Our Bankruptcy Attorney Blog

It is required for companies and other entities to employ an attorney when filing for bankruptcy, but this is not a requirement for individuals. Technically anyone is allowed to file for Chapter 7 or Chapter 13 bankruptcy “pro se” (Latin: “for oneself”), or without legal representation. However, realistically this is usually a bad idea for anyone with that still has assets and an income, since the smallest mistake in the very complex procedure can have long lasting and far reaching consequences.

The Bankruptcy Code (Title 11 of the U.S.C.) is well known for extreme complexity and staunch adherence to process. As such, bankruptcy law represents a legal specialization that even many other types of attorneys are not really qualified to deal with. Further, the courts are generally unforgiving of mistakes that result in wasting their time, even relatively minor omissions or failure to file all the requisite documents in the proper sequence. Worse still, since so many people try to hide assets or use bankruptcy unethically, the courts are much more likely to automatically assume that any particular mistake or omission is intentional and more likely to respond accordingly. In fact, each of the federal bankruptcy court’s websites specifically says as much and strongly advises all filers to use an attorney.

The only people that should even consider filing without an attorney are really people that have little or nothing to lose either way. If you have no assets, no cash, and no income then there is really little to lose and the filing process should be extremely simple. One of the places where many pro se filers get themselves in the most trouble is with the properly claiming their exemptions, but of course this does not matter for someone without any assets to claim as exempt. However, pretty much anyone else – and especially those with any sort of complex holdings like real estate – should certainly use an attorney in order to guarantee that their exemptions are claimed properly and claimed against all creditors.

Another area where many pro se filers get themselves in trouble is with listing all of their creditors. There is a set process to exempt particular creditors, but simply omitting them from the filing is an extremely bad idea that many pro se filers seem to do. Not only does this mean that the excluded lenders still have a full range of collection options available to them, but there is also a very distinct possibility that the court will believe the omission was deliberate in order to misrepresent the filer’s actual financial position. Again, an attorney knows how to file the proper paperwork in order to exclude – with limits – some creditors in a way that the court understands and appreciates as opposed to ad hoc measures taken by non-professionals trying to be clever.

To conclude, officially it is not really necessary to have an attorney for an individual filing for personal bankruptcy. However, realistically speaking, it is a good idea to have one for anyone that has a significant number of assets, money laid aside, real estate or equity, and/or a regular income. Pro se filing is only really a good idea for people with virtually nothing to lose.

Whether or not bankruptcy is the right financial move to make completely depends on one’s individual financial circumstances; therefore it is impossible to say if it is a good idea for any particular person without knowing their specifics. Filing for bankruptcy is obviously a major undertaking with long lasting and far reaching ramifications for not only the debtor’s finances, but many other aspects of their life as well, so it is a move that should not be taken likely. Remember that today many people use an individual’s credit history to get a sense of the person, from potential landlords to potential employers and few things look worse on a credit report than a bankruptcy.

Since 2005 it has been a legal requirement for anyone filing for bankruptcy protection to first receive credit counselling from a government approved credit counselling agency. While this reform has been very unpopular since it requires the debtor to pay extra money before they even have the option of filing it is also quite helpful. Since most of the credit counselling agencies that are able to issue the requisite ticket are non-profit organizations, they are fairly unbiased and will review the individual’s current financial situation in close detail to determine whether or not bankruptcy is the right way to go. Therefore, since this counselling is required anyway, it serves as a good way to help an individual determine if bankruptcy is the best option under the circumstances.

People considering bankruptcy should also keep in mind that there are two different types of bankruptcy that apply to most individuals as well: Chapter 7 and Chapter 13. Chapter 7 bankruptcy is the type of bankruptcy that most people think of first, where their non-exempt property is liquidated to pay some of the creditors and the rest of the debt is discharged. This may or may not be the best course of action, but is usually most applicable to people with fairly simple financial situations, extremely limited income, and few solid assets. 

Chapter 13 bankruptcy is more complicated and essentially results in a court ordered restructuring of the debtor’s liabilities, which are all paid off over the span of the three to five year Chapter 13 repayment plan. In many cases, Chapter 13 makes much more sense, especially if the debtor has significant assets and a regular income. Although Chapter 13 bankruptcy remains on the debtor’s credit report for a full ten years like Chapter 7 bankruptcy, it also tends to look better to most lenders since most of the actual debt should be paid in full through the Chapter 13 process.  

There are definitely times when bankruptcy is by far the best option for a debtor, but there are others when this might not be the case. Further, since few things look worse than a bankruptcy on someone’s credit report, it is a decision that should not be taken lightly. The mandatory credit counselling that has to be taken before filing should serve as a helpful measure to see if the bankruptcy is a proper fit or not.

The means test that now applies to bankruptcy filings in the United States is a completely new concept. Prior to 2005, anyone could file for bankruptcy and the judge had the discretion to determine whether or not a filing was legitimate or not and how the case should proceed. This all changed with the passing of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), which was essentially written by the institutional lending industry and passed on behest of their well financed lobby in Washington. The result is that now some people can be denied chapter 7 bankruptcy protection based on their income over the preceding six months, which in turn somewhat defeats the purpose of filing.

Prior to the passing of BAPCPA, Chapter 7 bankruptcy served as an excellent safety net for debtors that suddenly faced a major financial disaster. That is, indebted people that suddenly lost a job, had a medical emergency, or some other financial hardship could file for bankruptcy protection before they were utterly destitute as something as a preventive measure. This, in fact, is a large part of the entire purpose of bankruptcy, to help people facing default avoid utter destitution. However, the means test somewhat changes this dynamic because it looks at the filers income over the last six months, which means that the debtor would have to be in significant financial difficulty for at least half a year prior to filing.

The means test involves looking at the filer’s average income for the preceding six months and then comparing this to the median income of the state in which the debtor lives. This is done by averaging the previous six month’s income and then doubling it to produce an estimated annual income. This estimated annual income is then compared against the state’s median income for a person meeting the debtor’s specifics (single, married, etc.). if the debtor’s prior income is above the state’s median, then Chapter 7 bankruptcy is denied out of hand, though Chapter 13 bankruptcy may still be available. If the debtor’s income was below the state’s median, than Chapter 7 remains an option until the next phase of calculations.

The next part of the means test takes the filer’s income and subtracts basic living expenses (this does not include paying their debts, but includes a clearly defined list of regular living expenses like housing costs, utilities, and so on). The resulting number is supposed to represent the debtor’s discretionary income and it is then multiplied by 60 – representing sixty months/five years – to see if the debtor’s alleged discretionary income is enough to enable him to pay off his debts through a five year Chapter 13 debt restructuring scheme. If this “discretionary” income exceeds $10,000, then the court will deny Chapter 7 protection, allowing only a Chapter 13 bankruptcy. This has been the most controversial aspect of the means test because the living expenses are too narrowly defined resulting in gross misrepresentations of what is actually “discretionary” in many cases.

If the debtor’s previous income exceeds the state median, but his “discretionary” income does not equal $10,000, then a third calculation comes into play. If the debtor’s discretionary income is less than $100 per month, then Chapter 7 is readmitted as an option. If the debtor’s monthly income is between $100 and $166.67 (the $10,000 mentioned above over five years), then more calculations come into play.

The means test is extremely complicated and was designed to be that way by the authors of the BAPCPA in order to discourage people from filing for bankruptcy.

Contrary to some of the information floating around on the Internet, there is no comparison whatsoever between bankruptcy and debt settlement since the two are generally mutually exclusionary. Frankly, if the debtor has the money to make a successful debt settlement arrangement with all of his creditors, then he has too much money to file for Chapter 7 bankruptcy. Conversely, if the debtor qualifies for Chapter 7 bankruptcy, then it is unlikely that he has the money to enter into any sort of debt settlement agreement that a lender would accept. Though there may possibly be a few unusual exceptions, if you have the money for debt settlement agreements, then you have too much for a Chapter 7 bankruptcy and vice versa; so the two options are not viable alternatives to each other.

Debt settlement agreements generally involve paying off a large portion of a given debt in either a lump sum or over an expedited period of time in exchange for having the balance of the debt forgiven. Needless to say, most creditors are not very enthusiastic about forgiving legitimate debts; therefore in order to get the creditor to agree, the debtor’s offer has to be attractive. The creditor is under no obligation whatsoever to agree to any sort of debt settlement option, but may opt to do so if they believe that the alternative will be a complete default on the debt – either simple default or through bankruptcy. Nevertheless, the terms still have to be better than what the creditor could expect to get through law suits or other collection practices. The result is simple enough: in order to get a debt settlement option, the debtor has to have either a good sum of money immediately on hand (for a lump sum payment) or a good amount of discretionary income that will be devoted to increased payments to the creditor. Obviously debt settlement is not applicable to any sort of secured loan like a mortgage or car payments where foreclosure or repossession is an option.

In that debt settlement only applies to unsecured consumer debt, this also raises the issue of the means test implemented by the Bankruptcy Abuse Prevention and Consumer Protection Act of (BAPCPA) 2005 to Chapter 7 bankruptcy. Essentially any debtor with large unsecured consumer debts and above average income – which would be necessary for debt settlement – is not allowed to file for Chapter 7 bankruptcy. The BAPCPA mandated means test has made debt settlement and Chapter 7 bankruptcy incompatible: if you have the means for one, you cannot do the other and vice versa. 

There is still the option of Chapter 13 bankruptcy, which largely boils down to a strict debt restructuring program, but no debt is discharged and the debtor will still be expected to pay off the entire amount due over the life of the Chapter 13 plan (usually three to five years). However, Chapter 13 bankruptcy is predicated on having a decent level of steady income and if this was possible then debt settlement should also have been possible on better – and less intrusive – terms. People that qualify for Chapter 13 bankruptcy (debt restructuring without property liquidation of debt discharges) should be in good enough shape to negotiate decent debt settlement agreements.

For most people, filing for bankruptcy is a major decision that is likely to be more than merely financial. The fact is, filing for bankruptcy is more or less a public admission of one’s failure to meet his obligations and is probably the one of the worst black marks to have on your record, both financially and personally. While some people are more forgiving, for many people the idea of bankruptcy suggests that the bankrupt person is a failure in all respects. Nevertheless, if bankruptcy seems the only way, there are some things to consider.

The first thing to consider is the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Many people have some old fashioned ideas about what bankruptcy means, what can be exempted, what kinds of debts can be discharged and what you have to do to file. The fact is that the BAPCPA radically altered personal bankruptcy in the United States, making it generally harder to do, less likely to succeed, reducing the kinds of debt that can be discharged and otherwise making it more troublesome for most people. This bill was written directly by the lending industry, transferred to Congress by the lending industry’s lobbyists, and passed on their account. The entire idea is to make it harder to file for bankruptcy and reduce the benefits of doing so.

Examples of important changes introduced by BAPCPA included introducing the requirement to receive credit counseling from an approved agency sometime within six month of filing, adding a means test to determine if you are truly poor enough – by the credit card industry’s standards – to file for bankruptcy, mandating that certain technicalities in the filing process result in automatic dismissal of the case, and adding a number of kinds of debts to the list of those that cannot be discharged by the courts. Therefore, the first thing to look into before filing bankruptcy is to see if your debt can be discharged through the process or not and see if you meet all the new standards and requirements.

Also keep in mind that if you do file for bankruptcy and the case is accepted and debt is discharged, then this will be reported on your credit history for the next ten years. Contrary to some of the claims made by fraudsters online, there is no legal way to have a bankruptcy removed from your personal credit history once the process has been completed. This means that the consequences, as well as a very obviously red flag to almost all potential lenders, will follow you consistently for the next decade.

However, do not let that make you think that you will no longer be able to get credit. One of the things that the BAPCPA did was make it longer – eight years now – before you can file for bankruptcy a second time. This means that once your bankruptcy goes through you will become a prime target to all kinds of predatory lenders that will offer you credit the day you leave bankruptcy court. The idea is that most people that go bankrupt will make the same mistakes again if given the opportunity (credit), except this time they cannot file for bankruptcy for the next eight years. So these people are prime targets for predatory lenders since once they get caught a second time, they have no recourse but to lose everything.