Citizen Rights Series --------------------- What you should know about Bankruptcy ____________________________________________________________________ Published in the public interest by the Washington State Bar Association Bankruptcy In Washington State -------------------------------- Introduction ------------- People with financial dificulties sometimes consider bankruptcy as a legal remedy. This pamphlet is intended to provide you with general information about bankruptcy and other alternatives to easing the burden of too many debts. It is not intended to be a substitute for consultation with qualified legal, or financial advisers. What is bankruptcy? ------------------- Bankruptcy is a court supervised procedure to provide relief from debts. In general, its purpose is to ease the burden of too many bills and to arrange an equitable distribution of available assets among a debtor's creditors. The laws applying to bankruptcy appear in the Bankruptcy Code, which became effective on October 1, 1979 as part of the Bankruptcy Reform Act of 1978. Two basic forms of bankruptcy proceedings exist for individuals: Chapter 7, sometimes known as "straight" or "liquidation" bankruptcy, and Chapter 13, also called the "wage earner" or "repayment" plan. A third form of bankruptcy, Chapter 11, is primarily designed to allow reorganization of a going business. Under this Chapter's provisions, a debtor continues to operate with certain court protection from creditors' legal proceedings while the debtor attempts to work out a plan to pay the creditor. Chapter 11 is a relatively expensive and cumbersome process with specific restrictions that are beyond the scope of this pamphlet. While bankruptcy is generally a complete and effective legal remedy for someone with serious financial dificulties, it may not be the best solution for every financial problem. Who may declare bankruptcy? --------------------------- Almost anyone may file for bankruptcy. If the court believes the proceeding abuses the bankruptcy laws (typically because of income in excess of needs), relief may be denied. Because it is a serious matter with long term consequences, the decision to file should be carefully considered. Before filing, an individual should determine both personal and family needs, evaluate assets and obligations, and consider alternatives to bankruptcy. Who participates in the proceedings? ------------------------------------ In general, a bankruptcy proceeding involves: * the debtor, the person who files bankruptcy. also known as "the petitioner": * the Bankruptcy Judge, who presides over any hearings on disputes; * the Creditors, any persons, businesses, corporations or government a agencies that claim money from the debtor * the trustee, a court-appointed person who represents the interests of all unsecured creditors. The trustee is accountable for the bankruptcy property and is responsible for collecting and liquidating it. Other duties include investigating the debtor's financial affairs, examining all proofs of claim, supplying information to any party in interest (unless court orders otherwise), and filing reports, certain tax returns and other records required by the court. What is Chapter 7 Bankruptcy? ------------------------------ People often refer to Chapter 7 bankruptcy as "bankruptcy." This form of bankruptcy is a procedure by which a debtor may be legally freed of many financial obligations. Based on the belief that an individual is entitled to a "fresh start," the goal is to have a court "discharge" one's debts. In return for having debts discharged, the debtor turns over to a bankruptcy trustee certain non-exempt property, including assets acquired by inheritance, family law and insurance in the 180 day period following bankruptcy. This non exempt property is then sold, with the proceeds distributed to creditors according to priorities established by law. Are all debts discharged by a Chapter 7 bankrputcy? --------------------------------------------------- No. Certain types of debts may not be affected by bankruptcy. These debts include some taxes, claims of creditors who are not notified, spousal and child support, fines, certain student loans and damages caused by drunken driving. In addition, certain abuses of cash advances and credit cards on the eve of bankruptcy are non dischargeable. These debts also include obligations which arose through fraud or misrepresentation (by example, giving false financial information), theft, and intentional and malicious injuries, although in these instances creditors must obtain a Court Judgment, before the debts will survive bankruptcy. A discharge may be denied or may be revoked within one year after it is granted on grounds of debtor's fraud (by example, making false statements to the court, concealing assets, or fraudulent transfer of assets). What property may I keep in a Chapter 7 bankruptcy? --------------------------------------------------- State laws allow a debtor to keep some items called exempt property. The Federal Bankruptcy Code also sets forth a list of broad exemptions which may or may not be permitted in each state in lieu of state exemptions. Exemption statutes are very complicated. One must compare one's assets to available exemptions to determine what can be retained. In general, and within certain dollar limits, a debtor is allowed to keep equity in personal effects, household goods, a car, a house, and similar necessities. The debtor must decide whether to give back or keep and pay back property secured by a lien, such as a house mortgage What Is Chapter 13 bankruptcy? ------------------------------ A Chapter 13 bankruptcy sets up a plan under which some or all of the debt is repaid (typically by monthly payments) over a period of time, up to five years. A trustee handles most payments and administers income tax refunds according to the approved plan. This plan discharges all debts except those for spousal support or maintenance (formerly called "alimony"), child support and certain installment obligations, which typically must be paid as they come due. Under certain circumstances, mortgage delinquencies (or certain other delinquencies on secured loans) can be brought current. Once a plan has been filed, interest usually stops accruing on unsecured debts. Creditors who do not file timely claims may not have to be paid, and the percentage paid to non priority. unsecured creditors may be reduced in a Chapter 13 plan. Under certain conditions, a debtor can file a Chapter 13 plan and convert to or file Chapter 7 bankruptcy within six years. The trustee receives a fee for performing such services generally computed as a percentage of all funds handled. Although its scope is broader than Chapter 7, a Chapter 13 plan may be used only by individuals or very small businesses with a regular income and with limited debts (certain unsecured debts of less than $100,000 and certain secured debts of less than $350,000). What are some advantages and disadvantages of bankruptcy? --------------------------------------------------------- The advantages and disadvantages of bankruptcy will vary with each case. In general, the advantages of filing are: 1. Creditors may not commence most legal proceedings against an individual who has filed for bankruptcy, nor may they continue most legal proceedings already in process, except with court approval. (This relief may be desirable to prevent discharge from employment, which can occur for garnishment reasons upon the second garnishment.) 2. An orderly, systematic set of rules determines any property distribution or (for Chapter 13) the minimum amount one must pay to creditors. 3. Most pre-bankruptcy debts will be resolved in the proceedings, giving an overextended individual a "fresh start." 4. With few exceptions (such as those ordered in a Chapter 13 plan), creditors have no claim on a debtor's future income or assets. In general, wages, earnings and most property acquired after bankruptcy are not subject to claims of pre-bankruptcy creditors. 5. Federal and state laws permit a debtor to keep some (and maybe all) property, known as "exempt property." 6. Certain liens and certain involuntary transfers, such as garnishments, may be avoided if timely action is taken. Among the disadvantages of bankruptcy are: 1. Bankruptcy fillings are a matter of public record. Filing a petition may be noted by various commercial credit reporting companies. A filing remains on a person's credit history records for up to 10 years, possibly making it difficult to obtain loans, some types of credit, or other economic benefits. 2. Individuals who co-signed or guaranteed debts may ultimately be required to pay those debts (except in certain instances under Chapter 13). 3. A stigma may be attached to the bankruptcy procedure: some still view a bankrupt individual as socially irresponsible. For some, the proceedings may be embarrassing since a petitioner must submit to questioning and detailed financial disclosure. 4. Chapter 7 (and possibly other) debtors lose the right to receive another discharge in bankruptcy for six years. Because of this fact, a debtor should reflect on the stability of the debtor's income and the adequacy of the debtor's package of insurance prior to filing. 5. There may be tax consequences from a bankruptcy. What steps are required? ------------------------ Bankruptcy proceedings involve a series of steps, usually including the following actions: 1. Gathering detailed financial information, including a description of financial affairs for the past year, a list of all debts and assets (property, cash, etc.), and a statement of monthly home and expenses. 2. Filing forms and paying fees to the court clerk. 3. Providing notice to creditors (arranged by the court, approximately 20 days after filing). 4. Appearing in Court for a mandatory meeting with creditors. The court notifies parties of the hearing, which is scheduled between 20 and 40 days after filing. 5. Turning over property, if ordered by the court, for distribution to creditors. 6. Obtaining a discharge in bankruptcy (approximately 90 days after filing a Chapter 7 proceeding). 7. Attending other court hearings. How can credit be reestablished? -------------------------------- Reestablishing credit is usually accomplished one loan at a time by building up a history of payment. Some advisers suggest local department stores and employee credit unions as the best places to start rebuilding credit. If, after filing bankruptcy, a person makes prompt payments on any remaining debts, such as rent, utility bills, car loans or house payments, his or her credit may be reestablished over time. What are alternatives to bankruptcy? ------------------------------------ Bankruptcy is not the only method of dealing with financial difficulties. Among alternatives are: 1. Doing almost nothing. It may not be necessary for someone who is not working and who does not have substantial property to file bankruptcy. There are, however, a number of considerations to protect properly from creditors: professional advice may be appropriate. 2. Negotiate an out-of-court arrangement with creditors to reschedule and refinance debts. 3. Seek assistance from a private agency, such as a credit counselor. Do I need a lawyer? ------------------- A citizen has a right to represent himself or herself before the bankruptcy court. It should, however, be recognized that bankruptcy can be a complicated procedure, requiring careful attention to detail. The laws governing the process are complex and subject to change. Each situation is different, and the consequences of filing should be carefully considered. A lawyer can assist and advise by analyzing individual circumstances and preferences, preparing necessary documents and helping a debtor make informed decisions. This pamphlet was prepared as a public service by the Washington State Bar Association to inform citizens of their legal rights and obligations. It contains general information and is not intended to apply to any specific situation If you need advice or have questions about the application of the law in a particular matter, you should consult a lawyer. 500 Westin Building 2001 Sixth Avenue Seattle, Washington 98121-2599 (206) 448-044