The purpose of this page is
to provide an overview of the bankruptcy process. The information
contained herein will help you decide whether to file bankruptcy or not. If
you do file
bankruptcy, this overview will help you understand the process.
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WHAT IS BANKRUPTCY?
Bankruptcy is a proceeding
under federal law whereby you are granted partial or complete relief
from the payment of your debts. This relief is provided in the form of an
“automatic stay” issued
automatically and immediately upon the filing of the bankruptcy petition
which stops all creditor
collection activities. The Bankruptcy Court enters an order at the end of
the case relieving you
from responsibility for paying certain debts. This final order is called
the "discharge."
WHAT TYPES OF BANKRUPTCY
ARE THERE?
For individual debtors the
two types of bankruptcy proceedings available are Chapter 7 and
Chapter 13. Explanations of Chapter 7 and Chapter 13 are set out below.
CHAPTER 7:
Chapter 7 is often referred
to as "straight bankruptcy". In a Chapter 7 proceeding you are
relieved from the responsibility to pay your debts ("discharged"), with
certain exceptions. In
exchange for having your debts wiped out, you must give up any property that
is not protected
or “exempted” from the chapter 7 trustee. The property that you exempt is
free from the claims
of all your pre-bankruptcy creditors. If you have nonexempt assets that are
worth more than
any loans on the property, the trustee can sell them to pay on your debts.
In more than 90% of
the cases that we file, all our client's property is exempt, so the client
gives up no property. Such cases are called "no asset" cases because no assets are turned over to
the trustee. More detailed explanations of the exemptions and "exceptions to discharge"
are set out below.
CHAPTER 13:
Chapter 13 is often
referred to as a "wage earner plan." The concept behind a Chapter 13
bankruptcy is that you and your spouse, if any, make sufficient income to
pay all of your current
living expenses (e.g., rent, food, utilities, transportation, clothes, etc.)
and have some money left
over to apply to your debts. You submit a Chapter 13 Plan in which you set
out a budget
detailing your take-home pay and monthly living expenses. You pay the excess
income to the
bankruptcy trustee who then pays the money to your creditors. The plan
lasts for at least 36
months unless your debts are paid in full in a shorter time. The payment
period may be
extended beyond 36 months (but not over 60 months), if you need the extra
months to pay
enough on your debts to have the plan approved by the Court. At the end of
the chapter 13
plan, any amounts still owing on your unsecured debts are forgiven. In
certain cases, chapter
13 allows us to lower the amount of your loans or give you a lower interest
rate on certain
loans. If you have a secured loan like a mortgage, deed of trust, or car
loan that you are behind
on, chapter 13 allows you to catch up the amount you are behind over time.
Chapter 7 does
not offer this option.
Some attorneys have TV or Radio ads advertising “Debt consolidation under
federal law,”
without clearly stating that the “federal law” is bankruptcy law. There is
only one way in which
to get relief from debt under federal law and that is bankruptcy.
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WHAT CAN BANKRUPTCY DO FOR
ME?
Bankruptcy may make it
possible for you to:
1. Eliminate the legal obligation to pay most or all of your debts.
This is called a
“discharge” of debts. It is designed to give you a fresh financial start.
2. Stop foreclosure on your house or mobile home and allow you an
opportunity to catch up
on missed payments. (Bankruptcy does not, however, automatically eliminate
mortgages and
other liens on your property without payment.)
3. Prevent repossession of a car or other property, or force the
creditor to return property
even after it has been repossessed.
4. Stop wage garnishment, debt collection harassment, and similar
creditor actions to
collect a debt.
5. Restore or prevent termination of utility service.
6. Allow you to challenge the claims of creditors who have committed
fraud or who are
otherwise trying to collect more than you really owe.
WHAT BANKRUPTCY CAN NOT DO:
Bankruptcy can not,
however, cure every financial problem. Nor is it the right step for every
individual. In bankruptcy, it is usually not possible to:
1. Eliminate certain rights of “secured” creditors. A “secured”
creditor has taken a
mortgage or other lien on property as collateral for the loan. Common
examples are car loans
and home mortgages. You can force secured creditors to take payments over
time in the
bankruptcy process and bankruptcy can eliminate your obligation to pay any
additional money if
your property is taken. Nevertheless, you generally can not keep the
collateral unless you
continue to pay the debt.
2. Discharge types of debts singled out by the bankruptcy law for
special treatment, such
as child support, alimony, certain other debts related to divorce, most
student loans, court
restitution orders, criminal fines, and some taxes.
3. Protect cosigners on your debts. When a relative or friend has
co-signed a loan, and the
consumer discharges the loan in bankruptcy, the cosigner may still have to
repay all or part of
the loan.
4. Discharge debts that arise after bankruptcy has been filed.
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WHAT HAPPENS TO MY PROPERTY
IN A CHAPTER 7?
In Chapter 7 cases your
right to keep your property is controlled by the answer to two
questions. The first question is "Does a secured creditor have the right to
take the property
because I am not paying on the debt?" The second question is, "Can I claim
the property as
exempt?" If the answer to the first question is "no", and the answer to the
second, "yes", then
you can keep the property. The next two sections will help you answer these
questions.
WHAT HAPPENS IF A CREDITOR
HAS COLLATERAL SECURING THE PAYMENT OF
DEBT?
A secured debt is simply a
debt in which the creditor has a lien on some item of property to
"secure" your payment of the debt. The most common types of secured debts
are a mortgage
on a home and a lien on a car. Before bankruptcy a secured creditor has two
avenues of
recovering its debt. First, it can recover from you on your personal
liability. Secondly, it can
recover by repossessing and selling the collateral. Bankruptcy abolishes
the creditor's right to
recover from you personally, but does not abolish the creditor's right to
take and sell the
collateral if you fail to make your payments. Treatment of secured debts in
chapter 13 is
different from their treatment in chapter 7.
CHAPTER 7 OPTIONS FOR
SECURED DEBTS:
In Chapter 7 cases, with
two exceptions, explained later, you have the following four choices:
If your payments are current on the date that you file the chapter 7, and
your equity in the
collateral is covered under the exemptions, you may keep the property so
long as you continue
to make the monthly payments and comply with the terms of your contract, we
call this the “be
current and stay current” method. The advantage is that you cannot be held
responsible for the
debt if you can’t make the payments current sometime in the future.
If your payments are not current, you can try to negotiate a "reaffirmation
agreement" with the
creditor that allows you to catch up your payments. (There are two
drawbacks to this option.
First you cannot be sure that you and the creditor will be able to agree
upon terms that allow
you to catch up your payments. Secondly, the reaffirmation agreement
reinstates your personal
liability. Therefore, if possible, at the time of filing, you should have
the payments current on
any debts secured by property you want to keep.) If your payments on a
mobile home loan, a
mortgage, or a car loan are substantially behind or if the creditor has
threatened to repossess
or foreclose, you will need to file Chapter 13 to save the property.
Redeem the property by paying the creditor the value of the collateral. For
example, if you owe
the ABC Furniture Company $2,000.00 for a sofa that is now worth only
$500.00, you can pay
ABC Furniture $500.00 and keep the sofa.
Give the property back to the creditor (“surrender” the property) and have
the debt discharged.
Exceptions:
There are two exceptions in which you can keep the property in chapter 7
even if you don't
maintain your payments. These exceptions are:
1. When a creditor has a lien on exempt property as a result of a
judgment against you; and
2. When a creditor has a non-possessory, non-purchase-money security
interest in exempt
personal household items (Televisions, furniture, clothes, jewelry), tools
of the trade, or
professionally prescribed health aids. "Non-possessory" simply means the
creditor is not
physically holding the property. "Non-purchase-money" means that the
creditor neither sold
you the collateral, nor lent you the money with which to buy it. The most
common instance in
which a creditor obtains a non-possessory, non-purchase-money security
interest in household
items is when someone borrows money from a finance company and puts up
certain household
items as collateral for payment of the loan.
CHAPTER 13 TREATMENT OF
SECURED DEBTS:
In Chapter 13 cases,
secured claims are handled in one of two basic ways. The first, which we
call the "cure and maintain" method, is where past due payments on secured
debts are paid
from your monthly bankruptcy plan payments ("through the plan"), and future
payments
(payments that come due after filing bankruptcy) are paid directly to the
creditor ("outside the
plan"). When the bankruptcy plan has terminated, you remain obligated to
make any payments
remaining due on the secured debts.
We call the other method the "strip-down/stretch-out/cram-down" method.
This method is used
either when the collateral is worth less than the amount of the debt, or
when the number of
payments left on a debt is less than the length of the plan. The following
examples illustrate the
"strip-down/stretch-out/cram-down" method.
For example if you have a car loan with 30 payments of $233.00. The
interest rate is 12.25%
and the pay-off on the loan is $6,000.00. The car has high mileage and is
worth only
$4,000.00. You can strip-down the creditor claim to the value of its
collateral ($4,000.00),
stretch-out the payments to 36 months and pay the present value of the claim
at a reduced
interest rate ("cram-down "). Such that the monthly car payments through
the plan might be
$127.20.
The ability to "refinance" your secured loans through this second method
permitted by Chapter
13 bankruptcy lets you reduce the monthly payments and is sometimes the only
way to have
enough cash flow to keep your property.
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WHAT PROPERTY IS EXEMPT?
Exempt property is simply
property that you can keep when you file Chapter 7 bankruptcy. The
basic purpose of bankruptcy is to allow a person who has become overburdened
with debt to
free himself of that burden and get a " fresh start." The law allows you to
keep property. The
exemptions are broken down into categories. For Texas residents the
exemptions per person
are as follows:
Residence - You may keep your homestead up to 1 acre in town or 100 acres
rural.
Motor Vehicles - One vehicle per licensed driver is exempt.
Personal Property - up to $30,000.00 worth of personal property is exempt.
Pets - Household pets may be claimed as exempt property.
Insurance - Insurance amounts to be paid are exempt as well as life
insurance's present value.
Tools of Trade - Tools and equipment used in a trade are exempt.
Wages - Earned but unpaid wages and unpaid commissions (up to 25% of
aggregate cap).
Note - Wages exemption does not apply to self-employed debtors.
Retirement Plans - Funds in a qualified retirement plan are exempt.
Other - These are just a few broad categories of exemptions. Many other
exemptions may
apply to your unique situation.
Under certain circumstances, personal property purchased less than 90 days
prior to filing
bankruptcy cannot be claimed as exempt. Therefore, if you plan to file
bankruptcy do not
purchase any property other than consumable goods. If you have purchased
property within 90
days you need to discuss the details with us.
*If your property exceeds the amount of exemptions, and you are not willing
to risk losing it, you
need to concentrate on the Chapter 13 bankruptcy.
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WHAT DEBTS ARE NOT
DISCHARGED?
As explained earlier, the
basic purpose of bankruptcy is to obtain a discharge of your debts.
However, some specific types of debts are not discharged (i.e., the
bankruptcy does not relieve
you of your obligation to pay). Those debts are as follows:
A. In a Chapter 7 case:
Any debt not listed in the schedule of creditors. Therefore, it is
important to list all your
creditors.
Certain taxes, including funds borrowed with which to pay such taxes.
A claim based upon money, property, services, or credit obtained by fraud or
false pretenses (e.
g., a false financial statement used to obtain credit or charges incurred on
a credit card when
you had no intent to pay for the charge, will be considered this type of
debt).
Consumer debt for more than $1,000.00 for luxury goods or services to a
single creditor
incurred within 60 days of filing the petition.
Cash advances of more than $1,000.00 under an open end credit plan made
within 60 days of
filing bankruptcy.
Alimony and child support, and certain other exceptions other marital debts.
Damages for willful or malicious injury.
Certain governmental penalties.
Educational loans, except in cases of prolonged and severe hardship.
However, undue
hardship is a very difficult standard to meet.
Any debt for death or personal injury caused by the unlawful operation of a
motor vehicle while
intoxicated.
B. In a Chapter 13 case:
Any valid debt not provided for in the Chapter 13 plan.
Alimony and child support.
Educational loans, except in cases of prolonged and severe hardship.
However, undue
hardship is a very difficult standard to meet.
Any debt for death or personal injury caused by the unlawful operation of a
motor vehicle while
intoxicated.
Restitution or criminal fine included in a sentence upon conviction of a
crime.
Secured debts not paid off prior to last plan payment.
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IS IT POSSIBLE TO BE DENIED
A DISCHARGE OF ALL MY DEBTS?
You can be denied a
bankruptcy discharge if the Court determines that you committed any of
the following acts:
You have been granted a discharge in a prior bankruptcy filed less than six
years ago.
With the intent to delay or defraud a creditor or the bankruptcy court, you
transfer, destroy, or
conceal property within one year prior to filing bankruptcy or at any time
after filing bankruptcy.
Without justification, you conceal, destroy, falsify, or fail to keep books,
records and documents
related to your financial condition and business transactions.
You knowingly and fraudulently in the bankruptcy proceeding:
1. make a false oath, claim or account (i.e., lie about your property,
debts, or financial affairs);
2. give or receive money for taking certain action or agreeing not to take
certain action;
3. withhold books, records, documents or other records from the bankruptcy
court;
4. You fail to explain satisfactorily any loss of assets or deficiency of
assets to meet your
liabilities;
5. You refuse to obey an order of the bankruptcy court, or refuse to answer
a material question.
The lesson to be learned is that if you are open and honest with your
creditors and the
bankruptcy court, you will be granted your discharge
WHAT EFFECT WILL BANKRUPTCY
HAVE ON SOMEONE WHO COSIGNED A LOAN
WITH ME?
Another person who is
jointly liable with you on a debt is known as a "co-debtor". When you file
bankruptcy the co-debtor remains liable on the debt (unless the co-debtor is
your spouse and
you file a joint petition). The mere fact that you file bankruptcy will not
negatively impact your
co-debtor's credit. Of course, if the co-debtor fails to maintain the
payments on the debt, the
failure to pay the debt will likely be reported by the creditor to the
credit bureau.
In a Chapter 7 case the creditor is free to pursue collection from the
co-debtor immediately. In a
Chapter 13 case the creditor may be prevented from collecting from the
co-debtor during the
term of the Chapter 13 Plan. If you file a Chapter 13 and the status of a
co-debtor is important
to you, we will need to discuss the circumstances of the debt in order for
me to advise you of
the likely impact on the co debtor. It may be possible to put the debt in a
special class to be
paid in full to protect the co-debtor from collection activities.
WHAT SHOULD I DO IF I OWE
MONEY TO MY BANK OR CREDIT UNION?
If the bank or credit union
at which you have checking or savings accounts is also a creditor
(i.e. you have a loan, credit card account, or overdraft protection with the
bank), then it is
possible that the bank will put an "administrative freeze" on the funds in
the account on the date
the bankruptcy petition is filed. Such an administrative freeze will cause
checks that have not
cleared the bank to bounce. Therefore, you should open a new bank account
with a bank
whom you do not owe any money prior to filing bankruptcy and cease checking
activity in the
old account several weeks prior to filing the petition. It is not necessary
that you close the old -
account, but you should remove all but a few dollars from the account.
If your paycheck is automatically deposited to the account, you do not
necessarily have to
change the deposit. Funds that are deposited into the account after you
file the bankruptcy
cannot be frozen.
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SHOULD I FILE A CHAPTER 13
OR A CHAPTER 7 BANKRUPTCY?
You must ultimately decide
for yourself whether filing bankruptcy is the proper action to take,
and if so, which Chapter is better for you.
Under the new bankruptcy law, if your income is above the median income for
a family the
size of your household in Texas, you may have to file a chapter 13 case (the
median family
income for a family of 4 in Texas is approximately $59,369). A
higher-income
consumer must fill out “means test” forms requiring detailed information
about income and
expenses. If, under standards in the law, the consumer is found to have a
certain amount left
over that could be paid to unsecured creditors, the bankruptcy court may
decide that the
consumer can not file a chapter 7 case, unless there are special extenuating
circumstances.
Some of the factors to consider are as follows:
If you are not making more money than you need for your current living
expenses, Chapter 13 is
not a realistic option.
Chapter 7 has the advantage of wiping the slate clean and enabling you to
embark on your
"fresh start" immediately; whereas with Chapter 13 you will be making
payments for three (3)
years or more.
If you have a particular asset that is above the allowable exemption that
you want to keep, then
Chapter 13 may be the only alternative.
If you are trying to ward off a repossession or a foreclosure, Chapter 13
may be the only way to
do so.
If your debts are primarily consumer debts, and if your budget reveals that
after filing
bankruptcy your income substantially exceeds your expenses, it is possible
that a Chapter 7
bankruptcy would be dismissed. In such a case Chapter 13 is the viable
alternative.
You will not be allowed to make contributions to 401K or other retirement
plans while you are in
Chapter 13(The exception is required State Employee retirement).
WHAT DO ATTORNEYS NORMALLY
CHARGE AND WHEN MUST IT BE PAID?
Our base attorney fee for
the normal "consumer" Chapter 7 bankruptcy is $1,200.00. The exact
amount depends upon the complexity of the case. We will quote a fee after
we have received
the completed Chapter 7 information forms. If it becomes necessary for me
to render non-routine services to you beyond the 341 creditors meeting, we shall also be
compensated for
those services.
In a Chapter 13 consumer case the base fee, paid prior to filing, is usually
$950.00. The
balance of the fee (which varies from case to case and is approved by the
Court) is paid as an
administrative claim out of the money you pay into the Chapter 13 Plan.
In all cases there is a filing fee in addition to our fee, which is charged
by the court. The filing
fee in chapter 7 is $299.00; in chapter 13 is $274.00.
In Chapter 7 cases we require that the attorney fee and the filing fee be
paid in full before the
bankruptcy petition is filed. We will prepare your bankruptcy petition and
schedules after being
paid a $300.00, nonrefundable retainer toward your attorneys fees. We will
accept payments in
installments, but the full amount must be paid before the bankruptcy
petition is filed.
In Chapter 13 cases the filing fee and the base attorney fee are paid before
the petition is filed.
We require that the $300.0, nonrefundable retainer, be paid before we will
process the
paperwork necessary to file.
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WHEN WILL MY CREDITORS STOP
BOTHERING ME?
When you file a bankruptcy,
the court sends out an order to all the creditors listed in your
petition forbidding them from taking any action to collect the debt. They
are not to call you at
home or at work. However, up to the time that you file, creditors are free
to pursue lawful
collection efforts. The filing takes place when the bankruptcy petition is
received by the
Bankruptcy Clerk. The petition is sent to the Bankruptcy Clerk after you
come to our office and
review and sign the bankruptcy petition and schedules, which we prepare from
the information
forms that you complete.
If you are concerned about relief between now and filing the bankruptcy, our
experience has
been that when our clients have informed unsecured creditors that they have
retained us to file
bankruptcy, the creditors have stopped the harassing telephone calls.
However, do not tell
creditors that you have retained our services until you have paid us the
$300.00 nonrefundable
retainer.
Furthermore, do not tell a bank in which you have funds or deposit, because
the bank may take
funds from your account to pay your debt to it. If you owe a debt to a
creditor to whom you do
your checking or savings with, that bank has the option to freeze your
account upon receiving
notice of the filing of the bankruptcy petition.
HOW DO I GO ABOUT FILING
BANKRUPTCY?
If you know at this point
that you want to file, complete the forms available on the
client login
page.
If you cannot view the forms, contact our office to make arrangements to
obtain them.
We need you to provide all the information requested on these forms so that
we can prepare
the bankruptcy petition and schedules that are filed with the Bankruptcy
Court. Every blank
should be filed in. If the answer is no or none put "no" or "none". If the
question is not
applicable to you put "N/A".
If you have questions about how to complete the forms contact our office and
we will assist
you. If you need to consult further before deciding what to do, contact our
office to set up an
appointment.
After you have returned the completed forms and paid the non-refundable
retainer, we will
prepare the documents to be filed with the bankruptcy court. We often find
it necessary to
contact clients to clarify the information provided. Be sure to give us
telephone numbers where
we can reach you. After the documents are prepared an appointment will be
made for you to
review and sign the documents prior to filing them
WHAT EFFECT WILL BANKRUPTCY
HAVE ON MY CREDIT?
There
is no absolute answer to this question. Any blanket statement such as, "If
you file
bankruptcy, you can't get credit for seven years," is not correct. When you
apply for credit,
each creditor makes its own decision as whether to extend credit or not.
The fact that you have
filed bankruptcy is obviously a factor that a creditor is going to consider
along with other facts
such as your income and the value of any security collateral.
Many creditors rely upon credit ratings from credit bureaus in making a
decision to extend
credit. The Fair Credit Reporting Act in general requires a credit bureau
to delete adverse
information from your file after seven (7) years. However, in the case of a
Chapter 7, the
information remains on file for ten (10) years after you file the petition.
A Chapter 13 bankruptcy
or remains on file for seven (7) years.
Some relative statements can be made:
We used to believe that a successfully completed Chapter 13 proceeding has a
smaller
negative impact on your credit than a Chapter 7. It remains in your credit
file for three years
less, and your creditors receive some payment on their debts. However, we
now believe
Chapter 7 may have less negative impact. In a chapter 13, under our local
bankruptcy rules,
you cannot incur any debt in excess of $5000.00 without the approval of the
court. Therefore,
during the 3-5 years of the chapter 13 plan you can do little to reestablish
your credit. By
contrast a chapter 7 is over in 3 to 4 months, and you can begin taking
steps to reestablish
credit immediately. You cannot get a second discharge on any new debts in a
chapter 7
bankruptcy case filed within 6 years of the first case. Strangely enough,
this fact, in
combination with the fact that most or all of your debts have been erased,
make you a good
credit risk in the eyes of some creditors.
In the long run a bankruptcy may improve your ability to obtain credit. If
you are in a situation in
which you have accumulated more debts than you will ever be able to pay,
then you probably
may never be able to obtain credit again absent some sort of relief. By
wiping the slate clean
with bankruptcy, you put yourself in the position to eventually re-establish
your credit.
Our personal opinion is that too many clients are concerned with their
ability to incur more debt
in the future, when their focus should be on the best way to deal with their
existing debts. Our
advise is to get your current debts under control before concerning yourself
with more credit.
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CONFERENCE WITH AN ATTORNEY CALL (713) 961-3555
