Bankruptcy

Most consumers, whether they own a business or not, file either Chapter 7 and Chapter 13. The debtors assets become the property of a bankruptcy estate upon filing. An automatic stay temporarily prevents creditors from collecting any debts when bankruptcy is filed. A trustee is appointed by the court to supervise the estate. Chapter 7 is a liquidation bankruptcy in which all the assets of the estate are distributed to the creditors. Depending on the amount of property that the debtor may keep based on the exemptions, the creditor may get pennies on the dollar or nothing at all. Exemptions are typically limited to certain dollar amount so that any value above that would have to be liquidated for the creditor, usually by sale. However, BE VERY CAREFUL when listing the value of your assets. The court is not looking for replacement value, nor is it looking for what a dealer would get, but what you would get if you had to sell. How much would it be worth at the flea market or at a garage sale? Hence, a piece of furniture bought for $2,000, after a year or two might worth $200. This is fair because the trustee also would not get more if he or she sold the property at a liquidation sale.

We must distinguish between secured debt and unsecured debt. Secured debt when there is a lien or collateral. A mortgage on a home is a secured debt and the home is a security that the creditor can take if the debt is not paid. Technically, secured debts have to be repaid if the debtor want to keep the security. However, if the security is worth less than the debt, a debtor might be able to do a "cram-down" to discharge the difference between the value of the security and the amount owed.

Filing bankruptcy is a lot of work. You will need to collect and copy pay stubs, bank statements, credit card statements, and a host of other financial information. You will have to take inventory of everything you own including clothing, books and furniture. You will have to determine the "garage sale" value of all your possessions. Click Document List to download the complete document list.

This form shows the detailed information that you must provide your attorney. Click Intake Form to download.

Bankruptcy Homepage

Chapter 13

The "Means" Test

Chapter 7 can be attractive to many debtors because it provides a discharge of debts in a short amount of time. However, not every debt is eligible to file for Chapter 7. The Bankruptcy Code assumed that anyone that makes below a certain income cannot be abusing the system. In other words, their "means" qualifies them. Income is not current income but the income over the last six months. Keep this in mind when trying to time when to file. Basically, if a debtor makes less than the median income in the area, he or she passes the means test. However, there are permissible expenses, with limits, for food, shelter, clothing, and other needs that can push a debtor below the median income.

Bankruptcy is a two-way street. Debtors turn to the court for help getting them back on their feet but debtors also have a solemn duty of candor and honesty with their attorneys and the court. A debtor cannot hide assets by giving them away to a friend or not disclosing them. There are severe penalties for cheating and the petition will be dismissed if caught. Even if the debts are discharged, the creditors may be able to reopen a case when if fraudulently files. Again, one cannot overstate the importance of disclosure and integrity in the process. The court and trustee will not take it lightly and you attorney in particular will deem it a betrayal of his or her trust.