What is Bankruptcy:
Bankruptcy Is the Process
Of Using the Law
To Modify the Rights of Your Creditors.
The following information is designed to assist you in determining whether you should file bankruptcy. Understanding bankruptcy is not easy. There are different types of bankruptcy. These different types of bankruptcy are known as “Chapters.” Most individuals either file Chapter 7 or 13. A person who files bankruptcy is referred to as the “debtor.” Bankruptcy is 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), which was updated in 2005. It’s quite debatable whether or not the law needed to be changed back in 2005, but be that as it may, Congress made the changes.
The Bankruptcy Process Broken Down
STEP 1 – Gathering the Essential Information for your Bankruptcy.
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.
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 may 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 from my office in St. Charles County. At this point, you will be provided with your case number, a copy of the filed Petition, notice of the 341 Creditors Meeting, and 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 in St. Charles County.
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. See below for more information about the 341 Meeting.
Types of Bankruptcy in Missouri
There are five bankruptcy Chapters. The types of bankruptcy are:
- Chapter 7, “Liquidation”
- Chapter 9, “Municipal Bankruptcy”
- Chapter 11, “Reorganization”
- Chapter 12 “Farmer Bankruptcy”
- Chapter 13, “Adjustment of Debts of Individuals with Regular Income”.
Chapters 9, 11, and 12 apply to very few debtors and will not be discussed further.
1. Chapter 7 – The “Fresh Start”
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 paystubs 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) in Missouri. 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.
Reaffirmation Agreements – “To Reaffirm or Not to Reaffirm, that is the Question”
Throughout St. Charles County and the state of Missouri in general, a reaffirmation agreement is a legally enforceable agreement to repay all or a portion of a debt. For the agreement to be valid the creditor must sign the agreement as well as either your attorney or the judge. 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.
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 or 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 vehicles and most real property, especially if they currently have no equity in the 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.
2. Chapter 13 Bankruptcy in Missouri
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 in a Chapter 13 Bankruptcy. 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.
Understand 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, both federal and Missouri. 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 un-filed returns within 120 days of filing the bankruptcy.