“Bankruptcy” is term that describes a legal process individuals and businesses go through because they are not able to pay the debts they owe. The legal process is governed by federal law, not state law. However, certain parts of the process can be affected by an individual state’s laws. For example, if someone owns a home that has accumulated equity over time, the amount of equity that this person can “save” or keep out of the bankruptcy proceeding, varies among the fifty states. Someone who files for bankruptcy can exempt, from the total-available assets with which the trustee can liquidate and pay creditors, a certain portion of this home’s equity.
Throughout the United States, there are 94 federal bankruptcy districts where cases are filed. The federal district having jurisdiction over residents of Montgomery County is located in Philadelphia, where the case will be filed and the court is located.
The intent of the bankruptcy legal framework is to allow individuals to get a “fresh start” on life by liquidating assets to pay their debts or by structuring a plan to repay these debts.
A business, that is likewise unable to pay its creditors, can use the bankruptcy laws to arrange payments to creditors through a liquidation process or a reorganization process.
To file for bankruptcy, a person or business can start a bankruptcy case by filing a petition with the bankruptcy court. If a client has retained a lawyer, the lawyer will be responsible for drafting and filing the petition with the court and all subsequent filings and follow up.
Along with the petition, the client or clients are required to file sworn statements that support the petition. These statements must list the following:
– All assets owned.
– The income of the person or persons filing for bankruptcy.
-The expenses for the debtor and his/her family
– All liabilities owed to all creditors.
– The names and addresses of every creditor and the amount owed to each one.
The bankruptcy regulations set forth the types of assets that are not subject to liquidation. In addition to the “homestead” type of exemption referenced above, there are exemptions for automobiles, tools of the trade, household goods, retirement assets, jewelry, as well as many others. It is important to fully disclose your assets to your lawyer so that the proper exemptions can be claimed.
Once the petition is completed and accepted for filing by the court, the law provides for a “stay” of further attempts to collect a debt from the person or the company who has filed the petition. The “stay” prevents creditors from continuing or initiating debt-collection processes such as lawsuits, wage garnishments or phone calls demanding payment.
A petition may be filed by an individual, by a husband and wife together, or by a corporation or other type of business entity.
The term, “trustee,” is used to refer to the person or entity who is the representative of the bankruptcy estate. The trustee is statutorily authorized to act primarily on behalf of the unsecured creditors of the estate. The trustee acts under the general supervision of the court and the U.S. Trustee (see below) or bankruptcy administrator. The U.S. Trustee is not the same person as the trustee who represents the interests of the creditors. The trustee is appointed under one of the bankruptcy chapters and can be an individual or a corporation.
The trustee is charged with reviewing the bankruptcy petition and the supporting statements listing the assets, liabilities and other information submitted with the filing. If the debtor decided to pay some of his or her debts or transfer some remaining funds to children, for example, the court might require that these payments be added back into the bankruptcy estate. However, only assets that were transferred or paid to creditors within a specified period of time before filing may be able to be recovered.
An experienced attorney will ensure that any payments made to creditors in advance of a bankruptcy filing are done within the appropriate parameters. This is a major reason why it is important to consult with an attorney as soon as possible. The pre-filing planning process is extremely important to the success of the entire case. Because such payments and transfers are deemed to belong to the bankruptcy estate, the attorney could suggest waiting to file until a certain amount of time has passed.
In other types of bankruptcy filings (under other Chapters), the trustee liquidates property of the estate and makes distributions of the funds to the creditors; or, works to develop a reorganization plan or repayment plan that protects the creditors’ interests while allowing a business to continue operating or an individual to continue working.
The term, “trustee,” might also refer to the U.S. Trustee who is an officer of the Justice Department. The U.S. Trustee is responsible for supervising the administration of bankruptcy cases, the estate involved and the trustee described above. The U.S. Trustee monitors many of the procedural requirements of the application and hearing processes.
One of the first questions clients ask is will a bankruptcy affect their ability to obtain or refinance mortgages afterwards. They are also concerned about how it affects their credit report and how they can improve their credit score post-bankruptcy. The answers to these questions depend upon the type of bankruptcy that was filed and whether debts were completely discharged, or whether a reorganization or a repayment plan were agreed upon.
That being said, the general answer to both questions is, “Yes,” the bankruptcy will affect a client’s ability to refinance an existing mortgage or obtain a new mortgage. The bankruptcy will also affect the client’s credit report with the three main credit reporting agencies and the client’s credit rating from each one. The bankruptcy will remain on a client’s credit report for tenyears, in most cases.
However, it may be possible to refinance or obtain a mortgage after about two years. A mortgage banker can explain the lender’s requirements for each type of product offered. Additionally, the underwriting requirements change often as does the legislation governing the home-mortgage industry. So, what may prevent a client from borrowing today, may not be an obstacle in a few months.
Remember, the primary purposes of the law are to give someone a fresh start by relieving the debt and repay the creditors if there are assets available to do so. Bankruptcy is a complicated, paper-intense, and emotionally draining procedure. Having an experienced lawyer to guide and represent a client through the process is a very wise idea.