Bankruptcy Still Works - A guide to the new bankruptcy laws

Authors:
LEON D. BAYER
Partner: Bayer, Wishman & Leotta
JEFFREY WISHMAN
Partner: Bayer, Wishman & Leotta

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Always get expert help. Bankruptcy is too complicated for you to jump into this without getting expert help. Many people do try file on their own, without an attorney. However, many of the "do it yourselfers" will make serious, costly mistakes that could have been avoided by an experienced bankruptcy law expert.

The laws are very complicated. The laws and rules governing bankruptcy cases are extremely complex. The purpose of this Guide is to offer you a simplified basic understanding of consumer bankruptcy laws. Self help books, and non-lawyers calling themselves paralegals or legal document preparers are no substitute for having the help of someone with the legal training, experience and analytical ability that only an experienced bankruptcy attorney can bring to your case.

Consult an attorney. Any person considering the possibility of seeking bankruptcy relief should first consult with a knowledgeable attorney who specializes in this field. Many people will hurt themselves and make costly legal mistakes by going into a bankruptcy case without an attorney, or by retaining an attorney who is not a specialist - mistakes which an expert may have easily avoided. Often, these mistakes are irreversible, and may result in the loss of your property and sometimes even result in the denial of the bankruptcy.

Caveat: Bankruptcy is an absolutely incredible legal remedy for people with debt trouble. It really can give a fresh start, if you play by the rules! However, inexperienced people can't help but trip over the maze of those rules and regulations.

How bankruptcy works. Bankruptcy begins with the filing a Petition in the Federal bankruptcy court, seeking relief under one of the various chapters of the Bankruptcy Code. As soon as the Petition is filed, the bankruptcy law imposes an automatic stay, which operates as a restraining order against the creditors. In most cases this stops bill collectors from bothering you, lawsuits, foreclosures, even the IRS, and it creates a cooling off period while the court system sorts things out. When a bankruptcy is successfully completed, the court issues a discharge. A discharge is a permanent order from the court enjoining creditors from trying ever again to collect on a debt that has been discharged.

Don’t get discouraged. This is a "simplified guide", and we have tried to keep it that way. In the interest of presenting a basic overview, we have chosen to skip certain complex details that are still important to legal professionals and to the courts. Don’t be disappointed if you don’t always "get it." Some of the concepts discussed in this Guide are just too complex to be explained at a basic level. The laws and regulations that govern bankruptcy law are extremely complicated. Most judges and lawyers who work outside the field of bankruptcy don’t even understand these very well.

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Who files bankruptcy? Bankruptcy cases are filed by people who are drowning in debts they can’t afford to pay. There were about 2 million bankruptcy cases filed in the year 2005. If you are thinking about bankruptcy, you are not alone. Most cases are filed to discharge credit card debts, stop a foreclosure sale, auto repossessions, medical bills and unsecured credit lines. Even income taxes can be discharged under certain circumstances. Most people make financial obligations they are able to afford at the time they incur them. Later on, sometimes years afterwards, unforeseen circumstances can make debt repayment an extreme hardship if not an impossibility. Many of the people who have filed bankruptcy found themselves in a debt problem because of a job loss, divorce, or serious illness. These are some examples of the circumstances that most people could not foresee at the time they made their financial obligations.

Chapter 7 and Chapter 13. Bankruptcy cases are adjudicated in the United States Bankruptcy Court. Branches of the court are located in almost all major cities. Most individuals will generally seek relief under either of two different kinds of bankruptcy cases, called Chapter 7 and Chapter 13.

In appropriate cases, Chapter 7 bankruptcy allows a person to be legally excused from repaying most kinds debts, (but there are certain exceptions.) Chapter 13 is generally described as Reorganization, where a person pays some or all of their debts under a structured payment plan carried out under court protection and supervision.

New eligibility rules. The eligibility rules divide all bankruptcy filers into groupings of those who have above-median income and those who have below the median income. Those who have above-median income are subjected to a "means test." The means test was devised to identify and then exclude from chapter 7 bankruptcy those filers who may be able to pay back some of their debts. The means test uses a calculation that combines a person’s real living expenses and certain hypothetical living expenses. The combined real and hypothetical expenses are then subtracted from a person’s "current monthly income" to see if there is any "projected disposable income" left over to pay creditors. If there would be any left over income, the law says that person may have to pay the "left over" amount to creditors if the amount left over is enough to pay general creditors during a 60 month time period: $10,000; or 25% or $6000 of the general debts, whichever is greater.

IRS Rules are used to determine what a person’s living expenses should be. In a case concerning someone with above-median income, the hypothetical living expenses are drawn from what the IRS uses as a "collection standard." The IRS collection standards are used by tax collectors to determine how much money they will take from delinquent tax payers. These collection standards have very little flexibility and the imposition of these standards may result in unfairly penalizing a person who really can’t afford to pay any part of their debts.

The high-earner exclusion can be applied unfairly. Under this law, a person’s "current monthly income" is determined hypothetically. Current monthly income, called "CMI" is defined as the gross income (before taxes) from any source received during the six month period ending in the calendar month prior to bankruptcy filing, (divided by six to establish a monthly amount). For chapter 7 purposes, almost any kind of income is considered, (except Social Security payments and income such as payments to victims of war crimes). For chapter 13 purposes, income from Social Security, child support, and payments made into most kinds of retirement plans is excluded from the definition of "CMI." The big problem with CMI is that it is calculated on someone’s previous income. The income a person had during the past 6 months is not accurate in a case where a person no longer has that income. A person may have just lost their job or gone on disability, but they might still be excluded from bankruptcy because during the previous six months, they enjoyed an excellent income (even though they don’t have it anymore).

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Attorneys at Law
888 S. Figueroa Street, Suite 1970
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