Dallas Bankruptcy Blog

Approximately 30-60 after a debtor files for a Chapter 7 or Chapter 13 bankruptcy, they have to attend a Meeting of Creditors. 

The name is misleading because it implies that you’re going to sit down at a table with all of your creditors, which many people believe occurs in a courtroom.  In reality, it is extremely unlikely that any of your creditors will show up for this meeting and it often takes place in an office. 

The purpose of this meeting is really for the bankruptcy trustee to review your schedules and question you under oath regarding the filing of the bankruptcy case.  Once you receive the notice of this meeting you will attend with your bankruptcy attorney (if you were lucky enough to file with one), and be asked questions regarding your case. 

Some common questions are, “Did you read and review all the bankruptcy schedules before you signed them?  Are they true and accurate to the best of your knowledge?  Did you list all of your income, expenses, and debts?” 

The purpose of this is to verify the accuracy of your bankruptcy schedules, to make sure that you have not attempted to defraud the court, and that you’re not purposing to file a bankruptcy plan that is not feasible or practical. 

Also, in the case of Chapter 7 liquidation bankruptcy, to verify that you are eligible to file and that you haven’t transferred any property in contemplation of filing. 

Typically, this meeting is the only meeting that a debtor will have to attend.

The third most common reason for bankruptcy filing doesn’t have to do with a loss of income or medical illness, but instead the deceptive practices of the credit card industry.  People who have been lured in by such practices never meant to get in over their head - but slowly, over time, their debt has been building.

This phenomenon can easily be explained by the analogy of the frog and the pot.  If you drop a frog in a pot of boiling water, the frog will immediately jump out because it is hot. However, if you put the frog in some lukewarm water and slowly raise the heat, the frog will never jump out.  It will simply boil to death because it can’t sense the temperature slowly rising. 

That is what the credit card industry does to consumers.

Many credit card companies reel you in with the promise of a 0% interest rate and no payments for six months.  Then, God forbid, you miss a payment or are late - and suddenly that 0% interest becomes 27%. 

Now you can’t even afford to make the minimum payments.  Every payment you make is strictly interest. After that, the debt doesn’t go down.  You may find yourself having to make payments for the next thirty years in order to pay it off. 

What happens when the car breaks down or you get sick?  Filing for bankruptcy may be your only way out.

A very common reason for bankruptcy filing is medical illness.  The cost of healthcare, even for people who are lucky enough to have insurance, can be astronomical these days. 

If you are unfortunate enough to be diagnosed with a terminal illness, or even just an injury that requires you to be hospitalized, you are probably going to experience a reduction in income.  You may even lose your job. 

In addition to this loss of money, you also have to bear the cost of your medical treatment.  A one-night stay in a hospital can yield an unbelievable bill. 

What happens when it’s for a week or two, or more?

Let’s say you don’t have medical insurance but you still want to get top quality medical care. Most of the time the only choice a person has is to turn to credit cards.  They put the cost of their treatment on a credit card in order to get well, only to find later that they can’t afford to pay it back. 

This is the number two leading cause for bankruptcy filing.  These are not bad people.  No one wants to get sick!  Filing for bankruptcy may be the only available option for financial survival.

The perception perpetuated in the media and in our society is that only deadbeats file for bankruptcy.  Many people believe that you’re a bad person if you file because you’re just trying to get out of your debt and give your creditors the short end of the stick. 

That is simply not true. 

Many people who have filed for bankruptcy are good people.  They do not want to file, however they find themselves doing so for reasons out of their control. 

The number one reason people file for bankruptcy is due to a reduction in income.  People get laid off and have difficulty finding work, or replacing their previous salary.  A divorce or loss of a loved one can also cause you to be unable to fulfill your financial responsibilities. 

Be realistic - how many people nowadays can say that we have six months to a year of savings set aside?  It’s simply not the standard means of operation in our culture.  Many people get their paycheck and the spend it entirely on their mortgage, their car, their living expenses and then find there’s nothing left over for savings. 

Have you ever asked yourself this question, If I lost my job and was unable to find another job for three months, would I be okay?  Would I be able to pay for my car and my house and keep up with my debt?  

For many people the answer would be no.  Many of us are closer than we think to filing for bankruptcy, so be careful how you judge.

Many people believe that if they file for bankruptcy, they no longer have to make payments on their house and they can continue to live there for free.  This is a common misconception and misapplication of a Homestead Exemption. 

People often think that a Homestead Exemption, which protects your home from bankruptcy and other legal proceedings, can be extended to a house they still owe money on.  It cannot.  Homestead Exemption only applies to houses that are paid in full, that have no liens or mortgages outstanding. 

So, if you have a mortgage and have not paid off your house, the fact that you have filed for bankruptcy does not mean that you get your house for free. 

You still must make payments on that house.  You will not necessarily lose your house, even if you are filing a Chapter 7, or “liquidation” bankruptcy, as long as you continue to make your mortgage payments on a regular and consistent basis. 

This is the purpose of the Homestead Exemption. 

Failure to make any payments on your property will result in eventual loss.  While each state has some form of Homestead Exemption, the specifics do vary.  Check to see if the Homestead Exemption in your state will help you keep your home before filing for bankruptcy.  

A Chapter 7 bankruptcy is basically straight liquidation.  Once find out you are eligible for a Chapter 7 bankruptcy by completing the Means Test and your bankruptcy attorney files your bankruptcy schedules, you then file your case and go to your meeting of creditors. 

All non-exempt assets are sold in order to pay a portion of what you owe.  Approximately four to six months after filing all of your debt is discharged.  There are no further payments to any unsecured creditors.  Your debt is wiped clean.  However, payments on unsecured debt, such as home and car loans, must still be made if you don’t want to lose them.

Chapter 13 bankruptcy is very different from Chapter 7 bankruptcy.  With a Chapter 13 filing, you agree to a payment plan.  Your debt is reorganized and paid on for up to three to five years.  People who have too much income to qualify for a Chapter 7 bankruptcy according to the Means Test qualify for this type of plan. 

The Means Test was created by Congress in order to push people who make a sizable income away from filing a Chapter 7 bankruptcy and into Chapter 13, the re-payment plan.  Trying to get out of paying on your debt when you are capable of doing so is considered an abuse of bankruptcy law. 

Congress developed the Chapter 7 Means Test as part of the Bankruptcy Abuse and Consumer Protection Act of 2005. The Means Test consists of a form where you enter in information about your pay over the last six months to determine your current monthly income average.

In the next step your income is then compared with the applicant median income for other similarly situated individuals. For example, if you are single then you are compared to other singles, if you are married with kids then your income is compared to families of the same size.

The median income is based on IRS standards.  If your six month average is equal to or less than the IRS median for a family of the same size, then you automatically qualify for a chapter 7 bankruptcy.  However, the test doesn’t end there.  The Means Test also takes into consideration your mortgage and car payments,  your household living expenses, IRS deductions, 401K contributions, and such.

After all these additional expenses, is there still a surplus?  Is there still disposable income that will allow you to make payments toward your debt?  If so, then you will not be able to file a Chapter 7.  You qualify instead for a Chapter 13. In essence, the Means Test takes away the discretion that was previously in the hands of the courts and bankruptcy attorneys.  Congress believes this will prevent the abuses of people wrongly filing for Chapter 7.

If you’re looking at filing bankruptcy, chances are you’ve already considered and ruled out credit counseling. After all, completing a credit counseling course is now required fare for potential bankruptcy candidates under the Bankruptcy Abuse and Consumer Protection act of 2005. The counseling course can be done online, over the telephone, or in person, but must be completed before filing. However, the suggestions provided by credit counselors are often overrated. 

Credit counseling and consolidating is actually funded by creditors and is no more than an alternative means of collecting on debt.  While it may help you reduce your interest rate slightly, your credit is still going to be negatively impacted. The reflection of credit counseling on your credit report will likely have the same type of negative consequences as if you had just filed for bankruptcy.

In addition to hurting your credit rating, you’re still going to have to pay back sizable monthly payments and spend a considerable amount of time living on a sub-standard monthly budget.  Many people who consolidate debt find it hard to make these payments and end up filing bankruptcy in the end.  So if you are thinking about consumer credit counseling, it might be a good idea to talk to a bankruptcy attorney first and weigh your options.

The New Bankruptcy Act In 2005 Congress passed the Bankruptcy Abuse and Consumer Protection Act.  While The Act does change some of the criteria and processes for filing bankruptcy, many people have the misconception that the new laws make it nearly impossible to qualify.   

This is simply not true.   

Although The Act was predominantly sponsored by the credit card industry, who undoubtedly has plenty of reasons to try and make it more difficult for potential filers, the basic principles of bankruptcy filing remain the same.   

One of the biggest changes made by The Act is that all debtors must now pass a ‘Means Test’ before qualifying to file for Chapter 7, or “liquidation” bankruptcy.  Debtors who are unable to pass the test can instead file a Chapter 13, known as a “reorganization” bankruptcy.   

When a Chapter 7 bankruptcy is filed, the bankruptcy court liquidates all assets in order to pay back creditors.  Under a Chapter 13, filing the debt is reorganized into an installment plan.  Another change included in the 2005 Act is the length of time between bankruptcy filings.  Before The Act, you could file a Chapter 7 every six years; however, it is now eight years.

While there are some changes, the case law and the practical application of The Act by the bankruptcy courts and trustees is virtually no different.   If you’re having financial difficulty don’t be put off by these changes - talk to a bankruptcy attorney first and see if you are a candidate for bankruptcy under the new law.

Stay tuned for more information!