Bankruptcy

What Are Some Of The Most Common Reasons People Find Themselves Considering Filing For Bankruptcy?

The typical reasons for bankruptcy are unexpected events, such as a life change that could not have been predicted. For instance, you are injured and that creates some sort of large medical debt, you get a judgment against you, or there was a divorce that resulted in a change of income. People find themselves in a situation where they have been able to keep things afloat for a good amount of time and then that final straw that breaks the camel’s back hits. Often people will come in with a specific problem, which may not be bankruptcy, in their minds. It may be a judgment, a garnishment, or one particular creditor calling them. After talking with them, we determine whether there are non-bankruptcy options. If there are not great non-bankruptcy options that can solve the problem, then we start looking at bankruptcy.

When Someone Reaches Out To You Regarding Their Financial Issues, What Are Some Of The Key Questions That You Ask To Determine Whether Bankruptcy Is The Next Step?

The first question I ask is what brought them to me. Once we determine what that is, the next step is asking them some questions about their other life circumstances, such as what they do for a living and what their ability is, in terms of cash, to pay debts on a monthly basis. Do they have a second wage-earner in the house? Are there any dependents for whom they are caring? Once I start to get a picture of the problem and the circumstances, then the client and I can start talking about potential solutions. And those solutions may involve bankruptcy or they may not. Ultimately, whether it is on the bankruptcy side of my practice or the business side, I view my role as a problem-solver and not necessarily a litigator or a transactional lawyer. On the bankruptcy side, sometimes that involves a non-bankruptcy solution and sometimes the best solution may be a bankruptcy.

What Exactly Is A Chapter 7 Bankruptcy?

The Chapter 7 is the quickest and cleanest of the potential bankruptcy solutions for a client. It is known as a liquidation bankruptcy, but that is somewhat of a misnomer for most individuals. When an individual goes through the process, any assets that have significant value or equity will be sold by a trustee to get cash to pay the debtor’s unsecured creditors, which are those creditors who don’t have a lien on some asset of the debtor. Within 120 to 180 days, the client can come out on the other side of the bankruptcy. All of those unsecured debts that they had before are going to be discharged and all of their creditors are going to be barred permanently from attempting to collect on those debts.

What Requirements Must Be Met In Order To File For A Chapter 7 Bankruptcy?

In Chapter 7, the qualifications to file are income-based. In order to qualify, the family income for that individual must be less than the average family income in the state and in the county in which that client lives. For example, the average income of a family of three in Alabama in 2020 is approximately $68,500. If an individual’s family income is less than that average, then they will meet the “means test” to be able to file Chapter 7. The question will become whether a Chapter 7 is advisable or not. Whether or not a Chapter 7 is the best option for the client will depend on the assets that the client may have or want to protect.

Which Assets Will I Be Able To Keep After Completing A Chapter 7 Bankruptcy?

One of the disadvantages of a Chapter 7 is that it is a liquidation bankruptcy. When you enter Chapter 7, all of your assets are going to become part of the bankruptcy estate. That bankruptcy estate will be controlled by the Chapter 7 trustee, who is appointed, in Alabama, by the bankruptcy administrator’s office. That trustee is going to examine those assets and determine whether there is any value or equity in the assets above what the debtor may owe to a lender for those assets. If there is sufficient value or equity above the amount that is owed, then the trustee is likely to sell those assets to pay unsecured creditors.

If you have a decent amount of equity in some assets, those assets are likely to be sold. If you have a lot of debts and a lot of those assets, like your home or your car, are underwater, the trustee is unlikely to want to sell them because there is no real benefit to the unsecured creditors. One of our questions for deciding on a Chapter 7 versus a Chapter 13 is going to be how much equity the client has in his assets. If there is a lot of equity, then we may be talking about a Chapter 13. If there is not, then the quickest and easiest way to make your path to bankruptcy is going to be a Chapter 7.

What Exactly Is A Chapter 13 Bankruptcy?

A Chapter 13 bankruptcy is called a wage earner’s bankruptcy. In Chapter 7, all your assets become part of the estate and the trustee has the option to sell those assets to get money for unsecured creditors. In Chapter 13, most of your property would go into the bankruptcy estate but you get to retain that property and can continue using that property. The debtor will put together a plan and that plan will list all those secured and unsecured debts. Based on the wage earner’s income over a three-to-five-year time period, the plan propose to repay some or all of that total unsecured debt within that timeframe. The plan will either be three or five years. The client will pay a monthly amount to the trustee each month. The trustee will then pay the client’s various unsecured creditors.

Which Assets Am I Allowed To Keep In A Chapter 13 Bankruptcy?

In a Chapter 13, the client keeps all their assets, at least initially. There is no turnover of assets to the trustee, like there is in a Chapter 7. The next step is to determine whether there is a home that needs to be saved, a car loan, or a valueless mortgage on a client’s home. If we see one of those reasons, then we put together a plan that offers the client the opportunity to not only keep those assets now but to potentially restructure payments in a way where the client can keep that asset long-term.

For example, if you have a car that was financed at a high interest rate and with some amount that was still owed on the previous car rolled into the loan, we may be able to restructure the debt to get the payments down to the actual value of the car. We may be able to save the client a substantial amount of cash to pay other unsecured debts or to use for other needs of the home. Chapter 13 offers a real opportunity for clients to keep assets.

When Do I Have To Attend A 341 Meeting Of Creditors In A Chapter 7 Bankruptcy And What Should I Expect?

The 341 Meeting is named after the code section that calls for that meeting, which is section 341. This is just the first opportunity for the trustee in a Chapter 7 to review the financial materials and documents that the client and I will have prepared. We will have filed schedules setting out the assets of the client and the client’s debts. The client will come in and be placed under oath by the trustee. The trustee will then ask the client certain questions about his or her assets. For most clients, this is going to be a pretty painless process. The trustee will ask them a few questions, such as their name, where they live, who their spouse is, the number of children in their household, and other basic questions.

The trustee will ask a few questions about the client’s assets and maybe a question or two about the schedules. This may be the only time the client actually has to go in and speak on the record in a bankruptcy. It is not a process that a client should be worried about. As long as the client has given full and complete information to their lawyer and that information is contained on their bankruptcy schedules, the meeting will be fairly quick and painless.

What Happens If I Fall Behind In My Payments After Filing A Chapter 13 Bankruptcy?

A client falling behind on payments under a Chapter 13 plan is not unusual. The worst thing that a client could do is to stick their head in the sand and ignore it. That is going to make a small problem worse. If you fall behind in your payments under a Chapter 13, the easiest solution is likely going to be a simple modification of the plan. We may be able to just take those missed payments and, in essence, refinance them out over the remaining term of the plan. If a payment is missed, the best thing to do is to call your lawyer, explain that missed payment, and talk about ways that it can be remedied. Otherwise, the trustee can file a motion to dismiss or convert your bankruptcy to a Chapter 7. Then, we have to go in and fight with the trustee about whether to dismiss or convert the case.

What Can I Expect To Happen, Once I File For Bankruptcy?

Before you file, you are going to have a conversation with an attorney about your financial situation. We will work with you to get documentation of all of the debts owed and your assets and we will compile those into schedules. Ultimately, we will then use that information and those schedules to file for the bankruptcy. Once we file for that bankruptcy, you can expect to look for notices of the 341 Meeting with the creditors. You can also look for a stopping of calls from creditors and a stopping of creditors attempting to collect debts from you.

If you are involved in any kind of litigation, the filing of the bankruptcy would require that we file a notice in that litigation. Those cases would be stayed and the parties pursuing those actions would not be able to continue pursuing claims against you. If anyone wants to pursue those claims they would need to pursue them in the bankruptcy court or obtain permission from the bankruptcy court to pursue those claims in state court.

How Long After Filing Bankruptcy Will The Creditors Stop Calling?

The filing of the bankruptcy will initiate the automatic stay. This is a stay that is provided for by the bankruptcy code and restricts any creditors of that client from continuing attempts to collect those debts. Instead, those creditors will be given notice of the bankruptcy through the schedules that we would file which would list each of those creditors. Those creditors would receive that notice and would then be subject to that automatic stay and would be unable to contact the client, directly or indirectly, in any attempt to collect on those debts.

When Must I Complete The Pre-Bankruptcy Credit Counseling Course? If I Don’t Get This Done Right Away, Will It Hold Up My Case?

As a part of the bankruptcy, the client is required to attend and participate in two separate courses. One is a pre-bankruptcy credit counseling course. Ideally, this should be done before the bankruptcy is filed but if it is not, when the bankruptcy is filed, there will be an automatic filing by the clerk of the bankruptcy administrator that will give the option to attend that pre-bankruptcy credit counseling course within a certain amount of time or else the case will be dismissed. Typically those courses are either online or by telephone.

Provide A Brief Timeline Of The Bankruptcy Process In Both The Chapter 7 And The Chapter 13.

In any bankruptcy case, we will first gather information. We will identify the client’s problem and get information about the client’s assets and debts. We will combine that and create certain schedules based on that information. Through that information, we will also decide whether Chapter 7 or Chapter 13 is going to be appropriate for the client. The first choice is going to be Chapter 7 because it is easier, cleaner, and much quicker. In Chapter 7, we get the information and the schedules, the client takes their initial credit counseling course, and then we file. That creates the automatic stay, which puts an immediate stop to creditors’ attempts to collect on the debts.

Within 30 to 40 days, the trustee will set the 341 Meeting. We will gather a few more documents, then go to the meeting. The client talks to the trustee and in most instances, the trustee issues a no asset declaration or finding. Most people who are there in a Chapter 7 do not have any assets for the trustee to liquidate to pay unsecured creditors. If that is the case, then we will simply wait the required time for any objections to the discharge. In a no-asset Chapter 7, there will not be any opportunity for creditors to file any claims. The case would typically be discharged within 60 to 90 days following the 341 meeting, barring any odd or unusual circumstance in which a creditor filed an objection to the discharge.

In a Chapter 13, we would do the same document collection, file the case, and file the plan. The plan is going to set out the plan that we put together to repay some or all of the unsecured debts. We would have a 341 Meeting within 30 to 50 days and the client would need to take the first credit counseling course before or immediately after filing. If there are any motions or requests that we would need to make, we would start that process early. Within the first month of the plan being filed, the client would need to start making payments to the trustee under the plan.

The unsecured creditors and other creditors will have an opportunity to file proof of claims in the bankruptcy. If they do, then we have to decide whether those are accurate and whether we need to object. After those claims are filed and the plan has been created, the creditors would have a chance to object to the plan and the trustee would have a chance to object to the plan If the plan appears to be acceptable, then they would go forward for a confirmation hearing and this would usually be 90 to 120 days after the filing of the bankruptcy. If the plan is workable and there aren’t any objections, then the plan would be confirmed and the client would then continue making those payments throughout the term of that plan.

At the end of the plan, if the client has made all the payments, the client would receive a discharge. In a Chapter 7, the discharge would be received once the liquidation is completed. In both Chapter 7 and Chapter 13, the discharge would, with a few exceptions, discharge any of the debts that were owed by the client which were not paid through the bankruptcy.

Once I’ve Completed A Bankruptcy, What Post-Courses Am I Required To Take?

There is a pre-bankruptcy credit counseling that is required and then there is a second follow-up course that the court and the bankruptcy code requires. These are not difficult or expensive. You can take them online or over the phone and they help the client get a better idea about the workings of credit and give some helpful hints for them to manage their finances after the bankruptcy.

How Many Years Does A Bankruptcy Generally Stay On Someone’s Credit Report?

When a client files for bankruptcy, that bankruptcy is going to remain on their credit report for a number of years. However, it shows debts that have been discharged in the bankruptcy. When a new creditor sees that a debt has been discharged as opposed to charged off as overdue and unpaid, that is a good sign for those who are looking at that credit report. That signals to them that the debt is no longer collectible and that the client has taken the initiative to fix those financial and credit problems.

Will Filing For Bankruptcy Ruin My Credit Forever?

A bankruptcy will stay on a person’s credit report for a certain amount of time, but the client will be able to get credit again fairly quickly. The question is whether the filing of the bankruptcy and the resulting discharge of debt will be a benefit to their credit. If a credit report contains a lot of charged off debts or debts that are currently overdue and unpaid, then getting those debts discharged will reflect a discharge instead of the charge off or the missed or late payment. That is ultimately going to be a benefit to the client in obtaining future credit.

Why Do I Need A Bankruptcy Attorney To Help Me Through The Process? Can’t I Just Do It On My Own?

You are not required to have a lawyer to file bankruptcy, if you are an individual. However, the reason that you would hire a lawyer is that lawyer’s knowledge of the system, the bankruptcy code, and what the judges will or won’t do. Your attorney knows what the trustees will or won’t do and what can be done for you in the bankruptcy. A great example of this is taxes. A common misconception is that income taxes are never dischargeable in a bankruptcy and that is not true. There are some circumstances in which income taxes may be dischargeable and those are the things that your lawyer will know. For most clients, even the premium prices charged by very good lawyers will ultimately save the client more than they will have paid that lawyer.

What Could Be Coming, As Far As The Filing Of Bankruptcies For Both Businesses And Individuals, Due To The COVID-19 Pandemic And Government Assistance Eventually Running Out?

Thus far what we have seen is actually a reduction in the number of individual bankruptcies since March 2020. The bankruptcies that we have seen are large Chapter 11 bankruptcies by big businesses, like malls and retailers. What we haven’t seen is a lot of small business bankruptcies or individual bankruptcies since the beginning of the COVID crisis. I believe that once the PPP funds for businesses end and once the individual assistance from the government comes to an end, unless there is a significant upsurge in economic activity, we will see a lot of small businesses file. We will see a lot of individuals file who have been unable to work or find new work.

If you are one of these people in financial trouble, don’t ignore it for months. Call a bankruptcy lawyer and talk about the problems you are facing. Get an idea of what the debts are, what the assets are, and what the income is, and make a plan. With that plan, you can save yourself the most money and get the absolute best result. If you wait until your home is in foreclosure and the foreclosure sale is a week from the time you finally talk with an attorney, you are removing any ability to plan. You now just have to get that bankruptcy filed and then deal with the consequences as they arise. Don’t wait until you are getting evicted or your home is in foreclosure. Deal with those problems early and your solutions for those problems may be a whole lot better.

For more information on Bankruptcy, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (205) 506-3354 today.