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Relief from debt through personal bankruptcy is available to most individuals. Each year millions of Americans take advantage of the relief offered by the federal Bankruptcy Code. Bankruptcy can help people facing impossible debt situations, such as overwhelming credit card interest, collection actions, lawsuits, car repossession, and foreclosure against you and your spouse. These debt problems usually arise from unforeseen circumstances like job loss, medical issues, business failure, divorce, and a wide range of other events.

What Is Personal Bankruptcy?

Bankruptcy is a federal legal process that allows individuals, as well as married couples, to reorganize and even eliminate their obligations to pay some or all of their debts. Elimination of debt is referred to as a discharge in bankruptcy. The federal Bankruptcy Code provides protections to both individuals who owe debts, as well as to the creditors who are owed those debts. It’s important to note here that, while we’re discussing personal bankruptcy, the Bankruptcy Code also permits businesses, farms, cities, and other entities to obtain bankruptcy relief as well. There are several types of personal bankruptcy available to both individuals and married couples, the most common of those being Chapter 7 bankruptcy and Chapter 13 bankruptcy.

Chapter 7 Bankruptcy – Liquidation

When most people think of bankruptcy, they are likely to think of Chapter 7 bankruptcy, which is the most basic version of bankruptcy. A very basic explanation of a Chapter 7 case is that a trustee liquidates all of a debtor’s assets, distributes any funds to creditors, and the debtor walks away with a discharge. This is an extremely simplistic version of Chapter 7 bankruptcy because many people do not consider the impact of bankruptcy exemptions, nondischargeable debts, and the contested matters and adversary proceedings that may arise in a Chapter 7 bankruptcy case. So while Chapter 7 bankruptcy cases are usually the fastest and easiest kind of bankruptcy case, arguably carry the highest amount of risk for debtors who do not understand the powers of the Chapter 7 trustee that will be assigned to review their case, including the ability to sell their homes, cars, businesses and other assets that become property of the bankruptcy estate.

Qualifying for Chapter 7 Bankruptcy

Before filing for Chapter 7 bankruptcy, you must first confirm that you qualify under the Bankruptcy Code’s means test. There are two (2) ways to qualify for Chapter 7 under the means test. The first way is to confirm that your monthly household income is below the applicable median income for your household size in your county. If you don’t pass the means test this first way, you can attempt the second way, which is to take a closer look at your household income and expenses to determine if you qualify under the long form version of the means test.

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Once you’ve confirmed that you qualify for Chapter 7 bankruptcy under the means test, you need to next consider whether you have any exposed equity in your assets. Exposes equity is what a Chapter 7 trustee looks for when determining whether they must sell a Chapter 7 debtor’s assets. For example, a couple who file Chapter 7 bankruptcy, and who own their home, and who have a mortgage balance that is less than the value of their home, and who don’t have enough exemptions to protect that value, may have their home sold by a Chapter 7 trustee to realize the nonexempt equity in their home. That equity is then used to pay the Chapter 7 trustee’s fees, and the fees of their professionals, and then the balance is distributed to the couple’s creditors.

Once you’ve confirmed that you have no exposed equity at risk of sale by a Chapter 7 trustee, you must then complete credit counseling. Credit counseling can be taken online and is a fairly simple course. None of the information that you provide to the credit counseling provider is provided to the Bankruptcy Court. When you complete credit counsel, you receive a credit counseling certificate.

Once you’ve completed credit counseling, you must review and sign your Chapter 7 bankruptcy petition. Once completed, your attorney will electronically file the Chapter 7 petition with the Bankruptcy Court. Note that it’s crucial that your Chapter 7 petition be filed with the correct Bankruptcy Court corresponding note only with your state, but also with your county.

Once your Chapter 7 petition has been filed with the correct Bankruptcy Court, you will receive a case number, and the Bankruptcy Court will assign a Chapter 7 trustee to your case. The Chapter 7 trustee will oversee your case, and will likely request additional documents and information in order to fully review and understand your petition and your case as a whole.

Your Chapter 7 trustee will preside over your 341 meeting of creditors, which occurs around one month after your petition is filed. The Chapter 7 trustee will confirm your identity and your social security number using a valid proof of identification and social security number. Your creditors may appear and ask questions at your 341 meeting, although they will not be able to depose you in the way they could using a Rule 2004 examination. Once your Chapter 7 trustee is satisfied that your 341 meeting is completed, they will advise that they formally closed that meeting.

Once your 341 meeting is closed, you will need to complete the second course called debtor education. This course is generally taken online. None of the information that you provide to the company providing the debtor education course is reported to the Bankruptcy Court. Once you’ve completed the debtor education course, you will sign a certification that must be filed with the Bankruptcy Court.

If your Chapter 7 trustee is satisfied that all of your assets are protected by exemptions, and that none of your assets have exposed equity to liquidate, the Chapter 7 trustee will file a report of no distribution with the Bankruptcy Court. Alternatively, the Chapter 7 trustee will file a report of assets, and invite your creditors to file their proofs of claim. If your case is considered a “no asset case”, the Bankruptcy Court will file a series of documents including a Discharge Order, which will eliminate all dischargeable debt.

If and when a Discharge Order is entered in your bankruptcy case, the Bankruptcy Court Client’s office will enter a Final Decree and soon thereafter close your case. The Discharge Order acts as an injunction against creditors collection pre-bankruptcy debt. This federal court order is extremely effective, and allows you to move forward with your financial life without old debts following you into the future.

Chapter 13 Bankruptcy – Personal Reorganization

Many people do not qualify for Chapter 7 bankruptcy because of the means test. There are also many people who may qualify for Chapter 7 bankruptcy, but they have exposed equity in their assets that they don’t want liquidated by a Chapter 7 trustee. There are also many people who may qualify for a Chapter 7 case, but need to pay back certain debts over time, such as paying back missed mortgage or car payments, or certain nondischargeable tax debts. Finally, some people may need to take advantage of the super discharge offered by Chapter 13 bankruptcy that is not offered by Chapter 7 bankruptcy. In these cases, a Chapter 13 bankruptcy is a great option.

Chapter 13 bankruptcy requires people to propose a plan of reorganization, as opposed to simply liquidation under Chapter 7. A Chapter 13 plan is essentially a streamlined version of a Chapter 11 bankruptcy plan. In Chapter 13, debtors propose a 3 to 5 year plan to pay their disposable income to their creditors through a standing Chapter 13 trustee who collects those payments and makes monthly distributions.

Confirmation of a Chapter 13 bankruptcy plan can be very complex. Your Chapter 13 plan must state how much disposable income you will pay each month for 3 to 5 years. Your plan must also state if you are treating creditors secured by your assets, such as a mortgage company holding debt secured against your home. Further, if you have any back payments on your mortgage, your plan must state how those payments will be paid back over time. Additionally, your plan must pay back any priority debts, such as taxes. If you don’t have any exposed equity, calculated by assuming the amount of funds that a hypothetical Chapter 7 trustee would realize from sale of your assets, then your general unsecured creditors can receive a payout over 3 to 5 years of your disposable income on a pro rata basis. This means that your creditors each receive the same percentage of distribution. For instance, if your general unsecured creditors will receive a 5% pro rata distribution, a creditor owed $10,000.00 would receive $500.00 in full satisfaction of the entire $10,000.00. As a result, people who obtain relief under Chapter 13 bankruptcy case may be able to obtain a discharge of the majority of their debts.

Your Chapter 13 trustee will review your plan and object to any terms that run counter to the Bankruptcy Code. If your Chapter 13 plan is confirmed, the Bankruptcy Court will enter a Confirmation Order stating that, if you complete the plan as proposed, and follow other terms and conditions in the Order, you will receive discharge. So while a Chapter 13 plan may take more time and may result in more distributions to your creditors than under a Chapter 7 case, you can obtain substantial relief under Chapter 13 if you don’t qualify for a Chapter 7, or if you need the enhanced ability to pay back certain debts and preserve certain assets from sale by a Chapter 7 trustee.

The answer to this question requires an in-depth understanding of the Bankruptcy Code, Rules and other factors. This is where a bankruptcy attorney can be of great assistance. You will need to review at least 6 months of recent household income and expenses, the value of all of your assets, including your home, cars, inheritance, law suits, business interests, intangible property, and every other asset in your possession and control. You will need to consider a liquidation analysis of all of these assets, less secured debts, and while taking into account available exemptions under federal and/or state law.  You will also need to understand whether you can confirm a feasible plan of reorganization. This analysis is crucial to understand whether you stand to have your assets sold by a Chapter 7 trustee, and whether you are able to emerge from a Chapter 13 bankruptcy having confirmed a feasible plan of reorganization.

Each type of bankruptcy has its own costs. In general, personal bankruptcy requires the following costs: (1) credit counseling fee; (2) Bankruptcy Court filing fee; (3) Attorney retainer; and (4) Debtor education fee. In addition to the costs above, many people filing bankruptcy must also pay for a comprehensive credit report to collect information about their debts and judgments, as well as a broker’s price opinion or appraisal of their home.

The Bankruptcy Court closely regulates and monitors how much attorneys charge for their personal bankruptcy services. Generally, the Bankruptcy Court permits attorneys a $2,500.00 retainer for Chapter 7 bankruptcy, and permits a $3,500.00 retainer for a Chapter 13 bankruptcy. Chapter 11 bankruptcy may cost upwards of $7,500.00, and depends greatly upon the complexity of the case.

Attorneys have more flexibility to structure their retainer fee in a Chapter 13 bankruptcy. This is because a portion of their fee may be paid through your Chapter 13 plan of reorganization. Generally, attorneys cannot take a post-petition retainer in a Chapter 7 bankruptcy, and therefore require the entire retainer to be paid before the petition is filed with the Bankruptcy Court.

The short is no, there is no requirement to retain counsel to represent you in a bankruptcy case. However, bankruptcy law is complex, and all of your personal and real estate, and all of your debts and even your income, is all reviewed and impacted by bankruptcy. In particular, when filing a Chapter 7 bankruptcy, all of your assets are technically in the legal possession of a Chapter 7 trustee who is randomly assigned to your bankruptcy case. That Chapter 7 trustee has the duty and power to liquidate your assets, and may ask the Bankruptcy Court to deny your discharge if you do not cooperate with their efforts. With so much at risk, it often is a good idea to consult with a bankruptcy attorney and to hire their services. In particular, Chapter 13 bankruptcy and Chapter 11 bankruptcy are complex and have a high failure rate for self-represented debtors. Hiring an attorney to carefully review your options, prepare your petition and, if applicable your plan, and represent you throughout the bankruptcy processes is highly recommended in almost every case.

About Middlebrooks Shapiro

At Middlebrooks Shapiro, P.C., our attorneys have over 30 years of bankruptcy law experience. From our office in Springfield, NJ, we help clients with the most basic or complex personal and business bankruptcy cases by leading them through the legal process of numerous practice areas.

Call 973-218-6877 to speak with the experienced bankruptcy attorneys at Middlebrooks Shapiro. We’ll ensure you get the perspective you need to understand the full picture and the right guidance to have a successful bankruptcy, rebuild your credit, and move forward with your new debt-free life.