When I visit with clients about filing bankruptcy, nearly everyone I meet  is at the end of their financial rope and are resorting to bankruptcy when all hope of recovery is gone.  In much of my reading on bankruptcy there seems to be a new approach to bankruptcy, what it offers, and how the Bankruptcy Code can be used as part of an overall strategy in becoming and staying financially stable.  Understanding the bankruptcy process, its benefits, its consequences and how local state laws protect  your assets are all necessary to not only recovering from financial difficulties, but protecting your assets when times are good.

Admittedly, viewing bankruptcy laws as a financial tool rather than as a financial pit requires an adjustment in our thinking.  David A. Skeel’s book “Debt’s Dominion: A History of Bankruptcy Law in America” changed my view of the bankruptcy process and its purposes.  Specifically, he provided that bankruptcy is necessary in a market-based society, because without out laws that would provide for a fresh start, few would be willing to take the financial risk of starting a business.  Think about it, how many of us would be willing to incur the necessary debt to open a business knowing that if the business happened to fail, that we would be burdened with such debts for a lifetime.

If you would like to learn more about the bankruptcy process and how it can help your situation, Arizona Bankruptcy attorney John Skiba offers a free bankruptcy consultation.

There is an interesting article in the Wall Street Journal by Brett Arends about Rethinking Bankruptcy that I thought worth sharing here in its entirety.

Rethinking Bankruptcy

by Brett Arends

There’s a surge in personal bankruptcy filings at the moment, for obvious reasons. Some 30,000 Americans are filing each week, and the figures could top 1.4 million for the year.

But too many people are talking about bankruptcy as if it’s a sign this country’s social safety net has failed.

It isn’t. Bankruptcy is part of the safety net. Other countries have welfare states, America has bankruptcy. And so long as you plan ahead, it doesn’t have to wipe you out.

If you are smart you could get through a bankruptcy filing and still keep your home, your retirement savings, the childrens’ college funds, your car and your personal effects. Amazingly, according to a recent study by the Federal Reserve Bank of Boston, you may even get your credit cards back pretty soon — whether that is a good thing is another matter.

I don’t want to encourage irresponsible behavior. But I don’t write the laws, and they are there for a reason.

Furthermore, although there is some dispute about the numbers (we’ll get to that in a minute), it is certainly the case that sheer bad luck lands a lot of people in bankruptcy court. Yes, some people spend themselves into oblivion on Jacuzzis and trips to Lake Tahoe. But many others are walloped when their job is eliminated or when a child gets very sick.

Every middle class family should be aware of the risks of bankruptcy, and how to protect their assets if the sky falls.

Bankruptcy laws are complex and vary from state to state – if you want to make substantial plans you should probably talk with a lawyer in your state who specializes in the subject.

Some basics: Money in pension plans, including a 401(k), should be secure from creditors. The same is true for money in an IRA in amounts up to $1 million. If you have children or grandchildren, money in 529 tax-sheltered college savings plans becomes secure two years after deposit. You can contribute $65,000 per child to your 529 plan this year without triggering gift taxes, or $130,000 if you’re a couple. You retain control of the money in the plan, too.

Life insurance products, including retirement annuities, may also be protected, though rules vary by state.

Many states have a homestead exemptions that shield your home from unsecured creditors (though your home’s mortgage isn’t shielded, of course). You usually have to file paperwork to obtain the exemption. Florida and Texas, famously, offer virtually unlimited homestead exemptions. “It’s irresponsible not to have a homestead exemption on your house,” says Frank Morrissey, who teaches bankruptcy law at Boston University.

Little known: In more than 20 states married couples can own their home as “tenants by the entirety,” which affords substantial protection against a creditor of one spouse (though not of both). “In effect, neither party owns the property, it’s owned by the marriage,” explains Richard Nemeth, a bankruptcy lawyer in Cleveland.

There are other exemptions that vary by state, from a car and working tools to some other personal effects. Iowa exempts a family shotgun: An enterprising bankrupt several years ago bought a $10,000 antique gun on the eve of filing for bankruptcy to claim the exemption. He got away with it, too.

Such boldness is usually a bad move, however, as courts frown on naked greed. “When it comes to bankruptcy,” says B.U.’s Mr. Morrissey, “the usual rule is, pigs get fat, but hogs get slaughtered.” The earlier you shelter assets, the safer they should be.

As long the economy stays grim, bankruptcy filings will become increasingly common – which may diminish the stigma that accompanies bankruptcy. It is, in a sense, surprising that so many Americans should still feel ashamed of bankruptcy when those in a far more comfortable situation feel no such chagrin. Corporate bankruptcies are an accepted part of doing business from Wall Street to Silicon Valley. Executives who collect $30 million from a bank in the years before it collapses are not expected to give it back.

Bankruptcy gives people a fresh start, but the long-term effects vary. A study last year by researchers at the Federal Reserve Board in Washington, D.C., found that people who filed for bankruptcy were more likely than others to fall back into debt arrears, even many years later. But there may be complex reasons for that, and every case is different. (Here’s a link to the study: http://www.federalreserve.gov/pubs/feds/2009/200917/200917pap.pdf)

As for the causes of bankruptcy: The widely reported statistic that nearly two-thirds of personal bankruptcies are caused by medical bills deserves a more skeptical eye. The number comes from a study by Dr. David Himmelstein, et. al, to be published next month in the American Journal of Medicine. Yet if you read the report you’ll discover only 29% of those interviewed for the study actually said their medical bills caused their bankruptcy. And while the “medically bankrupt” claimed average medical bills of $17,943, that group’s total net debt averaged $44,622, or more than twice as much.

Claire Ann Resop, a bankruptcy lawyer in Madison, Wisconsin, adds that medical debt may show up more in bankruptcy filings because it’s often the last bill you pay when you get into trouble. Hospitals may be lenient on repayment and charge no interest, while the landlords demand cash and the credit card company charges 30% interest. “Medical facilities may simply be the best creditors to have,” she says.

That was the title of the hearing held earlier today before the Senate Judiciary Subcommittee on Administrative Oversight and the Courts.  Due to foreclosure rates that continue to climb across the country, Senate Democrats are taking a second look at a failed proposal to allow the modification, or “cram down” on first mortgages in homes that are upside down.

Senator Dick Durbin (D-Ill.) called once again on the Senate to adopt the “cram down” proposal he has been trying to get passed since 2007.  The measure, which would permit home owners to reduce the balance on their mortgage down to the fair market value of the home, was defeated in the Spring of 2008 and again early in 2009.  Such a provision would be extremely attractive in states such as Arizona that have many home owners seeing a 50% decline in the value of their homes.

With all of the foreclosures across the Valley there are many families that are now renting.  A common scenario facing tenants is after they enter into a lease agreement they find out that the landlord has not been paying the mortgage and the property is in the foreclosure process.  This leads to the question, what rights do tenants have the entered into the lease agreement in good faith?  Until recently, the answer was simple — they had to move out.

On May 20, 2009, President Obama signed into law the Protecting Tenants at Foreclosure Act of 2009.  With the passage of the new law, after a house is foreclosed upon, the bank must now honor the lease that was in place prior to the foreclosure.  Specifically, if a tenant had a lease agreement in place that was within 90 days of terminating, the bank must now provide 90 days notice to the tenant prior to eviction.  This applies to those tenants who are on a month-to-month lease as well.

If the tenant’s lease has longer than 90 days remaining, the bank must honor the remainder of the lease.   There are two exceptions: (1) if the bank has a buyer who will occupy the property then the tenant must move out within 90 days, and (2) the tenant must be paying the rent as agreed.  Further, the underlying lease must have been transacted at arms-length – meaning the lease cannot have been between family members.

While these new provisions may not be perfect, they go a long way to protect innocent tenants and provide additional time to locate a new place to live.

A common question I get from those contemplating bankruptcy is if they can continue to use their credit cards prior to filing bankruptcy or what effect their recent use of their credit cards will have on their bankruptcy case.  In regards to the first question, my recommendation is don’t continue to use your credit cards if you are going to be filing bankruptcy in the near future.  If however, you have made purchases on credit and now are faced with the reality that a bankruptcy case must be filed, you may end up paying back certain charges made on those credit cards.

The Bankruptcy Code provides that if a person incurrs debts on a credit card totaling more than $550.00 within 90 days prior to filing a bankruptcy case, there is a presumption that those debts are non-dischargeable and will likely have to be paid back.  However, this rule only applies to purchases for “luxury goods or services.”  See 11 U.S.C. § 523(a)(2)(C).  This leads to the question, what are considered “luxury goods or services?” The Code specifically states that “luxury goods or services does not include goods or services reasonably necessary for the support or maintenance of the debtor or a dependent of the debtor.”  11 U.S.C. § 523(a)(2)(C)(ii)(II).

What all this means is if you use your credit card within 90 days before  filing bankruptcy, and if what you purchase is not reasonably necessary for the support of you or your family, you may have to pay it back.  The opposite is also true — if you purchase something on a credit card within 90 days of filing that exceeds $500.00 and is necessary for the support of you or your family, you will likely not have to pay it back.  Things like groceries or gas for your car so you can get to work could be examples of items necessary for the support of your family.

Because your credit card statement only provies a total amount of a purchase and the store where the purchase took place, I have actually had creditors raise objections based upon the store where a purchase was made.  For example, you are much more likely to get an objection to a purchase made at Best Buy or some other electronics store than you would for a purchase made at your local grocery store.  I have even had a creditor distinguish between a charge at Target as compared to Super Target (because Super Target carries groceries while Target generally doesn’t).  In sum, you should avoid usuing your credit card if you are planning on filing bankruptcy, but minor use for necessities will likely not raise an objection from your creditors.

Similar to the 90 day rule on credit card purchases, the Code provides that if you take a cash advance from a credit card (or use a credit card check), within 70 days prior to filing your bankruptcy case, there is a presumption that those funds are non-dischargeable.  See 11 U.S.C. § 523(a)(2)(C)(i)(II).  The presumption only arises if the cash advance was more than $825.00.  General rule on cash advances, don’t take them out within 70 days prior to filing your bankruptcy, and if you did take out a cash advance and must file, plan on paying it back.

Arizona Bankruptcy Attorney John Skiba offers a free bankruptcy consultation to discuss how bankruptcy laws can help you obtain debt relief.

The U.S. Bankruptcy Court has released numbers for the first half of 2009 and Chapter 7 bankruptcy filings are up 102% in Maricopa County when compared with the same time period last year.  Likewise, Chapter 13 filings are up 52% in the Valley when compared to 2008.  Overall statewide bankruptcy filings in Arizona are up 88%.

While most consumers file either a Chapter 7 or Chapter 13 bankruptcy case, reports show that Chapter 11 filings have almost doubled since the beginning of last year.  Traditionally Chapter 11 filings were for businesses that were seeking to reorganize, while Chapter 13 was an option for individuals seeking to reorganize.  However, the Bankruptcy Code limits Chapter 13 filings to those debtors who have less than $1,010,650 in secured debts (like mortgages, car, loans, etc.) and less than $336,900 in unsecured debts (credit cards, medical bills, most judgments).  See 11 U.S.C. § 109(e).  Because of the Code limitations on a Chapter 13 filing as well as the fact that individuals are carrying heavy debt loads in the form of mortgage loans, investment loans, and deficiency judgments after a foreclosure, individuals are now seeking bankruptcy relief by filing a Chapter 11 case.

If you are facing financial difficulties or are carrying a high debt load and want to evaluate your options, Arizona Bankruptcy Attorney John Skiba offers a free bankruptcy consultation to discuss your situation and help you determine if bankruptcy is an appropriate option.

Different Types of Bankruptcy

Generally speaking there are two options available to individuals seeking bankruptcy protection: a Chapter 7 bankruptcy or a Chapter 13 bankruptcy. The 7 and 13 found in the title of these bankruptcies refers to the chapter of the bankruptcy code which governs that particular type of bankruptcy. A Chapter 7 case is generally considered a liquidation where you will be required to surrender any unencumbered, non-exempt assets for the payment of creditors. On the other hand, a Chapter 13 bankruptcy helps you reorganize your debt while remaining in possession of your assets. Chapter 13 offers many powerful tools in helping you reorganize, one of which is the “cram down.”

The Chapter 13 Cram Down

In a Chapter 13 case, the Bankruptcy Code permits debtors to modify the rights of secured creditors. A debt owed to a secured creditor is one in which there is property or collateral attached to the debt as security – for example, a debt on a car or a mortgage on a house. The cram-down is typically used on cars. In applying this tool, you will only be required to pay what your car is worth, not what you currently owe. For example, if you owned a 2005 Chevy Suburban that was worth $15,000, but you owed $25,000, in a Chapter 13 case, you would only have to pay the value of the car ($15,000) and the remaining balance would be discharged. The only limitation to this rule is that you must have purchased the car at least 2.5 years before you file for bankruptcy. If you purchased your car less than 2.5 years ago, this option is not available.

How the Cram Down Can Help

In addition to cars, the cram down can be used on almost any other secured debt including investment or rental properties. It cannot, however, be used on your personal home. If you would like to discuss the cram down option or to discuss bankruptcy and how it can help you, Arizona Bankruptcy attorney John Skiba offers a free bankruptcy consultation.

Different Types of Bankruptcy

Generally speaking there are two options available to individuals seeking bankruptcy protection: a Chapter 7 bankruptcy or a Chapter 13 bankruptcy. The 7 and 13 found in the title of these bankruptcies refers to the chapter of the bankruptcy code which governs that particular type of bankruptcy. A Chapter 7 case is generally considered a liquidation where you will be required to surrender any unencumbered, non-exempt assets for the payment of creditors. On the other hand, a Chapter 13 bankruptcy helps you reorganize your debt while remaining in possession of your assets. Chapter 13 offers many powerful tools in helping you reorganize, one of which is the “cram down.”

The Chapter 13 Cram Down

In a Chapter 13 case, the Bankruptcy Code permits debtors to modify the rights of secured creditors. A debt owed to a secured creditor is one in which there is property or collateral attached to the debt as security – for example, a debt on a car or a mortgage on a house. The cram-down is typically used on cars. In applying this tool, you will only be required to pay what your car is worth, not what you currently owe. For example, if you owned a 2005 Chevy Suburban that was worth $15,000, but you owed $25,000, in a Chapter 13 case, you would only have to pay the value of the car ($15,000) and the remaining balance would be discharged. The only limitation to this rule is that you must have purchased the car at least 2.5 years before you file for bankruptcy. If you purchased your car less than 2.5 years ago, this option is not available.

How the Cram Down Can Help

In addition to cars, the cram down can be used on almost any other secured debt including investment or rental properties. It cannot, however, be used on your personal home. If you would like to discuss the cram down option or to discuss bankruptcy and how it can help you, Arizona Bankruptcy attorney John Skiba offers a free bankruptcy consultation.

During the bankruptcy process all assets owned by the filer must be disclosed to the Court. Included in this list of assets that must be disclosed are any interest in funds that are held in a retirement account. Many are concerned that if they decide to file bankruptcy, that they will lose their retirement funds that they have accumulated in their 401(k) plan or their I.R.A.

However, most retirement accounts are fully exempt, and thus protected, under both federal and state law. Specifically, the Bankruptcy Code protects funds held by the debtor in 401(k) plans as well as any funds in an I.R.A. See 11 U.S.C. § 522(b)(3)C) and (d)(12) (there is a $1 million dollar cap on funds held in an I.R.A.). Similarly, with almost identical language, Arizona law protects most types of retirement accounts from execution as well. See A.R.S. § 33-1126(B). The only exception under Arizona law, is that any funds contributed to the retirement plan within 120 days prior to filing bankruptcy will not be considered exempt. See A.R.S. § 33-1126(B)(2).

Based on both federal and state exemption statutes, even in bankruptcy you will not lose your retirement funds. Arizona Bankruptcy Attorney John Skiba offers a free bankruptcy consultation where your specific situation can be assessed and a determination can be made if bankruptcy is an appropriate option.