Bankruptcy 101 - From What It Is To What Happens At Court

CHAPTER 7 BANKRUPTCY
By Martin Hoffman*

FINAL THOUGHTS UP FRONT

The purpose of the Bankruptcy Law is to give an honest debtor a "fresh start" in life by relieving the debtor of most debts. Often, clients wait too long to consult an attorney and waste exempt assets such as pensions, or mortgage their property in a futile attempt to avoid Bankruptcy. Many attorneys offer free consultations; the reader is encouraged to obtain a comprehensive consultation concerning your rights and remedies.

HOW DID YOU GET INTO THIS POSITION

The most common causes of bankruptcy include medical expenses, loss of a job, accidents/disability, business failure, divorce, and the current foreclosure crisis.

Consumer and commercial bankruptcy filings are on pace to reach 1.5 million or more this year. You are not alone.

WHAT IS BANKRUPTCY

Bankruptcy is the judicial process that allows debtors to discharge (eliminate) or reorganize debt. In many cases, you can discharge all or most of your debt and still keep all or most of your assets.

Bankruptcy cases are handled by the United States Bankruptcy Courts, part of the Federal Court system.

This essay will concentrate on Chapter 7 or ‘liquidating bankruptcies’.
In a Chapter 7 Bankruptcy, the Debtors will discharge all debts permitted to be discharged and keep all exempt property (see below). In a Chapter 13 Bankruptcy, a debtor may reorganize his debt and pay all or a portion of the debt over a period of three to five years.

EXEMPT PROPERTY

Even though you are filing for Bankruptcy, the Law allows you to keep certain assets free from the claims of your creditors. The assets that you are allowed to keep are considered exempt property. The exemptions available to you are decided by Federal Law and/or by the law of your state of residence. Usually, you can keep your home, pension plans, several thousand dollars worth of personal property (such as cars, furniture, bank accounts, jewelry, etc.), many types of insurance benefits, alimony and child support. Often, the exemptions are sufficient to protect all of your property, and nothing will be lost in the bankruptcy proceeding.

DISCHARGEABLE DEBTS

Not all debts are dischargeable in bankruptcy. You will not be able to discharge most tax debts, child support or alimony, most student loans, or to prevent a secured creditor (e.g., home loan, car loan) from foreclosing/repossessing the property that secures the debt. You may, however, be able to reaffirm the debt, which means that you can agree to pay the secured debt despite the bankruptcy in order to keep the secured property.

BEFORE YOU FILE

Your lawyer will ask you to provide certain documents in order to process your case. These ordinarily include a copy of your latest tax return, copies of deeds, mortgages, titles to vehicles, and a copy of your driver’s license and social security card. At some point, before filing a petition, you will also have to produce up to one year of your bank statements and 60 days worth of pay stubs or other verification of your income.

The Bankruptcy law requires you to take credit counseling (education) before you can file for Bankruptcy. This is often done through the Internet, and takes approximately one hour. After filing for Bankruptcy, there is a second, shorter counseling session that is required. Only credit counseling organizations and debtor education course providers that have been approved by the U.S. Trustee Program are permitted to provide counseling.

THE MEANS TEST: ARE YOU ELIGIBLE TO FILE

A ‘means test’ is required under the current law to determine your eligibility to file for bankruptcy under Chapter 7 of the Bankruptcy Code. The test is only applicable to consumer debt; if your debt is primarily business debt, you may not have to pass this test.

The means test is performed by comparing your average income for the past six months (CMI-current monthly income) to the median (average) income for households of the same size in the your State of residence. If your income is less than or equal to the state median income, you "pass" the means test and may file Chapter 7. If your income exceeds the median income, there are additional calculations and deductions that may allow eligibility.

FILING FOR BANKRUPTCY

The filing of a Petition begins the Bankruptcy case. The Petition is a document that sets out (1) what you own, (2) the amount and to whom you owe the debt, and (3) requests Bankruptcy protection and relief. Once the Petition is filed an automatic stay goes into effect- this means that no creditor can take further action against you. All collection efforts, including phone calls and lawsuits such as foreclosures and garnishments (levying on the debtor’s wages) are brought to an immediate halt. A husband and wife ordinarily file a Joint Petition.

THE BANKRUPTCY HEARING

Several weeks after your Bankruptcy petition is filed, you will attend a hearing in the Bankruptcy Court called a 341 hearing (or First Meeting of Creditors). A court appointed official called a ‘Trustee’ conducts the hearing. The hearing itself usually takes only a few moments unless the Trustee finds something unusual or incomplete in your Petition or accompanying documents.

If the value of your property is greater than your available exemptions, the property will be sold and the difference will be distributed to your creditors. You can also elect to pay the difference and keep the property.

The Trustee can try to have your case dismissed if there is evidence of fraud, perjury, or ineligibility.


BANKRUPTCY DISCHARGE

Unless there is litigation involving objections to the discharge, the debtor will usually automatically receive a discharge. The Clerk of the Bankruptcy Court will mail a copy of the order of discharge to all creditors, the U.S. trustee, the trustee in the case, and the trustee's attorney, if any. The debtor and the debtor's attorney also receive copies of the discharge order. Typically, this occurs about four months after the date the debtor files the petition with the clerk of the bankruptcy court.

This essay is intended to make you more informed about your rights and the Law of Bankruptcy and is not a substitute for competent legal advice. Please consult a licensed attorney in your jurisdiction regarding your specific case.


*Martin Hoffman is an attorney licensed to practice in Florida and New York. He is a senior partner at Hoffman, Larin and Agnetti PA, with offices in Miami, Fort Lauderdale, Islamorada and Key West. Mr. Hoffman can be reached at mhoffman@hlalaw.com or at 800-803-5555.