Tuesday 2 October 2012

Newlyweds & Bankruptcy

If you recently got married, you now have the option to file a joint bankruptcy with your spouse to discharge your debts together. However, in some circumstances, being married can make it harder for you to qualify for Chapter 7 bankruptcy or protect all of your property. Read on to learn more about how being a newlywed can affect your bankruptcy.

Filing Jointly Can Save You Time and Money

For bankruptcy purposes, one of the main benefits of being married is the ability to file a single joint bankruptcy petition. A joint bankruptcy is normally more convenient because you get to wipe out all of your debts together in a single bankruptcy and you don’t have to attend separate hearings.

Filing jointly can also save you money because court filing fees are the same for an individual or joint bankruptcy. Further, most attorneys (if you decide to hire one) will charge a lot less for a joint bankruptcy than two individual bankruptcies because there is less work involved with a single petition. However, depending on your income, assets, and debts, filing a joint bankruptcy may not always be in your best interest (discussed below).

Being Married Can Make It More Difficult to Qualify for Chapter 7 Bankruptcy

In order to qualify for Chapter 7 bankruptcy, you must first pass a means test. The bankruptcy means test compares your income against the median income for a similar household in your state. If your income is below median, you automatically qualify. If it is above median, you have to disclose your expenses on the means test to see if you qualify. (Learn what the Chapter 7 means test is and how it works.) If you are married, you must include both you and your spouse’s income on the means test form whether you are filing an individual or joint bankruptcy. This means that even if you want to file an individual bankruptcy without your spouse, his or her income will be taken into account to determine whether you are eligible for Chapter 7 bankruptcy.

Unfortunately, the median income for a two-person household is normally not twice that of a single person household. In fact, it is usually only slightly higher. This means that even if both you and your spouse make less than the state median for a single person, you may have trouble qualifying for Chapter 7 bankruptcy on your combined income. As a result, being married can make it harder for you to qualify for Chapter 7 bankruptcy even if you could have qualified individually prior to marriage. Example. Brian and Susan just got married. Brian makes $30,000 and Susan makes $35,000 per year. Their state’s median income for a single person household is $40,000 and $55,000 for a two-person household. Prior to being married, both Brian and Susan could have qualified for Chapter 7 bankruptcy because their individual income is below the state median for a single person. However, since their combined income of $65,000 is above the median for a two-person household, they do not automatically qualify (whether filing jointly or individually) and must disclose their expenses on the means test form to see if they pass.

Being Married Can Make It Harder to Protect All Your Property

Exemptions allow you to keep a certain amount of property in Chapter 7 bankruptcy. If you are married and filing a joint bankruptcy, certain states allow you to double the amount of your exemptions to take into account the fact that two people usually have more property than a single person.

However, in some states, married couples are not allowed to double their exemptions when filing a joint bankruptcy. This means that you may not be able to exempt all property you own between you and your spouse if you file a joint bankruptcy and share the exemption amounts. As a result, if you can’t double your exemptions, it may be in your best interest to file separately and exempt your assets individually. However, exemption law is complex and varies by state so consider talking to a local attorney about your options before filing.

What If Only Your Spouse Has Debt?

Being married doesn’t mean you have to file for bankruptcy together. If only one spouse has debt, then usually there is no need for the other spouse to file for bankruptcy. As we discussed, the nonfiling spouse’s income still needs to be disclosed in the bankruptcy. But he or she will not be part of the bankruptcy filing and does not need to attend any hearings.

Further, the nonfiling spouse’s separate (not jointly owned) property will not be part of the bankruptcy. However, keep in mind that if you live in a community property state, you usually must disclose all assets owned by your nonfiling spouse in your bankruptcy for the trustee to decide if they are community property and part of the bankruptcy estate.

Can I File for Bankruptcy If I Am Unemployed?

There is no requirement that you have to be employed in order to file for bankruptcy. In fact, job loss is one of the most common reasons people file for bankruptcy. However, being unemployed can still affect the outcome and success of your bankruptcy filing. This depends on whether you are filing a Chapter 7 or Chapter 13 bankruptcy. Read on to learn more about how being unemployed can affect your bankruptcy.

How Does Being Unemployed Affect Your Bankruptcy?

The answer depends on if you are filing a Chapter 7 or Chapter 13 bankruptcy. Being unemployed usually makes the bankruptcy process easier, especially in a Chapter 7. However, if you are filing a Chapter 13, it may create problems in getting your case approved if you cannot afford your repayment plan.

Chapter 7 Bankruptcy

Chapter 7 is designed to wipe out unsecured debts such as credit cards and medical bills for low income debtors with little or no assets. In most cases, creditors don’t receive anything because debtors don’t have any non-exempt property that can be taken and sold. (To learn more, see our Chapter 7 Bankruptcy area.) Since debts are wiped out without paying anything to creditors in majority of Chapter 7 cases, debtors must pass a means test to qualify for a Chapter 7. The means test compares your household income against your state’s median income for a similar household.

If your income is below the median, you qualify automatically. If you are above median, you must show that you have no disposable income because you have high allowable expenses. Most unemployed debtors have no income or they collect unemployment benefits which are normally well below Chapter 7 income limits. So being unemployed usually makes it easier for you to qualify for a Chapter 7 bankruptcy.

Chapter 13 Bankruptcy

In a Chapter 13 bankruptcy, debtors pay back all or a portion of their debts through a three to five year repayment plan. Chapter 13 also allows debtors to catch up on mortgage arrears, get rid of their second mortgage, cram down car loans, or pay back nondischargeable debts such as domestic support or certain taxes. These benefits are not available through a Chapter 7.

As a result, Chapter 13 is used not only by debtors who don't qualify for a Chapter 7 but also by those who choose to file a Chapter 13 instead of Chapter 7 to take advantage of these additional benefits. Since you are required to make monthly plan payments to the bankruptcy trustee, Chapter 13 is generally for debtors with regular income.

However, if you are unemployed, you can still file for Chapter 13 bankruptcy. Many unemployed debtors collect unemployment benefits, social security, or have other sources of income such as rental income which can be used to fund their plan. If you can show that you have enough income coming in from sources other than employment to afford your plan, then your case will likely get approved by the court. If you have no income, the court will dismiss your case unless you can prove that you are able to afford your bankruptcy plan. If you find a job during bankruptcy, you will usually be required to notify the trustee or the court and provide further documentation.

Multiple Bankruptcy Filings: When Can You File Again?

If you have filed for bankruptcy in the past, you may be wondering how soon you can file for bankruptcy again. Read on to learn about the time limitations for receiving a bankruptcy discharge after you have previously filed for, and received a discharge in, Chapter 7 or Chapter 13 bankruptcy.

Time Limits Apply to Discharges, Not to Filing

Technically, bankruptcy law does not set any minimum time that you to wait before you can file for bankruptcy again. However, there is a catch. If you file too soon after you have received a discharge of your debts in a prior case, you cannot receive another discharge. Since this generally makes the second bankruptcy filing a waste of time and money, it is important to know the time frames that apply to receiving a second discharge.

Filing Under the Same Bankruptcy Chapter: Chapter 7 v. Chapter 13

If you are filing under the same bankruptcy chapter, the time frames are different depending on whether you are filing for successive Chapter 7 or Chapter 13 cases.

Successive Chapter 7 Cases

If you received your first discharge under a Chapter 7, you cannot receive a second discharge in any Chapter 7 case that is filed within eight years from the date that the first case was filed.

Successive Chapter 13 Cases

If you received your first discharge under Chapter 13, you cannot receive a second discharge in any Chapter 13 case that is filed within two years from the date that the first case was filed.

This can get tricky if you file your second Chapter 13 case between two and six years from the first Chapter 13 and the court refuses to confirm your Chapter 13 plan in the second case. Normally, if your plan is not confirmed you could convert to a Chapter 7 case. But in this situation, the rules for receiving a Chapter 7 discharge after a Chapter 13 discharge would kick in (see below) and prevent you from getting a discharge in the converted case.

Filing Under Different Chapters: The Order Matters

If the second bankruptcy case you want to file is under a chapter that is different from the chapter you received your first discharge under, the order determines the time frame.

Chapter 13, Then Chapter 7

If your first discharge was granted under Chapter 13, you cannot receive a discharge under any Chapter 7 case that is filed within six years from the date that the Chapter 13 was filed. The only exceptions to the six-year waiting period are:

if you paid all unsecured creditors in full in the Chapter 13, or
if you paid at least 70% of the claims in the Chapter 13 and the plan was proposed in good faith and was your best effort.

Chapter 7, Then Chapter 13

If your first discharge was granted under Chapter 7, you cannot receive a discharge under any Chapter 13 case that is filed within four years from the date that the Chapter 7 was filed.

This can get tricky if you file your second case (the Chapter 13) between four and eight years after the Chapter 7 case and the court does not confirm your Chapter 13 plan. Normally, if your Chapter 13 plan is not confirmed, you could convert the case to a Chapter 7 bankruptcy. However, in this situation, the rules for successive Chapter 7 discharges would kick in, preventing you from getting a discharge in the converted case. In this case, it might make sense to simply dismiss the Chapter 13 case.

When a Second Filing Might be Beneficial Even Without a Discharge In some circumstances, you might still benefit from filing a Chapter 13 case immediately after getting a Chapter 7 discharge (this is commonly referred to as a Chapter 20 bankruptcy), even though you cannot get a Chapter 13 discharge. For example, perhaps you want the protection of the bankruptcy court while you pay a tax debt through a Chapter 13 plan. Whether you can get any benefit from a "Chapter 20" depends on your personal circumstances and the case law in your area. It would be wise to consult an experienced bankruptcy lawyer in your area for advice on this subject.

What If You Didn’t Receive a Discharge in the First Case?

If you didn’t receive a discharge in the first bankruptcy case, in most cases, you can file bankruptcy again without any limits on the second discharge.

If the First Case Was Dismissed

Unless the court orders otherwise, you can file again if your bankruptcy case was dismissed. A 180-day waiting period may apply if your case was dismissed for failure to obey a court order, failure to appear in the case, or you voluntarily dismissed the case after a creditor filed a motion for relief from the bankruptcy stay. There may, however, be different rules in effect with regard to the bankruptcy stay.

If Your Discharge Was Denied

If your discharge was denied in your first case, you may be able to file again, but you will probably not be entitled to a discharge of the debts from your first case. This is another special circumstance where you would be wise to seek the advice of an experienced bankruptcy lawyer.

Are You Eligible for Chapter 13 Bankruptcy?

For many debtors, Chapter 13 bankruptcy is a good option. But not everyone is eligible for Chapter 13 bankruptcy. Learn who can and cannot file for Chapter 13 bankruptcy.

Businesses Can't File for Chapter 13 Bankruptcy

A business, even a sole proprietorship, cannot file for Chapter 13 bankruptcy in the name of that business. Businesses are steered toward Chapter 11 bankruptcy when they need help reorganizing their debts.

If you own a business, however, you can file for Chapter 13 bankruptcy as an individual. You can include in your Chapter 13 bankruptcy case business-related debts for which you are personally liable. There is one exception to this rule: Stockbrokers and commodity brokers cannot file a Chapter 13 bankruptcy case, even if they want to discharge only personal (nonbusiness) debts.

You Must Have Sufficient Disposable Income

In order to qualify for Chapter 13, you will have to show the bankruptcy court that you will have enough income, after subtracting certain allowed expenses and required payments on secured debts (such as a car loan or mortgage), to meet your repayment obligations. Your plan must pay back certain debts in full, or the judge will not confirm (approve) it and allow you to proceed.

You can use the income from the following sources to fund a Chapter 13 plan:

regular wages or salary
income from self-employment
wages from seasonal work
commissions from sales or other work
pension payments
Social Security benefits
disability or workers' compensation benefits
unemployment benefits, strike benefits, and the like
public benefits (welfare payments)
child support or alimony you receive
royalties and rents, and proceeds from selling property, especially if selling property is your primary business.

If you are married, your income does not necessarily have to be "yours." A nonworking spouse can file alone and use money from a working spouse as a source of income. And an unemployed spouse can file jointly with a working spouse.

Your Debts Must Not Be Too High

You do not qualify for Chapter 13 bankruptcy if your secured debts exceed $1,010,650. (This amount is periodically adjusted for inflation.) A debt is secured if you stand to lose specific property if you don't make your payments to the creditor. Home loans and car loans are the most common examples of secured debts. But a debt might also be secured if a creditor -- such as the IRS -- has filed a lien (notice of claim) against your property.

In addition, for you to be eligible for Chapter 13 bankruptcy, your unsecured debts cannot exceed $336,900. (This amount is also periodically adjusted for inflation.) An unsecured debt doesn't give the creditor a right to take a particular piece of property. Most debts are unsecured, including credit card debts, medical and legal bills, back utility bills, and department store charges.

You Must Be Current on Your Income Tax Filings

To file for Chapter 13, you will have to submit proof that you filed your federal and state income tax returns for the four tax years prior to your bankruptcy filing date. If you need some time to get current on your filings, the court can postpone the proceedings. Ultimately, however, if you don't produce your returns or transcripts of the returns for those four years, your Chapter 13 case will be dismissed.

Can I Keep Cash in Chapter 7 Bankruptcy?

You can keep cash when you file for Chapter 7 bankruptcy, but only if the cash qualifies as an exempt asset. Read on to learn how bankruptcy exemptions can protect your cash if you file for Chapter 7 bankruptcy.

Cash That May Be Exempt

Examples of cash or assets readily converted to cash which may be exempt, depending on the exemptions available to you, include:

wages (learn more about protecting wages in bankruptcy)
IRAs or other exempt retirement accounts or benefits
unemployment benefits
public assistance
cash or bank balances covered by wildcard or personal property exemptions
cash in a bank account owned by a husband and wife when only one spouse files for bankruptcy and the non-filing spouse does not owe the debt
social security proceeds (even if the funds have been received and are held in a bank account as long as they can be traced back to their source), and
personal injury proceeds.

Cash That Is Not Exempt

As a general rule, cash that represents proceeds from an exempt asset that is sold before you file for bankruptcy generally loses its exempt character. For example, if you are entitled to a $2,500 motor vehicle exemption and you sell your car prior to filing for bankruptcy, the sale proceeds cannot be claimed as exempt under the motor vehicle exemption.

Exception. Social Security proceeds are an exception to this rule, as they retain their exempt status as long as they can be traced back to their source.

Your Pension in Bankruptcy

With few exceptions, your pension is safe when you file for bankruptcy. The current bankruptcy law contains broad protection for pensions and other retirement plans. The bankruptcy law identifies each type of plan by the Internal Revenue Code (IRC) section which qualifies it for tax treatment as a pension or other retirement plan. Your plan administrator should be able to provide you with documentation to tell you what section of the Internal Revenue Code your plan is qualified under.

Under the current bankruptcy law, certain retirement plans have been designated as “excluded” from the bankruptcy estate, which means you get to keep them. Because they are not part of the bankruptcy estate, these types of plans do not come under the control of the bankruptcy trustee so there is not, technically, a need to claim them as exempt. However, you still must disclose your interest in these accounts on your bankruptcy schedules and many attorneys choose to list them under your "exempt" property as well.

These accounts include:

educational Individual Retirement Accounts (IRA) under IRC 530(1)(b), subject to certain limitations
pension and retirement plans qualified under the Employee Retirement Income Security Act of 1974 (ERISA)
government retirement plans under IRC 414(d)
deferred compensation plans under IRC 567, and
tax deferred annuity plans under IRC 403(b).

If a retirement plan is exempt under the exemption system you choose to use, you get to keep it. When you file for bankruptcy, you are required to choose whether you are claiming federal or state exemptions. While the particular set of exemptions you use will determine whether your plan is exempt, most plans will qualify for an exemption under both state and federal exemptions.

Many states provide their own exemptions for pensions and other retirement plans, including special protections for state employee retirement plans. You need to check the law in your state for those details. But even when you claim state exemptions, you can claim most pensions and other retirement plans as exempt under the federal bankruptcy law as well. This is still considered electing state exemptions. These exemptions include:

qualified pension, profit sharing and stock bonus plans under IRC 401, including employee stock ownership plans
qualified annuity plans under IRC 403
Individual Retirement Accounts (IRA) under IRC 408, up to a value of $1,171,650.00
Roth IRAs under IRC 408A, up to a value of $1,171,650.00
retirement plans for controlled groups such as churches, partnerships, proprietorships and governments, under IRC 414
eligible deferred compensation plans under IRC 457, and
retirement plans established and maintained by tax-exempt organizations under IRC 501(a)

If you are electing federal exemptions or you do not qualify for state exemptions, the exemptions are even more expansive. In addition to claiming the plans identified above as exempt, you are entitled to claim an exemption for any right to receive payments under any stock bonus, pension, profit sharing, annuity or similar plan or contract on account of illness, disability, age, or length of service to the extent reasonably necessary for your support or the support of your dependants. Limitations may apply if you were employed by someone close to you, such as a relative, at the time the plan was created.

Plans that may not qualify for an exemption include:

Employee Stock Purchase Plans (ESPP)
plans that were improperly funded
plans that do not qualify as retirement plans under any identified section of the tax code
an IRA inherited by someone other than a spouse (this depends on the case law in your area, check with a lawyer)
plans that have not received a favorable determination from the Internal Revenue Service and are not in substantial compliance with any of the identified tax code sections, and
plan funds that have been rolled-over or transferred into a new fund in a way that is not in compliance with the tax code.

The California Homestead Exemption

A homestead exemption protects equity in your home from creditors. Here you’ll find specific information about the homestead exemption in California.

If you file for bankruptcy in California and are eligible to use California’s bankruptcy exemptions, you can choose from two exemption systems, often called System 1 and System 2.

In California’s System 1, single homeowners who are not disabled may exempt up to $75,000 of the equity in their home or other property covered by the homestead exemption. You may exempt up to $100,000 if you live with a family member; $175,000 if you are 65 or older, or physically or mentally disabled; $175,000 if 55 or older, single, and earn a gross annual income under $15,000 or are married and earn a gross annual income under $20,000 and creditors seek to force the sale of your home. If you are married but separated, you may claim the homestead exemption in community property occupied by your spouse.

In California’s System 2, homeowners can exempt up to $22,075 of the equity in their home.

Some states allow married couples filing joint bankruptcy petitions to double the amount of the homestead exemption. California, however, does not allow married couples to double the homestead exemption amount.

In California System 1 the homestead exemption applies to real or personal property where you reside, including a mobile home, boat, stock cooperative, community apartment, planned development, or condominium. In System 1, the homestead exemption also applies to proceeds from a forced sale of your home received six months prior to bankruptcy.

In California System 2 the homestead exemption applies to real or personal property that the debtor or a dependent of the debtor uses as a residence, including a cooperative, or a burial plot for the debtor or dependent of the debtor.

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