Bankruptcy - How It Works
The individual(s) or business filing for bankruptcy is referred to as the "Debtor". Once the Debtor files a "petition", the bankruptcy court clerk mails out notices to all creditors advising of the "meeting of creditors", which the Debtor is required to attend. The meeting of creditors is conducted by an individual known as the "Trustee", who is assigned to oversee and review the petition, ask questions of the Debtor, and conduct a due diligence investigation of the cases assigned. At this meeting, the Trustee will ask questions of you under oath in which you are required to respond.
The Trustee has the right to sell your non-exempt property. The Trustee and creditors have sixty days from the meeting of creditors to object to your Bankrutpcy. If there are no objections, the Court will enter a Discharge of your debts. The vast majority of cases are Discharged without objection from the Trustee and/or creditors.
One of the more difficult parts of filing for bankruptcy for the Debtor is the unfamiliarity with the terminology involved. For this reason, we have compiled the following list of terms and definitions that are used in Bankruptcy proceedings.
- Automatic Stay - provides for a period of time in which all judgments, collection activities, foreclosures, lawsuits, garnishments, and repossessions of property are suspended, as of the date of filing, and cannot be pursued by the creditors on any debt or claim that arose before the filing of the bankruptcy petition, unless and until special permission is received from the bankruptcy court by way of a motion.
- Confirmation hearing - the Debtor(s) must attend this hearing before the Judge wherein all oral and/or written objections to the plan are addressed and the bankruptcy judge either approves or denies the debtor's plan of reorganization or repayment.
- Creditor - the individual or business entity whom the Debtor owes money at the time of filing or prior to filing for bankruptcy relief.
- Debtor - the individual or business entity filing the petition and requesting the relief under the Bankruptcy Code.
- Discharge - An order of the court releasing the Debtor from personal liability for certain dischargeable debts and prevents creditors who are owed those debts from taking any action against the debtor or his/her unsecured and/or non-exempt property to collect the debt. The Trustee or a creditor may object to the discharge within 60 days following the first Meeting of Creditors. Under normal circumstances, if no objections are filed the court will grant a discharge after the 60 days have expired from the first Meeting of Creditors. If a Debtor is denied a discharge, the Debtor will continue to owe the debts as if the bankruptcy had not been filed. Examples of reasons for a denial of discharge and/or dischargeability of a debt are as follows: fraud, concealment of assets, false information and/or statements, refusal to obey court orders, drunk driving conviction, intentional injury or damage to others, embezzlement, larceny, theft, government and criminal fines, alimony, child support, student loans, debts not listed in the bankruptcy petition, etc. A discharge will eliminate the debtor's personal liability for a debt incurred; however, a co-debtor who does not file bankruptcy will remain fully liable for the debt. Furthermore, mortgages and certain other liens pass through bankruptcy and remain valid and enforceable post-bankruptcy.
- Joint Petition - A petition filed by both husband and wife. Unmarried individuals may not file a joint bankruptcy.
- Meeting of Creditors - (also known as a "341 Meeting") - The Debtor(s) must attend this meeting wherein a Trustee and creditors ask questions of the Debtor(s) under oath regarding the debtor's finances. The Debtor must respond in good faith. This meeting generally occurs one month after the initial filing of a Chapter 7, Chapter 11, or Chapter 13 bankruptcy petition. In a Chapter 13, the Trustee will determine if a confirmation hearing is necessary at this meeting.
- Petition - A sworn list of real property, personal property, creditors, assets, liabilities, income, expenditures, exempt property and a statement of your financial affairs. A joint petition is a petition filed by both Husband and Wife.
- Plan (Individual Adjustment of Debts in Chapter 13 or Plan of Reorganization in Chapter 11) - a listing of the debtor's proposed restructuring of payments for monies owed including attorney's fees and arrearages. The plan must be completed no later than sixty (60) months after the filing of the petition in a Chapter 13 case. Payment under the plan provides for secured creditors first, followed by priority and unsecured creditors.
- Secured Claim - a claim in which the creditor has a lien or mortgage on collateral of the Debtor(s) to secure all or part of the claim.
- Trustee - a representative appointed by the court to examine the assets of the Debtor for the benefit of payment to Creditors.
- Unsecured Claim - a claim in which the creditor has no collateral to secure its claim.
- Means Test - In its simplest terms, the Chapter 7 means test takes into account your gross income during the six months prior to the month you file. That number is used to calculate your annual gross income, which is then combined with your household size, marital status and any potential deductions. If you do not meet the requirements under the Chapter 7 means test, or if your debt relief goals show Chapter 7 is not the right type of bankruptcy for you, we will work closely with you to see if you are eligible for a Chapter 13 bankruptcy. The Chapter 13 means test is quite similar to the Chapter 7 test, but the goals are different. Under Chapter 13, we use the test to determine the minimum length of your repayment plan and how much debt you will pay back to your unsecured creditors. The means test is extremely complicated. A math error may inaccurately show you are not eligible for Chapter 7 bankruptcy. It is highly important that you work with an experienced bankruptcy attorney from the beginning to make sure you do not lose any debt relief opportunity that may be available to you or over pay your creditors in chapter 13.