Issues to Consider Before Filing Chapter 7 Bankruptcy

What Are Some Issues to Consider Before Filing for Chapter 7 Bankruptcy, Especially if You Live in Queens or Brooklyn?

While there are lots of sources that you can find that talk about bankruptcy, it seems that whenever I meet with a new client, at least some of the information they found is incorrect.  This article focuses on bankruptcy planning, and a couple of practical tips you should adhere to if you are contemplating filing for bankruptcy.  More succinctly, what are some issues that you should consider if  you’re thinking about filing for chapter 7 bankruptcy, especially if you live in Brooklyn or Queens?

The Chapter 7 Bankruptcy Client

I would like to preface this article with an actual “case” of mine.  The client, who has been working as a store clerk, is a single parent.  Due to a chain of unforeseeable circumstances that life presented (including a significant other leaving, loss of previous employment, and an attempt at purchasing real property gone awry), this person found themselves overwhelmed by debt.

My client did not have very much property – some clothing and housewares, renting a room in an apartment, a checking account where weekly wages are deposited.  Earlier this year, I received a call from them asking about bankruptcy.  As is most always the case, I tried to get an understanding of the factual circumstances in a telephone conversation, and subsequently we set up an appointment to meet face to face and review their circumstances in greater detail.

After Our First Meeting to Discuss Filing for Chapter 7 Bankruptcy

After meeting with the client and the both of us determining that filing a Chapter 7 bankruptcy was both an available and good option, I had the client sign my retainer and, as is my usual practice, gave the client a list of documents that I would need to go forward with a case.  The last I heard from my client, I was advised that they have planned to take an out-of-country vacation but that they would come to see me immediately after returning to continue with filing the bankruptcy petition.

While I did eventually tell the client to enjoy the vacation, I also cautioned them as to the consequences that these actions (such as spending this kind of money right before a chapter 7 bankruptcy) would bring.  For most clients and in most cases, one of the best things you can do is meet with and speak with a bankruptcy attorney near you as early in the process as possible so that, together, you can identify and map out any red flags, and any proper planning, if necessary, can take place.

Your Chapter 7 Bankruptcy Estate

Generally, we all hold “interests” in property.  Interests are, at its base, some kind of relationship between a person or party and property.  You have an interest in your shoes and clothing – you own them outright.  You also have an interest in your car – perhaps you own, or perhaps you are leasing or financing.  You may also have an interest in real property – you hold title to property, subject to liens; or, perhaps, you are set to inherit property upon someone’s death.  These are all interests in property – each representing different kinds of relationships between yourself and property.

How the Bankruptcy Estate Works

When a person files for bankruptcy, all of the interests a person holds are brought into a hypothetical “bankruptcy estate.”  A Trustee is appointed to organize and sort through these interests.  As bankruptcy law tries to find a balance between preventing individuals from become wards of the public with the rights of creditors, the Trustee is tasked with letting the debtor keep whatever interests the law dictates she may keep (known as exemptions), and then attempting to liquidate whatever interests are not protected by law to pay off creditors a pro rata share.

To understand how the trustee works in your chapter 7 bankruptcy case, let’s take a look at how a owning a car in a bankruptcy case would work.  So, for instance, let’s assume a person owns a car outright that is worth $3,000.00.  The New York State laws allow a debtor to keep a car that is worth $4,550.00.  In this case, the client’s car is fully exempt, and she gets to keep it even if she files for bankruptcy.  If the car, on the other hand, is worth $10,000.00, there is $5,450.00 of unprotected equity.  The Trustee would want that money (either take the car and sell it, or negotiate a deal with the client for payment) to pay off creditors.

Setting Realistic Goals in Bankruptcy

While filing for bankruptcy could help to accomplish many goals a person may have (including delaying a foreclosure or stopping a wage garnishment), many, if not most people, file to obtain a discharge of debts.  Simply stated, a debt that is discharged means that a creditor may no longer pursue collection of that debt.  Certain debts, however, are non-dischargeable.  That is, the law has decided that because of their particular nature and character, not even bankruptcy can cause these debts to be canceled.  Some non-dischargeable debts include many taxes owed to the state and federal governments, many domestic support obligations (such as maintenance and child support), and student loans.

Debts that are originally dischargeable, such as credit card debts, may become non-dischargeable if the debt was procured under fraud, or if the debt was incurred too close to the filing of the bankruptcy, among other things.  The policy behind this is clear and of common sense – to protect creditors from people abusing lines of credit immediately before the filing of a bankruptcy.  If a debt is determined to be non-dischargeable, bankruptcy does not cabin or interfere a creditor’s right to pursue collection of that debt.

Hopefully, by now, you have seen the story come full circle.  My client above was ready to file a bankruptcy petition.  As I do with all of my clients, we discussed how the bankruptcy operates, how long it would take (assuming no objections or unforeseen complexities), and costs involved.  Here is a client where the law exempts all of her property.  That is, she would have come out of the bankruptcy with everything she went in with (except the debts and credit card companies hounding her for payment) if she had filed when I suggested she file.  This person decided to go on vacation, and probably used a credit card or two while vacationing.  While this person can still file, if they did use a credit card this close to filing a bankruptcy case, they are likely going to have to pay that debt back (or at least deal with the credit card and collection companies chasing her for it).

Conclusion

There is nothing more prudent you can do than to ask questions and inquire.  In the case of bankruptcy, do not wait until your wages are being garnished or bank accounts levied upon, or wait until the day before a scheduled foreclosure sale to call an attorney.  I cannot stress this enough.  While emergency petitions can be, and do get, filed, they may often be riddled with problems, omissions, objections and more expensive litigation.  By planning early on (and sometimes, as above, circumstances are that you do not have to plan much), you could be “in and out” of bankruptcy relatively quickly and easily, and moving on to bigger and better things in life.  I understand that it is the summer, and people would much rather spend monies available on a vacation than on attorney’s fees.  Don’t let summer cost you in the long run.  If you have questions or would like to discuss bankruptcy or other legal matters, call the Law Office of Richard Kistnen, (718) 738-2324, or email info@LORK.nyc.

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