“Do you know anything about bankruptcy?”
This, sad to say, is a common refrain. Most people don’t think they need to know the ins and outs of bankruptcy; they just can’t imagine themselves in such dire straits.
But I’ve had this very conversation with enough people who DO declare bankruptcy to know that more of us need to understand how it works.
For the record, global investment research and wealth-building strategy is my foxhole. I’ve dedicated my life to investing for the past eighteen years. But the questions surrounding bankruptcy have popped up enough for me to take heed. That’s why I reached out to one of the top bankruptcy lawyers in Texas, Frank Maida of Maida Clark Law Firm, for this post.
Frank is board-certified and has been practicing bankruptcy law since 1980. His firm has been helping people climb out of mounting financial debt for decades. He knows how confusing the law is—and how embarrassing it can be to talk about it—which is why he offered to share his insights with ETR.
Without further ado, here’s my recent conversation with Frank about the details of bankruptcy:
Let’s start with terminology. What is bankruptcy?
It’s a legal proceeding that allows an individual or company to eliminate debt and to stop creditor harassment.
What kinds of bankruptcies are there?
Most individuals filing for bankruptcy will either have the option of chapter 7 or chapter 13.
Chapter 7 is known as “straight” bankruptcy or “liquidation.” Here, an individual must give up property which is not “exempt” under the law, so the property can be sold to pay creditors. Generally speaking, those who file chapter 7 keep all of their property except property which is very valuable or which is subject to a lien which they can’t avoid or afford to pay.
Chapter 13 is a type of “reorganization” used by individuals to pay all or a portion of their debts over a period of years using their current income. Typically, those who don’t qualify for Chapter 7 file use Chapter 13.
Ok, but how would I even know that I need to file for bankruptcy?
If you can pay your bills when they’re due, you should stay focused on that. However, if you have a lot of debt—more than your assets and income—bankruptcy would be an option to consider.
One thing to note, however. A person who is not eligible for a chapter 7 bankruptcy—because they have sufficient assets/income to pay creditors—should not file just to get rid of debt. If you do that, presumption of abuse will arise and the case will probably be dismissed or converted to chapter 13.
Can you offer more details on how the payoff happens in chapter 7 bankruptcy?
In chapter 7 bankruptcy, the debtor must turn in his or her nonexempt property, if any exists, over to a trustee, who then converts the property to cash and pays the debtor’s creditors. In return, the debtor receives a chapter 7 discharge (relief of existing debt). He or she must also obey any additional orders and rules of the bankruptcy court.
What kind of protection does that discharge entail?
Well, it’s a court order releasing a debtor from all of his or her debts and ordering the creditors not to attempt to collect them from the debtor.
Are there limitations to who can file for chapter 7 bankruptcy?
Any person who resides in, does business in, or has property in the U.S. is permitted to file—except a person who has an intentionally dismissed prior bankruptcy case within the last 180 days. To be permitted to maintain a chapter 7 bankruptcy, a person must qualify for chapter 7 relief under a process called “means testing,” designed to determine whether or not an individual has enough disposable income to pay off existing debt.
Can you talk more about what’s required in means testing?
Under this method, a person’s current annualized monthly income is tested to determine:
- If the disposable income exceeds the median annual income for the person’s state and family size (as reported by the U.S. Census Bureau)
- If the individual is not able to pay a minimum of $100 per month for 60 months to his or her unsecured creditors
Just to be clear: Disposable monthly income is a person’s current monthly income from all sources less the person’s permitted current monthly expenses. The chapter 7 case of a person whose disposable monthly income is such that he or she can pay $100 per month or more to unsecured creditors for 60 months will dismissed or converted to chapter 13 unless special circumstances exist.
Let’s talk about process. Do I need a lawyer to file? Or are their options to do this online?
It might be possible for some people to file a bankruptcy case without an attorney, but this is a complex process that requires specific timelines and steps to be followed. There is the possibility of losing property or other rights if you do not know the law, so the best option is to find a good attorney. Many offer free consultations so you can learn more about your situation.
How long does the whole process take?
A chapter 7 bankruptcy can take anywhere from 4-6 months. A chapter 13 bankruptcy can take much longer. That said, a case can be open for a minimum of 3 years and a maximum of 5 years before being dismissed or resolved.
Do people have to go to court for this?
Not usually. But when there are issues that cannot be resolved between a debtor and a creditors, a court appearance might be required.
Is there a website or phone number people can call if they have any questions or would like a consultation?
For anyone interested in finding out more, or if you know someone who might want a consultation, readers can contact Maida Clark Law Firm here. [They can also find a full database of bankruptcy lawyers and additional information on the filing process here.]
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