Sunday, January 9, 2011

Will The Court Sell My House If I File For Bankruptcy?

Like a lot of things in law, the answer to this question is “depends.”

Most consumers wishing to shed unsecured debt through bankruptcy (e.g. credit card debt, medical bills, etc.) opt to use the Chapter 7 form of bankruptcy. Chapter 7 bankruptcy is known as a liquidation type of bankruptcy in that after you file, you place all of your assets in trust with the bankruptcy court and the court determines what, if anything, can be sold (liquidated) in order to pay back your creditors. If you own relatively few assets and just rent an apartment, then the court appointed trustee is likely not going to take your playstation and Boyz II Men CDs and sell it at a yard sale. But if you have a large asset like a house, then the court very well may put it up for sale.

The question of whether the court will sell your house in a Chapter 7 bankruptcy depends on whether you have equity in the house. If you have no equity in the house, then it wouldn’t make sense to sell it as all of the money from the proceeds of the sale would go to your mortgage holder(s) leaving nothing left to pay to your creditors.

But even if you do have equity in your house, it does not necessarily mean that you cannot file for bankruptcy under Chapter 7. In every state, there are certain exemption amounts that can be applied to your assets. Exemptions are basically those assets defined by state law that the court cannot liquidate in order to pay back creditors. In California, you can exempt between $75,000 to $175,000 dollars in your equity share which depends on whether you live alone or with a family and whether you are elderly or disabled. If the amount of the exemption meets or exceeds the amount of equity you have in your home, then the court will not sell it.

For example, say you live in a home with your wife/husband and children and the house is worth $400,000 with $320,000 remaining to be paid off. Here, you have $80,000 in equity. Using the California exemption scheme, a home that has a family living in it is entitled to a $100,000 exemption amount. Because the exemption amount ($100,000) is greater than the equity ($80,000), the court will not sell your house as there will be no exempt assets they can get in order to pay back your creditors.

If after applying the exemption amounts you find that you still have a small amount equity remaining in house, then it becomes a little bit trickier to predict what will happen if you file for bankruptcy. If you have a very small amount of equity, it is not guaranteed that the court will sell your house. Because with the closing costs of a home sale (broker fees, title checks, etc.) which can be around 10 percent of the sale price, the court could still find itself with nothing to pay back the creditors with. And even if the court can only net $1,000 from the sale of a house, it is very unlikely they will go through the trouble of selling the home. In situations where it is a close call on how much unprotected equity you have, it is best to have the home appraised and consult an attorney.

Sunday, January 2, 2011

The Surprising Virtues of Bankruptcy

In this frigid economic climate, I meet a lot of people seeking advice on what to do with thousands of dollars of credit card debt, huge medical bills, or other financial headaches. For the most part, these people don't run into these problems because they are poor financial planners or because they are irresponsible; what typically happens is a person loses his or her job and they become dependent on their credit card to buy food or other necessities or they get injured and they have little to no medical insurance.

For people in these tough situations, it can seem like there is no way out and the only way you can cope is to throw the bills in the dustbin. But if you ignore a bill for too long, the company who you owe money to (called a 'creditor') will take the following actions: First, they will send your bill to a collection agency (whom will begin a nasty telephone assault against you at all hours and even at work); Second, they will file a lawsuit and obtain a judgment against you; Third, they will attempt to enforce their judgment against you by putting a lien on any valuable property you may own, freezing your bank account, or even garnishing your paycheck.

Usually, the best option to address large unpaid bills is to see if you can negotiate a settlement with the creditor to pay a smaller amount of what you owe. While most creditors will allow you to enter into a payment plan, even making monthly payments on a reduced debt will be tough for a lot of people having financial problems.

So if coming to a settlement with a creditor isn't an option, your only other (viable) option to deal with your bills is to file for bankruptcy. For those of you unfamiliar with bankruptcy, it is essentially a process where you petition the government to either eliminate your debts (called a "Chapter 7" bankruptcy) or have them consolidated in order to be paid off in monthly installments during a three or five period (called a "Chapter 13" bankruptcy).

So what's the catch to having your debts magically eliminated with a Chapter 7 bankruptcy? First and foremost, a bankruptcy will stay on your credit record for between seven and ten years. Secondly, the bankruptcy process will make certain private information about your financial affairs public.

But another reason people feel that bankruptcy isn't for them is that they feel that there is something morally wrong with walking away from legitimate debts. They feel that it is wrong to tell their creditors "listen, thanks for the money you lent me, but I don't feel like paying it back and here's the papers saying I don't have to." While this sentiment is certainly noble, I think two things should be considered in reflecting on the morality of bankruptcy:

1. Creditors Don't Care About You

This statement is pure hyperbole but it contains a lot of truth. Creditors won't hesitate to put a lien on your home, seize your car, or do other nasty things to get their money. Considerations such as whether you have kids to feed, or whether you just lost your job do not enter into the equation when a creditor is attempting to collect. If there is a way a creditor can get your money, they will do what they can to get it.

While not every creditor engages in strong-arm tactics, they are the exception and not the rule. Next time a collection company calls you, tell them about your kids and losing the job. Not only will this information not move them to the slightest, it will be immediately be forgotten the next dozen phone calls from a dozen different people you receive all trying to collect on the same debt.

2. Part of the Blame for Your Debt Belongs to the Creditors.

Bad deals happen. And if you will excuse the bluntness, when a credit card company allows you to run up a $5,000 debt that you can't pay back, they made a bad deal.

The allure of credit cards is easy to understand. You get a credit card and you can buy things you simply don't have the money for at that moment and you're able to make relatively small monthly payments. In exchange for this flexibility, the credit card companies slap on grossly high interest rates that average around 17 percent. Essentially, these creditors are betting that you will be able to pay them back at an interest rate that no sane person would accept in a normal lending situation.

But it's so easy to apply for and receive a credit card. We all receive junk mail on a weekly basis touting pre-approved cards, 0 percent introductory rates, cash-back promotions, that it is almost irresistible to not take up these offers. And after you get the card, the credit card company generously increases your credit limit as use the card (increasing their the amount of interest they earn on the card).

The combination of the ease of getting a credit card and the high interest rates associated with them make it make it extremely easy for you to get in over your head - and the credit card companies do little to warn you of this. By making it so easy, credit card companies must bear some of the blame when you rack up a huge credit card debt that you can't pay back. In many ways they set you up to fail.


A popular expression associated with bankruptcies is that it allows an individual a "fresh start" when they are swamped by debt. While it can certainly afford a person a great way to get out of a bad situation, it is a weapon that should be used sparingly as once you obtain a discharge through bankruptcy, you cannot file again for another seven years. But if you do decide to file, it is important to remember that there is nothing immoral or reprehensible about filing; it truly is one of the most powerful weapons a person can use to combat debt.

Wednesday, January 20, 2010

So You Want to go to Small Claims Court...

An unfortunate aspect of life is that sometimes, people owe you money. Whether it’s a friend you gave a loan to and hasn’t paid back or you bought a defective TV and the store won’t let you return it. It’s annoying, frustrating, infuriating, agitating, and even migraine inducing.

So what do you do? You’ve tried making numerous phone calls and pleading with the person but it seems like you’ve tried everything. At this point it may seem like a good idea to sue that person. But unless there is a lot of money at stake, it is probably not worth the money and the hassle to resort to all out litigation to take care of the problem. Civil suits are expensive because of attorney fees and filing costs and could take many months if not years to resolve. Typically, civil litigation suits cost thousands of dollars before anything is accomplished.

Instead of a typical lawsuit, an effective way to resolve a dispute that involves a relatively small amount of money is the Small Claims Court. The cost of filing a case is usually a small and you can have a court make definitive decision on your issue and obtain a legally enforceable judgment to force the person you are suing to pay you (if the court finds him or her liable).

The goal of this guide is to give you a few helpful pointers that will help you present your case clearly and effectively so that you can have the best shot at prevailing on the matter. What follows are a series tips of what to do before filing a small claims and action, how to best present your case at the hearing, and what to do after.

Before the Hearing

Starting the process of small claims action differs from state to state, but most states have some requirement that you take some steps to resolve the dispute without going to court. A good way of doing this is by writing a formal letter to the person you are thinking about suing. In the letter, be sure to state exactly how much money you think that the person owes you and why he or she owes it to you. You should end the letter by stating that you will resort to filing a small claims action if he or she refuses to pay you. In many cases the mere threat of legal action will be enough to get the person to act. But if not, a letter (or email) will be enough to show the court that you made a good-faith effort to try to resolve the matter informally.

After you have done everything required before you file, consult your local court to see what the requirements are to file your complaint with the court. For example, claimants in California should consult where you find a step-by-step process to filing claim including all the necessary forms and instructions on where and how to file it.

After you file a complaint you will be required to serve a copy of that complaint on the person you are suing. In almost all states, you will be required to have someone other than yourself personally serve the complaint on that person. There are service processors companies that will charge you to do this, but having a friend or relative of yours to do this it will work just fine. If you are unable to serve the person successfully after a few attempts, most states afford you the option of substituted service which allows you to give the complaint to that person’s home or office location without actually handing it to him or her.

Lastly, it is a good idea to consult an attorney about your case. One way small claims hearings differ from regular trials is that you cannot have an attorney represent you at the hearing. However, there is nothing wrong with having an attorney help you with your case. An attorney can be helpful in that he or she can offer an opinion on the merit of your case (i.e. whether you will be successful) and can help tell you what exactly you need to prove at the hearing.

During the Hearing

Going in front of a judge can be one of most intimidating things that you will ever do. Public speaking is a difficult task in any circumstance, but usually there is not much at stake. But with a small claims hearing, a lot of the outcome will based on your testimony before the judge. This is an extremely daunting task, especially if you have never testified at court before.

Thankfully, most small claims judges are used to people coming before them that have never been in a court room before. A good judge will tell you what he or she wants to hear and will help you get out story. Unfortunately there are some judges that are impatient, but in my experience these judges are the exception (e.g. Judge Judy) rather than the norm.

A good way to get a feel about how your hearing will play out is to attend other small claim hearings before yours. Seeing a hearing in action will give you an idea of what to expect and you will also see what type of facts the judge finds most relevant and what type of presentation is the most effective. Watching a few hearings will make your own hearing be less stressful because you will have a good idea of what to expect.

As for the hearing itself, I have counseled clients that think it is a good idea to prepare a statement and read from it. These individuals are worried that if they don’t write everything down they will forget a key fact. My advice to these individuals is simple: DON’T READ! While it may seem like a good idea to have every single word down on a piece of paper, the reality is that it is very hard to listen to someone reading a prepared statement. More often than not, people that are reading slip into a monotone, unnatural voice that is completely lacking in any inflection, emphasis, or color. Any person, judge or not, that is listening to another read will inevitably start to tune out and everything you say will sound like “blah, blah, blah.”

A much more effective way of presenting your case at the hearing is to simply tell your story. Start from the beginning; talk about when the trouble started, how you have tried to fix the problem, and anything else that you think is important. If you want to remember everything you want to say then use a series of note cards with bullet points covering the subjects you want to bring up to the court. Just tell the story as if you were telling it to a friend you have not seen in a long time. By telling a story, you will offer a much more compelling presentation of your case that will engage the judge and he or she will be much more likely to remember the key points you are bringing up.

It is very likely that the judge will have questions for you either during your presentation or after. When this happens, answer the judge in straightforward manner and try to keep your responses as short as possible. It is often tempting when answering a question to go off on tangents or give information that wasn’t necessarily asked for. But doing this may try the judge’s patience and may impact your credibility. Listen to the judge’s question and answer it directly as possible. If he asks you a yes-or-no question, don’t answer “yes, but…”, just answer “yes” or “no.”

A lot of what small claims hearings comes down to is credibility, i.e. whose story does the judge believe more? To maximize your credibility and improve your chances at winning your case, you need to be mindful of courtroom etiquette. What I mean by courtroom etiquette is having a certain respect for the court and its role in our society. Courtrooms are supposed to be solemn, respectful places, a place you take seriously. Therefore, be sure to address the judge as “Your Honor,” don’t cuss or use slang (chances are the judge doesn’t know that “scrilla” means money), don’t stare down the defendant, and please, please, PLEASE, dress appropriately (no shorts or basketball jerseys!).

And most of all, stay calm! Don’t get too emotional or lose your cool. Before you start speaking, take a few deep breaths, relax, and speak slowly. You’ll do fine!

After the Hearing

So you case is over and you won! Congratulations! I knew you had it in you. But now what? The court has found that the defendant owes you money and has accordingly entered a legal order to that effect. The question becomes: How do I collect my judgment? If the defendant refuses to pay you after the hearing you will have to figure out how to enforce the court order because in most states it is the responsibility of the winning plaintiff to collect.

Some states, for example California, offer what are called “Debtor’s Examination Hearings.” At these hearings you can compel the defendant to show up at a court hearing and you will be permitted to ask him questions, under oath, about what assets he has. Using this information, you will be able to get a lien on this property to satisfy the judgment. Another option is using a Collections Agency. Collection agencies are an effective way of satisfying your judgment, but they will take a cut of money.