and other retirement benefits. For example, you can see in the California Bankruptcy Exemption list the following exemptions:

Pensions

11 U.S.C. § 522 – Tax exempt retirement accounts. Traditional and Roth IRAs up to $1,095,000 per person.

704.110 – Public retirement benefits.

704.115 – Private retirements benefits, including IRA and Keogh.

Government 21255 – Public employees.

Government 31452 – County employees.

Government 31913 – County peace officers.

Government 32210 – County fire fighters.

So, yes you can keep your 401k when you file bankruptcy. If you have loans against your 401k, or are considering taking a loan against your 401k you should discuss your situation with a bankruptcy attorney because the money you receive from a 401k loan could be considered part of the bankruptcy estate and subject to being used to pay your creditors.