Interviewer: So, how do people prepare for bankruptcy? Do they simply fill out paperwork or close their bank accounts?
Paul: No. I really discovered this over the years that filing is an intimidating process for most people. Most people are concerned, before they ever meet with us. So, I try to make the process as painless, in that regard, as possible.
We don’t overwhelm them with the amount of paperwork that they have to initially produce. We don’t ask them to close things down. Usually, what happens is most people just need to bring some proof of their income in tax returns and some other–if they’re self-employed, some other documents.
And then at a second meeting that we have with the debtor, they’ll usually have to produce additional pay stubs but we complete all paperwork. We don’t ask people to complete forms. We try to spend as much time as possible completing, or I should say, acquiring the information from the people and thereafter completing what’s known as the bankruptcy petition and just having them review it for accuracy.
Interviewer: So, the main thing people should have prepared is the last two pay stubs, the last two years’ tax returns, the last two months’ bank statements?
Paul: Yes. Exactly. Those are the most important elements and, then, when they come back the second time–usually people will meet with us at least two times. The second meeting usually requires a little bit more in terms of pay stubs and, generally, if they’re self-employed, there’s some additional documentation we would need, which would be income and expenses, as well as business assets and inventory, if they’re self-employed.
Interviewer: What are some of the mistakes people make that can hinder their ability to file bankruptcy or, while they’re in it, that hurts their case?
Paul: Well, as long as they’re candid with their attorney, there really aren’t that many mistakes. I try to tell people that there really isn’t that much preparation from their end that really needs to go into filing.
We do assess, “Well, okay. Is there an issue that might arise? If there is, what can we do to avoid it?” So, for example, if someone, before they’ve met with us, has made a large transfer for any reason, that’s immediately a problem. This is because that constitutes what might be called “a preference,” or “a fraudulent conveyance,” where they’ve transferred something for no consideration. That’s something we would need to discuss with them, beforehand.
Interviewer: You said it’s called a fraudulent conveyance?
Paul: Yes. It doesn’t mean that there’s fraud involved but that simply means that if someone transfers something within a period of time, depending on the state–and in Pennsylvania that’s four years and in New Jersey is two years–if they transferred funds for a lack of consideration, when they were insolvent, that transfer could still be considered part of the person’s assets when determining whether they would qualify for a bankruptcy.
So, it could be with the best intentions but if they transfer, for example, a house, out of their name, to a child and if they’ve done that within the preceding four years, in Pennsylvania or two years in New Jersey, that’s considered their asset and that’s something that we inquire about.
Interviewer: So, what if they didn’t know that they’re going to file bankruptcy and two years ago they did transfer a house to their kid, and now they’re in financial trouble?
Paul: Well, if it makes more sense to wait or if you were going to include that asset as theirs still because there was no consideration and it was transferred while they were in dire straits–one of the important keys is while they were insolvent. So, if they were in a financial situation where they were insolvent at that time and made the transfer, even for the best of intentions, yes. I think they either have to wait or the other consideration is to file a Chapter 13, and pay back the creditors, because there are a many advantages, even in that situation, to paying unsecured creditors over a period of time.
Chapter 13 Bankruptcy – Paying Back Creditors Over Time
Number one, you’re reducing your monthly payment dramatically. Number two is you’re eliminating interest. So, all of a sudden, creditors are cut off at the knees, so to speak. They’re getting paid over a 60-month period, interest-free and only based upon them filing what’s called “a proof of a claim.”
So, creditors only get paid if they choose to accept payments over a 60-month period, interest-free. So, oftentimes, if that’s the only alternative someone has and it still will make financial sense, because there’ll still be a light at the end of the tunnel. They’ll still know that, “Okay, my payment is set at this amount, and I know that I’ll be done in five years.”
Interviewer: Are there any common unintended mistakes that people make that would fall under fraudulent conveyance?
Paul: Not too often. There aren’t too many really surprisingly, I would say. Most people that I meet with don’t fit within the category of doing something that is really going to necessarily make a case unsuccessful. I would say there are certain people who we can’t help, and unfortunately, there are certain circumstances that make bankruptcy a less than ideal answer.
That’s generally the person who has very low income, but a lot of equity in a home and has unsecured debt, like credit card debt. There’s going to be very little that a bankruptcy’s going to accomplish for them because they’re simply not in a position to make payments on unsecured creditors, and unfortunately, because of the equity in their home, they might have to. Or someone who, for example, lost a job and has fallen significantly behind on their mortgage and they haven’t been able to modify their mortgage.
A Chapter 13 Bankruptcy Will Not Lower Your Mortgage Payment
I try to explain this issue to people and, unfortunately, at this point, especially in Pennsylvania, Chapter 13 bankruptcies cannot reduce your monthly mortgage payment. Now, if the mortgage company chooses to modify that’s a different story, but the bankruptcy, itself, can’t force them to modify. So, it can allow you to catch up over time, but it can’t force you to modify. Now, New Jersey has a very aggressive program where there’s a much greater chance of the bankruptcy court at least exerting some pressure on a mortgage company to either modify or to give that debtor an answer as to why they don’t qualify.
In Chapter 13 Filings, Creditors Must Accept Repayment of a Percentage of the Debt
Interviewer: If you’re on a repayment plan with creditors, what if you owe so much that five years will never take care of it?
Paul: Depending on the circumstances, in a Chapter 13 bankruptcy, you’re paying a percentage back to unsecured creditors. It is usually just a percentage, and usually they have to accept the amount that the Chapter 13 trustee, allocates to them. So, they’re only getting a percentage in most cases.
There are rare circumstances where they’re getting what’s called a “100% plan,” and that’s usually only if someone has such high income or has so much equity in a home. Otherwise, they’re only getting a percentage of the payment and the creditors option is to either accept that amount or not to file a proof of claim, in which case, they don’t get paid anything over the five-year plan and the debt is still wiped out.
Interviewer: So, a Chapter 13 is a partial wiping out of debt. The creditors then get a percentage of what they were owed, not the whole thing.
Paul: In some cases, they’re not getting anything. I mean, in some cases, the only thing you’re paying back in a Chapter–in fact, in many cases, the only thing that you’re paying back in a Chapter 13 plan are non-dischargeable debts, such as mortgage arrears, and taxes, which are the two most common. In some cases, you are paying back a percentage of unsecured creditors, but that’s only in those cases where your equity exceeds the amount you’re allowed to have or your income is above a certain level.
Will Bankruptcy Filing Forestall Foreclosure, Eviction and Lawsuit Proceedings?
Interviewer: The most common relief, I imagine, that bankruptcy provides is relief from debt and creditors. You’re also saying that if someone’s behind on their mortgage that they can pause the collection of their mortgage? So, let’s say they’re in foreclosure, will bankruptcy pause their foreclosure, so they can work out a new plan with the bank?
Paul: Well, yes. In certain circumstances, it will automatically stop a foreclosure or short sale. However, in Pennsylvania, they have to resume full payments the month after they file. In New Jersey, however, what they can do is propose that the mortgage be modified and if the debtor wishes to participate in this loss mitigation program in New Jersey, it forces the creditor to then give them an answer as to whether they’ll qualify for modification. It kind of brings the matter to a head, so that it does, oftentimes, result in reduced monthly payments.
Interviewer: So, what other kinds of relief have you seen? How about if you’re being sued, will bankruptcy stop a lawsuit?
Paul: Absolutely. One of the primary concerns people have is somebody’s facing a lawsuit and maybe there’s a frozen bank account or maybe, in New Jersey, there’s a wage garnishment. Bankruptcy will automatically stop creditors who are pursuing a judgment and have either frozen an account or are in the midst of freezing an account and, likewise, it will stop any type of wage garnishment or even if there has been a wage garnishment, it will at least eliminate that garnishment from continuing.
Interviewer: If people are facing a civil lawsuit, it will pause that proceeding as well?
Paul: Absolutely. When somebody files a Chapter 7 bankruptcy, pursuant to the automatic stay provisions of the bankruptcy code, all action ceases and no creditor can continue to pursue it without court relief. In fact, court relief can be granted in situations such as pursuit of a judgment.
Interviewer: Okay. What about like an eviction? Let’s say you’re a renter, will a bankruptcy pause your eviction?
Paul: Yes. It will stop an eviction. However, since the changes in the bankruptcy code in 2005, if a creditor already has an eviction order, it’s necessary that the person, the debtor, or the person who will be thinking about filing, the tenant, must post one month’s rent with the bankruptcy court to go to the landlord while the matter is proceeding. So, where, before 2005, it automatically stayed all action, after 2005, it still stays all action, but if somebody already has an eviction order, the tenant must post one month’s rent, which does go to the landlord. So, it does prevent evictions, and it does present a lot of viable options for tenants, but not quite as many it would have in 2005, before 2005.
Interviewer: Are there any other special features of bankruptcies that I haven’t asked you about that it helps people to know about?
Paul: I think that Chapter 7 and Chapter 13, in a lot of cases, accomplish different things for different people. Chapter 7, I think, produces peace of mind that a lot of debtors haven’t had in a number of years, as does a 13, but in a different way.
A Chapter 13 is going to give people, potentially, someone who might’ve been out of work temporarily, and now can’t catch up on their mortgage, a means of catching up on a mortgage or maybe paying back past-due taxes that a Chapter 7 won’t offer, but I think both are viable options for a lot of people in a lot of different situations.