BANKRUPTCY
BASICS
NOTE: None of the information published here should be considered legal advice. Not every case is the same and without an attorney who knows the specifics of your situation, a mistake could cost you dearly. Set up a free consultation with ELC if you want to start the bankruptcy process.
What is Bankrutpcy?
The United States Bankruptcy Code is long and complicated. There are dozens of pages devoted to obscure subjects like special bankruptcy rules for farmers, railroads, and the liquidation of large corporations. These are, no doubt, important areas of law for people in those industries, and if you own a business, ELC is still the place for you. But for the most part the Bankruptcy Code is not relevant for our clients. That’s why we’re here.
Our goal with this website, and with our practice, is to demystify and simplify the process for you. Through our decades of practicing bankruptcy law we have done all the reading so you don’t have to. But that doesn’t mean we want our clients to be total novices.
​
Another goal of our practice is to make sure the benefits of bankruptcy are accessible to everyone. We’ve seen that the complexities of bankruptcy law are often so daunting that people already stuck in an overwhelming situation don’t even see it as an option. That should never be the case, and we’re here to prevent it.
Done reading? Reach out to us and we’ll talk you through what’s relevant to your specific situation.
​
Also be sure to check out our Bankruptcy Dos and Don’ts section where we discuss some potential pitfalls.
​
Again, your best bet is to talk to a bankruptcy attorney, but we’ve found that educating our clients is useful. The information here should break the ice before we get started.
​
In short, the bankruptcy code is divided into chapters, each describing the rules for different types of bankruptcy. The two types most relevant to our clients are Chapter 7 and Chapter 13. The first step is determining which chapter is best for your situation. This is done through what we call a “means test”
What is the means test?
If you and your attorney determine that bankruptcy is your best option for debt relief, the next step will be to determine which chapter to file under. If you read further you’ll get to know that chapter 7 bankruptcy gets rid of more debt, quicker than chapter 13. Because of the huge advantages, bankruptcy law does not provide the chapter 7 option to everyone. The means test is what determines your eligibility.
​
The first step of the means test is to determine if your income falls below the median household income for your area. If you make less per month than that median, you are eligible to file for chapter 7 bankruptcy.
​
But even if you make more than the median household income where you live, the means test is not over. Next we’ll determine what your disposable income is. Your disposable income is calculated by taking your income and subtracting your reasonable monthly expenses. If you don’t have enough disposable income to pay your creditors, then you will likely be eligible for chapter 7 bankruptcy.
​
If the result of your means test is that you’re not eligible for chapter 7 bankruptcy (as in, you have enough disposable income to pay your creditors) then you will still have the option to file under chapter 13. In that case you will pay what you can to your creditors for 3 to 5 years, followed by the discharge of your remaining dischargeable debt.
​
For many people chapter 13 bankruptcy is still a terrific option so you shouldn’t be stressed out about the results of the means test. The court will only require you to pay your creditors what you can while still providing for your family. In fact, even if you’re not eligible for chapter 7 bankruptcy, it might still be in your best interest to take advantage of chapter 13. Your attorney will help you make this choice.
​
Set up a free consultation today and we can conduct a means test for you over the phone!
What is chapter 7 bankruptcy?
With a chapter 7 bankruptcy, with certain exceptions, your debt is discharged usually within 4 months of filing. This means you never have to worry about these debts again, and the creditors can no longer try to collect from you.
In fact, under federal law, creditors are prohibited from contacting you at all from the moment you file your petition. And California law prohibits creditors from contacting you once you are represented by an attorney. So you can get immediate relief from creditor contact as soon as you enter a representation agreement with us and pay at least a portion of the representation fee, even as little as $50. Now that you have a lawyer, your creditors have to contact them instead.
​
And unless the debt is attached to your family home (a mortgage) or a car you wish to keep (an auto loan), then your attorney will advise you to stop making payments once you have made the decision to file a bankruptcy petition.
​
The Petition
​
But wait, what is this “petition” you keep talking about? A petition is a document filed with the court that lets the court know you want to take advantage of the bankruptcy process. It is formally referred to as a "request from relief" from your debts. Preparing and filing the petition is your lawyer’s job.
​
With ELC we have a streamlined, easy to use, digital form through which our clients provide the necessary information for us to prepare the petition. This includes information about your various debts and contact information of your creditors.
​
Do you hate online forms? We are still here for you! The ELC way provides an experience customized for the client. We’ve found that the best way to make sure your information is thorough and correct is through our forms. But we love talking to our clients and never mind getting information your way.
Importantly you will also provide us with information about your assets, like your real estate property and high value personal property, as well as any businesses you own or other forms of income and retirement accounts.
​
But don’t let that scare you. Although Chapter 7 is known as “liquidation” bankruptcy you are unlikely to lose any of your assets in the process. Of course, as always, there are certain exceptions. But the point of bankruptcy is to make you whole and give you a fresh start, not for your creditors to take their “pound of flesh.”
​
It is crucial that your petition contain complete information about all of your financial life. Not only because you are legally sworn to disclose everything to the bankruptcy court, but for your own sake hiding anything could completely derail the bankruptcy process and prevent you from enjoying its benefits.
But that’s why we are here to help you every step of the way. Remember, our aim is to make the bankruptcy process as painless and cost-effective as possible for you. Full disclosure might seem tedious or a bad strategy, but in our decades of experience, putting in the work to thoroughly prepare the petition provides the best possible outcome for our clients.
​
The Trustee and the Estate
​
The next step after filing your petition is that your creditors are notified. As described above this means your creditors cease all collection activity whatsoever. Which means they must stop contacting you and stop any wage garnishments, bank levies, or lawsuits.
​
When your petition is filed your case is assigned to what is known as a bankruptcy trustee. This is a neutral attorney who works for the bankruptcy court and is in charge of processing your petition. The trustee, along with your attorney, deals with your creditors through to your discharge.
​
They are called a “trustee” because, technically, your assets and debts are wrapped up in what is called the “bankruptcy estate.” In legal terms the bankruptcy estate is a “trust” and by filing a bankruptcy petition you are giving the trustee legal authority to manage your debts and assets (i.e. by deciding what assets will be protected and by discharging your debt).
​
The Creditor’s Meeting
​
After your trustee has taken control of your case, and a set time has passed, your trustee will schedule a mandatory meeting between you, your attorney, and your creditors.
​
The purpose of this meeting is to confirm that the information in your petition is complete and correct. With a competent, experienced team like you get with ELC, that has prepared the documentation properly and resolved any issues with the trustee beforehand, this meeting should last only 5-10 minutes. The fact is, again if you have good legal representation, creditors rarely even attend the meeting.
​
The Discharge
​
Sixty days after the creditor’s meeting you take back control of the assets that were protected in the bankruptcy, and the dischargeable debts are wiped away.
​
By “dischargeable” we are referring to the specific types of debt that the law allows to be forgiven through bankruptcy. Obligations like student loans and child support are not dischargeable.
​
Additionally, as mentioned before, your most important assets related to living, working, and supporting your family are protected. For most clients this means everything.
What is Chapter 13 bankruptcy?
As already discussed, the means test determines whether you are eligible for a chapter 7 bankruptcy. Because the benefits of a full and immediate discharge of your debt are so great, in order to prevent people taking advantage of the system, for those who earn above a certain income bankruptcy works a little differently.
​
The early stages of a chapter 13 bankruptcy are nearly identical to those of a chapter 7 filing. The petition is still the way to kick things off, and your assets and debts still become the bankruptcy estate and the estate is assigned to a bankruptcy trustee. And you are still required to attend the creditor’s meeting.
​
Additionally, as with a chapter 7 case, once a chapter 13 petition is filed, your creditors are prohibited from continuing to attempt to collect payments while the petition is being processed.
​
What happens next is what distinguishes a chapter 13 case.
​
The Plan and The Confirmation Hearing
​
Under a chapter 13 bankruptcy filing, instead of your debts being immediately discharged, you and your creditors enter a repayment plan. Now this does not work the same as a payment plan you enter directly with a collection agency or a debt consolidation company.
​
The chapter 13 payment plan is formulated by the trustee, working with your attorney. This plan takes into consideration your assets and income, as well as your living expenses and debts that are not part of the bankruptcy. The purpose is to determine how much you can actually afford to pay each month that would not be too burdensome so as to prevent you from moving on with your life and providing for your family’s needs.
​
Once the trustee determines what you can afford, the plan dictates how much of these monthly payments are dispersed to each of your creditors. You pay the trustee, and they pay the creditors, meaning creditors will continue to be prohibited from harassing you for payment.
​
Your attorney will then represent you in what is called a confirmation hearing, during which the bankruptcy court decides whether to approve the payment plan.
​
The Discharge
​
What? I thought with a chapter 13 bankruptcy means I’m still stuck with my debt? Well you’re in luck.
​
Under chapter 13 after a number of years determined by the plan (usually 3-5), whatever debt is leftover is discharged. The debt is off your books forever regardless of how much was actually repaid through the monthly payments. Compare this to debt consolidation, which may lower your monthly payments but leaves you saddled with your debt until every cent is paid off.
​
And better still than a debt consolidation, this discharge is tax free!
​
If a chapter 13 filing seems like the perfect option for you to reset your financial life. Set up a free consultation today!
Does All of My Debt Really Disappear?
Limitations of Bankruptcy
​
As discussed here the vast majority of the people who call us find that filing for bankruptcy is their most cost-effective and thorough option for debt relief. In fact, often the only regret our clients have is that they did not call us and get the process started sooner. And while we love spreading the word about what bankruptcy can do for people, it is also important for us to educate our clients about its limitations.
​
Non-Dischargeable Debts
​
While bankruptcy is great for wiping out obligations like credit card debt, unsecured personal loans, medical debt, past-due rent, older taxes you owe, and other unsecured debt, bankruptcy law still keeps certain types of debt on your books. Here are a few:
​
-
debts not listed in your bankruptcy petition (with exceptions)
-
debts secured by property (collateral) that you plan on keeping
-
several types of tax debt including penalties and interest owed to the government
-
most educational loans
-
child and spousal support
-
court-ordered money judgments against you for: fraud, criminal matters, malicious and willful conduct, drunk driving, and punitive damages
Credit Reporting
​
Understandably, one of the biggest concerns people have when considering bankruptcy is how it will affect their credit score and their ability to obtain credit in the future. If you’ve been reading our website you know that for our clients the benefits that bankruptcy brings to their financial life easily outweigh the social and ethical stigmas that exist against the process. But how potential future creditors and lenders view bankruptcy can have a very real impact.
​
First, filing for bankruptcy is likely to lower your credit score, and reporting agencies publish information about the bankruptcy itself for 7 to 10 years. While this may make it more difficult to obtain a prime-rate mortgage or car loan, recent bankruptcy filers are often bombarded with credit card offers, although at a higher interest rate at first. Banks know that bankruptcy filers are prohibited from filing for bankruptcy again for seven years, meaning their debts are locked in.
And remember, financial institutions want to get you back in the credit game as soon as possible for their benefit. In today's world you can rehabilitate your credit much more quickly than in the past. It is essentially a hockey stick profile with an initial sharp drop in your credit score followed by a sharp upward climb.
​
It’s also important to note that if you’re like most bankruptcy clients and you’ve already had trouble staying ahead of debt payments, these issues are already reflected in your credit score and bankruptcy should not lower it by as much.
​
Additionally, if your debt issues have already overwhelmed your finances and your ability to obtain new credit, then relief from old debt will give you more space and opportunity to improve your credit score. Paying bills and your mortgage on time while keeping your overall debt load low after bankruptcy is a great way to show creditors that you are now on top of your finances and you can watch your credit rating improve for the first time in years.
​
Unlike what you may have heard about other lawyers, when you reach out to ELC for a free consultation you won’t get the hard sell to file for bankruptcy and start paying legal fees. Instead we will get the big picture of your financial situation and your goals for you and your family. We will carefully and objectively help you weigh the pros and cons of bankruptcy for your case, including whether now is the right time to file or if it’s more prudent for various reasons to delay the process.
​
​
-or-
​
Check out our bankruptcy timeline, and bankruptcy glossary and start making more sense out of the process.
