General Bankruptcy Information
Many people today are suffering under a mountain of debt and expenses while their income has not kept pace. In many instances, people experience job loss, corporate downsizing, reduced work hours, divorce, serious illness or accidents that cause an interruption of their income. Bill collectors are very unsympathetic to many of these life-changing events. All they want is "their money."
Federal bankruptcy law provides a legal and respectable way to gain control over your life and your finances again. The law provides a mechanism to stop your debt collectors from filing a lawsuit against you, garnishing your wages or bank accounts, repossessing your vehicle or foreclosing on your home. The law allows you to restructure your finances in a manner that provides relief from a lot of your debts as well as providing a framework for paying for the debts you want to keep.
One of the most important features of a bankruptcy is something called the "automatic stay." This is the legal requirement that ALL creditors must stay away from you and stop ALL debt collection activity once an individual has filed for bankruptcy and received an official case number. The automatic stay stops all foreclosures, lawsuits, garnishments or other legal actions taken by a creditor in their efforts to collect on a past due debt. It also stops all creditors from taking any new action to collect on a debt while in a bankruptcy. Harassing phone calls, rude debt collectors and nasty mail or emails should stop as soon as a creditor receives notice that an individual has filed for bankruptcy. However, in the real world it may take a little time for the big corporations to make sure that the knowledge of a bankruptcy filing is properly communicated to the proper collection department or the proper subsidiary in charge of collections. It is a violation of Federal bankruptcy law for a creditor to continue to make collection attempts once they have received actual notice of a bankruptcy filing.
Most average Americans utilize either a Chapter 7 bankruptcy (see Overview) or a Chapter 13 bankruptcy (see Overview) to take back control over their financial lives. Overviews of each type of case are included in the following information. Because you owe debts, the law refers to you as a Debtor. The person or company that extended credit to you and to whom you owe the debt is referred to as a Creditor.
UNDERSTANDING YOUR DEBTS
There are generally three kinds of debts involved in a bankruptcy:
a) Secured Debts - These are debts for which the repayment is secured by a lien on a physical piece of property called, "Collateral." Some examples are: car loans, boat loans, 4-wheeler loans, real estate mortgages, bank loans secured by CD's, bank accounts or other property. Generally, if you default on the repayment of this type of debt, the Creditor can repossess or foreclose on the collateral, sell the collateral at auction, apply the proceeds to the balance owed, and sue you for what is left owing, called "a deficiency." If a Creditor obtains a judgment against you for the deficiency, then that Creditor can garnish (take money) from your paycheck or bank account. In some instances, the Creditor can force the Sheriff to sell some of your property to satisfy the judgment.
b) Priority (unsecured) Debts - These are generally unsecured debts that are considered by the law too important to just forgive so they must be paid in full. Some examples are: taxes and certain other debts owed to the federal or state government, and alimony, maintenance or child support payments. There are other types of priority debts but most average debtors will generally not encounter those.
c) General Unsecured Debts - These are the most common type of debts that most debtors experience. These debts are not tied to any specific collateral and are just general obligations to repay the debt owed. Some examples are credit card debts, medical bills, hospital bills, local merchant charge accounts, etc. As a general rule, unsecured debts are "discharged" after the completion of your bankruptcy. They simply "go away" and a Creditor is forbidden by law from ever trying to collect that debt.
PRELIMINARY EVALUATION and PRE-FILING PREPARATION
One part of the preliminary evaluation for any bankruptcy is to look at and determine exactly what type of debts you have. Many times this will guide a lawyer in which kind of bankruptcy will be most effective for your situation.
We offer a no-cost preliminary evaluation interview for anyone considering a bankruptcy. However, under the new Bankruptcy Law passed in October 2005, there are many items of documentation that are needed for this interview to be the most productive. To assist in evaluating your situation, you need to provide us with the following at the time of your first interview:
a) Pay history or income history for the past 6 months - This can consist of copies of your paystubs, a payroll history printout from your employer, or other documentation, such as a Social Security award letter where you receive the exact same amount every month. The law requires this information so we can determine if you qualify for a Chapter 7 or a Chapter 13 bankruptcy.
b) A credit report - This can be acquired on the internet by going to www.annualcreditreport.com and filling out the required information. You can secure a credit report from each of the three major reporting agencies: Experian, TransUnion, and Equifax. You can download these off the internet and print them out. These credit reports allow us to verify all reported debts, determine if you are the victim of credit fraud, and provide accurate name, address and account information for your listed creditors.
c) Copies of any bills that you owe that are not listed on one of your credit reports. (Not all creditors report their debts to a credit-reporting agency.)
d) Copies of installment sales contracts (as well as a title) on any vehicle or other item of personal property (i.e. boat, 4-wheeler, camper, trailers) that you own or are making payments on.
e) Copies of deeds or mortgage papers on any real estate that you own or on which you are making payments.
f) Copy of your county tax appraisal sheet for both real and personal property showing the assessed values.
QUALIFYING FOR BANKRUPTCY UNDER THE NEW LAW
With the passage of the 2005 bankruptcy law amendments, Congress created a "means test" to act as a method of determining those persons who can best afford to repay some of their debts through a Chapter 13 bankruptcy. This means that you have to "pass" the means test in order to qualify to file a Chapter 7 bankruptcy. Generally, anyone with a regular source of income can file a Chapter 13 bankruptcy. Congress believed that too many people were filing Chapter 7 bankruptcies when they, in fact, had the "means" to repay some of their debts.
Congress has created a two-part "means test" in order to determine who gets to file which type of bankruptcy. There are now two types of debtors: Above Median Income debtors and Below Median Income debtors.
In Part One, a debtor's past six months' income is calculated and averaged, then multiplied by 12 for a projected annual income. This annualized income is then compared to a chart maintained by the U. S Department of Justice/Office of U.S. Trustee that is based on U.S. Census data for the area in which you live. From these tables, a person is determined to be either "above" the local median income or "below" the local median income. These tables can be found by going to the United States Trustee's website at www.usdoj.gov.
If a person is "below" the median income level, then they have the choice of filing a Chapter 7 or a Chapter 13, whichever best suits their needs as determined by their lawyer. If a person is "above" the median income level, then Part Two of the test comes into play.
If you are an "above" median income debtor, then the law allows you to deduct certain pre-established expenses along with some discretionary expenses from your monthly income to determine if that brings you below the "threshold." The "threshold" is determined by whether you have "projected disposable income" after the allowed expenses are deducted from your income. If you have more than $100 of "projected disposable income," then you cannot file a Chapter 7 and must file a Chapter 13 bankruptcy. If you have less than $100 of "projected disposable income," then you generally have the choice of filing either a Chapter 7 or a Chapter 13.
This "means test" is artificial and a mechanical calculation. It does not have any real connection to your true current income or your true current expenses. However, this is what Congress has mandated.
Many times an individual is attempting to save a house or a car where they are behind on payments. To do so, the individual would need to file a Chapter 13 bankruptcy and catch up the past due payments over the life of the bankruptcy. In this situation, the "means test" isn't as important because, even if the individual passed the "means test" and qualified for a Chapter 7, they would need the Chapter 13 to save the house or the vehicle.
REPEAT or MULTIPLE BANKRUPTCY FILINGS
The changes to the bankruptcy law in 2005 altered the manner in which an individual can benefit from a repeat bankruptcy filing. The law has set new time frames that prohibit a repeat filer from receiving a "discharge" of their debts if they had a prior bankruptcy within the prohibited time frame. This does not prohibit an individual from filing the bankruptcy; however, it does keep them from receiving the all-important discharge of their unsecured debts.
The law now states that you can only receive a discharge if:
1) You filed a previous Chapter 7 and a new Chapter 7 is filed at least eight (8) years from the filing date of the first Chapter 7
2) You filed a previous Chapter 7 and a new Chapter 13 is filed at least four (4) years from the filing date of the first Chapter 7
3) You filed a previous Chapter 13 and a new Chapter 13 is filed at least two (2) years from the filing date of the first Chapter 13
Many times there are valid reasons to file a repeat bankruptcy where a "discharge" is not to be expected. If a person did not complete their bankruptcy, or did not receive a discharge in their previous bankruptcy, then there is no general restriction on when they can file a new bankruptcy. However, a Trustee can always challenge a bankruptcy filing as being an "abuse of the system" or "not filed in good faith" and try to have the bankruptcy thrown out.
UNDERSTANDING EXEMPTIONS
Many people worry about having to give up some or all of their property or personal belongings if they file a bankruptcy. Generally, an individual does not have to worry about this problem.
No matter which type of bankruptcy a person chooses, the law allows certain property in specific categories to be exempt from the bankruptcy. This means that the person can hang on to this property with generally no adverse consequences. The only time a person may have to worry is if the value of their personal property exceeds the limits allowed by law. If that happens, then a Trustee can demand that the excess property be sold, or require you to pay its value into the bankruptcy for the benefit of unsecured creditors.
Arkansas is a state that allows a debtor to use either the federal exemptions or the Arkansas constitutional exemptions, whichever is most advantageous to the debtor. Sometimes, if a debtor has a paid-for homestead that has a lot of equity, it may be necessary to use the Arkansas exemptions to fully protect the homestead. Even though the Arkansas exemptions are more liberal with respect to a homestead, they are more restrictive as to other items of personal property. Your lawyer can fully advise you on this issue.
The federal law lists specific categories of property that are considered exempt, such as: equity in a homestead, equity in a vehicle, household goods & furnishings, jewelry, tools, books, IRA's, 401(k)'s, etc. However, there are dollar amount limits on each of these categories. One part of the bankruptcy process will have you identify all such personal property and place a current value on each item.
Your lawyer will review your individual list of property, apply the exemption law and determine if there is any reason for concern. Most individuals never have a problem with their exemptions.
THE PRIZE AT THE END - A DISCHARGE
No matter which chapter of the bankruptcy law you and your lawyer choose, the reward to be expected is a "discharge" of your unsecured debts. There are lots of things to be considered from a legal point of view. There are limits on the discharge of many types of debts. However, subject to some restrictions, once a debtor has completed his/her bankruptcy, the Court will issue an order granting a discharge to the person named as the debtor. A discharge is not the same thing as a dismissal. A discharge is a good thing; a dismissal is usually not a good thing.
Collection of Discharged Debts Prohibited
The discharge prohibits any attempt to collect from the debtor a debt that has been discharged. For example, a creditor is not permitted to contact a debtor by mail, phone or otherwise, to file or continue a lawsuit, to attach wages or other property, or to take any other action to collect a discharged debt from the debtor. [In a case involving community property: There are also special rules that protect certain community property owned by the debtor's spouse, even if that spouse did not file a bankruptcy case.] A creditor who violates this order can be required to pay damages and attorney's fees to the debtor.
However, a creditor may have the right to enforce a valid lien, such as a mortgage or security interest, against the debtor's property after the bankruptcy, if that lien was not avoided or eliminated in the bankruptcy case. Also, a debtor may voluntarily pay any debt that has been discharged.
Debts That Are Discharged
The Chapter 13 discharge order eliminates a debtor's legal obligation to pay a debt that is discharged. Most, but not all, types of debts are discharged if the debt is provided for by the Chapter 13 plan or is disallowed by the Court, pursuant to Section 502 of the Bankruptcy Code.
Debts That Are Not Discharged
Some of the common types of debts which are not discharged in a Chapter 13 bankruptcy case are:
a. debts that are in the nature of alimony, maintenance or support
b. debts for most student loans
c. debts for most fines, penalties, forfeitures or criminal restitution obligations
d. debts for personal injuries or death caused by the debtor's operation of a motor vehicle, vessel or aircraft while intoxicated
e. debts provided for under Section 1322(b)(5) of the Bankruptcy Code and on which the last payment is due after the date on which the final payment under the plan was due
f. debts for certain consumer purchases made after the bankruptcy case was filed, if prior approval by the Trustee of the debtor's incurring the debt was practicable but was not obtained
This information is only a general summary of the bankruptcy discharge. There are exceptions to these general rules. Because the law is complicated, you may want to consult an attorney to determine the exact effect of the discharge in this case.
