Chapter 11 Bankruptcy Claims

At some point in their lives many people will receive a notice, that some company they have done business with has filed a Chapter 11 bankruptcy. The bankruptcy court sends the notice, because the company supposedly owes the person some money, and after reading the notice an ordinary person seldom has a good idea of what they need to do to protect themselves. As a creditor the person has the right to hire a bankruptcy lawyer to participate in the court proceedings on their behalf, but this is rarely a practical approach except for very large debts.

What the individual should do is to file a proof of claim with the bankruptcy court stating the amount of money that is owed to him or her. The form is available on the bankruptcy court web site. This will allow you to participate in the payments distributed by the court to creditors.

In most cases filing a proof of claim is in fact probably not necessary, but it is a good precaution to take. In a Chapter 11 bankruptcy a scheduled debt will normally participate in the distribution without the necessity to file a proof of claim. Presumably the reason a person receives the notice of bankruptcy is because their debt has been listed among the creditors.

The amount scheduled by the bankrupt company however, might be less than is actually owed and the only way to contest its sufficiency is to file a proof of claim. Furthermore, while bankruptcy petitions are public records, and you can go on line to figure out if your debt was scheduled, trying to find your way through a complex bankruptcy petition is no easy task. Filing a proof of claim to make sure you are in there tends to be a more feasible approach to protecting your interests.

Refinancing a Mortgage After Bankruptcy

When an individual goes through a Chapter 7 bankruptcy the amount owed on a mortgage note on her residence is discharged. However, the security interest the mortgage creates remains in affect. This means that the mortgage company can not force a debtor to make any payments on a mortgage after a bankruptcy filing, however the creditor may foreclose on the property and take possession, if the debtor does not make the mortgage payments. In most cases, if the debtor wants to keep the house, she continues to make the payments, the mortgage company continues to accept the money and everything works out fine.

A problem sometimes arises though, with borrowers attempting to refinance the mortgage several years after the bankruptcy. Mortgage companies in this situation are reluctant to refinance a debt that is discharged, because it is illegal for them to take action to collect on a discharged debt. Thus they often deny the refinance application to a customer, who has never missed a payment, and who would otherwise be a good candidate for the program.

Unfortunately there is not necessarily an easy solution to this problem. The situation would be solved, if the debtor reaffirmed the mortgage debt; however, this can only be done before the bankruptcy discharge. At the time the bankruptcy is pending though her bankruptcy lawyer may advise against reaffirming the mortgage, because of the personal liability that might create, if a foreclosure does take place. The problem might be avoidable by going to another lender, since the new bank would not be a creditor on the discharged debt, and would not have to worry about violating the law here. As a practical matter though a new lender can be less likely to approve the refinancing than the original lender.

Can I Reaffirm A Car Loan in Bankruptcy

When an individual files a Chapter 7 bankruptcy the discharge applies to secured debts, however the lender can still enforce the security interest. Thus when someone fails to make car payments after going bankrupt, the lender can repossess the vehicle, but it can not come after the debtor for additional funds, when the price the repossessed vehicle sells for is less than the outstanding loan.

In a Chapter 7 bankruptcy the debtor sometimes wants to enter a reaffirmation agreement on a car loan, which makes the debt fully enforceable, just as if the debtor had never filed the bankruptcy.

There are advantages of signing a reaffirmation agreement. Some car lenders will require the debtor to sign the reaffirmation agreement as a condition of keeping the vehicle, and the law gives them this right. Most secured lenders though seem happy to accept the payments whether or not there is a reaffirmation agreement and in this case the borrower will still own the property once the loan is paid off.

Anther advantage of signing a reaffirmation agreement is that signing the allows the lender to resume sending monthly statements, which helps him keep track of when payments are due. Furthermore, if you pay off a secured debt that has been reaffirmed it will show positively on your credit report.

The big disadvantage of reaffirming a car loan is that, if the debtor fails to keep up the payment the lender can still collect a deficiency after the property is repossessed. For this reason a bankruptcy judge will not approve the reaffirmation agreement, if he does not believes the debtor can keep up the payments. If the schedules on the bankruptcy petition indicate that the debtor cannot afford the loan, the court will presume that signing a reaffirmation agreement creates an unreasonable hardship. The debtor can present fact to the court however, that the court might not have been aware of and ask the judge to reconsider. For example, I once used the fact that a client had quit smoking after filing bankruptcy, which freed up a couple hundred dollars a month in income to make the car payment.

Inheritances During A Chapter 13 Bankruptcy

If an individual inherits property after filing bankruptcy the inherited property can be subject to creditor claims, if the person leaving the property dies within 180 days after the bankruptcy filing. The death is the key date in this rule. Normally after death probate takes a number of months. and it would be sometime, before the debtor actually receives the property. However, as long as the death occurred within six months of filing bankruptcy the trustee can claim the property.

This issue comes up more often in Chapter 7 bankruptcies than in Chapter 13. In most Chapter 13s the amount the debtor has to pay to his creditors is determined by his income, and acquiring an inheritance will not make a difference. If the debtor’s payments are based on the amount of his assets though, which is an alternate test in a Chapter 13 the inheritance will make a difference. Also if the inheritance is large enough it could force the debtor to switch from the income test to the asset test.

In a 2014 court case a debtor in Chapter 13 did receive an inheritance and tried to avoid increasing his payments on the grounds that it was more than 180 days past the filing date. The court however ruled that the 180 day rule only applied to Chapter 7. Unfortunately for the debtor the court said that in a Chapter 13 the inheritance could be considered until the Chapter 13 plan was completed, which is normally 5 years.

Living Trusts and Asset Protection

Although wills are the most common way to plan. who will receive property after the owner’s death, living trusts are a popular alternative to wills for estate planning. A living trust, which is also sometimes called a grantor trust or a revocable trust, is a trust you set up during your lifetime in which the person setting up the trust maintains full control over the property by naming himself as both the trustee and the beneficiary of the trust. During his lifetime the grantor will treat the property as his own and upon his death the property in the trust will be distributed according to the terms of the trust. The main reason living trusts are popular is because they enable the decedent’s estate to avoid putting the property through probate after the grantor’s death.

People sometimes ask whether putting property in a living trust will stop your creditors from taking it. Their feeling is that since the assets are no longer in their name someone trying to collect debts from the grantor should not be allowed to garnish the property. As a general rule this assumption is false. Since the grantor still has full control of the property a creditor who obtains a judgment against the grantor can attach his assets in the trust.

I refer to this as a “general rule,” because the laws on trusts are highly technical, and there are ways to set up trusts that will protect the owner’s property from creditors. The common living trusts though that are heavily marketed by lawyers and financial planners do not fall into this category. Therefore the best advise to someone, who is interested in using a trust for asset protection, is to consult an estate planning attorney, who can advise them of exactly what limitations on their control of the property they would have to accept to make it safe from creditor claims.

Tax Returns Of Individuals Filing Bankruptcy

A person filing a Chapter 7 bankruptcy must provide the trustee a copy of his most recent Federal Income Tax Return at least seven days prior to the creditors meeting. This requirement is contained in Section 521(e) of the United States Bankruptcy Code. If the debtor fails to meet this requirement the bankruptcy will be dismissed. A question arises though of what happens, if the debtor did not file a tax return for the most recent year, because his income was to low to require him to file. The debtor clearly has no obligation to provide such a return to the trustee, because he was not required to file it under the tax law. Some trustees have taken the position in this case however; that the Bankruptcy Code would then require the debtor to supply a copy of the last tax return he was required to file. If this is only a year or two back, I would advise the debtor to comply with the request on the basic principal that it is usually preferable to keep your bankruptcy trustee happy. If the debtor has not been required to file a return for a number of years though, it creates a greater problem, because the debtor probably has not saved his last tax return. Nor would he be likely to be able to obtain a copy from the IRS. In that case I think one can fall back on the part of the law that says the case will not be dismissed for failure to provide the tax return, since the failure is beyond his control.