Bankruptcy

Bankruptcy

Today’s economy can be absolutely brutal on the financial picture of families and businesses alike. The constant striving to do more with less frequently results in lost jobs, lost business accounts, reduced income or revenue, and unmanageable debt. With many families living paycheck to paycheck, a sudden health problem that leads to piles of medical bills, reduced earning potential, or the need to replace a vehicle or repair the house can push their finances over the edge.

At Nazette, Marner, Nathanson & Shea, L.L.P., we understand how tough it is to keep debt manageable and the stress and frustration that can overwhelm you when debts get out of hand. For many families and businesses, filing for bankruptcy can provide peace of mind and breathing room while you get back on top of your finances. Filing for bankruptcy can help you:

  • Stop the constant barrage of harassing phone calls from creditors
  • Stop foreclosures, wage and bank account garnishments, repossessions and other collection efforts IMMEDIATELY
  • Eliminate most unmanageable debts
  • Keep your assets that you need for daily living
  • Get more time to repay debts
  • Get a fresh start on your finances
  • Get creditors off your back 
  • Force creditors to modify loan terms to improve your ability to pay
  • Avoid dissolution of your business

If you’re experiencing overwhelming debt and think bankruptcy may be the answer, we invite you to meet with one of our experienced bankruptcy attorneys. Your attorney will review your situation, describe the options within bankruptcy law, to help you determine whether bankruptcy is the right answer, and assist you in taking the legal steps necessary to complete your bankruptcy or other corrective measure to address your debt problem. 

Overview of Bankruptcy Law

Bankruptcy law divides your creditors into two categories:  secured creditors and unsecured creditors. 

Secured creditors are creditors to whom you granted a security interest in property.  There are two ways this kind of debt may arise.  You may grant a security interest in property you are buying with the money advanced by the creditor, such as a mortgage on a house or a lien on a car.  This is called a purchase money security interest.  Secondly, you may grant a security interest in property you already own in order to convince a creditor to loan you money.

The secured creditors gets protected when you file bankruptcy.  For example, if you have a car loan, you don’t get to keep the car unless you are willing to continue to make the payments.  You do have a choice of three options about how to treat secured creditors.  One option is that you may reaffirm the debt, keep the collateral and keep paying the monthly payments, and then the debt is just not affected by the bankruptcy.  A second option is that you may return the collateral to the creditor and wipe out the debt.  Thirdly, you may pay the creditor the current fair market value of the property, keep the collateral, and wipe the balance owed on the debt.

Unsecured creditors are ones like credit cards, charge cards from stores, open accounts for services of any kind such as doctor bills, hospital bills, or lawyer bills, signature loans, balances remaining owed after repossession of a car, and payday loans.  If you qualify to file a chapter 7 petition, you may wipe out your liability for all of your unsecured debts without paying anyone anything.

There are some debts that cannot generally be discharged.  These debts include fines, child support or alimony judgments, income taxes (unless they were assessed more than 3 years ago), and student loans.

There are two ways to file a consumer bankruptcy: chapter 7 and chapter 13

Chapter 7 is the preferred option for most people, because it involves wiping out your unsecured debt without paying anything. In order to qualify to file a chapter 7, there are two tests that you must pass.  One test is called the means test.  This test was added to the bankruptcy law when it was changed in October of 2005.  You have to bring into our office all of the pay stubs you have received within the six-month period before you file, and a record of all other money received, such as child support, unemployment compensation, or workers compensation.  We turn this information over to the US Trustee’s office.  When you file bankruptcy, you are in federal court.  The US Trustee’s office is a division of the Department of Justice.  The trustee’s office oversees the bankruptcy process, to make sure that everyone is playing by the rules. The trustee takes the amount of income that your household had in the previous six months and doubles it to create a fictional annual income for your household.  They then compare that amount to a chart they have that tells them what the median income is for a household of the same size in the State of Iowa.  If your fictional income is below the median, you may file a chapter 7 petition.  If your income is above the median, then the rest of the means-testing form must be filled out, to see if your disposable income can be lowered below the threshold amount.  If it is still too high, then your only option is to a chapter 13 petition.

The second test to qualify to file a chapter 7 petition is basically a budget test.  You have to be able to show the judge that pretty much all of your available income is required to pay your month-to-month living expenses and those bills that you would still be paying even after you filed bankruptcy, such as secured loans that you decide to keep or nondischargeable debts.  If you can show the judge that kind of budget, that means you are legally insolvent, because you are insolvent when you don’t have enough cash flow to both pay your current expenses and your debts.  If that is the jam you are in, then you pass the budget test to file a chapter 7 petition.

If you pass both of the tests described above, there isn’t a magic amount of money that you have to owe in order to qualify to file bankruptcy.  The law leaves it up to you to decide if your situation is hopeless as far as paying your debt, given your income and living expenses.  Bankruptcy is a very powerful tool for giving yourself a chance to wipe your slate clean and make a new beginning, get a fresh start.  If you decide that you need to get a fresh start, the judge will allow you to do that.

If on the other hand, when you prepare your budget, you have a significant amount of money left over after you pay all of your living expenses that could be paid toward your debts, then you do not qualify for chapter 7 and your only option is to file a chapter 13 petition.   In a chapter 13 case, you have to promise to pay your disposable income every month for at least 3 years to the bankruptcy trustee.  If your income is above the median, then you have to follow a five-year plan.  Suppose that your budget shows that you have $300 a month you could pay toward your unsecured debt.  You would make that payment every month for the designated length of your plan, and after you have made all of the promised payments, then the judge will discharge, or wipe out, the rest of what owe on that debt.

Whether you file a 7 or a 13 petition, when you file a petition, the judge immediately issues a stay, which is an order freezing your creditors.  A notice is sent to all of your creditors that tells them that they cannot have any contact with you or make any effort to collect the debt.  That means that they cannot garnish your wages, they cannot sue you, they cannot call you on the phone, they can’t even send you bills.  Any contact that a creditor wants to have with you about the debt, they have to call our office and deal with us instead.

Procedure of a Chapter 7 bankruptcy

Before a person can file a bankruptcy petition, he or she must obtain prebankruptcy counseling.  If you hire Nazette, Marner, Nathanson & Shea, LLP, to help you, our office can give you a website that you can go to and obtain the counseling online.  There is alot of paperwork involved with filing bankruptcy.  The petition that is filed is typically about 55 pages.  Our office will give you a questionnaire to fill out and a list of documents we need that give us the information that we need in order to prepare the petition for you.  Once we have all of the necessary information, we can ususally get the petition ready for you to sign within about one week.  Once you have obtained a certificate proving that you obtained prebankruptcy counseling, signed your petition, and paid for the job to be done, the petition is filed.  From that point, it only takes a little over 90 days to complete the court procedure.

When a petition is filed, the first thing that happens is notice to creditors.  Secondly, a case trustee is appointed to represent the unsecured creditors, and a meeting with the trustee is scheduled for approximately thirty days after the petition is filed.  The meeting is low-key and does not take very long.  An attorney from our firm will attend the meeting with you.

The case trustee’s job is to look over the list of property that you own to see if you own anything that you cannot claim exempt.  If you do, his or her job is to take it from you, sell it, and give the money to your creditors.

When you file bankruptcy, you are entitled to claim certain property exempt, which means that you get to keep it. 

The exemptions cover pretty much everything that you need in order to live day to day:  the equity in your home is exempt (at least as to any debt that you incurred after you bought the house), all of your household goods as long as the total fair market value does not exceed $7,000, clothes, life insurance with cash value, provided your spouse or children are the beneficiary, retirement plans, $1,000 on deposit, and one car with an equity of up to $7,000 in it.  All of these exemptions are per debtor.

After the meeting with the trustee, there is a sixty-day waiting period.  The reason for the waiting period is to give your unsecured creditors a chance to pull up their records on your account, to see if there is a pattern that you ran up your credit card balances by getting either a large cash advance or buying a luxury item shortly before you filed.  If a creditor thinks that they can prove that you abused your credit privileges shortly before filing, they can file a complaint and try to have their debt excluded from discharge.

You have to do one thing while we are waiting for the deadline to pass, and that is that you have to take a class on personal finance management.  The class will take a couple of hours of your time, but you will get valuable information from it about how to set up a budget and live within it, so that you can avoid getting into trouble with credit cards after your case is closed.

After the sixty-day waiting period has passed, the judge will file a discharge order that formally discharges, or wipes out, your personal liability for all of your dischargeable debts.  Then, your case is closed.

Get a fresh start

As a practical matter, your fresh start largely begins on the day you file for bankruptcy for two reasons.  First, all of your creditors are frozen and have to leave you alone from that point on.  Secondly, the bankruptcy trustee and judge rely on the information that you file that reports your financial condition as of the date of filing.  You do not have to account to the court or the trustee for what you do with your money after your petition is filed.  You may immediately resume using your bank account, buy things, sell things, and pretty much do whatever you want to with your money.

There is one narrow exception:  if within six months after you file, someone dies and leaves you money that you are going to inherit, either through a life insurance policy or an estate proceeding, then you have a legal duty to report that to the court, and the court will expect you to use the inheritance to help pay your debts.

A bankruptcy attorney from Nazette, Marner, Nathanson & Shea, L.L.P., will be happy to meet with you to analyze your situation and help you determine whether a bankruptcy petition is the best solution, and if you decide to file, what the cost will be.  For more information, please call our office to schedule a free first meeting.

Legal advisories:  We are a debt relief agency.  We help people file for banruptcy relief under the Bankruptcy Code.

Call our office in Cedar Rapids today to schedule your initial consultation and learn how we can help: (319) 366-1000.

 

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Attorneys:  Henry E. Nathanson
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