Bankruptcy Information

Bankruptcy is a legal process designed to help consumers and businesses eliminate their debts or repay them under the protection of the bankruptcy court.

In many ways bankruptcy provides a fresh start for the debtor. In most cases involving consumer debtors, a fresh start is by far the more significant reason for filing since there are typically few assets available for distribution to the creditors involved.

The Effect Of Bankruptcy On A Spouse:

A married debtor may file for bankruptcy regardless of whether the spouse also files. If the husband and wife have kept their property and debts completely separate, one spouse may file for bankruptcy without affecting the other spouse. For example, if the debtor uses credit cards that are in his/her name only, the spouse cannot be required to pay for that debt out of his/her individual savings. However, it may impact the spouse in that the credit card company can go after any joint savings or property to pay for the credit card bills.

Voluntary Bankruptcy – the debtor files the majority of bankruptcy cases voluntarily. However, creditors are permitted to file involuntary bankruptcy cases against a debtor who is generally not paying his debts as they become due. These types of cases are rare and require 3 or more petitioning creditors who are owed a total of at least $10,000.00. If there are less than 12 creditors in total, then the involuntary petition may be filed by one creditor who is owed at least $10,000.00. 

Chapter 7 – Also known as straight bankruptcy or liquidation. With this Chapter, a bankruptcy trustee is appointed. The trustee then takes possession of the debtor's property, sells the property and distributes the proceeds to creditors.

Individuals, partnerships and corporations can file for Chapter 7 bankruptcy and relief is available regardless of the amount owed by the debtor. In addition, the filing can be voluntary or involuntary.

Chapter 13 – Proceedings for the alteration of debts of an individual with regular income. Formerly known as the wage earner plan, this Code provides an alternative to Chapter 7 liquidations for individuals who have regular salaries or commissions from their employment. However, owners of small, unincorporated businesses can also use it.

Chapter 13 is designed for individuals who wish to pay off most of their debts and who wish to avoid the stigma of going through a personal bankruptcy. With this chapter, the debtor may not have unsecured debts of more than $290,525 or secured debts of more than $871,550.

An unsecured debt is one that is not secured by collateral. A secured debt such as a house mortgage is a debt where collateral (the house) secures repayment of the amount of the debt. Homeowners generally choose this chapter to stop foreclosure and to pay arrearage to their mortgagor.

Chapter 13 differs from both Chapter 7 liquidation and Chapter 11 reorganization in that the debtor can only enter it into voluntarily.

Not all debts may be discharged in bankruptcy. There are two main categories of debts, known by the courts as “non-dischargeable debts”. The first category consists of debts that are exempt from the discharge regardless of whether anyone raises the issue during the bankruptcy case. The exceptions that fall into this category are those for:

• Most taxes
• Alimony and support
• Fines and penalties
• Most student loans
• Certain debts incurred through drunk driving
• Debts for which a discharge was denied or waived in a prior bankruptcy
• Certain debts owed to agencies that regulate federal depository institutions
• Debts for federal criminal restitution
• Debts incurred to pay non-dischargeable federal taxes
• Court costs owed by prisoners
• Certain support debts owed to states

Creditors that hold claims covered by these exceptions are free to assert them against the debtor after the bankruptcy, without the permission of the bankruptcy court.

The second category of exceptions consists of debts that are excluded from the discharge only if their non-discharge ability is raised and determined during the bankruptcy case. The debts that fall into this category are:

§ Those incurred by false pretenses or false financial statements

§ Claims for fraud on the part of fiduciaries

§ Claims for willful and malicious injuries

§ Certain marital property settlement debts

§ Please note the exemptions in these chapters vary from state to state in type and allowable dollar amount.

Deciding Whether or Not To File Bankruptcy:

Before a bankruptcy case can be filed, the debtor must decide whether bankruptcy is, in fact, the best vehicle for dealing with the problems associated with excessive debt. In a typical consumer bankruptcy case, most of the attorney's analysis involves comparing bankruptcy with other possible avenues of handling financial problems. It is never possible to safely determine whether or not to pursue bankruptcy without a thorough knowledge of the facts. Without such knowledge, unknown property (such as the right to a tax refund) may be lost in bankruptcy; major debts may turn out to be unaffected because they cannot be discharged or because there are liens on property; or the property might be incorrectly valued and, as a result, lost to creditors.

Some debtors have only a few debts and have strong defenses against them. For those debtors, the best avenue might be either litigation or settlement outside of bankruptcy court. To assess whether bankruptcy will help, the debtor should take the following steps:

§ Learn the advantages and disadvantages of bankruptcy. It is important to know the benefits and pitfalls of bankruptcy.

§ Determine whether bankruptcy will get rid of his/her debts. It is important to know what types of debts can and cannot be discharged.

§ Do a budget analysis. Calculate ongoing expenses and income, to determine whether a bankruptcy proceeding will solve the debt problem or if the problem will continue.

§ Consider the effect of bankruptcy on the spouse.

§ Consider the alternatives to bankruptcy.

Getting The Help Needed To File For Bankruptcy:

The bankruptcy court – The forms will have to be filed in the debtor’s local bankruptcy court. Most states have more than one court, therefore the debtor will need make sure that he/she is filing in the right court or else the case will be dismissed. The court has clerks that will take the papers and check to see that everything is in order.

It is a good idea to pay a visit to the court; however, the debtor can telephone them for information if the court is some distance from his/her home. When speaking with court personnel, the debtor should verify:

• That the papers are being filed in the correct court.
• The amount of the filing fee and whether they will accept a personal check.
• Which sets of bankruptcy forms the court will accept.
• How many copies of the forms will be required.
• Whether there are any "local forms" that his/her particular court requires that are not required elsewhere.

Hiring an attorney –Though a debtor has an absolute right to handle his/her own bankruptcy, hiring a lawyer can be a good investment even if he/she is financially strapped. Although the debtor can gain a lot of knowledge about the bankruptcy system through self-study, his/her knowledge will not match that of an experienced bankruptcy attorney who has intimate knowledge of not only the basic rules, but also of the exceptions and local procedures based on case law and experience.

At the outset, an attorney can help the debtor to better decide on whether or not to file for bankruptcy. The attorney may be able to represent the debtor in negotiating with creditors to restructure his/her debts without having to actually file for bankruptcy.

It may be a good idea for the debtor to consult with an attorney for a few hours even if he/she plans to handle the bankruptcy on his/her own. In most cases, an attorney can be found to fit even a limited budget.

The Advantages of Bankruptcy:

Bankruptcy has provided millions of people with relief from the constant collection calls, letters and other harassment tactics that accompany unpaid debts. It is sometimes the best way to prevent the loss of housing, utility service, income, a car, driver's license or one's freedom since imprisonment may result from the failure to comply with orders to pay support or other indebtedness. Bankruptcy also offers many other benefits, including the discharge of most debts, protection of property and an automatic stay.

The discharge of most debts – The principal goal of most bankruptcy proceedings is to have the majority of the unsecured debts discharged, which totally eliminates any personal obligation to pay many types of debts. After a debtor receives a discharge in bankruptcy, the creditors whose debts were discharged are required to report that the account has a zero balance. However, the fact of the filing itself can remain on the debtor’s credit report for up to 10 years from the date it was filed.

A consumer interested in re-establishing credit after bankruptcy should obtain his/her credit reports from the 3 largest credit reporting agencies (Experian, Equifax, and Trans Union) to ensure that the account balances have all been zeroed out. If they have not, the debtor should then contact the credit reporting agencies and ask that the record be corrected.

Protection of property and income from unsecured creditors – Bankruptcy is often the only sure way to protect a debtor's property from unsecured creditors. The proceeding may provide total protection for a home, car and other vital property. However, if a creditor has a lien on property taken as collateral, then the debt owed to that creditor may still have to be dealt with after the bankruptcy since in some cases, the lien will survive.

Bankruptcy may also provide protection from many types of discriminatory actions on the basis of unpaid debts discharged in bankruptcy by government bodies and private employers. It additionally serves to prevent any garnishment (attachment or seizure) of wages or other income after the petition is filed. This, in turn, may protect an individual's job if the employer does not favor multiple wage garnishments.

Automatic stay – The most valuable feature of a bankruptcy is sometimes the automatic stay, which the debtor gains instantaneously on filing a petition. The stay is an automatic court order that prohibits all sorts of collection attempts by creditors, allowing the bankruptcy to proceed in an orderly fashion. It forces an abrupt halt of most creditors actions against the debtor, including repossessions, garnishments or attachments, utility shutoffs, foreclosures and evictions. Many of these can thereafter be permanently prevented.

The stay is also an effective way (though hardly the only way) to end creditor collection efforts. Creditors who violate the stay risk contempt of court, money damages and attorneys' fees. Beyond all this, the stay gives the debtor time to sort things out.

The Disadvantages of Bankruptcy:

Despite all of the advantages that bankruptcy may provide, there are many valid reasons for choosing not to file a petition. The loss of property, effect on a debtor’s credit and reputation, possible discrimination and the cost involved are just some of the disadvantages of filing a petition.

The loss of property – One consequence of a Chapter 7 bankruptcy is the loss of nonexempt property or its value in cash. This is not a problem for many debtors because consumer debtors rarely have any nonexempt property. In certain states, the amount of property a debtor is allowed to keep is generous enough to protect the property of most non-homeowners and many homeowners. Only debtors with equity of substantially more than $18,000 in a home (per debtor), $2,775 in a car or $9,300 in household goods and certain other property is likely to have problems under the federal exemptions. Even in those cases, a Chapter 13 bankruptcy often presents a viable alternative through which debtors may retain all of their possessions.

The effect on credit and reputation – A bankruptcy will be part of a debtor's credit history for as long as the law allows, which is 10 years under the Fair Credit Reporting Act. This means that anyone who requests a credit report, including some insurance companies and employers, will be informed of the bankruptcy filing. The effect this will have on his/her future credit cannot be predicted, however, it is an understandable concern of many people who are considering bankruptcy.

Possible discrimination after bankruptcy – Discrimination against debtors who have filed bankruptcy cases closely relates to the problem of reputation. To a large extent, the Bankruptcy Code alleviates this problem.

Generally, government bodies may not discriminate on the basis of a bankruptcy or of a debt discharged in bankruptcy. Therefore, a housing authority or grantor of government assistance benefits cannot deny benefits to a person based on previously discharged debts. Similarly, utility companies may not deny service based on a bankruptcy or discharged debts, however, they may demand a security deposit for continued service. Private employers may not discriminate with respect to employment or terminate employment based on bankruptcy or discharged debts.

Cost of filing a petition – Besides the attorney’s fee, which could be hundreds of dollars, bankruptcy carries an out-of-pocket cost of at least $185 for the court fees and other fees may raise this figure somewhat. For example, in a Chapter 13 case, the trustee is usually entitled to a commission of up to 10 percent of the payments made through the plan. These costs, like the less tangible costs, must be weighed when deciding whether to file a bankruptcy case.