As credit card debt underlies many bankruptcy filings, it is not surprising that prospective bankruptcy filers want to know if they should stop paying credit card debt if they plan to file for bankruptcy.

At first blush, the answer to this question should be obvious - why should anyone “throw good money after bad?”  However, I think that your decision in this matter should merit some thought.

First, you must recognize the consequences of stopping payments to credit card vendors, especially if you have always been current or substantially current.  Once you miss a payment you can expect the phone calls to start in earnest.  Collection phone calls can be distracting and bothersome, especially if you have young children in the house who enjoy answering the phone.  If your delinquency goes beyond a few days, the tenor of the collection phone calls will change - credit card bill collectors can be quite nasty.

Secondly, note that delinquent credit card payments will damage your credit.  This concern may sound silly if you are thinking about bankruptcy but realize that credit reports document history.  A bankruptcy will damage your credit, but a bankruptcy + several months of delinquency will damage it more.  Anyone looking at your credit file after bankruptcy will see both the delinquent payments and the bankruptcy, which may make recovery more difficult.

Finally, I can report to you that in my experience, a certain percentage of bankruptcy filers end up either not filing or delaying their filings.   What seems like a certain course of action today may not seem like such an immediate need two weeks from now.

Now in many cases, a bankruptcy really is in your immediate future.  And once you make that decision and consult with your lawyer about stopping payments, that may be the course of action you choose.   However, until you are completely sure about your course of action, your decision about whether to stop paying credit cards should not be a casual choice.

By Jonathan Ginsberg, Atlanta Bankruptcy Attorney

Bankruptcy Law Network 

Once a Bankruptcy Case is filed, a “Bankruptcy Estate” is created.  The vehicle is part of this estate.  Even if it is totally claimed exempt and will not be sold or administered by the Bankruptcy Trustee, it does raise liability concerns.  Technically, if the vehicle was involved in an accident with the debtor at fault, not only could the debtor be sued for a post petition debt, but the Bankruptcy Estate may be liable as well, and if there are assets that are not claimed exempt, such a claim may diminish the dividends creditors might have otherwise received from such assets..

For example, suppose that the Trustee is liquidating a piece of real estate in a Chapter 7 case that will net $50,000 to the estate and the debtor is faulted for an auto accident post petition.  The damaged party might not only assert a claim against the debtor(which would not be dischargeable since it occurred after the bankruptcy was filed) but also against the Chapter 7 estate.  The $50,000 originally earmarked for distribution to creditors is now compromised by the auto accident claim.  Had the trustee required that insurance be maintained on the vehicle or that it not be driven until such time insurance is available, the $50,000.00 would still have been protected.  This then brings up trustee liability and the trustee may now be sued.

So there is a legitimate reason that the trustee might require that your vehicle be insured, even though it is fully paid for.  The same goes for home insurance, motorcycle insurance, sole proprietorship personal liability insurance, etc.

Written by Michael G. Doan

Bankruptcy Law Network

Several people have called me recently, saying that they wanted to file for Chapter 7, but couldn’t because their income was too high. In most cases,  however, a high income–even one significantly over your state’s median income–doesn’t automatically disqualify you from Chapter 7. I’ve personally filed Chapter 7 cases for people who have incomes over $150,000, without difficulty.

How? The answer lies in how the Bankruptcy Code looks at the “Means Test.”

The Bankruptcy Code requires individuals to complete a “Means Test” when they file Chapter 7, 11, 12 or 13. The stated purpose of the Means Test is to make sure that people who can afford to repay some of their debt to do so by having them file for Chapter 11 or 13 rather than Chapter 7.

The first requirement of the Means Test is to compute your household’s “Current Monthly Income,” or CMI. The joke among bankruptcy attorneys is that CMI is neither current, nor monthly, not income. This is because it is an average of the last six months (ending the last day of the month before you file) of only  certain types of income. Social security, for example, isn’t included. Unemployment probably isn’t (the statute’s language is unclear). So if you lost your job 3 months ago, the income you used to make is still part of your CMI. And if you start a new job on the first of the month and file on the 30th, that income is not part of your CMI.

CMI includes your CMI, your spouse’s CMI, and the contribution made towards the household by other members of your household. Who’s in your “household”? No one knows; the Bankruptcuy Code doesn’t define the term, and there aren’t a lot of court rulings to help. A child that lives with you full-time is, but what about your college student, who comes home only during semester breaks? What about if you share custody of a child with an ex-spouse? What about an adult child who’s living with you? What about a parent? These, and other issues, remain to be decided by the Courts.

Once you have your household’s CMI, you then compare it to the median income for a comparably-sized family in your state. Note that you are comparing “household” CMI to “family” CMI, yet another example of poor draftsmanship in the Bankruptcy Code. If the household CMI is less than the family CMI, you “pass” the Means Test and can file for Chapter 7.

But that’s not the end of the computation.

If your CMI is too large, you are allowed to take deductions from it. These deductions are based on the IRS standards it uses to determine ability to repay taxes. A complete list may be found at the Department of Justice website. They include mortgage, car payments, food, clothing, utilities, etc.

Even if your CMI is too high, most people lower it enough through these deductions to “pass” the Means Test. But even if you don’t, you can still file Chapter 7. If your circumstances are such that it would be appropriate to let you receive a Chapter 7 discharge, the Court can still let your case go through.

And if they aren’t? Chapter 13 and Chapter 11 are still available.

By Brett Weiss, Maryland Bankruptcy Attorney on Jul 8, 2008 in Bankruptcy Myths, Bankruptcy Practice and Procedure, Chapter 11 Bankruptcy, Chapter 12 Bankruptcy, Chapter 13 Bankruptcy, Chapter 7 Bankruptcy, Maryland, Means Testing

From the Bankruptcy Law Network

It should be no surprise to anyone that in the midst of skyrocketing food, gasoline, and heating costs, more and more people are falling behind on their utility payments. Yesterday, the Gannett News Service reported that electric and natural gas shutoffs are up at least 15 percent in many states compared to last year.

In fact, in Pennsylvania, PPL Electric Utilities disconnected 7,054 customers through April. That is an incredible 168 percent increase over the same period in 2007. Duke Energy is averaging about 11,000 shutoffs per month in North Carolina. The trend is especially on the increase in suburban areas.

With the continuation of energy price increases far outstripping increases in household income, the number of shutoffs will only get worse. The federal government has been debating methods to help people facing mortgage foreclosures (or are they really only trying to help the mortgage industry?)…but who is trying to limit the number of utility shutoffs?

If you are facing a utility shutoff, and you file bankruptcy, the Automatic Stay imposed by the bankruptcy court will prevent the utility company from shutting off your service. The amount you owe the utility prior to your filing date will be discharged in the bankruptcy.

Of course you will be responsible for paying all of the utility charges that are incurred after the filing date. In addition, the utility company can require you to pay a deposit in order to continue service. Often they will allow you 20 days to come up with the deposit. If you do not pay the deposit in the allowed time, they will then shut off your service.

The deposit you pay them is not applied to your past due balance, but is instead used as a credit. You have the right to get back the deposit when you no longer use their services, or after an appropriate time of showing them that you can remain current on your payments.

From the Bankruptcy Law Network

Cathy Moran recently discussed business debts in bankruptcy in her post entitled Bankruptcy & Small Business, but what if you have incorporated your business? Can a bankruptcy trustee take your business if you file a Chapter 7 Bankruptcy? After all, you went to the trouble of incorporating because it created a separate entity, and you learned from somewhere that people incorporated their small business to insulate themselves from liability. If the corporate entity can protect the shareholder from business liability, can the shareholder protect the corporate entity from personal liability in bankruptcy? The answer is simply that the corporate entity is not protected if the shareholder files for bankruptcy protection.

Technically, the bankruptcy debtor does not own the assets of the incorporated business, but he does own all of the stock! That stock becomes an asset of the bankruptcy estate, and that stock is nothing more than the right to ownership of the assets of the corporation. Therefore, because the estate now owns the corporate stock, the estate now has the power to liquidate the assets of the corporation for the benefit of unsecured creditors.

So, if the stock is an asset of the bankruptcy estate, can the debtor keep his or her business? Absolutely . . . if he pays the estate the fair value of the stock, which is generally the liquidation value of the corporate assets. In many cases, the liquidation value is not that much, especially if there is no inventory or if the business assets are subject to a bank’s lien. Since the value of a business is typically much greater as an ongoing operation, debtors usually “buy back” the business assets from the trustee.

From the Bankruptcy Law Network

It is unlikely the bankruptcy petition has to be amended if your income increases after the case is filed. This is because the bankruptcy petition, which is a document whose accuracy you have verified under penalty of perjury, is supposed to accurate as of the date you signed it, and as of the date the case was filed.

The bankruptcy petition is not required to be amended after filing every time something changes regarding your debts, assets, monthly budget or anything else. (The sole exception is inheritances arising in the 180 days after filing the case.) Otherwise, you would be amending your bankruptcy petition every hour after filing the case, forever, as your bank balance changes, your cash on hand is spent, your house payment changes, you buy a different car and junk the old one, you pay your dentist for the small bill you listed in the bankruptcy, and so on.

Accordingly, if your income was listed correctly on Schedule I as of the time of filing the case, you have no duty to amend your petition, even if your income increases. However, keep in mind that Schedule I contains a question asking for any increase or decrease in income that you anticipate in the next one year. If your income does increase shortly after filing, and you anticipated that could happen, then that fact should have been noted on Schedule I. If it was not, you have a duty to correct that misstatement by immediately amending the petition.

Also, at the meeting of creditors (which usually occurs about thirty days after filing), the trustee will likely ask you under oath if anything has changed since the date the case was filed. Thus if your income has increased you probably will have to tell the trustee about it at this meeting. After such a disclosure, your lawyer may decide as a tactical matter that the petition ought to be amended.

Additionally, some chapter 13 plans contain language requiring the debtor to inform the trustee of any increase in income occurring during the case. If your chapter 13 plan contains such a provision, this obviously will obligate you to inform the trustee of income increases, although a formal amendment to Schedule I might not be required.

New bankruptcy law section 521(f)(4) also requires chapter 13 debtors to file tax returns, or an income and expense statement, annually, during the pendency of the case, if requested by the trustee or a party in interest. While this should not lead to an amendment of the petition, it could lead to plan modification in rare cases.

From the Bankruptcy Law Network