Bankruptcy (For Debtors Only)

The decision whether to file for bankruptcy is often fraught with fear and shame. It doesn’t need to be. In fact, it shouldn’t be. Consider this: If Thomas Jefferson filed for bankruptcy protection (and he did), it might behoove you to toss out the moral guilt and consider your situation anew. Don’t buy in to the myth that “debtors” are “deadbeats.” That is simply propaganda from Wall Street financial institutions. If you’d like some perspective on this, Senator Bernie Sanders from Vermont wrote an insightful article in 2004 while he was a member of the House of Representatives, called the “Great Credit Card Scam.” I remember seeing it on Yahoo! then and believe it is faithfully reprinted here.

A friend once told me that “The best decisions are usually made on more complete information.” What you probably need now is a little more information.

Alternatives

Have you considered alternatives to bankruptcy? The first thing you should do is closely review your financial situation and determine what alternatives are available. Sometimes the financial stress you’re experiencing can be reduced or eliminated without filing for bankruptcy. For example, if you’re facing foreclosure on your home, you might arrange to refinance, sell it, negotiate an extension with your current lender or take other action. If you are a defendant in a lawsuit, there are many ways to resolve the suit for less than you might think and arrange for payment over time. There are as many alternatives as there are people with financial problems. And, if you do determine that bankruptcy is the best alternative, bankruptcy planning is just as important as tax or financial planning. Do it well before you file rather than after.

You probably should consider seeing a lawyer who is knowledgeable about debtor/creditor law. This would include for example, one who is experienced in bankruptcy law, collections, security interests and financing, and real estate. A great source of referrals is the National Association of Consumer Bankruptcy Attorneys.

Bankruptcy is Not a Moral Decision

There are myriad reasons for filing a business or personal bankruptcy, or taking other actions to reorganize or discharge debts. Among them are an unexpected judgment or lawsuit, job loss, a cancelled revolving line of credit with your bank, rising production costs, union contracts, an illness that resulted in huge medical bills, or as is the case for millions of homeowners, a variable rate mortgage that ratcheted up while the value of your home decreased, placing refinance out of reach.

Don’t Feel Guilty

Let’s also put this in perspective. In England, a debtor who couldn’t pay his debts could be thrown into prison – “debtor’s prison.” The U.S. Constitution grants Congress the power to establish bankruptcy laws. You shouldn’t feel guilty about using them. And, you’d be surprised who else already has.

You’re in Good Company

Consider some of the companies that have filed for bankruptcy protection. K-Mart, Pacific Gas & Electric Company, Dow Corning Company, Texaco, Napster, PanAm Airways, Inc., Converse, Delta Airlines and the Singer Company. Not to be outdone, the list of individuals who have filed for bankruptcy is just as impressive: Thomas Jefferson, Henry Ford, Ulysses Grant, Marvin Gaye, Merle Haggard and Walt Disney to name just a few. These companies and individuals made a decision to use the bankruptcy laws to their benefit. It was simply a calculated decision based on the best course of action and alternatives.

How Does Bankruptcy Work?

The overriding purpose of the Bankruptcy Code (the “Code”) is to give a fresh start to an honest but unfortunate debtor who cannot otherwise reasonably be expected to pay his debts. A corollary is that a valuable business that contributes to society should not have to be dissolved due to an unexpected or aberrational financial situation. Nearly everything in the Code reaffirms these global policies.

Corporate debtors normally will file for bankruptcy under Chapter 11 in which the estate attempts to reorganize while creditors are largely held in abeyance by the automatic stay. A corporation that files for protection under Chapter 7 (a liquidation) will not normally receive a discharge, because none is necessary after a liquidation.

The question is a little more involved for individuals. The first question is whether the individual debtor can reasonably be expected to pay his debts back. If so (under a recently implemented but somewhat arcane calculation called the “means” test), the typical debtor is required to file a bankruptcy under Chapter 13 (a “wage earner plan”) or Chapter 11 (a reorganization plan) in which future income may be used to help pay the debt. If it appears the debtor does not have the means to repay, a petition under Chapter 7 (liquidation) is often filed.

What is Involved?

In general, an individual who files for bankruptcy under Chapter 7 gives non-exempt assets to a trustee who pays the creditors in return for a discharge of the bankrupt’s listed pre-petition debts. Non-exempt assets include those in excess of what is reasonably necessary and reasonable to retain, including amounts for a car, tools of the trade and basic necessities of a reasonable life.

For policy reasons, some debts may not be dischargeable. Some examples are debts arising from:

  • family support obligations such as child support or alimony;
  • fines, penalties and forfeitures to governmental units;
  • educational loans backed by governmental units unless not discharging the debt would work an undue hardship on the debtor;
  • debts arising from injury or death caused by the debtor driving while intoxicated;
  • criminal restitution judgments;
  • HOA fees arising post-petition; and
  • some loans from retirement plans.

Other debts may be held non-dischargeable if the bankruptcy court finds the debt was incurred by:

  • willful and malicious conduct (you can’t punch someone and then hide behind bankruptcy laws);
  • actual fraud or embezzlement; or
  • false loan applications or other writings intended to deceive the prospective creditor (don’t charge up a credit card knowing you’re going to file for bankruptcy the next day).

Going through bankruptcy can be daunting, but with proper guidance it can be made easier. It can involve as little as attending some financial counseling classes, assembling lists of creditors, income, debts and assets, filing the petition and accompanying schedules, attending a meeting of creditors, then attending some more financial counseling classes and receiving a discharge. Some additional papers might be filed depending on additional facts such as whether you own your home or are leasing a car and whether you want to reaffirm these agreements.

If you’re thinking about filing your own case without using a lawyer, and you live within the boundaries of the Northern District of California, you should review the local Bankruptcy Court’s website and its webpage for “pro per” filers.

Among providing other legal services, The Law Offices of Brian Irion is a debt relief agency, providing assistance for debt relief, including possible bankrutpcy.