Understanding Personal Bankruptcy
Norma E. Ortiz, Esq.
For many people, the thought of filing a bankruptcy case evokes an image of failure and fear. Since most people don’t fully understand the purpose of a bankruptcy case, the term is often shrouded in mystery for lawyers and non-lawyers alike. But under the right circumstances, a bankruptcy case can save a business or home and solve many legal and financial problems. In fact, for many people, it can be a life-changing event. If you have ever thought it might be a solution for you or your client, read on.
What is Bankruptcy?
A bankruptcy case is a federal – not a state – proceeding that can only be filed in a bankruptcy court. There are different types of bankruptcy cases that resolve different types of problems. In most instances, a case is filed when someone can not, for many different reasons, pay his or her debts in full or when they become due. But there are many other uses for a bankruptcy case. Bankruptcy can be used to protect property and income from the claims of creditors, resolve disputes over claims and property, and accomplish a whole host of objectives.
How Is a Bankruptcy Case Started?
The bankruptcy process is started by filing a bankruptcy petition with the court. What
happens after the case is filed depends upon the type of bankruptcy case filed. The bankruptcy petition must contain a list of all the property and the debts of the person filing the bankruptcy petition, referred to as the “debtor.” The day the case is filed, the court will assign the debtor a case number. The case number is often used to prove to creditors that a debtor has, in fact, filed a bankruptcy case.
The Power to Stop (Almost) All Law Suits and Debt Collection
Subject to a few exceptions, such as for unpaid child support actions and criminal cases, all creditors must stop all attempts to collect a debt against a debtor once the bankruptcy petition is filed. This power is called the “automatic stay” because filing the bankruptcy case automatically stops actions against a debtor, including a foreclosure action or sale, a car repossession, a hold on a bank account, a wage garnishment, or a pending trial. Filing a bankruptcy case can also stop a utility company from terminating telephone or electric service. Obtaining the benefit of the automatic stay is very often the primary cause of many bankruptcy cases.
The Power to Forgive and Discharge Debt
The other very important power of a bankruptcy case is debt relief. When a case is successfully concluded, the debtor is free from some or all of its debt. This release of the obligation to pay debt is referred to as the bankruptcy “discharge.” Most debts are dischargeable in bankruptcy, such as credit card and bank loan debt, medical bills, deficiency judgments from repossessed cars and homes, and a business’s trade debt. The types of debt that are not dischargeable in bankruptcy are debts that are given special treatment by the law because of their nature, such as unpaid child support, recent taxes, criminal fines, and student loans.
Who Is Eligible to File Bankruptcy?
Almost any person facing economic distress or legal difficulties may file a bankruptcy petition. But factors such as income level, property value, and whether the debtor is an individual or corporation will affect the type of bankruptcy case filed.
Chapter 7 cases are designed to permit an individual debtor to turnover his property to an independent bankruptcy trustee in exchange for a discharge of his debt. The trustee is permitted to sell the property and distribute the money received from the sale to the debtor’s creditors. The Chapter 7 debtor does not contribute the income he earns after the case is filed to the bankruptcy case.
But most Chapter 7 debtors keep all of the personal property and exit the bankruptcy case with a discharge of debt. That is because the bankruptcy law permits a debtor to keep a certain amount of property so that he can obtain the fresh start on life that bankruptcy is designed to provide. In most cases, that includes all of the debtor’s household goods, clothing, cash in the bank, and a car. The property a debtor is permitted to keep is called “exempt” property. The type and amount of exempt property a debtor may keep varies from state to state.
Chapter 7 cases are limited to debtors that demonstrate they do not have the ability to repay all of or a portion of their debt to creditors. To make that determination, the court will look at the debtor’s household income, expenses, and the number of people residing in the household. For example, subject to many exceptions, a single person residing in Brooklyn that makes more than approximately $46,000 a year may be found to be capable of paying at least a portion of his debt through a Chapter 13 payment plan. If such a finding is made, the debtor would not be eligible to file a Chapter 7 case: he would have to file a Chapter 13 case. But it is important to note that the income caps for Chapter 7 bankruptcy filings are guidelines. There are many exceptions to these rules.
Chapter 13 cases permit debtors to dedicate a portion of their income to a monthly payment plan, administered by a bankruptcy trustee, in exchange for a discharge of their debt. Payment plans can be no less than 36 and no more than 60 months long. Once the payment plan is completed, the debt that was not paid is discharged. The amount that must be paid to creditors under the plan is determined by a number of factors, including the debtor’s monthly income and expenses and the value of his property. But there is usually no sale of property in a Chapter 13 case. Therefore, a debtor that wants to avoid the sale of property that could occur in a Chapter 7 case may choose to file a Chapter 13 case to protect his property. There are also powers contained in Chapter 13 of the Bankruptcy Code that do not exist in Chapter 7, such as the power to cure a mortgage default or discharge matrimonial property settlement claims.
Chapter 13 cases are limited to debtors that have a regular source of income and can demonstrate that they have enough disposable income to satisfy their Chapter 13 plan payments. Chapter 13 also has a limit on the amount of debt a debtor may have. For example, in 2010, a Chapter 13 debtor may not have more than $336,900 of unsecured debt and $1,010,650 of secured debt, such as a mortgages and car loans.
One of the key components of a Chapter 13 case is that creditors must receive, through the payment plan, no less than what they would receive if the debtor had filed a Chapter 7 case. So, for example, if a debtor has a vacant lot worth $15,000 that would be sold by a Chapter 7 trustee, his Chapter 13 plan would have to pay creditors at least what the creditors would have received if a Chapter 7 trustee sold the lot, after the cost of selling, taxes, etc..., are deducted.
Chapter 11 cases are the most complex but most flexible type of bankruptcy case. In personal cases, Chapter 11 cases are most commonly used when a debtor’s debt exceeds the permissible amount permitted in a Chapter 13 case. Chapter 11 cases are flexible, because a Chapter 11 debtor may sell property, such as in a Chapter 7 case, or may seek approval of a payment plan, such as in a Chapter 13 case. But they are more complex because they require much more court oversight than in Chapter 7 and 13 cases. This is due, in part, to the fact that there is no trustee appointed in a Chapter 11 case: the debtor administers his bankruptcy case. Chapter 11 cases are also the most expensive type of bankruptcy case: the professional fees required are often too high for the average individual debtor.
Frequently Asked Questions
Do I need a lawyer to file a bankruptcy case?
There is no requirement that a person – as opposed to a corporation – must be represented by a lawyer to file a bankruptcy case. However, bankruptcy is one of the most complex areas of American law. It is very difficult, in many circumstances, to determine which type of bankruptcy is best suited to your circumstances or when a case should be filed. Therefore, it is highly desirable to hire or consult an experienced bankruptcy lawyer before filing a bankruptcy case.
Can I file bankruptcy and still keep my car?
In most cases, the answer is “yes.” But it depends upon the value of your car, where
you live, and the type of bankruptcy case you file. In New York, a debtor is permitted to keep a car worth $2,400. But that value is determined after considering the cost of a car loan that may be due on the car. For example, if a debtor has a car worth $10,000, but has a car loan for $9,000, if the car were sold, there would only be a $1,000 left after the loan was paid. That debtor could file a Chapter 7 case and still keep his car. If that debtor had no car loan, a Chapter 7 trustee would have the right to sell the car and give the debtor $2,400 from that sale. A Chapter 13 debtor could keep the car: he would just have to ensure that his payment plan paid his creditors at least what they would have received if the car would have been sold. There are many exceptions to this rule. An experienced bankruptcy lawyer can help you determine the impact of a bankruptcy case on your car.
Can I keep my home after I file bankruptcy?
The answer is similar to the answer above: it depends upon the value of the home, the state you live in, the amount of your mortgage(s), and the type of bankruptcy case you file. For example, New York provides debtors with a $50,000 exemption in their home. If a husband and wife own the home, they can each claim the $50,000 exemption for an aggregate $100,000 exemption. Therefore, if the home is worth $400,000, and the amount due for the mortgage is $300,000, a husband and wife in New York could file a Chapter 7 case and keep their home. Why? Because if the home was sold by a trustee, the trustee would receive no more than $100,000, after the mortgage is paid to the bank. Since the debtors are entitled to the first $100,000 after the mortgage is paid, all of the sales proceeds would have to be returned to the debtors. The trustee will not sell a house unless there are funds to pay creditors other than the bank holding the mortgage.
The same analysis applies when the value of the house is less than the amount owed on the mortgage. If the amount of the mortgage is more than the value of a home, a debtor can file a Chapter 7 case without any risk that his house will be sold to pay creditors because a sale of the home will not result in any payment to creditors other than the mortgage company or bank. If there is too much value in a home – above the permissible exemption amount -- the debtor may consider a Chapter 13 or Chapter 11 case. An experienced bankruptcy attorney can advise you of your options.
Will I have bad credit after bankruptcy for 10 years?
Filing a bankruptcy case permits the credit reporting companies, such as Trans Union, to state that you filed a bankruptcy case for up to ten years on their credit reports. However, a debtor may rebuild his or her credit and obtain credit in one, two, or three years after a bankruptcy case. In fact, there are many credit card companies that send offers to debtors after they file bankruptcy, but usually at high interest rates. For more information on rebuilding your credit after bankruptcy, go to www.ftc.us.gov. The Federal Trade Commission has a number of articles on consumer rights and credit, including a report entitled “Building a Better Credit Report.”
Where Can I Learn More About Bankruptcy?
There are many websites available with information on bankruptcy cases. However, relying on governmental and bar association websites typically ensures that you will receive accurate and unbiased information, such as the article entitled “Bankruptcy Basics” published by the bankruptcy courts and located at www.uscourts.gov/bankruptcycourts.
1 By Norma E. Ortiz, Ortiz & Ortiz, L.L.P. , is a partner of Ortiz & Ortiz, L.L.P., and has been practicing bankruptcy law for over 20 years.
2 This article was written in March 2010 for the Puerto Rican Bar Association for informational purposes only. It should not be relied upon as legal advice under any circumstances. Any reproduction, copying, or distribution of this article without the express written consent of the P.R.B.A. is strictly prohibited.
For Further Reading:
American Bankruptcy Institute: Bankruptcy Filings Up 14 Percent Over
The Wall Street Journal: Personal Bankruptcies Resume Upward Trend
For many people, the thought of filing a bankruptcy case evokes an image of failure and fear. Since most people don’t fully understand the purpose of a bankruptcy case, the term is often shrouded in mystery for lawyers and non-lawyers alike. But under the right circumstances, a bankruptcy case can save a business or home and solve many legal and financial problems. In fact, for many people, it can be a life-changing event. If you have ever thought it might be a solution for you or your client, read on. What is Bankruptcy?
A bankruptcy case is a federal – not a state – proceeding that can only be filed in a bankruptcy court. There are different types of bankruptcy cases that resolve different types of problems. In most instances, a case is filed when someone can not, for many different reasons, pay his or her debts in full or when they become due. But there are many other uses for a bankruptcy case. Bankruptcy can be used to protect property and income from the claims of creditors, resolve disputes over claims and property, and accomplish a whole host of objectives.
How Is a Bankruptcy Case Started?
The bankruptcy process is started by filing a bankruptcy petition with the court. What
happens after the case is filed depends upon the type of bankruptcy case filed. The bankruptcy petition must contain a list of all the property and the debts of the person filing the bankruptcy petition, referred to as the “debtor.” The day the case is filed, the court will assign the debtor a case number. The case number is often used to prove to creditors that a debtor has, in fact, filed a bankruptcy case.
The Power to Stop (Almost) All Law Suits and Debt Collection
Subject to a few exceptions, such as for unpaid child support actions and criminal cases, all creditors must stop all attempts to collect a debt against a debtor once the bankruptcy petition is filed. This power is called the “automatic stay” because filing the bankruptcy case automatically stops actions against a debtor, including a foreclosure action or sale, a car repossession, a hold on a bank account, a wage garnishment, or a pending trial. Filing a bankruptcy case can also stop a utility company from terminating telephone or electric service. Obtaining the benefit of the automatic stay is very often the primary cause of many bankruptcy cases.
The Power to Forgive and Discharge Debt
The other very important power of a bankruptcy case is debt relief. When a case is successfully concluded, the debtor is free from some or all of its debt. This release of the obligation to pay debt is referred to as the bankruptcy “discharge.” Most debts are dischargeable in bankruptcy, such as credit card and bank loan debt, medical bills, deficiency judgments from repossessed cars and homes, and a business’s trade debt. The types of debt that are not dischargeable in bankruptcy are debts that are given special treatment by the law because of their nature, such as unpaid child support, recent taxes, criminal fines, and student loans.
Who Is Eligible to File Bankruptcy?
Almost any person facing economic distress or legal difficulties may file a bankruptcy petition. But factors such as income level, property value, and whether the debtor is an individual or corporation will affect the type of bankruptcy case filed.
Chapter 7 cases are designed to permit an individual debtor to turnover his property to an independent bankruptcy trustee in exchange for a discharge of his debt. The trustee is permitted to sell the property and distribute the money received from the sale to the debtor’s creditors. The Chapter 7 debtor does not contribute the income he earns after the case is filed to the bankruptcy case.
But most Chapter 7 debtors keep all of the personal property and exit the bankruptcy case with a discharge of debt. That is because the bankruptcy law permits a debtor to keep a certain amount of property so that he can obtain the fresh start on life that bankruptcy is designed to provide. In most cases, that includes all of the debtor’s household goods, clothing, cash in the bank, and a car. The property a debtor is permitted to keep is called “exempt” property. The type and amount of exempt property a debtor may keep varies from state to state.
Chapter 7 cases are limited to debtors that demonstrate they do not have the ability to repay all of or a portion of their debt to creditors. To make that determination, the court will look at the debtor’s household income, expenses, and the number of people residing in the household. For example, subject to many exceptions, a single person residing in Brooklyn that makes more than approximately $46,000 a year may be found to be capable of paying at least a portion of his debt through a Chapter 13 payment plan. If such a finding is made, the debtor would not be eligible to file a Chapter 7 case: he would have to file a Chapter 13 case. But it is important to note that the income caps for Chapter 7 bankruptcy filings are guidelines. There are many exceptions to these rules.
Chapter 13 cases permit debtors to dedicate a portion of their income to a monthly payment plan, administered by a bankruptcy trustee, in exchange for a discharge of their debt. Payment plans can be no less than 36 and no more than 60 months long. Once the payment plan is completed, the debt that was not paid is discharged. The amount that must be paid to creditors under the plan is determined by a number of factors, including the debtor’s monthly income and expenses and the value of his property. But there is usually no sale of property in a Chapter 13 case. Therefore, a debtor that wants to avoid the sale of property that could occur in a Chapter 7 case may choose to file a Chapter 13 case to protect his property. There are also powers contained in Chapter 13 of the Bankruptcy Code that do not exist in Chapter 7, such as the power to cure a mortgage default or discharge matrimonial property settlement claims.
Chapter 13 cases are limited to debtors that have a regular source of income and can demonstrate that they have enough disposable income to satisfy their Chapter 13 plan payments. Chapter 13 also has a limit on the amount of debt a debtor may have. For example, in 2010, a Chapter 13 debtor may not have more than $336,900 of unsecured debt and $1,010,650 of secured debt, such as a mortgages and car loans.
One of the key components of a Chapter 13 case is that creditors must receive, through the payment plan, no less than what they would receive if the debtor had filed a Chapter 7 case. So, for example, if a debtor has a vacant lot worth $15,000 that would be sold by a Chapter 7 trustee, his Chapter 13 plan would have to pay creditors at least what the creditors would have received if a Chapter 7 trustee sold the lot, after the cost of selling, taxes, etc..., are deducted.
Chapter 11 cases are the most complex but most flexible type of bankruptcy case. In personal cases, Chapter 11 cases are most commonly used when a debtor’s debt exceeds the permissible amount permitted in a Chapter 13 case. Chapter 11 cases are flexible, because a Chapter 11 debtor may sell property, such as in a Chapter 7 case, or may seek approval of a payment plan, such as in a Chapter 13 case. But they are more complex because they require much more court oversight than in Chapter 7 and 13 cases. This is due, in part, to the fact that there is no trustee appointed in a Chapter 11 case: the debtor administers his bankruptcy case. Chapter 11 cases are also the most expensive type of bankruptcy case: the professional fees required are often too high for the average individual debtor.
Frequently Asked Questions
Do I need a lawyer to file a bankruptcy case?
There is no requirement that a person – as opposed to a corporation – must be represented by a lawyer to file a bankruptcy case. However, bankruptcy is one of the most complex areas of American law. It is very difficult, in many circumstances, to determine which type of bankruptcy is best suited to your circumstances or when a case should be filed. Therefore, it is highly desirable to hire or consult an experienced bankruptcy lawyer before filing a bankruptcy case.
Can I file bankruptcy and still keep my car?
In most cases, the answer is “yes.” But it depends upon the value of your car, where
you live, and the type of bankruptcy case you file. In New York, a debtor is permitted to keep a car worth $2,400. But that value is determined after considering the cost of a car loan that may be due on the car. For example, if a debtor has a car worth $10,000, but has a car loan for $9,000, if the car were sold, there would only be a $1,000 left after the loan was paid. That debtor could file a Chapter 7 case and still keep his car. If that debtor had no car loan, a Chapter 7 trustee would have the right to sell the car and give the debtor $2,400 from that sale. A Chapter 13 debtor could keep the car: he would just have to ensure that his payment plan paid his creditors at least what they would have received if the car would have been sold. There are many exceptions to this rule. An experienced bankruptcy lawyer can help you determine the impact of a bankruptcy case on your car.
Can I keep my home after I file bankruptcy?
The answer is similar to the answer above: it depends upon the value of the home, the state you live in, the amount of your mortgage(s), and the type of bankruptcy case you file. For example, New York provides debtors with a $50,000 exemption in their home. If a husband and wife own the home, they can each claim the $50,000 exemption for an aggregate $100,000 exemption. Therefore, if the home is worth $400,000, and the amount due for the mortgage is $300,000, a husband and wife in New York could file a Chapter 7 case and keep their home. Why? Because if the home was sold by a trustee, the trustee would receive no more than $100,000, after the mortgage is paid to the bank. Since the debtors are entitled to the first $100,000 after the mortgage is paid, all of the sales proceeds would have to be returned to the debtors. The trustee will not sell a house unless there are funds to pay creditors other than the bank holding the mortgage.
The same analysis applies when the value of the house is less than the amount owed on the mortgage. If the amount of the mortgage is more than the value of a home, a debtor can file a Chapter 7 case without any risk that his house will be sold to pay creditors because a sale of the home will not result in any payment to creditors other than the mortgage company or bank. If there is too much value in a home – above the permissible exemption amount -- the debtor may consider a Chapter 13 or Chapter 11 case. An experienced bankruptcy attorney can advise you of your options.
Will I have bad credit after bankruptcy for 10 years?
Filing a bankruptcy case permits the credit reporting companies, such as Trans Union, to state that you filed a bankruptcy case for up to ten years on their credit reports. However, a debtor may rebuild his or her credit and obtain credit in one, two, or three years after a bankruptcy case. In fact, there are many credit card companies that send offers to debtors after they file bankruptcy, but usually at high interest rates. For more information on rebuilding your credit after bankruptcy, go to www.ftc.us.gov. The Federal Trade Commission has a number of articles on consumer rights and credit, including a report entitled “Building a Better Credit Report.”
Where Can I Learn More About Bankruptcy?
There are many websites available with information on bankruptcy cases. However, relying on governmental and bar association websites typically ensures that you will receive accurate and unbiased information, such as the article entitled “Bankruptcy Basics” published by the bankruptcy courts and located at www.uscourts.gov/bankruptcycourts.
1 By Norma E. Ortiz, Ortiz & Ortiz, L.L.P. , is a partner of Ortiz & Ortiz, L.L.P., and has been practicing bankruptcy law for over 20 years.
2 This article was written in March 2010 for the Puerto Rican Bar Association for informational purposes only. It should not be relied upon as legal advice under any circumstances. Any reproduction, copying, or distribution of this article without the express written consent of the P.R.B.A. is strictly prohibited.
For Further Reading:
American Bankruptcy Institute: Bankruptcy Filings Up 14 Percent Over
The Wall Street Journal: Personal Bankruptcies Resume Upward Trend
The PRBA thanks its top sponsors >>
