Americans are often thrust into financial hardship through little fault of their own. Sometimes, filing for bankruptcy is your only chance at a fresh start. In order to file for bankruptcy, you need to hire an attorney to help you throughout the bankruptcy process. Unfortunately, most Americans cannot afford to pay for a bankruptcy attorney. This power point presentation accompanies an article I am currently writing that shows how modern consumers cannot access the bankruptcy courts simply because the U.S. Bankruptcy Code does not allow Chapter 7 attorney fees to be paid over time like Chapter 13 attorney fees can.
Bankruptcy
Bankruptcy: Costs, Credit Scores, and Life After Discharge in Missouri
Bankruptcy is a court-supervised process where a debtor in files papers with the federal courthouse. This blog post answers three frequently asked questions about bankruptcy: (1) How much does a bankruptcy lawyer cost? (2) How bad will filing for bankruptcy hurt my credit score? (3) How quickly after bankruptcy will my credit score begin to improve? The answers are all specific to bankruptcies filed in Missouri only.
Bankruptcy is a tool used to halt your creditors in their tracks; as soon as one files the appropriate papers with the federal court, creditors must stop all collection attempts. This gives debtors something extremely valuable: breathing room. There are two federal court systems in Missouri: the Western District of Missouri and the Eastern District of Missouri. You file bankruptcy in one of those two districts depending on where you live. Additionally, there are two types of bankruptcy that debtors can file. Chapter 7 bankruptcy is the fastest option (approximately 3-6 months from beginning to end), whereas Chapter 13 bankruptcy lasts between 3-5 years before the court gives you a fresh start. Most debtors hire an attorney to consult and assist them throughout the bankruptcy process.
Frequent Question #1: “How much does a bankruptcy lawyer cost in Missouri?”
The Answer: it depends. Each bankruptcy lawyer will agree to a unique price with each client, and several factors go into this final price. I spoke with one lawyer who uses a flat-fee method. He will file a Chapter 7 bankruptcy for his clients on the western side of Missouri for $2,000. The same lawyer charges $1,300 for his clients on the eastern side of Missouri. If a client wants to pursue Chapter 13 bankruptcy, this lawyer charges a flat fee of $3,600 for clients in the western half of Missouri and $2,800 for clients in the eastern half. He requires that his clients pay $300 up front to cover certain expenses he will incur on the client’s behalf (doing a credit check, paying for the pre-filing credit counseling, etc.). The full amount of the bill must be paid prior to the end of bankruptcy.
Another lawyer, located in Jefferson City, Missouri, will file a Chapter 7 bankruptcy for as low as $675. However, this is not a flat fee; the price may go up depending on the complexity of the case and how many debts a client will discharge.
Frequent Question #2: “How bad will filing for bankruptcy hurt my credit score in Missouri?”
The Answer: it depends. One lawyer I spoke with told me that his clients usually take a 250 point hit to their credit score. Other research shows debtors who file bankruptcy experience a decline in their credit score between 180-260 points. Bankruptcy affects every debtor differently, but it will most likely result in a debtor having a “poor” credit score (a poor credit score is usually anything below 600 points). The hit to your credit score will appear once you file for bankruptcy. Filing for Chapter 7 bankruptcy will stay on someone’s credit score for 10 years, and fling or Chapter 13 bankruptcy stays on a credit score for 7 years. Discharged debts that disappear after bankruptcy will still remain on a credit report for 7 years. This is because while a bankruptcy court can wipe away your debts, it will still show up as a debt that was not paid in full.
Frequent Question #3: “How quickly after bankruptcy will my credit score begin to improve in Missouri?”
The Answer: it depends, but it can begin healing almost immediately. Filing for bankruptcy can be viewed as dropping a bomb on your credit score; it will be damaged for a while. But, like a forest fire, sometimes scorched earth can reveal new life underneath. One Missouri bankruptcy lawyer told me that he had a client who filed for Chapter 7 bankruptcy in the summer of 2017, she received her discharge (non-secured debts were wiped away forever) at the end of 2017, and a car dealership gave her a new car loan in January of 2018. While this result is specific to that particular debtor, the take away is that your credit will rebuild if you make it a priority.
Additionally, in the world of home loans (mortgages), most banks will begin to loan to someone 24 months after their bankruptcy discharge is issued. While most lenders will not extend credit (a loan) in the immediate months after bankruptcy, a person who works hard to improve their credit (by paying bills on time, for example) will eventually be back on their feet.
Bankruptcy Presentation from March 21
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Filing Bankruptcy? Make Sure You Double-Check Debt Collectors’ Submitted Claims
Debt collection is a multi-billion dollar industry, and it is only growing. One of debt collectors’ tactics is to get people who owe long past due debts to pay those debts despite the fact that the debts cannot be collected as a matter of states’ statutes of limitations. Debt collectors do so in a variety of ways, including filing collection actions in state courts and hoping that debtors will not assert the statute of limitations as a defense. Fortunately, the Fair Debt Collection Practices Act (FDCPA) deems this tactic a misleading and unfair practice. Courts hold that debt collectors violate the FDCPA when they file debt collection actions in state courts on debts that they are barred from collecting under statutes of limitation. Based on the FDCPA, debt collectors have entered into consent decrees with the federal government and paid millions of dollars in restitution to debtors for trying to collect time-barred debts through state court debt collection proceedings.
The FDCPA also has pushed debt collectors to look to another venue to collect on time-barred debts: bankruptcy proceedings. When a person files bankruptcy, particularly chapter 13 bankruptcy, debt collectors file proofs of claim asserting a right to collect these debts. It seemingly is up to the debtor, or the trustee, to object to the claim on the basis that collection of the debt is barred by the applicable statute of limitations. In recent years, debt collectors have added to their business model specifically buying debts that will be collected through bankruptcy proceedings and then filing claims in hopes that the debtor, trustee, or another party will not object. The practice has the potential to be quite lucrative. About a million people file for bankruptcy every year. One-third of those cases are filed under chapter 13. And given that Americans owe trillions of dollars in consumer debt, many of those cases likely include time-barred debts. The questions thus becomes, is filing a proof of claim for a time-barred debt a violation of the FDCPA?
The answer to this question split courts. Some courts said no, the FDCPA does not apply, reasoning that bankruptcy affords debtors its own set of protections. Other courts said yes, the FDCPA applies, and a private party or the government can sue a debt collector for filing time-barred claims in bankruptcy, potentially winning sanctions. This split among courts was brought to the Supreme Court, which yesterday held (in a 5-3 opinion, Midland Funding LLC v. Johnson) that the FDCPA does not apply to proofs of claim filed by debt collectors for time-barred debts. The majority, in short, reasoned that the Bankruptcy Code and other rules provide a way for debtors and trustees to identify and respond to these claims, as well as the ability for bankruptcy judges to levy sanctions against debt collectors for filing time-barred claims. The dissent, in contrast, noted that the realities of bankruptcy practice make it so that trustees and other parties are short on both time and money, such that the protections built into the Code are not protections in reality. Instead, the bankruptcy claims process now sets a “trap for the unwary.”
If you want to read more about the decision itself, see my co-blogger Adam Levitin’s post on Credit Slips. The on-the-ground question for consumers now is, what can people do to protect themselves? There are a couple actions that debtors can take to make sure that they do not fall into that trap and that time-barred claims are not paid out through their chapter 13 bankruptcy cases. If they are represented, they can ask their counsel to examine claims submitted by debt collectors. Indeed, all debtors’ counsel now should be on notice that they must examine claims submitted by debt collectors. Regardless of whether they are represented, debtors should specifically inquire about claims submitted by debt collectors, either through their counsel or by themselves.
That debtors make sure to double-check debt collectors’ submitted claims is very important. As noted in the dissent, and as my co-authors and I have shown in our recent work, less than half of chapter 13 cases end with a discharge of debts. If a time-barred debt is included in a chapter 13 case, and the case is dismissed, that debt is reactivated, and the statute of limitations on collection begins anew. As Justice Sotomayor wrote in the dissent, debtors will “walk out of bankruptcy court owing more to their creditors than they did when they entered it.”
Differences Between Chapter 7 and Chapter 13 Bankruptcy
The bankruptcy laws offer two primary options for consumer bankruptcies: Chapter 7 or Chapter 13. This blog post describes the basics of each of these chapters. In addition, the costs, benefits, and eligibility requirements of each chapter are described.
A Chapter 7 consumer bankruptcy is commonly referred to as a “liquidation” bankruptcy. Basically, consumers who file for Chapter 7 must give up all of their non-exempt property[1] in exchange for a discharge of a portion of their debt. The ability to discharge (which means to completely get rid of) outstanding debt is a very attractive feature of Chapter 7. However, lawmakers thought that consumers were abusing the system. So, in the last 10 years, the laws were changed to make it more difficult for consumers to be eligible for Chapter 7 “relief.” If the court determines that a consumer has the means and financial ability to make consistent payments to the consumer’s creditors over time, then the court can either convert the case into a Chapter 13 consumer bankruptcy (discussed below) or the court can dismiss the case entirely.
A Chapter 13 consumer bankruptcy is “repayment” bankruptcy. Consumers who file for Chapter 13 are allowed to keep all of their property. In exchange, consumers must promise to pay a portion of their future income over to the court for a period 3 to 5 years. This is called a repayment plan. The consumer submits her own repayment plan, and both the court and the consumer’s creditors are required to approve the plan. In deciding whether to approve the repayment plan, the court will look at whether the consumer’s income is stable and consistent, among other factors. If the court approves the plan, the consumer must not miss payments or default in any way, because the court can convert the case to a Chapter 7 or dismiss the case entirely.
As discussed above, Chapter 7 and Chapter 13 consumer bankruptcies contain different legal consequences and eligibility requirements. Each chapter is suited for different consumer financial profiles, and there are important advantages and disadvantages of each chapter. Here are some important requirements and features of Chapter 7 and Chapter 13 bankruptcies:
- Chapter 7 “Liquidation”
- Main Benefit:
- Ability to make a fresh start by discharging a large portion of outstanding debt
- Downside:
- Must give up all non-exempt property
- Eligibility
- Not all consumers are eligible
- **But, those with “below-median” incomes are usually eligible
- The court will compare the amount of debt with the amount of the consumer’s disposable income
- A consumer may only receive a Chapter 7 discharge once very 8 years
- A consumer may convert a Chapter 13 to a Chapter 7 case at any time
- Not all consumers are eligible
- Main Benefit:
- Chapter 13 “Repayment”
- Benefits:
- The consumer is able to keep all of her property
- Discharge of some debt is potentially available at the end of the repayment plan
- Downside:
- Often, a consumer cannot discharge any debt
- The consumer must endure a fixed budget and pay portion of her income to the court for 3 to 5 years
- If consumer misses payments or otherwise defaults, the case is converted to a Chapter 7
- Eligibility
- Only available to individuals (not corporations or other organizations)
- **But, individuals with business debts are eligible
- The consumer must have stable and consistent income
- The consumer may only have up to a limited amount of outstanding debt
- The court must approve conversion from a Chapter 7 to a Chapter 13
- Only available to individuals (not corporations or other organizations)
- Benefits:
The bankruptcy laws can be complicated, and Chapter 7 and Chapter 13 are different in many ways. For this reason, it is always recommended to consult with an experienced consumer bankruptcy attorney to discuss your options before filing for bankruptcy.
[1] For a discussion of exempt property in bankruptcy, please visit the blog post titled “Bankruptcy Basics – Exempt Property.”
Discharging Debts Through Bankruptcy
An underlying policy of bankruptcy law is to help consumers receive a fresh start in their financial lives. Many times, the only way to help people receive this fresh start is to allow them to completely get rid of a certain amount of debt. Getting rid of debt through bankruptcy is a process called discharge.
Discharge of debt occurs at the end of a consumer’s bankruptcy case. After the consumer’s non-exempt property has been collected and sold at auction, the proceeds of the auction sale are distributed to the consumer’s creditors. Once all of the auctions proceeds are gone, the consumer can discharge many of her debts one and for all. Indeed, the ability to discharge burdensome debt is one of the more attractive provisions of the bankruptcy laws.
However, not all of kinds of debt can be discharged through bankruptcy, and it is important to be aware of the types of consumer debts that are “non-dischargeable.” Debt that is “non-dischargeable” is debt that survives through the end of bankruptcy, and the consumer will still owe the same amount of that particular debt. For example, many consumers likely wonder if they can discharge their student loan debt through bankruptcy. Unfortunately, student loan debt is non-dischargeable through bankruptcy. The reason for this is because Congress decided that if a consumer could discharge her student loan debt by filing for bankruptcy, then lenders of student loans would be less willing to loan students money to pay for tuition. So, Congress created bankruptcy laws that do no allow for the discharge of student loans in order to encourage more institutions to lend students money to pay for their education. Other debts that are non-dischargeable include state and federal taxes, debt obtained through fraud by the consumer, domestic support obligations, fines or penalties payable to the government, and debt resulting from deliberate actions of the consumer resulting in harm to another person or entity.[1]
Importantly, however, a consumer might be able to discharge her student loans and other non-dischargeable debt if she can show what is called “undue hardship.” A consumer with undue hardship usually cannot maintain a minimal standard of living if forced to repay the loans and the court sees that these burdensome circumstances will persist into the future. It must be noted that the standard for proving undue hardship is a high standard and somewhat difficult for consumers to show in bankruptcy. If, however, the consumer can prove undue hardship, then a court has the ability to discharge the student loan debt or at least reduce the amount owed.
In addition, the bankruptcy laws are very clear in saying that dishonesty is frowned upon. In fact, a court may completely deny the ability of a consumer to discharge her debt if it finds that the consumer has lied to the court or to the consumer’s creditors. In these cases, where the court finds that the consumer has been intentionally dishonest regarding her bankruptcy, the consumer may not be able to discharge any of her debt thereby eliminating one of the most beneficial parts of filing for bankruptcy.
In summary, filing for bankruptcy can allow for a consumer to discharge a significant portion of her debt and allow the consumer to leave bankruptcy with a fresh start. However, some kinds of debt cannot be discharged, unless undue hardship is shown. As with all aspects of filing for bankruptcy, is it vital to consult with an attorney to discuss your options.
[1] For full list of non-dischargeable debt, see § 523(a).
Eligibility for Bankruptcy and the Means Test
When most people think of bankruptcy, they think of Chapter 7 Liquidation bankruptcy. A Chapter 7 bankruptcy involves the consumer (or “debtor”) giving up her non-exempt property in exchange for the discharge of a certain amount of her debt. Indeed, the ability to discharge debt through bankruptcy is one of the most attractive features of the bankruptcy laws. Discharging your debt is the first major step on the road to a fresh start.
However, not all consumers are eligible for Chapter 7 bankruptcy. In 2005, the bankruptcy laws were amended in response to a growing concern that consumers were abusing the system. Specifically, there were a growing number of complaints from creditors that it was too easy for consumers to file for bankruptcy, and that consumers were taking advantage of the discharge provisions. So, the creditors successfully lobbied Congress to pass what is called the “means test” for Chapter 7 Liquidation bankruptcy.
The means test is very complicated. Basically, the means test calculates the amount of income that is available to the debtor after into taking account certain expenses and the nature of the debt itself. The amount of income remaining after this calculation will determine whether the debtor is presumptively abusing the bankruptcy laws. In other words, if the debtor has more than a specified amount of income available to repay her creditors, then the law says the debtor should not obtain the discharge relief that bankruptcy provides. A simple example of the means test at work will be helpful.
Let’s say a debtor, who we will call Deborah, lives in Colorado and earns $7,000 per month in income. The means test starts by comparing Deborah’s income with the median income of debtors with the same size household in Colorado. If Deborah’s income is equal to or below Colorado’s median income, Deborah automatically “passes” the means test and further calculations are unnecessary. In this example, however, Deborah’s income is above the median income for Colorado, so we must take a closer look at the rest of her financial situation. Deborah’s monthly expenses are $6,850, and Deborah has $20,000 of debt. So, after deducting her monthly expenses from her monthly income ($7,000 minus $6,850), Deborah is left with $150 of disposable income per month and a total debt of $20,000. According to the means test, Deborah is presumed to be abusing the bankruptcy laws. Deborah’s monthly disposable income compared with her total outstanding debt makes her ineligible for the discharge provisions of Chapter 7 Liquidation bankruptcy. In other words, the law states that Deborah likely has the financial ability, or “means,” to make meaningful payments to her creditors without allowing her to discharge this debt. Here, Deborah’s case might be converted to a Chapter 13 repayment bankruptcy, or be dismissed altogether.
Now let’s say that everything is the same except for the fact that Deborah has $100,000 in outstanding debt. In this scenario, the law says that Deborah is not presumed to be abusing the system. Deborah’s $150 monthly disposable income compared to her $100,000 in total debt makes her eligible for Chapter 7 Liquidation bankruptcy. Here, the amount of Deborah’s total debt is such that she does not have the financial ability to make meaningful payments to her creditors, and therefore Deborah should be eligible to discharge some of her debt through bankruptcy.
Deborah’s example is meant only to provide a basic understanding of the means test. The actual language of the law is very technical and is frequently criticized as being needlessly confusing and complicated.[1] In any case, a consumer who is considering bankruptcy should be aware that not everyone is eligible for the discharge provisions of Chapter 7, and the bankruptcy court will look closely at the consumer’s current financial situation to determine whether Chapter 7 is appropriate or not. As always, consultation with an experienced bankruptcy lawyer is highly recommended.
[1] For the actual language of the statute, see 11 U.S.C. § 707(b).
Bankruptcy Basics – Exempt Property
In a traditional Chapter 7 liquidation bankruptcy, the court will gather all of the debtor’s property to eventually sell at auction. The proceeds from the auction sale are then disbursed to the debtor’s creditors to satisfy existing debts. Once all of the auction proceeds are disbursed, the debtor is discharged from bankruptcy.
While this process is seemingly straightforward, a consumer considering bankruptcy might wonder: can the court sell all of my property? The short answer to this question is no.
Certain property is exempt from sale at auction, and the debtor who filed bankruptcy is permitted to keep some of her property. These “exemptions” reflect an underlying policy of United States bankruptcy law – we want to leave every debtor with enough basic property to have a reasonable chance to successfully emerge from bankruptcy. In other words, exemptions help provide a debtor with a fresh start.
In Colorado, the following types of property are exempt from sale, up to a certain dollar amount, in a Chapter 7 liquidation bankruptcy[1]:
- Homestead: real property, mobile home or manufactured home you occupy up to $60,000 or $90,000 if occupied by an elderly (60+) or disabled debtor or spouse
- Insurance Benefits: disability benefits up to $200 per month; if lump sum received, the entire amount is exempt
- Includes group life insurance policy or proceeds
- Pensions: ERISA – qualified benefits, including IRAs
- Personal Property:
- Clothing up to $1,500;
- Food and Fuel up to $600;
- Household goods up to $3,000;
- Jewelry and articles of adornment up to $1,000;
- Motor vehicles used for work up to $3,000;
- Pictures and books up to $1,500;
- Full amount of any federal or state earned income tax credit refund
- Tools of the Trade: Horses, mules, wagons, carts, machinery, harness, and tools of farmer up to $25,000
- Also includes the library of a professional up to $3,000 or stock in trade, supplies, fixtures, machines, tools, maps, equipment, books and business materials up to $10,000
- Also includes livestock and poultry of farmer up to $3,000
A consumer might wonder what happens if she owns a piece of property that falls into one of these exemption categories, but the property is worth more than the dollar limit of the exemption. For example, a debtor owns an item of jewelry that is valued at $1,500, but Colorado law allows an exemption for jewelry only up to $1,000. In that case, the jewelry would be sold at auction for $1,500. The debtor would receive $1,000 from the sale, and the remaining $500 would be distributed to the creditors.
Importantly, property that is subject to a security interest affects whether the debtor may successfully claim an exemption. For example, let’s say a debtor who has filed for bankruptcy owns a car worth $3,000. When the debtor purchased the car, the dealership provided financing in exchange for a security interest in the car in the amount of $2,000. In that case, the car would be sold for $3,000, the dealership would receive $2,000, and the debtor would keep the remainder up to the limit of the exemption.
Finally, there is also something in the bankruptcy context called “exemption planning.” Let’s say a debtor knows that she will file for bankruptcy within the next few weeks. Aware of the exemptions available to her, the debtor converts non-exempt property into her homestead in order to maximize the amount of exemptions available. While some courts have found this type of conduct permissible, the debtor walks a fine line in these situations. If a court finds that the debtor has funneled assets into exempt property with the intent to defraud creditors, the court may completely prohibit the debtor from discharging any of her debt, or even dismiss the debtor’s case entirely.
[1] This is not an exhaustive list. For the full list of exemptions under Colorado law, see Colo. Rev. Stat. §13-54-102(1).
Exempt Property in Chapter 7 Liquidation Bankruptcy
In a traditional Chapter 7 liquidation bankruptcy, the court will gather all of the your property to eventually sell at auction. The money gathered from the auction sale is then distributed to your creditors to satisfy your debts. Once all of the auction money is disbursed, you are discharged from bankruptcy.
While the basics are straightforward, a consumer considering bankruptcy might wonder: can the court sell ALL of my property? The short answer to this question is no.
Certain property is exempt from sale at auction, and you are permitted to keep some of your property. These “exemptions” reflect an underlying policy of United States bankruptcy law –to leave every debtor with enough basic property to have a reasonable chance to successfully emerge from bankruptcy. In other words, exemptions help provide you with a fresh start.
In Colorado, the following types of property are exempt from sale, up to a certain dollar amount, in a Chapter 7 liquidation bankruptcy[1]:
- Your home
- Includes real property, mobile homes or manufactured homes
- Up to $60,000 or $90,000 if occupied by an elderly (60+) or disabled person
- Personal Property
- Clothing up to $1,500;
- Food and Fuel up to $600;
- Household goods up to $3,000;
- Jewelry up to $1,000;
- Motor vehicles used for work up to $3,000;
- Pictures and books up to $1,500;
- Full amount of any federal or state earned income tax credit refund
- Insurance Benefits
- Includes disability benefits up to $200 per month, in addition to group life insurance policy
- Pensions
- Includes ERISA – qualified benefits, including IRAs
- Tools of the Trade
- For example: Horses, mules, wagons, carts, machinery, harness, and tools of farmer up to $25,000
- Also includes the library of a professional up to $3,000 or stock in trade, supplies, fixtures, machines, tools, maps, equipment, books and business materials up to $10,000
- Also includes livestock and poultry of farmer up to $3,000
A consumer might wonder what happens if she owns a piece of property that falls into one of these exemption categories, but the property is worth more than the dollar limit of the exemption. For example, let’s say you own an item of jewelry that is valued at $1,500, but Colorado law allows an exemption for jewelry only up to $1,000. In that case, the jewelry would be sold at auction for $1,500. The debtor would receive $1,000 from the sale, and the remaining $500 would be distributed to the creditors.
In some situations, the person or company who sold you the property may not allow you to claim an exemption in bankruptcy. For example, let’s say someone named Alice has filed for bankruptcy. Two years before filing for bankruptcy, Alice bought a car from a dealership. In exchange for providing financing for the car, Alice agreed to allow the dealership to take back the car if she did not make her monthly car payments. With this type of agreement, Alice would not be able to fully take advantage of the exemption available to her.
Finally, there is also something in the bankruptcy context called “exemption planning.” Let’s say a consumer, Alice, knows that she will file for bankruptcy within the next few weeks. Aware of the exemptions available to her, Alice converts non-exempt property into her homestead in order to maximize the amount of exemptions available. While some courts have found this type of conduct permissible, Alice walks a fine line in these situations. If a court finds that Alice has funneled assets into exempt property with the intent to defraud her creditors, the court may completely prohibit Alice from discharging any of her debt, or even dismiss her case entirely. For this and other reasons, it is important to consult an attorney if you are considering filing for bankruptcy.
For those who are considering Chapter 7 liquidation bankruptcy, exemptions will play an important role. It is true that much of your property will be sold at auction if you file for bankruptcy. However, the court cannot take everything you own. Exemptions provide a consumer with the first step towards a fresh start.
[1] This is not an exhaustive list. For the full list of exemptions under Colorado law, see Colo. Rev. Stat. §13-54-102(1).