Bankruptcy Basics - Frequently Asked Questions

Can I still file bankruptcy after the new bankruptcy law?

Yes. The new law changed the bankruptcy rules, but the law did not eliminate your right to bankruptcy protection.

Do have to take a credit counseling course before I file bankruptcy?

Yes. But it is relatively straightforward to complete. The new bankruptcy law requires all debtors to fulfill two education requirements: a credit counseling course prior to filing and a financial management course after your creditors meeting before obtaining a discharge. Failure to complete either of these courses and file the appropriate certificates with the court will prevent a successful bankruptcy.

Chapter 7 debtors are required to take the courses on their own while the Chapter 13 Trustee will offer the required courses to Chapter 13 debtors, but. All bankruptcy education courses are available over the internet, in person, or by phone, and are approved for the district in which you are filing.

You may get additional information about the costs and availability of debtor education at one or more of the following agencies approved for the District of Massachusetts: http://www.usdoj.gov/ust/eo/bapcpa/ccde/CC_Files/
CC_Approved_Agencies_HTML/ cc_massachusetts/cc_massachusetts.htm

Who can file bankruptcy?

Any person residing, domiciled, or having property or a place of business in the United States may file Chapter 7. A business may also file a Chapter 7. One of the changes in the new law is that there is now a "means test" to Chapter 7 eligibility. This "means test" applies an income vs. expense test in order to file Chapter 7 bankruptcy. Your bankruptcy advisor can apply this "means test" before filing your petition. There are currently no minimum or maximum income limits or other income requirements or limitations for people whose unsecured debts are primarily non-consumer debts such as investment liability, business losses, taxes, or student loans.

What is a joint petition?

A joint petition is the filing of a single bankruptcy petition by an individual and the individual's spouse. Only people who are married on the date they file the bankruptcy case may file a joint petition. Unmarried persons, corporations and partnerships do not qualify to file joint petitions. And, although married debtors may file a joint petition, they are not required to do so.

What are the different chapters in bankruptcy?

Chapter 7 is the liquidation chapter of the Bankruptcy Code. Chapter 7 cases may be filed by an individual, a corporation (defined as including a qualifying business trust) or a partnership. Under chapter 7, a trustee is appointed to collect and sell all property that is not fully encumbered by a lien and is not exempt and to use any proceeds to pay creditors. When the debtor is an individual, the debtor is allowed to claim certain property as exempt. The individual debtor usually receives a discharge, which means that he or she is relieved of the obligation to pay certain types of debts. Corporations and partnerships are not eligible to receive discharges. For more detailed information on chapter 7, click here: Chapter 7 Liquidation Under the Bankruptcy Code

Chapter 11 is the reorganization chapter available to businesses and individuals who have assets and/or income for use in restructuring and repaying their debts. Creditors vote on whether to accept or reject a plan of reorganization, which must be approved by the Bankruptcy Court. While the debtor typically remains in control of the assets, the Court, in some circumstances, can order the appointment of a trustee to run the business. In addition to the filing fee paid to the Clerk, the debtor must pay a quarterly fee to the U.S. Trustee based on the debtor's revenues. For more information on chapter 11, click here: Chapter 11 Reorganization Under the Bankruptcy Code

Chapter 13 is the debt repayment chapter for individuals (including those who operate businesses as sole proprietorships) who have regular income, whose secured debts do not exceed $871,550 and whose unsecured debts do not exceed $290,525. (Note that these debt limitations change from time to time.) Chapter 13 is not available to corporations or partnerships. Chapter 13 generally permits individuals to keep their property by repaying creditors out of their future disposable income. The chapter 13 debtor proposes a repayment plan which must be approved by the Bankruptcy Court. The debtor pays the amounts set forth in the plan to the chapter 13 trustee, who distributes the funds to creditors in return for a small fee. The chapter 13 debtor receives a discharge of most debts after the debtor completes the payments required under the plan. For more information on chapter 13, click here: Chapter 13 Individual Debt Adjustment

What is a Chapter 7 bankruptcy?

Chapter 7 bankruptcy is the most common type of bankruptcy and is sometimes referred to as a "liquidation bankruptcy." In Chapter 7, all of the debtor's assets, other than those types of assets specifically exempt from liquidation by statute, are turned over to a bankruptcy trustee for sale. Sale proceeds, if any, are distributed among the creditors. Most Massachusetts Chapter 7 debtors have little non-exempt personal property because of the federal or Massachusetts' exemption laws. Chapter 7 bankruptcy is used to eliminate, or discharge, primarily unsecured debts such as credit cards or medical bills. Chapter 7 does not eliminate secured debts, such as vehicles (unless the secured item is surrendered). Chapter 7 will not save a house from foreclosure nor a car from repossession if you are delinquent in payments.

Under the new bankruptcy law, only people who pass the "means test" (see above) may file a Chapter 7 bankruptcy. People who fail the means test have to file Chapter 13 bankruptcy. The means test is a complicated mathematical formula. Your bankruptcy attorney can run a means test using bankruptcy software after he collects necessary information from you.

What is a Chapter 13 bankruptcy?

Chapter 13 bankruptcy results in a plan to repay all or part of your debt, but it is not designed to discharge or eliminate most debts. Chapter 13 is used most often to save a house from a foreclosure sale. Chapter 13 is also useful to eliminate some IRS debt and to establish an affordable plan to pay IRS debt that cannot be eliminated. Chapter 13 bankruptcy is available to debtors with regular income. A business cannot file Chapter 13. In addition, there are upper limits on the amount of the individual's secured and unsecured debts in Chapter 13 cases.

Who can file bankruptcy in the District of Massachusetts?

The Massachusetts Division accepts bankruptcy filings from individuals who reside or are domiciled in Massachusetts. Any Massachusetts resident can file bankruptcy in Massachusetts. If you file bankruptcy in Massachusetts, however, you can only claim Massachusetts' asset exemptions if you have resided in Massachusetts for the previous two (2) years. Otherwise, you must use exemptions of the state where you previously lived for two years or, in some cases, the default set of federal bankruptcy exemptions.

Can married people file bankruptcy jointly?

Married debtors can file a joint bankruptcy petition for a single filing fee, and most attorneys charge only a slight higher legal fee for joint cases as they do for individual cases. Married couples who are jointly liable on most debts should file a joint bankruptcy. On the other hand, if only one spouse is liable on most of the debts, the indebted spouse may file an individual bankruptcy, and in most cases, the individual debtor's bankruptcy will have no adverse effect on the non-filing spouse.

"How will filing a bankruptcy affect my ability to get future credit, (i.e., car loans, mortgages, etc.?)"

The answer is usually surprising. For most people considering bankruptcy due to a foreclosure, repossession, or high credit card balances, their credit is generally not good to start with. In fact, failure to pay on these types of debts will continue to lower credit scores on a monthly basis.

In contrast, a bankruptcy filing is designed to discharge debts and allow you to make a fresh start. In essence, while bad debt continues to drag your credit down indefinitely, a bankruptcy (although initially reducing a credit score) essentially "cleans the slate" and allows you, through the use of responsible post-bankruptcy credit, to rebuild your credit relatively quickly.

In fact, with responsible post-bankruptcy credit use, someone who filed bankruptcy is generally able to get new credit, (including a car loan/mortgage,) within a year or two.

Although many people perceive it differently, a bankruptcy provides honest, good, hard working people a fresh start and allows them to reestablish their creditworthiness so they can live prosperous financial lives.

Will I be able to buy a home after I file a Chapter 7 bankruptcy?

Filing bankruptcy is not the end of your home ownership dreams. Even people with a recent bankruptcy in their credit history can often get a home loan if careful steps are taken.

The prime reason lenders are typically comfortable in giving a home loan is that a house in itself is an asset, and if the mortgage goes unpaid, a foreclosure can be commenced to recoup the loan amount. Pursuant to FHA guidelines, many lenders will approve a mortgage loan after a period of two years has passed following a Chapter 7 bankruptcy. Generally, individuals who have filed a bankruptcy less than two years ago are not qualified for a FHA loan. In addition, once an individual has been in a Chapter 13 bankruptcy for two years, they may also be eligible for a refinance, provided they have made their last 12 monthly mortgage payments on time.

In contrast, an individual will be eligible for an FHA loan after three years has passed since his/her last foreclosure. FHA will insure mortgages to individuals who have filed for Chapter 7 liquidation bankruptcy two years after the discharge, provided the borrower has re-established good credit and has demonstrated an ability to manage financial affairs. Surprisingly, one of the best ways to increase your chance of getting a home loan may be by opening a new small credit card account right after filing for bankruptcy, and then maintaining the credit card account properly thereafter.

Can my back taxes be discharged in bankruptcy?

Taxes can sometimes be discharged in bankruptcy. Specifically, the discharge provisions for Chapter 7 applicable to taxes are found in §523(a)(1). The first exception to discharge is simply stated: if the tax is entitled to priority, it is not discharged. A quick review of these priority taxes is as follows:

• Income taxes where the return WAS DUE within the 3 years prior to the petition being filed. If the return was due on August 15, 1990 (the debtor requested an extension), the tax is priority in any bankruptcy filed prior to August 16, 1993. This is known as "the three year rule." §507(a)(8)(A)(i).
• Income taxes where the assessment was made within 240 days, prior to the petition date. This period of time is tolled while an offer-in-compromise is pending, plus 30 days. This is "the 240-day rule." §507(a)(8)(A)(ii).
• Income taxes are a priority where the tax remains assessable and the tax does not arise from 1) a non-filed tax return 2) a delinquent return filed within 2 years of the petition, or 3) a fraudulent return. For example, if the debtor has extended the assessment period by agreement with the IRS under 26 USC §6501(c)(4) or if the assessment has been prohibited due to litigation pending in the Tax Court, 26 USC §6231(a), the tax is assessable after the bankruptcy petition is filed and is granted priority. §507(a)(8)(A)(iii). Also see In re Massoni, 20 BR 416 (Bankr KS 1982) and In re Easton, 59 BR 714 (Bankr CD I11 1986).

In addition to priority taxes, other types of taxes are nondischargeable in Chapter 7:

• Taxes for which a return, if required was not filed are not dischargeable. §523(a)(1)(B)(i).
• Taxes arising from a return which was filed within two years before the petition date are not discharged. This is known as "the two-year rule". §523(a)(1)(B)(ii). Taxes arising from returns filed after the petition date are also not discharged. A substitute return prepared by the IRS under 26 USC §6020(b) does not constitute a filed return for this section. In re Bergstrom, 949 F.2d 341 (10th Cir. 1991).
• A discharge is not allowed for taxes where the debtor filed a fraudulent return or willfully attempted in any manner to evade or defeat the tax. §523(a)(1)(C). The conduct must be deliberate, not accidental, and done with fraudulent intent. In re Gathwright, 102 BR 211 (Bankr D Or 1989).
• Non pecuniary loss tax penalties (e.g., late filing, failure to pay, negligence, fraud, etc.) are not discharged unless either 1) the tax to which they are attached is discharged or 2) the penalty is based upon events that occurred more than three years before the date of the petition. §523(a)(7). In re McKay v. United States, 957 F.2d 689 (9th Cir. 1992). The "transaction or event" which gives rise to most penalties is the due date of the return.

Do I need an attorney to file bankruptcy?

Bankruptcy law does not require that you hire an attorney to prepare a bankruptcy petition or to represent you in your bankruptcy case. If you enjoy doing things yourself, or if you really cannot afford an attorney, you can find forms on the internet needed to file your own petition at http://www.mab.uscourts.gov/mab/node/26

However, bankruptcy is a complicated area of the law, and the bankruptcy law gives no special treatment to debtors who file their own petition. The new bankruptcy law makes filing bankruptcy substantially more complicated and the practice of bankruptcy law is therefore more specialized. We strongly believe that the financial risk of filing your bankruptcy incorrectly under the new bankruptcy law is much greater than the amount of a reasonable fee paid to a bankruptcy attorney. For example if you file incorrectly and not all your debt is discharged you will not be able to refile.

How does the "new" bankruptcy law affects MA Homestead Declarations

The new bankruptcy law signed into effect on April 20, 2005 by President Bush may affect the equity in a debtor's home. Substantial concern has been raised with regard to the ability of a debtor to protect his or her residence. Under present Massachusetts law, debtors can elect to use the Massachusetts Homestead Exemption to protect $500,000 of equity from creditors, either in a bankruptcy or non-bankruptcy situation. Under the present law, and effective immediately from the date the law was signed by President Bush, that figure has been reduced to a maximum of $125,000 in many situations. The ability to increase the $125,000 amount will be dependent upon the length of time that the debtor has owned the home, how long he or she has lived within the state and the source of the funds used to purchase the residence. This is a major change from the former law protecting residential property from loss when faced with financial difficulties.

What does a Homestead not protect me from?

The following are exempt from the Homestead Law:

• federal, state and local taxes, assessments, claims, and liens;
• mortgages used to purchase the residence, and in the case of the elderly homestead, first and second mortgages held by financial institutions or others;
• an execution issued from the Probate Court to enforce its judgment that a spouse pay for the support of a spouse or minor children;
• where buildings on land not owned by the owner of a Homestead estate are attached, levied upon or sold for the ground rent of the lot whereon they stand;
• upon an execution issued from a court of competent jurisdiction to enforce its judgment based upon fraud, mistake, duress, undue influence or lack of capacity;
  • debts contracted prior to the acquisition of the homestead.

What is the difference between a denial of discharge and a determination that a debt is non-dischargeable?

A denial of a discharge affects the debtor's entire discharge--and therefore all dischargeable debts - while a determination of nondischargeability affects only a particular debt. When a discharge is denied, the debtor gets no discharge at all and remains liable for the full repayment of all of his or her debts. The Bankruptcy Court can deny a debtor's discharge for various reasons, the most common being that the debtor failed to take the required financial management course; concealed property within one year prior to the bankruptcy or after the case is filed; made a false statement under oath in the bankruptcy case; presented or used a false claim; or refused to obey a lawful order of the court.

On the other hand, a determination of nondischargeability excepts only a particular debt from the discharge. If the Bankruptcy Court determines a particular debt is not dischargeable, then the debtor is obligated to pay that particular debt, but the remaining dischargeable debts are discharged.

What are the fees for filing bankruptcy?

How much do attorneys charge for bankruptcy?

In the past, most consumer bankruptcies were relatively simple and legal fees were low. The new bankruptcy law increases the amount and complexity of legal work required to prepare a bankruptcy petition and successfully complete a filing, and as a result, legal fees are higher than they used to be. Also, the amount of work and fees will vary according to the debtor's income level. As a general guideline, a debtor below Massachusetts' median income should not have to pay more than $1,700 in legal fees for a simple Chapter 7 bankruptcy. The court charges a $299 filing fee, and there may be other costs for financial education required by the bankruptcy law. A debtor with income above Massachusetts' median income will usually have to pay $300 to $500 more as additional paperwork is required. It is possible, but difficult, to file bankruptcy without the help of an experienced bankruptcy attorney.

Chapter 13 cases are more complicated, and legal fees are higher. The bankruptcy judges expect and approve legal fees of approximately $3,500 (this is just an estimate) (in addition to the filing fee) to file and complete a standard Chapter 13 case. If your Chapter 13 case involves a wholly-owned business, or other complicated legal issues, legal fees will be higher. The good news is that most attorneys require a down payment of approximately $1,500 to $2,500 (plus the filing fee) to prepare and file a Chapter 13 case. The balance is paid through the Chapter 13 plan over a period of several months.

Contact Mooney McGinn LLP

Mooney McGinn LLP has two Massachusetts offices to serve our clients - in Danvers and in Cambridge. We offer an initial phone consultation to all new clients.

Call our attorneys in Cambridge at 617-245-8080, in Danvers at 978-767-4221, or contact us by e-mail via the Contact Us page.