The Bankruptcy Process

August 6, 2017

The Bankruptcy Process

The United States Constitution and related federal law allow for individuals and organizations to apply for partial or complete relief from their debt if they are experiencing serious financial stress. The rules for obtaining this relief vary depending on the type of bankruptcy. There are four Chapters in bankruptcy law, three applicable to busineses and individuals and one for local governments. All four types or Chapters have some elements in common.


The Types of Bankruptcy:

Individuals may file for a fresh start or for permission to pay a some fraction of the debts they owe. These Chapter 7 and 13 bankruptcies are for individual petitioners who meet certain eligibility requirements. In Chapter 7, the individual has most types of debts erased. In Chapter 13, the individual pays off a small portion of their total debt on a plan overseen by a bankruptcy trustee.

Bankruptcy law also allows organizations to restructure their debt. Business owners may apply for permission to restructure their corporate debts under Chapter 11. Chapter 11 bankruptcy is an option for just about any business that is in serious financial trouble. Municipal governments (cities, towns, school districts, counties) may apply for debt restructuring under Chapter 9.


Protections in Bankruptcy:

Individuals who file for bankruptcy protection have a number of legal protections from foreclosure, wage garnishment, and so on. As soon as an individual files for bankruptcy, collection agencies have to stop calling or mailing. Foreclosure proceedings also stop in bankruptcy. Creditors are no longer able to garnish wages and freeze assets. Under New York law, utilities must wait 20 days before disconnecting phone, water, or electricity service. Individuals in bankruptcy cannot be sued for debts incurred before entering bankruptcy, as long as the creditor was listed in the bankruptcy petition.


The Automatic Stay:

The one thing all three types of bankruptcy have in common is the immediate relief they offer from collection activities. Collection agencies must stop calling or mailing. Creditors are also forbidden from filing lawsuits and freezing bank accounts. Wage garnishments also have to stop. Foreclosure and repossession activates must cease as well.

In some instances a creditor may be granted a relief from stay, which gives them permission to continue their collection or repossession activities. The best protection from this is to have the help of an experienced bankruptcy attorney.


Property Exemptions:

New York state law exempts some of the individual's real estate and other personal property. The amount of the exemption will depend on where in the state you live and whether you file individually or as a couple. In New York City counties, the individual exemption is $150,000 or $300,000 if filing for bankruptcy jointly. There are other exemptions for other categories of property, like personal items, and savings.


Means Testing:

In 2005, the United States bankruptcy code was amended to include a Means Test for Chapter 7 bankruptcy. An individual who petitions to restructure their debts under Chapter 7 must prove they meet certain requirements. The Means Test is passed, meaning the person is allowed to file, if their household income is under the median income for New York State.

A means test starts with a calculation of the debtor's current monthly income, using an average of the last six months to calculate an average income. That amount is then reduced by a number of allowable deductions described the the “collections standards of the Internal Revenue Service.”

These deductions include:

  • Reasonably necessary health insurance, disability insurance, and health savings account expenses
  • Contributions to the care of non-dependent family members
  • Limited spending on tuition and other costs associated with K-12 education
  • Some additional home energy costs that are deemed “reasonable and necessary”
  • 1/60th of all “priority secured debt” that will become due in the five years after filing for bankruptcy
  • Expenses for protection from family violence
  • Continuing contributions to tax-exempt charities
  • There may be other exemptions not specifically covered in IRS rules.

    The higher your disposable income the less likely you will be able to use Chapter 7. If you fail the means test, you might still be able to file Chapter 13 bankruptcy. Or, you can challenge the court's judgment.


    Filing for Bankruptcy:

    Before a person is officially declared bankrupt, they must file a petition for Chapter 7 or Chapter 13. There are specific legal reasons for favoring one over the other, though a court-mandated Means Test will largely determine eligibility. Before filing a bankruptcy petition the individual must complete credit counseling and debt management courses from a court-approved provider. Your attorney or the bankruptcy court Website will be able to point you to approved education providers. These short courses may be completed online or by phone, in some cases.

    At the hearing, the bankruptcy trustee will ask each petitioner some questions about their assets, liabilities, and income. Failure to appear always results in automatic dismissal. One or more creditors may appear and contest the individual bankruptcy petition, but this is rarely happens unless the debt is large or the creditor suspects fraud.

    After the trustee hearing, a small business owner or self-employed person will be required to attend a course on record keeping and tax preparation. The course is free and done in person.

    If the Chapter 7 petition is approved, the person has certain debts wiped away. In Chapter 13, the petitioner makes scheduled payments to the bankruptcy trustee for several years. In Chapter 11, the business owner will make debt payments monthly as well.


    New York Bankruptcy Attorney:

    If you are considering personal or business bankruptcy in New York, you should seriously consider working with an experienced bankruptcy attorney. That attorney can help you understand how federal and state bankruptcy law apply in your situation.

    Attorney Katz can be reached at (800) 251-3529