Firm Blog

Reaffirmation Agreements in a Chapter 7

Keeping your current vehicles following a Chapter 7 proceeding may involve what is called a “reaffirmation agreement.” It is a post-filing promise to remain personally bound on the secured debt, and it is an agreement that is additional to your bankruptcy statements and schedules—a reaffirmation agreement is one drafted by the creditor. In the event of a subsequent default, the agreement allows the creditor to sue you for any deficiency if it seizes and sells the collateral for less than what is owed. A reaffirmation agreement can be sought for any debt that is secured by a lien on tangible or real property. Though bankruptcy discharges most unsecured debts, most liens will remain in place. There are other options, about which I have previously written.

As your Austin bankruptcy attorney, I can help you with a reaffirmation agreement, under which you agree to repay an original loan on secured property like an automobile or a boat. Often a lender, acting in its own best interest, will give you some concessions on principal, interest rate, and the repayment schedule to accommodate your projected circumstances after discharge of your Chapter 7 bankruptcy. Unless you have considerable equity in that property, the lender will be anxious to obtain once again your personal guarantee.

You must, however, be able to demonstrate in a hearing with me before your bankruptcy judge that you can live up to the terms of any proposed reaffirmation agreement. And, often the judge will expect some concessions from the lender in order to look favorably on the agreement. It is important to realize that a reaffirmation agreement is only effective if approved by the judge. He or she must conclude that the agreement is in your best interest and that you are not likely to default under the revised terms and conditions of the loan.

However, there is an important exception. If you sign a reaffirmation agreement with a credit union, that agreement is binding with or without the consent of the judge.

In any case, you do have a short period of time to change your mind after signing a reaffirmation agreement, even if the judge has approved it. You have sixty days from the date you signed the agreement OR your discharge date to rescind the agreement. CAVEAT—often a hearing on the agreement occurs after your proposed discharge date, so your case can be discharged as soon as the judge enters his ruling—giving you virtually no time to rescind.

Note that if you are in arrears on a secured debt when you file for bankruptcy, a lender typically does not offer a reaffirmation agreement.

You should be aware of credit reporting issues when a debt is discharged under a Chapter 7 bankruptcy. Failure to execute a reaffirmation agreement is tantamount to discharging that secured debt as to you, personally. The lender’s only recourse thereafter is against the collateral. Normally the lender will stop reporting payments to the credit bureaus and will show your balance as zero. If the debt is reaffirmed, you will have a longer continuous history, and the length of time credit has been established is an important part of rebuilding your credit score.

As with all Chapter 7 bankruptcy matters, I will advise you on whether or how to pursue a reaffirmation agreement based on a detailed analysis of your particular circumstances. There are cases where this is the best method to retain assets like that old reliable car that is your work transportation, but sometimes there are better alternatives. It’s a matter of doing the calculations carefully and of knowing generally what is acceptable to judges in this jurisdiction.

September 30, 2013 at 8:16 pm | Category: Client Education

Trusts and a Chapter 7 Filing

As an Austin bankruptcy attorney, I occasionally see cases where the debtor is the ultimate beneficiary of assets held by a trust. This can create complex issues, and it always is best to have professional guidance in resolving them. You do not want to expose to your creditors assets that you think are protected by a trust.

Someone may have set up for you what is called a “spendthrift” trust. For example, a family member with money to bequeath upon his or her death may make some of that available to you, but under the absolute control of an independent trustee. This instrument, for example, is often used to allow offspring to reach an age where they are deemed capable of managing their own affairs. You don’t necessarily have to be a runaway spendthrift, but this is a term of art that must be carefully defined in the trust documents. Laws and specific trust language requirements vary by state. If documented properly, these assets will be preserved after a Chapter 7 proceeding. The underlying theory is that you do not have any “control” over them and do not have the power to disburse them to your creditors.

You should also know that there are both revocable and irrevocable trusts. In a revocable trust, you as a beneficiary really have no control over the assets until the grantor dies. At that point those become your assets and can become part of your bankruptcy estate. In an irrevocable trust, the grantor has given up all ownership and influence over the assets in the trust. There may be provisions that limit your access to the assets, as in the spendthrift concept discussed above. If these are very correctly documented, you potentially can protect the trust assets from creditors. Trust documents are generally the province of highly specialized estate planning lawyers. As a bankruptcy lawyer, I can spot the risks associated with trusts and develop a strategy to deal with them in a Chapter 7, but you may also require estate planning counsel to be absolutely certain your trusts are properly implemented.

I recently saw one case where a couple had put their home in a trust. This had the terrible consequence of making the home an asset of the bankruptcy estate and not eligible for the generous homestead exemption under Texas rules. I advised them to undo the trust before considering filing, but in this instance I also referred them to specialized counsel because of the risks associated with even a small mistake in the trust documents.

Suffice it to say that the bankruptcy codes don’t allow you to transfer your assets into some form of trust that you control and to wash away your liabilities separately in a Chapter 7. That is not the intent of the “fresh start” concept of bankruptcy. But, if you are fortunate to be the beneficiary of a spendthrift trust, you will get a fresher start than most. Just beware of the landmines involved in trusts and bankruptcy estates and let your counsel guide you around those.

July 23, 2013 at 10:44 am | Category: Client Education

Understanding Preferential Payments in a Chapter 7

As an Austin bankruptcy attorney I often see cases where payments have been made recently to certain creditors but not all. A “squeaky wheel” collector may have persuaded you to send a check, or you may have repaid a debt to your cousin, but, unless defined amounts of time have passed, these will cause you problems in a Chapter 7 filing. The Trustee may in fact be able to recapture these funds from those you repaid. There will be no penalty to you, but the recipients of the money probably won’t look very kindly on such a circumstance.

Here are some guidelines to consider for payments against unsecured debt. If you repaid a debt to someone considered an “insider” – essentially a relative – in excess of $600 within one year of filing, then that payment will be recognized as a preference and is subject to recapture. That doesn’t mean you can’t pay rent to or buy goods and services from that same relative during the one-year time frame, but if your funds are clearly repaying a pre-existing debt, you’ve created a preferential payment. These actions are not illegal, unless you can be shown to be intentionally and fraudulently disposing of funds that ought to be available equitably to all your creditors. You can, however, within the year borrow money from a relative to pay off an earmarked debt, e.g., a credit card you absolutely must have for business travel, in which case you’re essentially substituting one creditor for another. You can pay your helpful relative after your chapter 7 has concluded, if you wish.

If a creditor is not an insider, the relevant time frame is only 90 days. But the dollar amount mentioned in your filing is still $600. However, it’s not likely in our jurisdiction that a Trustee will pursue recapture of a debt unless it’s considerably greater than that. As your Austin bankruptcy lawyer, I will need to review your specific situation to advise you on whether now is the time to file or whether you should wait beyond these preferential periods to avoid the Trustee’s chasing around creditors you were trying in good faith to make whole.

The bankruptcy code presumes you were insolvent during the 90 days prior to filing. If you can prove you were not insolvent during the time when you made what would appear to be a preferential payment, then you may be able to get an exception. But, these exceptions aren’t easy to achieve unless you had some obviously unforeseen calamity that brought you to my office on short notice.

The bankruptcy code is designed to accomplish social good by giving people a fresh start after financial setbacks, and it’s also designed around a general notion of fairness. All creditors affected by your filing deserve to be treated equitably, and the guidelines on preferences are intended to accomplish just that.

May 11, 2013 at 3:56 pm | Category: Client Education

One Very Useful Online Tool to Help You Manage Your Credit Score

Credit Karma

Credit Karma Home

As your Austin Bankruptcy Attorney I generally see damaged credit scores as my clients have fallen into situations that require my services.  A Chapter 7 filing won’t help, and it remains on your credit report for ten years.  But, normally within a year or less after discharge, your score will be higher than it was before you entered the process.  I have written previously on this topic, but today I want to recommend an online service that can take some of the guesswork out of repairing your credit after you are discharged.

That service is Credit Karma.  It’s free to use, and it provides you constant tracking of your score from one of the major credit reporting agencies.  Among its features is a scorecard that shows you exactly what elements of your overall credit picture are good or bad for you.  Establishing a pattern of consistent timely payments on any debts is one obvious good thing.  Unused credit limits can be a plus, especially if you can keep your card balances below, say, 50% of their maximum limits.  Applying for too many loans and thus getting your credit checked too often is a bad thing; if, for example, you shop a bunch of car dealers when trading vehicles and let them all check your credit to give you precise quotes, you’ll get dinged a bit.  (You, that is, not your car!)

Credit Karma has a simulator where you can test the likely outcomes of decisions you are making that affect your credit score.  When you register for the service, it collects all your credit data, and it can use that actual information to show you what happens if you open a new credit card account, or pay one off, or let some payments slide during a cash crunch.   You might be surprised at what you learn from this simulator; for example, it might behoove you to open up a new credit card and put it in a drawer just to have some additional unused limit.

Credit Karma makes money by giving vendors like card companies the ability to advertise their products on the site in a way that is specifically tailored for you.  If you decide to get a new credit card, you’ll see links to apply for cards that are designed specifically for persons in your category.  Your odds of an approval may be much higher than if you just choose cards based on Jimmy Fallon or Alec Baldwin TV commercials.  And, you want those odds to be high so you don’t waste your credit check bullets unnecessarily.

There are other Internet based credit services; you probably get spam ads for them quite often.  Some allow you to buy access to your scores from all three of the major consumer reporting services, and they show you everything on your record.  These may be needed if you suspect there’s an error in your credit history, and such errors are not uncommon.  If you have been victim of identity theft, by all means you should be looking at the details of your history and getting corrections made.

As your bankruptcy lawyer, my intake process includes a credit check using a professional service.  This provides me needed information beyond what you can typically find yourself in online consumer oriented products.  It’s the official transcript of all your creditors and their addresses and becomes part of your Chapter 7 filing.

Think of your credit score not as a snapshot of one moment in time but as a process that you need to manage over the years after your discharge.  You’ll bounce back faster than you might imagine if you use tools like Credit Karma to help you make the best decisions, and you’ll probably even qualify for better rates as you take on new debts.   My direct services for you will have long been complete, but I will always remain hopeful that you are successful in rebuilding from the fresh start a Chapter 7 gives you.

 

 

 

 

April 26, 2013 at 2:49 pm | Category: Client Education

Liabilities for Business Debts in a Personal Chapter 7 Filing

Many of the clients I see as an Austin bankruptcy attorney have arrived at the need to file a Chapter 7 as a result of a business failure. You may have done your best to make your venture succeed, but sometimes markets shift quickly, competitors prevail, technologies change, and things just plain don’t work out. You may choose to put your business through a bankruptcy proceeding, or, as is more often the case, you may just wind it down informally. If your business has little in the way of assets to repay creditors, bearing the added expense and time of a business bankruptcy serves no good purpose.

If you are a sole proprietor and have been reporting your business income on Schedule C on your 1040, you and the business are indistinguishable in the eyes of creditors. You are personally liable, and if the creditors pressure you, a Chapter 7 may be your best and only resolution.

If however, you are an officer of a C Corporation or a Limited Liability Company, or if you operate as an S Corporation for its tax advantages, the law generally shields you from the debts taken on by the company itself. But, there are exceptions:

1. Personal Guarantees: If your venture has taken on some debt or signed an office lease, chances are high that you (and perhaps other officers) have personally guaranteed those obligations. When you shut down the company, you’ll still be obligated to pay those off. Even bankrupting the company provides no shield against that exposure.

2. Company Liabilities: If any funds are held in trust for government entities, like payroll tax withholdings and sales taxes collected but not remitted, you may have to cough those up out of your pocket. Corporate regulations vary considerably by state and change from time to time, but some states have gone further and will hold you liable for unpaid payroll, particularly if you let it accumulate knowing the company was headed into insolvency and would be unable to make good the obligations. In any event, if you are the one who keeps the books and pays the bills and fails to forward any taxes held in trust or to pay any earned wages, you can be held personably liable in Texas.

3. Fraudulent Transfers: If you removed assets, including intellectual property, customer lists, etc., from your company with the intention of getting a head start on a restart, you may be guilty of fraudulent transfers and be required to make those good for the benefit of the company’s creditors.

4. Failure to Follow Corporate Regulations: If you cease filing annual reports and meeting other routine corporate rules and continue to operate a business, you may transfer liabilities from the company to yourself. It is important to stay on top of these otherwise routine matters.

5. Personal Judgments Resulting from Corporate Dealings. If you’ve gotten sued along the way and have some creditor judgments against you as an individual, perhaps because you personally guaranteed a debt, those too will linger and demand your attention.

When you retain me as your Austin bankruptcy lawyer, I will review your personal exposure under Texas law to any of these types of liabilities resulting from shutting down a business. Some of these debts may be dischargeable in a personal Chapter 7, and some may not. Allow me to review them in the context of your overall circumstances, and we’ll find the best course of action for you.

April 17, 2013 at 10:30 am | Category: Client Education

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