Bankruptcy Basics
The words “bill” and “debt” are used interchangeably.
Discharge of Debt: The reason most people file for bankruptcy is to reduce or cancel/eliminate debt they owe. The legal term for cancellation is “discharge of debt,” which includes a permanent federal court injunction, restraining creditors ever in the future from attempting to collect the debt.
Automatic Stay (this is very powerful): The moment a bankruptcy is filed, an order is in effect restraining almost all creditor action intended to collect a debt, such as collection calls, wage garnishments, starting or continuing with a lawsuit, conducting a debtors’ exam, completing a foreclosure, etc. This restraining order, the legal term for which is “automatic stay,” is in effect until the discharge is entered, unless the restraining order is earlier terminated by a court order. This restraining order is what stops foreclosures to allow time to repay any back mortgage payments in a Chapter 13 bankruptcy.
Bankruptcy laws are designed to provide individuals with a “fresh start,” a new life in which one is free of debt. To actually get a fresh start, people filing for bankruptcy are allowed to keep a certain amount of property, even though they are not able to pay their debt. The property that one can keep is called exempt property. Our law makers have made a list of exempt property. So, when we first meet with a client we make a list of their property to determine if it is on the list.
Chapter 7 Bankruptcy: This is the preferred type of bankruptcy because it provides a “fresh start” in about 3.5 months; in these cases the person filing bankruptcy does not have the ability to repay creditors, keeps all their property, and receives a discharge of all their discharge- able debts. Chapter 7 bankruptcy is a five step process, as follows: a) The person filing must take an online course before filing; b) the person files a petition with the bankruptcy court, which includes schedules showing all their assets and debts and incomes and expenses, among other things; c) the person attends a hearing in Santa Barbara at which they are asked questions (we provide our clients with a list of questions that are to be asked, and then we discuss each question and answer with our clients prior to the hearings; d) the person completes a second online financial course; 5) the Court enters a discharge order about 65 days after the Santa Barbara hearing.
Chapter 13 Bankruptcy: This type of bankruptcy requires monthly payments for a period from 3 to 5 years. There must be a reason to file a Chapter 13 rather than a Chapter 7, because one does not receive the fresh start for 3 to 5 years, and must make payments. One reason for a Chapter 13 is to stop a foreclosure and then have up to 60 months to repay the amount owed for back payments and late charges, etc. It allows one to keep their home. If a person owes $24,000 in back payments and late charges, by filing a Chapter 13 they stop the foreclosure and pay $400 a month for 60 months, after which time they would not be in default, so the foreclosure would have to be terminated by the creditor.
Another reason to file a Chapter 13 bankruptcy is because they have some money left over each month after paying reasonable and necessary living expenses, and can afford to repay some (or all) of their debt. A third reason people file for a Chapter 13 bankruptcy is to have a second mortgage/lien removed from their home. This can only be done in a Chapter 13 bankruptcy and only if the home is worth less than is owed on the first mortgage/lien, in which case the second mortgage/lien has no equity in the home to attach to, so it is “unsecured” (there is no property securing its repayment). There are other reasons to file a Chapter 13, all of which we explore with our clients. Don’t forget, the order restraining creditor action is in effect during the 3 to 5 years that one is in Chapter 13.
Financial problems can be trying, but there is help available. Filing bankruptcy can bring relief from creditor phone calls and debt collection efforts. It will allow you to restructure your debt and begin building a brighter future.
Financial Bankruptcy and Spiritual Bankruptcy
By Dr. Michael Russell (reprinted with permission)
In Deuteronomy 15, Moses reveals God’s concern with perpetual or chronic debt among His people. Moses says,
At the end of every seven years you shall grant a remission of debts.
“This is the manner of remission: every creditor shall release what he has loaned to his neighbor; he shall not exact it of his neighbor and his brother, because the Lord’s remission has been proclaimed.”
This is a remarkable passage, to say the least. Debts were to be forgiven, i.e., not held against the debtor and not to be repaid. In God’s economy, debts could be forgiven and eliminated.
Certainly – and thankfully, I think – we do not live in a theocracy and the laws of the Bible do not dictate the behavior of Christians in such matters. We are to be subject to the laws of the land and, perhaps influenced by the nation’s Christian heritage, the United States does provide escape from debt. If a person has the ability to repay the debt, that is required, although the debt is sometimes lessened or restructured. When an individual is unable to repay, however, the debt is legally discharged and unsecured debt is eliminated.
It has puzzled me over the years why Christian leaders have stressed – almost legalistically at times – that debts have to be repaid no matter what. According to these experts (who often lack theological training), to fail to do so is to sin and reflects spiritual bankruptcy on the part of the person filing. Failure to repay a debt for any reason is sin, and financial bankruptcy is to them irrefutable proof of spiritual bankruptcy. But I question – no, I reject – that conclusion.
God is a God of grace; capital- ism knows nothing of grace. When I hear the Christian financial leaders demanding repayment of debts, I hear capitalism drowning out the grace of God.
This is not to encourage financial irresponsibility or deny the steward- ship Christians are given with their money. It is, however, to balance the legalistic, capitalistic demands of some that debt always has to be paid.
Certainly if one is financially able to pay a debt, they should do so; in those cases where a person is unable to repay, they should be allowed to apprehend the grace of God made possible through our government without having to bear the stigma of being spiritually bankrupt, too.
Christians need to recognize the need to file bankruptcy as discipline from God and a message to change their relationship to money. At the same time, however, they need to recognize the grace of God and that He is, once again, shown to be a God of new beginnings.
An Ear for your Debt
By Gary D. Hammond (reprinted with permission)
The term “bankruptcy” comes from two sources. One source is the Italian phrase “banca rotta,” meaning “broken bench.” In medi- eval Italy, when a merchant did not pay his debts, the merchant’s creditors would break his trading bench, oftentimes over his head. The other source is the French word “banqueroute.” Banqueroute signified debtors being on the “route” or the lam, a fugitive from creditors, often living well off their ill-gotten gains.
Modern bankruptcy law is directly traceable to ancient Roman law. Creditors were allowed to attach a debtor’s person and property un- der these laws. In fact, creditors could sell the debtor and his family into slavery to satisfy debts because the law considered the debtor’s body as part of the bankrupt’s estate.
Modified Roman bankruptcy law was utilized in medieval France and Italy, and was first adopted by England in 1542. These bankruptcy laws were not intended to give relief to debtors, but to give creditors remedies (other than im- prisonment) against debtors who did not pay their bills. A bankrupt individual was also subject to criminal punishment ranging from debtors’ prison to the death penalty.
Over the next 100 years, Parliament’s few changes to the bankruptcy laws sought primarily to increase the bank- rupt’s assets that creditors could seize and to increase penalties for noncompli- ance. One of the changes in 1604 even permitted the debtor’s ear to be cut off.
In 1705, England introduced the concept of a discharge of debts. The discharge rewarded honest debtors who appeared for court and who revealed property instead of fleeing. A debtor could only receive a discharge if 80 percent of the creditors approved it. Furthermore, early bankruptcy laws were only for “merchants” and could only be initiated by the merchant’s creditors.
In 1785, Colonial Pennsylvania enacted a bankruptcy law borrowed from Eng- lish custom. The law included standing the bankrupt in a public place for two hours with an ear nailed to a pillory before cutting off the ear.
Financial Relief Through Bankruptcy is a Federal Right
The financial relief obtained by filing bankruptcy is a federal legal right established in our United States Constitution (Article II), and is designed to give people in debt a “fresh start,” so that, among other things, they can become again productive members of our society. Our United States Supreme Court has commented on the issue; here are quotes from four of its cases (check the year each case was decided -can we trust stuff this old):
Case 1: “It is the purpose of the bankrupt act...to relieve the hon- est debtor from the weight of oppressive indebtedness, and permit him to start afresh free from the obligations and responsibilities consequent upon business misfortunes.” Williams v. U.S. Fidelity & Guaranty Co., 35 S.Ct. 289 (1915), citing Wetmore v. Markoe, 196 U.S. 68 (1904); Zavelo v. Reeves, 227 U.S. 625 (1913); and Burl- ingham v. Crouse, 228 U.S. 459 (1913).
Case 2:“The principal purpose of the Bankruptcy Code is to grant a ‘fresh start’ to the ‘honest but unfortunate debtor’.” From Marrama v. Citizens Bank of Massachusetts 127 S.Ct. 1105 (2007). (Cases continue on our website.)
“One of the primary purposes of the Bankruptcy Act is to ‘relieve the honest debtor from the weight of oppressive indebtedness, and permit him to start a fresh free from the obligations and respon- sibilities consequent upon busi- ness misfortunes’. This purpose of the act has been again and again emphasized by the courts as being of public as well as private inter- est, in that it gives to the honest but unfortunate debtor..., a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt.” Local Loan Co. v. Hunt, 54 S.Ct. 695 (1934).
“The central purpose of the [Bankruptcy] Code is to provide a procedure by which certain insol- vent debtors can reorder their af- fairs, make peace with their credi- tors, and enjoy ‘a new opportunity in life with a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.” Grogan v. Garner, 111 S.Ct. 654 (1991).
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Answers to Common Questions
Q: Can Seniors file Bankruptcy
A: Yes. Generally seniors are on a fixed income and have fixed resources for their future. Therefore, a sizeable, unexpected expense (medical, car repair, home repair, divorce), can be the beginning of a serious problem, one that cannot be remedied by extra work in the future. If a credit card had to be used to cover the emergency, the cost will have been increased due to the high interest rates and other fees. Because retirement accounts are exempt, bankruptcy is usually one very good alternative. There are unusual cases involving seniors in which bankruptcy was a necessity: I recently had a case in which a senior fell prey to one of the fraud scams, in which the seniors were notified that they had won a prize, but they must send money to collect the prize. This senior sent over $35,000 “knowing” that she would be receiv- ing the $25,000,000 prize. I had another case in which a senior was worried how he would pay his living expenses in the future; he tried making money by gambling.
Q: Did the 2005 changes to the bankruptcy code make it impossible to file?
A: No, however there now is a lot more work, e.g., the 2005 law brought us the “means” test, a test in which one’s allowable living expenses are limited in calculating whether one has the means to repay a certain percentage of their bills. Due to its complexity most attorneys use a computer program to run the test. National statistics show that approximately 5% of persons wanting to file a Chapter 7 bankruptcy must file a Chapter 13 due to the fact their income exceeds their living expenses as determined by the means test. The 2005 law also added new debts that will not be cancelled in a Chapter 13 case, which results in the benefits of a filing of bankruptcy being decreased in some cases.
Q: If someone is married does their spouse have to file also?
A: No, many times there is no reason for one spouse to file, such as when the bills were incurred only in one spouse’s name before the parties married. When one spouse files, the non-filing spouse will not have a bankruptcy on their credit report. We always obtain credit reports before filing to determine if both spouses should file.
Q: Who will know if a person files bankruptcy?
A: Almost no one. Bankruptcies are a public record, however, who one ever inspects the public records. The Tribune, the news- paper publishing this presentation, used to publish the names of business owners who filed bankruptcy; it no longer does. The creditors listed in a bankruptcy will be advised. Everyone who files bankruptcy must attend a hearing at which they are asked questions; approximately 20 other persons are scheduled for their hearing at the same time. Therefore, one might see someone they know at the hearing.
Q: Are medical bills cancelled in bankruptcy?
A: Yes, medical bills, credit card bills, lawyer bills, car repossession bills (known as deficiencies), judgments, bills in col- lection, are eliminated/cancelled forever by a bankruptcy discharge.
Q: Does bankruptcy ruin one’s credit forever?
A: No. In addressing this question, first one has to ask if a higher credit score important. If one is not intend- ing to borrow money in the near future he/she may not be concerned with their credit score - many people are not (check the internet: some even consider credit scores a scam). It is true that potential employers and perspective landlords often consider information contained in credit reports.
A bankruptcy stays on a credit report for 10 years. It is my understanding that unpaid bills, debts that are writ- ten off, are on one’s credit report for 7 years. As stated elsewhere in this presentation, almost everyone I talk to is current, and has been current, on their credit card debt; however, they are meeting with me because their credit card debt is insurmountable - they have tried to pay it down for at least a year, without success. So, in considering what a bankruptcy would do to one’s credit score, one must also consider what their creditworthiness is without a bankruptcy. Yes, they haven’t missed a payment for over a year, but do they have the income with which to pay more debt, if a lender were willing to lend. I have filed bank- ruptcies for residential mortgage bro- kers and residential real estate special- ists (persons who analyze home buyers for home loans) and all agree that between 2 to 3 years after a person has received their bankruptcy discharge they will be considered for a home loan, and that three years after the bankruptcy the bankruptcy is pretty much irrelevant. Don’t quote me, but I am also advised that HUD regula- tions provide that a bankruptcy is not considered if it is over three years old. Lastly, in analyzing this question, one must take into account the fact that after a bankruptcy cancellation of debt (discharge) is received, the person has no bills to pay and cannot file a Chapter 7 bankruptcy again for eight years. Does that make the person a better credit risk?
Q: Do people who file bankruptcy lose some or all of their property?
A: People almost always keep all of their property. As stated elsewhere in this presentation, a bankruptcy is designed to provide a “fresh start” and some property is needed to accomplish that goal.
From time to time I have consulted with a person whose property is not on the list of exempt property and on those occasions we have been able to exchange the non-exempt item for property that is exempt before filing bankruptcy. We always know before
a bankruptcy is filed if there might be a risk of having to surrender property to their bankruptcy estate. Sometimes a person has property which is not exempt so a Chapter 13 is filed; in such cases we do an analysis to insure the the person’s creditors receive at least the value of the non-exempt property which the person filing wants to keep.
Q: Must one have to list all of their creditors?
A: Bankruptcy law requires that all creditors be listed. However, say a person owed $40 on a credit card and wanted to have a credit card after bankruptcy (for emergency purposes). The person could pay off the credit card prior to filing, then would not have to list that credit card creditor. However, it is possible that that credit card creditor will learn about the bankruptcy, even if it is not listed, and cancel the account. That is something beyond our control.
A person can pay any creditor after their bankruptcy. There have been a number of occasions in my experience in which a person has filed for bank- ruptcy to stop creditor harassment, or a wage garnishment, etc., and the increasing charges, then, after getting back on his/her feet financially, paid the creditors the amount owed. This happens frequently with family and friends who are creditors.
Q: Are tax obligations cancelled in a bankruptcy?
A; It depends. The laws are designed to give out taxing agencies time to collect. Generally, a tax may be dis- chargeable if it was due more than 3 years ago, the return was filed more than 2 years, the taxes have been as- sessed for more than 240 days, and the return was not fraudulent. There are more rules; one must have a profes- sional to assist in this analysis. Impor- tantly, if one has tax debt it is impor- tant that they ask the IRS for free “account transcripts” for each year.
