Is Bankruptcy for me?
Overview of Bankruptcy Law
Bankruptcy law allows a debtor, who is unable to pay his creditors, to resolve his debts with his creditors according to their means. This supervised division also allows the interests of all creditors to be treated with some measure of equality. Certain bankruptcy proceedings allow a debtor to stay in business and use revenue generated to resolve his or her debts. An additional purpose of bankruptcy law is to allow certain debtors to free themselves (to be discharged) of the financial obligations they have accumulated, after their assets are distributed, even if their debts have not been paid in full.
There are two basic types of Bankruptcy proceedings. A filing under Chapter 7 is called liquidation. It is the most common type of bankruptcy proceeding. Liquidation involves the appointment of a trustee who collects the non-exempt property of the debtor, sells it and distributes the proceeds to the creditors.
Bankruptcy proceedings under Chapters 11, 12, and 13 involves the rehabilitation of the debtor to allow him or her to use future earnings to pay off creditors.
Under Chapter 7, 12, 13, and some Chapter 11 proceedings, a plan is created by which the debtor can make affordable payment to his creditors.
Advanatages of Bankruptcy
Q. What are the advantages of bankruptcy?
A. Once debts are discharged through the bankruptcy court they're gone forever. With the other options you will most likely have to pay some money even if it is pennies on the dollar.
Q. Is that better or worse for my credit?
A. Bankruptcy ranks as the worst thing possible on your credit report, but once it's over you may start to rebuild credit immediately.
Q. How long will the case take?
A. Chapter 7 cases may be filed in days and finished in 4-8 months most times. Chapter 13 cases may take many months until a plan gets approved then three to five years for the plan to be completed. I've seen chapter 11 cases take years for plan approval and even more years to carry it out.
Q. How long until my credit gets back to the point where I might hope to get a regular credit card or mortgage?
A. Rebuilding credit depends on how aggressively you try to get back on track, but don't figure less than 1-3 years. Remember, you can always get a secured credit card or a mortgage with a low loan to value (LTV) and high interest rate, sometimes even still in the middle of a bankruptcy.
Q. How does bankruptcy compare time-wise to the other options?
A. Timing ends up so dependent on individual creditors that comparisons would not be accurate. I think the best advice here is what you do to prove your new credit-worthiness after a problem will be as or more important than if the problem resulted in a workout or a bankruptcy for a solution.
Q. What type of debtor is best served by a Chapter 7?
A. Someone with no property, few enough assets that they may all be exempted, large consumer debt from national creditors and no non-dischargeable tax, student loans or court obligations.
Q. Whats unique about national consumer debt creditors?
A. Some of them have a policy that if they can't recover close to 50 cents on the dollar they would rather the debtor file a Chapter 7 and get nothing. Sometimes a debt workout settlement of even 30 cents on the dollar can be to much to pay even if the payments can be stretched over a term of years. When the debtor can not afford any of the settlement options bankruptcy may be the best way to go.
Q. Exactly which taxes, student loans or court obligations are non-dischargable?
A. Some federal taxes and student loans except in special cases where payment would create an undue hardship, alimony, child support and criminal restitution. For the exact list look at the federal laws for non-dischargable items.
Q. Which option has the fewest out of pocket costs?
A. Of course, doing nothing ranks first here. For just consumer debt a Chapter 7 remains the least expensive, which deals head on with the issues in most of the cases. There is no legal time negotiating with creditors and no money used to pay them off. Workouts come next followed by Chapter 13 and Chapter 11. By definition, paying creditors in full should rank highest.
Q. Wouldn't a Chapter 7 still be cheaper if the debtor had secured assets?
A. There would be less out of pocket costs, but remember when you file a Chapter 7 you turn over all non-exempted assets to the trustee. This means you have lost control of their future and may lose them completely.
Q. Can you pick and choose which assets to put into bankruptcy?
A. Only based on legal ownership. It works like this:If you control many partnerships, trusts and corporations, any one may file bankruptcy by itself without directly affecting the others. If you file personally, every asset you own must be included in the filing. From there you elect to exempt some.
Q. What happens to the assets I exempt?
A. If you can exempt all the equity you get it back. Lets take a car worth $10,000 with a $9,000 loan. You exempt the $1,000 equity and keep the car.
Q. Then the bankruptcy court discharges my loan. Do I now have a $10,000 vehicle free and clear?
A. No, the advantage of the bankruptcy discharge will be that the future of the asset will be up to you. If you don't want the car anymore just give back to the bank, you won't owe the loan or any deficiency. This can be very useful when you owe $15,000 for a car now worth only $10,000. If you want to keep the car you will have to keep up the payments after the bankruptcy. In fact, most creditors will want you to "reaffirm" the debt.
Q. What does that mean?
A. When you reaffirm a debt you become personally liable for it again. It's as if for that particular debt the bankruptcy dosen't count.
Q. What if I want to reaffirm all my loans?
A. You are not a bankruptcy candidate.
Q. What exactly can I exempt?
A. There may be two answers to this depending on where you live. See the table of which states allow the Federal exemptions, the Federal Bankruptcy exemptions and State exemptions for those not allowing the Federal exemptions. Most states allowing the Federal exemptions will also allow the debtor to choose using the state exemptions if they are more favorable.
Q. If I have a minority interest in a corporation do they get dragged into the bankruptcy with me?
A. No, only your shares go to the trustee. Daily operations do not get affected. This may have implications in terms of voting the shares and transfer of the shares where sales are restricted.
Is doing nothing an option?
Divorce and Bankrupcty
Workable solutions
Q. Could any of the other options ever cost more then paying creditors in full?
A. Legal fees for Chapter 11 cases can run so high it could happen. Don't try it unless there are a lot of assets at stake and the ability to fund the entire process available.
Q. Can a person even file a Chapter 11, or only a business?
A. Individuals may now file Chapter 11 too.
Q. Will I have to go before a judge in a Chapter 7?
A. No, you will meet with a trustee at a meeting much less formal than a trial.
Q. What is the trustee's job?
A. Find assets with equity, liquidate them and distribute the money left after paying off the secured creditors to the unsecured creditors.
Q. What if I want to keep some non-exempted assets?
A. You may try to buy them back from the trustee.
Q. If I change my mind after filing can I reverse out the bankruptcy?
A. You may be able to get the case dismissed but the fact that you filed it will be on your credit report and a judge will decide if it may be dismissed or not.
Q. After I file bankruptcy can I still workout the non-exempt assets?
A. In a Chapter 11 or 13 you may negotiate the plan with the creditors out of court, in a Chapter 7 you may still do a workout if the trustee abandons the property.
Q. What does it mean when a trustee abandons property?
A. When an asset's liquidation value can't even pay off the secured creditors, the trustee "abandons" it, or simply put; gives it back to the debtor. As in our car example above, although the debtor has been discharged from the obligation the security interest runs with the collateral. The debtor gets to keep the car because the trustee abandons the asset, but if a workout can not be achieved or the payments made, the car will be reposessed even though the debtor gets back title.
Q. I thought a big advantage of bankruptcy was it stopped foreclosures and reposessions. How can they do that?
A. When a bankruptcy gets filed, an automatic "stay" on litigation such as foreclosures and sheriff's sales goes into place. To get around the stay a creditor must go into court and ask the bankruptcy judge for a "relief from stay", if granted they continue with their plans to take back your asset.
Q. When would a judge allow a creditor to do that?
A. Here's a list of reasons:
1. You default on your scheduled Chapter 13 or Chapter 11 payments.
2. You fail to file a reorganization plan or other required documents on time.
3. Your income is insufficient to execute a reorganization plan within the court's guidelines.
4. The asset in question will not be needed to reorganize.
5. The value of the asset is rapidly eroding.
6. You filed a chapter 7.
Q. I can't do a workout and I can't make any payments at all, should I file a Chapter 13 to stop the impending forecloseure on my house?
A. Given these facts you will only be delaying the inevitable. The money you will spend on legal fees might best be used elsewhere, such as securing a new place to live, unless things may change in the next few months.
Q. Can I choose to leave some debts out of my bankruptcy?
A. Legally perhaps, but I rarely find it a good idea.
Q. Can I change from a Chapter 13 to a Chapter 7 or vice versa later?
A. You can make a motion to convert a case after it is filed, as can the bankruptcy trustee.
Q. When might this happen?
A. If a Chapter 13 looks like it will fail or has failed either or both parties may desire a conversion to chapter 7. These days Chapter 7 trustees look carefully at the assets and income of debtors. If they think money might be available for unsecureed creditors they may make a motion for conversion to a Chapter 13.
Q. Can I keep my house and car if I file a bankruptcy?
A. As long as the equity does not warrant the trustee keeping it and you stay current on payments for the items you want to retain you should be OK.
Q. May I keep my pets?
A. You should report animals of any value on your schedules such as pedigree dogs or cats, horses etc. You should then be able to exempt the item and keep the pet.
Q. What if I want to keep more assets after I have run out of exemptions?
A. Potentially exemptible assets can be bought back from the trustee after all exemptions have been exhausted just as with non-exemptible assets described above.
Q. May I file alone or must my spouse and I file jointly?
A. There is no law about who must file, the decision should be made based on the debt, credit and personal situations. Here are a few quick examples:
1. If all of the debt is in the name of only one spouse only that spouse need file.
2. If all debt is joint and you want a Chapter 7 discharge both should file.
3. If the goal is stoping a foreclosure with a Chapter 13 only one spouse need file. Make sure that the filing spouse is named in the title to the home.
Q If only one spouse files will the other spouse be affected in any way?
A. If there is no joint debt the bankruptcy filing may not appear on their credit report, but if you need to buy a car or house jointly in the future it will force most new loans to be evaluated based on whoever has the worst credit.
Q. What happens to joint debt when only one spouse files a bankruptcy?
A. The other spouse will owe the whole debt in most cases.
Q. Can I file without my spouse having to know about it?
A. This odd question has come up enough I feel I should include it here. Yes, I have secretly filed for a debtor when we feared for the physical safety of a spouse, but generally if this question needs to be asked the spouses may need to take a hard look at the relationship. One day the other spouse will likely find out such as when a home or car needs to be bought or refinanced.
Q. If my corporation goes bankrupt or out of business what debt will I owe personally?
A. Provided no one tries to "pierce the corporate vail" you will owe only any debts personally guaranteed and any taxes collected on behalf of the IRS (941 trust fund taxes) if you controlled the collection of those taxes and directed they not be paid.
The copyright holder of these questions is Mory Bremer, Esq. of Pittsfield Massachussets.