What you need to know about Bankruptcy

By: Lori T. Williams, Owner/Managing Attorney of Your Legal Resource, PLLC

I interviewed John Lange, a board certified Consumer Bankruptcy lawyer and partner in the Bankruptcy firm of Gold, Lange & Majoros, PC, about his perspective on the current state of Bankruptcy law and emerging trends. He and his partners have a combined 80 years of experience in this field of law, and have represented individuals and businesses entities in Chapter 7′s, Chapter 11′s, individual debtors in Chapter 13′s, Creditors under all chapters of the Bankruptcy code, as well as Chapter 7 Trustees.  Of the nearly 40,000 attorneys in Michigan, only 27 are board certified as consumer bankruptcy lawyers.

John started his legal career in 1986 as a law clerk and then as an associate in a firm where Stuart Gold was a partner.  A year later Stuart started his own firm and John joined him in practice as an associate and eventually became a partner in the firm now known as Gold, Lange & Majoros.

“Bankruptcy is one of the few areas of the law where you can benefit your client immediately. An automatic stay goes into effect as soon as you file the Bankruptcy case, and this protects the client from creditors.  There are also huge benefits at the end of the case when certain debts are discharged.  Finally, debts forgiven through Bankruptcy do not cause a taxable event, unlike forgiveness of debt outside of the Bankruptcy Court.”

WHAT ARE SOME OF THE MISCONCEPTIONS ABOUT BANKRUPTCY?

• What constitutes a typical Bankruptcy client?
   

“There are some stereotypes about the type of people who file Bankruptcy, but no one is immune from the possibility of facing serious financial problems.  I’ve represented people with little to no income, as well as professional athletes, doctors, lawyers, and business owners.”

• Where do you file a Bankruptcy Case?
   

“There is sometimes confusion about where people should file their Bankruptcy case.  Bankruptcy Court is part of the Federal Court System and each state is broken down into Districts to serve the Bankruptcy clients. In Michigan, we have 2 Districts known as Eastern and Western, each with a Northern and Southern Division. There are 13 Counties in the Southern Division of the Eastern District, which includes Genesee, Jackson, Lapeer, Lenawee, Livingston, Macomb, Monroe, Oakland, Sanilac, Shiawassee, St. Clair, Washtenaw, and Wayne.   9 of those counties have their cases heard at the Detroit office of the Bankruptcy Court, and the remainder are heard in Ann Arbor, Flint, or Bay City.”

• How are people treated in Bankruptcy Court?
  
   

“In all my years of practicing Bankruptcy Law, I’ve found the court staff, administration, and the US Trustee employees to act very professionally and are a pleasure to deal with on a regular basis.  The Bankruptcy Judges, and most of the attorneys who appear before them, are experts in their field. Rarely do you need to educate the Judge on a particular issue brought before them.  Their dockets and the administration of their cases are all handled very efficiently. As far as the clients go, the Court staff and Judges treat them with dignity and respect for the most part.  I have heard of some that people are concerned they will be humiliated or treated poorly because they filed Bankruptcy, but this hasn’t been my experience.”

• What Types of Debts are Dischargeable?
  
   

“This is an area with a lot of misconceptions.  Some people believe that it is almost impossible to seek relief under Chapter 7, but that simply is not true.” While Chapter 7 is certainly a more burdensome and expensive option, it is still widely available to many individuals.  Debtors with primarily consumer debt are subject to a “means test”.  This is a mechanical test which determines whether or not a presumption of abuse arises.  Any potential debtor whose household income, even if only one spouse is filing, exceeds the State median income for their family size, is subjected to the means test to determine whether there is a presumption of abuse.  Individuals whose debts are primarily from a failed business would not be subjected to the means test.

The type of debt you have falls into 3 categories:

• general unsecured debt;
• secured debt;
• non dischargeable debt
  
   

A trained attorney can advise you which debts will likely be dischargeable in Bankruptcy.

• Won’t my credit be ruined?
   

“Since Bankruptcy should be the strategy of last resort anyway, one’s credit score is irrelevant at this point.  I advise my clients to file the case and worry about credit later.  My former clients tell me that their credit scores often rebound a couple of years after the Bankruptcy is complete.”
 

WHAT CHANGES HAVE OCCURRED IN BANKRUPTCY LAW OVER THE YEARS?
 

“This is a simple question with a very long answer.  I have seen a lot of changes over the years, but the most recent one was in 2005 when the Bankruptcy Abuse Prevention and Consumer Protection Act was enacted.  Overall the process became more difficult and expensive for individuals to seek relief under Chapter 7. The ‘means test’, which I mentioned above, was also implemented at that time.

WHAT TRENDS ARE YOU SEEING IN BANKRUPTCY CASES?

• HOUSES ‘UNDER WATER’  
   

“This has been more and more common the last few years.  It is not unusual for someone to owe $200,000 as a mortgage on a home now worth $100,000.  It is difficult in that situation to estimate when there will be an increase in value and how long the homeowner would have to live in the house and pay enough of the mortgage principal balance before they would reach the break even point. Many debtors in that situation are choosing to simply walk away from the home and discharge any potential shortfall or deficiency balance which may exist after a foreclosure sale is completed.  They can live in the home essentially for free during the foreclosure process and if they stop making mortgage payments and save that money, they should have enough money to assist them with the move and getting back on their feet.”

• LIEN STRIPPING
   

“If you have a first mortgage of $100,000 and a second mortgage of $50,000 on a home worth $90,000, we could file Chapter 13 and strip the second mortgage off of the home.  The second mortgage may receive a dividend through the Chapger 13 case, along with whatever is paid to unsecured creditors, such as credit cards.  It is not unusual for the dividend to be 10% or less.  At the end of the Chapter 13 plan, the first mortgage still exists on the home, but the second mortgage is discharged.”

TIPS FOR DEBTORS CONTEMPLATING BANKRUPTCY:
 

• Seek advice about your options from a certified consumer bankruptcy lawyer, rather than a friend or family member or attorney in another practice area.  To assist you in locating such an attorney, contact the national website located at: http://www.abcworld.org/search.  In Michigan, you could inquire at the State Bar of Michigan, a local bar association in your County, or with Your Legal Resource.

• Things John Lange advises you DO NOT do, because they can negatively impact your Bankruptcy case:

1.         Put your car title in your brother’s name;

2.         Pay your mother that $5,000 that you owe her out of your income tax refund which you receive;

3.         Close all of your bank accounts and run the money through accounts owned by your spouse or other people;

4.         Quit claim your marital residence to your spouse so that your creditors can’t get at it.

• Useful Information to gather for your Bankruptcy attorney:

-pay stubs from the last six months;

-tax returns for the last 2 years;

-recent bank statements;

-statements from all creditors;

-property tax statement for your home indicating assessed value;

-any recent home appraisals;

-motor vehicle titles.

John Lange cautions, “what might seem routine to an outsider or lay person, may be far from being an ordinary bankruptcy case.  Even if the case is routine, it needs to be skillfully handled by a trained bankruptcy practioner.  We’ve been asked to take over pending cases after serious complications arise, which could have been avoided with proper pre-bankruptcy strategy, planning, and advice.”

________________________________________________________________________________________

Lori T. Williams is a 23 year attorney based in Birmingham, MI. She owns a legal referral and legal consulting business called Your Legal Resource, PLLC. She assists individuals and small businesses in need of legal advice or representation by connecting them with the right legal specialist for their situation. She also provides consulting services for attorneys and other professional service providers on how to generate more business through effective branding, marketing, networking, and by creating strategic partnerships. For more information, visit www.bestlegalresource.com.