Bankruptcy is too complex, making it costly and difficult for people to file under either Chapter 7 or Chapter 13.  We need to make it as simple as filing a 1040EZ tax return, and demand greater levels of documentation for more complex cases.

So says Columbia Law School professor Ronald Mann (he’s the guy in the center of the picture above) in an op-ed piece in the New York Times.

We’ve discussed the concept of legal fees in bankruptcy cases in the past, and I’ve written on the topic of the level of documentation needed to get a bankruptcy case rolling.  What concerns me about Professor Mann’s piece, however, is that he presupposes that people who need to file for bankruptcy in New York (I can’t speak for the rest of the country) will pay lower legal fees just because the output of documents is simpler.

Professor Mann is off base.  And before you get upset, I want to tell you exactly why.

Regardless of the forms that need to be filed with the U.S. Bankruptcy Court to get a case filed, the same information needs to be digested by the lawyer. Whether you make a lot of money or a little money, I still need your paystubs for the past six months.  Your credit card bills need to be reviewed whether you owe $100,000 or $10,000.

Sure, I don’t need to see the title to your car if you don’t have one.  But if you don’t have a car then I don’t complete that part of the bankruptcy schedules anyway.  My time isn’t spent there, and I don’t need to do that work.

Ideally, I would be charging less money in legal fees for those sorts of cases.  Less work means lower fees, right?

Maybe.  But maybe not.

You see, we bankruptcy lawyers still need to do an unholy level of work just to figure out how to get you qualified for Chapter 7.  And if you don’t qualify, we need to do a ton of work on figuring out your Chapter 13 Plan payment and Plan duration.  It’s called the means test, and it forces us to put every single client through a meat grinder of 6-month averaged income for the entire household, asset levels, and expense deductions that have no earthly connection to the real world.

You want to make the bankruptcy laws simpler?  I’ve got a fix for you – get rid of the means test and let the consumer come to the court with a statement of income and expenses. The judge can decide if those expenses are realistic or over-inflated, and the decision to allow a Chapter 7 discharge can be based on that rather than arbitrary figures.

The forms are largely generated by sophisticated software programs, not hand-typed.  We press a button and they get spit out of the printer.  The legal fees involved in filing for bankruptcy have to do with the level of legal analysis that needs to be done, and that has very little to do with drafting documents.

Professor Mann, your pro-consumer intentions are good but your anger is misplaced.

Photo courtesy of Center for American Progress.

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Reaffirmation is a key component of a Chapter 7 bankruptcy case, usually affecting your home or car. You decision is a critical one, and may affect you for years after your bankruptcy case is discharged.

What is reaffirmation?

Technically, a reaffirmation is a “re-promise.” In the context of a bankruptcy case, I tell my clients that it is:

A promise to repay the balance of the debt under terms that are negotiated between the creditor and the person who filed for bankruptcy. Those terms are usually the same as the original loan, but may from time to time be changed if everyone agrees.

When you reaffirm a debt, you are no longer protected by the discharge in bankruptcy. If you fall behind on the loan after case is finished then the creditor can not only repossess the property, but you can be held legally liable for the deficiency.

How long do you have to take action?

Once you file a Chapter 7 case you have 30 days to file what is called a “Statement of Intention” concerning any debts that have secured claims against them (usually a car or home). This tells the court what you intend to do about those debts and the property, and it guides your actions from that moment on.

Once you have your meeting of creditors, you get 30 days to do what you said you were going to do in the Statement of Intention.  If you don’t then the automatic stay terminates and the creditor can take whatever steps it deems necessary with respect to the property.

Change your mind about that reaffirmation agreement?

If you sign a reaffirmation agreement with a creditor, you can revoke it up to the time the court issues your discharge.  But if you make the wrong choice and don’t take action in time, you’re going to be bound by that agreement until the debt is paid in full.

The bottom line?  Don’t enter into a reaffirmation agreement lightly, and always speak with your lawyer before signing on the dotted line.

This photo of Di Fara Pizza in Brooklyn (which is the best pizza in New York City, by the way), courtesy of akuban.

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I recently did a free bankruptcy teleseminar (that’s a seminar on the phone) for a group of people interested in filing for bankruptcy.  I did a brief review of the basics and answered a bunch of great questions, and now I’d like you to have it.

Just click the title below to listen online, or right-click on this link to download it to your computer.

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Chapter 7 bankruptcy is rife with pitfalls, and there are a number of ways to get your discharge denied.  But what happens if you need to file after the denial, and are ready to play by the rules of Chapter 7 this time around?

First, we need to talk about denial of discharge in Chapter 7 bankruptcy cases. Under Section 727(a) of the U.S. Bankruptcy Code you can be denied if the court finds that you’ve:

• intentionally transferred, removed, destroyed, mutilated, or concealed (or allow someone else to transfer, remove, destroy, mutilate or conceal) and of your property within one year of the filing of your case or property after the filing of the case;
• concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which your financial condition or business transactions might be ascertained (unless such act or failure to act was justified under all of the circumstances of the case);
• knowingly and fraudulently made a false oath (in other words, that you lied);
• given, offered, received, or attempted to obtain money, property, or advantage, or a promise of money, property, or advantage, for acting or forbearing to act;
• withheld recorded information, including books, documents, records, and papers, relating to your property or financial affairs;
• failed to explain satisfactorily any loss of assets or deficiency of assets; or
• refused to obey any lawful order of the court, other than an order to respond to a material question or to testify.

Denial of your Chapter 7 discharge doesn’t stop the case. The Chapter 7 trustee is still going to gather and liquidate any non-exempt assets; all you lose is your fresh start free of those debts.  So it’s a lose-lose proposition for you overall.

Now we get to the whole matter of a new Chapter 7 bankruptcy case after denial of discharge in the previous case.  Bad news there as well.

Under Section 523(a)(10) of the U.S. Bankruptcy Code, you can’t get a discharge if you were denied a discharge in a prior Chapter 7.  So you’re left with a possible Chapter 13 bankruptcy if you do need to file for bankruptcy later.

So what’s the solution?  That’s simple – be honest, don’t lie, don’t shred your documents, pay attention, and communicate clearly with your lawyer at all times.

Photo: Ko_an

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Sorry I didn’t get this out to you earlier, but the time slot just opened up and I jumped on it.

This Wednesday – March 3, 2010 – at 2:00pm I’m going to be doing a live online seminar about bankruptcy. It’s sponsored by the folks over at avvo.com (a terrific source of information about lawyers, you should take a look at it) so there’s zero charge.

Zip. Zada. Nothing at all.

I’ll be going over some of the basics of bankruptcy, then I’m opening up the floor to take questions. They tell me it will go on for about 30 minutes, but I’m bringing a cup of coffee and plan to be there for as long as questions keep poring in.

Sign up for it here:

https://www2.gotomeeting.com/register/214461747

Hope to “see” you there!

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New York State bankruptcy laws are unique inasmuch as they reside within the federal Bankruptcy Code.  In fact, the laws vary from courthouse to courthouse, trustee to trustee.

Let me explain.  We all know that bankruptcy laws are federally-based. Title 11 of the United States Code governs how bankruptcy cases are handled, administered, and filed.  The judges are appointed under the federal system.  The courthouse is federal, too.

But the actual exemptions, the list of things you get to keep in bankruptcy?  New York decided to “opt out,” which means that New York State laws – not the federal cones – determine what you get to keep and what you have to give up.  So in that respect, bankruptcy is different in New York than elsewhere.

The local equation doesn’t stop there, I’m afraid.  Your Chapter 7 case in Ohio is significantly different that your Chapter 7 case in Manhattan, which is in turn different than the Chapter 7 case in Brooklyn or Long Island.  Why?  Because Manhattan is part of the Southern District of New York whereas Brooklyn is part of the Eastern District of New York.  One subway stop, two separate judicial districts.  And with those different districts come a whole different set of local rules that govern the processes.  Not radically different, but different enough to matter.

Now let’s get to the big differentiator – the trustee.  You could be in bankruptcy court in Manhattan and have one trustee (no, I’m not naming names) with a simple and pleasant experience.  The same person with a different trustee and the exact same case may have a miserable experience in the hands of the wrong lawyer.  With over a dozen bankruptcy trustees in each of the bankruptcy courts in New York, there’s a significant variation in the attitudes and personal preferences of each one.

So how do you maximize your chances for success when you file for bankruptcy?  You need to take a hard look at your lawyer and be sure that he or she knows the trustees and the local rules.  Local rules are easy – anyone can read them on the court websites.  But being able to gauge the habits and preferences of each trustee?  That’s the difficult part of the equation.

It’s one of the major reasons why we don’t file bankruptcy cases in Buffalo; the trustees and local rules in the Western District of New York are foreign to us.  We may know our stuff, but the local customs would spell disaster for our clients if we were to do any work in that region.

Photo courtesy of tom706.

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Equity is one of the most important terms when it comes to your bankruptcy case. When determining whether you can keep property in Chapter 7 bankruptcy, your lawyer will often look to the amount of equity. Too much and you could lose it, so you can see why it’s so important.

Put simply, equity is merely the difference between the market value of something and the claims held against it. But that presents a whole new set of questions, doesn’t it?

Market value is the first part of the bankruptcy equity analysis. This is the amount you could sell that particular piece of property for, given the current condition of the item. In other words, take a look at that pair of shoes you’re wearing – how much would you get for them if you took them off your feet and tried to sell them?

That’s market value. And for things like clothing and your household goods, the value is pretty small. After all, who’s going to give you money for your 8 year old sheet set? If it’s the bankruptcy trustee, the answer is pretty much zero.

But market value goes somewhat deeper. If you’ve got a home worth $800,000 the market value isn’t $800,000 because that’s not how much you’d be left with if you sold it. You’d have to pay a real estate broker, state and (if you’re in New York City) city transfer taxes, and maybe money to the co-op or condominium association. Those costs all go to reduce the market value of the home.

Now let’s look at the, “claims held against it,” part. We’re talking about secured debts here. If you own a car and there’s a loan of $14,000 against it, that’s a claim against the car. Simple, right?

It can get tougher, though. You’ve got a home you own, and there’s a $280,000 mortgage against it. But there’s also $4,500 in unpaid property taxes and $5,000 in unpaid common charges due to the condominium association. You also have a judgment against you for $20,000.

These are all claims against your home. Yes, even the judgment. Because in New York, a judgment attaches to all property – including your home.

So the upshot is that when determining equity, you need to take the market value (sale price less any costs of selling the property) and then take away the total of the claims against the property. When you’ve got that number, you know your equity for the purposes of the bankruptcy case.

Photo courtesy of Sappymoosetree.

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You’ve made a commitment to getting out of debt, and now you’re trying to narrow down the field to decide which bankruptcy lawyer to hire. Truth be known, there are a lot of us in New York – some with decades of experience, some with a few years, and even more just breaking into the field.

And just because someone’s still a newbie doesn’t mean they aren’t good at what they do. I know a lot of lawyers who have been in court just a few months and can run circles around those who have been in the trenches for 20 years or more.

How do you decide who to hire for your bankruptcy case? If you’re like most people, the fallback position to is examine fees. Lowest fee wins, right?

Wrong. At least, it should be wrong.

There are competent consumer bankruptcy lawyers in New York who will file your Chapter 7 bankruptcy for $800 plus the filing fees. And there are others who will charge you $4,000 or more for the same case.

I know you’re not made of money (if you were, chances are good that you wouldn’t be thinking about filing for bankruptcy in the first place) but the important thing to look at is what you’re getting for your bankruptcy lawyer’s fees.

Experience counts (to an extent), to be sure. But what kind of responsiveness should you expect from your lawyer? How accessible are they by email (for those days at work when you have a question and can’t pick up the phone)? Do they have a feel for who you are and what problems you’re having, or are they retiring each evening to their palatial estate to sip brandy by the fireplace?

Above all, what will they do for you? Will they take the initiative and get in touch with your creditors immediately, or will they let the calls keep coming until your case is filed? Will the lawyer help you re-build your credit after the case is done? Heck, will they take the time to explain things to you in language you can actually understand?

Again, I know you don’t have a ton of spare cash sitting around waiting to be spent on some fancy-pants lawyer. You’ve got to balance reality with the marketplace, and get the best lawyer you can afford. But if you make your decision based solely on cost then you may end up getting exactly what you paid for.

What do you think? Have you filed for bankruptcy in New York with a lawyer? If so, sound off in the comments section to tell us how much you paid – and if it was worth it.

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When you need to file for bankruptcy, you typically want it done pretty quickly.  In the old days, that just wasn’t possible without advance planning.  Your lawyer needed to make a bunch of copies of your bankruptcy documents, hop on the train or jump in the car, and be sure the court was open.

What most people don’t realize is that this is a thing of the past, as least for lawyers.  It’s true that if you file for bankruptcy on your own you still need to take those steps, but for lawyers it’s a lot faster and easier than that.

In fact, it takes nothing more than the press of a button.

In New York bankruptcy courts, the rule is that all bankruptcy papers must be filed electronically over the Internet.  The system is called CM/ECF (short for case management-electronic case filing) and is administered through the federal court system.  Using CM/ECF is pretty simple; in fact, most of the bankruptcy lawyers in New York and elsewhere use software that handles the filing with the press of a single button on the computer.

Of course, getting to the point where the case is ready to be filed still takes some time.  Documents must be provided to the lawyer, data input, and papers signed.  To be sure, that will keep you going for a little while.

Once you have made the effort to get your documents to your bankruptcy lawyer, the filing itself can be handled as quickly as the Internet allows.

This lets you get protection from your creditors as fast as you need it, even at 2:00am (though if you call my office at 2:00am your chances of finding someone at work is pretty slim).  Still, it’s good to know that your case can be filed without all the hassle that used to be involved.

Photo courtesy of Just Us 3.

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You’ve filed Chapter 7 bankruptcy in New York and there were assets that were sold by the trustee and turned into cash.  Now you’re wondering just how your creditors are going to get paid.

Will the tax collector get first crack at the money, or will the student lender?  How about the mortgage company?  Or child support?

There is a pecking order when it comes to getting paid in bankruptcy, and that pecking order is pretty strict.  Six classes of priorities, and they come one after another.

But first, creditors need to file a Proof of Claim in order to be paid.  If no Proof of Claim is filed, the creditor doesn’t get paid.  Period.

Once they do, who comes first?  Simple, really – all we do is look to the U.S. Bankruptcy Code for guidance.

First people who get paid are those who have valid liens on property.  So if your house is sold, the mortgage company gets the first bucket of money when the house is sold.  Makes sense, right?

OK, now onward to the next segment of creditors, which are called priority creditors.  Within that broad category, the segment gets chopped up as so:

First, domestic support obligations get paid.  Those are debts to a spouse, former spouse, or child of the debtor, or such child’s parent, legal guardian, or responsible relative.

Next, any administrative expenses due to the trustee are paid.

Third, any other allowed administrative expenses such as legal fees approved by the court.

Fourth, certain claims in involuntary bankruptcy cases (if someone files an involuntary bankruptcy against you, let me know in advance because I can’t help with those).

Fifth, up to about $11,000 in wages earned by employees of the debtor within 180 days prior to filing the case, followed by money to have been contributed to a business debtor’s employee contribution plan during the same period of time.

Next, allowed unsecured claims of individuals, up to $2,425, arising from the deposit, before the commencement of the case, of money in connection with the purchase, lease, or rental of property, or the purchase of services, for the personal, family, or household use of such individuals, that were not delivered or provided.

Followed by tax debts that are not otherwise dischargeable under Chapter 7.

Finally, allowed claims for death or personal injury resulting from the operation of a motor vehicle or vessel if such operation was unlawful because the debtor was intoxicated from using alcohol, a drug, or another substance.

Once those priority creditors are paid, the rest of the debts are paid out in pro-rata fashion (in other words, the money is divided according to the percent of the total unsecured debt owed to each creditor).  Assuming everyone is paid in fully, everyone gets interest at the legal rate of interest.  And once that gets paid in full, the balance comes back to the debtor.

So what does this mean for most people who file for Chapter 7 bankruptcy?  The reality is that most Chapter 7 cases are considered “no asset” cases, which means there’s nothing to liquidate and divide.  For the few cases that have nonexempt assets, the domestic support obligations get paid first.  After that the trustee gets paid his or her administrative expenses, the tax man gets his pound of flesh, and the unsecured creditors fight over the scraps.

But again – there typically isn’t anything to fight over.  If there are, chances are pretty good that a smart bankruptcy lawyer would do what he or she could to get you into a Chapter 13 bankruptcy if at all possible.

Photo courtesy of lakewentworth.

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