The information in this web site is not intended to constitute legal advice or to create an attorney-client relationship. It is also important to note that the information contained in this article may be outdated.
It is very important that you obtain legal advice from an experienced bankruptcy attorney regarding your particular situation. Consultation before you take action will certainly cost you less than what it will cost to fix your unintentional errors.
Why do I share all this information for free?
Diane L. Drain, lawyer, consumer advocate, retired law professor, wife and mother
Many people, both clients and fellow attorneys, ask why I give so much information away for free. I do it because I believe everyone has a right to understand the full breadth of the legal issues involved in bankruptcy. That does not mean this information will be sufficient for anyone to prepare their own bankruptcy. Instead, it is my goal to help everyone avoid the terrible nightmares that happen when someone tries to file without a competent bankruptcy attorney. “Laws are like a spider web, in that it snares the poor and weak while the rich and powerful break them.” Solon, ancient Greece
To quote Judge Redfield T. Baum, Arizona Bankruptcy judge, “You do not need to hire an experienced lawyer to help with bankruptcy, just like you do not need to hire a good surgeon to do open heart surgery; but, it might be wise to do so.
LIST OF QUESTIONS – CLICK ON EACH QUESTION AND THE ANSWER WILL OPEN UP
What is bankruptcy?
Bankruptcy is a constitutionally guaranteed protection designed both to help an individual or business that cannot meet its financial obligations and to protect the creditors involved. This is a very complicated process and full of traps for the unwary. Always use experienced lawyers, who practice bankruptcy law full time.
Why are some attorneys true professionals and others like used car salesmen (TV and some internet advertising firms)? And how do I find a good attorney?
How do you determine if bankruptcy is right for you?
Bankruptcy is a legal remedy offered by our laws since 1898 (United States Constitution, Art. 1, Section 8). Bankruptcy is a very complex set of rules. See flow chart of even the simplest of bankruptcies. Only an attorney, experienced in bankruptcy law, can properly advise you on the process. Often, your question is not a legal one, but one based on emotion and urban legends. My experience has been that the decision to file bankruptcy is based partially on facts, partially on emotion and partially on a person’s view of their future. The law allows any person and most entities to file a bankruptcy.
This is not the time to depend on the “advice” of friends and others. What type of bankruptcy is the important question. We have attempted to clarify this issue in our series of questions for chapter 7 and chapter 13.
What are the different types of bankruptcy?
There are two basic types of bankruptcies. The first is called a liquidation (chapter 7). In a chapter 7 an individual keeps certain items (house, furnishings, car, pension plan – see list of Arizona exemptions. Each state has a different list of exemptions. The second type is a reorganization (chapter 11, 12, 13 and 15). Each reorganization chapter is different and used for specific purposes. Individuals usually file a chapter 13 in order to cure the arrears on their homes, deal with the debt on their cars, and/or manage the payments on their tax debts. Chapter 12 is for farmers or fishermen – so that they can reorganize the debt on their livelihood. Chapter 11 is for businesses. Chapter 11 also has two mini-chapters for (a) small businesses and (b) companies that own only a single asset. Chapter 15 is for foreign corporations.
What is the difference between chapter 7 and chapter 13?
In chapter 7 the debtor’s assets and liabilities are essentially frozen when the bankruptcy is filed. The debtor keeps the exemption assets while the bankruptcy trustee liquidates the non-exempt assets and distributes the proceeds to the existing unsecured creditors. The debtor is then relieved (discharged) the duty topay most of the existing debts and the debtor’s future earnings cannot be seized by the existing creditors. Lenders with loans on property, such as a house or car, are either paid or have the right to repossess/foreclose on the asset.
Compare that to a chapter 13 which focuses on future income rather than on existing assets. The debtor can keep all their assets and pay the creditors the value of those non-exempt assets out of their future income. Monthly payments are made to the bankruptcy trustee, who pays the arrears on the home, vehicles, taxes child support; then, only if there is money left over, the trustee pays some to the existing unsecured creditors. This is done through a court-approved plan which pays over a period of three to five years. At the end of the plan the balance of the unpaid debts what were included in the plan are forgiven (discharged). Some debts survive both chapter 7 and chapter 13 – such as taxes and child support (if not paid through the chapter 13 plan) and student loans. A few debtors must file chapter 13 because they earn too much money. The means test is used to determine income and expenses in order to determine this issue. The good news is that a chapter 13 bankruptcy often allows the debtor so save their home, remove junior liens from their homes and pay off their vehicles, plus back taxes and child support.
What is the means test?
The means test is used to determine whether the Debtor is eligibility for Chapter 7 or 13 bankruptcy. The debtor’s average income for the 6 months prior to filing is compared to the State Median Income. This amount will change over time so make certain to check the current median annual income. Ms. Drain will be able to assist you in this because there are several exceptions to this rule. If the Debtor’s income is below the median, then Chapter 7 is an option. If the income is above the median, then step two is applied. Step two in the calculation takes income, less living expenses (as set forth in the IRS standards), times 60. This represents the amount of income available over a 5-year period for repayment of the debt obligations. If the income is $10,000 or more, a Chapter 13 will be required. In other words, anyone earning above the State Median Income, and with at least $166.67 per month of available income, will automatically be denied Chapter 7. But that is not the end on the analysis. Step three – if the available income is between $100 and $166.66 per month it is multiplied by 60 (5 years of payments). If the resulting number is more than 25% of the debt owed, then the Debtor may still not be able to file a chapter 7.
Where can I file bankruptcy?
The law 28 U.S.C. §1408 specifies that you can file only in the state in which you have had your domicile, residence, principal assets or principal place of business for the majority of the last 180 days. Therefore, you can file in Arizona after you have resided here for at least 91 days. Although you cannot file until you have met the residency requirement, you may still retain our firm and begin working on your documents. Once you have retained our office then you can refer creditors to us, which will stop annoying creditor’s calls before you file. Please remember- trustee sales, repossession, foreclosure, lawsuits and judgments are stopped only once a bankruptcy is filed with the Bankruptcy Court.
Are there alternatives to bankruptcy?
Yes. Sometimes payment plans can be negotiated with creditors. Obtaining loan extensions, compromises and workout agreements require negotiation skills and experience. These alternatives may alert your creditors to the existence of non-exempt property that the creditor could reach and can involve considerable expense. You also have the option of doing nothing. In any event you should seek professional advise in dealing with most of these alternatives. Back to top ?The only company that I recommend is National Foundation of Consumer Credit Counselors. It was originally called Consumer Credit Counseling Service, Inc. It is a true non-profit.
BEWARE – using such services will be included in your credit report and will have the same impact as a bankruptcy. Also, the counselors will fail to disclose that there could be serious and expensive tax consequences to paying less than that you owe (called “forgiveness of debt). I do not recommend the use of “debt restructuring” companies. Most, like AmeriDebt and its progeny are scams.
Yes. Under the bankruptcy laws a husband and wife may file a joint bankruptcy petition, using the same set of forms. Only one filing fee is charged for a joint petition, so it costs no more to file a joint petition than to file a single petition.
What about debt consolidation and consumer counseling?
None of these companies want you to know that using their services will have the same impact on your credit as filing for bankruptcy. For several years now my clients and many others, have been experiencing serious problems with using these services. They are no longer free; they are not “non-profit” despite their claims; they pay themselves before paying your creditors. They are very late on making payments to the creditors, causing more late fees to accrue, some just take the account and sell it to another “counseling service”, keeping the money they have received. What these “counseling” services do not tell their clients is that, according to creditors and credit reporting agencies, the use of their services has the same credit impact as filing bankruptcy.
Both the IRS and the FTC have started investigations into these abuses. Some of these problems are set forth in the Federal Governments investigation into “Profiteering in a Non-Profit Industry: Abusive Practices in Credit Counseling”. NOTE: I am not even trying to keep these updated – there are so many actions being filed that it would be impossible. 2005 Bankruptcy Reform – Congress expressed that the Board of Governors of the Federal Reserve System shall conduct a study of the consumer credit industry practices of soliciting and extending credit and report within 12 months of its finds. This was prompted by the extensive abuses suffered on the consumer by the credit industry. AmeriDebt is one of the first to be sued for fraud based on these and other claims; I predict they will not be the last. UTAH CREDIT COUNSELING Service shut down (3/2004). Senate Report raises concerns about credit counseling companies (3/2004) The Federal Trade Commission on Monday shut down National Consumer Council Inc., citing “misrepresentations and omissions” by the Santa Ana nonprofit credit-repair firm and its for-profit affiliates (5/2004). NCO Financial Systems, Inc. and NCO Portfolio Management, Inc. fined $1.5 million for violations of Fair Credit Reporting Act. Florida Supreme Court sanctions “WE THE PEOPLE” for unauthorized practice of law.
How much does it cost to file bankruptcy?
The court filing fees for bankruptcy are controlled by law. If you are a consumer there are two classes that you need to take. One before and one after filing your bankruptcy. Our office will provide you more information on these classes.
“Shopping for legal services must be done carefully. You should take time to consider the reputation, experience and commitment of any lawyer. Hiring the wrong lawyer for your particular situation is like hiring a bad surgeon or a bad plumber. You will pay thousands of dollars to clean up their mess, if it can be cleaned up. Always ask for references and check out referrals.” Diane L. Drain
Without exception you must disclose all assets and liabilities. The United States Trustee’s Office is very aggressive about uncovering bankruptcy fraud. If anyone, including a lawyer, tells you differently then run, don’t walk, away.
Who can file bankruptcy?
Any person who resides in, does business in, or has property in this country can file bankruptcy. There is no threshold of debts versus assets required in order to file a bankruptcy. In order to file in Arizona you must live here for the greater part of the last 6 months. There are limits on certain entities in filing bankruptcy, such as banks and savings and loans.
Can I file bankruptcy if I am not a citizen or don’t have a social security #?
Section 109 of the Bankruptcy Code: “Notwithstanding any other provision of this section, only a person that resides or has a domicile, a place of business, or property in the United States, or a municipality, may be a debtor under this title”. There does not appear to be a “legal citizen requirement”. This may be changed by case law. Use of a social security number is the “norm” with most bankruptcies, yet the law does not specifically require it.
What is required by the US Trustee’s office is some type of identification which is issued by a governmental agency. Therefore, an ITIN (Individual Taxpayer Identification Number) number should also suffice. The problem that non-residents face is that many of them have used a false social security number to obtain credit, buy a home or car. By doing this they have committed a crime of moral turpitude. If these folks file for bankruptcy protection their creditors can bring an action which determines the debtors to have committed fraud. This will have serious consequences if that debtor ever tries to apply for citizenship.
Moral – don’t use someone else social security number to obtain credit.
Can both husband and wife file a joint bankruptcy petition?
Yes. Under the bankruptcy laws a husband and wife may file a joint bankruptcy petition, using the same set of forms. Only one filing fee is charged for a joint petition, so it costs no more to file a joint petition than to file a single petition. The law does not require that both husband and wife file bankruptcy. Extreme care must be taken whether or not spouses should file a separate bankruptcy.
Under what conditions should both husband and wife file bankruptcy?
First, the expectation is that both husband and wife will file a joint bankruptcy. If they do not, then they must explain the deviation from the norm. Both husband and wife should file when some of the debts are owed jointly by both the husband and the wife. If both husband and wife owe the debts and only the husband files bankruptcy, the creditors may try to force or harass the wife into paying the debts, even if she is unemployed. Citizens of Arizona have both a burden and protection of the community property laws. So, under Arizona law it may not be appropriate for the creditors to collect from the non-filer, but it depends on the specific circumstances surrounding the debt.
Can I file bankruptcy if my debts are managed by financial counselors?
Yes. A financial counselor has no legal status and cannot prevent you from filing bankruptcy.
Will there be forgiveness of debt "income" as a result of a bankruptcy?
Normally not (11 USC Section 346(j)(1). But make certain to discuss your situation with an experienced tax attorney. Taxes issues can be very complicated.