Friday, June 20, 2014

Bankruptcy -- not the answer it used to be.

Last evening I attended a Legal Aid Bankruptcy Clinic in East Naples, Florida at the Legal Aid Society, where pro bono help is offered to those in need.

Four practiced bankruptcy attornies spoke to a room full of potential clients, focusing on Chapter 7 Bankruptcy basics. Some of the information was not new to me: Your income needs to be less than $42K to even qualify for Chapter 7, but if you meet that criteria, then other rules come into play.

The Role Of Exemptions in Chapter 7 Bankruptcy

When you file a Chapter 7 bankruptcy, almost all of your assets and property become property of the bankruptcy estate (there are a few exceptions).

A bankruptcy trustee is appointed (SELF EMPLOYED trustee who gets paid in accordance with the amount of debt they recover!) and given the authority to sell your assets to pay your creditors. However, filing for bankruptcy does not mean that you have to give all of your property to your creditors.

Exemptions allow you to keep a certain amount of your property so that you can make a fresh start after the bankruptcy. In a Chapter 7 bankruptcy, if you can exempt an asset, the bankruptcy trustee cannot sell it to pay your creditors. How much property you can keep in a Chapter 7 bankruptcy depends on the value of your assets and what your specific exemptions are. Thanks to exemptions, most Chapter 7 filers keep all or most of their property. (A fresh start with a $6000 exemption? Who are they kidding?)

This is where it gets (imo) really sordid. Of course one's assets are in contention. If you have boats and jet skis and Corvettes or CASH, forget it, you're not going to keep them if you file bankruptcy--that would be no surprise. BUT, what is exempt from being "taken" and sold to repay your debt is:

1. a Homestead exemption $1,000 of your house is exempt;
no Homestead exemption $5,000 of your house is exempt

2. personal property (electronics, furniture, collectibles) $1,000 is exempt. Yes, they could sell your couch, your mother's jewelry, your grandmother's silver, etc. if it comes to more than 1K totaled up. Trustees get paid by those totals, so overvaluing assets is common. This has got to be seriously WRONG.

3. Auto $1,000 of your auto's value is exempt. ( My 2005 Dodge van clunker, worth $3500 would be taken away and that $1,000 exemption is lost (cannot be applied to other personal property) The auto worth is often overstated too, the lawyers admitted.

Your wages and pension and a few other things are also exempt, but it's pretty slim. Here's more details:
Florida Bankruptcy Exemptions

Chapter 7 Trustee Compensation
In a Chapter 7 case, the trustee is paid in two ways depending on whether there are assets administered in your case, or not.

Administrative Case Fee

First, the trustee receives a $60 administrative fee which is paid from the filing fees you pay to the court clerk when you filed the case. In cases where the filing fee is waived, the trustee receives no administrative fee.
No Assets, No More Fees for the Trustee

If there are no assets in the case for the trustee to sell and the trustee does not recover any other money through tax refunds, lawsuits, or other actions, there is no further fee paid to the trustee.

Commission Based on a Sliding Scale

If there are assets that the trustee collects in the case and the trustee makes payments to creditors, the trustee also receives a commission on the money collected based on the amount disbursed to interested parties (generally professionals and creditors) by the trustee. The commission is paid from the money collected from the sale of nonexempt assets or the recoveries on lawsuits brought by the trustee. You do not make any extra payments to the court to cover the trustee’s commissions in a Chapter 7.
The amount the trustee is paid is based on a sliding scale as follows:

25% of the first $5,000 disbursed
10% of the next $45,000
5% of the next $950,000, and
3% of anything over $1,000,000.

The sliding scale is set as the maximum amount of the trustee’s compensation. In order to be paid, the trustee must file an application for compensation with the bankruptcy court. All creditors and interested parties receive notice of the amounts requested. If no one objects, or after a hearing is held on any objections filed, the court reviews the trustee’s fee application and enters an order awarding the fee that the court finds reasonable.

Since the trustee's fee is defined by the bankruptcy law as a commission, the maximum allowable is often awarded if no objection is filed. However, in cases where the commission is very large in comparison to the work required, or there was a substantial delay in the administration of the estate due to inaction or another problem in trustee’s office, the court may award a fee less than the maximum allowed.

Sweet, eh?

Oh, and the Clinic attorneys said you have to take a Credit Counseling course ($5 to $50 online) before the bankruptcy is filed and another financial course after the filing. Mandatory. I once filed bankruptcy in California, decades ago, and nobody came to my house, it didn't take 6 to 8 months for the case to be completed. And the only thing I lost was my debt! We live in a different world where only banks and Wall Street get away scott free.

Floridians, they tell you our bankruptcy laws are among the most lenient. But you'd never prove it by me.

Needless to say, this is not an option I'll pursue.


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