BANKRUPTCY – AN OVERVIEW

Bankruptcy is a difficult decision. The top three reasons for filing bankruptcy
are (1) layoff or other job problems; (2) a medical crisis; and (3) divorce.
These three problems account for a large percentage of all filings.

My experience is that the vast majority of the people who file for bankruptcy
protection are honest, and are not trying to take advantage of anybody. They
file for bankruptcy because they see no other feasible way out of their
financial troubles.

Bankruptcy law is federal law that applies in all states. States may not
regulate bankruptcy, although there are certain parts of the Bankruptcy Code
that may incorporate the law of the state in which the bankruptcy is filed.
Bankruptcy proceedings are supervised by and litigated in the United States
Bankruptcy Courts. These courts are a part of the District Courts of the United
States.

The person or entity that files for bankruptcy is known as “the Debtor.” A
person or entity to whom money is owed is known as a “Creditor.”

Once a person files for bankruptcy, a bankruptcy “stay” automatically goes into
effect. This prevents most Creditors from taking actions to collect on the
debts that they are owed.

No matter what type of entity is filing for bankruptcy (e.g., an individual, a
partnership, or a corporation), there are essentially two types of bankruptcy -
liquidation and reorganization.

A liquidation is known as a Chapter 7 (Chapter simply refers to the chapter in
the Bankruptcy Code). It is the most common type of bankruptcy proceeding. In a
Chapter 7, the Debtor discloses the assets (that is, the property owned) and
the debts that he or she has. Then, the Debtor applies his or her exemptions to
the assets. Exemptions are what the Bankruptcy Code allows you to keep even
though you are filing for bankruptcy. In most Chapter 7 cases, the Debtor keeps
everything because the exemptions are broad enough to cover all of their
assets. In the infrequent case where the Debtor has more property than the
Bankruptcy Code allows the Debtor to keep, the Trustee (the person in charge of
administering the bankruptcy estate) collects the non exempt property, sells
it, and distributes the proceeds to the Creditors.

If the Debtor has secured debt, such as a mortgage on a house or a security
interest in a car, then the Debtor has to make a choice; a.) the Debtor can
give that property back and no longer be responsible for the debt; b.) the
Debtor can pay the Creditor cash on the barrel for the present fair market
value of the item; or, c.) the Debtor can reaffirm the debt. Reaffirming a debt
means that between the Debtor and the Creditor with whom the Debtor reaffirms,
it as if the Debtor never filed for bankruptcy. The Debtor gets to keep the
item, and the Debtor still owes the money to the Creditor. While the Creditor
is under no obligation to reaffirm, most Creditors are usually willing to
reaffirm when the Debtor is not delinquent on payments prior to the bankruptcy.
That is why it is generally very important if you are having financial problems
to pay secured debts (for example, a mortgage) before general unsecured debts
(for example, a credit card).

The type of reorganization that would apply to most individuals who choose to
reorganize is a Chapter 13. In a Chapter 13, the Debtor pays the Creditors
none, some, or all of what is owed over a period of three to five years. How
much is paid and over what course of time is determined by the contents of a
“plan” submitted by the Debtor. The contents of the plan, and the treatment of
any specific Creditor, is determined by many factors, including the Debtor’s
monthly cash flow, the secured status of a particular Creditor, and the amount
of assets the Debtor has, among other things.

The goal of both Chapter 7 and Chapter 13 is for the Debtor to be discharged
from his or her debts. When a debt is discharged, it means the Creditor can no
longer pursue the Debtor for the debt even though it may have been a valid
obligation. In a Chapter 7, the discharge generally occurs approximately five
to six months after the case is filed. In a Chapter 13, the discharge typically
occurs after the plan payments have been completed in three to five years.

Filing for bankruptcy typically has a devastating impact on the credit of the
Debtor. The law states that a bankruptcy may stay on your credit record for up
to 10 years. Generally speaking, a person filing for bankruptcy will have
extreme difficulty getting credit for a number of years.

This review of bankruptcy is a general discussion of a complex topic. Each
person’s circumstance will depend on the facts of his or her particular case.

If you should have any questions about whether bankruptcy is a viable option
for you, you should seek legal counsel competent in the field of bankruptcy. I
have been involved in hundreds of bankruptcy cases, and I invite you to call me
to discuss your situation.

If you are a creditor seeking bankruptcy counsel, I have also represented many
creditors through the bankruptcy process. I would also welcome a call from you.