Bankruptcy and Divorce

All too often, overwhelming debt can cause serious problems in a marriage and often lead to divorce. If you and your partner are considering divorce and have outstanding debt, it’s possible that one or both of you might end up filing bankruptcy.

Should you file bankruptcy before or after a divorce? I generally advise clients that it’s best to file bankruptcy before your divorce for several reasons.

First, the discharge of overwhelming debt may remove a serious strain on your relationship. With the removal of this giant source of stress, couples can focus on their relationship, reconcile and avoid divorce.

Even if the marriage can’t be saved, a bankruptcy prior to filing will make the divorce process much smoother. Just as couples fight over assets in a divorce proceeding, there will also need to be a decision regarding the assumption of debts. Divorce is expensive, and extended negotiation regarding the assumption of debts will greatly increase the cost of the divorce.

Filing bankruptcy prior to divorce will save you money. We’ve already discussed the cost associated with addressing debts in bankruptcy, but if you’re both headed towards filing, it will be cheaper to file together, before the divorce. By filing together, you will only have to pay one attorney and one court filing fee. Even if you and your spouse are no longer living together, you may still file a joint bankruptcy if you are still legally married.

If debt has placed a serious strain on your marriage and you are considering a divorce, you should speak with an experienced bankruptcy attorney. At the very least, you’ll make the divorce proceeding much easier.

Posted on February 26, 2016 .

I Received A 1099. What Do I Do?

A few times a month we receive a phone call from someone that is very upset as they have just received a 1099 from one of their creditors for a debt that was forgiven or discharged in bankruptcy. They could not afford the payments anymore and thought the creditor had moved on, or they had taken care of the debt by filing bankruptcy. Now they are faced with a large tax bill. It’s just not fair and doesn’t seem right. How could this happen? Well, the good news is that you almost certainly will not have to realize the 1099 income on your tax returns.

The Internal Revenue Code contains specific provisions regarding the recognition of forgiven or discharged debt. The relevant code section is 26 U.S.C. § 108. This section explains that if you have filed bankruptcy, you will not include the discharged debt in your gross income. The section further explains that if you have not filed bankruptcy, you may still exclude this amount from income if you were insolvent at the time the case was filed. This simply means that if your liabilities exceed your assets, you will not have to recognize any forgiven debt as income. If you’ve reached the state where debts are being forgiven, it is unlikely that you are solvent.

This all seems pretty straight-forward, but you’d be surprised by how many “tax preparers” don’t know this. Wherever you live there is likely a national tax preparation chain around the corner. The majority of these “tax preparers” have no accounting background and are focused on getting you in and out as quickly as possible.

I recently had a client that had received a 1099 for forgiven debt and was concerned about the tax liability. He usually received a refund of about $1,500.00 and used that money to purchase necessities for his young son. His “tax preparer” told him that due to the 1099 he would owe the IRS about $1,000.00. The client explained that he didn’t believe this was correct and even provided the “tax preparer” with a copy of the relevant tax code. The preparer told him the exclusion didn’t apply and filed the return with the forgiven debt included as income.

When I met with the client I was able to recognize the error on his tax return. We were able to help the client file an amended tax return with the correct income information. The client no longer owed the IRS and was entitled to his normal refund.

If you have questions regarding a 1099 you have received from a creditor then call us today.

Posted on February 22, 2016 .

Should I Reaffirm My Mortgage In A Chapter 7 Bankruptcy?

When you file a Chapter 7 Bankruptcy, you must include all of your debts. Even if you have a mortgage and wish to keep the house, the debt must be listed in your Chapter 7 Bankruptcy Petition. Does this mean you will lose your house? NO! As long as you are current on your home and continue to make payments, you will not lose the property.

The more important question to ask is should I reaffirm the debt on my home. When you reaffirm the debt, you are telling the creditor and the Bankruptcy Court that you will continue to honor the mortgage and be legally liable for that debt. If you are unable to pay in the future, your home may be foreclosed. Additionally, if you live in a recourse state, the creditor may seek recovery against you if the home sells for less than is owed against it.

The decision to reaffirm is very subjective. Depending on your situation it may or may not be a good idea to reaffirm the debt. If you do reaffirm the debt, the mortgage company will continue to report your payments to the credit reporting bureau. If you do not reaffirm, it’s possible that the mortgage company will no longer report your payments (however, you can report these payments yourself).

If you do not reaffirm the mortgage you can remain in the home if you continue to make payments. If something comes up and you can no longer make the payments you can surrender the property and not have to worry about personal liability. If you are on a fixed income, have volatile income, or simply can’t afford the house you should not reaffirm. Remember, just because you don’t reaffirm, doesn’t mean you can stay in the home without paying. If you want to retain possession of the home but do not wish to sign the reaffirmation agreement you must remain current on the mortgage, insurance and real estate tax payments. If you make these payments, the mortgage company will not foreclose.

Posted on February 19, 2016 .

How Do I Stop A Wage Garnishment

Many of our clients first contact us after they have received a wage garnishment. A wage garnishment is a judicial action by a creditor that allows them to collect a debt owed directly from your paycheck. In Missouri, the maximum amount that a creditor may garnish from your wages is 25%. If you are a head of household, you can reduce this amount to 10%. If you are already in financial trouble, a wage garnishment can be devastating and leave you unable to make your monthly car, rent or mortgage payments. This can lead to repossession, eviction or foreclosure. If you find yourself subject to a wage garnishment we can help.

The filing of a Chapter 7 or Chapter 13 Bankruptcy will stop a wage garnishment. Bankruptcy protection is automatic and we can stop the garnishment immediately. Depending on how much has been withheld, we may even be able to get back some, or all of the garnished wages.

Hopefully, you do not get to the point of having your wages garnished. If you receive a summons regarding a lawsuit it is imperative that you seek legal advice. If you fail to attend the hearing, your creditor will obtain a judgment and can begin to take collection efforts including garnishing your wages, freezing your bank account and placing a lien on your home. However, it’s never too late to address your financial problems. If your wages are being garnished or you fear they may be garnished in the future, contact one of our experienced bankruptcy attorneys today.

Posted on February 15, 2016 .

What Is A Redemption?

When you file a Chapter 7 Bankruptcy, you have the option of keeping your vehicle and reaffirming the debt or surrendering. If you reaffirm the debt, you are usually stuck with the same payment and possibly high interest rate. Your car may have greatly depreciated and you may end up paying much more than it is actually worth. If you surrender the vehicle, you’ll likely have to find a new vehicle. If you take a loan out shortly after filing you will face a very high interest rate and may find yourself right back in the same vicious cycle of debt. Are there any other options? Yes!

Sometimes, we may be able to help you perform a redemption. 11 U.S.C. § 722 allows you to “redeem” a vehicle. This means you pay the fair market value of the vehicle at the time of filing instead of the outstanding balance. If you have a car that has greatly depreciated or a loan with a high interest rate, you may be able to keep your and save hundreds of dollars per month by performing a redemption.

For example: You own a car that is worth $10,000.00, but you owe $15,000.00 on the vehicle. By filing a Chapter 7 Bankruptcy and utilizing 11 U.S.C. § 722, you can pay the creditor $10,000.00 and have a clear title to the car.

Of course, many of our clients can’t come up with $10,000.00 on the spot. If they could, they probably wouldn’t be in our office. However, there are companies that will offer you a “redemption loan”. We generally send our clients to 722 redemption, though there are other companies that perform this service as well. Basically, this company will pay off your old loan, and take a security interest in your vehicle. You would then make your monthly payments to the new company, but a reduced amount as your outstanding balance has been reduced to the fair market value of the car.

Redemptions can be fantastic deals for our clients and can be used on other types of collateral besides vehicles. Make sure you discuss the possibility of a redemption with an experienced bankruptcy attorney.

Posted on February 12, 2016 .

Stopping A Foreclosure

If you have fallen behind on your mortgage and are worried about your home being foreclosed, we can help. Filing a Chapter 13 Bankruptcy will stop a foreclosure and allow you an opportunity to catch up on your missed mortgage payments. 11 U.S.C. § 362 expressly prohibits your mortgage company from continuing with a foreclosure action if you have filed a Bankruptcy.

When you file a Chapter 13 Bankruptcy, you will file be able to repay your mortgage arrearage (the amount you are behind) over an extended period of time. In the Eastern District of Missouri, mortgage arrearage can be repaid over a period of 48 months, generally without any interest.

If you have received a foreclosure notice or are behind on your mortgage payments, you should contact an experienced bankruptcy attorney today. You must act quickly, as once the foreclosure sale has occurred, it cannot generally be undone.

Posted on February 8, 2016 .

What Are Exemptions?

When you file a Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, everything you own on the date of filing becomes property of the bankruptcy estate (see 11 U.S.C § 541).

This includes your home and car, but also includes things like your household goods and furnishings, clothes, retirement accounts, etc. Basically, every single item you own belongs to the Bankruptcy Estate.

Does that mean you are going to lose all of your property? The answer is a simple no. In fact, most Chapter 7 Bankruptcies are “no asset” cases, meaning the Trustee is not going to take any property or money from you. You won’t lose any property if you can claim an exemption. An exemption is simply a mechanism that protects your property from your creditors and the Bankruptcy Estate.

11 U.S.C. § 522(d)  lists the federal exemptions. However, this section also allows states to opt out of the Federal Exemptions. Missouri has opted out and has their own bankruptcy exemption scheme and residents of Missouri cannot claim the federal exemptions from 11 U.S.C. § 522(d). Rather they must use the Missouri Exemptions and the majority of these exemptions can be found in RsMO § 513.430RsMO § 513.475 allows residents to claim an exemption in their homestead of up to $15,000.00. Residents of Missouri may also claim federal exemptions not listed in 11 U.S.C. § 522(d).

To ensure your property is properly protected it is imperative that you meet with an experienced bankruptcy attorney. An experienced bankruptcy attorney will be able to maximize your use of exemptions and minimize the likelihood that you will lose any property or money in your Bankruptcy. Most times, an experienced bankruptcy attorney will be able to protect all of your property.

Posted on February 5, 2016 .

Removing Judicial Liens

Most people know that if a creditor obtains against a judgment against you they can garnish your paycheck or levy (freeze) your bank account. However, creditors may also place a lien against your home. Often, our clients do not even know these liens exist until we tell them, or they try to sell or refinance their homes. Although a bankruptcy will eliminate your personal liability regarding the judgment, unless your attorney takes additional steps to remove the judicial lien it will continue to encumber the property until it is paid.

In a Chapter 7 Bankruptcy, your attorney can file a Motion to Avoid Judicial Lien pursuant to 11 U.S.C. § 522(f). This section allows Debtors to avoid a judicial lien that impairs an exemption in the property. In Missouri, Debtors may exempt $15,000.00 of equity in their homestead (Rs.MO 513.475). So, if you have less than $15,000.00 of equity in your home you can avoid a judicial lien in full. If you have more than $15,000.00 in equity, you may still be able to avoid a portion of the judicial lien. It is important that you speak with an experienced bankruptcy attorney that is familiar with the lien avoidance process to ensure your judicial lien does not survive the bankruptcy.

In a Chapter 13 Bankruptcy, your attorney can also file a Motion to Avoid Judicial Lien pursuant to 11 U.S.C. § 522(f). If the Motion to Avoid Judicial Lien is not filed and your creditor files a secured claim, this will cause the judgment to be paid in full through the Chapter 13 Bankruptcy. To repay this amount in full, your monthly Chapter 13 Plan Payment will be higher than it should have been, or your plan will no longer be feasible and you will not be granted a discharge. Make sure you do not spend years paying money to creditors that don’t have to receive it, or worse, lose your discharge. Contact one of our experienced St. Louis bankruptcy attorneys today.

Posted on February 1, 2016 .

What Is Chapter 13 Bankruptcy

A Chapter 13 Bankruptcy, also known as “wage-earners” plan, is a restructuring of debt. Lasting three to five years, income is used to repay a portion of some or all of your outstanding debt. Upon filing your Chapter 13, you will submit a proposed repayment plan to the Trustee. This is known as the Chapter 13 Plan. Certain debts must be repaid in full, while other debts may be settled for pennies on the dollar. Once payments are completed, any remaining (non-student loan) unsecured debt will be discharged. A Chapter 13 Bankruptcy will also stop foreclosure proceedings against your home, or repossession attempts against your car.

Debts that must be repaid in full: In a Chapter 13 Bankruptcy, certain debts must be repaid in full. The most common debts that must be repaid are: Mortgage arrearage; secured debt; and priority debt.

One of the main reasons Debtors choose to file Chapter 13 Bankruptcy is protect the family home from foreclosure. In your Chapter 13 Plan, you must repay any outstanding mortgage arrearage (missed mortgage payments) over a period of 48 months – generally with no interest. Once your home is scheduled for a foreclosure, the lender will not stop the foreclosure unless you are able to cure the default in full. The Chapter 13 Bankruptcy is an excellent way to stop the foreclosure and offer an affordable repayment of your outstanding mortgage arrearage, thereby saving your home.

Debtors may also choose to file Chapter 13 Bankruptcy to protect collateral (generally a vehicle) from repossession or replevin from a secured creditor. In your Chapter 13 Plan, you must make payments to your secured creditors. Depending on the age and type of secured debt and the collateral, you may be able to reduce the total balance owed. You will also repay the secured debt at an interest rate assigned by the Bankruptcy Court. The current interest rate is 4.75%. We find that this rate is generally a lower rate than many of our current clients have.

Debtors may also choose to file Chapter 13 Bankruptcy to gain protection from collection efforts from priority debts. The most common forms of priority debt are back taxes and unpaid domestic support obligations. In your Chapter 13 Plan, you must repay past due priority taxes or domestic support obligations over the length of the Plan. There should be no further interest or penalties charged while you are making the repayment.

Debtors may also choose to file Chapter 13 Bankruptcy because they are ineligible to file a Chapter 7 Bankruptcy or wish to protect non-exempt property.

Repayment to unsecured creditors: In a Chapter 13 Bankruptcy your unsecured creditors (credit cards, medical bills, payday loans, etc.) are repaid according to a “liquidation analysis”, or your “disposable monthly income” as determined by the Means Test. Whichever method results in a greater repayment to unsecured creditors will be required. This amount will be repaid over a period of three to five years, and unsecured creditors will receive a pro rata portion of the amounts paid for the benefit on unsecured creditors.

For Example: Debtor has three outstanding credit cards. Credit Card 1 is owed $5,000.00. Credit Card 2 is owed $5,000.00. Credit Card 3 is owed $10,000.00. The Means Test requires the Debtor to repay $10,000.00 to unsecured creditors over the course of the Chapter 13 Plan.

In this example both Credit Card 1 and Credit Card 2 will receive $2,500.00 while Credit Card 3 will receive $5,000.00. After the Chapter 13 Bankruptcy is concluded, the remaining debt will discharged.

Chapter 13 Bankruptcy is a very technical process but can offer great relief. An experienced bankruptcy attorney can represent you through this difficult experience and ensure the best possible result. 

Posted on January 29, 2016 .

Discharging Tax Debt Through Bankruptcy

Many clients come to us under the mistaken belief that taxes may not be discharged in a Chapter 7 Bankruptcy. Though some taxes may never be discharged under Chapter 7 Bankruptcy (such as those withheld by an employer, or tax debt secured by property) income taxes may very well be discharged if three conditions are met.

The 3-Year Condition:

To discharge your income tax debt, the debt must have become due at least three years before you file your bankruptcy (11 U.S.C. § 507(a)(8)(A)(i)). Income taxes are generally due on the 15th of April. As I write this blog in early June, 2014 the deadline to file 2013 income tax returns (absent extensions) has already passed. Therefore, income tax debt attributable to 2013, 2012 or 2011 would not currently be dischargeable in a Chapter 7 Bankruptcy. Tax debt attributable to earlier years may be discharged if the other conditions are met.

The 2-Year Condition:

To receive a discharge of tax debt under a Chapter 7 Bankruptcy your tax returns must have been filed for at least two years. Even if you filed your return late, as long as two years have elapsed you will fulfill this condition (11 U.S.C. § 523(a)(1)(b)(ii)).

The 240-Day Condition

To receive a discharge of tax debt in a Chapter 7 Bankruptcy the tax debt you are seeking to discharge must have been assessed at least 240 days before you file your bankruptcy (11 U.S.C. § 507(a)(8)(A)(ii)).

In short, if the tax debt became due more than 3 years ago, your return has been filed for at least two years and the tax was assessed more than 240 days ago, you should be able to discharge any income tax debt in a Chapter 7 Bankruptcy. Interest and penalties attributable to the tax debt should be discharged as well. It is important to note that certain actions can affect the timeline for these conditions, so it’s important that you speak with an experienced bankruptcy attorney regarding your income tax debt.

Posted on January 25, 2016 .