October 21, 2009
By: Gregory Arcaro
What You Need to Know Before Filing for Bankruptcy
The purpose of this article is to give a basic overview of the bankruptcy process with particular emphasis, where appropriate, on the State of Connecticut. Although the Bankruptcy Code is a Federal law, variations in state laws that effect bankruptcy are significant. In addition, regardless of the laws, judges, trustees and members of the bar of every state all have their own way of doing things. I am reminded of this fact each year when I attend the Annual Convention of the National Association of Consumer Bankruptcy Attorneys, of which I am a member. My practice is limited to Connecticut bankruptcy cases.
There are two chapters of bankruptcy that individuals typically file, Chapter 7 and Chapter 13. A Chapter 7 bankruptcy discharges all pre-petition debts that are … dischargeable. Some are not. Some examples of non-dischargeable debt are income taxes incurred in the last three years, child support, alimony, student loans and liability incurred as a result of intentional harm. A Chapter 13 bankruptcy is most often used to repay a mortgage arrearage, non-dischargeable taxes, or if your income is too high.
In Chapter 7 Bankruptcy it is necessary to obtain mandatory credit counseling within 180 days before filing bankruptcy petition. I list of the approved credit counseling agencies for Connecticut are listed by the Office of the United States Trustee. Once that is done, a bankruptcy petition is filed with court. A trustee is appointed to administer bankruptcy. All non-exempt assets should be surrendered for liquidation and distribution. Debtor retains only exempt assets. The proceeds from liquidation are split among creditors, according to priority established by the Bankruptcy Code.
Likewise in chapter 13 it is necessary to obtain mandatory credit counseling within180 days prior to bankruptcy. The same as with a Chapter 7 Bankruptcy, a petition is filed with the Bankruptcy Court. In addition to the petition, a Chapter 13 Plan is also filed. The Plan sets forth what you intend to pay creditors during the course of your Chapter 13 case. The Plan provides payments over a period of three to five years. As a result of a law passed in 2005, more plans will be for five years. Payments are made from disposable income, which means whatever is left over after providing for the basic necessities like food, shelter, etc., while debtor retains assets. In Chapter 13 all or a portion of debts are paid off over a period of time under a specific plan. With exceptions noted in text (e.g., student loans, support obligations) debts are discharged.
Eligibility: One has to pass the Means Test to qualify for a Chapter 7 bankruptcy There is a lot of calculation to be done as the state laws apply differently for the different states. There are two ways to “pass” the Means Test (and qualify for a Chapter 7). The first is to be below the State of Connecticut medium income. Your income for Means Test purposes is an annualized average of what you (and your spouse if you are married) earned in the last six months. The second way to pass the means test is to have more allowed deductions than income. Allowed deductions are a combination of IRS standards and payments to secured creditors, like car loans and mortgages. Often this is complicated and should be done only be an experienced bankruptcy attorney familiar with Connecticut practice.
Prior Bankruptcy (?): If you have filed a Chapter 7 bankruptcy in the last 8 years, you will not receive a discharge in a new case that is filed. It is very important to find out the exact date of your prior filing. If you have filed a Chapter 7 in he last 8 years, you can still file a Chapter 13, but you will have to pay all your debts as part of the Chapter 13 case. Non-dischargeable debts: As discussed previously, there are 2 types of debts, non-dischargeable debts and the dischargeable debts. Nondischargeable debts include child support, alimony, income tax and student loan. It is useless to file a chapter 7 bankruptcy with these kinds of debts, as these debts will remain even after discharge. In this situation one can file the Chapter 13 bankruptcy instead.
Non-Exempt Property: There are two types of property, mainly exempt and non-exempt. In chapter 7 bankruptcy the non-exempt property is at risk of liquidation. So, it is important to evaluate as to how much of the property is at risk, before filing for bankruptcy. In Connecticut, you can choose between Federal or Connecticut exemptions. Connecticut exemptions provide more protection for your homestead but Federal exemptions provide more protection for other property. See my related articles on State of Connecticut Exemptions and Federal Exemptions.
Co-signers: It is important to note that your bankruptcy does not effect the liability of co-signers. If you file bankruptcy, the creditor can still collect from any co-signer on the same debt.
Although bankruptcy does resolve a lot of problems for people in distress, one should take caution of the effect of a bankruptcy before filing. Bankruptcy is very predictable if done by an experienced practitioner, but could have drastic consequences if not done properly. If you have questions regarding this article or wish to schedule an appointment with me, please do so. I would be happy to meet with you.