Monthly Archives: November 2014

Can I list an SBA loan in my bankruptcy?

Yes.

An SBA loan is a U.S. Small Business Administration loan.  Although it is a loan brokered by a branch of the government, it IS dischargeable in bankruptcy (bankruptcy can wipe out that debt).  I am including definition information from the SBA at the end of this blog.  To clarify, the SBA loan is NOT a priority debt which is non-dischargeable in bankruptcy.

So, if you have taken out an SBA loan to start your business, and the business failed, then you CAN go bankrupt on that loan.  Just remember that most SBA loans are secured.  For instance, if you take out an SBA loan to start a towing business, then the two tow trucks you purchased for your business are going to be secured by the loan.  If you list the loan in the bankruptcy to discharge it, they will take back the trucks.  I have even had some clients who secured the SBA loan as a second mortgage against their home.  This means that they would have to keep the loan to keep their home (unless we could strip it off in a chapter 13 case).  sba

So you can list the loan, and you can discharge it, but you’ll lose whatever collateral was secured by the loan.  Don’t sell off the equipment or business fixtures secured by the loan:  the SBA lender has a legal right to take those back.

What SBA Offers to Help Small Businesses Grow
What does SBA offer to small business owners? The programs are many and varied, and the qualifications for each are specific. SBA can help facilitate a loan for you with a third party lender, guarantee a bond, or help you find venture capital. Understanding how SBA works is the first step towards receiving assistance.

SBA’s Role

SBA provides a number of financial assistance programs for small businesses that have been specifically designed to meet key financing needs, including debt financing, surety bonds, and equity financing.

Guaranteed Loan Programs (Debt Financing)

SBA does not make direct loans to small businesses. Rather, SBA sets the guidelines for loans, which are then made by its partners (lenders, community development organizations, and microlending institutions). The SBA guarantees that these loans will be repaid, thus eliminating some of the risk to the lending partners. So when a business applies for an SBA loan, it is actually applying for a commercial loan, structured according to SBA requirements with an SBA guaranty. SBA-guaranteed loans may not be made to a small business if the borrower has access to other financing on reasonable terms.

SBA loan guaranty requirements and practices can change as the Government alters its fiscal policy and priorities to meet current economic conditions. Therefore, you can’t rely on past policy when seeking assistance in today’s market.

How much money does a chapter 7 bankruptcy trustee make?

Not as much as you would think.  trustee compensation

The court pays a chapter 7 trustee $60 a case out of your $335 filing fee.  This $60 pays for the trustee to review all 60+ pages of your paperwork, conduct the 341 Meeting of Creditors, and file a report in your case.  If you waived the filing fee, then the trustee doesn’t even get his 60 bucks.

So, in short, the trustee gets $60 for your case.

However, the trustee also gets paid out of any non-exempt assets he can take from you and sell off.  If he discovers these assets, he sells them off, pays himself a commission and “administrative fees,” and then the rest goes to your creditors.  The trustee will need to file an application for those additional fees, but it is almost always granted by the court.

The trustee’s compensation is set by statute (below), but it basically follows a sliding scale as follows:

25% of the first $5,000,
10% of any amount between $5,000 and $50,000,
5% of any amount between $50,000 and $1,000,000, and
3% of monies in excess of $1,000,000.

This means that if the trustee discovers your million dollar home in the Cayman Islands, he will make some good money selling it off for your creditors.  However, if you did have an asset like that secret home, you probably shouldn’t have filed bankruptcy.  In general, the trustee’s compensation is not great because the debtors (people filing bankruptcy) don’t really have anything for him to sell off.

11 U.S. Code § 326 – Limitation on compensation of trustee

(a) In a case under chapter 7 or 11, the court may allow reasonable compensation under section 330 of this title of the trustee for the trustee’s services, payable after the trustee renders such services, not to exceed 25 percent on the first $5,000 or less, 10 percent on any amount in excess of $5,000 but not in excess of $50,000, 5 percent on any amount in excess of $50,000 but not in excess of $1,000,000, and reasonable compensation not to exceed 3 percent of such moneys in excess of $1,000,000, upon all moneys disbursed or turned over in the case by the trustee to parties in interest, excluding the debtor, but including holders of secured claims.

Can bankruptcy control the interest rate I’m paying out to my creditors?

Yes.  If you make too much money to go bankrupt on your payday loans and bad auto loans, you can still control the interest rate you’re paying back in a chapter 13.  (Technically, you don’t make too much money to file bankruptcy;  you just make too much money to file a simple chapter 7 case).

If your income is too high to qualify for a chapter 7 bankruptcy, then you will most likely be filing a chapter 13 case.  You will be controlling your repayment of your creditors at 2% interest over 60 months, instead of the 29% interest credit cards or the 500% interest payday loans.  (Your car loans will be at about 5%, give or take half a point depending on the market).  interest rate

Today, I received a call from a potential client who wanted to file a chapter 7 on about $20,000 in payday loans and medical bills and a $20,000 car loan she was behind on.  However, when I reviewed her income, she was making about $30,000 above the median income for her household size, and even with her expenses/health insurance/taxes/etc., she did not qualify for a chapter 7.

As we spoke a little more, I realized that she could file a chapter 13.  In her bankruptcy, her car and creditors would be paid back at about $700 a month for 5 years.  Prior to this proposed bankruptcy, her car payment alone was $600 a month, not counting the horrendous payday loan payments every two weeks (interest only, not principal).

This was definitely not as good as a chapter 7, but it controlled her debt repayment, dropped the interest rate by 498%, and let her get her life back under control.

Does Utah law exempt my tax refund/EIC in bankruptcy?

No.

If you file bankruptcy before you receive and spend your tax refund, there is a good chance that the bankruptcy trustee will take it.  tax refund exemption

I have written about this subject many times, and you can find the other entries by typing “refund” into the search button and hitting “search.”  However, it is an important question, and I don’t mind asking its many variations.

To briefly recap:  you cannot protect your tax refund in Utah.  A creditor can attach it, your student loans can garnish it, and the bankruptcy trustee can keep it.  However, you can time your bankruptcy so that you lose very little or none of your tax refund.  If you are getting a good tax refund next year, then you want to wait to file bankruptcy until after you’ve received and spent it.

Utah does not have any state law which exempts (protects) your refund.  Other states may.  In California, you can use your $25,000 wildcard, Ohio gives you a $1,150 wildcard, Virginia gives you $5,000 to spread between household assets and the refund, in New York you can opt to use federal exemptions and protect up to $5,000 in cash, and there are others.

In Utah, there are none.  You will lose that refund unless you time your bankruptcy correctly.  Get a good bankruptcy attorney and talk this one out at length before you file.

What happens after a repossession if my car is in bad shape with body damage?

Nothing if you file bankruptcy.

When you finance a car, you are required to keep it insured in case anything happens to the car.  This gives the bank some protection in case you are in a car accident, or the vehicle is stolen, or a boulder falls on it, etc.  Unfortunately, when you are in financial trouble, you let the insurance lapse and can’t repair the vehicle.  20141106_075033

Now if you fall behind on payments and the bank repossesses the car, they will notice that it has been damaged.  This affects the resale (auction) value.  They may even sue you for the damages.  Of course, at this point, you already owe the repo fee and the deficiency balance on the loan.

If you file bankruptcy, you list all of these debts to the bank in your bankruptcy and should be able to discharge them.  The only real exception would be if the bank sued you in the bankruptcy court, arguing that you had maliciously damaged the car in anticipation of bankruptcy, but I have never seen this and don’t think it would actually happen.

So, if you go bankrupt, the body damage doesn’t matter.  Even if the vehicle is in bad shape, we can list your debt to the bank and discharge it.

Can I get a breast job before I file bankruptcy?

Yes.  I think that’s a great idea!

Seriously, I have been asked this question at least 50 times over the last 7 years or so.  However, there are some considerations in timing the breast job or breast augmentation.  Primarily, how will it affect your bankruptcy?  breastjob and bankruptcy

First, it may help in your meeting with the trustee.  There is at least one bankruptcy trustee in the state who will be so mesmerized by you, that your 341 Meeting of Creditors will go smoothly.  No, I’m not joking.  And yes, I know, men are pigs, but it’s true.

Second, if you finance the breast job through the plastic surgeon, or care credit, or put it on a credit card, and then go bankrupt a month later, there is a good chance that this creditor will sue you and make you pay those monies back.  Credit purchases within 90 days of bankruptcy may result in an adversary proceeding (bankruptcy lawsuit) for nondischargeability, which means that you have to pay that money back.  Even worse, if you get the breast job contemplating bankruptcy, you are planning on defrauding a creditor, which is very, very different morally than going bankrupt on a surprise $30,000 medical bill which hit you after you lost your job.

Third, the doctor will probably refuse to see you for any follow-up visits unless you agree to repay the financed debt.  He can’t make you pay him back, but he can refuse to see you unless you pay him back.

Fourth, the new breasts may be secured collateral!  About 6 years back, I had an exotic dancer in my office.  She had had some work done which made her look structurally unstable, like she would fall over at any minute.  Her surgeon had told her that the new breasts were secured collateral, same as a financed car or an entertainment center you buy from R.C. Willey.  In all sincerity, she cupped her secured collateral and asked me if the doctor could repossess them if she refused to pay on the loan.  For some reason I became a little dizzy and tongue-tied.  I waffled with an attorney answer saying that I’d need to see the contract, but honestly, if they were secured, technically, he could take them back.  In reality, this would never happen, and I don’t think he could get a court order to remove them.

Fifth, it may be a great idea (or a horrible one) to use your tax refund to finance them.  In a chapter 7, I have had MANY clients who have used part of their tax refund to pay for a breast job before they filed bankruptcy.  In a chapter 13, I don’t know whether or not the trustee would object to the work as an unnecessary expense for luxury collateral.

Sixth, you may be able to work the breast job into your divorce decree.  I had a client a few years back who paid for his soon-to-be-ex-wife’s bankruptcy.  He had also agreed to pay for a breast job for her prior to the divorce to “help her on the dating scene.”  It sounds strange, I know, but it was part of the agreement they worked out.  He did pay for the bankruptcy (and has sent me many other clients since then), and she did get the work done (and it turned out very well).

This is an honest question, and it deserves an honest answer.  I see no problem with getting the work done, but you need to consider the creditor and its effect on your bankruptcy.

What happens to my music royalties when I file bankruptcy?

They are not an exempt (protected) asset, and you may lose them if you file the wrong kind of case.  If  chapter 7 trustee can sell those music royalties and use them to pay your creditors, he will.

I had a client who owned something like a 1/64th share of the music royalties for a James Taylor song.  I don’t remember if it was “Fire and Rain,” but that is the song playing in my head as I write this blog entry, so we’ll go with it.  This tiny share of a song written in 1970 still generated a royalty of $250 a month to my client, 40 years later!  My client had some rather overwhelming medical debt, low income, and no real options.  music royalties

Other than this song royalty, she would’ve been an easy chapter 7 case.  However, in a chapter 7, the bankruptcy trustee will attempt to liquidate any asset with real value for the benefit of your creditors.  In other words, the trustee sells things and pays that money to your creditors.  Most people don’t have things for the trustee to sell, and they are safe in a chapter 7.  Here, if my client had filed a chapter 7, the trustee would have sold their music royalty and used the proceeds to pay off her creditors.  An ongoing stream of income of $250 a month stretching into forever does have value.

Instead, we filed a chapter 13 and counted the royalties as income.  The trustee objected and had us pay a small amount for the value of the royalties, and we were able to move forward in a chapter 13 without losing the ongoing royalties.

To sum up, if you file a chapter 7, you’ll lose them.  If you file a chapter 13, you can keep them.

 

Should I file bankruptcy right away to stop a foreclosure from showing up on my credit?

Maybe, but your credit is going to be bad either way.

Today I received a call from a client who has a home being sold at a foreclosure sale this month.  She doesn’t live there and doesn’t necessarily need to stop the sale.  She has a medical procedure in a couple of months that may be very costly, and may or may not be covered by her insurance.

She had been advised to file bankruptcy before the foreclosure sale to protect her credit, and I advised that we wait until after the medical procedure.  It could be a very costly one, and she may need to go bankruptcy on that debt as well.

As far as credit goes, her friend may be right.  Filing bankruptcy before a foreclosure would mean that you would only have the black mark of bankruptcy on your credit report, instead of a foreclosure followed by bankruptcy.  But, that tiny difference in a credit score is not worth the risk of having a huge medical bill two months after filing bankruptcy (a bill which could not be included in your already-filed bankruptcy).

So in my opinion, she needs to wait.  Her credit will suffer a little more, but we will have the cushion of the next two months to see what actually happens with her medical procedure.