Suleman faces $1 million in debt and her assets total only $50,000. She has called her financial state "rock bottom" and is hoping that Chapter 7 bankruptcy will help her start anew. She has been supporting her children with Social Security Disability payments and food stamps. She owes money to her father as well as her gardener, her children's school, the owner of her house and DirecTV.
]]> Bankruptcy creditors: Priorities and preferencesAs Suleman's bankruptcy shows, the creditors in a bankruptcy action can range from a mortgage company to a gardener and family member.
In a Chapter 7 bankruptcy case, the bankruptcy trustee will liquidate the debtor's assets to pay back creditors. There are specific rules detailing which creditors receive money when. For example, any creditors with valid liens on your property (such as mortgage companies) get the first bite at the apple. Then, the trustee will pay a long line of priority creditors. Priority debt includes debt such as domestic support obligations, administrative expenses and non-dischargeable tax debt.
Because of these rules, debtors should not pay off one creditor prior to filing bankruptcy. Many debtors would like to pay back their family members or friends before filing for bankruptcy, but this is a mistake. The bankruptcy trustee can go after any of these "preferential payments" up to one year prior to filing, including contacting a family member directly to seize the payments.
There is no evidence that Octomom has made preferential payments. However, her case is a good example of the variety of debts that people face before they file for bankruptcy. If you face multiple debts and are considering filing bankruptcy, contact an experienced bankruptcy lawyer.
Source: Digital Journal, "Octomom Nadya Suleman files for bankruptcy, $1 million in debt," JohnThomas Didymus, May 1,2012.
]]>This is exactly what we advise clients not to do. Bankruptcy myths scare many people away from the one thing that could lead to financial independence: filing for bankruptcy.
The truth is that you will be able to keep some of your most important property during Chapter 7 bankruptcy. Both California and federal bankruptcy law allow you to exempt property from bankruptcy. You may choose between using either the California bankruptcy exemptions or the exemptions found under the U.S. Bankruptcy Code. There are also two separate California exemption tracks that you must choose between.
]]> They are:703 exemptions / Wildcard exemptions
Debtors who do not own a home usually choose this track. Under this track, you may exempt:
704 exemptions / Homestead exemptions
This track is best for those who would like to keep their home during bankruptcy. Under this track, you may exempt:
*Note: The dollar values listed above are subject to change. For a current list, please see an experienced bankruptcy attorney.
]]>The Dodgers filed for protection under Chapter 11 of the Bankruptcy Code in June following the owner's dispute with Major League Baseball (MLB) that left the franchise short of cash. A bankruptcy court required the team's owner, who was accused of looting funds, to sell the team and accept MLB's bankruptcy financing. The Dodgers then looked into possible media deals, entering into talks with Fox Sports without MLB's permission.
]]> After months of negotiation with a retired bankruptcy judge acting as mediator, the parties reached an agreement on the sale and media rights. The settlement allows the bankruptcy court to consider a new reorganization plan that sells the team for $2.15 billion to Guggenheim Baseball Management, a group including CEO Mark Walter, baseball executive Stan Kasten and former basketball star Magic Johnson.Part of the purchase price is funded from the existing debt financing from MLB. The court will decide whether the plan follows a fair auction process.
The Dodger's lawyers say the plan is a generous one that will fully compensate the team's creditors for their allowed claims. If the bankruptcy court confirms the plan, the team will emerge from Chapter 11 bankruptcy after nearly a year under the court's supervision. MLB is expected to raise questions about ownership of stadium parking and the court's ability to resolve future issues, but experts say the court is likely to confirm the plan.
The Dodgers' Chapter 11 bankruptcy is one of many examples where businesses were able to emerge from bankruptcy with effective reorganization plans. To learn more about Chapter 11 bankruptcy, speak with an experienced bankruptcy lawyer.
Source: CBS Los Angeles, "Dodgers Sale on Track to Exit Bankruptcy By April 30th," Apr. 6, 2012.
]]>He and his wife had assets of $833,000 but their debts were more than that, at $895,000. Like other individuals who face bankruptcy, his income dropped significantly in the last few years - from $270,000 to $170,000.
The social stigma of bankruptcy is fading as more people discover that Chapter 7 and Chapter 13 bankruptcy can lead to debt relief and a financially secure future.
]]> Through Chapter 7 bankruptcy, a bankruptcy trustee liquidates a debtor's nonexempt assets in order to pay back creditors. However, there is a wide range of property that is exempt from bankruptcy, which means many debtors will not lose their most significant property (such as a home). Furthermore, once the bankruptcy is complete, the debtor can move forward relatively debt-free. Certain debts, such as student loan debt, will remain, but others will be discharged.Some people do not qualify for Chapter 7 bankruptcy. Generally, your income must be less than the state's median income to qualify. The bankruptcy judge, as well as other higher-income-earning individuals, can still qualify for Chapter 7 bankruptcy if they meet the Chapter 7 "means test," a complicated calculation that takes into account monthly income, expenses and unsecured debt.
If a debtor does not qualify for Chapter 7 bankruptcy, he or she may still file for Chapter 13 bankruptcy. This form of bankruptcy allows a debtor to repay creditors over an extended period of time (three or five years) through a Chapter 13 reorganization plan.
Source: Mercury News, "Federal judge in Los Angeles files for Chapter 7 bankruptcy," Associated Press, Apr. 26, 2012.
]]>An adversary proceeding involves three parties to the bankruptcy: the creditor, the trustee and the debtor, and any of the three can initiate the process if they feel wronged during the course of a bankruptcy.
There are three types of adversary proceedings. In the first type of adversary proceeding, the creditor argues that the debt owed to it should not be discharged through the bankruptcy. For example, a creditor can argue that the debt owed is an exception to bankruptcy discharge because it was the result of fraud. A creditor may also bring an adversary proceeding when it believes the bankruptcy was filed in bad faith.
]]> The second type of adversary proceeding may be filed by a bankruptcy trustee for several reasons. The trustee could argue that schedules were not filled out properly or were intentionally fraudulent. The trustee may also file an adversary proceeding in order to get money back from a creditor after it received property or money from a debtor that was not in line with the bankruptcy proceedings. In addition, the trustee may file an adversary proceeding in order to undo the transfer of real property, or have the debtor's bankruptcy shifted from Chapter 7 to Chapter 13 if they feel bad faith is involved.The third type of adversary proceeding is when the debtor files against the creditor. The debtor may get damages from the creditor because the creditor took action in violation of the U.S. Bankruptcy code, violated the automatic stay or violated the discharge injunction. In other words, if the creditor attempts (unlawfully) to collect money or property from the debtor during the bankruptcy proceedings, the debtor may bring an adversary proceeding to stop the creditor's actions.
]]>The term "pink slime" refers to boneless lean beef trimmings treated with ammonia, and the type of beef has long been considered safe to eat under USDA guidelines. Recently, boneless lean beef trimmings acquired the moniker of "pink slime" as critics began to attack the meat as unhealthy and unappetizing. Some fast food restaurants such as McDonald's and Burger King have stopped using the meat, and schools and supermarkets have also pulled the type of beef.
With major purchasers of boneless lean beef trimmings now refusing to purchase the product, many meat producers have been negatively affected. AFA Beef Products Inc. was forced to close three of its four processing plants. A debt extension plan that was in the works before the public outcry over pink slime began was not sufficient to aid the company after the media frenzy hit.
According to the company's bankruptcy filing, the outrage over pink slime reduced the overall demand for beef products to the extent the company could not hold out until the spring barbeque season began. AFA may not be alone. Tyson Foods Inc. echoed AFA's sentiments that demand for ground beef products will slump because of the fallout over lean beef trimmings.
]]> Unfortunately, certain industries or businesses can be subject to sway of public opinion. If the market turns against a business, a bankruptcy attorney can help a business restructure through the Chapter 11 process while helping a company repair or maintain its reputation.Source: Los Angeles Times, "AFA Food Blames 'Pink Slime' Controversy for Bankruptcy Filing," Tiffany Hsu, April 2, 2012
]]>Secured debt is debt that a debtor has backed up with collateral. In other words, the borrower pledges property (such as a house or a car) to the lender in order to ensure the borrower will repay the loan. If the borrower defaults on the loan, the lender can seize title to the property. A home mortgage is a secured debt.
Unsecured debt is not secured with property. Instead, unsecured creditors often use higher interest rates. Credit cards and student loans are examples of unsecured debt.
]]> Priority of creditors in bankruptcyThe U.S. Bankruptcy Code determines which creditors have preference over others in collecting on their debts during bankruptcy.
Secured creditors have protections above those of unsecured creditors. For example, in a Chapter 7 bankruptcy case, most unsecured debts can be discharged without consequence. Secured debts can also be discharged, but secured creditors have a right to take the property that was used as collateral on the loan.
A debtor may choose to pay off debt and make payments on secured claims during bankruptcy. Otherwise, he or she must surrender the property, agree to pay back the loan through a reaffirmation agreement or redeem the property (pay the lender the full value of the property as of the date you filed for bankruptcy).
Some unsecured debt does take priority under the Bankruptcy Code. These debts include (in order of priority):
Source: U.S. Bankruptcy Code, 11 USC Section 507, "Priorities."
]]>The only way to discharge your student loans in bankruptcy is to prove that repaying those loans would impose undue hardship on you. This is a very difficult standard to meet. To prove undue hardship, you must show:
Crippling student loan debt
The total U.S. student loan debt is even greater than credit card debt, at approximately $867 billion. The individuals and groups who would like to change the system believe that private student loan debt is especially concerning, since many private loans do not offer income-based repayment or other debt management options.
Sallie Mae, the largest private student loan lender in the U.S., supports loan discharge reform as long as students have made a good-faith effort to repay the loans during at least a five-year repayment period.
Those opposing the discharge of student loans in bankruptcy state that the discharge would force lenders to increase interest rates on those loans. Thus, the cost of student loans would increase for all borrowers. Instead, they say, the issue is not student loan debt per se, but the root of that student loan debt: tuition inflation.
Source: SFGate, "Durbin urges private student loans be discharged in bankruptcy," Janet Lorin, Mar. 21, 2012.
]]>Here are some common questions bankruptcy clients have about credit and bankruptcy.
]]> Will bankruptcy destroy my credit?Bankruptcy will not stay on your credit report forever. After filing for Chapter 7, the bankruptcy will appear on your credit report for 10 years. A Chapter 13 bankruptcy will appear on your credit report for seven years. During that time, you can still obtain credit and work on reestablishing yourself as a credit-worthy individual.
Will I be able to buy a house or car after bankruptcy?
After a few years, many individuals who go through Chapter 7 or Chapter 13 bankruptcy can get a mortgage loan on very similar terms to those who haven't filed for bankruptcy. Car loan and mortgage companies are most interested in how much money you can put down on the home/car, your monthly income and your financial stability.
How can I rebuild credit after bankruptcy?
There are many steps you can take to rebuild credit, but all come down to financial responsibility. Now is the time to show that you are financially secure. You can do this by:
Source: Market Watch, "Unlocking the black box," Andrea Coombes, Nov. 9, 2004.
]]>American Airlines would like to cut approximately 13,000 jobs, a request which is certainly concerning to the unions. Attempts to come to agreements with the unions have failed, and American Airlines has said it will likely ask the Chapter 11 bankruptcy judge to allow it to throw away contracts with the unions and start anew.
]]> If arbitration is allowed, it would likely be binding arbitration. Arbitrators, or neutral third parties, would listen to both sides of the dispute (American Airlines and the unions) and set contracting terms, which both sides would need to accept.Usually, the U.S. National Mediation Board does not take part in bankruptcy concession talks. Whether they will intervene in American Airlines' Chapter 11 has yet to be seen.
As a company going through bankruptcy, American Airlines is in a tough position. The pilots union recently brought a lawsuit against American, challenging its authority to throw out the contracts. Meanwhile, the airline has already bypassed previous proposals by the other unions that would have reduced the number of jobs cut.
While many businesses don't have to negotiate with unions while going through Chapter 11 bankruptcy, there are other parties to consider, including creditors and investors. Whether you are a business going through a bankruptcy, a creditor or a third party involved in the bankruptcy, turn to a bankruptcy lawyer who understands the many facets of bankruptcy.
Source: BloombergBusinessweek, "AMR Unions Seek Arbitration in Bankruptcy Concession Talks," Mary Schlangenstein, Mar. 9, 2012.
]]>Through Chapter 11 bankruptcy, American Airlines' goal is to cut its costs by $2 billion; however, it would also like to increase the number of departures it makes from key hubs by 20 percent, thereby increasing revenue while cutting costs.
"It's about renewal and growth," said Tom Horton, the CEO of American Airline's parent company, AMR. American Airlines has scaled back its business substantially in the last ten years and it is the only major airline currently in bankruptcy. In prior years, multiple airlines were in bankruptcy at one time.
]]> Now, American Airlines must try to stay competitive while cutting its costs.American Airlines plans to use new equipment to meet this goal, and will not cancel its order of 460 new jets. The aircraft will reduce fuel costs and appeal to its corporate customers. According to the chief commercial officer of American, Virasb Vahidi, "Our best corporate customers demand that we have frequency of service in key markets because they want to fly when they want to fly."
In addition to increasing its number of departures and buying fuel-effective airplanes, American Airlines also plans to target international joint ventures as well as expand its domestic partnerships to increase revenue.
Chapter 11 Reorganization
Reorganizing through a Chapter 11 bankruptcy allows businesses to remain in possession of their assets and continue to operate the business under supervision of a bankruptcy court. Generally, a business debtor negotiates a reorganization plan with its creditors. The plan must be approved by the creditors and the court.
As seen with American Airlines, Chapter 11 bankruptcy is a flexible bankruptcy option. Of course, some struggling businesses are better off liquidating their assets under Chapter 7. A bankruptcy lawyer can help you determine what the best option is for your business.
Source: Financial Times, "American eyes route out of bankruptcy," Jeremy Lemer, Mar. 5, 2012.
]]>In order to file for bankruptcy under Chapter 7 of the U.S. Bankruptcy Code, you must meet a "means test."
]]> The means test states that a debtor usually cannot file for Chapter 7 bankruptcy if his or her monthly income is less than the state median. In California, the state median income for single income earners is $47,683. The median income for a family with two people is $61,539, for a family with three people, it is $66,050 and for a family with four people, it is $74,806. These numbers change frequently, so please check with an attorney or with the U.S. Department of Justice to find out if your family meets the California state median income.If a debtor's income is more than the state median, he or she may still be able to file for Chapter 7 bankruptcy if the filing is not considered "abusive" under the Bankruptcy Code.
The court will determine that a filing is abusive if the debtor's aggregate current monthly income over the last five years is more than $11,725, or more than 25 percent of his or her "nonpriority unsecured debt" and at least $7,025. The debtor will have a chance to overcome this finding by showing that he or she had special circumstances that justified the difference.
A debtor who does not meet the Chapter 7 means test can still file for Chapter 13 bankruptcy. A bankruptcy lawyer can help you determine if you qualify for either type of bankruptcy and help you start down the path toward financial recovery.
Source: United States Courts, "Liquidation Under the Bankruptcy Code," Alternatives to Chapter 7.
]]>What court cases are put on hold during bankruptcy?
If bankruptcy does not prevent an infringement case, what court cases does it halt? Probably the most important actions that bankruptcy stops are creditors' actions to collect on their debts. During bankruptcy, all judgments, collection activities, foreclosures and repossessions of property are suspended unless the court grants a creditor relief from this "automatic stay."
]]> There are also a number of exceptions, or cases that can continue during bankruptcy, such as:Kodak's bankruptcy
Kodak filed for Chapter 11 bankruptcy in January due to its failure to sell digital cameras (even though it invented them). According to court filings, the company has $5.1 billion in assets and $6.8 billion in debt.
Through a Chapter 11 bankruptcy, a business can reorganize under the U.S. bankruptcy laws. During the bankruptcy, the debtor usually remains in control of the business and the business' debts and assets are reorganized. The debtors and creditors may propose plans to allow the debtor to repay creditors over a certain period of time.
Source: Bloomberg, "Apple Asks for Court Approval to Sue Bankrupt Kodak in N.Y. Over Patents," Joel Rosenblatt, Feb. 15, 2012.
]]>Forty-nine attorneys general signed onto the deal (all except for the Oklahoma AG), as well as the U.S. Department of Housing and Urban Development (HUD) and the Justice Department.
The settlement includes $1.5 million for homeowners who faced home foreclosure between 2008 and 2011. These homeowners will receive $2,000 for improper foreclosure but may still sue their banks to recover damages.
]]> Perhaps more importantly, the settlement could stop future home foreclosures. The settlement will benefit underwater homeowners, or homeowners who owe more on their principal than their houses are worth. At least $17 billion will go to reduce principals faced by underwater homeowners. The money could potentially help one million homeowners reduce their principal by $17,000. Others will be able to refinance their mortgage loans to reduce their rates.California's position on the mortgage deal
California Attorney General Kamala Harris said that California might receive up to $18 billion of the settlement money. While she claimed it was a victory, she also said, "There is a lot of work yet to be done." She has appointed a California monitor to ensure that the banks keep to the terms of their agreements.
Harris had originally refused to sign the settlement because it prevents states from bringing civil charges for wrongful foreclosure. The relief offered to California was then $4 billion. She has agreed to the greater relief now offered.
California was one of the states hardest hit by the mortgage crisis. In California, nearly two million homes are currently underwater.
Source: CNN Money, "Mortgage deal could bring billions in relief," Chris Isidore, Jennifer Liberto, Feb. 9, 2012.
]]>The new home refinancing plan would allow some homeowners to find relief - most eligible borrowers would save approximately $3,000 per year. This plan would be available to homeowners whose homes are underwater by 140 percent (the principal on their mortgage exceeds their home's value by 140 percent) and who have been unable to refinance due to their underwater mortgages. These homeowners - potentially 3.5 million borrowers - would now be able to take advantage of the lower rates available through refinancing.
]]> The deal is also beneficial to mortgage companies, who would receive immunity from any new state servicing and originating claims (though not from criminal investigations). Homeowners could still pursue claims against these companies.This plan comes after allegations that mortgage companies used robo-signing and other improper services to foreclosure on some homes. Yet, the home refinancing plan would not return homes to those who have already lost them to foreclosure.
States have only a few days to decide whether to sign on to the plan. According to CNN, the California Attorney General has considered rejecting the plan, saying that it is simply not good enough. Attorneys general from multiple states are concerned that agreeing to the deal would hurt their current investigations into the mortgage crisis. The plan would also have to pass Congress, which may be difficult given the history of past attempts.
Whether or not this home refinancing plan is approved in California, homeowners may still decide to file for Chapter 7 or Chapter 13 bankruptcy. Bankruptcy stops foreclosure and may allow debtors to repay their mortgage debt through manageable payments.
Source: CNN Money, "Finally, a foreclosure settlement (maybe)," Jennifer Liberto, Feb. 3, 2012.
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