Q: Can I keep my home?
In most cases, yes, you can keep your house.  It is a better question to consider whether it is in your best interest to keep your home.  In most cases, if you are current you can keep your home through chapter7 bankruptcy.  If you are not current on your home but can afford to make payments to catch up you can keep your home through chapter 13 bankruptcy.  One of the bankruptcy methods should work to keep your home.  If you are in a position to modify your loan or take advantage of other government programs you may be able to keep your home and reduce your principal or mortgage payments and interest.  In any event, you can likely keep your home in bankruptcy.

However, a majority of the time a client asks me to find a way to keep a home, that home is underwater.  This means that the client owes more on the home than the home is worth.  When this is the case, an objective determination about keeping the home absent sentimental attachment or moral obligation needs to be conducted.  This is one of the hardest parts of bankruptcy.  If your home, or any other asset, is simply not worth what you owe, it is likely in your best interest to simply forfeit the home.  When you forfeit a home in bankruptcy it is similar to a foreclosure in that you are relieved of all debt associated with the home including taxes, late payment charges, foreclosure charges, liens, etc.  Because of a quirk in the bankruptcy code you will still be responsible for the HOA fees between the time you file and the time the home is sold, but most other debts and liens associated with the home are forgiven.  If you can buy a reasonable substitute for your home, or your exact home at the bank’s resale, for less money than you owe, there is no reason to fight to retain your home.  This is called a strategic foreclosure if done outside the bankruptcy system.  It is called a good decision no matter when it is made.

Whether you are going to keep your home or forfeit your home, you want it done right.  Improper categorization of your mortgage or other debt or improper use of your exemption could cause you to lose your home of to owe money after you try to forfeit it.  You had an attorney draft the documents to get into the real estate, consult an attorney to get you out of the real estate deal the right way.

Q: Will I be responsible for paying taxes on debts that are discharged?
No.  Sometimes a bank or some other collector will threaten you with a 1099-C.  The C stands for cancelation of debt.  If you have debt canceled by a creditor that is not discharged in bankruptcy, they could send you a 1099-C and force you to declare the amount of debt as income providing you with an unexpected tax burden as a prize for doing business with them.  This is a common creditor threat, but one that does not ring true in bankruptcy.  Even if the creditor cancels the debt or issues a 1099-C, you do not have to declare this as income if it is discharged in bankruptcy.

Many times you will receive a 1099-C after the discharge of your bankruptcy.  These are easily defended, but it requires legal counsel to keep the creditors honest.  Don’t fight the good fight alone.  You are only going to declare bankruptcy once.  The attorney’s fees are inexpensive for something that affects your life this much.

Q: What if I used my credit card right before I file?
The law says that if you used your credit card within the last few months before you filed, anything that you charged can be consider a fraudulent charge and not discharged in bankruptcy.  This sounds threatening because they use the word fraudulent, but let’s look at the actual risk before making any conclusion.  Only the charges you made within that time period can be considered fraudulent.  In almost every circumstance, absent some malice or intentional fraud, only those charges can be considered as fraudulent and not discharged in your bankruptcy.  All of the other charges and the entire rest of the balance on the card is still discharged.  You will only have to repay the amount that you charged in the last few months.  Additionally, the only way you will be forced to repay this amount is if the credit card company files a federal lawsuit called an Adversary in the bankruptcy court to determine if the debt is able to be discharged.  This costs money and none of that money can be recovered through the suit.  Therefore, unless it is a large sum, you will likely not have to pay it back regardless of when you used your card.  If the usage was small usage amount many cards, it is even less likely that it will be worth the creditors’ time to chase you.

If you are concerned about a fraudulent transfer, you should seek legal advice.  There are many ways to classify a debt or transfer that your attorney will understand and be able to help you with.  Any fraud can result in a denial of your discharge.  If you have any activity that you are concerned with, consult an attorney.

Q: Can I keep my car?
Not only will you likely be able to keep your car, but if you owe more than it is worth there are ways to pay the value of the car, regardless of what you actually owe.  If you are current on your car you will likely be able to keep your car through chapter 7 bankruptcy.  If you are not current on your car and able to make payments to catch up, you will likely be able to keep your car through chapter 13 bankruptcy.

If you have had your car over 30 months and you owe more than it is worth, you will be able to pay the amount that it is worth through a chapter 13 plan and the rest of the debt will be discharged.  If you owe more than the car is worth and want to keep it in a chapter 7 bankruptcy you will be able to do a “Redemption” where you finance the amount the car is worth and discharge the rest of the debt.

The better question is if the equity in your car is over the exemption limit.  An exemption is something you get to keep through the bankruptcy process.  It is exempt from execution in bankruptcy.  Each adult gets a car exemption of $5000 in Arizona.  Therefore, each spouse gets his/her own exemption.  Equity is the amount your car is worth less what you owe.  For example, if you owe $10,000 and your car is worth $15,000 you have $5000 in equity.  There should not be a problem keeping your car if you want to continue to make the payments.  If you have more than $5000 in equity and a spouse, you can double up the exemptions and use your spouse’s exemption to cover up to $10,000 in equity.  You cannot, however, split exemptions.  For example, if you have three cars, each with $1000 in equity, you can only use the exemption on one car.  That does not mean it will be worth the trustee’s time to take the other two, it just means you will not be able to use your exemption status on them.

Redemptions, cram downs, and exemptions can be confusing.  Unless you thoroughly understand these issues, you should seek legal counsel before contemplating a bankruptcy.  The cost is small compared to the potential loss.

Q: Do I have to take classes?
Yes, but they are on the internet and there is no test.  You will have to take a credit counseling class before you file to learn about the bankruptcy process and alternatives.  You will have to take a debtor education class before you are discharged to learn about debt and how to use it wisely.  The first class can be completed in about 20 minutes.  The second class is a little longer but usually only an hour.  The two classes together should cost less than $100 and must be completed by every debtor.

Q: I repaid a loan to my mother right before I filed.  Is that ok?
No.  Any money you repaid to an insider or family member within a year before filing has to be disclosed and can be undone by the trustee.  For example, if you repaid $1000 to your mother right before filing for a loan she made to you, the trustee could seek to get that money back from her.  Also be careful about allowing your mother to secure against one of your assets to protect the debt.  Any security must be a contemporaneous exchange of assets for security.  If you have repaid a loan to a family member or allowed a family member to take a security interest in any property you must be sure to raise this issue with your attorney.  There are many things that will mitigate the damages, but you should have a bankruptcy lawyer to do so.  Insider loans and repayments to family members are nothing to mess with in bankruptcy.