Each week, bankruptcy attorney Elizabeth Domenico spends time educating the community about their debt resolution options.
Debt Resolution Fridays is dedicated answering your debt questions. See what Coloradans asked on June 19, 2020. (A transcript of the event is available below.)
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Good morning, welcome to “Friday Debt Resolution” with me, attorney Elizabeth Domenico with Robinson & Henry. For the past few weeks, I’ve been taking about a half an hour or so to answer questions that people have relating to debt resolution and bankruptcy. As we know, the virus is still hanging out there. Although some things are opening back up with the economy, small businesses, may be able to be getting back to work, may have been on furlough or even lost your job, and can maybe start looking again. So we’re here to answer your questions. This is a live event. It is being recorded so that if you aren’t able to join us live, you are going to be able to go back through our website and look at the recordings that we have in place for these Friday sessions. And as long as people have questions, we’re gonna continue to do these, to make sure you’re getting the information that you need. So the basic format is, is I am going to look at the questions being asked, gonna read them, some may be repeats from before, but we always wanna make sure if it’s a topic that’s really particularly relevant right now that we make sure people keep getting that information. At the end, you are able to click a link to follow us on Facebook. You can also join our newsletter through our website. I also believe these are available on our webpage and LinkedIn as well. If you aren’t able to join in, you can pre-send your questions prior to the next week’s cast. And if we don’t get to it, you can also call the office or email us to make sure we’re getting that information from you and we can address it here. All right, I’m gonna jump right in.
Will I lose my retirement accounts if I file for bankruptcy?
So I’ve got a general question that a lot of people are asking me right now is, what happens to retirement accounts in a particular bankruptcy, or even if a creditor obtains a judgment, are those going to be something that can be protected? In most instances, if it’s a normal 401 through your employer, a Roth IRA that you set up, as long as it’s what we call RISA qualified, meaning that if you put money in, you have a penalty if you pull it out too early, due to age requirements or to some other event. Such that you’d be taxed on it because it’s considered pre-tax income, you would pull it out and be subject to those taxes. There’s a few other rules, but by and large, most people’s protections stay in place with those 401 s. So while the money’s in the actual retirement vehicle, it is not able to be sought after by the creditor. And certainly in a bankruptcy, the trustee could not force you to turn over any of those funds. The only issue we have run into is if you have a bunch of money in retirement and you take it out of your retirement account and you put it in a bank account, even if there’s no other money that would go into that account, they can consider that an unexempt asset. Once you take that money out of the retirement account, in otherwise don’t spend it, especially in a bankruptcy setting, if it’s just still sitting in that non-retirement vehicle, you would have it be able to be taken from you. So it’s always a risk to take it out of the retirement, because it would lose its exempt status. Now, in terms of it being counted as income, typically we’re not counting retirement withdraws as income for purposes of the bankruptcy to determine what’s your average monthly or even yearly income is for what we call the means test qualification. So by and large, it’s a good idea to keep your money in the retirement, unless you really need it. At which point you should wanna look at spending it on inappropriate things rather quickly, especially if you already have a judgment creditor who has looked to garnish your bank accounts, that you don’t have that money being sent or sitting in there.
How long does a bankruptcy take?
Okay, Beverly from Denver asks, “How long does a bankruptcy take?” There’s a couple of different nuances to that question. So, when you hire an attorney, you are gonna be told there are certain things that you have to accomplish. You have things like a document collection phase. You have data that we have to gather. You have to complete a credit counseling course. You’re generally meeting with your attorney to review all your paperwork and then you’re actually getting filed. So from the time you hire an attorney through to when you file your case will depend in large part upon how quickly you get your paperwork completed. There may be attorney fees to pay upfront, so however long that takes. So that’s very different in everyone’s situation. I will say that in our specific specific instance, we generally see clients moving pretty quickly through those process. On the long end, it can take six months, because we offer payment plans. On the short end, if you have all the funds and you pay in full, had someone who hired on a Monday and we were able to file on a Friday. Now after you file, that’s where the difference comes in in terms of timing between a Chapter 7 and a Chapter 13. You’re always gonna have one court date that you have to attend in both Chapter 7s and Chapter 13s. Those are going to run probably between four to six weeks after filing before you’ll go to that. It’s a time where you meet the trustee, creditors can ask you questions. it generally doesn’t take very long, but you’re about four to six weeks out after filing before that occurs. Now, in a Chapter 7 the normal timeframe from when your case is filed through what we call your discharge, which is basically the order that wipes out what debt can we discharged, it’s typically between 90 and 120 days. Once you get your discharge, there’s most likely not a lot that you’re gonna have to do. In a Chapter 13, it’s a little different. A Chapter 13 is a repayment plan. You are on the repayment plan for a period of three to five years. The bankruptcy itself does not get completed and discharged in a Chapter 13 until your last payment is made, anywhere between that 36 and 60 months. So you’re going to be in the bankruptcy and it’s going to be active for a much longer period of time in a Chapter 13 than it is in a Chapter 7.
Can an SBA loan be part of a bankruptcy?
All right, someone wants to know of an SBA loan can be part of a bankruptcy. We are seeing a lot of people who have taken advantage of SBA loans or the PPP loans and wanting to know what happens if they can’t pay those back, can those be part of a bankruptcy? For a normal SBA loan, if it’s unsecured, yes. A personal bankruptcy will alleviate the obligation to pay that back. Now, one thing you have to be careful of is a lot of SBA loans we see are secured against a piece of real estate or other property. If you’re granted a deed of trust on your house, which acts like a mortgage secured by that SBA loan, then if you file a bankruptcy that SBA loan will not be removed in most cases from that primary residence or whatever security interest you gave them on property. So you have to be careful that you look and make sure that it’s not tied through a deed of trust to your real estate, otherwise you cannot get rid of it in bankruptcy. Otherwise these other payroll loans and things that may have an SBA personal obligation definitely is something that can be looked at to be gotten rid of in a bankruptcy scenario.
My mom has been helping me by paying some of my bills for a while. How much could this affect my bankruptcy if I file?
All right, someone is asking, “If a family member has helped them pay bills for a while, “if this could affect their ability, “or how it might affect a bankruptcy filing?” So when you get help from a family member or friends, sometimes people are doing it as a gift and they don’t expect the payment back. And sometimes they’re expecting it to be paid back as a loan. How those are treated in bankruptcy are a little bit different. If you received that money as a gift or help, and you’re normally not going to after you get out of the debt situation, have that be money that’s continuing to come in. We don’t typically count it as income in some instances, depending upon the amount possibly we do disclose if you’re thinking it’s gonna be ongoing, that it will be part of your monthly budget. If you have someone who wants you to pay them back and you have paid them back money in the year before filing, that can be something that is a problem in a bankruptcy. We have what we call insider preference or insider fraudulent conveyance laws that prohibit family members, friends, people with a close relationship to you from being preferred over your other creditors. Now, if you have been paying all of your other debt equally, minimum payments, everybody else, and you’re paying your family member back too, then you’re treating everyone fairly. But a lot of times what happens is when you can’t pay your bills and you owe a family member or friend money, you pay them back first. If you do that in the year before filing, a bankruptcy trustee can go and take that money back, either from you or from the person who you paid back. So if you’re contemplating bankruptcy and you owe a family member or friend, and they want to be paid back and it’s not a gift, we would recommend that you do not pay them back if at all possible. Once you file the bankruptcy, you can list them as a creditor, they’ll get discharged. But if you choose to pay them back after, then that is something you can choose to do. But we do not recommend paying back a family member or friend money before you file bankruptcy. If you already have, well, then what we do is we offer those consultations to work through some possible options for you on either how to get around it or waiting a certain period of time so it’s dropped off and you don’t have that risk of that money being taken back.
Can you explain what the class is you have to take when you file for bankruptcy? How long is the class?
Bryce in Colorado wants to know what the class you have to take when you filed for bankruptcy is, how long is it, what are the general things surrounding that class? So in order to file bankruptcy, before you file, you have what we call a credit counseling course you have to take. Most companies offer them online or over the phone. You’re not going anywhere to take a class. It does take about 90 minutes. If you’re doing it online, you are timed. It is pretty much set up as a PowerPoint. It’s designed to get information about your budget, where your money is going, what your finances should look like. And once you’re complete, they will issue a certificate of completion to you or your attorney. And that gets filed with the court so they know you’ve completed that. There are any number of places online. We do tell people to be careful because there are some scams out there. You wanna make sure it carries a bankruptcy court approved designation on their site, or some other indication that they are bankruptcy court accredited. Once you file, there’ll be an obligation to complete a second course. It’s called your financial management course. And before you can get your discharge, you have to complete that. Most of the time we recommend doing it right away, it will require your case number. So you have to have filed in order to have that second course completed, but that also does need to be filed with the bankruptcy court. So you wanna make sure that you complete both the pre and the post course once, one to get filed and one to actually get your discharge.
Are you restricted from doing anything while you’re going through bankruptcy?
Someone wants to know if you’re restricted from doing anything while you’re going through bankruptcy? It’s a very broad question and somewhat tough to answer, because again, it comes down to different chapters of bankruptcy and certainly honestly different circumstances of other people as you’re going through this. As a general rule, while you’re going through bankruptcy, meaning you’re in the process, but you haven’t filed, you wanna make sure that again you do not pay back family members or friends who have loaned you money. You don’t wanna go out and charge up all your credit cards or incur other debt right before you file, because you could run into fraud issues. You do not wanna be transferring title of assets out of your name. If you have a car and your child drives it and they turn 18 and you wanna transfer it to ’em, don’t do that prior to bankruptcy filing, keep everything the same. Or at least until you talk to an attorney. We are trained to do asset planning and preparation of bankruptcy and guide you through based upon your certain specific circumstances, what may be appropriate to do and what may not be. Certainly selling assets to other people for way less than they’re worth is a problem. You get into what we call fraudulent transfers, especially if it’s with a family member or friend, those are gonna be very highly scrutinized and have to be reported in the bankruptcy. So you wanna make sure you’re doing it correctly. We also don’t recommend liquidating your retirement account or other protected assets and having that money in an unprotected asset to where the trustee could ask for turnover of that in a bankruptcy. So those are just some of the general things you wanna keep in mind. And again, when a client comes in, we have them fill out a form that’s designed to capture things like what assets you have, what types of transfers you’ve made. So we can assess whether we need to give some guidance on what to do or what not to do. Once you file bankruptcy, the only thing you can’t do for your kind of two year period runs is buy the home. And I think I’ve mentioned this before, the FHA guidelines say that you have to wait two years once your case is filed to be able to actually purchase a home without a co-signer. You can go out and you can get a new car and you could go out and accrue new debt, not typically recommended if you’re coming out of bankruptcy. So at least in a seven there’s not a lot of things you can’t do. Now, if you’re in a Chapter 13, buying a car, buying a home, you do have to get court approval. You have to wait to sell your home until you’re confirmed. If you wanna change jobs, then you have different income, then there’s reporting requirements to the court. But by and large living day-to-day, paying your bills, working, you’re not gonna have much if any impact on the day-to-day life of things you can and can’t do once you file bankruptcy. Okay, I’ve got a question, “Are you restricted?” Oh sorry, I already addressed that, next one.
When does a bankruptcy appear on your creditor report? After you file or after the bankruptcy is finalized?
What does the bankruptcy appear like on your credit report? When does it appear and how long does it stay? So, that depends on your credit reporting agencies. We typically say your bankruptcy will appear anywhere from a week to four weeks on your credit report as a public record once you file. How long it takes your individual creditors to close out the accounts and show them as in bankruptcy may take a little longer. For example, we had one where we gave notice to the address on the bill, but they had a outsourced bankruptcy department, so it took a few more weeks for the bankruptcy department to get notice of the bankruptcy from the collection department, and therefore it still showed up a little longer on the credit report because of that difference in where we sent the notice and where the processing of the bankruptcy took place. It is the responsibility of the lender to notify the Credit Bureau of the bankruptcy. So we always recommend you pull your credit report six months after you filed to make sure there’s no one who’s not supposed to be reporting on that form. The distinction that we run into, and a lot of confusion comes between the fact that you filed bankruptcy, showing your case number. When you file and where you filed, that’s gonna show up on your public records section. And that will typically be fairly quick. The credit score is tied to the reporting of the debt in the actual collection section or your account section, which is different from that public record section. And so that’s why it can take anywhere from two to maybe six weeks for all the accounts to be zeroed out and show in bankruptcy. And then how long does it stay on there? While the public records section will reflect the bankruptcy filing and specifics to the case actually being in existence until about seven to 10 years after filing. Now, I will say some people say, “What happens if my bankruptcy doesn’t go through, “if it is dismissed or whatever the case may be, “you don’t finish it?” Unfortunately, once you file, the fact that you filed goes on the credit report and it cannot be removed from that public record section, just because you say, “I didn’t complete it “or it didn’t go through discharge.” Once you file, it’s gonna show that you filed. It’s not gonna contain any other information about whether dismissal, if it was discharge, it’s gonna stay on there. And that credit impact, even if you don’t complete the bankruptcy will stay at that kind of year and a half to two year mark of where you’re going to find that it’s gonna take that period of time to recover that credit score, once you file, even if you don’t complete the bankruptcy.
Is there anyway to keep your house if you file chapter 7?
Another question we got, “Is there any way to keep your house “if you file Chapter 7?” So, if you are current on your mortgage payment and your home has less than what we call a homestead exemption in terms of equity, then you’re able to keep your home as long as you make your payments. We run into issues in Chapter 7 where if you have too much equity, you could have a risk of the trustee taking and selling your home. That is why we offer Chapter 13 as a protection for the equity of your home. The homestead exemption in Colorado is not per person. That’s one thing a lot of people mistake, they say, “Oh, I have two people who are on the title, “or maybe even more, “I get to take the homestead exemption “and I get to double it, because there’s two people.” Well, the homestead exemption does what we call, it runs with the land. There’s only one homestead exemption for that property. Anyone who is younger than 60, or doesn’t have any documented physical or mental disability or any dependent who resides there as their primary residence, can claim a homestead exemption of 250,000. If you exceed that number, it may not be enough for the trustee to want to sell the house in a Chapter 7 because there’s realtor fees and some other closing costs. But the more you go over that 250,000, the more at risk you are of having that house sold, regardless of whether you keep current on your payments. For anyone who is 60 or older, or does have some type of documented physical or mental disability, the homestead exemption bumps up to 350,000 for equity protection. So that’s why it’s really important to one, kind of get a good idea of the value, because you know online appraisals are somewhat high based upon Zillow or something else, so. Getting a market analysis from a realtor, just doing your due diligence about what houses are selling for in your neighborhood will give you a good idea. Also two, when we do an assessment, we review what that debt against the property looks like, versus the value of the home to say how much equity relative to your ability to claim whichever amount of homestead you have, how much equity does that leave? And certainly in cases of Chapter 7, where it exceeds it by quite a bit, we do not recommend filing that way. Unless you have money sitting around where you could pay the trustee the difference between the equity overage and what debt you owe. That is where Chapter 13 comes in. And Chapter 13 allows you to protect that equity that you otherwise might lose in a Chapter 7. But, going back to the original question, depends on your circumstances and the house value equity, and whether you’re current on your payments. Certainly if you’re not current on your mortgage payments, we would not want to put you in a Chapter 7 if you’re trying to keep your home, we would wanna look at a Chapter 13. There’s some instances where you’re wanting to sell your house, but you don’t want it to go to foreclosure because you lose that homestead exemption back to the bank. They don’t have to pay you anything through a public trustee sale. So if you were just trying to buy more time to sell the home, you could actually file a Chapter 7 and have the trustee sell your home for you. You’d be guaranteed the first, either 250,000 or 350,000 and then other amounts over that would be used to pay some of your debt. So sometimes we use the Chapter 7 to actually try to sell the house, because it gives you a longer period of time to stop the foreclosure if a foreclosure is eminent, but you can otherwise maybe afford to keep the home through a Chapter 13.
Is alimony or child support considered income that creditors can come after?
All right, a couple more questions, “Is alimony or child support considered income that creditors can come after?” So there’s really two different parts of that question. In terms of a bankruptcy child support and alimony, in terms of determining your meeting income for eligibility for Chapter 7 or Chapter 13, it is counted as income. It goes towards what that gross median income is. And if you’re too high for a Chapter 7, it can push you into a Chapter 13. So it’s counted as income on what we call the means test for bankruptcy. In terms of whether or not a creditor can garnish those funds or intercept them, they cannot, unless you put them in a bank account and leave it there unprotected. It does have an exemption as long as the funds are the only thing in that account. Once you do what we call co-mingling monies, such as with wages or with sale proceeds from a house or anything other than the child support and alimony payments, you come into some issues where, if you can’t show dollar for dollar in that bank account what was alimony and what was child support, you may have a judge say they’re unable to take all of it and you may not have a claimed exemption. So when you have debt and you are getting things like social security, disability, child support and alimony, which were otherwise exempt, we always recommend getting a separate account where the only money that goes into that account is that source of funds. You do not put wages, you don’t put anything else in that account. You can take money out of it and put it into other accounts as needed. But by and large, we certainly suggest setting up a direct deposit account. Or if you have one of those cards it gets loaded on so that you can clearly show the only funds in that account or on that card are and have been the protected funds, this case specifically child support and alimony, but it would also apply to your property through social security, disability, those types of things.
How soon do you start paying your chapter 13 payments?
All right, it looks like we have time for maybe one more question. Ginny from Denver wants to know how soon you start paying your Chapter 13 payments? So once you file a Chapter 13 bankruptcy, you will have 30 days and then your first plan payment will be due. And then every month thereafter, it will fall on the same date of the month per the court’s instruction, it will not change. You can split up your payments if you want to do weekly, if you wanna do biweekly, some are monthly, or just once a month, a lot of people do that. But your first plan payment would be due 30 days after your case is filed. So that’s why, depending upon what circumstances you have for a rising and needing to file bankruptcy, planning and meeting with an attorney to talk about your budget and finances and getting a workable timeframe down for filing the bankruptcy is really important.
All right, that is all the time we have for questions today. I wanna briefly remind you that again, we offer free in-person, Zoom or telephonic consultations that are half an hour. What we do is we gather information from you so we can make sure we’re addressing your needs. You tell us kind of why you’re calling in, and we’ll be able to address what options you have. Maybe it’s bankruptcy, maybe it’s debt resolution. Maybe you’re just calling in to get some guidance. Maybe you’re not in a position where you need to do it yet, but I always recommend before the need arises, arming yourself with that knowledge of knowing what your options are. You can go through our website, robandhen.wpengine.com to schedule that, you can self-schedule. You can also call the main office number at 688-0944 to schedule that as well. Also remember, we have these live events every Friday. So you can preregister, even if you aren’t able to attend, you can send us your questions and we’ll be happy to answer them. And if you aren’t able to attend, we will put these up on LinkedIn, Vimeo and our website, and I believe also Facebook, so you can refer back to these if you have any questions specifically. We’ve also been doing some small little videos about other germane topics that may not get addressed in these question sessions. So feel free to check all of those out. Again, I’m attorney Elizabeth Domenica, joining you for “Debt Resolution Friday.” Thanks for tuning in, I’ll see you guys next week.