Bankruptcy Questions and Answers


Q. What is an automatic stay?
   
A. An automatic stay goes into effect when the clerk of the bankruptcy court sends an order for relief to all creditors upon the filing of a bankruptcy petition. The stay orders that most collection activities and judicial proceedings be immediately stopped. The automatic stay remains in effect until the case is closed, the case is dismissed, or a bankruptcy discharge is granted or denied.
   
Q. The debtor may be entitled to monetary damages, including attorneys' fees and costs. This does not happen often.
   
A. What happens if a creditor continues its collection activities after receiving notice of the automatic stay?
   
Q. What activities are not stayed by the automatic stay?
   
A. Collection activities and court proceedings that are not stayed include the following:

Actions for dissolution of marriage, paternity, domestic support, child custody, child visitation, and domestic violence;
   
Criminal actions;
   
Actions for suspension of a driver's license or professional license;
   
Actions by landlords of a non - residential lease that expired before the bankruptcy petition was filed;
   
IRS audits and demands for tax returns;
   
Actions by landlords to continue an eviction under a residential lease if the landlord obtained a judgment of possession prior to filing the petition;
   
  There are other less common activities that are not automatically stayed.
   
Q. What is a preferential transfer?
   
A. A preferential transfer exists when a debtor transfers property to a creditor for payments of a debt when the debtor was insolvent. It is presumed by law that a debtor was insolvent ninety days prior to filing a bankruptcy petition or between ninety days and one year if the creditor was an insider.
   
Q. What are a Trustee's Avoidance Powers?
   
A. Avoidance powers permit a bankruptcy trustee to cancel certain transactions in order to ensure equitable treatment of creditors. The most commonly cancelled transactions are preferential transfers and fraudulent transfers. In short, the trustee can force preferred creditors to return payments or property received from the debtor under certain circumstances. The deadline for a bankruptcy trustee to bring a lawsuit to recover money or property paid as a preference is two years after the petition is filed.
   
Q. Does your firm represent clients who are ordered to return property or money to a debtor because the trustee is claiming that a preferential transfer was made?
   
A. Yes.
   
Q. Does my spouse have to file bankruptcy with me?
   
A. No. You may file individually or together. Whether one or both should file will depend on many factors that should be analyzed by an experienced bankruptcy attorney.
   
Q. I am very concerned about having to pay substantial federal and state income taxes resulting from the forgiveness of debt due to the foreclosure of property that I currently own. What should I do?
A. If you file for bankruptcy before the foreclosure takes place, the property is property of the bankruptcy estate, and consequently, there will be no tax payable by the debtor resulting from the foreclosure.
   
Q. I am far behind on my homeowner association assessments due to financial problems. I owe almost ten thousand dollars. The association is threatening to sue me in Superior Court. My loan amount exceeds the value of the property and I owe nearly twenty thousand dollars to credit card companies. I have tried to get a loan modification but the bank says no. Can the association file suit against me?
   
A. Yes. Homeowner association dues or assessments are a personal obligation. The association can sue you for all assessments owing plus the cost of attorneys fees and related costs. Your situation is very common. You should consider a Chapter 7 Bankruptcy. The past due assessments and credit card debt should be totally extinguished (discharged) and your chances of negotiating a loan modification will improve greatly because your income to debt ratio will be improved.
   
Q. When can federal income taxes be discharged in a Chapter 7 Bankruptcy?
   
A. Federal income taxes, not including payroll taxes and fraud penalties, can be discharged if the following conditions are met:
   
The debt is at least three years old prior to filing for bankruptcy;
   
You have filed a tax return for the debt at least two years before filing for bankruptcy;
   
The income tax debt must have been assessed by the IRS at least 240 days before filing for bankruptcy, or must not have been assessed yet; and
   
You did not commit fraud or willful evasion in connection with the debt.
   
  Please note that while the personal tax obligation may be discharged, any tax lien encumbering your real estate or other property will not be discharged or extinguished. This means the tax and any penalties and interest must be paid, if or when the property is sold.
   
Q. What is the roll of the bankruptcy trustee in a Chapter 7 Bankruptcy?
   
A. Upon the filing of a Chapter 7 Bankruptcy petition, a trustee is appointed by the United States Trustee. The duties of the trustee include the examination of the debtor under oath, the collection of assets of the estate, if any, and the distribution of those assets to creditors according to law. During the examination of the debtor under oath, the trustee will review the bankruptcy petition and copies of all required documents to be presented at the hearing. If everything is in order, a discharge will follow. If everything is not in perfect order, the trustee will inform the debtor of the deficiencies. A future hearing may be ordered.
   
Q. I have seen some attorney ads for bankruptcy services priced far below what most law firms charge. How do they do it?
   
A. Be aware that some attorneys do not meet with and give advice to their bankruptcy clients. Some attorneys have a law clerk or paralegal meet with the client to gather information, providing no legal advice. The attorney then signs the petition which is filed with the federal bankruptcy court. In some cases, the attorney does not represent the client at the meeting of creditors held before a bankruptcy trustee. Thus, the client is not represented at the hearing. In other cases, the attorney will have an appearance attorney show up and meet the client at the bankruptcy hearing.
   
  Not all bankruptcy attorneys provide the same service and not all attorneys are equally knowledgeable and experienced. Always interview the attorney before deciding to have him or her represent you. Make certain you know exactly what services you will be receiving. Filing for bankruptcy in federal court is serious business.
   
Q. Are there any situations where the means test is not required?
   
A. Yes. Three are three situations:
   
If your debts are not primarily consumer debts;
   
If you are performing a homeland defense activity for at least ninety days as an employee of the United States Department of Homeland Security; or
   
Members of a reserve component of the Armed Forces and members of the National Guard who were called to active duty after 9-11-2001 for a period of at least ninety days, are excluded during the time of active duty or homeland defense activity and for 540 days thereafter.
Q. I owe my homeowners association over eight thousand dollars in delinquent assessments. Can I simply walk away from my under water condominium and not pay the past due assessments?
   
A. Unpaid homeowner association assessments are a personal obligation. This means the association can file suit against you, obtain a judgment, and then garnish your wages or take other collection action against you. Only the filing of a Chapter 7 Bankruptcy can extinguish your personal obligation to pay the past due assessments.
   
Q. If I list my house for a short sale, am I required to make a disclosure to a potential buyer?
   
A. Yes. If the loans and other encumbrances exceed the estimated net sales proceeds, you must disclose this fact to any agents involved in offering the property for sale, and any prospective purchasers. The fact that a property is "under water" is material to the decision to offer to purchase the property.
   
Q. Do I have to include in my petition property that I do not have in my possession, but I am entitled to receive?
   
A. Yes. Failure to report such property may be considered fraud by the Bankruptcy Trustee. The most common examples include:
   
Money or other property you have inherited but have not yet received,
   
Severance and vacation pay not yet received,
A legal claim for monetary compensation, and
Money earned but not yet received.
   
Q. Is the Bankruptcy Trustee or creditors entitled to receive any property that I receive after I file a bankruptcy petition?
A. Most property you receive after filing a bankruptcy petition is yours to keep but there are a few exceptions. If you acquire, or become entitled to acquire, the excepted items within 180 days from the date you file, you must report the items to the bankruptcy court and the bankruptcy court may take them. The excepted items include but are not limited to:
   
Life insurance policy proceeds or death benefits, and
   
Property you inherit.
   
  As you can see, sometimes the filing date becomes a very important consideration. We can assist you in filing the supplemental document if it becomes necessary.
   
Q. What is a Reaffirmation Agreement?
   
A. Even if a debt can be discharged, you may have special reasons why you want to promise to pay it. For example, you may want to work out a plan with the bank to keep your car. To promise to pay that debt, you must sign and file a reaffirmation agreement with the court. Reaffirmation agreements are under special rules and are voluntary. They are not required by bankruptcy law or by any other law.
   
  Reaffirmation Agreements:
   
must be voluntary;
   
must not place too heavy a burden on you or your family;
   
must be in your best interest; and
   
can be canceled anytime before the court issues your discharge or within 60 days after the agreement is filed with the court, whichever gives you the most time.
   
  If you are an individual and you are not represented by an attorney, the court must hold a hearing to decide whether to approve the reaffirmation agreement. The agreement will not be legally binding until the court approves it.
   
  If you reaffirm a debt and then fail to pay it, you owe the debt the same as though there was no bankruptcy. The debt will not be discharged and the creditor can take action to recover any property on which it has a lien or mortgage. The creditor can also take legal action to recover a judgment against you.
   
Q. Can I eliminate homeowner association assessments in a Chapter 7?
   
A. HOA assessments that arise after you file for bankruptcy do not get discharged, but any unpaid assessments listed on your schedule of debts will be discharged. Notwithstanding, a lien recorded against your property for past due assessments will remain on your property unless your attorney is successful in having the lien voided. If the lien is not voided, when you sell your property, you will be required to pay the delinquent assessments. Therefore, you should discuss with your attorney the possibility of having any lien voided. This is not automatically done as part of a Chapter 7 Bankruptcy. After filing for bankruptcy, it will be necessary to resume paying the monthly assessments.
   
Q. What do you recommend we do to determine the fair market value of a vehicle?
   
A. Two websites that are available are the National Auto Dealers Association site: www.NADAGuides.com and the Kelly Blue Book site: www.KBB.com. The value estimates they provide are similar but not always identical.
   
Q. My 18 year old son was in an automobile accident that was his fault. People in the other car were seriously injured and one died. The insurance was not adequate resulting in a large judgment against my son. He was convicted of driving under the influence in connection with the collision. Will a bankruptcy help?
   
A. Debts for personal injury or death caused by an intoxicated driver are not dischargeable. Even if he files under Chapter 13, the debt will have to be paid in full during the plan. If they are not fully paid during the plan, the balance will remain at the end of the plan period.
   
Q. Why would a credit card company object to the discharge of a credit card debt?
   
A. The most common reasons include:
   
Charges were made after the card issuer demanded return of the card;
   
Multiple small charges were made on the card shortly before filing (to avoid preclearance of the charge by the issuer of the card) after exceeding the card's credit limit;
   
Charges were made after the card holder received a past due notice;
   
Charges you made were incurred after you consulted with an attorney; or
   
Charges were made in bad faith:
   
You were insolvent, or
   
You had no employment or other sources of income.
   
  The fact that a creditor objects to the discharge of a debt does not mean they will prevail in court. An experienced bankruptcy attorney can respond to such a claim on behalf of the petitioner.
   
Q. I am planning to file for bankruptcy because my business failed as the result of the recession and other reasons. The business failure resulted in two law suits being filed against me which I understand will be discharged. I intend to start over by establishing a new, smaller business and want to make certain that I am better protected in the future. What do you recommend?
   
A. Consult with an attorney that can help you with business formations and asset protection. Investing a small amount of money in quality legal advice can save you thousands later.
   
Q. After accepting some bad advice from a real estate agent, I sold my rental home through a short sale only to learn that the short sale resulted in the forgiveness of debt and a $103,000 tax liability. I now understand that the $103,000 tax liability is not dischargeable in bankruptcy. Any suggestions?
   
A. Assuming you qualify, a Chapter 13 Bankruptcy repayment plan may help. You should also discuss the possibility of an offer in compromise or other tax strategy with a qualified attorney. Please visit StopIRSThreats.com.
   
Q. Is it true that the IRS can contact my neighbors, bank and employer to obtain information on me to help them seize any funds I have in order to pay past due federal taxes?
   
A. Yes. In fact, if you were an employer, they could also contact your employees to obtain information to help them collect taxes they believe are owing. Collection action by the IRS and California Franchise Tax Board are one of the primary reasons people file for bankruptcy protection. They can be brutal in their collection methods and unlike other creditors they don't need a court judgment to seize your home, car, bank account, business, or other assets.
   
Q. What is a strategic default?
   
A. While many people face the foreclosure of their property by a mortgage lender because they are in financial distress, a strategic default involves an affirmative or intentional decision by an owner / borrower to stop making payments on a real estate loan despite having the financial ability to make the payments.
Q. How common are strategic defaults?
   
A. Not all areas of the county are identical, but in Los Angeles County and Ventura County, approximately 35% of all residential foreclosures are the result of a strategic default.
   
Q. Why do most strategic defaults take place?
   
A. It's almost always the result of the following factors:
   
The fair market value of the property has plunged due to no fault of the owners,
   
The property owners have concluded that they have no equity and will develop no equity in the near future,
   
The mortgage lender is not agreeable to a reduction in the principal balance of the loan, and
   
After a financial and legal analysis, the owners conclude they would be better off financially by ceasing to make any more payments to the mortgage lender and county tax collector.
   
Q. Is a strategic default helpful or harmful to obtaining a loan modification?
   
A. Loan modifications are relatively easy to obtain if you have sufficient income to service the debt, no equity, and will be satisfied with a minor reduction in your monthly payments. However, it is nearly impossible to obtain a substantial principal reduction without a strategic default.
Q. If we stop making payments on our mortgage loan, how long do we have before we must move out?
A. This is not an easy answer to provide because lenders have different policies for dealing with delinquencies and lenders find themselves in differing situations. In California, most lenders will file a Notice of Default with the County Recorders Office within 2 to 3 months of the first payment being missed. It then takes approximately 4 months to foreclose if the mortgage lender wants to own the property as soon as possible. A well timed bankruptcy filing will delay most foreclosures about 2 more months. After a foreclosure, if the mortgage lender is required to evict the former owners, it will take nearly 2 more months on average for the lender to acquire possession. These time periods are average time periods based on our knowledge and experience. Some foreclosures take considerably more time because the lender is disorganized, overwhelmed with foreclosures, or has decided it doesn't currently want another foreclosed property in your neighborhood.
   
Q. Is a strategic foreclosure the right thing to do if it makes economic sense?
   
A. Right for whom? If you want to do what is best for you and your loved ones - yes. If you want to do what is best for your mortgage lender - no. We believe it is your duty to do what is best for you and your loved ones. You can be certain that your mortgage lender will do what they think is best for their stockholders. You can also be certain they will not place your interests ahead of their own. They have no duty to do so and you would be foolish to expect them to increase their loss in order to benefit you. Do not worry about Bank of America, Wells Fargo Bank, Citi, Chase, or any other mortgage lender. They will protect themselves and, likewise, you should protect yourself and your loved ones.

When you obtained your mortgage loan, presumably you had sufficient equity in the property to satisfy the lender that it was making a safe loan. Your equity was put at risk when you gave the mortgage lender your property as collateral for the loan. If you defaulted, the lender could foreclose and your equity would protect the lender against a loss. While neither you nor the mortgage lender expected this to happen, that was the agreement. You took a risk that something could happen resulting in the loss of your equity. The lender also took a risk that the value of your property securing their loan could decline in value and they could sustain a loss. Due to no fault on your part and no fault on the part of your lender, the value of the property has declined placing both parties at risk. Very simply, you must decide whether to use your other assets and / or income to bail out your mortgage lender. We believe you should do what is in your best interest just as the lender will do what is in its best interest. Think of your loved ones - think about your future. Obtain the advice of an experienced real estate attorney and protect yourself.
Q. What is a group strategic default?
   
A. This refers to a group of two or more borrowers in the same neighborhood with the same lender, working together, to use strategic defaults to obtain favorable loan modifications that include meaningful principal reductions. Often, we find that a particular mortgage lender has made many loans within a neighborhood and that several are in default simultaneously. The lender knows that one foreclosure will effect the value of the other properties that serve as collateral for their loans. This is a fact that is considered when making the decision when to foreclose or whether a loan modification should be offered and on what terms. If two or more borrowers are working together with any experienced attorney, they have added leverage or negotiating strength in dealing with the mortgage lender. A group strategic default can be a powerful tool.
   
Q. Will a strategic default result in harm to our credit score?
   
A. Yes. Late payments, a recorded Notice of Default, and a foreclosure will appear on your credit report for 7 years and will effect your credit score on a declining basis over a seven year period. The negative consequences diminish substantially after the first 2 years.

While your credit score is important, you must balance the negative consequences against the following possible benefits:
   
Saving your pension fund for retirement,
Saving your cash savings for your child's education,
   
Saving your cash and income to purchase another home at the current lower price / value, and
   
Trading your high cost of housing for a lower cost of housing.
   
Q. Our business will soon be filing for bankruptcy primarily because Google has decided to punish our website for reasons that are unknown to us. We have tried for more than one year to determine why they have done this and get absolutely no response. We have gone from the first or second page to having been removed altogether. We have made no changes to our site so we know that the removal was not based on a change to our site. Given that we were receiving 90% of our traffic from Google, and now receive no traffic from Google, we have been damaged beyond repair. Is there anything we can do?
   
A. You can write to your Representative in Congress and United States Senators asking that they break Google up based on its monopoly power, and you can also encourage everyone you know to use Yahoo, Bing, or another search engine. Otherwise, there is not much you can do. Google has incredible power to make or break any business that depends on the internet. Until that changes, they don’t have to respond to you or any other user of the internet.
   
Q. We have a Self-Directed IRA Account that holds a high yielding unsecured promissory note, a parcel of land in Simi Valley that is being banked as a long term investment, and a note secured by a deed of trust. If we file a Chapter 7 Bankruptcy, can we keep these assets?
   
A. Yes. Any assets held in your Self-Directed IRA Account are exempt and you may retain them. By maximizing your holdings in an IRA Account, you are protecting these assets from creditors.
   
Q. The IRS is threatening to close down our family business unless we pay two years of back income and payroll taxes. We are slowly making progress in building up our business from the results of the recent near economic depression, but they won't wait much longer. Do they have the right to actually close down our family business? Will a bankruptcy help? We have several employees at risk of losing their jobs.
   
A. If you have not paid your payroll taxes, the IRS and Franchise Tax Board have the absolute ability to put you out of business. You must immediately prioritize your cash flow in order to pay the past due payroll taxes while your business is still open. A bankruptcy will likely discharge most other debts, but it will not discharge payroll taxes and it will not discharge your most recent income taxes. You need to seek immediate legal advice.
   
Q. My partners and I recently closed our business and I am now considering the possibility of filing for bankruptcy. Other than listing the creditors of our former business on the petition, is there anything else I should consider?
   
A. Yes. There are many things to consider when filing a bankruptcy after closing a business. While too numerous to list all of the items to be considered, you will clearly want to name your former partners as creditors. Even though you may be on good terms with them now, naming them on the petition should eliminate any future claims and it does no harm to include them.
   
   






 

 

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