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Phillip Gillet, Jr. A T T O R N E Y A T L A W 1705 27th Street Bakersfield, CA 93301-2807 (661) 323-3200 E-mail: lawyer@bak.rr.com |
BANKRUPTCY |
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FREQUENTLY
ASKED QUESTIONS
1. What is Bankruptcy and how do the different chapter differ (e.g. 7, 11 and 13)? Chapter 7 is the liquidation chapter of the Bankruptcy Code. Chapter 7 cases are commonly referred to as "straight bankruptcy" or "liquidation" cases, and may be filed by an individual, corporation, or a partnership. Under chapter 7, a trustee is appointed to collect and sell all property that is not exempt and to use any proceeds to pay creditors. In the case of an individual, the debtor is allowed to claim certain property exempt. In exchange for this, the debtor gets a discharge, which means that the debtor does not have to pay certain types of debts. Corporations and partnerships do not receive discharges. Consequently, any individuals legally liable for the partnership's or corporation's debts will remain liable. Therefore, individual bankruptcies may be required as well as the corporation or partnership bankruptcy. A Chapter 7 bankruptcy may enable you to get rid of all your unsecured debts. In most cases, if you have barely enough or less than enough income to live on, not counting payment of your credit card (and other unsecured) debts, you can make all of your credit card debts go away. If, however, when you look at your monthly budget you have a significant amount of cash left over without paying your credit card (unsecured) debts, you will not be permitted to proceed with a Chapter 7 bankruptcy. Instead you will be required to file a Chapter 13, also alternatively described as a "debt consolidation" or wage earner bankruptcy. Chapter 9 is only for municipalities and governmental units, such as schools, water districts, and so on. Chapter 13 is the debt repayment chapter for individuals with regular income whose debts do not exceed $1,162,075 ($290,525 in unsecured debts and $871,550 in secured debts), including individuals who operate businesses as sole proprietorships. It is not available to corporations or partnerships. Chapter 13 generally permits individuals to keep their property by repaying creditors out of their future income. Each chapter 13 debtor proposes a repayment plan which must be approved by the court. The amounts set forth in the plan must be paid to the chapter 13 trustee who distributes the funds for a small fee. Many debts that cannot be discharged can still be paid over time in a chapter 13 plan. After completion of payments under the plan, chapter 13 debtors receive a discharge of most debts. In a Chapter 13 proceeding, the court will require you to pay, usually for three years, all of your disposable income to the bankruptcy trustee, who will in turn pay your creditors. The amount of your monthly payment to the trustee will be approximately equal to the amount of the cash you ordinarily have on hand after you pay your basic necessary living expenses. In many cases, you will not have to pay back everything that you owe. For instance, if you have $100,000.00 in unsecured debt, but you only have $500.00 per month of income available to pay the creditors, your unsecured creditors may receive a total of only $18,000.00 over a period of three years (that's $500.00 multiplied by thirty-six months). Chapter 12 offers bankruptcy relief to those who qualify as family farmers. There are debt limitations for chapter 12, and a certain portion of the debtor's income must come from the operation of a farming business. Family farmers must propose a plan to repay their creditors over a period of time from future income and it must be approved by the court. Plan payments are made through a chapter 12 trustee who also monitors the debtor's farming operations while the case is pending. Chapter 11 is the reorganization chapter available to businesses and individuals who have substantial assets and/or income to restructure and repay their debts. Creditors vote on whether to accept or reject a plan of reorganization which must be approved by the court. While the debtor normally remains in control of the assets, the court can order the appointment of a trustee for cause, such as when the debtor does not get a plan approved in a reasonable amount of time, or fails to follow some of the rules, or breaks the law. In addition to the filing fee paid to the bankruptcy clerk, a quarterly fee is paid to the U.S. Trustee in all chapter 11 cases. There is no debt limit under chapter 11. However, only a chapter 11 debtor that qualifies as a small business may request expedited treatment under chapter 11. To qualify as a "small business," the debtor must be engaged in commercial or business activities, other than the ownership or operation of real property, and the total of its secured plus unsecured debts must be less than $2,000,000. Due to the expense and complexity of chapter 11, the decision to file a chapter 11 petition should be made in consultation with an attorney. 2. How much does it cost to file bankruptcy? That depends on which Chapter you file, and also on how complicated your case is. As a consumer, you will likely file either a Chapter 7 or a Chapter 13. The filing fee for a Chapter 7 is currently $209.00; for a Chapter 13, its $194.00. The filing fee goes to the Clerk of the court and your attorney, if you use one, receives no part of that. Your attorney will charge a fee for his or her services in the bankruptcy proceeding. The range of fees charged is almost as varied as the complexity of cases. Fees can be as high as $2,500.00 in a consumer Chapter 13 and $4,000 in a business chapter 13 without requiring special orders from the court. Generally, a Chapter 7 proceeding will be much simpler and therefore usually much less expensive than a Chapter 13. However, even a Chapter 7 proceeding can be complex if there are very many creditors, liens to be expunged or certain other complications. After a brief consultation with an attorney, he or she should be able to give you an approximate amount for representation. Adversarial proceedings can complicate your bankruptcy significantly and often are not included in the base fee charged an attorney. 3. Is the filing fee always required? I am filing bankruptcy because I'm broke. How can the court justify charging a filing fee? Sooner or later, this issue was bound to be litigated. The validity of the bankruptcy court filing fee has been uniformly upheld. Although the law makes provision for a debtor to apply for an order permitting him or her to pay the filing fee in installments, as a practical matter one should simply plan on paying the filing fee in full at the time the petition is filed. 4. Should I hire an attorney to file my bankruptcy petition? Sound legal advice and preparation are absolutely essential to the successful completion of your bankruptcy case. There is nothing legally requiring you to be represented by an attorney in bankruptcy court, or that you have an attorney prepare your bankruptcy documents; however, the risk of loss resulting from error in your bankruptcy filing is high if you do not receive competent legal advice. If you got a traffic ticket and you wanted to pay the fine, you would not hire an attorney to represent you. On the other hand, if you are a tourist in a country where you do not speak the language, say one of those far east countries where people can disappear into the jail system for minor offences, would you consider hiring an attorney for your traffic ticket? Yes of course. First you don't speak the language and second, why take the risk? When it comes to bankruptcy, some of the same reasoning applies. Bankruptcy laws and regulations are like a foreign language to the average person and frankly, most people do not know what to expect. Will they have their property taken from them? Will they lose their job? Will they be arrested for fraud if they make a mistake or if they had lied on a credit card application? Why you should hire an attorney. Peace of mind is another valid reason to hire an attorney and if you are the nervous type, it is worth it. There are other options besides hiring an attorney in filing bankruptcy. There are paralegals and other persons who may prepare your documents for you at what appears to be a discounted price. Clients often discover the hard way that you get what you pay for. Attorney fees are paid before your bankruptcy petition is filed, so for a few hundred dollars you can rid yourself of thousands and thousands of debt--not a bad bargain. Remember, too, that, at the time of this writing among bankruptcy preparers only an attorney can carry professional liability (read "MALPRACTICE") insurance that will cover any loss to the client resulting from errors in the attorney's planning, preparation of the documents or conduct at hearing(s). Many experienced bankruptcy attorneys have found that an attorney is much less likely than a nonprofessional to make a costly error. Another way to think about it is that you have never filed bankruptcy and even if you feel ripped off afterwards, you can take comfort in knowing that it will never happen again. If you have a business or a corporation, it is highly recommended that you hire an attorney. Most paralegals and bankruptcy kits cannot handle business bankruptcies. 5. How are attorney's fees paid? In a Chapter 7, generally your attorney's fees must be paid up front before the filing. This makes sense because in a Chapter 7 proceeding a promise made before filing the case to pay attorney's fees after filing makes the promise dischargeable, too. In a Chapter 13, your attorney's fees can be paid either before the filing or as part of the repayment plan. For Chapter 13 cases, the installment payment plan is the preferred choice of most clients since it requires less up-front cash. 6. Which creditors (if any) get paid? May I choose to repay some creditors and not others? The answer depends on what Chapter bankruptcy you file under, and whether the debt is secured (like a home mortgage or auto loan) or unsecured, like most credit card debt. Secured creditors usually get paid in full no matter whether yours is a Chapter 7 or 13 if you decide to keep the collateral (i.e. the house, the car). In a Chapter 7, where most unsecured creditors get nothing at all anyway, a debtor may "reaffirm" some debt and not others. However, in a Chapter 13, you may not discriminate between one unsecured nonpriority creditor and another. 7. Who's eligible to and should file bankruptcy? There are many events which commonly may trigger a client's need to file bankruptcy or curiosity about bankruptcy. Some of the more frequently observed events are: an impending foreclosure, repossession, lawsuit, lien, wage garnishment, loss of employment, unexpected medical emergencies, and divorce. You should contact my office for a consultation as to whether you may be eligible "and whether it is advisable for you" to file bankruptcy. 8. Do I have to keep paying my bills after I file bankruptcy? In addition to your recurring expenses such as utility bills (you don't want your power cut off!) you must continue to pay certain creditors. You must continue to pay your secured creditors even after you have filed bankruptcy. Secured creditors are usually the lender(s) on your house and/or car. If you don't make your regular house payment, the bank or mortgage company will foreclose. If you don't make your car payment, the lender will repossess the car. Foreclosure or repossession during a bankruptcy does require pre-approval of the bankruptcy court, but such pre-approval is routinely granted. Unsecured creditors, usually credit cards, you need not continue to pay, at least temporarily. Some credit card debt(s) may not ultimately be dischargeable at all. For instance, Sears, unlike most credit card issuers, has a provision on its charge slip which gives it a secured interest in whatever you bought with their card. In a Chapter 7, you will pay none of the unsecured creditors. In a Chapter 13, unsecured creditors will be paid by the bankruptcy trustee through the plan. You will not pay the unsecured creditors directly. You must, however, make your Chapter 13 plan payments in full and on time. Failure to do so may result in the trustee requesting your case be dismissed. The first plan payment is generally due thirty days after the filing of the Chapter 13 Plan and Schedules. 9. What is a "secured debt?"(and who is a secured creditor?) Usually, a debt is secured and hence the lender has a "security interest" and is a "secured creditor" if the creditor lent you all or part of the purchase price of the asset and reserved a "security interest" in it. The latter is referred to as a "purchase money security interest" and a creditor who has one is highly favored among creditors in a bankruptcy proceeding. There are other types of security interest but, for the sake of brevity, only the most common is discussed here. A purchase money security interest gives the seller/lender the right to repossess the asset if you fail to make the required payment. A secured debt is most commonly a home mortgage or a car loan, but might be any asset against which money may be borrowed. Whether you have filed a Chapter 7 or a Chapter 13, if you wish to keep property that you financed to purchase, you must continue to make the current payments (as distinguished from arrears) on any such debts. If you fail to make payments as they come due on these assets, the lender may ask the bankruptcy court for permission to repossess your car or foreclose on your home, as the case may be. It is therefore imperative that you continue to make these payments, and to make them on time. If you are behind on your mortgage payments, for instance, or your car payments, and you have filed a Chapter 13, the amount that you are behind can be repaid in the Chapter 13 bankruptcy payment plan. One of the most common uses of a Chapter 13 bankruptcy is to stop a foreclosure and provide the borrower (that's you) an opportunity to create and implement a repayment plan. The end result in an ordinary case, if the plan is performed by you, is that you keep your house or car or both, you make your current mortgage / car payments, and you will have paid the arrears off in thirty-six months as part and parcel of your repayment plan. In a Chapter 7, you may choose to simply surrender the property, sometimes referred to by the lender as "collateral", to the lender. As with most rules, there are exceptions. Not all security interests are absolutely enforceable by the lender in a bankruptcy proceeding. Call our office for a consultation to discuss further details. 10. Can foreclosure action be stopped by bankruptcy? Foreclosure may be stopped temporarily by the filing of either Chapter 7 or Chapter 13, or stopped permanently upon the filing and contingent upon complete performance of a Chapter 13 plan. Usually, if one is far behind on one's mortgage, the lender will start a foreclosure proceeding and, unless a bankruptcy is filed for the borrower or the borrower is able to pay all the arrears, will complete it. Many of my clients have had "near misses", calling on me to file bankruptcy on the very eve of a foreclosure sale. It is best not to wait until the last minute, since unexpected problems might delay a filing. Your choice of Chapters (i.e. 7 or 13) is crucial in a the context of a foreclosure. If your choice of bankruptcy is a Chapter 7, and you are in arrears, the lender will simply ask the court for permission to proceed with its foreclosure. The court routinely will grant such a request. This is not to say that a Chapter 7 is never the right choice when a foreclosure is threatened, pending or proceeding. You should call our office to discuss your options. In a Chapter 13, you will usually be permitted to repay the arrears over a period of three years, as long as you comply with the rest of your Chapter 13 repayment plan and continue to pay the current mortgage payment. 11. What are unsecured, nonpriority debts? Most unsecured nonpriority debts will be associated with a credit card. Exceptions to that generalization might be personal loans from friends or family members or, in some cases, a property settlement liability resulting from a divorce or a judgment resulting from a lawsuit. Conversely, most credit card debts will be unsecured. As mentioned elsewhere in this page, a common exception to the latter is the Sears card. If you examine closely the fine print on a Sears charge slip, you will likely discover language which creates a secured interest in that toaster, electric can opener, vacuum cleaner, etc. that you just charged on your Sears card. 12. What are unsecured, priority debts? Some unsecured debts get treated with "priority." These might include taxes, whether payroll, income or other taxes, student loans, child support, spousal support and support arrears. This is not a complete list. Not all unsecured priority debts are created equal, however. Some are simply not dischargeable at all, such as child and spousal support. Others get priority among the unsecured creditors, depending on whether yours is a Chapter 7 or 13. Consult my office to learn what may be critical distinctions in your individual case. 13. Can bankruptcy get rid of tax debts and liens? As a general rule, if you have an income tax debt that is at least three years old, and you filed your tax returns on time for the year in question, you may be able to discharge all such taxes in a Chapter 7 proceeding. In a Chapter 13, however, that tax debt would be paid in the same way as any other unsecured creditor (i.e., repaid over three years). Payroll taxes (i.e. taxes you failed to withhold from your employees' pay or withheld and did not pay the appropriate government agency) are generally not dischargeable. 14. Are child and spousal support erased by bankruptcy? If you are behind on either or both of these support obligations, you will not be permitted to discharge the arrears in bankruptcy. You may, however, be permitted to schedule repayment of arrears in a Chapter 13. 15. Can bankruptcy extinguish my student loans? Students loans are rarely dischargeable except in the most dire hardship cases, but not yet completely impossible. Call to discuss. 16. Unsecured nonpriority claims These will be comprised of generic credit card debt. Usually, it doesn't matter why you incurred the debt, except if you paid your taxes with a credit card, in which case the special rules relating to dischargeability of tax debts comes into play. There are some common sense exceptions to this rule as well. For instance, if you charge something, or take a cash advance, on a credit card shortly before you file bankruptcy, the credit card company should have little trouble convincing the bankruptcy court that the charge or advance was fraudulent and therefore non-dischargeable (translation: you'll have to repay it.) In the federal bankruptcy district where you have lived for the past 180 days. If you have not lived in your current District for 180 days, you may file in the district in which you most recently resided for one hundred eighty days or you can take your chances filing where you now live. 18. Do I have to have a lawyer? Sound legal advice and preparation are absolutely essential. There is no legal requirement requiring you to be represented by an attorney in bankruptcy court, or that you have an attorney prepare your bankruptcy documents; however, the risk of loss resulting from error in your bankruptcy filing is high if you do not receive competent legal advice. There are other options besides being represented by an attorney or having an attorney prepare your documents, of course. There are paralegals and other persons who may prepare your documents for you at what appears to be a discounted price. Clients often discover the hard way that you get what you pay for. Attorney fees are paid before your bankruptcy petition is filed, so for a few hundred dollars you can rid yourself of thousands and thousands of debt--not a bad bargain. Remember, too, that, at the time of this writing among bankruptcy preparers only an attorney can carry professional liability (read "MALPRACTICE") insurance that will cover any loss to the client resulting from errors in the attorney's planning, preparation of the documents or conduct at hearing(s). Many experienced bankruptcy attorneys have found that an attorney is much less likely than a nonprofessional to make a costly error. 19. How do I choose an attorney? If you want to keep this really simple, you can just hire me. But for a more objective approach, first and most obviously, you'll want to select an attorney who is an active member of his or her state bar, is admitted to practice before the federal court in his or her bankruptcy court jurisdiction, and actually practices in the bankruptcy court, like me (that was subtle, too, wasn't it?). That doesn't narrow the field very much, though. Next, you'll want to be sure the attorney is in good standing with his or her state Bar Association. In California, you can find that out at the California Bar Association Web site (www.calbar.org). You can determine from information available on the site whether an attorney you are considering has a record of public discipline by the Bar Association. For instance, you wouldn't want to hire an attorney who has been disciplined for failing to file documents on time, missed deadlines, or who doesn't show up at court! (These things do happen!) You might respond to an advertisement on television. While you may receive adequate service from the firm pitching to you on TV, remember that television ads are expensive and the cost must be passed on to the clients. Translation: you are likely to pay more. And, if it is personal service you value most highly, I offer the highest level of personal attention and service. I meet personally with each client. Unless there is a conflict with some other important event on calendar, I appear personally with each client in all bankruptcy proceedings. If a client calls my office with a question, I personally return the phone call. Of course, I hope you will choose me and my office to help you if you are contemplating bankruptcy. First, you should make no attempt to collect any money owed you by that person, and immediately seek the advice of an attorney. You must wait on using any foreclosure, repossession, bank levy or other debt collection enforcement mechanism until and unless you are successful in a motion in bankruptcy court permitting you to proceed. This remains true even if you have succeeded in suing the debtor and obtaining a judgment and even a lien. While there are some limitations and exceptions, usually, you may keep all of your household furniture and furnishings, as well as your clothing and other personal effects. Valuable assets which are not necessary for your daily living could be sold by the bankruptcy trustee in order to pay your creditors. Examples might include a collection of expensive or exotic firearms, art, furs, jewelry, stamps, first edition books, etc. You should consult an attorney for advice on how or whether to convert nonexempt assets (things you may not be permitted to keep) into exempt assets, which you can keep. 22. What if my spouse doesn't want to file with me? Among other things, his or her income will be deemed by the bankruptcy trustee and, if it comes to an actual court hearing, by the judge, to be available to pay debts and household expenses. This can have a significant impact on whether you may qualify for a Chapter 7, for instance, or on how much you may be required to pay monthly to the trustee under a Chapter 13 plan. 23. "Thou shalt not's" for clients Rules of thumb: don't try to cheat the bankruptcy court, don't lie in the documents you submit to the court, don't sell your Ferrari to your brother-in-law for $5.00 on the condition he turn title to the car back to you after you get your final discharge from the bankruptcy court. Sound ludicrous? It actually happened! That debtor is probably still serving his federal prison sentence. There are many legal and legitimate ways to protect your assets in bankruptcy. I can help you figure out which ones are appropriate for you. Taking the wrong approach can land you in serious trouble. Bankruptcy fraud is currently punishable by a fine of up to $500,000.00 and / or a prison sentence of up to five years in a federal penitentiary. Be sure to get competent legal advice!!! 24. How do I get ready to file bankruptcy? Assemble the most recent invoices from each of your creditors. Get a copy of the trust deed and / or loan agreement for any secured debts, such as a home mortgage or auto loan. Be sure all your tax returns have been completed and filed for the current and at least the two previous tax years. Save your most recent pay stubs. Locate your proof of insurance on your car(s) and / or home. Provide to your attorney copies of all of the documents mentioned in this paragraph. That should get things rolling, but it's not an exhaustive list. Creditors are harassing me (or us, as the case may be) calling me at home and work, sending threatening letters. What will happen if I file bankruptcy? As soon as your petition is filed with the court, an "Automatic Stay" goes into effect which prohibits all of your creditors from taking any action to collect a debt. The creditors listed in your Petition, Schedules and Mailing Matrix get a notice from the Court shortly after filing, but the Stay is effective even if the creditor doesn't know about it! Violations of the Stay by any creditor should be immediately brought to the attention of your attorney. Serious fines can be imposed for willful violations of the Stay. 26. How long does the bankruptcy process take? Depends on whether yours is a Chapter 7 or Chapter 13 proceeding. A Chapter 7 typically runs its course from start to finish in about three months. A Chapter 13 usually takes three years to complete but in special cases can take up to five years. 27. Judgments Most judgments can be disposed of in a Chapter 7. Some judgments cannot be, but these are relatively limited. A judgment for an intentional tort, like assault, or for intentional or fraudulent misconduct, say, misappropriation of funds belonging to someone else, probably won't be affected by a bankruptcy. On the other hand, judgments for ordinary negligence, such as a personal injury judgment resulting from an auto accident, for example, can still be discharged in a Chapter 7 or treated as a nonpriority unsecured debt in a Chapter 13. There is often a hidden problem with judgments, though, if a lien has been filed as a result of the judgment. You must make your attorney aware of any lien or judgment so that the attorney can solve the lien problem at the same time as he or she deals with the judgment. They are two separate issues. © 2001 Phillip W. Gillet, Jr., M.S., J.D., EA The information on this site is of a general purpose
nature only and is not legal advice. The proper decision in
proceeding in your particular case should be made only after consulting a
licensed lawyer in your state. |
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