In a typical bankruptcy, the case ends with a discharge of indebtedness. You no longer owe the $20,000 you once owed to Capital One, but how does this affect your next tax return? Essentially, it doesn’t.
Cancellation of debt income (CODI) is typically taxable. The creditor will send you a 1099-C, showing the amount of debt that was cancelled, and the cancelled amount is reported on your tax return as income. This can increase the amount of taxes you owe or decrease any refund you may receive.
But some cancelled debt is excluded from taxable income under 26 U.S.C. § 108. One exclusion provides that if a debt was discharged in a bankruptcy, the amount is not to be included as gross income. If a creditor sends a 1099-C for a debt that was discharged in bankruptcy, the taxpayer reports the income on the tax return and files Form 982 to exclude that amount. Basically, you need to tell the IRS that you received a 1099-C, but the amount isn’t taxable because of your bankruptcy discharge. (Yes, it would be easier to just ignore the income. But tax forms aren’t known for being easy.)
Keep in mind that debt settlements *may* result in taxable CODI. If Bank of America agrees to settle your $25,000 debt for a lump sum of $10,000, you may end up having to pay income tax on an extra $15,000. If you are negotiating a debt settlement, be sure to factor in the possible tax consequences before you finalize a deal. (Funny how most debt settlement companies never tell you about this…)
So far as refunds go, as long as you can exempt the right to receive a tax refund, you will be able to keep it. If you can’t exempt it, your attorney may have some options for protecting it. Most of my clients keep 100% of their tax refunds, but this will vary depending on where you file your bankruptcy.
If you have any questions about how your bankruptcy will affect your tax return, ask your bankruptcy attorney or tax professional.
Let’s get the answer out of the way right at the top. Yes, you can probably keep your home if you file bankruptcy in Wisconsin.
Keeping a home is the primary concern for many of my clients. After all, it’s likely the most expensive asset they own. And moving can be a real pain. As I tell them, I have never had a client lose a house that they wanted to keep. Here are a few scenarios that my clients and I commonly encounter:
Equity in the house
House value – Balance owed on all mortgages = Equity. Because of the exemptions available in Wisconsin, a bankruptcy filer can keep the house as long as he/she has less than $75,000 of equity in the house ($150,000 for a married couple). Most of my clients have far less than $75,000 of equity in their homes. If you have more than $75,000 and file bankruptcy, you can still keep your house by paying the excess over $75,000 into your Chapter 13 plan for 36-60 months.
Current on the mortgage payments
Clients who are current on their mortgage payments can keep their homes in either Chapter 7 or Chapter 13 by simply continuing to make the mortgage payments. The bank doesn’t want your house, it wants your money. As long as you keep making your payments, everyone will be happy.
Behind on the mortgage payments
Clients who are behind on their mortgage payments can also keep their homes in bankruptcy. Chapter 7 filers may need to get current in a couple of months, but Chapter 13 filers can pay back the mortgage arrears over 36-60 months through the Chapter 13 plan while also starting to make the regular mortgage payments directly to the bank. Chapter 13 can save your house even if a foreclosure has been filed.
If you have a situation that isn’t covered, you can discuss it with your attorney. But the important takeaway from this post is that you can probably keep your house if you file bankruptcy in Wisconsin. Whether you SHOULD keep it is another question.
Image credit: Stefano A./Flickr
So you’ve decided to meet with a bankruptcy attorney to learn about your debt-relief options. What do you need to bring to your appointment?
When you set up your consultation, your attorney will tell you what papers to bring. Some attorneys will ask for very little, while others will ask for stacks of documents. In general, here is a list of documents you should be prepared to have available:
– Pay stubs from employment for the past six months. These will help the attorney determine whether you are above median or below median for your household size.
– Tax returns for the last two years. Used to see if there have been significant changes to your income.
– Real estate tax bills. If you don’t know the fair market value of your house, the tax bill may give you a ballpark figure.
– Vehicle titles and recorded documents from the county land records. These will show if your creditors have properly perfected their liens against your assets.
– Recent billing statements. These will help your attorney understand how much you owe and how many creditors you have.
– Credit report. If you don’t know who you owe money to, a credit report is a great place to start. You can get a free credit report once a year from any of the three credit reporting agencies here: AnnualCreditReport.com
– Court documents if you’ve been sued or a foreclosure has been started. This will help the attorney decide if you’re under some kind of time crunch.
Your attorney may ask for more or less. Personally, I don’t require any documents for our first meeting, although I may ask for most of the items above if you decide to hire me. I tell clients to bring anything that will help them answer my questions. For example, if you know how much your house is worth, I don’t need to see the tax bill at our first meeting.
Image credit: Joel Bez/flickr
A recent news story out of Madison caught my eye. A woman filed a Chapter 7 bankruptcy and didn’t disclose a bank account with a $10,750 balance. When this was discovered (and it’s almost ALWAYS discovered eventually), she lost the money she was trying to hide, lost her discharge, was fined $1000, and was sentenced to two years of probation.
(A couple of notes about the original story: The Bankruptcy Court filings show that the debtor’s first name is spelled Bonny, not Bonnie, and she’s from Monroe, not Lancaster.)
In my opinion, the debtor got lucky. Those convicted of bankruptcy fraud are subject to a fine of up to $250,000 and up to five years in federal prison.
Had the debtor in this case simply disclosed and exempted the asset, everything most likely would have been fine. If she couldn’t exempt the full amount, she would have been required to turn over the non-exempt portion but would have retained everything else. If she innocently forgot about the asset, she probably would have been allowed to amend her original pleadings to disclose and exempt. But seriously, who “forgets” about a $10,000 bank account? If she made that argument, neither the bankruptcy judge nor the U.S. Attorney bought it.
In the end, what did this debtor lose by lying to the bankruptcy court and trying to conceal a $10,750 bank account?
– The trustee took the $10,750 to pay creditors.
– The debtor lost her discharge, meaning that all the debts she was looking to eliminate will remain forever (or until she pays them).
– She was fined $1000 and sentenced to two years of probation.
As I tell my clients, the way most people lose anything in bankruptcy is by trying to hide it. If you’re honest and disclose everything, you’ll probably be able to keep it. If there’s a problem, your attorney will tell you how to resolve it. Whatever you do, don’t dispose of assets or conceal them. Unless, of course, you’re willing to lose the asset, pay a fine, and go to prison.
Image credit vomsorb/flickr
If you live in Wisconsin, can you file your bankruptcy case in Iowa? Maybe.
The subject of this post is venue. “Venue” is the court in which a case is filed. In most criminal cases, the proper venue is the county in which the crime was committed. If you are charged with theft from a store in Lancaster, your case should be filed in the Grant County Circuit Court. In a civil case, the proper venue is the county in which important events took place or the county in which the defendant lives or conducts his business.
The proper venue for a bankruptcy case is laid out in 28 U.S.C. § 1408. A bankruptcy case may be filed either in the district in which the (1) domicile, (2) residence, (3) principal place of business, or (4) principal assets of the debtor have been located for the 180 days immediately preceding the filing, OR in the district in which the debtor’s domicile, residence, business, or assets were located for a longer portion of that 180-day period than in any other district.
“Domicile” is the place you consider your permanent home. “Residence” is the place you are currently living. The distinction usually comes up with students, military personnel, or people who move for business.
Short version: You may file your bankruptcy case in the judicial district where any of those four things were located for the last 180 days. If your domicile, residence, business, or assets were in more than one district during those 180 days, the proper venue is the district where they were located for the most time.
Venue may be proper in multiple districts. Example: Debtor lives in the Western District of Wisconsin and owns a business with headquarters in the Northern District of Iowa. Either district would be a proper venue. The debtor who has his home in Minnesota, lives in the Northern District of Iowa while attending school, owns a business with headquarters in the Northern District of Illinois, and still has the majority of his assets at his parents house in the Eastern District of Wisconsin could theoretically file his bankruptcy case in any of those four Bankruptcy Courts.
But can an Illinois debtor who has never lived in Wisconsin, never owned a business in Wisconsin, and doesn’t own anything located in Wisconsin file his bankruptcy case in Wisconsin? Yes and no. She could file in Wisconsin, but Wisconsin would be an improper district under 28 U.S.C. § 1408. And Rule 1014 of the Federal Rules of Bankruptcy Procedure tells us that cases filed in an improper district may be dismissed or transferred to the proper venue. If the judge doesn’t mind and if no “party in interest” objects, our Illinois debtor may sail through with no problem.
If your bankruptcy attorney recommends you file in an improper venue, question his motivations. Is it because the attorney isn’t licensed in the proper venue and he doesn’t want to lose you as a paying client? Is it just more convenient for him? Is he willing to foot the bill if your case is dismissed or transferred to the proper venue? Protect your interests from unethical people by being an informed client. Insist your attorney file your case in the proper venue.
Image credit: flickr/w.marsh
In a Chapter 7 bankruptcy, you will be given the option to reaffirm certain secured debts. A reaffirmation agreement basically says you will continue making your payments on a specific debt and retain the collateral. If you default in the future, the creditor may pursue any remedies allowed by state law, such as repossession or obtaining a money judgment. With respect to the reaffirmed debt, your bankruptcy discharge will make no difference at all and it would be as if you had never filed in the first place.
Some bankruptcy attorneys refuse to allow their clients to reaffirm any real estate loans. But here in Wisconsin, reaffirming your first mortgage isn’t terribly risky. Here’s why:
If you default on your home mortgage in Wisconsin, the lender will foreclose. Once the foreclosure judgment is entered, the clock starts ticking on the redemption period, a 6-12 month period during which you are allowed to stay in the house before the sheriff can sell the place in a foreclosure sale. During this redemption period, you live in the house without paying rent or a mortgage payment. Wisconsin law gives the lender two options on redemption:
1) A 12-month redemption period, after which the lender may sue for a deficiency judgment (the difference between what you owe and the value of the house), OR
2) A 6-month redemption period and a waiver of the right to any deficiency judgment.
Because most homeowners who default on their mortgages won’t be able to pay a deficiency judgment anyway, most lenders in Wisconsin choose to waive the deficiency judgment in exchange for the shortened redemption period.
So the reaffirmation agreement gives the lender a right (sue for a deficiency) that it likely won’t exercise. Keep in mind that holders of junior mortgages will usually sue for a deficiency, so it rarely makes sense to reaffirm a second or third mortgage. Also, each state has its own rules on foreclosures. I can’t tell you what the risk of reaffirming a mortgage may be in any other state.
As you can see, there’s not much risk in reaffirming a first mortgage in Wisconsin. Whether you should reaffirm will depend on your personal circumstances. There are some benefits to reaffirming, such as:
– Refinancing. Most lenders will not refinance if you do not reaffirm the debt in your bankruptcy. They will tell you your lawyer messed up by not filing the reaffirmation agreement (that’s not true), and that you should reopen the bankruptcy case to have the reaffirmation agreement filed (that won’t be allowed in most jurisdictions).
– Online account access. Some lenders won’t let you manage your account online without a filed reaffirmation agreement.
– Statements and automatic payments. Some lenders won’t send monthly statements for your mortgage payments or allow you to set up automatic debits from your bank account without a reaffirmation agreement. You’ll have to remember to send your payments each month without being reminded.
– Credit reporting. Most lenders won’t report your payments to the Credit Reporting Agencies if a reaffirmation agreement wasn’t signed.
Most of these are just ways for the bank to punish you for not reaffirming the debt. The Bankruptcy Code doesn’t require any of these measures; they are simply bank policies. If the ability to refinance with that specific bank or credit reporting are important to you, you may wish to reaffirm your home mortgage. But if the risks of reaffirming outweigh those benefits, you might decide to simply continue making your mortgage payments without reaffirming the debt. Talk with your bankruptcy attorney to decide if reaffirming your home mortgage makes sense in your situation.
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You can find a lot of advice online regarding taxes this time of year. Even if you restrict your search to “bankruptcy and taxes,” you’ll get over 50 million results. I’m devoting this post to my number one tax tip in the exciting world of bankruptcy!
Disclaimer: I’m not a tax attorney, I’m not saying that this tip will make sense for anyone who isn’t filing bankruptcy, and this is not intended as legal advice for your specific situation. Ask your bankruptcy lawyer if this tip is right for you (sort of like those drug ads on TV.)
With that out of the way, here’s the tip: File your tax returns on time, even if you owe money and can’t afford to send payment. (If you’re due a refund, this won’t apply.)
Fascinating, isn’t it? It may seem simple, but many people fail to file their returns when they think they may owe the I.R.S. or state Department of Revenue. That can be a problem if you later decide to file bankruptcy. Here’s why:
Filing late (or not at all) isn’t going to change the amount of tax you owe. The debt is there whether or not you file the return. There’s no benefit to not filing the return; hiding from the taxing authorities just doesn’t work.
If you need to file bankruptcy three years or more down the road, those taxes may be dischargeable in your bankruptcy, but only if you filed the return. One of the rules for discharging taxes in bankruptcy is that the taxes have to be at least three years old (that’s the simplistic version of Section 523(a)(1)(A) of the Bankruptcy Code). The rule that is relevant for the purposes of this article is found in § 523(a)(1)(B). It says that the tax is not dischargeable unless the return was filed more than than two years prior to filing the bankruptcy petition.
In other words, if you don’t file the return, the tax owed will never be dischargeable. If you file the return, even if you can’t send the money you owe, the tax *might* be dischargeable 2-3 years later, depending on if the other dischargeability rules are met.
Furthermore, there are court decisions that say if the I.R.S. files a Substitute For Return or if the taxpayer files a return late, that late-filed return “isn’t a tax return” for purposes of § 523. According to these rulings, filing a late return is the same as not filing at all. And as I’ve discussed above, that means that the tax will never be dischargeable in a bankruptcy. (I won’t get into why I think those cases are wrongly decided.)
The takeaway here is that you should always file your returns on time, even if you owe money and can’t afford to pay. Filing a return without sending along a check won’t affect the amount of tax you owe, but it might allow you to discharge those taxes if you need to file bankruptcy in the future.
As with all my blog posts, this is general information only and is not intended as legal advice. For advice specific to your particular situation, you need to speak with a local attorney.
Image credit: 401(k) 2013/flickr
If you choose to file bankruptcy without an attorney (i.e. pro se), petition preparers will offer to complete your bankruptcy petition and schedules for you. The first thing you need to understand is that petition preparers are not lawyers and are not allowed to give legal advice. They’re basically paid typists; they can take the information you give and put it in the right places on the schedules. That’s it. They can’t advise you on the legal ramifications of filing, they can’t answer your questions about which assets, debts, or other information you must disclose on your paperwork, they can’t tell you if an asset is exempt, they can’t tell you if filing bankruptcy is the best debt-relief solution for you, and they can’t represent you if something goes wrong with your filing. In other words, if you’re going to file pro se, you might as well do it all yourself rather than hire someone to just type the info for you. Check out this document from the U.S. Department of Justice regarding Bankruptcy Petition Preparers.
I recently saw a few ads online for businesses that advertise $80 – $150 bankruptcy filings. All you need to do is complete a short online interview and these people will put your petition and schedules together for you. It sounded great! But keep in mind that all they will do for that money is type up the information you provide. They will not offer legal advice or representation and are not allowed to tell you if the information you provided was sufficient.
So I read through their sites to see what services they provide. Unfortunately, the sites were full of misinformation. Here is just a sample of the incorrect information I found in their FAQ sections:
“All that you need to do is to sign your name and file with the bankruptcy court. You do not need to know bankruptcy law or spend weeks researching.”
Untrue. Because these agencies cannot give legal advice, you need to know what you are signing and filing with the Court. A bankruptcy attorney will explain every piece of paper you sign and advise you every step along the way. These agencies are saying, ‘just sign here and trust us.” Unless they are willing to go to federal prison in your place, you should be wary of signing something under penalty of perjury that you do not understand.
“This is the easiest part of the process since it lasts only about 30 to 60 seconds and since there are usually no creditors there. It is just a mere formality.”
This refers to the 341 meeting. True, it’s generally nothing to be afraid of. But I’ve never seen a 341 meeting last less than five minutes. And it is MUCH more than a formality. You are sworn in and must answer all the questions truthfully under penalty of perjury. Lie about anything, and the consequences are severe. While you need not lose sleep over your 341 meeting, treating it as a “mere formality” is dangerous.
(Writing about exemption law) “This is the compelling reason why you should have your bankruptcy prepared for you by professionals rather than trying to do it yourself with forms, kits or software.”
True, exemption law can be tricky and only an attorney can give you legal advice about which exemptions are available to you. But petition preparers are not legally permitted to advise you. By hiring one of these agencies, you are paying for a professional typist, not professional legal advice.
“Fortunately for you, the means test is only a paper tiger. It may look fearsome but the truth is that all of our customers pass it.”
If this is true (highly unlikely), it’s merely a coincidence. Debtors don’t pass through the means test because of some legal trickery that is only understood by these agencies. A good attorney may be able to find additional deductions to help, but a petition preparer doesn’t give legal advice. So how can they guarantee that you’ll pass through the means test?
The various sites look to be designed by the same person, so it’s possible they’re all owned by the same company. They all mentioned that they don’t advertise and their sites may be hard to find. If you were offering a valuable service at a fair price, wouldn’t you want your
marks victims potential customers to know about it?
In short (yeah, I know. Too late.), either file your bankruptcy by yourself or with the help of a licensed bankruptcy attorney. Don’t pay someone just to type the papers and show you where to sign them. These agencies take your money but add no value to your case. If they manage to mess up your case, it will cost you more to hire an attorney to fix it than it would have cost to do it right in the first place.
Image credit: Kurt and Becky/Flickr
A banker called me yesterday, asking for “a list of all the debts that were discharged” in my client’s bankruptcy a couple of years ago. I’ve also had clients call to ask for the same information. Usually, they are trying to refinance their home mortgage or applying for credit and the lender is demanding this magical list. The problem is, no such document exists.
If asked about a specific debt, I can tell my clients whether or not it was discharged. But I can’t produce a list of all discharged debts. The judge doesn’t check off a list of debts and say, “Yes, no, yes, yes, no…….” If a debt is dischargeable, it’s discharged. In bankruptcy, most debts are dischargeable. Those that aren’t dischargeable are laid out in Section 523 of the Bankruptcy Code.
HERE is a sample discharge form used by many bankruptcy courts. As you can see, it doesn’t list any debts. The second page simply says that some debts aren’t discharged, but you may need to speak to an attorney if you’re not sure if a specific debt is affected by the discharge.
Contrary to popular belief, simply having listed the debt in the bankruptcy papers doesn’t determine whether or not the debt was discharged. Some debts that are listed are not discharged (e.g. most student loans, child support obligations, recent taxes). Some debts that are not listed in the paperwork are discharged in most jurisdictions (e.g. garden variety debts in a no-asset Chapter 7). Simply looking at the filed papers to see if a debt was listed does not tell you if the debt was discharged.
But this explanation probably won’t satisfy most lenders demanding “the list of discharged debts.” If this information is the only thing holding up a refi or extension of credit, I generally advise clients to just submit the papers that were filed with the bankruptcy court. If the lender wants to think that’s “the list,” who am I to correct him?
It’s the time of year when people start thinking about tax refunds. Many people use overwithholding of taxes as a forced savings plan. My clients who do this often ask if they will be forced to turn over their tax refunds to the Bankruptcy Court or if they should wait to file their taxes until after their bankruptcy is completed.
As with many legal questions, the answer is “it depends.” Relevant factors include the Chapter under which you are filing, which Court has jurisdiction over your case, the size of the refund, and what exemptions are available to you.
A tax refund is an asset, even if you haven’t received it yet. Most bankruptcy clients are allowed to keep most (or all) of their assets. (See THIS BLOG POST for the reasons why.) Depending on which set of exemptions you use, your bankruptcy attorney may be able to protect your anticipated refund. If your attorney cannot protect the expected refund, he or she may be able to protect the funds once you receive them. (An expected refund is categorized differently than funds you have received and different exemptions may apply.)
For Chapter 13 filers, some jurisdictions require tax refunds to be surrendered to the trustee each year of the plan. Others allow the debtor to keep them. Your attorney can tell you how your jurisdiction treats this issue.
If you are considering filing for bankruptcy, be sure to speak with an attorney to determine what options will benefit you the most. Some people will be better off filing their taxes before filing bankruptcy, others will benefit by filing the bankruptcy first. This is an important decision that should not be made lightly. Timing can make all the difference.
Image credit: 401(K) 2013/Flickr
Many of my clients come to me when their houses are worth less they they owe against them, they can no longer afford to make their payments, and they are ready to walk away. The question is almost always, “what will happen if the bank forecloses?” In most cases here in rural Wisconsin, the bank will start the foreclosure process and take the property in 6-12 months. Whether or not we file a bankruptcy, I help my clients through the process and make sure they owe nothing once the foreclosure is complete.
But it’s not always so simple. In larger cities (and with larger banks), the timeline looks like this:
– The lender files a foreclosure complaint.
– The homeowner moves out, thinking the bank now owns the property.
– The lender dismisses the foreclosure suit because it doesn’t want another house in its inventory.
– The house sits empty, sometimes gets vandalized, and becomes a blight on the neighborhood.
Many times, city fines pile up against the owner. So who is responsible for paying these fines, the debtor who walked away once he got notice of the foreclosure, or the creditor that dismissed the foreclosure case?
Usually, the responsible party is the debtor. Here in Wisconsin, ownership of the real estate doesn’t pass to the lender until the foreclosure sale (or “sheriff’s sale”) is confirmed by the Court. If the lender dismisses the foreclosure case, the sale never happens and the debtor remains the owner of record. If the debtor has moved away, thinking that he no longer owns the property, the problem of a Zombie Deed arises.
A Zombie Deed happens when a homeowner thinks a property is gone, but later learns that he still owns it. (Sort of like bad guys in movies. Think he’s dead? Surprise, he’s back!) The homeowner with a Zombie Deed has a big problem. He no longer lives in the house and is receiving no benefit from ownership. But he may be incurring debt while the city clears the sidewalk, mows the lawn, or imposes fines for health code violations. All because he moved out while he still owned the house, thinking the bank would be the owner soon.
How can you protect yourself against the problems of Zombie Deeds? Simple; don’t move out of your house until the foreclosure sale has taken place. If the lender doesn’t follow through with the foreclosure, you can continue living in your house without making mortgage payments. If you are living in the house and taking care of the place without making mortgage payments, the lender will be more likely to foreclose and take ownership. However, if the house is abandoned, the lender may prefer to leave it in your name rather than take on the responsibility of maintaining it. Therefore, continuing to live in the house is a good way to encourage the lender to proceed with the foreclosure.
Alternatively, you could rent the place out or simply let a friend live there in exchange for routine maintenance. As long as the tenant realizes that the bank may decide to foreclose and evict after the sale and is prepared to move on short notice, it could be a good solution to a bad situation. In either case, you’re not doing anything wrong. You’re simply asking the lender to make a choice; “Either take ownership of the property or let me keep the house.”
The problem of Zombie Deeds doesn’t happen often in my corner of the state. And it doesn’t happen nearly as often with smaller, local banks and credit unions. If you’re wondering whether you are still the owner of the house you thought was foreclosed on long ago, speak to a local bankruptcy attorney today.
To read more about Zombie Deeds, check out these articles:
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Today’s guest post was written by bankruptcy attorney Michael Goldstein, of the Phillips Law Offices, practicing in Massachusetts and Rhode Island.
You have decided that enough is enough. Your debt has simply gotten out of control and you have made the decision to take the plunge and file a bankruptcy and seek a fresh start to rebuild your credit and finances. However, you are concerned about whether you will be able to really walk away from your obligations to pay back your credit cards and the tens of thousands of dollars that they claim you owe them.
Many of my clients have asked me, “will my credit card company object to my bankruptcy?” Although any unsecured creditor, such as American Express, Discover Card or others may contest whether a Debtor can obtain a discharge relative to a specific debt, they rarely try to challenge a full bankruptcy. It is a debt-by-debt issue that filers must be aware of when determining the timing of their case. There are several situations where a creditor may challenge your ability to discharge their specific debt pursuant to Title 11 of the United States Code, Section 523.
The most common reason why a creditor would allege that the debt you incurred to them is non-dischargeable would be due to the timing of your bankruptcy as it relates to the last use of your credit card or amount put on the card. It is called an “abuse of the bankruptcy process due to the intent of the use of a credit card”. More specifically, timing of your bankruptcy is important because pursuant to 11 USC §523(a)(2), a debt is presumed to be nondischargeable if a Debtor charges more than $600 for luxury goods on a credit card with in 90 days, or takes cash advances of more than $875 within 70 days of filing for bankruptcy. This presumption can be rebutted, but the burden is on the debtor to prove that the purchases did not involve luxury goods or services.
Another reason a creditor may object to your discharge is fraud and misrepresentation of your assets in order to obtain credit. If you misrepresent your financial condition in order to obtain a loan or credit line, and your creditor relies upon your misrepresentation when agreeing to extend credit, the creditor can object. For example, you earn $35,000 a year, but in order to get an Amex credit line of $10,000, you put on your credit application that you earn $100,000 a year.
Hiding an asset or failing to disclose it in a bankruptcy proceeding are also grounds to challenge a Debtor’s discharge. For example, if you own an investment property, especially one with equity, which could not be protected under the Bankruptcy Code, and fail to inform the Court of this asset, then a Creditor may challenge your right to a discharge pursuant to 11 U.S.C. §727.
Finally, the transfer of ownership of valuable items to family members or others just before filing bankruptcy can cause a creditor to challenge the bankruptcy case. It is particularly a problem if the asset you transferred would not have been fully exempt (meaning you could not protect the full value from liquidation), and the transfer was made with the intent to deprive a creditor of a benefit. If you do this, either your bankruptcy Trustee or any creditor who might have received a benefit from the sale of this asset may allege you committed a fraudulent transfer of an asset. The Federal look-back period (11 U.S.C. §548) of any asset transfer is two years, but each state has their own period. For example, in Massachusetts, a Trustee may look back up to four years. (Note from Bret: the Wisconsin look-back period is also four years.)
With the foregoing in mind, I always advise my clients to stop using any credit cards at least 90 days prior to filing for bankruptcy. But sometimes, due to a foreclosure or some other court preceding that requires the automatic stay provisions, you simply cannot wait. If this is the case, your attorney will need to work out a deal with the Trustee and your creditor. So long as you have been honest with your creditors and did not lie to obtain the money that is now the noose around your neck, you should be fine. However, as with anything in the law, it is always advisable to discuss your matter with an experienced bankruptcy lawyer in your state before making any final decisions.
Image credit: Images_of_Money/flickr
For most consumers, your choices in filing for bankruptcy will come down to Chapter 7 or Chapter 13. (Chapters 9, 11, 12, and 15 are for municipalities, businesses and high-income debtors, family farmers, and foreign cases, respectively.) Which is the right one for you? It all depends on what you’re looking to accomplish and your current financial situation.
A Chapter 7 bankruptcy is sometimes referred to as a “liquidation” bankruptcy. Even though most people don’t lose anything, non-exempt assets may be sold by the trustee to pay creditors. (Don’t let that scare you. Seriously, very few people lose anything in a Chapter 7 bankruptcy. Your attorney should let you know before filing if any of your assets are at risk.)
In a Chapter 13 bankruptcy, you repay a portion of your debts through a 3-5 year plan. You send payments to a trustee and the trustee pays certain debts in full while other creditors receive a pro rata share of their claims.
The following are some of the main differences between Chapter 7 and Chapter 13:
– Typically completed in 3-6 months.
– Legal fees usually in the range of $1500 – $2000.
– No payments to the bankruptcy trustee.
– Plan typically completed in 3-5 years.
– Legal fees usually in the range of $3000 – $4000.
– Plan payments to the bankruptcy trustee for the life of the plan.
At the end of the case, the debtor will typically receive a discharge. There are a few debts that are dischargeable in a 13 that are not dischargeable in a 7, but the discharge is essentially the same in both.
So which makes more sense in your situation? For most of my clients, Chapter 7 is the better choice because of the lower cost and shorter time commitment. Most of my Chapter 13 clients file a 13 for one of three reasons:
1 – They aren’t eligible for a Chapter 7 discharge because they filed a previous bankruptcy less than eight years earlier.
2 – They make too much money and can’t rebut the means test’s presumption of abuse.
3 – They are trying to save a house or vehicle from foreclosure or repossession and want to cure any arrearage over 3-5 years while also making their regular mortgage/vehicle payments. Once you’ve defaulted on a loan, you can’t force a lender to reinstate in a Chapter 7, but can in a Chapter 13. For example, if you were $10,000 behind on your mortgage payments, a Chapter 13 would allow you to keep the house by repaying the $10,000 over 3-5 years. At the same time, you’d have to begin making the regular mortgage payments. While it may be expensive, it will allow you to keep your house without coming up with $10,000 immediately.
During initial consultations, I listen to my clients’ stories and try to figure out what would best serve their financial interests. Then I lay out all the options available to them (including the non-bankruptcy options) and explain why one would be better than another. When you speak with your bankruptcy attorney, be sure to learn if Chapter 7 or Chapter 13 makes the most sense in your particular circumstances.
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Okay, this doesn’t really have a whole lot to do with bankruptcy or debt relief. But I was doing some presentations at local high schools in May and some of the students were considering a career in law. I’ve also had clients and friends ask what I had to do to become an attorney. I thought this would be a fine place to answer that question. I promise to get back to bankruptcy topics next time.
The first step was obtaining a college degree. I got my B.A. from Luther College in Decorah, IA. So far as I know, there is no “pre-law” degree; there are just courses you can take that will prepare you for law school. I was a music major, and I know other attorneys who majored in English, engineering, and political science. I don’t know of any law schools that require an undergrad major in any particular field. I would advise a college freshman considering law school to take extra writing classes, logic classes (or anything else that encourages critical thinking, like philosophy), and history courses.
As you may know, I taught music for awhile after I graduated from Luther. Some people work after graduation, others go straight from undergrad to law school. In either case, law school applicants must take the Law School Admission Test (LSAT). The LSAT is given four times per year and consists of five multiple choice sections (35-minutes per section) and a writing sample. Scores range from 120 to 180. The only people who will care about your score are the law school admission staffers. In fact, I don’t even remember my score anymore, even though it was quite important to me back in June of 2004. This site will show you what the average LSAT scores are for accepted students at various schools.
Once you’ve taken the LSAT, you apply to law schools. There are plenty of websites out there that explain how to get into the law school of your dreams, so I won’t bother. Suffice it to say, I was admitted to law school and started in August 2005.
The typical law school “career” is three years of full-time study. Some students choose to work while in school and take a lighter class load, so school might last four years for them. Most schools require the same core classes the first year: Civil Procedure, Torts, Property, Contracts, and Legal Writing/Research.
There’s a lot of flexibility in the second and third years, when students take more classes that focus on specific areas of law. For example, I knew I wanted to practice bankruptcy law when I got out of school. In my second year, I took Bankruptcy, Creditor/Debtor Relations, Income Tax, and Secured Transactions. The rest of my classes in my second and third years were a mix of requirements (i.e. Constitutional Law, Criminal Law, Evidence) and personal interests (i.e. Family Law, Legal History, Estates & Trusts). I really enjoyed law school and made some great friends. It was difficult, especially with the four-hour one-way commute each week, but definitely worth the hard work.
After graduation from law school, the only thing standing between me and a new career was the bar exam. Wisconsin allows those who graduate from one of the two state law schools (UW-Madison and Marquette) to practice law without taking the bar exam, but the rest of us are required to pass the exam. The bar exam is a two-day test that is given twice each year. I won’t bore you (or frighten you) with the details. Let’s just say that I didn’t do much but study from graduation in mid-May until the exam in late July. I found out in early September that I had passed and would be sworn in on October 6.
So that’s the story. College, LSAT, law school, bar exam. Those are the four basic steps to becoming a lawyer. It took a lot of hard work, but it was worth it to me. I hope you found this interesting. If you’re interested in going to law school, or are just curious about my experiences, please comment below. I’ll do my best to reply within a couple of days. Thanks for reading!
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A few weeks ago, I came across this article by Dave Ramsey. In case you don’t know, Mr. Ramsey is an author and radio personality who gives advice about financial matters. His programs may work for many people and he may have some good ideas about investing, but his “Truth About Bankruptcy” article was off-base.
– Let’s start with his opening, “Truth: Bankruptcy is a gut-wrenching, life-changing event that causes lifelong damage. [Y]ou know it’s a living nightmare. It can devastate your job, destroy your marriage and steal your peace of mind.”
Nearly all of my clients will tell you this simply wasn’t true for them. The marital stresses and gut-wrenching, painful experiences were the events that caused the financial troubles, the constant calls and threats from debt collectors, the financial “experts” calling them failures and blaming them for their situation, or the waiting before finally seeking legal help. Bankruptcy lawyers help relieve those stressors and that pain, we don’t cause them.
I compare it to the emergency root canal I had during final exams in my first year of law school. The pain was unbearable, but the dentist relieved the pain with the root canal. It would have been great if I hadn’t needed the root canal in the first place, but it was the best solution for relieving the pain. Same with bankruptcy. It would be great if no one found themselves in terrible financial straits, but bankruptcy may be the best solution for relieving the pain.
– Mr. Ramsey goes on to say that he will talk anyone out of filing bankruptcy if given the chance. This kind of one-size-fits-all legal advice is irresponsible. Of course bankruptcy isn’t for everyone. A good bankruptcy attorney will explain all your options once he/she understands your situation. The opposite end of the spectrum from Ramsey’s advice would be, “Some people don’t need bankruptcy, but I will still talk you into filing bankruptcy if given the opportunity.” Such a statement would be bad legal advice and equally irresponsible.
– Next, we come to a pitch for Ramsey’s services, “Most bankruptcy cases can be avoided with proper help, such as our certified counselors…” I’d go a step further and say that nearly all bankruptcy cases can be avoided, just like nearly all root canals can be avoided. If you’re content to live with the pain, no one is going to force you to treat it. I explain alternatives to bankruptcy to all my clients. When I believe one of those alternatives is in the client’s best interests, I advise accordingly. I’m not unique; any reputable bankruptcy lawyer does the same thing. Unlike Mr. Ramsey, we don’t eliminate options that may be in our clients’ best interests without understanding the individual facts of the situation.
– The article ends with this quote: “I know from personal experience the pain of bankruptcy, foreclosure, and lawsuits. Been there, done that, got the t-shirt, and it is not worth it.” If you’ve read this far, you can probably already point out the flaw in his reasoning. Bankruptcy can’t be lumped in with foreclosure and lawsuits. Bankruptcy typically is the cure for people who have already been sued or been served with foreclosure papers.
Mr. Ramsey filed his own bankruptcy years ago. I wonder why he feels it wasn’t worth it? Would he have been in the same position he is in now had he not discharged his debt? Does he believe he would have been further ahead if he’d not taken advantage of the fresh start bankruptcy provided him? Would he have preferred debt collectors to keep hounding him and garnishing his wages to keep him from getting ahead?
I’ve never met Dave Ramsey. He might be a lovely person and some of his advice might be great for certain people. But his blanket advice to avoid bankruptcy, even when it’s the best solution for your particular problems, is simply poor legal advice. If you want the “Truth About Dave Ramsey’s Opinion of Bankruptcy,” visit his website or listen to his radio program. If you want the “Truth About Bankruptcy,” contact a local bankruptcy attorney.
What do you think? Is Dave Ramsey right when he says bankruptcy should be the last resort for everyone? I welcome your comments below.
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In my Bankruptcy Alphabet, Z is for Zany. Not that bankruptcy (or any other area of law) is particularly wild and crazy, but things happen after the case is filed that can throw the best-laid plans out of whack. And sometimes lawyers get strange phone calls before even meeting with a client. As bankruptcy attorneys, we try to plan for all possible contingencies. But who would have thought these things would happen?
DISCLAIMER: I’m not saying that any of these things happened in my cases or that I took any of these calls. Some stories may have come from personal experience, some may have been told to me by other bankruptcy lawyers. And others may be made up. Still, I think they’re good stories. I have changed a few details to prevent identifying any of the relevant parties.
Phone call at 3:00 P.M.
PC: Can you stop a foreclosure sale?
L: Usually. When is the sale?
PC: Today at 1:00.
L: You realize that the sale was two hours ago, don’t you?
PC: Yeah, but they don’t really mean that, do they?
Prospective Client: (on phone) Do you do bankruptcies?
PC: If I also have you handle my divorce, will you charge just for the bankruptcy and do the divorce for free?
PC: Then I will NOT hire you! Plenty of other lawyers will charge for just one case.
L: Buy one, get one free in the legal industry is new to me.
PC: YOU ARE GREEDY! *click*
Lawyer: I can take your case. That will be $4000, plus expenses. Certified check or cash only. Be here before 4:00.
Prospective Client: I thought it was customary for attorneys to be paid for Chapter 13 cases through the plan?
L: It’s 3:00. Your house will be sold at 10:00 tomorrow morning, but you waited until today to call me. And you have already told me that you have spoken to three other attorneys that flat-out told you “no.” Are you sure you want to haggle with me?
Debtor files Chapter 7 case on a Friday. On Sunday, he goes to a convenience store and fills up his gas tank. Instead of paying, he tells the owner, “just charge it to my account.” On Monday, he calls his attorney.
Debtor: I need to add another creditor to my bankruptcy.
Attorney: Okay. Why was this creditor not listed before we filed?
D: I just charged the gas this weekend.
A: After we filed? Remember when I told you not to charge things once we filed your case?
D: I thought just a couple days after filing wouldn’t make a difference.
At a hearing in front of a Bankruptcy Judge.
Small Town Lawyer: Your honor, I object to this evidence. I wasn’t given notice of it, despite your pretrial order.
Tall Building Lawyer: Your honor, I didn’t see that part of the order. It was on the second page, and I only read the first page.
Judge: Mr. TBL, maybe it makes me an egomaniac, but I expect attorneys to read all the pages of my orders.
Prospective Client: I have about $50,000 cash. You don’t need to know where I got it. Since it’s in cash, can you protect it for me if I file bankruptcy?
Attorney: Probably not. But I could help you invest it in exempt assets.
PC: But it’s cash. Who would know that I even have it?
A: You’d have to disclose it in your paperwork.
PC: Let’s say I have a gambling problem. What if I gambled it away?
A: Is that what happened?
PC: No, but how would anyone find out I still had the money if I said I lost it gambling?
A: I think you need to find another lawyer.
Granted, I probably think most of these stories are funnier than you do. Unless you’re a fellow bankruptcy attorney, in which case you’re either laughing or nodding your head in recognition. In any case, that’s it for my Bankruptcy Alphabet! Thanks to Jay Fleischman, who suggested this assignment and Ryan Caldwell, who put together an online spreadsheet to help all of the participating bloggers efficiently link to the other Alphabet posts. Finally, thanks to the other attorneys who took part in this exercise. I enjoyed reading your posts!
Bankruptcy attorneys from around the country are taking part in this “Bankruptcy Alphabet” exercise. Please take a few minutes to check out these other blog posts on the letter “Z.”
Zero – by Jacksonville Bankruptcy Attorney, J. Dinkins G. Grange
Zero – by Neighbor Island Bankruptcy Attorney, Stuart Ing
Zero Percent Plan – by Omaha/Lincoln, Nebraska Bankruptcy Attorney, Ryan D. Caldwell
Zero Plan Payment – by Cleveland Bankruptcy Attorney Bill Balena
Zillion – by Bay Area Bankruptcy Lawyer Cathy Moran
Zombie – by New York City bankruptcy attorney Jay S. Fleischman
Zones – by Livonia Bankruptcy Attorney, Peter Behrmann
Zowie! – by Detroit Bankruptcy Attorney Kurt OKeefe
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If you’re filing for bankruptcy, you need to keep in mind that this is YOUR case. It’s not your lawyer’s case, the bank’s case, or the trustee’s case. It’s yours. You’re the one who will (hopefully) get the benefit of the discharge and you’re the one signing all of those papers under penalty of perjury.
Why does this matter? Because if you expect someone else to care more about your case than you do, you’re going to be very disappointed in the results. The bankruptcy process requires a high level of effort from clients. You cannot simply hand off the problems to your attorney and wait for them to be solved. While I try to make it as easy as possible for my clients to work with me, I do need some cooperation. A successful bankruptcy requires teamwork. I can prepare your paperwork, deal with your creditors and the trustee, and guide you through the whole process. I’ll need you to gather some documents and provide information about your assets and debts. As long as you make YOUR case a priority, the odds for success will be pretty good.
Bankruptcy attorneys from around the country are taking part in this “Bankruptcy Alphabet” exercise. Please take a few minutes to check out these other blog posts on the letter “Y.”
Yacht – by Jacksonville Bankruptcy Attorney, J. Dinkins G. Grange
Years Between Discharges – by Hawaii Bankruptcy Attorney, Stuart T. Ing
Years Between Filings – by Livonia Bankruptcy Attorney, Peter Behrmann
Yoke – by Bay Area Bankruptcy Lawyer Cathy Moran
Young v. United States – by Omaha/Lincoln, Nebraska Bankruptcy Attorney, Ryan D. Caldwell
Your Bankruptcy Trustee – by Cleveland Bankruptcy Attorney Bill Balena
Yo-Yo – by New York bankruptcy lawyer Jay S. Fleischman
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How will anyone know if you lie on your bankruptcy papers or lie to your bankruptcy attorney? The X-Factor.
Disclaimer: When clients ask me, “how will anyone find out if I lie?” little red lights & sirens go off in my head. If you’re thinking about being anything less than 100% honest with me, you need to find another lawyer. But the answer to the question is The X-Factor. Undisclosed assets or income are frequently uncovered by bankruptcy trustees thanks to ex-spouses, ex-friends, or ex-business partners.
No one can keep all their financial secrets from everyone. Think the bankruptcy trustee won’t find out about that collection of Roman coins that you were able to keep in your divorce? Your ex-spouse is likely to be the first to drop a dime. The $500,000 you made in a business deal four months ago? The business parter who thought he deserved a bigger cut will be making a call. Any assets or income you have are known by someone. Have you made anyone mad? That “X” will probably make a beeline to your 341 meeting to inform the trustee that you lied on your bankruptcy paperwork.
Most bankruptcy filers are honest people. But the court records are full of people who thought they could pull a fast one and outsmart the system. More often than not, those people lost assets or lost their right to a discharge. In extreme cases, they ended up in federal prison. Because we don’t look good in orange, most bankruptcy attorneys refuse to lie for any client. If you’re thinking about lying and filing bankruptcy, be sure to consider the X-Factor.
Bankruptcy attorneys from around the country are taking part in this “Bankruptcy Alphabet” exercise. Please take a few minutes to check out these other blog posts on the letter “X.”
Ex-Spouse – Maui Bankruptcy Lawyer, BankruptcyHI.com
OEX – Bay Area Bankruptcy Lawyer Cathy Moran
Xantusiidae – Cleveland Bankruptcy Attorney Bill Balena
Xenagogue – Omaha/Lincoln, Nebraska Bankruptcy Attorney, Ryan D. Caldwell
Xenocracy – Jay S. Fleischman, New York bankruptcy lawyer
Xerox of Your Financial Life – by Livonia Michigan Bankruptcy Attorney, Peter Behrmann
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You’ve successfully completed your bankruptcy and obtained your discharge. Congratulations! You (and your marvelous bankruptcy attorney) did a great job. Now what?
Maybe you filed bankruptcy because some event caused your income to decrease and/or your expenses to increase. Now that you’ve remedied that situation and eliminated the debt you incurred, you need to establish good spending habits & build up some savings to ensure that you don’t need to file bankruptcy again. Or perhaps you made some poor choices and lived beyond your means for too long. If you fall back into the same spending habits that caused your bankruptcy, you’ll be seeking bankruptcy relief again in a few years. As much as I like my clients, it would be good if they didn’t need me more than once.
Here are some tips for curbing wasteful spending habits post-discharge:
1 – Credit card use. Most of my clients receive credit card offers within six months of getting their bankruptcy discharge. Credit cards aren’t inherently bad. They’re convenient and making regular payments on time can help rebuild your credit after bankruptcy. But you need to use credit cards wisely. Pay your credit card balance in full and on time each month. This way, you don’t pay interest or late charges. And the on-time payments will show up on your credit report, showing other lenders that you’re a good credit risk. But be careful! This tip only works if you pay in full and on time every month. It’s easy to skip a month or start to carry a balance, but doing so will likely land you back in your bankruptcy attorney’s office.
2 – Payday loans. This one’s easy; don’t take them. The APR on these loans frequently exceed 500%. If you fall on hard times and need cash, you’d be better off borrowing from a friend or family member. The payday loan cycle frequently ends with a visit to a bankruptcy attorney.
3 – Keep track of your spending. Whether you use a credit card or cash, keep track of how much you spend each day. You may be surprised how much you spend in an average week on small things like coffee, candy bars, or drinks after work. The true cost of these expenditures doesn’t show up until you get your credit card bill or bank account statement showing all the ATM withdrawals. Once you know where your money is going, it’s easier to change your habits.
4 – Give yourself an allowance. All work and no play makes Jack a dull boy. When you get paid, set aside some amount for “walking around” money. Once that’s spent, don’t take more until you get paid again. This will help you budget your money and ensure that you have enough each month for your necessary expenses (rent/mortgage, car payment, utilities, groceries, etc.)
If you apply these tips to your spending post-bankruptcy, you should be well on your way to making the most of your fresh start.
Bankruptcy attorneys from around the country are taking part in this “Bankruptcy Alphabet” exercise. Please take a few minutes to check out these other blog posts on the letter “W.”
Wage Earner Bankruptcy – by Peter Behrmann, Livonia Michigan Bankruptcy Attorney
Wage Garnishment – by Cleveland Bankruptcy Attorney, Bill Balena
Wages – by Hawaii Bankruptcy Attorney, Stuart T. Ing
Wages – by Jay Fleischman New York Bankruptcy Lawyer
Wait – by Bay Area Bankruptcy Lawyer Cathy Moran
Warning – by Omaha/Lincoln, Nebraska Bankruptcy Attorney, Ryan D. Caldwell
Wayne Industries: Batman Bankruptcy? – by Kurt O’Keefe, Detroit MI bankruptcy lawyer
When Can You File For Bankruptcy Again? – by Allen Park, Michigan Bankruptcy Attorney, Christopher McAvoy
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People who file bankruptcy are required to disclose all of their assets and the value of those assets. Some of my clients have trouble placing a value on certain things, such as a wedding ring or pet. When I ask how much these items are worth, I get responses like “Priceless!” or “Unknown.”
Different people value assets in different ways. The method you choose isn’t important as long as your valuations are reasonable. I tell people to ask themselves how much they could get if they sold the sofa/TV/desk/etc. in its current condition at a garage sale or auction. Very few things have an intrinsic value; they are worth only what someone is willing to pay. While your pet may be priceless to you, there is a limit to what Joe Blow on the street would pay you for it. And even if you don’t know how much your wedding ring is worth, there are plenty of professionals who can tell you what it would sell for.
You’re required to disclose how much your assets are worth to a hypothetical, objective third-party buyer. You’re not setting the price at which you would sell. For example, you might not sell your engagement ring for any price because the emotional attachment is worth more than any dollar amount. That doesn’t change the fact that our hypothetical, objective third-party buyer would pay $500 for it. Keep in mind that we’re not asking how much your assets mean to you; we’re asking for your best good-faith estimate as to how much a reasonable third-party would pay to own them.
When valuing your assets for a bankruptcy filing, reasonableness is the key. While you don’t need to get an appraiser to tell you if your silverware is worth $5 or $6, you do need to make a reasonable inquiry into the value of your assets. If you really have no idea whether your baseball card collection is worth $10 or $10,000, you need to make a reasonable effort to find out. What is a reasonable inquiry? Depending on the nature of the asset, you could take it to a collector, jewelry store, or pawn shop. You could go to garage sales and auctions or look on eBay and Craigslist to see how much people pay for similar items. It might also be reasonable to estimate values yourself. If you purchased your sofa eight years ago for $500, and since then the kids have thrown up on it, the dog has peed on it, and the cat has scratched up the arm, you might reasonably estimate that it’s worth $75 today.
Valuing assets is important, but you don’t need to worry about it. You probably won’t lose anything, because of the applicable exemptions. If you state on your bankruptcy schedules that you own an original Picasso painting that’s worth five bucks, the trustee may send out an appraiser to verify your claim. But no one is going to send an appraiser to your house to make sure your easy chair is really worth $50 and not $60. As long as your value estimates are reasonable, you’ll be fine.
Bankruptcy attorneys from around the country are taking part in this “Bankruptcy Alphabet” exercise. Please take a few minutes to check out these other blog posts on the letter “V.”
Bankruptcy Versus Other Options – by Allen Park, Michigan bankruptcy lawyer, Christopher McAvoy
Value – by Silicon Valley Bankruptcy Attorney Cathy Moran
Value of Your Bankruptcy Attorney – by Peter Behrmann, Livonia Michigan Bankruptcy Attorney
Vehicle – by Omaha/Lincoln, Nebraska Bankruptcy Attorney, Ryan D. Caldwell
Venue – by Cleveland Bankruptcy Attorney Bill Balena
Venue – by Metro Richmond Bankruptcy Attorney, Mitchell Goldstein
Vesting – by Jay Fleischman, a bankruptcy lawyer in New York
Violation of the Automatic Stay – by Hawaii Bankruptcy Attorney. Stuart T. Ing
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