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BARRY STERNBERG LAW OFFICE

4245 Union Road, Suite 101

Cheektowaga, New York  14225

(On Union Road, directly across form the Airport Plaza and the Route 33 on/off ramp.)

Call (716) 626-5900 for a free consulation.

You are Not Alone!

I have represented people filing bankruptcy since 1987. Just about everyday of my professional career I talk with people like you who are going through a financial crisis, and like you, the vast majority are good people who never dreamed they would someday consider filing for bankruptcy relief.

Most people want to repay their creditors if they could. I know that thinking about bankruptcy can be frightening, not to mention the blow it may inflict to your personal pride. Many clients often tell me of their exemplary past credit history, even though it has little to do with their present predicament. I suspect the reason arises from a need to explain why they are different from the cheats and criminals they had always perceived typically abused the bankruptcy process. The irony is that they are typical of those who file bankruptcy. It is simply a myth to believe that most bankruptcy filers can pay their debts. The fact is most filers have already sold valuable assets, borrowed from friends, relatives and other credit lines attempting to keep-up, and finally reached the point where there is simply no other place to turn.

The most common reasons for filing bankruptcy include loss of employment, health problems, divorce, or a failed business venture. Most recently, bankruptcy filings are surging as a result of the unprecedented availability of high interest credit cards being pushed by corporate loansharks targeting America’s working and middle class.  And carrying thousands of dollars in high interest debt spells disaster when combined with job loss, divorce or some other unforeseen disaster.

The inability to keep current on payments causes stress that affects marriages, jobs and all other aspects of daily life. Anyone who has suffered a barrage of hostile telephone calls from bill collectors knows something must eventually give. The bankruptcy laws provide a safety valve for honest people to start over and live normal lives again. bankruptcy isn’t an occasion to celebrate, but you shouldn't feel like an outcast either. If you are experiencing a financial crisis –  you are not alone! Yearly, over a million and a half people turn to the bankruptcy laws for debt relief. Statistics show the cross section of people filing bankruptcy mirror society as a whole by income, type of employment, home ownership and almost any other relevant category. In other words, anyone can find themselves in bankruptcy. In these days of corporate downsizing, and uncertain economic conditions, more and more people are in need of a fresh start.

Helping people understand the bankruptcy laws has been my career, and I understand what people go through in deciding whether bankruptcy is the right choice.

People are understandably concerned that they will lose their home or vehicle.  Let me assure you that this is not often the case. Be cautious of well meaning people who tell “horror” stories about bankruptcy. I am continually amazed by the degree of misinformation being circulated. I offer a free consultation to explain the facts about the bankruptcy process and answer your questions.

In the meantime just remember - you are not alone!

What is Bankruptcy?

The origin of the word “bankruptcy” is derived from the French word, banquerote, meaning "broken bench," and refers to a time in the middle ages when a  merchant lost his trading bench in the marketplace as a penalty for not paying debts.  In those bygone days, bankruptcy served as punishment for the business transgressions of merchants and tradespeople. Today, the laws are more complex, serving to grant honest debtors a fresh start –  not to punish for misdeeds. The bankruptcy laws are often thought of as public benefit or “safety net” laws which protect people, whom, after having suffered a financial disaster, are in need of help to become productive members of society again.

In the United States, the main laws governing bankruptcy proceedings are federal statutes known as the Bankruptcy Code. Even though the “Code” is a federal law, there can be significant differences from state to state for certain aspects of the law, such as property exemptions or procedural requirements.

Bankruptcy laws are administered by a special bankruptcy court system, set up to administer the cases and resolve disputes between debtors and creditors. Bankruptcy courts are divided into districts. The Western District of New York has a court located in Buffalo covering the eight counties west of Rochester.

Under the Bankruptcy Code there are several different forms of bankruptcy, which can be specifically utilized by either consumers, businesses, municipalities, or family farmers. Most consumers, though, will utilize either Chapter 7 or Chapter 13. "Chapter" refers to the section of the Code where the specific laws are indexed.

Bankruptcy Basics

Certain basic concepts apply under both Chapter 7 and Chapter 13. Bankruptcy proceedings are commenced by filing a petition with the bankruptcy court. The petition lists all of your assets, liabilities and other financial and personal information required under the Code. You cannot pick and choose which creditors to include on the petition, as all creditors must be listed, but that doesn't mean you cannot keep your home or vehicle, as will be explained later. You may file as an individual, or jointly as husband and wife. Married couples do not have to file jointly if substantially all debts are solely in one spouse's name.

The filing of the petition invokes the “automatic stay.” This means that your creditors are immediately prevented from doing anything to compel collection of a debt once the petition has been filed. The harassing calls, garnishments, law suits, foreclosures, repossessions or shutting off of utility services are all stopped. The "stay" is designed to give you time to sort out your affairs free from the harassment of creditors.

In the petition, your debts are classified as either priority, secured or unsecured. Each is treated differently depending on which chapter is filed. Priority debts in consumer cases are usually limited to government tax liabilities and support obligations. Priority creditors have certain rights to payment over other creditors.

Secured debts are backed by property pledged as collateral, and typically consist of vehicle loans and mortgages. The creditor has a lien, or right to recover the property upon default. In most cases, these liens are created pursuant to the written agreement signed when the pledged property is purchased or upon a creditor extending a loan.

Unsecured debts are almost every other type of debt not backed by collateral. They include credit cards, utilities, medical bills, store charges and unsecured personal loans. Unsecured creditors do not have a lien or collateral interest in any of your property.

Chapter 7 Bankruptcy

Chapter 7 is commonly known as a “straight” or “liquidation” bankruptcy.

Under Chapter 7 you are seeking to have your debts discharged, meaning the legal obligation to pay creditors is canceled. You can pay all or some creditors after bankruptcy if you feel morally obligated, but cannot be legally required to repay. In exchange for discharging debt, certain non-exempt assets may be liquidated under court supervision, with the proceeds to be applied to creditors. You can file Chapter 7 no more than once every 8 years.

Certain types of debts are non-dischargeable. With some exceptions, they include student loans, taxes, support payments, fraudulent debts, debts for embezzlement or larceny, fines and penalties, debts incurred as a result of a willful or malicious injury, unscheduled debts and debts denied discharge in a prior bankruptcy.

Secured debts are fully dischargeable, but valid liens will survive the bankruptcy, and you must surrender the collateral back to the creditor if you do not intend to continue making payments. If you want to keep the secured collateral, you can reaffirm the debt. Reaffirmation means a legal re-obligation to pay the debt as if the bankruptcy never occurred. In exchange for reaffirming, the creditor allows you to keep the secured property, as the creditor will retain the right to collect on the debt should you later default. Reaffirming requires that you sign a written contract that must be filed with the court prior to the conclusion of the case. You will most likely want to reaffirm on a home and automobile, but not charge cards or other debts, unless there is good reason.

Once your petition is filed, a trustee is appointed to represent the best interest of your creditors. The trustee is given broad power under the law. He can set aside improper transfers of property, and can even recover money improperly paid to creditors before filing. The trustee makes sure that all creditors are treated fairly and equally in the bankruptcy proceeding.

Most importantly, the trustee is responsible for collecting and liquidating any non-exempt assets. If assets are available for liquidation, creditors are notified and sale proceeds are distributed to creditors based upon the classification and priority of their debt. Any money left over is returned to you after creditors and administrative expenses are paid.

The trustee theoretically has an interest in all non-exempt assets you own up to the date the petition is filed. These assets, as a group, are called the bankruptcy estate. With limited exception, property you acquire after filing does not become part of the bankruptcy estate, and can not be taken by the trustee.

Does this mean you lose everything? Not at all. In most cases, valuable property such as your home or vehicle is either secured or exempt. Much of your other property, as a practical matter, may not be worth the expense of conducting a sale. A typical rule of thumb is that property with a value of less than $1000 will not be sold by a trustee.

The laws allow you to keep certain property above any liens or encumbrances to preserve your ability to live. These are called property exemptions. Exempt property, up to certain value limits, includes your home, vehicle, furniture, appliances and various other personal possessions.  

The trustee cannot sell secured property unless he first pays off the lien. Therefore, the trustee will not have any incentive to sell secured property that, at a minimum, does not exceed the value of the lien on the property. As long as you can afford the payments on secured debts, such as for your home or vehicle, you can reaffirm with the creditor and keep the collateral.

For this reason, most people keep their home and automobile because there is usually no non-exempt equity in such property. A home, for example, may have a payoff amount on the  secured mortgage close to the value of the property. In New York, a husband and wife can exempt up to $20,000 of equity in their home. In other words, as long as the sale of your home would net you less than $20,000 ($10,000 if owned individually) after payment of liens and closing costs, the home is exempt from sale by the trustee. As long as equity does not exceed the exemption amount, the collateral  has no value to the bankruptcy estate, and the trustee cannot sell the property. The same holds true for a motor vehicle with equity less than $2,400.

Approximately 45 days after filing the petition, you are required to attend a meeting, known as the Section 341 First Meeting of Creditors. There, the trustee will determine whether there are assets to be liquidated, or whether there has been any improper conduct affecting your case. There is usually only one meeting, but occasionally a second meeting is scheduled if further information is needed. Your creditors are free to appear and ask questions as well, but creditors rarely attend. The length of the meeting may vary. It usually takes no more than an hour for all scheduled cases on the calendar to be completed.

Approximately two months after the meeting date the court issues the Discharge Order signifying the conclusion of the case. The two month waiting period is designed to allow the trustee or a creditor enough time to file an objection to dischargeability, if appropriate. These objections to discharge are known as adversary proceedings, and are usually based on some alleged fraudulent activity. The U.S. Trustee's office, a branch of the Justice Department, can also object if they find that there has been a “substantial abuse” of the bankruptcy laws. The vast majority of cases, however, will be concluded without objections, and honest debtors should have nothing to fear.

The average case is completed in three to four months and you then have a fresh start. While your creditors will not be paid after discharge, some can treat the discharged debt as a loss on their income tax return.

Chapter 13 Bankruptcy

Chapter 13 is sometimes known as the “wage earner” or repayment plan bankruptcy.

You can think of Chapter 13 as a debt consolidation, where all debts are grouped together, and repaid to creditors over a three to five year installment payment plan supervised by the Chapter 13 Trustee’s Office and the Bankruptcy Court. The Chapter 13 must be filed in "good faith."

The main advantage of Chapter 13 is that non-exempt property is not liquidated. Chapter 13 permits people to keep any non-exempt assets. In Chapter 13, however, you are not completely discharging unsecured debt. For the privilege of keeping non-exempt assets you repay creditors a percentage on the dollar over a three to five year payment plan, established in accordance with the value of your assets and ability to pay.

Not everyone is permitted to file under Chapter 13. For instance, there is a debt ceiling, or limit to the amount of debt you can have. The debt ceiling is periodically adjusted to reflect inflationary concerns. Most typical consumer cases are usually well within the debt ceiling, and it is rare when someone has too much debt to qualify for Chapter 13.

The required Chapter 13 repayment plan must also be feasible. In other words, to be eligible you must have regular income such as wages, pensions, or self-employment income sufficient to fund the plan while still meeting your monthly living expenses.

Corporations cannot file under Chapter 13, and must use the more complex and expensive Chapter 11 bankruptcy to reorganize debt. A business proprietor that is not incorporated, however, can use Chapter 13, provided the debt ceiling and other provisions discussed here are being met.

The Chapter 13 Trustee acts as a disbursing agent by collecting your installment payments and distributing them to creditors according to the plan; but the trustee also represents the interest of the creditors, and is responsible for ensuring continued compliance with the plan during the three to five year repayment period.

All creditors may not be fully paid in Chapter 13. Unsecured creditors, in many cases, are paid only a small percentage on the dollar, and upon successful completion of the plan the remainder of the debt is discharged similar to Chapter 7. To determine how much unsecured creditors get paid in Chapter 13, the Bankruptcy Code provides two guidelines or “tests.” First, the “disposable income test” requires that you pledge all of your disposable income into the plan for at least three years. Second, under the “Chapter 7 test,” you must pay unsecured creditors the same amount over the life of the plan as they would have hypothetically received had your property been liquidated under Chapter 7. Put another way, your plan must pay unsecured creditors an amount equal to the value of your non-exempt property.

A Chapter 13 Plan must also take account of priority and secured debts. In every case, priority debts, such as taxes and support obligations, must be paid in full through the plan, and secured creditors are entitled to receive an amount at least equal to the value of their collateral. For instance, if a vehicle is worth $7,000, then the plan must propose to pay the secured lender up to that amount. Any amount still left owing above the secured value is treated as unsecured debt, and that portion of the claim will be repaid along with the other unsecured creditor claims.  Under the new laws taking effect on October 17, 2005, some secured creditors may be entitled to receive the full amount of what is owed to them through the plan depending on when the collateral was purchased.

In Chapter 13 you must attend a Section 341 Meeting of Creditors and Confirmation Hearing, which is held within 45 days of the filing. At the Section 341 Meeting the trustee reviews the plan with you and your attorney. Immediately after the 341 meeting, the Confirmation Hearing is conducted, where the plan is presented to a bankruptcy judge for his review. If there are no objections, and the plan meets the requirements of Chapter 13, then the judge will confirm the plan, which makes it binding upon creditors.

The first payment under the plan is due approximately 30 days after filing the petition. Thereafter, the payments must be made regularly under the terms of the plan. Debtors can make payments to the trustee themselves on a monthly basis, or for convenience, the payments can be deducted directly from wages via a wage assignment, which is similar to a garnishment, where your employer deducts and sends a portion of your wages to the Chapter 13 office each pay period.

Chapter 13 may have some other advantages aside from allowing people to retain otherwise non-exempt property. For instance, Chapter 13 is commonly used to save a home from foreclosure. Delinquent mortgage payments, back property taxes or missed car payments can be paid through the plan to stop foreclosure or repossession.

A plan which proposes to pay all mortgage arrears can “cure” a mortgage default by stopping the foreclosure, while forcing the mortgage lender to accept the missed payments over time through the plan. There must, however, be enough disposable income both to fund the plan, and to allow people to recommence making the current mortgage payments directly to the lender, starting with the next due date after the petition is filed.

 Also, your co-signors are protected if the co-signed debt is paid in full through the plan.

Re-establishing Credit After Bankruptcy

When bankruptcy is appropriate, it is usually not a question of maintaining good credit - your credit standing is probably already damaged. Judgments, delinquent payments, and credit counseling services are reported to the credit agencies for long periods of time like bankruptcy.

The Barry Sternberg Law Offices gives each client detailed information on how to improve credit scores after bankruptcy.  

The credit reporting bureaus report a Chapter 7 filing for a period of seven to ten years, depending on the Chapter filed.  Negative information such as delinquencies and charge-offs are reported for seven years.  Judgments and other types of public records can be reported up to ten years.

THE CREDIT GAME

If you’re serious about re-establishing your creditworthiness after bankruptcy you must know how the “credit game” is played.

Lending Industry Deregulation has Opened the Door to Greater Availability of Credit

The lending industry has changed drastically since the early 1980s.  Prior to then, lenders were strictly regulated in the interest rates they could charge. As a result, people were either approved or denied credit based on very narrow creditworthiness criteria.  If a bankruptcy was part of someone’s credit history – well, that was especially bad!  The door to credit markets was shut tight to anyone who had declared bankruptcy.  Nowadays, the credit industry is completely different. It has evolved into risk-based markets, meaning that credit is more widely available based on the ability of lenders to charge higher interest rates for higher risk customers.

Larger institutional lenders needed to develop policies and methods for quickly evaluating the risk factors for tens of thousands of potential customers seeking credit.  Thus, lenders began the wide-spread use of “credit scoring” as a fast, inexpensive way to group their customers into categories based on their relative creditworthiness, and allowing the lender to vary the price of credit (the interest rate) accordingly.  The way lenders view it – lower scores justify higher profits!

Lenders, Insurance Agents and Employers are Starting to Keep Score.  Are You?

The importance of credit scoring in American society today can’t be over-estimated.  Credit scores, in large part, determine not only what interest rate you pay for obtaining credit, but also what you pay for insurance, where you can rent an apartment, and possibly where you can be employed.

There is one important thing to keep in mind – nowadays it’s not your bankruptcy filing that determines how lenders, employers and insurance agents will evaluate you – it’s your credit score!  Bankruptcy is certainly an important factor in your credit score, but the negative effect of a bankruptcy can be overcome in a relatively short period of time if you understand how the credit game is played.

Despite the growing importance of credit scores, the majority of Americans have no idea of their credit score.  In fact, until very recently the credit bureaus prevented lenders from divulging scores to their customers. Now, however, you can obtain your score from the credit bureaus for a small fee.

What many people don’t realize is that those who file bankruptcy will actually see an improvement in their credit score.  On the other hand, after a bankruptcy you need to be vitally aware of your score, and how your credit history is being reported.  There is a greater potential that inaccuracies will appear in the credit reports of those who have filed bankruptcy, which will keep the credit score supressed unless certain steps are taken to remove the inaccurate information.  This process for correcting these errors has been called “credit re-scoring.”

After Bankruptcy, You Must do Everything Right

After bankruptcy, not only will it be necessary to ensure that your credit report is accurate, you will need to do everything right when it comes to re-building your credit history. Especially important, you must pay your bills on time! The Fair Isaacs Company, the leading developer of credit scoring, states on their website that one delinquent account can lower a credit score by as much as 70 to 120 points.

Suffice it to say, anything that can improve your score even a few points after bankruptcy could make a significant difference in how much you pay for credit, or even whether you can obtain credit at all to buy the home or vehicle you always wanted.  Rule number one – if you want to win the credit game, you need to know the score!

CREDIT REPORTS AND CREDIT SCORING BASICS

Most people are aware that credit reporting bureaus are the gate-keepers to the credit markets.  There are three main national credit bureaus, and several regional credit bureaus.  The three main bureaus control and disseminate most of the information to the regional bureaus, so therefore you only need to know about the “Big 3,” which are TransUnion, Equifax and Experian.  These credit bureaus control vast databases that collect information about people which is furnished by creditors and from public records.  The information is then provided in the form of a “credit report” to potential lenders and others for approved purposes authorized under the Fair Credit Reporting Act.  You are legally entitled to see your own credit report.  For more information on obtaining your credit report and credit score, you can contact the three major national credit bureaus:

The Barry Sternberg Law Offices gives you the tools to start improving your credit score after bankruptcy.

BARRY STERNBERG LAW OFFICE

4245 Union Road, Suite 101

Cheektowaga, New York  14225

(On Union Road, directly across form the Airport Plaza and the Route 33 on/off ramp.)

Call (716) 626-5900 for a free consulation.