Vol. 77, No. 11, November 2004

• Representing Chapter 7 Bankruptcy Debtors: Going for Broke

The Decision to File

There are a myriad of considerations that may enter into a decision to file a bankruptcy. However, for the run-of-the-mill consumer debtor, there are usually only a few. The first is the extent of the debtor's income and assets. A debtor who has no assets that can be seized or income to garnish is "judgment proof" and will not benefit from a bankruptcy. On the other hand, a debtor with significant nonexempt assets may not be best served by any bankruptcy.

The second consideration is whether the debtor has a sufficient amount of dischargeable debt to make a bankruptcy worthwhile. The amount of dischargeable debt, not the total debt, is the key. Many debtors wish to keep their homes and vehicles and reaffirm those debts. If the debtor does not have sufficient disposable income to pay the debts to be discharged within a period of time acceptable to creditors, the debtor will likely benefit from a bankruptcy.

Another consideration is whether there are alternatives to bankruptcy. For example, many credit card creditors will accept a lump sum payment of 20 to 75 percent in full settlement from debtors in financial trouble. Some debtors are able to obtain sufficient funds from their assets or from loans from friends or relatives with which to settle their problem debts. Also, some attorneys believe a proceeding under Wis. Stat. chapter 128, "Creditors' Actions," is a viable alternative to bankruptcy.

Finally, the effect on the debtor's future credit is a consideration of some debtors. A bankruptcy often will negatively affect a debtor's credit. The extent and duration of the impact on the debtor's credit depend on many factors, such as how much the debtor wishes to borrow, when the amount is borrowed (how long after the bankruptcy), and the debtor's financial condition when the credit application is made. In fact, however, most debtors have a poor credit history, which a bankruptcy cannot harm substantially.

Choice of Bankruptcy Chapter

Chapter choice is too complex to fully discuss here. However, attorneys representing consumer debtors must deal with this very important issue, because there are significant advantages and disadvantages to each chapter. Additionally, 11 U.S.C. section 341(d) requires the trustee in a Chapter 7 bankruptcy to examine the debtor to ensure the debtor is aware of the debtor's ability to file under a different chapter.

There are four chapters in the Code: 7, 9, 11, and 13. (The former Chapter 12, under which only family farmers could file, is no longer available; however, it is in the legislative process of being resurrected and may be by the time this article is published.) Only municipalities may be debtors under Chapter 9. Chapter 11 is a very involved, formal procedure aimed at business reorganizations; it is virtually always inappropriate for consumer debtors. Therefore, consumer debtors are faced with choosing between Chapters 7 and 13.

While Chapter 13 is useful in a variety of situations, most often a Chapter 13 bankruptcy is used to reinstate a mortgage on a home in foreclosure or to pay debts that are not dischargeable in a Chapter 7 bankruptcy. Most consumer debtors do not need to do either and, therefore, Chapter 7 is the chapter of choice.

Representing Chapter 7 Bankruptcy Debtors: Going for Broke

Resources

Bankruptcy is a debt relief procedure created and governed by federal law. Therefore, there should be no difference in filing a Chapter 7 in one federal district or another; however, in practice, there are differences between the districts. For example, the local rules of the Western District of Wisconsin differ from those of the Eastern District. An attorney must always refer to the local rules.

The primary sources of bankruptcy law are the Bankruptcy Code¹ and the Federal Rules of Bankruptcy Procedure (collectively, the "Code"). There are numerous useful secondary resources that attorneys can consult when representing debtors. For example, practice manuals such as Henry Sommer, Consumer Bankruptcy Law Practice (National Consumer Law Center Inc. 2000, supp. 2003), and The Attorney's Handbook on Consumer Bankruptcy and Chapter 13 (Argyle Pub. 2003), and its companion manual, the Bankruptcy Issues Handbook (Argyle Pub. 2004), both by John H. Williamson, are all excellent references. Wisconsin practitioners should not be without Ginsberg & Martin on Bankruptcy (Aspen Pub. Inc. 4th ed. 2001) by Robert E. Ginsberg and Robert D. Martin. (Judge Martin is the Chief Bankruptcy Judge for the Western District of Wisconsin.)

Web sites such as the Eastern and Western District Court Web sites² also provide valuable information. Organizations such as the National Association of Consumer Bankruptcy Attorneys,³ the Commercial Law League of America,⁴ and the American Bankruptcy Institute⁵ provide tremendous amounts of information to both members and nonmembers. Members of the State Bar of Wisconsin Bankruptcy Section should visit www.wisbar.org/sections/bankruptcy and sign up on bicrlistserve, an invaluable question-and-answer forum used by practitioners.

Several excellent seminars are presented regularly in Wisconsin. The State Bar's Bankruptcy Update and the CLEW Debtor-Creditor Conference are held each year. The Northwestern Bankruptcy Institute, also sponsored by the State Bar, is held biannually in Eau Claire.

Finally, an attorney would be well advised to make inquiries of experienced bankruptcy attorneys. Many are more than willing to lend their hard-earned experience to others. Much of my early training came informally from this wellspring of knowledge. A good resource to use in seeking this kind of help is the State Bar's Lawyer-to-Lawyer Directory, published each January in the Wisconsin Lawyer Directory.

¹11 U.S.C. §§ 101-1330.

²www.wiw.uscourts.gov/bankruptcy and www.wieb.uscourts.gov.

³National Association of Consumer Bankruptcy Attorneys, 2300 M St., N.W., Suite 800, Washington D.C. 20037.

⁴Commercial Law League of America, 70 E. Lake St., Suite 630, Chicago, IL 60601.

⁵American Bankruptcy Institute, 44 Canal Center Plaza, Suite 404, Alexandria, VA 22314.

Get the Latest on Bankruptcy Law at the State Bar CLE Seminars Annual Bankruptcy Update

Bankruptcies are here to stay. Although total personal and business bankruptcies fell to 1.6 million last year, that figure is still more than five times the average yearly rate sustained during the 1980s. Americans currently carry about $9 trillion worth of debt, and 30% of Americans believe that they will always be in debt.

With these statistics, and the fact that bankruptcy filings have become more complex, it is imperative that bankruptcy practitioners stay abreast of the law. At the State Bar CLE Seminars 2004 Annual Bankruptcy Update, Wisconsin's federal judges and experienced practitioners discuss the most current issues concerning the complexities of business and consumer bankruptcies, disturbing trends in bankruptcy fraud, dealing with marital property issues, determining if retirement accounts can be exempted from bankruptcy, and more.

Whether you represent creditors or debtors, businesses or individuals, you won't want to miss this program.

Eastern District, video seminar, Friday, Dec. 10, in Green Bay, Milwaukee, Oshkosh, Racine/Kenosha

Western District, video seminar, Thursday, Dec. 9, in Eau Claire, Hudson, La Crosse, Madison, Rhinelander, Superior, Wausau

Tuition is $199; this full-day program qualifies for 7.0 CLE credits / 1.0 EPR credit, and will be submitted for Minnesota CLE credits.

For more information, or to register, call (800) 728-7788.

Wisconsin Lawyer