bankruptcy blog
It’s A Family Affair: Multi-generational Financial Distress
At the bankruptcy court hearing called the First Meeting of Creditors, the Trustee, an attorney assigned to oversee your bankruptcy case, will typically ask whether you expect to receive an inheritance in the next six months. Almost every person responds with a laugh followed by a brief “no” or “I hope not.”
Most people find it incredulous or hard to believe that they’d be the recipient of any inheritance. An many hope that no one that they are close to passes away anytime soon.
In that first response there is an anecdotal message, a common story that many bankruptcy filers do not have family with any wealth to transfer upon death. We have the baby boomers that have to take care of parents who are outliving their retirement savings and children who are saddled with student loan debt. Millennials will be first generation to do financially worse than their parents. Americans do not save enough money, which will create a bit of a crisis as more baby-boomers retire. This is all happening even though unemployment is low and the economy is doing pretty well.
On several occasions, I have represented different generations of the same family who have had to file bankruptcy to resolve debt-driven financial distress when the collection funds and resources run out. When a significant life event occurs, most of us turn towards our main support system, our families. As previously stated, many Americans have little to no money in savings. What they do have can be gone in an instant helping out a son, daughter, mother, father, etc.
For example: Son and daughter-in-law fall behind on their mortgage, owing $5,000 in arrears, and face a pending foreclosure. Parents agree to use all their money in savings to bring the mortgage current and save the home from foreclosure. In the meantime, the parents turn to credit cards to pay unexpected expenses. The son and daughter-in-law fall behind on the mortgage payments again because the underlying cause of financial distress is still lingering.
It is possible that the son and daughter-in-law could have sought another alternative such as a loan modification or a Chapter 13 bankruptcy where a mortgage can be brought current through a plan that lasts 3-5 years. The parents could have then instead used the money in savings to cover the unexpected expenses or to pay the Chapter 13 bankruptcy filing fee of $310. For most of us, we want to help our family avoid disaster. However, there may be ways to provide support that you are not aware of.
The Financial Struggles of Aging
Living on a fixed income is difficult for many older Americans. Over the course of time, there has been a shift to individuals bearing a higher burden of financial risks. Gone are pensions. Health insurance is more of the burden on the insured than before. Savings are usually not sizable enough to cover an unexpected or unplanned expense. Social Security benefits, if taken early, come with a cost as the monthly benefit is permanently reduced.
As a result, the rate of individuals over the age of 65 that are filing for bankruptcy has tripled as compared to 1991. Despite a lifetime of hard work, many face the uncomfortable reality of mounting debt.
It could be that a spouse fell ill or passed away, leaving behind insurmountable medical bills and funeral costs. It could be that you had to retire early because of an injury, a child or grandchild moves in with you, or you could simply miss one car payment. Any small thing that snowballs.
Bankruptcy may be the best way to address the debt. Instead of feeling pressure to liquidate assets, a bankruptcy may allow you to achieve the end goal of being debt free and retaining all of your property.
In some situations, a bankruptcy is not necessary to protect assets but to provide peace of mind. The phone calls stop. The collection letters cease. The fear eliminated. Bankruptcy can provide many emotional and mental benefits beyond dollars and cents. After a bankruptcy, you can focus more on your well-being than on how you are going to continue to pay debt. Bankruptcy can be a liberating experience.
I have seen many clients try to outwork the debt. They attempt to find solutions because they were brought up that “you pay your debts.” However, That can be like running on a track and each step you take requires that you run another lap. A bankruptcy allows you to step off the track. There can be a fear that people will assume you have given up or avoided your responsibility to pay for your debt. Alternatively, you are showing that you are brave to take that uncomfortable step towards a fresh start. Peace of mind awaits.
Bankruptcy Is More Common Than You Think
Filing for bankruptcy is not something that most people want to do. However, it may provide the best, most straightforward solution to dealing with overwhelming debt. Many people struggle for months and even years before they decide to take the first step to a fresh start by setting up a free bankruptcy consultation.
During the contemplation phase, a person can experience a myriad of emotions: shame, guilt, frustration, or sadness. It is hard to admit to yourself and others that you may need help. I have seen people make the decision to liquidate a retirement account in an attempt to resolve the situation only to be left with a tax bill from the IRS. I call this replacing the monkey on your back with a baby gorilla: both are a burden to carry. Seeking support from a bankruptcy attorney can protect the retirement account and eliminate the debt.
Figuring this all out on your own can be both overwhelming and isolating. I am here to tell you that you are not alone (https://www.marketplace.org/2017/07/25/economy/americans-emergency-savings-wealth). While confiding with a trusted family-member, co-worker, or friend, you may be surprised that others have experienced similar situations. Having that shared experience will empower you to take steps to address the issues and move toward solutions.
In many consultations, the person I am meeting with will divulge that they finally decided to come in because someone provided them with the support to make the decision. It is also common that the person shares that he or she should have made the decision long ago. You don’t have to go this path alone. Life can change in big ways in a moment. Letting in support allows you to get outside of your own head when making a decision. You may be thinking your way in a circle trying to figure out how to pay off your debt when a simple and straightforward solution like a bankruptcy is readily available.
Letting in support can be hard. But it doesn’t have to be. Here are a few simple tips to get started:
- Write down who you would trust to share your financial struggles with.
- Write down your goals, e.g., financial stability, spend more time with my children instead of figuring out how to pay debt.
- Let in support for taking meaningful action, e.g., scheduling a free bankruptcy consultation.
- Be open to questioning your most closely held beliefs, opinions, and assumptions, e.g., “I have to do this alone. I will never get out of this.”
Step by Step: Chapter 7 Bankruptcy in 7 Clear Steps
Dealing with debt can be overwhelming. Your path to a fresh financial start doesn’t have to be. The Chapter 7 bankruptcy process can be broken down into 7 clear steps.
- Meet with an experienced bankruptcy attorney. During a free initial consultation, a bankruptcy attorney will listen to and analyze your situation to determine whether or not a bankruptcy is a viable solution for you to deal with your debt.
- Pay a set fee for your Chapter 7 bankruptcy. For most Chapter 7 bankruptcy cases, you will pay a set fee to your attorney, which is due in full prior to the case being prepared and filed. This is in contrast to a retainer that your attorney bills against for time spent at an hourly rate.
- Provide your attorney with documents. In your Chapter 7 bankruptcy paperwork, you are required to list all that you own, all the creditors you owe, and your monthly household income and expenses. As such, your bankruptcy attorney will request documentation and information relevant to drafting the paperwork such as:
- Tax Returns. Your last two (2) years State and Federal returns. If you have any tax returns that have not been filed as required, you must file them with the proper taxing authority prior to your bankruptcy being drafted and filed.
- Income Information. Your last six (6) months of income, which are typically paystubs.
- A List of assets. You will complete a handout with an inventory of your assets, including house, cars, household goods, electronics, etc. For many items you will use garage sale or Craigslist values.
- A List of household expenses. You will provide an itemized list of household expenses, including mortgage/rent, utilities, food, clothing, insurance, etc. In preparing this information, it will be helpful to review bank statements for at least the last six months.
- A List of Creditors. You will receive a copy of a comprehensive bankruptcy-based credit report. If a creditor is not included, you must provide us with a list of creditors, including account number and creditor’s address. Medical debts and pay day loans are common examples of debts that may not show up on your credit report.
- Complete a Short Credit Counseling Course. You must complete a credit counseling course prior to filing. The course can be completed online and takes about one hour. The course completion certificate is only valid for 180 days, so you need to make sure you don’t complete the course until you are close to filing your case.
- Review and sign your Chapter 7 bankruptcy paperwork. Your bankruptcy attorney will meet with you to review the bankruptcy paperwork to ensure that it accurate and complete. Your bankruptcy attorney will then file your case with the bankruptcy court. Once filed, your creditors cannot start or continue any efforts to collect a debt. This includes phone calls, letters, emails, filing lawsuits, and continuing garnishments.
- Attend one bankruptcy court hearing. About 4-5 weeks after you file your Chapter 7 bankruptcy, you will attend a bankruptcy court hearing with your bankruptcy attorney called a First Meeting of Creditors. You should not fret too much because creditors rarely show up to the meeting. Also, the name implies that there is a second meeting, which is misleading because this is the only time you will have to go to court. At that meeting, you testify under oath in front of a Trustee (who is not a judge), that the information contained in your bankruptcy paperwork is true and accurate. You usually spend less than 10 minutes answering the Trustee’s questions.
- Debts Are No Longer Owed. Typically, 60 days after the court hearing the bankruptcy court enters the discharge order, eliminating your legal obligation on your debt. The discharge does not apply to student loans, child support, and most tax debt. Because of your Chapter 7 bankruptcy, you are freed from past debt and can enjoy your fresh financial start.
Beware of an Oral Agreement before Bankruptcy
How many times have we placed our trust in someone just to later be disappointed when what the other person told us was either misleading or a downright lie? So many business transactions or deals are done based upon what the parties have said without memorializing anything in writing. When it comes to incurring debt, a debtor can now orally make a misrepresentation through a statement respecting his or her financial condition to a creditor and not be denied a discharge of debt, even if that statement was only about a single asset. Recently, the US Supreme Court decided the case of Lamar, Archer, & Cofrin, LLP v. Appling, which dealt with this very issue.
In that case, the debtor, R. Scott Appling, had hired the law firm of Lamar, Archer, and Cofrin, LLP to represent him in a legal dispute. The debtor had incurred significant attorney’s fees totaling $60,000 when Lamar approached the debtor about placing a lien on the work product, the documents the law firm had prepared on Mr. Appling’s behalf. The law firm would have been able to withhold the release of these documents until Mr. Appling paid the $60,000.
Instead, Mr. Appling informed the law firm that he was to receive a $100,000 tax refund, which may come as no surprise was not the amount he actually received. The law firm continued to work on Mr. Appling’s behalf because of his statements regarding his tax refund. Once Mr. Appling owed $100,000, the law firm inquired about the tax refund. Mr. Appling, even after receiving and spending the tax refund on business expenses, told the law firm that he had not yet received the tax refund. Subsequently, the law firm sued Mr. Appling and obtained a judgment. In response, Mr. Appling and his wife filed for bankruptcy.
During the bankruptcy, the law firm filed a lawsuit, called an adversary proceeding, in the bankruptcy court stating that Mr. Appling should not be able to discharge the $100,000 debt for unpaid attorney’s fees. In these actions the creditor sets forth a reason why the debtor should be prohibited from eliminating his or her legal obligation on the debt. Ultimately, the US Supreme Court sided with Mr. Appling that in order for a debt to be found non-dischargeable the false or misrepresenting “statement respecting the debtor’s financial condition” must be in writing. Because he made the false statement orally, Mr. Appling was able to discharge the debt to the law firm.
In practice, this means you should get everything in writing. Also, be honest, transparent, and forthright. Even though Mr. Appling evaded the consequences of his bad behavior in the bankruptcy court, he has shown the kind of person he is. Sometimes it is not about the legal outcomes, but the practical impacts of bad behavior.
Tax Benefits for Family Farmer Filing For Chapter 12 Bankruptcy
With the current state of the farm economy in Nebraska, many family farmers are considering their options for dealing with overwhelming debt. In many situations, the farmer owes one bank who in turn has a lien or security interest in all of the farmer’s assets (land, equipment, machinery, fertilizer, etc.). Failure to pay short-term or balloon notes that come due all at once, may lead to a situation where the bank threatens to take or does take some or all of the assets that served as collateral for the loans. In some situations, the farmer may voluntarily surrender or turn over the assets to satisfy some or all of the debt owed to the bank. In still other situations, the farmer and the bank may agree to allow for the sale of the collateral with the proceeds used to pay down or off the bank loan.
When faced with a sale, liquidation or repossession of assets, a farmer should be considering the tax consequences of those actions. Under the Internal Revenue Code, these events may trigger tax liabilities. It would be like getting the monkey off of your back and replacing it with a baby gorilla, trading one problem for another.
Formerly, filing for a Chapter 12 bankruptcy did a family farmer little good if a sale, liquidation or foreclosure occurred before or during the bankruptcy. Under the former federal bankruptcy law, a resulting tax liability was considered a priority unsecured debt that the farmer had to pay in full through the 3-5 year Chapter 12 repayment plan. In many instances, this left many family farmers unable to move forward because of his or her inability to pay the tax debt in full.
However, in October 2017, Congress passed the Family Farmer Bankruptcy Clarification Act of 2017, an amendment to the bankruptcy law regarding the treatment of tax debt in Chapter 12 bankruptcy for family farmers. Now, the resulting tax liability from the sale, foreclosure, or liquidation of a farm asset that occurs before or after the Chapter 12 bankruptcy is considered a general unsecured debt, meaning that the bankruptcy laws do not require that these debts be paid in full, allowing many more family farmers to feasibly reorganize.
As such, it provides a viable solution for more family farmers to wind down the entire farm operation or a portion of the operation without being faced with an insurmountable tax bill. The new law provides the farmer with an opportunity to start anew and move forward by filing a Chapter 12 bankruptcy.