Bankruptcy Basics – Page 5 – Rochester Bankruptcy and Debt Relief

Meeting of Creditors and Debtors’ Duty to Provide Bank Statements

Debtors who filed Chapter 7 and Chapter 13 Bankruptcy cases are required to provide certain documents to the trustee prior to the Meeting of Creditors. It is responsibility of bankruptcy attorneys to make sure that all of the required documents are collected in advance and provided to the trustee ahead of the meeting.

According to Bankruptcy Rule 4002, the trustee must be provided sixty days of pay stubs and the most recent tax return. In addition, debtors who own real estate that they intend on keeping must provide the trustee with some kind of valuation or appraisal. Here in Rochester, bankruptcy trustees also require copies of deed, mortgage, if any, as well as the most recent mortgage statement.

In addition, Bankruptcy Rule 4002 requires the debtor to bring to the Meeting of Creditors all bank and other financial account statements showing the balances in the accounts on the date the bankruptcy petition was filed. All bankruptcy trustees here in Rochester adhere to this rule. Turning the statements over at the meeting of creditors will save debtors time and will allow the trustee to resolve any issues related to exempt funds.

If debtors do not have such statements and are unable to obtain them from their bank, Bankruptcy Rule 4002 provides a solution by allowing debtors to submit a verified statement to that effect.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

Bankruptcy, Credit Unions and Cross-Collateralization of Loans

One issue that periodically comes up in bankruptcy cases is cross-collateralization of assets by credit unions. What does that mean? Cross-collateralization is basically the use of collateral from one loan to secure other loans.

Most credit unions, including local credit unions here in Rochester, New York, use “Loanliner” documents. These form agreements are used by financial institutions for their lending transactions. Included in standard Loanliner lending agreements is a provision in which the borrower agrees that all other loans with the lender are cross-collateralized. The cross-collateralization clause from a recent Loanliner agreement reads: “the security interest also secures any other loans, including any credit card loan, you have now or receive in the future from us and any other amounts you owe us for any reason now or in the future.”

Credit unions often use this clause in vehicle loan agreements to secure all other credit union debts with the vehicle. This may surprise someone when they discover that the debt on the car may include a personal loan, a line of credit, and credit card balances.

There are a few options in bankruptcy if the debtor has a cross-collateralized auto loan. If a Chapter 7 Bankruptcy case is filed, the debtor can request that the credit union prepare a reaffirmation agreement for the vehicle without regard to other debts. In this situation, the debtor is asking the credit union to voluntarily strip off the cross-collateralized loans. If the credit union rejects such request, the debtor has two options: (1) surrender the vehicle and discharge all debts to the credit union; or (2) redeem the vehicle.

If the debtor surrenders the car, the credit union takes the car back and sells it, usually at auction. Any deficiency left on the car loan and all additional cross-collateralized debts owed to the credit union are discharged in the Chapter 7 Bankruptcy. If the debtor in Chapter 7 Bankruptcy chooses to redeem the car, the debtor gets to keep a vehicle by paying the value of the vehicle, not the total debt that is owed. While somewhat similar to a Chapter 13 Bankruptcy cram-down, redemption requires that the payment to the secured creditor must be made in a lump sum and does not allow for payments over time.

If the debtor is filing a Chapter 13 Bankruptcy, the loan can be crammed-down to match the vehicle’s value provided that the loan is over 910 days old. Any remaining debt is treated as unsecured debt and is discharged at the end of the Chapter 13 case. Another option is to surrender the vehicle just as in Chapter 7 Bankruptcy.

Utility Services After Bankruptcy

There are times when debtors need to discharge debts owed to their local utilities. However, often the debtor has to come back to the same utility after discharging the debt owed to it in either Chapter 7 Bankruptcy or Chapter 13 Bankruptcy. The utility has to provide services to the debtor, provided that the debtor complies with applicable provisions of the Bankruptcy Code. The following will describe applicable law and practices common in Rochester, New York, area.

In general, the Bankruptcy Code requires utilities to continue to provide service after a bankruptcy filing, since debtors need electricity and heat as much as anyone else. The Bankruptcy Code authorizes utilities to charge a security deposit in exchange for providing their services.

In Rochester, Rochester Gas & Electric (RG& E) is the largest utility company. When RG&E receives a notice that they have been listed as a creditor on a bankruptcy, RG&E will close the existing account and open a new account (with a new account number) for the debtor. RG&E will calculate what is owed on the account as of the date the bankruptcy petition was filed. If RG&E is listed as a creditor in a bankruptcy case, they will request that a debtor provide them with a security deposit. They calculate the amount of the deposit at two months of average utility bills, with the deposit being due within 30 days of after RG&E sends out the security deposit request. The deadline for the deposit cannot be changed. After the debtor has made timely payments for a year, his deposit will be returned.

The above guidelines were discussed in a decision by the Bankruptcy Court Judge, John C. Ninfo II, which addressed these issues in In re Spencer. Judge Ninfo decided that:

1) Absent extraordinary circumstances, public utilities, pursuant to Bankruptcy Code Section 366(b) may require a Ch. 7, 11 or 13 residential customer to pay a security deposit equal to the highest two months, without late charges, of the previous twelve months.
2) While a case is still open, if a post-petition utility payment is more than 10 days late, the utility may apply to the court (on two business days notice to debtor and attorney) for an order authorizing termination of service should the debtor fail to pay any two consecutive monthly statements by the due date. The attorney for the debtor can set up a telephone conference and oppose the application if circumstances warrant it.
3) Should a residential customer who has made a two month security deposit be late in paying any statement, the utility may commence “whatever procedures are available to it under applicable state law and regulations to terminate service, so that it will be in a position to terminate service at the earliest permissible time before or after the debtor’s case is closed.

My concern as attorney representing debtors is that it may be difficult for my clients to come up with a substantial deposit. At the same time, I recognize that my clients have to pay for the service they receive, and that they already benefited from discharging their prior utility bills in bankruptcy.

What Are the Benefits of Bankruptcy?

I am often asked during initial bankruptcy consultations about negative implications and benefits of filing either Chapter 7 or Chapter 13 Bankruptcy. My usual answer is that in most cases, benefits associated with a bankruptcy far outweigh its negative aspects. Debtors who are dealing with significant amounts of debt that they cannot repay should not fear filing. There are many benefits to filing; some readily obvious and some surprising.

Top 3 obvious benefits of filing for bankruptcy

1. Assuming you are filing Chapter 7 bankruptcy, your bills will be discharged and you will not need to repay them. In Chapter 13 bankruptcy, you will be repaying either all or a portion of your debts through the plan that will be based on your ability to pay. Ultimately, bankruptcy will eliminate most or all of your credit card debt, loans, medical bills and other unsecured debt.

2. Once you file for bankruptcy, your creditors will stop contacting you. You will no longer receive letters or phone calls from the creditors. Once the bankruptcy is filed, creditors have no right to contact you and can be punished by the bankruptcy court for doing so.

3. After the bankruptcy is completed, debtors have an opportunity to have a fresh start without paying old bills and concentrate on rebuilding their financial health. They will not need to choose which bills to pay first, or chose between paying for their home or paying credit card debt.

Top 3 surprising benefits:

1. Debtors get their dignity back. They are able to sleep better at night knowing that they will not be harassed by creditors and they do not have to worry about the debt they are unable to repay. Once the bankruptcy is filed, there is an immediate sense of relief.

2. Bankruptcy gives you a chance to rebuild your credit score. Your credit score is greatly affected by such negative items as judgments and late payments. While a bankruptcy will not rebuild your credit right away, it gives you a chance to make future debt payments on time which will lead to a better credit score.

3. Your life becomes easier. Concerns about debt can damage personal and business relationships, make work more difficult and can lead to depression. If those concerns are eliminated, debtors can go on with their lives.

Rather than being something negative, a bankruptcy is a solution to problems that otherwise cannot be resolved. It can help and it usually results in both financial and intangible benefits, and can lead to a life free of debt.

Hardship Discharge in Chapter 13 Bankruptcy

When a debtor files for Chapter 13 Bankruptcy in New York, the typical end result is either a 3 or 5 year plan requiring the debtor to pay his disposable income to the bankruptcy trustee, who in turn will pay to the debtor’s creditors. Occasionally, a debtor may suffer further financial reverses or health problems, so that the repayment plan is no longer affordable, and there is not possibility of modifying the plan. While one of the options is converting the Chapter 13 Bankruptcy into Chapter 7 Bankruptcy, it may not always be possible because of the means test issues.

If debtor can’t keep up with Chapter 13 plan payments, U.S. Bankruptcy Code includes a provision called a Hardship Discharge that provides relief for debtors who can’t continue with a Chapter 13 bankruptcy. The hardship discharge is contained for in 11 U.S.C. 1328(b). The debtor who cannot complete the repayment plan, can ask the court for a hardship discharge. In most cases, the discharge is only available when the following conditions are met:

Through no fault of his own, debtor has experienced circumstances that are beyond his control that makes it impossible for him to continue to make plan payments.
The payments made so far in the Chapter 13 Plan are at least as much as each creditor would have received in a Chapter 7 bankruptcy liquidation case, i.e., the “best interest” test is satisfied.
The repayment plan can’t be modified to allow debtor to continue making payments at a lower amount.

When it is expected that the period of hardship is short, the bankruptcy courts prefer that debtor moves to modify his Chapter 13 Plan to pay a lower amount than was originally agreed upon until circumstances change for the better. Given the present economic difficulties, bankruptcy courts, here in Rochester and elsewhere in New York, are willing to consider a hardship discharge as a way to move the case forward rather than risking dismissal or conversion to Chapter 7 Bankruptcy.

If debtor cannot continue to work as a result of an illness or injury, it is likely that his income was reduced significantly or he may not be able to work at all. In some cases, debtor might not have any money left over once his basic living expenses are met. In this case, a hardship discharge may be the answer. It will eliminate any debts that are dischargeable in a Chapter 7 bankruptcy.

Upcoming Changes to the Means Test

Once again, the means test figures for median income are changing as of March 15, 2011. In New York, it means that the amount of income that the debtor can have before being forced into a Chapter 13 Bankruptcy is going to increase.

Through March14, 2011, a single debtor in New York could have $45,548 in income in income and still be able to file Chapter 7 Bankruptcy. Starting March 15, 2011, that figure is increasing to $46,295. Similar increases will take place for all family sizes. The comparison of the existing and new income limits is below.

Old Income Limits

FAMILY SIZE

1 EARNER 2 PEOPLE 3 PEOPLE 4 PEOPLE *

$45,548 $56,845 $67,292 $82,587

New Income Limits

FAMILY SIZE

1 EARNER 2 PEOPLE 3 PEOPLE 4 PEOPLE *

$46,295 $57,777 $68,396 $83,942

* Add $7,500 for each individual in excess of 4.

While the increases are not large, they are an improvement on the last set of income limits. The reason for a slight growth in the median income is the decline in the American economy. Since the economy is down, employers do not give employees significant wages increases. As a result, the American median family income has grown only slightly, and means test figures increased only moderately.

If you are contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, New York, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

Tax Refunds and Chapter 7 Bankruptcy

It is that time of the year again. Starting in the beginning of the year and until April 15, debtors are filing their federal and New York State income tax returns. For those debtors who are thinking about filing Chapter 7 Bankruptcy, it is usually a good idea to receive and use their income tax refunds prior to filing for bankruptcy. For those debtors who filed for Chapter 7 Bankruptcy during the past year, it maybe the time to provide copies of their income tax returns to the bankruptcy trustee.

Debtors who filed for Chapter 7 Bankruptcy usually learn during their meeting of the creditors whether the bankruptcy trustee will want to see their income tax returns for the past year. The reason that the bankruptcy trustee will want to see the income returns because it will allow him to figure out what portion of the income tax refunds, if any, is the property of the bankruptcy estate.

Tax refunds are probably the largest single type of asset which debtors lose in bankruptcy. In New York, the tax refund may protected by your cash exemption up to $2,500, if the bankruptcy was filed prior to January 24, 2011, and up to $6,000, if Chapter 7 Bankruptcy was filed after January 24, 2011, and if you are not claiming a homestead exemption.

The trustees’ goal is to see whether or not a portion of the income tax refund can be pro rated from the beginning of the year to the date of filing bankruptcy. If this prorated portion of the income tax refund is large enough, the trustee may make a demand that a portion fo the refund be turned over to the trustee. If only one spouse is filing for bankruptcy, and they file a joint tax return, Rochester Chapter 7 trustees usually take position that one half of the refund belongs to the trustee, subject to the applicable exemption.

It is important to disclose the tax refund to your lawyer and the bankruptcy trustee, since a bankruptcy trustee can simply write to the Internal Revenue Service and have it send the tax refund directly to the trustee, and a deliberate failure to disclose information can be a basis for a denial of discharge. Some of the Rochester bankruptcy trustees will ask debtors to sign a stipulation at the meeting of the creditors, requiring the debtors to provide copies of their income tax returns as well as a portion or all of the income tax refunds to the trustee. If debtors fail to do so, their bankruptcy discharge may be revoked.

Under the New Law, Federal Bankruptcy Exemptions Are Available In New York

As I have written previously, the new exemption law permits New York residents to choose between the New York exemption statutes and the Federal Exemption that are set forth in Section 522(d) of the Bankruptcy Code.

The federal exemptions have never been available to debtors filing Chapter 7 and Chapter 13 Bankruptcy in New York before because New York chose to opt out of the federal exemptions statute in the past.

The federal exemptions have different provisions that may be more favorable for individual debtors than New York’s statutory exemptions. They may allow debtors and their bankruptcy attorneys to protect certain assets that may not be available under New York’s statutory exemptions, provided that debtors do not need to take advantage of their homestead exemption.

The federal exemptions contain a “wild card” exemption that enables consumers to protect a substantial amount of cash, well in excess of New York’s statutory limit.

Specifically, the federal exemptions are as follows:

(1) The debtor’s aggregate interest, not to exceed $21,625 in value, in real property or personal property that the debtor or a dependent of the debtor uses as a residence, in a cooperative that owns property that the debtor or a dependent of the debtor uses as a residence, or in a burial plot for the debtor or a dependent of the debtor.

(2) The debtor’s interest, not to exceed $3,450 in value, in one motor vehicle.

(3) The debtor’s interest, not to exceed $550 in value in any particular item or $11,525 in aggregate value, in household furnishings, household goods, wearing apparel, appliances, books, animals, crops, or musical instruments, that are held primarily for the personal, family, or household use of the debtor or a dependent of the debtor.

(4) The debtor’s aggregate interest, not to exceed $1,450 in value, in jewelry held primarily for the personal, family, or household use of the debtor or a dependent of the debtor.

(5) The debtor’s aggregate interest in any property, not to exceed in value $1,150 plus up to $10,825 of any unused amount of the exemption provided under paragraph (1) of this subsection.

(6) The debtor’s aggregate interest, not to exceed $2,175 in value, in any implements, professional books, or tools, of the trade of the debtor or the trade of a dependent of the debtor.

(7) Any unmatured life insurance contract owned by the debtor, other than a credit life insurance contract.

(8) The debtor’s aggregate interest, not to exceed in value $11,525 less any amount of property of the estate transferred in the manner specified in section 542(d) of this title, in any accrued dividend or interest under, or loan value of, any unmatured life insurance contract owned by the debtor under which the insured is the debtor or an individual of whom the debtor is a dependent.

(9) Professionally prescribed health aids for the debtor or a dependent of the debtor.

(10) The debtor’s right to receive–

(A) a social security benefit, unemployment compensation, or a local public assistance benefit;

(B) a veterans’ benefit;

(D) alimony, support, or separate maintenance, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor;

(E) a payment under a stock bonus, pension, profitsharing, annuity, or similar plan or contract on account of illness, disability, death, age, or length of service, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor, unless–

(i) such plan or contract was established by or under the auspices of an insider that employed the debtor at the time the debtor’s rights under such plan or contract arose;

(ii) such payment is on account of age or length of service; and

(iii) such plan or contract does not qualify under section 401(a), 403(a), 403(b), or 408 of the Internal Revenue Code of 1986.

(11) The debtor’s right to receive, or property that is traceable to–

(A) an award under a crime victim’s reparation law;

(B) a payment on account of the wrongful death of an individual of whom the debtor was a dependent, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor;

(C) a payment under a life insurance contract that insured the life of an individual of whom the debtor was a dependent on the date of such individual’s death, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor;

(D) a payment, not to exceed $21,625, on account of personal bodily injury, not including pain and suffering or compensation for actual pecuniary loss, of the debtor or an individual of whom the debtor is a dependent; or

(E) a payment in compensation of loss of future earnings of the debtor or an individual of whom the debtor is or was a dependent, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor.

(12) Retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986.

Here is an example of how a typical debtor may benefit from using Federal exemptions. If debtor owns a motor vehicle that has $6,000.00 in equity, under the New York exemptions, debtor can only protect $4,000.00 of that equity (plus the New York wildcard exemption, if available). However, if debtor uses the Federal Exemptions, debtor can COMBINE the wildcard exemption with the standard Federal auto exemption of $3,450.00, and use an additional $2,550.00 of the wildcard exemption to protect the remaining equity in that vehicle. As long as debtors do not need to use homestead exemption in excess of the Federal Homestead Exemption of $21,625.00, debtors are likely to benefit from the Federal Exemptions.

Debtors Get More Time to Take Personal Financial Management Course

One of the basic procedural requirements that the debtors have to satisfy before receiving their discharge in Chapter 7 Bankruptcy and Chapter 13 Bankruptcy is completing the personal financial management course.

Starting on December 1, 2010, the new rules went into effect giving the debtors in Chapter 7 Bankruptcy 60 days to file a statement of completion of a course in personal financial management. The statement of completion is also known as Official Form 23.

After December 1, 2010, debtors must complete the course within 60 days from the first date set for the meeting of creditors, also know as 341 Hearing. This is an increase of 15 days, up from the prior 45 day time limit.

If debtors fail to satisfy this requirement, they are denied a discharge of their debts. If debtors do not receive their discharge, their bankruptcy was not successful in discharging their debts, and they will not be able to file for bankruptcy again for a long time.

The rules for individuals in Chapter 13 cases were not changed, and still provide that the personal financial management course has to be completed no later than the date when the last payment was made by the debtor as required by the plan or the filing of a motion for discharge.

Changes to New York’s Bankruptcy Exemptions

Back in July I have written about a pending bill which would have changed New York’s bankruptcy exemptions and allowed debtors to use the current federal exemptions or the exemptions in New York Law. At the time, it was impossible to predict whether the bill would ever become law.

On December 23, 2010, the bill was signed into law and will become effective in 30 days. This is the biggest change in New York’s bankruptcy exemptions in years, and will make a tremendous impact on the debtors filing both Chapter 7 Bankruptcy and Chapter 13 Bankruptcy.

Homestead Exemption Increases to $75,000 per person for those in Rochester and Western New York

Right now each homeowner can protect only $50,000 worth of equity in a house. However, for those living in Rochester and Western New York Counties, that amount will increase to $75,000. Since a married couple can combine their exemptions, that means that a couple will be able to protect a$150,000 worth of equity in their home.

This will enable almost any typical Rochester middle class family to file bankruptcy to eliminate their credit card debts while protecting their home. In my Rochester, New York, bankruptcy practice, I periodically meet with homeowners who are forced to file for Chapter 13 Bankruptcy instead of Chapter 7 Bankruptcy because they have too much equity in their homes. Now, almost everyone will be able to seek Chapter 7 Bankruptcy relief and keep and protect their homes.

Amounts for Almost All Other New York’s Exemptions Categories Are Being Increased and New Categories Are Being Added

The new law also increases the exemptions for many other assets such as cars, and adds some new categories like home computers and vehicles for the handicapped.

Comparison of New York’s Old and New, 2011 Bankruptcy Exemption Statutes

Existing New York State Bankruptcy Exemptions

NEW New York State Bankruptcy Exemptions

Homestead Exemption (note: this can be combined for married couples filing jointly, who own the real estate together)

$50,000

Homestead Exemption (note: this can be combined for married couples filing jointly, who own the real estate together)

$150,000 for property in the downstate New York (Counties of Nassau, Suffolk, Kings, Queens, Bronx, Richmond, Rockland, Westchester and Putnam)

$125,000 for property in the Counties of Dutchess, Albany, Columbia, Orange, Saratoga and Ulster

$75,000 for all other counties

Motor Vehicle

$2,400

Motor Vehicle

$4,000

Motor Vehicle equipped for use by a disabled person (new category)

$10,000

Cash Exemption if Homestead Exemption is taken

None

Cash Exemption if Homestead Exemption is taken

$1,000. (Note: New exemption. Can also be used for personal property. However, the Federal Exemption is much greater and allows debtors to protect much more in appropriate situations.)

Jewelry and Art

a wedding ring

a watch worth up to $35

Jewelry and Art

a wedding ring

a watch, jewelry and art worth up to a total of $1,000 (Notes: New exemption. This will make it much more difficult for trustees to seek payment for engagement rings)

Tools of Trade (these are the working tools and implements that are necessary to carry on one’s business)

$600

Tools of Trade (these are the working tools and implements that are necessary to carry on one’s business)

$3,000

Aggregate Individual Bankruptcy Exemption for Cash, Household Goods and Clothing

$5,000

Aggregate Individual Bankruptcy Exemption for Cash, Household Goods and Clothing

$10,000

The New and Increased Exemptions Will Benefit Future Bankruptcy Debtors

Not only will more consumers be able to file for Chapter 7 Bankruptcy, but it will also help those debtors filing Chapter 13 Bankruptcy since they may be paying substantially less through their monthly Chapter 13 plan. In addition, existing Chapter 13 Bankruptcy debtors may be able to convert their cases to Chapter 7 and eliminate all future monthly payments.

I have attached a copy of the actual bill here.