General Bankruptcy FAQs

Probably the biggest misconception people have is that they won’t have a life after bankruptcy, but our clients actually end up being remarkably happy and prosperous after going through the process and getting rid of the debt, so they can then embark on a new business or financial plan.

The second biggest misconception is that they will lose everything, whereas the retirement accounts and some equity in a house can all be protected or considered exempted assets in the bankruptcy, which means they won’t necessarily lose everything. Our goal is to make it so that our client does not lose anything and we almost always are able to achieve that result.

In my private practice, I have seen that the vast majority of people who have filed bankruptcy are good people who ended up in a bad spot. Most trustees believe that to be the case as well. I know they believe this because I discussed this with other trustees when I was on the panel. However, there are always a few bad apples in every bushel who give a bad name to everyone else. An example would be people who try to commit fraud. They are the difficult people who stick out and are remembered although they are in such a small minority.

Bankruptcy is something people should certainly avoid if they reasonably can, but it can be the best move if it makes sense economically. After a careful analysis with a couple of advisors, if it makes sense, they should do it and not look back.

Sometimes people contact me wanting to file bankruptcy just to clean up and fix their credit, and I tell them that just cleaning up their credit is a bad reason to utilize their fresh start. The bankruptcy will sit on their credit report for between 7-10 years, although a client who pursues a credit rehabilitation program right after the bankruptcy can usually have very good credit within 2-3 years. This is not credit repair, which I define as denying debt and playing games with credit reporting agencies to see if they can verify the debts. I am talking about removing untruthful things and replacing them with new positive credit. I have seen clients get home and car loans after 2-3 years.

Often, a person’s credit is better after the bankruptcy because it shows discharged debt as opposed to it showing all the past-due debts before the bankruptcy.

A bankruptcy is a matter of public record when it’s filed, although it’s unlikely anyone will actually dial up the court’s database and make an inquiry. The only people who get affirmative notice are creditors, so unless someone owes their employer money, there is no reason for the employer to know.

One other way they may find out is if there was a wage garnishment, in which case they will have to notify their employer to stop the garnishment anymore.

First and foremost, the biggest mistake would be not having a lawyer guide them through the bankruptcy process and not getting a complete bankruptcy or losing assets, because that would just be foolish. Yet, about 20 percent of people nationwide try to handle their bankruptcy themselves.

The success rate is far less than with a lawyer, in part because there is a kind of hierarchy. You can try and do it yourself, or hire a paralegal or you can hire a lawyer who just started, but the best choice is to hire an attorney who has made this their career and who has years of experience, and who may even be a trustee.

We look at their income and expenses, as well as their assets and liabilities, and then we look at what they have been up to financially for the last couple of years and where they felt they might be in a couple of years. We place all of that into consideration and come up with potential solutions.

United States Senator Elizabeth Warren, who was previously a Harvard Law professor, studied bankruptcy filings statistically and published a couple of bestselling books on the matter. She found that people usually filed for bankruptcy for three reasons; medical bills, divorce or the loss of a job. People usually cannot predict these kinds of things, although they can lessen their likelihood.

I make the analogy that it’s like driving a car; if you drive too fast, you accept the greater risk of an accident, and if you buy a lot of stuff on credit, you accept a lot of financial risk you have a greater chance of getting into an accident or needing to file for bankruptcy. Of course, just as a lot of slow drivers who get into accidents, many people who are very conservative financially still need to file bankruptcy.

One way would be to refinance the debt, which means borrowing new funds to pay off the old at more favorable terms or a better interest rate. Another way is to sell assets to pay debts. A third way is to negotiate debts down, although someone can do a combo of the second and third way, by selling assets and using that money to negotiate debts.

People should be careful when negotiating debts because there could be tax implications. According to the government, if someone owed $8,000 and they settled it for $5,000, they received $3,000 in benefit, which is called “forgiveness of indebtedness” and the creditor will have to send that person a 1099C for that $3,000, which they will have to include on their tax return.

Sometimes the person won’t have to pay tax on it, especially if they’re insolvent, because there are ways for an accountant to can minimize the effect on the tax return. Anyone with any concerns about this issue should take with their accountant.

The bankruptcy law currently requires that a debtor go through a consumer credit counseling session and get a certificate before their bankruptcy will be accepted at the courthouse. Normally, by the time someone sees an attorney, their problems are so severe that the credit counseling session won’t actually do them any good. This is why, in my opinion, credit counseling rarely has any real value.

Current bankruptcy law also requires that before someone comes out of bankruptcy, they have to take a financial management class, which is similar to a traffic school. I think this has great value for people, just as going to traffic school has great value to people, because even if they know most of it already, they would usually walk away feeling like they actually learned a couple of things.

A large portion of our responsibility is getting people to focus on the future and getting them excited about what their financial life can look like after the bankruptcy is complete. It’s really sad when someone files for bankruptcy and doesn’t take advantage of it. We want clients who file to take advantage of it and undertake a very purposeful and thoughtful plan, so we provide a list of reading materials and CDs. We really want our clients to think about what they will do after they got rid of the debt. The first thing people generally ask me is how they can get credit cards again, and I tell them they shouldn’t want one or if they really needed one, to opt for one with a low limit.

We do not currently charge for a consultation, although we used to in the past. When we sit down with the client and look at their situation, we provide them with four, five or six possible solutions and we will quote them a flat fee depending on the bankruptcy solution they think will be best for them. This way, I know what I am being paid and they know what they know that they’re being charged.

Most bankruptcy attorneys take payments on their fees but hold off on filing the case until they had been paid in full, since if the client owed them money when they filed, they would not have to pay the balance after the filing. Any attorney of any quality will insist on payment in full before the case is filed.

We have unparalleled experience and commitment to our clients to get them turned around and on to their fresh start and a new financial path; there are very few firms that can say they have a former bankruptcy trustee as part of their firm.

It would be a red flag if an attorney had not practiced bankruptcy law for a while, as would another attorney who had filed a huge number of bankruptcies in a relatively short period of time. It’s also a red flag if the attorney doesn’t focus on bankruptcy only and practiced in a lot of other areas, or if the attorney wanted to meet the client somewhere other than an office that seemed like a reasonable work environment. Being asked to meet the attorney at the 7-Eleven is a red flag.

Most people are typically concerned with three types of bankruptcy; the first is Chapter 7, which is a straight bankruptcy or liquidation, and constitutes about 80-85 percent of all bankruptcy cases filed. In a Chapter 7 bankruptcy, the person will show up at a first meeting of creditors and if the trustee sees no assets to administer or sell, they will file a no-asset report and the case will usually be closed within about 4 months, giving them a start fresh. A corporation filing a Chapter 7 will essentially legally cease to exist and become defunct. It will still technically be there but it would have no authority to conduct further business. Individuals will get a discharge, whereas corporations won’t; they essentially just die.

Chapter 13 is called a wage earner’s plan or adjustment of debts, which means a debtor will propose a repayment of debt, either in full or in part, over a period of 3-5 years and they will have to make monthly payments for that long.

My typical clients are professionals and small businesses; people with unique issues or those looking to discharge taxes in bankruptcy. Someone making $20,000 a year with $10,000 worth of debt would probably not want to pay what it costs to hire me. Although we are within the realm of average fees, we are on the high side of that range.

We want to emphasize the trustee experience and the experience of being devoted to our practice for so many years, as well as our success rate and our emphasis on helping people after they have gone through the bankruptcy, because I think it’s important that they don’t end up back in the same boat. For that reason, I give every client a CD, “10 ways to prosper and avoid bankruptcy in the future.”

A Chapter 7 trustee is appointed by the United States Trustee Program to oversee each bankruptcy case. A trustee is usually a private attorney or accountant who is appointed to look at the bankruptcy paperwork, tax returns, and make sure the paperwork is filed truthfully and correctly. They also administer assets that can’t be protected, meaning they sell assets and then distribute that money among the bankruptcy creditors.

Bankruptcy judges oversee the trustees and make all of the legal decisions in a case.

A debtor almost never needs to show up in court for a Chapter 7 bankruptcy. They would need to appear at one administrative hearing, called the First Meeting of Creditors, and usually that hearing is in front of the trustee. It will usually last less than 5 minutes if the case had been prepared correctly.

We get people to focus on the future and to try and understand exactly how they got in a bind, but we do it in a way that treats them with understanding and great respect so they walk out of here feeling far better about the financial portion of their life path.

One would think bankruptcy looks worse, but the reality is, they look the same, which is why so many more people file a Chapter 7 than a Chapter 13. About 15 percent of the cases nationwide are under Chapter 13 because no one wants to repay their debt over 3-5 years if they can just make it all go away in 4 months.

One reason we advise people to opt for Chapter 13 is if there is a delinquent house payment and we want to keep them in that protective bubble for 3-5 years so they can repay the delinquent portion of the mortgage over that time. Another reason they may opt for Chapter 13 is if they owe taxes that are otherwise non-dischargeable in a Chapter 7; the IRS must take payments over 3-5 years without penalty, and sometimes without interest.

A third reason to file under Chapter 13 is if they’re afraid of losing an asset in a Chapter 7, because we can allow them to keep that asset by repaying the value of that asset into the bankruptcy over the 3-5 year period. Another reason comes if they had a huge moral compunction about wanting to repay and delay their fresh start. I’m not sure this reason makes legal sense, but if someone is driven by that moral compunction, I’m completely fine with that.

In a Chapter 13, a person will repay their debts, in full or in part, over a 3-5 year period. In a Chapter 7, a person’s debts are discharged in a proceeding that usually only lasts 4-5 months. It will cost twice as much in fees, which is another reason why a Chapter 7 will look good.

About 15-20 years ago, Congress had a sense that people with the ability to repay something were filing Chapter 7, rather than Chapter 13. Obviously, if a person could make all their debt go away in a 4 month proceeding, why would they want to repay over a 3-5 year period of time in a Chapter 13? When Congress finally understood this, they looked for ways to “encourage” people to file Chapter 13 and make payments over time. They came up with a “means test”, which looks at the person’s income and expenses. Someone who doesn’t pass the means test won’t be allowed to file a Chapter 7; they will make them convert to a Chapter 13 plan or dismiss the case.

Chapter 13 is great to repay delinquent mortgage payments back over time, pay delinquent taxes back over time or for people with higher incomes. However, without one of these issues, and all other things being equal, a person is usually better to file a Chapter 7 and start fresh sooner.

State exemption laws are designed to protect certain items of property from execution by judgment creditors or the Bankruptcy Court if a debtor files for protection under the Bankruptcy Code. The law has its genesis in the English Common Law which did not allow for creditors to take a debtor’s clothing. This law was not necessarily designed to protect debtors, but to avoid breaches of the peace caused by naked debtors wandering the streets.

• The California Constitution requires the state legislature to provide an exemption scheme to protect individuals from the “extreme consequences of economic misfortune “[California Constitution Article 20, § 1.5]. Accordingly, California has a statutory scheme whereby debtors are allowed to protect certain items of their possession to assist them in their “fresh start.”
• The California legislature has enacted a dual system whereby a debtor can choose one of two sets of exemptions. The selection of which set of exemptions to use should be done with the help of a Bankruptcy attorney. However, a debtor cannot use exemptions from each set of exemptions. They must opt for one set or the other and the set of exemptions used will generally depend upon the nature and extent of a debtor’s assets.
• The Bankruptcy Code provides that, to be eligible to claim a particular state’s exemptions, a debtor must reside in that state for 2 years preceding the bankruptcy filing. If they did not reside in any one state for that period, then the laws of the state in which they resided during the 180-day period before the 2-year period applies (or during a longer portion of the 180-day period than in any other place). If this sounds confusing, it is. Courts and attorneys around the country are struggling deal with the interpretation of these new code provisions.
  

Absolutely, and it is interesting to note that five states have unlimited homestead exemptions, which means any house someone lived in would be protected from creditors up to any amount, including in Texas and Florida. California opted out of the federal exemptions and has two sets of its own. If a state did not opt out, they have to go with the exemptions allowed in the federal bankruptcy code, although a lot of states do not do that.

California has certain defined amounts, while some states like Nevada have $540,000 as its homestead exemption amount, whereas Tennessee has a $14-15,000 exemption amount; it does vary greatly from state to state.

The Bankruptcy Code provides that, to be eligible to claim a particular state’s exemptions, a debtor must reside in that state for 2 years preceding the bankruptcy filing. If they did not reside in any one state for that period, then the laws of the state in which they resided during the 180-day period before the 2-year period applies (or during a longer portion of the 180-day period than in any other place). If this sounds confusing, it is. Courts and attorneys around the country are struggling deal with the interpretation of these new code provisions.

They further said that, if someone wants bigger homestead, like in Texas and Florida, they would have to be there for about 3-and-a-half years, instead of just two years, to make it difficult for people to shop for homesteads.

Which set of exemptions and which state’s exemptions someone is entitled to has become a very complicated analysis because there is a lot more to it, although this is a highlight.