BANKRUPTCY: THE PROCESS & PROCEDURE
By: Joel S. Treuhaft, Esquire
There are several categories of debt which are individually accepted from discharge under certain circumstances. These exceptions constitute a basis for objecting to your bankruptcy, in part, or automatic exceptions of certain types of debt which you will continue to owe despite the fact that you have filed bankruptcy. These exceptions are grouped into several categories, and are discussed below.
The first category of debt which the bankruptcy law does not wipe out is most state, local and federal taxes.
Income taxes which were due at least three years prior to the bankruptcy’s petition filing date and which were filed at least two years prior to the filing date may be dischargeable, however, this requires an additional, separate procedure and fee in order for this to be accomplished.
It’s important to understand, however, that most taxes which are owed prior to filing bankruptcy will not be discharged. They will still be due and owing after the bankruptcy.
The next category of debt which bankruptcy law does not wipe out is property, credit or service that is obtained by fraud. For instance, selling someone the Brooklyn Bridge when you really do not own it, or filling out a false financial statement to induce someone or some institution to extend credit based on false information, such as you own the all the Beatles’ guitars or the Eiffel Tower. Another example of debt considered to be incurred by fraud is purchasing at least $1000 worth of luxury goods, or taking at least a $1000 cash advance, on a particular credit card within 60 days of filing a bankruptcy. These types of debt are considered to be made with knowledge that you were in financial trouble, or that you knew you had no ability to repay them at the time that the charges were made. Any debt in this category is not wiped out in bankruptcy, however, the creditor must file an adversary proceeding (which is a lawsuit inside your bankruptcy), which makes your bankruptcy a contested matter, and for which to defend will require an additional, separate fee.
Another category of debt which bankruptcy law does not wipe out is for people or institutions which do not have complete names and/or addresses so as to be unable to give them notice of the pending bankruptcy. If the creditor, real or disputed, does not receive notice of the bankruptcy, they have no opportunity to participate in or object to the bankruptcy within the 90-day period the bankruptcy law provides. If these creditors do not receive notice and are excluded from having the opportunity to object to your bankruptcy while your bankruptcy is pending, the presumption is that the debts to these creditors are not wiped out.
Under certain circumstances, it may be possible to re-open your bankruptcy case to add additional creditors once the discharge has been issued. This procedure requires the filing of an adversary proceeding where the burden of proof is on the debtor to show that the failure to include the additional creditors was due to an inadvertent mistake, and that the creditor was not prejudiced by your failure to include them in the original bankruptcy filing. The filing fee to the bankruptcy Court to reopen a closed case is nearly as much as the filing fee for the original case, and the cost of prosecuting the adversary proceeding is more extensive and requires an additional, separate fee as great or greater than the cost of the filing of your original bankruptcy case. Therefore, you are greatly encouraged to list any and all persons that you think you might owe as the cost of obtaining their complete names and addresses now is a lot less than trying to add it in the future. This is especially true since the electronic bankruptcy filing software allows us to directly import the names and addresses of your creditors and collection agencies from at least two of the credit reporting agencies.
A fourth category of debt which is not wiped out in a Chapter 7 or 11 bankruptcy is fraud in a fiduciary capacity, larceny or embezzlement. An example of this type of non-dischargeable activity would be an Escrow Agent, or one who holds property in trust, who then uses that property to finance a trip to Europe instead of its intended purpose. Suffice it to say this type of debt would not be discharged in bankruptcy.
A fifth category of debt which is not wiped out by bankruptcy is Alimony/Maintenance/ Support or Child Support. Property settlements may be discharged under certain circumstances, but alimony or support is never dischargeable.
The sixth form of non-dischargeable debt is willful or malicious injury or damage to persons or property, such as when you take a crow bar and break your neighbor’s kneecaps or their car’s windshield. Other types of intentional conduct may also not be discharged in bankruptcy.
Guaranteed Student Loans are only dischargeable in bankruptcy if they constitute an undue hardship. An undue hardship has been interpreted as not only being a debt that you cannot pay back now, but one you will never be able to pay back. Accordingly, this is a standard that is incredibly difficult to meet.
An eighth form of non-dischargeable debt are fines imposed by state agencies (ex. polluting) or by criminal Courts for restitution. A similar type of non-dischargeable debts are fines or restitution from drunk driving convictions and/drug abuse offenses.
Another type of non-dischargeable debt is a debt which could have been discharged in a prior Chapter 7 bankruptcy, but for one of these reasons was not.
Funding commitments of officers, directors or shareholders of failed saving & loans institutions or banks are not discharged in bankruptcy.
Condominium association or homeowner’s dues or assessments for property you continue to live in after you file bankruptcy will continue to be your responsibility.
All the rest of your credit card, medical bills or unsecured debt will be wiped out completely.
YOU SAY THAT SOUNDS GREAT, WHAT IS THE CATCH?
The catch is that you are only allowed to keep a limited amount of property. What are you allowed to keep? In Florida, as of now, you are allowed to keep your homestead, regardless of its value, as long as you continue to make the regular monthly payments on it. Other forms of real property, such as rental property are generally not exempt from administration by the Bankruptcy Court and Trustee, and most likely will be turned over to the Trustee, liquidated, and the proceeds applied to the administration of the bankruptcy estate, and to the repayment of creditors.
Everything but real property is personal property. Under Florida law (which is adopted for exemption purposes, or the things you are allowed to keep), each person who files is entitled to keep: (i) up to 6 months’ worth of wages if they are not co-mingled with other monies, (ii) the Cash Surrender Value of your Life Insurance or Annuities, (iii) ERISA qualifying pension plans, 401K or similar plans, (iv) some pre-paid college tuition plans, (v) $1,000.00 of equity (the value of the vehicle versus what is owed on the vehicle) in one vehicle, plus (vi) $1,000.00 of other personal property based on garage sale or other liquidation values. Jewelry or higher value items could be based on pawn shop or jewelry store values.
Antiques, collections, objects of art, gold, silver, precious metals, stocks, bonds diamonds, crystal, china, or other objects of value are generally not exempt, and are not able to be kept in a Chapter 7 bankruptcy. Stocks, bonds and/or small businesses also will usually be taken by the Trustee. This type of property may be kept in a different form of bankruptcy, such as a Chapter 13, which envisions that you will pay back money over a period of time, in addition to its other advantages. However, when you base things on a garage sale or liquidation value, most people keep most or all of their personal property, and are able to discharge their unsecured debt.
WHAT IS THE CHAPTER 7 BANKRUPTCY PROCESS?
The first thing that needs to be done is the compilation and preparation of the information needed to file the bankruptcy petition. The petition is signed under the penalty of perjury, therefore it is important that the information that you provide is truthful and accurate. A questionnaire will be provided to you to assist you with the preparation of the required information. The information will then be reviewed with you, and then given to a legal staff member to enter into a computer system which will allow for the electronic filing of most or all of your bankruptcy papers. Your bankruptcy protections do not begin until the original paperwork is filed with the Court and the filing fees have been paid. That is when the protection of the Automatic Stay begins.
In 2005, Congress added new requirements for people filing consumer bankruptcies. They were concerned that bankruptcy attorneys were not exploring enough non-bankruptcy options with their clients, and developed a requirement that anyone seeking to file bankruptcy must first be screened by an independent non-profit credit counseling agency at least one calendar day before a bankruptcy petition is filed. This class normally takes about thirty minutes, and focuses on the consumer’s monthly income and expenses. A certificate is then issued and must be included when the bankruptcy petition and other initial papers are filed with the Bankruptcy Court. This initial certificate is often referred to as the “ticket in.” Additionally, Congress also requires people who have filed bankruptcy to take a second class, the Debtor Education class, and upon completion of this 45-minute class, to file a Certificate with the Court showing the course was completed. This certificate is often referred to as the “ticket out.” Finally, Congress also now requires that attorneys representing people filing bankruptcy pull an independent credit report which lists the names and addresses of a filer’s creditors. Accordingly, this has also added an additional layer of costs to the filing of a bankruptcy case (about $50 each for the “ticket in,” “ticket out,” and the credit report).
Prior to filing, you should advise your creditors when you have retained an attorney (once you have retained an attorney) to deal with your debt resolution situation. Under a different federal law (the Fair Debt Collections Practices Act), once you have notified a creditor that you have retained an attorney to deal with the collection matter, all further communications must go through the lawyer’s office. However, this does not stop the creditors from continuing to sue you until the bankruptcy is filed. Therefore, you are encouraged to file your bankruptcy as quickly as possible.
Once your information has been processed, we will meet again to review the bankruptcy papers, and if they are accurately prepared and reflect your current financial situation, you will sign the verification forms, and once all attorney and filing fees are paid, then your bankruptcy case will be filed and the protection of the Automatic Stay begins. This automatic stay is the device which prevents creditors from further bothering you. They are not supposed to call you, write to you or even drive down your street and give you a dirty look. If they do, they may be sued, and responsible for paying your actual and punitive damages, costs and attorney’s fees.
Once the bankruptcy petition is filed, you commence your fresh start. If you go out the next day, buy a lottery ticket and win, you get to keep the money. If you incur new debt after you file the bankruptcy, you get to pay for it and the debt is not discharged.
Approximately 30 days after the bankruptcy petition is filed, you will have your only required Court appearance (a 341 Meeting of Creditors) unless someone files some form of objection to your bankruptcy. The Court appearance is in front of your Trustee, and five to six other 341 meetings scheduled every ½ hour. The purpose of the meeting is to verify that you provided and reviewed the information contained in the papers filed with the Court, whether you listed all of your liabilities and assets, how you arrived at the value of your assets, whether you have sued anyone or have the right to sue anyone over the last 4 years, and the reasons why you have filed for bankruptcy. Creditors have the right to attend the 341 Meeting, however, most creditors do not show up to the creditors’ meetings unless they intend to object to your bankruptcy (which is very rare).
After the conclusion of the 341 Meeting of Creditors, the Trustee, the U.S. Trustee (a division of the Department of Justice) and your creditors get the opportunity (60 days) to object to your bankruptcy (based on those types of objections listed above), the Trustee gets 30 days to object to your claim of exemptions (or the property you claim you are allowed to keep), and the U.S. Trustee can review your case for substantial abuse situations (the ability to make a meaningful payment to creditors in a Chapter 13), such as a failure to keep important business records, or records of substantial business or financial transactions. If no one objects during that 60-day period, the objection period will end and you will receive your bankruptcy discharge in the mail. If you change your address during the pendency of the bankruptcy, it is your responsibility to notify our office so that we can notify the Court of your new address, and you can receive the information the bankruptcy Court sends you in the mail.
Once you receive the bankruptcy discharge, your part of the bankruptcy is substantially over. If someone were to file an objection to your bankruptcy, your bankruptcy would become a contested matter, more hearings will be required, and additional fees will be required for our continued representation. However, objections are rare, and only occur in situations similar to those outlined above.
OTHER FORMS OF BANKRUPTCY
Bankruptcy law requires that you be aware that there is more than one type of bankruptcy, including the reorganization Chapters of 11, 12 and 13. These Chapters necessitate that you are going to repay money to creditors over a period of time. They have a greater cost and take longer to complete. Additionally, they also look to monthly or quarterly payments to be made to your creditors.
Chapter 11 – Reorganization
Chapter 11 is a full blown corporate reorganization which is mostly for businesses or people with more property than someone is allowed to keep. This is the type of bankruptcy Enron and WorldCom filed. Smaller corporations are also eligible for the reorganization options offered by Chapter 11.
Basically, all of the company’s back debts go into deep freeze, and the company continues to operate its business, hopefully adjusting its operations in order to operate profitably. If the company can begin to operate profitably, it can then propose a plan of reorganization which will then be voted on by the creditors. If the creditors accept the Plan of Reorganization, that is all payments they will receive. If the company’s creditors reject the Plan, the Company is usually closed, the case is converted to a Chapter 7, the assets repossessed by the secured creditors or liquidated by the Trustee, and unsecured creditors receive a pro rata distribution, if any, of the assets of the business.
The cost of the Chapter 11 cases requires at least a $15,000.00 retainer, plus over $1,700 in filing fees.
Chapter 12 – Family Farmer Reorganization
Chapter 12 cases are like smaller versions of a Chapter 11, except there are certain requirements, such as at least 80% of your income and at least 50% of your debt is a result of farming. If you do not meet these requirements, you are not eligible to file a Chapter 12 bankruptcy.
Chapter 13 – The Adjustment of Debt for Individuals with a Regular Income
The adjustment of Debts for Individuals with a Regular Income is for people with a steady income stream, and are either behind on tax, house, or car payments (or for people doing vehicle valuations), have more non-exempt property than they can keep in a Chapter 7 bankruptcy, or have the ability to make a meaningful repayment plan to creditors over a period of 3 to 5 years. It is generally for people who need help saving their house, or to obtain relief from the IRS.
A Chapter 13 Plan gives filers 5 years to pay back taxes with no penalties or interest, and at least 3 years to catch up on back house or vehicle payments (sometimes longer if written consent can be obtained). The Chapter 13 Plan also requires a meaningful payment schedule to unsecured creditors, and the contribution of all disposable income during the life of the Plan.
A Chapter 13 usually costs between $3,000.00 and $3,500.00, and unless you are in one of the special situations set forth above, why should you pay my office more money for the privilege of re-paying a portion of your debt, when a Chapter 7 is cheaper, easier, quicker, and wipes out your debts completely?