The purpose of this overview is to answer the questions about bankruptcy asked most frequently by our clients and to provide an overview of the bankruptcy process.  The information contained herein will help you decide whether to file bankruptcy or not.  If you do file bankruptcy, this overview will help you understand the process.

WHAT IS BANKRUPTCY?

Bankruptcy is a proceeding under federal law whereby you are granted partial or complete relief from the payment of your debts.  This relief is provided in the form of an “automatic stay” issued automatically and immediately upon the filing of the bankruptcy petition which stops all creditor collection activities.  The Bankruptcy Court enters an order at the end of the case relieving you from responsibility for paying certain debts.  This final order is called the "discharge."

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WHAT TYPES OF BANKRUPTCY ARE THERE?

For individual debtors the two types of bankruptcy proceedings available are Chapter 7 and Chapter 13.  Explanations of Chapter 7 and Chapter 13 are set out below.

CHAPTER 7:

Chapter 7 is often referred to as "straight bankruptcy".  In a Chapter 7 proceeding you are relieved from the responsibility to pay your debts ("discharged"), with certain exceptions.  In exchange for having your debts wiped out, you must give up any property that is not protected or “exempted” from the chapter 7 trustee.  The property that you exempt is free from the claims of all your pre-bankruptcy creditors.  If you have nonexempt assets that are worth more than any loans on the property, the trustee can sell them to pay on your debts.  In more than 90% of the cases that we file, all our client's property is exempt, so the client gives up no property.  Such cases are called "no asset" cases because no assets are turned over to the trustee.  More detailed explanations of the exemptions and "exceptions to discharge" are set out in this brochure.

CHAPTER 13:

 Chapter 13 is often referred to as a "wage earner plan."  The concept behind a Chapter 13 bankruptcy is that you and your spouse, if any, make sufficient income to pay all of your current living expenses (e.g., rent, food, utilities, transportation, clothes, etc.) and have some money left over to apply to your debts.  You submit a Chapter 13 Plan in which you set out a budget detailing your take-home pay and monthly living expenses. You pay the excess income to the bankruptcy trustee who then pays the money to your creditors.  The plan lasts for at least 36 months unless your debts are paid in full in a shorter time.  The payment period may be extended beyond 36 months (but not over 60 months), if you need the extra months to pay enough on your debts to have the plan approved by the Court.  At the end of the chapter 13 plan, any amounts still owing on your unsecured debts are forgiven.  In certain cases, chapter 13 allows us to lower the amount of your loans or give you a lower interest rate on certain loans.  If you have a secured loan like a mortgage, deed of trust, or car loan that you are behind on, chapter 13 allows you to catch up the amount you are behind over time.  Chapter 7 does not offer this option.

Some attorneys have TV or Radio ads advertising  “Debt consolidation under federal law,” without clearly stating that the “federal law” is bankruptcy law.  There is only one way in which to get relief from debt under federal law and that is bankruptcy.

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WHO CAN FILE BANKRUPTCY?

An individual, a partnership or a corporation may file a Chapter 7 bankruptcy.  Only individuals may file a Chapter 13 bankruptcy.  The information contained herein is for the individual debtor.  If you are married you can file by yourself or file a joint petition with your spouse.  If you have filed a bankruptcy petition that you voluntarily dismissed in the last six months, you may not be able to file until the six months has elapsed

WHAT HAPPENS TO MY PROPERTY IN A CHAPTER 7?

In Chapter 7 cases your right to keep your property is controlled by the answer to two questions.  The first question is "Does a secured creditor have the right to take the property because I am not paying on the debt?"  The second question is, "Can I claim the property as exempt?"  If the answer to the first question is "no", and the answer to the second, "yes", then you can keep the property.  The next two sections will help you answer these questions.

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WHAT HAPPENS IF A CREDITOR HAS COLLATERAL 
SECURING THE PAYMENT OF DEBT?

WHAT HAPPENS IF A CREDITOR HAS COLLATERAL SECURING THE PAYMENT OF DEBT?
A secured debt is simply a debt in which the creditor has a lien on some item of property to "secure" your payment of the debt.  The most common types of secured debts are a mortgage on a home and a lien on a car.  Before bankruptcy a secured creditor has two avenues of recovering its debt.  First, it can recover from you on your personal liability.  Secondly, it can recover by repossessing and selling the collateral.  Bankruptcy abolishes the creditor's right to recover from you personally, but does not abolish the creditor's right to take and sell the collateral if you fail to make your payments.  Treatment of secured debts in chapter 13 is different from their treatment in chapter 7.

CHAPTER 7 OPTIONS FOR SECURED DEBTS:

In Chapter 7 cases, with two exceptions, explained later, you have the following four choices:

1. If your payments are current on the date that you file the chapter 7, and your equity in the collateral is covered under the exemptions, you may keep the property so long as you continue to make the monthly payments and comply with the terms of your contract, we call this the “be current and stay current” method.  The advantage is that you cannot be held responsible for the debt if you can’t make the payments current sometime in the future.

2. If your payments are not current, you can try to negotiate a "reaffirmation agreement" with the creditor that allows you to catch up your payments.  (There are two drawbacks to this option.  First you cannot be sure that you and the creditor will be able to agree upon terms that allow you to catch up your payments.  Secondly, the reaffirmation agreement reinstates your personal liability.  Therefore, if possible, at the time of filing, you should have the payments current on any debts secured by property you want to keep.)  If your payments on a mobile home loan, a mortgage, or a car loan are substantially behind or if the creditor has threatened to repossess or foreclose, you will need to file Chapter 13 to save the property.

3. Redeem the property by paying the creditor the value of the collateral.  For example, if you owe the ABC Furniture Company $2,000.00 for a sofa that is now worth only $500.00, you can pay ABC Furniture $500.00 and keep the sofa.

4. Give the property back to the creditor (“surrender” the property) and have the debt discharged.

Exceptions:

There are two exceptions in which you can keep the property in chapter 7 even if you don't maintain your payments.  These exceptions are:

1. when a creditor has a lien on exempt property as a result of a judgment against you and

2. when a creditor has a non-possessory, non-purchase-money security interest in exempt personal household items (Televisions, furniture, clothes, jewelry), tools of the trade, or professionally prescribed health aids.  "Non-possessory" simply means the creditor is not physically holding the property.  "Non-purchase-money" means that the creditor neither sold you the collateral, nor lent you the money with which to buy it.  The most common instance in which a creditor obtains a non-possessory, non-purchase-money security interest in household items is when someone borrows money from a finance company and puts up certain household items as collateral for payment of the loan.

CHAPTER 13 TREATMENT OF SECURED DEBTS:

In Chapter 13 cases, secured claims are handled in one of two basic ways.  The first, which we call the "cure and maintain" method, is where past due payments on secured debts are paid from your monthly bankruptcy plan payments ("through the plan"), and future payments (payments that come due after filing bankruptcy) are paid directly to the creditor ("outside the plan").  When the bankruptcy plan has terminated, you remain obligated to make any payments remaining due on the secured debts. 

We call the other method the "strip-down/stretch-out/cram-down" method.  This method is used either when the collateral is worth less than the amount of the debt, or when the number of payments left on a debt is less than the length of the plan.  The following examples illustrate the "strip-down/stretch-out/cram-down" method.

For example if you have a car loan with 30 payments of $233.00.  The interest rate is 12.25% and the pay-off on the loan is $6,000.00.  The car has high mileage and is worth only $4,000.00.  You can strip-down the creditor claim to the value of its collateral ($4,000.00), stretch-out the payments to 36 months and pay the present value of the claim at a reduced interest rate ("cram-down ").  Such that the monthly car payments through the plan might be $127.20. 

The ability to "refinance" your secured loans through this second method permitted by Chapter 13 bankruptcy lets you reduce the monthly payments and is sometimes the only way to have enough cash flow to keep your property.

WHAT PROPERTY IS EXEMPT?

Exempt property is simply property that you can keep when you file Chapter 7 bankruptcy.  The basic purpose of bankruptcy is to allow a person who has become overburdened with debt to free himself of that burden and get a " fresh start."  The law allows you to keep property.  The exemptions are broken down into categories.  For Florida residents the exemptions per person are as follows:

1. Residence
   You may keep all the equity in your residence, including a mobile home and burial plots.  "Equity" is the value of the property less all debts or liens secured by it.   

2. Motor Vehicle
   You can claim up to $1,000.00 in equity in one motor vehicle.

3. Household Goods
   You can claim exemptions of up to $1,000.00 for yourself, plus $1,000.00 for your spouse, in items such as household furniture, clothes, jewelry, etc.  You value these items at a price at which you can sell them, not at their original cost or replacement value.

4. Life Insurance
   Life insurance policies insuring the life of the debtor in which his or her spouse and/or children are named beneficiaries are totally exempt.

5. Health Aids
   You can claim an unlimited amount of professionally prescribed health aids for the debtor or a dependent of the debtor (e.g., wheel chair, hearing aid and the like).

6. Compensation for Injuries
   Compensation for personal injuries and workman's compensation is exempt.

7. Retirement Benefits
   IRA accounts.  Retirement benefits of Florida  Teachers, State Employees, Local Government Employees, and Federal Civil Service Employees are exempt.  Individual retirement accounts are exempt.  Your interest in an ERISA qualified retirement plan (401-K account, pension or profit sharing plan) is also protected from your creditors. 

8. Government Benefits
   Veterans Administration, Social Security and AFDC benefits are exempt.

9. Wages
   Your earnings for personal services rendered within 60 days of filing the bankruptcy which are necessary for the support of you and your family such earnings remain exempt even though, they have been deposited in a bank account.

10. Tenants By The Entirety
    Any real estate (not just a residence) owned by a husband and wife jointly is exempt from any creditor who has a claim against just the husband or wife.  It is not exempt from a creditor who has a joint claim against both the husband and wife.  If you own real estate jointly with your spouse with a large amount of equity, it may be crucial to know what joint debts you have with your spouse.

11. Other
    Other specific benefits and property are exempt.

Under certain circumstances, personal property purchased less than 90 days prior to filing bankruptcy cannot be claimed as exempt.  Therefore, if you plan to file bankruptcy do not purchase any property other than consumable goods.  If you have purchased property within 90 days you need to discuss the details with us.

*If your property exceeds the amount of exemptions, and you are not willing to risk losing it, you need to concentrate on the Chapter 13 bankruptcy

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WHAT DEBTS ARE NOT DISCHARGED?

As explained earlier, the basic purpose of bankruptcy is to obtain a discharge of your debts.  However, some specific types of debts are not discharged (i.e., the bankruptcy does not relieve you of your obligation to pay).  Those debts are as follows:

A. In a Chapter 7 case:

1. Any debt not listed in the schedule of creditors.  Therefore, it is important to list all your creditors.

2. Certain taxes, including funds borrowed with which to pay such taxes.

3. A claim based upon money, property, services, or credit obtained by fraud or false pretenses (e.g., a false financial statement used to obtain credit or charges incurred on a credit card when you had no intent to pay for the charge, will be considered this type of debt).

4. Consumer debt for more than $1,000.00 for luxury goods or services to a single creditor incurred within 60 days of filing the petition.

5. Cash advances of more than $1,000.00 under an open end credit plan made within 60 days of filing bankruptcy.

6. Alimony and child support, and certain other exceptions other marital debts.

7. Damages for willful or malicious injury.

8. Certain governmental penalties.

9. Educational loans, except in cases of prolonged and severe hardship.  However, undue hardship is a very difficult standard to meet. 

10. Any debt for death or personal injury caused by the unlawful operation of a motor vehicle while intoxicated.

B. In a Chapter 13 case:

1. Any valid debt not provided for in the Chapter 13 plan.

2. Alimony and child support.

3. Educational loans, except in cases of prolonged and severe hardship. However, undue hardship is a very difficult standard to meet.

4. Any debt for death or personal injury caused by the unlawful operation of a motor vehicle while intoxicated.

5. Restitution or criminal fine included in a sentence upon conviction of a crime.

6. Secured debts not paid off prior to last plan payme

IS IT POSSIBLE TO BE DENIED A DISCHARGE OF ALL MY DEBTS?

You can be denied a bankruptcy discharge if the Court determines that you committed any of the following acts:

1. You have been granted a discharge in a prior bankruptcy filed less than six years ago.

2. With the intent to delay or defraud a creditor or the bankruptcy court, you transfer, destroy, or conceal property within one year prior to filing bankruptcy or at any time after filing bankruptcy.

3. Without justification, you conceal, destroy, falsify, or fail to keep books, records and documents related to your financial condition and business transactions.

4. You knowingly and fraudulently in the bankruptcy proceeding:

   • make a false oath, claim or account  (i.e., lie about your property, debts, or financial affairs);

   • give or receive money for taking certain action or agreeing not to take certain action;

   • withhold books, records, documents or other records from the bankruptcy court;

5. You fail to explain satisfactorily any loss of assets or deficiency of assets to meet your liabilities;

6. You refuse to obey an order of the bankruptcy court, or refuse to answer a material question.

The lesson to be learned is that if you are open and honest with your creditors and the bankruptcy court, you will be granted your discharge

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WHAT EFFECT WILL BANKRUPTCY HAVE ON 
SOMEONE WHO COSIGNED A LOAN WITH ME?

Another person who is jointly liable with you on a debt is known as a "co-debtor".  When you file bankruptcy the co-debtor remains liable on the debt (unless the co-debtor is your spouse and you file a joint petition).  The mere fact that you file bankruptcy will not negatively impact your co-debtor's credit.  Of course, if the co-debtor fails to maintain the payments on the debt, the failure to pay the debt will likely be reported by the creditor to the credit bureau.

In a Chapter 7 case the creditor is free to pursue collection from the co-debtor immediately.  In a Chapter 13 case the creditor may be prevented from collecting from the co-debtor during the term of the Chapter 13 Plan.  If you file a Chapter 13 and the status of a co-debtor is important to you, we will need to discuss the circumstances of the debt in order for me to advise you of the likely impact on the co debtor.  It may be possible to put the debt in a special class to be paid in full to protect the co-debtor from collection activities.

WHAT SHOULD I DO IF I OWE MONEY TO MY BANK OR CREDIT UNION?

If the bank or credit union at which you have checking or savings accounts is also a creditor (i.e. you have a loan, credit card account, or overdraft protection with the bank), then it is possible that the bank will put an "administrative freeze" on the funds in the account on the date the bankruptcy petition is filed.  Such an administrative freeze will cause checks that have not cleared the bank to bounce.  Therefore, you should open a new bank account with a bank whom you do not owe any money prior to filing bankruptcy and cease checking activity in the old account several weeks prior to filing the petition.  It is not necessary that you close the old -account, but you should remove all but a few dollars from the account.

If your paycheck is automatically deposited to the account, you do not necessarily have to change the deposit.  Funds that are deposited into the account after you file the bankruptcy cannot be frozen

SHOULD I FILE A CHAPTER 13 OR A CHAPTER 7 BANKRUPTCY?

You must ultimately decide for yourself whether filing bankruptcy is the proper action to take, and if so, which Chapter is better for you.

Some of the factors to consider are as follows:

1. If you are not making more money than you need for your current living expenses, Chapter 13 is not a realistic option.

2. Chapter 7 has the advantage of wiping the slate clean and enabling you to embark on your "fresh start" immediately; whereas with Chapter 13 you will be making payments for three (3) years or more.

3. If you have a particular asset that is above the allowable exemption that you want to keep, then Chapter 13 may be the only alternative. 

4. If you are trying to ward off a repossession or a foreclosure, Chapter 13 may be the only way to do so.

5. If your debts are primarily consumer debts, and if your budget reveals that after filing bankruptcy your income substantially exceeds your expenses, it is possible that a Chapter 7 bankruptcy would be dismissed.  In such a case Chapter 13 is the viable alternative.

6. You will not be allowed to make contributions to 401Kor other retirement plans while you are in Chapter 13(The exception is required State Employee retirement).

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WHAT ARE THE FEES NORMALLY CHARGE AND WHEN MUST IT BE PAID?

WHEN WILL MY CREDITORS STOP BOTHERING ME?

When you file a bankruptcy, the court sends out an order to all the creditors listed in your petition forbidding them from taking any action to collect the debt.  They are not to call you at home or at work.  However, up to the time that you file, creditors are free to pursue lawful collection efforts.  The filing takes place when the bankruptcy petition is received by the Bankruptcy Clerk.  The petition is sent to the Bankruptcy Clerk after you come to our office and review and sign the bankruptcy petition and schedules, which we prepare from the information forms that you complete.

If you are concerned about relief between now and filing the bankruptcy, our experience has been that when our clients have informed unsecured creditors that they have retained us to file bankruptcy, the creditors have stopped the harassing telephone calls.  However, do not tell creditors that you have retained our services until you have paid us our retainer. 

Furthermore, do not tell a bank in which you have funds or deposit, because the bank may take funds from your account to pay your debt to it.  If you owe a debt to a creditor to whom you do your checking or savings with, that bank has the option to freeze your account upon receiving notice of the filing of the bankruptcy petition.

HOW DO I GO ABOUT FILING BANKRUPTCY?

HOW DO I GO ABOUT FILING BANKRUPTCY?
If you know at this point that you want to file complete the forms sent to you with this Overview.  If no forms were enclosed contact our office to make arrangements to obtain them.  We need you to provide all the information requested on these forms so that we can prepare the bankruptcy petition and schedules that are filed with the Bankruptcy Court.  Every blank should be filed in.  If the answer is no or none put "no" or "none".  If the question is not applicable to you put "N/A". 

If you have questions about how to complete the forms contact my office and a member of our staff will assist you.  If you need to consult further before deciding what to do, contact our office to set up an appointment.  One factor we look at in determining my fee is how you are filling out the forms.  If our paralegals have to spend time gathering information you should have provided, the fee will be higher. 

After you have returned the completed forms and paid the non-refundable retainer, one of our paralegals will prepare the documents to be filed with the bankruptcy court.  We often find it necessary to contact clients to clarify the information provided. Be sure to give us telephone numbers where we can reach you.  After the documents are prepared an appointment will be made for you to review and sign the documents prior to filing them

WHAT EFFECT WILL BANKRUPTCY HAVE ON MY CREDIT?

WHAT EFFECT WILL BANKRUPTCY HAVE ON MY CREDIT?
There is no absolute answer to this question.  Any blanket statement such as, "If you file bankruptcy, you can't get credit for seven years," is not correct.  When you apply for credit, each creditor makes its own decision as whether to extend credit or not.  The fact that you have filed bankruptcy is obviously a factor that a creditor is going to consider along with other facts such as your income and the value of any security collateral.

Many creditors rely upon credit ratings from credit bureaus in making a decision to extend credit.  The Fair Credit Reporting Act in general requires a credit bureau to delete adverse information from your file after seven (7) years.  However, in the case of a Chapter 7, the information remains on file for ten (10) years after you file the petition.  A Chapter 13 bankruptcy or remains on file for seven (7) years.

 Some relative statements can be made:

1. We used to believe that a successfully completed Chapter 13 proceeding has a smaller negative impact on your credit than a Chapter 7.  It remains in your credit file for three years less, and your creditors receive some payment on their debts.  However, we now believe Chapter 7 may have less negative impact.  In a chapter 13, under our local bankruptcy rules, you cannot incur any debt in excess of $5000.00 without the approval of the court.  Therefore, during the 3-5 years of the chapter 13 plan you can do little to reestablish your credit.  By contrast a chapter 7 is over in 3 to 4 months, and you can begin taking steps to reestablish credit immediately.  You cannot get a second discharge on any new debts in a chapter 7 bankruptcy case filed within 6 years of the first case.  Strangely enough, this fact, in combination with the fact that most or all of your debts have been erased, make you a good credit risk in the eyes of some creditors.

2. In the long run a bankruptcy may improve your ability to obtain credit.  If you are in a situation in which you have accumulated more debts than you will ever be able to pay, then you probably may never be able to obtain credit again absent some sort of relief.  By wiping the slate clean with bankruptcy, you put yourself in the position to eventually re-establish your credit.

3. Our personal opinion is that too many clients are concerned with their ability to incur more debt in the future, when their focus should be on the best way to deal with their existing debts.  Our advise is to get your current debts under control before concerning yourself with more credit.

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CAN I BE DISCRIMINATED AGAINST IN AREAS 
OTHER THAN CREDIT IF I FILE BANKRUPTCY?

CAN I BE DISCRIMINATED AGAINST IN AREAS OTHER THAN CREDIT IF I FILE BANKRUPTCY?

The federal, state, county, or municipal government may not discriminate against you with respect to the issuance of a license or permit because you have filed bankruptcy.  No employer, government or private, can lawfully terminate your employment or discriminate with respect to your employment as a result of filing bankruptcy.

Utility companies (power company, telephone company, etc.) are put in a separate category than other creditors.  They cannot discontinue service to you or refuse to provide you service because you file bankruptcy.  They can require you to pay a reasonable security deposit for the payment of future service.  Pursuant to regulation of the Florida Utilities Commission security deposits may be set at an amount equal to twice the average monthly bill.

Finally, you may not be discriminated against in obtaining a future student loan on the grounds that you have filed a bankruptcy or failed to pay a student loan that is discharged in bankruptcy.

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