Tied down by liens? What the bankruptcy code can do about it

By doug | Published: February 16, 2012

Tied down by liens on your property? If your financial situation has deteriorated to the point where you would consider filing a bankruptcy case, take heart. In some cases, the liens can be eliminated as part of the case. But there are rules and limits to this.

The first method of getting rid of liens is called “avoiding” them by bankruptcy lawyers. Simply put, if the lien has been placed on property that can be declared “exempt” in a bankruptcy case, the lien can be “avoided” or eliminated during the case. This requires an extra motion to the bankruptcy judge, but it is not a tremendous undertaking. The types of liens that can be avoided are “judicial liens” (in other words, those arising out of a collection lawsuit), and “non possessory, non purchase money” liens (examples of which include CashCall advances, HFC personal loans, etc.). These liens can be avoided by consumer debtors in either Chapter 7 or Chapter 13 bankruptcy.

The second method of getting rid of a lien is by stripping it. This can only be done in a Chapter 13 case. Chapter 13 allows debtors to strip liens if they are no longer supported by any valuable equity in the underlying property. The law won’t allow you to strip a first mortgage on a residence, or on a car loan if you bought the vehicle just recently. But what this strategy is really good for is stripping off second mortgages from properties whose value has sunk in the recession. Again, a motion is required to strip a lien — not really a do-it-yourself project.

The third method for dealing with liens is called “cramming them down.” Again, this is a Chapter 13 strategy. If the lien is on property that is partly secured, and partly unsecured, it can be crammed down to the value of the security. So if an old used car is worth $2,000, but has a lien on it with a loan balance of $10,000, the loan balance can be lowered to $2,000 by order of the court. Again, the law does not let you do this on a first mortgage for a principal residence.

If you have any questions on which liens can be removed in a bankruptcy case and which can’t, just give me a call at 978-975-2608 in North Andover, and I’ll go over it with you.

Photo: Noele Niell in the 1950s Superman TV series.

 

By Doug Beaton

Posted in Practical tips, Secured loans | Comments closed

Friendly’s emerges from bankruptcy with a new strategy

By doug | Published: February 15, 2012

The Friendly’s Ice Cream bankruptcy case is over.

The restaurant chain emerged from Chapter 11 protection in January, 2012, after filing the case in October, 2011. Over 100 restaurants were shuttered as part of the case, typically an indication of too-high lease payments.

The chain also will be using the benefits of the bankruptcy to change its business strategy, according to the Boston Globe. Chief among the new tactics: an effort to sell its ice cream treats at retail through stores like Walmart and Target.

In the past few months, Friendly’s products have been added to the freezer aisles of 3,200 more supermarkets, a 40 percent increase.

“We will double [the number] within the full year and have Walmart selling our ice cream cakes coast to coast,’’ said Harsha Agadi, who served as Friendly’s chief executive until resigning last week and currently sits on the board of directors. “It’s a huge opportunity.’’

Using the bankruptcy laws to their advantage allows the Fribble maker to be nimble in this way.

While many of the chain’s stores had to be closed, the Merrimack Valley was essentially spared. Friendly’s shops in Haverhill, Methuen, and Lawrence were open continuously through the bankruptcy proceedings, and appear to still have a healthy number of customers looking for their burger and ice cream fixes.

 

By Doug Beaton

Posted in Bankruptcy News | Comments closed

Gary Busey is the latest celebrity bankruptcy

By doug | Published: February 14, 2012

It’s largely been overshadowed by the news of Whitney Houston’s untimely death, but actor Gary Busey filed for Chapter 7 bankruptcy last week

The idea is not to unduly embarrass Busey, who joins a long parade of celebrity bankruptcies both recent and historical, but this filing is a bit of a cautionary tale. The actor’s papers indicate that he has left than $50,000 in assets remaining from his long Hollywood career.

Celebrities are really no different from anyone in any other business — they use the bankruptcy code to get a fresh start when financial circumstances have ground them down.

It works for people in Hollywood, and it works for people in Massachusetts and New Hampshire, too. Let’s hope Busey gets the fresh start he needs, and that we see a lot more of him in the years to come.

 

By Doug Beaton

Posted in Bankruptcy News | Comments closed

Personal bankruptcy filings fall by 16% in Massachusetts

By doug | Published: February 13, 2012

The final tally for 2011 is in, and banking industry watchdog The Warren Group estimates that personal bankruptcy filings in Massachusetts dropped 16% compared to the previous year.

That may make 2010 the high water mark for bankruptcy for all time.

The drop was in line with the national figures, which also went down about 16%.

Many will take this as an encouraging sign — that the economic slowdown has finally turned the corner. Lets hope so!

Others may see an “eye of the hurricane” scenario, akin to a double dip recession.

Timothy Warren Jr., CEO of the Warren Group says it best: “The decrease in bankruptcy filings is running parallel with lower unemployment rates in Massachusetts. Unfortunately, I haven’t seen a big enough improvement in the employment picture to confidently say the economy has completely turned the corner.”

There were 14,716 Chapter 7 bankruptcies filed in Massachusetts last year, down from 17,496 filed in 2010. Chapter 7 of the U.S. bankruptcy code is the most common option for individuals seeking debt relief, and accounted for almost 75 percent of Massachusetts’ bankruptcy filings last year.

Filings under Chapter 13 in Massachusetts dropped 11 percent to 4,813 in 2011, from 5,392 in 2010.

 

By Doug Beaton

Posted in Bankruptcy News | Comments closed

File Chapter 7 bankruptcy and skip the means test!

By doug | Published: February 10, 2012

There is a simple way to avoid filling out the means test when you are filing a Chapter 7 bankruptcy case.

If a debtor has primarily business debts, there is no need to complete the means test!

Or, to put it in more precise bankruptcy language, if a debtor has “primarily non-consumer debts,” just check the box on the front of form B22A and move on.

The most common form of non-consumer debt is that incurred in business. But don’t forget to include taxes, judgments on collections lawsuits (like auto accidents and drink driving cases, for example), and debts involving investments in general, and investment properties in particular.

Debtors who can get these categories to equal or exceed 51% of their total declared debt are then home free, at least as far as the means test is concerned.

For those who have run a business by the seat of their pants (financing it with personal credit cards), it may be necessary to sort the cards into piles of “business” versus “personal” credit lines. And if you have mixed business and pleasure on a single card, you might have to go through statement by statement highlighting the business purchases. But in the right case, it could be worth it if it gets you qualified for a chapter 7 bankruptcy.

 

By Doug Beaton

Posted in Chapter 7, Means Test, Practical tips | Comments closed

Form 1099-A, foreclosure, and bankruptcy cases

By doug | Published: February 9, 2012

Recently the IRS has been sending out a blizzard of forms 1099-A to homeowners who lost their house to a foreclosure or short sale in 2011. Since so many homes have been lost this way in the Merrimack Valley and southern New Hampshire recently, a lot of folks have been getting them.

The 1099-A Form is called “Abandonment or Acquisition of Property.” The business end of the form has a box listing the date of the foreclosure, another with the balance of the principal outstanding on the loan, and an estimate of the property’s fair market value — calculated by God only knows what method. There is also a check box to indicate if the borrower was “personally liable” for repayment of the debt.

If you have filed a bankruptcy case recently, this form should cause you no problems with your taxes. First of all, it is NOT necessarily indicating that you debt was canceled by the lender — that would be reported on a 1099-C form.

Second, if you filed a bankruptcy case prior to the foreclosure, the “personally liable” box should not be checked.

In essence, if you have filed for bankruptcy, you are not personally liable for either the debt or the cancellation of the debt on your tax return.

As a last resort, you may want to have your tax advisor consider whether to file Form 982 along with your 2011 return; this will make it unmistakably clear that you do not owe additional income taxes as a result of your bankruptcy.

 

By Doug Beaton

Posted in Foreclosure, Practical tips, Taxes | Comments closed

Getting a tax refund? How it impacts a Chapter 7 bankruptcy case

By doug | Published: February 8, 2012

This is the season for tax refunds, and don’t think that the bankruptcy trustees don’t know it! Like sharks around a bucket of chum, there is little that can get a trustee into an excited frenzy like a debtor coming in to bankruptcy court with a sizable tax refund.

But with a little knowledge and planning, you can protect your refund even if you file a chapter 7 bankruptcy case.

First off, we start with the principle that a tax refund is an asset you own in a bankruptcy case. It’s an asset when you get the refund check, its an asset when you are waiting for the check, and its even an asset before you have made out your return.

The next important thing to know is that there is no specific exemption for tax refunds. So it is at risk for being turned over to the bankruptcy trustee if you file a Chapter 7 case.

So what can you do about this? There are two basic strategies.

First, you could spend the money before filing the case. Just as a for-instance, you could use it to pay your bankruptcy attorney! Trust me, your bankruptcy attorney loves this option . . .

You could also spend it on goods that will unquestionably be exempt when you do file the bankruptcy case. Furniture would be an example, but there are many other classes of exemptions, and a bankruptcy lawyer can give you an idea if what will work and what won’t. If you are in the Merrimack Valley area, you can call me at 978-975-2608 if you need help.

The other strategy is to apply your “wild-card” exemption to the refund. This will vary a bit depending on where you live, but many debtors will have enough of a wild-card to protect the whole refund check.

Just to give an example, most debtors in both Massachusetts and New Hampshire can claim federal wild card exemptions up to an amount just short of $12,000. This is used to protect liquid investments not covered elsewhere in the bankruptcy code. So if you had a $3000 refund coming, and $8000 in a bank account already, the $11,000 total is still yours to keep, and you still have some wild card left over for something else (a second bank account), for example.

So with good planning, and by filling the bankruptcy schedules out correctly, it is frequently possible to protect tax refunds while filing for bankruptcy!

 

By Doug Beaton

Posted in Exemptions, Practical tips, Taxes | Comments closed

What’s IN your bankruptcy? Everything had better be IN your bankruptcy!

By doug | Published: February 6, 2012

This may be included in the realm of misguided terminology, but I often get comments from my bankruptcy clients that sound something like this:

“I didn’t know my cars were IN the bankruptcy.”

Or, “I thought we were keeping the house out of this bankruptcy.”

These statements are grating on my ears (they would be painful to any bankruptcy attorney), although the clients are probably not going to be harmed, and are just a little mistaken about bankruptcy lingo.

So, to straighten things out, here is a very short (I promise) primer on bankruptcy-speak for the layman:

When a consumer files a bankruptcy case, he needs to list all of his assets, of whatever type and value, on the filing. So everything is really “IN” the bankruptcy — or it should be. The actual lingo that attorneys use is that the debtor’s assets now form a bankruptcy estate, which is what the court is charged with administrating.

Debtors then make a separate listing of the assets that they claim are “exempt” from sale in the bankruptcy. This list typically runs up to and including every asset declared in the first place — so the debtor is often able to keep ALL of his assets, and NOTHING is sold. Bankruptcy geeks call this a “no-asset case.”

But what if assets are really left off the petition? If it’s an innocent mistake, it MIGHT be possible to add it later, but not a 100% guarantee. And if a judge gets a whiff of the idea that the mistake isn’t so innocent, bad news is around the corner, because this case will be headed for trouble sooner rather than later.

The moral of the story: it is possible to lose a cherished or valuable asset by NOT listing it in your bankruptcy petition, while it is rare to see this happen to assets that are properly listed.

So make sure you take some time and list everything you own before you file. You’ll be glad you did, and will sleep a lot easier, and will probably keep it all, too.

 

By Doug Beaton

Posted in Exemptions, Practical tips, The Bankruptcy Code | Comments closed

What will filing for bankruptcy do to your credit score?

By doug | Published: January 27, 2012

It may sound obvious but most people contemplating bankruptcy are behind on their bills, and have rapidly deteriorating (or bottomed-out) credit scores.

But everyone who contemplates filing a bankruptcy case is entitled to consider what impact the case will have on their lives going forward.

When it comes to credit scores, there are a lot of myths out there. Part of that is due to the general secrecy that surrounds the exact formula for computing these numbers, and part of it is the general human tendency to spread information regardless of whether it’s true or not.

So here, as a sort of public service, is an article by Mark Greene, the CEO of Fair & Isaac, which is the company that owns the formula for generating the scores in the first place: FICO Questions Answered.

As you can see from the article, a bankruptcy case will typically result in a 150 point “hit” to your score. This isn’t always the case: since the scale bottoms out at 300, debtor’s with truly awful scores to start with should have little fear about filing.

Greene also says in this article that it might take as long as seven years to rehabilitate one’s score after filing a bankruptcy case. While this may be true, debtor’s should realize that they may not need to fully rehabilitate the score in order to get credit.

A better guide is to think about what will the score be one year after a bankruptcy case is filed. Often the FICO score has risen enough by then for a debtor to get some credit offers. Maybe not a $300K mortgage, but debtors who stay on the narrow path and pay their bills after the case is filed should be OK generally.

Another factor to consider is that all of this can change at any time. Here in the Lawrence – Methuen, and Haverhill areas, though, my bankruptcy clients have generally started receiving new credit offers in about six months to one year after the filing of their Chapter 7 bankruptcy case.

 

By Doug Beaton

Posted in Credit cards, Practical tips | Comments closed

Leigh Steinberg — the “real” Jerry Maguire, has filed for bankruptcy

By doug | Published: January 26, 2012

The need to file a bankruptcy case can happen to anyone. Just recently ESPN brought the news that once high-flying sports agent Leigh Steinberg, known as the inspiration for the “show me the money” character of Jerry Maguire in the movie of that name, has filed a Chapter 7 case in California.

In his heyday, Steinberg was known as the agent for NFL stars Troy Aikman, Warren Moon, Steve Young and Ben Roethlisberger.

Prior to filing for bankruptcy, Steinberg was sued for $1.4 million in back rent on his offices.

Steinberg pulled no punches, and blamed his stint in an alcohol rehabilitation clinic for letting his debts get out of control. “I just lost track while I was in rehab,” Steinberg told The Associated Press. He said he struggled with alcohol for years but has been sober since 2010.

The super agent also cited a 2003 dispute with an unnamed NFL player, which caused him to lose his agent’s certification with the football player’s union.

One of Steinberg’s quotes is especially poignant, because it echoes almost exactly what just about every one of my bankruptcy clients here in Massachusetts says at one point before filing a case:

Steinberg said he delayed filing for bankruptcy for several years “because of my moral and legal obligation to people who advanced me funds or performed services in good faith. But the constant and aggressive collection efforts and press initiatives undertaken by creditors have harassed my family and prevented me from working to be able to pay these debts.”

 

By Doug Beaton

Posted in Bankruptcy News, Chapter 7 | Comments closed
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