Tuesday, July 20, 2010

What are the Costs of Bankruptcy?

Bankruptcy in the United States is permitted by the United States Constitution (Article 1, Section 8, Clause 4) which authorizes Congress to enact "uniform Laws on the subject of Bankruptcies throughout the United States." As such, Constitutional recognition of bankruptcy law is amongst the oldest in the United States, predating even the bill of rights. Even 223 years ago, the Founding Fathers and the draftsmen of this Country’s earliest laws recognized that sometimes people got in over their heads as a result of insufficient planning or factors beyond their control. They understood that it was in the best interests of both debtors and the economy as a whole to provide people with a fresh start in the event someone found themselves with debts they were unable to pay.

Despite the fact that the Constitution specifically permits Congress to enact bankruptcy legislation, there is still a significant cost, both economic and emotional, to seeking the protection of the Bankruptcy Court. So, if you or someone you know is considering bankruptcy, let’s take a look at the undocumented costs of bankruptcy.

First, the most obvious: Court Fees.

Court filing fees (the fee for filing your petition) for bankruptcy vary depending on the chapter you are filing under, but initially plan on $274.00 for Chapter 13 and $299.00 for Chapter 7. If you need to change your petition after it is a filed, there is an additional $26.00 filing fee.

In addition to court fees, there will be Legal Fees, i.e. what you pay to your Bankruptcy Attorney to analyze your case, review your purchase history to avoid nondischargability issues (meaning you still owe money to a creditor after bankruptcy), make recommendations regarding when you should file and under which chapter, preparing your petition, schedules and disclosures, and representing you at the §341(a) Creditor’s Meeting. Each attorney offers slightly different services, and charges different amounts. You should speak with your attorney to understand his or her fee structure, and always get the fee agreement in writing.

Rebuilding Credit: Assuming your bankruptcy goes to discharge without objection and you receive your Order Discharging Debtor, debtors now finds themselves with the daunting task of rebuilding their credit, post-bankruptcy. The costs here are more difficult to identify specifically. Because bankruptcy negatively impacts your credit, borrowing money may be more difficult, and when possible, may be more expensive.

For example, assume that the debtor has an old car and would like to trade it in for a new car, post-bankruptcy. The debtor may find themselves unable to qualify for a car loan for some time after discharge, thereby incurring the increased maintenance costs and fuel costs of an old, inefficient vehicle for longer than originally anticipated. When the debtor does qualify for a new car loan, the increased interest rate assessed to borrowers with negative marks on their credit score will cost the borrower more in interest over the term of the loan. Similarly, a borrower seeking to obtain a home loan may be required to pay “points” in addition to a higher interest rate, adding thousands of dollars in closing costs.

However, there are potential savings and benefits to a bankruptcy filing. The costs of bankruptcy should be weighed against the benefits. First, bankruptcy offers a debtor a fresh start, and a responsible debtor can begin repairing their credit immediately after discharge, and may qualify for a prime rate mortgage in as little as 3 years after filing. Since the debtor’s previous debts were discharged, the debtor no longer has the burden of making monthly installment payments on consumer credit cards or other non-retained property.

Finally, potential bankruptcy petitioners should be aware of the noneconomic costs of bankruptcy: A bankruptcy filing remains on your credit report for 10 years, and individual debts discharged in bankruptcy for 7 years following your discharge. Therefore, whenever you apply for credit, a new loan, and more frequently, a job or undergo a background check, a previous bankruptcy will be visible to the loan officer, hiring manager or credit card company. While many debtors are encouraged by a “light at the end of the tunnel” or feel as though a weight has been lifted from their shoulders upon discharge in bankruptcy, there may be the lingering feeling of personal failure or shame in filing for bankruptcy. To that, I recommend the debtor consider my opening remarks in this post, and make a decision about what is best for them and their family in the long term.

If you need help weighing your options and if bankruptcy can help you if you are in over your head, contact Attorney Matthew Trask at 508.655.5980 to schedule a one-hour consultation.

Monday, July 19, 2010

I Just Filed My Chapter 13 Case - Now What?

As you may have read in our similarly entitled post "I Just Filed My Chapter 7 Case - Now What?", our clients often ask us after the filing of a bankruptcy petition:

"So what happens next?"

Just like in a Chapter 7, what happens next is a flurry of deadlines and court control dates, some of which require the client's participation (such as responding to the Trustee's requests for additional information), some do not require the client's participation, and others may require the attorney's participation, depending on how the case progresses.

Often, the client is overwhelmed with the detail and the numerous dates, and simply wants to know where to send the plan payments. However, some clients with more complex cases appreciate the added detail, which is why we have added a convenient Chapter 13 Timeline to our website.

The new addition allows a client or prospective client to input their Chapter 13 Filing Date and Section 341(a) hearing date (if known), and will output a scaled timeline with the important dates. Links to the relevant portions of the U.S. Bankruptcy Code and the Federal Rules of Bankruptcy Procedure are also included for cross reference at the bottom of the timeline page.

For those of you reading this post on your smartphone, you can also check out our mobile version of the calculator.

We hope this tool will help clients, prospective clients and attorneys alike better understand and navigate the meticulous and often trap-ridden world of bankruptcy law.

If you have any questions regarding Kelsey & Trask, P.C.'s Chapter 13 Timeline, please contact Attorney Matthew Trask at 508.655.5980.

Thursday, July 1, 2010

My house is in a trust. Is it protected in a Bankruptcy?

Question of the week: My house is held in a nominee trust, primarily for estate planning purposes. If I were to file for bankruptcy, would my house be protected if I filed a Chapter 7 Bankruptcy?

Answer: There are a number of factors that all address whether or not a debtor's house is exempt from the bankruptcy estate, or whether the bankruptcy court could require the debtor to sell his property to pay some (or all) of his debts. For example, whether or not the debtor actually resides in the subject property or if it is held as an investment property; the total net equity in the property, including mortgages or other liens; and the debtor's exemption elections could all affect how a debtor can protect (or, conversely, risk) a house and your other various assets upon filing a Chapter 7 petition.

First, in Massachusetts, recall that there are two separate exemptions schemes which define what types of property you are allowed to retain, and cannot be sold by the Chapter 7 Trustee to be distributed to your creditors: Federal Exemptions and Massachusetts Exemptions. Generally speaking, the federal exemptions are better suited to protecting your tangible personal property, such as automobiles, bank accounts, etc., but cannot protect more than approximately $21,625.00 worth of equity in a homestead. In situations where you are seeking to protect more than $21,625 in home equity, the Massachusetts Exemptions can protect up to $500,000.00 in home equity, at the cost of significantly reduced exemptions for personal property (i.e., $700.00 equity in an automobile, for example). The caveat is that in order to benefit from the Massachusetts Exemptions, you must file and record a Massachusetts Declaration of Homestead.

Ownership of real property through a nominee trust creates a legal impediment to protecting your equity in your home, however, in certain circumstances, the court has essentially ignored this impediment.

In situations where a trust is the legal titleholder of the debtor's residence, and not the debtor, there is a legal question of whether the debtor is still permitted, by law, to file a Massachusetts Declaration of Homestead. A 2007 Massachusetts Bankruptcy Court case titled “In re: Edward R. Szwyd” decided that “property held in trust is not eligible for Homestead protection. Only individuals may claim a Homestead.” However, in Szwyd, the debtors nevertheless filed a homestead declaration and the Court allowed the Homestead to stand. In this case, the debtor was the sole trustee and beneficiary and no trust existed under Massachusetts law, because the legal protections of the trust merged into the sole trustee and beneficiary, making the debtor the sole beneficial “owner” for purposes of the bankruptcy code.

UPDATE: The law in this area has developed rapidly and swung widely on the issue since 1995. The most recent decision, and currently viewed to be the controlling law with respect to Massachusetts bankruptcy case, is In re Olga M. Rodrigues, 2010 WL 716192 (Bankr. D. Mass., 2010). The Rodriguez decision looked to the statutory language of the Massachusets Homestead Act, which permits a person who “rightfully possess[es] the premises and occup[ies] said home as a principal residence” to file a Declaration of Homestead on the property.

As long as the debtor resides in the house, the debtor may file a Declaration of Homestead to protect the debtor’s interest in the home, even if that interest is little more than a right to ownership upon revocation of the trust. Debtors should take the Rodriguez decision to mean that even in the case of a self-settled trust, nominee trust or merged trust (or any trust where the trustee has significant discretion regarding the trust assets) that trust may be breached by the trustee, and the assets included in the bankruptcy estate. However, the legal form of ownership of the debtor’s residence (including whether the property is held in trust) will no longer serve as a bar to the election of Homestead Act protection, and provides a means of exemption under the Massachusetts bankruptcy exemptions.

If you own property that is held in a trust, and are considering bankruptcy, it is important that you understand the trust which is the legal titleholder to your property as well as the nuances of the United States Bankruptcy Code. If you have questions regarding how to protect your assets through a Chapter 7 Bankruptcy, contact Kelsey & Trask, P.C. for a one-hour consultation at 508-655-5980.
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