You may have wondered what filing bankruptcy is all about. I hope that this brief explanation will give you a better idea of what is involved before we talk. Filing bankruptcy is a legal way for people to deal with overwhelming and burdensome debts.

First of all, the Bankruptcy Code is a federal law passed by Congress. Its purpose is to give honest debtors a fresh start. People usually file one of two types of bankruptcy: Chapter 7 commonly called straight bankruptcy and Chapter 13 which was often known as the wage earner plan. There is also another proceeding called Chapter 11, but that is typically reserved for corporations or individuals with huge amounts of debt.

CHAPTER 13

A Chapter 13 is like a debt consolidation plan. We take a look at your income from whatever source it may be, and then subtract your monthly living expenses. If we have a surplus or discretionary income, then we have the makings of what is called a Trustee payment. In a Chapter 13 Plan we try and put all your bills into one basket and deal with them collectively. Typically you make a lump-sum payment to a court appointed Chapter 13 Trustee, who will then take your money and pay it out to the various creditors that we list in your plan.

In a Chapter 13 (and Chapter 7 also) we must list all your creditors. We cannot pick and choose among your creditors. However, because of the way that the bankruptcy law is written and interpreted by judges, certain creditors get more favorable treatment than others. The amount of your monthly Trustee payment will depend not only on how much money you owe but also on the type of debt you owe and what your current monthly income is. For example, if you have a house or trailer payment and you want to keep the house or trailer, you must continue making your regular monthly payments to the mortgage company. However, if you are behind on your payments, we can take this delinquency, which we call arrearages, and place it into your Chapter 13 Plan. Thus, as long as you are making your Chapter 13 Trustee payment and also making your regular mortgage payment from that point on, you can keep your house out of foreclosure. You can also put car payments into a plan whether it is for a new or used car. Retail installment contracts such as furniture purchases, jewelry purchases, television, stereo, or other electronic appliance purchases can also be put into a Chapter 13 Plan. The type of debt that I have just discussed is called secured debt.

Secured means that you put up your property as collateral to secure your promise to repay a debt or some obligation. Occasionally, the cash flow into a household has been reduced for some reason. In that case there may not be enough money to spread around between all the secured creditors. If that is the case, we often must make hard choices and prioritize our obligations. This means that sometimes we must decide what items we will keep and continue to pay, and which items are too burdensome to pay for and must be surrendered to a creditor. This does not happen in every case but I have had clients surrender everything from houses, mobile homes, boats, timeshare property, televisions, furniture, and computers. It all just depends on the needs of the individual person.

In a Chapter 13 you can put in delinquent income taxes as well as property taxes. These tax debts as well as the secured debts must be repaid during the life of the plan.

The other type of debt is called unsecured. Common examples of this would be credit cards, signature loans, some finance company loans, and medical bills. Typically a Chapter 13 Plan will last 36 months, but it can go up to 60 months if there is a special need for it. At the end of a person's plan, any balance remaining on most unsecured debts is discharged. Being discharged means that you have no legal obligation to repay the money.

CHAPTER 7

The other type of bankruptcy is the Chapter 7 or straight bankruptcy. We typically take a closer look at this when someone is in a "break even situation." By this I mean that by the time you make your house payment, car payment and regular living expenses, there just is no money left over with which to make a trustee payment. In fact, in the Chapter 7 bankruptcy there is no trustee payment, and you are asking the court to grant you an immediate discharge on your indebtedness. Your eligibility to file a Chapter 7 Bankruptcy will depend on your gross income and the number of people in your household, and perhaps, the amount of your allowed living expenses.

In a Chapter 7 you must also file a petition and list everyone to whom you owe money. You must also file a schedule of all the property that you own to include land, buildings, bank accounts, investments, household goods, cars and trucks, trailers, retirement plans, and any other property rights that you might have. As in a Chapter 13, the secured creditors get better treatment in the Chapter 7 as well. As to your secured creditors, if you want to keep your house, you must continue making the payments. The same rule would apply as to a car payment or any retail installment contract where you are financing the purchase of furniture, jewelry or stereo equipment. However, if something is too burdensome to pay, you have the same option of surrendering the item back to the creditor, and any balance owed on that debt typically would be discharged.

One disadvantage in a Chapter 7 is that a person may wish to keep a car, but find that he is several months behind in his payments. In that situation the bank may decide not to let a person reaffirm the debt on the car and instead ask for the car back. There is little that can be done to stop the bank from reclaiming the car (their collateral) in that situation other than to pay them the balance of the loan or pay them the value of the car at that time. Therefore, if a person is presently current in their house payment, trailer payment, car payment or retail installment contract, and if they desire to keep the item, they should continue to maintain their payments on a current basis.

One other concern in filing a Chapter 7 bankruptcy is how much property does the person own. The traditional notion of a bankruptcy was that the trustee would gather your property together, sell it, convert it to cash, and pay out your bills as far as the money would go. However, under modern bankruptcy law, we have what are called exemptions. Exemptions are types of property and equity value that you have in that property that you get to protect from the claims of your general unsecured creditors and the bankruptcy trustee. For most people this covers everything that they own; however, I do have some clients who either own too much property or have too much equity value in one item and face the risk of losing it. However, if this is likely to occur, we usually see it coming so proper arrangements can be made.

Some people may decide that they have no other choice but to file bankruptcy anyway. Others may decide to do nothing, and others find a way to file a Chapter 13 instead in order to protect their assets.

The court costs for filing a Chapter 7 bankruptcy is $299.00. The cost for filing a Chapter 13 is $274.00. (This is the fee the court charges you to actually file your petition and is separate from your attorney's fees.) Once you actually file your bankruptcy, there is an automatic stay that goes into effect. This is a bankruptcy court injunction which prohibits any further collection efforts against you outside the bankruptcy court venue. This would include stopping a foreclosure action, repossession of property, lawsuits, execution of judgments, garnishment actions, collection letters and harassing phone calls.

In the typical bankruptcy case should you decide to file a petition, I would have you return for a follow-up interview that would last approximately two to three hours. At that time I would have you bring in copies of all your latest bill statements, coupon books, any original loan documents or contracts that you still have, collection letters, and any lawsuit papers that you might have. I further require a copy of your pay stubs for the past six (6) months, copies of your last two years income tax returns, copies of your W-2's and 1099's, and a hand written list of all the property that you own together with your estimate as to what each item of property is worth.

Once I have you and this information, we will go over your financial situation and see what needs to be done in your case. Most of the time my clients have an instinctive feeling as to which way is best for them, Chapter 7 or Chapter 13. I try to direct the work in that manner, but if there is a problem in doing it the way that they would like to do it, I will suggest an alternative and see what we can do at that point.

The new bankruptcy law also requires you to attend a pre-bankruptcy counseling session. You must do this and get a certificate for having done so in order that your bankruptcy petition will not be dismissed. You must also attend a debt management course afterwards to get your discharge.

The next step after the follow-up interview would involve your returning to the office to read and sign the petition. At that point a bankruptcy petition would be filed and then the automatic stay would go into effect. If you have been in a bankruptcy in the past year, there could be a restriction on that. Once the petition is filed by the bankruptcy court, the court will then send out a written notice to all your creditors that you have filed, and they are to cease any collection efforts at that point.

The court will also notify you of a court hearing date which is typically held four to six weeks after your petition is filed. This is a mandatory court hearing with the Bankruptcy Trustee. It involves going to the Federal Court House which is located here in Fayetteville at the Post Office Building on Green Street. It usually involves you, me and the trustee and any of your creditors that care to show up sitting at a conference table. The trustee will put you under oath and ask you questions to make sure that the information in your petition is truthful and accurate. If your case is a Chapter 13, the trustee makes sure that the amount of your monthly payment is adequate to accomplish what we are trying to achieve. For most people this is the only court appearance that they have to make and they are on their way.

When filing a Chapter 13 you will be required to attend a Debtor Education Class on the same day you appear in court. This class also serves as your mandatory financial management course. If you and your spouse file jointly, both must attend this class. Your failure to attend this class could result in your bankruptcy not being completed. This class usually starts at 9:00 AM and is immediately followed by your 341 hearing. BOTH THE CLASS AND THE HEARING ARE MANDATORY.

It is also of the utmost importance that you keep your attorney updated on any phone number or address changes that may take place until such time that your bankruptcy is discharged. If you do not have a valid phone number or address, then it is important for us to have some point of contact that can relay information. We must have a means of communication at all times. We cannot keep you informed of important changes in your case if we cannot get in touch with you.

Either type of bankruptcy will be reflected on your credit report. A Chapter 7 Bankruptcy will be on your credit report for up to 10 years, and a Chapter 13 Bankruptcy will be on your credit record anywhere from seven to ten years depending on the credit reporting agency. However, I often find that most people, by the time they see me, are not that concerned with their credit report as they are having other more immediate problems. They also figure that probably their credit rating is "shot" for the next seven years anyway.

A bankruptcy does not mean that you will be unable to get credit in the future. That determination is made by any individual creditor to which you apply for credit. However, it is a factor that any creditor will use in deciding whether to advance you credit.

If you have not already done so, please take the time to fill out the Debt Worksheet . I need a list of all your creditors and the approximate amount that you owe each one.

FROM THIS POINT FORWARD DO NOT INCUR ANY ADDITIONAL DEBT, OR BORROW, MAKE ANY ADDITIONAL CHARGES, MAKE ANY CREDIT APPLICATIONS, AND DO NOT BUY, SELL, PAWN, TRADE, MORTGAGE, NOR GIVE AWAY ANYTHING.