Understanding the Basics of 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 – “FREEZE” 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 “setoff” 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 employer sponsored pension, profit sharing, stock bonus, or other plans recognized by the IRS as tax exempt.
EXEMPTIONS. Before the “estate” 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.
THE MEETING OF CREDITORS, OR 341 MEETING
You will be required to attend what is called the “341 Meeting of Creditors“. 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 4 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 social security number.
Prior to the hearing the trustee must receive a signed declaration with copies of the following attached:
- Paystubs from the 60 days prior to bankruptcy filing;
- Most recent pay stub after filing;
- Most recent filed federal tax return;
- 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 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 creditors meeting 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 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 the 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 title to the property.
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:
- 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 the 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.
- 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.
- 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.
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 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 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.
O’Fallon Location:Markwell Law, LLC 9979 WingHaven Blvd. Ste 210A, O’Fallon, MO 63368 636-486-1093
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By: Guss Markwell