Frequently Asked NM Bankruptcy Questions

Bankruptcy Law FAQ
by: Albuquerque Bankruptcy Lawyer, Don Harris

New Mexico Bankruptcy Frequently Asked Questions

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• Won't Bankruptcy destroy my credit for many years if not forever?

  No. This is a myth, promoted primarily by the credit card industry that desires for people to be afraid of bankruptcy. In fact, if someone is overwhelmed with debt, bankruptcy will usually improve a person's Fair Isaac Corporation (FICO) score within 18 months to two years. It is true that the bankruptcy filing can legally remain on a credit report for up to ten years under the Fair Credit Reporting Act. However, it tends to have a positive rather than negative effect over the long term.

  Here is why. If you have ever applied for a mortgage, you might remember the loan officer discussing "debt ratios," which relate to the percentage of available income that an individual has to service the debt that is being applied for. In the case of a mortgage, for instance, many lenders want total debt obligations (including mortgage, credit cards, other debt, and car payments) to be less than 40 percent of the borrower's gross income. Although not discussed as openly in other credit transactions, a person's total debt is always considered and factored into the decision to grant credit. The more debt you have, the less likely you are to be able to manage even more, which is directly reflected in your FICO score. Second, if you file for Chapter 7, for instance, and receive a discharge, you are precluded from filing another Chapter 7 and receiving a discharge for eight years. For that reason, a person is often a better credit risk the day after he files bankruptcy than the day before. Why? It is because if a person is overwhelmed with debt, she is a bankruptcy waiting to happen. However, after she files bankruptcy, there is no longer a significant risk, at least for another eight years. Creditors know this. In fact, many people have little difficulty obtaining a car loan (a five to six year note typically) immediately after they file for bankruptcy. Finally, creditors and the FICO credit score system look at the overall picture of a person rather than just one event. With good income and very responsible use of credit, a FICO score of over 700, while not typical, is possible within two years of a bankruptcy discharge.

• Will the Trustee sell my house or my car if I file for bankruptcy?

  No, absent unique circumstances. New Mexico has a very generous "homestead exemption" which protects a primary residence from creditors (other than the mortgage holder). In New Mexico, the homestead exemption is $60,000 per person, or $120,000 for a couple. That amount refers to the equity (the amount that the value of the home exceeds the mortgages) in a house. Most individuals have a lot less. The federal exemptions have less homestead protection, but the federal law offers other advantages to those with little or no equity in a house.

  With regard to automobiles, New Mexico law allows up to $4000 in equity in one motor vehicle per person. The federal exemption is slightly less and is adjusted with inflation. If people have a lien on a vehicle, they usually have very little equity. By the time a vehicle is paid off, it is usually worth less than the exemption amount. New Mexico law allows people who file for bankruptcy to choose either the federal exemption provisions or the state exemption provisions. Under the federal provision, there is something called the "pour over" or "wild card" exemption that can be used for people without significant equity in a homestead. Even if a person were to have a valuable, newer-model vehicle with no lien, for instance, he might be able to add the motor vehicle exemption and the "pour over" exemption together to protect the vehicle. By comparison, if you have several nice vehicles that are paid off or an antique car or race car, then those types of vehicles will not be protected.

• Can I keep my retirement and pension accounts?

  Usually, yes. As long as the retirement accounts or retirement plans are qualified under the Internal Revenue Code as tax exempt retirement assets or protected under the Employees Income Retirement Security Act (ERISA), then those retirement accounts are generally exempt under state and federal law no matter what the value. Analyzing retirement accounts, as they relate to ERISA, the Internal Revenue Code, and the Bankruptcy Code should be done with the assistance of a qualified bankruptcy attorney.

• Didn't Congress change the law to make it almost impossible to file for bankruptcy anymore?

  No. Congress did change the law in ways which make filing for bankruptcy more cumbersome and therefore slightly more expensive than before. However, most people who would benefit by filing for bankruptcy will still qualify for Chapter 7 bankruptcy relief, which normally allows them keep their property while discharging (eliminating) their general unsecured debt. With the assistance of an experienced bankruptcy lawyer such as Don Harris to walk you through, the process is very easy to navigate. To learn more about Chapter 7 bankruptcy and the new "means test," click here.

• What about the Means Test?

  The United States Supreme Court is set to decide an important question regarding one of the more controversial aspects of the new bankruptcy law-the "means test." The means test was perhaps the cornerstone of the 2005 amendments to the Bankruptcy Code.

  After nearly five years of bankruptcy attorneys and bankruptcy courts struggling with the issues, the Supreme Court should provide some much-needed clarification. The issues are complex, and bankruptcy lawyers throughout New Mexico, and indeed throughout the United States, will be carefully watching what the Supreme Court has to say about this important bankruptcy law issue.

  To learn more about the new "means test", click here.

• What may a Bankruptcy Lawyer say to their clients?

  The United States Supreme Court issued an important ruling, during the spring of 2010, which regulates consumers' relationship with their bankruptcy attorneys. The Court focused on a provision in the Bankruptcy Code, section 526(a)(4) which was added by Congress in the 2005 amendments, that prohibits a bankruptcy attorney from advising his client to "incur more debt in contemplation of such person filing [a bankruptcy case]." This new language caused great concern among bankruptcy lawyers.

  There are several situations where incurring debt, even though a bankruptcy may be imminent, is perfectly appropriate. For instance, no creditor or trustee could seriously object if someone used her credit card to purchase groceries for her family prior to filing for bankruptcy, especially if she had no cash because it had all gone to service the interest payments on her credit cards.

  There are several situations were incurring debt prior to a bankruptcy is problematic, and perhaps fraudulent. One example would be purchasing several costly goods on credit knowing full well that the person was going to file bankruptcy without either the means or intent to pay the debt.

  One reading of the new provision could have been read to prohibit a bankruptcy attorney even from advising a cash-strapped consumer that it was o.k. to use his credit card to buy necessities whenever he were considering bankruptcy. A Minnesota law firm that represents clients who file bankruptcies sued to have the law declared unconstitutional for that reason, as it potentially prevented lawyers from giving clearly legal and ethical advice. The Supreme Court, in an opinion authored by Justice Sotomayor, disagreed, and ruled that the statute was constitutional. However, in so doing, the Court clarified that the statute is not to be read so broadly.

  The United States Attorney General argued that the statute was constitutional because it should be read as only prohibiting advice that was intended to manipulate the bankruptcy process. The Supreme Court essentially agreed with the Justice Department, and interpreted the statute as referring only the situation where someone purposely "loads up" on debt in order to manipulate the bankruptcy laws.

  Justice Sotomayor wrote the important opinion for a unanimous court that is very important for bankruptcy attorneys and bankruptcy law. Milavetz v. United States. http://www.supremecourt.gov/opinions/09pdf/08-1119.pdf. The Court ruled that the prohibition only comes into play when a person is advised to incur debt if the "impelling reason" was the decision to file for bankruptcy. The Supreme Court could have been clearer on drawing the line of improper advice. The Court did assist bankruptcy lawyers by implying that the type of advice that would likely get a bankruptcy lawyer into trouble would be advice that would harm her client if followed.

  There are situations where incurring debt, in particular secured debt that will be retained after bankruptcy, could be appropriate under some circumstances or inappropriate under others. The test is whether the purpose for acquiring the debt was to "load up" on debt to "manipulate" the Bankruptcy Code, and whether the decision to file bankruptcy in the future was the "impelling" reason for acquiring the new debt.

  Congress, in 2005, may have intended to make bankruptcy relief less desirable and make bankruptcy lawyers more careful about how they advise their clients. However, after many years, the courts have given experienced bankruptcy lawyers sufficient guidance so that they can advise their clients how to legally and ethically take full advantage of the benefits the law provides. Because of the new law, however, you need an experienced bankruptcy attorney, such as the Bankruptcy Law Firm of Don Harris, more than ever.

• When did Federal Bankruptcy Laws change?

  Congress passed sweeping changes to the Bankruptcy Code and this law represents a major reform of the U.S. bankruptcy system. The Federal Bankruptcy law is titled "Title 11 of the United States Code (11 U.S.C. §§ 101 - 1330)". Changes instituted by this new law took effect on October 17, 2005. Since the law has been recently passed, it is impossible to be certain how the changes will be implemented and interpreted by bankruptcy trustees and judges. It is certain though that under this new law that there will be far more hurdles for the debtor to jump over to get a fresh start. The process is likely to be more expensive for the debtor, and there will be an extended period of uncertainty as the players work their way through the changes.

• What are the changes in the new Federal Bankruptcy Laws?

  There have been a number of changes and it is important to go over each of them with your attorney if you are seriously considering filing for bankruptcy. The following list is an overview areas with significant changes.

  Eligibility for Bankruptcy - A "means test" determines whether a debtor can file Chapter 7 bankruptcy.

  Barriers to Filing - Debtors must obtain approved credit counseling before they can file bankruptcy.

  Chapter 13 - Disposable income is calculated using the IRS collection standards, rather than allowing the judge flexibility.

  Multiple Bankruptcies - The interval between Chapter 7 discharges has increased by two years. A Chapter 13 may not be filed within 4 years of a Chapter 7 discharge.

  General - The law imposes new duties on debtors and their attorneys, and failure to timely perform these duties will result in dismissal of the case or lifting of the automatic stay.

• What is a Bankruptcy Court?

  Each of the 94 federal judicial districts handles bankruptcy matters, and in almost all districts, bankruptcy cases are filed in the bankruptcy court. Bankruptcy cases cannot be filed in state court.

• Where are the Bankruptcy Courts in New Mexico?

  The United States Bankruptcy Court, District of New Mexico, is located at:
  Dennis Chavez Federal Building & U. S. Courthouse
  500 Gold Avenue SW, Tenth Floor
  Albuquerque NM 87102
  
  Matters are also heard in Las Cruces and Roswell in the federal courthouses located at:
  United States Courthouse and Federal Building
  200 E. Griggs Las Cruces NM 88001
  
  United States Courthouse and Federal Building
  500 N. Richardson Roswell NM 88201

• What is a Bankruptcy Petition?

  A Bankruptcy Petition is a formal request for the protection of the federal bankruptcy laws. You can file a petition in a district where you have been domiciled or had a residence, principal place of business, or principal assets for 180 days OR for a longer part of 180 days than in any other district. You may also file in a district where an "affiliate," general partner, or partnership has a pending case.

• What is a Bankruptcy Estate?

  A Bankruptcy Estate is all legal or equitable interests of the debtor in property at the time of the bankruptcy filing. The estate includes all property in which the debtor has an interest, even if it is owned or held by another person.

• As a creditor, are there filing deadlines?

  Creditors have until 60 days after the first date set for creditor's meeting to file a complaint under § 727(a). § 727(a) allows objections to the discharge of all debts because of misconduct including transfer, destruction or concealment of property; concealment, destruction, falsification or failure to keep financial records; making false statements; withholding information; failing to explain losses; failure to respond to material questions; having received a discharge in a prior case filed within the last 8 years.

• What are exempt assets?

  These are assets that you must list on your Statement of Financial Affairs and schedules and that you may shield from your unsecured creditors. The analysis is complex, and your exemptions must be properly asserted. The law does not allow for creditors to make people homeless or destitute, and thus insulates certain assets as being "exempt" from creditor collection efforts or bankruptcy proceedings. Those assets are called "exemptions." The assets that you may protect in this way are defined by federal and state law. In about fifteen states you may chose either of the two laws, while in most states you may use only the state exemptions. New Mexico is a state that is very generous to people filing for bankruptcy with regard to exemptions, because in New Mexico, a person filing for bankruptcy can choose either the federal or state exemption statutes.

  Exemptions vary widely. For example, under the federal statute a couple filing jointly may exempt a total of just over$40,000 in equity (at the time this page was written) in their home, approximately $20,000 for each of them-this is commonly called the "homestead exemption." The federal exemption statutes are adjusted annually for inflation. Thus, if the home is worth $100,000 and has a $50,000 mortgage, the Trustee on behalf of the creditors can claim only $10,000 (the difference between the equity of $50,000 and the $40,000 federal homestead exemption). In a circumstance such as the one described above, it would probably be better to claim the New Mexico exemptions rather than the federal exemptions. The New Mexico exemption is $60,000 per person in a homestead, $120,000 for a couple. If the New Mexico exemptions were claimed there would be no value for the Trustee to claim on behalf of creditors in the home (the $50,000 in equity is far less than the $120,000 New Mexico homestead exemption).

  Under either the New Mexico or federal exemptions, most people can exempt the equity in their vehicle, reasonable household goods, reasonable personal effects and jewelry, reasonable tools, and their retirement accounts or plans. The exemption statutes and their analysis under specific situations are complex, however, and generalizations cannot be relied upon

• What are non-exempt assets?

  Every asset that is not exempt! Everything not specified under the law. The Bankruptcy Code requires that you give all these nonexempt assets to the bankruptcy trustee. The trustee will then liquidate (sell off) these nonexempt assets for the benefit of your creditors. However, in actual practice, over 85 percent of Chapter 7 filings are "no-asset filings" that is, there are no assets left for unsecured creditors after the exempt assets have been claimed.

• What is a "automatic stay"?

  An Automatic Stay is an injunction that automatically stops lawsuits, foreclosure, garnishments, and all collection activity against the debtor the moment a bankruptcy petition is filed.

• What is a "Bankruptcy Trustee"?

  A Bankruptcy Trustee is a private individual or corporation appointed in all Chapter 7, Chapter 12, and Chapter 13 cases to represent the interests of the bankruptcy estate and the debtor's creditors.

• What is wage garnishment?

  If your creditor sues you and obtains a court judgment against you which you don't pay, he may collect that judgment by having the court order your employer to take no more than 25% of your paycheck and pay that money directly to the creditor. A wage garnishment is any legal or equitable procedure through which some portion of a person's earnings is required to be withheld by an employer for the payment of a debt. Most garnishments are made by court order. Other types of legal or equitable procedures include IRS or state tax collection agency levies for unpaid taxes and federal agency administrative garnishments for non-tax debts owed the federal government. The filing of a bankruptcy will immediately stop most wage garnishments, and, in many cases, will enable the person to get some or all of the garnished wages back.

• Who can be considered a "secured creditor"?

  Secured creditors have a lien giving them specific rights to the property which is the collateral for their claim. Most often, those rights are created by, and described in, a deed of trust on real property, a security agreement on personal property, or a judgment lien. Secured creditors have the best chance of getting relief from the automatic stay or "adequate protection payments" to prevent a decline in the equity available to secured their claim. In a bankruptcy, the parties that often have the most to lose and the least leverage in protecting their interests are unsecured creditors. Their claims against the debtor are low priority, falling at the bottom of the list.

• How important is the Bankruptcy Questionnaire?

  The bankruptcy schedules that The Bankruptcy Law Firm of Don Harris will prepare for you are based upon the information you provide to the firm. All information you furnish regarding your creditors must be complete and accurate. It is your responsibility to assure the accuracy of that information when you deliver the completed Questionnaire. Your creditors who do not receive notice of your bankruptcy because of an incorrect address or account number might not be discharged (the elimination of the debt) and you would still owe them money.

• How do I find out the details of who my creditors are?

  If you are not sure you know all your creditors you may want to get a report from a credit reporting agency. If you have recently been denied credit, you are entitled to a free credit report from the reporting agency. Instructions for obtaining this report should be on the letter you received denying credit. You can obtain your credit report from Equifax online at http://www.equifax.com, by mail at Equifax Credit Information Services, Inc., PO Box 740241, Atlanta, GA 30374, or by telephone at 1-800-685-1111. You can obtain a copy of your credit report from TransUnion online at http://www.transunion.com, or mail at TransUnion, LLC, Consumer Disclosure Center, PO Box 1000, Chester, PA 19022, or by telephone at 1-800-888-4213. TransUnion accepts telephone requests only if you have been denied credit within the last 60 days and TransUnion was the reporting agency. Anyone can get one free credit report from all three credit bureaus once per year by going to www.annualcreditreport.com. Don Harris's Bankruptcy Law Firm may be able to order a more complete credit report.

• Are You Personally Liable for Your Business's Debts?

  Are You Personally Liable for Your Business' Debts?

  Copyright 2010 Nolo

  
  by Bethany K. Laurence
  

  Learn whether a business creditor can come after your house, bank account, or other personal property.

  If your business is having trouble paying its bills, you may be worried about whether a creditor can come after your personal assets. Can a creditor raid your personal bank account? Garnish your wages? Foreclose on your house?

  To answer these questions you need to understand whether you are personally liable for your business’s debts. If you aren’t personally liable for your business’s debts, you have a lot less to worry about: a creditor can only go after your business’s bank account and assets if your business doesn't pay its bills; creditors can't take your home or other personal property. But if you find out you are personally liable for your business’s debts, you have a lot more to lose.

  Which debts are you personally liable for? First, know that every business owner who has employees, no matter whether the business is organized as a corporation, LLC, partnership, or sole proprietorship, is personally liable if the business doesn’t pay the taxes it withheld from employees’ paychecks. Second, for other types of business debts, your business structure as well as what kind of contract or purchase order you signed usually determines whether or not you’re personally liable for a business debt. Let’s take a look.

  Sole Proprietorships and Partnerships

  If you're operating your business as a sole proprietorship (or “DBA” or as an independent contractor), you and your business are legally the same, which is another way of saying that you personally owe every penny that your business can’t pay. So if your business doesn’t have enough cash or assets to pay its debts, creditors can, and sometimes will, take your personal assets – or at least the assets that aren’t protected by state exemption laws.

  This is also generally true for general partnerships -- the partnership debt belongs to each partner personally -- with this added twist: Each partner is personally liable for 100% of the business’s debts. This means that if there aren’t enough business assets to pay the partnership’s debts, and your partners are broke, creditors can take your partner’s personal assets to pay all of the business’s debts, not just your pro rata share of the debts.

  Corporations and LLCs

  If your business is organized as a corporation or LLC, you and your business are separate legal entities. As such, in theory you could have no personal liability for the debts of your business, meaning that creditors can’t take your house or other personal assets to pay your business’s debts, even if your business can’t pay them.

  However, there are many ways for a shareholder or LLC member to become personally liable for business debts; in fact, most owners of small businesses are personally liable for at least some business debts. Here are the most common ways the owner of a corporation or LLC can become personally liable.

  Signing a Personal Guarantee

  Because most suppliers, banks, and landlords know that shareholders or LLC members don’t have personal liability for the corporation or LLC’s debts, they often won’t extend credit or loan money to a small LLC or corporation without the owner’s personal guarantee. If you signed a personal guarantee for a particular loan, lease, or contract, you promised that you would pay it personally if your business did not. Put another way, every time you personally guaranteed that you would repay a debt, you deliberately gave up your limited liability for that debt. You volunteered to let the creditor sue you to take your personal assets if the business couldn’t pay the debt.

  Check to see if you signed a personal guarantee on all of your business contracts; for example, a loan for a business vehicle or business equipment, trade terms with a supplier, a bank line of credit, or a commercial lease.

  Offering Your Property as Collateral

  Banks typically require the owners of small corporations or LLCs to put up their house or other real estate as security for a loan. If you secured a business loan or debt by pledging property such as a house, boat, or car, you are personally liable for the debt, and if your business defaults on the loan, the lender or creditor can sue you to foreclose on the property and use the proceeds to repay the debt.

  Signing a Contract in Your Own Name

  You may also have given up your limited liability if you were careless about signing purchase agreements and service contracts. Sometimes these agreements display the personal name of the business owner without the name of the corporation or LLC. If you signed an agreement in your personal name and not on behalf of the corporation or LLC, you’re personally liable for the underlying debt, even if it was the supplier’s mistake. If you’re not sure whether you have given a personal guarantee on an agreement or loan, check both the language of the agreement and the signature block to see whether you signed it in your name or in your capacity as an owner or officer.

  Example: Talia signs a loan contract as Talia Smith, CEO of Book Nook, Inc., so only her business is liable to repay the loan. But she signs her commercial lease as just Talia Smith, so she will be personally liable to the landlord if her business can’t pay the rent.

  Using Credit Cards or Personal Loans to Fund the Business

  You may have used credit cards or home equity loans to obtain funds for your business, which definitely means you are personally liable for those debts. (You are almost always personally responsible for making payments on your credit cards, even if they have your business name on them, under the terms of the application you signed.)

  Fraud, Misrepresentations, or Sloppy Record keeping

  If you personally misrepresented or lied about any facts when you were applying for a loan or credit on behalf of your corporation or LLC, you could be held personally liable for the debt. Likewise, if you failed to maintain a formal legal separation between your business and your personal financial affairs, creditors could try to hold you personally responsible for the business’s debts under a theory known as “piercing the corporate veil.” This happens when a court finds that your corporation or LLC is really just a sham and that it is you personally operating the business. One way creditors try to pierce the corporate veil is by showing that you didn’t observe the formalities imposed on corporations and LLCs by state law. For instance, you may have made important corporate or LLC decisions without recording them in minutes of a meeting. Or you may have paid a number of the business’s bills out of your personal checkbook or with a personal credit card. Even corporations or LLCs owned by a single individual or a married couple have to obey these rules and formalities.

  Next Steps

  If you've determined you’re personally liable for all or some of your business’s debts, you risk being sued personally for the debt. If you think it’s likely you’ll be sued, you’ll want to make sure that your business pays the debts off, either in full or by negotiating a settlement for less than you owe. If that’s not possible, you may be able to file for Chapter 7 personal bankruptcy to wipe out your personal liability for your business debts. For more information on your options.

• When You Can't Pay Your Business Debts: Personal Liability and Bankruptcy Options?

  When You Can't Pay Your Business Debts: Personal Liability and Bankruptcy Options

  Copyright 2010 Nolo

  
  by Attorney Shannon Miehe
  

  If your business is in the red, take steps to protect your personal assets.

  If your business is in distress -- you owe a lot of money but you can't pay -- your creditors will probably threaten legal action against you personally. How much they can collect will depend on how your business is organized, whether you personally guaranteed any repayments, and whether you decide to file for bankruptcy.

  Payroll Taxes: You're Personally On the Hook The IRS holds all business owners personally liable for unpaid payroll taxes, regardless of your business's structure.

  Sole Proprietors and Partnerships

  If you're a sole proprietor, you and your business are legally one and the same, so you're personally responsible for all debts. If there isn't enough money in the business to pay these debts, creditors can and will take your personal assets.

  In a general partnership, each partner is personally liable for the entirety of the business's debts (and any partner can usually bind the entire partnership to a business deal -- a scary combination). This means that if there isn't enough money in the business to pay the debts, and your partners are broke, creditors can take your personal assets to pay all of the business's debts, not just your share.

  Corporations and Limited Liability Companies

  If your business is organized as a corporation or a limited liability company (LLC), your personal assets are usually protected from business creditors --unless you specifically gave up your so-called "limited liability" protection. Unfortunately, you may have done so if a bank or other creditor required a personal guarantee and/or personal security before loaning you money, leasing you space, or extending credit. It's a common practice. Such personal guarantees undo your limited liability, allowing the creditor access to your personal assets if the business can't cover the debt. A creditor can also ask a business owner to secure a business debt by pledging specific personal property, such as a house, boat, or car.

  The Bankruptcy Option

  If your business bank account is empty and you're in a lot of debt, you might be considering bankruptcy. Although it won't guarantee you'll get to keep your house or other property, it can at least give you some breathing room. And you'll be able to keep the basic necessities of life (clothing, furniture, and so on), as well as some or all of your equity in your house and car.

  Business vs. Personal Bankruptcy

  If you're a sole proprietor, you can file for either Chapter 13 or Chapter 7 bankruptcy. Either can be used for personal debts or business debts.

  If you're a corporate shareholder, LLC owner, or partner in a partnership and you've signed personal guarantees or pledged collateral for business loans, putting your business through bankruptcy won't protect your personal property.

  So let's assume you want to file for personal bankruptcy, either using Chapter 7 or Chapter 13. In a Chapter 7 bankruptcy, your assets (except for property that's exempt under state or federal law) can be sold to pay off your creditors. At the end, all your debts that are eligible for discharge in bankruptcy will be wiped out.

  In a Chapter 13 bankruptcy, you propose a repayment plan where you repay part or all of the debt over three to five years. You don't lose any property in a Chapter 13 bankruptcy; instead, you pay off your debts using your income.

  How Bankruptcy Might Help

  When you file for bankruptcy, something called an automatic stay immediately stops your creditors from foreclosing on your house or any other personal property. This can buy you time, if nothing else.

  Beyond this, the type of debt you have will affect how and whether bankruptcy can help you. Bankruptcy wipes out most unsecured debts (for example, credit card bills and lawsuit judgments), but secured debts are a bit different. If you pledged property -- such as your home -- as collateral for a loan, the creditor is entitled to take the property, even if you file for bankruptcy. Although you may not have to pay back what you owe on the loan, even if it's more than your home is worth, you will lose your home. You may have the right to keep some of your equity in the home, however.

  Filing for Chapter 13 might be a better option if you're faced with losing property you really want to keep. In Chapter 13, you can include the debt in your repayment plan, spreading the payments out over five years. This gives you a better chance of making good on the debt, which will allow you to keep your property.

  If you're in imminent danger of losing your family's home or livelihood, get in touch with a knowledgeable small business attorney with bankruptcy experience.

• Tax Consequences When a Creditor Writes Off or Settles a Debt?

  Tax Consequences When a Creditor Writes Off or Settles a Debt

  Copyright 2010 Nolo

  
  

  The IRS may count a debt written off or settled by your creditor as taxable income to you.

  If you settle a debt with a creditor for less than the full amount, or a creditor writes off a debt you owe, you may owe money to the IRS. The IRS treats the forgiven debt as income, on which you may owe income taxes.

  Why the IRS Can Assess Taxes on Forgiven Debts

  Here's how it works. Creditors often write off debts after a set period of time -- for example, one, two, or three years after you default. The creditor stops its collection efforts, declares the debt uncollectible, and reports it to the IRS as lost income to reduce its tax burden. The same is true when you negotiate a debt reduction. The creditor will report the amount you didn't pay as lost income to the IRS.

  Of course, the IRS still wants to collect tax on this money, and it will turn to you for payment. Because you no longer have to pay the full amount of the debt, the IRS treats the forgiven amount as gained income, for which you should pay income taxes.

  Foreclosures and property repossessions. This rule applies even to debts you owe after a house foreclosure or property repossession. In this situation, the law can seem especially cruel: Not only have you lost your property, but you'll also have to pay income tax on the difference between what you originally owed the lender and what it was able to sell your property for (called the "deficiency").

  However, the Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648) changed this for certain loans during the 2007, 2008, and 2009 tax years only. The law provides tax relief if your deficiency stems from the sale of your primary residence (the home that you live in).  Here are the rules: 

  • Loans for your primary residence. If the loan was secured by your primary residence and was used to buy or improve that house, you may generally exclude up to $2 million in forgiven debt. This means you don’t have to pay tax on the deficiency.
  • Loans on other real estate. If you default on a mortgage that’s secured by property that isn’t your primary residence (for example, a loan on your vacation home), you’ll owe tax on any deficiency.
  • Loans secured by but not used to improve primary residence. If you take out a loan, secured by your primary residence, but use it to take a vacation or send your child to college, you will owe tax on any deficiency.  

  If you don’t qualify for an exception under the Mortgage Forgiveness Debt Relief Act, you might still qualify for tax relief. If you can prove you were legally insolvent, you won’t be liable for paying tax on the deficiency. See "Exceptions on Reporting Income," below, for details on the insolvency exception.

  IRS Reporting

  Any financial institution that forgives or writes off $600 or more of a debt's principal (the amount not attributable to interest or fees) must send you and the IRS a Form 1099-C at the end of the tax year. These forms are for reporting income, which means that when you file your tax return for the tax year in which your debt was settled or written off, the IRS will make sure that you report the amount on the Form 1099-C as income.

  Even if you don't get a Form 1099-C from a creditor, the creditor may very well have submitted one to the IRS. If you haven't listed the income on your tax return and the creditor has provided the information to the IRS, you could get a tax bill or, worse, an audit notice. This could end up costing you more (in IRS interest and penalties) in the long run.

  Exceptions to Reporting Income

  There are several reporting exceptions stated in the Internal Revenue Code. For example, if the financial institution issues a Form 1099-C, you do not have to report the income on your tax return if:

  • the cancellation or write off of the debt is intended as a gift (this would be unusual)
  • you discharge the debt in Chapter 11 bankruptcy, or
  • you were insolvent before the creditor agreed to settle or write off the debt.

  Insolvency means that your debts exceed the value of your assets. To figure out whether or not you were insolvent, you will have to total up your assets and your debts, including the debt that was settled or written off.

  Example 1: Your assets are worth $35,000 and your debts total $45,000, so you are insolvent to the tune of $10,000. You settle a debt with a creditor who agrees to forgive $8,500. You do not have to report any of that money as income on your tax return.

  Example 2: Your assets are worth $35,000 and your debts still total $45,000, but the creditor writes off a $14,000 debt. You don't have to report $10,000 of the income, but you will have to report $4,000 on your tax return.

  If you conclude that your debts exceed the value of your assets, include IRS Form 982 with your tax return. You can download the form off the IRS's website at www.irs.gov.

  If you are suffering from debt troubles, get help from Solve Your Money Troubles: Get Debt Collectors Off Your Back & Regain Financial Freedom by Robin Leonard (Nolo).

• Repossession: What Creditors Can and Can't Take?

  Repossession: What Creditors Can and Can’t Take

  Copyright 2010 Nolo

  
  by Monica Steinisch
  

  Find out what property your creditors can repossess, and what’s off limits.

  If you’re behind in your loan payments, you may be worried that the creditor can repossess something you own -- your car, your home, the new refrigerator. Repossession is what happens when a creditor takes back property you have used as collateral (security) for a loan because you have defaulted on the loan agreement. There are strict rules as to what a creditor can and cannot take if you default on a loan.

  Typically, you default on a loan if you don’t make your monthly payments in full and on time. But you could also be in default if, for example, you don't maintain insurance coverage on a car you financed. Though credit agreements differ and laws vary from state to state, here are some general guidelines for what creditors can and can’t repossess.

  What Can Be Repossessed?

  Below is list of what creditors can repossess if you default on a loan. If a creditor is allowed to repossess an item, the creditor does not have to go to court and get a judgment before it repossesses the property.

  Your home. Your home loan is secured by the property you purchased with it. If you do not make your mortgage payments, the lender can repossess the home. This is what happens in a foreclosure. After the lender evicts you, it sells the property to recover as much of the outstanding loan balance as possible.

  Most auto loans, whether obtained through the dealer, a bank, a credit union or any other lender, give the creditor the right to repossess the vehicle if you default on the car loan. The lender is not required to give prior notice. After repossessing your car, the lender will sell it to recover the money you owe. If there is a shortfall between your outstanding loan balance and the sale price, you may be held responsible for paying it, plus the creditor’s repossession expenses.

  Rent-to-own items. This includes furniture, electronics, appliances, and anything else you rent with the option of purchasing.

  Any property used as collateral. A debt is secured if a specific item of property (called collateral) is used to guarantee repayment of the debt. If you don't repay the debt (or are in default on the loan for some other reason), most states let the creditor take the property without first suing you and getting a court judgment.

  For example, say you have a car that you do not owe any money on, and you offer it as collateral on a loan for a new business. If you fail to fulfill the terms of that loan agreement, your car can be taken. (Repossess is a bit of a misnomer in this sense, because the lender may never have owned an interest in the item that is being taken.)

  If you are unsure whether a debt is secured, check your credit agreement. Your credit agreement will also detail the things that would put you in default on the loan (for example, being behind on your payments or not maintaining proper insurance).

  What Can’t Be Repossessed?

  Here’s a list of what creditors cannot repossess if you default on a loan. Keep in mind, however, that the creditor can always sue you in court to recover the money you owe. If the creditor wins the lawsuit, it may be able to garnish your wages or put a lien on your property.

  Property not specifically named as collateral. If something is not specifically named as collateral for a debt, it cannot be repossessed. So, for example, say you have an unsecured personal loan and a car loan, both with A&B Bank, and you default on the personal loan. As long as you continue to make payments on the car loan, the bank cannot repossess your car because it was not specifically named as collateral for the personal loan.

  Credit card purchases. Credit card debt is unsecured, which means the credit agreement does not name anything as collateral for the loan. Therefore, items purchased with a credit card cannot be repossessed.

  Property named as collateral in an unenforceable contract. A contract that does not comply with your state’s legal requirements may be void and unenforceable. A lawyer can review your contract for validity and advise you on your consumer rights. (For tips on finding a lawyer, see How to Find an Excellent Lawyer.)

  To learn more about repossession, and to get practical do-it-yourself information about dealing with debt, read Solve Your Money Troubles: Get Debt Collectors Off Your Back & Regain Financial Freedom, by Robin Leonard and John Lamb (Nolo).

• An Overview of Chapter 13 Bankruptcy

  An Overview of Chapter 13 Bankruptcy

  Copyright 2010 Nolo

  
  

  The basic steps involved in a typical Chapter 13 bankruptcy case.

  Chapter 13 bankruptcy, sometimes called reorganization bankruptcy, is quite different from Chapter 7 bankruptcy. In a Chapter 7 bankruptcy, most of your debts are wiped out; in exchange, you must relinquish any property that isn't exempt from seizure by your creditors. In a Chapter 13 bankruptcy, you don't have to hand over any property, but you must use your income to pay some or all of what you owe to your creditors over time -- from three to five years, depending on the size of your debts and income.

  Chapter 13 Eligibility

  Chapter 13 bankruptcy isn't for everyone. Because Chapter 13 requires you to use your income to repay some or all of your debt, you'll have to prove to the court that you can afford to meet your payment obligations. If your income is irregular or too low, the court might not allow you to file for Chapter 13.

  If your total debt burden is too high, you are also ineligible. Your secured debts cannot exceed $1,010,650, and your unsecured debts cannot be more than $336,900. A "secured debt" is one that gives a creditor the right to take a specific item of property (such as your house or car) if you don't pay the debt. An "unsecured debt" (such as a credit card or medical bill) doesn't give the creditor this right.

  The Chapter 13 Process

  Before you can file for bankruptcy, you must receive credit counseling from an agency approved by the United States Trustee's office. (For a list of approved agencies, go to the Trustee's website at www.usdoj.gov/ust and click "Credit Counseling and Debtor Education.") These agencies are allowed to charge a fee for their services, but they must provide counseling for free or at reduced rates if you cannot afford to pay.

  In addition, you'll have to pay the filing fee, which is currently $274, and file numerous forms. For line-by-line instructions on filling out the required bankruptcy forms, see Chapter 13 Bankruptcy: Keep Your Property & Repay Debts Over Time, by Stephen Elias and Robin Leonard (Nolo).

  The Chapter 13 Repayment Plan

  The most important part of your Chapter 13 paperwork will be a repayment plan. Your repayment plan will describe in detail how (and how much) you will pay each of your debts. There is no official form for the plan, but many courts have designed their own forms.

  How Much You Must Pay

  Your Chapter 13 plan must pay certain debts in full. These debts are called "priority debts," because they're considered sufficiently important to jump to the head of the bankruptcy repayment line. Priority debts include child support and alimony, wages you owe to employees, and certain tax obligations.

  In addition, your plan must include your regular payments on secured debts, such as a car loan or mortgage, as well as repayment of any arrearages on the debts (the amount by which you've fallen behind in your payments).

  The plan must show that any disposable income you have left after making these required payments will go towards repaying your unsecured debts, such as credit card or medical bills. You don't have to repay these debts in full (or at all, in some cases). You just have to show that you are putting any remaining income towards their repayment.

  How Long Your Repayment Plan Will Last

  The length of your repayment plan depends on how much you earn and how much you owe. If your average monthly income over the six months prior to the date you filed for bankruptcy is more than the median income for your state, you'll have to propose a five-year plan. If your income is lower than the median, you may propose a three-year plan. (To get the median income figures for your state, go to the United States Trustee's website, www.usdoj.gov/ust, and click "Means Testing Information.")

  No matter how much you earn, your plan will end if you repay all of your debts in full, even if you have not yet reached the three- or five-year mark.

  If You Can’t Make Plan Payments

  If for some reason you cannot finish a Chapter 13 repayment plan -- for example, you lose your job six months into the plan and can’t keep up the payments -- the bankruptcy trustee may modify your plan, or the court might let you discharge your debts on the basis of hardship. Examples of hardship would be a sudden plant closing in a one-factory town or a debilitating illness.

  If the bankruptcy court won’t let you modify your plan or give you a hardship discharge, you might be able to convert to a Chapter 7 bankruptcy or ask the bankruptcy court to dismiss your Chapter 13 bankruptcy case (you would still owe your debts, plus any interest creditors did not charge while your Chapter 13 case was pending). For information on your alternatives in this situation, see Chapter 13 Bankruptcy: Keep Your Property & Repay Debts Over Time, by Stephen Elias and Robin Leonard (Nolo).

  How a Chapter 13 Case Ends

  Once you complete your repayment plan, all remaining debts that are eligible for discharge will be wiped out. Before you can receive a discharge, you must show the court that you are current on your child support and/or alimony obligations and that you have completed a budget counseling course with an agency approved by the United States Trustee. (This requirement is separate from the mandatory credit counseling you must undergo before filing for bankruptcy -- you can find a list of approved agencies at the Trustee's website, www.usdoj.gov/ust; click "Credit Counseling and Debtor Education.")

• Reasons to Use Chapter 13 Bankruptcy Instead of Chapter 7 Bankruptcy

  Reasons to Use Chapter 13 Bankruptcy Instead of Chapter 7 Bankruptcy

  Copyright 2010 Nolo

  
  

  Sometimes it makes sense to file for Chapter 13 bankruptcy instead of Chapter 7 bankruptcy.

  Many debtors choose not to file for Chapter 13 bankruptcy because it requires repayment of at least a portion of their debts (unlike Chapter 7 bankruptcy, which wipes out many debts entirely ).

  In some situations, however, Chapter 13 bankruptcy is the better bankruptcy option. Not only that, but certain debtors don't get to choose: Not everyone is eligible for Chapter 7 bankruptcy, so Chapter 13 will by the only option available to some filers.

  Here are some good reasons to file for Chapter 13:

  You cannot file for Chapter 7. You won't be allowed to file for Chapter 7 if you cannot meet some new requirements imposed by the 2005 revisions to the bankruptcy law. Under these new rules, you cannot file for Chapter 7 if both of the following are true:

  • Your current monthly income over the six months prior to your filing date is more than the median income for a household of your size in your state (go to the website of the United States Trustee, www.usdoj.gov/ust, and click "Means Testing Information" to see the median figures for your state).
  • Your disposable income, after subtracting certain expenses and monthly payments for debts you would have to repay in Chapter 13, exceeds certain limits set by law. These calculations are commonly referred to as the "means test" -- if you have the means to repay a certain amount of your debt through a Chapter 13 repayment plan, you flunk the test and are ineligible for Chapter 7 bankruptcy. (For more information, including a link to an online calculator you can use to see whether you pass the means test, see The Bankruptcy Means Test: Is Your Income Low Enough for Chapter 7 Bankruptcy?)

  The means test can get fairly complex -- and, to make matter worse, Congress has its own definitions of "disposable income," "current monthly income," "expenses," and other important terms, which sometimes operate to make your income seem higher than it actually is. You can find step-by-step instructions to determine if you qualify for Chapter 7 under these new rules in How to File for Chapter 7 Bankruptcy, by attorney Stephen Elias, attorney Albin Renauer, and Robin Leonard, J.D. (Nolo).

  In addition, if you have received a Chapter 7 bankruptcy discharge within the last eight years, or a Chapter 13 discharge within the last six years, you may not file for Chapter 7 bankruptcy.

  You are behind on your mortgage or car loan, and want to make up the missed payments over time and reinstate the original agreement. You cannot do this in Chapter 7 bankruptcy. You can make up missed payments only in Chapter 13 bankruptcy.

  You have a tax obligation, student loan, or other debt that cannot be discharged in Chapter 7. You can include these debts in your Chapter 13 plan and pay them off over time.

  You have a sincere desire to repay your debts, but you need the protection of the bankruptcy court to do so. This might be the case if creditors are coming after you, or if you simply require the formal structure and deadlines the Chapter 13 process provides in order to follow through on your good intentions.

  You have nonexempt property that you want to keep. When you file for Chapter 7 bankruptcy, you get to keep only exempt property -- property that is protected from creditors under state or federal law. You have to give your nonexempt property to the bankruptcy trustee, who can sell it and distribute the proceeds to your creditors.

  In Chapter 13, you don't have to give up any property. Instead, you repay your debts out of your income. So, if you have nonexempt property that you can't bear to part with, Chapter 13 might be the better choice.

  You have a codebtor on a personal debt. If you file for Chapter 7 bankruptcy, your codebtor will still be on the hook -- and your creditor will undoubtedly go after the codebtor for payment. If you file for Chapter 13 bankruptcy, the creditor will leave your codebtor alone, as long as you keep up with your bankruptcy plan payments.



Pursuant to 11 U.S.C. §528(a)(4) we are required to state the following:  We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.



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Don Harris Law, P.A., is an Albuquerque New Mexico based bankruptcy law firm which provides United States Bankruptcy legal services and advice throughout the state. The majority of its clients reside in the Albuquerque, New Mexico, area, i.e., Albuquerque, Bernalillo, Rio Rancho, Las Lunas and Belen. But the firm can also represent clients statewide in Hobbs, Las Cruces, Clovis, Farmington and other New Mexico cities. Don Harris represents clients who reside in New Mexico and also New Mexico residents residing in out-of-state jurisdictions. Bankruptcy law, as practiced by Don Harris Law, P.A., addresses all of a client's concerns; legal, financial, and emotional. Don attempts to settle bankruptcy cases through negotiation. If negotiation is unsuccessful then the trial skills of Don and his firm the firm are brought into play. Don Harris is a well-known and respected Albuquerque, New Mexico, lawyer. Don Harris not only provides the legal bankruptcy advice and guidance expected of an experienced lawyer, he also works with other professionals such as financial advisors, CPAs and mental health counselors to provide the firm's clients with many of the services needed to get through their financial and personal challenging times.

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