There are two kinds of bankruptcies for getting rid of personal (rather than business) debt.  Generally, chapter 7 bankruptcies are for people with few assets and low income.  Chapter 13 bankruptcies are for people with assets to protect (such as equity in a house) and higher income.  A chapter 7 wipes out most debt in existence on the day the bankruptcy is filed.  In a chapter 13, the debtor enters into a 5-year-plan of monthly payments, approved by the Bankruptcy Trustee, to pay off the debts owed.  The bankruptcy law sets specific monetary thresholds to qualify for bankruptcy.  However, there are “grey areas” where a debtor might qualify for either kind.  Your attorney should take the time to understand your current and future finances, in advance of preparing your bankruptcy petition, to explain which kind you qualify for, or whether a chapter 7 or 13 bankruptcy is better for your financial circumstances. 



In a chapter 7 bankruptcy, everything you own and owe is legally transferred to a Bankruptcy Trustee, who can then use your assets to pay your debts.  The Trustee is appointed by the Bankruptcy Court to administer your debts – either by paying them from the sale or liquidation of your assets or, if your assets are insufficient to pay your debts, by legally erasing the debts.  Numbers and formulas drive virtually every part of a bankruptcy.  In most cases, you are allowed to keep approximately $28,000 of your assets and cash in a chapter 7.  Legal ownership of the assets is transferred back to you when the bankruptcy is completed.  Valuing some assets is a no-brainer: a $5,000 savings account is worth $5,000.

But what about that 14-year-old RV in the back yard that no longer works so well?  Asset valuation is an art form in bankruptcy.  Your attorney should claim the lowest, believable value for your assets because you want to keep as many of them as possible through bankruptcy.  If your attorney undervalues the equity in your house but the Trustee thinks there is more value in the home, then the Trustee may decide it’s worth it to sell your house and take the proceeds to repay your creditors.   It’s critical that your attorney know the “sweet-spot” between minimizing the value of your assets and the Trustee not challenging those valuations.  It’s generally better also to have an attorney who has had cases before the Trustee in charge of your case because that means she know that Trustee’s tendencies when it comes to asset valuation.



Unfortunately, bankruptcy is a legal practice area that tends to attract “mills” — firms filing lots of bankruptcies, sometimes with no lawyer involved.  Hiring a firm where most, if not all, of the preparation of your bankruptcy petition and appearances are done by paralegals or other non-attorneys, is risky.  Non-attorneys often do not know the full range of debts that can be discharged in bankruptcy (such as taxes or certain kinds of student debt), or the very specific requirements for erasing certain kinds of debt.  Firms doing hundreds of bankruptcies often prepare sloppy petitions, that are rejected by the Trustee.  I know because many of their former clients end up in my office, angry and dejected.

Don’t waste your time and money.  Do your homework.  Grill firms on who prepares the bankruptcy petition and attends the 341 Meeting of Creditors.  Make sure the attorney is actually a member in good standing of the state bar association.  Better yet: if the attorney is a certified specialist in bankruptcy, then she is more likely to know the obscure areas of bankruptcy law that may benefit you, than a non-attorney at a bankruptcy “mill”.  Check the on-line reviews of anyone you’re considering hiring and avoid anyone with a reputation for being unresponsive.  Most people rightfully find bankruptcy stressful and sad.  Don’t hire (and pay!) anyone to take you through a sensitive financial and emotional experience who isn’t qualified, kind and known for competently shepherding bankruptcies to conclusion. 

January 20, 2020

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