A largely forgotten form of consumer bankruptcy is Chapter 12.

Although geared for a family farmer or fisherman, it is designed to be filed by consumers rather than companies.

A Chapter 12 can be filed by a family farmer or fisherman. To qualify, more than 50% of your income must be derived from a farming or fishing enterprise.

Fortunately, our courts have given pretty wide latitude to what constitutes a farming enterprise. Even if you are simply using your property to raise horses, you probably qualify.

These cases are similar to chapter 13 bankruptcies. They allow you to “reorganize” your debts. You can change the terms of some secured debts, pay only that portion of unsecured non-priority debts as you can afford to pay, and spread out payments on priority obligations over several years.

There are significant advantages to a chapter 12 bankruptcy compared to a chapter 13 bankruptcy. Here are three of my favorites:

1.     The debtor doesn’t  have to undergo the means test to do a chapter 12;

2.    The limitation on the amount of debt you are allowed is much  greater in chapter 13 (although at least 50% of it must be from the farming or fishing operation); and

3.    You can actually modify the amount you pay back on the first mortgage of your home. The law prevents you from doing that in a chapter 13 bankruptcy, but if your house is underwater in a chapter 12, you can change the terms. Simply put: you can force the mortgage company to lower the interest, take less towards the principal, and even extend the term of the loan!

Chapter 12’s aren’t for everyone. As noted above, you have to qualify. And they can be complex and therefore expensive. But if you’re operating some form of agriculture or fishing business, you should seek a qualified bankruptcy attorney to determine if this kind of bankruptcy might be a good approach for you.

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Bankruptcy helps individuals with debt problems.  It can also reorganize a business such as a corporation or partnership.  And it can protect a sole proprietorship!

A Chapter 13 bankruptcy is designed to help reorganize one’s debts.  It allows a debtor to “catch up” on secured or priority obligations (like house payments or taxes) and to get rid of a portion of unsecured non-priority debts (like credit cards or medical bills).

And it will also allow you to reorganize a sole proprietorship.

 Bankruptcy Code Section 1304 lets you to file a chapter 13 if you meet the debt limitations for a chapter 13, have regular income and incur “trade credit.”

Trade credit?  All that means is that you operate a business that borrows money or incurs debt to buy goods and pays off those loans on a regular basis.  This includes buying materials to use in the business or buying manufactured goods to resell.  Even paying phone book advertising will qualify!

There are tremendous advantages to filing a Chapter 13 bankruptcy if you are self-employed and running a sole proprietorship.   You can renegotiate a lease or cancel one if you can’t afford it.  You can continue to borrow money to run the business if necessary (although in some instances you will need court approval to do that).  And, you can choses to not pay some unsecured debts altogether or pay others over time.

You can even force the IRS to spread tax payments you owe over several years.

And, at the same time, you’ll get all of the other benefits of a Chapter 13.  These include stopping a foreclosure on your home or stripping an unsecured lien (including a 2nd mortgage or line of credit).

If you are facing financial problems in your business; seek the advice of a competent local bankruptcy attorney.  You just might be surprised to learn that you can save the business!

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The bankruptcy trustee, at last week’s meeting of creditors, came up with a new way of making money for the bankruptcy estate and annoying debtors.

Here’s what happened:

The debtor owns a house and a rental property that she would like to keep.  Both properties are completely up-side down (she owes more than they are worth).

The holder of the first mortgage on the rental showed up at the meeting to ask questions.  After a few minutes, the bankruptcy trustee suggested that they simply speak on the phone in a day or two.  I wondered why.

The trustee’s plan is to “sell” the property from the bankruptcy estate to the holder of the mortgage for $5,000 to $10,000.  NO, the house hasn’t suddenly gone up in value, but the bankruptcy trustee figures that buying the property from the bankruptcy estate would be a lot quicker and less expensive for the mortgage holder than foreclosing.

In California, a foreclosure can take about 4 months. And that can’t even be started until the property is released from the bankruptcy estate – either by bringing a motion in court or waiting for the case to close.  In an asset case, closing can take 6 months to a year (or longer).

Buying the property, however, can be done fairly quickly.  A motion to sell must be filed, but under these circumstances, with no one else likely to bid on the property, the process goes pretty smoothly.

For the bankruptcy trustee – he gets some funds to distribute to unsecured creditors (and receives a percentage for doing that).

For the mortgage holder – she gets the house quickly, and without the hassle and expense of going through a formal foreclosure.

For the unsecured creditors – they get a payout from the bankruptcy estate where there would have been nothing.

And for the debtor – she loses the house with no chance to stop the foreclosure or get caught up in payments.  (Certainly, that was probably unlikely to happen anyway, but at least she would have had a chance.)

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When a bankruptcy is filed, the debtor can keep anything that is “exempt.” That always includes household goods and personal effects, and, most of the time, provides a homestead exemption that protects the debtor’s home. But why?

Actually, bankruptcy exemptions are absolutely necessary to a fair and forgiving economic system.  If filing bankruptcy meant losing everything, all we would accomplish would be to create a community of destitute, starving people who would have to live off of welfare or government aid unless we sentenced them to a Dickens’ debtor’s prison!

Further, studies show that the more liberal the bankruptcy exemptions, the greater the state’s economic growth.  States with generous exemptions, like Texas and Florida, attract more entrepreneurs and businesses.  The owners know that if their business should collapse, they can file bankruptcy and won’t become completely destitute.

Determining which set of exemptions to use, however, can be a little frustrating.    Under current law, you can use the exemptions of the state where you are domiciled; if you have lived there for 730 days (two years).  If not, you have to use the exemptions of the state you lived in for the 180 days before the last 730. And if there is no state that meets those criteria, then you use the exemptions of the state you lived in for the longest portion of that 180 day period.  Clear?

This is confusing at best, and to make matters worse, some states don’t allow you to use their exemptions unless you are a resident. In those cases you can use the Federal exemptions. (These are laid out in the Bankruptcy Code at Section 522.)

Filing bankruptcy is traumatic enough without taking the chance that you could be giving up more property than you legally need to.  Find a competent bankruptcy attorney to help.

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Exactly when a Bankruptcy petition is filed can make a big difference in your case.

There’s an old Vaudeville bit that has one comedian talking to another. The first asks: “What is the most important thing about com…” and before he can finish his question, the other comedian answers “Timing.”  Ok, not very funny; but just as true about comedy as it is about filing bankruptcy.  A mistake in the timing can leave you with a much more ineffective or difficult case and you otherwise might have.

In bankruptcy, there are several reasons to file the petition earlier rather than later:

1.    End the annoying credit calls and letters;
2.    Stop a garnishment or attachment or even a foreclosure;
3.    Lock in your income for the past 6 months (avoid listing a year-end bonus on the means test (B22));
4.    Start rebuilding your credit;

And there are several reasons where waiting might make the Bankruptcy more effective:

1.    Avoid the preference period for that payment to mom;
2.    Wait more than 90 days to avoid a presumption of fraud when you used a credit card for a luxury purchase under (523(a)(2));
3.    Wait until more than 6 months have passed from receiving a Christmas bonus;
4.    Wait until enough time has passed to be able to discharge some taxes;
5.    Wait until enough time has passed since your last bankruptcy.

You get the idea. The exact day you file your bankruptcy petition can make quite a difference in the administration of your case.  Many bankruptcies benefit or suffer because of filing a day or two early or a week late.   Check with a competent bankruptcy attorney in your area to get this right.  It’s simply too important to leave to chance.

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You can file for bankruptcy protection even if are not technically insolvent. 

The common definition of insolvency is the inability to pay one’s debts as they fall due.  So, if you can pay some or most of your bills, you don’t fit the definition.  But you still might need the help that filing a bankruptcy can give you.

The first thing that happens when a bankruptcy is filed is that any debt collection or enforcement is immediately stoped.   That relief may be just what is needed to slow things down long enough to get caught up on a bill, or fix a recurring economic problem.

Here are three good examples of when filing a Chapter 13 makes sense even if you aren’t broke:

1.    If there is a 2nd or 3rd deed of trust on your house, and the property isn’t worth as much as you owe on the1st deed of trust, you can treat the junior lien(s) as unsecured.  You will pay only what you can afford,  rather than the full amount of the loan and still keep your house.

2.    If you have a tax bill that can’t be paid off in a year (the normal time the IRS will give you to resolve a delinquency), you can spread the payments out for as long as 5 years. (You might even be able to make some of the debt go away!)

3.     If you simply need some more time to make things work, then a Chapter 13 can provide that.  For example, if your house is in foreclosure because you got behind in your payments, filing bankruptcy will allow  you to make minimal payments over a five year period until you are no longer behind.

So, if you find yourself needing a break from creditors, speak to a competent Chapter 13 attorney about the advantages of filing bankruptcy.

Don’t take money out of your retirement account to ease a temporary economic crunch.

Difficult times come and go; and sometimes they seem insurmountable.  When that happens, it might appear wise to tap into the 401k or the IRA and borrow or take some of the funds.  Don’t do it!

I see bankruptcy clients every day who have used their 401k or their IRA to cover bills.  They come to see me after they have reduced or spent all of their retirement!  It’s too bad they didn’t see a bankruptcy attorney or competent financial adviser before that money was gone.

Almost all retirement accounts are considered exempt property.  That means that even after filing a bankruptcy, you’ll still have it.  But your debts, or most of them, will be gone.

Your retirement account is probably the only hope you have for the future.  None of us will work forever, and if you deplete the account today, you may well find yourself unable to retire; or not able to afford anything more than a meager existence at that time.  And don’t expect the Social Security system to bail you out.  At the top rate, the monthly pay-out is barely enough to afford reasonable housing and food, much less travel money to see the grandkids or go fishing.

You should also remember that any money you withdraw from a retirement account gets taxed now.  And there’s a 10% penalty for early withdrawals from an IRA.  Those taxes won’t go away in the bankruptcy.  Not only will you lose an exempt asset you could have kept, but you will incur a new debt too.

So, don’t deplete your retirement.  Leave it for when you really need it.  See a competent bankruptcy attorney in your state before you make the decision.

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1.    Once you decide that a business bankruptcy is the appropriate remedy for  your failing business, you must prepare a corporate resolution.

2.    The bankruptcy petition is then prepared listing all of the assets and liabilities.

3.    The business is closed.  Employees are terminated, paid their final wages, all taxes are paid, and the doors are closed.

4.    The bankruptcy petition is signed, filed and a trustee is appointed to administer the estate.

5.    All assets are turned over to the trustee, including equipment, inventory, and receivables.

6.    The trustee’s job is to return any secured property to the secured party and then sell or liquidate the rest of the assets for cash.  Generally this is done at an auction or internet sale.

7.    If there is a buyer for all of the assets, the trustee will, rather than hire an auctioneer to sell things on a piecemeal basis, consider such an offer.  This is generally an as-is sale of everything.  But it must be court approved, so a hearing will be held after notice to all interested persons.  The judge will then take bids and sell the assets to the highest bidder.

8.    The time between filing the bankruptcy and the appointment of a trustee is, generally, only a day.

9.    The time between the trustee gathering the assets and getting everything sold depends on the extent of the property and the ease of a sale.   It can take a week or several months.

10.    Once the assets are sold, the money will be distributed by the trustee, first for administrative expenses, then to priority creditors, such as taxes and last to the unsecured creditors in proportion to the amount they are owed.  That, too, can take several months while a proper accounting is prepared, taxes are filed and the trustee ensures that all creditors are include in the distribution.

11.    The bankruptcy is then closed after distribution.

12.    A business cannot receive a discharge; but is dissolved upon completion of the bankruptcy and, therefore, no longer exists.

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Brett wrote a great post about not reaffirming a mortgage in a bankruptcy proceeding.  He’s right – mostly.

There are, generally, two types of mortgage loans: recourse and non-recourse.  A recourse loan is one where the lender can come after the borrower if the loan is not paid and the security is insufficient to retire the debt.  What that means is that the mortgage company can come after you if you don’t pay the mortgage, the house is foreclosed upon and there isn’t enough money received from the home to pay off the loan.

A non-recourse loan, on the other hand, means that the lender can’t collect any money from the borrower if, after a default, the house doesn’t pay off the loan.

So, as Brett said, don’t ever reaffirm a recourse loan because if you do the lender can come after you even though you have filed bankruptcy.

But, there are some situations where my clients want to reaffirm a non-recourse loan.  Although it doesn’t make any difference to the lender to have such a loan re-affirmed since they can’t proceed against the borrower personally anyway after the bankruptcy, many banks are asking to have these signed.

The problem my clients are experiencing is that if they don’t sign a reaffirmation agreement on their mortgage, the lenders are refusing to report payments to the credit reporting companies and therefore my clients get no benefit to their credit score by making those payments!  This is annoying since making regular payments is the fastest and surest way to rebuild your credit.

In some states, like California, almost all loans used to purchase a home are non-recourse, and there can be no personal liability of the borrower.  But your state may differ.  Always best to check with a qualified bankruptcy or real estate attorney in your state.

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Not really.  The greatest effect on your Credit Score (Fico score) Is the number of late payments on your accounts.  More late payments – worse scores.  Certainly there are other factors, and filing bankruptcy may have the immediate effect of lowering the score.

But why do you care?  That’s the truly important question.

First of all, if you have months of missing credit card or house payments, your  credit score is none too good at the moment. Filing bankruptcy won’t hurt it that much.  And it will give you a fresh start – a clean slate to build your credit back from where it is and in far less time than it takes struggling to pay off those credit cards.

Secondly, and most importantly, let’s look at the advantages of having good credit.  What will it do for you?  Well, you can qualify to buy a new home. But you still have to prove you can make the payments on that home and that is far more important to lenders than your credit score.

And with a good score, you will  be able to  qualify for the deals on television to buy a car with nothing down or a terrific interest rate.  Wow, a great thing! But what does it really mean?  Let’s suppose you want to buy and finance a $30,000 automobile.  Even with bad credit score the car company will probably still sell you the vehicle; they’ll just charge you two or three times the interest rate of someone with good credit.

So, let’s look an example.  If the special interest rate for “good credit” is 3%, then on a $30,000 loan spread over 5 years, you will pay $2343.64 in interest.  If you don’t qualify for that rate and end up at 7% interest you’ll pay $5642.16 in interest.  Thus, having good credit will save you $3299 over five years.

When you compare that savings to the credit card and other debts going away by filing bankruptcy, having bad credit for a couple of years is clearly the better of the two!

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