Tactics and Strategies for Managing Debt and Surviving Bankruptcy (eBook)

Chapter One: General Information about Bankruptcy

Bankruptcy law allows the debtor to discharge or eliminate some or all his debt. In most cases, a debtor can eliminate debts associated with credit cards, medical bills, old utility bills, cell phone bills, gym memberships, installment loans, payday loans, repossessions, and foreclosures. In most cases, a debtor cannot eliminate debts associated with student loans, debts associated with Drinking and Driving, certain back taxes, court fines, restitution, child support, spousal support, and debt incurred because of his own fraudulent acts.

There are two primary types of consumer bankruptcy: Chapter 7 and Chapter 13. The Chapter 7 bankruptcy is the one that eliminates all your dischargeable debt without you having to repay it. The Chapter 13 bankruptcy requires the debtor to pay back a portion of his debt over a 36 to 60-month period. In most cases, to qualify for a Chapter 7 bankruptcy, the debtor must earn less than the state median income; otherwise, he must file a Chapter 13 bankruptcy. In other words, if the debtor makes too much money, then he will not be able to file for a Chapter 7 bankruptcy. At the end of this book you will find the URL to a website that lists each state’s median income.

Many debtors choose to file a Chapter 13 even though they qualify for a Chapter 7. The Chapter 13 bankruptcy offers some benefits to the debtor that are not available in a Chapter 7. For example, in a Chapter 13 Bankruptcy, the debtor can (1) stop a foreclosure and place his mortgage arrears in a long-term repayment plan, (2) repay tax debt interest and penalty free, (3) restructure high interest rate automobile loans to better terms,(4) protect equity and assets that would be subject to sale or administration by the Chapter 7 Trustee,(5) still file bankruptcy even though he may not be eligible for a discharge under Chapter 7, and (6) remove a voluntary lien, such as a second mortgage, that does not attach to equity in the property.

Finally, in a Chapter 7 bankruptcy, the debtor will have to determine what he wishes to do with his secured debts. A secured debt is one in which the creditor has placed a lien against the item sold or other collateral. Examples of secured debts include: (1) mortgages on real estate, (2) automobile loans, (3) judgment liens on real estate, (4) furniture loans, and (5) jewelry loans. With these items, the creditor retains the right to their collateral even after bankruptcy. Therefore, in most cases, the debtor will have to continue paying for these items to keep them.

Credit Counseling

When Congress overhauled the bankruptcy code in 2005, they made several critical changes. Two of the biggest changes were to add a (1) Means Test, and (2) Credit Counseling requirements. While the Means Test primarily affects only those debtors in higher income brackets, the credit counseling requirements affect every debtor. Every consumer debtor must take two credit counseling classes.

Each of the two classes take between 1.5 hours to 2.5 hours to complete. You can take both classes online or over the phone. Some areas have brick and mortar locations for debtors to appear in person to take the class. The first class must be taken before you file for bankruptcy, and the second class must be taken after you file. Upon completion of the classes, you will receive a certificate that must be filed with the bankruptcy court. If you fail to file either certificate in a timely fashion, then your bankruptcy will either be dismissed or closed without a discharge. Both are bad outcomes.

There are numerous private companies that are approved by the U.S. Trustee’s Office to offer these credit counseling classes. Lists of these companies can be readily found by doing an online search. At the end of this book you will find the URL to a website that contains a list of approved credit counselors. Typically, these classes cost between $10 to $25 to complete.

Can I file Bankruptcy without a lawyer?

People ask me if they can file their own bankruptcy without an attorney. Bankruptcy is very complicated, and it is easy to make a mistake and have your case dismissed or have your assets seized. Recently we have seen celebrities receive prison time for intentionally leaving assets off their bankruptcy schedules. If the schedules are not filled out properly, you can have any number of assets taken by the bankruptcy trustee, including tax refunds, bank accounts, cash, automobiles, inheritance, personal injury settlements, and even your home. If the Court determines that you intentionally left off an asset or omitted a recent transaction, you could be prosecuted for perjury or fraud.

The Trustee is assigned by the bankruptcy court to review your case to determine if there are any assets he can take from you to sell for the benefit of your creditors. He is paid a commission based on the amount of assets he takes. Therefore, he is highly motivated to find all the assets he can. Many people think they do not have any assets, but that is not normally the case. Are you expecting a tax refund next year? Do you have money in a bank account? Do you have a car? If not properly protected by an attorney, the Trustee can seize these assets. In many cases, there is a deadline for you to properly claim your exemptions, and if you fail to do so, then you may not be able to go back and amend your schedules.

There are certain exemptions that are available to the debtor but must be claimed in a timely manner. If the debtor does not properly claim the exemption, he loses the asset. I have seen debtors lose valuable property, such as large tax refunds, simply because they did not file the paperwork timely. In one case, the debtor lost over $5,000.00 in tax refund money because she saved $1,000.00 by not hiring a lawyer. Imagine that: losing a $5,000.00 tax refund because you didn’t want to spend $1,000.00 to hire an attorney to ensure your paperwork was filed properly.

The risk in Do-It-Yourself bankruptcy does not end with the loss of assets. People are put in prison each year for bankruptcy fraud. The bankruptcy petition is signed under oath. If you answer a question falsely, it could be considered perjury, and you could get up to five years in prison. Some of the questions are not easy to understand, and you need an attorney to help you determine the correct answer. There are several questions on the Statement of Financial Affairs that are complicated, and most debtors do not understand why these questions are asked. These questions are designed to help the Trustee determine if there are undisclosed assets that he could take for the benefit of the creditors.

The Bankruptcy Code requires certain documents to be provided to the Trustee by certain deadlines. If the documents are not provided within the acceptable time frame, then the Trustee has the right to dismiss your case. You may be able to hire an attorney to file another bankruptcy, but in some cases, you may be barred from filing a subsequent case.

The Bankruptcy Code allows a non-attorney to type your bankruptcy petition for you. However, that non-attorney is not allowed to give you any legal advice, particularly regarding the exemptions that protect your assets and tax refund. That means, if you hire a Petition Preparer, that person is not allowed to assist you in protecting your home, car, accounts, or tax refund. Also, the petition preparer is not there to help you at the 341 Meeting of Creditors where the Trustee is trying to determine if you have any assets he can seize. If the petition preparer messes up your schedules, it is you standing before the judge; the petition preparer will not be standing next to you. When you hire an experienced bankruptcy lawyer, he will stand by your side until the case is finished.

Many people who decide on a Do-It-Yourself bankruptcy wish they had used an attorney after their tax refund and other assets are seized, or their case gets dismissed for not filing a document. All that said, I have seen some people successfully navigate the bankruptcy process without an attorney. But, they are the folks with very few assets, no real estate, very low incomes, and inexpensive automobiles. If you have real estate, or other assets, including tax refunds, then you should hire an attorney to assist with the bankruptcy process.

Throughout this book you will see me refer to the “pro se” debtor. “Pro se” simply means the litigant has chosen to represent himself, rather than hire a lawyer. This is not just a bankruptcy term, anyone that chooses to appear before any court without a lawyer is referred to as “pro se.” In most cases, throughout America, everyone has the right to represent themselves without the benefit of counsel. Often, this is a huge mistake.

Top Six things to Avoid in Bankruptcy

Having been a bankruptcy attorney since 1998, I have had the opportunity to see debtors make the same mistakes time and time again. There are numerous pitfalls for a debtor in bankruptcy, but here are my top six things to watch out for:

1. Do not run up credit card balances immediately prior to filing a bankruptcy. It seems many people are of the mindset that if they are going to file bankruptcy they might as well “charge up” or “max out” their credit cards beforehand. This is a terrible idea because it can be considered bankruptcy fraud and render the debt non-dischargeable....