When Is Bankruptcy an Option?

"Who can file for Bankruptcy" and "How do I know if Bankruptcy is right for me?"  These are two common questions that many of our clients have before they come in to meet with us.  Common misconceptions about Bankruptcy have caused some of our clients to unnecessarily carry a lot of stress and undue hardship, for long periods of time.  Bankruptcy is a big step; it should be treated in a flippant manner, but for many it is a good, and sometimes the best, option.

So, to our first question, "Who can file for Bankruptcy?"  The answer - practically anyone can.  So long as a person has debt and a social security number (which is not needed if the filing party is a corporate body of some sort), then that person can file for bankruptcy.  Now, that doesn't mean that Chapter 7 (liquidation), and Chapters 13 and 11 (reorganization) don't have limits and qualifications, but Bankruptcy is always an option, though not always the best one to choose.

If you go in the right direction,
there IS light at the end of the tunnel!

To our last question then, "How do I know if Bankruptcy is right for me?"  As a general rule, if a person's unsecured debt (credit card, medical bills, etc.) equal or exceed their annual income, it is probably time to talk.  When you are looking at that sort of debt/income ratio, digging your way out could take decades without a fundamental change to income and expenses.  However, often times our clients are forced to consider Bankruptcy, after their creditors start to severely impact their lives.  Many people cannot afford to have their wages garnished, or their bank accounts levied.  Others simply want the phone calls and the stress to stop.  It is fairly typical to meet many of our clients after they've been sued, their homes are being foreclosed, or they are just flat out of money.

If you are trying to figure out what options are available to you, you can't afford wage garnishment/bank levies, or you just can't take the creditor calls anymore, then let's talk.  We can set you on the path to financial recovery.  As always, there is no charge for a Bankruptcy consultation.

Changes to the Means Test

Most people that file for bankruptcy end up filing either Chapter 13, or Chapter 7.  Chapter 13 bankruptcy is referred to as a "reorganization."  It consists of a monthly repayment plan which lasts for 3-5 years.  Once the repayment plan is complete, the debtor gets a discharge and the Chapter 13 in concluded.  However, the situation is very different in Chapter 7.  A Chapter 7 case usually lasts 5-6 months, before the discharge is granted and no repayment plan is required. 

The vast majority of cases filed by Clint W. Smith, P.C., are Chapter 7 cases.  Why?  Chapter 7 is cheaper and easier for the debtor.  Yes, Chapter 13 cases can be helpful and there are some really neat things that can be done in a Chapter 13 that can't be done in a Chapter 7, but Chapter 13 is only right for a specific type of client.

However, not everyone qualifies for Chapter 7.  In order to qualify for Chapter 7, you must pass the "Means Test."  Part of that test includes an analysis of your yearly income.  This analysis is based on the "Arizona Census Median Income", based on household size.  If your income is above, then it becomes harder to qualify for Chapter 7.  If your income is below the average, then most of our clients do not have any issues qualifying for Chapter 7.

Effective November 1, 2011, the Arizona Census Median Income is changing and here is how it looks:

1 Person ($41,385); 2 People ($53,781); 3 People ($56,508); 4 People ($61,267); 5 People ($68,767); 6 People ($76,267); 7 People ($83,767); 8 People ($91,267); Each Additional Person in Household ($7,500)

From the above, if you are a single person making $41,385 or less per year (gross), then you will likely qualify for Chapter 7.  If you have a household of 6 people and you make $76,267 or less per year (gross), the you will likely qualify for Chapter 7, and so on.

If you would like to discuss your situation and how bankruptcy or debt-settlement might affect your situation, please give us a call.  We'd love to see if we can help.

Tools of the Trade

From a handyman or plumber...

Whenever a person files for bankruptcy, they get to keep certain property, while other property must be turned over to the Bankruptcy Court.  Whether or not a person gets to keep a certain type or amount of property depends on whether or not it is exempt.  This is what is meant by the word "Exemptions."  In the State of Arizona, exemptions are granted by statute (written law).

Today, we want to touch on the "Tools of the Trade" exemption.  Arizona's "Tools of the Trade" exemption is written in A.R.S. Section 33-1130.  Here is the language:


...to a hairdresser,
the "Tools of the Trade"
exemption may protect your
ability to make a living!

"The following tools and equipment of a debtor used in a commercial activity, trade, business or profession shall be exempt from process:

1. The tools, equipment, instruments and books of a debtor or the spouse of a debtor primarily used in, and necessary to carry on, the commercial activity, trade, business or profession of the debtor or the debtor's spouse, not in excess of an aggregate fair market value of two thousand five hundred dollars. For the purpose of this paragraph, "tools" do not include a motor vehicle primarily used by a debtor for personal, family or household purposes such as transportation to and from the debtor's place of employment.

2. Farm machinery, utensils, implements of husbandry, feed, seed, grain and animals not in excess of an aggregate value of two thousand five hundred dollars belonging to a debtor whose primary income is derived from farming.


3. All arms, uniforms and accoutrements required by law to be kept by a debtor."

Obviously, sections 2 and 3 above will not apply to most people, since farmers/ranchers/law enforcement are fairly specific types of employment.  However, it is important to note that there are specific Tools of the Trade exemptions available to them, and no one else.

For most people using the Tools of the Trade exemption, section 1 above becomes very important.



Here's the short of it...  If a person files for bankruptcy and they own their own business, that person can protect $2,500 worth (garage sale value) of any tools, equipment, instruments and books that are primarily used, and necessary, to that business.  The exemption increases to $5,000 worth of tools, if the debtor is married, since the debtor's spouse gets an exemption as well. 

It is important to realize that the Tools of the Trade exemption does NOT apply to a vehicle that is primarily used for household purposes, such as driving to and from work.



Whether you're a handyman, a hairdresser, or anything in between, you may be able to protect your "Tools of the Trade" if you need to file for bankruptcy.  If you have questions, and you would like to discuss your situation with us, please give us a call to set up your free bankruptcy consultation.

Your Car and Redemption!

When most people start the process of considering bankruptcy, they generally have two initial concerns: (1) what happens to my house?; and (2) what happens with my car?  This is why several of our prior posts deal with homes and cars.

For today's topic, we return to cars, and one option that is available to those who file for Chapter 7 Bankruptcy.  It is called "Redemption".  Dictionary.com defines Redemption as "to repurchase, as of something sold."  That definition holds true in a bankruptcy context. 

Section 722 of the Bankruptcy Code states: "An individual debtor may, whether or not the debtor has waived the right to redeem under this section, redeem tangible personal property intended primarily for personal, family, or household use, from a lien securing a dischargeable consumer debt, if such property is exempted under section 522 of this title or has been abandoned under section 554 of this title, by paying the holder of such lien the amount of the allowed secured claim of such holder that is secured by such lien in full at the time of redemption."

So, what does this mean?  It means, if you use an exemption to protect some personal asset, such as a car, appliance, or furniture, and that property has a lien against it, then you can pay the lender for the value of that property and keep it through a bankruptcy.

You're chances go up,
if you have red hair.

Here's an example - Let's say you own a car with a $10,000.00 loan on it, which you protect with your automobile exemption, but the car is only worth $5,000.00.  In a Chapter 7, you can pay your lender $5,000.00 to keep the car and the prior loan gets discharged.  This sounds like quite a deal, but keep in mind that $5,000.00 needs to be paid in one lump sum.  

Where would one come up with $5,000.00?  Here are a few options: (i) get a loan from a relative or friend, (ii) pull funds from an exempt retirement account, (iii) sell exempt assets, or (iv) get a new loan to pay off the car, based on what the car is actually worth, not what you owe.  If you don't have Daddy Warbucks as a family member or friend, then you might be wondering who on earth would give you a loan when you've just filed for bankruptcy.  Good question, but there's an answer - 722Redemption.com.

722Redemption.com is a company (backed by US Bank) that will work with you, us as your BK attorneys, and your current lender to "redeem" your vehicle.  Keep in mind that their willingness to issue the loan comes at a higher interest rate (often in the 20% -25% rage), so these types of redemption loans do not always make good financial sense.

If you have any questions about redemption, or how it might benefit you, please give us a call to set up your free consultation today!   

Short Sale v. Foreclosure

Since the beginning of the current financial crisis, foreclosures have cost the top five U.S. lending institutions $66 Billion, according to Bloomberg, L.P.  Yet, there doesn't seem to be any end in sight.  The banks don't seem interested in a solution and the government hasn't yet been able to do anything to help. 

Do to today's economic climate, many find themselves at the crossroads of either a foreclosure or a short sale, unsure of which direction to turn.  So, what is a distressed homeowner to do? 

In Arizona, a foreclosure is a non-judicial (no court is involved) legal action, that allows your bank to sell your home at an auction, following a default under the loan documents.  A short sale is similar to a typical "sale" of your home, except that your bank (or banks) agree to accept a lessor amount that what is actually owed. 

Here are a few key points:

1.  One of the biggest differences between a foreclosure and a short sale is that Arizona's anti-deficiency statutes (A.R.S 33-729 and 33-814) do NOT apply to short sales; they only apply to foreclosures.  Arizona's anti-deficiency statutes give certain automatic protections to homeowners in the event of a foreclosure.  These protections are NOT automatically available for a short-sale.

2.  A short sale is basically an amendment to your contracts with the bank.  They agree to let you sell your home for less than you owe.  However, it is not unusual for the banks to require certain conditions.  For instance, oftentimes a second lien holder will require some amount of money (in the form of a new promissory note or a lump sum payment at the close of escrow) in order for their permission to proceed with the sale.  Some lenders will reserve their rights to pursue the seller for a deficiency; such an action could happen years following a short-sale. 

3.  In either case (foreclosure or short sale) the bank will issue a 1099-C.  This matters because the IRS considers forgiven debt to be "income" for tax purposes.  There are exclusions and exemptions, but whether or not these exemptions apply should be discussed with a legal or accounting professional BEFORE making the decision to foreclose or short sale.

4.  The presence of a second lien (a second mortgage or a line of credit) can complicate your situation.  You need to understand the difference between "purchase money loans" and "non-purchase money loans".  It matters.

5.  You also need to understand what happens to delinquent property taxes, HOA fees and property insurance premiums.

6.  Both a foreclosure or short sale will negatively impact your credit.  How bad of a hit will it be?  How long with the hit last?  When can you purchase a new home?  All of these questions should be discussed with someone who understands the process BEFORE you move forward.

Foreclosures and short sales can be minefields.  We can help you find your best path forward.  If you have questions on what road is best for you, please don't hesitate to contact us today.  

Show Me the Note!

Um...not quite the same thing.

"Show Me the Note!"  No, it doesn't mean the same thing as "Show Me the Money!"  "Show Me the Note" is a legal argument based on "standing"; it requires a lender, before they can foreclose on your home, to show that they hold the Promissory Note.  If they can't, then they won't be permitted to foreclose in states where this defense is accepted.  So, does "Show Me the Note" work in Arizona? 

First, a little background.  In the State of Arizona, whenever you purchase a home, you sign two important documents.  One is the Promissory Note; the other is the Deed of Trust.  The Promissory Note, or simply the Note, is the document that you give to the lender that says, "I owe you the money you lent to me so that I could purchase my home."  Like a personal check, it can be indorsed to succeeding parties.  Who ever holds the original Note is the party that has the ultimate right to hold you accountable for the money you borrowed. 

On the other hand, the Deed of Trust is the document that gives your lender a security interest in your home.  Besides yourself, there are two important parties in a Deed of Trust.  First, there is the beneficiary.  The beneficiary is typically the bank that gave the loan.  They benefit from the security interest.  The second important party is the trustee.  The trustee is the party that is trusted to insure compliance with the Deed of Trust.  Like a Note, a Deed of Trust can be assigned and transferred to various parties.  It is not unusual to have only the beneficiary's rights, or just the trustee's rights, transferred to another party.   

In today's world of Securitization, the Banks often lose track of the original Note and subsequent transfers of the Deed of Trust.  As a result, it is not unusual for a party to attempt to foreclose on a home, when that party cannot show that it has a valid interest in either the Deed of Trust or the Note.

In several states (mostly in the Eastern United States), lenders are required to go to court and get permission to foreclose. This is referred to as "judicial foreclosure."  However, under Arizona Law, either the beneficiary or the trustee under a Deed of Trust is allowed to foreclose on a home, without going to a Court.  This is called "non-judicial foreclosure."  Basically, after giving the borrower a Notice of Default and a chance to cure, followed by a Notice of Trustee's Sale, a trustee or beneficiary under a Deed of Trust can hold an auction and foreclose on the home.

One way that those in "judicial foreclosure" states fight foreclosure is to force the foreclosing party to "Show Me the Note."  In many instances, those courts will require the party to show that they have an interest in the Note, before the court will permit foreclosure.  But, Arizona is NOT a typical "Show Me the Note" state.

Let's look at a typical "Show Me the Note" case in Arizona:  Hogan v. WAMU

This case was decided on July 26, 2011, in the Court of Appeals for the State of Arizona.  In 2004, the Hogans purchased a home here in Arizona and they signed a Note and a Deed of Trust (a "DOT") to Long Beach Mortgage Company, their lender.  Three years later a Notice of Substitution was filed wherein WAMU was named as the beneficiary under the DOT.  The Hogans stopped paying their mortgage and WAMU filed a Notice of Trustee's Sale on September 28, 2008.  On October 10, 2008, the Hogan's received a notice from the federal government indicating that WAMU had been shut-down by government and the FDIC had been appointed to manage its assets.  Chase Bank then purchased the Hogan's loan from the FDIC.  Chase also received an assignment of the beneficiary's rights under the DOT.  

In September of 2009, The Hogans filed suit against WAMU and Chase on a "Show Me the Note" theory, since the Hogans believed that there was no document showing the transfer of their original Note from Long Beach Mortgage Company to either WAMU or Chase.

The lower Court dismissed Hogan's suit and the Appellate Court agreed.  Why? In Arizona, the beneficiary or trustee under a DOT has the right to foreclose, even if it doesn’t hold or own the note.

BUT...

Let's look at a case that recently came down in Bankruptcy Court for the District of Arizona:  Sardana v. Bank of America

This case was decided on June 7, 2011 by the 9th Circuit Bankruptcy Appellate Panel.  Back on September 23, 2008, Sardana filed for Chapter 13 bankruptcy protection.  In her bankruptcy schedules, she listed B of A as the lien holder on her home in Chandler.  Sardana stopped making her house payments and on April 13, 2010, B of A filed a motion for relief with the Court, indicating that they wanted the Court's permission to foreclose on Sardana's home.  B of A was the lender identified in the Note and they were the beneficiary under the DOT.  Sardana fought the motion for relief by arguing that B of A did not hold the Note; they were merely the servicer under the pooling and servicing agreement.  She also proved that B of A had transferred the Note to Fannie Mae.  In other words, she said, "Show Me the Note!" 

The lower Court rejected Sardan's argument.  It cited the many authorities that state that Arizona is NOT a "Show Me the Note" state.  In fact, the lower Court stated, “Even if the note had been transferred, the right to foreclose the deed of trust…remains with the beneficiary of record."

However, on appeal, the BAP Court noted that, (i) A.R.S. §33-801(1) defines a beneficiary as, “the person named or otherwise designated in a trust deed as the person for whose benefit a trust deed is given, or the person’s successor in interest"; (ii) A.R.S §33-817 states further, “the transfer of any contract or contracts secured by a trust deed shall operated as a transfer of security for such contract or contracts.”

As a result, if the holder of the beneficial interest in a note changes, even if the beneficiary under the DOT does not change, then the beneficiary’s right to enforce the note obligation and foreclose on the DOT must by based on some further agreement with the new owner or holder of the note. (see Hill v. Favour, 52 Ariz. 561, 568, 84 P.2d 575, 578 (1938)).  Hence, B of A should be required to establish that it retained the rights to enforce the note.

Sardana is currently back in front of the lower Court and it remains to be seen if B of A can produce the documents necessary to satisfy the Court.  Meanwhile, Sardana is still in her home.

The bottom line here is that Arizona is NOT a "Show Me the Note" state, but more and more, the Bankruptcy Courts are willing to require "Show Me the Note" type documentation, before permitting a party to foreclose on a home. 

If you are facing foreclosure and you'd like to discuss your options, please don't hesitate to give us a call.

Home Sweet Home!



Whether you live here, or....



Home is where the heart is...  That's the expression and that's how most of us feel.  The question of what happens to one's home in a bankruptcy is a question that causes a lot of apprehension for our clients.

Most people are surprised to find out that generally they can keep their home through a bankruptcy.  So, how does that work?



...here, it is still home!

Let me give you a couple of examples. 

Example A:  Home is worth $200,000 with a $50,000 mortgage.  If a person who lives in this home files for bankruptcy, they can keep it, so long as they keep their mortgage current.  Why?  Arizona law says that you can protect $150,000 worth of equity in your home.  In other words, neither the bankruptcy court, nor your creditors, can take that home from you.  This is true in a Chapter 7, a Chapter 13, or a Chapter 11. 

Example B:  Home is worth $200,000 with a $210,000 first mortgage and a $50,000 second mortgage.  If a person who lives in this home files for bankruptcy they can still keep it for the same reasons set forth above.  There is no equity to protect, so as long as they keep their mortgage payments current, they will be left alone. 

However, in Example B there is a substantial difference between Chapter 7 and Chapter 13.  In a Chapter 7, the debtor can discharge both loans, but they can't get rid of either lien.  This means they don't have to pay on either loan, but the lenders can choose to foreclose.  Most likely, if the debtor stopped paying on their first mortgage, the lender would foreclose.  However, if the debtor stops paying on their second mortgage, but keep the first current, the second lender likely WON'T foreclose.  Why?  The second mortgage lender gains nothing from the foreclosure sale, because all the proceeds from the sale of the home would go to the first mortgage lender.  So what happens in that case?  The second mortgage can be held in limbo until (i) the debtor and lender settle the account; (ii) the debtor tries to sell the home (in which case the second mortgage lender will require payment); (iii) there is enough equity to refinance the home; or (iv) the home's value increases to the point where it is worth it to the second mortgage lender to foreclose.  Wow, there is a lot going on there.

So, what happens in a Chapter 13?  This is really cool.  Chapter 13 permits the debtor to strip-off the second lien and treat the second mortgage lender as an unsecured creditor.  This means that upon completion of the Chapter 13 repayment plan, the home will only have one loan on the home (the original first mortgage lender).  The second mortgage lender has their lien stripped and they get treated as an unsecured creditor in your repayment plan (which generally means they get a few pennies on the dollar for their loan).

Another tool available in a Chapter 13, which is not available in a Chapter 7, is that arrearages (the amount you are behind on your loans) can be made up through a Chapter 13 repayment plan.  This is very useful if you are trying to avoid or cancel a foreclosure.

Remember, every situation is different.  If you would like to see how these issues affect your personal situation, set up a time and we'd be happy to sit down with you.

Chapter 11 Bankruptcies Increased 24.2% in July 2011!

According to an article written by Rachel Feintzeig (click the preceding link to view), 1,217 business and individuals filed for Chapter 11 Bankruptcy in the month of July, 2011.  This represents a substantial 24.2% increase over the previous month. 

Chapter 11 Bankruptcy is a "reorganization type" bankruptcy, which is most often times filed by businesses (corporations, LLCs, etc.).  Individuals who desire to reorganize under the Bankruptcy Code, but do not otherwise qualify for Chapter 13, may also file for Chapter 11 Bankruptcy protection.

There is no "qualification" process for Chapter 11 like there is for Chapter 13.  In a Chapter 13, the debtor must be an individual; businesses cannot file Chapter 13.  In addition, in a Chapter 13, the debtor cannot have more than $360,475 in unsecured debt, or more than $1,081,400 in secured debt, going into the plan (note: these figures are the current limits set by Congress, but are subject to change).  Chapter 11 Bankruptcies have no such limits.

In many cases, a Chapter 11 Bankruptcy can help a business survive a past financial hiccup, adjust to a new market reality, or provide temporary relief from demanding creditors.  However, a Chapter 11 Bankruptcy will not "save" a failed business model or bring a company back from the dead.  In order to remain in a Chapter 11, the business must be profitable enough to fund its Chapter 11 Plan payments.

In general, a Chapter 11 Bankruptcy permits a business to disclose its current financial situation to their creditors and propose a reorganization plan.  The creditors then vote on whether or not they are willing to accept the proposed plan, while the business continues to operate.  Once the plan is approved by the businesses' creditors and the Court, the business will commence repaying its creditors, in accordance with the approved Chapter 11 Plan.

Chapter 11 also permits businesses to "lien strip" through a Chapter 11 Plan.  In other words, if a business owns property with more than one loan secured by the property, and the property is worth less than the 1st position lien, then the other liens get stripped and treated as unsecured debt.

Finally, the most powerful tool in a Chapter 11 is "cram-down."  In some cases Chapter 11 Bankruptcies permit a business to pay a creditor the current market value of the property, rather than what is actually owed on a loan.  If the cram-down is approved by the Court, the creditor is forced to accept the fair market value of the property as a pay-off of the loan.  The only downside to a cram-down is that the fair market value must be paid in its entirety during the Chapter 11 Plan.

Chapter 11 is a wonderful tool in the right situation, but even then it can be a minefield. If you have questions about whether or not a Chapter 11 Bankruptcy might be right for you or your business, please contact Clint W. Smith, P.C., and let's talk.

What Happens to My Car If I File for Bankruptcy?



Can I keep it?  Please?



Generally speaking, you can keep any vehicle (car, motorcycle, boats, etc.) and file for bankruptcy.  The real question is: Does it make sense to keep a vehicle, in light of certain consequences.  In many cases that answer is - yes!

In Arizona, the law currently says that each person filing for bankruptcy gets to "exempt" $5,000 of equity in a car.  For example, let's say you own a car that is worth $5,000 and you are planning on filing for Chapter 7 Bankruptcy.  If you own that car, you can file for bankruptcy without any consequence as to that car.  If you are married and filing jointly, both spouses get a $5,000 exemption to protect one car each.



This one is probably OK.



So, what happens if your car is worth more?  Let's say you have a car that is worth $8,000.  The law says you can only protect $5,000.  What happens to the extra $3,000?

We refer to that $3,000 as "excess equity" and it is not protected.  This means that your creditors must be compensated for the extra $3,000.  So, what can be done?  First, you could sell the car prior to filing and spend the money on a $5,000 car (the remaining $3,000 could be spent on household expenses prior to filing).  Second, you could compensate the Trustee for the non-exempt equity, meaning you could pay the Trustee $3,000, after you filed, over the course of 6-12 months.  Third, you could turn the car over to the Trustee, let them sell it, pay you the first $5,000 and let the Trustee pay your creditors with the remainder.  Fourth, and lastly, you could get a $3,000 lien against the car prior to filing.  In this last case, you would then be obligated to pay the $3,000 loan as agreed with the lender, but the remaining $5,000 in equity would be protected under Arizona law.

How is this different if you are filing for Chapter 13?  Each of the above scenarios still apply, with the exception of the second scenario above (which is not allowed).  However, Chapter 13 permits a scenario that is similar to the second scenario above.  In a Chapter 13, where there is excess equity in a vehicle, the debtor is permitted to increase their reorganization plan payment in an amount equal to the excess equity.  Let's use the same example as above, but this time they file a 60 month reorganization plan under Chapter 13.  In such a case, the $3,000 would be paid over 60 months in equal installments to the Trustee and it would be in addition to the payment amount they would otherwise be required to pay.  In other words, they can keep the car and pay an additional $50 each month (in addition to the amount required by law to be paid under their reorganization plan).  

As you can see, there are many factors that need to be considered and discussed with your attorney prior to filing for bankruptcy.  If you have questions about what would happen to your vehicles in a bankruptcy, please give us a call to schedule a free consultation.

Please remember, every case is different and the law is constantly changing.  The above should not be considered legal advice and proper legal advice should always be sought prior to filing for bankruptcy.