BANKRUPTCY FACTS

EVERYTHING YOU WANTED TO KNOW ABOUT BANKRUPTCY

BUT WERE AFRAID TO ASK

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Bankruptcy Facts Everything You Wanted To Know About Bankruptcy But Were Afraid To Ask Consumer Education Series 1st Edition Author: Thomas J. Cesta, Esq. Contributing Editor: William W. Fife III, Esq. For information, please contact: Law Offices of Fife & Cesta, PLC 1811 S. Alma School Road, Suite 270 Mesa, AZ 85210 Main Number: (480) 850-6541 Fax Number: (866) 352-7974 www.FifeCestaLaw.com Copyright 2012 All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording, email, or any information storage and retrieval system, without the express written permission.

LEGAL DISCLAIMER This firm is a debt relief agency as prescribed by the U.S. Bankruptcy Code. We also help people eliminate their debts.

This book does not constitute legal advice. If you would like to obtain legal advice you should meet with an attorney to review your particular facts and circumstances.

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Contents Contents 3 Bankruptcy Myths 5

Myth 1 I will lose everything if I file for bankruptcy. 6 Myth 2 Bankruptcy will hurt my credit. 7 Myth 3 If I file for bankruptcy I will not be able to buy a home or car for 10 years. 7 Myth 4 No one will give me a credit card again. 8 Myth 5 Only bad people do not pay their bills. 9 Myth 6 I caused the problem, not the bank. 10 Myth 7 Banks only lend to people who can easily afford to pay back the loan. 11 Myth 8 Bankruptcy is bad for the country. 12 Myth 9 Bankruptcy is immoral. 12 Myth 10 Bankruptcy will hurt the banks. 14

The Positive Credit Impact of Bankruptcy 15 How Much Does A Bankruptcy Hurt My Credit Score? 15 How Long Will It Take To Bring My Credit Score Back Up? 18

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But What About Obtaining Credit? Will The Bankruptcy Affect My Ability To Get A Loan? 19 What Types Of Loans Will I Be Able To Get After Bankruptcy? 21

When Will My Creditors Stop Harassing Me? 23 Why File If I Can Still Scrape By? 25 The Difference Between Chapter 7 And Chapter 13—Which One Is Right For Me? 32

Chapter 7 Bankruptcy 33 Chapter 13 Bankruptcy 35 WHAT TYPE DO I QUALIFY TO FILE? 38

Will I Lose My Property? 40 Do I have to give up my car? 41 My house is upside down, do I have to give it up? Should I? 43

How Much Will Bankruptcy Cost? 46 Bankruptcy Dos And Don'ts 50 Wrapping Up 53 About the Authors 54

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Bankruptcy Myths

Do Not Let Assumptions Stop You From Learning About Your Options In Bankruptcy

Bankruptcy—the prospect sounds so much worse than it is. Most consumers fear bankruptcy, even to the point of complete financial ruin. Businesses on the other hand see bankruptcy for what it really is—a financial tool to get back on track.

Bankruptcy is an important decision, not to be taken lightly. However, many people have opinions about bankruptcy which are just not valid. The following are 10 of the most common bankruptcy myths feared by our clients.

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Myth 1 I will lose everything if I file for bankruptcy.

Fact: In most cases you will keep your car and your household goods, and most other things you own; even your savings can be protected prior to filing. Every state either has exemptions or uses the federal exemptions. Exemptions are protections provided by law that protect assets from being taken by creditors or lost through bankruptcy. These exemptions are fairly realistic and most of your property will be protected. Anything that is not protected you probably already sold to make ends meet. And if you didn’t sell it yet, you still can prior to filing for bankruptcy to use for fees, or to spend on something exempt.

Your bankruptcy attorney can help you decide how to cover your assets.1

1 Only an attorney can advise you on your exemptions. If you prepare your case on your own, or use a document preparer, you may lose more from missed exemptions, or by not properly protecting assets, than an attorney would have cost you. Penny-wise, but pound-foolish, as they say.

For more information on this topic, see Chapter 5: Will I Lose My Property?

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Myth 2 Bankruptcy will hurt my credit.

Fact: Your credit is usually already bad because of late payments, high balances, charged-off accounts, collections accounts a foreclosure, or repossession, etc. However, the average consumer that files bankruptcy will see their post-petition credit score increase 100 or more points in one year or less after the bankruptcy discharge. And with good management, you could be back in the 700s in two years. For more information on this topic, see Chapter 2: The Positive Credit Impact of Bankruptcy.

Myth 3 If I file for bankruptcy I will not be able to buy a home or car for 10 years.

Fact: You may qualify for an FHA home loan as early as 2 years after your discharge.2

2 FHA has other limitations on loans that do not relate to the bankruptcy. This article does not purport to identify all of the FHA requirements.

Car loans are frequently obtained while the bankruptcy is still pending. Earlier

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loans may have a higher interest rate, but you can usually refinance these in about a year. Often only about a year after the discharge you can get a loan with an interest rate at least comparable to what you would have gotten before filing, maybe better. For more information on this topic, see Chapter 2: The Positive Credit Impact of Bankruptcy.

Myth 4 No one will give me a credit card again.

Fact: Most filers get credit card offers within weeks of filing for bankruptcy protection. Think of it this way: when you get the discharge, you will not be able to obtain another Chapter 7 bankruptcy discharge for 8 years, or Chapter 13 for 4 years. In short, you are a better risk than someone who has not filed. For more information on this topic, see Chapter 2: The Positive Credit Impact of Bankruptcy.

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Myth 5 Only bad people do not pay their bills.

Fact: Many good people have found themselves unable to repay a debt, often because of a change in finances, or because of something the bank did to make it more difficult. Some of your Heroes may well be on that list. Abraham Lincoln filed for bankruptcy long before he became our 16th President. So did Rembrandt, Mark Twain, Oscar Wilde, PT Barnum, Debbie Reynolds, Mickey Rooney, Dorothy Hamill, Johnny Unitas, Burt Reynolds, Larry King, Donald Trump, and Dave Ramsey, to name a few. Most people who apply for bankruptcy protection are simply drowning in debt. Most will never need to file bankruptcy again. For them, it is a choice between maximizing the bank’s bottom line, and providing for their family. Bankruptcy is the solution they need.

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Myth 6 I caused the problem, not the bank.

Fact: Most consumers blame themselves for having financial difficulty, and most feel that they owe the companies that took a chance on lending them money. However, credit card companies, banks and other financial institutions do not have your best interest at heart. They are in it for the money. Your difficulties maximize the profits for banks and financial institutions. Most consumers do not have a degree in finance. The banks exploit this. Banking policies and procedures are set by people who have graduate level degrees in finance in order to maximize profit. For example, due dates are seldom the same day each month, which makes it harder to schedule the payment and results in more frequent late payments, and late fees. It is not an even playing field. It is a bit like playing poker where you only see your cards, but the other player gets to see your cards and theirs.

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Myth 7 Banks only lend to people who can easily afford to pay back the loan.

Fact: Most of us believe that a company will not lend us money unless we can afford to repay it. The truth is, the more difficult it is for us to repay the loan, the more money the companies will make from lending to us. Although the risk is higher, so is the reward.

It makes perfect sense that banks make more money on people who have difficulty repaying the loan. When money is already tight borrowers are more likely to make a late payment; and the bank then charges late fees, and may also raise the interest rate, often by double or triple the introductory rate. Banks may also lower the credit limit and then charge over-the-limit fees. Banks justify this by saying you have proven to be a bad risk so the decreased credit limit and increased interest rate protects them. But in fact the increase in interest rate just makes the loan harder to repay, and makes the minimum payment higher. This means more late payments and more bank profits.

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Myth 8 Bankruptcy is bad for the country.

Fact: Bankruptcy and Consumer Debt are neither good nor bad. Consumers with debt make banks rich, but the consumers cannot afford to buy new clothes and other consumables. Consumers who get a bankruptcy discharge are often able to afford to spend money with local companies: and local companies need to sell product in order to continue to retain employees. These consumers can also better afford to send their kids to college, which means higher incomes for the kids, and more money to spend in the economy.

Myth 9 Bankruptcy is immoral.

Each consumer should seek their own guidance on this one. Let’s face it, attorneys are not often thought of as a source for moral guidance. Seriously though, the bible and the Koran both instruct on debt forgiveness.

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Bankruptcy is an important decision, not to be taken lightly. But financial questions are only moral issues when it is a choice between legal and illegal. After that, it is just a math problem. Businesses understand this; and intuitively, so do we as consumers, when it is a business filing for bankruptcy. A business is in business to make money. If some of the business’ obligations are preventing the business from turning a profit to benefit the shareholders, then the business needs to address the situation. Occasionally, bankruptcy is the best method.

It is harder to see this as just math problem when it is personal, but individuals and families must also consider the bottom line. When the household cannot make ends meet, something will be left unpaid. Unlike businesses, real people cannot live without food and water; and in modern society we also need electricity, gas, transportation, clothes, etc. Children need an education and adults must plan for retirement. Some individuals and families need to do something extreme to restore their financial health. Sometimes the best solution is bankruptcy.

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Myth 10 Bankruptcy will hurt the banks.

Fact: Most bankruptcy filers have been paying their debts for 5 years before even considering the bankruptcy option. In the typical credit card situation, this will mean about 25% interest, and minimum payments designed to pay back the debt over a 25 to 30 year period. In such cases the banks will have already recovered 109% of the original principal before a bankruptcy is ever filed.3

Your bankruptcy will only mean less profit to the bank, and also a write-off.

Rather than simply fearing the myths surrounding bankruptcy, schedule a free consultation today and learn the truth about bankruptcy.

Call now to schedule a free consultation.

(480) 850-6541

3 See the following section, Bankruptcy, A Financial Option

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The Positive Credit Impact of Bankruptcy

How Much Does A Bankruptcy Hurt My Credit Score?

Let’s face it, one of the biggest fears about bankruptcy is your future access to credit. A quick Google Search suggests that bankruptcy is going to drop your credit score by 100 to 300 points. But is that really true?

4 Image courtesy of Nutdanai Apikhomboonwaroot / FreeDigitalPhotos.net

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The truth is that most people who are considering filing for bankruptcy have already been struggling to pay their bills, and many have been late on their payments multiple times, or they have stopped paying some or all of their bills altogether. Payment history with multiple late or unpaid accounts has already driven the credit score down. The bankruptcy may be the latest negative mark, but it is only a part of the reason for the lower score.

Also, the lower the score is, the less the bankruptcy can impact it. FICO scores are from 300 to 850. But, a 300 is actually a very difficult score to get. There are 5 categories FICO considers to determine your score. You have to bottom out in every category to get 300. Most bankruptcy filers are already in the low 500s at the time of filing. And while bankruptcy is a negative mark as an adverse public record, it is a positive mark in that it not only reduces the amount owed, but it also stops the reporting of late payments.

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The Five FICO Categories

It is likely true that if you have a credit score of 800, that you can expect a 300 point drop; but someone with a credit score of 800 that is considering bankruptcy is probably someone that has been robbing from their retirement accounts and savings to pay the creditors. And most of the time this is money they would get to keep in a bankruptcy. But if they do not file for bankruptcy, at some point the money will run out and the late payments will happen. When that starts happening, the credit score will drop anyway.

Even if there is an initial drop in your credit score, the financial companies want you to believe that it is permanent. This ignores the element of time. In fact,

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any initial drop will be quickly erased because of positive changes, such as having less debt and no longer having late payments.

Your credit score will not change overnight, but it will take less time than you think. Once the discharge is recorded, your credit score will begin to improve. The impact of the bankruptcy depends on how long it has been since the discharge was entered. Over time your credit score will go up even without doing anything.

How Long Will It Take To Bring My Credit Score Back Up?

You can usually expect to have a score back in the mid 600s within a year. It is even possible to get into the 700s in two years, though it is more likely that you will be in the upper 600s in that timeframe. The bankruptcy filing will stay on your credit for 7 to 10 years, depending on which chapter you filed. However, the older the information is, the less impact it has on your score.

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But What About Obtaining Credit? Will The Bankruptcy Affect My Ability To Get A Loan?

Generally, the answer is no, though it will affect what the terms of the loan will be. Almost everyone who files gets credit card offers as soon as the discharge is entered. Some people even get offers before the discharge is entered. And most people get car loan offers before the discharge is entered.

The reason for this is that creditors treat credit like crack, and they see us as addicts. Someone entering bankruptcy has chosen to enter a treatment program that will get them off credit, and back onto solid financial ground. But your creditors do not want you to recover. They want you addicted because it is how they earn a profit. So even before you complete the treatment program they will start plying you with a free taste of credit.

And this tactic works, mostly because people filing for bankruptcy think they will never have credit again. So

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when the creditors make their offers, many people feel lucky to have the chance to use credit again.

It is a good plan for your creditors. If you file a Chapter 7 case, you will not be able to file another for 8 years. Because of this, if you default, the creditor can sue you and garnish wages, and there is little you can do to stop them, so they have less risk. You will be able to file a Chapter 13 in 4 years, but a Chapter 13 requires you to make monthly payment through the bankruptcy court for three to five years; so, a creditor may still get paid.

Also, even though the bankruptcy makes you a better risk, because you have less debt to pay and few options if you cannot pay, the creditors will still be able to impose high interest rates. However, if you can wait a year before getting a loan your credit will have improved so that the interest rate you have to pay is not as high; and after 6 months in the new loan you may even be able to refinance for a rate which is lower.

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One important note is that some lenders will try to ding you twice for the same information. Your credit score takes the bankruptcy into account. If the lender is saying that it needs to consider the score AND the bankruptcy, you might want to try another lender.

What Types Of Loans Will I Be Able To Get After Bankruptcy?

Most loans will be available to you as soon as your discharge is entered. However, it will take a few years before you will be able to get a mortgage. For an FHA loan, you will need to wait two years after your discharge, and meet other eligibility requirements. Some conventional loans will take longer. However, as stated above car loans and credit cards will usually be available immediately.

A bankruptcy is not something anyone wants to need. But filing bankruptcy is the fresh start many people do need. If you are struggling to pay your bills, then before you dip into your savings, which are likely exempt, you

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should consider whether you are going to truly be able to solve the problem that way, or whether you are just postponing the inevitable.

Everyone’s situation is unique. At the very least you should seek a consultation with a qualified bankruptcy attorney to learn about how a bankruptcy will affect you in your present condition.

Call now to schedule a free consultation.

(480) 850-6541

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When Will My Creditors Stop Harassing Me?

If you are being hounded by collection calls and letters, retaining an attorney is an important step to getting the peace of mind you need. Upon retaining an attorney and notifying the creditors that you have retained an attorney for the purpose of filing for bankruptcy, most creditors are barred by federal law from contacting you further to collect on the debt. Instead the collector has

5 Image courtesy of Idea go / FreeDigitalPhotos.net

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to contact your attorney to discuss the matter. So, the numerous calls you are receiving and are afraid to answer, can stop right away.

If a creditor knows you have retained an attorney for the purpose of filing bankruptcy and has not yet filed a law suit against you, many creditors will opt to wait before taking any further litigation action. Upon retaining an attorney for bankruptcy, the goal should be to file your case within three months. Any longer than three months and you run the risk of the creditor pursuing litigation against you for the debt.

If you are being sued or already are being garnished by a creditor who obtained a judgment against you, you need to act fast and get a bankruptcy filed. Retaining an attorney will not stop the law suit, nor will retaining an attorney stop a garnishment. Only filing for bankruptcy, with the power of the automatic stay, will prevent the law suit from continuing or stopping the garnishment.

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Why File If I Can Still Scrape By?

Whether you should consider bankruptcy depends on many factors, not the least of which is what chapter you would need to file. Although there are six types of

6 Image courtesy of scottchan / FreeDigitalPhotos.net

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bankruptcy under the US Bankruptcy Code, there are only two types that most people will need to consider: Chapter 7 or Chapter 13.

A Chapter 7 bankruptcy discharges debts, but no liens; and you may have to give up some assets. A Chapter 13 bankruptcy also discharges debts, but it can extinguish some liens, and reduce what you owe with some others. You can also usually keep all of your non-exempt assets. However, a Chapter 13 bankruptcy also requires you to make periodic payments of your disposable income to a bankruptcy trustee for a period of three to five years, but a Chapter 7 does not. Also, a Chapter 7 is essentially complete in 3 to 6 months, but a Chapter 13 takes 3 to 5 years.7

In evaluating what chapter you are eligible to file, an attorney will conduct a means test calculation. This calculation subtracts expenses from income, to determine disposable income. If there is little or only a

7 See the following section for a more complete discussion of the differences between Chapter 7 and Chapter 13.

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minimal amount to pay the creditors, then you may well qualify for a chapter 7 bankruptcy.

However, what chapter you qualify to file is not the end of the question. It is also important to consider the amount of debt that will be discharged. If you only have $100 disposable income, but you also only have $5,000 unsecured debt, you would probably be wise to attempt to negotiate the debt, or continue to make payments rather than file for bankruptcy.

In contrast, if you have $500 disposable income, but $80,000 in general unsecured debt a bankruptcy might be the right option. In this case, you will usually be filing a chapter 13 which will require you to pay into a plan. If you make 60 monthly payments of $500, you will pay $30,000, but you will then get a discharge of the remaining $50,000.00 of debt.

It could also be true that you will have enough disposable income and little enough unsecured debt and other obligations to have a 100% plan—that is, a plan that pays

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100% of the unsecured creditor claims. However, this may also be very beneficial to you.

Consider these examples:

A consumer, let’s call him Michael owes $40,000.00 in credit card debts. His credit cards have interest rates of 25% (not unusual after a few late payments). At this rate, in order to pay off the debt in just 10 short years, he will need to pay $909.97 a month. The interest alone is $833.33 for the first month. That means that if Michael pays $833.33 each month, the principal will never be reduced and he will owe the debt for the rest of his life.

The average “minimum payment” required by credit card companies is designed to require 25 to 30 years of payments. If Michael paid $833.83, it would be just enough to pay off the cards in 30 years. After 5 years of paying $833.83 a month Michael would have paid $50,029.81, but he would still owe $39,941.66. This is

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because $49,971.46 of what he paid would have been interest.

Also, every time Michael was late with his payments he would incur late fees on top of the regular payment; and every late payment would hurt his credit.

If Michael has little enough disposable income that he qualifies for a Chapter 7 bankruptcy, then he could file a Chapter 7 and the debt would be discharged in about 3 to 6 months. But if Michael had enough disposable income that he needed to file a Chapter 13, Michael would still benefit from the bankruptcy.

To pay off the debt in 30 years without filing bankruptcy, Michael would need to have at least $833.83 disposable income a month. But 30 years is a long time to wait for solvency. What if Michael had this amount, but instead filed bankruptcy. Assume that Michael will pay $2,500 in attorneys’ fees as part of his plan, and 8% to the Trustee for administering the plan.

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Michael has enough disposable income to be in a 100% plan. This is because interest is frozen for most of your general unsecured creditors. Michael would pay all of his disposable income each month, $833.83, and in about 55 months he would pay off the general unsecured creditors and get his discharge.8

So Michael has a choice: pay his creditors $833.83 for 30 years; or file a Chapter 13 bankruptcy and be done in less than 5.

A bankruptcy discharge brings you back to “zero”; but from negative, zero looks pretty good. After the discharge, you can save or invest any disposable income you have, building your nest egg, rather than the banker’s.

Another important consideration is whether there are liens you would also like to strip, or secured debts you would like to reduce. If Michael had a first and second 8 There are many factors that affect how many payments will be required, too many to cover in this example. However, no chapter 13 plan will be more than 60 months in length before the discharge can be issued, even if the plan pays less than 100%.

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mortgage on his home, and he owed more for the first mortgage than the home was worth, Michael could also remove the lien held by the second mortgage as part of the Chapter 13.

And if Michael had a vehicle for which he owed more than it was worth, he could also do a cramdown, in which what he owes on the vehicle is reduced to the value of the vehicle.9

Even if Michael qualified for a Chapter 7, he may still want to file a Chapter 13 just to take advantage of a lien strip and cramdown.

Every jurisdiction has different filing guidelines and exemptions. To determine the pros and cons of filing, meet with an experience bankruptcy attorney today.

Call now to schedule a free consultation.

(480) 850-6541

9 There are important specifics to consider regarding lien strips and cramdowns. Be sure to discuss these options with your bankruptcy attorney.

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The Difference Between Chapter 7 And Chapter 13—Which One Is Right For Me?

Although there are six types of bankruptcy under the US Bankruptcy Code, there are only two types that most consumers will need to consider: Chapter 7 and Chapter 13.

A Chapter 7 bankruptcy discharges debts, but no liens; and you may have to give up some assets. A Chapter 13

10 Image courtesy of Gregory Szarkiewicz / FreeDigitalPhotos.net

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bankruptcy also discharges debts, but it can extinguish some liens, and reduce what you owe with some others. You can also usually keep all of your assets. However, a Chapter 13 bankruptcy also requires you to make periodic payments of your disposable income to the Trustee, but a Chapter 7 does not. Also, a Chapter 7 is essentially complete in 3 to 6 months, but a Chapter 13 takes 3 to 5 years.

The following sections give more details of what to expect in each bankruptcy chapter.

Chapter 7 Bankruptcy A Chapter 7 bankruptcy is a basic liquidation. This means that you discharge your debts11

11 Not all debts are subject to discharge. Some debts, like child support, most taxes, and student loans automatically survive; whereas others can be declared non-dischargeable, if the creditor actively opposes the discharge, though this is a rare occurrence.

without needing to pay into a Plan. In order to get this discharge, you will have to surrender any assets that are not exempt. However, every state has exemption laws; and most petitioners

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usually have few assets that are not exempt. You will get to keep any exempt assets.

The Chapter 7 discharges personal liability, but not liens. So property which is secured will remain secured. You can surrender the security, a car with a loan against it for example; but if you want to keep the car, you will have to pay it off or continue to make payments to that creditor.12

Once you complete your pre-filing class13

12 There are specific processes for each of these. Consult your attorney to discuss these options.

you will file your petition. About a week later you will get a letter from the Trustee asking you to complete a questionnaire and asking for copies of certain documents. You will then attend a 341 hearing with the Trustee and us about 4 weeks after filing. Besides completing a financial management course, this is often the last thing you need to do in your case. Your discharge can be entered 60

13 The Consumer Credit Counseling course is required to be completed before filing for both a Chapter 7 and a Chapter 13 bankruptcy, and not more than 180 days prior to filing. However, this course is available online, takes about 90 minutes, and can be completed in your own home.

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days after the 341 hearing, and is usually issued within 60 to 75 days.

If the Trustee determined that you had no assets to liquidate, then the Trustee will issue a report and request to be relieved from further obligations as trustee. Once this happens, your case will be closed. However, if the Trustee feels that there are assets that can be liquidated, like income tax refunds for the year in which the bankruptcy was filed or for any years prior that you have not already received and spent the refund, then the Trustee will keep the case open until the funds are received and distributed. After the distribution, the case will be closed.

Chapter 13 Bankruptcy A Chapter 13 will usually last for 3 to 5 years. Upon filing, you will also receive a questionnaire and document request from the Trustee; and you will attend a 341 hearing.

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Your attorney and you will prepare a Plan. The Plan will specify what payments you will make, and how often. Plans can be very simple, with the same amount due each month for a number of months, or very complex, with several periods, or even every month having a different payment amount due. However, the simpler the Plan is, the easier it will be to get it confirmed.

Once the Trustee receives the Plan, the Trustee will review it and make recommendations. You will then discuss these with your attorney, and either addresses these in the Stipulated Order of Confirmation, or with an Amended Plan. However, once your Plan is confirmed, you will generally simply complete its terms. However, if you have unexpected difficulties, you can file to modify your Plan.

Your case will not be longer than 5 years, though it could be shorter if your plan is a 100% repayment plan.14

14 For a discussion of how a 100% payment plan is still a huge benefit for you, see the section above titled Why File If I Can Still Scrape By.

The Plan requires you to commit all of your disposable income for the Plan Period. However, there are pretty

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reasonable expense guidelines. You can also usually keep all or most of your assets, whether or not these are exempt.15

Keeping your assets is important, but there are more significant advantages to a Chapter 13 Plan. One is that if you have a vehicle and you owe more than it is worth, then if you entered into the loan more than 910 days before your petition was filed, you can reduce what you owe for the vehicle down to its present value. If, for example, you owe $25,000.00 for a vehicle, but it is only worth $15,000.00, then you can pay for it through the Plan and reduce your payments.

Another significant advantage to a Chapter 13 is a lien strip for a residence. With your residence, if you have more than one mortgage, but the home is worth less than the first mortgage, you treat ALL junior mortgages as unsecured debts. This will allow you to pay for your

15 While this is an advantage, this is not usually the best reason to be in a Chapter 13. This is because there are usually few assets that are not exempt, and also because you will have to make plan payments for 3 to 5 years.

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commitment period, and at the end of that time the lien will also be discharged.16

WHAT TYPE DO I QUALIFY TO FILE? We will perform a means test calculation to determine what your options are. The means test determines if you must file a Chapter 13, or if you can take your pick of either a Chapter 7 or a Chapter 13.

There are three ways to qualify under the test. The first is to determine whether your income is less than or equal to the median for your size household, and if so you can file either type of bankruptcy.17

This is state specific, and the guidelines can change every six months.

If your income is greater, then we subtract your allowed expenses from your income to determine your disposable income. If this calculation leaves you in the negative, or up to no more than $117.08 per month, then

16 There are specific requirements to ensure that this is handled properly. Make sure you hire an attorney with experience handling this issue. 17 This is a discussion of the Means test only. There may be other limitations to consider, such as prior bankruptcy filings.

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you still qualify to file either. If the calculation leaves you with more than $195.42, then you must file a Chapter 13. But if you are between these numbers you may still qualify to file either, depending on how much general unsecured debt will be discharged.

There are many factors to consider, and the most important things your attorney can do for you are to help you understand the pros and cons of filing bankruptcy, determine what chapters you can file under, and the impact each chapter will have for you.

Call now to schedule a free consultation.

(480) 850-6541

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Will I Lose My Property?

Whether or not you will keep most things is largely up to you. Every state has exemption laws so that you will retain many things following bankruptcy. Which laws apply depends on how long you have been in the jurisdiction before filing, and where you were before. As long as you have been in Arizona for the last two years, Arizona’s laws apply. Some, if not all of your equity in your vehicle will be protected, as well as your household

18 Image courtesy of digitalart / FreeDigitalPhotos.net

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goods, your big screen t.v., business equipment, retirement accounts, etc.

However, if some asset is not exempt or partially exempt, you may be able to prepare before filing your petition so that you protect the value of the asset. Perhaps you sell non-exempt assets, then buy exempt ones. Or instead, you may choose to retain the non-exempt asset, and agree to pay the value of it to the Trustee.

With prior planning, most of your assets can be protected.

Do I have to give up my car?

In most cases, the answer is no.

The exemption in an automobile is $5,000.00, or $10,000.00 if you are disabled and have handicap plates. Each petitioner gets one automobile exemption, but a filing couple can put the entire amount on one vehicle.

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If yours is a joint filing, and you have two cars, and one is worth $2,000.00 and the other is worth $8,000.00, then the $2,000.00 vehicle will be fully protected, but the other will only be protected up to $5,000.00. However, if you have a $2,000.00 lien against the $2,000.00 vehicle, and no lien on the $8,000.00 vehicle, then you can fully protect it. Or if instead you have a $3,000.00 lien against the $8,000.00 vehicle and no lien on the other, then you can fully protect both. And if both have liens, then both will be protected.

Likewise, if you have a car worth $100,000.00, but you owe $95,000.00, then your $5,000.00 exemption fully protects your equity.

Even if your vehicle is not fully protected, we can negotiate with the Trustee to determine how you will pay for the non-exempt portion and keep the automobile. But if you want to let the vehicle go, you can choose to do that too.

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My house is upside down, do I have to give it up? Should I? (Can I?)

You do not have to give up your home either, but you may want to. In the current housing market, many homes are worth substantially less than the mortgage remaining. Often, homeowners have a first and second mortgage, but even the first is upside down. If you owe more for the first mortgage than the home is worth, you can strip the second mortgage.

But an important consideration is whether this is the right thing to do. This is a difficult issue. Often the decision involves concerns of shame, what will the neighbors think when I let the house go, or concerns of pride, I put umpteen thousand dollars into this home, so if I leave I wash it all down the drain, and even concerns of family, my kids are growing up here, I don’t want to make it hard on them.

These are all important concerns, but it is equally important to consider the basis for buying the home in the first place. The two things buying a home rather than

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renting gives to us is security and equity. A home that is considerably upside down gives us neither of these. You might also want to revise your thinking. Are your neighbors opinions worth more than your family’s financial future? Isn’t the money you spent already gone? Is moving harder than paying for college?

Consider this: A family owns a home worth $150,000.00, but they owe $250,000.00. Their payments will reduce the principal of the loan over time. If equity increases at 3% per year, the home will once again be worth what they owe in roughly 126 months, or 10.5 years.19

At that point the home will be worth $206,000.00, and they will owe the same.

If they need to borrow money, such as needing money for their children’s college, they will not be able to use the home as collateral in this period. And it will still take

19 Historically, real estate is said to increase in value by 6% per year. This cannot actually be true or we would all be living in million dollar homes. As cities change, the equity increase slows, and may even stop or slide backward. The recent housing bubble actually caused homes to lose more value than they gained. However, at some point most homes should start to gain back some of these losses.

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another 4 years before they have sufficient equity to borrow enough for a year or two of college.

If instead they surrendered the home in the bankruptcy, then they could buy another home two years after the discharge. If we consider the same amount of growth, then two years from now the home will be worth $159,264.00. If we then looked ahead 8.5 years so that we are at the same point the home will be worth the same $206,000.00, but they will only owe $138,000.00. Instead of being at the breakeven point, they will have $68,000.00 equity—enough to afford college.

Another important consideration is the monthly payment. At 6% the mortgage for $250,000.00 costs $1500 a month; while the mortgage for $159,264 costs just $955 a month.

Bankruptcy does not require you to give up your home, it just gives you the option.

Call now to schedule a free consultation.

(480) 850-6541

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How Much Will Bankruptcy Cost?

There are different things that make up the cost of bankruptcy. Your attorney will need to obtain a credit report as part of the process. You will need to take a pre-filing class, and a post-filing class. And while both of these can be completed online in the comfort of your

20 Image courtesy of Nutdanai Apikhomboonwaroot / FreeDigitalPhotos.net

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home in less than two hours each, they do add to the cost.

There is a filing fee charged by the Court, which varies depending on the type of case filed, and the Court periodically changes the amount. There may also be a charge for reaffirmation agreements, lien strips, cramdowns, etc.

You will also find that the price can vary significantly from firm to firm. Surprisingly, you are likely to find that the high volume filing firms, which typically offer little direct communication with your attorney, will often cost much more than smaller firms.

If the firm you are dealing with advertises that they have filed some unbelievable number of cases, when the attorneys in the firm have only been practicing a few years, and/or the firm has only been around a few years, you might want to ask yourself if you are likely to get the kind of customer service you would like to have. Are you a client or a number to add to the advertising.

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You should expect to pay for good representation. You could go to a certified document preparer and get your bankruptcy case much cheaper. But a document preparer is not allowed to give you legal advice. So if you have property which is not exempt, the document preparer cannot advise you on how to protect the value. You are likely to save money at the outset, but spend a lot more by the time everything is complete.

That said, good representation should not be that expensive. The total cost for everything, including the filing fee, classes, credit report and attorney’s fees should not be more than $2,100.00 for a Chapter 7 bankruptcy. A Chapter 13 will cost more because there is much more involved. However, the attorney’s fees still should not usually be more than $4,000.00. If the attorney is suddenly willing to discount fees when you bring it up, how much is the attorney trying to profit from your misfortune? Is this an attorney that is trying to help you, or himself?

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Some cases will cost more than this because of complex issues involved. However, having 10 creditors versus 5, or having a car loan and home loan, does not increase the complexity of a case enough to justify higher rates. Unless you have a significant number of creditors (more than 50), or pending lawsuits involving allegations of fraud against you, you probably should not pay much more than the amounts stated above.

Call today to schedule your Free Consultation.

(480) 850-6541

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Bankruptcy Dos And Don'ts

Before you file your bankruptcy, it is important to prepare. Remember, your attorney is there to minimize the impact of filing, and your attorney will be able to give you the most help only if you do not hold anything back. Also, because of confidentiality rules, you should feel comfortable being completely up front. With this in mind:

DO disclose everything you own in your paperwork.

DO tell your attorney if you are about to receive a tax return or an inheritance.

DO tell your attorney about liens or judgments you may have.

DO tell your attorney about your small business, sole-proprietorship, or hobby.

DO keep your attorney up-to date with your address, phone number & email address.

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DO appear in court and bring your social security card and driver's license.

☒ DON'T leave out Bank, Checking, Savings, Brokerage, Credit Union accounts.

☒ DON'T use your credit cards or do balance transfers.

☒ DON'T take Credit Card Cash Advances or use convenience checks.

☒ DON'T pay money to Family or Friends

☒ DON'T tell a creditor that you intend to pay.

☒ DON'T give or gift property to anyone.

☒ DON'T pay more than $600 on any past due bill within 90 days of filing.

☒ DON'T transfer property to anyone.

☒ DON'T cash out retirement plans or 401k's.

☒ DON'T take out a second mortgage, or borrow money.

☒ DON'T gamble.

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☒ DON'T hide assets or debts.

☒ DON'T put your money in your kids' bank accounts.

☒ DON'T omit or 'save' a credit card for after your bankruptcy.

☒ DON'T fail to list debt to family or other "insiders."

☒ DON'T write bad checks.

☒ DON'T make major financial decisions without talking to your attorney.

☒ DON'T misrepresent facts to your attorney.

☒ DON'T run up your credit cards in advance of filing bankruptcy.

There are many more factors that go into preparing to file for bankruptcy. For more in depth information, call today to schedule a free consultation.

Call now to schedule a free consultation.

(480) 850-6541

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Wrapping Up

Some final thoughts to take away are that bankruptcy can not only give you breathing room in the short term, but it can give you the freedom to build for the future. Once you discharge your debts, you can save for retirement, for your children’s education, or both.

Bankruptcy can let you dump under-performing assets, like a home or car. And because you have very little time to wait before buying a home that is worth what you owe, you will be able to see the value of a bankruptcy very quickly.

Our bankruptcy firm offers a free bankruptcy consultation in which we will go over your situation in detail and cover all of the advantages and disadvantages.

Call today to schedule your Free Consultation.

(480) 850-6541

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About the Authors

Thomas Cesta and William Fife are both attorneys in Arizona. Although they had worked elsewhere first, Tom and Will began working together in 2007, while working for a local respected firm in Phoenix.

Tom and Will both have a background working in the credit card and banking industries, where they learned first-hand how credit card companies treat consumers. They each came away from this experience with a strong commitment to communication and good customer service, as well as a firm understanding of the help most families need.

At the Law Offices of Fife & Cesta, PLC you will receive direct customer care. We will not only return your calls and emails promptly, we encourage you to contact us so that we can give you the best representation possible.

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Attorney Thomas J. Cesta

Education: ASU, Tempe. B.A., 1996 Capital University Law School, J.D., 2001 Admissions and Memberships: Arizona Bar Association; All Arizona State Courts; U.S. District Court, Arizona; National Association of Consumer Bankruptcy Attorneys;

Ohio Bar Association, (Inactive Membership); Arizona State Bar Fee Arbitration Committee.

Biography Although Tom was born in Columbus, Ohio, his family eventually settled in Arizona when Tom was seven. After high school in Mesa, Tom was a medic/paratrooper in the 82nd Airborne, US Army, from 1987 to 1990, he served at Fort Letterman Army Medical Center in 1991 during Operation Desert Storm, and he then joined the Navy and was assigned as a Marine Corps Corpsman.

Tom was on the Dean’s list every year in Law School, earning two concentrations. Tom is an active member of

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the Arizona State Bar Fee Arbitration Committee, arbitrating fee disputes between attorneys and their clients.

Before becoming an attorney Tom worked in customer service. Tom recognizes that law is also a customer service industry.

Tom and his wife Rachel have four children.

Email for Thomas: tcesta@fifecestalaw.com

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Attorney William W. Fife III

Education: ASU, Tempe. B.S., Cum Laude, Major, Justice Studies, Minor, Political Science, 2001. Political Science Junior Fellow. ASU Law School, J.D., 2005

Admissions and Memberships: All Arizona state courts; U.S. District Court, Arizona; Arizona Bar Association; National Association of Consumer Bankruptcy Attorneys; American Bankruptcy Institute; Association of Credit and Collection Professionals.

Biography While attending ASU for his undergraduate degree, William was selected as a Junior Fellow in the Political Science Department, collecting data on military coup d’états in Sub-Saharan Africa and researching the stability of nations in that region. William attended Mississippi College on scholarship for his first year of law school, and earned the highest overall grade in his Torts

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class. Upon completing his first year of law school, William returned to Arizona to complete his law degree at Arizona State University.

William is an Arizona native, born and raised in Mesa. Following high school, William served a mission for the LDS Church in Rostov-Na-Donu, Russia. In his free time William enjoys spending time with his wife and their two daughters.

Email for William: wfife@fifecestalaw.com

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Law Offices of Fife & Cesta, PLC 1811 S. Alma School Road, Suite 270

Mesa, AZ 85210 www.FifeCestaLaw.com