How Do You File For Bankruptcy? A Case Study
File this Bankruptcy not that Bankruptcy!
Bankruptcy can mean a fresh start or it can mean getting caught up on absolutely essential secured debts. Or it is both. One thing that we will address in this article though is how to file for bankruptcy. Should you file it by yourself, or hire a talented and reputable firm to help you?
Because you are reading this, it means bankruptcy could be a difficult reality in your immediate future. Read this guide and learn the must-know information to ensure you’re armed with information when you visit with a local bankruptcy attorney.
Have you seen that meme that describes bipolar disorder? It usually reads something like: “I hate being bipolar”; then just below that, you read the words: “It’s awesome!” Filing bankruptcy can actually elicit the same dual response out of someone. A person might describe the process of filing bankruptcy as being difficult, horrible, embarrassing and cumbersome. But the same person might also describe in almost the same breath that bankruptcy has been one of the most liberating actions they have ever taken.
But you could also take two different people who are deciding whether to file for bankruptcy and who end up in alternate realities. Take Dave from down the street. He comes to a point that feels like he is either at the end of his rope or he is feeling like he simply cannot ever get his finances back into a position where he feels like he can put his difficult and checkered financial past behind him.
Based on the fact that it has been mentioned that Dave is looking for a fresh start, most skilled attorneys would begin formulating questions about whether Dave should consider filing a chapter 7 bankruptcy. Although this still is not enough information for even a skilled attorney to know what to because of a lack of the full story, they might already have a decent idea as to how bankruptcy could affect Dave. Such an attorney with a career of experience helping people eliminate debt would realize that this person is likely better suited for a chapter 7 bankruptcy simply because this is the type of bankruptcy that is most commonly used to effectively offer a debtor like Dave a fresh start. So now let’s review how Dave’s life would unfold in two different alternate realities.
Alternate Reality #1 for Dave
Because Dave is looking for a fresh start, you will learn that he is probably yearning for a Ch 7 bankruptcy. But the simple fact is that Dave may not realize it yet. He contacts an attorney specializing in bankruptcy and discovers that the attorney whom he has contacted is focused on making more money for his own law firm and not necessarily on the thing that is best for the client. Combine this with the fact that a chapter 13 bankruptcy typically generates more revenue for a law firm. Dave comes to the lawyer for advice and receives the surprisingly bad advice that he should file for Ch 13 bankruptcy because this will be something that he can get started filing much sooner for less money down.
After some follow up questions that determine that Dave qualifies for either a chapter 7 or a 13 case, and after the attorney determines that Dave likely will have the ability and the money to be able to afford a monthly trustee payment in chapter 13 bankruptcy (albeit barely,) he charts a course that is designed to convince Dave that he should file chapter 13.
His attorney explains that he will be entering into a repayment plan for 3 years (although the plan could also be structured to happen over a 4-year or 5-year period of time as well.) Over this period of time, Dave will become intensely familiar with the frustration of being stuck in a bankruptcy that is not accomplishing what he was desiring in the first place.
Initially, Dave came into the bankruptcy lawyer’s office looking for advice on getting a new start in his financial life. But instead of a new start, he got a new set of painful delays. Instead of rebuilding his credit fairly quickly due to the lack of unsecured debts, he instead is left to make monthly payments over a long duration of time. If he previously did not have problems with broken leases or getting credit for auto loans, he may not be completely barred from getting a new apartment lease or getting a new car, but these will come at significant expense and red tape because of his requirement to get permission from the bankruptcy court and the trustee’s office before doing just about anything when it comes to debt.
In summary about this alternate reality, you have a situation where Dave felt that he needed a fresh start. He may have been right, but what he received was anything but a fresh start. Instead, it was a long, protracted battle to complete payments in a type of bankruptcy that was not well suited to the specific situation of someone looking for a fresh start.
But that is not how this had to go for Dave.
Alternate Reality #2 for Dave
In our second scenario, you watch the story unfold differently. Dave walks into the offices of an attorney who quickly perceives that Dave wants a new beginning. As opposed to the previous scenario, this attorney is looking out for the best interests of his clients and not just his own attorney bank account. He discusses at length with Dave about the pros and cons of filing for bankruptcy and begins to guide Dave toward a chapter 7 bankruptcy procedure by letting Dave make the decision himself. Because of his years of experience that have been put to use helping clients come up with the best solutions for their financial difficulties, the attorney does put more emphasis on the negative side effects from being locked into a chapter 13 bankruptcy for at least 3 years.
The ensuing 3 years for Dave in this alternate realty are actually quite pleasant compared to the drudgery of being involved in a Ch 13 bankruptcy case. After the same initial period of meetings like the 341 hearing that exists for both chapters 7 and 13, the rest is quite different. When the 2nd and 3rd months come and go for Dave, he is not required to make a 2nd or 3rd monthly trustee payment as ordered in his repayment plan. Instead, he spends most of month 2 and 3 waiting. While his bankruptcy is not technically completed by this point, his job in the whole ordeal is quite literally boiled down to a hefty bit of waiting around for the discharge which signals the completion of his chapter 7 bankruptcy. This typically lasts between 3 and 5 months total and Dave is on his way.
His bankruptcy attorney may have a specific procedure for helping clients rebuild their credit, or he may simply be instructed to be careful and wise with his money moving forward. If he does a decent job of guarding his credit and working diligently to rebuild, he can expect to have good credit again within just a few years. If his lawyer provides additional assistance like our law firm provides, then he can actually accelerate the process of rebuilding and can get into good credit score ranges typically within just a short period of 1 to 2 years after bankruptcy.
What if You Actually Do Need a Chapter 13 Bankruptcy Filing?
To contrast the difference between how a chapter 13 bankruptcy case could go well and how it could go poorly for people who actually were suited for that bankruptcy, consider the dual alternate realities of Tonya.
Tonya was someone who was an undisputed good candidate for a Ch 13 bankruptcy case, but did not know what law firm she should choose to help her. Consider the following alternate realities for a picture of how two different types of attorneys can bring a different outcome for the client.
Alternate Reality #1 for Tonya
Tonya searched online for an attorney to help her know how to file for bankruptcy. She did very little research and felt that the first law firm in the list she found looked good enough to call and so she dialled the number. The phone rang and went to voicemail and she proceeded to leave her name and number. The second bankruptcy law firm listed produced a similar result, so she left her name and number and got busy with getting ready for work and so she did not thing too much more about the subject. The next couple days remained busy and she did not hear back from either bankruptcy attorneys for several days.
When she did hear back from the attorney’s office, she wasn’t sure which one of the two she had contacted had called her back. The process felt pretty robotic but she felt she did need to act on her situation and so she agreed to come into the office for a consultation with the attorney.
She signed up with the law firm to do a chapter 13 bankruptcy that would help her save her home from foreclosure. Because she was not sure how the process would go, she generally waited until the attorney contacted her back about important dates in the bankruptcy. The law firm was pretty disorganized and rarely called and if they did, they would usually be calling to say that something had gone wrong that could have been prevented if Tonya had provided them with the information that the law firm needed.
Although the bankruptcy process for Tonya continued for a while, eventually her case was dismissed because she failed to turn in a tax return that the chapter 13 trustee’s office required. The attorney’s office got the case reinstated but at an expensive cost to her of several hundred dollars.
Eventually her case was finished and she rejoiced that it was over and she felt she was back on track. The day came and left without fanfare and she never heard from her attorney to congratulate her or thank her for her business, in spite having paid thousands of dollars for her attorney representation.
Alternate Reality #2 for Tonya
In the alternate version of events for Tonya, she knew that she needed the help of a bankruptcy attorney, but before making a single phone call, she read up on reviews, even spoke to a couple of the bankruptcy law firms on the phone before setting an appointment. Then, she set a couple appointments but she realized that not all bankruptcy attorneys are created equal and so she chose one who was very responsive and even picked up the phone when she called instead of pointing her to voicemail whenever she called.
Her chapter 13 bankruptcy was no cake walk, but she didn’t have her case dismissed for lack of paperwork, and it seemed that at every turn, her team that was working for her at the attorney’s office seemed to be anticipating her needs. They would call and remind her of important upcoming dates, remind her of paperwork required, and more. At the beginning, she would find herself asking herself, “What do I need to file bankruptcy?” But toward the middle and end of her process, she would find herself thinking that she needed to make sure and return the calls of her attorney because as long as she stayed in touch with them, they handled all the important details and told her what was required of her throughout the process.
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U.S. Trustee has become much more aggressive in recent times in pursuing (what the U.S. Trustee believes to be) abusive Chapter 7 filings.
One thing to keep in mind, whether using an attorney or attempting to file a pro se bankruptcy on your own without an attorney, the US Trustee’s office has become increasingly more aggressive in stopping bankruptcies which they feel are an abuse of the bankruptcy code. This generally does not apply to most common bankruptcy cases, but rather applies to those individuals who are filing for bankruptcy in a way which would lead the U.S. Trustee to have the opinion that they are “getting away with something.” For example, if a normal debtor sought out protection under the bankruptcy code and received a fresh start, and had annual household salaries of approximately $50,000 with a household size of 4, and supposing that they had not done anything out of the ordinary in process leading up to their filing bankruptcy, they would draw very little inspection from the US Trustee’s office. On the other hand, the same family of 4 might encounter entirely different circumstances if their household income was over $100,000 and yet they were still able to qualify for filing chapter 7 bankruptcy due to the fact that they had high car balances and expensive childcare and an expensive mortgage payment which offset a large amount of their income and still technically allowed them to file for bankruptcy. If the U.S. Trustee decided to audit the case, they could hold that the bankruptcy was filed in bad faith and that it was an abuse of the bankruptcy code.
The new notice provisions require the debtor to give notice of the bankruptcy to the creditor at an “address filed by the creditor with the court,” or “at an address stated in two communications from the creditor to the debtor within 90 days of the filing of the bankruptcy case.
When filing bankruptcy, a debtor is required to provide a list of their creditors to the court which is contained in their petition for bankruptcy. Under a provision that was nicknamed the new notice provisions, debtors are specifically required to provide an attempt at an accurate address for the creditor in order to ensure that they receive proper notice. If the creditor submits their proof of claim and provides an address directly to the court, then this address should be used to notice the creditor. On the other hand, in some cases, creditors do not offer up proofs of claim to the court automatically and in such cases, the debtor is to notice the creditor at an address which the creditor had provided to the debtor in specifically two statements (mailed communications) from the creditor within a 90-day period of time of filing the case.
A bankruptcy attorney can advise the consumer on when the best time to file is, whether they qualify for a chapter 7 or need to file a chapter 13, ensure that all requirements are fulfilled so that the bankruptcy will go smoothly, and whether the debtor’s assets will be safe if they file.
With expanded requirements of the BAPCPA bankruptcy act of 2005, filing a personal chapter 7 bankruptcy is complicated. Many attorneys that used to practice bankruptcy in addition to their other fields, have stopped doing so due to the additional requirements, liability and work involved. After the petition is filed, the attorney can provide other services.
When hiring a bankruptcy lawyer, one of the most important forms of legal advice that they provide to consumers revolves around the timing and type of bankruptcy to file. For example, the lawyer could gather information from the debtor and then perform a means test in their law office that would help the debtor find out whether they qualify for a chapter 7 bankruptcy or whether they would be forced to file a chapter 13 bankruptcy due to income that does not fall within the guidelines of the median income.
Another important aspect of the guidance that an experienced and skilled bankruptcy attorney should offer to a client pertains to important considerations about the client’s assets. If a client owns certain types of assets which are not exempt and hence do not receive protection under the bankruptcy code, then the attorney would need to advise the client about their options and risks for filing bankruptcy. For example, if a debtor owned two homes, and one of their homes was an inherited house from a diseased parent along with a home in which they live with their family. The 2nd home would not fall into a protected class and hence the client would need to be aware that if there were an equity position in both homes, one of the homes would likely be in a position to be liquidated by the trustee and the debtor could lose the home when the trustee sells the home to pay unsecured creditors.
Furthermore, this is just one treacherous pitfall that a debtor could encounter among many complicated rules and procedures that were enacted as a result of the 2005 BAPCPA bankruptcy act. Due to the nature of bankruptcies becoming much more complicated to file, many attorneys stopped handling bankruptcy law. Many of these consumer attorneys had previously acted as generalists, filing bankruptcy cases for clients among other areas of law practice such as family law, criminal law, or other forms of consumer law. However, the chances for a major mistaken by an attorney who is not skilled and focused on bankruptcy opened these attorneys up to serious liability and hence, many made the choice to stop practicing in bankruptcy law. Furthermore, there are specific obligations that an attorney must adhere to such as keeping the client’s bankruptcy petition and other documents locked up and safe for a period of 5 years following the bankruptcy. With chapter 13 bankruptcy cases, the requirements for follow up work by the attorney are even greater.
Neither the federal bankruptcy court nor a state court usually oversee this process, however the assignee is subject in most cases to a look back provision within the state the assignment took place.
It is this removal of the court from the liquidation process which increases the speed of the assets sold in an assignment process. This is one substantial difference from a regular bankruptcy.
There are certain instances that stem from the family court in processes involved in divorce. Still in other cases, such as complex business liquidation bankruptcies, a trustee might seek to unwind a transaction that occurred prior to the date when a bankruptcy was filed. The participants such as creditors in some of these bankruptcy cases might attempt to remove the court from the process of liquidating assets in order to seek for a more efficient process that results in better recovery for the creditors. In such cases, the body that has specific jurisdiction for such a process will generally defer to the assignee who will review whether the look back provision will apply. This look back provision is something that will be applied within the original state where the assignment or receivership took place.
One specific risk a secured creditor wants to avoid is preference or the perception of preference in the liquidation process (see fraudulent transfer).
If a creditor is negotiating a settlement with a debtor, they might specifically bar the filing of bankruptcy until a specific period of time has passed. Such foresight is usually an attempt to avoid what the bankruptcy court will later define as a fraudulent transfer. If the transfer is found to have occurred within the preference period, then the trustee has the right to unwind such a transaction and attempt to pull back the money or other asset transfer and use that money to pay other unsecured creditors in a way that does not benefit the singular creditor, but rather the entire pool of unsecured creditors.
While bankruptcy cases are always filed in United States Bankruptcy Court (an adjunct to the U.S. District Courts), bankruptcy cases, particularly with respect to the validity of claims and exemptions, are often dependent upon State law. One example: two states, Maryland and Virginia, which are adjoining states, have different personal exemption amounts that cannot be seized for payment of debts. This amount is the first $6,000 in property or cash in Maryland, but only the first $5,000 in Virginia. State law therefore plays a major role in many bankruptcy cases, and it is often not possible to generalize bankruptcy law across state lines.
Bankruptcy is filed in US Bankruptcy Court, which is a federal jurisdiction due to being adjunct to United States District Courts. While federal law naturally applies, state laws also come into play in an extensive and all-encompassing manner as applying to exemptions and claims that are dependent on the laws of the particular state where the bankruptcy was filed or the previous state location of the debtor, or the state in which certain assets are located.
For example, if a debtor owns a home in the state of Texas, the value of the equity exemption for a homestead is virtually unlimited. If a person who owned a home free and clear worth $250,000 in Texas were deciding whether to file bankruptcy before selling and moving to Colorado, they would encounter serious ramifications of such a move. If they were to buy an equivalent home in Colorado worth $250,000, they would be thoroughly disappointed when finding that the exemption for a homestead in Colorado is only $75,000 and hence, their new home would not be protected.
Further complicating the application of bankruptcy laws across various states is the fact that some states allow the use of federal or state exemptions, while other states require the use of state exemptions.
However, articles by attorneys often argue that bankruptcy petition preparers are harmful to consumers because of their lack of legal training.
For a while, there was a trend toward the use by consumers of non-attorney petition preparers for bankruptcy. This trend comes and goes, but is highly frowned upon by courts and attorneys alike. The danger in use of such petition preparers lies in the lack of ability to offer competent legal advice. When a person seeks to file bankruptcy, they may feel that their case is very simple and they may have even filed bankruptcy previously and felt that the process was extremely easy and hence felt that the process would be easy once again. But without the ability to have a case reviewed carefully by the knowledgeable eyes of an experienced bankruptcy lawyer, certain pitfalls might be essentially invisible to a bankruptcy petition preparer or to the debtors themselves.
In the United States, a debtor can file a Chapter 13 Wager Earner Plan. The plan will typically last for up to five years, during which time the debtor makes payments that are distributed to their creditors.
When a person is considering the type of bankruptcy to file, there are specific times that different bankruptcy types are better suited to the situation. If a person is facing foreclosure on their home, then a chapter 13 bankruptcy is often suited to saving the home and catching up the past-due portion of the mortgage payments. This bankruptcy is often referred to as a wage earner plan because the necessity of having income to cover the monthly payments in Ch 13 bankruptcy. This type of bankruptcy will involve the formation and approval a repayment plan designed to pay back a portion or all of the debt owed over a period of three to five years. The trustee collects these payments and distributes them according to priority to creditors. First in line are certain types of priority creditors and secured creditors like the IRS, auto lenders, and mortgage companies.
A debtor with no assets or income cannot be garnished by a creditor, and therefore the “Take No Action” approach may be the correct option, particularly if the debtor does not expect to have a steady income or property a creditor could attempt to seize.
If a person is considering bankruptcy, it would be unfortunate for an attorney who is reviewing their case to simply accept them as a client, begin taking their money for legal services, and get to work filing their bankruptcy. The reason for this is that sometimes bankruptcy is not appropriate as a solution. For example, if a person were in their later years of life and had no assets or income excepting for social security income, then it would be unlikely that creditors could do much to the debtor. They could not garnish the debtor because of a lack of income. They could not seize assets or place liens on a home or other real estate due to the lack of these assets as well. Hence, in such situations, the debtor should carefully review whether they ought to essentially do nothing at all.
A general assignment made by a natural person who is subsequently adjudged bankrupt is void against the trustee in bankruptcy as regards any book debts which have not been paid prior to the presentation of the bankruptcy petition.
If a small business owner or mid-sized or large corporation seeks to wind up their business and go “bankrupt” in a way that simply shutters the doors and windows and seeks to let it all go, then they could opt for a bankruptcy liquidation performed by a trustee in an organized fashion. But they could also choose to bypass the bankruptcy code and go straight for a general assignment in a way that would allow the company or person to transfer ownership to the creditor(s) in a way that is much more efficient than going through the red tape involved in bankruptcy liquidation by a trustee.