What is Bankruptcy?
Bankruptcy is a proceeding under federal law that grants partial or complete relief from the payment of your debts. Upon filing the bankruptcy petition all creditor collection activities are stopped. The Bankruptcy Court enters an order relieving you from responsibility for paying certain debts.
There are two main types of bankruptcy – Chapter 7 and Chapter 13. You’ve probably heard these terms before without really knowing what each one entails. Leinart Law Firm would like to provide information so that you know the details of both of these terms as well as the other types of bankruptcy you should be considering bankruptcy as a course of action.
Bankruptcy Terms Explained
Debtor: the person or business filing bankruptcy. A debtor and spouse can file a joint petition in bankruptcy. The debtor has various “duties” which your attorney will help you with. The debtor’s most important “duty” is simply to be honest and cooperative throughout the process.
Creditor: the person or business which has a claim against a debtor. That claim is often simply for an amount of money owed on a debt, but can also include obligations on a contract or for an injury that are not of a specific amount. Creditors can be involved in the bankruptcy process in lots of ways, but often choose not to be. They tend to be more involved if they have collateral securing their claim, or have some personal axe to grind (such as ex-spouses and ex-business partners).
Bankruptcy Clerk: the person, and all of his or her employees, who handle the clerical aspects of the bankruptcy court. These people accept your case for filing, maintain your bankruptcy file, and handle most of the paperwork having to do with your bankruptcy case. Much of this “paperwork” now occurs electronically—including the filing of your petition and other documents. So you will not likely have anything directly to do with the clerk’s office.
Bankruptcy Judge: the person who is ultimately in charge of your case. Bankruptcy judges are appointed to terms of 14 years. They are “judicial officers of the United States district court,” not full federal judges. In most straightforward Chapter 7 and 13 cases, you will not have any occasion to meet the bankruptcy judge assigned to your case. But if there is any significant dispute with a creditor or anyone else, the judge will likely be the person resolving that dispute.
U.S. Trustee: The enforcer in the bankruptcy system. You will seldom hear from the U.S. Trustee, but if you do it’s not usually good news. As described on its website:
The United States Trustee Program is a component of the Department of Justice that seeks to promote the efficiency and protect the integrity of the Federal bankruptcy system. To further the public interest in the just, speedy and economical resolution of cases filed under the Bankruptcy Code, the Program monitors the conduct of bankruptcy parties and private estate trustees, oversees related administrative functions, and acts to ensure compliance with applicable laws and procedures. It also identifies and helps investigate bankruptcy fraud and abuse in coordination with United States Attorneys, the Federal Bureau of Investigation, and other law enforcement agencies.
Chapter 7 Trustee: the person in charge of determining if you have assets which are not exempt (protected), and presides at the so-called “meeting of creditors.” Your trustee is assigned to your case by the U.S. Trustee from a panel of local Chapter 7 trustees, and your attorney cannot influence who becomes your trustee.
Chapter 13 Trustee: the person assigned to oversee your Chapter 13 case. Unlike Chapter 7 trustees, there is usually a single Chapter 13 trustee, with a staff of assistants, assigned to all the Chapter 13 cases filed in any particular area. He or she reviews your Chapter 13 Plan and other documents, presides at your “meeting of creditors,” raises objections to your Plan before the bankruptcy court if appropriate. Then once the Plan is approved, the trustee receives your Plan payments and distributes them to the creditors as specified in the Plan, files motions at court if you are not complying with the Plan, and, finally, tells the court when you have successfully completed your plan obligations.
The Top Reasons Why People File For Bankruptcy
A staggering majority of bankruptcies are due to medical expenses. Unfortunately, the majority of those that declare bankruptcy due to medical expenses have insurance. Rare or serious diseases can cause devastating financial damage. Often people are required to wipe out savings accounts, home equity, and retirement accounts just to meet minimum payments. Unexpected medical expenses are hard to plan for. Ensure you have adequate insurance and understand the policy limitations and coverage.
Another top reason is the loss of a job, especially when the person who was fired is the main provider for their family. If a family lacks an adequate emergency fund, bills begin to pile up and the results can be disastrous. Try to put as much away as possible into an emergency fund until you have at least 3-6 months of living expenses saved.
Credit Card Debt
We know that sometimes people just make financial mistakes. Living above their means, making hasty purchasing decisions, or perhaps just not fully paying attention to their monthly purchases. Credit card debt can often spiral out of control quickly. Minimum payments are made but interest keeps accruing. Soon a $50 purchase is now $150 due to interest and late fees. While debt consolidation can help, sometimes bankruptcy is the only way to reach a better financial future.
The Chapters of Bankruptcy
When you are considering filing for bankruptcy, there are many different options available. When you meet with an experienced attorney, you will discuss your particular circumstances. Based on the details of your case, you will want to file under a certain chapter.
The different bankruptcy options are organized into different “Chapters” based on where each is found in the U.S. Bankruptcy Code. Chapters 7 and 13 are overwhelmingly the ones used by people with consumer and small business debt, so those are likely the ones you will want to focus on. However, if you are a farmer, rancher, or fisherman, Chapter 12 may be right for you. Chapter 11 can be used by people with a large amount of consumer and/or business debt, but is mostly for corporations. Chapter 9 is for city, county, and other governmental bankruptcies.
Chapter 7: often called “straight bankruptcy”. It discharges (legally writes-off) most debts, while usually providing options for dealing with secured debts (those with collateral such as a house or a car). A Chapter 7 case can be filed by individuals, married couples, corporations, partnerships and other business entities. Consumer cases are usually completed in about three months.
Chapter 13: a 3-to-5-year consumer payment plan, formally called “adjustment of debts of an individual with regular income”. It is important to note that not all debts have to be paid back in Chapter 13 – many (or all) unsecured debts can be discharged just as in a Chapter 7 case. The Chapter 13 case has many advantages not provided by Chapter 7.
Chapter 9: a restructuring of debts of a city, county, or other subdivision of a state. Very few are filed—during the last 30 years or so of this Chapter’s existence, between only 1 to 18 cases have been filed per year.
Chapter 11: a “reorganization” of debts. Usually used by corporations and other business entities. But can be filed by individuals, generally when their debts exceed the debt limits for filing Chapter 13.
Chapter 12: a specialized type of bankruptcy designed for family farmers, ranchers, dairy owners, poultry and livestock producers, as well as family fishermen. It helps save the debtor’s farm and business by allowing him or her to reorganize the finances of the farm, ranch, etc., by reducing and restructuring its debt.
Is Filing for Bankruptcy Right for You?
Making the choice to file for bankruptcy is not an easy one. It takes a lot of thought and planning in order to determine if bankruptcy is right for your situation. There are several reasons why people choose bankruptcy and there are important things to consider. Here are a few things that you should take into account when deciding whether to file for bankruptcy.
Not just anyone can file for bankruptcy. You must be eligible for filing. This is determined by your debt, type of debt, income, your ability to pay, and other factors. If you speak with a bankruptcy attorney, they can give you a good idea if you would qualify, and if not, what other alternatives are available for you.
Consider Emotional Impact
Bankruptcy can be incredibly intrusive. Sharing your personal finance troubles can be stressful. With a Chapter 7 bankruptcy, you may have property liquidated or sold. With Chapter 13, there is a long lasting impact of 3-5 years. Bankruptcy can be stressful on a family. However, being in debt can often be worse. Bankruptcy can help you get back on track financially; you just have to weigh the benefits and determine whether it is the best fit for you.
Bankruptcy Forms and Deadlines
In recent years, a number of websites, books, and do-it-yourself kits have appeared, offering advice and guidance in how to file for bankruptcy without an attorney. The problem is, if you haven’t filed for bankruptcy before and aren’t familiar with the bankruptcy code, you could lose valuable property and important rights. Keep in mind, too, that staff and court personnel that work at the bankruptcy court are not allowed to offer advice.
The bankruptcy code is over 500 pages long – are you confident you’ve mastered everything it says to file your bankruptcy with confidence?
As a result, you may provide incorrect information on certain required forms, miss important deadlines, or be unprepared to answer a bankruptcy trustee’s legal questions should problems arise regarding claimed assets or exemptions.
The Importance of Filling Out Forms correctly in Bankruptcy
Every Chapter 7 or Chapter 13 bankruptcy is unique. Consequently, when filling out forms it’s essential that the correct information be provided and specific legal procedures adhered to. In Texas, when you file for bankruptcy you must choose exemptions provided for under federal guidelines or ones provided for under Texas state law. People who file by themselves can confuse these two and, as a result, list exemptions they are not entitled to under one or the other set of guidelines.
Additionally, if you have a second mortgage it’s important to list it correctly on Schedule F. Since people who file by themselves are often unfamiliar with bankruptcy forms and have extremely limited experience with them, they may list a second mortgage as unsecured debt when it should be listed as secured debt under Schedule D.
If creditors show up to your 341 meeting and raise concerns about information you’ve provided, you may not be in a position to respond to their questions and concerns accurately. For example, you need to know what it means to have legal title to assets. Even if you’re only the co-signer on your son’s car or on your elderly mother’s bank account, these could still be considered assets applicable to your bankruptcy filing. Failure to understand this may require that you correct certain forms, resulting in delays and triggering other court procedures.
Completing the Bankruptcy Means Test
If you’re interested in filing for Chapter 7, you’ll need to fill out a 6-page bankruptcy means test calculation. In certain respects, it’s like filling out a tax return, requiring detailed information about assets, your income, expenses, and debts. However, these calculations are often so complex that a majority of bankruptcy attorneys use special software to make sure the calculations are done correctly. If you make a mistake on your Chapter 7 means test calculation, you could have your case dismissed or have your Chapter 7 transferred to a Chapter 13.
Know What NOT To Do Before You File for Bankruptcy
There also are certain things you cannot and should not do before filing for bankruptcy. For example, you can’t max out a credit card under the false assumption that any new debt on it will be discharged through your bankruptcy. Additionally, you can’t transfer property to a family member in an attempt to protect it or have it excluded from your assets. And, if you try to pay back a personal loan from a family member, the bankruptcy trustee may initiate an action to recover the money from them and have it counted among your assets.
What is a “Discharge” in Bankruptcy, and How Does It Work?
The “discharge” is the most important part of bankruptcy. “Discharge” is the legal elimination of your debts.
Bankruptcy gives you immediate and permanent relief from your debts. The automatic stay provides the immediate relief by stopping virtually all creditors from chasing you or your property as of the moment your bankruptcy case is filed. The “discharge” provides the permanent relief by legally preventing your creditors from ever trying to collect their debts.
What is a Bankruptcy Discharge?
Once the court approves your bankruptcy, your creditors are notified and an injunction is issued prohibiting them from trying to enforce certain obligations against you. Consequently, if you filed under Chapter 7 and owe money on a credit card account, the credit card company can’t pursue collection actions against you. Your debt on the account will be wiped out. If you filed under Chapter 13, any house or car arrears (the amount you are behind) and any other debt being handled through the bankruptcy will be rolled into the monthly payments collected by the bankruptcy trustee. As a result, your creditors must accept the amount paid under the terms of your bankruptcy and cannot penalize you for not adhering to the original terms of the loan.
Which of My Debts Might NOT Be Discharged?
Section 523 of the Bankruptcy Code lists a series of possible “exceptions to discharge,” including:
- Most but not all taxes
- Debts that were incurred through fraud or misrepresentation, including recent cash advances and “luxury” purchases
- Debts which were not listed on your bankruptcy schedules on time
- Money owed because of alleged embezzlement, larceny, or through other kinds of theft or fraud in a fiduciary relationship
- Child and spousal support
- Claims against you for intentional injury to another person or their property
- Most but not absolutely all student loans
- Claims against you for allegedly causing injury or death to someone by driving while intoxicated (also applies to boating and flying)
What a Discharge Isn’t
A discharge prevents creditors from taking collection actions against you, the person who files for bankruptcy. However, it does not in and of itself wipe out a debt. As such, if there is another person on any of the accounts selected for your bankruptcy, creditors can still pursue legal action against them. For example, if you and your spouse are on a credit card account and only you file for bankruptcy, the credit card company can still pursue collection actions against your spouse. In the case of a car loan, a discharge doesn’t erase the remaining balance you owe on a car unless you surrender the car in the bankruptcy. As such, if you are unable to keep current on your car payments, your creditor can repossess your vehicle.
Will an Employer Be Able to See My Bankruptcy?
If you’re considering filing for bankruptcy, you may be concerned that it will negatively affect your employment. Your employer cannot legally fire you just because you filed for bankruptcy. The law prohibits both government and private employers from terminating your job due to your bankruptcy filing. Recently, attention has been called to the practice of employers pulling credit reports on job candidates as part of a standard background check. Given the troubled economy, many have criticized the practice as unduly prejudicial to the unemployed who may have taken a hit on their credit score due to factors beyond their control. When employers use credit scores to exclude people from consideration for jobs they may be qualified for, it puts them at an even further disadvantage.
As a result, a number of states have passed laws prohibiting the practice or, at the very least, requiring an employer to obtain written permission from a job candidate first before pulling his or her credit history. Further, if the candidate is rejected because of their credit report, a copy of the report and their rights must be sent to them. If a background check was conducted by a third party, the employee has the right to dispute any information believed to be inaccurate.
What Does an Employer See on My Credit Report?
If you give an employer permission to pull your credit report, there are a few things you should be aware of. First, pulling the report will not count as a “credit inquiry” or “credit check” which can negatively affect your credit score. Second, the credit report provided to your employer will not include your credit score. Third, your employer will not be able to see account or credit card numbers on your report but they will see credit card and loan payment histories, credit inquiries, collection actions, and any bankruptcies or liens.
Will My Current Employer find out about My Bankruptcy?
In the vast majority of bankruptcy cases, there is no reason for your employer to find out about your bankruptcy. If, for whatever reason, your employer is one of your creditors, they will be notified eventually as part of your bankruptcy filing.
Most importantly, however, it is against the law for an employer to take action against an employee that has filed for bankruptcy. So, even if your employer somehow finds out that you’ve filed for bankruptcy, under the law they can’t do anything to you because of your bankruptcy alone.
Alternatives to Bankruptcy
If you are considering bankruptcy, whether it is Chapter 7 or Chapter 13, you may have other options. There are some instances when an alternate course of action is the best solution. At Leinart Law Firm, we want you to be as well informed as possible so that you can make the decision that is best for you.
There is a way you may be able to negotiate with your creditors rather than opting for bankruptcy. If you have some assets you are willing to sell or you have some income you can part with, negotiation could buy you some time. In some instances, creditors may be willing to settle with you for a greatly reduced amount. However, you will be required to pay the negotiated amount quickly (usually within 3 months at the most) and, most likely, the negotiated amount will still cost you considerably more than a bankruptcy.
You may have considered getting in touch with a credit counseling agency if you don’t feel comfortable negotiating, or your creditors are proving to be intractable. An agency can help you figure out how to repay your debts while helping strengthen your financial situation. However, this does not provide any relief in the amount owed to creditors, it does not stop the interest from accruing, and creditors can still call you or pursue legal judgments from you at any time.
Many credit counseling agencies provide debt management services. However, there are some disadvantages to taking this approach rather than filing Chapter 13 bankruptcy. While Chapter 13 will protect you from creditor collection actions, debt management will not. Also, in Chapter 13 you have to only pay a portion of your unsecured debt (if any at all) while a debt management program will require you to pay them in full.