Declaring Yourself Bankrupt

Declaring yourself bankrupt has, and still is, often been misunderstood by the public at large who in the past have often thought that people who declare bankruptcy are in some way lazy or just happy to walk away from their responsibilities. Of course the facts are somewhat different.

This is a simple fact that in America the fastest-growing group of individuals filing for bankruptcy are over the age of 65. In other words they properly worked most of their lives both had the misfortune of becoming ill, (which is not unusual!), and find that their medical bills have spiralled out of control. This is just one example, but there are many more. One out of every seventy five households in America have someone who has filed bankruptcy, and the assertion that those who file bankruptcy are simply walking away from their responsibilities is one of the biggest myths about filing for bankruptcy.

However, it is important to note that the US bankruptcy laws were established to help what we might call "honest" debtors. Bankruptcy is not there to be used by people who simply want to rip off their creditors, and to a great extent the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act has put a stop to this possibility in any case, due to the introduction of the compulsory means test. The means test is designed to allow the bankruptcy court to scrutinize the debtor’s financial position to ensure that they are indeed in a position to file bankruptcy legitimately.

Which Type of Bankruptcy?

The two main types of bankruptcy filed by individuals are chapter 7 and chapter 13. In addition there are chapters 11, (usually used by large corporations), and chapter 12, (similar to chapter 13, but specially designed for farmers and fishermen).

Chapter 7 Bankruptcy

Under a chapter 7 filing the bankruptcy court trustee oversees the liquidation of the debtor’s assets, the proceeds of which are then distributed amongst the creditors in full and final payment of the debt. Any outstanding debt is then discharged, in other words no longer the responsibility of the debtor. This is the bankruptcy to file under for those whose debts are mainly what are called unsecured debts, such as credit card debt. Indeed credit card bankruptcy is one of the most common reasons for filing bankruptcy, as those successful in filing chapter 7 will eliminate credit card debt.

The bankruptcy law provides for retention of certain assets, and in reality the bankruptcy court is not usually interested in any asset worth less than about $400, so chapter 7 bankruptcy does not usually result in the loss of all of one's possessions. Indeed somewhere around 90% of chapter 7 bankruptcy cases are what are called "non-asset" bankruptcies, in other words the bankruptcy court finds nothing of sufficient value in the debtor's estate worth liquidating.

So how do you decide if chapter 7 is for you?

Perhaps the first thing to consider is whether or not you have received a bankruptcy discharge in the past. If you have, and it is within eight years of your current filing you are ineligible. The only exception to this is if the discharged bankruptcy was under chapter 13, and you repaid at least 70% of your creditors’ claims.

In addition, if you have no assets that are likely to be liquidated by the bankruptcy court trustee, your mortgage and any repayments on your car are up-to-date, or you are happy to lose them and at the end of every month you are left with almost nothing after paying your living expenses, then chapter 7 is the best route for you to go.

If on the other hand however, you are behind on mortgage or alimony payments, or you need more time to catch up with tax debt and your earnings easily cover your living expenses, then chapter 13 is the best option. You can also file chapter 13 if you have had a bankruptcy discharged within the past eight years.

If you decide to file under chapter 7, you will need to pass the means test.
Assuming you and your lawyer decide that chapter 7 is the way forward. The first major event is what is called the 341 meeting of creditors. This will usually take place between 20 and 40 days after signing the petition. The meeting is chaired by the trustee and both you and your lawyer have to attend.

The purpose of the 341 meeting is to allow the bankruptcy court to scrutinize the documentation that you and your bankruptcy lawyer will have already put together with particular regard to your financial position.

It is at this meeting the court will decide whether or not you have assets that should be liquidated with the proceeds distributed amongst your creditors. If you have an item that could be sold, the trustee will usually give you the opportunity to keep it by paying its value to the trustee.

There are three key deadlines established by the Bankruptcy Code before the bankruptcy can be discharged.

1. Within 10 days of the 341 meeting the US trustee has to file with the bankruptcy court a statement. This statement will declare the result of the means test. If you fail the means test the US trustee must then instruct the court to dismiss the case and this must be done within 30 days of filing the statement. However, if you pass the means test,

2. the trustee or creditors have 30 days after the 341 meeting to object to your claims of any property being exempt. In other words, if they feel that you have property that should be liquidated they can have the matter looked at. The important thing here is to make sure that all your possessions are properly listed and presented to the court. This is one reason why having a bankruptcy lawyer is so important. If any objection is upheld then there is another period of 30 days after the amendment and so on.

3. There is a 60 day deadline after the 341 meeting for creditors to object to certain unsecured debts being discharged. These creditors are typically credit card companies or ex-spouses who object to having non-support payments discharged. Creditors can make no claim after the 60 day period has expired.

When no assets are considered of sufficient value for the trustee to liquidate, the bankruptcy is usually discharged after 60 days from the 341 meeting. All the possessions that you have listed for the court are yours again.

However, where there are assets to be liquidated, the case is not discharged until the trustee has liquidated the assets, distributed the proceeds amongst the creditors and filed report that effect to the court. In the event of a trustee being unable to sell an asset, the asset is considered to be abandoned and becomes the property of the debtor once more. This process can take several years, depending on the type of assets that are to be liquidated.

As far as money owed is concerned, if the debtor is owed money on the date of filing bankruptcy, the trustee can sue the person concerned for that money. Likewise, if the debtor was already in the process of taking someone to court to recover funds, the trustee can take over the case, recover the money and distribute it amongst the creditors. Interestingly, this does not delay the debtor receiving a discharge, but the debtor is under obligation to cooperate with the trustee to recover such funds.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is different chapter 7 in that it is essentially a repayment plan of 3 to 5 years in length. Chapter 13 bankruptcy is the best option when your main financial problems consist of non-dischargeable debt. This includes things like mortgage payments, alimony payments, student loans and federal taxes, (this list is not exhaustive), which cannot be discharged under a chapter 7 bankruptcy. It is also the next best option available for those who fail the means test.

A chapter 13 bankruptcy filing is also often referred to as the "wage earners" bankruptcy, as anyone filing has to have a regular income. In addition, there are limits to the amount of debt and you can have to be eligible for chapter 13. The limit as regards unsecured debt, (i.e. those debts where nothing can be repossessed if you default), is $307,675, and secured debt, (such as mortgages and car loans), is $922,975.

The repayment plan has to be submitted to the bankruptcy court trustee within 15 days of filing the bankruptcy petition. There are two tests that the repayment plan must satisfy, the "best interest test" and the "best efforts test".

The best interest test must demonstrate that the creditors will receive at least as much under the proposed plan as they would have done under a chapter 7 bankruptcy. However, if your case under chapter 7 filing would be a "non-asset" case, in other words the creditors would receive nothing from a liquidation of assets because no liquidation of assets would take place, the best interest test does not apply.

The amount you repay your creditors under chapter 13 bankruptcy is almost always less than the amount you actually owe. The best efforts test is in place to ensure that whilst you cannot compensate your creditors in full, you are at least paying as much as you can.

The length of the plan is determined by your income less allowable expenses. If your monthly income for the six months prior to filing bankruptcy is greater than the mean income for household of the same size and in the same state, then the allowable expenses are based on Internal Revenue Collection Financial Standards, and the plan has to run for a full five years. If your monthly income is less, then the amount that the court decides you can afford is based on your monthly income less your actual expenses and the plan runs for 36 months.

Both the "best interests" and "best efforts" tests and the repayment plan itself are reviewed at what is called the 341 meeting, which you have to attend. This is where the chapter 13 bankruptcy trustee gives your bankruptcy paperwork, with particular reference to your income and expenses, a thorough examination to ensure that the tests are passed, and the repayment plan is workable.
A "confirmation hearing" is held for the court to approve or reject the repayment plan. Unless the bankruptcy trustee or a creditor objects the plan you do not have to attend this meeting.

The bankruptcy is discharged when the terms of the repayment plan have been fulfilled.
Chapter 7 and chapter 13 bankruptcy cases, a debtor must attend a credit counselling course from an approved agency, and Lodge a certificate of completion with the court. This is obligatory under US bankruptcy laws and must be done within 180 days before bankruptcy.

In addition, it is a condition of discharge that in both a chapter 7 and chapter 13 bankruptcy the debtor completes a US trustee approved course in financial management. Failure to attend either of these courses will result in the bankruptcy being dismissed.

After a discharge is received, is important to restore your credit rating. A chapter 7 bankruptcy stays on your credit report for 10 years and a chapter 13 bankruptcy for seven years, but if dismissed a chapter 13 bankruptcy will stay on your credit report for 10 years.