Memphis Bar Association

Bankruptcy-Part 1

Courtesy of attorney Bruce Ralston and www.memphisbankruptcylawyer.com

What Is Bankruptcy?

Bankruptcy is a legal proceeding in which a person who can not pay his or her bills can get a fresh financial start.  The right to file for bankruptcy is provided by federal law.  Filing bankruptcy immediately stops almost* all creditors from seeking to collect debts from you, at least until your debts are sorted out according to the law.  (*It does not stop criminal proceedings or collection of past-due child support, but those debts can usually be managed through a chapter 13 plan.)

While bankruptcy as we know it today is based on a provision that was included in the original U.S. Constitution, the concept is based on the Lord’s Release, also known as The Seven Year Release, as outlined in Chapter 15 of Deuteronomy in the Old Testament.  For more information on what the Bible says about debt and bankruptcy, please contact me for a copy of another handout entitled, “Forgive Us Our Debts, As We Forgive Our Debtors; Bankruptcy and The Bible.”

When it comes right down to it, there are two basic reasons for filing for bankruptcy: the “automatic stay” and the “discharge.” The automatic stay is what stops creditors from bothering you. It is imposed automatically at the beginning of the case, and lasts until the case is closed, or until you get your discharge (whichever comes first). It is possible for a creditor to have the stay lifted as to them, but they must first either get your approval to do that or file a motion to have the judge order that the stay be lifted. That costs them a lot of money, so only very motivated creditors will file those motions.

The discharge is what happens at the end of a successful bankruptcy case. Technically it is an injunction that stops all discharged creditors from bothering you. It is important to understand that while most debts are discharged, some are not. The exceptions are listed later in this brochure.

 What Can Bankruptcy Do for Me?

Bankruptcy may make it possible for you to:

  • Eliminate the legal obligation to pay most or all of your debts (depending upon what types of debts that you have).  This is called a “discharge” of debts.  It is designed to give you a fresh financial start.

  • Stop foreclosure on your house or mobile home and allow you an opportunity to catch up on missed payments.  (Bankruptcy does not, however, automatically eliminate mortgages and other liens on your property without payment.)

  • Prevent repossession of a car or other property, or force the creditor to return property even after it has been repossessed.

  • Stop lawsuits, wage garnishment, debt collection harassment, and similar creditor actions.

  • Restore utility service or prevent termination of service.

  • Allow you to challenge the claims of creditors who have committed fraud or who are otherwise trying to collect more than you really owe, and in some cases to file suit against creditors who have been abusive and/or dishonest.

 What Bankruptcy Can Not Do

Bankruptcy can not, however, cure every financial problem.  Nor is it the right step for every individual.  In bankruptcy, it is usually not possible to:

  • Eliminate certain rights of “secured” creditors.  A “secured” creditor has taken a mortgage or other lien on property as collateral for the loan.  Common examples are car loans and home mortgages.  You can force secured creditors to take payments over time in the Chapter 13 process, and bankruptcy can eliminate your obligation to pay any additional money if your property is taken, or if you choose to surrender the collateral to the secured creditor (which changes the nature of that debt from secured to unsecured).  In most cases you cannot keep the collateral unless you continue to make payments.

  • Discharge types of debts singled out by the bankruptcy law for special treatment, such as child support, alimony, certain other debts related to divorce, most student loans, court restitution orders, criminal fines, and some taxes.

  • Protect cosigners on your debts.  When a relative or friend has co-signed a loan, and the consumer discharges the loan in bankruptcy, the cosigner may still have to repay all or part of the loan. However, in Chapter 13 you can protect cosigners by paying the full amount of the debt through the plan, if you are able to do that.

  • Discharge debts that arise after bankruptcy has been filed. It is very important to understand that bankruptcy only affects debts or claims that existed before the bankruptcy petition was filed.

 What Are the Different Types of Bankruptcy Cases?

There are four types of bankruptcy cases provided under the law for individuals:

  • Chapter 7 is known as “straight” bankruptcy or “liquidation.”  It requires a debtor to give up property which exceeds certain limits called “exemptions,” so the property can be sold to pay creditors. In more than 95% of all chapter 7 cases the debtor either loses nothing or only loses something that he or she wants to surrender, such as a car that is no longer working or that she can not afford to keep.  (There is a longer discussion of exemptions later in this paper.)

  • Chapter 11, known as “reorganization,” is used by businesses and a few individual debtors whose debts are very large (over $1,000,000.00).  Chapter 11 is usually a very complicated and expensive process.

  • Chapter 12 is reserved for family farmers and fishermen. This is much like Chapter 13, but with higher debt limits and special provisions for the types of debts that farmers often have.

  • Chapter 13 is often called “wage earner,” even though it has been more than 30 years since that was actually the proper legal term.  It requires a debtor to submit a plan to pay debts (or parts of debts) over a period of 3 to 5 years. In Memphis that time period is always set at 5 years unless you can pay 100% of your debts in full in less time. (Long term debts such as mortgages and student loans only need to be brought current during the plan; not paid in full.)

What Type of Bankruptcy Case Should I File?

Again, you should only file bankruptcy after considering all of your options, and after consulting with an experienced attorney who is licensed in your state.  Most attorneys in this area offer free consultations. If you believe that bankruptcy may be in your future, go ahead and take advantage of that free offer. At the very least you will have a better understanding of what sort of result you might get, and on top of that you just might avoid making a serious mistake.

Most people filing bankruptcy will want to file under either chapter 7 or chapter 13.  Either type of case may be filed individually or by a married couple filing jointly.

Chapter 7 (Straight Bankruptcy)

In a bankruptcy case under chapter 7, you file a petition asking the court to discharge your debts.  The basic idea in a chapter 7 bankruptcy is to wipe out (“discharge”) your debts in exchange for your giving up property, except for “exempt” property which the law allows you to keep.  In more than 95% of all chapter 7 cases, all of the debtor’s property is exempt, and for those people there is no danger of losing anything to the trustee.  But property which is not exempt can be sold, with the net proceeds distributed to creditors. (There is a longer discussion about exemptions later in this paper.)

In chapter 7 it is possible to keep your home, your car(s), and other things that you are still paying for. If you are current on the payments, and if the property is not worth a great deal more than the balance of the loan, then in most cases you can keep the property if you want to. However, if you are far behind on the payments on a mortgage or car loan, and if you want to keep that house or car, a chapter 7 case probably will not be the right choice for you.  That is because chapter 7 bankruptcy does not eliminate the right of mortgage holders or car loan creditors to take your property to cover your debt, and the farther behind you are on the payments, the less likely it is that they will agree to work with you.

Chapter 13 (Reorganization, or “wage earner”)

In a chapter 13 case you file a “plan” showing how you will pay off some of your past-due and current debts over three to five years.  The most important thing about a chapter 13 case is that it will allow you to keep valuable property--especially your home and/or car--which might otherwise be lost, even if you are in default on the payments. However, you must be able to make certain payments which the bankruptcy law requires to be made to your other creditors, too.  The payments are based on: (A) the types of debt that you have; and (B) the results that you are attempting to achieve.  The payment schedule is different in every case, so do not assume that your payments will be the same as anyone else’s.

 You should consider filing a chapter 13 plan if you:

1. own your home and are in danger of losing it because of temporary money problems;

2. are behind on car loans or other debt payments;

3. have valuable property which is important to you but which is not exempt; AND

4. you have regular income (regardless of the source) that will be sufficient to make the payments that will be required in your particular case.

 Also, there are certain kinds of debts that are not affected by chapter 7, but which can be managed in a chapter 13 plan. The most common examples are taxes, child support, criminal fines and court costs, outstanding MLG&W bills, and a few other specific types of debt.

You must have enough income in chapter 13 to pay for your necessities and to keep up with the required payments as they come due.  The most common mistake that debtors make is attempting a chapter 13 when they do not have enough income to make the required payments and to maintain their household expenses at the same time.

 How Much Does It Cost to File for Bankruptcy?

For most people there are three separate fees (court costs; attorney fees and credit counseling fees) that must be paid before a case can be filed, and a fourth fee (financial counseling) that usually must be paid before a case can be closed.  People who are truly indigent* may be able to waive some or all of these fees entirely, or get reduced rates.

The filing fees (“court costs”) are presently $299.00 for Chapter 7 and $274.00 for Chapter 13. The same fee applies whether one person is filing alone or if a married couple is filing jointly.  In some cases you may be allowed to pay this filing fee in installments if you can not pay all at once, but that process can be risky so you should pay the fees in advance if at all possible.  For Chapter 11 if you have to ask how much the filing fee is, then you can’t afford it.

The standard attorney fee in Memphis for Chapter 13 is $3,000.00.  All or part of that can be paid in advance, but in most cases that fee is paid later, as part of the plan.  Some attorneys offer a discount if all or part of the fees are paid in advance.  If your case becomes complicated you may have to pay extra, but that is rare in Memphis

There is no “standard” fee for Chapter 7, but most attorneys charge between $800.00 and $1,500.00, depending on the type of case and on the complexity of the situation.  Fees for businesses may be much higher.  While the attorney fees for Chapter 7 are usually much lower than they are for Chapter 13, most private attorneys insist that all Chapter 7 fees be paid in advance, or within a very short period after filing, because there is no “plan” through which those fees can be paid.

Before filing any type of bankruptcy, all individuals (anybody other than a corporation, LLC or partnership) must now submit a certificate showing that they have completed a credit counseling course from a pre-approved agency.  The cost for that is usually between $35.00 and $60.00, depending on the agency, and depending on whether one person is filing alone vs. a married couple filing jointly.

After filing a bankruptcy case, but before the case completes, all individuals must also submit a second certificate showing that they have completed a debtor education (a.k.a. “financial management”) course from one of the approved agencies. Most agencies charge between $25.00 and $50.00 for that course. The state Department of Agriculture offers a class once per month for only $10.00 per person, but most people choose to pay more for the convenience that is offered by the private vendors for taking the course online or by mailing in a workbook. (Note: The Dept. Of Agriculture’s only offers the debtor education course, not the preliminary credit counseling.)

*People who are truly indigent may qualify for free services or reduced rates for chapter 7 (not for chapter 13). This applies only to the poorest of the poor; typically people who are elderly and/or disabled, who have no significant assets, and who have no realistic chance of improving their income. If you think that you may qualify for free services, call Memphis Area Legal Services at (901)523-8822.

What Must I Do Before Filing Bankruptcy?

You must get a credit counseling certificate from an approved credit counseling agency, and it must be dated within 180 days before your bankruptcy case is filed.  The agency will review possible options available to you in credit counseling and assist you in reviewing your budget.  Different agencies provide the counseling in-person, by telephone, or over the Internet.  Frankly, for the vast majority of people this is a waste of time and money, but until the law is changed it must be done.

If you decide to go ahead with bankruptcy, you should be careful in choosing an agency for the required counseling. While there are many agencies that have been approved in certain parts of the country, not all of them are approved in this district. Even if they advertise that they are approved in all districts, you should still check with a local attorney or with the office of the United States Trustee to be certain.  

Some of the approved agencies offer debt management plans (also called DMP’s).  This is a plan to repay some or all of your debts in which you send the counseling agency a monthly payment that it then distributes to your creditors.  Debt management plans can be helpful for some consumers, but for other people DMP’s are a terrible idea.  Some counseling agencies have been known to pressure people into entering a debt management plan even if that is not in your best interest, because they can charge a fee for managing that plan.  Also, there are a number of creditors who simply refuse to participate in a private payment plan. One of the benefits of bankruptcy is that creditors have no choice about whether to participate or not (with the exceptions of child support obligations and criminal court costs and fines).

You must also gather up any documents that have anything to do with your finances during the past 6 months or more. This includes:

  • Paycheck stubs (or other payroll data);

  • Anything showing income from any other source, such as Social Security, child support, alimony, self-employment, private retirement, etc.;

  • Billing statements, contracts and collection letters (as many as possible);

  • Copies of your last 3 tax returns or official “return transcripts” from the IRS;

  • Bank statements;

  • Papers related to lawsuits or garnishments;

  • Credit reports;

  • Etc., etc., etc. . . . . (If it has to do with income, assets or debt, save it.)

It is important to keep in mind these important points:

  • Bankruptcy should be the last choice, but is not necessarily to be avoided at all costs.  In many cases, bankruptcy may actually be the best choice for you.

  • Timing can be critical, especially in chapter 7. This is another very good reason for consulting with an attorney early in the process.  There are far too many variables to list here, but with the complicated rules that are now in place filing one day too soon or one day too late can literally make all the difference.

  • If you sign up for a debt management plan that you can’t afford, you may end up in bankruptcy anyway.  If that happens you may have only lost more money and suffered more financial agony than you would have otherwise.

  • There are approved agencies for bankruptcy counseling that do not offer debt management plans.

  • Bankruptcy does not prevent you from repaying your debts. From a legal perspective, all bankruptcy really does is to prevent your creditors from bothering you. After the case is closed you are free to repay anyone that you want to, and I highly encourage that as long as you are truly able to afford it. (If you choose to repay debts that have been discharged in bankruptcy, don’t tell the creditor(s) of your intentions in advance, because you could accidentally be making promises that you can’t keep. Just send them a check, with a note saying that you want to pay the debt despite the bankruptcy discharge. Also, don’t pay them just because something is showing up on your credit report. If that has happened to someone you know, call me immediately. I handle those matters for free.)

  •  It is usually best to meet with an attorney before you receive the required credit counseling.  Unlike a credit counselor, who cannot give legal advice, an attorney can provide counseling on whether bankruptcy is the best option.  If bankruptcy is not the right answer for you, a good attorney will offer a range of other suggestions.  The attorney can also provide you with a list of approved credit counseling agencies, or you can check the website for the United States Trustee Program office at www.usdoj.gov/ust.

  • Do not buy, sell, give away or otherwise transfer ownership of anything significant shortly before filing bankruptcy. There are far too many points to list here, but trust me when I say that doing this not only raises big red flags for the other people involved, but it can also create a situation where something that would not have been a problem if it had been left alone is suddenly now a big problem simply because its status changed before the bankruptcy was filed. Again, consult with an attorney before making any major moves.

Bankruptcy Questions Continued in Bankruptcy-Part 2. Click here to go there now.

  DISCLAIMER:  The preceding appears courtesy of Bruce Ralston and www.memphisbankruptcylawyer.com, whose contributions toward its content are greatly appreciated.  However, the summary explanations above are for general informational purposes only and are not intended as legal advice.  No attorney-client relationship is created herein.  As each is unique, specific legal advice should be sought for each situation in which legal advice may be warranted.

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