Bankruptcy Basics

Bankruptcy is as American as Apple Pie

There is no shame in filing for bankruptcy.  Bankruptcy is a part of our American financial and legal systems and has been since our nation’s founding.

Article I of the Constitution explicitly grants Congress the power to create uniform bankruptcy laws. Although bankruptcy was originally designed to benefit creditors, today the process has become much more consumer friendly.

As long as you are honest, you should not feel ashamed about filing bankruptcy. It is your right as an American.

Two things are important to keep in mind when thinking about your debt.

• Creditors such as banks, credit card companies, and mortgage companies factor the potential of a consumer filing bankruptcy into their decision to extend credit. As such, when you pay interest to a creditor you are already paying for the risk of filing bankruptcy.
• You are much more productive to society when you are not crushed under overwhelming debt. You have no incentive to work hard or innovate if you are paying it all to your creditors. Returning you back to productivity and solvency is better for everyone – you, your family and society at large.

At the Law Firm of James D. Wade, we help people in southern Maine who are struggling financially. We do not recommend bankruptcy lightly; only when it is necessary.

We have yet to meet someone who doesn’t want to pay their debts. Oftentimes, the client has tried and failed to pay off his or her debts and only comes to our firm when they are dead broke. Bankruptcy offers people in financial trouble a workable solution so they can get a fresh start.

The Bankruptcy Process

Before filing, it is important to know that bankruptcy is not a single process, but rather consists of various so called “chapters” of bankruptcy each with its own benefits and detriments. The most common bankruptcy chapters are Chapter 7 and Chapter 13.  There are three concepts that apply to all chapters: dischargeable debts, bankruptcy exemptions, and the automatic stay.

Dischargeable Debts

In formulating bankruptcy laws, Congress decided that some debts are dischargeable upon meeting certain requirements, and that some debts are never dischargeable, regardless of the circumstances.

Examples of a non-dischargeable debt include:

• Debts from alimony and child support.
• Criminal fines and penalties or restitution
• Certain tax debts, such as the employee’s portion of payroll taxes.

Some debts are by default non-dischargeable, but if certain requirements are met then the debt can be discharged. Student loans are a great example.  In Maine, debtors who prove undue hardship to repay your student loans can have the debt discharged.

Other debts may be dischargeable or non-dischargeable depending on which chapter you file. One example is property settlements in divorce.  With Chapter 7 these debts are non-dischargeable, but in Chapter 13 such debts are dischargeable.

As you can tell, it is important to know what debts someone owes before filing for bankruptcy. Care must be taken to choose the proper chapter so the debtor gets the best outcome possible.  Hiring an experienced bankruptcy lawyer can help you achieve that goal.  Contact our office today to speak with Attorney Wade about the options you have with your debt.

Exemptions

Exemptions are state laws that protect a certain minimum level of assets from creditors’ claims. When the Bankruptcy Code was updated in the late 70’s, each state was given the option on whether to apply Federal or state law when a resident files bankruptcy.

Maine has opted to apply state law, so when you file you look to state law regarding exemptions. Maine exemptions can be kind of stingy but there are several big ones that help debtors.

• A Maine debtor, under age 60, can shield up to $47,500 in equity in his or her personal residence (if married this can double to $95,000).
• A Maine debtor can shield $7,500 in equity in a car or truck (if married, both debtors can claim the exemption in their respective car or truck).
• A Maine debtor who owns a business can exempt up to $5,000 in equipment and other items of property used in his or her business.
• Retirement assets are exempt for Maine debtors up to $1M dollars, except for any voluntary contributions made within 180 days of filing bankruptcy.

If an asset is wholly exempt then the debtor will be able to retain the asset.

If the asset is only partially exempt or not exempt at all then the debtor may have to surrender it for sale by the trustee (in a Chapter 7) or pay the value of the non-exempt portion to the trustee (in a Chapter 13).

Once the trustee has the money from either the sale of the non-exempt asset or receives the value of the non-exempt portion from the debtor then the trustee will pay your creditors. Very rarely do creditors receive the full value of their claim.

The Automatic Stay

The automatic stay prevents creditors from taking any action to collect on your pre-bankruptcy-petition debts, which allows you some breathing room. Generally, so long as you are in bankruptcy the automatic stay protects you from creditors’ attempts to collect a debt.

However, there are exceptions to the automatic stay where it may not apply or may lapse. Additionally, creditors may request that the automatic stay be lifted to take certain actions, like foreclose on a debtor’s real estate.

If a creditor violates the automatic stay, a debtor may be able to get damages, attorneys’ fees and punitive damages. For this reason, our firm counsels our clients to keep a log of every call and preserve any correspondence received from a creditor once bankruptcy has been filed.

Filing Under Chapter 7

Filing Chapter 7 is the most common and easiest route to take in bankruptcy.  The whole process takes about 6 to 9 months to complete, depending on the complexity.

The only limitation on filing Chapter 7 is the so-called “means test” which prevents individuals who have primarily consumer debts and who earn over Maine’s median income (which changes from year-to-year) from filing.

Earning over the median income in Maine does not absolutely prevent filing a Chapter 7, but it does mean that a debtor who earns a good living should speak with a bankruptcy attorney to see if he or she qualifies.

Even if a debtor qualifies for Chapter 7, there may be other reasons not to file under this chapter. For example, if the debtor has non-exempt assets or if the debtor is behind on his or her mortgage or car payments than Chapter 13 may be preferable.

Filing Under Chapter 13

Chapter 13, called the “wage earner plan”, is restricted to individuals with regular income. A Chapter 13 filing requires the debtor to make monthly payments under a Chapter 13 plan over the course of three to five years.

Understandably, most debtors prefer to file Chapter 7 to get immediate relief, but Chapter 13 does have some real advantages. If a debtor is behind on paying his or her mortgage or auto loan, the Chapter 13 can be used to cure any arrears or strip off underwater second mortgages and liens.

The focus of a Chapter 13 is on the plan, which is a debtor’s proposal on how to pay his or her debts. Generally, this means the debtor is required to pay the trustee an amount equal to his or her disposable income (the excess of a debtor’s monthly income over necessary expenses).

The plan will then break down how the payments will be allocated amongst a debtor’s creditors. There is a hierarchy among creditors and so payments are first applied to secured creditors, normally a mortgage or car loan. After that, payments are then made to priority creditors, such as for child support and certain income taxes. Finally, payments will be made to the general unsecured creditors, such as credit card companies and medical debts.

If the plan meets the requirements of the law and there are no objections it will be confirmed. Once confirmed, the plan is legally binding on both debtors and creditors. The debtor will continue to make monthly payments to the trustee until the plan is complete. Upon completion of the plan, the debtor will receive his or her discharge.

One limitation to filing Chapter 13 is that your debts cannot exceed certain limits. There is a limit to both a debtor’s secured and unsecured debts.

How to File for Bankruptcy in Maine

We discussed above the relative benefits of filing a Chapter 7 versus Chapter 13. While there are differences between chapters of bankruptcy, the filing requirements are exactly the same.

Pre-filing Requirements

​To file for bankruptcy, you will need to file a petition in bankruptcy court. The Maine Bankruptcy Court has locations in Portland and Bangor.

The petition consists of a packet of forms, almost like a tax return, in which you list all of your assets and creditors as well as disclose your income and expenses.

Honesty is required throughout this process and if you are not completely open and forthcoming on your petition then you risk losing the ability to get a discharge and may even face criminal charges.

In addition to the petition, you will be required to complete a credit counseling course. This is often a mere formality but if you do not complete the course in time you cannot file for bankruptcy. In most cases, the credit counseling course can be completed in half hour over the phone phone or on the Internet.

Once you have completed the petition and credit counseling then you can file for bankruptcy.

When you file for bankruptcy, the automatic stay arises and your creditors need to cease all collection action against you.

Our firm highly recommends you keep a list of any calls you receive from creditors. If the creditor knew you filed bankruptcy you may be able to sue them for violating the stay and collect damages.

Post-filing Requirements

About a month after your petition is filed, you will be required to attend a “meeting of creditors” where you will be asked questions about your case by a case trustee (referred to by us as simply the trustee).

The trustee is a private individual, hired by the U.S. Trustee (a part of the Department of Justice), who is tasked with managing your case. The trustee is not a judge and does not represent the court. The trustee’s job is to make sure you have filed your bankruptcy petition in good faith, and to investigate your petition to ensure you have listed all of your assets, liabilities, income and expenses.

After the meeting of creditors, you typically will not have to appear in court or meet with the trustee again. Depending on the type of bankruptcy you file, you will receive a discharge of all of your dischargeable debts from the court.

In Chapter 7 cases, your discharge will come a short time after the meeting of creditors. In Chapter 13 cases, which requires making monthly payments over 3 to 5 years, your discharge comes after you make all payments required under your plan.

Your only other requirement is to complete a financial management course. This course takes longer to complete than the credit counseling course, and is normally done over the Internet. The financial management course is mandatory and must be done before you get your discharge.

After Obtaining the Discharge

Once you receive your discharge, creditors whose claims were discharged are barred from attempting to collect from you.

If a creditor tries to collect on such a debt you may be able to reopen your bankruptcy case to request the court find the creditor in contempt.  If the court finds a creditor has violated your discharge you may be awarded damages, attorneys fees and punitive damages.

Contact a Maine Bankruptcy Lawyer Today!

The process of filing bankruptcy is complicated. People who file without an attorney put their future financial health at risk. Failing to understand the nuances of bankruptcy can lead to real problems.  Attorney Wade can explain the process and advise you on the pros and cons of filing.  Let us help you find a workable solution to your financial situation that provides you with a fresh start!

Do yourself a favor and contact our office today to learn more about your debt relief options.

Questions Attorney Wade Will Ask:

•  How much do you think you owe to your creditors?
• What sort of debt do you have?
  • Car Loan(s)
  • Home Mortgage(s)
  • Student Loan(s)
  • Unpaid Taxes
  • Medical Debts
  • Credit Cards
  • Pending Lawsuits
  • Business Loan(s)
  • Personal Guarantees
• Have you ever filed bankruptcy before?
• Are you in danger of a home foreclosure or vehicle repossession?
• Do you worry that a creditor will levy your bank account or garnish your wages?