Bankruptcy Overview

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There have been a number of changes to bankruptcy laws and requirements.  For the average consumer for the average debtor, bankruptcy is still a viable option but there have been a few changes...

Before Filing your Chapter 7 Bankruptcy Case, You Now, Must Receive a Briefing from a Credit Counseling Agency

The law requires that you receive a Credit Counseling Briefing from a certified credit counseling agency before you may file a Chapter 7 bankruptcy petition. The agency will explain financial management and how to do a budget analysis, and will also discuss alternatives to bankruptcy. While there are some hardship exceptions to this rule, most debtors will have to get this briefing, and failing to do so before filing may result in your case being DISMISSED.

What if your income is High?

Recent Bankruptcy legislation has changed Income/Debt requirements for filing bankruptcy.  This has been done with the intent of minimizing the abuse of bankruptcy protection laws.  There is now a means test, but the the good news is, if you really need it, bankruptcy is still an option. For details of bankruptcy means test income requirements Click here. 

The following is an outline of select areas of bankruptcy law which are significant as you contemplate a filing under Chapter 7. Often, someone who considers bankruptcy is unaware of the nuances of bankruptcy or certain creditors' rights in bankruptcy. You should be familiar with some of the applicable provisions as you prepare for filing. What follows is not, by any means, an exhaustive review of bankruptcy law; nor does it fully explain each provision of the bankruptcy code or rules which might apply because each individual's situation is unique and sometimes unanticipated events occur; however, this overview will provide you with broad guidelines so that you may be comfortable with your decision. I will begin with an outline of basic procedures in Chapter 7 case and conclude with a discussion of various Chapter 7 pitfalls.

Basic Procedure
A. Upon filing, you will be required to file a sworn list of creditors, a schedule of assets and liabilities, a list of exempt property, a schedule of current income and expenditures, a statement of your financial affairs and a statement of intent regarding consumer debts secured by property of the estate. You will also be required to surrender to the trustee all property of the estate. 11 U.S.C. 521. The order of relief is granted when you file. What this means, among other things, is that an automatic stay is triggered, prohibiting creditors from pursuing you or your property
outside of the bankruptcy proceeding.

B. The clerk of court will give notice of the bankruptcy to your creditors. 11 U.S.C. 342.

C. There will be a meeting of creditors called to question you about your debts and ability to pay. The U.S. Trustee calls this meeting and you are required to attend. The judge may not question you at this time. Other creditors and the trustee may question you. Unlike a trial, your attorney may not "object" to questions in a formal sense. It is an open opportunity for creditors to question you and you are required to respond in good faith. 11 U.S.C. 341.

D. A creditor of the trustee assigned to your case may object to your listed exemptions within 30 days after the meeting of creditors.

E. A creditor must file a proof of claim within 90 days after the first date set for the meeting of creditors. At the end of the case, if a surplus remains after all of the claims are paid in full, the court may grant an extension of time for filing of claims not filed during the initial 90 day period.

The trustee may object to any claim.

F. An objection to your receiving a general discharge of all of your debts must be filed by thetrustee or a creditor within 60 days following the first date set for the creditors meeting If no objections are filed, and if no motion to dismiss is pending, the court will ordinarily grant a discharge upon expiration of the 60 day period. Bankruptcy Rules 4004 and 1017; 11 U.S.C. 727.

G. A creditor may object to the dischargeability of a particular debt at any time if the debt: (1) is for a tax or customs duty; (2) is not listed in the schedules so that a creditor could file a proof of claim; (3) is related to alimony or child support; (4) is a government fine or penalty; or (4) is a
government insured student loan. Any student loans guaranteed or insured by the government will not be dischargeable. This means that you will continue to be liable for the payment even if you file bankruptcy.

A creditor may object to the dischargeability of a particular debt only within 60 days of the first date set for the meeting of creditors, if the debt: (1) is a consumer debt created close to filing; (2) is a result of fraud; (3) is a result of a wilful and malicious injury to a person or property of another. Bankruptcy Rule 4007; 11 U.S.C. 523.

Debtor Pitfalls
The debtor's goal in any Chapter 7 is to have as many debts discharged as possible. The general rule is that all debts created before the bankruptcy filing are discharged. Discharge destroys any person liability you may have on a claim or debt. (Discharge will not destroy liens; liens survive the bankruptcy.)

There are some very significant exceptions to the general rule that all debts will be discharged. As stated above, a creditor can try to have his claim excepted from discharge pursuant to the provisions of 11 U.S.C. 523. If the claim is not discharged, the debtor continues to be responsible for its payment; obviously, this could have severe consequences to the debtor seeking a "fresh start" which is the very purpose of the Chapter 7 filing.

There are ten categories of debt excluded from discharge under 523. These fall into two areas: debts that are not dischargeable due to the wrongful conduct of the debtor and debts that are not dischargeable due to public policy.

The debts not dischargeable due to the debtor's misconduct include those created by intentional torts, fraud, larceny, embezzlement, fiduciary violations, and drunken driving. The debts not dischargeable due to public policy include alimony and child support, taxes and customs duties, governmental fines, penalties and forfeitures, educational loans, unscheduled debts and certain debts surviving a prior bankruptcy case. A claim must fall within one of these exceptions to be
found non-dischargeable.

To prevail on a fraud exception, the creditor would need to show that there was a false, material representation of fact made by the debtor that the debtor knew was false at the time he made it, made with the intention of deceiving the creditor. Some courts have held that when a credit card is used, the debtor impliedly represents that the debtor has the ability and intention to pay for the goods and services charged. Those courts have therefore found that some credit card debt is
non-dischargeable under the fraud exception.

This is not the only potential problem that can arise with credit card or similar debt. 523 also provides that there is a presumption that certain consumer debt created right before filing a Chapter 7 is non-dischargeable. The presumption of non-dischargeability will apply if the debt is a consumer debt for so-called "luxury goods or services" incurred or within 40 days before the filing, owing to a single creditor aggregating more than $500. Further, the presumption of 
non-dischargeability will apply if there are cash advances made by a creditor for more than $1000 that are extensions of consumer credit under an open end credit plan within 20 days of filing bankruptcy.

Luxury goods and services are not defined by the Bankruptcy Code and the determination of same will be contingent upon the facts and circumstances of each case. I can tell you that courts have characterized such items as a person computer, coffee maker, floral arrangements and three-wheel recreational vehicle as "luxury" items.

Any credit extended based on false financial statements is subject to exception from discharge. Statements made in the financial statements have to be materially false with the intent to deceive the creditor to fall within this exception. Note that a credit application should not qualify as a "financial statement" if it does not require a disclosure of debts.

It is crucial for the debtor to include all creditors in his schedules filed with the court. If a debtor knows of the creditor and does not schedule him, the creditor is denied participation in any distribution; to protect the creditor from this type of problem, the code provides that unscheduled claims may be non-dischargeable.

Debts created by willful and malicious injury will also be excepted from discharge. These types of claims arise from intentional actions by the debtor, done with malice which causes damage. It is important to note that ordinary negligence claims are dischargeable. A plaintiff with a personal injury claim would need to allege significantly more than simple negligence to have his or her claim deemed non-dischargeable in the bankruptcy court.

Not only may a single creditor attempt to have a particular debt found non-dischargeable pursuant to 523. Chapter 7 debtors also need to be aware that, pursuant to U.S.C. 727, upon motion by the trustee or a creditor, the court may disallow a final discharge of all debts, of whatever nature, if the debtor, among other things:

(1) destroys or conceals his property within one year before filing or after the date of filing, with the intent to hinder, delay or defraud a creditor;

(2) conceals, destroys, falsifies or fails to preserve records of his financial condition;

(3) knowingly in a bankruptcy case makes a false account, oath or claim;

(4) gives, offers, receives, or attempts to obtain money, property or an advantage for acting or forbearing to act;

(5) withholds from an officer of the estate records related to his property or financial affairs;

(6) fails to satisfactorily explain any loss of assets; or

(7) refuses to obey court orders or refuses to respond to questions posed by the court.

Finally, the court may dismiss a Chapter 7 case if the debtor:

(1) unreasonably delays the proceedings to the creditors' prejudice;

(2) fails to pay necessary fees or payments; or

(3) fails to file his schedules.

Dismissal may also be justified if the debtor is an individual who has primarily consumer debt and the court finds that the granting of relief would be a substantial abuse of the bankruptcy process. Substantial abuse has been found by courts if the debtor is actually able to pay his
debts when due.

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