Many clients ask me if they will lose everything when they file bankruptcy. The answer is a resounding NO! It is likely that they will keep most, if not all of their property.

When someone files, an “estate” is created and all property belonging to the debtor becomes property of the estate, which is then administered by the US Trustee. However, certain property is exempt which vests back to the debtor. The one question that seems to be the most important to my clients is whether they will be able to keep their home.

Most States have homestead exemptions and Florida has one of the strongest protections in the country when it comes to protecting the home from creditors. Obviously, if there is a Note and Mortgage on the home, the creditor holding that note owns the home until it is paid for. They have superior rights to the house, should the debtor not adequately protect it, and can foreclose as the home is a secured asset. If the home is current, the homestead in Florida works to protect the home if it sits on 1/2 an acre or less when located in a municipality or 160 acres or less when located elsewhere. If the house is owned by tenancy by the entirety (two people who are married) and only one has a creditor seeking relief against the property, then homestead works to protect the entire property.

The homestead exemption protects unlimited equity in the home so long as the home is owned for at least 40 months prior to filing the bankruptcy. If owned less than that time, then only $137,000.00 per person is protected. In the event the home is not current, people can use the Chapter 13 plan to catch up on the deficiency and still claim the homestead exemption, saving their home from all creditors, including the secured creditor that holds the Note!

The Trustee, in the bankruptcy Chapter 13 case, must pay all allowed claims and creditors must file proof of their claims to get paid. Debtors and the Trustee may also file claims to insure that certain creditors get paid. Once the petition for bankruptcy is filed, there is a claims bar date set when once past, prevents further claims to be filed against the estate.

The date is 90 days from the 341 meeting of creditors unless the Court orders otherwise.

Unless objected to, all claims will be allowed. Your plan may even allow late filed claims, but if a claim is filed late, after notice and a hearing, the Court must (usually) sustain the objection. Claimants can try to extend their deadlines, but unless they can demonstrate that they fit within the exceptions provided for under the Code, their request will be denied.

Once the deadline passes, your attorney as well as the Trustee will review the claims and objections will be made where appropriate. Claims should be filed with supporting documents, such as a note or contract. If not, an objection will likely follow. Supporting documents show the claim to be valid as prima facie evidence but not necessarily wholly undisputed. A creditor may show a claim to be higher than what is really owed. Debtors may still challenge a claim based on standing – which is the right the creditor has to file the claim in the 1st place, the amount owed, interest, fees and costs assessed, the type of supporting documents used and the nature of any amendments filed. The dispute of any creditors claims may be resolved by evidentiary hearing or may turn into an adversarial proceeding.

When a debtor files Chapter 13 Bankruptcy relief, they are seeking a confirmation of a plan which is basically a pathway that is proposed by their attorney to reach his/her goals, obtaining an Order from the Court for confirmation of the plan which will then establish the rights of all the parties involved, including creditors.

This Order of confirmation, establishes the rights, duties and obligations of all parties and bind the debtor and each creditor even if any particular creditor is provided for, has objected to or has accepted the plan. When a Petition for bankruptcy is filed, the law establishes an estate of all property belonging to the debtor that is managed by the Trustee. The confirmation of the plan reinvests all the property of the estate back to the debtor which, unless specifically provided for within the plan, becomes free and clear of any claim or interest of any creditor provided for within the plan.

The plan must be filed in good faith and comply with all bankruptcy laws which mandate certain requirements but maintains the flexibility so that debtors may formulate a plan that enables them to keep property, stop foreclosure, repossessions, garnishments, attachments, catch up on missed payments, reduce interest rates on certain creditors, in specific circumstances, strip off liens and reduce the amount of unsecured debt being repaid over a period of time.

So long as the plan complies with the aforementioned and is feasible, meaning the debtor has the funds necessary to comply with the terms of the plan, it would likely get confirmed. It is also possible, with changed circumstances for the debtor to request a modification of the plan, such as when there is a substantial change in income.

The plan created by your attorney is the most important document of the case. When confirmed, it binds all parties and creditors and may only be modified with Court approval. While there are certain requirements which a plan must contain, there are also things that a plan “may” do. A debtor can choose to designate classes of creditors, such as secured and unsecured and must treat each class fairly.

However the debtor has the right to designate classes such as consumer debts differently than other unsecured claims. The debtor may modify the rights of secured claims, other than the security interest in the debtors principal residence, or of the unsecured creditors or choose to leave any particular class unaffected and provide for the curing of any default.

As a practical matter, debtors who have certain secured claims with exorbitant interest rates can present a plan that reduces the interest rate that the creditor has applied against the property. Unsecured creditors are paid a small percentage of their totals, based on disposable income.

The most interesting aspect of the debtors power in the plan is the strip off or lien-stripping power. When an evaluation is done by the attorney, we look to see if the primary home, like many in Central Florida as well as around the United States, has lost value so that the value is proven to be worth less than what is owed on the first mortgage and note. If this turns out to be the case, then any other secured interest in the property, such as an equity line of credit or second mortgage, is now reclassified as unsecured debt and is treated in that class like any other unsecured creditor. Only a fraction of that debt is repaid and the remaining balance will be discharged at the conclusion of the plan.

As an example, say your home has a 1st mortgage on it for $200,000.00 dollars, a second mortgage for $68,000.00 and a $20,000.00 dollar equity line of credit. The market crashed and now your home is worth $174,000.00 dollars. In this case, so long as you prove its worth less than 200k, you can strip off both the second mortgage and equity line of credit but may not modify the 1st mortgage. You would therefore still owe the entire 1st mortgage but pay only a fraction of the second and equity line as unsecured debt, called a “cram down”, then discharge the balance.

The most important document filed with the bankruptcy Court when pursuing Chapter 13 relief is the plan. It is the document, that once confirmed, binds all parties to the proceedings. The plan must provide for the submission of all or part of a debtors future income to the Trustee as may be necessary for the execution of the plan. A plan must pay all priority claims unless

that particular creditor agrees to different terms. It must provide for the same treatment for each claim within any particular class of claims if “classes” are designated and may provide for less than full payment of all amounts owed for a claim if all debtors disposable income is being applied to making the payments under the plan. Common classes used would normally appear as secured and unsecured creditors. Secured creditors would hold security instruments such as a mortgage, leases or other instruments demonstrating creditors rights to the property involved. Unsecured creditors would normally be credit cards, medical bills and money judgments (not based on intentional acts). Certain claims must be paid in full such as domestic support obligations.

It’s critical that the debtor have enough income to fund a plan if it will be successful.

Plans typically fail when debtors try to keep property that is simply too expensive for them to own, when unforeseen circumstances arise or when there is a drastic change in income. The Chapter 13 bankruptcy still works to protect the debtor as it is a re0organization of their finances. Motions can be made to the Court to amend the plan and adapt to the changed circumstances as the need arises. If the debtors income changes by more than $10,000.00 dollars up or down, then the plan must be changed.

After filing a bankruptcy petition, all clients must attend the 341 meeting of creditors. The meeting is presided by the Trustee and creditors may attend and ask questions of the debtor about his/her petition, schedules,statements and finances. Typically, only the Trustee does the questioning and it is rare that any creditor shows at all. The meeting is usually recorded and is held under oath.

Debtors must produce a form of identification such as a driver’s license and their social security card to the Trustee.

Documents are submitted to the Trustee before the meeting which usually include proof of income and tax returns. Additional documents may be requested by the trustee to clarify potential discrepancies in the petition or other supporting documents. It is not a time where the debtor will be intimidated or be asked embarrassing or humiliating questions.

The Trustee usually asks about the debtors background, assets and liabilities as well as income and expenses. They will inquire whether the debtor realized he filed his documents under the penalties of perjury; whether the documents were reviewed for their accuracy, completeness and truthfulness; whether anything needs to be added or changed regarding the petition, schedules or statements; if they have any interest in any real estate; if any transfer of property occurred in the year preceding the bankruptcy; if anyone holds property that belongs to the debtor; if they are owed any monies or are a party to a lawsuit or anticipate receiving funds in the near future. In the event of the debtor being self employed, the Trustee will look into the financial aspects of the business as well. Though this sounds like it may take a while, the typical meeting is concluded in 5 to 10 minutes.

When the meeting is concluded, creditors then have a limited time to object to the debtors claimed exemptions.

Not filing bankruptcy can, in many cases, have longer lasting consequences than filing. Most of my clients ask, “What happens if I do nothing”? There are many opinions on the subject and the credit industry spends billions stigmatizing bankruptcy as a means to find relief from a mountain of debt, foreclosure, repossessions and harassing calls. One client came in to my office, lets call her Sally,

who asked why she should consider bankruptcy and what might happen if she did nothing- would she get sued? What would happen to her belongings? Would she lose her home and car? Sally appeared pretty stressed from her situation. She was recently divorced and had a child to take care of. She was a few months behind on her mortgage and about to fall behind on her car payment as well. She had used credit cards (over 50k -running at 18% interest+) to supplement her income while she went through her divorce, which had been expensive. She made a decent income, but couldn’t make ends meet with her crushing debt load. Sally even took money out of her retirement account to help pay her bills, but still fell behind. We discussed various options to relieve her burden, including the possibility to debt settle her bills and attempt a loan modification of her mortgage which had a fairly high interest rate.

We decided that it was in Sally’s best interest to file a Chapter 13 re-organization. Why? Sally had received Notice from the bank of a Lis Pendens. That’s the bank’s Notice that they were about to begin foreclosure. She tried to work with her creditors, to no avail, they called her at all hours at home, then at work. Turns out that Sally has a second mortgage on her home and the home, like many in Central Florida, lost so much value that the second mortgage could be stripped off in the bankruptcy. With the strip off of the second mortgage and the elimination of her unsecured debt, Sally would be in a better position in the long run filing bankruptcy than attempting settlements, which she did not have the means to do.

What if Sally did nothing? Sally was about to get sued in foreclosure and it was likely her creditors would file lawsuits as well. If the home was foreclosed, she would have been evicted, the home sold and a deficiency judgment would be placed against her, including fees, penalties and interest. Judgments in Florida gain interest at 10% a year and stay viable for 10 years. However, they can be renewed at that time for another 10 years. The creditor could then seize and sell at auction all her property including cash, vehicles and other property, except $1000.00 dollars worth, to satisfy her debt. If there was not enough to sell, they would wait and keep repeating the process years later until the debt was paid.

With the elimination of much of her debts, Sally could make her plan payments in the bankruptcy, keep her home and car, pursue a loan modification with her bank while she was reorganizing her finances and graduate from bankruptcy with a much brighter financial future. The collection calls would end. She would begin to repair her credit and after 10 years or less, the bankruptcy would be removed from her credit reports.

I never advise clients to consider options as short term goals of relief but to carefully consider which options place them in the best financial position for their retirement or to enjoy their retirement. Bankruptcy is not the only solution to a financial crisis, but sometimes it’s the best solution. A complete financial analysis must be made and all options explored in order for someone, like Sally, to make informed decisions on how best to meet their long term financial goals. If only she came to see me earlier, she would have saved her retirement account – its exempt!