Personal Bankruptcy Laws For Dummies®

by James P. Caher and John M. Caher

Personal

Bankruptcy Laws

FOR

DUMmIES‰

2ND EDITION

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Personal Bankruptcy Laws For Dummies®

, 2nd Edition

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About the Authors

James P. Caher, a practicing attorney with 30 years of experience, is a nation￾ally recognized expert on consumer bankruptcies and authority on the

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

Jim coauthored, with his brother John, Debt Free! Your Guide to Personal

Bankruptcy Without Shame (Henry Holt, 1996) and two highly regarded books

for lawyers: Discharging Marital Obligations in Bankruptcy (LRP, 1997) and

Discharging Credit Card Debts in Bankruptcy (LRP, 1998).

In addition, Jim has published scores of articles for bankruptcy professionals

and is frequently called upon to analyze and interpret the complicated provi￾sions of the 2005 bankruptcy law. He was labeled the “online guru” by a

national legal weekly because of his regular appearances on the Internet as

an expert analyst on bankruptcy law. Jim also serves on the editorial board of

the American Bankruptcy Institute.

Jim graduated from Niagara University and then earned his law degree from

Memphis State University Law School, where he was a member of the Law

Review and recipient of the American Jurisprudence Award for Excellence in

the field of debtor-creditor relations. He filed his first consumer bankruptcy

case shortly after graduating in 1975. Jim lives and practices in Eugene,

Oregon.

John M. Caher is a legal journalist who has written about law and the courts

for most of his 25-year career.

Currently the Albany bureau chief for the New York Law Journal, John previ￾ously was state editor and legal affairs reporter for the Times Union of Albany,

New York. His legal reportage has won more than two dozen awards, including

prestigious honors from the American Bar Association, the New York State Bar

Association, the Erie County Bar Association, and the Associated Press.

John coauthored, with his brother Jim, Debt Free! Your Guide to Personal

Bankruptcy Without Shame (Henry Holt, 1996). He is the author of King

of the Mountain: The Rise, Fall and Redemption of Chief Judge Sol Wachtler

(Prometheus Books, 1998). In addition, John was the principal writer assist￾ing former U.S. Treasury Secretary William E. Simon in preparation of his

memoirs. Mr. Simon’s autobiography, A Time for Reflection, was published in

2003 by Regnery.

John is a 1980 graduate of Utica College of Syracuse University, where he

received his bachelor’s degree in journalism, and a 1993 graduate of

Rensselaer Polytechnic Institute, where he earned a master’s degree in tech￾nical communications/graphics. John lives in Clifton Park, New York.

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Dedication

This book is dedicated to the memory of our parents, James C. and Dolores

Caher (a.k.a. “Big Jim and Fitz”), who died way before their time but left us

with their own life examples of personal responsibility, fairness, justice, affin￾ity for the underdog, basic decency, and common sense. It is also dedicated

to the five grandchildren they should have known and would have adored

and enjoyed beyond measure: Sean and Brendan Caputi of East Aurora,

New York, and Erin, Kerry, and Norah Caher of Clifton Park, New York.

Authors’ Acknowledgments

For the second edition of this book, just like the first, our respective spouses

Kate Donnelly and Kathleen Caher were there every step of the way with

their love, support, and encouragement.

Also for the second edition of our book, just like the first, Michael J. O’Connor

took time from his busy law practice to offer expert analysis of our effort.

Mike, an outstanding bankruptcy attorney in his own right and prominent

partner in O’Connor O’Connor Mayberger & First PC in Albany, New York, has

always been there when we needed him, and we would like to publicly

acknowledge our humble appreciation for his efforts.

We also acknowledge the continuing dedication of our long-time agent, Sheree

Bykofsky of Sheree Bykofsky Associates in Manhattan, and the insights of the

talented folks at Wiley Publishing who made this come together, especially our

project editor, Kelly Ewing, and acquisitions editor, Stacy Kennedy.

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Publisher’s Acknowledgments

We’re proud of this book; please send us your comments through our Dummies online registration

form located at www.dummies.com/register/.

Some of the people who helped bring this book to market include the following:

Acquisitions, Editorial, and

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Project Editor: Kelly Ewing

(Previous Edition: Marcia L. Johnson)

Acquisitions Editor: Stacy Kennedy

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Diane Graves Steele, Vice President and Publisher, Consumer Dummies

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Publishing for Technology Dummies

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Composition Services

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Debbie Stailey, Director of Composition Services

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Contents at a Glance

Introduction .................................................................1

Part I: Bankruptcy: The Big Picture ...............................7

Chapter 1: Considering Bankruptcy.................................................................................9

Chapter 2: Stopping the Bleeding...................................................................................27

Chapter 3: Meeting the Players ......................................................................................47

Chapter 4: Deciding Which Type of Bankruptcy Is Best for You................................57

Chapter 5: Confronting the Means Test.........................................................................69

Chapter 6: Getting from Here to There: The Bankruptcy Process .............................91

Part II: Avoiding Bankruptcy.....................................115

Chapter 7: Considering Alternatives to Bankruptcy..................................................117

Chapter 8: Handling Bill Collectors..............................................................................135

Chapter 9: Negotiating with the IRS .............................................................................145

Part III: Keeping Your Stuff.......................................153

Chapter 10: Understanding Which Assets Are Off Limits to Creditors ...................155

Chapter 11: Dealing with Secured Debts .....................................................................173

Chapter 12: Saving Your Home .....................................................................................183

Part IV: Getting Rid of (Most of) Your Debt...............199

Chapter 13: Lingering Obligations................................................................................201

Chapter 14: A House of Cards: Wiping Out Credit-Card Debts .................................215

Chapter 15: Give unto Caesar: Using Bankruptcy to Deal with Tax Debts..............223

Chapter 16: The Devil Made Me Do It: Fines, Fraud, and Other Foibles..................237

Chapter 17: Till Debt Due Us Part: Bankruptcy and Divorce ....................................247

Chapter 18: Student Loans and Other Mind Games...................................................257

Part V: Strategies for a Successful Bankruptcy ...........271

Chapter 19: Avoiding Troubles with Your Trustee.....................................................273

Chapter 20: Living on the Edge in Chapter 13 Bankruptcy .......................................283

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Part VI: Enjoying Your Fresh Start .............................305

Chapter 21: Repairing Your Credit ...............................................................................307

Chapter 22: Staying Out of Financial Trouble .............................................................319

Part VII: The Part of Tens..........................................327

Chapter 23: Ten Common Bankruptcy Mistakes ........................................................329

Chapter 24: Ten Things You Can Do Right Now to Ease Your Financial Woes........333

Chapter 25: Ten Common Questions about Bankruptcy...........................................337

Appendix: Homestead Exemption Laws .......................343

Index .......................................................................347

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Table of Contents

Introduction .................................................................1

About This Book...............................................................................................1

Conventions Used in This Book .....................................................................2

What You’re Not to Read.................................................................................2

Foolish Assumptions .......................................................................................2

How This Book Is Organized...........................................................................3

Part I: Bankruptcy: The Big Picture......................................................3

Part II: Avoiding Bankruptcy.................................................................3

Part III: Keeping Your Stuff ....................................................................3

Part IV: Getting Rid of (Most of) Your Debt.........................................4

Part V: Strategies for a Successful Bankruptcy ..................................4

Part VI: Enjoying Your Fresh Start........................................................4

Part VII: The Part of Tens ......................................................................4

Icons Used in This Book..................................................................................4

Where to Go from Here....................................................................................5

Part I: Bankruptcy: The Big Picture................................7

Chapter 1: Considering Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

Viewing Bankruptcy in a Historical Context...............................................10

Debunking Bankruptcy Myths......................................................................12

People who go bankrupt are sleazy deadbeats................................12

Bankruptcy is the easy way out for folks who

can pay their bills .............................................................................14

Bankruptcy threatens the ethical foundations of our society........15

Honest folks pay a “tax” to support those who are bankrupt ........16

Understanding What You Can Gain Through Bankruptcy ........................16

Stopping creditors in their tracks ......................................................18

Wiping out most of your debts ...........................................................18

Catching up on back mortgage and car payments ..........................18

Filing bankruptcy to pay some debts over time...............................19

Using bankruptcy to pay all your debts ............................................19

Knowing What You Can Lose in Bankruptcy ..............................................20

Considering Alternatives to Bankruptcy.....................................................21

Introducing the Different Types of Personal Bankruptcy .........................22

Liquidations (Chapter 7) .....................................................................23

Consumer reorganizations (Chapter 13)...........................................23

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x Personal Bankruptcy Laws For Dummies, 2nd Edition

Weighing the Consequences of Not Filing Bankruptcy .............................24

Claims secured by your car ................................................................24

Claims secured by your home ............................................................25

Student loans ........................................................................................25

Support obligations..............................................................................25

Fines and restitution ............................................................................25

Taxes ......................................................................................................25

Lawsuits.................................................................................................26

Using the Statute of Limitations...................................................................26

Chapter 2: Stopping the Bleeding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27

Realizing You’re Not Alone............................................................................27

Preventing Further Damage Now .................................................................28

Comparing Your Income with Your Spending.............................................30

Focusing on how much income you have .........................................31

Coming to grips with where your money goes.................................32

Assessing Your Spending Habits ..................................................................37

The devil’s in the details: Scrutinizing your expenses ....................38

Are you a spendaholic?........................................................................39

Getting a Handle on What You Own.............................................................40

Figuring Out How Much You Owe ................................................................43

Chapter 3: Meeting the Players . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47

Finding Professional Help .............................................................................47

Answering why a lawyer is a must .....................................................48

Finding a good lawyer..........................................................................48

Understanding what to expect from your lawyer ............................49

Paying the piper ...................................................................................49

Getting to Know the Players .........................................................................51

Bankruptcy judge .................................................................................51

Case trustee ..........................................................................................52

U.S. Trustee ...........................................................................................54

Creditors................................................................................................56

Chapter 4: Deciding Which Type of Bankruptcy Is Best for You . . . . .57

Deciding Whether to Fly Solo or As a Married Couple..............................57

Looking at Your Probable Bankruptcy Choices .........................................58

Chapter 7: Straight bankruptcy ..........................................................59

Chapter 13: Debt repayment plans ....................................................60

Deciding Between Chapter 7 and Chapter 13.............................................62

Recognizing when Chapter 7 is best ..................................................63

Considering Chapter 13 as your number-one option ......................63

Considering Other Types of Bankruptcy ....................................................67

Chapter 11: Large reorganizations .....................................................67

Chapter 12: Reorganizations for family farmers and fishermen.....67

Chapter 20: Adding Chapters 7 and 13 ..............................................68

Changing Your Mind ......................................................................................68

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xi Table of Contents

Chapter 5: Confronting the Means Test . . . . . . . . . . . . . . . . . . . . . . . . . .69

Putting the Means Test in Perspective........................................................69

Taking the Median Test .................................................................................70

Computing your income......................................................................71

Comparing your income to the median.............................................75

Deducting Your Expenses and Taking the Means Test..............................76

IRS National and Local Standards ......................................................77

Other necessary expenses ..................................................................78

Specific BARF deductions ...................................................................82

Deductions for certain debt payments..............................................84

Figuring Out How Much of Your Debts You Can Pay .................................87

Passing the Means Test by Showing “Special Circumstances” ................88

Considering Ways around the Means Test..................................................89

Getting Kicked Out of Chapter 7 for Abuse ................................................90

Chapter 6: Getting from Here to There: The Bankruptcy Process . . . .91

Navigating the BARF Maze ............................................................................91

Getting Organized Before Talking to a Lawyer ...........................................93

Doing your financial homework .........................................................93

Tracking down your creditors ............................................................96

Meeting Your Lawyer for the First Time......................................................98

Arranging for Credit Counseling ..................................................................98

Completing the Paperwork ...........................................................................99

Filing Your Bankruptcy Case.........................................................................99

Using the Automatic Stay..............................................................................99

Exceptions to the automatic stay.....................................................101

Situations where the automatic stay does not apply

due to a prior bankruptcy .............................................................101

Receiving Notice of the Creditors’ Meeting ..............................................103

Supplying Copies of Tax Returns ...............................................................103

Attending the 341 Meeting ..........................................................................104

Signing Up for Your Financial Management Course.................................104

Working Your Way through Chapter 7.......................................................105

The 341 meeting in a Chapter 7 case ...............................................105

Dealing with secured creditors.........................................................107

Amending paperwork ........................................................................107

Adding creditors.................................................................................107

Sweating out key deadlines...............................................................108

Attending a discharge hearing..........................................................108

Closing no-asset cases .......................................................................108

Administering asset cases.................................................................109

Anticipating complications ...............................................................110

Working Your Way through Chapter 13.....................................................110

Filing your plan and beginning your payments..............................110

The 341 meeting in a Chapter 13 case .............................................110

Confirming your repayment plan .....................................................111

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xii Personal Bankruptcy Laws For Dummies, 2nd Edition

Going through valuation hearings....................................................111

Filing annual reports..........................................................................111

Looking at the claims process ..........................................................112

Comparing the Chapter 7 and Chapter 13 Process..................................112

Part II: Avoiding Bankruptcy .....................................115

Chapter 7: Considering Alternatives to Bankruptcy . . . . . . . . . . . . . .117

Appreciating the Negative Consequences of Bankruptcy ......................118

The drawbacks of bankruptcy..........................................................118

Reasons not to file bankruptcy.........................................................118

Reasons to delay filing bankruptcy..................................................119

Looking at Remedies Other Than Bankruptcy .........................................120

Budgeting ............................................................................................120

Allowing your family to bail you out................................................121

Selling your assets..............................................................................121

Transferring credit-card balances....................................................122

Restructuring home mortgages........................................................123

Tapping your retirement plan...........................................................126

Choosing Which Bills to Pay First (If at All) .............................................127

Deciding whether to pay your mortgage.........................................129

Considering whether to make car payments..................................129

Dealing with alimony and child support payments .......................129

Deciding whether you should pay your taxes ................................129

Negotiating with Your Creditors ................................................................130

Workout agreements..........................................................................130

Threatening bankruptcy....................................................................130

Considering Credit Counseling Services...................................................131

Simply Ignoring Creditors ...........................................................................133

Chapter 8: Handling Bill Collectors . . . . . . . . . . . . . . . . . . . . . . . . . . . .135

Taming the Toothless Tiger: The Bill Collector........................................136

Invoking Federal Law...................................................................................137

When debt collectors can contact you............................................138

Where debt collectors can’t contact you........................................139

When debt collectors may contact others about your debt ........139

Dirty tricks are outlawed...................................................................140

Your remedies under the FDCPA ......................................................141

Tapping State Laws ......................................................................................141

State statutes ......................................................................................141

Common law remedies ......................................................................142

Keeping Your Dukes Up...............................................................................142

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xiii Table of Contents

Chapter 9: Negotiating with the IRS . . . . . . . . . . . . . . . . . . . . . . . . . . . .145

Looking at the Tax Collection Process ......................................................145

Service centers ...................................................................................146

Automated Collection System (ACS) ...............................................146

Local revenue officers........................................................................147

Making Nice with the Touchy-Feely IRS ....................................................147

Your due process................................................................................148

Negotiating an installment agreement.............................................148

Knowing when to get professional help ..........................................149

Gaining “uncollectible” status ..........................................................150

Planning bankruptcy while pursuing an

installment agreement ...................................................................150

Submitting an Offer in Compromise ..........................................................151

Getting Help from a Taxpayer Advocate ...................................................152

Part III: Keeping Your Stuff .......................................153

Chapter 10: Understanding Which Assets Are Off Limits

to Creditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .155

Grasping the Legal Concepts......................................................................155

Digging through the property of the estate ....................................156

Understanding how exemptions work.............................................158

Determining the Value of Your Stuff...........................................................160

Understanding How the Courts View Certain Assets..............................161

Homesteads.........................................................................................161

Automobiles........................................................................................162

Household goods................................................................................162

Inheritances and life insurance benefits .........................................163

Divorce settlements ...........................................................................163

Spendthrift trusts ...............................................................................164

Rent receipts.......................................................................................165

Security deposits................................................................................165

Wages ...................................................................................................166

Bank accounts.....................................................................................166

Severance and vacation pay .............................................................166

Sales commissions .............................................................................167

Real estate commissions ...................................................................167

Insurance commissions.....................................................................168

Suits to recover money......................................................................168

Income tax refunds.............................................................................169

Earned income credits.......................................................................170

Retirement accounts..........................................................................170

Education savings plans....................................................................170

Creating Exemptions....................................................................................171

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xiv Personal Bankruptcy Laws For Dummies, 2nd Edition

Chapter 11: Dealing with Secured Debts . . . . . . . . . . . . . . . . . . . . . . .173

Getting the Lowdown on Liens...................................................................174

Perfecting liens ...................................................................................174

Seeing liens as double-edged swords ..............................................174

Identifying Different Kinds of Liens ...........................................................175

Consensual liens.................................................................................175

Nonconsensual liens ..........................................................................177

Dealing with Liens in Bankruptcy ..............................................................177

Freeing your household goods and tools from liens .....................177

Redeeming (getting back) your property........................................179

Reaffirming your debts ......................................................................179

Using the Special Powers Afforded Chapter 13 Filers .............................180

Dealing with Rent-to-Own Contracts .........................................................180

Banging the Gavel on Judgment Liens.......................................................181

Chapter 12: Saving Your Home . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .183

Your Home, Your Castle — and Sometimes Your Hassle ........................183

Figuring out how much your home is worth ..................................184

Deducting mortgages and other liens that affect

your share of the pie ......................................................................184

Understanding the homestead exemption......................................185

Dealing with Jointly Owned Property........................................................187

Example 1: When the homestead exemption is larger

than your equity .............................................................................188

Example 2: When your equity is larger than

your homestead exemption ..........................................................188

Understanding How Foreclosures Work....................................................189

Heading off the Homewreckers ..................................................................190

Keeping your home in Chapter 7......................................................190

Keeping your home in Chapter 13....................................................190

Comparing Chapter 7 and Chapter 13 .............................................194

Using Truth-in-Lending Laws ......................................................................196

Coping When Your Dream Home Becomes a Nightmare ........................197

Part IV: Getting Rid of (Most of) Your Debt ...............199

Chapter 13: Lingering Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .201

Recognizing (Possibly) Indelible Debts.....................................................201

Confronting obligations enforceable by court orders...................202

Debts arising after bankruptcy.........................................................203

Unlisted debts.....................................................................................205

Debts preserved under sections of the Bankruptcy Code............205

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Table of Contents xv

Nondischargeable Debts in Chapter 7 versus Chapter 13 ......................206

Sweating Out the 60-Day Bar Date .............................................................209

Avoiding the Urge to Borrow to Pay Nondischargeable Debts ..............209

Understanding Reaffirmation Agreements................................................210

Reasons to reaffirm ............................................................................210

Changing your mind...........................................................................211

Having Your Discharge Denied or Revoked ..............................................211

Grounds for denial of a Chapter 7 discharge..................................212

Grounds for denial of a Chapter 13 discharge................................213

Protecting your discharge.................................................................213

Revoking your discharge...................................................................214

Chapter 14: A House of Cards: Wiping Out Credit-Card Debts . . . . .215

Playing the Credit-Card Game ....................................................................215

Seeing What Judges See ..............................................................................217

Examining Your Mind Set When You Incurred the Debt..........................218

Forcing the Credit-Card Company to Prove Its Case ...............................219

Explaining Presumptively Fraudulent Charges ........................................219

Defending Against False Financial Statement Allegations ......................220

Using Credit-Card Advances for Gambling ...............................................220

Bullying the Credit-Card Bullies .................................................................221

Transferring Credit-Card Balances.............................................................222

Chapter 15: Give unto Caesar: Using Bankruptcy

to Deal with Tax Debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .223

Getting a Handle on What Happens to Taxes in Bankruptcy..................223

Wiping Out Dischargeable Income Taxes..................................................224

Paying Nondischargeable Priority Income Taxes ....................................225

Coping with Nondischargeable Nonpriority Income Taxes....................225

Confronting Unfiled Tax Returns................................................................226

Coping with Interest and Penalties............................................................230

Managing Federal Tax Liens........................................................................231

Making the Trustee Pay Your Taxes...........................................................231

Keeping on Top of Postpetition Taxes in Chapter 13 ..............................232

Paying Taxes Before Bankruptcy................................................................232

Using the Statute of Limitations to Escape Taxes....................................232

Facing the Consequences if You’re a “Tax Protestor” .............................233

Dealing with the State Tax Man ..................................................................233

Addressing Taxes Other Than Income Taxes ...........................................233

Paying trust fund employment taxes...............................................233

Deciding whether to pay real and personal property taxes .........234

Obtaining Loans to Pay Your Taxes ...........................................................234

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