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Saturday, November 7th, 2009

Chapter 7 Bankruptcy Exemptions at Heart of Supreme Court Case

Earlier this week, the U.S. Supreme Court heard arguments in a case that could affect many Americans who seek financial relief from Chapter 7 bankruptcy. Here’s a look at what’s going on.

Background: Chapter 7 Bankruptcy

Chapter 7 bankruptcy (sometimes called liquidation), works by giving debtors a complete discharge of many non-secured debts. Though the debts are forgiven, some filers must sell off some of their property to raise money to pay whatever they can against the debts.

Filers are also entitled to keep specific items of property; these exemptions are determined by state law.

The Case: A Caterer’s Equipment

In the case before the Court…

  • A caterer filed for Chapter 7 bankruptcy. When she filed in 2005, she indicated on her forms that the equipment required to run her catering business was worth $10,718 – exactly the value of property her state permitted in exemptions.
  • An auctioneer valued her equipment. He estimated that her gear was worth closer to $17,000, which would mean she’d have to auction some of it off to repay her creditors.
  • Her trustee never filed an objection. William Schwab, the bankruptcy trustee assigned to the case, failed to file an objection before the deadline. Though he reportedly filed a motion in court to have the caterer sell her equipment to raise $10,718, she countered that, because of the missed deadline, this request was unfounded.

So far, the bankruptcy court and the appellate courts have sided with the caterer here, essentially ruling that, because the trustee did not file his motion in time, it cannot stand.

Possible Implications

It seems the Supreme Court justices have expressed two major concerns:

  • Trustees have insufficient time to review all their cases. This could lead to more oversights like the one in the caterer’s case and could promote bankruptcy fraud among unscrupulous filers.
  • Filers have motivation to undervalue their possessions. Naturally, if there’s a chance your trustee isn’t reviewing your case that carefully, that provides an incentive to underestimate the value of your possessions so you have a chance of keeping more stuff.

Take-Home Lesson

Reports indicate that the caterer who filed for bankruptcy clearly filled out her forms and indicated that she had no exempt property, which suggests that the error of careless oversight may indeed be her trustee’s. If you are filing for Chapter 7 bankruptcy, you may want to speak with a bankruptcy lawyer who can help make sure you take necessary steps to protect yourself and your property when you file.

Additional Resources

Summary of Significant Changes Implemented by BAPCPA in 2005 (PDF)

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Posted in Bankruptcy Courts | 9 Comments »

Sunday, November 1st, 2009

Bankruptcy Median Incomes Change Today

Debtors May Have 21 Days to File Under Old Income Levels

The U.S. Trustee Program and Department of Justice announced new bankruptcy median income numbers for the Chapter 7 means test, which affect bankruptcy petitioners who file on or after November 1.

For debtors who income now falls above the new median income, a 21-day grace period may be granted to file under the previous levels. For more information or to begin bankruptcy proceedings to meet the 21-day deadline, connect with a local bankruptcy attorney.

Median Income Tables

One part of the Chapter 7 means test, introduced in the 2005 bankruptcy reform laws, is to compare the income of the debtor with income levels for similar family sizes in the state. In each state (plus Washington, D.C., Puerto Rico and other territories), there is a set median for families of one-to-four people, plus additional levels for families of more than four.

The median income is the middle point of all incomes for each state and family size—half of families will fall above, and half below, the median income. The provision was introduced to help prevent abuse of chapter 7 bankruptcy.

Perhaps a sign of the current recession, with unemployment rising and many workers working below full-time hours, median incomes levels in many cases have fallen. However, income levels have also risen in certain cases. For more information, compare the new median incomes with the previous incomes at the U.S. Trustee web site.

Window to File Bankruptcy Under old Incomes

Under the means test, a debtor compares his income to the median for his state and family size; if his income is below the median, he "passes" that part of the test. Debtors whose incomes are above must look at state exemptions to possibly continue under Chapter 7, or must file under a Chapter 13 debt reorganization plan.

In the rare cases where an income level has lowered (such as a single-earner in Maine, which fell from $40,618 to $38,812) and now excludes a debtor whose income falls in that range, the bankruptcy court allows for a brief 21-day window to "pass" the means test under the previous median income levels.

While most income levels only changed a small amount, for those close to the median, the change could be the difference between a debt discharge under chapter 7 and a 3-to-5 year repayment plan under chapter 13.

For more information on the chapter 7 means test, new median income levels, and if you need to file in the next 3 weeks to qualify for chapter 7 bankruptcy, visit Total Bankruptcy and connect with an attorney about filing bankruptcy.

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Posted in Bankruptcy Filing Requirements, Bankruptcy News and Events | 5 Comments »

Thursday, February 5th, 2009

Was 2008 the Year of the Bankruptcy?

Times are indeed tough—more than one million Americans filed Chapter 7 and Chapter 13 bankruptcy last year.

As the U.S. economy sunk, the number of Chapter 7 and Chapter 13 bankruptcies rose 33 percent, according to data from U.S. bankruptcy courts compiled by bankruptcy data firm, Automated Access to Court Electronic Records.

Bankruptcy data shows there were 819,115 personal bankruptcy filings in the U.S. during 2007.

In 2008, that number rose to 1,086,130. While the number of bankruptcy filings in 2008 falls far short of the record 2.1 filings in 2005, it’s still a significant increase.

The number of U.S. personal bankruptcies in 2008 was the highest since the new bankruptcy law went into effect.

The Reason for the 2005 “Bankruptcy Rush”

In 2005, many consumers raced to file Chapter 7 bankruptcy before the bankruptcy reform law took effect.

After BAPCPA took effect, it became more expensive to file bankruptcy and some people weren’t eligible to file Chapter 7, making Chapter 13 bankruptcy more appealing to some.

Some States Hit Harder Than Others

Although the number of bankruptcy filings increased everywhere, some areas of the country seemed to be hit harder by the recession.

The greatest increases in per capita bankruptcy filings were seen in Nevada, Delaware, California, Rhode Island and Florida, where the effects of the collapse of the housing market, mass layoffs and a generally poor economy were particularly pronounced.

For the second year in a row, Tennessee had the highest per capita rate of personal bankruptcy filings.

Texas saw an increase of only 1,500 more Chapter 7 and Chapter 13 bankruptcies, making it the state with the smallest increase in bankruptcy filings.

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Posted in Bankruptcy and the Economy | No Comments »