Bankruptcy - Your Fresh Start - Part Two

Bankruptcy Can Ease Tremendous Emotional & Financial Burdens, But at a Price

For more information, read part one of Bankruptcy.

The Bankruptcy Procedure

Bankruptcy courts are part of the Federal court system. The bankruptcy law itself is a Federal law, although the states can have their own laws, which govern such things as exemptions. Federal bankruptcy judges apply both the Federal and state laws in the jurisdiction where they sit.

You should have a choice of which law should apply.

Bankruptcy proceedings are commenced by filing certain required forms (after mandatory credit counseling) and paying a fee. Filling automatically stays all legal proceedings against you as well as all debt collection actions. Fees can be paid in installments, but must be completely paid before the discharge will be granted.

A trustee will be appointed. The reform act requires that many supporting documents be supplied to the trustee. His job is to review your financial affairs, collect and sell assets, if necessary, and distribute the proceeds to your creditors.

If you are setting up a repayment plan, he will be responsible for seeing it implemented. He will even pursue your debtors to collect money owed you that can be used to pay off your creditors.

The trustee?s powers include the power to set aside preferential transfers made to creditors within 90 days before the filing of the bankruptcy petition, the power to undo security interests and other transfers of property that were not properly recorded under non-bankruptcy law at the time the petition was filed and the power to pursue claims such as fraudulent conveyance and bulk transfer remedies available under state law.

He also holds meetings which are attended by the debtor filing for bankruptcy and his creditors. This is probably the hardest part of the whole procedure for most people.

The trustee will question the debtor about his financial affairs and go over his financial records to determine that all assets have been disclosed and that no fraud is being perpetrated on the court.

Because of widespread fraud by bankruptcy filers which mainly consisted of fraudulent conveyances or outright lying about assets, the Justice Department has set up a special unit to detect fraud. It has had some success in catching cheaters.

Attorneys for the creditors are also allowed to ask questions about your expenses and assets. Find a local bankruptcy attorney to represent you at these hearings.

The trustee will also instruct you on other alternatives and lecture you on the proper use of credit.

He will then issue a report the bankruptcy judge will use in deciding whether to discharge your debts and which debts are to be included.

A debtor is unlikely to ever meet the judge. In a Chapter 7 case, the debtor will not appear in court unless an objecti

on is made by a creditor. In a Chapter 13 case, the debtor might have to appear at a hearing approving his repayment plan.Most of the work will be done in the trustee?s office.

What Debt Can Be Discharged in Bankruptcy?

Not all debt can be discharged by a bankruptcy court.

A bankruptcy court cannot discharge debts arising from alimony, child maintenance and support obligations; certain taxes (including the last three years income taxes); debts for educational benefit over payments or federal student loans; debts for willful and malicious injury; debts for death or personal injury caused by the driving while intoxicated from alcohol or other substances; and debts from criminal restitution orders.

To the extent that these types of debts are not fully paid by the sale of assets during during a Chapter Seven case or not fully repaid during a Chapter Thirteen case, the debtor is still responsible for them after the bankruptcy case has been concluded.

Other debts may or may not be discharged. Debts for money or property obtained by false pretenses, through fraud, embezzlement or misuse of funds while acting as a fiduciary; debts for willful and malicious injury to another entity or to the property of another entity; and debts arising from a property settlement agreement incurred in connection with a divorce or separation are discharged, unless a creditor convinces the court to have such debts declared exempt from discharge.

If you can't get at least half of your debts discharged, it's not worth the effort.

The Bankruptcy Reform Act has tightened things some what. It makes it even more clear that student loans will not be discharged. It also makes a Chapter Thirteen filing more onerous, while at the same time trying to force more people to file under that Chapter. But, for the most part, it seems the advocates of tightening the bankruptcy laws have failed and that bankruptcy is still pretty much what it was before the law was changed.

Please read Bankruptcy Reform. to learn how the procedure has changed.