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BANKRUPTCY LAW INFORMATION May 2002
By
Attorney James J. Fiorentini 
Caution: Congress is in the process of radically changing all the bankruptcy laws. I do not promise this web site is up to date. Check with an attorney before you rely on this material. Jim Fiorentini
Table of Contents
DECIDING
WHICH CHAPTER TO FILE
REORGANIZATIONS—Chapters
11, 12 and 13
EXEMPTIONS:
WHAT YOU CAN SAVE IF YOU GO BANKRUPT
Commonly
Asked Bankruptcy Questions
What
happens if I file a chapter 7 Bankruptcy?
Will
the bankruptcy stop bill collectors from calling?
Who
deals with my bill collectors during the bankruptcy?
Who
will know about my bankruptcy?
Can
my employer fire me for filing bankruptcy?
Are
there alternatives to bankruptcy?
What
should I do to prepare for filing bankruptcy?
Can
I just file for some creditors and not others?
Can
I use bankruptcy to delay?
Do
I have to Disclose All My Assets?
What is Bankruptcy?
Bankruptcy allows a person to file a bankruptcy petition in Federal Court, discharge their debts and get a fresh start in life. Bankruptcy is governed by Federal Law contained in Title 11 of the United States Code.
You begin by filing a “petition” with the bankruptcy court. The person filing a Chapter 7 is referred to as the “debtor.” You must disclose on your petition all of your assets and all of your debts. The debtor is required to turn over all nonexempt property to the bankruptcy trustee, who then converts it to cash for distribution to the creditors. The debtor then receives a discharge of all dischargeable debts.
Caution:
Going bankrupt is an extremely important decision and one that should be
made only after a good deal of thought and after consultation with a
professional. Bankruptcy shows up on
your credit rating for ten (10) years, and there are several debts that are not
discharged in bankruptcy. The most
important thing we do is to advice people on whether to file or not.
Sometimes doing nothing is a better option.
The Procedure
The process begins with a petition in the Federal Bankruptcy Court listing assets, debts and describing your financial affairs. A trustee is appointed to oversee the process of distributing the assets.
Once a petition is filed, you obtain the benefit of an “automatic stay” of any proceedings against you. This immediately stops pending court actions, foreclosures, evictions, harassing telephone calls from creditors, utility shutoffs-virtually anything being done because of your financial problems. An automatic stay means that even if a foreclosure sale is pending to sell your house, it is stopped while the bankruptcy is pending. This can give the debtor a chance to work things out. However, be aware that the bankruptcy stay is “automatic” but it is not indefinite. The bank holding the mortgage is going to apply quickly to the court for permission to “lift the automatic stay” and to allow them to go forward with the sale. You have to move quickly.
The trustee will look at any transfers of property or payments made shortly before you declared bankruptcy. If special treatment had been given a creditor or family member, the trustee can void the payments and recover the funds.
The next step after you file is for a hearing, called a
341 hearing before that bankruptcy trustee. In
DECIDING WHICH CHAPTER TO FILE
LIQUIDATIONS-CHAPTER 7
Chapter 7 is for straight liquidation. Usually the fastest and easiest solution, it is very appealing to individuals with uncertain future income. It is the most common type of bankruptcy proceeding. Liquidation involves the appointment of a trustee who collects the non-exempt property of the debtor, sells it and distributes the proceeds to the creditors.
REORGANIZATIONS—Chapters 11, 12 and 13
Sometimes we find that no amount of planning is going to help and we recommend either that the client not file bankruptcy (we recommend that fairly often for lots of reasons) or that the client file a reorganization plan instead.
Chapters 11, 12, and 13 are bankruptcy reorganizations. These bankruptcy proceedings mean that the debtor will still pay the debts, but they are spread out over a period of time-usually three years. In some cases, the repayment period can be spread out as long as five (5) years.
Chapter 11 is designed for the business debtor who, with some cooperation from the creditors, thinks he can reorganize and be successful.
Chapter 13 is a consumer reorganization. It allows
you time to pay creditors more than they would get if you filed for liquidation.
You keep your assets and make payments in accordance with a plan approved by the
Court. A Chapter 13 reorganization
plan will often allow a debtor to keep all of their assets, assets that are not
exempt. If you are a glutton for
punishment and want to read the actual Federal law on Chapter 13’s, click here.
You can learn more about reorganization plans by clicking here
and reading a good introduction by a bankruptcy lawyer in
Not All Debts are Discharged
Bankruptcy will generally not protect you from debts such as taxes, money obtained by fraud, child support, and student loans. It does not wipe out the mortgage on your house, it does not allow you to void student loans or back taxes.
EXEMPTIONS: WHAT YOU CAN SAVE IF YOU GO BANKRUPT
In deciding whether to file bankruptcy, and if you do file what chapter to file, you need to know about “exemptions.” Exemptions are property that you can keep even though you are bankrupt.
Exemptions vary from state to state. In Massachusetts and New Hampshire (the two States our offices practices in) debtors are allowed to choose either the items exempt under Federal law (called the “Federal exemptions”) or the items exempt under State law (called the State exemptions which as you would suspect vary from State to State.) You cannot mix them—you must choose either the State or the Federal exemptions, you cannot take some Federal and some State. Choosing which exemptions to take is a critical element of bankruptcy planning, and normally our firm spends a good deal of time in comparing whether you are better off with the Federal exemption scheme or the State scheme.
Federal Exemptions
The Federal exemptions are outlined in the United States Code at 11 USC. Section 522. Congress updates and increases the amounts all the time, so if it is important that you be right to the penny with your exemptions, always check the updated law at 11 USC 522. For planning purposes, this summary is usually fine.
Under the Federal exemptions, a bankrupt couple may keep the first $34,850 in equity in their home, the first $2,775 each in equity in a car, and $1,150 worth of jewelry. Debtors are also allowed to keep up to $9,300 in cash surrender value of life insurance and furniture and clothing up to $9,300 in value total.
They are also allowed $925 plus a maximum $8,725 per person (17,450 per couple) of any unused portion of the homestead exemption. This is referred to as the “wild card exemption”. This is the best thing about the Federal exemptions.
This "wild card" exemption--doubles for a couple-- as do all the Federal exemptions. The net result is that if you have a lot of equity in your house you normally want to choose the State exemption in Massachusetts. If you have very little equity you want to choose the Federal exemption and use the unused portion to protect other assets.
To read more about exemptions:
Check the actual law on Federal exemptions (don't take my word for it, I don't always update this) by clicking here 11 USC section 522.
Massachusetts Exemptions
If you live in
The most important
It had generally been thought that the
If you choose the
Except for the IRA and house, the
New Hampshire Exemptions
As of
To read more about New Hampshire exemptions, click here. To read the New Hampshire Homestead exemption click here.
To log onto the Bankruptcy Court in New Hampshire, at least until they are completely on the Pacer system, click here
Saving Your Retirement Plan
A person filing bankruptcy is allowed to keep most of his or her retirement accounts. Under a 1992 United States Supreme Court case, Patterson v. Shumate, most 401(k) plans are not considered assets of the debtor and do not count. To qualify for this exclusion the retirement plan must be “ERISA qualified”. Check with your plan administrator to see if your plan is ERISA qualified.
IRA’s present a more difficult problem. IRA’s are not
ERISA qualified plans and are not excluded when counting bankruptcy assets. In
Either way, do not under any circumstance cash in your retirement account unless your attorney specifically tells you to. Cashing in an ERISA qualified retirement account takes an asset that is exempt, and converts it to an asset that the trustee can reach.
Commonly Asked Bankruptcy Questions
Who can file a Chapter 7?
Almost anyone can file for bankruptcy unless they have filed a prior bankruptcy petition and the prior proceeding was dismissed within the last 180 days 11 U.S.C. sec. 109(g), or they have received a bankruptcy discharge with the past 6 years or completed a chapter 13 plan in a prior case. This rule does have some exceptions.
Who Can file a Chapter 13?
Individuals may file chapter 13 bankruptcy petitions if they:
(1) Have a source of regular income; and
(2) On the date the petition is filed owe less than $290,525 in non-contingent, liquidated, unsecured debts and less than $871,550 in non-contingent, liquidated, and secured debts.
Corporations and partnerships may not file a chapter 13 bankruptcy petition.
If you filed a prior bankruptcy petition and the prior proceeding was dismissed within the last 180 days, you may not be able to file a second petition and should check 11 U.S.C. sec. 109(g).
Will the bankruptcy stop bill collectors from calling?
Yes. The automatic stay prevents bill collectors from taking any action to collect debts as soon as they are notified that you have filed. The Court notifies them about two weeks after you file.
Who deals with my bill collectors during the bankruptcy?
Usually, your attorney deals with all creditors.
Who will know about my bankruptcy?
Bankruptcy petitions are public records. However, it is not the practice of newspapers in this area to run stories of who filed bankruptcy. Under normal circumstances, only your creditors know that your have filed.
Can my employer fire me for filing bankruptcy?
No. 11 U.S.C.sec.525 prohibits employers from discriminating against you because you filed a bankruptcy petition or because you failed to pay a dischargeable debt.
Does my spouse have to file?
No. In some cases where only one spouse has debts, or one spouse has debts that are not dischargeable then it might be advisable to have only one spouse file.
Can I keep any credit cards?
Under some circumstances, you may be able to keep some credit cards if the creditor agrees. Generally, I recommend against this.
What is the procedure?
About 30 to 40 days after filing the bankruptcy petition, you will have to attend a hearing presided over by a bankruptcy trustee. This hearing is called the 341 hearing. At hearing, the trustee will ask you questions under oath regarding the content of your bankruptcy papers, your assets, and debts. Creditors will also be permitted to ask you questions.
After the initial meeting, you normally do not return to court.
Are there alternatives to bankruptcy?
Sometimes payment plans can be negotiated with creditors. Obtaining loan extensions, compromises and workout agreements require negotiation skills and experience. You also have the option of doing nothing. In any event, you should seek professional advice in dealing with most of these alternatives.
What should I do to prepare for filing bankruptcy?
1. Stop using your credit cards.
If you borrow money with the intent of discharging the debt in bankruptcy, the debt is not dischargeable. In addition, certain luxury purchases over $1,150 within 60 days of the bankruptcy filing are not dischargeable; cash advances aggregating $1,150 within 60 days of the bankruptcy filing are presumed non dischargeable; and, debts involving materially false financial statements are non-dischargeable under certain circumstances.
2. Do not transfer your assets.
The transfer may be considered a fraudulent conveyance. If it is, you may lose both the property and your right to a bankruptcy discharge. Do not under any circumstances try to hide assets by putting things in your spouse or children's names.
3. Do not destroy any business or financial records.
You can lose your right to a bankruptcy discharge as a result.
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. You should pay the mortgage on your house if you are planning to keep the house, your utility bills, your taxes and your student loans.
Can I just file for some creditors and not others?
No. you must list everyone you owe money to and cannot select among creditors.
Do I have to Disclose All My Assets?
Yes. If you fraudulently conceal assets, you have committed a felony. The penalty is severe, up to five years in prison.
How Can I learn More?
The Internet is a useful resource for learning about bankruptcy. The Bankruptcy Lawfinder includes links to a number of on-line bankruptcy law guides, including one at Cornell School of Law.
To check out our bankruptcy law links, click here
To check our general law links, click here
If
you would like more information on bankruptcy, please contact us:
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