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Inheritances in Bankruptcy

Chapter 7

Under a Chapter 7 bankruptcy, the trustee looks to the timing of the inheritance. If the inheritance was before filing, any amount on hand at the time of filing will become part of the estate. When it becomes part of the estate, an individual will have to exempt it in order to protect it. Any portion of the inheritance that is nonexempt will allow the trustee to take it and distribute it to creditors. If an individual is entitled to receive an inheritance 180 days after filing the bankruptcy, the inheritance will not become part of the estate and the trustee will have no claim to any of it. However, if an individual is entitled to receive an inheritance within 180 days of filing for bankruptcy, they will need to amend their bankruptcy paperwork regardless of whether the court closed the case or not. Similar to an inheritance prior to filing for bankruptcy, the inheritance will need to be exempted through an amendment, if it cannot be exempted then the trustee will be able to take that portion and distribute it to creditors.

Chapter 13

Under a Chapter 13 bankruptcy the individual may still need to exempt the inheritance, similar to a Chapter 7. If the case is a 36-month ACP, then if the client becomes entitled to receive the funds after successfully making payments for 36 months, then the inheritance becomes the clients. A case becomes a 36-month if they pass the means test and were eligible for a Chapter 7, but regardless, filed a Chapter 13.

In any other scenario, the client will need to exempt as much of the proceeds as possible, then put forth an application outlining what unexpected expenses they have to retain the inheritance for, much like they would for a tax refund.

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Chapter 13 Bankruptcy: Liquidation Analysis

In a Chapter 13 Bankruptcy, if you are unable to exempt all of your assets, you will need to perform a liquidation analysis (LA).  The purpose of a liquidation analysis is to ensure the general unsecured creditors are receiving at least the amount they would be receiving if the unexempted assets were liquidated in a Chapter 7 bankruptcy. As such, cost of sale, trustee’s compensation, and priority debts are to be taken into consideration.

For example, let’s say that a client has $5,000 in unexempted assets and owes $1,500 to the IRS. Under this scenario, the Chapter 7 trustee’s fee would be 25%, reducing the amount to be actually distributed to $3,750. Of that, the first $1,500 will go to the priority class of creditors (IRS), leaving the remaining amount of $2,250 available for the general unsecured creditors. Therefore, $2,250 would be the result from the LA.

If we were dealing with a home where some of the equity is not able to be exempted, you may also deduct the cost of sale, typically 6% of the FMV.

For more questions about Bankruptcy or the Liquidation Analysis, please give us a call at (616) 920-0555.

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Chapter 13 Bankruptcy: Save the Home

When an individual falls behind on their mortgage, they have the benefit of filing for a Chapter 13 bankruptcy in order to prevent a foreclosure. A unique feature of a Chapter 13 bankruptcies is that junior mortgages, a second or third mortgage, can be eliminated if the house is worth less than the balance of the first mortgage. How this works, when an individual gets behind on their mortgage payments. The first mortgage could start a foreclosure procedure. Instead of going through with the foreclosure, that individual can file for a Chapter 13 bankruptcy, thereby stopping any foreclosure proceeding.

Additionally, if the individual’s home is worth less than the first mortgage, any junior mortgages would not receive anything from that potential foreclosure. Under a bankruptcy, those junior mortgages would be considered “wholly unsecured” and as such they could be stripped. Those junior mortgages would be treated the same as other unsecured debts and at the end of the bankruptcy, would be discharged the same as the other unsecured debts. At the end of the bankruptcy, the lien for the junior mortgages would be removed from the individual’s property and the individual would no longer need to worry about having multiple mortgages on their properties.

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Chapter 13 Bankruptcy: What is a Cramdown?

 A “cramdown” essentially reduces the principal balance of a secured debt from the outstanding loan amount down to the Fair Market Value. This is most often used with car loans, mobile home loans, household goods, and other personal property in a Chapter 13 Bankruptcy. This will allow an individual to pay the fair value of the property and the remaining balance would be lumped into other unsecured debt.

The most common example is a vehicle, if the vehicle is work $6,000 but there is a $13,000 loan on the vehicle, the individual would be required to pay the $6,000 as secured debt and the remaining $7,000 would be seen as unsecured debt which would be paid in proportion to all other unsecured debt. Any portion of the unsecured debt that was still due and owing on the loan would be discharged at the end of the bankruptcy.

The huge benefit of cramming down the loan is to be able to reduce interest rates, reduce the amount owed, stretch payments out over a longer term, and lower the monthly obligation. This “cramdown” is allowed in Chapter 13 cases, as opposed to a Chapter 7. In order to utilize this process, the loan must have been acquired at least 910 days prior to the bankruptcy. This way, an individual who goes out and buys a new car and acquires a loan cannot turn around and file for bankruptcy in order to lower the loan.

If you have questions about this process, or if you want to know what Russell can do for you, feel free to give us a call at (616) 920-0555.

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Why file a Chapter 13 Bankruptcy when you qualify for Chapter 7?

A Chapter 7 bankruptcy is a liquidation bankruptcy, which in essence wipes out most of an individual’s general unsecured debts (i.e., credit card and medical bills) without a need to pay the balances through a repayment plan.  A Chapter 13 bankruptcy is a bankruptcy that reorganizes an individual’s debt and creates a monthly repayment plan that repays at least a portion of the debt over a period of three to five years.  The easiest way to qualify for a Chapter 13 bankruptcy is to not qualify for a Chapter 7, meaning, an individual would need to make more than the median income. In Michigan, the median household income from 2017 was $54,909. However, a Chapter 13 bankruptcy is not limited to only individuals who do not qualify for a Chapter 7 bankruptcy.

A Chapter 13 bankruptcy has a few more advantages than a Chapter 7 bankruptcy. For example, an individual who is behind on their mortgage has the ability to catch up on missed mortgage payments and prevent the possibility of a foreclosure action. An individual behind on car loan payments also has the option to restructure their debt to get caught up on missed car payments and prevent a possible repossession. This is not true under a Chapter 7 bankruptcy, in a Chapter 7 bankruptcy an individual is not able to catch up on missed payments. Therefore, the possibility of repossession or a foreclosure is still possible. Under a Chapter 13 bankruptcy, an individual is able to restructure their debt in a way to keep maintaining their payments as well as pay any possible arrears in order to get caught up and avoid the possible repossession or foreclosure.

When an individual falls behind on their mortgage, they have the benefit of filing for a Chapter 13 bankruptcy in order to prevent a foreclosure. Additionally, if the individual’s home is worth less than the first mortgage, any junior mortgages would be “stripped” away. Under a bankruptcy, those junior mortgages would be considered “wholly unsecured” and as such they could be stripped. Those junior mortgages would be treated the same as other unsecured debts and at the end of the bankruptcy, would be discharged the same as the other unsecured debts.

Another benefit to a Chapter 13 bankruptcy is that an individual will be able to keep all of their property under the bankruptcy, even if some is unexempted. In a Chapter 7 bankruptcy, property would need to be exempt in order for the individual to be able to keep their property. If an individual’s property cannot easily be exempt, for example, if an individual has a lot of valuable property or a lot of equity in their homes, then the individual’s total property may not be exempt. Any amount that is not exempt, the individual is required to either hand the property over to the trustee so that the trustee can sell it, or pay the trustee the monetary value in order for the individual to be able to retain possession. Whereas an individual filing for a Chapter 13 bankruptcy is able to retain possession of all property but must pay unsecured creditors an amount (typically pennies on the dollar) equal to the value of nonexempt assets through a process called the Liquidation Analysis.

Additionally, if someone owes significantly more on a vehicle than it is worth, they can “cramdown” the debts to its’s Fair Market Value (FMV).  This “cramdown” is allowed in Chapter 13 cases, as opposed to a Chapter 7. In order to utilize this process, the loan must have been acquired at least 910 days prior to the bankruptcy. This way, an individual who goes out and buys a new car and acquires a loan cannot turn around and file for bankruptcy in order to lower the loan.

So while there are a ton of advantages to filing a Chapter 7 bankruptcy, an individual may be more inclined to file a Chapter 13 bankruptcy, especially if a foreclosure or repossession is possible. It is good to check each individual’s needs in terms of what they are looking to get out of the bankruptcy, and not just to get out of debt.

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Chapter 13 Bankruptcy: Examples of Disposable Income

Disposable Income in the bankruptcy world will be whatever is left over after taxes, insurance, and any necessary household expenses. This disposable income must then be turned over to the Chapter 13 trustee.

However, there are additional forms of income that can come into when calculating disposable income:

  • Bonuses – If these were not already factored into the Schedule I, then the funds must be turned over to the trustee. However, one can submit an application to retain.
  • Tax Refunds – This is the most common form of “disposable income” that is turned over to the trustee. However, please review our article on how you can keep you tax refunds.
  • Inheritance – The amount deemed disposable could be reduced by available exemptions
  • Life Insurance Proceeds – The amount deemed disposable could be reduced by available exemptions

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Chapter 13 Bankruptcy: Can I Keep My Tax Refunds?

Short answer, yes, as long as the paperwork is handled correctly.

In a Chapter 13 bankruptcy, tax refunds are treated as disposable income, and as stated in other articles, by default all disposable income is to be turned over to the trustee. However, the following are the most common avenues we take to ensure our clients are able to retain some, or all of their tax refunds.

Application to Retain:  If a client has unexpected expenses, not already accounted for in their budget, we often submit an application with the trustee’s office to retain some or all of their refund.  Examples of this is home repairs, vehicle repairs, vehicle replacement, and post-petition medical expenses. We sit down for a meeting which takes approximately 30 minutes, we review the tax returns, and documentation for these unexpected expenses and submit the application that day. Often, we can have the refund request approved within a week.

100% Plan:  Bankruptcy plans where the client is already paying their creditors back at 100% are automatically approved to retain 100%  of their refund. However, clients may turn over some or all of their refund in order to reduce their plan length.

More than 36 months into a 36-month ACP Plan:  A 36-ACP is a case where the client passed the Means Test, but decided to file a Chapter 13 for another reason. In those cases, after the client successfully completed 36 months of their plan, the client is able to keep any future disposable income.

Built into Budget: Clients can list a proration of their tax refund on their Schedule I. For example, the client can list “ProRated Tax Refunds” under miscellaneous income for the amount of $500. By doing so, the client automatically gets to retain $6,000 from each tax refund. If they need to keep more, they may submit an Application to Retain with the trustee.

 

If you have questions about this process, or if you want to know what Russell can do for you, feel free to give us a call at (616) 920-0555.

 

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