While the members of my firm are not bankruptcy attorneys, we are frequently asked questions about the bankruptcy process. Clients who have made radio loans to shareholders, for example, will often ask if they can continue to make weekly deductions after the shareholder has filed a bankruptcy petition (the answer is “no”), and whether they may take steps to repossess the radio (if it is secured by a promissory note and security agreement, the answer is “yes”). We are also often asked by clients with a judgment against them and/or other financial issues whether bankruptcy is a viable option for them.
In this month’s article of Attorney’s Corner, we’ll go over some of the more frequently asked questions about the bankruptcy process, including the pluses and minuses of filing. This article is intended as a general overview of the consumer bankruptcy process and should not be relied upon as legal advice, or as a complete guide to this highly complex area of law.
Basic Types of Bankruptcy
Individuals generally choose one of two bankruptcy options; liquidation under Chapter 7, or reorganization under Chapter 13. Chapter 7 bankruptcy wipes out most general unsecured debt (e.g. credit card bills, utility bills, medical bills).
Income requirements must be met to file under Chapter 7, and with the exception of certain categories of exempt property, some of your property will be liquidated and used to pay creditors. Each state has its own set of property exemptions that dictate what a debtor may keep, and what he or she must liquidate in bankruptcy.
If you earn too much money to file under Chapter 7, if you have certain types of non-dischargeable debt (such as certain types of taxes), or if you wish to keep property that is not exempt under Chapter 7, filing under Chapter 13 is another option. In a Chapter 13 filing you offer creditors a repayment plan that covers all or part of your debts. If you stick to the terms of the repayment plan (which is generally stretched out over a period of three or more years) and make all the payments, any remaining dischargeable debt is forgiven at the end of the plan. Chapter 13 is useful if you owe non-dischargeable back taxes, have missed car or mortgage payments, are in foreclosure, or want to keep non-exempt property.
Note that there are other chapters of the bankruptcy code that are not covered in this article.
Filing for bankruptcy is neither cheap nor free; a fact that many financially stressed debtors are completely unaware of when they consider filing. Costs include credit counseling fees, Court filing fees and attorney’s fees. Payment plans are available for Court filing fees, and if your income is below 150% of the federal poverty limits, it is possible to apply for a waiver of the fees.
What Happens When a Bankruptcy Petition is Filed?
The first step in the process involves filing a bankruptcy petition and related schedules with the Court. These papers will detail, among other things, your current assets, and how much you owe and to whom. It is important that you provide your bankruptcy attorney with accurate information, particularly with respect to creditors and what you owe them. If a creditor is not listed, the debt owed to that creditor might not be discharged (assuming it is a dischargeable debt).
After the petition has been filed, the Court will issue notices to your creditors informing them that you have filed a bankruptcy petition, and that the Court has issued an “automatic stay.” The automatic stay stops most (but not all) creditors from seeking to collect from you during the pendency of the bankruptcy proceedings. It will stop, for example, a base from collecting on a radio loan, or a utility company from shutting off service due to non-payment, and even many lawsuits at least temporarily. It will not, however, stop things like tax enforcement proceedings, child and spousal support proceedings or criminal proceedings.
Once the automatic stay is in place and creditors are notified of the bankruptcy, the Court assigns a trustee to administer the case. The trustee has numerous duties, including reviewing the paperwork you filed in connection with your petition, distributing assets to creditors, and in a Chapter 7 filing selling any non-exempt assets you may own and distributing them to creditors. The trustee also presides over a meeting of creditors, where those you owe money to are entitled to attend and ask you questions (though most don’t bother attending).
Are My Woes Over Once I File My Petition?
No. First off, it’s important to note that there’s no guarantee that you’ll get a discharge, and/or if you file under Chapter 13 that your repayment plan will be approved; it’s up to the Court based upon the petition and other documentation you’ve filed. Bankruptcy cases can and do get dismissed if there are, for example, false statements or misrepresentations in the papers you’ve filed, if your paperwork is wrong, if certain fees are not paid, if your income is too high, if you don’t attend the meeting of creditors, and/or if you fail to attend mandatory credit counseling sessions.
Second, as I mentioned above, in a Chapter 13 case you agree to pay off most of your debts pursuant to a reorganization plan. If those payments are not made, you won’t get a discharge. While a Chapter 7 case does not involve making payments and instead contemplates wiping the slate clean, one can never get an entirely clean slate as certain debts are simply not dischargeable. These include secured loans (e.g. mortgage, car loans), most taxes (though some income-based taxes can be discharged under certain circumstances), tax liens and domestic support obligations. Judgments obtained against you for non-dischargeable debts and obligations are likewise non-dischargeable.
Third, there are other things that can trip up a bankruptcy filing. Bankruptcy Courts frown upon “preferential transfers,” in which certain creditors who are otherwise on equal footing are given preferential treatment over other similarly situated creditors. Were you to, for example, pay off a non-secured loan to your brother-in-law at the expense of other non-secured creditors just before filing, the Court would likely direct the trustee to sue him to get the money back, and red flag your petition for further scrutiny. As another example, if you sold your fully paid-off 2017 Mercedes (worth $45,000) to your brother-in-law for $10,000 the week before you filed, your brother-in-law would likely be sued in order to void the transaction and get the car back, so it could be sold and the money used to pay your debts. Even paying off a perfectly legitimate debt owed to a third party (like your cable provider) can be regarded as preferential in the absence of a valid explanation as to why that particular creditor was paid and others weren’t.
Another thing that can derail a bankruptcy filing (and usually result in its dismissal) are fraudulent transactions. For example, if you sold the Mercedes mentioned above to your brother-in-law for $10, the transaction would almost certainly be viewed as an attempt to defraud other creditors, and result in dismissal of your bankruptcy petition. Likewise, were to you incur significant debts prior to filing bankruptcy (for example, maxing out your credit cards in the weeks or months before filing), your bankruptcy filing will likely be rejected. You should expect any major transactions and/or transfers of assets that occurred during the year prior to your bankruptcy filing to be closely scrutinized.
Are My Woes Over Once I Obtain a Discharge?
If you successfully complete the bankruptcy process, your woes are over to the extent that you will have stopped creditors from hounding you for payment, and you will have obtained a discharge of many though not all of your debts (in a Chapter 7) or arranged to pay back most of your debts in an orderly fashion (in a Chapter 13).
What about your credit? Filing for bankruptcy will almost certainly make it harder to obtain credit for a number of years (usually 5-7), as it signals to prospective creditors that you have a track record of being unable to repay what you owe. Of course, if your credit is already damaged filing for bankruptcy probably won’t make it that much worse. In fact, post-bankruptcy you may find yourself in a better position to timely pay your financial obligations and rebuild your credit.
In conclusion, there are many considerations that need to be made when one considers filing bankruptcy, and as I mentioned at the beginning of this article the bankruptcy laws are highly complex. While the process has significant pluses for those in financial distress (the automatic stay, possible discharge of debt), it also carries with it significant minuses as well (not the least of which is the significant cost of filing). If you are thinking about declaring bankruptcy, we recommend that you consult with experienced bankruptcy counsel to see if doing so would be in your best interests.