First off, what is a Chapter 7 bankruptcy?

A Chapter 7 bankruptcy is designed to eliminate a debtor’s dischargeable debt. Some debt may not be dischargeable such as student loans, domestic support obligations, and certain taxes, but unsecured debt, including credit cards, medicals bills, club memberships, and deficiency balances, is typically dischargeable.

A Chapter 7 is often referred to as a liquidation bankruptcy due to the fact that a Chapter 7 bankruptcy trustee is appointed in order to gather and sell the debtor’s nonexempt assets and to use the proceeds of such assets to pay the debtor’s creditors in accordance with the provisions of the Bankruptcy Code. In order to protect their assets, debtors are permitted to apply Federal or State exemptions, and as a result, most Chapter 7 Debtors do not have give up any of their property. Still, it should be realized that the filing of a petition under Chapter 7 could result in the loss of property, but an experienced bankruptcy attorney should be able to inform you whether you will have to give up any property prior to you making your decision to file.

Now, who qualifies to file a Chapter 7 bankrupty?

Since the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) went into effect on October 17, 2005, debtors must qualify to file a Chapter 7 proceeding, or it must be determined whether they have a capacity for debt repayment and must file a Chapter 13 bankruptcy.

What is median income?

Contrary to popular belief, many debtors qualify for Chapter 7 bankruptcy relief even if their income is above the median income amount as established for the state in which they live. The Office of the U.S. Trustee in the U.S. Department of Justice publishes the median income amounts here (please note that this links you to the applicable median incomes for cases filed on or after March 15, 2009 through the date of this post – median incomes are updated frequently). The number of people in a debtor’s household is taken into consideration in determining the applicable median income.

The debtor’s current monthly income

The income measured by the Bankruptcy Court in order to evaluate whether a debtor qualifies to file a Chapter 7 is not just any old income that the debtor chooses to disclose. A debtor must disclose all household income for the six months prior to the month in which he or she files bankruptcy proceeding. Income includes wages, rental income, business income, investment income, unemployment compensation, worker’s compensation, and contributions from family or friends. The total amount of income for that six-month period amount is divided by six to come up with the debtor’s current monthly income.

If the debtor’s annualized current monthly income is below the established median income, only Parts I, II and III of Form 22A, or the “means test”, must be filled out, and the debtor qualifies to file a Chapter 7. Please note, however, there are some circumstances under which a debtor may not be entitled to filing a Chapter 7 even when his or her income is less than the median income. I will leave that for another post.

The means test for a debtor with above-median income

If the debtor’s income is above the applicable median income, the remainder of the means test must be completed. The remainder of the means test consists of entries whereby the debtor’s current monthly income can be reduced by a set of certain allowed deductions specified by the Internal Revenue Service’s Collection Financial Standards, as well as some of the debtor’s actual expenses. After the deductions are applied, the amount of the debtor’s leftover current monthly income, if any, becomes known as the debtor’s monthly disposable income.

The debtor’s “monthly disposable income”

Many debtors, after going through the completion of the means test, will end up with a negative monthly disposable income. What does this mean? Well, even though that debtor’s income was above-median, he or she will qualify to file a Chapter 7. If the debtor has a positive monthly disposable income but it is equal to or less than $166.66, the debtor may still qualify to file a Chapter 7 proceeding.

Amazingly, some bankruptcy attorneys still do not know how to fill out a means test. I have seen several cases within the last year where a debtor’s bankruptcy attorney had put the debtor into a Chapter 13 bankruptcy case solely because the debtor’s income was above median. These debtors qualified for filing Chapter 7 proceedings and had no reason to be in Chapter 13 proceedings. The means test is not an easy form to fill out because it has many nuances and ambiguities. Several of the line items on the means test actually are being litigated in Bankruptcy Courts across the country in an effort to determine the Congressional intent behind some of the amended statutes under BAPCPA.

The bottomline is – to determine whether a debtor with above-median income qualifies to file a Chapter 7, he or she needs to go to an experienced bankruptcy attorney. If a debtor goes to a nonattorney bankruptcy preparer, an inexperienced attorney, or an attorney who is just out to make more money off of him or her by collecting higher attorney fees, he or she may end up in Chapter 13 case unnecessarily. Chapter 13 bankruptcies usually have much higher attorney fees and the debtor ends up paying his or her creditors some amount of money over a 3 to 5 year period.

There are several reasons why a debtor who qualifies to file a Chapter 7 may want to file a Chapter 13 (which I will address in another post), but if one of those reasons is not applicable, a debtor will save money, time and headaches by filing a Chapter 7. Do yourself a favor, and find an experienced and ethical bankruptcy attorney.

Mr. Chapman faces up to 13 years in prison and fines up to $750,000. You can read about other cases involving bankruptcy fraud at the Bankruptcy Fraud Resource Center. The Internal Revenue Service website also publishes real examples of bankruptcy fraud investigations.

Anyone who files a bankruptcy proceeding is required to sign a declaration under penalty of perjury that the information they provide is true and correct. They also sign a notice, Form B201, which clearly warns that if they make any false statement or conceal any assets, they may be subject to a fine, imprisonment, or both. You can read the entire notice here.

Section 152 of Title 18 of the United States Code describes how a debtor can commit a bankruptcy crime. Some of the crimes described in the statute are:

• knowingly and fraudulently concealing any property belonging to the estate of a debtor;
  
• knowingly and fraudulently making a false oath or account in or in relation to a bankruptcy case;
  
• knowingly and fraudulently making a false declaration, certificate, verification, or statement under penalty of perjury in relation to a bankruptcy case;
  
• knowingly and fraudulently receiving any material amount of property from a debtor with intent to defeat the provisions of the Bankruptcy Code;
  
• knowingly and fraudulently concealing, destroying, mutilating, falsifying, or making a false entry in any recorded information (including books, documents, records, and papers) relating to the property or financial affairs of a debtor; and
  
• knowingly and fraudulently withholding any recorded information (including books, documents, records, and papers) relating to the property or financial affairs of a debtor.
  

Debtors who are found to have committed bankruptcy fraud face three kinds of penalties:

1. may forfeit their right to receive a discharge of their debts;
   
2. may incur criminal sanctions, including up to five years in prison and fines up to $250,000; and
   
3. may lose their exemptions in any property that they attempted to hide or give away.
   

Although prosecution for bankruptcy fraud is not common, it does happen. A debtor who thinks that nobody will find out if they do not disclose an asset in which they have an interest must be weary. The penalties are harsh, and the stress and consequences just are not worth it. Make sure to tell your bankruptcy attorney everything!

Pennsylvania’s lower ranking could be an indication of the success of state and city initiatives, including Philadelphia’s mortgage foreclosure diversion pilot program, which you can read more about here.

The rise in the foreclosure filings obviously can be attributed to the rising unemployment rates as well as employers cutting back on employee benefits and lowering employee’s pay. The Philadelphia Inquirer quotes Patricia Hasson of the Consumer Credit Counseling Service of the Delaware Valley as saying her counselors report “seeing clients with middle and higher income coming in due to cutbacks in company benefits, having to accept lower pay to keep their job, reduction in overtime, and self-employed people whose business slowed due to the economy.”

Other rankings include Nevada who the nation’s highest rate of filings, with more than 6 percent of all households receiving a notice, or one out of 16 homes. Arizona at No. 2, followed by Florida, California and Utah. Rounding out the top 10 were Georgia, Michigan, Illinois, Idaho and Colorado. Nationally, the foreclosure filings were up 33 percent in June 2009 compared with June 2008, and experts do not expect the foreclosure filings to peak until the middle of 2010. You can read more here.

The numbers seem to continue to rise despite the $50 billion plan to give the lending industry financial incentives to modify mortgages to lower payments lauched by the Obama administration in March. The loan modification process has its own set of problems as you can read in an earlier blog entry here.

This news closely follows the filing of bankruptcy by sports star, Randy Brown, a former Chicago Bulls point guard, and Lenny Dykstra, the former star centerfielder for the Phillies and Mets. They join fellow athletes including:

• Joe Louis (boxer)
• Mike Tyson (boxer)
• Evander Holyfield (boxer)
• Bjorn Borg (tennis player)
• Johnny Unitas (former quarterback for Indianapolis Colts)
• Denny McClain (former pitcher for Detroit Tigers)
• Jack Clark (former powerhitter for several major league teams)

As a result of Randy Brown’s bankruptcy filing, he lost his house, cars, and precious jewels. Brown stated that what hurt him most was the Bankruptcy Judge ordering him to sell his three Chicago Bulls championship rings. You can read more about Brown’s experience here.

Please be aware that most debtors who file for bankruptcy do not end up losing assets like Randy Brown did. Mr. Brown had significant assets in which his equity in those assets could not be protected by the applicable statutory exemptions. Most debtors’ assets can be protected by applicable bankruptcy exemptions. An experienced bankruptcy attorney should be able to inform you of any assets that might be at risk prior to filing your bankruptcy proceeding.

Bankruptcy seems to be getting a bum rap from many of the individuals and companies that are pushing their “solutions”. They make misleading and false claims such as: (i) if you file bankruptcy, your credit is ruined for 10 years, (ii) if you file bankruptcy, you will never ever get a credit card or loan again, and/or (iii) their solution is easier and/or cheaper than bankruptcy.

Some even try to guilt people into using their services by claiming that filing bankruptcy is taking the easy way out. I assure you that filing bankruptcy is far from taking the easy way out for most people – it involves an upheaval of people’s lives financially and emotionally. But that being said, it can provide much needed relief.

Those pushing alternatives to bankruptcy are trying to sell and make money, and like many “salespeople”, some make promises that are just flat out untrue, misleading, and are not in the best interests of consumers. There really is no secret solution that will wipe out your debts for pennies. I agree with what Cathy Moran, a bankruptcy attorney in California, says in her article on Bankruptcy Law Network, “[t]here are no painless, quick fixes.” You can read what she has surmised about debt settlement companies here. I wish I could sell a silver bullet that would take everyone’s financial pain away.

Rarely do all the cards fall into place for debtors to solve all their debt problems by utilizing the recent heavily-marketed alternative solutions. Often debtors regret the money and time they spent seeking the alternatives, because they could have used the relief that bankruptcy provides much sooner.

As Ms. Moran eloquently concludes in her article, “Bankruptcy works because it binds all creditors with a few exceptions: support, recent taxes, student loans. It is enforced by the power of a federal judge. It generates no tax consequences. It is resolved in a finite period of time…Most clients need relief from the stress that debt brings with it. They need to save for retirement. They need to create an emergency fund. They need these things NOW. Bankruptcy does that. No secrets; no magic.”

• Number of participating homeowners: 5,000
• Foreclosures averted: 1,400
• Sheriff’s sales postponed for more discussion: 700

You can read more about the program here.

Basically, when a foreclosure lawsuit is filed against owner-occupied real estate, a conciliation conference is scheduled between the homeowner/s and the holder of the mortgage note.  A representative of the mortgage note holder must be at the conference and have authority to negotiate with the homeowner to try to resolve the issues in the lawsuit.

Philadelphia VIP, an organization which provides provides legal services for low-income residences and families facing civil legal problems, has been very active in helping homeowners facing foreclosure.  They provide volunteer attorneys to attend the conferences on behalf of the homeowners in order to help the homeowners to negotiate an affordable loan modification or payment arrangement.

Congratulations to the innovative and hardworking individuals with the Philadelphia Court of Common Pleas and the volunteers who have made this program such a success!

There are many problems that may arise when a debtor seeks a loan modification.  It seems that a debtor can only get the attention of his mortgage company if he is in default on the loan.  This is unfortunate for those debtors who have struggled desperately to stay current on their loans in an effort to salvage their credit scores.

The article also describes how one debtor had negotiated the mortgage company to take less than owed to allow a refinance, however, the mortgage company refused to apply the mortgage payments made by the debtor to his loan which caused the debtor’s credit score to plunge and prevented a refinance.

Perhaps as time passes the mortgage companies will get their acts together – maybe through restructuring, training and hiring.  One can hope that soon the number of success stories begins to outnumber the stories we hear about the frustrations and pitfalls of the loan modification process.

I would like this blog to disseminate relevant and interesting information regarding consumer issues, whether it be about the new credit card laws, foreclosure issues, bankruptcy and non-bankruptcy options, debt collection issues, etc. There is a lot of information on this world wide web and hopefully I can bring to this blog’s readers up-to-date insights about relevant consumer topics and point readers in the right direction to find out more information. Please subscribe to the blog so that you can receive all the latest posts.

By the way, I also would like this blog to let people know in the Philadelphia area that I am here, a consumer bankruptcy attorney with compassion and experience. If you, or someone you know, would like to know your options and rights as a debtor and consumer, please contact me at kcoleman@shainberg.com or 215.988.9700.