Bankruptcy Law



What is Bankruptcy?

Bankruptcy means different things to different people. For some, the word signifies fear and failure; for others, it is a means of relief from harassment by their creditors.

Bankruptcy law is one branch of what is known as the "law of creditors and debtors". Under normal circumstances, (and based upon complex definitions) a debtor will file a Chapter 7 or 13 petition in the Bankruptcy Court under the United States Bankruptcy Code. Based on the chapter, the Court will either sell all of the debtor’s non-exempt property (assets) and use the proceeds to pay the debtor’s creditors, or the debtor will submit a payment plan to be confirmed by the court, where the debtor pays a certain amount each month to complete the plan.

The primary reason many debtors choose to file bankruptcy is for a “fresh start.” Within 3-6 months of filing (in a Chapter 7 case) or after the payment plan has been completed (in a Chapter 13 case), many, and in some cases all, of the debtor’s remaining debts incurred before the bankruptcy filing are discharged, and creditors may no longer collect on those debts. 

Types of Bankruptcy

There are two main chapters of the Bankruptcy Code that debtors file under: Chapter 7 and Chapter 13. 

Chapter 7
Also known as liquidation, Chapter 7 is primarily used by debtors who do not have many assets to administer.  In many Chapter 7 cases, the debtors do not actually lose any property because it is either all exempt or, in the case of a house or a vehicle, the bank may hold a lien (such as a mortgage) on the property for debt that is worth more than the property itself.  Indeed, in the last two years there has been a major upswing in these so-called “underwater mortgages.” In such cases, the lender and the debtors’ attorney will often work out a reaffirmation agreement, so that the debtors can keep their home.  In other cases, the debtors may decide that the home is simply not worth keeping, and they allow the bank to sell the home and collect whatever it is worth, with the remainder of the loan usually being discharged in bankruptcy.

Some debtors, however, are not eligible to initially file a Chapter 7 petition. In 2005, Congress amended the bankruptcy laws to prevent a debtor from filing under Chapter 7 if they had primarily consumer debts, made income above the state median, and also failed a complex “means test” set forth in the new law. This had the effect of forcing many debtors into Chapter 13 or into not filing bankruptcy at all. A licensed bankruptcy attorney can perform the necessary calculations for you to determine whether you are eligible to file for Chapter 7 bankruptcy.

Chapter 13
Chapter 13 is usually used by higher-middle-to-higher income debtors or debtors that have significant assets that they do not wish to part with. Under Chapter 13, a debtor must submit a payment plan to the court, send it to all creditors, who will have a chance to object to the plan, and if the plan meets certain legal requirements and any creditors’ objections are overruled by the court, the court will confirm the plan. Once the plan is confirmed, the debtor will then be required to make scheduled payments to the Chapter 13 Trustee for a period of approximately 3-5 years. These payments are often lower than the payments the debtor would have been making to their individual creditors before the plan was put in place, and can be scheduled over a longer period of time than previously allowed by the creditor.

In some cases, the debtor can even strip liens off of certain types of property, such as vehicles, so that the creditor involved may only recover the market value of the asset. Currently this cannot be done with a debtor’s home, but there have been bills proposed in Congress to change the laws in this regard.

At the end of the payment plan, and provided that the debtor complied with the plan, any debts that are dischargeable are discharged.

What Debts are Not Dischargeable
There are several types of debts that are not dischargeable in bankruptcy, or which are limited in their dischargeability. Most significantly, student loans are usually not dischargeable in bankruptcy. Student loans are only dischargeable upon a showing of undue hardship, and such hardship petitions are rarely granted.

Other types of non-dischargeable debt include the following:

• Family support such as alimony and child support
• Criminal fines and restitution
• Debts from drunk driving judgments

The dischargeability of some other debts is determined by which chapter is filed. These types of debts include the following:

• Taxes, recent and past
• Debts to spouse arising from divorce
• Debts incurred by fraud
• Debts incurred as a result of injuries caused by the willful and malicious wrongdoing of the debtor

These are not exclusive lists, and each debtor’s situation is different.  That is why it is important for debtors contemplating bankruptcy to sit down with an attorney and review their financial situation. At that time, the attorney can make the proper recommendation as to which chapter to file and which debts, if any are likely to be non-dischargeable. Part of the consultation with all my bankruptcy clients includes discussing the dischargeability of their debts.

It is important to remember that even if the actual debt itself is discharged, secured creditors will usually retain a lien on any property for which they had a lien before bankruptcy was filed. In such cases, the creditor may not collect on the original agreement from the debtor’s wages or assets acquired after the bankruptcy, but may be allowed to foreclose on the property to which the lien is attached. There are, however, some cases in which a court will allow a debtor to avoid the lien so that it is no longer attached to the property.

What Alternatives are There to Bankruptcy?
Bankruptcy may not be right for everyone. Every client’s situation is different, and I counsel each of my clients as unique individuals based upon their individual circumstances. It may be that a client’s credit card debts are unmanageable, but they are able to pay the rest of their debts. In such situations, I often counsel clients to allow me to contact their credit card companies and try to settle their credit card debts for a percentage of what is owed. Many credit card companies, fearing the prospect of receiving little to nothing in bankruptcy, are willing to make this type of payment arrangement.

Likewise, if a client owes more on their house than it is worth and cannot afford to continue making payments, it may be best to arrange to execute a deed in lieu of foreclosure, with the agreement that the bank not pursue the difference between the fair market value of the home and the amount owed. Such decisions however can have important tax consequences, and it is important to consider these consequences before making a decision. I will review any potential tax consequences before making a recommendation as to whether this is the right choice.

What Can You Expect from Me as a Bankruptcy Attorney?
First, you can expect me to respect you as a person and as a client, regardless of your financial situation. My goal is to help you achieve your goals. You can expect me to be non-judgmental and to listen to what you have to say. You can rely on me to represent you with competency and professionalism.

When you call me, we will set up an appointment for you to come into my office to sit down and discuss your financial situation. Before our appointment I will send you an intake form that will ask about you and your finances, what property you own, what debts you owe, etc. You must bring that intake form with you to our appointment. At our appointment, I will review the intake form with you, make a recommendation on how to proceed and discuss what fees would be involved if I were to take the case.

If you decide that you want me to represent you, we will both sign a fee agreement outlining what services will be provided and at what cost. As your bankruptcy attorney, I will analyze your financial situation, prepare and file the petition, represent you at the meeting of creditors and assist you with any reaffirmation agreements that may be necessary as a result of filing the case. I can also represent you in any separate proceedings filed either for or against you arising from, or related to, the bankruptcy proceeding. Due to the unique nature of these actions, however, they are usually covered in a separate agreement.

DISCLAIMER: Nothing on this site is intended to be used or relied upon as legal advice.  If you are contemplating taking any action in a any legal matter, you should consult a licensed attorney before doing so.  Nothing on this page or this website is intended to create an attorney/client relationship between the reader and the author’s firm.  Only by signing a representation agreement with the firm will any person be considered to be a client of the firm.  If you are interested in hiring me as your attorney, please contact me by clicking here.

I am a debt relief counselor.  I help people file for relief under the Bankruptcy Code.