Bankruptcy has been used by more than 1 Million people each year for over 20 years in order to eliminate debts. In 2005, over 2 Million people filed bankruptcy. Bankruptcy offers options for people whose financial situations are difficult and challenging. It can stop a foreclosure on a home and stop the IRS. It can stop a wage garnishment and stop the repossession of a car. It is a powerful remedy that gives financial solutions to the average person. And it’s not difficult or scary to get compassionate, expert legal advice so that you understand your options and how you can dramatically improve your financial circumstances. But there are some “bankruptcy basics” that everyone should know before they begin the process.
While it may be relatively easy to start the process of a bankruptcy filing, getting high quality legal advice and help is crucial. Many complications can arise after a bankruptcy filing when it is done by an inexperienced lawyer or done “pro per” (a term for people acting as their own lawyers).
In 2005 the bankruptcy law was changed in some important ways, and filing and sustaining a bankruptcy petition became more difficult and complicated. Of course, you are legally allowed to file pro per and act as your own attorney. But if you decide to act in pro per, expect problems. It is far more advisable to consult with an expert bankruptcy lawyer in San Diego who can fully explain your legal options and who will also help you avoid serious mistakes that people make both before and after they file.
Maybe it would help to give some examples of how pro per filers and inexperienced lawyers can mess up a bankruptcy case and risk losing the benefits of filing or risk losing property that you could otherwise keep. Below are some problems or mistakes that we have seen in the San Diego bankruptcy court system when people fail to consult with an experienced bankruptcy lawyer. Keep in mind that these mistakes have consequences that include serious delays, the dismissal of a case, the loss of property that could have been saved or retained and the denial of bankruptcy relief:
Another thing to keep in mind is that there are bankruptcy preparer services (paralegal or filing services) that advertise that they can file your petition for you, but these services are legally prohibited from giving you legal advice. Also, these services can not represent you when problems arise in your case.
None of these mistakes are necessary when you consider that you can meet with an expert bankruptcy lawyer for a free consultation and get free bankruptcy advice. We meet with people every day for no charge and analyze their legal situation and their options. We give free bankruptcy advice and can show you how you can get the help you need to get a fresh start.
There are three “Chapters” under the Bankruptcy Code that apply to “individuals” (people, not corporations or other legal entities). These Chapter under which individuals can file for relief are Chapter 7, Chapter 11 and Chapter 13. The right Chapter for your situation will depend on your circumstances. Once you file a petition, you start a bankruptcy case which must be administered by the Bankruptcy Court. In the case of Chapter 7, a Trustee is appointed to oversee the administration of your case.
Chapter 7 is known as a liquidation or as a “straight bankruptcy.” A chapter 7 case will take only a few months to complete assuming that there are no complications in your case. And within a few months (often 90 days or so after filing) you can expect to receive your “discharge” and you case will be done! In your Chapter 7 case you must list all of your debts and you must also decide which property you want to keep if the property is affected by a mortgage (real estate) or other liens (personal property where some form of lien has attached—such as an installment sales agreement or a car loan). For the property you wish to keep, it will be necessary for you to continue making payments on the mortgage or other debt even though you have filed bankruptcy. These are issues that should be discussed with your attorney before you file bankruptcy. Our clients always know what to expect, but some people who file are surprised by these issues after they file. This will never happen if you choose the right lawyer to handle your case.
Your Chapter 7 discharge eliminates virtually all debt, but there may be some debts that survive and this will depend on your circumstances. For example, certain student loans are not discharged. Income tax debts may not be discharged unless they are older and unless certain specific conditions apply. And of course, domestic support obligations may not be discharged. There are often complex rules that apply to these situations and that makes it even more important that you consult with an expert bankruptcy lawyer.
Chapter 11 is also called a business reorganization, however individuals may also file Chapter 11. In a Chapter 11 case, the individual or business keeps possession of the assets and proposes a “plan of reorganization” to pay creditors. Creditors may be divided into “classes” and these classes of debts get to vote on the plan. A Chapter 11 plan may “impair” (lower or reduce) the amount of debt that is paid back, although creditors in the same class must be paid the same percentage of their claims (equal pro rata payment).
Chapter 13 is also a “reorganization” but it is only available to individuals, not businesses. You may also see Chapter 13 called a “wage earner’s plan.” The debtor proposes a plan of reorganization that will pay creditors, according to their priority, over a 3 to 5 year period. The monthly payments by the debtor typically come from the debtor’s wages and creditors receive their payments from a Chapter 13 Trustee who administers the plan.
Chapter 13 is most often used when the debtor’s home is threatened with a foreclosure or when the debtor has substantial assets (which are not exempt and cannot be protected in Chapter 7) or when the debtor needs relief from creditor harassment but has high income which does not pass the “Means Test.” Chapter 13 offers some unique advantages for dealing with creditors. For example, your attorney can have assets revalued and can “strip liens” off of these assets where the lien amounts exceed the asset value. There are eligibility limits in Chapter 13 (dollar limits on the total amount of secured and unsecured debts that the debtor can have) and these limits change on a yearly basis.
Most people who file bankruptcy in San Diego (and nationwide) keep everything they own when they file bankruptcy. Bankruptcy law has a very complex system that allows “exemptions” to each debtor—property is considered “exempt” and you get to keep it if you properly request the correct “exemptions” allowed under the applicable law and rules when you file your petition. The good news is that, when properly handled, the exemptions are generous and they serve the purpose of allowing San Diegans and other California debtors to keep their property and to truly get a “fresh start” after they receive their discharge.
After your petition is filed, certain documents and forms must be filed with the Bankruptcy Court and give to your Trustee. And all this has to happen according to very specific deadlines. If you decide to file without an attorney, no one will tell you what these deadlines are and what has to be filed. You’ll be on your own. If you fail to comply with the deadlines and rules it’s likely that your case will be dismissed by the Court.
Your first bankruptcy petition acts as an automatic stay (an injuction) that prevents creditors from taking any further action to collect debts or to enforce a lien or to foreclose on property. Everything stops. If you have had a recent bankruptcy petition dismissed, then there are different rules that will apply to you, and you may not get the benefit of an automatic stay. This is yet another reason to use an expert attorney the first time you file.
All of your creditors are notified by mail that you have filed a petition (i.e., creditors that you list in your schedules and documents). The notice that creditors receive gives them enough information to respond, if necessary, to your filing (e.g., the date of your filing, the Chapter under which you filed and information about the automatic stay that applies). Foreclosures must stop and the same goes for wage garnishments, law suits, a civil trial and auto repossessions. But criminal cases are not stayed and neither are child support hearings. This “notice” that creditors receive also contains the date and time of your meeting of creditors (or your plan confirmation hearing if you file Chapter 13). The notice also lists deadlines that apply to creditors.
A Trustee is appointed for your case and that Trustee will examine your paperwork and ask you some questions under oath at your meeting of creditors. Normally creditors don’t bother to attend this meeting of creditors. You will be accompanied by your attorney and the Trustee asks you some simple questions to verify the accuracy of the information you have provided in your bankruptcy papers (Schedules, Statement of Affairs and related forms).
For the overwhelming majority of debtors, that’s the end of your involvement in the case and your discharge will be issued in the normal course after your meeting of creditors. In a tiny minority of cases, some creditors may ask the Court to determine that a particular debt should be “excepted” from your discharge. This could happen, for example, when a creditor believes a debtor has lied or committed fraud that resulted in a debt. But there are strict and short time limits during which such creditors must come forward and file such “complaints” with the Court. In most cases, these complaints have to be filed within 60 days after your meeting of creditors.
An experienced bankruptcy lawyer will guide you through this process. He or she will make sure that:
A bank or loan company that holds a mortgage on your home or a lien on title to your car is called a “secured creditor.” They have collateral for their debts (your home or car) and they have a right to eventually enforce those rights against their collateral. The debts that you owe these secured creditors are discharged. This means that you have no personal liability to repay the creditor. But often debtors who are behind on a mortgage choose to file Chapter 13 in order to pay the defaulted mortgage payments back over time. This is possible in Chapter 13, and if your reorganization plan is confirmed, you will be able to pay your current mortgage payments after the petition and “cure” the defaulted amounts typically over 3 years.
But if you choose to file Chapter 7, you will get a short period time during which the automatic stay prevents any repossession or foreclosure. But when that period of time runs out (or when the creditor asks the Court to terminate the automatic stay earlier), the creditor will be allowed to complete a foreclosure or repossession and take back their collateral.
Sometimes people file Chapter 7 to eliminate credit card debts or medical bills, but they are up to date on their mortgage payments on their homes. In these cases, as long as the debtor stays current on their mortgage payments, they will continue to own their home and nothing will change. The only exception to this would be where a homeowner has a great deal of equity in their home (more than $75,000 to $175,000, depending on which homestead exemption applies). In these cases, there is risk that the Trustee will sell the home, pay the homestead proceeds to the debtor and pay the left over balance to creditors. This risk, if it applies to your situation, will require that you consider Chapter 13 and a plan that pays your creditors something over time, based on your net income after allowed expenses. Your attorney should understand these risks and will explain your options in detail.
Getting free advice about your financial situation and your debt options is possible. This information about “bankruptcy basics” gives you a general idea about some important issues that may affect your San Diego bankruptpcy case. We meet with clients for free consultations virtually every day. Understanding your rights and getting expert advice and counseling is where you should start. Bankruptcy isn’t for everyone, but it’s a powerful remedy that will get you a fresh financial start and set you on your way to recover from the stress, creditor harassment and problems that occur when you have debts that you just can’t pay.