Can I Plan for Bankruptcy?

It is perfectly proper to engage in pre-bankruptcy planning to maximize your allowable exemptions. Your planning, however, should be done with the guidance of a knowledgeable bankruptcy attorney.

Unfortunately, many clients tell me that they sold their car for $1 to their girlfriend, or they signed a quit claim deed to their property to their sister shortly before coming to see me. These types of attempts at protecting assets often result in the needless loss of the very property they were trying to save.

Other times people borrow from their family to catch up payments or to pay off a particular debt. They use their income tax refund to pay their family back followed by filing for bankruptcy. This type of pre-bankruptcy activity often results in a Chapter 7 trustee recovering the money paid on the debt AND recovering the tax refund money paid to the family.

An example of proper pre-bankruptcy exemption planning is as follows: Say you have $6,000 in cash in the bank, a car on which you owe more than its value, and furniture worth $1,000. Depending on your exemptions, a Chapter 7 trustee could take up to $4,950 of your cash (and perhaps the entire $6,000) and use it to pay creditors. What you could do instead is, using the cash that you have in the bank, purchase a used car for $3,225, purchase $1,000 of furniture you need for your house, and use the remaining $700 towards repairs needed for your home. Then, you are left with an exempt car (with no car payments-you can walk away from the one that you are upside down on), exempt furniture, and $1,075 in exempt cash in the bank. The trustee now has nothing to take.

Remember, while it is perfectly acceptable to engage in pre-bankruptcy planning to maximize your assets, it is NOT acceptable to defraud your creditors, or engage in actions that could constitute “bad faith”. You CANNOT “hide” your assets. Please use the advice of an informed bankruptcy attorney.

Does the Bible Tell Me So?

Many times when people come to see me about debt relief, they don’t want to file bankruptcy. Bankruptcy is seen as an indication that they are “bad” or that they are “unjust” or even “unchristian.”

I am not a Biblical scholar nor am I theologian. However, in Deuteronomy 15:1-3, the Bible does reference debts and the forgiveness of debt. Deuteronomy establishes many concepts that have influenced religious thought and life of both Jews and Christians down through the ages. Moses is generally considered the original author with possibly Joshua authoring the final chapters. Verses are from the King James Version.

“1 At the end of [every] seven years thou shalt make a release. 2 And this [is] the manner of the release: Every creditor that lendeth [ought] unto his neighbour shall release [it]; he shall not exact [it] of his neighbour, or of his brother; because it is called the LORD’S release. 3 Of a foreigner thou mayest exact [it again]: but [that] which is thine with thy brother thine hand shall release;"

The Sabbatical year was also to be a time of release (Deut 15:1) but only in one specific aspect - that all debts between the children of Israel were to be cancelled (Deut 15:2), though a foreigner’s debt was not annulled (Deut 15:3). That the Scriptures teach a canceling of outstanding debt and not just an annulment of the interest on the debt is clear from Deut 15:4-11.

"4 Save when there shall be no poor among you; for the LORD shall greatly bless thee in the land which the LORD thy God giveth thee [for] an inheritance to possess it: 5 Only if thou carefully hearken unto the voice of the LORD thy God, to observe to do all these commandments which I command thee this day. 6 For the LORD thy God blesseth thee, as he promised thee: and thou shalt lend unto many nations, but thou shalt not borrow; and thou shalt reign over many nations, but they shall not reign over thee. 7 If there be among you a poor man of one of thy brethren within any of thy gates in thy land which the LORD thy God giveth thee, thou shalt not harden thine heart, nor shut thine hand from thy poor brother: 8 But thou shalt open thine hand wide unto him, and shalt surely lend him sufficient for his need, [in that] which he wanteth. 9 Beware that there be not a thought in thy wicked heart, saying, The seventh year, the year of release, is at hand; and thine eye be evil against thy poor brother, and thou givest him nought; and he cry unto the LORD against thee, and it be sin unto thee. 10 Thou shalt surely give him, and thine heart shall not be grieved when thou givest unto him: because that for this thing the LORD thy God shall bless thee in all thy works, and in all that thou puttest thine hand unto. 11 For the poor shall never cease out of the land: therefore I command thee, saying, Thou shalt open thine hand wide unto thy brother, to thy poor, and to thy needy, in thy land.”

Discharge of Debts (Bills).

What is a discharge in bankruptcy?

A bankruptcy discharge releases the debtor from personal liability for certain specified types of debts. In other words, the debtor is no longer legally required to pay any debts that are discharged. The discharge is a permanent order prohibiting the creditors of the debtor from taking any form of collection action on discharged debts, including legal action and communications with the debtor, such as telephone calls, letters, and personal contacts.

When does the discharge occur?

The timing of the discharge varies, depending on the chapter under which the case is filed. In a chapter 7 (liquidation) case, for example, the court usually grants the discharge promptly on expiration of the time fixed for filing a complaint objecting to discharge and the time fixed for filing a motion to dismiss the case for substantial abuse (60 days following the first date set for the 341 meeting). Typically, this occurs about four months after the date the debtor files the petition with the clerk of the bankruptcy court. Since a chapter 12 or chapter 13 plan may provide for payments to be made over three to five years, the discharge typically occurs about four years after the date of filing.

How does the debtor get a discharge?

Unless there is litigation involving objections to the discharge, the debtor will usually automatically receive a discharge. The Federal Rules of Bankruptcy Procedure provide for the clerk of the bankruptcy court to mail a copy of the order of discharge to all creditors, the U.S. trustee, the trustee in the case, and the trustee's attorney, if any. The debtor and the debtor's attorney also receive copies of the discharge order. The notice, which is simply a copy of the final order of discharge, is not specific as to those debts determined by the court to be non-dischargeable, i.e., not covered by the discharge. The notice informs creditors generally that the debts owed to them have been discharged and that they should not attempt any further collection. They are cautioned in the notice that continuing collection efforts could subject them to punishment for contempt. Any inadvertent failure on the part of the clerk to send the debtor or any creditor a copy of the discharge order promptly within the time required by the rules does not affect the validity of the order granting the discharge.

Will Bankruptcy Affect My Credit?

There is no clear answer to this question. Unfortunately, if you are behind on your bills, your credit may already be bad. Bankruptcies will probably not make things any worse.

The fact that you've filed a bankruptcy can appear on your credit record for ten years. But since bankruptcy wipes out your old debts, you are likely to be in a better position to pay your current bills, and you may be able to get new credit.

What Else Should I Know?

- Utility Services - Public Utilities, such as the electric company, cannot refuse or cut off service because you have filed for bankruptcy. However, the utility can require a deposit for future service and you do have to pay bills that arise after bankruptcy is filed.

- Discrimination - An employer or government agency cannot discriminate against you because you have filed for bankruptcy.

- Driver's License - If you lost your license solely because you couldn't pay court ordered damages caused in an accident, bankruptcy will allow you to get your license back.

- Co-signers - If someone has co-signed a loan with you and you file for bankruptcy, the co-signer may have to pay your debt.

Will Bankruptcy Wipe Out All My Debts?

Yes, with some exceptions.

Bankruptcy will not normally wipe out:

-money owed for child support or alimony fines, and some taxes;

-debts not listed on your bankruptcy petition;

-loans you got by knowingly giving false information to a creditor, who reasonably relied on it in making you the loan;

-debts resulting from "willful and malicious " harm;

-student loans owed to a school or government body, except if, the court decides that payment would be an undue hardship;

-mortgages and other liens that are not paid in the bankruptcy case (but bankruptcy will wipe out your obligation to pay any additional money if the property is sold by the creditor).

Can I Own Anything After Bankruptcy?

Yes! Many people believe they cannot own anything for a period of time after filing for bankruptcy. This is not true. You can keep your exempt property and anything you obtain after the bankruptcy is filed. However, if you receive an inheritance, a property settlement, or life insurance benefits within 180 days after filing for bankruptcy, that money or property may have to be paid to your creditors if the property or money is not exempt.

Can I File a Chapter 7 By Myself, Without an Attorney?

You certainly have the right to file a Chapter 7 case by yourself. The forms are available either on-line or at an office supply store. There are also several books about how to do this.

Here are the problems:

1. Bankruptcy has become significantly more complicated since October 2005, when the BAPCPA changes to the bankruptcy laws were enacted. Many lawyers who used to file the occasional Chapter 7 have given up the practice because of the complications. Particularly, you need to fully understand how the means test works. If you do the calculations incorrectly, you could end up in a deposition at the United States' trustee's office, face a motion to dismiss, or face a motion to convert to Chapter 13.

2. You need to understand about the pre-filing credit counseling requirement as well as the pre-discharge financial management course requirement

3. In order to actually file your case, you will need to have your petition and schedules scanned into PDF format for filing with the Bankruptcy Clerk. You can do this at the Bankruptcy Court and I believe that this process is not particularly complicated, but I have not done it since I file electronically from my office.

4. You may not be able to dismiss a Chapter 7 voluntarily if you change your mind. For example, if you file, but it turns out that you earn too much or own too many assets the judge may not let you out of your case, at least until after your assets are liquidated.

5. You need to understand how the bankruptcy exemption law works and how it applies in Chapter 7 to protect property that the law allows you to protect. If you don't properly declare property as exempt even if the law would otherwise allow you to protect it, then you could lose your property anyway.

6. You will not receive advice from the Chapter 7 trustees or the U.S. Trustees. Their interest is to maximize the recovery of the estate (i.e. your creditors). They are not your friends.

I do not think it is a good idea to try to file bankruptcy without counsel. I have always been willing to work with Chapter 7 debtors with straightforward cases and not a lot of money.