Bankruptcy is enshrined in our constitution and valued as a way to “give an honest Debtor a fresh start.” Its purpose is to help an individual debtor get back on their feet while paying the debtor’s creditors as fairly and evenly as possible. The procedures of the Bankruptcy Code provide an orderly process for liquidating and distributing some of the Debtor’s assets, while protecting others.
The process of determining whether an individual qualifies for bankruptcy, and if so under which section of the Bankruptcy Code, is complex. The attorneys at JRFPC can provide effective and efficient counsel to help you determine whether bankruptcy is the right step for you to take when you are overwhelmed with bills you cannot pay. We will guide you through selecting the proper chapter of bankruptcy for your circumstances, and how to position yourself to benefit the most from a fresh start.
Individual Bankruptcy Law.
Individual bankruptcy allows a Debtor to be released from paying certain debts. These debts are “discharged” by the bankruptcy. Not all debts are eligible to be discharged. For example, debts due to the Debtor’s fraud are not dischargeable, and under current law student loans are not dischargeable. Child support arrearages are also not dischargeable.
Individual bankruptcy also allows a Debtor to preserve certain assets, such as retirement accounts and the Debtor’s home. Whether these or other assets can be preserved through a bankruptcy depends on the individual Debtor’s location and circumstances. The attorneys at JRFPC will help you understand how much of your estate you can save, and why.
Here are some frequently asked questions about individual bankruptcy.
1. What type of bankruptcy would I qualify for?
The Bankruptcy Code provides two main paths for personal bankruptcy: Chapter 7 and Chapter 13. By far, most individual bankruptcies in Michigan are Chapter 7 Bankruptcies.
- Chapter 7 Bankruptcy is designed for those Debtors who are genuinely unable to pay their bills. In the simplest terms, to qualify for Chapter 7 Bankruptcy, a Debtor’s earnings must be less than the median income for a family of six in the Debtor’s state. There are many nuances to evaluating a Debtor’s income and solvency, however, and even Debtors with a higher income may qualify for bankruptcy. The Bankruptcy Code provides for a means test to determine whether the potential Debtor genuinely needs, and qualifies for, Chapter 7 relief.
- Chapter 13 bankruptcy is also known as the “wage earner’s bankruptcy.” The Chapter 13 Debtor must have a stable source of income and substantial unsecured debts, such as personal loans, credit cards, and medical bills. The Bankruptcy Code includes minimum and maximum limits for different types of debt. In some instances, a Debtor who does not qualify for a Chapter 7 Bankruptcy is a good candidate for a Chapter 13 Bankruptcy instead.
One of the key differences between the two types of bankruptcy is that a Chapter 7 Bankruptcy is a much faster process. Another key difference is that a Chapter 13 Bankruptcy includes a 3-5 year repayment plan, and debts are discharged only to the extent they are not repaid under the plan and only after the plan has been completed by the Debtor.
2. Do all your Debts Qualify for Bankruptcy?
The answer to this question depends on the type of debts the Debtor has. Many, if not most, individual bankruptcies are filed because the Debtor cannot pay medical bills.
As mentioned above, not all debts can be eliminated in bankruptcy. The following debts cannot be discharged under individual bankruptcy laws:
- Child support debts
- Obligations arising from Alimony or Spousal Support
- Debts owed to government agencies
- Student loans
- Income taxes
- Court penalties and fines
- Debts arising from the Debtor’s fraud, such as judgments against the Debtor
The debts covered under Chapter 7 Bankruptcy include personal loans, medical bills, credit card debts, obligations from contracts and leases, and lawsuit judgments that are not based on fraud.
The debts covered under Chapter 13 Bankruptcy include all the Chapter 7 Bankruptcy debts, as well as divorce debts (except domestic support obligations) and certain other debts.
3. Do I qualify for Individual Bankruptcy
A Debtor qualifies to file for bankruptcy if, generally speaking, the Debtor cannot pay his or her debts. The question of whether someone qualifies for bankruptcy, however, can be fairly complex because of the required means testing, and because the nature of debts determines whether they can be discharged. A person hoping to file for bankruptcy should consult with an experienced bankruptcy attorney to determine whether they qualify.
4. The Adverse Effects of Declaring Individual Bankruptcy
Bankruptcy allows a Debtor to receive a fresh start. There are, however, some serious downsides to filing for bankruptcy, including:
- The Debtor’s future ability to borrow money is significantly affected. Bankruptcy records can remain on your credit report for up to 10 years.
- The Debtor might not be able to avoid foreclosure.
- Bankruptcy may lead to a deduction of money from any form of monetary compensation, including salary and tax refunds.
- Bankruptcy also sometimes carries a societal stigma. Some people view bankruptcy as a personal failure rather than simply a product of circumstances that are often outside the Debtor’s control.
5. What Is the Appropriate Time to Declare for Bankruptcy?
The best time to file for individual bankruptcy depends on the Debtor and the Debtor’s circumstances. The following situations, however, often indicate that it is time to file for bankruptcy:
- It would take more than five years for the Debtor to repay current debts (not including student loans).
- If huge debts comprising of credit card debts, mortgage debts, student loans have ruined the Debtor’s financial standing entirely, and with no possibility of the situation changing anytime soon.
- If the Debtor has unsuccessfully gone through a debt settlement or debt management program with creditors.
- If the Debtor has unsuccessfully explored other debt relief measures.
6. What can cause you to Declare Individual Bankruptcy?
There are several reasons that can force someone to seek debt relief. The leading cause of individual bankruptcy is medical debt, but other causes include unexpected job loss and other consumer debts such as credit card debt. Other conditions that can force someone to declare bankruptcy include the following:
- Lawsuits by creditors for late payments.
- A home in danger of foreclosure.
7. What Can Cause You to be Disqualified from Individual Bankruptcy?
As mentioned above, determining whether someone qualifies for bankruptcy requires careful analysis and should generally be done by an experienced bankruptcy attorney even for individual debtors with few assets and debts. Some reasons an individual might not qualify for bankruptcy include:
- Failing the means test. This means that an individual’s income is too as compared to that person’s expenses. Alternatively, the individual could own too many valuable assets that could be used to offset debts.
- The debts are too small.
- The Debtor can’t afford to pay the filing costs or attorney fees. It is estimated that filing for individual bankruptcy costs between $1,500 and $4,000. This covers both the attorney and court filing fees. A Chapter 7 Bankruptcy usually costs around $1,500, but a Chapter 13 Bankruptcy is more complicated and time-consuming, and usually costs upwards of $4,000.
8. What Are the Steps in Successfully Filing for Individual Bankruptcy?
A successful bankruptcy involves careful planning and execution, working with an experienced bankruptcy attorney. There are some steps an individual can and should take, however, before consulting with a professional. In general, a bankruptcy requires the Debtor to do the following:
- Gather all financial records. These include income documents such as W-2s and tax returns, expenses, assets, and debts. Records also include all bank and credit card statements. These documents provide the Court and a bankruptcy attorney with the factual picture of the Debtor’s financial standing.
- Visit a reputable financial counselor and obtain a certificate of completion. This step is an absolute requirement for a Chapter 7 Bankruptcy and it can be a valuable step for anyone in financial straits. Be wary, though. This counseling should be extremely cheap; if you are being asked to pay large amounts for financial counseling you may be the victim of a scam or a bad business practice. There are options to complete this counseling online within a few hours.
- File a petition for bankruptcy. This step should be done by an attorney if at all possible. Navigating the bankruptcy system, including understanding the Bankruptcy Code as it applies to your case and understanding how the Bankruptcy Court requires you to submit information or respond to requests, can be difficult and confusing. Bankruptcy requires an abundance of forms and many steps with the Court. A Debtor who fails to follow the right procedure risks having their case rejected.
- The Bankruptcy file is assigned to a court trustee. The trustee is mandated to arrange a meeting with your creditors, called a “341 Meeting.” You are required to attend the meeting in person. Creditors will use this opportunity to ask for your financial information and conduct their own analysis of whether you qualify for debt relief.
- The Court determines whether you qualify for Chapter 7 protection or not. If the courts deny your petition, you can sometimes still file for Chapter 13 of bankruptcy.
- The trustee will then decide on your nonexempt property. Some property is exempt from bankruptcy, meaning a Debtor cannot be forced to liquidate that property to pay debts. The remaining property, however, is nonexempt and will be liquidated. A competent bankruptcy attorney will negotiate with the trustee on the Debtor’s behalf to keep certain property qualified as exempt, or to make deals with the trustee or creditors to trade certain exempt property for nonexempt property. The goal of the bankruptcy process is to provide for an orderly distribution of the Debtor’s assets to creditors, and that can be done in various ways if the Debtor’s attorney is creative and thoughtful and understands how to work with creditors.
- Deal with and settle secured debts. Secured debts are the collateralized debts, such as a car loan. It means that the creditor has the right to take the collateral (such as the car) in case you fail to pay the debt as agreed. A Debtor can reclaim property that is collateral by paying off the debt in full or reaffirm the debt. Reaffirming the debts means the Debtor agrees to continue paying it once the bankruptcy is over, even if that debt could otherwise be discharged. Again, a common example of this type of debt is a car loan, where it would often be more cost-effective for the Debtor to keep the car, and for the creditor to allow the Debtor to keep it and continue making payments.
- After filing, the Debtor is required by law to take a financial management course.
- The Debtor will receive a “discharge” three to six months after filing for bankruptcy. The discharge ends the bankruptcy case and allows the Debtor to go forward with as clean a slate as possible.
Bankruptcy is complicated, for individuals as well as for businesses. It can be a tremendously worthwhile effort, or it can be a costly waste of time, depending on the Debtor’s individual circumstances. At JRFPC we strongly believe that we can provide the best value to an individual debtor, whether that value lies in counseling our clients that bankruptcy will not resolve their financial woes, or guiding them through bankruptcy to a brighter financial future.
 See statistics for Michigan at the American Bankruptcy Institute’s website, https://www.abi.org/newsroom/bankruptcy-statistics.