We are a federally designated Debt Relief Agency under the United States Bankruptcy Laws. We assist people with finding solutions to their debt problems, including, where appropriate, assisting them with the filing of petitions for relief under the United States Bankruptcy Code.
Bankruptcy in Brief
The object of bankruptcy is to give one a discharge. It is achieved in two different ways: Liquidation under chapter 7; reorganization under chapters 11 or 13. Put simply, "reorganization" means that through a plan you pay your creditors at least a portion of what is owed. Chapter 11 is generally resorted to by businesses that have a chance of turning things around. Chapter 13 is used by persons who are behind in payments on things in which a creditor has a security interest, like a mortgage or deed of trust on a house or a lien on a car, are in danger of losing the property by foreclosure or repossession, want to keep the property, and have a regular income with which to get caught up on the missed payments. A typical chapter 13 plan would be to get caught up on a mortgage arrearage over 36 months and to pay the unsecured creditors - the credit card creditors - at least 15%. Such a plan would have the debtor paying the chapter 13 trustee monthly installments. Once the plan is confirmed, generally about three months after filing, payments would be made by wage withholding. Chapter 13 can also be used by someone who owes taxes and either cannot work out an installment payment plan with the taxing authority, needs more time to pay than the taxing authority is willing to allow, or finds that paying a 10% administrative fee is a less expensive alternative than an installment arrangement where the taxes continue to accrue interest. In other words, on this last point, it may be cheaper, say, if you owe $100,000. in taxes to pay the 10% administrative fee, $10,000. in this case, than an installment arrangement where the taxes continue to accrue interest and payments are applied first to the oldest accrued interest, then to taxes for the oldest year, then to the next oldest interest and taxes, etc. (As an aside, with Bankruptcy Reform you can calculate the actual percentage for the trustee’s fee and in the Eastern District of Virginia it is 6 %.)
One feature in reorganization not available under chapter 7 is what is called "cramdown." A basic principle of bankruptcy is this: If a creditor has a security interest in collateral (a durable good, except your principal residence), that creditor is only secured up to the current fair market value of the collateral, or property. When property depreciates in value - such as a car wearing out - that means the creditor need only be paid the current, depreciated value. For example, if a creditor has a lien on a car, is owed, say, $15,000., but the car is only worth $10,000., then in a chapter 13 plan you can, in effect, re-write the car loan, splitting it into a secured portion, $10,000., and an unsecured portion, $5,000. You would through the bankruptcy plan pay the $10,000., at interest, and for the balance of $5,000. pay the creditor, along with other unsecured creditors, an unsecured dividend, generally 10 to 15%. The drawback is that the numbers have to work to make it worthwhile and for any amounts in a chapter 13 plan you have to pay adminstrative fee mentioned above. In other words, in this example, you would be paying $10,600., that is the $10,000. revised principal amount, plus the actual 6% administrative fee. The typical debtor in chapter 7 owes on average $17,000. in unsecured, or credit card, debt. In order to file under chapter 13, as of April 2007 you must owe less than $337,000. in unsecured debt and no more than $1,010,000. in secured debt.
With the filing of a petition, under any of the chapters, an automatic stay is in effect which prevents creditors from taking any further action to collect. Thus, if a foreclosure sale is to be held tomorrow, by filing for bankruptcy petition today the foreclosure sale has to be halted. Also, when someone is behind in a mortgage payment and they try to work out a catch-up arrangement with the mortgage lender, as much as the lender will give them to get caught up is six months. If they are three months behind, that’s payments-and-a-half for six months. But if you file for bankruptcy under chapter 13, you have a right to go to 36 months to get caught up, and, if necessary ("for cause"), you can go to 60 months.
The typical chapter 7 case for a consumer debtor is what is called a "no asset" case. That means - generally speaking - you keep what you have, get a discharge from your debts, and the creditors get nothing. It’s a no asset case because what the debtor has is not much, but - more importantly - the exemptions that you can invoke are generous enough to protect all your property. While bankruptcy is Federal law and uniform across the country (although its interpretation can vary from bankruptcy court to bankruptcy court), the exemptions, in at least in 33 states, including Virginia and Maryland, are based on state law. And whereas the exemptions in either state are not generous compared to some states, they are generous enough to allow the typical debtor to go through chapter 7 and get a discharge. Briefly, the exemption scheme in Virginia is that you can exempt $5,000. in family heirlooms, $5,000. in household goods, $10,000. in tools of a trade, $2,000. in a vehicle, $1,000. in clothing, and $5,000. per person, and $500. per dependent, in any property you want to identify - money on deposit in a bank, equity in a house, utility security deposits, or a tax refund.
The only contact that one has with the bankruptcy process is what is called a "meeting of creditors." That’s not a meeting with your creditors because they don’t bother to attend. It’s a meeting with a person called a "trustee." The trustee is there for the unsecured creditors, the credit card creditors. In a chapter 7 case, he’s trying to get his hands on the debtor’s non-exempt property. If the lawyer does his job, the trustee cannot get his hands on any of the debtor’s property. He abandons it - meaning he’s not going to sell it or liquidate it, to make a payment, or distribution, to unsecured creditors. In Northern Virginia, after Bankruptcy Reform 10 to 12 meetings of creditors are scheduled per hour. That’s, on average, five to six minutes that one is seated across the table from the trustee who asks about now 20 standard questions. The meeting is scheduled about a month after the petition is filed.
With completion of the meeting of creditors, there’s a waiting period of 60 days. During this period creditors can take several actions, although they rarely do. If a creditor believes you’ve hidden assets and not listed them on the bankruptcy petition, they can file a complaint objecting to a discharge. On the other hand, a creditor can seek to have a particular debt excepted from discharge. There are 19 exceptions to discharge. All but three are, you might say, automatic. Most importantly, they are debts owed for support obligations; taxes due within three years of filing for bankruptcy; and government guaranteed student loans. The other 15 exceptions to discharge are Congress’s tinkering with social policy. For example, a debt arising out of liability from drunk driving is excepted from discharge. The most frequent exceptions used by creditors is essentially fraud - typically where a creditor claims that you got a cash advance or purchased goods on a credit card without an intention to repay. If no creditors object to a discharge or seek an exception to discharge - and they typically don’t - the debtor gets a discharge order in the mail about a week to two weeks after the expiration of the 60 day period. In chapter 13, the debtor gets a discharge after making all plan payments. What is key to a successful chapter 13 case, though, is that all payments to secured creditors after filing for bankruptcy, such as house and car payments, are made.
With the discharge one is eligible to borrow again. However, the net effect of bankruptcy is that one is viewed by a prospective creditor as a higher risk. The risk a creditor assumes is reflected in the interest rate that is charged. Thus, after bankruptcy - and the record of a bankruptcy remains on your credit report for ten years - you’re likely to find that credit is more difficult to get and more costly. Nevertheless, to re-establish credit, what any creditor wants to see is, How have you paid? On time? If you’ve been behind in payments, that will be reflected on your credit report. Therefore, to re-establish credit, you have to pay on time. Besides finding credit somewhat more difficult to get as a result of bankruptcy, you’re able to obtain a non-conforming or Veterans Administration (VA) mortgage loan one year after a discharge, and a conforming mortgage loan two years after the discharge; although there now are programs for loan qualification that shorten those time periods.Back to Top
Congress effective October 17, 1005, tried to make bankruptcy more difficult and more expensive for the consumer debtor. It has placed more obstacles in the way of filing. It did it in a number of ways.
What Congress did in Bankruptcy Reform was to try to get consumer debtors who would otherwise file under chapter 7 to file under chapter 13 and thru a plan pay their creditors something. They chose a complex mechanism, one fraught with interpretations either way - which can help or harm the debtor. It starts with Median Income. (Median means that half the population are above and half below.) Median Income as of February 1, 2007, for Virginia is as follows: One person household, $46,600. per year; Two person household, $58,800.; three person, $69,700; four, $79,900. If there is only one person in your household and your annual income is less than $46,600., then you can file as if Reform didn’t occur. Except now you have to take a Credit Counseling Course, which can cost as much as $50., and take as much as two hours, before filing. And to get a discharge, you have to take another course - one in Financial Management - which can cost as much as $20., and consume as much as two hours. (You can take these courses over the phone or internet; and one outfit has local offices for in-person counseling.)
However, if your income, based on a review of it for the previous six months, is above-median, then you get into the "Means Test." The Means Test is to determine whether you may be abusing bankruptcy if you were to file under chapter 7. (Congress in Bankruptcy Reform changed the standard from "substantial abuse" to mere "abuse.") That is to say that if you flunk the Means Test and want to file under chapter 7 nevertheless the Office of U.S. Trustee, which monitors cases in bankruptcy, can file a motion to have your case dismissed for abuse. The Means Test takes your mandatory deductions, such as income taxes and Social Security, and then takes the IRS national and regional expense standards for housing, transportation, and food, clothing and incidentals as your expenses. If after applying those "expenses," your disposable income - the money left over after deducting your living expenses from your gross monthly income - you have now more than $110. left over each month, then you must file under chapter 13 and for five years (60 months) pay that disposable income to the chapter 13 trustee, who in turn makes distributions to the unsecured creditors filing timely proofs of claim.
Congress in Bankruptcy Reform dictated that you use the IRS standards. But if you have actual expenses greater than the IRS ones when you are buying a car or house, for example, then those amounts are deemed "reasonable" even though they may be in excess of the IRS standards. In other words, on its face it favors those buying their homes, versus renting, and buying a Hummer over a Honda Civic.
Cases in chapter 7 are almost all "no asset" cases because of exemptions debtors can claim, as mentioned above. Congress in Reform limited the exemption of equity to $125,000. you can claim for a homestead if you purchased the house within 1215 days (three years and four months) of filing for bankruptcy protection. While this is not an issue in Virginia, since there is no real homestead exemption other than owning property with a spouse as tenants by the entirety, it illustrates how complex Congress has made the process. On the other hand, if you have moved around within the six month period preceding filing, then your claim of exemptions can get tricky. You can claim the exemptions in the state where you resided for the six month period prior to the two years immediately preceding filing, unless that state requires that you be a resident of the state to claim its exemptions, in which case you can claim the Federal exemptions - which are usually more generous than state exemptions.
It tried to eliminate the "ride through" or "keep and pay" option in chapter 7 mainly for cars being financed. Bankruptcy courts prior to Reform across the country had recognized this option. It is where the debtor simply continues making payments on a car loan, without "reaffirming" the debt. Now, the debtor must either surrender the car or reaffirm the debt. And in order to reaffirm the debt, you have to enter into a reaffirmation agreement with the creditor and file it with the court. But in doing that you have to demonstrate that by continuing to make payments reaffirmation is not going to impose an undue hardship. Woe to him who needs the car, can’t get another loan, has someone who co-signed, but whose budget cannot afford the car payments. In chapter 13 Congress in Bankruptcy Reform limited the "cramdown" of car loans. It is now limited to loans obtained more than 910 days before filing (30 months). However, as the provision is being interpreted, it only applies as worded to "purchase money security interests" for the debtor. If the debtor bought the car for his wife, or it has a business use or purpose to the purchase the restriction does not apply and the newer car loan can be crammed down. As the result of a Supreme Court decision in 2003 (Rash), the interest rate is the prime rate, plus one or two risk factor points, now about 10%, irrespective of whether the loan is being crammed down or not.
In the ordinary chapter 7 case, however, at the very least the debtor has to furnish to the trustee a week in advance of the creditor’s meeting their most recent tax return and pay statements for 60 days prior to filing. Generally, at the meeting of creditors the trustee then returns the paperwork since they don’t want to be burdened keeping any such papers. Another aspect of Reform is audits. Beginning in October 2006, every 1 out of 250 cases is being selected randomly for audit. Papers which were provided to the trustee for the meeting of creditors, plus bank statements, tax returns for two years, and pay statements for six months now will have to be provided to auditors if the case is selected.
Whether Reform achieves its stated objective of rooting out abuse and fraud in the system is probably not going to be proven definitively. What can be said is that just before Reform took effect in mid-October 2005 an overwhelming number of petitions were filed. That tapped out the reservoir of debtors for most of 2006 when only about one-third the number of cases were filed. But by mid-2007 the numbers were beginning to escalate simply as a reflection of the economic times - the downturn in the housing market, interest rates creeping upward, and the ever-increasing cost of living, especially gasoline.Back to Top
Life After Bankruptcy
You have filed a bankruptcy case under chapter 7 of the Federal Bankruptcy Code. The object of bankruptcy is to discharge all of the debts you have as of the date of filing the petition and to give one a "fresh start."
The fresh start begins with the discharge issued by the bankruptcy court about four months after your petition was filed. Keep a copy of the discharge order handy, as well of the bankruptcy petition because if you ever buy a house or apply for a mortgage loan in the future the loan underwriter will want to see a copy of the bankruptcy petition.
You will have discharged all of the debt you had as of the date of the filing, whether a creditor was listed on your petition or not, as long as you did not not list the creditor for purposes of hindering, delaying or defrauding them. Yours is or will be a "no asset" case which is to say that the creditors get no money from the bankruptcy trustee. Thus, if you omit a creditor all the omitted creditor does not receive is notice of the bankruptcy. So when you apply to buy a house in the future and the lender wants to see a copy of the bankruptcy petition to compare with a current credit report and they find that there are creditors listed on your credit report which should show the debt as discharged and it is not listed on the petition, be assured that you do not owe the debt. If the creditor was not listed on the petition, you nevertheless got a discharge. What you need to do is clear up your credit report. You can begin clearing up your credit report by requesting a copy from each of the three credit reporting agencies. Start about a month after you receive the discharge order. Contact them as follows:
P.O. Box 75013
Allen, TX 75013
P.O. Box 740241
Atlanta, GA 30374
P.O. Box 390
Springfield, PA 19064
You will have to pay a fee for the report if you have not been denied credit in the past 60 days. You can now obtain one from each credit reporting agency annually. Go to www.annualcreditreport.com and print out one for each. Under the Fair Credit Reporting Act, you can dispute erroneous information on your credit report through the credit reporting agencies. The credit report will have a form for disputing information. Once you submit your dispute, the credit reporting agency refers it to the creditor for verification. The creditor has 30 days to verify the information. If it is not verified in 30 days, the information is presumably incorrect and is to be removed. If it verified as correct and you still dispute the information, you can place a note on the account of up to 100 words. By disputing information on your credit report you are cleaning up your credit. As you get some information removed or corrected, it is easier to get other information straightened out.
In re-establishing credit, bear in mind what any creditor wants to see in a borrower: That regularly you have paid your debts on time. To be "put in collections" means the creditor has to expend resources trying to collect, an effort which costs them money. You will be eligible to borrow as soon as you get a discharge. But the net effect of bankruptcy is that you will be charged a higher interest rate since you are viewed as a greater risk You qualify for a non-conforming mortgage loan or a VA loan one year after a discharge. You qualify for a conforming mortgage loan two years after the discharge. The bankruptcy will be on your credit report for ten years; your payment history for seven years. However, what is unknown is the time after which bankruptcy has no effect on a credit score. It could well be two years after the discharge, although the record remains on your credit report for ten years.
One means of re-establishing credit is with a gasoline credit card. You tend not to build up big balances and pay it off monthly. Once you obtain two credit card accounts and show a history of regular payments, you will note that you will begin receiving more - and more - unsolicited credit card offers in the mail. This generally occurs about a year after bankruptcy. Be wary of having too many credit cards. It may have been what got you into financial trouble in the first place. Having too much credit has a negative effect on your credit scoring - what every prospective lender looks at in determining whether to make a loan and at what interest rate. And paying credit card balances at the minimum monthly amount is like a mortgage loan. You might pay it off in 30 years.Back to Top