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Andrews, Bongar, Starkey & Clagett: Waldorf, Maryland Attorneys

Five Things Every Lawyer Should Know About Bankruptcy

Bankruptcy filings are up - higher than they have been in recent memory. No matter what your practice area, you will run into situations involving a bankruptcy.

Maybe your client needs to sue someone who is financially on the edge. Will they file bankruptcy? What would it mean if they do? Maybe your client is a creditor in a bankruptcy proceeding? What will happen? Will they ever get paid? When? Maybe your client is themself on the edge financially. Should they consider bankruptcy? What would it mean for them?

Chances are, unless you have extensive experience in bankruptcy after 2005, you cannot fully answer these questions. In October 2005 the new bankruptcy statute was enacted. Everything changed, and there were a lot of open questions which confused even the few bankruptcy practitioners who stayed in the game. It's now five years later. Those questions now have answers. The process is set. The rules are now clear, but no less complicated.

Bankruptcy is now a very complex area of law It just isn't possible to get by knowing a little bit about bankruptcy.  You must either refuse to give advice, or refer to someone who can. That is why we offer ourselves as your bankruptcy information resource. You can call us or email us with any questions you like, free of charge. Just keep us in mind for referrals.

In that spirit, we are sending you this fact sheet of sorts listing 7 things you should know about bankruptcy. We hope this will help you spot potential bankruptcy issues in your practice, and allow you to give a little advice to your clients who run into a situation involving a bankruptcy.

Maryland Has A (Brand New) Homestead Exemption, But It Is Limited.

Until October of 2010, if you had equity in your home, you were probably going to lose it if you had to file for bankruptcy. The bankruptcy court wanted that equity to pay your creditors. But last year Maryland finally enacted a Homestead Exemption. Other states have had them for years. However, unlike some states, Maryland's is not an unlimited exemption.

The amount of the exemption is $20,200. While that may not sound like much, it is a major increase. And with real estate prices depressed, it may help a lot of people who were not able to file for bankruptcy even 6 months ago. A limit this low is not designed to help everyone, but it should help the people who most need it. In the future, this exemption will rise. It is tied to the federal homestead exemption and is likely to increase as home values begin to recover.

There are exceptions to the exemption (say that 10 times fast), and this is where it gets complicated. Unlike the other exemptions, the homestead exemption does not double when both husband and wife file jointly. Also, the exemption must not have been used to protect the same home in the last 8 years by the debtor, the debtor's spouse, child, child's spouse, grandparent, sibling, or third cousin twice removed. OK. I made that last one up. But you get the picture. A lot of people can use the exemption, and that may prevent your client from using it later.

Before October, the Trustee would seize all non-exempt assets and divide them among the creditors. With no exemption for home equity, this affected those with some home equity in one of two ways - either they had to sell the home to get the equity (which may be at fire sale prices due to the real estate market), were forced into a Chapter 13 instead of a Chapter 7, or they avoided bankruptcy altogether, often staying mired in an untenable financial situation.

Sure, one could make interesting comments about Maryland finally enacting an exemption for home equity now that nobody has any, but we would never do that. The important thing to remember is that we have it now.

The Most Common Bankruptcy Exemptions In Maryland.

No. Your client does not lose everything when filing for bankruptcy. You can exempt certain property from the bankruptcy process. Most lawyers probably knew that already, but the new law set specific monetary limits on exemptions that it might be helpful to know.

Currently, the most commonly used exemptions are $5,000 for personal property, $1,000 for household goods and furnishings, and $6,000 for cash and property of any kind. Other exemptions include tools of your trade, pensions, workers' compensation payments, and assets like those. There are more, of course. These are just the most common and the main exemptions you should keep in mind.

Maybe Your Client's Last Marital Act Should Be A Joint Bankruptcy.

When people divorce, they typically do not engage in a lot of joint activities. Perhaps that shouldn't be the case if they have substantial debts, are upside down in their house, or have another serious financial situation that will only get worse after the divorce. In those cases, they may want to consider a joint or coordinated bankruptcy.

For example, what do you do if the marital home is upside down, and one spouse is willing to surrender the house while the other spouse wants to keep it? The spouse surrendering the house can file a Chapter 7, discharging their liability on the house and other debt. The other spouse can file a Chapter 13, and if the house is worth less than what they owe on the first mortgage, they can have the second mortgage treated as unsecured debt in the payment plan. This should be done as a coordinated bankruptcy filing, and negotiated by the divorce attorneys.

Often, if the couple face substantial joint debts, it often makes more sense to file a joint bankruptcy before they are divorced. The costs are usually less, and by filing jointly instead of individually there is no concern that one spouse will be treated differently by the Trustee and thereby complicate the divorce negotiations.

Both of us have handled family law cases, and it amazes us how often a bankruptcy can actually solve the seemingly insurmountable problems sometimes faced by divorcing couples. When economic times were good, divorce negotiations sometimes centered on keeping the house and the equity in it. Now, it is more often centered on avoiding the foreclosure. Your divorce clients should at least consider their bankruptcy options early on. This is one area in which we recommend an early consultation, just to get all of your options.

Chapter 13 Is The New Chapter 7.

Before the statute changed in 2005, most bankruptcy filings were Chapter 7 - total liquidation and discharge of all debts. In fact, one of the primary aims of the new law was to tighten things up so people with income and assets could not wipe out their debts as easily. So the new statute pushes people into Chapter 13 instead. Not that it always works out that way, but that was the aim. And certainly, there are a lot more Chapter 13 filings than before.

Chapter 13 is a complicated process, so everything we say here is a gross oversimplification. With that disclaimer made, we can tell you in general terms what happens in Chapter 13.

Every debtor has to undergo a means test before they can file for bankruptcy. The means test varies from state to state, and it is based on the state's median income. Since Maryland has a fairly high average income compared to the rest of the country, it can be easier to get residents with financial problems in under that means test. If they fall under the magic number, they can file a Chapter 7. If not, they are forced into Chapter 13.

I wish I could just tell you the magic number, but as you probably expected, it isn't that easy. There are exemptions to account for which are different in every case. It is sort of like doing your taxes, where your taxable income can be very different from your gross income. Doing the financial exercise that is the means test is the primary reason bankruptcy consults are free. Without that consultation, we cannot give anyone an honest answer to the main question - should I file for bankruptcy?

Once in Chapter 13, the Trustee will consolidate all of your debts into a single plan, and you will agree to make certain payments to the Trustee under the plan. The attorney is very instrumental in setting up this plan and arguing for your interests with the Trustee. The Trustee then takes your money and pays off your debts. The plan usually lasts 3-5 years. You get your discharge at the end of that time. The creditors get paid what the Court says they will get paid.

When Are Divorce & Custody Related Debts Dischargeable In Bankruptcy?

It depends on the nature of the debt and whether the debtor files Chapter 7 or 13. Child support and alimony are not dischargeable in either a Chapter 7 or a Chapter 13. People always have to pay their alimony and child support. If the debtor files Chapter 7, you can add to that list any other debts incurred pursuant to a divorce decree or separation agreement. The debtor cannot completely discharge those debts.

In Chapter 13, those debts can be discharged after the Chapter 13 repayment plan is completed. But that means those debts are going to be part of the repayment plan. The creditor (your client) will have to submit a timely proof of claim to the Chapter 13 Trustee, and that debt will be included in the plan. The Trustee gets to decide how much, if any, of the debt is included. At the conclusion of the plan, the debtor can get a discharge for the remaining balance of the debt.

This is why it is vital that you understand a little about Chapter 13 so you can act to protect your client's interests. We can help you get that proof of claim submitted on time. We can also monitor the case so we can act if the debtor misses their required payments.

Conclusion

We hope this report is useful to you and your practice. We stand ready to assist you and your clients if you need any help. If you find yourself encountering a bankruptcy issue in a case you are handling, call us. We are happy to answer your questions and help you choose the best possible strategy for negotiating the often tricky waters of the bankruptcy process.

We won't charge you anything. We will provide you with all the advice you need as a professional courtesy. If you know of anyone who may need our services, please refer them to us. Consultations for bankruptcy are always free. If it is your client, we will be happy to work with you so you will keep the client long term. You can also refer people to the free legal information on our website, which is written specifically for consumers.

Feel free to contact us if you have any questions or to make a referral. Thank you.

David M. Gormley & David J. Hebb
Andrews, Bongar, Starkey & Clagett

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