Newsletters & Articles
BANKRUPTCY LAW
Bankruptcy - Disaster or Deliverance?
The mere mention of the word conjures up a plethora of negative implications ranging from personal failure and lack of character to the ruination of one's credit. In fact, even in light of the recent sweeping changes in the Bankruptcy Code, it is not the nightmare than many imagine it to be. The purpose of the law is to give those unable to pay all their debts a chance to start over.
The relaxed credit underwriting standards employed by banks in the extremely competitive credit card market over the past decade led to a veritable explosion in the amount of debt owed by many Americans. Recent studies have found that the average person owes over $7500.00 in credit card debt. Paying the minimum payments on this principal at 22-29% interest with no new purchases could take seven to ten years to repay. In our practice, we have found many people who owe more than $50,000.00.
The incredibly small print found in most credit card contracts may provide for substantial penalties for late payments. Some may even authorize other credit card companies where a person is not late to substantially increase the interest rates due to that one late payment. Fortunately, there is relief from this financial minefield.
Chapter 7 or Chapter 13?
The Bankruptcy Code is Federal law arising under Congressional authority set forth in Article I of the United States Constitution. Since the ratification of the Constitution in 1789, the Federal government has been vested with exclusive jurisdiction over bankruptcy proceedings. Chapter 7 and Chapter 13 apply to individuals whose debts are primarily consumer related, such as credit cards, mortgages and installment loan agreements. The right avenue as to which provision to file under depends on a number of factors such as income, personal assets and the amount of debt involved.
Chapter 7 is often referred to as "liquidation". A trustee is appointed and it is his job to collect the non-exempt assets of the debtor, sell them and distribute the proceeds to the creditors. Certain assets are considered exempt from sale under the Texas homestead provision in the Texas Constitution. These include your home, tools of one's trade, clothing, household furnishings, etc. Once the trustee is appointed, all of the debtor's property becomes an asset of the so-called bankruptcy estate. A debtor cannot sell, mortgage or convey any property without the trustee's consent.
Upon filing the bankruptcy, whether under Chapter 7 or Chapter 13, Section 362 of the Bankruptcy Code imposes an automatic stay of all collection efforts by creditors, i.e. they cannot call, write, file suit or engage in any attempts to collect without prior court approval. If a lawsuit is in progress, it is immediately halted and may not resume without approval from the bankruptcy court.
There are two basic types of debt-secured and unsecured. A secured debt is one such as a car loan or mortgage where payment of the debt is ?secured? by collateral and imposes a lien on the property. In the event of a default in payment, the debt holder can repossess or foreclose on the property.
Unsecure debts are obligations such as credit cards and some charge accounts and are not secured by any collateral. They are essentially secured only by the debtor's promise to pay. If the bankrupt estate is comprised only of non-exempt property, it is referred to as a ?no asset? case which means that after the payment of the filing fees and administrative expenses, there will be no funds left with which to pay any creditors. The unsecured debt is discharged by order of the bankruptcy court which means it does not have to be repaid. The creditor is forbidden to make any attempt to collect a debt that has been discharged by the bankruptcy court. In some limited circumstances, the creditor may file suit in the bankruptcy court to oppose the discharge of a certain debt. If the creditor can prove that the debtor did not have the means to repay the debt at the time it was incurred, the court may not grant a discharge as to that debt. If the creditor is successful in this effort, it may also recover attorney's fees and costs expended in the litigation.
In reality, even if the discharge is denied and the debtor has no non-exempt property that can be seized to pay the debt, the creditor has only a judgment that cannot be collected. Most will not expend several thousand dollars in attorney's fees if there is not a reasonable chance of collecting.
As long as the debtor in not behind in the payments on a secured obligation such as a car or house, most likely this property can be retained. If there are past due car or house payments, then a Chapter 13 filing is more appropriate. Chapter 13 is a re-organization of the debts rather than liquidation. While some debts, particularly unsecured obligations can be liquidated in a Chapter 13, the emphasis is on structuring a repayment plan that lasts from three to five years. The debtor must set forth in this plan which debts he intends to repay, which he intends to liquidate and the period of time required. The past due payments and other obligations that are going to be repaid in the plan are totaled and all funds in excess of living expenses of the debtor are paid into the plan for the benefit of the creditors. The trustee will recommend that the court either approve or disapprove the plan. The debtor must then amend the plan so that it is acceptable to the trustee. If this cannot be accomplished, the court will dismiss the case and the debtor will lose the protection of the automatic stay. Creditors are then free to resume collection efforts.
Recent Changes in Bankruptcy Law
On October 17, 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 became law. This new law is the most comprehensive change in the Bankruptcy Code in more than twenty five years. Perhaps the most significant change is the requirement that debtors seeking to file Chapter 7 must now pass a ?means test? as a threshold requirement to file. Generally, if a debtor earns less than the median income in his home state, Chapter 7 relief is available to him. In Texas, the median income for a single wage earner is currently $35, 280.00. These figures are published by the United States Census Bureau and are periodically updated. A family of four can earn up to $66, 381.00 and still qualify. For households larger than four, add $6900.00 for each person. If you have any doubts about qualifying, call us and schedule a consultation. It appears that this year will be a record year for bankruptcy filings across the nation. In the Central District of California, filings in Chapter 7 cases are up 76% over 2008.
A debt counseling program is also mandatory in Chapter 7 and Chapter 13 cases prior to filing and post filing. A certificate showing compliance must be filed with the court at the time of the filing and another debtor education course completed and that certificate filed before the discharge will be granted.
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