This webpage deals with bankruptcy (a federal court action (with Iowa exemptions) staying the actions of creditors and collectors, paying or dismissing debts to creditors, and allowing a debtor to "start over"), filing requirements, and divorce implications.
Bankruptcy is an often misunderstood and complex activity (as you can see on this webpage), so I would strongly encourage people to have an initial consultation with an attorney concerning their rights and obligations. Because bankruptcy is complex, not all the information on this page is accurate for every debtor. Debtors are cautioned to see an attorney to verify the accuracy of this information in their particular case. (Note: amounts in the codes change with the CPI. While every effort has been made to update these amounts on this webpage, amounts should be verified to determine if current.)
There are several types of bankruptcies (which are often referred to by their respective Chapters in the Federal Bankruptcy Code (Title 11 of U.S. Code, with bankruptcy rules promulgated pursuant to 28 USCA § 2075). Personal Bankruptcies include Chapter 7 (liquidation) and Chapter 13 (reorganization), and Businesses include Chapter 7 (liquidation but no discharge of debts for businesses) and Chapter 11 (reorganization). There is also a Chapter 12 bankruptcy for farmers and fishermen.
Debts Not Dischargeable:
Certain debts are not discharged in bankruptcy including:
1. Alimony
2. Child Support
3. Most recent back taxes and government fines and penalties
4. Most student loans
5. Fraudulent debts
6. Cash advances of up to $825 made within 70 days of filing ($875 after April 1, 2010).
7. Recent large purchases of more than $550 made for luxury items within 90 days of filing ($600 after April 1, 2010).
Student loans:
To discharge in bankruptcy, you must show an extremely difficult standard of "undue hardship" to you, your family, and your dependents (although a recent Supreme Court decision stated that if a Chapter 13 plan discharges the student loan after the payment period and the lender does not object, then the remainder of the loan is discharged. United Student Aid Funds, Inc. v. Espinosa, 08-1134 (U.S. 2010)). To meet the undue hardship standard, you basically must be physically unable to perform any work and chances of gainful employment in the future is virtually nonexistent. The standard must be met at the time of filing, not later during the bankruptcy process. If this is the case, a separate motion must be filed with the bankruptcy filing, and you must appear before the judge to explain the hardship during an adversary proceeding.
Private loans are now treated the same as government insured loans under the 2005 reform act and are not dischargeable except under this undue hardship standard..
Chapter 13 might be an advantage for student loans, as it could clarify how much is owed by challenging the claim (often difficult to determine how much is owed when the loans are resold and transferred), and could make scheduled payments under Chapter 13. However after the plan is completed in 3-5 years, you will still be required to payback the remaining loan amounts. There are no longer any statute of limitations for collection of student loans so the Department of Education has the right if the loan is not discharged or repaid to:
1. Tack collection fees of up to 25% and collection agency commissions of up to 28% onto the loan.
2. Take your federal income tax return until the loan is repaid
3. Garnish up to 15% of your income without suing you first.
4. Take as much as $750/month (up to 15% of your income) in federal benefits to which you might be entitled (social security etc.)
5. Sue you for your debt and place liens on your property.
It may be best to work out a repayment plan over a longer period, consolidate the loans, or defer or forebear the loans, as bankruptcy will probably not help out student loans.
Student loan debt can be collected by garnishment without ever going to court. The federal agency guaranteeing the student loans can issue the garnishment orders. The agency must send you written notice (to your last known address) at least 30 days before issuing a garnishing order to the employer. You are then entitled to a hearing before an administrative law judge, entitled to review and copy your student loan records, and entitled to enter into a payment plan in lieu of garnishment. A student loan agency garnishment can take up to 15% of your disposable income (after tax income). If you were involuntarily unemployed, garnishment cannot be issued until you have been continuously re-employed for more than 12 months. Also, you can be sued in state or federal court concerning the student loan debt. However all collection activites are stayed by filing of bankruptcy and are stayed while you are in bankruptcy.
Filing Requirements for Bankruptcy: (Section 521) (These are the items that must be filled out or completed prior to being able to file for bankruptcy. Please complete the requirements or draft lists of financial debts, creditors, income, etc. prior to your appointment with the attorney.
1. Prior to filing for bankruptcy, the debtor must attend credit counseling within 180 days before filing and a certificate from the counseling agency is required as part of the pleading for bankruptcy. List of approved credit counselors in Iowa. (Note: another course is required prior to discharge)
2. Notice to debtor (will be completed by your attorney)
3. Two months of pay stubs or other payment advices (521 (a)(1)(B)(iv)) (Actually need 6 months for completion of the Means test).
4. List of creditors (521(a)(1)(A))
5. Schedule of assets and liabilities
6. Schedule of current income and current expenditures
7. Statement of debtor’s financial affairs
8. Certificate of attorney that delivered notice required under 342(b) (will be completed by the attorney).
9. Statement of monthly net income
10. Statement of anticipated income or expenditure increases
11. Copy of debt repayment plan, if any (your attorney will help develop, if necessary).
12. The attorney signs the petition after investigating and determining that the pleadings are accurate
The filing of the bankruptcy consists of the Petition, schedules, and statement of financial affairs. To fill out the required paperwork, the filer should develop:
1. a list of creditors with the amount and type of the claim;
2. income listing source, amount, and frequency of income;
3. a listing of all property;
4. A detailed list of all monthly living expenses.
For a look at sample bankruptcy forms, look at the official website of the bankruptcy court.
Automatic Stay of Collection Actions and Acts (Sect 362)
Dates from time of filing, so don’t tell car lender or other secured lender that you will be filing bankruptcy because the asset might be repossessed to be utilized as a bargaining chip before bankruptcy.
The automatic stay is comprehensive and includes virtually all creditor collection activity including garnishments (if notice given to proper subdivision), dunning letters, legal action to collect, disconnecting utilities, repossession, liens on property, foreclosure, filing or continuing collection suits, enforcing judgments obtained prior to bankruptcy, obtaining or exercising control over property of estate including secured creditor’s claim, informal collection actions, any act to create, perfect, or enforce any lien against property of estate, act to collect, assess or recover claim that arose prior to commencement of case, setoff of any debt owed to debtor that arose prior to commencement of case against any claim against debtor, commencement or continuation of any proceeding before U.S. Tax Court concerning debtor. Judgments obtained past date of filing, but before notice, are invalid.
Emotions:
Bankruptcy can be an extrememly emotional decision. Often the stigma of bankruptcy scares the client. The fear of being published in the paper will often scare the client. In larger cities, the chances of anyone noticing are slim. In smaller cities, the rumor mill will be prominent anyway, so publishing the notice should not be a concern.
Bankruptcy should be viewed as a business decision. It is smarter to have a fresh start or to reorganize than to struggle and owe more due to collection fees and interest. Businesses and individuals with high incomes understand this concept and will utilize bankruptcy to start over. It's usually the people with lower incomes that are more concerned about bankruptcy. Bankruptcy happens in all walks of life and affects good people who have had usually unexpected unfortunate circumstances. The stigma of bankruptcy doesn't last long, and your credit is usually better after bankruptcy than immediately prior to bankruptcy. Look at bankruptcy as a business decision, not an emotional decision, and determine whether it makes sense for you.
Don't make promises that you cannot keep prior to filing bankruptcy. A recent promise may require repayment after bankruptcy, but an older debt could simply be discharged. Comingling business and personal debts could also require repayment. If you are struggling financially, it may be better to declare bankruptcy than to try extraordinary methods to survive financially (which may not work out anyway.) It may be better to get a fresh start after bankruptcy.
Bankruptcy and Divorce:
Often bankruptcy follows a divorce and can affect the results of a divorce judgment or settlement. Support is not affected by bankruptcy and is not discharged, but property settlements may be affected and may be discharged in bankruptcy (not in Chapter 7, but may be affected in Chapter 13). Thus, if bankruptcy is anticipated, either all property settlements should be completed (quit claims signed in court or property exchanged prior to bankruptcy filing). However, issues could still be identified by the bankruptcy trustee in certain cases to bring the property back into the bankruptcy estate, and removed from the ex-spouse. Thus in some circumstances bankruptcy should be considered prior to a divorce settlement.
Smart planning should occur to determine whether bankruptcy or divorce comes first. If bankruptcy is filed before the divorce is finalized, unsecured debts for both parties will be discharged, and the divorce can determine who pays for the undischarged debts. This could eliminate the problem of nonpayment of the divorce ordered debts (which the other spouse is liable for regardless of the divorce decree according to the creditor). This could eliminate the possibility of being sued by the creditor. Additionally, the means test could be affected positively or negatively by filing jointly as opposed to individually, and income should be considered. Contracts for items that neither party wants could be discharged and then the contracts don't need to be addressed in the divorce. The type of bankruptcy should also be considered. A chapter 7 would be finished in about 90 days (the same period required for a waiting period in Iowa). Filing for bankruptcy first eliminates any debt argument during the divorce. However, a Chapter 13 may affect a divorce as the payment plan will continue after the divorce and you both would be responsible for the payment plan and may be prevented from selling assets.
Divorce first might be preferable in certain circumstances. If there is a big difference in income, the spouse with less income might qualify for a Chapter 7 when a Chapter 13 might be required with both incomes considered. Divorce planning may move assets out of the bankruptcy estate and protect against creditors. The divorce might require support that needs to be considered for income and expense purposes during bankruptcy. Otherwise with bankruptcy first, you may be counting on income that you don't have. Property settlements could be affected and discharged in bankruptcy (Chapter 13, but probably not Chapter 7). Possible contempt actions should be considered if the divorce is finalized first. Will either party be able to pay their obligations without bankruptcy? Are there any assets that might be seized in contempt actions that might be eliminated in a bankruptcy? However, by finalizing the divorce first, a joint bankruptcy cannot be filed. Only spouses can file for joint bankruptcy.
A Qualified Domestic Relations Order (QDRO) may possibly be discharged in a bankruptcy depending upon timing. A QDRO divides up a pension following a divorce. Once the QDRO is finalized (signed by all parties, approved by the family law judge, and processed by the pension administrator), then the QDRO is not dischargeable. Before the finalization, it may possibly be discharged in a Chapter 13 since it could be argued to be a property division (but not in Chapter 7).
Timing and Transfers of Property Prior to Bankruptcy
Transfers of property prior to bankruptcy are not a good idea. The bankruptcy trustee can reverse the transfer and you then lose any possible exemption when you may have been able to keep the asset before the transfer. The trustee specifically looks for fraudulent conveyances and can go back differing amounts of time based on a number of factors including the time, financial situation and who you transferred to property to. You may also not receive a discharge if you transfer too many assets. The general rule is not to make transfers prior to filing bankruptcy, and exempt the property to which you are entitled to exempt.
A debtor is allowed to time his/her bankruptcy filing, however, and timing should be a smart part of planning the bankruptcy. The trustee will inquire about income tax refunds, money owed to the debtor, income that is still due to the debtor, and any lawsuits. Timing may also affect whether the debtor passes or avoids the means test by timing the "window" looked at by the means test and possibly avoid the presumption of abuse. Debtors are allowed to maximize their rights to the extent allowed by law, and filing the case at an opportune time is not an indicia of bad faith, but an acceptable exercise of rights granted by the Code. In re Hageney, 2009 WL5217674 (Bky E.D.Wash. Dec 31, 2009).
The debtor should also consider the possibility of a lawsuit. There are many class action lawsuits that are ongoing in which the debtor could possibly be awarded money. It is smart to determine if there are any class action lawsuits that the debtor is entitled to participate in, and to include the possibility of a lawsuit in the filing if a bankruptcy is possible.
Note: The debtor has undoubtedly paid down bank accounts and other assets prior to bankruptcy. However, it is forbidden to pay down these accounts to prevent money from going to a trustee or a creditor. Under section section 727(a)(2) of the bankruptcy code, a discharge is granted to a debtor unless ...the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed...property of the debtor, within one year before the filing of the petition. Thus, the debtor must not pay down accounts to prevent the money from going to a creditor or the trustee. A discharge of the debts can be denied and the bankruptcy closed and filing another case for years denied. a criminal case can even be filed. One reason for the Meeting of the Creditors is to determine if assets have been hidden or transferred. All debtors usually pay down their assets prior fling. As long as the assets are used to pay bills (but not nrmally to insiders or family members), normal expenses, creditors, etc. this reason may be allowed. It is not allowed to prevent the money going to a trustee or creditor!
Income Tax Refund
One asset that is often overlooked in a Chapter 7 filing is any income tax refund that is due to the debtor. The trustee will ask about a refund during the section 341 creditor meeting. If a refund is due at the time of filing (even if a tax return has not been filed), the trustee may grab the refund as a portion of the debtor's estate to pay creditors (subject to exemptions). Tax refunds are calculated to accrue 1/12th each month. Thus depending upon the month for filing your bankruptcy, the months prior to filing would be subject to loss to the trustee.
The debtor needs to have calculated the refund before filing, schedule the refund as an asset (even if the amount is unknown), and then exempt the refund under one of the exemptions, if possible. Otherwise, the debtor may lose the entire refund. Better yet, don't file until after obtaining the refund. However, the trustee will still ask about the refund, and what the debtor did with the refund. Even if the bankruptcy is discharged, the refund could be due to the trustee! Find out for sure on the status of your refund.
Hiding Assets/ Lying on paperwork
Never lie on the bankruptcy paperwork. You swear that the filing is accurate in several locations. Falsely filing a bankruptcy can lead to debts that are nondischargeable that may have otherwise been dischargeable, loss of exemptions when exemptions might have been allowed, fines, imprisonment, and possible closing of the case without discharge.
There are numerous documents that indicate property owned. These include: financial statements to banks, prior bankruptcy schedules, depreciation schedules on tax returns, schedule of insured assets on insurance policies, inventories, credit card statements, bank account statements, and cancelled checks mong other documents. The trustee can request documents (and will see your latest tax return) and if there are discrepancies, this can lead to an investigation and possible discharge and criminal problems.
The best bet and what is required, is to list all your property on the Schedules. Use general categories for items such as clothing, furniture, appliances, etc. But list all your assets. In most cases, you will be able to keep the majority (if not all) of your assets. Even if the trustee wants the asset, it is possible to work out a deal with the trustee, subject to court approval, to allow the debtor to keep property that is not exempt (and most property will probably be exempt). All property includes items such as cash on hand, bank accounts, money owed to you, retirement accounts, vehicles, deposits with utilities and landlord, possible lawsuits, income tax refunds, stocks, bonds, recreational items, boats, bicycles, house, rental property, items that you own with another person, and items that you owe money on. If you do not list an item as an asset, you can lose the asset, not receive a discharge of your debts, possibly charged with a crime, and other issues.
Fraudulent concealment or false statements are punishable under law. The federal government investigates bankruptcy fraud and prosecution can lead to a $250,000 fine and/or 5 years in prison, and the discharge denied, with no chance to refile for years.
Criminal Prosecution
As stated above, the trustee can ask for various documents in a bankruptcy case. If there is a possibility of criminal prosecution, the debtor may be reluctant to turn over documents to the trustee. The debtor has a Fifth Amendment right to remain silent and not incriminate himself. By providing certain documents to the trustee, the debtor may incriminate himself and face criminal prosecution. If there is a possibility of criminal prosecution, the debtor should see a criminal law attorney prior to filing bankruptcy.
Documents may be incriminating but are already in the hands of other people, such as tax returns. These documents would not be testimonial and are not protected by the Fifth Amendment. Documents that are testimonial ad incriminating should not be turned over to the trustee, as they could be turned over to prosecutors. Even non-testimonial documents, if there is the possibility of prosecution, should not be turned over directly by the debtor, and the debtor may want to take the "Fifth". It might be better to have a bankruptcy closed without discharge than to face a criminal prosecution.
Attorney-Client Privilege
Attorney-Client privilege is limited in bankruptcy and may not even exist according to several court cases. A few decisions on this point indicate that the privilege does not extend to matters intended to be disclosed in a public document such as a banktuptcy petition. Additionally, if the debtor claims that he/she provided the correct information to the attorney, but the attorney incorrectly placed information on the petition, the attorney and his/her paralegal can be examined as to what was discussed.
Attorneys are not required for filing bankruptcy if the debtor is filing as an individual. But if a corporation or partnership is filing for bankruptcy an attorney is required.
Discrimination
Discrimination based on filing for bankruptcy is prohibited by U.S.C. section 525(b). This section reads: No private employer may terminate the employment of, or discriminate with respect to employment against an individual who is or has been a debtor under this title...because such debtor...is or has been a debtor under this title." 11 U.S.C. section 525(b). However, in Banner v. ABF Freight System, Inc. 5216883 (Bky.N.D.Tex. Dec. 30, 2009), the court allowed the firing of an employee since the firing was not solely related to the bankruptcy.
Same Sex Marriages
Quoting the Defense of Marriage Act, some bankruptcy courts have not allowed joint filing of a same sex marital couple even if allowed by the state. To file bankruptcy, the couple may be required to file separately. This may have changed since the Justice Department started refusing to enforce the Defense of Marriage Act on February 23, 2010. The Justice Department had been asking for dismissals of same sex marital couple bankruptcies. This is a fluid situation, and the courts may now allow these bankruptcies. However, expect some challenges. The courts may still quote the act, and creditors may also request dismissal due to the act.
Bank Debts
If the debtor owes money to a bank, he may consider setting up another bank account prior to filing bankruptcy. Banks are allowed to "set-off" debts owed them from money in the debtor's accounts. Thus, the bank is allowed to recoup money owed to them by the debtor by taking money out of the accounts. This is not protected by the bankruptcy stay. Even cashing a check at the bank could allow the bank to recoup its loses.
Another advantage to setting up a new bank account is that the old bank account is known to creditors. Prior to bankruptcy (and after bankruptcy for nondischarged debts), the creditors are able to obtain judgments and execute by getting the funds from your bank account. Another problem if the debtor owes money to a bank, he may not be able to set up another account after bankruptcy. Thus, it makes sense for debtors to set up new accounts in different banks outside their local area (so that creditors have difficulty in locating assets). Of course, these accounts must still be listed in the bankruptcy so after filing, the bank accounts will be "known" to creditors.
Discharged Debt
The goal of bankruptcy is to discharge debt. Discharged debt is no longer collectable by your creditors. This does not mean that they might not try to get you to repay. But you have a legal defense not to repay the discharged debt and if the creditor files suit, you can claim that the debt was discharged. A judge in Laboy v. FirstBank Puerto Rico, 2010 Bankr. Lexis 345 (D. Puerto Rico 2/2/2010), held the original creditor liable for selling the debt years after discharge (zombie debt) to another debt collector who attempted to collect the debt. The judge held that the very act of selling the account to someone who was expected to attempt collection was a violation of the prohibition of collection of a discharged debt. However, consumers often make mistakes in dealing with zombie debt. Never admit the debt which could restart the debt obligation. See the Fair Debt Collection Practices Act for how to handle these collectors.
One other issue with discharged debt in bankruptcy is that the debt discharged is not considered income by the IRS. Debt cancelled by the creditor is usually considered as income. The creditor will send the debtor a Form 1099-C stating the amount of debt cancelled. This amount is considered income unless the debt was discharged in bankruptcy or the debtor was insolvent (and several other conditions). If the creditor sends a Form 1099-C after the debt is discharged, the debtor can file form 982 to exclude the discharged debt from income. This income issue is a major difference between bankruptcy and debt consolidation programs. Under debt consolidation programs, the debt cancelled may be considered as income and taxes due on the income.
Real Estate
All real estate interests must be listed on the bankruptcy forms, regardless of the interest, and the value of that interest must be calculated. This can lead to complex issues depending upon how the real estate is owned. On Schedule A, real estate interests are listed, except if real estate is owned under a partnership of limited liability company. Prior to filing bankruptcy, it might be smart to conduct a title search to determine what liens are placed against the property.
If real estate is owned, an attorney should be consulted to determine the effect on the real estate if bankruptcy is filed, or if bankruptcy is even needed to be filed. In some cases, if there are no other debts, allowing foreclosure of the real estate might be a smart move (especially if there is no possibility of a deficiency judgment). Homesteads are protected under Iowa law.
if bankruptcy is anticipated, a short sale (selling the house for less than the mortgage with the permission of the lender) may not be advised. A short sale can eliminate the deficiency judgment (shortfall) if the lender agrees, but surrendering the house in bankruptcy can do the same thing with possibily less risk to the debtor. However, the house still must be foreclosed on after bankruptcy to surrender the house to the lender and this can affect credit, while a short sale might have less effect on the debtor's credit.
Debt Settlement Companies
Debt Settlement Companies offer an alternative to bankruptcy by accumulating money and after certain amounts are paid by the debtor then make payments to creditors (often paying much less than owed). There are numerous problems with this system, often leading to the filing of bankruptcy anyway at a later date, and after paying hefty fees to the debt settlement company. Usually, fees are paid first to the companies before any money is accumulated to pay debts. These fees are often 6 months to a year's worth of payments. Meanwhile, the creditors are often not being paid at all, and some companies have not communicated with the creditors. Thus creditors still can sue the debtor, garnish wages, late fees and charges added to the account, credit is adversely affected, and creditors and collectors continue to call. There is no obligation for a creditor to accept a debt settlement company offer (which is made only after a large amount has been accumulated in your account). Many of these companies are not regulated, and some are outright scams. Often, the debtor files bankruptcy after determining that payments for months have not improved their situation at all, just merely made payments for fees to the debt settlement company. If the debtor decides to utilize a debt settlement company, investigate the company throughly first, and go forward only after you understand the problems that might be created.
IRS Form 1099-C
Creditors may issue an IRS Form 1099-C which reports the cancellation of the debt as income. However, debts discharged during bankruptcy are specifically not treated as income and are not taxable. The debtor should file IRS Form 982 to show that the income is not taxable. The confusing portion of the form is to check the box 1a showing that the income was discharged in a Title 11 case- do not confuse Title 11 (Bankruptcy Code) with Bankruptcy Chapter 11. In block 10a, list the extent that the basis exceeds the debt discharged after bankruptcy (to avoid capital gains in the future). If the debt was cancelled prior to bankruptcy though, taxes may be owed, as the debt was not discharged in bankruptcy.
Adversary proceedings:
Normally a bankruptcy case is a fairly straight-forward administrative procedure with one hearing (Meeting of the Creditors). However, occasionally issues in the case require a court hearing to resolve. This would involve an adversary proceeding. A creditor may dispute the possible discharge for a debt (for example fraud or for nondischargeable reasons). A debtor may try to discharge a debt that is normally nondischargeable, bring a claim, or obtain a determination from the court. Either case would require a filed complaint to ask for a court decision. There is a complaint, answer, discovery, possible depositions, and a trial, just like an ordinary lawsuit. If there are adversary proceedings, I charge additional fees for these proceedings.
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