Debt Resolution Fridays- August 14, 2020

Each week, bankruptcy attorney Elizabeth Domenico spends time educating the community about their debt resolution options.
Debt Resolution Fridays is dedicated to answering your debt questions. See what Coloradans asked on August 14, 2020. (A transcript of the event is available below.)

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Good morning out there in debt resolution world. I’m attorney Elizabeth German, and this is Debt Resolution Fridays, our live event. I’m a bankruptcy attorney with Robinson and Henry. I also handle debt resolution for businesses and other individuals. So kind of a global perspective on debt resolution today and for the last few Fridays. So we have this live event to allow individuals who have questions that may not necessarily want to come in and see an attorney right away to get those answered. You can submit those on our website, www.robinsonandhenry.com. You can submit them through Facebook. We have someone monitoring them, so we should be able to get them during our live event. You can also send them at any time prior to the live event or even after, and we can get those addressed. We also offer one-half hour free consultations regarding your debt situation and anything you would like to go over individually. It’s always a good idea because everybody’s circumstances are different to meet with an attorney, talk about your options and see what best step resolution options for you might be. So with that, we’re gonna be taking questions. We already have a few lined up here. So if you are not able to view this live, you can look at these on our website archived. We also will have these up on a Facebook page, as well as Vimeo. So let’s get to it.

Is there any way to preserve some of my cash on hand if I file bankruptcy?

So the first question that is asked is, “Is there any way to preserve some of my cash on hand if I file for bankruptcy?” So this is a very common question. People wanna know, “Well, if I’m going through bankruptcy and trying to get back on my feet, can I save money? “If I have some already put in the bank, or maybe I have cash from a gift, what happens if I file bankruptcy to that “and have money in my bank account?” So a lot of it depends on which chapter you’re gonna file. So if you’re in a Chapter Seven, which is called a liquidation bankruptcy, the idea is, is that you’re not really meant to keep a bunch of assets and be able to get rid of all your debt. Now, if you have money in a bank account and it’s due to wages, so money you earn from working, any money in there on the date your case is filed, you can protect 75% of that. So if you have $100 in the bank account, you can keep 75, and the trustee could ask for 25. If it’s other proceeds, so for example, some people sell their house and they get money from that sale and they have that to use for other purposes. If you put that money in a separate bank account, you can keep it as long as there’s no other money that goes in there. We call it segregating it. And then you can use that to go ahead and buy a new property. It has to be within two years of a bankruptcy filing. Statute says that money has to be used towards another house purchase to protect it. So if you take money out of that account where the sale proceeds are and you put it into a normal bank account where other things are put in, like your paycheck, it loses its exempt status. You wanna be careful what money’s in there on the date you’re filing. Another common problem that we run into with bankruptcy is when people pull money out of a retirement account, and then they put it in a bank account. Once it’s out of a retirement account, just like once the sale proceeds of a homestead exemption are out of a protected account, they lose their exempt status. So we really aren’t wanting in a Chapter Seven to see a lot of money in a bank account. So people ask, “Well, what do I do? “How can I save?” Well, sometimes we can do some planning to try to protect some of those proceeds, like funding a retirement account, or paying towards other things that you have a benefit of like a car payment or maybe rent or mortgage payment. Those are all things that will be benefited from talking to an attorney on to do some planning, depending upon how much, if any money you have in a savings or in the bank account. Now in a Chapter 13, you might not have to spend money down or worry too much about it, depending upon how much money you have in there. Chapter 13 is designed to protect things and pay the value of them instead of having in a Chapter Seven to pay them directly over to the trustee. So if you have a lot of money in a bank account, it may not necessarily mean you have to spend that money down. You just may pay for the value over it over a longer period of time. So that’s why it’s really important to speak to an attorney to talk about all your options and what might work best for you personally.

Is my retirement safe from bankruptcy?

All right, next question, “Is my retirement safe from bankruptcy?” So this kind of piggybacks on the last question and that I hit on with regards to retirement. So most retirement accounts are protected in bankruptcy. When I say most, I am disqualifying what are called annuities. So sometimes people set up what is an annuity retirement from a lawsuit settlement, or some other funds that they have. As long as typically it’s called ERISA qualified IRA, 401k through your employer, meaning that if you take an early distribution, there’s gonna be tax penalties on it, then you’re going to be able to protect that. Now that only accounts for monies in that protected retirement account on the date of filing. Again, if you pull money out of that account and you put it, you have savings, checking, or you just have it in cash, then that is gonna lose its protected status once you file, and the trustee can ask for that to be paid for the benefit of your creditors. So as long as it’s in a protected retirement vehicle, when you have the case filed, most of the time with that ERISA qualification, you can protect your retirement funds, which is why it’s always a good idea when you’re looking at bankruptcy to not draw out of your retirement to pay unsecured debt until you talk to an attorney. Because some people think, “Well, I’m gonna use my savings cause I’m gonna lose it anyway,” in terms of a 401k, IRA, or other retirement to pay down debt. A lot of times, that’s the worst thing you can do because you can end up with tax implications, and then you don’t have your retirement, whereas in bankruptcy, you can usually protect those funds.

Can a deficiency balance on a foreclosed home that was auctioned, be included in a bankruptcy?

All right, next question is, “Can a deficiency balance on a foreclosed home that was auctioned be included in a bankruptcy?” The answer is yes. If you have a property that has gone to foreclosure, and you are getting sued by that lender for any balance still owed that was due. A lot of times, right now, we’re seeing these in terms of second mortgages that have not been paid or satisfied due to the first mortgage not being paid in full on a foreclosed property. You can use a bankruptcy to get rid of those. A true Chapter Seven will just wipe it away. There might be some funds, small amounts that you pay that they end up getting. Chapter 13, sometimes they will get funds based upon your income and assets, but they can be included for discharge in a bankruptcy. One thing we’ve seen come up quite often in the last few years is these second mortgages. A lot of people are saying, well, these foreclosures happened 10, 12, 15 years ago. “They shouldn’t be able to collect that debt anymore due to the statute of limitations on collection of a debt.” Here in Colorado, there is a case that has the proposition and legal holding that if you have that foreclosed property, and the second mortgage or any mortgage doesn’t do what we call accelerate the note, then they do not have a time limit in which they have to collect it. The statute of limitations does not apply to them. They could collect against you indefinitely. So it is entirely possible that you’d go years and years, years in one case, like I said, 15 years had passed and the second mortgage then started to come after the homeowner once they realized that they had new real estate and tried to get to assets. But long and short of it is that the bankruptcy can help to eliminate or protect you from those garnishments or types of liens due to that second mortgage or other mortgage deficiency obligation.

How can I keep my car in a chapter 7 bankruptcy?

All right. Next question, very common one. “How can I keep my car if I file a Chapter Seven?” So cars, keeping those, is a very important thing because you’re trying to get to and from work, you may have a family you’re trying to get around and most families are needing some form of transportation to get around, most likely a motor vehicle. The Colorado state exemptions carved out an exception for protecting some value to a car. Now, if you have a car and it’s financed and you don’t think there’s much equity or it’s upside down, then you probably don’t have to worry about it. Where we get into the issue is if your car is paid off, or if you’ve put a large down payment on, if you’re a single person filing in the state of Colorado, you, if you are under 60, or you do not have any kind of documented physical or mental disability are limited to a $7,500 motor vehicle exemption. Now you can apply it to any two motor vehicles. If you have more than two, and that value exceeds the 7,500, you may have to work out a deal with the trustee to try to keep those vehicles, or they could eventually end up selling them if you exceed that exemption. If you are 60 or over, or you have a documented medical or physical disability, then what we say is you get the heightened exemption amount for that. You get $12,500 to apply to any two motor vehicles. The exemption runs double basically, if you are a married couple, then you get 15,000 for exemption still on any two motor vehicles, unfortunately. It’s not two per person in that scenario. And then also it jumps up 12-five each person, but still on any two motor vehicles. So you wanna talk to an attorney. If you think you have a lot of equity, there may be some things you can do in terms of asset planning, purchasing a new vehicle. You also may want to then look and consider a Chapter 13 if you have too much equity and you absolutely have to keep that particular vehicle.

Does a bankruptcy show up on a background check?

Okay, “Does a bankruptcy show up on a background check?” Now it depends on what type of background check you are having done. A lot of times they will ask if you’ve ever filed bankruptcy. And if you have, you are bound to explain and let them know that you have filed. Also too, a bankruptcy will show up on your credit report under the public records section, along with the fact that any debts they see that will once you’ve filed show as included in bankruptcy. So most of the time through a background check of some kind, especially if they ask, or if they are running your credit, they will be made aware of that. So it’s always a good idea just to be upfront if that is a question that’s asked, or you’re in some type of financial institution where it would be important for them to know that. It’s always better to volunteer it first and let them know in most instances. The only real issues we’ve ever seen with those are when you’re trying to get a Series Seven or Series Nine license for insurance purposes or brokerage purposes. You’re usually not allowed to get those while you’re in an act of bankruptcy. They have some other things you have to report and talk about to the issuing agency if you have a bankruptcy and you’re trying to do that and it’s still open and active.

Can a past due child support be factored into a chapter 13 payment plan? Could it reduce the payment amount?

All right, next question is, “Can past due child support be factored into a Chapter 13 repayment plan, and could it possibly reduce the payments?” So if you’re past due on any type of child support, alimony, or maintenance, you can use the bankruptcy to catch up in a Chapter 13 what those arrears are. A lot of times, if you’re already having deductions taken from your payroll or making voluntary payments, and they include the past due amount, we don’t recommend that you separate out the present obligation from the past due and include it in the bankruptcy repayment. You have a lesser amount of time, possibly, if that’s the case, to pay those back. You could possibly have longer and have a lower payment if you kept it outside of bankruptcy. A lot of it just depends on how much you owe, how is it already being handled, are you being sought after from the obligation holder. All those things are gonna factor in. But the long and short answer is yes, you can, but it may not always be the best option. Now, the other part of the question could it possibly reduce the payments? I’m not sure if the person was asking if it could reduce the obligation payments for the past due amounts, or could reduce the Chapter 13 plan payment. Any amount in a Chapter 13 plan that you paid to the creditors for unsecured debt is going to be offset and reduced by any amount that you have to pay on an ongoing or past due support obligation up to the point you’re no longer paying it. If it does pay off in the bankruptcy, then it will bump back up. In terms of the actual obligation that you owe to the support holder, either on the past due or current amount, those are not gonna be able to be altered by virtue of filing bankruptcy. Those are gonna be bound up in the divorce court, and if you need to look at modification, you’re gonna have to go back into the domestic court and get that re-evaluated.

Is it possible to recover my home if it’s sold at auction after I file bankruptcy?

All right, “Is it possible to recover my house if it’s sold at auction after I file bankruptcy?” A lot of this has to do with just the sale, not necessarily bankruptcy. There is a statutory right to redemption in most states. I believe Colorado, it’s 75 days after a sale, you have to redeem that. But you have to pay in full all the arrears, the amount due, and anything in terms of taxes, fees, and things related to the foreclosure. So a lot of people don’t have the wherewithal to come up with the total amount past due and everything else related to other costs. What you can’t do is if the house is already sold, you can’t file bankruptcy and then try to take those amounts that are past due and put them in a Chapter 13 plan to catch up because they are all due at once. You cannot spread it out over five years. Bankruptcy under Chapter 13 is designed to allow you to repay those arrears over a five-year period, or pre-petition arrears in the house cannot have sold. But you do have a 75-day statutory right to redeem that property in Colorado, upon foreclosure, but you have to have all the funds available to be paid at once. And I believe you have to let them know through a Notice of Redemption 15 days before the expiration of that 75 days. So a lot of this again, is all really going to be something you wanna talk to an attorney about, and see what your specific circumstances warrant. And it’s always, like I said, a great idea to talk to an attorney before that happens. If you’re in an active foreclosure, you can use a Chapter 13 to stop it. But typically once it’s happened, unless you have those funds available to cure it in full, you cannot get that house back.

When would a chapter 13 payment extend beyond 5 years?

Okay, “What might Chapter 13…” Or sorry, last question about Chapter 13, “When would a Chapter 13 payment extend beyond five years?” So usually most Chapter 13s, at least up until we got involved in this coronavirus pandemic, we’re limited to five years. You could not exceed that period of time to be in your repayment plan. Under the CARES Act, starting back in end of March, the trustees determined that if someone has an impact, either indirectly or directly due to COVID-19, that they could ask the court to modify their current plan and extend it out to seven years, or up to seven years, anywhere between that five to seven years. The thing that has to have happened is you have to have your plan have been confirmed prior to that, I believe, March 27th date. Anyone who is an active case that was not confirmed and anything filed after, you can only still have the five-year or up to five-year repayment plan.

Can I sell my house to a family member prior to filing bankruptcy?

All right, “Can I sell my house to a family member prior to filing bankruptcy?” The answer is yes, but you have to be careful how you do it. If you sell that property for fair value, in what we call an arms length transaction, everything was above board, they paid you fair purchase price for it, you got the proceeds and they’re within the protected limits, or you otherwise spend them appropriately, there’s not gonna be a problem. But those types of transactions are scrutinized heavily. If you simply transfer the property with no consideration through a quitclaim deed to a family member, you’re gonna run into fraud issues, and that transaction can be undone. The same goes if you sell the property, but you get significantly less value for it. Let’s say your house is worth 300,000, and you sell it to your brother and he pays you 150. That’s not fair consideration for that property, so that can also be a fraudulent transfer or sale that can be set aside by a trustee in bankruptcy. And even a creditor, if you don’t file bankruptcy can use the fraudulent transfer statute, which is a two-year look back. If you transfer property or sell property for less value, especially to a family member or friend, they can undo that transaction under that fraudulent transfer act either in state court or even in the bankruptcy court. So if you’re going to do it, just make sure you’re getting fair market value. Probably best to get an appraisal done, to see what that is, or have a realtor handle the transaction so that it is what we call above board, arms length transaction. There’s no suggestion that you were getting rid of this just to keep your creditors from getting money.

Can personal loans be included in a bankruptcy?

Okay, final question we have for today is, “Can personal loans be included in a bankruptcy?” I’m gonna assume that the person writing this asks about personal loans, such as from a family member or friend. Personal loans through your financing institution, sure. Those always can be added. Personal loans, if you owe them to a relative, neighbor, business partner, or family friend, yes. Even if they’re not in writing and you believe you owe them money, then you can list them as a creditor and potentially discharge that obligation. Now, any creditor always has the right to sue you to try to argue that the debt shouldn’t be discharged, but you can look at giving them notice. And then if ultimately it’s needed, a judge can determine whether or not you can discharge it. But yes, it’s always a good idea. Anybody you owe to and you’re supposed to, when you fill out your paperwork, even if you don’t have it in writing, or you say, “Well, I’m not sure,” if they ask for it back, anyone you believe you owe money to should be listed as a creditor in your bankruptcy.

All right, that is all the time we have for questions. So this has been Debt Resolution Friday. Again, I’m attorney Elizabeth German with Robinson and Henry answering your debt resolution in bankruptcy questions. If you weren’t able to join in our live event and you still have questions, you can reach out to the firm. Our website is www.robinsonandhenry.com. There’s a section to submit questions. You can also go on our Facebook page and we’ll be able to get that question answered for you, or schedule that half-hour free consultation that we offer, or you can call our office 688-0944. Hope you guys all have a great weekend.

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