A “new” bankruptcy law (called BAPCPA) took effect in 2005. The new law contains many complicated changes that affect individuals filing bankruptcy. For example, there are revised eligibility standards that exclude people from CHAPTER 7 who might be able to pay back part of their debts.
Those who can pay something toward their debts are usually required to file under CHAPTER 13 and reorganize. Reorganization requires giving up a part of your future income to pay some or all of what you owe based on what the court decides you should pay.
You are going to need some expert help, but we know that you have questions you’d like answers for right away! So, our Los Angeles Bankruptcy Lawyer is here to explain the “Basics” on getting debt relief in bankruptcy. Click on the arrows to read more about each topic below.
GETTING EXPERT HELP IS NOT HARD TO DO
Most bankruptcy lawyers will give you a free consultation. You should take full advantage of such offers. Bankruptcy is too complicated for you to jump into without getting expert help. Many people do try to 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 and 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 bankruptcy relief should first consult with a knowledgeable attorney who specializes in this field. Our Los Angeles Bankruptcy Lawyer says that 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 bankruptcy relief.
HERE’S HOW BANKRUPTCY WORKS FROM INSIDE THE MIND OF A LOS ANGELES BANKRUPTCY LAWYER
Bankruptcy begins with the filing of a PETITION in the Federal bankruptcy court, seeking relief under one of the various chapters of the Bankruptcy Code. As you will see, there are other important papers and forms that must be filed at the same time.
The moment 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. 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. WE ARE MAKING IT AS EASY AS POSSIBLE FOR YOU TO UNDERSTAND WHAT GOES ON INSIDE A BANKRUPTCY CASE.
This is a simplified guide and we have tried to keep it that way. Because we are only 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.” Our Los Angeles Bankruptcy Lawyer says that some of the concepts mentioned in this Guide are just too complex to be explained at a basic level. The laws and regulations that govern bankruptcy are extremely complicated. Most judges and lawyers don’t understand these laws and rules unless they work on bankruptcy cases every day.
LEON’S TIP: Don’t give up! Money problems can be depressing and frustrating because it often seems that there is no solution that is just right for your circumstances. This is true for folks even after they talk to a lawyer! But no matter how confusing or frustrating it seems, don’t give up! An experienced bankruptcy lawyer will take the time necessary to explain things to you and will help you find solutions! Leon Bayer is a Los Angeles bankruptcy attorney with more than 30 years of experience, and is a bankruptcy Specialist.
WHO SHOULD FILE BANKRUPTCY?
Bankruptcy cases are filed by people who are drowning in debts they can’t afford to pay. About 1.4 million bankruptcy cases have been filed on average each year over the last 10 years. In 2010, a little less than 1.6 million cases were filed. If you are thinking about bankruptcy, you are not alone.
Most cases are filed to discharge credit card debts, medical bills and unsecured credit lines or to stop a foreclosure sale or auto repossession. 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 who file bankruptcy find themselves in financial trouble because of a job loss, divorce, or serious illness. The problems in the economy in recent years have also led to extended periods of job losses or reduced income that are unprecedented in our lifetimes. These are some examples of the circumstances that most people could not foresee at the time they made their financial obligations.
GET FAMILIAR WITH CHAPTER 7 AND CHAPTER 13 CASES
Bankruptcy cases are filed and heard in the United States Bankruptcy Court. Branches of the court are located in almost all major cities. Under the bankruptcy law, humans like us are referred to as “individuals” or “persons” to distinguish them from corporations or other business types.
Most individuals seek relief under one of the two predominant kinds of bankruptcy cases—called CHAPTER 7 and CHAPTER 13. When appropriate, Chapter 7 bankruptcy allows a person to be legally excused from repaying most types of debts (but there are certain exceptions.)
Chapter 13 is generally described as REORGANIZATION. In a Chapter 13 REORGANIZATION, a person pays some or all of his or her debts under a structured payment PLAN carried out under court protection and supervision.
THE NEW BANKRUPTCY LAW:
A “new” bankruptcy law (called BAPCPA) took effect in 2005. The new law contains many complicated changes that affect individuals filing bankruptcy. For example, there are revise eligibility standards that exclude people from Chapter 7 who might be able to pay back part of their debts.
Those who can pay something toward their debts are usually required to file under Chapter 13 and reorganize. Reorganization requires giving up a part of your future income to pay some or all of what you owe based on what the court decides you should pay. The rules governing how this might affect you and the way courts decide these issues are discussed further on in this Guide.
INCOME ELIGIBILITY RULES FOR BANKRUPTCY AND HOW IT AFFECTS YOU
The eligibility rules for bankruptcy divide all bankruptcy filers into two groups—those who have above MEDIAN INCOME and those who have below the MEDIAN INCOME. The first group of filers (above the median income) is subjected to a MEANS TEST.
The MEANS TEST was devised to identify and then exclude from Chapter 7 people 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 with certain hypothetical living expenses. It’s complicated and confusing, so you will likely need help making the calculations and judging whether you qualify for Chapter 7. But we’ll try to explain it briefly here.
Using this calculation, if there would be any leftover income, the law says that person may have to pay the leftover amount to creditors. If the leftover amount is less than $7,025 over the next 60-months (about $117 per month), then you’ll probably qualify for Chapter 7. If the leftover amount is more than $11,725 over the next 60-months, you are presumed “disqualified” for Chapter 7 unless there are special circumstances (see below) that apply to you.
Between the $7,025 leftover amount and the $11,725 leftover amount, there is a gray area that requires your lawyers to make another calculation. We compare this leftover amount to your total unsecured debts (like credit cards and similar general debts) and come up with a percentage. If your leftover amount is less than 25 percent of your unsecured debts, you’ll likely be allowed to file Chapter 7. If your leftover amount is more than 25 percent, you’ll probably be forced to file Chapter 13.
THE BANKRUPTCY LAW USES IRS RULES TO DETERMINE HYPOTHETICAL LIVING EXPENSES:
Under the MEANS TEST (see above), the bankruptcy laws require us to apply HYPOTHETICAL LIVING EXPENSES in cases concerning persons above MEDIAN INCOME. These 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 IN BANKRUPTCY CAN BE APPLIED UNFAIRLY
Under the income eligibility rules, a person’s CURRENT MONTHLY INCOME (CMI) is determined hypothetically. Sometimes this causes unfair results. However, an bankruptcy expert can often beat the means test. Even for high income earners.
Leon’s Tip: High Income Earners can often proceed with a bankruptcy case. But all too often they get wrong advice. We have successfully represented many bankruptcy clients who had been told elsewhere they could not file. The list includes doctors, lawyers, and business executives. Don’t give up on filing bankruptcy if you are a high income earner who needs to file bankruptcy.
Under the rules, 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. This gross amount is divided by six to establish a monthly amount.
For Chapter 7 eligibility purposes, almost any kind of income is included, 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 are excluded from the definition of CMI.
The biggest problem with CMI is that it is calculated on someone’s previous income. The income a person had during the past six months is not accurate in a case where a person no longer has that income. For example, a person may have just lost a job or gone on disability, but he or she might still be excluded from bankruptcy because of the good income earned during the previous six months. [/expand]
HIGH INCOME EXCLUSION WAIVER MAY APPLY TO YOU FOR ‘SPECIAL CIRCUMSTANCES’
The court has the discretion to waive the income eligibility rule in the case of special circumstances. The law defines special circumstances to mean situations such as a serious medical condition or a call to active duty in the U.S. military.
It remains to be seen if the courts will make rulings that broaden the definition of special circumstances to include such common misfortunes as a job loss, death of a spouse, and other serious misfortunes that disrupt or terminate a person’s ability to pay debts. [/expand]
BANKRUPTCY TERMINOLOGY THAT YOU SHOULD KNOW
There is a Glossary of KEY TERMS on this site. But here is a quick summary of some terms you may need to know.
The person who files bankruptcy is called the DEBTOR. A case may be filed by an individual person (that’s a human like you or me), or a JOINT CASE can be filed by a married couple.
Every bankruptcy case is ADMINISTERED by someone called the TRUSTEE. A TRUSTEE is appointed by a branch of the U.S. Department of Justice to investigate the financial affairs of each person who files bankruptcy. The TRUSTEE has very broad powers to recover PREFERENTIAL TRANSFERS of money and other assets that were made before bankruptcy by an insolvent debtor. These powers also allow a TRUSTEE to recover FRAUDULENT TRANSFERS of assets, to sell NON-EXEMPT ASSETS of the debtor, and even seek the DENIAL OF DISCHARGE or a DISMISSAL of the bankruptcy on the grounds of debtor ABUSE.
Every DEBTOR is required to attend a hearing conducted by the trustee and answer questions under oath about their financial affairs. The TRUSTEE can require the debtor to supply copies of the debtor’s financial records, such as bank statements, cancelled checks and tax returns in order to help the TRUSTEE to investigate the case.
The TRUSTEE is paid with a portion of the debtor’s filing fee, plus additional compensation paid out of assets recovered or sold by the TRUSTEE. The trustee is not a judge. Every bankruptcy case is assigned to a BANKRUPTCY JUDGE who will make rulings if necessary when any type of controversy arises.
Most bankruptcy cases pass through the legal system without any controversy and will never be reviewed by a judge.
FILING FEES AND COSTS
The court charges a filing fee for each bankruptcy petition. As of 2015, the filing fee is $335.00 for a Chapter 7 case, and $310.00 for a Chapter 13 case. Filing fees are subject to change, and can be determined from the web site of your local bankruptcy court. Here is the website of the Los Angeles Bankruptcy Court is which always has current information on fees and links to all other Federal Courts. [/expand]
DUTIES OF THE DEBTOR IN A BANKRUPTCY CASE
Every person filing bankruptcy is required to submit and sign under penalty of perjury a very complex set of financial data called BANKRUPTCY SCHEDULES. These documents include a listing of all debts (even debts you intend to keep paying such as car payments and house payments), all assets of every kind, no matter what it is, no matter where it is, and certain other detailed information about the person’s financial affairs.
The debtor is required to provide all of their income records for the prior 60 days. In addition, the debtor must appear and answer questions under oath at an examination conducted by the TRUSTEE, submit a copy of their most recent tax returns (or in a Chapter 13 case, copies of tax returns for the last four years) and submit a schedule identifying all secured consumer debts. This last schedule requires you to state how you propose to treat those secured debts and whether you intend to keep the collateral (such as a car) that secures the debt. [/expand]
DIFFERENCES BETWEEN CHAPTER 7 AND CHAPTER 13
Here’s an easy way to understand the workings of Chapter 13 and Chapter 7. Each Chapter provides very different kinds of bankruptcy relief. Each Chapter has different rules concerning what property you might be allowed to keep and what debts you might be allowed to erase.
To understand why you might select one Chapter over the other, take a look at Chapter 7, see what it does, and see what happens in a typical Chapter 7 case. Then we will compare Chapter 7 to the relief afforded under Chapter 13.
But first, take a quick look at the next topic in line–the AUTOMATIC STAY that will benefit debtors no matter what Chapter they choose.
GOT A QUESTION? IT’S OK TO CALL AND ASK US. ASK FOR LEON OR JEFF. THE TOLL FREE BANKRUPTCY HOTLINE IS 800-477-3111.