Sharanya Gururajan has practiced in the area of bankruptcy for 10 years and is an attorney with Ralph, Schwab & Schiever, Chartered ( www.rss-chtd.com). Her interest in this area of the law started with a summer job as a law student with a bankruptcy firm. She loves her work in bankruptcy which involves a great deal of client contact and courtroom work. Though many bankruptcy clients generally feel a lot of embarrassment, fear and regret regarding their situation, Gururajan enjoys the challenge of assisting and reassuring her clients and determining the best course of action for them. Her success in helping her clients is based on disclosure; clients must feel comfortable with their attorney so that they disclose all relevant information needed for the bankruptcy process.
Gururajan started practicing just prior to the beginning of the Great Recession. At the same time in 2005, there were changes to bankruptcy law that tightened up requirements that were previously more lenient to debtors. Bankruptcy law changed dramatically for everyone; debtors and attorneys alike. Some changes included required credit counseling which is an online course, much like traffic school, that must be completed before the bankruptcy can be filed. Likewise, a second similar course must be completed by the debtor prior to the end of, or discharge of the bankruptcy. Additionally, debtors could no longer just choose which type of bankruptcy they wanted to file (Chapter 7 or Chapter 13). The 2005 amendments to bankruptcy law included a means test whereby a calculation based on the debtor’s income, certain expenses and the median household income would determine which type of bankruptcy a debtor could qualify for.
There are two types of bankruptcy for consumers; Chapter 7 is liquidation of debt and Chapter 13 is a repayment plan of debt. As stated earlier, much of the discretion that a consumer had in choosing which type of bankruptcy they could file was removed by the means test. Generally, consumers who are trying to keep their home will file a Chapter 13 petition. Filing a Chapter 7 bankruptcy petition will not save a home.
The bankruptcy case starts with the filing of the petition (and the preceding credit counseling as mentioned previously). The parties to a bankruptcy case are the consumer-debtor, the creditors, the bankruptcy trustee (who is responsible for administering the assets of the debtor for the benefit of the creditors) and the United States trustee (who is part of the Department of Justice and oversees the whole process in order to prevent any abuse of process). Once a petition is filed, an automatic stay occurs. This means that creditors must stop any collection efforts as long as the case is open.
Thirty days after the petition is filed and the stay is in place, a creditors meeting takes place. This is an opportunity for the debtor, trustee and any creditors to meet face-to-face and question the debtor about assets and liabilities. Previous to this meeting, the debtor will have submitted financial information to the trustee such as tax returns and pay stubs. In reality, this meeting is usually between the debtor and the trustee, as creditors usually do not attend these meetings. A creditor has the opportunity to file an objection or an adversary action to a debtor’s proposed discharge from bankruptcy within sixty days of the filing of the petition. The bankruptcy court must approve a plan and schedule for the debtor. Though there is no exact timeline for the administration of a bankruptcy, it may be as short as 3 or 4 months for a Chapter 7 petition if there are no complications. Once the bankruptcy process is complete, a debtor is given a discharge which is forgiveness of the debtor’s personal and legal obligations.
What should people think about if they see bankruptcy on the horizon? Gururajan advises people to contact an attorney earlier; that is don’t wait until they receive a notice of a Sheriff’s Sale of their foreclosed home or receive a notice of Judgment entered against them. Common practices that can occur on the way to bankruptcy include borrowing money from credit cards to pay mortgages, taking money out of retirement accounts to pay credit card debt or repaying debt owed to family members. Also, people need to realize that some debt is more difficult to discharge than other types of debt. It is nearly impossible to discharge tax or student loan debt unless the debtor is suffering from undue hardship such as a severe disability which prevents the debtor from working. Credit card debt is easier to discharge through bankruptcy. These types of debt are all unsecured, that is, there is no collateral. A mortgage, on the other hand, has collateral and is secured.
The bankruptcy system is the United States is generally a fair system. It is more generous than systems in many other countries as it allows debtors a “fresh start” without the debt forever hanging over their heads. Additionally it is a system of checks and balances for all sides of the equation, where no party gets more than their fair share.