Misconceptions of Bankruptcy, with Jen Lee
Ever heard the myth that filing bankruptcy ruins your chances to buy a home for years! Would it surprise you to learn that this is not necessarily the case? On this episode of I Know a Lawyer, I discuss the misconceptions of bankruptcy with Jen Lee of Jen Lee Law. Jen is an expert in debt and credit strategies and loves to dispel the myths of bankruptcy. We discuss:
The process of a bankruptcy and differences between Chapter 7 and Chapter 13 (00:59).
What is a bankruptcy trustee (02:34).
Is conversion from Chapter 7 to Chapter 13 possible? (08:29).
Impact on credit and buying a home (10:51).
Options for student loans (13:00)
Contact Jen Lee at jenleelaw.com if you have any questions pertaining to bankruptcy or credit or debt issues. She is a tremendous resource and has helped many individuals and businesses chart a path forward, even in these pandemic times. Thank you to Jen for joining me on the podcast.
This podcast is brought to you by McKenna Brink Signorotti LLP.
Transcript
Ryan Lockhart (00:01):
Welcome to the show. This is, I Know a Lawyer and I am your host, Ryan Lockhart, as you may know, by now, this podcast is brought to you by McKenna Brink Signorotti, LLP. We are your full service boutique law firm in Walnut Creek, California, where we provide legal services ranging from business law estate and tax planning and civil litigation. Check us out at mckennabrink.com for more information on how we can provide legal solutions for you. Today, I am joined by Jen Lee of Jen Lee law. Jen is the expert attorney in debt and credit strategy and has agreed to join me today to discuss the misconceptions of bankruptcy. Welcome to the show, Jen, how are you today?
Jen Lee (00:40):
Good. Thank you for having me, Ryan. This is my favorite topic.
Ryan Lockhart (00:43):
Ah, thank you for joining. I've be looking forward to this discussion for a little bit now because bankruptcy is that area of the law that I know a little bit about, but definitely not the right things. So really just, let's just start with the process of a bankruptcy. What is the process of a bankruptcy?
Jen Lee (00:59):
So it's interesting. There are different chapters of bankruptcy, but usually once someone decides they're going to file bankruptcy, there's a lot of information that's collected. The court requires about 60 pages worth of schedules that are filled out. And that's my job as the attorney to make sure those are filled out correctly. And you have to list all of your assets, all of your liabilities, your income, your expenses, basically all your financials are out there so that the trustee and the court can see kind of what went on, why we're in this situation that we're in. And so once the case is filed, then there is a trustee meeting. Right now with COVID going on, the trustee meetings are all by zoom or by phone. So it's been an interesting transition. And at the trustee meeting, they review all of your documents, make sure that you answered everything correctly, make sure that you're not hiding the vacation house in Hawaii or something like that for your schedules.
Jen Lee (01:52):
And it's usually like five to 10 minutes on a normal straightforward case. So it's a pretty easy meeting and hearing to go to as long as you're prepared. And then depending on what chapter of bankruptcy you're in, if you're in chapter seven, you're discharged then comes in 60 days later and your debt is gone. If you're in chapter 13 or chapter 11, there's usually a payment plan. That's proposed that the court approves and that kind of thing. So it starts separating out. Once you are in different chapters of bankruptcy, what happens, but all of them involve full disclosure of financials and a trustee meeting, generally speaking.
Ryan Lockhart (02:27):
So who is the trustee? This is obviously different than a trustee in like estate planning. So let's say so who's a trustee in this process.
Jen Lee (02:34):
That's a good question. So it's appointed by the U S trustees office and they are assigned to a case to review and make sure that all the assets are disclosed. All of the income is there. And in the chapter seven, a trustee's job is to sell assets and pay creditors. Now people freak out when I say sell because they think that trust is going to come to their house and auction off their kids' beds on the front lawn. And that's not how it happens. Generally speaking, the most cases that are filed there aren't any assets to sell. Everything you have is exempt. Meaning if the household goods or furniture furnishing there's exemption for car, there's an exemption for basically wildcard. You can use it for anything. So most cases don't actually involve the trustee selling assets, but the trustees there to make sure that your creditors get paid, what they're supposed to get. If there are assets available in chapter 13, the trustee is there to make payments to your creditors because in a chapter 13, you're proposing to pay back some of your creditors over three to five years. And so the trustees, the one that collects your payment each month and then turns around and pays your creditors as part of your reorganization of debt. So trustee oversees the process.
Ryan Lockhart (03:53):
Okay. So it sounds like the main difference between chapter seven and chapter 13 is seven. Your you can liquidate whatever non-protected assets to be able to pay off your creditors. And it's kinda like one big fell swoop, and then it's done, but 13 is more of a payment plan. Just run through that trustee.
Jen Lee (04:09):
Yeah. So, and that's a good way to look at it. Chapter seven is a liquidation. There's no payments. It's just assets are sold. So chapter seven is usually good. When we're looking at the debts, it gets rid of things like credit cards, unsecured, personal loans online, medical bills are included. If you owe attorney fees, those are generally unsecured debts that are discharging. The chapter seven older taxes can get discharged in a chapter seven. The things that don't get included in chapter seven are things like your mortgage, your car loans. If you want to keep your car, you'll get to get rid of the loan and keep the car and student loans. I know that the hot topic these days, but they're not discharged automatically in a chapter seven. And if you owe child support or alimony payments rears, those aren't discharged in a chapter seven.
Jen Lee (05:02):
So generally speaking, the person who files chapter seven has unsecured credit card debt or medical bills and very few assets. Then when you're looking at chapter 13, chapter 13 is a repayment plan three to five years. It's usually used for someone who has a mortgage, that's going into foreclosure. They want to save their house. You can do that in chapter 13. Taxes. If you owe taxes, we can get rid of a lot of taxes and penalties and chapter 13 or someone who makes more money than can file for chapter seven, because there are income requirements for chapter seven. So usually for looking at chapter 13, it's because there is one of those things, there's taxes, mortgage, they own a business and want to reorganize their debt, that kind of thing. So a little bit more complicated in chapter 13.
Ryan Lockhart (05:54):
What do you are those income limits for chapter seven case by case? Or is there like just some bright line, you know, numbers?
Jen Lee (06:02):
Yes and no, it depends. So there's a bright light number out there. I'm a lawyer. I have to say it like that, but there is a bright line number. So you automatically qualify for chapter seven, if for your household size, your household incomes below the median income for your state. So on the website for bankruptcy, for the U S trustee, it goes all through 50 States. And what the median income is for a household of one household of two. And if you're below that, you automatically qualify. If you're above that, it doesn't mean you don't qualify. It just means you need a good lawyer to get you through the extra calculations. So if you're above that, you can deduct certain expenses. Some of them are defined by the IRS guidelines for deductions, and some of them are actual expenses. So if you can get your disposable monthly income is the term that they use, basically what you have left over each month to be negative on the means test, you still qualify for chapter seven. So a lot of having a lawyer do the means test helps people that are above that income, but still qualify if they have the right expenses and right deductions to do that.
Ryan Lockhart (07:13):
That raises the one quick question. I think I know the answer because I get questions from like such like family and friends around in bankruptcy. Like, do I really need a lawyer to run? You know, it helped me with bankruptcy and I always tell them, absolutely, it's just, you're not gonna be able to do it on your own. So I assume you're going to have that same recommendation.
Jen Lee (07:30):
For the most part. Yes. I mean, if someone's very low income, there are, I do help with some of the clinics. Counties often have bankruptcy clinics for very low income. And, but for the most part, if you want to make sure that your assets are protected and that your bankruptcy doesn't go sideways very quickly, I would have an attorney involved. And usually the cost for the attorney is way less than the amount of debt that you have. It could be as low as like 2% of the debt that you have that you actually pay for attorney's fees. So they're fairly reasonable. I have seen cases go really bad where people lose their house because they filed without an attorney. Because yeah, I mean, and it's hard to say things like that. Once you file for chapter seven, you can't dismiss your case. You don't get to choose to get out of bankruptcy. Once the trustee has their hands in the pot, then you can't dismiss that and say, Oh, nevermind, I choose not to do this.
Ryan Lockhart (08:29):
So you can't enter in chapter seven and say, you know what, I'm sorry, I filed the wrong one. Can I go do the chapter 13? Now you're pretty much stuck. Right?
Jen Lee (08:36):
You can convert to a chapter 13. But there's a process and you have to be able to, so if you have a ton of equity in your house in a chapter 13, you have to be able to pay back all of your creditors over five years. And so sometimes that's not feasible, but the payment is too high. So that's one consideration when you're looking at going from chapter seven to 13, can you even make that payment?
Ryan Lockhart (09:01):
Yeah. So in, in 13, do you have to pay off the entire debt or is there like some sort of like settlement payment plan pennies on the dollar type of situation?
Jen Lee (09:10)
You don't have to pay it all back. So that's the difference between like a debt settlement company and chapter 13 as chapter 13, I can force creditors to take what we give them. There's no settlement. As long as I follow the code, most of the time credit cards and unsecured debt get between zero and 10% of the balance that's owed. And then the things that take priority are like taxes, mortgage arrears, any arrears on child support alimony, your attorney's fees are sometimes included as part of your monthly payment to the court. So those things all take priority over credit card debt. So many of the plans that we propose pay zero to 10% of those debts back, more paying back the stuff that can't be discharged instead.
Ryan Lockhart (09:57):
So I have heard, and I've even repeated that the IRS has always first in line. Is that true?
Jen Lee (10:03):
Actually, I get to beat the IRS, attorney's fees and chapter 13, ahead of IRS, the IRS is a priority debt. Generally speaking, they're going to get paid before most of the unsecured creditors, but they do not have priority over like child support, arrears or alimony or domestic support obligations basically. And attorney's fees in chapter 13 are actually above IRS. If they're just regular priority debts.
Ryan Lockhart (10:31):
Oh, that makes me actually feel good. Cause then I love to take on the IRS anyway, as a tax attorney though, because I know they're getting it somewhere else too.
Jen Lee (10:38):
And keep in mind that a lot of taxes can be discharged in chapter 13 and people don't often realize that the tax that's one of the misconceptions out there is that taxes can be dealt with very handily in chapter 13.
Ryan Lockhart (10:51):
No, I'm joking. You know, when I say it's nice get over on the IRS, but they're actually really flexible and will work with a lot of people. If you have an attorney working with you, especially, I mean, they're, they're willing to willing deal. Yeah. So one of the big thing that I hear, I'm going to get to the student loans here at, towards the end. But I want to start here is I've heard for over my lifetime, like avoid bankruptcy at all costs. It's going to nail your credit. You're going to not be able to do anything, you know, for like seven to 10 years. So where's the truth really lie in this area.
Jen Lee (11:23):
So this is probably the biggest misconception out there. Most clients who come in, they don't, first of all, people don't ask for bankruptcy attorney until it's the last resort. And I wish they would at least talk to one earlier because a lot of times we can avoid bankruptcy before it gets too bad, but bankruptcy shouldn't always be the last resort. I always tell people and it's sounds interesting, but sometimes the quickest way to buy a house is to file for bankruptcy. And the reason for that is most people who come in with collection issues and some credit card debt have a really low credit score already and low, I mean under 600 and some of them get down in the four hundreds, as soon as you file for bankruptcy and your credit score will go up a lot, a hundred points. And so immediately you're in the six hundreds with your credit score. As soon as you file for bankruptcy, mortgage lenders will lend to someone who has filed for bankruptcy one year after the bankruptcy was filed. So generally speaking, if I'm looking at settlement versus bankruptcy, bankruptcy is so much better for your credit and recovery than settlement. Your credit is destroyed for five to seven years under a settlement options and paying off collection accounts. Whereas bankruptcy you'll have about a 700 credit score a year after filing.
Ryan Lockhart (12:40):
I think that might blow some people's minds when they hear that, because it kind of blew my mind when you told me about it before
Jen Lee (12:46):
It often does. And I'm I feel so I almost feel bad because people delayed talking to me because they have that misconception. And then when I explain it, they're like, wait, this makes sense. This is a great tool for us to use in order to get back on track.
Ryan Lockhart (13:00):
Absolutely. I mean, you're not having to pay those, you know, monthly payments to all those different credit cards that you've been. You could just never get over on that one. Right? So that's where this kind of proceeded with bankruptcy can get you over that. And a lender for a new home is gonna be like a good, they took care of all that. And people are usually more, you know, more concerned about their home. Anyways, as far as the mortgage goes, that's great. Let's talk about student loans. We're lawyers, I know lots of lawyers, me included that have student loans. And is there anything that we can do with our student loans in bankruptcy context?
Jen Lee (13:32):
So there, to some extent, yes. So student loans are one of those awful debts that are not discharged after recent changes last 20 years to bankruptcy law, they're not discharged whether they're private or federal, and if you want to discharge bankrupt or in bankruptcy, you have to file. What's called an adversary proceeding. It's basically a lawsuit in bankruptcy court to show that the debt is an undue burden and that you've tried to make payments that you've tried to work something out. There are no other options. You'll never going to make enough money to pay this debt back. And it's really hard to prove. There are some cases that are coming through that are promising for getting discharged student loans. The problem is, is you really do have to not be able to have income and be able to show that like in the next 10, 20 years, that you could pay even a small amount towards these loans. The best options generally for student loans are not bankruptcy, but coming up with either applying for the income based repayment programs, which there are over 50 of for federal loans, they don't tell you about them. By the way, the servicers don't tell you that you have options.
Ryan Lockhart (14:46):
I've heard of two of them. Definitely not 50.
Jen Lee (14:50):
It depends what kind loans are. They are, there's different options. But what I mostly been working on with clients, if you have federal loans, generally keeping them at in the federal system is better. If you don't have enough income to pay for them and applying for income based repayment, don't refinance those private, unless you have good income that you can repay them over five to 10 years, and then the different forgiveness options like public service forgiveness. If you work for a nonprofit or a government agency, the 10 years of payments is a really good tool to be able to forgive the debt and not have tax consequences. That's the only one that doesn't have tax consequences. So at the end of the 10 years, and your balance is forgiven under public service. It's not taxable as canceled debt. However, if you do the income based repayment options, which there are many of, and you pay for 20 to 25 years, and at the end, you owe a million dollars because all the interest is capitalized on it.
Jen Lee (15:52):
Then they're going to send you a 1099 C for the debt that was canceled. And you have to report that as income. So some of it is looking to see how likely are you going to be able to pay back the taxes and how much has that final balance going to be for student loans? There is one final option that we sometimes use with private student loans that won't work in a payment options and that's consecutive chapter 13. So when you put someone into chapter 13 for that repayment plan, and it's three to five years, they can't collect from you. They can only take what they're getting from the chapter 13 plan. And so if they're garnishing wages or if they're trying to levy your bank accounts, constantly chapter 13 can keep private student loans kind of at bay. While, we work on other plans and options. That's not a good option, but it has been used.
Ryan Lockhart (16:50):
So if I am back up a little bit just on the tax question, so in a chapter seven or chapter 13, whatever balance of the debt is not being paid off, is that cancellation of debt income to the
Jen Lee (17:02):
No, no, that's what I did about some of the exceptions for chapter seven and 13. Yeah.
Ryan Lockhart (17:07):
But if you're at a student loan, you're doing the income based repayment for 20, 25 years. And you're like you said, you have a million dollars. I ended up getting forgiven 25 years down the road. Could you then file bankruptcy on that tax liability.
Jen Lee (17:21):
So that's what I've suggested is that technically speaking, you could go into an installment agreement for a couple of years to let the time periods run, to make it dischargeable. And then you could. Yeah. So it's easier to get rid of taxes then student loans, believe it or not,
Ryan Lockhart (17:38):
Hey, just, just a 30, 35 year plan to get rid of your student loans.
Jen Lee (17:42):
Crazy. Although I do. Okay. So I will say if you have the ability to pay off your student loans, pay them off, obviously. Yeah, but some people try to find every way they can not to pay on them thinking it was wasted money. And I have come to the conclusion that just throwing chunks of money at student loans is better for financial stability and the financial stress that goes along with $200,000 hanging over your head. If you went to law school in the last 10 years.
Ryan Lockhart (18:09):
That is true. Those student loans, I mean, didn't help that the federal government took over basically everything on the student loan front. And I just leave this for a different episode. If they just give a decent interest rate, that'd be a little bit easier to,
Jen Lee (18:21):
Yes, exactly. We could go on for hours on just student loan issues.
Ryan Lockhart (18:26):
I know. So great. So thank you very much for that recap of jeez, the process of bankruptcy. I didn't really understand fully the differences between chapter seven and chapter 13. So I think that you really illustrated the differences and how those programs operate. And again, I think if you have these complicating issues, especially if there's some of these other non-dischargeable debts right away, like spousal support, child support issues, having a, getting, getting hold of Jen early, before it's too late is just going to benefit you in the long run. Like she said, there's some other options that can be explored and just have it, just have a discussion. So Jen, if somebody wanted to contact you, they had some questions where could they contact you?
Jen Lee (19:09):
So the easiest way is our website. It's jenlaw.com, J E N L E E L A W.com. It's really easy. And we have ability to sign up for several different types of appointments there. We're doing phone and zoom right now during the pandemic. But yeah, just reach out to the website. That's the easiest way to see what we do and what we can help with and schedule. Great.
Ryan Lockhart (19:32):
So that's generally law.com and there'll be a link to her website in the show notes. So again, give her a call. Even if you think that all those different misconceptions you've heard over the years, like avoid bankruptcy at all costs, or it's going to hurt your credit. You'll never be able to get a home or you won't get one for 10 years as she just discussed and may even bumped your credit score. That's still the mind blowing aspect about how you can get a house, go buy a house within a year or about a year after you do this bankruptcy. So give Jen Lee a call and I think you'll be very happy if you do, Jen, thank you very much for joining me today. It was a great discussion. I really, I learned a lot. Thank you. Thanks Ryan. Alright, so that's Jen Lee and this is Ryan Lockhart signing off for, I Know a Lawyer take care everybody. Bye bye.