Bankruptcy is a subject most people want to avoid - people want to avoid the stress of having to deal with unmanageable debt. Bankruptcy is often treated as a taboo subject - only our closest friends and relatives know about our financial affairs, and there's usually an even smaller circle of people who know about our financial struggles.
Bankruptcy isn't fun to think about either. There is, for many people, a stigma about bankruptcy that makes it uncomfortable for people to talk about, let alone taking the steps to file a bankruptcy case.
For these reasons, there are a lot of unknowns for people struggling to deal with overwhelming debt. Most of the clients with whom I meet have limited knowledge, if any, about bankruptcy law and procedures. And almost every client has limited knowledge about outcomes for people who file a bankruptcy case.
One of the most important jobs for the lawyers at Kain & Scott is to explain, clearly and understandably, what clients will go through if they choose to file a chapter 7 or chapter 13 bankruptcy case. It's our job to answer the question posed at the top of this blog: what happens after a bankruptcy case is filed?
When I speak with clients who ask, "so what happens after I file a case, I tell them they should be aware of the impacts of filing a bankruptcy case in three different areas: legal, financial and emotional. Let's look at these impacts separately, and in detail.
What Happens Legally
Bankruptcy is a legal proceeding; it is governed by the federal bankruptcy code, although state law can play a role in bankruptcy cases. Of the three areas of impact we will look at, the legal consequences of filing a bankruptcy case are the easiest to describe. Let's look at what happens legally at the time the case is filed, during the time the case is open, and the. What happens after the case is discharged.
Filing The Case
The legal effect of filing a bankruptcy case is that, at the moment a case is filed, the bankruptcy court enters an injunction that is effective against all creditors of the bankruptcy debtor that prohibits the creditor from taking any action to collect on the debt. The injunction that the bankruptcy court issues is called an "order for relief," and the protection given the debtor is called the "automatic stay." The automatic stay is issued immediately upon the filing of the case. The case filing might be deficient in some way; the information filed in the debtors schedule might be inadequate or incomplete. That doesn't matter - the bankruptcy debtor is protected when the case is filed with the bankruptcy court. A creditor may not yet have received a notice of the case. Again, this doesn't matter - the automatic stay is in place and all collection activity must be stopped.
Creditors receive their order for relief when a case is filed. This notice is mailed or emailed to them by the clerk of bankruptcy court. Bankruptcy debtors receive a copy of the order for relief by mail. The order for relief contains the name and address of the bankruptcy debtor, as well as any other names the debtor has used in the last eight years and the name(s) of any businesses owned by the debtor. The order for relief also contains the name, address and phone number of the attorney representing the debtor and the name, address and telephone number of the bankruptcy trustee who has been appointed to administer the case. The order for relief also includes the day, time and location of the only formal procedure in most bankruptcy cases: the meeting of the debtor with the bankruptcy trustee.
The Meeting With The Trustee
Whether a client has filed a Chapter 7 or Chapter 13 bankruptcy case, the bankruptcy debtors are required to meet with a bankruptcy trustee who is appointed by the office of the United States Trustee to administer the debtor’s case. The meeting with the trustee is usually scheduled between four and six weeks after the bankruptcy case is filed. These meetings are ceremonial in nature; the trustee assigned to the case has a job to do: to make sure that the information contained in the petition, schedules and statements that comprise a bankruptcy case is correct and complete, and to determine if there are any non-exempt assets that can be collected and liquidated to pay creditors, any preferential payments that the bankruptcy debtor made to a third-party creditor in the 90 days before the case was filed or to a relative in the year before the case was filed, and/or any transfers of money or property made by the debtor to another person that can be avoided by the bankruptcy trustee.
Clients are represented by their attorney at these meetings. The meeting is not the same as a judicial hearing. The bankruptcy trustee is neither a judge or a magistrate. But the bankruptcy debtor is sworn in as a witness at the beginning of the meeting and when the debtor answers the trustee’s questions, he does so under oath. Deliberately misleading the trustee in answering the trustee’s questions not only puts the debtor’s discharge at risk; the debtor can face the possibility of an indictment for bankruptcy fraud if the testimony is egregiously false.
But while testimony under oath is a serious business, for almost all bankruptcy debtors, the meeting is routine in nature and takes, at most, five minutes, start to finish. The trustee’s questions are (usually ) straightforward and easy to understand; the answers are typically “yes” or “no.”
Car Loans
It is common for our clients to be obligated on a car or truck loan with an unpaid balance at the time the bankruptcy case is filed. If the client files a chapter 7 case, the client will either have to continue paying on the car loan to retain possession of the car, or surrender the car to the lender. In chapter 7 cases with car loans, debtors will normally receive something called a reaffirmation agreement from their car lender. A reaffirmation agreement is a legal document requiring the debtor’s signature that reinstates a debtor’s personal liability to pay on a car loan. As a general rule, we advise our clients to not sign reaffirmation agreements; we file the bankruptcy case to eliminate debt, not take it back on. In limited cases, signing a reaffirmation agreement might be worth thinking about, but as a general rule, signing a reaffirmation agreement is not advised.
There are no reaffirmation agreements in chapter 13 cases. In chapter 13 cases, the debtor identifies secured creditors and, in the chapter 13 plan, the debtor proposes to either pay the secured debt in full through the chapter 13 payment plan, or pay the loan directly (if the loan in question is a long-term loan), or surrender the collateral for the loan. In cases in which the loan is long-term, but the debtor is in arrears in making payments, the chapter 13 debtor can propose to “cure” or make up the back payments through the chapter 13 plan, while continuing to pay the secured lender directly for payments that come due after the case is filed.
This covers a lot, but not all, of the legal consequences of filing a bankruptcy case. Next week we’ll wrap up our look at the legal aspects of filing, and start to look at the financial consequences of filing a bankruptcy case.
