Last month, we marked the sixth anniversary of changes to the bankruptcy law.  The Bankruptcy Abuse Prevention and ConsumerProtection Act (BAPCPA or dis-affectionally called BARF by many in the field of bankruptcy) became operative on October 17, 2005.  And then the world changed.

A little more than six months later, the Case-Shiller index of real estate values reached their peak and began a free-fall that hasn’t stopped yet.  Soon real estate will be worth what it was in 1998 and the U.S. will have lost a decade of growth. Many have filed for bankruptcy to get out from under depressed values.

Much has been said about thte “perfect storm” of threats to our economy that set up during the ten years prior to 2005, but we may be on the precipice of revolutionary change, both good and bad.

Although no one wants to use the word “depression” publicly when referring to the economy, consider the following:

1. Foreclosures have increased 14% during the last quarter and the number of pending foreclosures and mortgages in default is staggering..
2. Home ownership is falling and is reaching historic lows among segments of the population.  Parts of Florida are reaching 20% vacancy and other states are not far behind.
3. Unemployment is pegged at a stubborn 9%, but that number doesn’t include those who no longer qualify for benefits or college or high school grads who have never been able to find a job.  More than 400,000 people lose their job every week.
4. Municpalities and state governments are running huge deficits as they struggle to maintain social services in the face of declining tax collections.  Look at Harrisburg, PA or Jefferson County, Alabama that have filed for bankruptcy.
5. Tent cities of the displaced are showing up everywhere.  Check the desert outside San Diego, CA or any of the “Occupy Wall Street” or its progeny around the country.

Meanwhile, the number of people around the country filing for bankruptcy have declined some 15 to 20 percent since the beginning of the year.  Why?  Because bankruptcy is designed as a safety net to catch you before you hit the ground.  You file for bankruptcy to save assets and future income.  But when you have neither, why bother to file bankruptcy?

You can almost point to the reforms in bankruptcy that started this ball rolling.  It removed the safety valve for overburdened consumers and any incentives for starting a small business that might grow into the next Apple computer.

So here is my prediction for the outcome of the BAPCPA.  Watch the protests growing our the “Occupy Wall Street” closely.  They have already spread to there parts of the country and even other parts of the world.  If the winter season or real change does’t cool the protests off, there is the potential for real violence.  Out of that violence can come a revolution.  Even if there is no violence, change has already started.   Credit card spending has reached no lows.  As I tell my local judges, “People who are in foreclosure don;t buy big screen TVs.”  That cripples our entire consumer economy.

We all know the famous saying that there’s nothing more certain in life than death and taxes.  Well, we haven’t figured out how to cheat death yet, but bankruptcy can help solve your tax problem.  Keep in mind that not all taxes are dischargeble.

If you owe taxes based on your income all you need to remember is “3, 2, 240″.  If you fit the rule, you can discharge your tax obligation in a bankruptcy case.  There are three steps to the rule, so follow closely.

Step 1 - “3″.  If the last date to file your taxes was more than three years before you file for bankruptcy, you fit step one.  Now we all think of April 15th as being the date to file for taxes, but be aware, there are circumstances when that might be a different date.  The most common would be receipt of an extension of time to file your return to August 15th or October 15th.  So more than three years will have to have passed from that deadline, even if you filed your taxes before the deadline.

An example:  You receive a deadline of October 15, 2009 to file your taxes  but do so on September2, 2009.  If you owe taxes as a result of that tax return, you cannot file before October 16, 2012 to make those taxes dischargeable.

Step 2 - “2″.  At least two years must have passed since that tax return was filed.  Wait, what?  I thought you said I had to wait three years after I filed the taxes?  No, I said you had to wait three years from when the tax papers were due.  So the example I set out above is correct.  But, what if you filed the forms after the due date?  Then not only do you have to wait three years from when the return was due, but you also have to wait two years from you finally filed that return after the due date.  Here’s an additional trap to avoid – “filed” means actually received by the taxing authority, not when you mail it or otherwise transmit it to the taxing authority.  [For you lawyers out there, the "mailbox rule" does not apply to taxes, that return must be logged as received.  Get a tax transcript from the taxing authority to find out when they got it.]

An example:  You received an extension to October 15, 2009 to file your 2009 tax papers, but because you knew you owed money for the taxes and couldn’t pay it, you waited until July 17, 2011 to actually file the return.  You have to look at both criteria, three years from the last date to file the return [October 16, 2012}, but also two years from when you actually filed the return [July 17, 2013].

Step 3 - “240″.  In addition to “3″ and “2″, at least 240 days have to have passed since the taxing authority assessed those taxes.  Now, if it has been three years since the taxes were due and two years since you filed those taxes, this should be an easy one to satisfy.  The problem is that the bill for the taxes does;t come right away since the taxing authority has to process your papers and compare it to other data it has.  Additionally, each time you might offer to compromise that tax bill extends the 240 days.  It easy to see that if you have made several offers to compromise the tax bill by pay meant of some sort, you could easily eat up 500 of those days in submissions.  The time period doesn’t begin again until the taxing authority acts on your request.

There are a couple of other things to consider when looking at bankruptcy to solve your tax problem.  The tax return that was filed must not be fraudulent and you must not be guilty of evading taxes.  If you like flow charts, take a look at Morgan King’s graphic on Page 26.  There are finer appoints that require consultation with a quality bankruptcy attorney.

Yup.

Scared?  Well, it just not so simple as that, so don’t believe the collectors when they call and say they will have you arrested and put in jail for not paying a debt.  While it is possible, there are a lot of safeguards for consumers in financial trouble, including bankruptcy.

Let’s start with the basics. Debtor’s Prison is jail time for failing to pay a bill.  There is a famous line in the Charles Dickens’ story, A Christmas Carol, as he is asked for a donation to the poor and he retorts. “Are there no prisons? Are there no workhouses?”  If you did not pay your bills, you could be sentenced to prison or to a factory to work off your debt.  Even Dickens’ family ended up there for a while.  The United States and most individual states outlawed the practice in the early 1800′s.

So, if its illegal, how can I go to jail for not paying my bills?   Easy, ignore a court order.  When a  creditor sues you, the court will order that you pay the bill most times in weekly installments.  The Judges recognize that you probably don’t have the money to pay it all at once.  But beware, most judgments do carry interest at various rates set by rule or statute.  If you don’t pay the installments, the Court won’t order you to jail, but it will give the creditor some power to pursue your assets.  This can come in various forms such as a lien on your home, a pay garnishment, an attachment of your bank account or some other seizure of your property.  If you have nothing to seize, no worries; still no jail time.

The final step in frustration for the creditor who has a judgment is to subpoena you to an examination to see what they can recover from you.  This is where you get into trouble.  Ignore that subpoena and no you are in contempt of court.  You are ignoring a judge’s order to appear and that IS punishable by jail time and sometimes a hefty bail bond.

Now if you file for bankruptcy first, the Federal Bankruptcy system preempts the state court system and you’ve avoided going to jail.  You can think of bankruptcy as a ‘Get Out of Jail free’ card.

You know the drill; your brother, cousin, or good friend, is arrested on a criminal charge and wants to get out of jail pending a trial on his or her case.  So you agree to sign a personal bond to gain a release from jail.  And then your brother/cousin/good friend/dirtbag skips town leaving you owing the bail bondsman and facing bankruptcy.  What to do?

The first question is what does the bond cover?  There are several varieties that do not involve cash.  If you posted bail that creates a lien on some property that you own, then the question is can you avoid the “lien” for lack of value in a bankruptcy case?  A criminal bail bond lien would be treated like any other lien or mortgage on your home.  If there is not enough value to cover the lien, then it can and will be avoided in a bankruptcy proceeding leaving you with the property.

So if the bond is simply a personal guarantee that you will pay the bond amount if the relative or friend skips town, then it is an unsecured debt much like any other.  If you later file for bankruptcy, the debt must come under some provision of Bankruptcy Code Section 523 to survive.  Courts have held that the bond is not a debt owed to a governmental authority under Section 523(a)(7), but is merely a private contract where a third party pays the government on a guarantee of debt.  So the bond debt IS dischargeable.

However, you must also watch out for other provisions of Section 523.  If the bond was obtained by submitting a false financial application or by actual fraud, then subsection (a)(2) might prohibit the discharge.  This is time to consult a skilled bankruptcy attorney to determine the extent of your exposure and whether or not a bankruptcy can help you under from that bag your relative or friend left you holding.

So you’ve found the cheapest bankruptcy attorney in the market.  For only the price of $250.00 and the court costs, he’ll file your case provided you give him several post-dated checks for the balance of his fees.  So you can file now and pay later.  Great!!! (For you, not for him – read on to see why.)

A Florida Bankruptcy Court recently ruled that the practice of accepting post-dated checks in a Chapter 7 Bankruptcy case violates the law on several levels.  The law firm  has been ordered to stop the practice of collecting fees after a bankruptcy has been filed, to return all un-cashed post-dated checks for payment of fees and refund any money collect after the bankruptcy from clients.

First, the act of accepting the post-dated checks creates a claim or debt that is stayed by the filing of a bankruptcy.   So when the checks are later deposited for payment, the act of collecting on the checks is a violation of the Automatic Stay.  This makes perfect sense.  When you write a check, that piece of paper is a contract to pay and an order to your bank to pay that contract.  After a bankruptcy is filed, the Automatic Stay prohibits any attempt to enforce a contract without getting permission of the bankruptcy court first.  So every time the attorney deposited a post-dated check, he was violating the bankruptcy stay.

Second, when the attorney waited to deposit these checks after the discharge entered, he violated the discharge.  The discharge is a permanent stay against the enforcement of a contract or obligation to pay.

Third and most importantly, creating the obligation to pay the lawyer after the filing of the petition creates an irreconcilable conflict of interest because he cannot be both a creditor in the case and the attorney in the case.  Common sense says if the attorney is owed money in the case, why should he use his best efforts to push the case to a discharge because that will eliminate any possibility of ever getting paid.

The problem here is that the practice really works to the disadvantage of the client.  The attorney is encouraging the “buy now-pay later” attitude that caused the financial problems in the first place.  The client becomes a debt-slave to the attorney when the client should be getting a fresh start instead.  The attorney is taking advantage of the client who does not know better.

Sure, filing bankruptcy is expensive.  A quality bankruptcy lawyer works very hard to get the best for his client.  But when you shop for an attorney based solely on price, you will get what you paid for.  And that can include a boatload of trouble for you in the future.

So if you can find a lawyer who will file a Chapter 7 bankruptcy and wait to get paid by post-dated checks after the case is filed, hire him!  Then make sure you never pay him another cent because the Florida Bankruptcy Court says you have no requirement to do so.

If you have been reading Bankruptcy Law Network recently, you would have seen various articles about reaffirmations.  What they are, what they do, under what circumstances you should reaffirm a debt or mortgage and when you should not.  There are even some courts that say you must reaffirm a car loan in bankruptcy.  But there is one avenue not yet explored and applicable if you do not want to reaffirm.  Change the law.  Last time I looked, the United States was still a democracy.  That means that everyone has a voice and your can be heard too.  You don’t have to lobby Congress to change the bankruptcy Code; there are many ways you can do this on the local level.  Let me give you an example.

After the revisions to the Bankruptcy Code can into effect in 2005, car loan companies thought that they had sewn up a requirement that you cannot keep a car secured by a car loan after bankruptcy unless you reaffirm the loan.  Reaffirming the loan puts you back on the hook personally for the car loan as if the bankruptcy had not been filed.  If you did not reaffirm the car loan, the car companies were taking the position that you could not keep the car EVEN IF YOU WERE CURRENT IN YOUR PAYMENTS.

So companies like Chrysler Credit and Ford Motor Credit were repossessing cars from borrowers who had filed bankruptcy, simply because they had filed bankruptcy and did not reaffirm and no other reason.  This seems patently unfair.  If you are making your payments and have the insurance in effect on the car and you are keeping the car in good shape, what difference does it make to car loan companies whether or not you file bankruptcy?  If you don’t pay, they can take the car then.

Like Captain Kirk in Star Trek facing the Kobayashi Maru scenario, we changed the rules in Connecticut.

Although bankruptcy is a Federal Law, the law governing car loans is a state matter.  The right to repossess is governed by State Law.  So if you default on a car loan, state law governs the procedure a car loan company has to follow, not bankruptcy law.  So, we added a provision to the Connecticut laws on repossessions that says that filing a bankruptcy is not an event that can trigger repossession.  You have to fail to keep insurance on the vehicle or default in your payments.

And so with the addition of a few words to a sentence, sanity was returned to the car loan world.

It is not hard to lobby your local state representatives for such a change.  The change makes simple sense.  Why should a car loan company take a car if you are current in your payments and maintain insurance?  Isn’t money what they really want?

If you are a citizen and you vote, contact you local government representatives now and see what you can do to avoid the injustices of the Bankruptcy Reform Act.

(And One Good Reason Why You Should)

Do you have a business that is in a corporation?  Is it failing and you think you need to file a bankruptcy case to get rid of the business debts?  Don’t!

Why shouldn’t you file a bankruptcy for a corporation?  Let me count the ways:

1. No Discharge of Debts – Corporations don’t get a discharge in bankruptcy.  What that means is that the debt does not go away.  Once the assets of the business are liquidated, there should be nothing left for anyone and the corporation ceases to function.  But if the corporation later comes into any additional money or assets before it is dissolved under the state laws, the debt is still there that has to be paid.
2. Transfers can be Undone. –  Payments to corporate officers and owners can be attacked.  Under the Bankruptcy Code, any transfer to an insider within one year prior to the filing of the bankruptcy can be undone by the Chapter 7 Trustee.  That mens salary, payment on corporate officer loans, retirement benefits ,etc. may be exposed to recovery by the Trustee.  Just about anything that has come from the corporation to the individual can be reversed.  Even if you can prove that it is a transfer under proper circumstances, you will be faced without he expense of defending actions of the Trustee.
3. No Attorney-Client Privilege - There is no attorney-client privilege.  Let me say that again -there is no attorney-client privilege.  Anything an owner or officer of the corporation may have told a lawyer for the company is not protected.  The relationship between the company and the lawyer is governed by the Bankruptcy Code and that information is the sole domain of the Chapter 7 Trustee.
4. Administration by the Chapter 7 Trustee – Every action of the company and every action of the officers running the company is open to inspection.  There is no authority to continue operating the business so the division between business and personal assets and liabilities can  be painful.
5. Personal Guarantees Survive – Most small businesses, even if they are incorporated, bear the personal guarantees of the owners for every loan or vendor account.  So when the business goes out of business, most of the debt remains even of the company is liquidated in a Bankruptcy case.  That means the ;lenders and vendors to the business can come knocking on your door looking for payment notwithstanding the bankruptcy filing.

So filing a bankruptcy for a  business generally doesn’t do the owners or officers any real good.

However there is one really good reason to file if that one reason trumps all the downside.  As in #2 above, assets transferred out of the company will be recovered by the Trustee assigned to the case.  Recovery of assets will result in redistribution of that money.  If that redistribution will result in payment of certain debts that would otherwise be payable by the owners or officers of the business, some good can result.

For example, the IRS is a priority in any case.  If there is money owed for payroll taxes, that liability might comes down to the officers under the 100% penalty rule.  If recovery of assets for the company leads to a redistribution, the IRS will be among the first re-paid from that money.  If that happens, the officers of the company will be released from that liability as a result.  And that is a good result from filing a Chapter 7 Bankruptcy for a corporation.

You’ve had to file bankruptcy before, but now you need that emergency relief again.  How long do you have to wait between bankruptcy cases?  It used to be that the rule was simple; you only had to wait 6 years between Chapter 7 cases.  Now there is a more complicated rule of 2, 4, 6, 8.

The Two Year Rule

If you received a discharge (completed the payment plan) in a previous Chapter 13 case, you  must wait two years before filing another Chapter 13 case or you will not get a discharge in the new case.  This is tricky stuff because there is a line of thought and some authority to say that if you do not need a discharge in the new case, but only need time to stretch out your current obligations, then you don’t need to worry about this restriction because you are not looking to discharge anything.  That would mean you could file another Chapter 13 case immediately after receiving your discharge in the prior case.  [For those seeking the statute on this, look at 11 U.S.C. 1328(f)(2)]

The Four Year Rule

If you received a Chapter 7 Discharge in a previous case, then you must wait 4 years before filing a new Chapter 13 case.  Again, if you don’t need a discharge in the new case, but intend to pay 100% of your creditors over the life of the plan, you don’t need to wait 4 years.  [The statutory section is found at 11 U.S.C. §1328(f)(1)]

The Six Year Rule

You must wait 6 years between the filing of a previous Chapter 12 or 13 case and a new Chapter 7 case.  Unlike the previous sections this is important because you don’t file a Chapter 7 unless you are looking for a discharge.  Now as with everything Congress does, there are exceptions.  If you paid 100% of your debts in the previous Chapter 12 or 13 case or paid at least 70% of your debts in those cases and the Court found that this was your best effort, then the 6 year rule does not apply.  You can file Chapter 7 right away and get a discharge if you otherwise qualify.  [11 U.S.C. §727(a)(9)]

The Eight Year Rule

You must wait 8 years between Chapter 7 cases.  The previous rule was six years, but has been extended to 8 years in 2005. However, this may be the time to consider a Chapter 13 as there are many hidden benefits to a budget plan than you might think. [11 U.S.C. §727(a)(8)]

Need protection of the bankruptcy automatic stay, but you’ve filed for bankruptcy before?  There are complex rules that cover when you are protected and when you are not.

Safe At The Plate

Generally speaking every bankruptcy filing results in a stay of all actions against you automatically.  {You can read the code section – 11 U.S.C. §362] You don’t need to do anything to get that protection.  But you can lose it very quickly.  There are exceptions to every rule so even if you are filing for bankruptcy the very first time, a bankruptcy will not stop criminal proceedings or family proceedings involving paternity, support, custody, dissolution of marriage or domestic violence.

One Ball, One Strike

You can lose the automatic stay if you have had one case dismissed for cause within the previous year, your protection ends at 30 days unless you file a motion to continue the stay.  That motion must be filed and heard within the first 30 days of the case or the Court loses any ability to extend the stay.  So if this is the case, get hopping!

2 Strikes And You’re Out!

Likewise, if you are a repeat filer and have had two cases dismissed within the previous year, there is no stay at all.  If you want to gain the protection of a stay in bankruptcy, then you must file a motion with the Court to show that the protection is needed in good faith.

Suspended For The Game

Similar to the lack of protection for repeat filers, you can also be prevented from filing at all.  In my district especially, but other districts are similar, a repeat filer can be ordered not to file another case at all for a period of time, usually 180 days (six months).  This is called dismissal with prejudice.  In cases where a piece of property in foreclosure is repeatedly the subject of a bankruptcy filing, I have seen a Court enter an “in rem” order providing that no case involving that piece of property be filed of period of time.

Saved At The Plate

Some courts have helped debtors in repeat cases by holding that even though the automatic stay is not effective against the filing debtor, it is in place as to property of the estate.  This means that while creditors might be able to pursue you personally, they can’t touch anything you own which has become part of your bankruptcy case.  In at least one case, a court has protected a spouse who is filing for the first ftime with a repear filer.

Is Bankruptcy For You?

Is it time for Bankruptcy?  You are at the end of your rope.  Nothing you have tried seems to work.  You can’t duck the collectors, and you don’t have the ability to pay them anything meaningful. But you have something to lose, even if it is only part of your paycheck.  You don’t want to be living in a cardboard box down by the river, do you?  It’s time to consider the bankruptcy option.

Bankruptcy should never be the starting point for considering the solution to your financial problems.  Neither is it the end of your problems.  Bankruptcy is not a cure-all, but it is a tool to be used in the “fix-it” box for finances.  The important thing to do is to learn as much about personal finance as you can so you can avoid making the same mistake twice and then use the bankruptcy tool to start on the road to recovery.

Let’s get rid of some of the myths first.  You will not be forced to sell all your property, but you may not be allowed to keep that Rolls Royce.  You don’t get to pick which creditors are listed in your case – you have to list everyone and everything, but you  might make a deal to pay some of them anyway.  And even though those creditors are discharged and prohibited from collecting from you doesn’t mean that they won’t break the law and try anyway.

Here are the first steps that you should take:

1. Contact a qualified attorney who knows about bankruptcy.  One of the attorneys on this site is a good start.  But if one of us is not in your area, then look up an attorney on the NACBA website.

2.  Open your mind to the possibilities.  Even though you might have learned a lot on this site, everones situation is different and there may be solutions that work for you that you cannot imagine.

3.  Get organized and stay organized.  Even after your bankruptcy case is over.  You will need to stay on top of all of your financial issues.