The Bankruptcy Code, found in Title 11 of the United States Code, is an invaluable tool to help individuals, farmers, corporations and even municipalities seek refuge from their creditors in times of financial hardship. At its most basic level, financial hardship may be defined by using what is called the insolvency definition of bankruptcy; in other words, you are unable to pay your debts as they become due. These debts that you are unable to pay may include credit card payments, house payments, car payments, tax debts and even child support. The Bankruptcy Code is a powerful tool that provides immediate redress and reprieve from the efforts of debt collectors, regardless of the type of debt. There are some exceptions to what debts can be forgiven, but that is beyond the scope of this article.
It has been my experience that one of the biggest obstacles for individuals seeking redress under the Bankruptcy Code is the lack of understanding of the process by those who do not venture into the Bankruptcy realm on a consistent basis. This is especially true for individuals but is also true for attorney's that do not practice daily in this area of the law. The narrow purpose of this article is to give some insight to your average individual as to how this process works and what can be expected to concur within the first 90 days: from the initial meeting with a bankruptcy attorney to the completion of the case under the liquidation chapter of the Code (A Chapter 7) or to confirmation of their plan (A Chapter 13) under a Bankruptcy Reorganization.
A solid, consumer based law firm will never offer to place a client in Bankruptcy until they have looked at all of the client's debts and assets and determined that Bankruptcy is the best option given the situation. Generally, such a firm will offer a free initial consultation to meet with a potential client and look at the particulars of the case. A good firm will present the client with any available alternatives to Bankruptcy that may be available. Only once those other remedies have been explored, should the possibility of Bankruptcy be broached.
The Bankruptcy Code requires that an attorney inquire into the complete financial history and condition of a potential client. It requires that the attorney look at the totality of a client's assets and liabilities. There is a list of documentation that an attorney is required to gather before he is permitted to file a Bankruptcy Petition and commence the case. This documentation serves to provide the Court with a complete picture of a client's income, expenses, assets, debts and etc. At the free consultation, the potential client will be provided with a list of documentation that will be necessary to complete the Bankruptcy schedules: these schedules provide the Court the information necessary to determine whether Bankruptcy is prudent in each case.
Once the client has had his initial consultation and provided his attorney with the necessary documentation, the client will help his attorney prepare the Bankruptcy schedules. Once those schedules have been completed, the client will participate in forty-five minutes to one-hour's worth of credit counseling over the phone. This credit counseling class is required under the Code. During this call, the credit counseling agency will inquire into the client's financial situation and budget and will offer any Bankruptcy alternatives that they believe are available. Once this phone call is completed, the agency will email the client's certificate of completion to the attorney and the case may be filed immediately via electronic filing with the Court.
Once the Bankruptcy has been filed, the Automatic Stay provision of the Bankruptcy Code goes into effect. This "Automatic Stay" is what prohibits a client's creditors from contacting him, collecting from him, repossessing vehicles and foreclosing on homes. This tool is the most powerful protection provided by the Bankruptcy Code to protect the individual. In most cases, this "Automatic Stay" protection is absolute and remains in effect while the individual is in Bankruptcy.
Once the case has been commenced and the "Automatic Stay" is in effect, the client, now classified as a "debtor" by the Code, will not see much activity. For them, the phone calls have all but stopped and life continues to go on, except without the stress of the harassing phone calls and letters. However, behind the scenes, your attorney is still hard at work. The Code requires that your attorney provide your "Trustee" (the attorney/office charged with making sure the debtor and creditors play fair and in accordance with the law) a copy of your last four years of tax returns - via tax return transcript - as well as proof of your last six-months of income. During this same period of time, for a chapter 13, you will begin submitting your payments to the Trustee for disbursement to your creditors for your car, house and etc.
Thirty to forty-five days after the filing of your case, you will be directed to appear before your Trustee at what is called a Creditor's meeting. This meeting, which will generally last no more than 10 minutes, gives the Trustee the opportunity to examine you under oath about the information contained within the Bankruptcy schedules that your attorney filed on your behalf. Generally, this meeting is a formality and is nothing to be feared. Under the new Bankruptcy Code - in effect since 2005 - creditors generally do not bother to show up to these meetings.
Once the client's creditor meeting has been concluded, the Trustee will have 14 days to object to anything they see in the client's schedules that they deem to be questionable or just need clarification about. In a typical chapter 7, a client will not usually see an objection. Instead, the Trustee will certify back to the Court that all of the client's assets are protected and that all of his debts deserve to be discharged (forgiven) by the Court. In a chapter 7, the client will then complete a financial management course and wait for the Court to grant his discharge - this generally will take another 60 days. After the discharge, the client is out of bankruptcy and free to begin his life anew - this is the "fresh start" provided by bankruptcy.
Under Chapter 13, the reorganization side of Bankruptcy, the client generally will see an objection from the Trustee or from a creditor during that 10 day period following his creditor meeting. Chapter 13's aim is to "reorganize" a client. This generally means the client is seeking to have his unsecured debts (credit cards, medical bills and the like) discharged, but is also trying to pay a car off or to catch up on missed mortgage payments. In chapter 13, a client's attorney proposes a "plan" of reorganization whereby the attorney proposes how the client will pay for the car and the house. Since these plans are centered on handling the debtor's secure as well as unsecure debts, the Trustee and client's attorney must carefully check the proposed plan against the client's creditor's proof of claims that have been filed. These "proof of claims" show the Court how much the Creditor believes the client owes in order to keep their house or car. When the creditor's numbers and the client's numbers are in dispute, the Trustee or the creditor will generally file an "objection to confirmation" of the plan so that the difference between the figures may be worked out.
Once these differences are resolved - which happens 99% of the time without a client setting foot in court - the Plan as proposed can be "confirmed." A confirmed plan is one in which all objections have been resolved and serves as a new contract between the client and his creditors. Once confirmed, the client's primary obligation is simply to make his monthly Trustee payment according to the terms of the proposed plan. Once a plan is confirmed, the client, even though in Bankruptcy, lives his life in a very normal fashion. During the pendency of a three, four, or five year Chapter 13 plan, the client's attorney remains on retainer and is constantly on the lookout for any problems. Once the term of the plan has finished, the chapter 13 client receives his "discharge" and has his remaining debts wiped clean.
Bankruptcy, generally, is an extremely powerful tool to help people out of extremely tough situations. Bankruptcy allows for a complete "fresh start" for individuals; it allows them the chance to start over despite a creditor's insistence that they be paid what they are owed. Bankruptcy is not a decision to be taken lightly, but once that decision has been made in an educated and informed fashion, hiring the right law firm will make the process both smooth and painless and will allow you to get back to what you need to be doing - living your life.
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