Bankruptcy Basics
A short overview of bankruptcy and how it works

What is Bankruptcy?

Bankruptcy is a powerful tool for dealing with your creditors. Bankruptcy is provided for in the U.S. Constitution and in Title 11 of the United States Code. Title 11 is broken up into several chapters that set out how the whole bankruptcy system works. This is why bankruptcy attorneys talk about chapter 7 and chapter 13 bankruptcy.

The key thing to remember about bankruptcy is that it’s a system designed to give you a way to deal with all of your creditors at once and to pay them what you can actually afford to pay them. It’s not intended to be a way to avoid your creditors and your obligations. Instead, it is intended to be a way to give “honest, but unfortunate” people a responsible way to resolve debt they cannot otherwise afford to pay.

Most people find that the bankruptcy process frees them of most, if not all, of their debt.

Before You Start Reading

“Short,” as in a “short” overview of bankruptcy is a relative thing.

The information that follows contains a lot of information, and it’s likely to seem really long and boring. Even then it is only a very, very general outline of the most fundamental aspects of bankruptcy. There are statements below that might apply differently in any particular case. This information is not a substitute for a review of your situation with an experienced bankruptcy attorney. Also, if you don’t read all of it, you might gain a very incomplete and possibly confusing understanding of the bankruptcy process. Reading it all carefully will answer a lot of questions you have right now, and it will give you a realistic idea of what’s involved in this process.

You should not take any actions based on what you read below EXCEPT to schedule an appointment with me, listen closely to the advice I give you and cooperate fully and quickly as I work to help you resolve your financial situation.

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How do I file for Bankruptcy?

Getting started with a bankruptcy case involves meeting with me to discuss your financial situation and expore your options. While I prefer to meet in person, I am able to do at least some of our meetings by telephone. However, we must meet in person or by video conference at least once before filing.

If filing a bankruptcy case is your best option, I will give you a financial questionnaire to complete and a list of documents he will need you to provide. It is very important that you complete the questionnaire as thoroughly as possible, and that you provide as many of the documents requested as possible. You will also need to obtain a certificate of Pre-Bankruptcy Credit Counseling from an authorized provider.

I will use this information to complete the bankruptcy filing paperwork, which includes the Petition, Schedules of Assets, Liabilities, Income and Expenses, the Statement of Financial Affairs, the Statement of Current Monthly Income (the “Means Test”), and in some cases, the chapter 13 plan.

When the paperwork is ready, we’ll get together again to review and sign it. You will need to review this paperwork carefully, and work with me to correct any missing or incorrect information.

Once you have reviewed and signed the paperwork, I will file it with the court and your bankruptcy case will begin.

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Exemptions, Creditor Classes and the Means Test

As I prepare your paperwork for filing, I will do several important things.

First, I’ll identify the exemptions that apply to your property. Exemptions are defined in the bankruptcy code and state law and define property that cannot be taken from you to pay creditors, unless you have given a particular creditor a lien against the particular piece of property. (In other words, exemptions do not allow you to keep a house if you can’t pay the mortgage, or keep a car if you can’t pay the loan.) Property that is not protected by an exemption is called “non-exempt” property. Most people have very little non-exempt property, and what they have is not usually worth much.

Second, I’ill complete the means test form, which may determine whether you are able to file under chapter 7, or if you are required to file under chapter 13. The means test applies a formula based that compares your income and expenses to the median income and expenses for a household of your size in your state and county. The outcome of that formula determines in many cases whether you will be able to file under chapter 7 or if you will be required to file under chapter 13.

Third, I’ll determine which category each of your debts and creditors falls into. There are three classes of debts and creditors: secured creditors or those with collateral they can take to force payment of a loan; unsecured priority creditors like taxing authorities, domestic support obligations, and unpaid wages you owe to an employee; and third unsecured general creditors like credit cards, medical and utility bills and just about everything else.

Some unsecured debts may also be nondischargeable, which means that bankruptcy won’t eliminate them. Nondischargeable debts include domestic support obligations like child support and alimony, some taxes, and student loans.

Fourth, in chapter 13 cases, I’ll prepare a chapter 13 debt reorganization plan.

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Chapter 7 or Chapter 13?

The bankruptcy code provides for two bankruptcy options for individuals with consumer debts: a liquidation bankruptcy under chapter 7 or a debt reorganization bankruptcy under chapter 13.

Chapter 7 is what most people are thinking of when they hear about bankruptcy. Under chapter 7, non-exempt property is sold (or “liquidated”) and the money is distributed equally among the unsecured priority and general creditors. Secured creditors (those with collateral, like mortgage and auto lenders) make arrangments with you to either reaffirm and keep paying the loan, or to return the collateral so that they can sell it and apply the money to the loan balance. Most chapter 7 cases end up being “no-asset” cases, which means that whatever non-exempt property there is in the estate isn’t worth enough to be worth the costs of converting it to cash. In those cases, you get to keep your property and the creditors get nothing.

In a chapter 13 case, I’ll prepare a debt reorganization plan that complies with the requirements of the bankruptcy code. There is no liquidation of your property, although sometimes surrendering certain types of property might make the plan easier to complete. Instead the plan will propose a monthly payment that over a 3 to 5 year period will give your creditors at least what they would have received through a chapter 7 liquidation. How long the plan payments last and exactly how much you’ll have to pay is determined by a formula that takes into account your income and expenses, as well as the value of your property and the amount of money you owe.

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The Bankruptcy Estate, the Trustee and the Automatic Stay

Two things happen immediately and automatically as soon as the bankruptcy case is filed: the bankruptcy estate is created and the automatic stay goes into effect.

The bankruptcy estate includes everything you own, were entitled to receive, or have a legal interest in as of the moment your case is filed. This includes any houses, land, cars, bank accounts, wages and salary you have earned but haven’t received, and any tax refunds to which you are entitled but haven’t received, and also includes things you don’t own free and clear, like houses with a mortgage or cars with a loan against them. The most important thing to remember about the bankruptcy estate is that once the bankruptcy estate is established, your property is controlled and managed by the bankruptcy trustee, not you. You can no longer sell or give away any of your property without the permission of the bankruptcy court.

The bankruptcy estate does not include anything you acquire or earn after the case is filed. The only exception is property you receive by inheritance which can still be added to the bankruptcy estate for up to six months after your case is filed.

The automatic stay is a court order that immediately stops any action to collect a debt from you, or to take any property that is part of the bankruptcy estate. This keeps any one creditor from acting outside the bankruptcy process and benefitting at the expense of the debtor, the estate, or the other creditors. Once creditors have notice of the bankruptcy filing they have to stop everything they’re doing to collect a debt from you. No more phone calls, letters, foreclosures, or repossessions. In some very limited circumstances creditors will be able to resume a foreclosure or repossession, but they have ask for and receive permission from the court, and you’ll have a chance to have me present your side of the case before permission is given. It usually takes the court about two weeks to send a copy of the notice of the bankruptcy case filing to you and your creditors. If someone is really harassing you, let me know so that I can take additional steps to notify them of the automatic stay.

The bankruptcy estate is managed by the bankruptcy trustee. A trustee is assigned at random to each bankruptcy case. The trustee’s job is administer the estate for the benefit of creditors. The trustee does not represent any one creditor, and he also doesn’t represent you. On the other hand, subject to my advice and the orders of the court, you must cooperate with the trustee as he administers your bankruptcy estate.

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The Section 341 Meeting of Creditors

About a month after your bankruptcy case is filed, you will need to attend the meeting of creditors. This meeting is required by the bankruptcy code. If you do not appear at the meeting your case will be dismissed and you’ll have to start the process all over again.

At this meeting you will be intereviewed by the bankruptcy trustee. His job at this meeting is to ask you any questions he has about the paperwork that you filed in your case, to make sure the information you have given is accurate, and to give you any instructions you need to follow as he manages the bankruptcy estate. The instructions or “directives” may include providing additional paperwork or copies of documents, assisting with appraisals, deliverying non-exempt property to an auctioneer to be sold, or appearing at a follow up meeting if the case is unusually complicated.

You will have to make your first chapter 13 plan payment at this meeting if you’re in a chapter 13 case. The payments will be due on the 25th of each month from then on.

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Chapter 7 after the Meeting of Creditors

In most chapter 7 cases, things are pretty easy for you after the meeting of creditors, but there’s still a lot going on elsewhere.

The most important thing for you to do during this time, besides working with me to comply with any trustee directives, is to obtain your Certificate of Debtor Financial Education from an approved provider. This certificate must be filed with the court no later than 45 days after your meeting of creditors. If this deadline is not met, the court will close your case without granting you a discharge, which will mean your case was a big waste of time and money.

After the meeting, the trustee will continue to manage the bankruptcy estate. He will look at the value of assets and decide if any non-exempt property is to be sold. You will need to comply with any instructions he gives you at the meeting of creditors and any instructions he gives you after the meeting through your attorney, subject to the advice of my advice and orders of the bankruptcy court. (It’s important that you consult with me before you do anything with your property until your case is fully administered and closed.)

In all chapter 7 cases, creditors and the US Trustee have 60 days from the date of the meeting of creditors to file an objection to your discharge. If no objections are filed, the court will grant your bankruptcy discharge shortly after this 60-day period runs.

If yours is a “no-asset” case, the trustee will file a no-asset report with the court. At that point all of the property in the bankruptcy estate returns to you and the trustee is released from his assignment to administer the case. In a no-asset case, the case will be closed once the discharge order is entered.

If there are non-exempt assets worth enough to sell and pay creditors, the case will not be closed after the discharge order is entered. Instead, the trustee will send out a notice to your creditors to file their proofs of claim. A proof of claim is a document creditors file to tell the court how much you owe them. If creditors do not file a claim by the deadline in the notice, they will not receive anything from the bankruptcy process. Once the trustee has converted the non-exempt property of the estate and reviewed all of claims, he will file a report with the court showing how much each creditor will receive after covering the trustee’s own fees and expenses. Once this report is approved by the court, the trustee will issue checks to the creditors. When all of the checks have cleared, the trustee will file a final report and the case will be closed.

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Chapter 13 after the Meeting of Creditors

About 6 to 8 weeks after the meeting of creditors in a chapter 13 case, the plan confirmation hearing is held. This purpose of this hearing is to give the bankruptcy judge the chance to review the plan and any objections that have been filed by creditors or the chapter 13 trustee.

I will be working to resolve any objections to the plan well before the date of the hearing. If the objections are not resolved, or if some aspect of the plan requires a ruling by the bankruptcy judge, the hearing will be held as scheduled. If the hearing is held, you must be there. If no objections to the plan are filed or they are all resolved before the hearing, the judge may approve or “confirm” the plan without actually having the hearing. Resolving any issues with the plan so that the plan can be confirmed without a hearing saves me, the court, the trustee and your creditors a lot of time and money. It will also save you the trouble and expense of taking time off from work to sit in an uncomfortable courtroom for several hours, so it is well worth it to maintain close communication with me and cooperate with any requests during this time.

You should also obtain your Certificate of Debtor Education from an approved provider before the confirmation hearing date, and as early in your case as possible. You will receive important budgeting and spending advice in this education course that will help you in managing your finances and successfully completing your chapter 13 plan. The certificate of completion must also be filed with the court in order for you to obtain your discharge. Failure to file this certificate will result in your case being closed without a discharge, even if you’ve made all of your plan payments for five years.

The most important thing for you to do once your chapter 13 bankruptcy case is filed is to make all of your bankruptcy plan payments on time, make all of your direct payments to creditors one time, keep up with your domestic support obligations, and live according to the budget you and I work out in preparing your chapter 13 plan. Failing to stick to the budget and missing payments is the single greatest cause of chapter 13 plan failures.

Most chapter 13 cases will last for 3 to 5 years, during which you will make a plan payment each month to the chapter 13 trustee. You will not receive a discharge of your debts until you have completed these payments and filed your certificate of Debtor Education.

Finally, it is very important to tell me immediately if you move, change your phone number, or have a change in employment or income during your chapter 13 plan. You are required to keep a current address on file with the court at all times and I can’t properly assist you if I can’t reach you.

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The Discharge and Life After Bankruptcy

Once you’ve paid what the bankruptcy code says you’re required to pay your creditors, either through a chapter 7 liquidation or chapter 13 debt reorganization plan, you’ll receive a “discharge,” even if it turns out you don’t have to pay anything at all.

A discharge is a permanent order issued by a federal bankruptcy judge that prevents any further action to collect a discharged debt from you personally.

A discharge is not a forgiveness of debt by your creditors. Instead, creditors are ordered to leave you alone and denied legal options for collecting or enforcing the debts against you.

The discharge does not protect your property from liens that existed prior to the bankruptcy filing. This means you still have to make payments on anything you want to keep, including your house or car. On the other hand, if you have received a discharge, a creditor who repossesses a car or forecloses on a home can no longer collect the difference between what they were able to recover selling the repossessed collateral and what you owed them.

It is important to protect your discharge. If you experience any collection activity on a discharged debt, or believe a creditor is violating the discharge order, contact me immediately.

Of course, a big part of life after bankruptcy involves rebuilding your credit and managing your finances responsibly. I strongly recommend taking a financial management course beyond the minimal course required to get your discharge. Sometimes people do everything right and still get into trouble. But if there was anything you could have done differently to avoid getting into financial trouble make every effort to figure out what that was, and do everything you can to avoid it in the future.

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Conclusion

That’s the bankruptcy process in a very big nutshell. You probably still have some specific questions, which may answered on the Frequently Asked Questions page.

I don’t expect to be able to answer every question you might have on my website, so be sure to bring up anything you’re still concerned about when we meet.

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