Los Angeles Bankruptcy Law Monitor : Los Angeles Bankruptcy Lawyer & Attorney : Christine Wilton Law Firm : Southern California Chapter 13 & Chapter 7 Bankruptcy, Foreclosure

As a consumer debtor, you will usually have two options when deciding to file bankruptcy; Chapter 13 or 7 under the Bankruptcy Code.  The question is which is better?; and which one should you file?  The answers to these questions are as unique as your individual circumstances.

Under Chapter 7 of the Bankruptcy Code, you are declaring that you have no ability to pay your debts at all.  You are, in a sense, liquidating your estate.  From the moment you file your case under chapter 7, the trustee takes control and has the right to take any assets available to pay your debts.  However, you have certain rights to retain assets under California Code of Civil Procedure Sections 703 or 704.  This means, that you will be able to keep your home, cars, retirement accounts, personal belongings, up to the limits pursuant to the law. These cases usually conclude within about six (6) months.

Under Chapter 13, you are declaring that you have some disposable monthly income to apply toward your debts and you are asking the Court to allow you to restructure that debt over time and allow you to pay only what you can afford. 

Chapter 13 is, in my opinion, the best choice to save your home, dispute debts owed, and otherwise hold your creditors accountable for any mistakes in your debt obligations, accounting, collection activity, fraud or abuse.  These cases require a longer period of time, usually up to five (5) years, and there are additional reporting duties involved.  You are strongly discouraged from filing a chapter 13 bankruptcy without an attorney because of the additional local rules, accounting and reporting requirements. 

Most everyone has thought of filing bankruptcy as simply filling out a bunch of forms.  I would have said that before the BAPCPA in 2005.  Now, with the sub-prime mortgage meltdown and their complex financial contracts; scams, despair and desperation of the banking industry; and the complexities of the Bankruptcy Laws, you need to consult with your personal bankruptcy lawyer before your case is filed.  Your bankruptcy lawyer will save you time and money by reviewing your current financial situation and create strategic plan to eliminate your debt with the least amount of money out of your pocket.

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Let's talk about your retirement accounts as they relate to your decision to file for bankruptcy.  There are many varieties and vehicles for retirements savings that include pensions, 401k, 403b, IRA and Roth IRA accounts.  Perhaps there are others that I am not aware of.  As I have said before, DO NOT CASH OUT YOUR RETIREMENT TO PAY YOUR DEBTS.  Your retirement accounts are ONLY for retirement and should NEVER be accessed for any other reason. 

When you file bankruptcy, all of your assets become a part of your estate.  The trustee will have temporary control over that estate and can administer certain assets to pay debts.  However, some assets in your estate, including retirement accounts are exempt from being taken by the trustee. 

One great reason to hire an attorney to assist you in filing bankruptcy is pre-bankruptcy planning.  Your attorney will give you valuable advice before filing your bankruptcy case.  Converting non-exempt assets to exempt assets before filing a bankruptcy is not only non-fraudulent, your attorney has a duty to maximize this type of pre-bankruptcy planning.  Keep in mind the CA IRA has a "reasonably necessary" for retirement limit, in addition to limitations of contributions to only the tax deductible amount for each tax year.

The good news is yes, you can fund that IRA before filing bankruptcy.  Be sure to consult with your personal bankruptcy lawyer to ensure you're taking full advantage of your exemption rights.

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I believe that filing bankruptcy is a compassionate act.  I alleviate the suffering of my clients by assisting them to obtain relief from their debts through bankruptcy.  My clients are good people with severe financial hardship, who seek to transform their financial distress into financial freedom.

In case you haven't heard, bankruptcy has a history as old as religion itself.  The Bible itself even allows for forgiveness of debts, as Matthew B. Tozer and Ben E. Lofstedt wrote so eloquently.  Jill Lepore wrote, Annals of Finance, “I.O.U.,” in The New Yorker, which chronicles how we used to treat debtors in America.  My favorite sentence in that article reads, " . . .most people who fall into debt are victims of the business cycle, and not of fate or divine retribution."  Keep that in mind as you consider that it's okay for the likes of Chrysler, GM, and celebrities to file for bankruptcy, but not you.

I have the hardest time, standing by, watching the incredible suffering of humanity over debt.  Remember when the airline attendant says that in case of emergency you put the oxygen mask on yourself first?  The same applies to your finances.  Loving one's self starts with you.    When you put yourself and your family first, you can transcend the suffering and make your own choices in life, moment to moment. 

Law Professor Brent T. White recently wrote a paper entitled, "Underwater and Not Walking Away:  Shame, Fear and the Social Management of the Housing Crisis."  The media plays a huge role in supporting the "moral responsibility' to pay one's mortgage.  Read his paper and decide for yourself. What will you do in 2010 to put your self and your family first?

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Back in November, I explained to you the complexities involved in discharging student loans in bankruptcy.  These rules have not changed with the latest U.S. Supreme Court ruling in the case of United Student Aid Funds v. Espinoza.  The New York Times article, Bankruptcy Ruling in Student Loan Case points to the brief submitted by United that warned of "open flood gates" if the court were to rule in favor of the debtor in this case.  All this crying on the creditor side reminds me of the story of  the boy who cried wolf.  Unfortunately, this win for the debtors will not likely amount to a broad brush approach or change the dischargeability of student loans in bankruptcy; here's why.

First, we're dealing with the underlying chapter 13 bankruptcy case where neither the Debtor, nor the judge  followed the the "undue hardship" test.  Again, remember the hurdles that I laid out in my last article on this subject, Discharging Student Loans In Bankruptcy, and you will see that the Debtor, Espinoza, did not file or serve an adversary proceeding complaint on United. 

Second, the reason the Supreme Court ruled in favor of the Debtor in this case was simply because the Creditor, United, failed to timely object or appeal the Court's confirmation of the Debtor's plan.  United received notices from the Court regarding the chapter 13 plan and the Court's approval of it, which named the only debt in the plan as the student loan and United neither objected or appealed the Court's ruling.  So, United had notice of the Court's error and took no action.  Years later, when they tried to re-open the case, it was too late.

This decision is not about student loans as much as it is about bankruptcy procedure and that two wrongs don't make a right.  This is just another tool to use to protect consumer's rights where the lenders sit on their thumbs and fail to file timely objections.  As an aside, I must note that this was a unanimous decision by the Supreme Court, which is a very rare occurrence.

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Adversary Proceedings: what are they?  The simple answer to this question is that an adversary proceeding is a civil action in the Federal Bankruptcy Court; it's a lawsuit.  All adversary proceedings are governed by the Federal Rules of Bankruptcy Procedure "F.R.B.P." Part VII.  F.R.B.P. Rule 7001 provides that a party can file an adversary proceeding to recover money or property; to determine the validity, priority, or extent of a lien or other interest in property; to obtain the court's approval to sell property; to object to or revoke a discharge; to object to the an order of confirmation of a chapter 11, chapter 12, or chapter 13 plan; to determine the dischargeability of a debt; to obtain an injunction or other equitable relief; to subordinate any allowed claim or interest; or to obtain a declaratory judgment to any of the foregoing.  There are some exceptions stated in the Rule, but you get the idea.

From the moment you file for bankruptcy, your entire estate comes under the scrutiny of the trustee and the court.  Your bankruptcy lawyer's job is to protect your interests in your estate.  Sometimes this requires the additional work of filing an adversary proceeding.

Why are they used? Adversary proceedings are used to protect your estate.  As an example, I have a client whose home was in foreclosure at the time I filed a chapter 13 case on her behalf.  Upon reviewing her mortgage documents, I determined that I could possibly cramdown her mortgage because some persuasive case law supported this in her situation.  In order to gain the court's approval to cramdown her mortgage, I needed to file an adversary proceeding against the lender.  This is just one example of why we use adversary proceedings in bankruptcy cases.

Who can initiate them? Any party can file an adversary proceeding, but remember that an adversary proceeding has limited scope as discussed above.  Generally, the debtor will initiate an adversary proceeding to protect her estate from creditors who have not followed the law.

How do they affect bankruptcy proceedings?  Generally, an adversary proceeding will cause your bankruptcy discharge to be suspended, or put on hold, until your adversary case has been decided.  This is especially true if the subject of the adversary is to dispute your discharge. 

A knowledgeable bankruptcy attorney will first listen to your unique concerns and create a strategy that will help you to achieve your financial objectives with the least amount of liability.  One of the best reasons to file an adversary case is to protect your home from the predatory lenders who may have lost your note.  Talk to your bankruptcy lawyer today. 

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