[NOTE: This discussion is offered for general informational and educational purposes. It is not offered as, and does not constitute, legal advice or a legal opinion.
These materials should not be utilized as a substitute for professional services in a specific situation.
If legal advice or other expert assistance is required, the services of an appropriate professional
should be sought.]
BANKRUPTCY FAQs [Frequently Asked Questions] FOR INDIVIDUALS CONTEMPLATING BANKRUPTCY
What are the purposes of bankruptcy?
What does filing for bankruptcy involve?
How has BAPCPA changed bankruptcy?
What are my bankruptcy alternatives?
Will I need to make any Court appearances?
What kinds of debts are not discharged?
What happens to liens in bankruptcy?
How long will my bankruptcy remain on my credit records?
How much will filing for bankruptcy cost?
What kinds of information should I bring to my initial meeting with my attorney?
What are the purposes of bankruptcy?
The primary purpose is to obtain "debt relief." The type of relief actually provided varies by Chapter. The relief provided by Chapter 7 (which is the liquidation Chapter) is the "fresh start" which comes from a discharge of one's debts. The relief provided by Chapters 11, 12 and 13 is a "reorganization" of debt (which, depending on circumstances may involve a partial repayment and/or a modification of the terms (time or interest rate) of repayment).
What does filing for bankruptcy involve?
The particular steps in a bankrutpcy vary by Chapter. However, all cases start the same way.
Typically, the process would begin by meeting with an attorney for the purpose of discussing your circumstances and the relief you seek, and determining whether bankruptcy is indicated. See What kinds of information should I bring to my initial meeting with my attorney? Next you would begin to accumulate the documents and information needed to complete the Bankruptcy Paperwork.
One of the most difficult and time consuming aspects of the bankruptcy process for most debtors is preparing the Schedules,Statements of Financial Affairs, and other documents that need to be filed as part of bankruptcy case (the "Bankruptcy Paperwork"). The Bankruptcy Paperwork requires debtors to provided detailed information about their assets (consisting of a list of the assets and the fair market value of the assets), liabilities (including the names, addresses and account numbers for each creditor), income (during the three years prior to the bankruptcy, and month to month beginning 6 months before the bankruptcy is filed), and expenses. Needless to say, it takes time and effort to dig this information out, and to put it into the format required by the Bankruptcy Paperwork.
Note that under BAPCPA you will need to have month to month records of your gross income and payroll deductions for the 6 months prior to your bankruptcy filing, and will need to have copies of all paystubs and other evidence of wages of salaries received within 60 days of the bankruptcy filing. You should start retaining these records as soon as you begin to think that you may need bankruptcy relief.
Furthermore, BAPCPA requires that the address you use for a creditor in your Bankruptcy Paperwork be the one supplied by the creditor for bankrutpcy notices any time within 90 days of a bankruptcy filing. Therefore, you should also retain copies of all statements or other written communications you receive from any creditors once you begin to think about bankruptcy.
Although it is not necessary that the Bankruptcy Paperwork be completed before a bankruptcy is filed (you would have 15 days after the filing to complete the paperwork and could seek additional time under certain circumstances), except in an emergency situation the Paperwork should be completed first. If all information and documents required by the Paperwork has been accumulated and reviewed you should be able to identify the issues that might come up in the case. Whether those issues can be resolved prior to the case being filed, you at least want to know about them before the case is filed. If you wait until after the case is filed to accumulate the information you may not know about the issues until after it is too late. Secondly, getting the Paperwork done before the case is filed avoids the pressure created by what is a relatively short deadline.
A precondition to the bankruptcy filing (for individuals) is the participation in a credit counseling briefing by an agency which has been approved by the Office of the United States Trustee. Some briefings are offered over the phone and internet. Note that while the competition of the Bankruptcy Paperwork is recommended, participation in the briefing is required. If you have not undergone a briefing during the 180 days prior to your bankruptcy filing your case will be dismissed. You must file a certificate of completion (provided by the counseling agency) with your Bankruptcy Paperwork. Your attorney can assist you in locating an approved agency or you can go to http://www.usdoj.gov/ust/bapcpa/ccde/cc_approved.htm.
After the case is filed all debtors must attend a first meeting of creditors (also called the "Section 341 Meeting"). A trustee (or in a Chapter 11 the Office of the United States Trustee) will preside at the meeting. The Trustee uses the meeting to ask you questions about your bankruptcy paperwork, to determine if you have assets which exceed the amount of allowable exemptions, and to determine (at least in the case of Chapter 7) whether there is anything about your case (including disposable income) that renders the case an abuse. In addition, all your creditors receive notice of the meeting and can attend and question you about your financial condition and the bankruptcy, although creditors seldom appear.
Beyond the Section 341 Meeting the steps diverge depending on the chapter. In Chapter 7 you would deal with exemption, reaffirmation, lien avoidance, and dischargeability issues (to extent relevant). In Chapters 11, 12 and 13 you would deal with exemption, lien avoidance, and dischargeability issues (to extent relevant), along with reorganization and plan issues.
How has BAPCPA changed bankruptcy?
In short, it has increased the documentary burdens on individuals filing for bankruptcy and, in so doing, increased the complexity and cost of cases.
Among other things, as a result of BAPCPA:
(a) Individual debtors must undergo a a credit counseling briefing before they file for bankruptcy, and must complete a financial management course before they are entitled to a discharge.
(b) Individual debtors must undergo a "means test" in order to determine whether a presumption of abuse exists (in Chapter 7), or the minimum duration of a plan (in Chapter 13). The "means test" is based on income received within 6 months of the case filing together with secured debt and certain additional allowances.
(c) Individual debtors in Chapter 7 must reaffirm secured debt or assume leases in order to retain the property, i.e., there is no longer the option to retain and remain current. Note, however, if your Bankruptcy Paperwork shows that your income is less than your reasonable and necessary expenses you may not be permitted to reaffirm your debt.
(d) Nondischargeable debts have been expanded in all Chapters.
(e) The ability to "strip down" recent undersecured car loans in Chapter 13 has been limited.
(f) U.S. Trustees are required to engage in random audits of the information contained in the Bankruptcy Paperwork;
(g) Additional disclosures are required to be provided to debtors by trustees, the court and attorneys which result in additional documents that must be read and signed off on by debtors.
What are my bankruptcy alternatives?
An individual contemplating bankruptcy has 4 alternatives. The two main ones are Chapters 7 and 13. In some cases Chapter 12 may be available and/or Chapter 11 may be necessary.
Chapter 7 is the liquidation Chapter. In Chapter 7 all nonexempt assets are liquidated by a trustee and the proceeds distributed to creditors in accordance with the statutory priorities. All debts, except those expressly excepted by statutory language, or those secured by an unavoided lien (to the extent of the value of the property subject to the lien) are discharged. There are a number of exceptions to discharge (such as debts resulting from fraudulent misrepresentations, willful and malicious conduct, embezzelment and breaches of fiduciary duty, along with student loans, "trust fund" tax liabilities or income taxes due within the the three years priors to the case filing (assuming the returns were timely filed, and domestic obligations). Dischargeability issues (including unavoidable secured claims) need to be evaluated in the context of your particular situation. A asset Chapter 7 (i.e., one where the debtor has nonexempt assets) generally culminates with court approval of the trustee's final report and proposed distribution, although debtors are normally discharged before the administration of the case is complete.
Will I need to make any Court appearances?
In a sense, you appear through documents which you must file with the court. The documents require detailed disclosure of a number of items including your assets (and their values), your creditors, and any transfers made prior to bankruptcy. Needless to say, accuracy and completeness are essential.
Beyond the documents, you will be required to appear at a first meeting of creditors (the Section 341 Meeting). All your creditors receive notice of the meeting and can attend and question you about your financial condition and the bankruptcy. The meeting is conducted by a trustee who typically takes the lead in the examination. As a practical matter, creditors seldom appear, and, in a Chapter 7 at least, unless the trustee believes there are nonexempt assets, the questioning is short. In Chapters 11, 12, and 13, the examination will typically be more involved.
Whether you need to make any appearances beyond the first meeting of creditors depends on the Chapter, the issues in your case, and local requirements. To the extent a matter arises in your case which requires your testimony, you will need to appear. This, therefore, is something you should discuss with your attorney.
There are two types of exemptions. Federal bankruptcy exemptions and state law exemptions. Under the Bankruptcy Code a state may "opt out" of the federal bankruptcy exemptions and thereby limit its citizens to the state law exemptions.
Pennsylvania has not opted out. Therefore, citizens of Pennsylvania may elect either the federal or state exemptions.
Under the federal bankruptcy exemptions, each debtor may exempt tangible assets up to: $18,450 in his/her residence (under Section 522(d)(1)); $9,250 in cash or property of any unused portion of the (Section 522(d)(1)) homestead exemption plus an additional $975 (under the Section 522(d)(5) "wildcard" exemption); $2,950 in equity in an auto; $9,850 (not to exceed $475 in any particular item) in household furnishings, household goods, wearing apparel, appliances, and books held primarily for personal use; $1,225 in furs or jewelry; and $1,850 in implements, professional books, or tools, of the trade of the debtor. In addition, there are exemptions for some intangible assets such as: up to $9,850 in any accrued dividend or interest under, or loan value of, any unmatured life insurance contract owned by the debtor under which the insured is the debtor or an individual of whom the debtor is a dependant; up to $18,450 on account of personal bodily injury; and interests in certain retirement (including IRAs) and qualified deferred compensation plans. The dollar limits are adjusted every three years (and are next due for adjustment in February 2007).
The major Pennsylvania state exemption is in property owned jointly by a husband and wife ("entireties' exemption"). However, this particular exemption is only helpful if the creditors have a claim only against one of the two spouses. The entireties exemption is not operative against joint creditors. In addition, Pennsylvania exempts pension plans, insurance policies, etc. Finally there is a relatively nominal exemption of $300 cash (or in property) and exemptions in some other items of personal property.
Which set of exemptions (federal or state) you should elect (where you have the choice) depends on your particular circumstances and requires a discussion between you and your attorney.
What kinds of debts are not discharged?
Nondischargeable debts include: certain tax obligations (including taxes due within three years of the bankruptcy filing); debts resulting from fraudulent conduct on the part of the debtor; debts owed to unlisted creditors; debts resulting from breaches of fiduciary duties; support obligations; debts resulting from willful and malicious conduct; fines, penalties and restitution obligations; student loans (unless such an exception would impose an undue hardship on the debtor or a dependent); and domestic obligations.
In addition, a debtor may be denied discharge as to all debts if, among other things, the debtor: transfers or conceals property within a year of the bankruptcy filing with the intent to hinder, delay or defraud a creditor; fails to keep or preserve relevant records; makes a false oath with respect to, among other things, information provided in the bankruptcy paperwork or to the bankruptcy trustee; or refuses to cooperate with the trustee in the administration of the estate.
What happens to liens in bankruptcy?
Bankruptcy generally discharges in personam liability. In personam liability is personal liability for a debt. Bankruptcy discharge, does not, however, ordinarily prevent creditors with consensual
"purchase money" liens in your property from enforcing those liens. The lien creditor's rights include repossessing their collateral, after discharge is granted (or earlier if they seek and are granted relief from stay). However, lien creditors ordinarily cannot sue you for any deficiency (i.e., the difference in value between what is owed and the value of their collateral). For example, assume you purchased a couch in which the seller retained a security interest (i.e., lien) to secure your payment obligations. Assume that at the date of the bankruptcy, you still owed $1000 on the couch, but that the fair market value of the couch (i.e., the amount the creditor would realize if it repossessed the couch and sold it) is $400. The deficiency would be $600.
Of course, you may want to keep property subject to liens. Your options with respect to such property, in a Chapter 7 are as follows:
1. reaffirm the debt;
2. redeem the collateral;
3. attempt to negotiate reaffirmation in a lower amount than the full debt; or
4. do nothing and hope the creditor decides not to pursue repossession.
Reaffirmation. When you reaffirm a debt, you agree to remain liable on that debt. Accordingly, your in personam liability to the creditor is not discharged. If you reaffirm a debt, and you later default, you will be liable for any deficiency. Secured creditors, although not obligated to do so, will generally let you keep the property if you agree to reaffirm the entire amount they are owed. Reaffirmation involves your signing a written document that is then filed with the Court. The document typically sets forth your repayment obligations, or incorporates the original document under which you are liable.
Redemption. Redemption involves paying the creditor in one lump sum an amount equal to the current value of its collateral. Redemption makes sense, if you can afford it, if the value of the collateral is less than the debt. A debtor may only redeem tangible personal property intended primarily for personal, family or household use from a lien securing a dischargeable consumer debt. If the parties cannot negotiate the redemption amount, an action can be filed with the Court asking it to value the property to be redeemed.
Negotiating reaffirmation of an amount lower than the full amount of the debt. Recognizing that their main remedy in the event of a failure to redeem or reaffirm is a state court repossession action, many creditors are willing to let the debtor reaffirm in an amount less than the full debt. The negotiated reaffirmation amount is typically close to the value of the collateral to be retained. The debt is then paid off according to the terms of the agreement.
Doing nothing. The last option is to basically "call the creditor's bluff." Unless the personal property is valuable, and or worth more than the debt owed, it may not be economically prudent for
the creditor to pursue state law repossession after discharge. A debtor cannot, however, rely on a creditor to always act in an economically prudent manner. In addition, there is always a possibility that the creditor will seek damages for the debtor's "wrongful retention" (although this is a problematic claim). However, doing nothing is certainly an option available to the debtor. In addition, there is nothing to prevent the debtor from seeking to negotiate something with the creditor if it turns out the creditor is going to pursue repossession.
Chapter 13 of the Bankruptcy Code provides a set of tools for an individual with regular income to adjust his debts. In contrast to Chapter 7 which involves a liquidation of all nonexempt assets in return for a limited discharge, Chapter 13 allows the debtor to retain his assets in return for agreeing to use future income to fund a plan. Like Chapter 11, Chapter 13 provides a number of tools to facilitate the reorganization including the right to reject burdensome contracts, abandon burdensome property (subject to certain limitations), and modify the terms of secured and unsecured obligations. In contrast to the reorganization provisions of Chapter 11 which are structured to handle a case of any size or complexity, Chapter 13 is geared to achieve the expedited submission and confirmation of a payment plan.
There are three primary reasons to consider Chapter 13. The first is because you need time to cure accrued arrearages on a secured claim or a lease for an asset you must retain (such as your home, a car, or a business asset). Chapter 13 gives you the opportunity to retain and cure. A second reason is because you have assets in excess of allowable exemptions and you want to "buy" those assets back. Again, Chapter 13 will give you an opportunity to pay off the value of assets in excess of allowable exemptions over time. The third reason is because you fail the "means test" or have disposable income (i.e., your income exceeds your "reasonable and necessary expenses") and a Chapter 7 case would be subject to dismissal under 11 U.S.C. §707(b).
A Chapter 13 plan must be 60 months (unless you are below the median income for your state). You must pay into a plan, at a minimum, the greater of: (1) 60 months of “disposable income (or 36 months if you are below the median income for your state);”(2) an amount equal to what creditors would have received in a Chapter 7 (i.e., the value of your nonexempt assets); or (3) an amount sufficient to render the plan feasible (which means satisfying plan goals (which may be curing arrears) along with all statutory requirement for confirmation). Among the statutory requirements for a plan is that all priority debts (including pre and post petition tax debts, legal fees, and the Chapter 13 Trustee’s commission (which is a percentage of your plan payments)) be paid in full under the plan. By way of example, if (I) your non-exempt assets total $80,000, (ii) your monthly disposable income is $500 (for a total of $30,000 over a 60 month minimum plan), and (iii) your priority tax debt (which must be paid over the life of the plan) and Plan “goals” total $70,000, payment of the $80,000 value of your non-exempt assets sets the minimum plan amount.
Note that there is also a “subjective” aspect to Chapter 13. Even though a plan may meet the minimum requirements (as discussed above) the Plan may still not be approved if the Trustee feels that it is not proposed in good faith, i.e., you could do better for the creditors by tightening your “belt” a little more.
Chapter 13 has debt limitations. It is limited to individuals with total noncontingent, liquidated, unsecured debts of less than $307,675, and total noncontingent, liquidated, secured debts of less than $922,975. The dollar limits are adjusted every three years (and are next due for adjustment in February 2007). Debtors with debts in excess of these limits who desire to reorganize rather than liquidate must consider Chapter 11.
For more information on Chapter 13, see Chapter 13 Primer. Note, however, that this article is pre-BAPCPA and has not yet been updated.
Chapter 12 is the family farmer reorganization Chapter. It is modeled after Chapter 13 with some variation to facilitate the debt adjustment of the family farmer. This Chapter is only relevant to persons falling within the definition of family farmer.
Chapter 11 is the business reorganization Chapter, although it may be utilized by individuals with consumer debts. The debtor remains in possession of his business and business assets (or in the case of a consumer debtor, his personal assets), albeit subject to court control, and, in certain cases, subject to oversight by a creditors' committee. Utilizing various tools provided by the Bankruptcy Code, including the right to reject burdensome contracts, abandon burdensome property (subject to certain limitations), and to modify the terms of secured and unsecured obligations, the debtor seeks to rehabilitate its business and/or reorganize its
capital structure. If successful, the case will culminate in court approval of a reorganization plan. If unsuccessful, the case will end in a dismissal or conversion to Chapter 7. An individual debtor can obtain no better discharge in a Chapter 11 then he could have obtained in a Chapter 7. Because of the complexity and cost of Chapter 11, an individual wage earner, if eligible for Chapter 13, is normally better off in Chapter 13.
A determination of whether you would be helped by a bankruptcy filing can only be determined after you and your counsel have discussed your specific circumstances, including your assets and liabilities, what you want to accomplish, etc.
Some of the things which you and your counsel may discuss include:
1. Alternatives to Bankruptcy. The best time to consider whether bankruptcy can help to resolve financial problems is when there are alternatives. Alternatives can include attempts at comprehensive out-of-court workouts, forbearance arrangements with key creditors, doing nothing
and hoping that the problem passes, etc. Of course, bankruptcy may remain the best strategy.
2. Which Chapter in Bankruptcy. You will need to choose between the options. The best Chapter in a given case will depend on what you want to accomplish, the financial stakes, eligibility issues, etc.
3. Pre-bankruptcy Planning. Is there any pre-bankruptcy planning which needs to be done. While both the bankruptcy and criminal law prohibit pre-bankruptcy transactions done for fraudulent purposes, there are, in some cases, things which can and should be done prior to the bankruptcy filing to enhance your fresh start.
4. The risks of Bankruptcy. You need to be aware of the risks of the bankruptcy as well as the potential benefits. For example, risks include, but are not limited to: (i) assets which you may want to retain may be sold over your objection; (ii) you may be denied a discharge if you engage in any wrongful conduct in relation to the bankruptcy case such as failing to disclose assets or failing to cooperate with the trustee; (iii) not all debts are discharged by a bankruptcy such as debts owed to creditors who are not given notice of the bankruptcy, debts arising from fraudulent or other wrongful conduct, certain tax and support obligations, etc.; (iv) the bankruptcy may spawn unanticipated litigation that increases the (legal) cost of the bankruptcy case; and (v) you may be denied credit for some period in the future.
5. The Bankruptcy Tradeoffs. Bankruptcy entails tradeoffs. As is the case with the risks, you must be aware of the tradeoffs. By filing bankruptcy you obtain the benefit of the automatic stay and get access to the various tools provided by the Bankruptcy Code to effect a fresh start and/or
reorganization. In return you will, among other things: be subjected to examination by your creditors at a first meeting of creditors (Section 341 meeting), and in possible Rule 2004 depositions; be obligated to make full disclosure of all assets and liabilities and all other aspects of your financial affairs; have subjected substantially all of your assets to the jurisdiction of the bankruptcy court; and have many of your business and/or financial decisions be second guessed, particularly in the context
of Chapters 11, 12 and 13. In order to make effective use of your bankruptcy it is necessary for you to appreciate the existence of tradeoffs.
Not surprisingly, the answer is generally yes. Whether you will be able to obtain credit post-bankruptcy, outside of the reaffirmation of pre-petition credit cards, depends on your situation, including income, and the underwriting requirements of the companies from which you seek credit. There is information available on the internet, and elsewhere, regarding rebuilding credit which may be helpful.
How long will my bankruptcy remain on my credit records?
The Fair Credit Reporting Act (15 U.S.C. §1681 et. seq.) prohibits the reporting of obsolete information about consumers. Obsolete information includes bankruptcy cases filed more than 10 years prior to the report. See 15 U.S.C. §1681c(a)(1). There are, however, exceptions to the prohibition such as reports used in connection with large credit transactions, or certain employment situations. It is therefore likely that while the fact of the bankruptcy filing will remain on your records forever, it may only be generally disclosed by credit reporting agencies for the first 10 years following the bankruptcy filing, and thereafter only in certain situations.
How much will filing for bankruptcy cost?
It depends. Legal fees varies by attorney, by complexity of the case, and by Chapter. In addition to legal fees, there may be other costs and expenses which you will be obligated to pay. These costs and expenses may include
transcripts, costs of copying documents and mailing, expert witnesses, deposition costs, filing fees, etc. You should request a written fee agreement so your responsibility for legal fees and costs and expenses are clarified at the outset.
The filing fees, which are paid to the Clerk of the Bankruptcy Court, vary by Chapter and are generally not included in the negotiated legal fees. The filing fee for a Chapter 7 is $274.00, for a Chapter 13 it is $189.00, for a Chapter 12 it is $239.00, and for Chapter 11 it is $1039.00. These amounts are subjected to change from time and time, and if a factor should be confirmed with your attorney.
What kinds of information should I bring to my initial meeting with my attorney?
This is, of course, something which you should ask the attorney who you intend to consult. At a minimum you should bring the following information:
(a) a list of your creditors (and balances due);
(b) a list of your major assets (i.e., any items of property worth more that $475) and your best estimate of the fair market value of those assets; and
(c) your current monthly income and your current monthly living expenses.
This information will not be sufficient to allow the completion of the Bankruptcy Paperwork, but should allow you to discuss your situation and options. As discussed above, however, a complete analysis requires everything needed to complete the Bankruptcy Paperwork.
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