Introduction to Bankruptcy Law

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	An Introduction to Bankruptcy Law
Books about Debtor-Creditor Law More Articles Legal.com Home Page	by David M. Alden, Esq.

There is no such thing as a standard bankruptcy case. All are different. Some are large, and some small. Some are friendly while others are hotly contested. The purpose of this section is to give people an overview of what consumer bankruptcy in the United States is all about. To keep things straightforward, we won't get into business bankruptcy filings other than to mention that people who own small businesses can file bankruptcy to liquidate or reorganize business debts.

That depends. All bankruptcy filings are required to be 'in good faith.' This requirement comes from Congress' intent that bankruptcy may be used to give people a fresh start after some event, or series of events, left them in financial straits. (The U.S. Congress, by the way, wrote and periodically revises the Bankruptcy Code which is Title 11 of the United States Code. In this way, Congress considers the balance of power between creditor and debtor interests, and is able to maintain fairness in the balance by virtue of its power to make and amend these laws). Bankruptcy is not intended to give debtors an unfair advantage over their creditors. And it certainly is not intended to protect people who have acted deliberately to cause harm to others. But bankruptcy is intended to help honest debtors, who would otherwise exist (perhaps chronically depressed) under an unrelenting burden of debt, get back on their feet. Congress' rationale is that it is better to have a mentally healthy and productive population than to punish people for years, if not decades, for their financial mistakes.

Sure. A consumer good faith filing might follow a period of unemployment caused by layoff or illness. Sometimes it is caused by debts left over from an ill fated attempt to start a new business (what is that statistic ... that 80% of all new business fail within the first five years?) A less than good faith filing is one where a person lived, from month to month, off their lines of credit and credit cards when they should have realized that they would not be able to pay back the ever increasing balances. Sometimes there is a plausible explanation, like the person who is out on disability but expects to return to work soon. If their temporary disability status becomes permanent, they may never return to work and be able to pay off the debts. A bad faith filing is when someone abuses the bankruptcy process, perhaps by filing bankruptcy after having been caught committing fraud; then making things worse by lying about (concealing) their assets during the bankruptcy. When things get this bad, the bankruptcy court usually throws out the debtor's case by dismissing it.

The first step for most people is to talk with an attorney or buy a book about filing bankruptcy. Either way, you can get an idea of the law and how it applies to your set of circumstances. Once having made the decision to file, the first step is to prepare the documents that make up the Voluntary Petition (there is a rarely used Involuntary Petition where creditors can put a debtor into bankruptcy, usually because the debtor is paying everyone except the creditors who begin the Involuntary case). A bankruptcy petition can easily be 25 pages long, so you must gather quite a bit of information to be able to get it all filled out. It is, in fact, a little like preparing your income tax return.

Your choices for getting the petition prepared are: Hire a lawyer who will take care of it for you (most expensive but best chance of getting it done quickly and accurately, especially if you're sure to hire a lawyer who is experienced in bankruptcy matters); hire a paralegal, correctly called a Bankruptcy Petition Preparer, who can type the forms for you (less costly, but the BPP cannot legally or ethically give you legal advice, which can happen as simply as their answering a straightforward question for you); type the forms for yourself (minimal cost of purchasing a book or forms kit, although budget a weekend of your time to read the instructions and get all the pages typed).

Once your petition is typed, you will need to make approximately five sets of copies (check with your bankruptcy court's clerk) so that you will get one court stamped set back when you file your case. The filing fee changes from time to time, so check to determine the exact amount, but runs in the neighborhood of $160 to $175. It is usually best to pay by cashier's check or money order, but the court will also accept cash so long as you bring the exact amount (the author had to buy a cup of coffee with a $100 bill once when he showed up to file a petition and did not have exact change with him). The bankruptcy court won't accept your personal check. Sorry.

The bankruptcy court will mail a notice of your case to all of the creditors that you listed in your petition. Be patient while these notices find their way through the mail to each creditor's bankruptcy department. If collectors call in the interim, be honest with them. Tell them that you filed for bankruptcy and answer their questions regarding the case number, date of filing, where filed, etc. If you don't tell them that you filed, they will keep trying to collect from you. Once they know you've filed they will start to leave you alone, which is what you want ... isn't it?

About a month after your case is filed, you will go to the Meeting of Creditors (aka the 341 Meeting, named after the Bankruptcy Code section that requires it). As with many things in life, it's name is misleading: It is not a meeting of creditors at all. Instead, you will meet with the Trustee assigned to your case, who may ask you for more information about the things you listed in your petition. There may be a creditor there to ask you some questions, but don't count on it (unless, of course, you've spent the last several years soliciting investment moneys from retired persons and lost it all, in which case you may expect to have many creditors present. If this is the case, plan to be on your most diplomatic behavior. You will feast on crow. Good luck.)

Give the court three, or so, months after your 341 Meeting to wrap up your case and, one day, you will receive a document in the mail that discharges the debts that you listed in your petition.

You will want to keep your copy of the petition and your discharge paper safe for many years following completion of your case. These documents will be your first line of defense in the event a creditor whose debt was discharged attempts to try to collect from you after your bankruptcy case is completed.

Most people regain credit within two years after they complete their bankruptcy case by demonstrating good payment habits following their bankruptcy. Many people reaffirm one or two of their obligations in order to keep property that they purchased, such as major appliances from Sears or an automobile financed by their bank or credit union. By making these payments on time each month, good credit is being reported on their behalf. So, with most of their old debt discharged and nothing but on time payments being reported for the past two years, may ex-bankruptcy debtors find themselves having good credit again. You want to be sure to make your payments on time, and not at the end of the grace period, as you recover from bankruptcy. And be sure to not reaffirm too much debt. For example, don't reaffirm a $3,000 credit card just so you can keep the card. Apply for a secured credit card after your bankruptcy instead of obligating yourself to pay back $3,000 of old debt. Bear in mind that some creditors will continue to send statements to you for awhile. This is technically illegal, but are you really going to go out and hire a lawyer to sue them? Just throw the statements in the garbage and, after a while, they'll stop coming. Be sure to respond, though, if you're ever served with a law suit attempting to collect a debt that was discharged. All you have to do is show that the debt was discharged by bankruptcy and you'll win. But if you don't respond by filing an Answer, the creditor will get a default judgment against you.

About the author: David Alden is an experienced bankruptcy attorney who practiced law for nearly ten years in San Jose and San Francisco, California. He has represented hundreds of clients and additionally serves as a Judge Pro Tem and case arbitrator for the Santa Clara County, California courts. Alden founded Legal Recourse® in 1991 and co-founded Legal.com, Inc. in 1999 with the intent of making the law more accessible to people.

An Introduction to Bankruptcy Law

by David M. Alden, Esq.