Cate Eranthe

If I file bankruptcy, where can I bank?

If you are considering bankruptcy, you are advised to move any accounts you may have with Wells Fargo or Wachovia to another institution.

It doesn’t matter that you have never bounced a check and never borrowed any money from them. It doesn’t matter if you owe them money or not!  If you file bankruptcy the corporate policy is to freeze your accounts. This policy continues today as litigation has resulted in a finding that this administrative freeze policy doesn’t violate the automatic stay.

Litigation continues but even if you have a corporate account it is wise to move your money. If the corporate account is linked in any manner to your personal account or social security number it will also be frozen.

How long will my account be frozen?

Likely, at least 30 days although it could only be a few days or a week. For at least some period of time, you will not have access to your money, your ATM card will not work and any checks that are outstanding will be returned.  If you end up with bounced check charges and the aggravation of getting replacement payment to cover the check that will cause an even bigger mess. Eventually the account can be unfrozen but meanwhile you won’t be able to pay the mortgage or buy food.

What if I don’t file bankruptcy, can I keep my account then?

I had a client come in who had been with Wells Fargo. She mistakenly overdrew on her account by less than $15. She then lost her job and was unable to make any deposits for a while. After a few months that small original sum grew to almost $300! With her unemployment, she was not able to pay it off so she looked for an account somewhere else. She was refused a bank account at Bank of America and the local credit union because of the earlier overdraft at Wells Fargo. You want to bank at a smaller regional bank NOT one that is too big to fail.

Don’t forget – move your money from Wells Fargo (and Wachovia) to another bank or credit union before you file bankruptcy. Anywhere where you don’t have any loans, lines of credit or credit cards is fine. There are usually local banks that have free checking accounts with no monthly minimum balances to contend with. Better yet, look into a credit union account. These are member owned and usually have the best customer service.

Make me a list of your assets, I say.

But I don’t have any assets, you say.

It’s a common misunderstanding that assets must have a high value. Assets are simply all the property that you have and includes every form of property not only real estate (the house, condo, vacant lot, commercial building and/or apartment building). All forms of assets must be disclosed if you file for bankruptcy.

Some of the most common assets that people have include:

  • Bicycles
  • Books
  • Cars
  • Trucks
  • Motorcycles
  • Scooters
  • Cemetery plots
  • Cremation certificates
  • Clothing
  • Jewelry
  • Coin collections
  • Computers
  • Accounts receivable
  • Electronics
  • Furniture
  • Insurance policies
  • Stamp collections
  • Art on the walls

Assets that someone is holding for you and assets that are out of the country are all listed. There is even a place to disclose assets that belong to someone else that you are holding for them.

Assets are more than stocks and investments

Assets include future rights such as potential income tax refunds. Assets also include intangible things such as business goodwill, the right to sue someone, or stock options. All assets must be disclosed on the bankruptcy schedules and exemptions remove the exempt assets from property of the bankruptcy estate.

For bankruptcy purposes, it is better to err on the side of disclosing more than less. If an asset is listed and the trustee chooses not to sell it, you can keep it. If it wasn’t disclosed, the trustee can still come back years later and sell it to satisfy your creditors. The general rule is list it or lose it.

Other Lawyers in the Alphabet Game:

Are business credit card offers a good idea? Probably not. 

Beware of those credit card offers that look like small business cards and are anything but. There have been a slew of them in the past few months. I’ve received them myself. They look intriguing – lots of points for purchases but they have hidden fees and are not covered by the Credit Card Accountability and Responsibility and Disclosure Act of 2009 because they are “professional” cards.

The Wall Street Journal Weekend Investor, warned that: While the Credit Card Act bars issuers from raising rates on existing balances unless a cardholder is at least 60 days late with a payment, there isn’t any such prohibition on the Ink from Chase card. The card agreement says Chase is free to implement a default rate of 29.99% if a customer is late by just one day on a payment. And holders of Capital One Financial’s Business Platinum Card, meanwhile, can see their low introductory interest rates spike if they are just three days late with payment twice in a 12-month period, far less than the 60-day notice period required under the Card Act.

They are Personally Guaranteed

Even more distressing is the small business owner that applies for one of these credit cards without realizing that they are personally guaranteeing the card. So if the business goes under the owner will still owe on the credit. A close reading of the application indicates that rather than true business credit cards these are an attempt by the big banks to have the best of both worlds — Business card regulations with few restrictions and a personal guarantee to sweeten the pot.

According to WalletHub it is very rare for a small business to have a credit card that isn’t personally guaranteed. A representative of the company almost always has to promise to pay on the card if the business is unable. It is large corporations with millions of dollars in annual revenue that are able to obtain corporate credit cards using the business assets as collateral.  

Check out Jay Fleischman’s post where B is for Bank Account. He discusses the unbanked and how having an account makes your finances tidier.

More Bankruptcy B’s:

Chapter 7 is a complete liquidation of your debt through a process in Federal Bankruptcy Court.

If you cannot afford to meet your monthly living expenses and pay your debts, you may be able to liquidate your debt. Not everyone will qualify to file Chapter 7 under the Bankruptcy Code’s “means test” which looks at your income level and certain types of debt cannot be discharged or wiped out (such as most federally guaranteed student loans, many taxes, government fines and any outstanding family support obligations).

Means Test

At its simplest, the means test is based on the average California median income according to family size. The median income levels are regularly adjusted to reflect the state of the economy. For a single person it is currently $62,938 a year and it goes up as family size increases. See the United States Department of Justice Census Bureau Median Family Income.

There is a long form of the means test that factors in secured debt payments such as your mortgage or auto payment and other necessary expenses like union dues, transportation, medical bills and insurance. This is a complex form best undertaken by a knowledgeable local bankruptcy professional. Completion of the long form will let you know if you pass the means test even though you have above median income.

Required Courses

You are also required to take two courses from approved credit counseling providers. You can consider these courses as your ticket in and your ticket out of the bankruptcy proceedings. The first course must be completed no less than 180 days before you file and the second course is completed after filing and before you can obtain a discharge. I recommend taking the second course before the 341 hearing.

Chapter 7

After you file for bankruptcy, most of your assets become property of the estate and subject to sale and distribution to the creditors. However, in most consumer cases all the assets are exempt and are not available for liquidation.

The debt liquidation is called a discharge. You cannot get a Chapter 7 discharge of your debts more often than every eight years. Only individuals obtain a discharge of their debts. If a corporation or partnership files for Chapter 7 relief the entity is dissolved.

The entire process of a Chapter 7 from beginning to end is generally four to six months. If there are any non-exempt assets to be sold it will take at least several months longer. If assets are to be sold and distributed it can even take several years.

A Chapter 7 will stay on your credit report for 10 years from the date of filing. The impact on credit is generally minimal because most people who need to file a bankruptcy already have low credit scores. Also there are ways to rebuild credit without going into debt after you have filed.

Check out consumer protection attorney Jay Fleischman who thinks C is for Creditor. He provides a thorough explanation of who your creditors are.

More Bankruptcy C’s:

Do I have to list everything in my bankruptcy? Is everything included in my case?

Everything must be disclosed. All debts (everything you owe to anyone including disputed claims) must be disclosed. All assets (everything you own, no matter the value) must be disclosed. Assets you hold for others must be disclosed. Open and closed financial accounts must be disclosed including regular checking accounts and pension plans. Safe deposit boxes and the contents must be disclosed; storage lockers and their contents must be disclosed. Charitable donations and gifts over a certain sum must be disclosed. Insurance policies, books, cemetery plots, motorcycles and art must all be disclosed.*

Disclosures Must Be Complete and Accurate

When you disclose your financial information to your bankruptcy lawyer be as complete and accurate as possible. All assets, debts, income and expenses must be included and all supporting documentation submitted. The value of your assets is what you could sell them for, or the current market value, not what you paid for them. It also makes no difference if the item was a gift; none at all. You can’t value something at zero just because you didn’t pay for it. Make a reasonable inquiry using local dealers, Craigslist and/or eBay to get comparable values. If using eBay it is best to search for sold values and not use the listings which are often high.  Have a realtor give you a selling price for your home that is geared to get a quick offer, not a high bargaining position. Use NADA or Kelley’s Blue Book to value your automobile.

Income Disclosures

Let your lawyer know how much your income is and its sources along with your monthly expenses. Include all sources from wages and dividends to social security and pension distributions. Include any investments and losses. Your attorney can decide when and where your information fits into the petition, schedules and financial affairs forms for a chapter 7 or chapter 13. This information will also form the basis for your reorganization plan in a chapter 13.

Possible Audit and Failure to Disclose

You should have documentation for all income, expenses, assets, debts and transactions. Documentation might include tax returns, W-2s, 1099s, pay stubs, profit and loss statements, or letters of award. One in every 250 bankruptcy cases is audited. If you are chosen for an audit the documentation will be valuable to establish you did your best to be accurate and complete in your disclosures.

You will want to search your records and your memory and be as complete as possible. Failure to disclose all of your assets, debts, income, expenses and financial affairs can result in you being denied a discharge and you may be charged with a crime. You might spend years in prison and have to pay a substantial fine.

The bankruptcy crime of nondisclosure or concealment of assets may also take the form of transferring or concealing property before you file without making the proper disclosures. If you are completely honest and forthcoming with your bankruptcy attorney you’ll have no problems. Your attorney will know what needs to be provided to the court and will have the documentation to back up her decisions.

*This disclosure applies to all bankruptcy cases and is not to be confused with the written disclosure statement required in a chapter 11 reorganization.

Other Lawyers writing on the Bankruptcy Alphabet:

Equity is not always present in our homes.

It is the value of your house after deducting the loans and other encumbrances on it. 

Home Equity Example 1

You think your home would sell for $650,000 based on the recent sales in the neighborhood for similar houses in a similar condition. You have a first mortgage of $550,000 and a second of $125,000. You got the second to perform maintenance, add a bathroom and pay off some accumulated credit card debt. It seemed like a good idea at the time because the market had been going up.

Now you owe $675,000 on a house that would sell for only $650,000. If you subtract what you owe from what it would sell for, that sum is less than zero. That means there is no equity in the property. In this instance there is nothing to protect and should you happen to file for bankruptcy you do not need to use an exemption to protect this asset.

Home Equity Example 2

Lets look at the same house that sells for $650,000. This time there is only a first mortgage of $600,000. In this case, there is $50,000 of equity in the home. If you filed bankruptcy, would you need to exempt this asset? Maybe not, more information is needed to determine how to answer this time.

Costs of sale would be at least 7%. Therefore we can subtract $45,500 from the $50,000 leaving only $4,500. Are there any property taxes due? If property taxes have been assessed, they are due even if the payment date is in the future.  Look at your property tax statement or see if you can find the assessment online at your county’s website. This tax would need to be paid from the sale of the home and should be deducted before there is any equity to consider.

Are there any homeowner’s association’s dues to pay? Are there any mechanics liens or contractor’s liens? It seems likely that we will end up with another zero sum.

Other Attorneys who are writing on the Bankruptcy Alphabet:

Image Credit: Leo Reynolds

How does bankruptcy work to give me a fresh start?

Debtors obtain a fresh start because when the bankruptcy is filed creditors can no longer harass them due to the automatic stay.

Debtors obtain a fresh start because once the bankruptcy is filed creditors can no longer harass them due to the automatic stay. Later most debt is liquidated or discharged. A discharge is the legal elimination of debt through a bankruptcy case: the debt is no longer legally enforceable against the debtor. This permanent order prohibits the creditors from taking any form of collection action on discharged debts including legal action and communications with the debtor, such as telephone calls, letters and personal contacts.

Discharged Debts

Although a debtor is not personally liable for discharged debts, a valid lien that has not been avoided will remain after the bankruptcy case. That means a secured creditor may enforce the lien to recover the secured property. This is why you must maintain your mortgage payments if you want to keep your house. Likewise, you’ll need to make your car payments to keep your car. (Some lenders may also require a reaffirmation agreement so that you are still personally liable on the debt even after the bankruptcy discharge.)

All debts must be listed and included in the bankruptcy case but not all debts are discharged.

The following are some of the debts that will survive the bankruptcy case:

  • Child support debts
  • Spousal support debts
  • Debts not listed in the bankruptcy paperwork 
  • Government fines and penalties
  • Student loans
  • Certain tax claims
  • Debts for personal injury caused by the debtor’s operation of a motor vehicle while intoxicated
  • Certain condominium fees
  • Child support debts
  • Spousal support debts
  • Debts not listed in the bankruptcy paperwork 
  • Government fines and penalties
  • Student loans
  • Certain tax claims
  • Debts for personal injury caused by the debtor’s operation of a motor vehicle while intoxicated
  • Certain condominium fees

You cannot get a Chapter 7 discharge of your debts more often than every eight years. It is your ace in the hole and not to be played lightly. However, if you need the assistance of the Bankruptcy Court and the relief a “fresh start” can give it is a very useful tool.

Even if the debt is discharged you may still pay the debt after the bankruptcy case has been closed. There are times you might want to pay a debt even though it has been discharged because it is owed to a family member or treating physician. This is your decision.

Debt Follow Up After Bankruptcy

Part of the fresh start will depend on your follow up after you receive your bankruptcy discharge. Debtors need to review their credit reports approximately two to three months after the discharge. It usually takes one to two months before the credit report reflects the bankruptcy discharge. The accounts should be reported as discharged in bankruptcy and show a zero balance. Any incorrect reporting should be contested. The sooner you are aware of any mistakes, the sooner you can begin to take the steps necessary to repair the credit report.

As more and more prospective employers and insurance companies use credit reports in decision-making, the more important it is to correct these errors.

Under the Fair Credit Reporting Act (FCRA), credit bureaus and creditors have a duty to correct inaccurate information. You should request a copy of your credit report from each of the three credit bureaus and review the information listed:

P.O. Box 2104
Allen, TX 75013

P.O. Box 74021
Atlanta, GA 30374 

Trans Union
P.O. Box 2000
Chester, PA 19022 

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Image Credit: Leo Reynolds

Gumshoe? What does that have to do with bankruptcy?

To file a bankruptcy in chapter 7 or chapter 13 you
must be an investigator or a bit of a sleuth!

Asset Values

You have to dig into and explore the value of your assets. It will take some looking to figure out what that stamp or baseball card collection is worth. It’s not just the catalog value (which is easy enough to find) but the value is what you could sell them for at the time you file the bankruptcy case. You’ll have to look at what similar items sold for at auction or what the dealer will pay you for them. This will usually be far less than any listed catalog values.

You might have to search online at eBay or Craigslist. These are both good sources for musical instruments and your electronics such as a computer or television. Make sure you use the year, make, model number and specs when comparing items. Also see what the items have sold for on eBay not just the starting auction prices or the buy it now price. Items are often listed high to see what the buyer might be able to sell it for. What the item is actually sold for is a far more accurate valuation and is generally less than a listing price. 

Sometimes people think that if it is a new unused item, the value must be what they paid for it. Rarely ever is that the case. In fact, I have never seen that to be so. Values these days are on the decline and just taking something home causes a minimum of 50% depreciation off that initial sales cost.

$55,000 valuation with actual fair market value of $1,200

One of my clients had an extensive stamp collection which he valued using catalogs. His valuation was $55,000 which I seriously questioned. This was not something that I could protect for him and I had him take the collection into a shop where they bought and sold such items to confirm that it really was an issue. It turned out that the real world value was just $1,200. There was  a high sentimental value and a low dollar value which worked out well for the case. 

I also know of someone who purchased an expensive set of real silverware that was still in the shrink-wrapped box. They insisted the value was at least $10,000 and they were concerned about getting a bankruptcy exemption for it. I insisted they look more into the value and see what they could actually sell the set for. The amount it could be liquidated for was only $1,500 and I had no trouble protecting it under the circumstances of the case.

Debts and Liabilities

You also need to investigate all your liabilities and become a Gumshoe. Sometimes you need to call for a payoff value (auto and home loans) and other times you need to investigate the mailing address. If you are filing for a bankruptcy you’ll need to list the correspondence address or a bankruptcy notice address — not the payment mailing address. Often there are addresses in the small print on the back side of your statements and it’s not always easy to locate these addresses. If you run your credit report the listed address is usually not correct but may be. You can generally locate the appropriate  correspondence address on the statement, sometimes on the front and often in small text on the back.

Be Careful of Assumptions and Do Your Digging

The take away here is do your research and don’t make assumptions. Don’t assume the value has any relationship to what you paid for the item. Do look into it and investigate the value. With the internet and available options anything can be valued. Also make sure you have the correct notice addresses for your creditors.

More Bankruptcy G’s:

Image Credit: Leo Reynolds.

What income do I need to disclose in my bankruptcy?

  • Retirement income
  • Pensions
  • Social security
  • Stock distributions
  • Trust disbursements

Means Test Income

All debtors filing bankruptcy are required to take a “means test” which will determine if they need to file Chapter 7 or Chapter 13 bankruptcy.

For purposes of the means test, the U.S. Bankruptcy Code defines current monthly income as including: “any amount paid by any entity other than the debtor (or in a joint case the debtor and the debtor’s spouse), on a regular basis for the household expenses of the debtor or the debtor’s dependents (and in a joint case the debtor’s spouse if not otherwise a dependent)…” Benefits received under the Social Security Act, payments to victims of war crimes or crimes against humanity on account of their status as victims of such crimes, and payments to victims of international terrorism or domestic terrorism on account of their status as victims of such terrorism are excluded from the means test.  Stimulus payments from the Covid-19 pandemic are also excluded from the means test but could be an asset.

The means test looks back at the past six months of income as defined above. If you file a bankruptcy in January, the past six-month (or look back) period is July through December. It is this six-month period that will determine what your average annual income is. You must compare your average annual income based on the past six-month period to the median average for your state to see if you qualify to file a Chapter 7 bankruptcy. If your income is too high to file a Chapter 7 you may still qualify to file a Chapter 13.

All of it gets listed one way or another:

  • Wages
  • Commissions
  • Bonuses
  • Vacation pay
  • Business income
  • Workers Compensation
  • Unemployment
  • Regular contributions from family
    or housemate
  • Disability

Couples often ask if they should file separate bankruptcy petitions.

“We have our own debts and don’t think we should file
together,“ they say.

California is a community property state

Those debts the couple thinks are separate usually are not. It doesn’t matter if the debts are only in the name of one spouse. Unless the debt was incurred prior to the marriage or the couple had entered into a valid prenuptial agreement, it is a community debt even if it is only in one name. If the debt is in one name and there is a valid pre-nuptial agreement to keep all finances separate then it would be a separate debt. In addition, if there is not enough separate property to pay separate debts the community assets can be reached by creditors.

Filing Jointly

If both spouses need the protection of the bankruptcy court it is usually easier, more efficient and more economical to file jointly. A joint filing will only require one filing fee. Separate filings require each spouse to pay a filing fee.

All these must be listed whether filing jointly or separately:

  • Community assets    
  • Separate assets  
  • Community liabilities
  • Separate liabilities

If the couple files separately, they need to list everything anyway so it may make sense to file one time and list everything together.

Separate Households

If a couple has been separated for a while and set up two distinct households it might be easier to file separately. Sometimes the spouses cannot communicate well and one spouse doesn’t have all the information needed on the other spouse’s income and expenses. In that case it would likely be better to file an individual bankruptcy.

Sometimes spouses don’t want to communicate and feel as though they would rather not go through this process together.

Nothing in the law requires a couple to file jointly. The decision should depend on the specific circumstances of the couple involved.

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Image credit: Leo Reynolds