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Law Office of

Peter N. Hadiaris

23 Pleasant Lane, San Rafael, CA 94901

Voice: (415) 694-0052 Email:peter@hadiaris.com

What is bankruptcy law?

Bankruptcy is a federal law that allows individuals, married couples, and businesses to eliminate or restructure their debts when they have financial difficulties. Because it is a federal law, it applies throughout the United States. However, it incorporates certain aspects of state law, so the procedures and benefits can vary from state to state.

What type of bankruptcy is best for me?

That depends on your financial situation and what you want to accomplish. Bankruptcy law provides for several different types of bankruptcy, called "chapters," because the various provisions that govern them are contained in different chapters of the Bankruptcy Code. These are:

Chapter 7 - also known as "straight bankruptcy." In this chapter, a trustee is appointed to examine your case and collect non-exempt assets and sell them for your creditors, and your debts are discharged. This chapter is used by most consumers who want to eliminate credit card debt and other past due bills. For most consumers who have no significant assets, the case takes about four to five months from beginning to end.

Chapter 13 - also known as a "wage earner's plan." In this chapter, the trustee collects monthly payments according to a plan you file and the court approves. These payments are then distributed to creditors in accordance with the priorities of bankruptcy law and your plan. This chapter is used primarily by people who are behind in their mortgages or car payments, have too high an income to qualify for chapter 7, have assets they would need to surrender in a chapter 7, or have debts such as some taxes that cannot be eliminated in a chapter 7 case. The case remains open for three to five years.

Chapter 11 - also known as a "reorganization." In this chapter, there is no trustee unless the court decides to appoint one. You or your creditors can propose a plan to reorganize your debts, which your creditors and the court approve. Chapter 11 cases are very complicated and expensive, and are used primarily by businesses. Generally, only individuals with very large mortgages use chapter 11 instead of chapter 13. Chapter 11 cases generally remain open for about one year.

Chapter 12 - This chapter is very similiar to chapter 13, only it allows for payments to be made quarterly or annually instead of monthly. This chapter is limited to family farmers, and is designed to accommodate their needs because they receive their income annually when the crop comes in, rather than monthly.

Chapter 9 - This chapter is for municipal debt reorganizations, such as Orange County's case. Only municipalities can file under this chapter.

Chapter 15- This chapter is for cases ancillary to a bankruptcy proceeding in a foreign country.

How do I know if I qualify for bankruptcy?

There are few legal "qualifications" for filing bankruptcy. What is more important is whether one form of bankruptcy or another can fulfill your needs.

If you have a previous bankruptcy case dismissed within the past six months, there are some limitations on your right to re-file your case. A debtor in a chapter 7 case will not have his debts discharged if he or she received a discharge in a previous case filed less than eight years ago. In addition, the court may dismiss a chapter 7 case if the debtor has the ability to fund a chapter 13 plan and the court thinks the case is abusive.

The 2005 amendments to the Bankruptcy Code have made it more difficult for debtors with incomes over the state median to qualify for chapter 7 instead of 13. Chapter 13 cases are limited to individuals and married couples who have a regular income to make monthly payments, and debts totalling less than $419,275 unsecured and $1,275,850 secured. A previous discharge in a case filed less than four years ago will also prevent a new discharge.

Chapter 12 cases are limited to family farmers, and chapter 9 cases are limited to municipalities. There are also some esoteric rules governing certain types of businesses such as railroads and stockbrokers.

The 2005 amendments to the Bankruptcy Code added a requirement that most individuals receive counseling from a non-profit credit counselor before filing bankruptcy. The cost is usually $25 or less, and the course may be taken over internet or telephone. I can provide you with a list of the counseling agencies by e-mail.

How will bankruptcy affect my credit? Can I keep my credit cards?

Well, it's not good. A bankruptcy filing is a highly negative mark on a credit report. It will stay on your report for ten years. It will make it more difficult, but not impossible, to obtain credit. It generally makes little difference what chapter you file.

There are some good places to start to rebuild your credit. First, most department stores and some banks will let you keep their credit card if you reaffirm the debt you owe them and pay them anyway. Many retailers will extend small credit lines to people with recent bankruptcy discharges. Also, there is a growing segment of the Visa and Mastercard market which caters to poor credit risks - with security deposits, astronomical interest rates, and high fees. If you reaffirm a vehicle loan to keep the car, or have nondischargeable debts like student loans, continued payments on these accounts will appear on your credit report and help rebuild your credit.

Another possibility is that you may be able to keep a credit card with a zero balance when you file. Since these cards have no debt, they are not listed on your filing and do not receive notice of your bankruptcy. However, many of these creditors will find out about the bankruptcy because they subscribe to a service that tracks filings, or they periodically recheck your credit. This method usually works for department store and retailer cards, sometimes works with Visas and Mastercards, and does not work with American Express.

If you need a car loan after filing bankruptcy, expect to pay credit card rates. If you intend on buying a home, mortgage financing will be difficult and interest rates higher than normal. If you need credit, the extra costs incurred need to be considered when deciding whether to proceed with your bankruptcy.

Will bankruptcy affect my job or business?

It shouldn't affect employment with a third party. The Bankruptcy Code prohibits employers from using a bankruptcy as the sole basis for making employment decisions, even if a debt to the employer is discharged.

With businesses, the situation is more complicated. In chapter 11 and 13 cases, you maintain control of your assets, and there is generally no interference with your operation of the business as long as you maintain insurance and comply with your obligations as a debtor. In chapter 11 cases, the court can appoint a trustee if it is unhappy with your progress in reorganizing, which may result in closing or losing control of the business.

In chapter 7 cases, you can normally keep operating the business as long as you can claim as exempt all the assets you use in the business. It helps if the business is a solely owned corporation or LLC, since you only need to claim the stock as exempt, not all the corporation's property. Even with sole proprietorships, you can usually continue to operate using exempt property.

That said, I have had three cases in almost thirty years where trustees have insisted that the debtors close businesses in chapter 7. Usually the closure is temporary. There is no rhyme or reason that I can discern about why these three cases (out of dozens) were selected. For example, one case involved a restaurant, but I have represented other restaurant owners who filed for chapter 7 and kept their restaurants open during the case.

Will bankruptcy affect my ability to get student loans?

No. The Bankruptcy Code prohibits lenders from considering a bankruptcy in making decisions on applications for federally guaranteed student loans, even if a debt to the lender was discharged.

Will bankruptcy affect my ability to rent an apartment?

Yes. Many landlords check a prospective tenant's credit. Some landlords are only interested in whether there are any evictions shown, but many will reject your application, particularly if the rental market is tight. Your best chance is to apply at smaller properties managed directly by the owner, who may rely more on his or her personal impression of you, and to have good references from previous landlords in hand.

What property can I keep if I file for bankruptcy?

In chapter 7 cases, the law provides that you can keep certain property despite filing bankruptcy. These provisions are called "exemptions," and vary from state to state. In California, you can choose between either of two sets of exemptions. Both sets protect pension plans, social security benefits, IRAs and SEPs depending on your needs, some equity in motor vehicles, and ordinary household goods and personal effects. Under one scheme, you can keep up to $21,825 in any other property. Under the other scheme, you can protect between $75,000 and $175,000 of your equity in your home. Each scheme also has minor provisions establishing small amounts of other types of property you can protect, such as jewelry, tools of your trade, or art work.

In all chapters except chapter 7, you keep all your property. Instead, the value of your non-exempt property is considered in establishing how much of your debt you need to repay.

Although some other states provide for greater homestead protections, California's exemption scheme as a whole is quite generous to debtors.

If you have lived in California for less than two years, your exemptions are determined according to the law of the state where you lived two to two and one-half years ago.

What debts can I eliminate through bankruptcy?

After you file bankruptcy, your debts are eliminated through a legal order called a "discharge." In a chapter 7 case, you receive the discharge about three to four months after filing the case. In chapter 12 and 13, you receive the discharge when your payment plan is complete. In chapter 11, you receive the discharge when your plan is approved by the court. In order to qualify for the discharge, you must complete a personal financial management course after your case is filed. This is a second course distinct from prefiling credit counsiling, but the cost is similar.

Chapters 7, 11, and 12 result in the basic discharge with the most exceptions. This discharge does not affect:

  • sales and employment taxes;
  • income taxes, unless
    • the tax return was due three years ago;
    • the tax return was filed two years ago; and
    • the taxes were assessed at least eight months ago;
  • alimony, child support, and most marital property settlements;
  • debts incurred through fraud, embezzlement, or intentional injury, including credit card charges made without the intent of paying them;
  • student loans, unless the court determines that requiring payment would create an undue hardship;
  • debts for death or personal injury incurred through driving while under the influence of alcohol or drugs;
  • debts incurred to pay non-dischargeable taxes;
  • homeowner's dues accruing after the case is filed;
  • fines and penalties payable to a governmental unit
  • federal criminal restitution obligations;
  • debts not listed on your schedules, if and only if the creditor did not find out about the case in time to file a claim and receive a payment from the trustee or to ask the court to determine that the debt was a non-dischargeable marital property settlement or incurred through fraud, embezzlement, or intentional injury;
  • debts secured by collateral, but only to the extent that the creditor seeks to take the collateral and apply it to the debt.

Chapter 13 results in a slightly broader discharge if payments are completed.

What happens when I file for bankruptcy?

Your case starts when you file your bankruptcy petition with the court. Unless you have filed multiple cases in the previous year when the petition is filed, the "automatic stay" goes into effect. This stay is the equivalent of a court order which enjoins collection of your debts without the permission of the bankruptcy court. It prohibits dunning letters, telephone calls, repossessions, foreclosures, garnishments, and further court proceedings against you. As a practical matter, of course, you need to let creditors know about the filing to get them to stop bothering you. They will usually want a copy of the petition or information about the filing like your case number, to make sure that you really filed and are not just saying you did to get them to stop trying to collect.

If the petition is not accompanied by the schedules, statement of affairs, and other required financial disclosures, they must be filed within fourteen days. These disclosures list all your assets, liabilities, income, and expenses, and contain other information about your financial affairs. You also need to provide the trustee with a copy of your last tax return, and any other information he requests.

After the case is filed, the court sets a time for your meeting of creditors. There will be many other cases set for the same time as well. The meeting will be at the Office of the US Trustee, a division of the Department of Justice, and not at the court. You need to attend this meeting to answer any questions the trustee has about your case. You need to bring picture identification and your social security card. Usually, the trustee will ask if you have moved from your address listed on the papers, and if you read your papers and listed all your assets and debts. He may ask other questions as well. In chapter 7 cases, there is usually an information sheet distributed at the meeting which the trustee wants you to read. Creditors may attend and ask questions also, but rarely do so because of time constraints the trustee imposes due to the number of cases on the calendar.

In a chapter 7 case, the trustee collects or sells any non-exempt property, and distributes the money to creditors. In a chapter 13 case, you begin making payments to the trustee thirty days after your case is filed, and before your plan is approved by the court. If creditors or the trustee object to the plan, you may change the plan or ask the court to rule on the objections. Once a plan is approved by the court ("confirmed"), the trustee will begin disbursing money to creditors.

In both chapter 7 and chapter 13 cases, there may be other court proceedings as well. Creditors may file complaints with the bankruptcy court to preserve their debts if they feel you defrauded them, and you may need to defend those cases. Creditors may ask for permission to foreclose or repossess property ("relief from the automatic stay") under some circumstances, for example.

In order to receive your discharge, you need to complete a personal financial management course provided by a non-profit credit counseling agency. Most people use the same agency they used for their first course.

Will bankruptcy affect my immigration status?

In my experience, my clients have not reported any problems with immigration because of a bankruptcy.

Should I try a non-profit consumer counseling service first?

Many bankruptcy attorneys advise against using non-profit consumer counseling services like CCC. I think they can be very helpful, but consumers need to understand their limitations.

First, the small fee you pay with each payment does not come close to covering their budget. Most of their funding comes from grants from credit card companies, usually a percentage of their collections. This creates a conflict of interest which some services do not disclose.

Second, the debt relief they provide is not as complete as a bankruptcy. You can usually get some or all future interest forgiven, but little else.

Third, the budgets they provide to you are usually extremely tight. There is little allowance for unexpected expenses like car repairs or medical bills.

Fourth, the damage to your credit is almost as bad as a bankruptcy. By the time most consumers would finish repayment, a bankruptcy case would have finished, and you could be on your way to rebuilding your credit.

Generally, consumer credit counselors are a good bet if you meet three criteria: (1) your only financial problem is overdue credit cards; (2) you have extra income that would allow you to pay off the cards over two to three years, without finance charges; and (3) you expect to need a good credit report to buy a car or house within the next few years.

Should I file bankruptcy without an attorney?

Many people file bankruptcy without the assistance of an attorney. Some save a few hundred dollars; some live to regret it. People have been known to lose their houses because they filed under the wrong chapter, have their cases dismissed due to procedural mistakes, make improvident agreements with their creditors which cost far more than an attorney, or pay attorneys a lot more to fix problems instead of prevent them. Some people successfully file chapter 7 without an attorney, but very, very few of the people who file chapter 13 without an attorney succeed, and it is virtually unheard of for a chapter 11 case to succeed without an attorney.

Some people hire "bankruptcy petition preparers" to assist them. These preparers are paralegals who know how to type the papers up. They are not supposed to give legal advice, like helping you decide which chapter to file, but most of them do anyway. The court limits their fee to $150.00, and they are not supposed to collect the filing fee from you.

My opinion, at least, is that if you are not sophisticated enough to type up the papers yourself using the Nolo Press book, you should hire an attorney. Some of these preparers will promise to have an attorney review your papers, but without a personal interview this has almost no value.

But then, my opinion is that most people should hire an attorney anyway. Generally speaking, you should only consider foregoing an attorney if you are filing under chapter 7, have under $10,000 in debts, all of which are at least six months old; you rent; you have no significant financial assets whatsoever; you mske under the median income for your family size; and you feel comfortable doing the paperwork yourself.

You should definitely, positively, unquestionably, and indubitably hire an attorney if you are trying to save your house from foreclosure, you have recent charges on credit cards or very large credit card bills, or you need to determine if student loans and taxes are dischargeable.