27 Jun 2007 04:37 pm
F.A.Q.
FREQUENTLY ASKED QUESTIONS:
What is Bankruptcy?
Bankruptcy is a federal court process designed to give consumers and/or businesses a “fresh start” by either eliminating many of their debts or repaying their debts through an order of the court.
When a bankruptcy is filed, creditors have to stop any attempt to collect a debt. Most creditors cannot call, correspond, or sue you after you have filed for bankruptcy. A bankruptcy can stop a pending foreclosure sale of your home, a garnishment of your wages, or a threatened repossession. All types of bankruptcies have numerous rules as to the kind of debts, who is able to file, and what property you can and cannot keep. Below is a list of the different types of bankruptcies that can be filed.
Chapter 7: Liquidation
Chapter 7 is designed for individuals in financial difficulty who do NOT have the means to pay their existing debts. Generally, excessive credit card and/or medical services debt. The purpose of filing a Chapter 7 case is to obtain a discharge of your existing, primarily unsecured, debts. Even if you receive a general discharge, some particular debts are NOT discharged under the law. Therefore, you may still be responsible for most I.R.S. taxes and student loans; debts incurred to pay non-dischargeable taxes; domestic support and property settlement obligations; most fines, penalties, forfeitures, and criminal restitution obligations; certain debts which are not properly listed in your bankruptcy schedules; and debts for death or personal injury caused by operating a motor vehicle, vessel, or aircraft while intoxicated from alcohol or drugs.
Chapter 13: Reorganization or Repayment of Debt
Chapter 13 is designed for individuals with regular income who would like to pay all or part of their debts in installments over a period of time. Generally, to save a house from foreclosure, a vehicle from repossession, domestic support and property settlement obligations, and/or I.R.S. tax issues. Under Chapter 13, you must file with the court a plan to repay your creditors all or part of the money that you owe them, using your future earnings. You must have enough income to pay for your regular expenses and to keep up with the required monthly payments, plus your bankruptcy plan payments, as they come due. This is called your “disposable income”. The period allowed by the court to repay your debts may be three years and/or up to five years, depending upon your income and other factors.
Chapter 11: Corporation Reorganization
Chapter 11 is designed for the reorganization of a business, but it is also available to consumer debtors. Any decision for an individual to file a Chapter 11 should be reviewed by an attorney.
Chapter 12: Farming or Fisherman Reorganization
Chapter 12 is designed to permit family farmers and fishermen to repay their debts over a period of time from future earnings and is similar to a Chapter 13. Any decision for a family owned farm or commercial fishing operation to file a Chapter 12 should be reviewed by an attorney.
How did Bankruptcy change as of October 17, 2005?
One of the biggest change to bankruptcy law in 2005 was Form B-22, otherwise known as the Means Test. This test helps determine “Disposable Income”. Disposable Income is an important concept in filing bankruptcy. It simply determines whether an individual has any money remaining in their budget after paying all necessary living expenses. If there is money left over (disposable income), then the individual must file a reorganization(probably Chapter 13) to pay back creditors. If there is no disposable income, then they are qualified to file a Chapter 7 and receive a discharge without paying creditors back.
Until October 17, 2005, disposable income was determined very simply. A Debtor’s average monthly expenses were deducted from their average monthly income. If there was anything left over, there was disposable income; if not, there was none.
Apparently, Congress felt this was too simple and was allowing too many people to file Chapter 7. The Means Test was designed to force more Debtors into a reorganization. It has accomplished that with much complication and unfair results.
To fully explain the working and effects of the Means Test would take a book. A simple overview follows.
First Step. Determine the last six months average gross income from all sources, including bonuses and overtime. The unfair aspect of this step occurs when someone, through job disruption or illness, is no longer earning that average. Whether or not the income average will be earned in the future is not taken into account at this stage. Compare the average income to the median income for a family of your size in your county. CLICK HERE to see the state median standards.
If the average is at or below the median income, the Debtor passes the Means Test and may file either a Chapter 7 or Chapter 13. If the income is more than the median, proceed to Step Two.
Step Two. Subtract from this average income not the Debtor’s ACTUAL monthly expenses but the Internal Revenue Service guidelines for what they think the expenses OUGHT to be. This is what catches most people. The IRS guidelines discount many of what are typically considered necessary living expenses. To view link CLICK HERE.
The Debtor does receive a deduction for house payments and cars, but even then not always the full deduction. For instance, if a Debtor has a monthly car payment of $600 on a balance of $12,000, they only receive a Means Test deduction for $200. The deduction is figured on the 60 months of a Chapter 13 Plan rather than the 20 months remaining on the loan.
Another issue is the repayment of 401k loans. Although repayment is allowed in bankruptcy, they are not allowed as a deduction on the Chapter 7 Means Test unless they are “mandatory” ( this means they are only allowed if you will be fired for not paying them). There are many other quirks to the test. Eventually, a disposable income is determined.
Step Three.If the disposable income exceeds $110, the Debtor must file a Chapter 7; absent very compelling extenuating circumstances. If a Chapter 13 is filed, the disposable income figure is used to determine not how much is paid to the Chapter 13 Trustee, but rather how much is paid to unsecured creditors without priority (credit cards and other bills without collateral). For instance, let’s take a case that needs $1000 per month to pay the mortgage, cars, and Chapter 13 Trustee fees. A disposable income of $300 means that over and above any money needed to pay car loans, mortgage payments and taxes, unsecured creditors must be paid $300 x 60 months=$18,000. In other words, the Trustee payment must be at least $1300 rather than $1000.
The Means Test is complex and fact-intensive. To prepare it correctly requires provable income and expense numbers; and the knowledge and experience of a qualified attorney.
The second change was that the new bankruptcy law requires a debtor to complete a Credit Counseling Course prior to filing the bankruptcy and a Debtor Education/Financial Management Course prior to discharge of the bankruptcy. On the home page of this website under LINKS, you will be directed to the U.S. Trustee Approved Credit Counseling Agency list.
How do I start the Bankruptcy Process?
1. CONSULT AN ATTORNEY. Bankruptcy law is very complicated, even for attorneys who do practice in this area of law, due to the new bankruptcy laws. On the FORMS page of this website, I have attached a Preliminary Questionnaire to help the initial consultation visit with my office to be an uncomplicated process.
2. CREDIT COUNSELING. The new bankruptcy law requires a debtor to complete a Credit Counseling class and obtain a certificate that must be filed with the Chapter 7 or 13 bankruptcy petition. This course usually lasts for 45–90 minutes, and can be taken in person, by telephone or over the internet from a U.S. Trustee-approved counselor. The certificate is good for 180 days or six (6) months prior to the filing of the bankruptcy petition, and costs anywhere from nothing to about $50. On the home page of this website under LINKS, you will be directed to the U.S. Trustee Approved Credit Counseling Agency list. My office recommends the following Credit Counseling Services: a) Start Fresh Today, Inc. CLICK HERE to be directed to their website. They can also be reached by phone at 1-800-435-9138. b) Hummingbird Credit Counseling and Education, Inc. CLICK HERE to be directed to their website. They also can be contacted by telephone at 1-800-645-4959. c) Sage Personal Finance CLICK HERE to be directed to their website. They also can be contacted by telephone at 1-800-516-2759. d) Money Management International, Inc. CLICK HERE to be directed to their website. They also can be contacted by telephone at 1-877-918-2227. e) FOR PERSONS LIVING IN VICTORIA AND SURROUNDING AREAS: Consumer Credit Counseling, 3908 John Stockbauer Drive, #A, Victoria, TX 77904. They can be reached by phone at 361-576-9899.
3. HIRE AN ATTORNEY. After consulting with an attorney and you hire an attorney, that attorney is paid to do the following: (1) prepare and file your bankruptcy petition and schedules; (2) attend your section 341 Meeting of Creditors; (3) attend your Confirmation hearing; (4) prepare, review, and file all other necessary pleadings and documents required in the case; and (5) anything else your fee agreement sets out. DO NOT SIGN BLANK SCHEDULES, DECLARATIONS OR ANY OTHER BLANK DOCUMENTS YOUR ATTORNEY GIVES YOU TO SIGN. By signing blank documents, you are at risk of perjuring yourself if your attorney does not input the correct and accurate information. If for any reason the document is questioned by the court, YOU are the person who is in trouble since YOU executed the document under the penalty of perjury.
How Long will Bankruptcy Stay on My Credit Report?
The result of your bankruptcy filing will be part of your credit report for ten (10) years. The ten year period is counted from the date you FILED your bankruptcy. This does not mean you CANNOT get a house, vehicle, loan, or a credit card for ten years. In fact, you will probably begin to receive and obtain credit even before your bankruptcy is over.
Where Can I Get More Information?
Bankruptcy law is very complicated, even to attorneys who do practice in this area of law. You need legal advice you can count on to help guide you through the complex process. My office is experienced in helping you through your financial difficulties. If you have any questions, please call my HOUSTON office at 713-622-3893, my VICTORIA office at 361-576-1779, or CLICK HERE to e-mail us to make an appointment to meet with me to review your situation.