First, and most important step, STOP BEATING YOURSELF UP.  You did not ask to be here.  Life brings unexpected challenges – loss of job, medical, bad economy, real estate collapse, divorce, death are just a few of the reasons why people need the opportunity to start over.  You are in good company, because a number of successful people have found themselves needing to file for bankruptcy protection, only to successfully stick it out and find firmer financial footing again. These people include Abraham Lincoln, Thomas Jefferson, William McKinley, Henry Ford and Walt Disney.

So, please give yourself a break.  You are now looking to take control of your situation.

– Diane L. Drain

First, you should consult with an experienced bankruptcy attorney.  If your case is the standard consumer issues then this consultation is normally free; at least it is with our office. Only an experienced bankruptcy attorney can help you plan for the bankruptcy, decide when to file a bankruptcy petition, or even avoid filing for bankruptcy. This is a life altering decision – if it is done wrong you will be in a worse situation than you were without the bankruptcy.

The following are some specific items that you need to keep in mind. Please remember that the dollar amounts stated may change by operation of law.

  1. If you intend to file bankruptcy you should stop using your credit cards.  If you borrow money with the specific intent of discharging the debt in bankruptcy instead of paying it back, the debt is not dischargeable. In addition, certain luxury purchases or cash advances within a certain period before filing are presumed non-dischargeable; (523(a)(2)(C).
  2. Debts involving materially false financial statements are non-dischargeable under certain circumstances.
  3. Don’t sell or transfer your assets to friends, family and business associates expecting to protect the assets from your creditors. The transfer may be considered a fraudulent conveyance. If it is, the person you sold or transferred the asset to will lose the property. In addition, you could lose your bankruptcy discharge.
  4. Don’t destroy any business or financial records. You can lose your right to a bankruptcy discharge as a result.
  5. Carefully choose the creditors you pay before filing a bankruptcy. Some creditors, such as landlords, secured creditors, and some utilities should be paid under most circumstances. If you pay a credit card debt that eventually will be discharged, you may be throwing money away. Our firm can advise you on what debts should and should not be paid while you prepare to file a bankruptcy petition.

Every person who files Chapter 7 or 13 bankruptcy will have to take a credit counseling “briefing” within 180 days PRIOR to filing their bankruptcy and file a certificate of compliance. There is a provision for emergency situations, but they still must prove that they tried to obtain the class within the last 5 days of filing, but they must take the class and file a certificate of compliance within 30 days after filing their bankruptcy Petition. There is also a budget class that must be taken within 45 day s after filing your bankruptcy. Failure to do so will result in additional fees and costs in order to get your discharge in your bankruptcy. There will be fees charged for those classes, unless you cannot afford to pay such fees. Ms. Drain will explain the process.

Maxed Out” an award-winning documentary describing the abuses by and little known secrets of the banks and credit card industry and their effect on our daily lives.”

Warning – About all these Credit Counseling Companies

Their information regarding bankruptcy is often not accurate. You must talk to a bankruptcy attorney in your State. Before filing bankruptcy you must take an on-line class called credit counseling: Ms. Drain will give you information about these on-line classes. After filing your bankruptcy you must take a second on-line class called Personal Financial Management. People will try to sell you this second class before filing, do not take this offer. We will provide you with information about some great providers.

Important Note: no matter who you chose to provide these classes – make sure to confirm that they are approved by the US Trustee’s Office – Credit Counseling and Debtor Education.

In order to file a bankruptcy you must complete a series of documents that list all items that you own, all debts that you owe and all rights that you have. This also includes your income and expenses. If a business is filing, then there are a series of questions related to business issues. Everything you own or owe must be listed. This does not mean you cannot keep most, if not all, of those items that you list; this just means that you must be thorough in your listing all your debts and assets. Assuming that you have lived in Arizona for the last full 2 years, then the basic living items are exempt under Arizona law. I will review all these rules with you when we meet. Once the documents are completed they are signed and electronically filed with the Bankruptcy Court.

At a creditor’s meeting (it is very rare for any creditors to attend a consumer bankruptcy) you will be asked to testify that you have reviewed all the documents filed with the Court and that they are true and accurate. The court has approved the forms that must be used for these documents. They are called the petition, schedules, statement of financial affairs, statement of intentions, social security declaration, master mailing matrix, means test, employer declaration and other documents, depending on the circumstances. These forms are used to list all of your assets, debts, along with some recent financial history. The automatic stay goes into effect upon filing the petition. The automatic stay is very powerful. It stops all creditors from taking any action against you or your assets, without first obtaining a Bankruptcy order.

If you are filing a chapter 13 you must also file a Plan of Reorganization, with other documents related to the Plan. Some chapter 13 trustee’s have forms for these chapter 13 plans. In order to have a successful chapter 13 plan there must be in-depth analysis of income, expenses, arrears and fair market value of assets; along with certain transactions that you may have made before filing. All Debtors must appear at a §341 meeting, also called a creditors meeting. The Trustee assigned to your case will ask you questions under oath about your assets and liabilities and other important issues. Creditors can also question the debtor on those subjects, but seldom appear. By law the creditors must contact your attorney, not you.  Your attorney will assist you in understanding your rights as to each issue the creditor raises.

If there are assets in a chapter 7 case which are not exempt, the Trustee takes control of those assets and usually, sells them at a public auction. You and/or your family/friends have a right to bid at that auction. From the sale of assets or the recovery of certain transfers or payments (called avoidance powers), the Trustee pays the expenses related to your case, and then distributes the remaining funds to creditors who have filed proofs of claims. In a chapter 7 case all wages you earn after the case belong to you. But, monies that were owed to you before your case was filed belong to your creditors, such as tax refunds, inheritances, accounts receivable, and money from any lawsuits. Generally, the only responsibilities you have after the 341 meeting is to cooperate with the Trustee in providing any information requested and assist your attorney in addressing any assets that you want to keep, but that are secured by a creditor.

In order to file bankruptcy you must fill out several forms. These forms will include basic information about all your debts, all your real and personal property and all significant transfers you have made in the last year. This information has been summarized in a questionnaire that I require all my clients to fill out based on your past and current situation. You and I will have a free telephonic discussion.

After that you will complete some educational classes; obtain a recent credit report (if you are married you will need a separate report for each spouse) and fill out more information at our web site.  You must list everything that you own and owe.  All meetings are with me, not with my staff. I do not believe in delegating the meetings to anyone else. At our meetings you and I will review all the information related to your debts and assets.  When you are ready for us to file your bankruptcy we will determine the best time for filing your bankruptcy.

Chapter 7 bankruptcy is called a liquidation bankruptcy. It is intended to give the individual debtor a fresh start. Debts such as credit cards, medical bills and lawsuits are discharged. The debtor keeps most of their property (exemptions) that are not considered luxuries. A company that files a chapter 7 will be closed and its assets sold to pay its creditors. See our link to additional FAQ for chapter 7 cases.

In most consumer cases, all the assets are exempt, and therefore there are no assets to liquidate and there is no money to be paid to creditors. If there are assets in a chapter 7 case which are not exempt, the trustee takes control of those assets and usually, sells them at a public auction. You and/or your family/friends have a right to bid at that auction. From the sale of assets or the recovery of certain transfers or payments (called avoidance powers), the trustee pays the expenses related to your case, and then distributes the remaining funds to creditors who have filed proofs of claims.

In order to file for a chapter 13 you must: have sufficient regular income to meet monthly living expenses allowed by the chapter 13 Trustee, as allowed by the IRS and make a plan payment. [§109(e), §101(30)] – Have less than $307,675 of unsecured debt, and less than $922,975 of secured debt. [§109(e)] (as of April 1, 2004) – Not be a corporation, partnership, stockbroker, or commodity broker. [§109(e), §101(30)]

You may file Chapter 13 and obtain a discharge, so long as you did not receive an earlier discharge in a 7, 11 or 12 in the last 4 years, or another chapter 13 in the last 2 years, but that is an issue to discuss with your attorney. (§1328(f) A liquidated debt is one where the amount the debtor owes is known, or capable of easy calculation. For example, a loan is a liquidated debt; the damages owing in an auto accident are usually unliquidated until judgment is entered.

Some Chapter 13 frequently asked questions.

Chapter 7 to discharge those debts that are dischargeable, and file a subsequent Chapter 13 to repay those debts that were not discharged in Chapter 7, or that cold not be dealt with in a chapter 7 (such as paying arrears on houses, etc).

Chapter 13 bankruptcy is a repayment plan that protects the debtor from collection action during the plan and discharges any unpaid balance of dischargeable debts at the end of the plan. The discharge in Chapter 13 covers a few debts that cannot be discharged in Chapter 7. The 2005 Bankruptcy Reform Act changed this area of law, but it is still a powerful tool for debtors to regain control of their financial lives and to get a meaningful fresh start. Debtors choose to file a repayment plan under Chapter 13 when: – they owe debts not dischargeable in Chapter 7 ( such as taxes, child support, fraud judgments) – they have secured debts on real property or vehicles which they wish to scrape off. – they have liens that exceed the value of the assets securing the debt – they have years of unfiled taxes – they are behind on car or house payments – their assets are worth more than allowed exemptions – their income is substantially more than their allowed expenses.

This is an excerpt from a bankruptcy court case that details what the court looks at to decide if a person is permitted to file a chapter 7 (this Order is dated before the 2005 Reform Act, so may not be applicable): (1) Whether the debtor has a likelihood of sufficient future income to fund a Chapter 11, 12, or 13 plan which would pay a substantial portion of the unsecured claims; (2) Whether the debtor’s petition was filed as a consequence of illness, disability, unemployment, or some other calamity; (3) Whether the schedules suggest the debtor obtained cash advancements and consumer goods on credit exceeding his or her ability to repay them; (4) Whether the debtor’s proposed family budget is excessive or extravagant; (5) Whether the debtor’s statement of income and expenses is a misrepresentation of the debtor’s financial condition; and (6) Whether the debtor has engaged in eve-of bankruptcy purchases.

Debtors frequently want to friends, family or employers back monies that they have borrowed. This is called preferential treatment. That means that you owed other creditors money, but preferred to pay your friend or relative. This includes not only family but also other creditors (paying off a credit card so they can keep it after the bankruptcy). If you made these preferential payments within 90 to 365 days prior to filing the bankruptcy, the Court can force the parties who received the money to give it to the Bankruptcy Trustee. The 90 day period is for “outsiders” – those that have no reason to want to help the Debtor. If the person/entity receiving the funds is an “insider”, then the period extends to one full year.

“Insider” is defined in 11 U.S.C. 101 and includes family members, partners, and corporations in which the debtor is a decision maker. It is not wrong for the debtor to make payments to one creditor and not another so long as they are certain types of debts. If the Trustee elects to go after the monies or transfers made to that creditor, then it is the creditor who will lose, not the debtor. This is an issue that needs to thoroughly discussed with your attorney, BEFORE making the payment or the transfer.

There is nothing to prohibit you from voluntarily paying anyone you wish after your bankruptcy is filed, but talk to your bankruptcy attorney first. The same problem arises if the Debtor sold or transfers any assets prior to filing for bankruptcy. The look-back period is 90 day for outsides and two years for insiders. Again, do not make any transfers or give any any assists without first obtaining the advice of an experienced bankruptcy lawyer.

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. 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 involves secured debts (house or vehicle), back taxes (depending on age), child support and alimony.  Step three calculates 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 a court could decide there are unique issues involved. But that is not the end on the analysis. Step four – 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.

Your bankruptcy is filed in the state where you currently live.  There may be issues about what exemptions you use, but your attorney can explain the calculations.

The answer depends on the status of your dischargeable debts and the nature of your non—exempt assets. It is not wise to file bankruptcy if you are likely to incur sizable new debts in the near future. For example, if you or a member of your family are in bad health and have incurred huge medical bills, it would be wise to wait until the illness or injury is cured, or until you have obtained adequate insurance coverage, before filing bankruptcy. It will be at least eight years before you can file a chapter 7 bankruptcy again and it will do you little good to discharge, say $20,000 in medical bills by filing now, and then incur another $40,000 bills in the next few months. It would be better to wait a few months, let your situation stabilize, then decide if it is necessary for you to file. Having said that you cannot incur debt that you know you will never pay – this is fraud. There is a fine line here that you need to discuss with experienced bankruptcy lawyer.

Under the bankruptcy law, all non-exempt property that becomes yours by inheritance, life insurance, or divorce within six months after the date that you file bankruptcy must be turned over to the Trustee. Therefore, if you anticipate acquiring any property or money during the next six months by inheritance, as the beneficiary of a life insurance policy or death insurance plan, or through a divorce, you should not file now. These are issues that you must discuss with your attorney before taking any legal action.

Debtors often worry that they will lose personal possessions and household goods when they file bankruptcy. Most Chapter 7 cases are no asset cases: that is, the debtors give up nothing to the trustee because used household goods and personal effects are worth very little to anyone, other than the Debtor. The point of bankruptcy is to get a fresh start and that is only possible if the debtor has something to start over with.

The Bankruptcy Code allows each individual who files bankruptcy to keep basic assets deemed necessary for the debtor’s “fresh start” after bankruptcy. That property is the debtor’s “exempt property“. Be aware that the 2005 Bankruptcy Reform Act dramatically changed the law governing exemptions. Under the 2005 Reform Act you must reside in Arizona for the last 2 years in order to use Arizona exemptions. Otherwise, you will have to use the state that you lived in for the six months prior to the last 2 years prior to filing a bankruptcy. Confusing – you betcha! Moral – use an experienced bankruptcy attorney.

In Arizona ERISA retirement plans are usually exempt, but any monies put into any retirement account within 120 days of filing the bankruptcy are not exempt. You may only protect a small amount in a bank account (on the day that the bankruptcy is filed). No cash is protected. Also, 25% of what you are owed on the day you file belongs to your creditors. New paychecks you earn after filing belong to you.

You will only have to turn your non—exempt property over to the Trustee. Unless you owe back child support, or alimony/maintenance. Under the laws of the state where you live, and under the federal laws, certain properties are declared to be exempt, and out of the reach of your general creditors.

WARNING: All your property, including exempt property, can be sold to pay back child support or alimony/maintenance.

I would prefer that you have a credit report that no more than 3 months old. If you are married you will need a report for each spouse. I would also prefer that you order a credit report that includes all three major credit bureaus (CBI/Equifax, Experian and TransUnion). As of December, 2004, every Arizona resident can receive one free credit report (all 3 bureaus) per year. I recommend

Bankruptcy Judge’s open letter to Debtors and their Attorneys: Hon. Alan Jaroslovsky U.S. Bankruptcy Judge, Northern District of California, Santa Rosa Division:

“I have noticed a disturbing trend among debtors and their counsel to treat the schedules and statement of affairs as “working papers” which can be freely amended as circumstances warrant and need not contain the exact, whole truth. Notwithstanding execution under penalty of perjury, debtors and their counsel seem to think that they are free to argue facts and values not contained in the schedules or even directly contrary to the schedules. Some debtors have felt justified signing a statement that they have only a few, or even a single creditor, in order to file an emergency petition, knowing full well that the statement is false. Whatever your attitude is toward the schedules, you should know that as far as I am concerned they are the sacred text of any bankruptcy filing. There is no excuse for them not being 100% accurate and complete. Disclosure must be made to a fault. The filing of false schedules is a federal felony, and I do not hesitate to recommend prosecution of anyone who knowingly files a false schedule. I have no idea where anyone got the idea that amendments can cure false schedules. The debtor has an obligation to correct schedules he or she knows are false, but amendment in no way cures a false filing. Any court may properly disregard subsequent sworn statements at odds with previous sworn statements. I give no weight at all to amendments filed after an issue has been raised. As a practical matter, where false statements or omissions have come to light due to investigation by a creditor or trustee, it is virtually impossible for the debtor to demonstrate good faith in a Chapter 13 case or entitlement to a discharge in a Chapter 7 case. I strongly recommend that any of you harboring a cavalier attitude toward the schedules replace it with a good healthy dose of paranoia. “

Why is it Important that all Information on my Bankruptcy Documents be Absolutely Accurate?  Bankruptcy Fraud: Without exception you must disclose all assets and liabilities. The United States Trustee’s Office is very aggressive about uncovering bankruptcy fraud.  If the debtor knowingly and fraudulently conceal an asset from the Court they will have committed a felony and can be fined up to $250,000, imprisoned for up to five years, or both. In addition, the Court can also deny the debtor’s discharge, or dismiss or convert the bankruptcy proceeding and order that the debtor’s assets are liquidated.  This will mean that the debtor has lost their property and does not have the protection from the creditors.  I have never had a client end up with this situation.