Bankruptcy 101

Skeen & Kauffman LLP is committed not only to assisting our clients in an effective and affordable manner but is also committed to making sure our clients understand the bankruptcy process.  This page will provide you with general information about various bankruptcy concepts to help you evaluate this firm and your needs.


Bankruptcy is a way for a consumer or a business to either eliminate their debt or reorganize their debt into more manageable payments.  The bankruptcy process is governed by Title 11 of the United States Code and for consumers generally consists of either a Chapter 7 filing or a Chapter 13 filing.  A business that is seeking to end operation may also file a Chapter 7 and a business seeking to reorganize will file a Chapter 11.  There are special provisions for farmers, fishermen, and municipalities.

Generally, in a Chapter 7 bankruptcy, the filer is seeking to eliminate debts without making any further payment on that debt.  For consumers there are certain threshold requirements that generally relate to the yearly gross household income.  When a bankruptcy is filed an entity called the bankruptcy estate is created.  The bankruptcy estate is made up of all the assets of the person or business.  Each individual state has exemption statutes that allow the filer to protect assets that would have otherwise been made a part of the bankruptcy estate.  These exemptions allow filers to keep things like cars, household goods, retirement accounts, bank account balances, tax refunds, life insurance policies, pension income, child support income, and other personal property items.

Any property that is not exempt is considered non-exempt and is subject to seizure and liquidation to allow some payment to be made to the filer's creditors.  Generally, most people filing for Chapter 7 bankruptcy protection will be able to keep most, if not all, of their belongings.  All unsecured debt is discharged in a Chapter 7 bankruptcy.

Generally, in a Chapter 13 bankruptcy, the filer is seeking to reorganize debts and make limited repayment on most unsecured debt.  A Chapter 13 bankruptcy allows a filer to keep their home if they are behind on monthly mortgage payments, reduce car loan payments under certain circumstances, stop penalty and interest from accruing on unpaid taxes, eliminate certain tax debts, remove second mortgage debts and liens under certain circumstances, and eliminate divorce decree debts.  A Chapter 13 bankruptcy tends to last between 3 and 5 years depending on the proposed repayment plan.  The amount to be paid back to unsecured creditors over the term of the repayment plan is based in large part on the disposable monthly income of the filer as calculated by certain provisions of the bankruptcy code.  Typically, Chapter 13 filers pay back between 5 cents and 35 cents on the dollar on unsecured debt.  Any unpaid debt at the end of the plan is discharged.


A Chapter 7 bankruptcy is governed by Chapter 7 of Title 11 of the United States Code.  This form of bankruptcy protection is often referred to as liquidation bankruptcy or Fresh Start bankruptcy.  A Chapter 7 is designed to give your personal finances a restart and allows a consumer to unload, or discharge, their debts.  There are certain types of debts that are not discharged in a Chapter 7 bankruptcy like student loan debt, child support payments, tax debts, government fines, or divorce decree debts (debts a person was ordered to pay as part of a divorce settlement).  In most cases, all other debts are discharged or forgiven.  This process generally takes about 6 months to complete from filing to the case closing.  In many cases you will be able to keep all or most of your belongings including your house, your car, retirement accounts, insurance policies, and your household goods.  One of the main advantages of a Chapter 7 bankruptcy is that the filing alone will stop wage garnishment, foreclosure, repossession, and harassing creditor calls.  One thing to keep in mind is that under a Chapter 7 bankruptcy, if you have loans on your car or home you will need to stay current on those debts to keep the car or your home.  If, however, you want to give up your car or home and the loan on it you can do that through a Chapter 7 Bankruptcy without any future liability.


Another form of consumer bankruptcy is governed by Chapter 13 of Title 11 United States Code.  This bankruptcy is often referred to as consumer reorganization or payment plan bankruptcy.  Under a Chapter 13 bankruptcy consumers try to reorganize their debts through a Chapter 13 Plan.  A Chapter 13 Plan is a repayment plan that usually lasts between 3 and 5 years and is confirmed by the Bankruptcy Court.  Generally, plans pay back anywhere from 5 cents to 45 cents on the dollar of unsecured debt like credit cards, medical bills, personal loans, payday loans, or repossession balances.  This is done through a monthly payment to the Trustee appointed to oversee your plan.  The Trustee takes that monthly payment and distributes it based on priority to your creditors.

A Chapter 13 bankruptcy provides several benefits to consumers who have a steady income each month.  Under a Chapter 13 you can prevent foreclosure of your home by paying back mortgage arrears  or missed payments, over the term of your Plan.  In addition, if you have subordinate mortgages, or second mortgages, on the property you can strip off the lien for that second mortgage if the second mortgage is no longer secured by the value of the home.  If you have owned your car for more that two and a half years and still owe your lender, you can pay back what the car is worth at the time you file as opposed to what you owe at the time of filing.  In addition, you can recalculate the interest rate on that loan.  Consumers with tax debt can pay back the tax debt they owe over the term of the plan without additional interest or penalties accruing.  Finally, divorce decree debts can be discharged through a Chapter 13 as long as the plan is successfully completed.

A Chapter 13 is a long and difficult process and the advise of an attorney is strongly recommended instead of filing a Chapter 13 on your own.


The Trustee in a bankruptcy case is generally the person appointed to look out for the interests of the unsecured creditor in a Chapter 7 or Chapter 13 bankruptcy case.  This person is different than the United States Trustee, although they serve similar functions.  In a consumer Chapter 7 and Chapter 13 case the assigned case trustee usually conducts the Section 341 Hearing or Meeting of Creditors.  The case trustee is also generally tasked with administering the case.  This usually means that he/she will conduct certain hearings, review financial documents provided by you, review your petition and schedules, and in some cases distribute non-exempt assets of your bankruptcy estate.   The case Trustee is not your attorney and is not looking out for your best interests.  This does not mean that your interaction with the Trustee will be hostile or antagonistic.  Generally, the only time you will talk with the case trustee is at your meeting of creditors and you will find that the experience with the Trustee is generally stress free and runs extremely smoothly.  The case Trustee should not be viewed as an enemy or opponent in your case.  Rather, the Trustee is as interested as you are in moving your case along to discharge.


The discharge of debts in a bankruptcy case is the reason a person files for bankruptcy protection.  As long as it is a debt that can be discharged under the bankruptcy code, the discharge of debts under any chapter eliminates a debtor's responsibility to pay the debt and eliminates the creditor's legal right to come after the debtor for the debt.  As an example, if you have filed for bankruptcy and received a discharge for a credit card debt you had the discharge forgives the debt so you do not have to pay the debt anymore and stops the creditor from being able to sue you to collect the debt.  It truly is a clean slate.  Generally speaking, for a debt to be discharged in bankruptcy you must list the creditor who you owe the debt to in your bankruptcy paperwork.  If you fail to list the creditor, that debt may not be discharged as to that creditor.   Under certain circumstances your discharge may be revoked.  This is especially true if you have committed some type of fraud on the Court.  Generally, no such fraud occurs and your discharge is entered by the Court as a matter of formality about 2 – 3 months after your meeting of creditors.


A secured debt is a debt that the lender has taken what is called a security interest in.  The best example of secured debts are car loans and home loans.  What this generally means is that you took the money to purchase a specific good like a car or a home.  In exchange for the money you granted the lender a security interest in what you bought with the money.  In the event you do not pay back the loan on the agreed terms, the lender may take or repossess the good you bought with the money.  In the case of cars and homes this security interest is usually recorded on the car title as a lien or recorded as a deed of trust on the house.  In some cases, if the security interest is not recorded prior to the filing of a bankruptcy case the lender does not have a secured interest in the good. In addition to cars and homes, in some cases, store credit cards also generate a secured interest in what you buy.  Credit cards issued by stores like Sears, Home Depot, Best Buy, and other large retailers have provisions in the credit agreement that you are granting a security interest in the goods you are buying with that credit card.  This is especially true if you get the credit card to make a large, one-time purchase during special sales or promotions.  While it is rare that these security interests are actually enforced during the bankruptcy process, in some cases they may be.  There are several ways to deal with this type of security interest in bankruptcy including reaffirmation, redemption, or surrender.  Consult an experienced bankruptcy attorney if your case may involve some of these issues.   In addition to these types of traditional secured loans, another example of s secured loan is a title loan.  The lender usually perfects or records the title loan lien on your car title.  These loans tend to have exorbitant interest rates and you usually end up paying double the loan in a short amount of time.  Like traditional car loans, these loans are secured and must be treated as such in bankruptcy.


Unsecured debts are debts that do not have any collateral or good securing your promise to pay back the money you borrowed.  These types of loans generally include credit cards, personal bank loans, pay day loans, or medical bills.  Typically these loans do not have anything securing your promise to pay.  They are merely a promise by you to the lender to repay the money.  Typically, they have higher interest rates than secured loans.  As a general rule, bankruptcy will almost always discharge unsecured debts although some unsecured debts, like student loan debt, is not discharged automatically.


While the bankruptcy code discharges or forgives many debts, there are also several types of debts it does not forgive.  A Chapter 13 discharge is much broader than a Chapter 7 discharge.  Generally speaking, in a Chapter 7 liquidation case, some debts that are not discharged include student loans, tax debts, money you owe a government entity (i.e. restitution payments), divorce decree debts, credit obtained by fraud, home owners association dues assessed after filing, and support obligations.  For the most part, all other debts are discharged in a Chapter 7 including your home loan obligation or car loan, if you want them discharged.


A reaffirmation agreement is a type of agreement in bankruptcy where you and the lender agree that the debt you owe the lender will survive the bankruptcy discharge.  The agreement leaves your legal liability for the loan in place after the bankruptcy discharge.  Typically, these agreements are entered into to deal with your car loan.  The bankruptcy code requires you to at least go through the reaffirmation process if you want to keep your car.  In some cases, the lender will renegotiate the loan terms with you through the reaffirmation process but that is not typical.  Most lenders, especially credit unions, want you to simply agree to the same terms you had before you filed bankruptcy.   As hard as it may be, sometimes it is best to let your car go back to the lender.  Sometimes you can simply keep paying for the car without signing a reaffirmation agreement.  Depending on state law the lender may not repossess the car if you are current on the loan regardless of whether you reaffirm the debt or not.  In some jurisdictions you will need to go through the process, especially if the lender tells you they will repossess the car if you do not sign a reaffirmation agreement.   Reaffirmation agreements are legal and binding contract approved by the bankruptcy court.  If something happens after your discharge you are still liable for the loan if you sign one.  It is important to consult an attorney if your case will involve a reaffirmation agreement.


The best way to describe an adversary proceeding is that it is like a civil case inside a bankruptcy case.  Typically, it is used to do something that the bankruptcy code does not do automatically.  The best example is the discharge of student loan debt.  Student loan debt is generally non-dischargeable unless you can prove an undue hardship for the term of the repayment period, usually 25 years.  In other words, you must have a provable hardship that will last for the foreseeable future.   Another situation is when a creditor believes a debt you owe them is non-dischargeable.  The creditor will then have to file an adversary proceeding to challenge your discharge as to their debt.  Adversary proceedings can be very complicated and really do require the services of an experienced bankruptcy attorney.  Also, generally speaking, adversary proceedings are not included in typical bankruptcy fee agreements and can be very expensive and time consuming.  In that way, they are just like a civil case.


Under specific circumstance tax debt can be discharged in a Chapter 7 and Chapter 13 bankruptcy filing.  If the criteria are meet under the bankruptcy code your federal and state income tax may be discharged.  For this to occur:1) The tax return due date is at least three years prior to filing your bankruptcy case;2) You actually filed a return at least two years ago, no substitute returns filed by the IRS qualify;3) Any assessment of taxes is at least 240 days old prior to filing your bankruptcy case;4) Any tax return you filed was not fraudulent; and 5) You are not guilty of tax evasion.  Also, the application of tax liens complicates this issue to some degree as the debt itself may be discharged but the lien may not.   While the same rules apply in a Chapter 13, filing a bankruptcy case under Chapter 13 that includes tax debt that does not meet the discharge standards has an added benefit in that the more recent tax debt will stop accruing interest and penalty during the term of your Chapter 13 Plan.  In addition, the tax debt will be paid in full during the term of your plan so when you clear bankruptcy you no longer have that tax debt.


In general, student loan debt can not be discharged in a bankruptcy case.  Under Section 523(a)(8) of the Bankruptcy code, it may be discharged if you can prove that paying the debt will cause you an undue hardship.  It is important to note that undue hardship is not defined anywhere and courts have developed a three part test to determine if the repayment of student loan debt will cause an undue hardship.  It is a standard that is very difficult to meet and requires you to prove that:

  1. You cannot maintain a minimal standard of living if you are required to repay the loan;
  2. Special circumstances exist that will make it difficult for you to repay the student loan over the life of the loan; and
  3. You have made good faith efforts to repay the loan

To show these factors you will need to file an adversary proceeding and produce evidence sufficient to convince the bankruptcy court that you meet these qualifications.  The factor that most often ends up causing problems for people is the third prong.  Typically you can apply for an income contingent repayment plan or income dependent repayment plan that will reduce or eliminate your student loan payment based on your current income.  The monthly amount you pay is re-evaluated each year for 25 years.  Typically, if you do not participate in one of these programs, you will be found to have not made good faith efforts to repay the loans.


When you file for bankruptcy protection all of your possessions are placed into a property pool called your bankruptcy estate.  These possessions are called your assets and may include your bank account balance on the date you file, any tax refund you are owed, your car, your home, your retirement accounts, your life insurance policies, your household goods, your clothing, and anything else you own or are entitled to receive.  Each state has what are called exemption statues that allow you to exempt some of your assets from being sold to pay your unsecured creditors in bankruptcy.  The group of assets that are protected by these exemptions are called your exempt assets.  This is a legal way of saying you get to keep them after your bankruptcy is completed.


When you file for bankruptcy protection all of your possessions are placed into a property pool called your bankruptcy estate.  These possessions are called your assets and may include your bank account balance on the date you file, any tax refund you are owed, your car, your home, your retirement accounts, your life insurance policies, your household goods, your clothing, and anything else you own or are entitled to receive.  Each state has what are called exemption statues that allow you to exempt some of your assets from being sold to pay your unsecured creditors in bankruptcy.  The group of assets that are protected by these exemptions are called your exempt assets.  The assets that are not protected by state statute are called your non-exempt assets.  This is a legal way of saying that those assets may be subject to seizure by the case trustee and sold to pay your unsecured creditors.  Usually this does not happen and you will be able to keep all of your belongings.  The only time this issue tends to come up in a Chapter 7 case is when you have something with a great deal of equity like a car that you do not have enough exemptions to cover.  Even when this happens, you can often negotiate with the Trustee to buy back your equity as opposed to surrendering your asset.  Most people filing for Chapter 7 Bankruptcy protection do not have to deal with this. A chapter 13 will work a little differently.  If you do have non-exempt assets, as long as your plan pays back to your unsecured creditors at least the value of your non-exempt property you will be able to keep all your non-exempt property.  Generally, Chapter 13 plans cover at least this amount.


As a general statement, you will be able to keep your home if you file bankruptcy.  As with any secured debt, you will generally need to be current on the loan and you will need to continue to pay your normal monthly payment on the loan during and after bankruptcy.  If you fail to remain current on your loan, the lender will ask the bankruptcy court to lift the automatic stay.  Once the stay is lifted the lender will be able to repossess the item or foreclose on the house. This general rule is a little different when you file a Chapter 13 bankruptcy.  If you are behind on your home loan, a Chapter 13 plan will allow you to pay back the mortgage arrears over the term of your plan while you make your current monthly mortgage payment.  At the end of your plan your mortgage is current as all the arrears has been paid back and you have been making your monthly mortgage payment.   Finally, if you have a second mortgage on your home that is no longer secured by the value of the home you may be able to strip off the lien and eliminate your responsibility to pay that second mortgage.  As a result, after you complete your Chapter 13 plan you will only have one lien and one mortgage.  There is no way to strip off a lien on a home in a Chapter 7.


As a general statement, you will be able to keep your car if you file bankruptcy.  As with any secured debt, you will generally need to be current on the loan and you will need to continue to pay your normal monthly payment on the loan during and after bankruptcy.  If you fail to remain current on your loan, the lender will ask the bankruptcy court to lift the automatic stay.  Once the stay is lifted the lender will be able to repossess the car.This general rules is altered a little in a Chapter 13.  Through a Chapter 13 you may be able to reduce the amount you owe on the vehicle and the interest rate you pay.  The initial requirement here is that you have had the loan for at least 910 days before you file.  If you do, generally you are able to pay back what the vehicle is worth at the time of filing and reduce your interest rate to something like 4.5%.  This is generally referred to as a cram down.


The Automatic Stay is the bankruptcy court order that prevents a creditor from taking any action against you when you file for bankruptcy protection.  In many cases, a secured creditor will be able to get the stay lifted if you are not making payments on the secured debts.  This typically comes up when you are dealing with car and home loans.  The automatic stay ends when you receive your discharge and is replaced by the discharge order.  The discharge order provides the same protections after your case is over.


The Meeting of Creditors or 341 Hearing is an opportunity for your creditors to ask you questions under oath.  As a practical matter, creditors almost never appear at these hearings.  The meeting is also a chance for the trustee assigned to your case to ask you questions under oath and an opportunity for the United States Trustee's Office to ask you questions.  Typically the only person present at the hearing is the case trustee.  The meetings tend to be very short and the questions tend to center on very basic questions.


The Chapter 13 Confirmation Hearing is the court event when your proposed chapter 13 repayment plan is approved and entered by the Court.  This process tends to take some time and may not occur at the first setting.  Generally, the case trustee and your attorney will negotiate in the days leading up to your confirmation hearing to see if a compromise can be reached and the plan can be confirmed by consent.  This is how the vast majority of plans are confirmed.  On occasion, you will have to appear and testify to convince the Court that your plan should be confirmed.  As a practical matter, if the trustee does not agree with your plan it will be hard to convince the Court your plan should be confirmed.  The two biggest issues in any plan are either you are not contributing all of your disposable income or you do not have enough money to pay all the necessary expenses of a Chapter 13.


Along with loss of income and excessive medical bills, wage garnishment is one of the biggest reasons people file for protection under the bankruptcy code.  Wage garnishment is a way for a creditor with a judgment against you to collect on that judgment.  The process of getting a judgment can take several months and the wage garnishment process may also take some time.  Generally, wage garnishment allows the creditor to take 25% of your net pay check each pay period.  If you have multiple creditors, usually there is only one garnishment at a time.  Garnishments tend to include not only the balance you owe but attorney fees, interest, and additional costs.  Wage garnishment can make it almost impossible for you to meet your minimum standard of living commitments and is a serious drain on the family finances.  Filing for bankruptcy will stop a garnishment and discharge your responsibility to pay the debt.  In addition, some of the garnished wages may be returned to you after filing for bankruptcy.  If you do not receive your discharge, the garnishment may start up again.  Certain types of income cannot be garnished such as Social Security Act income.


A law suit debt is essentially like any other debt in bankruptcy.  Generally, any debt that is the result of judgment in a law suit can be discharged in bankruptcy.  This general rule varies between Chapter 7 and Chapter 13.  Also, the filing of a bankruptcy will generally stop any law suit being pursued against you.  Again, some exceptions apply but the automatic stay that is put into place upon filing the bankruptcy will stop the law suit.  This is especially the case if the law suit is one of your credit card companies suing you for not making your payments.


A potential inheritance that you are aware of is an asset in your bankruptcy case and must be listed.  This includes if you are the beneficiary under anyone's will, trust, or estate or if you have any future interest in a person's piece of real property.  These are called contingent assets as your rights to them are contingent upon a certain event occurring, such as the death of a relative.  If you become entitled to an inheritance within six (6) months of your bankruptcy filing that inheritance will most likely be property of your bankruptcy estate and subject to distribution to your creditors.


Generally, tax refunds in your Chapter 7 case will be exempt as long as you have exemptions to apply to the refund.  Whether the trustee will be interested in your refund will depend in part on when you file your case.  The closer to April you file your case the more likely the trustee will wait to see what, if any, tax refund you get.  In a Chapter 13, generally tax refunds are contributed to the plan as supplemental funding.  Otherwise you need to pro rate your anticipated tax refund over your monthly payments.  While the supplemental funding will not make your plan shorter, it will make it easier to plan your finances during your plan.


Debt settlement and debt resolution companies come in many forms and with a variety of motivations.  There are organizations out there that seek to assist consumers in reducing their unsecured consumer debt in a meaningful way and in a way that does not cost you a great deal of money.  These organizations are few and far between.  Most debt settlement and debt resolution organizations charge excessive fees to settle your consumer credit debt and in most cases are unable to deliver on what they promise.  In addition, these programs are generally at the mercy of the credit card company being willing to participate in the program or to negotiate a settlement.  These programs tend to run into the greatest difficulty when there is a card with a high balance.

The key to any of these programs is funding the escrow account with enough money to make a settlement.  With the organization taking almost 50% of your monthly payment in fees it is difficult to build up enough in that escrow account.   More importantly, these programs cannot grant you the protection that a bankruptcy can.  While in debt settlement, you are still subject to law suits.  In addition, debt settlement organizations are often out of state and not very responsive to your needs.  Most important however, is the programs do as much damage to your credit as a bankruptcy does without the protection bankruptcy provides through the automatic stay.  In the end, this is a service with a big buyer beware warning.


Bankruptcy fraud is very rare.  The rules allow for liberal amendments but you must keep in mind that your bankruptcy documents are signed under the penalty of perjury.  Honest mistakes will not be penalized.  Intentional and knowing mistakes will be penalized with fines and prison.  The trustee who is appointed to oversee your case is a member of the Department of Justice and has authority to not only require you to submit to extensive questioning but also has the ability to audit your situation.  The concealment of assets and liabilities will get you into serious trouble with the courts and prosecuting authorities.  Bankruptcy will give you the Fresh Start you need but you will need to be completely forthright with the trustee and court about your situation.  Nothing is worth going to prison over.


Divorce decrees and divorce settlements get special treatment in bankruptcy as do support obligations.  You cannot discharge a support obligation in any bankruptcy proceeding.  As a general rule you cannot discharge debts that are part of a divorce decree.  Again, whether you can will depend on what chapter you file.

Skeen & Kauffman, L.L.P.

With 75 years of combined experience, the law firm of Skeen & Kauffman, L.L.P., is able to offer clients advocacy across a specific range of legal areas. Attorneys Skeen & Kauffman were employed at the same law firm more than 25 years ago, and formed Skeen & Kauffman, L.L.P., in Baltimore, Maryland, in 2004 to meet the needs of clients in a few select areas of law.

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