The Who, What, and How of Bankruptcy
“Bankruptcy Is the Process of Using the Law to Modify the Rights of Your Creditors.”
Guss Markwell is a St. Charles Bankruptcy Lawyer, Practicing in the areas of Chapter 7 and Chapter 13, Debt Lawsuits and FDCPA Claims.
There are several different types of bankruptcy. These different types of bankruptcy are known as “Chapters.” Most individuals either file Chapter 7 or 13. The following information is designed to assist you in determining whether you should file bankruptcy. A person who files bankruptcy is referred to as the “debtor.” Bankruptcy and the bankruptcy process are derived from what was formally referred to as “The Bankruptcy Code”. The most current version of which is called the “Bankruptcy Abuse Prevention and Consumer Protection Act” (BAPCPA), most recently updated in 2005.
Bankruptcy Process in St. Charles Explained
STEP 1 – Gathering the Essential Information. Perhaps one of the most tedious tasks in Bankruptcy is gathering the required information. This takes a significant effort on your part. I will provide you with the guidance and forms which will assist you in gathering such.
STEP 2 – Preparation of the Bankruptcy Petition, Step two of the bankruptcy process, once you have provided me with the essential information, I will prepare your bankruptcy Petition. This process usually takes a few weeks, though can be completed quicker if necessary. During this time, it will be essential to meet with you, in order to properly prepare, and protect what can be protected regarding your property.
STEP 3 – Filing the Petition. I will file your Bankruptcy Petition electronically. At this point, you will be provided with your case number, a copy of the filed Petition, Notice of the 341 Creditors Meeting. I will also provide you with information about additional documentation that will need to be provided to the trustee. Commonly called “4002 documents” after the section in the bankruptcy code, these documents will need to be provided to my office well in advance of the 341 Meeting.
STEP 4 – The 341 Meeting. This is where the type of bankruptcy determines the next step. Below, you will find additional information about the various types of bankruptcy and the issues involved.
TYPES OF BANKRUPTCY
There are five bankruptcy Chapters. The types of bankruptcy are: 1) Chapter 7, “Liquidation”; 2) Chapter 9, “Municipal Bankruptcy”; 3) Chapter 11, “Reorganization”; 4) Chapter 12 “Farmer Bankruptcy”; and 5) Chapter 13, “Adjustment of Debts of Individuals with Regular Income”. Chapters 9, 11, and 12 apply to very few debtors and are not discussed further.
Chapter 7 – The “Fresh Start Bankruptcy in St. Charles”
Individuals who have not received a bankruptcy discharge within the last 8 years and corporations may file under this Chapter. All non-exempt assets are sold by the trustee and the proceeds are distributed to creditors. However, it is rare for a debtor to have any non-exempt assets that are sold. The available exemptions will be discussed below.
Passing The Means Test. An individual or couple must enter their income and allowable expenses in an elaborate formula that will indicate whether they have the ability to repay a significant portion of their debt. An individual or couple may not qualify for Chapter 7 if they have the ability to repay a significant portion of their debt. I will have you provide the necessary information to advise you as to whether you pass the means test. This will include all your pay stubs for the 6 months preceding the bankruptcy.
Looking for Substantial abuse. Upon completion of your case, the court will issue a “Discharge Order.” You do not have to pay debts that are discharged in your bankruptcy. Your case could be dismissed, and no discharge granted if the court determines that granting you a discharge would be a “substantial abuse” of the bankruptcy laws.
Secured debts. Generally, you must reaffirm, redeem or surrender the personal property if there is a lien (security interest). You must file a statement of your intention to reaffirm, redeem or surrender with the court. Within 30 days of the meeting of creditors, you must perform the stated intention. The law is unclear as to what happens if you do not comply with your stated intent. Some creditors have interpreted the law as giving them the right to repossess the property.
“To Reaffirm or Not to Reaffirm, that is the Question” – Reaffirmation Agreements
A reaffirmation agreement is a legally enforceable agreement to repay all or a portion of a debt. In order for the agreement to be valid, the creditor must sign the agreement as well as either your attorney or the Judge. This is a situation where Congress has substituted my judgment for your judgment. I will not sign the reaffirmation agreement unless I believe that reaffirming the debt is in your best interest and you can afford to repay the debt. Once all parties have signed the agreement it must be filed with the court prior to the deadline issued by the Court.
A creditor that has a debt secured by an interest in real property (e.g., a house) cannot foreclose on the property simply because you chose not to reaffirm the debt. However, the creditor may elect not to send you statements and may choose not to report payments to credit reporting agencies. I discourage my clients from reaffirming on home loans. However, reaffirming a loan secured by your house may make it easier to reestablish your credit, pursue a loan modification, or simply communicate with your bank. Therefore, some clients elect to pursue a reaffirmation agreement on a home loan.
A creditor that has a debt secured by an interest in personal property (e.g., a car) may repossess the property if you have not entered into a reaffirmation agreement or redeemed the property within 30 days of your creditors meeting.
In order for the reaffirmation agreement to be valid either your attorney or the judge has to approve it. If I, as your attorney, am approving the reaffirmation agreement I must sign a declaration that I believe that the agreement does not impose an undue hardship on you or your dependents. I will not sign the reaffirmation agreement if your budget does not support the position that you can afford the payments, if the interest rate is unreasonable, or if the value of the property is significantly less than the amount owed on the debt.
Once you have gone through this process the creditor cannot repossess the property unless you are in default on your contract (e.g., behind on the payments or don’t have insurance). Debtors who timely offer to enter into reaffirmation agreements and are not in default on the loan may keep their cars even if the bankruptcy court does not approve the reaffirmation agreement.
Redemption – Pay the creditor the fair market value of the property in a lump sum during the bankruptcy. There are lenders who may offer to loan you the money to pay off the fair market value of the vehicle. This may make sense if you owe more than the vehicle is worth and already have a high-interest rate.
Surrendering Secured Property – This means you return the property to the lender.
Keeping the property and continuing to make payments – I generally discourage my clients from reaffirming debt secured by real property. I recommend you just continue to make the payments if you want to keep the property. Your lender may choose to not send you statements or coupon books and may not provide the information to credit reporting agencies. Also, you may not qualify for loan modification programs if you have not reaffirmed the debt.
The Loan Modification – “Modification Smodification”
First off, I wish you the best of luck with this. Secondly, I do not represent debtors in their attempts to renegotiate the terms of their mortgages whether in Chapter 7 or Chapter 13. If requested I can provide you with a letter that allows the lender to negotiate with you directly. A lender may refuse to consider a loan modification if you have not reaffirmed the debt. Also, some lenders have stopped processing loan modification applications once the bankruptcy has been filed. If you are pursuing a loan modification, I recommend you wait to file the bankruptcy until after the loan has been modified. If you intend to pursue a loan modification after the bankruptcy is complete, I recommend that you consider reaffirming the debt. In Chapter 13 a loan modification cannot be finalized without permission from the Court.
Chapter 13 Bankruptcy
Individuals who have less than $336,900 in unsecured debt and less than $1,010,650 in secured debt may file under this Chapter. A plan is proposed to repay some or all of the debt. A trustee oversees the administration of the plan.
The Chapter 13 Plan
Generally, the plan must provide for payment of secured creditors in full or according to the terms of the contract if the security is retained (e.g., home loans and vehicles). However, some secured creditors may have their claims modified. The plan must also pay all administrative and priority creditors in full. Unsecured creditors are entitled to receive as much as they would receive under Chapter 7, or how much you can afford to pay them over the life of the plan, whichever is greater. Payments are made over a period of time. Plans can provide for payments over as little as 10 months or as long as 5 years. The minimum plan length will be determined by your income and allowable expenses. Payments usually start immediately via payroll deduction if the debtor is employed or directly from the debtor if self-employed. The first plan payment is due no later than 30 days after the case is filed. No new debts can be incurred while in Chapter 13 unless approved by the court. The court considers bonuses part of your disposable income, your employer may be directed to pay bonuses over to the Trustee.
Tax Returns. All tax returns (local, state, and federal) must be filed prior to the meeting of creditors. All post-petition tax returns must be timely filed.
Bankruptcy and Domestic Support Obligations. If you are responsible for paying child support or alimony/maintenance to another person you are required to keep those payments current after the bankruptcy is filed. If you do not keep those payments current the State can file a motion to have your case dismissed. Whether you have support obligations or not there is a declaration that needs to be filed in all cases when the Trustee is getting ready to finalize and close your case. The Trustee will inform us when it is time to prepare and file that declaration.
TAX RETURNS – I will need a copy of your most recent year’s tax return. The Trustee and any creditor requesting it are entitled to a copy. A transcript from the IRS may be used instead of the actual return. If you file Chapter 13 you must file all unfiled returns within 120 days of filing the bankruptcy.
BUDGET AND CREDIT COUNSELING – Before you file bankruptcy you must complete a credit counseling class. After the bankruptcy is filed, but before you receive your discharge, you must complete a money management class.
THE AUTOMATIC STAY – Immediately upon filing bankruptcy you are entitled to the advantages of “The Automatic Stay” Bankruptcy provides immediate relief from most actions that can be taken by creditors to collect debts. Collection notices must stop, lawsuits cannot be commenced, and garnishments cannot be pursued.
Allowed actions under Automatic Stay.
Criminal and Support Actions – Criminal prosecutions may continue and actions to collect child support or alimony may be taken. Even against exempt property.
Setoff – An exception to the Stay is if you have deposits with a creditor the creditor can “set off” what it owes you (i.e., the amount of your deposits) against what you owe it. Therefore, if you owe your bank or credit union money it is best to have as little as possible in the account on the date you file.
Loans Against Retirement – Withholding from the debtor’s wages and collection of loan amounts due as a result of the debtor’s borrowing from an employer-sponsored pension, profit-sharing, stock bonus, or other plans recognized by the IRS as tax-exempt.
Expiration of Automatic Stay.
Previous Bankruptcy in Last Year. The automatic stay may not apply.
Debt Secured by Personal Property. The stay terminates 30 days after the meeting of creditors if the debtor has not reaffirmed or redeemed unless the debtor has proposed a reaffirmation to the creditor and the creditor has refused to file.
The Creditors Meeting – also called “341 Meeting” or “Meeting of the Creditors”
As part of the Bankruptcy process in St. Charles, you will be required to attend a creditor’s meeting. The Creditors Meeting is conducted by the bankruptcy panel trustee. The Trustee’s job is to make sure that your papers are complete and accurate, to ensure all those entitled to Notice have been notified, and to handle the disposition of any assets that are subject to being distributed. The Trustee works for the Court, not for the debtor, and acts as a middle person between the debtor, the Court, and the creditors.
The meeting will be held about 6 weeks after your bankruptcy is filed. Generally, no creditors will show up at the meeting, however, a Trustee will conduct an examination of your bankruptcy filing and ask you a few questions. You will receive notice of this meeting from the bankruptcy court (if you do not receive a notice within 14 days of filing call my office). You are required to bring to your 341 Creditor’s Meeting the original or certified copy of your proof of identity and verification of your social security number.
Prior to the hearing, the trustee must receive a signed declaration with copies of the following attached:
1) Paystubs from the 60 days prior to bankruptcy filing; 2) Most recent pay stub after filing; 3) Most recent filed federal tax return; 4) A statement of all your bank accounts, investment accounts, mutual funds, and brokerage accounts showing the balance or value of the account on the date of filing.
Some of this information will have to be provided after the bankruptcy is filed. If you fail to provide the information required in a timely manner or don’t bring the proper identification and proof of social security number to the 341 Creditor’s Meeting you will be required to attend another meeting to present your information. The court sets the time and date of this meeting.
DISCHARGE – This is what you’ve been waiting for!
Upon completion of the bankruptcy, a discharge is granted. Usually, 60 days after the Meeting of Creditors in Chapter 7 and after completion of the plan payments in Chapter 13. Most debts are then discharged, meaning that the creditor has no right to collect the debt, it no longer exists. The following debts are generally not discharged: Charge card purchases within 90 days of filing bankruptcy; cash advances on charge cards within 70 days of bankruptcy; loans against retirement plans; student loans; judgments based on a DWI; taxes (income taxes can be discharged in some circumstances); debts incurred through fraud or false financial statements; debts not listed on your bankruptcy schedules; obligations created by divorce (e.g.., maintenance, alimony, child support, property settlements and hold harmless provisions); debts resulting from willful or malicious injury of a person or property; and Government Fines/Penalties.
SECURED CREDITORS. A deed of trust, legal ownership of a vehicle, or interest under the Uniform Commercial Code are examples of security interest (leases are not secured debts). Some property may secure more than one loan, this is called cross-collateralization. For example, your car may secure a loan on the car plus a personal loan or charge card through the bank or credit union. Generally, you will have to pay off both loans in order to clear the title to the property.
Avoiding Liens. Generally secured creditors maintain their security interest after the bankruptcy is filed. However, in some cases that security interest (i.e., lien) can be avoided by bringing a separate action during the bankruptcy to avoid the lien. There are three types of liens that are commonly avoided:
1. Judgment lien. If you have real property (i.e., real estate) and a creditor gets a judgment against you prior to you filing bankruptcy that judgment can become a lien against your property. In certain cases, after the bankruptcy is filed, this lien can be avoided. It is your responsibility to discuss any liens against your property with us. My office does not do searches for liens. A local title company can do a search if you would like. If you have a judgment lien that can be avoided in bankruptcy a retainer is required to prepare the paperwork to avoid the lien. If a judgment lien exists and it is not avoided in the bankruptcy when you go to sell or re-finance your property you would be responsible for either paying the debt or trying to re-open your bankruptcy to avoid it, which could become costly, or the judgment creditor could foreclose on the property.
2. Non-purchase money security interest. When you obtain a personal loan, the lender may ask for a security interest in household goods. This type of security interest is called a non-purchase money security interest and is avoidable in some circumstances. A retainer is required to prepare the paperwork to avoid the lien. If a non-purchase money security interest exists and it is not avoided in the bankruptcy the creditor can take action during the bankruptcy or after the bankruptcy is over to repossess the property.
3. Subordinate mortgage. If there is no equity in your home for a deed of trust to attach to, the debt is technically unsecured, and the lien can be avoided in a Chapter 13 bankruptcy. For example, if you have a home worth $300,000, with a first mortgage of $320,000 and a second mortgage of $50,000.00. Then, the second is unsecured because there is no equity for the lien to attach to. In a Chapter 13 bankruptcy, the second mortgage can be treated as an unsecured debt and the lien removed. The amount may count towards the unsecured debt limits.
LEASES/EXECUTORY CONTRACTS – If you have leased property or an executory contract (executory contracts are contracts in which performance is still due by the debtor, non-debtor, or both parties to the contract) the agreement must be assumed, or it is deemed rejected. Generally, the lessee will allow you to reaffirm or continue to make the payments under the contract. However, you do not necessarily have the right to merely continue making the payments. If the lessee wants the property they may be able to get it back.
BANKRUPTCY AND YOUR CREDIT REPORT – A bankruptcy filing may be retained on your credit report for 10 years. In addition, most loan applications require that you disclose that you have filed bankruptcy. Businesses, including banks and apartment owners, may refuse to do business with someone who has filed bankruptcy. I do not guarantee that creditors will accurately report information on your credit report. An additional fee will be required if there are issues you want me to address. For a discussion of what I refer to as the “Game of Credit Score Fear”, please click the following link: Bankruptcy and Credit Scores
THE BANKRUPTCY ESTATE. When you file bankruptcy a “bankruptcy estate” is created. It is an entity similar to a Trust or Corporation. The estate is comprised of all property you own or have rights to. Under some circumstances, property that you have transferred, or property that you become entitled to after the bankruptcy is filed, may also be property of the estate. You do not have the right the sell, transfer, or encumber that property until it is no longer property of the estate. The property is usually no longer property of the estate when the case is closed. Generally, the case is closed shortly after you receive your discharge. However, under some circumstances, the case can be kept open for the administration of assets even though you have received your discharge. In most cases, the property will probably never leave your possession and you’ll be allowed to keep it, this is because of the “exemptions”.
Property that you currently own. Upon filing bankruptcy essentially everything you own or have rights to will become the property of the “bankruptcy estate”.
Property that you have transferred. Some payments made to creditors within 90 days of filing may be pulled back into the estate, or 1 year if the payment was made to an “insider” (e.g., relative). Transfers made within the last four years that violate the Uniform Fraudulent Transfers Act may be undone (generally a transfer made for less than economic value while you were insolvent).
Property that you become entitled to in the future. Included in the estate is property you become entitled to via inheritance, life insurance, or a property settlement with a spouse within 180 days of the bankruptcy or while making payments in a Chapter 13 Plan.
EXEMPTIONS. Before the “estate property” is used to pay creditors you can exempt certain property. That means you get to keep the exempt value of the property. In some states, you may elect Federal or State exemptions. In Missouri however, only the state exemptions are available. If you are married and filing jointly you are entitled to double the many exemptions. Property claimed as exempt must be sufficiently described so that the trustee and parties in interest can reasonably be expected to know what property the debtor claims as exempt, therefore when preparing your worksheet, provide detailed descriptions of your property where requested. If you omit property from your schedules the court may deny your exemptions in that property even if you would otherwise be entitled to exempt the property.
O’Fallon, MO 63366