Is Bankruptcy the Best Option for Me?

Can I file bankruptcy?

Should I file bankruptcy?
Is bankruptcy right for me?

My first job out of law school was for a highly profit-driven law firm that believed that everyone could benefit from bankruptcy in some way, and that there was no excuse for an attorney to not get a prospective client to retain our services.
I won’t say who that law firm is, but you can identify firms like these pretty easily.  Many of them will have a short survey posted on their website that asks you a few questions to determine if you should file for bankruptcy.  The survey is coded and rigged in such a way that no matter how you answer the survey (or if you answer ‘yes’ to even one question, and the questions are designed that 99% of people would), then the result would be a profound warning that you needed to file for bankruptcy right away.
That law firm I used to work for – and other firms like it – are absolutely wrong.  Bankruptcy is not for everyone.  Admittedly, it is true that there are few people in the world who – if they filed for bankruptcy – would not get any benefit from it.  But those people are out there.  Sometimes they land in my office.  If someone would not benefit from bankruptcy – I will tell them, even though it costs me business.  I, as all attorneys do, have a duty and ethical obligation to look out for my clients’ (and prospective clients’) best interests.
So… rather than post a gimmicky survey, I’m going to walk you through some of the factors you should consider if you’re thinking about bankruptcy.  It won’t be as easy and fast to go through as a six question survey, but I feel that you will have a much clearer idea of what you need to do after reading this article.
Of course, since I can’t know the specifics of your financial circumstances, this article paints with very broad brush strokes.  There is no substitute for getting a consultation from an experienced bankruptcy attorney who can analyze your particular situation.  Most attorneys – including myself – offer free initial consultations.  There is no risk or commitment.  Just an opportunity for you to arm yourself with information and options.
Fundamentally, what is bankruptcy?
Declaring bankruptcy, in its most fundamental sense, is nothing more than asserting that you cannot afford to pay all of your debt obligations as they become contractually due.
Put another way, if your income is X, your ordinary living expenses are Y, and minimum payments on your debts is Z, then X – Y < Z.  The shortfall could just be a few dollars a month, or a few thousand.  Either way, the equation is unbalanced.  Ideally, you want it to look like either X – Y = Z or X – Y > Z.
But I’m not poor…
Bankruptcy is not just for poor people living off of unemployment benefits or food stamps.  In fact, many people on public benefits would benefit the least from bankruptcy protection – essentially because they have little or nothing to lose.  In Wisconsin, those receiving public assistance are protected from having what little wages they have from being garnished.
People have a tendency to look at key items of their financial circumstances in isolation.  “I make $100,000 per year, therefore, bankruptcy isn’t for me.”  “I only have $10,000 in debt, therefore, bankruptcy isn’t for me.”  Well, if you’re making $100k a year and only have $10k in debt, I might be inclined to agree.  But if you’re making $100k a year and trying to pay back $500k in taxes – then you might need some help.  And a single mother raising two kids on $30k a year might get a lot of benefit from bankruptcy even if her debt is only $10k.
It’s not just about your debt or your income, but your debt-to-income ratio.
But I have excellent credit…
Have you pulled your credit report and score?  Recently?  Most people who tell me this haven’t.  They think their credit is excellent because they have never missed a payment.  But your credit score is much more than just a record of your payment history.  Your credit score is affected by numerous factors, including your income, your assets, debt-to-income ratio, minimum monthly payments, number of active accounts, types of credit accounts, your indebtedness relative to your available credit, residential stability, occupational stability, length of credit history, and credit inquiries.
All we’re saying is – if you’re reading this article and you haven’t pulled your credit recently, it might not be as high as you think.
That being said, impact on your credit score is a valid concern.  Bankruptcy does negatively impact your credit – there’s no denying that.  If there is a feasible way to get out of debt without bankruptcy, it is something worth considering.
But bankruptcy isn’t a permanent black mark against your credit, either.  I tell my clients to think of bankruptcy as a reset button on a video game.  You start with a clean slate – just like when you turned 18.  No credit.  You start over and build a new history.  If you happen to have a preexisting debt that will survive the bankruptcy (mortgage, car loan, student loan, etc.), that will help you rebuild even faster.
I’m not in trouble… yet.
If you think you’re headed down a path where bad things are going to happen, talk to an attorney now.  Don’t wait until disaster strikes.
  • Has a creditor filed a lawsuit against you?  They may be looking to garnish your wages.  Why wait until after your wages have started to be garnished before speaking to an attorney?
  • Have you not paid your utility bills all winter?  Your services will likely be disconnected on or after April 15.  Why wait until April 14 to do something about it?
  • Are you behind on your car payment?  In Wisconsin, it doesn’t take long for a creditor to repossess a car.  If they do, you have a very short window (and limited possibilities) to get it back.
  • Are you falling behind on your mortgage payment?  Foreclosure takes a bit longer in Wisconsin, but the longer you wait, the more expensive it could be to stop the foreclosure action.  Don’t gamble with your home by waiting until the eve of the Sheriff’s Sale to speak to an attorney.

It doesn’t necessarily have to take a long time to file a bankruptcy case.  But to do it properly, you should plan on meeting with an attorney several weeks (if not months) before you need to file for bankruptcy.  Why so long?
Chances are that you are not your attorney’s only client.  Your attorney will need time to prepare a proper petition for you, to review all of the relevant documents and information you provide, and to advise you accordingly.  If you drop a case in your attorney’s lap and expect him to drop everything and file a case for you in 24 hours – you can expect the quality to suffer, and you can expect problems.  In fact, I would urge you to avoid any attorney willing to file a case that quickly.
Furthermore, you are going to have certain obligations and responsibilities in bankruptcy.  You’re going to want time to digest these, and make sure that you’re making the right decision before you commit to filing your bankruptcy petition.
Okay, I want to file bankruptcy.  Here’s some information.  Get it done for me.
Bankruptcy is a privilege, not an absolute right.  And it’s a privilege that usually confers a tremendous financial benefit.  In exchange for that benefit, the bankruptcy court is going to have some expectations of you.  They expect a full disclosure of your income, assets, and debts – to determine what, if anything, you can reasonably be expected to pay on your debts.  They also expect you to conduct yourself in a manner that doesn’t unfairly and unjustly impact your creditors (meaning not racking up a bunch of debt right before you file your case, not paying certain creditors at the expense of others, and not selling or giving away valuable assets).
Your attorney’s job – my job – is to help guide you through this intensely bureaucratic process; to advise you to avoid legal pitfalls; and to make sure that you follow the laws and procedures properly.  But that doesn’t mean you can sit back and not take an active and serious role in your own case.  If you cannot bring yourself to disclose information or to follow explicit instructions and advice from your attorney, then you may want to seek some other form of debt relief with less rigid expectations.

Statute of Frauds

Borrowing money from family or friends is very commonplace.  Because of the relation, seldom are these debts ever made in writing.
In an asset case (a Chapter 7 with non-exempt assets or a Chapter 13 repayment plan) it is natural for the debtor to want their relative or friend to receive their fair share out of the assets to be distributed by the bankruptcy estate.  But can they?
Federal Rule of Bankruptcy Procedure 3001(c) describes the evidence (or supporting information) that is to accompany each proof of claim.  Since many family and friend debts are informal and made orally, it is unlikely that your friend or relative will be able to file a proper proof of claim.
This is especially true if the oral agreement violates the statute of frauds, which is a set of rules that describes when a contract or agreement must be made in writing.  Traditionally, the following types of agreements cannot be made orally, but rather, must be done in writing in order to be enforceable in a court of law:
  • Contracts in consideration of marriage, including prenups;
  • Contracts that cannot be fully performed within one year;
  • Contracts for the guaranteeing of someone else’s debt;
  • Contracts for the sale of goods in excess of $500.00.

Each state adopts its own statutes of frauds.  In Wisconsin, they are primarily codified at Wis. Stat. § 241.02 and § 402.201, and they are substantially similar to the common law rules.

Proposed National Model Chapter 13 Plan

This is a post that will probably be more of interest to bankruptcy practitioners than bankruptcy debtors.  However, there is potential for some substantial changes that will drastically impact how Chapter 13s are administered, so potential bankruptcy filers shouldn’t completely blow this off.
Currently, each federal district has its own way of handling Chapter 13 Plans.  Most if not all have a “model plan” which is the form template attorneys and debtors are encouraged to use when drafting the Chapter 13 repayment plan.  Many districts have made use of their model plan mandatory.  I was on the Local Rules Committee back in 2009, which ultimately made our model plan in the Eastern District of Wisconsin mandatory in early 2010, if memory serves (and over my sole objection).  In districts without a mandatory plan, attorneys can and do have their own versions.
But even if each district adopted a mandatory model plan, it would still leave 94 different plans, which makes it difficult to create uniform case law.  It also becomes burdensome to creditors who do business nationally (though as debtors’ counsel, I care less about that).
So, for quite some time now, a committee has been established to draft and propose a national model plan for use everywhere in the United States.  There are also proposals floating around to the Federal Rules of Bankruptcy Procedure to accommodate this national model plan.  The proposal for FRBP 9009 would prohibit alteration of the model plan except in the special provisions area of the plan.  That rule seems to suggest that the committee will recommend that the model plan be mandatory (and frankly, if it isn’t mandatory, there isn’t much point in having a model plan).  The downside to a mandatory plan, of course, is that if the plan is not drawn up well, it will – at the very least – create some administrative problems.  Worst case, it has the potential to force changes on the rules and procedures at the local level.  Also, there are rumors that what is allowed in the special provisions section of the model plan will be far more restrictive than what we currently do in the Eastern District of Wisconsin (which is basically – ‘anything goes’, so long as it doesn’t violate established law).
So what do we know?  Well, the rule-making process is a long and arduous one.  If everything remains on schedule, the earliest we expect to see implementation of this proposed national model plan is December 2015.  That’s right – 2.5 years from now.  On the upside, this gives us more time to address concerns that exist concerning the current draft of the model plan.

It is worth noting that there is a form modernization project in the works (also referred to as the form lengthening project).  Although there appears to be no set date yet, I expect the new forms to go into effect December 2013, roughly coinciding with the eight year anniversary of BAPCPA.

Because this is the early draft, and is likely to go through substantial changes after feedback has been submitted, there’s not much point in going through the document line by line.  I do want to highlight a few of the expected changes that I think will be the most dramatic.
FRBP 3002 – would shorten the time-frame for filing proofs of claim.  Currently, it is 90 days after the sec. 341 meeting of creditors, which itself is scheduled between 21 and 50 days after the bankruptcy petition is filed.  So all in all, creditors have upwards of 4-5 months to file a proof of claim.  The government has 180 days (or 6 months) after the petition date to file its claim.  This makes administration of a case difficult, as plans are often confirmable long before the bar date to file claims has passed, and feasibility can’t really be addressed until all claims have come in.  So, the new bar date should really help in administration.  The catch is – the government’s 180 days appears to be unaffected by the proposed rule change.  I don’t mind the government getting more time to file claims that private creditors, but 6 months seems excessive to me.
Certain actions to strip liens that have traditionally been done by separate motion or adversary proceeding.  Those are now being folded into the plan, which does cut down on paperwork.  To address notice requirements, however, Rule 3015 is expected to be amended to integrate enhanced service requirements of the Chapter 13 Plan in those circumstances.
The current draft of the plan is no doubt reflective of the districts that its chief authors hail from.  There are a lot of references to confirmation hearings, which not all districts have (unless a creditor objects to confirmation).  Our judges have stopped having confirmation hearings in cases that are not being contested (after the appropriate time to object has passed).  At the moment, lessons learned in law school escape me, and I forget the relative authority of the federal rules to district court cases.   But if this model plan doesn’t force districts to hold confirmation hearings, the language is going to make administration of the plan tricky.
The current draft also is pretty rigid in how payments are structured.  It doesn’t provide for splitting payments between joint debtors, it doesn’t provide for customization of payroll orders into weekly or bi-weekly pay periods, and it only provides for one step provision.  Of course, these issues can be addressed in the special provisions section, but we could save a LOT of unnecessary special provisions by having a better structured paragraph.
The tax refund committal paragraph is similarly rigid and doesn’t account for variances in local customs on the subject.
Another concern is that the plan allows certain “options” that are not available in all districts or not available in all circumstances.  It is said that the Chapter 13 Plan is being drafted to help pro se debtors.  Quite frankly, Chapter 13 is complicated enough that no debtor should try it without an attorney.  Moreoever, without the legal knowledge, pro se debtors will be filing uncomfirmable plans because they won’t know in which districts or in which circumstances certain plain provisions are available.
Other concerning language – the absence of a provision that discusses which aspects of administration are controlled by the plan and which aspects are controlled by the proof of claim; and language in the signature section allowing debtor’s counsel to sign the plan without the debtors’ signatures; the conduit mortgage provision isn’t terribly detailed enough for districts that do not have conduits as a default.  On the upside, this version provides for vesting of property of the estate upon “closing of the case” instead of upon “discharge”, which helps resolve an ambiguity in attorneys who prefer not to have revestment on confirmation, but are filing cases in which a discharge is not available.
Those who wish to review the proposed rule changes or the proposed model plan can try the following links:

Post-filing changes to your mortgage payment.

If you’re a Chapter 13 debtor with a mortgage, you have probably been noticing the occasional letter in the mail from your mortgage company with a form captioned either as “Notice of Mortgage Payment Change” and/or “Notice of Post-Petition Mortgage Fees, Expenses, and Charges”.

Debtors who have been in Chapter 13 for more than a year and a half might be a little more puzzled about these notices than newer Chapter 13 clients.  That’s because, before December 2011, these notices didn’t exist.  They are part of Fed. R. Bankr. P. 3002.1(b) and (c).

Apart from curing mortgage arrears, bankruptcy law doesn’t allow for the modification of the terms of a mortgage secured solely by a principal residence (11 U.S.C. § 1322(b)(2)).  That means that if you have an adjustable rate mortgage, a balloon provision, a high mortgage interest rate, or any other unfavorable term – you’re still stuck with those terms in a Chapter 13 bankruptcy.

So, when your interest rate adjusts periodically per the terms of the mortgage, your mortgage has and will continue to change throughout the life of your mortgage.  However, while in bankruptcy, and effective 12/1/2011, the mortgage company is required to file a Notice of Mortgage Payment Change” with the bankruptcy court.  These notices are also very commonly filed each year in cases where there is an escrow for property taxes.

Really, the notice of mortgage payment change doesn’t have a material impact on a bankruptcy case, other than it affords your attorney and other interested parties a chance to be aware of the change.  But, aware or not, you are responsible for making the new mortgage payment as reflected on the notice, unless you have grounds for objecting to that change (and successfully contest that change).

The second notice is for post-petition fees, expenses, and other charges.  I see these most often filed some time after a motion for relief from stay (which happens when a debtor defaults on post-petition mortgage payments) for late fees, penalties, and legal fees associated with the motion for relief.  I also see these for periodic property inspections.

Now, these fees are above and beyond your ordinary mortgage payment, and they will need to be paid separately – either soon after the charge is incurred, or at the end of your bankruptcy plan.  FRBP 3002.1(f-h) outlines the procedure for the mortgage company to make a statement concerning any remaining arrears that exist prior to you receiving your Chapter 13 discharge.  These post-petition charges are not paid by the trustee unless they are filed as supplemental proofs of claim.

So – it’s something to be careful of and watch out for, especially as you near the end of your Chapter 13 Plan.  Again, there’s nothing new about post-petition charges, but at least now you are receiving notices about them through the bankruptcy court – which is more notice than debtors got before December 2011.

Note:  The way we have constructed our new conduit mortgage provision does allow for the trustee to automatically make adjustments to plan payments to accommodate both a change to mortgage payments and a for additional charges.