The Bricks Law Firm, PC

Whether in a Chapter 7 or a Chapter 13 bankruptcy, a lender has the right to file a “Motion to Lift Stay,”  to get at their collateral. This is typically only done by a lender when the debtor is not current, and if it is done when the debtor is current, then the debtor has a valid defense.

A lot of times when debtors get notice of hearing for the “Motion to Lift Stay,” they will ask me if they have to move out of their house on that day. The answer is no, and here is why.

Without filing a Motion to Lift Stay, a lender cannot assert its non-bankruptcy rights of foreclosure, because the debtor is protected by the Automatic Stay. Therefore, a lift stay order is not a foreclosure order. Rather, it is just an order allowing the lender to pursue its foreclosure rights through applicable state court methods.

In other words, once the lender is successful in its lift stay motion, it does not get to foreclose right away. Instead, the lender now has the same rights of foreclosure it had prior to the debtor filing bankruptcy. That means the lender must still follow the state law method of foreclosure, and it must start this process from scratch.

In Georgia, the lender must advertise for four weeks in the legal organ for the county of the property. It also must send certified notice to the debtor a month prior to the foreclosure sale. Doing the math, the lender cannot actually foreclose on the property until at least a month after the lift stay motion is granted.

Furthermore, lenders are not always chomping at the bit to foreclose. Often they do not want the property in their name for quite some time. Thus, they might go months after a lift stay motion without initiating a foreclosure sale, if at all. The lift stay motion might have been solely about drumming up attorney fees.

As a debtor, you have several options after the lift stay motion is granted. While you could move out right away, you could also wait to move until the foreclosure notice. Additionally, you could also ask your lender about renting the property or perhaps offer a “cash for keys” exchange to move out of the property early. The good news for the debtor is he/she is not reaffirming the mortgage, so the mortgage note is discharged regardless of when the lender ultimately forecloses. And if the bank takes it time to foreclose, the debtor can take advantage of this arrangement to continue to live in the property, perhaps even rent free. That is especially important because any place the debtor would likely move, he/she would instantly begin paying rent.

However, it is important to note that until the property is ultimately foreclosed upon, the debtor is still on title. Being on title, the debtor is liable for any injuries on the property, code violations and association dues. Therefore, the debtor should make sure to keep the property up to code, pay post petition filing date association dues and maintain insurance on the property until title switches hands. The last thing a debtor wants to do after filing bankruptcy, is to incur post petition debts relating to a property they are no longer living in. As those debts would be incurred after the filing date, they would not be discharged in the debtor’s bankruptcy case.

For an additional perspective on the pros and cons of “walking away” prior to a foreclosure sale, read this.

When you file bankruptcy, a trustee is appointed by the Office of the United States Trustee to administer your case. Barring an unusual case of a conflict of interest between the debtor and the trustee or a request by creditors to remove the trustee, this person will remain your trustee throughout your case.

It is important to note that while the trustee has powers, it does not have legal authority to “force” a debtor to do anything. If there ever is a dispute between a debtor and the trustee that cannot be resolved, the two sides can always take the matter in front of the assigned judge, who will be the arbiter.

While many bankruptcy cases come and go without the debtor meeting his/her assigned judge, the debtor will always meet the trustee. The debtor must appear in front of the trustee for his/her meeting of creditors, also known as a debtor’s exam or 341 hearing. In that hearing the trustee will put the debtor under oath and ask him/her various questions relating to the filed petition.

The trustee’s role in a chapter 7 case is much different than in a chapter 13 case. In a chapter 7 case, the trustee is looking to determine if the debtor has non exempt assets, meaning the debtor has more assets than he/she is allowed to exempt in a chapter 7. In such an event, the trustee will liquidate the asset and pay and use the money to pay creditors who file a “proof of claim” with the court. The trustee will take a percentage commission for this liquidation, and it is possible that the debtor will also receive a sum of money from this sale. It is important to note however that the majority of chapter 7 debtors do not have any assets to liquidate, and are considered “no asset” cases.

In a chapter 13 case, the trustee does not liquidate assets. In fact, many debtors choose the chapter 13 alternative to chapter 7 so that none of the assets they want to keep are liquidated. In a chapter 13, the debtor pays the chapter 13 trustee a monthly payment for a period of 36 to 60 months, and the trustee in turn distributes the money among the debtor’s creditors who have filed a “proof of claim.” The trustee receives a commission not exceeding 10% for making the distributions.

Since chapter 13 involves a payment plan, whereas chapter 7 does not, there must be confirmation of the plan in a chapter 13. One of the trustee’s jobs is to make sure creditors are treated fairly and that the debtor contributes all of his/her disposable income into the plan, so the trustee will often object to confirmation. The two sides will then attempt to resolve any disagreements so that the trustee will allow the plan to be confirmed.

Although the trustee seems like an opponent of the debtor, in actuality the trustee is not for or against the debtor. The trustee is merely doing the job assigned under the bankruptcy code, and as long as the debtor is honest and thorough in describing his/her financial condition to the trustee, the actions the trustee takes in the case are often very predictable.

Many debtors filing bankruptcy think they cannot discharge income taxes in bankruptcy. However, that is not true. Income taxes can be discharged in bankruptcy.  Of course, it is hardly that simple to discharge your tax debt. Discharging taxes depend on a variety of factors, and many debtors are not eligible to discharge their tax debt.

To understand how complicated it can be to determine if your tax debt is dischargeable, consider that debts come in three forms- secured (i.e. your mortgage), unsecured (i.e. your credit card bill), priority (i.e child support and alimony). Now consider that taxes can be classified as all three- even sometimes within the same debtor’s case.

A secured tax debt is one that the IRS has filed a lien against the debtor. That lien attaches to all of the debtor’s property, making it secured. A priority tax debt is one that the debtor will not be able to discharge in bankruptcy, but there is no lien. An unsecured tax debt is one the debtor should be able to discharge.

So what determines if an income tax debt is eligible for discharge? There are six rules for discharging income tax, and they apply equally to State and Federal income taxes. The tax is dischargeable if all of the following conditions exist:

• The most recent due date for filing the return is more than three years old. (Note: the three-year period is computed from the most recent date the tax return is due for the tax year. An extension to file the return delays the start time, so don’t just assume you know the due date. Your 2006 return was due no earlier than April 15, 2007. If an extension was filed, it could have been due as late as October 17, 2007 (depending on weekend dates)).
• A tax return has been filed or given by the taxpayer for the tax year in question at least more than two years preceding the filing date of the bankruptcy.
• If a tax claim has been assessed, then it has been at least more than 240 days between the last date of assessment and the filing of the bankruptcy.
• The tax is assessable, meaning the debtor is not a non-filer.
• The tax return was not fraudulent
• There was no willful tax evasion by the debtor

Therefore, a debtor should keep those conditions in mind before filing bankruptcy. For instance, the debtor might be able to discharge his/her taxes if he/she waits another 35 days to file the petition. It is thus recommended that if a debtor thinks his/her taxes might be dischargeable, that a tax account transcript is ordered from the IRS to verify filing dates, due dates and assessment dates.

It should further be noted that this blog is a very basic description of the rules associated with discharging income taxes and there are bound to be many complex questions that arise in a debtor’s case. Some questions that might need to be addressed by the debtor include, but are not limited to:

• Does an offer in compromise toll any of the time periods?
• What property is covered by an IRS lien?
• Will IRS self release a tax lien?
• How does the IRS setoff tax refunds when the debtor is in bankruptcy and has dischargeable taxes?

Upon filing of a bankruptcy case, the automatic stay immediately kicks in. The importance of the stay instantly kicking in cannot be understated. Many debtors wind up filing the day before a foreclosure sale or a car repossession, so without the immediacy of the stay, they would lose their house or car.

While the stay gives the debtor a lot of relief at the filing of the bankruptcy case, the stay is not necessarily permanent. The stay can expire over time with respect to personal property, but the most common way the stay expires is upon a creditor filing and winning a “Motion to Lift Stay.”

A Motion to Lift Stay is filed by the creditor during the pendency of the bankruptcy case almost exclusively for the purpose of repossessing its collateral. In simple terms, a lift stay motion is almost always filed by a creditor to get back its car or its home.  Without the stay being lifted, the stay remains in effect, and it is the stay that keeps the creditor from taking back its collateral from the debtor.

Note that the motion filed by the creditor is not technically asking for money. It is technically asking only for its collateral. It cannot ask the debtor for money, since that would be a violation of the bankruptcy code. This begs the question, what would cure the problem for the creditor? The answer is of course money.

The creditor should only bring the action if the debtor is behind in its payments. The creditor brings the motion arguing that its collateral is not being “adequately protected”; therefore, if the debtor is current in its payments, then the creditor has no room to argue that its interests are not being adequately protected. Remember, just because a debtor has filed bankruptcy does not mean it cannot retain its house or its car. As such, if the debtor has made and continues to make timely payments on these items, the creditor should not be bringing a lift stay motion and should not get an order granting that motion.

So how can the debtor fight a lift stay? The debtor can fight it in several ways. The debtor could get current on its payments, which would deny the creditor its adequate protection argument. The debtor could also fight the creditors standing to bring the motion. This often happens in mortgages, where the creditor bringing the motion might not have proof that it has received the deed or note via an assignment. The debtor could also settle with the creditor. The creditor might agree to not lift the stay in consideration for the debtor getting current in a set number of days.

If the stay is lifted, then the creditor is free to pursue its collateral according to state law methods. In other words, the creditor can go after its collateral in the same methods it could have done prior to the debtor filing bankruptcy once the stay has been lifted. That is why a debtor who intends to continue to use the collateral in its bankruptcy estate cannot afford to ignore a lift stay motion.

I have seen my fair share of debtors who file bankruptcy without needing immediate relief. They might be current on all their bills and have not even received a single phone call from a creditor, but are overwhelmed by their debt load and do not see any way out besides bankruptcy. In that situation, their filing date is arbitrary and could possibly have waited for month.

However, often debtors have an immediacy to their situation. They might be facing a foreclosure or a garnishment. Perhaps they have been served and the answer is past due and in default.

The good news is no matter which fact pattern the debtor is facing prior to the filing, the second the debtor files, he/she enjoys the protection of the “automatic stay.” The protections of the automatic stay are laid out in 11 USC 362. They prevent creditors from taking the following actions:

• Starting or continuing a garnishment
• Starting or continuing a foreclosure
• Starting or continuing a lawsuit against the debtor
• Calling the debtor
• Sending bills to the debtor
• Repossessing a vehicle

Basically any act to collect money short of a domestic support obligation is going to cease at the filing. This does not mean the debtor does not have to pay to continue to use any of its collateralized items. Rather, it just means until such time as the stay expires- which can happen through the expiration of time or through a creditor action called a “motion to lift stay” – the debtor is protected by the automatic stay.

The automatic stay works differently in chapter 7 versus chapter 13. For instance, the debtor in a chapter 7 proceeding has to file a reaffirmation agreement within 45 days of its court appearance to retain its vehicle or else the stay expires automatically at that point, whereas in a chapter 13 the debtor would pay off the car as part of its plan and the creditor would actually have to file a “motion to lift stay” to repossess the car. (Note: the technicalities of possibly keeping a car without signing a reaffirmation and whether a debtor would pay off a car in a 13 directly to the creditor or through the trustee will vary according to district).

Additionally, in a chapter 7 the automatic stay operates differently as to personal property versus real property. As mentioned above, the stay will expire automatically as to personal property (usually the debtor’s car) if the debtor does not file the reaffirmation agreement the debtor listed in its statement of intention within the allotted time. However, as to real property, (the debtor’s house) the stay remains in effect until the earliest of the trustee abandoning the property, the case being discharged, the case being closed or the case being dismissed. Therefore, real property stays often last until the end of the case in a chapter 7 or 13 unless the creditor files a “motion to lift stay.”

Finally, it is important to note that the debtor loses automatic protection stay if he/she becomes what it known as a “serial filer.” If this is the debtor’s second filing within a calendar year, the debtor only gets automatic stay protection for 30 days and must file a “motion to extend stay,” to keep it in force longer. If this is the debtor’s third filing within a calendar year, the debtor gets no stay and must file a “motion to extend stay,” to get any stay protection. Without a valid excuse for the repeat filings, the debtor’s motion might not be granted.

Filing bankruptcy is painful enough for most debtors. The last thing you want to do on top of that is to make a mistake in your filing that leads to even more heartache, especially the kind of mistake that can be easily avoided. That is why after you make the decision to file the case, you have to make another important decision- when to file the case.

While there are certain things not to do before filing your case, even if you have done some of these things, they can often be corrected by picking the correct filing date.

Generally speaking, the debtor should avoid filing if he/she has:

• Charged on a credit card or received a cash advance in the last 90 days
• Paid off an unsecured debt exceeding $600 in the last 90 days
• Paid off a debt to a family member in the past year
• Given a sizeable gift to someone in the past year
• Transferred an asset for less than equivalent value in the previous two years (or even longer, if your state law anti-fraud statute reach back is longer)
• Just purchased a vehicle

The debtor might also wish to avoid filing in certain other circumstances, depending on the facts of the case. Some scenarios the debtor might not want to file in include:

• About to receive an inheritance.
• About to receive a tax refund
• Received a sizeable bonus in the previous six months which inflates the debtor’s income on the “means test”.
• In the middle of working out a home loan modification

While filing after having done some of those things might not affect the debtor’s case in certain circumstances, it is important to alert your attorney to these issues before filing. Even though it might not be possible to avoid filing before letting the timeline run on one of these issues (for example, you might need to file to stop a foreclosure while knowing full well this exposes you to having a debt repayment to a relative rescinded), it is critical to run the facts by your attorney so you can be given all your options.

Often times the debtor will think he/she “needs to file,” well before it is actually necessitated. In those circumstances, waiting to file can often lead to a smoother bankruptcy case for the debtor.

No matter which chapter of bankruptcy you file, you will have to attend a debtor’s exam with your assigned trustee (also known as your 341 Meeting of Creditors). This is a requirement of the bankruptcy code and will be under oath.

This meeting will usually take place about 4-6 weeks after you case is filed. You will not meet with your Judge and usually do not need to bring much, if any, paper work. At least a week prior to the meeting you should have given your trustee the required tax returns. A picture ID and proof of social security number is required at the meeting.

While a Chapter 13 examination is slightly more complicated and time consuming than a Chapter 7 exam, neither one lasts too long. An exam typically takes between 5-10 minutes, with some ranging even shorter or longer. It is also an opportunity for creditors to question the debtor, although in the typical case, creditors do not appear.

Some of the trustees questions are routine and given to all debtors, while others are specific as to your case. Among the typical questions debtors can expect to hear are:

1. Did you read and sign your petition and schedules before signing them, and did you attorney review it with you? Are they true and correct?
2. Is all of the information still true and correct or are there changes?
3. Do you understand that while you are under Chapter 13 you cannot incur any new debt or buy or sell any property without permission of the Court?
4. Do you have any claims against anyone or the right to sue anyone?  Do you understand that while you are in bankruptcy, you must tell your attorney about any claims that you have against third parties, even if they arise after your case was filed?
5. What caused you to file this case?
6. Do you owe any taxes to the IRS or the State Department of Revenue?
7. Do you participate in a 401(k) or other retirement program?  If so, do you currently contribute to this program?  Do you have any loans against the funds?
8. Do you pay or receive child support?  If you pay, is the creditor’s name, mailing, address, and phone number listed in your schedules?  Have you made all of your support/alimony payments that have come due since this case was filed?
9. Do you have any student loans? If so, what is their status (deferment, default, etc.)?
10. Does anybody owe you money?
11. Do you have any credit cards, either with you or at home?
12. Are you expecting or entitled to an inheritance?

Questions that are specific to your case will focus on things like the following (note this list is hardly all inclusive):

1. How did you arrive at the value of your house?
2. Describe the value received for any transfers of property in the previous two years.
3. How much money was garnished or setoff from your bank account in the 90 days previous to filing?
4. Describe the nature of a particular asset you own that you cannot exempt
5. Give the details of you any gift you gave in the past year exceeding $200.

At the conclusion of the meeting the trustee will give you a list of things that need to be corrected prior to confirmation if it is a chapter 13. If you are in a chapter 7, the trustee might ask you to supplement additional information or conclude the meeting.

No matter which chapter you are in, there will be additional things you must do after the hearing. Filing a financial management certificate, filing reaffirmation agreements and/or lien avoidance motions, or redeeming a car are just the bare minimum of things that might still need to be done.

When you file a bankruptcy petition, you are filing a voluntary bankruptcy petition, as it is called. However, the word voluntary applies to your decision to file the petition, not as to what information you must provide to the court. Debtors are often surprised at some of the information required of them, in particular those questions asked on the Statement of Financial Affairs.

Those questions are geared towards finding out what has necessitated the debtor’s situation, and in particular what activity the debtor has engaged in for the previous 12 months before filing. Some things the debtor did in that time, whether done innocently or not, can come back to haunt the debtor or necessitate the debtor hold off filing the bankruptcy petition.

Therefore, it is important to note activity the debtor should not engage in prior to filing bankruptcy. Prior to filing, debtors should not do the following:

• Use your credit cards with 90 days of filing
• Take out credit card cash advances within 90 days of filing
• Pay off a debt to a family member or friend within a year of filing
• File if you are expecting to receive a sizeable tax refund or inheritance.
• Give or gift property to anyone
• Pay more than $600 on a past due bill
• Cash out retirement plans or 401(K)s
• Gamble
• Take out payday loans
• Put money in your children’s bank accounts
• Fail to appear at State Court hearings

Although those warnings are provided for a variety of reasons and doing any of them will result in different consequences from the next, they will all result in adverse consequences for the debtor. Among the potential consequences:

• Money debtor paid to a family member prior to filing could be recovered by the trustee to go to the debtor’s creditors
• A credit card provider could have part of all of its debt determined non dischargeable
• An inheritance can be forced to be turned over to the trustee
• Money paid on a credit card bill prior to filing could be recovered by the trustee, in turn keeping the debtor’s bankruptcy case open longer and resulting in the case being deemed an “asset case”
• A transfer of property can be rescinded

When considering their actions prior to filing, prospective debtors should ask themselves the following question: “If someone was going to not pay a debt to me, what questions would I ask of them before forgiving that debt”? Rest assured, the trustee and the bankruptcy court will be asking the debtor the same question and more; therefore, if the debtor is considering doing something that does not pass the smell test, then the debtor should know it should not be doing it.

Perhaps the most common question I get when I am talking to a client for the first time about filing bankruptcy is “Don’t I have to give up everything?” The answer is no, and that’s because of your “exemptions.”

It is often said that bankruptcy is about giving the debtor “a fresh start, not a head start.” In order to accomplish that goal, Congress knew that it could not leave the bankruptcy debtor with nothing. So how much does the debtor get to keep? The answer is at least what the debtor is allowed to exempt.

Exemptions used by debtors are either federal or state, depending on which state you file in and how long you have resided in that state. Your state has either chosen to use the federal exemptions or decided to opt out and provide state specific objections. If you have not lived in your current state for at least two years prior to filing then you will either use federal exemptions or maybe the exemptions from the state you lived in for the majority of time over the 24 to 30 months prior to filing. If you have moved states in the two years previous to filing and want to know what exemptions you will use, see here.

Exemption amounts vary wildly from state to state, as well as from state to federal. Debtors get to exempt amounts for specific items (example: In Georgia, a debtor can exempt $3,500 in equity in a vehicle); however, not all assets have a specific exemption amount, in which case the debtor will have to use the debtor’s allowed “wildcard,” to exempt the item. For example, Georgia does not have a specific exemption for cash, so a debtor must use his/her wildcard to exempt whatever cash the debtor is in possession of at the time of filing.

For a full list of Georgia exemptions and amounts, see OCGA 44-13-100. For a full list of federal exemptions and amounts see 11 USC 522.

It is important to note that what you are exempting is not the value of your assets, but the value of your equity in the item. So if you own a car worth $10,000, but you owe $12,000 on the car, then you have no equity and therefore do not need to exempt it. You might want to give up your car for other reasons in the bankruptcy, but you will not have to give it up to your trustee to liquidate since it has negative equity. However, if your $10,000 car was owned free and clear, then you would need to have $10,000 of exemptions to use on it, or else possibly have to pay the cash equivalent of the non-exempt amount to retain or see the trustee liquidate it.

Note: If the trustee does liquidate the car, you do get paid your exemption amount by the trustee, while creditors get the excess. Also note: Debtors often file a chapter 13 to prevent liquidation of an asset. If they are “over exempt” in an asset, then they can keep the item, but must pay off the over exempt amount to creditors over the life of the chapter 13 plan.

Since most bankruptcy filers owe more on their big-ticket items than they are worth (think your underwater house and/or car), and don’t have a huge amount of assets otherwise, they often keep all their items when they file chapter 7.

While it can be argued that the effort and preparation required in just filing a Chapter 7 case constitutes the majority of the work the debtor needs to perform in its case, the same can hardly be argued about a Chapter 13. After filing, the Chapter 13 debtor has to perform a good bit of work to get its plan confirmed, and then often has obstacles to deal with even after confirmation.

For those of you wondering “what happens next”? After filing your chapter 13, the initial stages, at least, are not that different from a chapter 7.

The first thing that happens is your attorney files the case electronically (or if you are filing pro se, meaning without an attorney, then you file the case in person at the courthouse), and you get a case number. As part of your filing fee, the court mails out a notice of your filing to you and all your creditors that you included on the creditor matrix. Therefore, within several days of your filing, everyone associated with your case is put on notice that you have filed.

Although the notice is when creditors officially get notice of your case filing and therefore must stop all collection activity against you because of the automatic stay provided to debtors, the automatic stay actually kicks in when the case is filed, not when the creditor receives notice of your filing. Therefore, as soon as you file, creditors cannot: garnish your wages, repossess your car, foreclose on your house, send you letters, call you, etc. Should they attempt to do any of these, even a second after your filing, you should immediately notify them that you have filed and give them your case number.

The notice contains several things of importance. It contains your private information so that creditors can identify you. It also tells you who is your bankruptcy case trustee, as well as the assigned meeting time for your “meeting of creditors.”

The meeting of creditors is usually set more than 30 days after the filing of the case. Since the debtor’s first plan payment is due within 30 days of filing, the debtor usually has to make a plan payment prior to the meeting of creditors. Additionally, the debtor should also make the ongoing mortgage payment and continue to pay utility bills and other living expenses.

If the debtor is self employed, a business questionnaire form might need to be filled out by the debtor prior to the 341 hearing and then submitted to the trustee in advance of the hearing. Documents for production might also be required, particularly checking account records.

Whether the debtor is self employed or not, it must turn over tax returns for the last four years to the trustee. So if the debtor has not completed returns for those years, the debtor must do so.

The meeting of creditors, otherwise known as your debtor’s exam, or 341 hearing, is a chance for the trustee and any creditors to question the debtor. While some exams might be as short as five minutes, others can take as long as 15 to 20 minutes. Self employed debtors typically have longer exams.

The 341 hearing is usually set for about 4-6 weeks after the debtor’s filing. The time and date is assigned by the court and the debtor cannot request a specific date or time. Should the debtor be unable to make that date or time, the trustee will set a “reset” date, which the debtor must appear. If the debtor misses the original date and the reset date, the debtor’s case might very well be dismissed.

The debtor must have picture ID and proof of social security number (a social security card or W-2) present at the meeting. If the debtor does not bring these items, they might not even make it past security (remember, you are probably entering a federal courthouse), and even if the trustee was willing to hold the hearing, the debtor would at a minimum have to reappear to prove social security identity.

At the conclusion of the meeting, the trustee will state its “objections” to the debtor’s plan. The debtor must cure these objections prior to confirmation. The easiest and most typical way to resolve these objections is by reaching an agreement with the trustee. The trustee’s objections are sometimes based on errors in the debtor’s petition, but other times are just a way to of saying the debtor needs to increase funding.

In addition to the trustee, creditors might also object to the debtor’s plan. The debtor should try to resolve these objections prior to confirmation. If the debtor and the creditor cannot come to an agreement, the judge will resolve the disagreement at confirmation. This could delay or deny the debtor’s confirmation.

All throughout the process creditors are filing “proof of claims,” so they can be paid as part of the trustee’s distribution of the debtor’s plan payments. While it may seem counter intuitive, the debtor sometimes wants to file proof of claims on behalf of certain creditors, should they not have filed these claims themselves.

A myriad of things can occur between the 341 and confirmation, as well as between confirmation and discharge. Remember, a chapter 13 is a 36-to-60 month payment plan, so a lot can change in the debtor’s life over that time. Defending adversary proceedings, defending lift stay motions, filing the financial management certificate and recouping tax refunds from the trustee are just some of the issues debtors might have to address during the pendency of the case.

Thus, it is particularly hard for a debtor to file a chapter 13 pro se and it is highly recommended that anyone considering filing chapter 13 speak with an attorney.

To read what happens after you file your Chapter 7 case, click here.