INTRODUCTION TO BANKRUPTCY BASICS

By LAUREN ROSS

ATTORNEY AT LAW

This article is a very brief but hopefully helpful discussion of some of the basics of the bankruptcy laws in the United States.  These comments are necessarily general and are not meant to be a complete explanation of the topics presented, but merely an introduction to the bankrutpcy law and some of the issues facing those contemplating bankrutpcy.  The information contained herein is not intended to be and should not be construed as legal advice, but merely as general legal information.  Of course, for legal advice, you should consult with a qualified attorney in your area.   

WHAT IS BANKRUPTCY?

The United States Bankruptcy Code, 11USC 101 et seq. (the “Code”), is a federal law

designed to give debtors a “fresh start”.  The concept of bankruptcy in this country is not new; Article I Section 8 of the United States Constitution gives Congress the authority to establish bankruptcy laws.   Clearly, the founding fathers recognized that United States citizens should be able to be relieved of their debts without being put in debtors’ prison.

The basic idea of the Code is that  people should have an opportunity to be relieved of their debts in appropriate circumstances.  The Code has been formulated with two competing interests in mind: 1) to relieve debtors of insurmountable financial problems; and, 2) to treat fairly the creditors of financially ailing debtors.       

 

The Code is divided into sections that are known as chapters, many of which contain general provisions that apply to all bankruptcy cases.  The substantive chapters that provide alternatives for relief for the majority of debtors are chapters 7, 11, and 13.  Chapter 7 is by far the most frequently used chapter since it provides the best opportunity for debt relief.  Both individuals and businesses can file a chapter 7.  Chapter 13 is available for individual debtors , including those engaged in business, but is not available for corporations. Chapter 13 allows debtors a period of between 36 and 60 months to repay all of the arrearages on secured debt and a percentage of unsecured debt.  Chapter 11 is a reorganization, designed primarily for business debtors.

The goal of filing a bankruptcy is to receive a discharge- a court order which effectively states that the debtor is not legally required to repay those debts which are dischargeable.  Not every debt is dischargeable, however.  Non-dischargeable debts include most taxes, spousal and child support, debts incurred as a result of fraud, student loans and several other categories of debts.  

WHEN SHOULD I CONSIDER THE BANKRUPTCY OPTION?

The best time to evaluate whether you should consider filing bankruptcy is before the point at which there is no alternative.  Many times there are ways to resolve debt problems before they get out of control.   A person or business that is having trouble meeting its monthly obligations, or is adding additional debt every month, should evaluate the cause of the financial problem and address those problems, if possible, before they get out of control.  Not everyone who is having financial problems will be a good candidate for a bankruptcy and the sooner you know what relief a bankruptcy could offer, the better choices you can make.

HOW DO I DECIDE IF I SHOULD FILE A BANKRUPTCY?

There are many factors that should be weighed before the decision is made to proceed with a petition in bankruptcy.  The first step necessary to evaluate  whether a bankruptcy is appropriate is to make a complete and accurate list of the amount and type of all of your debts and the type and value all of your assets.  Under the Code and the various states’ laws, debtors get to keep certain assets, known as exempt assets, and the determination of which assets a debtor would retain through a bankruptcy is one of the first questions that needs to be answered before a prudent decision of whether or not to file a bankruptcy can be made.  This determination will vary from state to state, since the exemption laws vary from state to state.

The next issue to consider is the type of debts that you have and whether they would be discharged in a bankruptcy.  Frequently, a debtor has some debts which will be discharged and some that will not, and a careful evaluation of those amounts of debt should be made before the decision to file is made. 

The issue of what types of debts you have will dictate whether a bankruptcy will give you adequate debt relief to warrant filing.  Secured debts- those debts collateralized by a specific item of property- are not dischargeable.  Unsecured debts, such as most credit card debt, are generally dischargeable. 

WHAT ABOUT CREDIT CARD DEBT?

When it comes to credit card debt, there are two primary issues which must be examined to determine if the debt will be discharged. First, use of a credit card when the debtor had no intention to repay the debt or the debtor should have known that he would not be able to repay the debt is considered fraudulent and may not be discharged.  Generally, this means that credit card use shortly before the filing of a bankruptcy may be non-dischargeable.

The second issue with respect to credit card debt has to do with the purchase of  durable consumer goods.  The debts for durable consumer goods purchased on a credit card are deemed secured debts, and therefore the debtor must elect to either 1) keep the merchandise and continue to pay for it, 2) surrender the merchandise back to the creditor, or 3) buy the merchandise for a lump-sum payment of its market value. 

GENERAL ISSUES TO CONSIDER

The fact that a debtor has filed a bankruptcy is public record and will be reported on the debtor’s credit report for 10 years.  Under the current law, a debtor may only file once every six years.

Congress has been discussing some significant changes to the bankruptcy laws and will likely take up the issue of bankruptcy reform again when it reconvenes in the year 2000.  The reforms that have been suggested recently are attempts to make it more difficult for consumers to get the extent of debt relief that they are now entitled to under the Code.  Although there is no way to predict what Congress will do, if you are having financial problems it would be prudent to find out whether bankruptcy is appropriate before the laws change.  

LAUREN ROSS is a bankruptcy attorney practicing in the Los Angeles, California area.  She can be reached at lross@pacbell.net.