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Bankruptcy in New York

Bankruptcy is a legal method of eliminating debt and providing a means for debt-oppressed people to obtain a “fresh start.” In many cases, bankruptcy means the elimination of the debt that you owe to your creditors. There are two primary forms of bankruptcy, Chapter 7 and Chapter 13.


Why is it legal to file bankruptcy?

More so than in any other time in our country’s history, our economy is based on consumer debt. In fact, in this age of multibillion dollar corporate bailouts, easy credit and relentless bombarding of seductive messages cajoling us to “charge, consume, buy” it is not surprising that so many people are drowning in debt. For many of us, this debt is insurmountable and is causing family problems and feelings of hopelessness and even suicide. With credit card interest rates of 18-27%, many feel like modern day indentured servants. Many times, the debt is occasioned by unforeseen events such as loss of a job or medical bills, but more often it is simply poor planning. Nevertheless, in instituting our bankruptcy laws, Congress recognized that responsible, well-intentioned people could from time to time run into financial problems. By allowing you to recover from your debt burden you will be able to start afresh, look to the future and become a more productive member of society. This is good for you and good for society as a whole.


Should I File Under Chapter 7 or Chapter 13?

You must ultimately decide for yourself whether filing bankruptcy is the proper action to take, and if so, which Chapter is better for you. Some of the factors to consider are as follows: If you are not making more money than you need for your current living expenses (you have no “disposable income”), Chapter 13 is not a realistic option. Chapter 7 has the advantage of wiping the slate clean and enabling you to embark on your “fresh start” immediately. With Chapter 13 you will be making payments for three to five years. If you have a particular asset that you want to keep and that is valued above the allowable exemption then Chapter 13 may be the only alternative. For example, if you own a house with significantly more than $25,000.00 in equity and you don’t want to lose it, Chapter 7 probably will not work. If you are trying to ward off repossession or a foreclosure, Chapter 7 will not help you, and you will need to file a Chapter 13. If your debts are primarily consumer debts, and if your budget reveals that after filing bankruptcy your income substantially exceeds your expenses, it is possible that the United States Trustee could file a motion to dismiss the Chapter 7 case for “substantial abuse.” In such a case Chapter 13 may be the better alternative.


Chapter 7 vs. Chapter 13

There are two basic options available to consumers under the bankruptcy laws: chapter 7 and chapter 13. The major benefit of a chapter 7 is to “discharge” or get rid of unsecured debt such as credit cards and medical bills. You will be allowed to keep certain kinds of property under the exemptions allowed by federal and/or state laws. The definition of “exempt property” differs in each state and usually includes your home, car, clothing, furniture, household appliances, and tools of your trade — each to a certain dollar amount. While a chapter 7 bankruptcy is appropriate under the right circumstances, its use is limited in comparison to a chapter 13. A chapter 13 can be used to protect “unexempt property.” In a chapter 13, you pay a portion of your monthly income to a trustee for distribution to your creditors. A repayment plan is useful when you are behind on your home mortgage payments, taxes, or a car loan. A chapter 13 may be in effect from three to five years. It normally allows you to pay less than you owe. The extended payment period allows you to make smaller payments. You will be allowed to keep part of your monthly income to pay for living expenses like food, clothing, rent/mortgage, and medicine. To qualify for a chapter 13 repayment plan, you must have regular income, and your unsecured debts must not exceed $250,000. If your unsecured debts exceed $250,000, you may be able to qualify for a repayment plan under chapter 11. Proceedings under chapter 11 are much more complicated and expensive (but not more powerful) than those available under chapter 13. Many law firms do not offer a chapter 13 bankruptcy option because of the extensive law office administration required. However, the Law Office of Brian McCaffrey is happy to always offer this option. A “Chapter 20 bankruptcy” is an attorney-created combination of a chapter 7 and a chapter 13. However, it is extremely rare for the savings of a chapter 20 to more than offset the additional attorneys’ fees. In other words, we will only recommend a chapter 20 if it is in your best interest, not ours, we never plan a “Chapter 20”, but sometimes it happens. After completing a chapter 7, you may not start another chapter 7 for six years. There is a minimal waiting period after a chapter 13. The attorneys at The Law Office of Brian McCaffrey can review your situation and advise whether to seek a chapter 7 or chapter 13. The best bankruptcy alternative for you depends on a number of variables, including the source of your income, the amount and types of your bills, your desire to protect your cosigners, the equity you have in your property, and what property you wish to keep. We will be happy to give your financial situation careful consideration and explain your rights fully, but the decision to file is left to you.


Chapter 7

Chapter 7 is commonly known as straight or liquidation bankruptcy. Under this chapter, you are seeking to have your debts discharged, which means the legal obligation to pay creditors is canceled. You can pay all or some creditors after bankruptcy if you feel morally obligated, but is not legally required. You can file Chapter 7 no more than once every 6 years. Certain types of debts are non-dischargeable. With some exceptions, they include student loans, taxes, alimony and child support, fraudulent debts, debts for embezzlement or larceny, debts incurred from purchasing luxury items or for taking large cash advances shortly before filing, fines and penalties, debts incurred as a result of a willful or malicious injury, unscheduled debts and debts denied discharge in a prior bankruptcy. Secured debts are fully dischargeable but you may lose the collateral because valid liens survive bankruptcy, and the creditor is free to repossess or foreclose on the collateral once the bankruptcy case is concluded. If you want to keep the collateral you must reaffirm the debt. Reaffirmation means a legal re-obligation to pay the debt as if the bankruptcy never occurred. In exchange for reaffirming the creditor will allow you to keep the pledged property because the creditor is assured payment. Reaffirming requires that you sign a written contract that is filed with the court. You will most likely want to reaffirm on your home and automobile, but not charge cards or other debts unless there is good reason. Once your petition is filed, a trustee is appointed to represent the best interest of your creditors. The trustee is given broad power under the law. He can set aside improper transfers of property, and can even recover money paid to creditors shortly before filing. The trustee makes sure that all creditors are treated fairly and equally in the bankruptcy proceeding. Most importantly, however, the trustee is responsible for collecting and liquidating certain valuable assets at a bankruptcy sale. Your creditors are notified of the sale and have an opportunity to bid, or object to someone else’s bid. Sale proceeds are distributed to creditors based upon the classification and priority of their debt. Any money left over is returned to you after creditors and administrative expenses are paid. The trustee theoretically has an interest in all non-exempt assets you own up to the date the petition is filed. These assets, as a group, are called the bankruptcy estate. With limited exception, property you acquire after filing does not become part of the bankruptcy estate, and can not be taken by the trustee. Does this mean you lose everything? Not at all. In most cases, your valuable property is either secured or exempt. Much of your other property, as a practical matter, may not be worth the expense of conducting a sale. A typical rule of thumb is that property with a value of less than $1000 will not be sold by a trustee. The laws allow you to keep certain property above any liens or encumbrances to preserve your ability to live. These are called property exemptions. Exempt property, up to certain value limits, includes your home, vehicle, furniture, appliances and various other personal possessions. Can the trustee sell secured property? If the trustee sells secured property, he must first pay off thelien. Therefore, the trustee will not sell any secured property that at a minimum does not exceed the value of the lien. Therefore, if you can afford the payments on the secured debts, you can reaffirm with the creditor to keep the collateral if you choose. For this reason, most people can keep their home and automobile, as there is usually limited equity in such property. A home, for example, may have a secured mortgage which leaves little or no equity in the property. Equity is further eroded if you deduct 10% of the home’s sale price as an estimate of closing costs. In New York, a husband and wife can exempt up to $20,000 of equity in their home. As long as equity does not exceed the exemption amount, the trustee is left with nothing to distribute to unsecured creditors if the property were sold. Therefore, the home has no value to the bankruptcy estate, and the trustee will not sell the property. The same holds true for a motor vehicle with equity less than $2,400. Approximately 45 days after filing the petition, you are required to attend a meeting, known as the Section 341 first meeting of creditors. There, the trustee will determine whether there are assets to be liquidated, or whether there has been any improper conduct affecting your case. There is usually only one meeting, but occasionally a second meeting is scheduled if further information is needed. Your creditors are free to appear and ask questions as well, but creditors rarely attend. The length of the meeting may vary. It usually takes no more than an hour for all scheduled cases on the calendar to be completed. Approximately two months after the meeting date, the court issues the discharge order signifying the conclusion of the case. The two month waiting period is designed to allow the trustee or a creditor enough time to file an objection to dischargeability, if appropriate. These objections to discharge are known as adversary proceedings, and are usually based on some alleged fraudulent activity. The U.S. Trustee’s office, a branch of the Justice Department, can also object if they find that there has been a substantial abuse of the bankruptcy laws. The vast majority of cases, however, will be concluded without objections, and honest debtors should have nothing to fear. The average case is completed in three to four months. You then have a fresh start, free from the harassment of creditors. While your creditors will not be paid after discharge, some can treat the discharged debt as a loss on their income tax return.


Chapter 13

Chapter 13 is known as the wage earner or repayment plan bankruptcy. You can think of Chapter 13 as a debt consolidation, where you group all your debt together, and repay creditors over three to five years through an installment payment plan formulated with the help of your attorney. Chapter 13 can be filed more often than Chapter 7, as long as it is filed in “good faith”. The main advantage of filing under Chapter 13 is that your property is not liquidated by the trustee as in Chapter 7. You keep all of your property as long as you comply with the plan. But you are not completely discharging your debt. You must pay your creditors a percentage on the dollar established in accordance with your assets and ability to pay. Not everyone can file under Chapter 13. For instance, there is a debt ceiling, or limit to the amount of debt you can have. Total secured debt cannot exceed $750,000, and unsecured debt cannot exceed $250,000. The plan must also be feasible. To be eligible, you must have regular income such as wages, pensions, self-employment or other income sufficient to fund the plan. The plan cannot run longer than five years, and you must show the court that you have enough disposable income to pay your plan payments within that time. Corporations cannot file under Chapter 13, and must use the more complex and expensive Chapter 11 bankruptcy if they wish to reorganize. A business proprietor that is not incorporated, however, can file under Chapter 13 provided the debt ceiling and other provisions under Chapter 13 are met. The Chapter 13 Trustee acts as a disbursing agent. He collects your installment payments, and distributes them to creditors according to the plan. All creditors may not be fully paid. Unsecured creditors, in many cases, may be paid only a small percentage on the dollar, and upon successful completion of the plan the remainder of their debt is discharged similar to Chapter 7. To determine how much of your creditors will be paid in Chapter 13, the bankruptcy code provides two guidelines which determine the minimum amount unsecured creditors must receive through the plan. First, the disposable income test requires that you pledge all of your disposable income into the plan for at least a three year period of time. Disposable income is your monthly income after your monthly living expenses are paid. In other words, you must pay unsecured creditors as much as you can afford for at least three years. Second, under the Chapter 7 test, you must pay unsecured creditors the same amount through your Chapter 13 plan as they would get had your property been liquidated under Chapter 7. Put another way, your plan must pay unsecured creditors an amount equal to the value of your non-exempt property. Let’s take an example. Assume we have a husband and wife owning a home with $30,000 worth of equity. Remember, only $20,000 worth of equity can be exempted. That leaves $10,000 worth of equity which, theoretically, would have been distributed to unsecured creditors if a Chapter 7 petition were filed. So, under the Chapter 7 test, this means that unsecured creditors must receive a total of $10,000 over the duration of a Chapter 13 plan. Now, let’s assume there is $14,000 in total unsecured debt. By dividing $14,000 into the minimum $10,000 to be paid, you arrive at the percentage to be paid to unsecured creditors. 10,000 divided by 14,000 equals 0.71 or sevently-one cents on the dollar. What about priority and secured debts? In every case, your plan must pay priority creditors in full. Also, secured creditors are entitled to be paid an amount equal to the value of their collateral. The difference between the value of the collateral and the balance of the note is the unsecured portion of the debt, and is grouped together and paid the same percentage as the other unsecured debts such as credit cards. You must also provide for a trustee commission of approximately 5% of the total debt paid through the plan. A simplified Chapter 13 Plan would look like the chart below. Let’s assume this debtor owes $1,500 in back taxes, has $12,000 in credit card and other unsecured debt, and has a $6,000 loan secured with a car having a value of $4,000. Also, let’s assume this debtor has no non-exempt equity and very little disposable income, which makes this debtor eligible to pay the minimum five cents on the dollar to their unsecured creditors. Similar to Chapter 7, in Chapter 13 you must attend a Section 341 meeting of creditors, held within 45 days of the filing. Unlike Chapter 7, however, the meeting is followed by a confirmation hearing. At the confirmation hearing, the plan is presented to a bankruptcy judge for his review. If there are no objections, and the plan meets the requirements of Chapter 13, then the judge will confirm the plan, which makes it binding upon creditors. The first payment under the plan is due approximately 30 days after filing the petition. Thereafter, the payments must be made regularly under the terms of the plan. Debtors can make payments to the trustee themselves, or for convenience, the payments can be deducted directly from their wages. Chapter 13 may have some advantages aside from allowing you to retain property which is otherwise non-exempt in Chapter 7. For instance, your co-signors are protected if the co-signed debt is paid in full through the plan. Delinquent mortgage payments, back property taxes and missed car payments can be paid through the plan to stop foreclosure or repossession. Chapter 13 is commonly used to save a home from foreclosure. Under the code, a plan which proposes to pay all mortgage arrears through the plan can decelerate a mortgage default. You must, however, have enough disposable income both to fund the plan, and to start making the current mortgage payments once again directly to the lender as they become due after the petition is filed. You can pay student loans, child support arrears or restitution through the plan, and some debts which are non-dischargeable in Chapter 7 may be partially dischargeable as an unsecured debt in Chapter 13.


When Bankruptcy Affects your Credit

When bankruptcy is appropriate, it is usually not a question of maintaining good credit – your credit standing is probably already damaged. Judgments, delinquent payments, and credit counseling services are reported to the credit agencies for long periods of time like bankruptcy. Few lenders give credit under those circumstances anyway, and even if you satisfy a judgment it still is a part of your credit history. The credit reporting bureaus report a Chapter 7 filing for a period of almost ten years. The credit bureaus report a Chapter 13 filing for almost seven years as long as you successfully complete the plan. If the plan is dismissed, then the Chapter 13 will be reported for ten years as well. A fresh start allows you to re-establish your damaged credit. Aside from being reflected on your credit report, the bankruptcy laws do not restrict you form obtaining credit after the case is completed. Keep in mind that whether you have good or bad credit is always a subjective decision in the eyes of a prospective creditor. Of course, you must be prepared to explain why it is necessary to file if a prospective creditor should inquire. Maintaining a good “track record” after filing will minimize the adverse impact of the financial troubles leading to the bankruptcy. With the right strategy, you can build good credit once again. There may be some “pre-filing” strategies to re-establish credit. A non-filing spouse’s credit report is not affected by the bankruptcy unless the spouse is a co-signer on any of the debts. If only one spouse files then the other may be able to maintain a good credit standing. Also, if there is a bank card or line of credit with a zero balance before filing, you may be able to use the card after filing, provided it is not revoked by the creditor.

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