Our Bankruptcy Attorney Blog

The United States bankruptcy code is part of the federal legal code (meaning that it is very much the same in all fifty states, though there are some differences) and is divided into a series of chapters. Each chapter represents a different type of bankruptcy ranging from Chapter 7 for individuals and small businesses to Chapter 15 (for foreign entities operating in the United States). Chapter 7 bankruptcy, or straight bankruptcy, is the most common type of bankruptcy used by individuals in the United States and as such is generally what most people think of when they think about personal bankruptcy.

The basic idea is that the debtor lists all of his or her property, assets, and income and then lists all of their debts and liabilities. The court exempts the basic possessions needed for life and making a living and the remainder of the debtor’s property is liquidated through an auction. The funds received from the liquidation are used to pay off the creditors (at least in part and in a prioritized sequence) and the remainder of the debt is discharged, or essentially written off by the court. Although this very simple description covers the basics, in reality it is all vastly more complicated which is why bankruptcy law is a legitimate specialization within the legal profession.

The property that is deemed exempt from liquidation under Chapter 7 bankruptcy includes ones home, basic furniture and appliances, clothes, and other necessities for day-to-day life. Similarly, basic items needed by the individual to make a living – like tools or a vehicle – may also be exempt. What can be exempted differs by state and is one of those areas where having an attorney is extremely helpful. Needless to say, exempted items that secure debts – like a house with a mortgage or car still being paid on – may be exempt from liquidation but is not exempt from creditors and Chapter 7 bankruptcy cannot discharge the amounts owed on secured debts like this.

It is also important to note that Chapter 7 bankruptcy cannot discharge many other kinds of debts beyond secured loans (like a house mortgage or car payments). Section 523(a) of the bankruptcy code spells out a broad list of kinds of debts that cannot be discharged, and this should be reviewed before filing for bankruptcy in the first place. After all, if the debts in question cannot be discharged through Chapter 7 bankruptcy, it is pointless to file for it. These kinds of debt include, but are not limited to: (a) any sort of tax liability (federal, state or local); (b) any debt that is not specifically listed in the relevant schedule of the bankruptcy filing; (c) child support or alimony; (d) any sort of fees or fines or compensation ordered b y a court for criminal conduct; (e) any sort of debt owed to the government or any government agency or service (like student loans); (f) debts owed to certain tax-advantaged retirement arrangements (401(k)s or pension plans); and others.

Since 2005, a number of more stringent policies and practices have been mandated in Chapter 7 proceedings as well, making it more difficult to file and more difficult to have debt fully discharged. Chapter 7 bankruptcy can be a very good option in some circumstances, but may not be in others. It all comes down to the debtor’s individual circumstances and situation.

Although the entire bankruptcy process in the United States is designed to help prevent people from ending up utterly destitute; due to the social stigma that surrounds bankruptcy, most people do not file for it until they are realistically facing destitution. Therefore, most Americans would prefer to avoid this circumstance if at all possible. Obviously the key to this is keeping your financial position in proper proportion to your financial means: not borrowing more than you can pay back; not spending more than you have; and not accepting responsibilities that you cannot handle.  These common sense tips notwithstanding, there are usually at least some options available to people before bankruptcy.

If you are still receiving a fairly dependable income and still have some assets and holdings, then there are more options available such as debt settlement, debt consolidation, and so on. Of course in this case it may actually make more sense to aim for a Chapter 13 bankruptcy then to deal with all of the tricky negotiation that is involved in debt settlement and similar arrangements. Essentially, for any lender to agree to debt settlement and similar arrangements the lender has to believe that agreeing to such terms is better than the alternative. Therefore, as long as you have a degree of income and some assets, the lenders are much less likely to agree to such proposals. This is, in fact, precisely when most people should consider bankruptcy, though there are a decent range of alternatives available.

If, on the other hand, you are already facing extreme financial hardship – due to a dramatic decrease in household income (as comes from unemployment) or a dramatic increase in financial liabilities (as happens with adjustable mortgages) – then the alternatives to bankruptcy have more appeal to the lenders. In this case, the lenders are already very concerned that you are likely to file for bankruptcy, in which case they want to agree to terms that will see them get more than would be given them by a bankruptcy court. Bear in mind that this is only true insofar as unsecured debt is concerned; secured debt (like a home mortgage or car payment) cannot be discharged by Chapter 7 bankruptcy without surrendering the underlying asset. So, as a consequence, unsecured lenders will be far more receptive to debt settlement or modification proposals than secured lenders will be.

As anyone that has ever dealt with a Chapter 13 bankruptcy restructuring agreement knows, personal finances can be very complicated. Therefore there is no “one size fits all” advice that makes sense for everyone. A lot of your personal options are tied directly to your personal circumstances; therefore one of the best ideas would be to have a personal finance expert review your overall situation and offer advice on how to proceed. Before you can even file for bankruptcy there is a legal requirement to under go credit counseling through a government approved credit counseling service. These credit counseling services are recognized by the government and have a specific mandate to look for viable alternatives to bankruptcy where possible. As a consequence, undergoing this credit counseling – which is required to file for bankruptcy anyway – may offer you the best alternatives.

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.

Bankruptcy in the United States is an element of federal law. Though there are some state-specific differences (for example, in respect to what kinds of property may be declared exempt in a Chapter 7 bankruptcy), for the most part the laws governing the bankruptcy process are the same throughout the country. One of the rights that individuals have before the bankruptcy courts is the right to file “pro se” (Latin: “for oneself”, sometimes called “pro per” for propria persona), or without an attorney. Generally most companies and other entities (partnerships, trusts, etc.) are required to have properly accredited legal representation, but this is not the case for individuals.

While anyone has the right to file for bankruptcy by themselves without legal representation, in general this is a terrible idea. Bankruptcy law is extremely complex and extremely technical, involving very specific steps that have to be done in a very specific sequence. Any mistake, from an accidental omission to a simple oversight of a document submission can result in very serious consequences. Failure to list an item for example may result in that item not being exempted though it qualified for exemption; or just as easily may be viewed as a deliberate effort to “hide” the asset from the court opening the filer up to sanctions from the court and/or having their case dismissed out of hand. Bankruptcy law is a specialized legal field which represents its own specialist niche in the legal field and this specialization is justified in view of the complexity of the process.

Further, the Bankruptcy Abuse Prevention and Consumer Protection Act, which was completely written by the commercial lending industry and implemented as law in 2005, mandates a number of even tighter restrictions on leeway afforded the bankruptcy judges. Many small mistakes that might have been forgiven by a sympathetic judge in the past now result in an immediate dismissal of the case. On top of this, depending on how far the case had proceeded before it was dismissed, the debtor may lose the right to re-file, leaving them with no recourse to the bankruptcy courts at all. Therefore, even a small accidental oversight can result in a calamity if the person filing pro se does not know what they are doing.

Obviously anyone considering filing for bankruptcy is already hard pressed financially, so hiring an attorney may not seem like a good investment, but this is only true in the most basic of cases. If the debtor has an extremely simple situation – no cash, no assets – then they may be able to file on their own without too many problems. However, for anyone that owns a home, has items to exempt from liquidation, has an income, or even considering a Chapter 13 bankruptcy; getting legal representation is well worth the effort. Depending on how dire the borrower’s situation is, they may qualify for free legal counsel from a number of charitable legal aid organizations. The bankruptcy courts themselves strongly advise that all filers have legal representation and provide resources on where to look for free legal assistance on their website (www.uscourts.gov > FederalCourts > Bankruptcy > BankruptcyResources > FilingBankruptcyWithoutAttorney).

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.