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FAQ

 

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Should I file bankruptcy?
Will I lose some, or all, of my property?
Can filing bankruptcy stop creditors from harassing me?
Can bankruptcy stop the garnishment process?
Can bankruptcy stop the foreclosure process?
What is Chapter 13 Bankruptcy?
Can a business file a Chapter 7?
What is a Chapter 7 with primarily business debts?
What is a Chapter 7 with primarily consumer debts?
What is a Chapter 7?
Who Can File a Chapter 7 Bankruptcy?

 

Should I file bankruptcy?

Whether you should file bankruptcy, or not, is a difficult decision that requires you to consider many factors, including but not limited to the amount of unsecured and secured debt you may have, your regular monthly income and expenses, employment security, the value and type of assets you possess, etc… The below list provides some general circumstances that may indicate that bankruptcy should be seriously considered. Ultimately, please take the time to contact me and discuss your situation, as everyone’s circumstances are truly unique.
In each example, it is assumed that your debt (i.e., credit cards, lines of credit, vehicle payments, house payments, judgments etc…) has become very burdensome to maintain, and that you have already reduced your monthly living expenses, in an attempt to make ends meet.

1. Your budget ends, each month, in the red.
Let us assume that you have pared your budget to the bare essentials. Due to debt payments and your other regular monthly expenses, you find yourself, either, in the red each month, or you are one large medical bill, or blown water heater, from operating in the red in the future. You cannot save any money for emergencies, and your debt does not reduce significantly, each month. This is the very common situation, and you should speak with a bankruptcy attorney to see if you have options.

2. You have enough income to keep the debt from growing larger, but you cannot pay enough on your debt to reduce its level.
Picture an individual in a row boat with a hole in it. He or she has a bucket to use. However, for each bucket of water tossed, another enters through the hole. In short, your current level of income prevents you from repaying enough of the debt’s principle, each month, to repay the debt within a reasonable time. The only parties happy in this situation are the creditors, who receive more and more from you in the form of interest. You should speak with a bankruptcy attorney.

3. You have good income, but your debt levels have too high, and you have fallen behind on house payments.
In this situation, the debt payments (credit cards, lines of credit, vehicles) have taken precedent over the mortgage payments. However, the home has some equity, and you do not want to lose it. Here, you would benefit from filing a Chapter 13. It would allow you to submit a plan to repay the house arrears, and preserve the home. The plan would also make some providion for payment of the other debt, depending on your particular circumstances.

Other Considerations:

1. Should I sell assets?
Whether you should sell assets to avoid bankruptcy depends on whether selling the asset will truly help you. Below are some questions to ask yourself. I will offer my thoughts, as well.
— Will the money from your assets pay enough of your debt so that you can easily operate in the black? Anyone who file bankruptcy has exemptions that protect some or all of his/her/their property. It would be foolish to sell assets, if their sale will not benefit you in some way.

— Is the asset in the form of retirement? No, No, No! (Sorry, it’s a reflex response). Please speak with an attorney before touching retirement. Except for limited exceptions, retirement is protected by certain exemptions, and usually in full. While circumstances exist to that may justify using your retirement, they are limited.

— Who is buying the asset, and for how much? Who buys the asset and the amount paid for it could create a problem for you, if you file down the road. For example, if you sell an asset for below market value, a trustee can demand the item from the purchaser. Further, if you sell items to family members, you can expect the trustee to closely examine the transaction. In any case, you need to keep all paperwork evidencing the transaction.

2. Should I negotiate with creditors? In my experience, the ability to negotiate with creditors primarily depends on your ability to pay the settlement amount, sooner than later. If a creditor is willing to accept a lower amount, the creditor will want that amount paid within one to three months, usually. More important: 1. You must get the agreed amount in writing; and, 2. You should never pay the creditor a large sum of money for it to consider making you an offer of settlement. These are the two most repeated mistakes by debtors. You may wish to consider paying your attorney to conduct the negotiations.

3. Can I surrender a secured asset and avoid bankruptcy? The short answer is “maybe.” I have helped clients, in the past, surrendered a burdensome, secured asset, and then helped them reach settlement with the creditor on the debt. However, each situation is different.
As stated at the top of the page, whether you should file bankruptcy, or not, will depend on your unique circumstances. If you find yourself approaching a financial predictament, you should consult with a bankruptcy attorney immediately. Be pro-active. I have witnessed too many persons who have lost assets because they didn’t make a simple phone call. Remember, at Heineman Law, the initial, one-hour consultation is free. Please feel free to call today.

DISCLAIMER: This site and any information contained herein are intended for informational purposes only and should not be construed as legal advice. Seek competent counsel for advice on any legal matter.

 

Will I lose some, or all, of my property?

In the vast majority of cases, a debtor will not lose any property when he or she files a bankruptcy. Every debtor has the ability, and right, to protect assets with the use of certain State laws called “exemptions.” Exemptions allow an individual to protect either the equity in the item, or the item itself. For example, the State of Idaho exemptions allow each debtor to protect $7500 of equity in household possessions, $7000 of equity in a vehicle, and $2500 of equity in tools, or inventory, that a debtor uses in his or her trade, or business, to make money. Since the value of the item is based on what it is worth, given its age and condition (not its original price or replacement cost), a debtor’s exemptions tend to protect most every thing. Further, if a debtor cannot protect all of his or her property, then he or she can purchase the particular item(s) from the trustee*.

Most residents of Idaho will utilize Idaho’s exemptions to protect their property. However, if you have lived in Idaho for less than two years, the bankruptcy code will likely require you to use the exemptions from the state where you had previously lived. This situation is not unusual, and it can be easily determined. Please call if you are unsure. A list of some of Idaho’s exemptions is set forth below.

Some common things retained in the bankruptcy estate*, due to the inability to protect with exemptions, include: Part or all of one’s tax refund for the current year; “Toys” like boats, ATV’s, etc…; Expensive musical instruments and antiques. However, the only way to determine what property you can protect, or properly utilize, is to contact a knowledgeable bankruptcy attorney to discuss your options. Heineman Law offers free initial phone or in office consultations to help you understand this very complex area of the law. Please contact us today.

Of course, there are time when a debtor may surrender property to a trustee that has equity because it has become too burdensome to maintain. Some times, a debtor may surrender property, with little or no equity, to the creditor (after the trustee has first passed on it) as it has become too burdensome.

Various Idaho Exemptions:
Homestead — $100,000 of equity in real property or mobile home; sale proceeds are exempt for six months
Vehicle — $7000 of equity in a vehicle utilized by a debtor; In a joint filing, debtors can combine their exemptions to protect up to $14,000 of equity in one vehicle; the exemption cannot be split to protect more than one vehicles, of lesser values.
Household items — $7500 of equity, per debtor; $15,000 for joint filers; $750 maximum amount on any one item. (Pets, guns, musical instruments included)
Jewelry — $1000 of equity, per debtor; $15,000 for joint filers.
Wild Card — $800 per debtor; $1600 for joint filers; It can be applied to any TANGIBLE piece of personal property; You cannot use it to protect money in a bank account, but you can use it to protect cash at home (stuff in a sock or under a mattress).
Tools of the trade — $2500; Can be applied to tools, inventory, and even a vehicle, if used by the debtor for his work, to make money (i.e., a delivery van). Further, you must be currently using these items to make money, not that you could use them to make money, or that at one time in the past you used them to make money.
*Trustee, or interim trustee — He or she is an individual appointed to oversee the administration of your bankruptcy case. One of his jobs is to review your schedules to determine if there are any assets, or equity in assets, that you cannot protect, that should remain part of the bankruptcy’s estate. If some exists, he will collect those assets, sell them, and then distribute the funds to the creditors.
*Bankruptcy estate — The bankruptcy estate consists of all your property; whether it is tangible items, like a chair or a vehicle; or it is intangible items like the right to sue someone for money. Property remains part of the bankruptcy estate until, generally, your exemptions become valid, the property is abandoned by the trustee, or by operation of law (i.e., a bankruptcy case has closed).

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Can filing bankruptcy stop creditors from harassing me?

Yes! Pursuant to bankruptcy law, creditors must immediate cease all actions against you when you have filed for bankruptcy. These actions include repossessing vehicles, selling your home, garnishing wages, seizing property, or even contacting you by phone, letter, or otherwise. When you obtain your discharge, your liability for the debt has ended. However, if you are not current with house or car payments, and have not reached agreement with those creditors regarding arrearages, then those secured creditors can seek to regain their property.

 

Can bankruptcy stop the garnishment process?

Yes! Once you have filed your bankruptcy, the creditor must stop garnishing your wages. If the creditor does garnish your wages after you filed for bankruptcy, it may return the wages to you. The creditor may also return garnished-wages, to the trustee, that it collected before the filing. If the trustee determines that he or she cannot use the monies to make a distribution to creditors, then the trustee will return the monies to you.

 

Can bankruptcy stop the foreclosure process?

Yes! Even if you file your bankruptcy one minute before the foreclosure sale, you can stop the process.
However, do understand that if you filed a Chapter 7 bankruptcy, or a Chapter 13 bankruptcy that does include paying arrears and keeping your residence, then the creditor will likely ask the Court for permission (Legally, it is called requesting “relief”) to continue with the foreclosure process. In Idaho, this means that the creditor, once it has obtained an order granting “relief”, it can set a new sale date, at least, 30 days down the road.

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What is Chapter 13 Bankruptcy?

Chapter 13 bankruptcies usually occur under the three circumstances, described below. A Chapter 13 bankruptcy requires the debtor, or debtors, to submit a plan which proposes, in general, how much the debtor will pay to the trustee each month, and how the trustee should distribute the funds to the creditors. The plan must be sent to Court, the trustee, and the creditors for approval. Depending on your circumstances, the plan commonly lasts 3-5 years.

1. A Chapter 13 bankruptcy is commonly used by a debtor to save property, usually one’s home. Generally speaking, when a person falls behind on his or her mortgage, that person, or “debtor”, will file a Chapter 13 bankruptcy and submit a plan that proposes how much the debtor will pay the arrears on the home. The plan can address other arrears, including past-due amounts on vehicles.

2. Since the over-haul of the Bankruptcy Code (“Code”) in 2005, many debtors must file a Chapter 13. One of the documents that a debtor must submit, when he or she files, a “Means Test”. The test can be difficult to understand, and even more confusing to surmise, but I will try. Generally speaking, the test determines (based on income earned six months prior to filing, and expenses that include a mixture of those set by the IRS, those permitted by the test, and those actually incurred by you) whether you can proceed as a Chapter 7 or Chapter 13.

3. Still, some individuals choose to file a Chapter 13, so that they can try to pay some or all of their debts, even when they can file a Chapter 7.

 

Can a business file a Chapter 7?

In general: The quick answer is yes. However, unlike an individual, a business cannot obtain a discharge from its liability on debt. Usually, a business will file a Chapter 7 bankruptcy to initiate a controlled method of selling assets and resolving debts. While it may result in the end to some businesses, it may allow individuals a way to end a poor business venture, and start anew.

Another answer may be to dissolve your business as provided by State statute. This method is another way to allow a business to end its current existence, and begin anew. Please contact our office to discuss your options.

Are you a sole proprietorship? If you are, then you must file, since you, personally, are linked to the debts and the assets. Many past clients, who operated as an LLC or corporation have personally guaranteed the companies loans/debt. Therefore, they are liable personally, and so, they must file a personal bankruptcy to eliminate the debt.

Do you have a corporation or LLC? The corporation or LLC can file for bankruptcy. Be aware that the trustee will determine if any unencumbered assets exist. However, creditors get first dibs on the corporation assets, pursuant to Idaho State Statutes. Further, the trustee has the ability to sell your interest in the corporation.

 

What is a Chapter 7 with primarily business debts?

This bankruptcy is one where the majority of the debts are business related. This distinction is important because it can allow a debtor, or debtors, to file a Chapter 7 bankruptcy, even when the debtor, or debtors, income and expenses would dictate that he, she, or they should file a Chapter 13. The business debt could result from any type of business venture, including home-based operations, small stores, or rental properties. When drafting the Bankruptcy Code, Congress believed in the importance of small business owners to our economy, and that the resulting debt, from these efforts, differed from the debt normally accumulated by consumers.

With regard to the debt, it can come from many sources. For example, if you applied money from a second or third mortgage to your business, then it is a business debt for the purposes of this bankruptcy. The same is true if the source of the money is a personal credit card or a line of credit. Mathematically, if your business debts exceed your personal debts by a penny, you can qualify as a business bankruptcy. Of course, the wider the margin, the less scrutiny by the U.S. Trustee. If you are unsure, please call. Remember, your initial phone or in-person consultation is free.

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What is a Chapter 7 with primarily consumer debts?

It is the most common bankruptcy filed by debtors. It does not infer that a person with a business is excluded from filing this kind of bankruptcy. In short, it is a bankruptcy where the majority of the debts arise from personal use. In other words, a debtor could be personally liable for business debt, but if the business debt is less than 50% of debtor’s total debt (business and personal), the debtor must file a consumer 7 bankruptcy. Please click on “What is a Chapter 7?” for more information about Chapter 7’s.

 

What is a Chapter 7?

Chapter 7 bankruptcy is the most common bankruptcy filed. The main goal in a Chapter 7 bankruptcy is for the debtor (or debtors) to obtain a discharge of his or hers debt. While bankruptcy is not desired by my clients, they experience a great sense of relief when the burdened created by excessive debt has been lifted.
Generally speaking, the bankruptcy process requires a debtor, or debtors, to file documents with the Court that lists all of the debtor’s assets, liabilities, and creditors. These documents will also require that the debtor provide information regarding his or her finances, as well.
About 30 days after filing, the debtor must attend the First Meeting of Creditors. At this meeting, an interim trustee will ask the debtor questions about his or her schedules. Creditors rarely appear. The trustee’s job is to review the schedules and determine if there is any property that the debtor cannot protect, or that the trustee can reclaim from those who received transfers of money, or property, from the debtors. If he/she can accumulate enough property, the trustee will convert it to cash and then distribute it to creditors.
In the vast majority of cases, the debtor will not lose any assets. Approximately 60 days after the meeting with the trustee, the debtor will receive a discharge order from the Court, officially eliminating his or her liability for any of the debts listed in the proceeding. If the trustee cannot collect enough assets to distribute, then the case will be closed, usually on the same day.

 

Who Can File a Chapter 7 Bankruptcy?

The Bankruptcy Code (“Code”) has requirements to determine is a debtor can file a Chapter 7 bankruptcy. If a debtor fails to meet the Chapter 7 requirements, the debtor will need to convert to a Chapter 13 bankruptcy. The Chapter 7 requirements do not apply to two types of debtors. One type is the disabled veteran that incurred debt while on active military duty; the other is the debtor whose debts are primarily, business-related. (Please see the “Primarily business debts” subsection under this FAQ.)

How is it determined whether a debtor can file Chapter 7 Bankruptcy?
In general, the three things, set forth below, must be evaluated. Also, let us assume that the debtor does not need to file a Chapter 13 (for example, to save a house), or that the debtor is otherwise prohibited by the Bankruptcy Code from filing a Chapter 7.

Part I. The Debtor’s Federal Means Test must show that the Debtor’s yearly gross income is equal to, or below, the state’s median income level for the size of debtor’s household.
The Federal Means Test (“FMT”) was created in 2005 to better determine which debtor (or debtors) should qualify for a Chapter 7. The first thing to determine is whether the yearly gross income, for debtor’s household, is at or below the State’s median income level for a household. The “gross monthly income” is computed by added the gross incomed earned, by debtor’s household, for the six full months prior to debtor’s filing. That number is then multiplied by 2, to get a yearly gross amount, and then compared with the State’s median income for a household of debtor’s size. If debtor’s gross annual amount is at or less that the State median income level, then debtor will very likely be a Chapter 7. If it is more, then debtor may still be a 7, but debtor must pass the other parts of the test.
FYI — To find a State’s Family Median Income levels, go to ****

Part II. If the gross annual amount exceeds the State’s Family Median Income level, then the Debtor must complete the second half of the FMT that deducts certain permitted expenses to see if Debtor can still file a Chapter 7.
In the second part of the test, the FMT allows the debtor to deduct certain monthly expenses which come from three sources: (1) IRS standards; (2) case law; and, (3) some of the debtor’s actually monthly expenditures. If the difference between the monthly income and expenses (this difference is called “disposable income”) is greater than $166/month, then you will likely need to convert to a Chapter 13. If the disposable income amount is close to zero, or below, then you may still be able to file a Chapter 7. An disposable income amount less than $166, but more than $100, will put the debtor in a gray area.

Part III. A Debtor’s current monthly income and expenses must be evaluated as well.
The final part of the analysis looks at a debtor’s current monthly income and expenses. Where the FMT evaluates the debtor’s past income, as well as some past expenses, the debtor’s current monthly income and expenses must also be evaluated. The easiest example why this is necessary is the situation where the debtor has not worked for six months, but suddenly get a job working at GM before he files. Here, his FMT would show that he is presumed to be a Chapter 7, based on the median income levels. However, his bankruptcy schedules, given his new income and regular monthly expenses, might show that he has $200, $300, or more dollars of disposable income. In that case, the U.S. Trustee would insist that the debtor needs to file a Chapter 13 due to his ability to repay some of his debt.
FYI — The following are examples of includable income:
• wages, salary, tips, bonuses, overtime, and commissions
• gross income from a business, profession, or a farm
• interest, dividends, and royalties
• rents and real property income
• regular child support or spousal support
• unemployment compensation
• pension and retirement income
• workers’ compensation
• annuity payments
• state disability insurance
Social Security retirement benefits are not included.

Other factors that prevent a debtor from filing a Chapter 7 or may cause a Chapter 7 to be dismissed:

1. Debtor received a Discharged in a previous Bankruptcy

If a debtor received a discharge from a previous Chapter 7, filed within eight (8) years of debtor’s current bankruptcy case, or from a Chapter 13 bankruptcy within the past six years, then the debtor is ineligible for Chapter 7 discharge. If such a debtor would file a bankruptcy, anyway, the U.S. Trustee would seek to dismiss it.

2. A Previous Bankruptcy Case was Dismissed within the Previous 180 Days
The Bankruptcy Code states that a person cannot be a debtor if the dismissal of a previous Chapter 7 or Chapter 13 bankruptcy case occurred within the past 180 days for any of the following reasons:
• The debtor willfully violated a court order
• The previous bankruptcy case was considered fraudulent or constituted abuse on the court
• The debtor requested a dismissal after a creditor asked the court to lift the automatic stay

The Debtor Failed to Meet the Credit Counseling Requirement
In general, all bankruptcy candidates must take a bankruptcy counseling course within 180 days of filing their Chapter 7, from a Court-approved agency. (A recent rule change will allow debtor to complete the course up to If not, the Court will dismiss the case. The exceptions listed in the Bankruptcy Code include the inability to complete the course due to a physical disability, mental incapacity, or active duty in a military combat zone. Upon completing the course, the debtor will receive a certificate, stating his or her completion of the course, that must be filed.

The Debtor Defrauded Creditors
The interim trustee appointed to the debtor’s case, or the U.S. Trustee may seek to dismiss a debtor’s case if it appears the debtor is attempting to defraud creditors. While the time frame and circumstances of each case are considered, the following list consist of the more frequent reasons:
• The debtor transfers property to friends and family members
• The debtor mutilates or destroys property
• The debtor misleads a creditor regarding security for a debt
• The debtor lied on a credit application

The Debtor lies on his schedules
***When you sign and file bankruptcy papers you do so under penalty of perjury. While a debtor is allowed to amend schedules, grievous errors or omissions have resulted in a debtor losing his right to a discharge of all the debt listed in the bankruptcy, and in some cases, some jail-time.

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