Have you seen the list of documents I require of each of my clients? It’s easily ten times more invasive and time consuming than applying for a mortgage loan these days.

Even though a lot of us pay our debts on time, bankruptcy as a system of laws is well rooted in the American legal system. The US Constitution makes provision for uniform bankruptcy laws; the first folks to come here from England were debtors. That said, nobody wants to be a debtor. Debtors don’t have a lot of political muscle.

At bottom, and this was explained to me by Bankruptcy Judge Myers when I had a group of students in Bankruptcy court last fall, is that we live in a dynamic, free market economy that produces incredible wealth, but also incentivizes risk-taking. Free markets, like our own, involve risk. Bankruptcy has become part of our economy, as well as our social safety net, because it allows those of us who took risks that didn’t work like they originally hoped, get back up, get a fresh start and get back in the game.

Bankruptcy may make it possible for a person to:

• 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. If your case is successful, then you will get a discharge at the end of your case.
• 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.)
• Prevent repossession of a car or other property, or force the creditor to return property even after it has been repossessed.
• Stop wage garnishment, debt collection harassment, and similar creditor actions to collect a debt.
• Restore or prevent termination of utility service.

Chapter 7. Straight bankruptcy, also referred to as a “liquidation proceeding.” Normally ends with a discharge (release) of most debts without payment or giving up any property.

Chapter 13. A reorganization of business and personal debts. This is the repayment chapter. These cases last three to five years. Debtors commit to sending in their disposable monthly income to the bankruptcy trustee to be distributed among their creditors. Debtors make monthly payments to the bankruptcy trustee in an amount they can afford based on their budget.

Factors that may influence which Chapter I would recommend….

A couple comes in to meet with me. They are three payments behind on their home. The bank is threatening foreclosure, or has already started the process. He works at Vista Outdoor, or the county, or the mill or another good employer, and makes a good living, she works as a school teacher. Notwithstanding some recent financial stumbles, the couple has had reliable enough income to pay their costs of living (mortgage, car payments, utilities, etc.) with a little left over. In this case, I would recommend a Chapter 13 because Chapter 13 bankruptcies are particularly effective in saving a home from foreclosure so long as the debtors’ incomes can support a viable plan. Chapter 13 is also great in dealing with IRS and other tax debts…it can’t make valid debts disappear, but we have a lot more flexibility in structuring a repayment plan to make sure those debts get paid first.

Chapter 7 is generally designed for debtors with little or no disposable income, after they pay their reasonably necessary household expenses. It’s the liquidation chapter, which means that any property that isn’t otherwise exempt, or protected from creditors under state law, is liquidated (sold) by the trustee and the proceeds are distributed to the debtor’s creditors.

In a foreclosure situation, Chapter 7 bankruptcy makes sense after the foreclosure because it helps people clear the slate, so to speak, and get a fresh start financially, without the threat of a deficiency lawsuit following them around after their lost the house or car to the lender and they are trying to rebuild. (A deficiency judgment, by the way, is if the debtor’s home or car sells for less than the amount owned…the creditor might later sue for the difference.)

A person can try that route. In my experience, it usually doesn’t work and the clients end up paying some portion of the initial settlement and then they still end up filing. But to back up a step, there are three basic options when it comes to dealing with creditors:

1. Remain judgment proof. This means do not have any real estate, personal property that you own outright, like cars, boats, horses, etc., do not have any wages.
2. Negotiate and enter a settlement. Possible but difficult. The person will have to do this with every single debt. May have to pay attorney’s fees and costs, interest, penalties and other unpleasantries, including taxes on the debt. (Which can cause major problems down the road.) Under this option, lawsuits aren’t stopped, interest isn’t stopped, garnishments out of bank accounts or paychecks may not be stopped. Not to mention, settlements often fall through and a lot of the debt arbitration or settlement companies are crooks themselves.
3. Bankruptcy. Best option because of the certainty and finality of the results. It’s a permanent resolution.

It depends on the individual case. Typically, after we obtain all the necessary information to draft your bankruptcy petition and schedules, we can file your case within a few days.

If there is an emergency, like a foreclosure or your car was just repossessed, we can often file in a matter of a few days, or even hours.

Approximately 30 days after filing, you must attend a Creditor Meeting. The Creditor Meeting is usually the only contact you will have with the court and creditors.

About 90 days after the meeting you will receive an order of discharge from the Bankruptcy Court stating that you are no longer obligated on the debts included in the petition, except those debts that are non-dischargeable under the bankruptcy code.

The starting point is whether your income is above the median for Idaho or below. If you are above median, you are looking at a 60-month plan. If you are below, then we are looking at a 36-month plan, though we can draw it out longer to make your payments more affordable. The amount of money you pay every month is keyed to your projected disposable income over the life of your plan. My office is very careful about creating realistic budgets so that our clients only pay what they can afford. You will continue to pay your normal costs of living (mortgage, utilities, car, cell phone, etc.), the amount of what is left over is the amount you will pay, in general cases.

Not usually. Under Chapter 7, depending on your financial situation, there is always a risk that you will be unable to keep your home, car, or other valuable assets. However, in most of our Chapter 7 cases we are able to make arrangements with your secured creditors to reaffirm the debt on cars so that clients can retain them. That said, exemptions exist that allow clients to retain their personal property. Most clients are generally able to keep their house and car, too.

It’s an order from the Bankruptcy Court removing a person’s personal obligation to pay a debt. A discharge order issued by the Court permanently prohibits creditors from taking action against a debtor personally to collect debts incurred before the filing of the bankruptcy petition. The discharge does not prevent secured creditors from seizing collateral if payments are not kept up. The discharge does not prevent collection of debts incurred after the filing of the bankruptcy. Some debts are not dischargeable, and some debts are not dischargeable under certain circumstances.

No, not every debt is dischargeable. There are 5 kinds of debt that come up now and again with my clients that are not dischargeable:

1. Student Loans
2. Taxes less than 3 years old
3. Damages arising from a DUI, including fines or penalties
4. Debts arising from a domestic order, including child support and alimony
5. Debts arising from fraud

A secured creditor is a creditor who has obtained a lien on real or personal property either with the consent of the debtor, such as a home mortgage, or involuntarily, such as a tax lien. Debts of this type include car loans, home loans, tax liens and mechanics & materialman’s liens. A secured creditor has a priority on collection of its debt on the specific property on which it has a lien.

An unsecured creditor is a creditor who does not have a lien to secure repayment of its indebtedness. Debts of this type include medical bills, credit cards, cash advance or pay day loans.

Yes, but what you must do to keep the car through a Chapter 7 varies depending on whether there is nonexempt equity in the car.

Will the trustee take the car? If there is no equity in the car, after subtracting any car loan and exemption from the car’s present sale value, the bankruptcy trustee will not take the car. If there is equity in the car over and above the value of the exemptions available, a debtor can usually buy any unprotected equity from the Chapter 7 trustee.

If you still owe money on the car, you can choose to reaffirm the debt to the secured lender, keep the car, and continue paying under the existing terms; or you can buy the car from the secured creditor in a single payment for its present value (redemption). With some lenders, you don’t even have to reaffirm the debt: you can keep the car if you continue to make the payments called for in the contract.

If you choose, you can surrender the car and be free of any obligation to pay for it. After all, bankruptcy is a chance for a fresh start, and sometimes that means to get away from a car that isn’t working for you, such as a lemon or a gas guzzler.

When a client schedules their initial appointment, we send them a letter with very specific requests. It’s up to the client to bring the paperwork—I can usually have an effective consultation without everything on the list. But it really helps if the person brings their most current paystubs, any divorce paperwork, any lawsuit or garnishment paperwork they were recently served with and Bluebook values for all vehicles. If they own real estate, it really helps to know the amount owing on their mortgage and if they are behind, how many payments were missed.

There is no clear answer to this question. Unfortunately, if you are behind on your bills, 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 because your income to debt ratio has improved, and you most likely will be able to get new credit.