Bankruptcy 101 - Basic Bankruptcy Information
What is Bankruptcy:
Bankruptcy is a federal court proceeding whereby an insolvent debtor is able to seek relief from many of their financial obligations. This remedy is geared to provide the filing party with a \"fresh start\". An order of discharge from the bankruptcy court gives the debtor this remedy. Depending on certain eligibility requirements and circumstances of the debtor, an order of discharge can come from several different chapters under the United States Bankruptcy Code.
TYPES:
The Bankruptcy Act Means Test uses an individual debtor\'s income and expenses to determine if your average income for the 6 months prior to filing bankruptcy is below the median income for your state’s residents.
A Chapter 7 Bankruptcy is the “liquidation” chapter. In theory this chapter involves the liquidation of the filer’s estate. The estate is all of the property that the debtor owns or has an interest in at the time of filing. These assets can include items such as a debtor’s house, car stocks, furniture, potential claim for damages in personal injury action, outstanding debts owed to the debtor, patents, etc.
The estate assets will be liquidated or sold by a chapter 7 trustee who is appointed by the United States Trustee’s office. This appointed chapter seven trustee is normally a professional who operates in this capacity in addition to his own private practice.
Although a Chapter 7 is the “liquidation” chapter, a high percentage of the cases filed under this chapter do NOT trigger a sale of the debtor’s belongings. This is because the filing party is allotted a set of statutory exemptions that they can use to protect their personal and real property. In a bankruptcy, a resident who has lived in the state for over two years will almost always use the state exemptions found in the OCGA. These exemptions allow an insolvent debtor to protect a certain dollar amount in their personal and real assets.
A Chapter 13 Bankruptcy is a “reorganization” chapter. As it sounds, this chapter allows the filing debtor an opportunity to reorganize or restructure many of his/her financial obligations. Under protection from the court’s automatic stay, this chapter can stop an upcoming home foreclosure or car repossession by proposing a chapter 13 plan that indicates a schedule of how this debt will be repaid. If the filed plan complies with the code and laws of the court, a debtor can have the proposed plan override the existing repayment schedule. For example, through a Ch 13, a person can stop a home foreclosure by proposing a plan to get current with delinquent mortgage payments over a three to five year period. This is a powerful tool because the mortgage company does not have to approve the proposed plan for it to control. A court holds a confirmation hearing and if the plan complies with the bankruptcy code, then the plan is implemented and forces its terms onto the creditor.
The debtor will not receive a discharge order from the court until he completes the entire plan.
ELIGIBILITY:
Someone can file for relief in bankruptcy regardless of their income level or ability to repay their debt. However, the debtor’s financial picture may make them unable to receive a discharge under a particular chapter.
A current monthly income test is used to help assist the courts with making presumptions regarding a person’s ability to repay all or a portion of their bills. The laws changed back in 2005. The eligibility standards prior to this change were a lot more subjective and allowed the person and their attorney a less structured way to convey their financial picture. The changes implemented by BACPA imposed a much more objective test that someone must follow to determine the ability or inability to repay certain debts.
The current monthly income test or means test is determined by taking the filer’s average income over the last 6 months. This average income is then annualized out to project an annual salary based on this average. Once this is determined, a debtor whose average annual income falls under the median level for the state they file in will be given the presumption that they do not have any disposable income to repay their unsecured creditors. This presumption can be challenged by the US Trustee. If the debtor’s annual income, derived by their average monthly income, is above the median income for the state they reside in then they most go through a second tier set of variables to determine the ability to repay the unsecured debt. If the second part of the means test comes back with a disposable income that will allow them to repay more than 25% of the unsecured bills then cannot file a 7 and must enter a 13 repayment plan. Otherwise, if their monthly disposable income does not provide enough over 60 months to pay at least 25 percent of their debt than they could still receive the presumption enabling to file a chapter 7.
How to prepare for your attorney consultation:
Itemize current sources of income
Itemize major financial transactions incurred over a two year period
Itemize your living monthly expenses
Itemize your secured and unsecured debts
Itemize all property including assets and possessions
Gather tax returns, car titles, other important documents.
The Process:
Complete financial counseling within six months prior to filing. This is a specific certificate that must be an agency accredited by the US Trustee’s office.
Itemize you finances
With your attorney – determine your exemptions
You and your attorney will file an electronic petition along with forms that list you property, debts, income and expenses. Also a statement describing your financial affairs will be included. Your honesty on these forms will be judged by the court to determine the status of your petition. This is important as you will be sworn in under oath to attest to the veracity of the statements made in the above referenced filings.
Most of the time, an automatic stay is imposed once the bankruptcy schedules are filed. The automatic stay means creditors are barred from attempting, directly or indirectly, to collect a debt from the debtor. For example, this stops the harassing phone calls and threat from the creditors or collection agencies. It also allows debtors in many instances the power to remove garnishes from bank accounts or paychecks.
Approximately one month after filing, a proceeding called the 314 Meeting of the Creditors will be held. Creditors and the trustee will attend. (optional for creditors) The trustee will look to assert a claim in all non-exempt assets or the cash value of non-exempt assets in order to repay creditors. The debtor will also be asked to show proof of identity and to make an oath that the filed information is the truth.
The creditors and trustee have sixty days following this meeting of creditors to challenge or object to the discharge of all debts or even object via an adversary proceeding to one particular debt. A debtor has a second credit counseling requirement to complete in order for them to be eligible for their discharge. A case can close without a discharge if this is not complete. This court mandated financial management instructional course can be done online.
Finally, in a chapter seven the debtor will receive an order of discharge from the court if all of the above steps have been completed. A chapter 13 debtor will receive their discharge after completing the entire 13 plan that was confirmed by bankruptcy court.
Costs:
Chapter 7 - $299 to file + attorney Fees + Credit counseling certificate course fees
Chapter 13 - $274 to file + attorney Fees + Credit counseling certificate course fees