While filing a bankruptcy can provide enormous financial relief if you are buried under a mountain of debt, the process is complex. Although you can file a bankruptcy without an attorney, it is not recommended because bankruptcy law and the process of proceeding through a bankruptcy, whether Chapter 7 or Chapter 13, can be extremely complicated. The cost to retain a bankruptcy attorney is relatively modest when weighed against the high cost of making a critical mistake when planning and preparing your bankruptcy filing or proceeding through the process of bankruptcy. A bankruptcy attorney will typically provide an initial consultation for free or a nominal charge so that you can assess your options.
If you decide to handle your own bankruptcy, you will be expected to understand the Bankruptcy Code and Federal Rules of Bankruptcy Procedure, to accurately and correctly complete a voluminous stack of Bankruptcy Petitions and Schedules and to appear at meetings with the Bankruptcy Trustee or hearings in the Bankruptcy Court. The consequences of a mistake can be devastating, including dismissal of your bankruptcy, involuntary conversion from a Chapter 7 to a Chapter 13 costing thousands of dollars, criminal charges for bankruptcy fraud or loss of property and assets that you should have been entitled to retain. In short, the cost associated with not using a bankruptcy attorney can exceed the cost of retaining a bankruptcy attorney many times over.
There are many ways that a bankruptcy attorney can assist you through the bankruptcy process, including the following:
1. Estate Planning/Asset Management
Many people presume that the purpose of bankruptcy is to eliminate debt or ease the burden of repayment. While this view of the bankruptcy process is not inaccurate, it does overlook one of the most valuable aspects of bankruptcy protection. The function of a bankruptcy is not only to eliminate debt but to preserve assets and protect wealth. If you fail to seek legal advice prior to filing a bankruptcy, you may not realize that proper timing of a bankruptcy and asset and money management can result in you retaining many valuable assets that might otherwise be subject to liquidation in a Chapter 7.
When you file bankruptcy, you may not simply give away assets to friends, family or companies that you own or engage in sham transactions that are simply designed to hide assets from your creditors. If you are caught engaging in this type of conduct, it may be considered bankruptcy fraud, which is something you definitely want to avoid. If you are caught trying to conceal assets when filing for bankruptcy, you may be convicted of a felony and subject to a penalty of up to five (5) years in prison and/or a $250,000 fine. Transferring an asset to a friend, family member or business that is really just your alter ego may constitute concealing an asset in this context.
Fortunately, there are legitimate ways to protect your assets when you file for bankruptcy. The Bankruptcy Code has many exemptions and a skilled bankruptcy attorney can help you engage in asset management involving the conversion of assets that are not exempt into assets that are exempt. This is a legal way to preserve the wealth that you have worked hard to build while still obtaining bankruptcy relief.
An experienced bankruptcy attorney can also help with the timing of your bankruptcy. There is a “look back period” within the three months prior to filing bankruptcy where the Bankruptcy Trustee can evaluate transactions and deem them voidable (i.e. undo the transaction). This is designed to prevent fraudulent conveyances and prevent debtors from showing preferences to certain creditors over others. If you transfer an asset to an “insider” the look back voidable transaction period is a full 12 months. Sometimes if you have engaged in significant transactions with creditors during the three months prior to bankruptcy or with an insider like a friend, family member or closely held business, your bankruptcy attorney may advice you to wait to file bankruptcy until the look back period has expired to protect the transaction from being voided by the Bankruptcy Trustee.
2. Choosing the Correct Bankruptcy Chapter
One of the first and most fundamental tasks in seeking bankruptcy relief is selecting the correct bankruptcy chapter under which to file. If you are a consumer, you will typically need to choose between a Chapter 7 and Chapter 13. As a default matter, it is preferable to file a Chapter 7 because it means that most forms of unsecured debt, including but not limited to credit card debt, unsecured credit lines, store charge cards, hospital bills and the like, will be discharged, whereas when you file a Chapter 13, you will have to pay a portion of what you owe toward these debts over a 3 to 5 year period. A bankruptcy attorney can determine if you are in a situation where you must or should file a Chapter 13 including the following:
• Failure to qualify for Chapter 7 under the financial means test
• Protection of equity in a family home that you are behind on but wish to keep exceeding any exemption amount
• Possession of other assets that have value that cannot be protected under any of the bankruptcy exemptions
While these are not the only criteria that may lead one to file a Chapter 13 instead of a Chapter 7, they are the most common reasons for making this selection. An experienced bankruptcy lawyer will examine all of your assets and debts as well as your income and monthly expenses, so that he can advise you whether to file a Chapter 7 or Chapter 13. If you proceed on your own and file a Chapter 13 when you could have filed a Chapter 7, you may end up making monthly payments to unsecured debts for 3 to 5 years that could simply have been discharged.
3. Completing Bankruptcy Petitions and Schedules
If you are thinking about driving down to the bankruptcy courthouse to pick up “a form” and submitting it so that you can file bankruptcy, you are in for a rude awakening. The bankruptcy packet of forms for filing either a Chapter 7 or Chapter 13 may be 40-60 pages in length and filled with legal jargon and other terms that may be unfamiliar. If you feel the forms out incorrectly, the bankruptcy trustee will typically give you a chance to amend and re-file, but after a couple of attempts your bankruptcy may be dismissed by the trustee. If your bankruptcy is dismissed, you must wait 180 days to re-file. This delay can be devastating because you may lose critical assets while waiting to re-file. If you are behind on your mortgage payment, for example, the six (6) months that you are waiting to re-file your bankruptcy may result in your home being lost in a foreclosure sale.
Another important reason to use an experienced bankruptcy attorney is that the failure to list an asset can have a devastating impact on your bankruptcy. If you fail to leave a creditor out of your bankruptcy, then your bankruptcy discharge will not be effective against that creditor. This means that the omitted creditor can continue to pursue you including attaching your wages, filing liens against your home, levying against your bank account or obtaining and enforcing court judgments against you. Sometimes listing all creditors can be more difficult than you realize since “bad debts” are frequently bought and sold many times. Most people have creditors that they have never even dealt with directly. An experienced bankruptcy attorney generally will run credit reports through all three (3) credit reporting bureaus and meticulously list every creditor to ensure that there are no surprises after you obtain your bankruptcy discharge.
While it is never a good idea to file bankruptcy on your own, it borders on insanity to try to file a Chapter 13 without an attorney. A Chapter 13 involves complex analysis to develop a Chapter 13 plan that meets “feasibility” requirements. This means in essence that you must be able to show that your income is sufficient to fund the plan. While completing the forms for a Chapter 7 is difficult, it is virtually impossible to successfully obtain a Chapter 13 discharge without a skilled bankruptcy attorney.
4. Selecting and Maximizing Exemptions
Many people hesitate to file for Chapter 7 bankruptcy because they believe it means that they will have to give up most of their assets. In reality, most Chapter 7 bankruptcy filings are what are referred to as “no asset Chapter 7s”. This does not literally mean that you have no assets but only that you have no significant assets that are not covered by a “bankruptcy exemption.” The bankruptcy exemption system determines what you get keep after a Chapter 7 bankruptcy discharge, including assets like cars, retirement plans, household furnishings, clothing, trade tools and other items. Every state has an extensive list of exemptions, which includes miscellaneous exemptions that can be used when you have assets with too much value to fit completely within a particular exemption.
While many states require you to use their state system of exemptions, some states allow you to choose between the federal and state exemption schedule. Selection of the proper exemption schedule will depend on the fit between your assets and the exemption schedules. An experienced bankruptcy attorney can analyze your assets and determine the best exemption schedule to fit your needs. Bankruptcy attorneys also have the skill to creatively employ exemptions and maximize the property that you get to keep. This skillful use of the exemption system may mean that you keep much more of the assets that you have acquired than if you try to navigate the exemption system without legal advice.
5. Appearing at 341 Meeting of Creditors and Hearings
Whether you file a Chapter 7 or Chapter 13, you will be required to appear in front of the bankruptcy trustee at a hearing. While these hearings are somewhat informal, it can be extremely unnerving to have to answer questions about mistakes in your paperwork if you do not have an attorney present. If you appear at the standard hearings that are part of any successful Chapter 7 or Chapter 13 hearing, they typically will be routine if you have a bankruptcy attorney represent you.
If you own a home and are behind on your mortgage, it is even more important to have a bankruptcy attorney who can appear for you. Mortgage companies will typically file a “Motion for Relief from Automatic Stay,” which basically is a request to be allowed to proceed with debt enforcement actions, including foreclosure, because the mortgage company’s collateral is in jeopardy. This type of proceeding is a formal court hearing in Federal Bankruptcy Court in front of a federal judge. This intimidating setting is not somewhere you want to be without legal representation when your home is at stake.
The point to take away from this is that there are many sound reasons to use an attorney when filing for bankruptcy and virtually no good reason to go it alone. While some debtors think they may save money by avoiding attorney fees, it is highly unlikely that this savings will exceed the value you will gain from legal representation. Bankruptcy attorney fees are limited by the Bankruptcy Court so they are typically reasonable even nominal when compared to the potential risk of proceeding without an attorney.