Five Things About Bankruptcy

1. The consideration

The decision to file bankruptcy should never be taken lightly. Bankruptcy is appropriate as soon as your client is so burdened by debt that he or she struggles to pay creditors. Clients should consult with a bankruptcy attorney before leveraging or liquidating assets.

2. The chapter

Attorneys should be familiar with the three most common bankruptcies: Chapter 7, 11, and 13.

In Chapter 7, non-exempt property is surrendered to a trustee, liquidated, and then distributed to creditors by priority. The individual receives a discharge —legal proof that dischargeable pre-petition debts are no longer owed.

Chapter 11 is designed for businesses but sometimes used for individuals. The goal is to confirm a “plan of reorganization” that will set the obligations of the debtor and may discharge certain debts. The plan will become binding upon all creditors.

Chapter 13 cases are for individuals whose debt is below statutory limits. In a Chapter 13 case, the debtor generally keeps all property but must devote all “disposable income” over a period of three to five years. Secured claims continue to be paid. The debtor does not receive a discharge until completion of the plan. If a debtor cannot maintain payments, the case can be dismissed or converted to a Chapter 7.

3. The debts discharged

Dischargeability is whether a debt is eligible for discharge. While many debts can be discharged, some debts cannot. Common nondischargeable debts include:

• Money/services/credit obtained by false written statement
• Fraud, fiduciary defalcation, embezzlement, or larceny
• Alimony or child support
• Willful and malicious injury
• Student loans
• Most (but not all) taxes
• Criminal restitution

Nondischargeable claims remain debts even after the discharge. That said, a creditor must timely alert the court of the nondischargeable status of these claims or the debts may be discharged.

4. The automatic stay

A bankruptcy filing instantaneously invokes a stay which shields the debtor from further acts to collect on any debt then owed. The stay enjoins most actions taken by creditors against the debtor or property of the estate for debts incurred prior to the bankruptcy filing. This includes judicial proceedings, enforcement of judgments, acts to obtain possession of property of the estate, and lien enforcement. The stay does not enjoin criminal prosecutions; alimony, child support, and paternity actions; governmental, police, and regulatory powers; and the assessment of taxes.

Acts that violate the stay are void ab initio. A creditor that commits an intentional act with knowledge of the existence of the stay is liable for damages. A party injured by any willful violation of the stay shall recover actual damages, including fees and costs and, if appropriate, punitive damages.

5. The consultation

The number one thing that every lawyer should know about bankruptcy is that the consult should be done as soon as financial strain becomes an issue for your client. The sooner, the better. A qualified bankruptcy attorney should help your client plan, manage creditors, and preserve assets.

About the author

Nedda Ghandi, Esq. is an attorney with Ghandi Deeter Blackham Law Office. Nedda’s primary practice area involves bankruptcy for both individual and business debtors.