What is bankruptcy?
What can bankruptcy do for me?
What bankruptcy cannot do.
What different types of bankruptcy cases should I consider?
What property can I keep?
What will happen to my home or car if I file?
Can I own anything after bankruptcy?
Will bankruptcy wipe out all of my debts?
Will I have to go to Court?
Will bankruptcy affect my credit?
What else should I know?
Should I hire an attorney?

 

What is Bankruptcy?
Bankruptcy is a legal proceeding in which a person who cannot pay his or her debts can get a fresh financial start.  The Supreme Court described the fresh start goal of bankruptcy as follows:

“It gives to the honest but unfortunate debtor…a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.”

Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934).

What is the Bankruptcy Code?

The right to file for bankruptcy is provided by federal law, and all bankruptcy cases are handled in federal court.  Article I, Section 8, of the United States Constitution authorizes Congress to enact "uniform Laws on the subject of Bankruptcies." Under this grant of authority, Congress enacted the "Bankruptcy Code" in 1978. Debtors seeking personal bankruptcy protection in south Alabama will utilize Alabama law to exempt property they would like to keep after filing for bankruptcy. However, the majority of the bankruptcy process will be governed by federal bankruptcy law. Bankruptcy legislation changed dramatically in 2005 with the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). Today’s Bankruptcy Code is more complex than ever before, making it important to hire a knowledgeable bankruptcy attorney.

What Procedures are followed in Bankruptcy?

The day to day activities of bankruptcy courts are governed by the Federal Rules of Bankruptcy Procedure which contain a set of official forms to be used in bankruptcy cases across the country. In addition to the standard Bankruptcy Rules which are uniform nationwide, each jurisdiction publishes its own local bankruptcy rules which set out filing requirements and preferred document formats for each court. Together, the Bankruptcy Code and Bankruptcy Rules (and local rules) set forth the formal legal policies for dealing with the debt problems of individuals and businesses.

What is the Bankruptcy Court?

There is a bankruptcy court for each judicial district in the country. Each state has one or more districts. Alabama has 3 districts, the Southern, Middle and Northern District Courts. South Alabama, Baldwin County and Mobile County bankruptcy filings are handled by the United States Bankruptcy Court for the Southern District of Alabama.

What is the Bankruptcy Trustee?

While it is the United States bankruptcy judge who has the power to adjudicate all matters before the bankruptcy court, such as whether a debtor is entitled to a discharge, much of the bankruptcy process is administrative. In Chapter 7 and Chapter 13 personal bankruptcy cases, a trustee is appointed to oversee the bankruptcy process. The trustee is vested with authority to administer the bankruptcy estate, liquidate property to satisfy the claims of creditors as well as the authority to review a debtor’s bankruptcy petition for evidence of fraud and compliance with the law.
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What can bankruptcy do for me?
First, filing bankruptcy immediately stops all of your creditors from seeking to collect debts from you, at least until your debts are sorted out according to the law. 
Bankruptcy may make it possible for you to:

1. Eliminate the legal obligation to pay most or all of your debts.  This is called a “discharge” of debts.  It is designed to give you a fresh financial start (see “Eliminating Debt - the Bankruptcy Discharge”).
2. Stop foreclosure on your house or mobile home and allow you an opportunity to catch up on missed payments. (Bankruptcy does not, however, automatically eliminate mortgages and other liens on your property without payment.
3. Prevent repossession of a car or other property, or force the creditor to return property even after it has been repossessed.
4. Stop wage garnishment, debt collection harassment, and similar creditor actions to collect a debt.
5. Restore or prevent termination of utility service.
6. Allow you to challenge the claims of creditors who have committed fraud or who are otherwise trying to collect more than you really owe.

Eliminating Debt - the Bankruptcy Discharge

The goal of most bankruptcy filings is to obtain a discharge of debts. At the conclusion of a bankruptcy case, the debtor is relieved from his or her personal obligation to pay debts that were included in the bankruptcy case. A discharge in bankruptcy prohibits creditors from ever taking any action against you to collect those debts and permanently prohibits creditors from contacting you regarding the discharged debt.  Your financial slate is literally wiped clean.
When does the discharge occur?

The timing of the bankruptcy discharge will depend on the chapter under which the debtor proceeds. In a Chapter 7 case, for example, the court usually grants the discharge only a few months after the filing of the bankruptcy petition with the bankruptcy court.  The only obstacle to such a rapid discharge is the filing of a complaint by a creditor objecting to the discharge. The filing of such a complaint will initiate what is called an adversary proceeding, which is essentially a civil suit under the jurisdiction of the bankruptcy court in which the debtor’s right to a discharge will be adjudicated. Certain debts, such as debts incurred by fraud, are not dischargeable in bankruptcy and can cause litigation.

In individual Chapter 11 cases, and in cases under Chapter 13 (adjustment of debts of an individual with regular income), the court generally grants the discharge soon as practicable after the debtor completes all payments under the plan. Since a Chapter 13 plan may provide for payments to be made over three to five years, the discharge typically occurs about four years after the date of filing. Generally, a Chapter 13 debtor must complete their payment plan before debts are discharged. However, in limited circumstances, Chapter 13 debtors may appeal to the bankruptcy court for an early discharge before completion of the plan known as a “hardship discharge.” Such a discharge is available only to a debtor whose failure to complete plan payments is due to circumstances beyond the debtor's control. For example, an individual who files for Chapter 13 bankruptcy may lobby the court for an early discharge after losing his job.

Further, the court may deny an individual debtor's discharge in a Chapter 7 or 13 case if the debtor fails to complete “an instructional course concerning financial management” after filing bankruptcy. The financial management course is separate from the credit counseling requirement which is a pre-filing requirement. However, the Bankruptcy Code does provide limited exceptions to the “financial management” requirement if the U.S. trustee or bankruptcy administrator determines there are inadequate educational programs available, or if the debtor is disabled or incapacitated or on active military duty in a combat zone.

Unless a creditor initiates an adversary proceeding in opposition to the discharge, the discharge will take place automatically by order of the bankruptcy court. The Federal Rules of Bankruptcy Procedure provide for the clerk of the bankruptcy court to mail a copy of the order of discharge to all creditors, the debtor, the U.S. trustee, the trustee in the case, and the debtor’s attorney. The notice, which is simply a copy of the final order of discharge, informs creditors that the debtor’s obligations to them have been eliminated and that they are prohibited from further contact with the debtor. Creditors who contact debtors after receiving such notice may be held in contempt of court. Any inadvertent failure on the part of the clerk to send the debtor or any creditor a copy of the discharge order promptly within the time required by the rules does not affect the validity of the order granting the discharge. However, failure to include a creditor in the mailing matrix at the outset of the bankruptcy case will prevent that creditor’s claim from being eliminated through the bankruptcy process. For example, an individual filing for bankruptcy in south Alabama will be unable to discharge an obligation to Alabama Power Company if Alabama Power is not listed on the petition mailing matrix.

What debts are eligible for discharge?

The ability to discharge debts by filing bankruptcy varies depending on the chapter. Section 523(a) of the Bankruptcy Code specifically specifies various types of debts as ineligible for discharge. Congress has determined that public policy should prohibit the discharge of certain debts. For example, the legislature does not want to encourage drunk driving or fraud, so therefore will not allow debts incurred through those acts to be discharged in bankruptcy. Debts excluded from discharge by 523(a) are not affected by filing bankruptcy and will still be owed after the discharge of eligible debts.

A Chapter 13 bankruptcy allows more debt to be discharged than a Chapter 7 bankruptcy. Debts dischargeable in a Chapter 13, but not in Chapter 7, include debts for willful and malicious injury to property, debts incurred to pay non-dischargeable tax obligations, and debts arising from property settlements in divorce or separation proceedings.

Does the debtor have the right to a discharge, or can creditors object to the discharge?

A Chapter 7 discharge is never guaranteed. The U.S. Trustee, bankruptcy trustee or a creditor may object to the discharge. For example, a creditor who believes they have been defrauded by a debtor under the parameters set out in section 523(a) of the Bankruptcy Code may file an adversary proceeding contesting the debtor’s right to bankruptcy relief. When a Chapter 7 case is filed, creditors receive a notice that sets forth much important information, including the deadline for objecting to the discharge.  The court may deny a Chapter 7 discharge for any of the reasons described in section 727(a) of the Bankruptcy Code, including failure to provide requested tax documents; failure to complete a course on personal financial management; transfer or concealment of property with intent to hinder, delay, or defraud creditors; destruction or concealment of books or records; perjury and other fraudulent acts; failure to account for the loss of assets; violation of a court order; or an earlier discharge in an earlier case commenced within certain time frames before the date the petition was filed.

In Chapter 13 bankruptcy cases, the debtor is usually entitled to a discharge upon completion of all payments under the plan.  Unlike Chapter 7, creditors do not have standing to object to the discharge of a Chapter 13 bankruptcy debtor. Creditors wishing to challenge a Chapter 13 filing must do so at the confirmation hearing. Once the plan has been confirmed, the debtor “controls their own discharge destiny.” For example, a debtor who files a Chapter 13 bankruptcy and receives confirmation of their plan will likely receive a discharge assuming they make timely payments and comply with the personal financial management course requirement.
In both Chapter 7 and Chapter 13 bankruptcy cases, debtors will not be entitled to a discharge without completing a personal financial management course. A Chapter 13 debtor is also ineligible for a discharge if he or she received a prior discharge in another case commenced within certain time frames.

Can a debtor receive a second discharge in a later Chapter 7 case?

The bankruptcy court will deny a discharge in a later Chapter 7 case if the debtor received a discharge under Chapter 7 or Chapter 11 in a case filed within the previous eight years. The court will also deny a Chapter 7 discharge if the debtor previously received a discharge in a Chapter 12 or Chapter 13 case filed within six years before the date of the filing of the second case unless (1) the debtor paid all "allowed unsecured" claims in the earlier case in full, or (2) the debtor made payments under the plan in the earlier case totaling at least 70 percent of the allowed unsecured claims and the debtor's plan was proposed in good faith and the payments represented the debtor's best effort. A debtor is ineligible for discharge under Chapter 13 bankruptcy if he or she received a prior discharge in a Chapter 7, 11, or 12 case filed four years before the current case or in a Chapter 13 case filed two years before the current case.

Can the discharge be revoked?

The debtor’s right to a discharge can be revoked. For example, a trustee, creditor, or the U.S. trustee may request that the court revoke the debtor's discharge in a Chapter 7 case based on allegations that the debtor: committed fraudulent acts; failed to disclose vested rights in property that when acquired would have become part of the bankruptcy estate or committed one of several acts of impropriety described in section 727(a)(6) of the Bankruptcy Code. In most cases, a request to revoke must be filed within one year of the discharge at which time the bankruptcy court will determine the merits of the claim.
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What bankruptcy cannot do.
Bankruptcy cannot, however, cure every financial problem.  Nor is it the right step for every individual.  In bankruptcy, it is usually not possible to:

1. Eliminate certain rights of “secured” creditors.  A “secured” creditor has taken a mortgage or other lien on property as collateral for the loan.  Common examples are car loans and home mortgages.  Although a debtor is not personally liable for discharged debts, a valid lien (i.e., mortgage or tax lien) that has not been avoided (i.e., made unenforceable) in the bankruptcy case will remain after the bankruptcy case. Therefore, a mortgage lender can still foreclose on a borrower’s home post-bankruptcy. This may seem counterintuitive, but it is important to remember that bankruptcy eliminates only a debtor’s personal obligation to pay debt. A mortgage is a security instrument, which attaches to collateral, allowing the lender to take property in the event payments are not made on the note. Under the law, it is impossible to separate a note and a mortgage. Therefore, even after a personal discharge of a borrower’s obligation to pay the note, the lender’s security interest in its collateral remains.  However, you can force secured creditors to take payments over time in the bankruptcy process; and bankruptcy can eliminate your obligation to pay any additional money if your property is taken.
2. Discharge types of debts singled out by the bankruptcy law for special treatment, such as child support, alimony, certain other debts related to divorce, most student loans, court restitution orders, criminal fines, and some taxes.
3. Protect cosigners on your debts.  When a relative or friend has co-signed a loan, and the consumer discharges the loan in bankruptcy, the cosigner may still have to repay all or part of the loan.
4. Discharge debts that arise after bankruptcy has been filed.

Debts ineligible for discharge:

The ability to discharge debts by filing bankruptcy varies depending on the chapter under which the case proceeds. Section 523(a) of the Bankruptcy Code specifically excludes various types of debts as ineligible for discharge. Congress has determined that public policy should prohibit the discharge of certain debts. For example, the legislature does not want to encourage drunk driving or fraud, so therefore will not allow debts incurred through those acts to be discharged in bankruptcy. Debts excluded from discharge by 523(a) are not affected by filing bankruptcy and will still be owed after the discharge of eligible debts.

There are 19 categories of debt excepted from bankruptcy discharge under Chapters 7, 11, and 12. A more limited list of exceptions applies to cases under Chapter 13 of the Bankruptcy Code.

Certain types of debts, specifically listed under 523(a) of the Bankruptcy Code, are not eliminated by filing bankruptcy regardless if any affirmative action is taken by creditors to prevent discharge. For example, an individual filing for bankruptcy under either Chapter 7 or Chapter 13 in will not be permitted to discharge child support obligations regardless of whether the creditor takes any action challenging the bankruptcy.  The most common types of nondischargeable debts are certain types of tax claims, debts not set forth by the debtor on the lists and schedules the debtor must file with the court, debts for spousal or child support or alimony, debts for willful and malicious injuries to person or property, debts to governmental units for fines and penalties, debts for most government funded or guaranteed educational loans or benefit overpayments, debts for personal injury caused by the debtor's drunk driving, debts owed to certain tax-advantaged retirement plans, and debts for certain condominium or cooperative housing fees.

The types of debts described in sections 523(a)(2), (4) and(6) (obligations affected by fraud or maliciousness) are not automatically excepted from discharge. Creditors must file suit asking the court to determine that these debts are excepted from discharge. In the absence of an affirmative request by the creditor and the granting of the request by the court, the types of debts set out in sections 523(a)(2), (4) and (6) will be discharged.
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What different types of bankruptcy cases should I consider?
There are four types of bankruptcy chapters provided under the law:

Chapter 7 is known as “straight” bankruptcy or “liquidation.”  It requires a debtor to give up property which exceeds certain limits called “exemptions,” so the property can be sold to pay creditors.
Chapter 11, is used by businesses and a few individual debtors whose debts are very large.
Chapter 12 is reserved for family farmers.
Chapter 13 is called “debt adjustment.”  It requires a debtor to file a plan to pay debts (or parts of debts) from current income.
Most people filing bankruptcy will want to file under either Chapter 7 or Chapter 13.  Either type of case may be filed individually or by a married couple filing jointly.

Chapter 7 (Straight Bankruptcy)
In a bankruptcy case under Chapter 7, you file a petition asking the court to discharge your debts.  The basic idea in a Chapter 7 bankruptcy is to wipe out (discharge) your debts in exchange for your giving up property, except for “exempt” property which the law allows you to keep.  In most cases, all of your property will be exempt.  But property which is not exempt is sold, with the money distributed to creditors.

If you want to keep property like a home or a car and are behind on the payments on a mortgage or car loan, a Chapter 7 case probably will not be the right choice for you.  That is because Chapter 7 bankruptcy does not eliminate the right of mortgage holders or car loan creditors to take your property to cover your debt.

Chapter 13 (Reorganization)
In a Chapter 13 case you file a “plan” showing how you will pay off some of your past-due and current debts over three to five years. The most important thing about a Chapter 13 case is that it will allow you to keep valuable property--especially your home and car--which might otherwise be lost, if you can make the payments which the bankruptcy law requires to be made to your creditors. In most cases, these payments will be at least as much as your regular monthly payments on your mortgage or car loan, with some extra payment to get caught up on the amount you have fallen behind.

You should consider filing a Chapter 13 plan if you:

1. Own your home and are in danger of losing it because of money problems;
2. Are behind on debt payments, but can catch up if given some time;
3. Have valuable property which is not exempt, but you can afford to pay creditors from your income over time.

You will need to have enough income in Chapter 13 to pay for your necessities and to keep up with the required payments as they come due. 

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What property can I keep?
In a Chapter 7 case, you can keep all property which the law says is “exempt” from the claims of creditors. You can choose between your exemptions under your state law or, if your state’s laws allow, under federal law.

In determining whether property is exempt, you must keep a few things in mind.  The value of property is not the amount you paid for it, but what it is worth now.  Especially for furniture and cars, this may be a lot less than what you paid or what it would cost to buy a replacement.

You also only need to look at your equity in property.  This means that you count your exemptions against the full value minus any money that you owe on mortgages or liens.  For example, if you own a $50,000 house with a $40,000 mortgage, you count your exemptions against the $10,000 which is your equity if you sell it.

While your exemptions allow you to keep property even in a Chapter 7 case, your exemptions do not make any difference to the right of a mortgage holder or car loan creditor to take the property to cover the debt if you are behind.  In a Chapter 13 case, you can keep all of your property if your plan meets the requirements of the bankruptcy law.  In most cases, you will have to pay the mortgages or liens as you would if you didn’t file bankruptcy.
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What will happen to my home and car if I file bankruptcy?
In most cases you will not lose your home or car during your bankruptcy case as long as your equity in the property is fully exempt.  Even if your property is not fully exempt, you will be able to keep it, if you pay its non-exempt value to creditors in Chapter 13.
However, some of your creditors may have a “security interest” in your home, automobile or other personal property.  This means that you gave that creditor a mortgage on the home or put your other property up as collateral for the debt.  Bankruptcy does not make these security interests go away.  If you don’t make your payments on that debt, the creditor may be able to take and sell the home or the property, during or after the bankruptcy case.

There are several ways that you can keep collateral or mortgaged property after you file bankruptcy.  You can agree to keep making your payments on the debt until it is paid in full, or you can pay the creditor the amount that the property you want to keep is worth.  In some cases involving fraud or other improper conduct by the creditor, you may be able to challenge the debt.  If you put up your household goods as collateral for a loan (other than a loan to purchase the goods), you can usually keep your property without making any more payments on that debt.
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Can I own anything after bankruptcy?
Yes!  Many people believe they cannot own anything for a period of time after filing for bankruptcy.  This is not true.  You can keep your exempt property and anything you obtain after the bankruptcy is filed.  However, if you receive an inheritance, a property settlement, or life insurance benefits within 180 days after filing for bankruptcy, that money or property may have to be paid to your creditors if the property or money is not exempt.
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Will bankruptcy wipe out all my debts?
Yes, but with some exceptions.  Bankruptcy will not normally wipe out:

1. Money owed for child support or alimony, fines, and some taxes;
2. Debts not listed on your bankruptcy petition;
3. Loans you got by knowingly giving false information to a creditor, who reasonably relied on it in making you the loan;
4. Debts resulting from “willful and malicious” harm;
5. Student loans owed to a school or government body, unless the court decides that payment would be an undue hardship;
6. Mortgages and other liens which are not paid in the bankruptcy case (but bankruptcy will wipe out your obligation to pay any additional money if the property is sold by the creditor). Further, you can force secured creditors to take payments over time in the bankruptcy process; and bankruptcy can eliminate your obligation to pay any additional money if your property is taken. 

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Will I have to go to court?
Consumer debtors are rarely required to appear in court in most personal bankruptcy proceedings.
A typical Chapter 7 debtor will not generally appear in court and will usually not see the bankruptcy judge unless an objection is raised in the case.

A Chapter 13 debtor may only have to appear before the bankruptcy judge at a plan confirmation hearing. In most cases, the only formal proceeding at which a debtor must appear is the meeting of creditors, which is usually held at the offices of the U.S. trustee. Most of the time, this meeting will be a short and simple procedure where you are asked a few questions about your bankruptcy forms and your financial situation.  Creditors very rarely attend the meeting of creditors. This meeting is informally called a "341 meeting" because Section 341 of the Bankruptcy Code requires that the debtor attend this meeting so that creditors can question the debtor about debts and property.

Occasionally, if complications arise, or if you choose to dispute a debt, you may have to appear before a judge at a hearing.  If you need to go to court, you will receive notice of the court date and time from the court and/or from your attorney.
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Will bankruptcy affect my credit?
There is no clear answer to this question.  Unfortunately, if you are behind on your debts, your credit may already be bad.  Bankruptcy will probably not make things any worse.

The fact that you’ve filed a bankruptcy can appear on your credit record for ten years.  But since bankruptcy wipes out your old debts, you are likely to be in a better position to pay your current bills, and you may be able to get new credit.   In fact, in many cases, the damage done to credit isn't nearly as bad as expected. Over the long run, obtaining a score high enough to make you eligible for very competitive rates isn't out of the question.
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What else should I know?

1. Utility services - Public utilities, such as the electric company, cannot refuse or cut off service because you have filed for bankruptcy.  However, the utility can require a deposit for future service, and you do have to pay bills which arise after bankruptcy is filed.
2. Discrimination - An employer or government agency cannot discriminate against you because you have filed for bankruptcy.
3. Driver’s license - If you lost your license solely because you couldn’t pay court-ordered damages caused in an accident, bankruptcy will allow you to get your license back.
4. Co-signers - If someone has co-signed a loan with you, and you file for bankruptcy, the co-signer may have to pay your debt. If you file a Chapter 13, you may be able to protect co-signers, depending upon the terms of your Chapter 13 plan.

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Should I hire an attorney?
In bankruptcy, as in all areas of life, remember that the person advertising the cheapest rate is not necessarily the best. 
Paying for debt counseling is almost never a good idea. There is almost nothing that a paid debt counselor can offer other than a recommendation about whether bankruptcy is appropriate and a list of highly priced debt consolidation lenders.  There is no good reason to pay someone for this service.  A reputable attorney will generally provide counseling on whether bankruptcy is the best option.  This avoids the double charge of having to pay a counselor and then an attorney.  If bankruptcy is not the right answer for you, a good attorney will offer a range of other suggestions.

Document preparation services also known as “typing services” or “paralegal services” involve non-lawyers who offer to prepare bankruptcy forms for a fee.  Problems with these services often arise because non-lawyers cannot offer advice on difficult bankruptcy cases, and they offer no services once a bankruptcy case has begun.  There are also many shady operators in this field, who give bad advice and defraud consumers.

When first meeting a bankruptcy attorney, you should be prepared to answer the following questions:

1. What types of debt are causing you the most trouble?
2. What are your significant assets? 
3. How did your debts arise and are they secured? 
4. Is any action about to occur to foreclose or repossess property or to shut off utility service? 
5. What are your goals in filing the case?

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