Purposes, Benefits and Costs of Bankruptcy

Notice No. 1

Notice Mandated By Sections 342(b)(1) and 527(a)(1) of the Bankruptcy Code

PURPOSES, BENEFITS AND COSTS OF BANKRUPTCY

The United States Constitution provides a method whereby individuals, burdened by excessive debt, can obtain a “fresh start” and pursue productive lives unimpaired by past financial problems. It is an important alternative for persons strapped with more debt than they can manage.

The federal bankruptcy laws were enacted to provide good, honest, hard-working debtors with a fresh start and to establish a ranking and equity among all the creditors seeking payment from the debtor’s limited resources.

Bankruptcy helps people avoid permanent financial discouragement1hat can prevent them from ever re-establishing themselves as hard-working members of society.

To the extent that there may be money or property available for distribution to creditors, creditors are ranked to make sure that money or property is fairly distributed according to rules establishing which creditors get paid and how much.

This discussion is intended only as a brief overview of the types of bankruptcy filings and of what a bankruptcy filing can and cannot do. No one should base their decision as to whether or not to file bankruptcy solely on this information. Bankruptcy law is complex, and there are many considerations that must be taken into account in making the determination whether or not to file. Anyone considering bankruptcy is encouraged to make no decision about bankruptcy without seeking the advice and assistance of an experienced attorney who practices bankruptcy law.

Types of Bankruptcy

The Bankruptcy Code is divided into chapters. The chapters which almost always apply to consumer debtors are Chapter 7, known as a “straight bankruptcy”, and Chapter 13, which involves an affordable plan of repayment.

An important feature applicable to all types of bankruptcy filings is the automatic stay. The automatic stay means that the mere request for bankruptcy protection automatically stops and brings to a grinding halt most lawsuits, repossessions, foreclosures, evictions, garnishments, attachments, utility shut-offs, and debt collection harassment. It offers debtors a breathing spell by giving the debtor and the trustee assigned to the case time to review the situation and develop an appropriate plan. In most circumstances, creditors cannot take any further action against the debtor or the debtor’s property without permission from the bankruptcy court.

Chapter 7 (Liquidation)

If you cannot afford to meet your monthly living expenses and pay your debts, you may be able to completely liquidate your debt. Chapter 7 contemplates an orderly, court-supervised procedure where a trustee takes over the debtor’s assets, reduces them to cash, and makes distributions to creditors -- all subject to the debtor’s right to retain certain exempt property and the rights of secured creditors. Because there is usually little or no nonexempt property in most Chapter 7 cases, there may not be an actual liquidation of the debtor’s assets. These cases are called “no-asset cases.”

A creditor holding an unsecured claim will get a distribution from the bankruptcy estate only if the case is an asset case and the creditor files a proof of claim with the bankruptcy court. In most Chapter 7 cases, if the debtor is an individual, he or she receives a discharge that releases him or her from personal liability for certain dischargeable debts. The debtor normally receives a discharge just a few months after the petition is filed.

Not everyone will qualify to file under Chapter 7 as debtors are subject to a “means test” designed to determine whether the case should be permitted to proceed. If your income is greater than the median income for your residence state and family size, creditors may have the right to file a motion requesting that the court dismiss your case under § 707(b) of the Code. The court decides whether the case should be dismissed.

Some debts are not discharged under the law even if you receive a general discharge. You will still be responsible for most taxes and student loans; debts incurred to pay non-dischargeable taxes; family support and property settlement obligations; most fines, penalties, forfeitures, and criminal restitution obligations; certain debts which are not listed in your bankruptcy papers; and debts for death or personal injury caused by operating a motor vehicle, vessel, or aircraft while intoxicated. In addition, if a creditor proves that a debt arose from fraud, breach of fiduciary duty, theft, or from a willful and malicious injury, the bankruptcy court may determine that the debt is not discharged.

Chapter 11 (Reorganization)

Chapter 11 is typically used for the reorganization of a business. Its provisions are complicated, its time frame lengthy and any decision by an individual to file a Chapter 11 case should be reviewed with an attorney.

Debts not discharged include debts for alimony and child support; certain taxes; debts for certain educational benefit overpayments or loans made or guaranteed by a governmental unit; debts for willful and malicious injury by the debtor to another entity or to the property of another entity; debts for death or personal injury caused by the debtor’s operation of a motor vehicle while the debtor was intoxicated from alcohol or other substances; and debts for certain criminal restitution orders.11 U.S.C. § 523(a). The debtor will continue to be liable for these types of debts to the extent that they are not paid in the Chapter 11 case. Debts for money or property obtained by false pretenses, debts for fraud or defalcation while acting in a fiduciary capacity, and debts for willful and malicious injury by the debtor to another entity or to the property of another entity will be discharged unless a creditor timely files and prevails in an action to have such debts declared non-dischargeable. 11 U.S.C. § 523(c).

Chapter 12 (Family Farmers and Fishermen)

Chapter 12 is designed to permit “family farmers” or “family fishermen” with regular annual income to repay all or part of their debts over a period of time and make installments to creditors over three to five years. There are extensive eligibility requirements and it is limited to those whose income arises primarily from a family-owned farm or commercial fishing operation.

Certain categories of debts are not discharged in Chapter 12 proceedings. 11 U.S.C. §1228(a). Those categories include alimony and child support; money obtained through filing false financial statements; debts for willful and malicious injury to person or property; debts for death or personal injury caused by the debtor’s operation of a motor vehicle while the debtor was intoxicated; and debts from fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny. The bankruptcy law regarding the scope of a Chapter 12 discharge is complex, however, and debtors should consult competent legal counsel in this regard prior to filing. Those debts that will not be discharged should be paid in full under a plan. With respect to secured obligations, those debts may be paid beyond the end of the plan payment period and, accordingly, are not discharged.

Chapter 13 (Repayment or Reorganization of All or Part of an Individual’s Debts)

Chapter 13 is designed for individuals with regular income who would like to pay all or part of their debts in installments over a period of time. You are only eligible for Chapter 13 if your debts do not exceed certain dollar amounts set forth in the Bankruptcy Code.

Chapter 13 contains a special automatic stay provision that protects co-debtors. Unless the bankruptcy court authorizes otherwise, a creditor may not seek to collect a “consumer debt” from any individual who is liable along with the debtor. 11 U.S.C. § 1301(a). Consumer debts are those incurred by an individual primarily for a personal, family, or household purpose. 11 U.S.C. § 101(8).

Individuals may also use a Chapter 13 proceeding to save their home from foreclosure. The automatic stay stops the foreclosure proceeding as soon as the individual files the Chapter 13 petition. The individual may then bring the past-due payments current over a reasonable period of time. The debtor may still lose the home if the mortgage company completes the foreclosure sale under state law before the debtor files the petition. 11 U.S.C. § 1322(c). The debtor may also lose the home if he or she fails to make the regular mortgage payments that come due after the Chapter 13 filing.

Under Chapter 13, you must file a plan with the court laying out how you will repay your creditors all or part of the money that you owe them from your future earnings. The period allowed by the court to repay your debts is usually three years or five years, depending upon your income and other factors. The court must approve your plan before it can take effect.

After completing the plan payments most debts are discharged. Debts not discharged include family support obligations; most student loans; certain taxes; most criminal fines and restitution; debts not listed, or improperly listed, in your bankruptcy; debts for acts leading to death or personal injury; and certain long term secured obligations.

What Bankruptcy Can and Cannot Do

Bankruptcy may make it possible for financially distressed individuals to:

• Discharge liability for their debts and to obtain a financial fresh start. When the debt is discharged, the debtor has no further legal obligation to pay the debt
• Stop foreclosure actions on their home and allow them the opportunity to catch up on past-due payments.
• Prevent repossession of a car or other property, or force the creditor to return repossessed property.
• Stop wage garnishment and other debt collection harassment.
• Restore or prevent termination of certain types of utility service.
• Lower the monthly payments and interest rates on debts, including secured debts such as car loans.
• Allow debtors an opportunity to challenge disputed claims of creditors that may be questionable due to numerous reasons

Bankruptcy, however, cannot cure every financial problem. It is usually not possible to:

• Eliminate certain rights of secured creditors. Although a debtor can force secured creditors to take payments over time in the bankruptcy process, a debtor generally cannot keep the collateral unless the debtor continues to pay the debt and maintains insurance.
• Discharge types of debts singled out by the federal bankruptcy statutes for special treatment, such as child support, alimony, student loans, certain court-ordered payments, criminal fines, and most taxes.
• Protect all cosigners on their debts. If a relative or a friend cosigned a loan which the debtor discharged in bankruptcy, the cosigner may still be obligated to repay the unpaid balance.
• Discharge debts that are incurred after the bankruptcy case has been filed.

Bankruptcy’s Effect on Your Credit

By federal law, a bankruptcy can remain part of a debtor’s credit history for up to 10 years. Whether or not the debtor will be granted credit in the future is unpredictable, and probably depends more on what good things the debtor does in the nature of keeping a job, saving money, making timely payments on secured debts, etc., than the fact that the debtor filed bankruptcy.

In some cases it may actually be easier to obtain credit after bankruptcy, because new creditors may feel that since the old obligations have been discharged, they will be first in line. They also recognize that the debtor cannot file bankruptcy again for at least the next four years in the case of Chapter 13 or eight years in the case of Chapter 7. The truth is that if a debtor cannot pay his or her bills, and the debtor’s credit is already ruined or exhausted, filing bankruptcy can actually be an important first step in rebuilding credit.

Services Available from Credit Counseling Agencies

If you’re not disciplined enough to create a workable budget and stick to it, can’t work out a repayment plan with your creditors, can’t keep track of mounting bills, or need more help with your debts than can be achieved by merely having a few of your unsecured creditors lower their interest rates somewhat, it makes NO sense to consider contacting a credit counseling organization.

However, there are many nonprofit credit counseling organizations that will work with you to solve your financial problems.

But be aware that just because an organization says it’s “nonprofit,” there’s no guarantee that its services are free, affordable, or even legitimate. In fact, some credit counseling organizations charge high fees, which may be hidden, urge consumers to make “voluntary” contributions that can cause more debt, and urge consumers to enter “debt repayment plans” that they simply cannot afford.

Most credit counselors offer services through local offices, online, or over the phone. It is best to find an organization that offers in-person counseling. Many universities, military bases, credit unions, housing authorities, and branches of the U.S. Cooperative Extension Service operate nonprofit credit counseling programs. Your financial institution, local consumer protection agency, and friends and family also may be good sources of information and referrals.

Reputable credit counseling organizations can advise you on managing your money and debts, help you develop a budget, and offer free educational materials and workshops. Their counselors are certified and trained in the areas of consumer credit, money and debt management, and budgeting. Legitimate counselors will discuss your entire financial situation with you and help you develop a personalized plan to solve your money problems. An initial counseling session typically lasts an hour, with an offer of follow-up sessions.

If your financial problems stem from too much debt or your inability to repay your debts, a credit counseling agency may recommend that you enroll in what is known as a “debt management plan” or “DMP.” A DMP alone is not credit counseling, and DMP’s are not for everyone. You should sign up for one of these plans only after a certified credit counselor has spent time thoroughly reviewing your financial situation, has offered you customized advice on managing your money, and has analyzed your budget to make sure that the proposed DMP is one you can afford. However, remember that many organizations that promote DMP’s fund themselves in part from the money to be paid to the creditors involved. It is important to check with your counselor about how your particular program will be funded and how the credit agency will be paid. Even if a DMP is not appropriate for you, a reputable credit counseling organization still can help you create a budget and teach you money management skills. Consult with your attorney about whether the credit counseling agency should prepare a written budget.

In a DMP, you deposit money each month with the credit counseling organization. Your deposits are then used to pay your creditors according to a payment schedule the counselor develops. Your creditors may agree to lower your interest rates or waive certain fees, but it’s always best to check with all your creditors, just to make sure they have agreed to the concessions that a credit counseling organization is promising you. A successful DMP requires you to make regular, timely payments for several years. Ask the credit counselor to estimate how long it will take for you to complete the plan. You may have to agree not to apply for—or use—any additional credit while you are participating in the plan, A DMP is useless if your financial problems stem from or involve your secured creditors enforcing their lien rights on your personal or real property. DMP’s are also useless if your financial problems stem from alimony, child support or overdue taxes.

The bottom line is this: If all you need is a little lowering of your interest rates on some unsecured debts, a DMP might be the answer . However, if what you really need is to reduce the amount of your debt, bankruptcy may be the only solution.

Notice No. 2

Notice Mandated By Section 527(a)(2) of the Bankruptcy Code

NOTICE OF MANDATORY DISCLOSURE TO CONSUMERS
WHO CONTEMPLATE FILING FOR BANKRUPTCY

You are notified as follows:

1. All information that you are required to provide with a petition and thereafter during a case under the Bankruptcy Code is required to be complete, accurate, and truthful.

1. All of your assets and all your liabilities must be completely and accurately disclosed in the documents filed to commence your case.

1. Some places in the Bankruptcy Code require you to determine and list the “replacement value” of an asset—for instance a car or furniture. When replacement value is required, it means the replacement value, established after reasonable inquiry, as of the date of the filing of your bankruptcy case, without deduction for costs of sale or marketing. With respect to property acquired for personal, family or household purposes, “replacement value” means the price a retail merchant would charge for “used” property of that kind considering the age and condition of the property.

1. Before your case can be filed, it is subject to what is called “Means Testing.” The Means Test was designed to determine if you qualify to file a case under Chapter 7 of the Bankruptcy Code, and if not, how much you need to pay your unsecured creditors in a Chapter 13 case. For purposes of the Means Test, you must state, after reasonable inquiry, your total current monthly income, the amount of all expenses as specified and allowed pursuant to section 707(b)(2)of the Bankruptcy Code, and if the plan is to file a Chapter 13 case for you, then you must state, again after reasonable inquiry, your “disposable income,” as that term is defined in the Bankruptcy Code.

1. Information you provide during your case may be audited pursuant to the provisions of the Bankruptcy Code. Your failure to provide complete, accurate and truthful information may result in dismissal of the case or other sanctions, including criminal sanctions.

Please note: This notice is required by legislation adopted by Congress in 2005 after intense lobbying by the credit industry. These notices are designed to deter people who are filing fraudulent bankruptcies. So long as you are honest and meet the requirements set out under the law, you are entitled to debt relief under the Bankruptcy Code. Your bankruptcy attorney will guide you through the process and through all the requirements of filing bankruptcy, so long as you provide him or her accurate and complete information.