Oregonian™ Professional Advice Columns
Vanden Bos & Chapman, LLP has authored many articles in The Oregonian's™ Professional Advice Column. Below are selected edited versions of those articles, with the content modified to conform to changes in the law occurring after the initial publication of the column.
Question: I haven't filed my tax returns for many years. I'm not sure where to start. I heard that bankruptcy might be able to help. What should I do?
Answer: We can help. Bankruptcy is often a very effective way to deal with un-filed tax returns. There are extremely technical rules to determine whether taxes are discharged (wiped out) or reduced, in both Chapter 7 (straight bankruptcy) and Chapter 13 (payment plans). Where the applicable tax returns have been filed for more than two years prior to the bankruptcy petition date, and the income taxes are over three years old and they have other legal characteristics, you may be able to discharge the taxes, or substantially reduce them. If you have to pay, you can take up to five years if you file Chapter 13. Good planning and legal analysis is everything. My advice is don't do anything or sign anything (such as an offer of compromise with the IRS) until you see a qualified bankruptcy lawyer so you are informed of and understand your options.
Question: Two weeks ago I read a feature article in The Oregonian which indicated over 800 home owners lost their homes in the Portland area through foreclosure. The article really hit home because I'm facing foreclosure, too. The Oregonian article did not discuss whether Chapter 13 could stop a foreclosure. Could Chapter 13 help me keep my home?
Answer: Yes – Chapter 13 will stop a foreclosure. It can give you three to five years to cure your past due payments. Chapter 13 allows you to set the repayment schedule at a level that you can afford.
The cost of Chapter 13 depends on the complexity of your case. In most cases, there is a small up front fee (plus the filing fee) with the balance paid through the plan. Your monthly plan payment and your fees will be higher if you wait until the last minute to file Chapter 13. If you are facing foreclosure, you should call an attorney immediately.
For more information, please view our open letter to persons facing foreclosure on our website. To find out if you qualify for Chapter 13, please call for a consultation.
Borrowing to avoid bankruptcy
Question: My wife and I are thinking about refinancing our house to pay off our credit card bills so we can avoid bankruptcy. We can get a loan but at a high interest rate. Is bankruptcy a better alternative?
Answer: It depends. Factors to consider include: can you afford a higher mortgage payment or will you default and lose your home in foreclosure? You can discharge the credit card debt in bankruptcy now, but once you refinance you will have to pay the new mortgage loan in full or give up your house. A married couple filing a Chapter 7 (a liquidation bankruptcy) can have up to $50,000 in equity (a single person $40,000), and keep their home after bankruptcy, if they pay their mortgage payments. Even if your equity is above $50,000, you may be able to make payments in a Chapter 13 over time, and avoid the sale of your home. In many cases, Chapter 13 is far less expensive than trying to "borrow" your way out of your financial problem. Isn't borrowing what got you in trouble in the first place?
Interest on credit cards
Question: Why can't I seem to get ahead on my credit card payments? I've been making the payments for over a year and the balances are almost the same. I keep moving the balances from one card to another to get a lower interest rate but it doesn't seem to really help. Should I consider bankruptcy?
Answer: Many of my clients suffer from the common misconception that the interest on their credit cards is the problem. In most cases, that is not the case. It's the principal balance you actually have to pay off eventually. The interest is a distraction. So, for now, forget the interest. Let's assume you owe $30,000.00 on your credit cards and you can afford payments of $250 per month to service this debt. Without any interest at all, it will take you 10 years to pay off the debt. Most people are surprised when they look at their debts this way. Chapter 7 (straight bankruptcy) or Chapter 13 (a payment bankruptcy where interest generally stops on credit cards) might be a better way to go.
Question: If I file bankruptcy, will a bankruptcy trustee go through my house and sell my property?
Answer: Although a bankruptcy trustee has the right to examine your personal property, they almost never do. Unless you have extremely valuable property, such as artwork or antiques, the trustee will usually accept your testimony as to the nature and value of your property. In our consumer cases during our 30 years of practicing bankruptcy law, there have been less than five times that a trustee has wanted to look through a client's home for property.
Further, a bankruptcy trustee does not have the right to simply sell your property. You are entitled to keep all of your exempt property, such as household belongings, clothing, personal jewelry, a car, and your house. However, there are upper limits on the value of almost all the exemptions. In most consumer bankruptcy cases, the Oregon exemptions protect all of the debtor's property. If you have questions about whether a specific item of your property would be covered by an exemption, please call for a consultation.
Protecting assets in bankruptcy
Question: Will I lose everything if I file bankruptcy?
Answer: Usually not. We would need to determine if there is any equity in your property and whether it is protected by an exemption. For example, let's say your car is worth $12,000 and you owe $4,000 against it; your equity is $8,000. Your exemption in a motor vehicle is $3,000; the unprotected equity is $5,000. In Chapter 7 (straight bankruptcy), the car would be sold to capture the unprotected equity. You would receive $3,000 from the trustee for your car exemption amount. However, you could avoid losing the car if you filed a Chapter 13 (payment bankruptcy) and proposed a monthly payment plan where your creditors received $5,000 over the life of your plan ($83 monthly in the longest plan available – five years). You may also be able to do some pre-bankruptcy planning that would put you in a better position to file.
Divorce & bankruptcy
Question: My spouse and I are getting divorced. I am afraid my spouse will file bankruptcy and leave me with all the bills, then I may have to file bankruptcy, too. Are there any precautions I should take?
Answer: The interplay between divorce and bankruptcy can be very complicated. Some of your rights may be determined simply by whether the divorce occurs before the bankruptcy or after the bankruptcy. These consequences can be significant. There may be language which could be used in your divorce decree which will provide you some protection in the event of a future bankruptcy of your spouse. The use of the right language is crucial whether you are the husband or the wife, and regardless of whether you will pay or receive support.
If you are in a divorce and bankruptcy of you or your spouse is a good possibility, you should consult with a bankruptcy lawyer before making any final agreements regarding the divorce.
Question: My husband and I recently divorced. The judge ordered him to pay our joint credit card bills and pay me child support and alimony. If he files bankruptcy, what impact does it have on me?
Answer: If he files, the credit card companies will expect you to pay the outstanding balances owed on your joint debts. The judge's order cannot terminate your obligation to pay the creditors; it simply imposed an obligation on your husband to pay the debts for you. In Chapter 7 (straight bankruptcy), debts that are owed to you under the divorce decree are not dischargeable. In Chapter 13 (payment bankruptcy), he could propose a payment plan where your joint debts are paid in full before his other debt, in order to protect you from your joint creditors. He cannot discharge child support or alimony obligations in Chapter 13 or Chapter 7. He can discharge property settlement obligations in a Chapter 13 but not in a Chapter 7. However, if he's behind on those child support payments or alimony, he could take up to five years to get caught up on those obligations in a Chapter 13.
Credit card interest
Question: My husband and I got behind on our credit card payments and taxes after the slow season in his business and my maternity leave. We'd like to pay our creditors but they want more than we can pay – and they won't stop calling! Can bankruptcy help?
Answer: As soon as you file bankruptcy, all collection activity stops. Chapter 13 would allow you to propose a monthly repayment plan (usually of at least 36 months of duration) with lower payments now, and higher payments after your maternity leave ends. In most cases, interest on taxes and credit cards stops the moment you file. The taxes would be paid before the credit cards. At the end of 36 months, if the credit card debt hadn't been paid, you could discharge the balance owed (wipe it out), or extend your plan another two years to pay more. The key to a successful case is a realistic budget that would take into account any seasonal aspects of your husband's business, his estimated taxes, as well as the costs of your new baby.
Bankruptcy with dignity
Question: I never thought I'd find myself in need of a bankruptcy attorney. I have perfect credit but I'm in over my head with my credit cards. Am I eligible to file? If I file, will I ever get credit again?
Answer: You do not have to be behind on your debts to file a bankruptcy. If you can see that you can't keep up your payments in the future, (without continuing to borrow from other credit cards, for example) you're probably a candidate for bankruptcy. Many of our clients had perfect credit at one time and can rebuild a good credit rating again. Most clients keep their homes and cars. More importantly, we help them retain their dignity through the bankruptcy process. Picking up the phone is the hardest part.
There are several ways to rebuild credit after bankruptcy, including reaffirmation of loans (continuing to pay as you normally would) or obtaining a secured credit card after bankruptcy.
Bankruptcy & tax refunds
Question: My wife and I will have to file bankruptcy because my sole proprietorship failed. We expect a large tax refund this year. Is our tax refund in jeopardy if we file bankruptcy before we receive it?
Answer: Possibly. Even though you have presumably kept a separate business account and think about your business and personal affairs separately, when a sole proprietor files bankruptcy both personal and business assets and debts become part of the bankruptcy case. You cannot pick and choose which assets or debts to list. You must list everything.
Therefore, your personal tax refund is an asset of your sole proprietorship bankruptcy and will probably be taken from you by the bankruptcy trustee. If you file bankruptcy before you receive your refund, you may be able to partially protect it with an "exemption" but that will depend on a number of different factors. If you can hold off filing bankruptcy until after you receive your refund, you may be able to spend it legitimately on various expenses, including your legal fee for the bankruptcy, before you file.
Bankruptcy & home equity
Question: We own a home worth $220,000 with a mortgage of $140,000. We owe $75,000 in credit card debt. My wife had to quit her job to care for her terminally ill mother. We can afford $400 monthly on the credit cards until she is back to work. We are afraid we may lose our house to our creditors. Can you help?
Answer: A married couple filing bankruptcy can protect up to $50,000 of equity in their home, after deducting costs of sale (estimated at 8%) and paying off liens. If you filed a Chapter 7 (liquidation), your home would be sold so your trustee could capture the non-exempt equity of $12,400 for your creditors ($220,000 - $17,600 selling costs - $140,000 mortgage - $50,000 exemption = $12,400). You can avoid the sale of your home by filing a Chapter 13 bankruptcy and proposing a plan where you pay your creditors the larger of (1) $12,400 over the life of your plan (which can run as long as five years), OR (2) what you can afford to pay after reasonable living expenses for three years. (In some cases, where the Debtor earns above the median income, the Debtor may be required to perform a Chapter 13 plan having a five-year duration.) Any balance remaining on the credit cards after your plan is completed would be discharged.
Bankruptcy & newly married couples
Question: My spouse and I were recently married. I have A-1 credit but my spouse has too many debts for us to pay. Can we file bankruptcy for my spouse but leave me out of it?
Answer: Just because you are married does not mean that both spouses have to file bankruptcy. In Oregon, you are not responsible for your spouse's debts incurred prior to the time of the marriage. However, you will probably be inconvenienced by the collection activities against your spouse, because you will most likely end up answering creditor phone calls. The best thing to do is explore whether your spouse should file bankruptcy now.
Bankruptcy would likely discharge your spouse's debts. Because only your spouse would be filing, you would not have to sign any bankruptcy papers nor appear at any hearings. This will give your spouse a clean start and both of you freedom from the worry of creditor contact.
Bankruptcy & consolidation loans
Question: Eighteen months ago, I took out a consolidation loan at the credit union where I have my car loan. In the last seven months, I maxed out the same credit cards I paid off. Can I file a bankruptcy, keep my car, and wipe out the other debts?
Answer: Chapter 7 (liquidation) won't work for two reasons. Most credit unions have a "cross-collateralization" clause in their documents that tie the two loans together, even though you think of them separately. If you want to keep your car in Chapter 7, you would likely have to repay both credit union loans. In addition, the recent credit card activity may be considered fraud because the Court might conclude there was an insufficient intent or effort to repay the new credit card debts before filing either a Chapter 7 or a Chapter 13. If a fraud claim was successful, those recent credit card debts would not be discharged. Certain pre-bankruptcy strategies may be successful in dealing with this problem. Please call for a consultation.
Question:I have a lot of medical bills which aren't covered by insurance. I don't want to hurt my other creditors, but I can't pay my medical bills. Is there a bankruptcy where I can discharge the medical bills but leave my other creditors out?
Answer: There seems to be a common misconception of the availability of a so-called "medical bankruptcy." There is no such thing. While bankruptcy is a good way, sometimes the only way, to discharge the burden of an uninsured medical event, bankruptcy applies to all your creditors regardless of the nature of the debt. If you want to voluntarily pay a creditor after your bankruptcy is over, you have that right, but you must list all your creditors in the bankruptcy when you file or you run the risk that your bankruptcy discharge will be denied by the Court.