I DECLARE . . . BANKRUPTCY!  So said Michael Scott in the sitcom television show “The Office.”  [For video, click here I declare bankruptcy! ]  With that, he was absolved of his debts.

As we know and as Michael’s co-workers know but apparently Michael did not know, there is more to it than that.  So what is really involved in “declaring bankruptcy.”

First, you must file a petition with the United States Bankruptcy Court located for the district in the state in which you live.  The petition is a fairly straight-forward document with basic information about you.

Attached to that petition, you must file a Statement of Financial Affairs.  This document sets out financial information such as income that you have earned year-to-date; last year and the year before.  It will also require you to list any business income that you may have received or other type of income such as Social Security payments, child support payments and other sources of income.  You will also be required to list payments made to your creditors within certain time frames.  You will need to list any charitable contributions; whether you closed any financial accounts and the amount contained in those accounts.  You must also list any property that you transferred within certain timeframes.  You can find out more here.

Additionally, you must file a series of schedules.  These schedules list a variety of information including your assets, a list of creditors, and income/expenses.  A detailed listing of your assets is critical because you are under an obligation to list your assets and if you want to protect your assets to the maximum extent available, you must list them.  You are required to state your income on a schedule and your expenses.  A listing of your creditors is also required divided up into secured creditors (creditors with collateral securing the obligation), unsecured creditors, and priority creditors–usually tax claims, child support obligations and other claims.   For more, see here.

You must also file a Statement of Current Monthly Income (Form B22A or B22C).  You will need your paychecks or other evidence of income for the six months prior to the month you file to calculate your current monthly income.  If your income exceeds the median income for your state, you may have to complete the “means test.”  After you do the “means test” calculations, if applicable, you determine if you are eligible to file a chapter 7 and/or to see what amount of money must be paid to your unsecured creditors under a chapter 13 plan.  For more on the Means Test, click here.

Just from the above, there is a lot of information to compile for the court.  And we have not even gone to court, yet?

After these documents are filed, a creditors’ meeting is scheduled approximately four weeks after you file your petition.  At that meeting, you will meet with the trustee who will examine your case to ensure all is in order.  Your trustee is also looking for assets that can be liquidated or sold to pay your creditors if a chapter 7 case or to see that your plan complies with the Bankruptcy Code.  If all is in order, then, if you are in a chapter 7 case, your case will ultimately go to a discharge and your debts eliminated.  If you are in a chapter 13, you continue to pay your money to the trustee and once all the payments are made, your debts will be discharged and your mortgage current if included in the plan.

As you can see, there is far, far more required of a bankruptcy filing.  If you are facing debt issues, it is worthwhile to consult with experienced bankruptcy counsel such as on this website.

As a Consumer Bankruptcy Attorney, I get to see the amazing financial deals that my clients get themselves into.  Some of my bankruptcy clients must have been amazing salesmen to get family members and others to co-sign their debts.  I don’t know what a person would have to say to get me to put my signature on a piece of paper for them.  Unless, it’s a scene from The Godfather. ” My father put a gun to his head and said either his signature or his brains were going on that contract.”  (Michael)  Then I would have to consider the idea.  But, in the back of my mind I would be thinking about whether or not I could pay for this if the other party defaults.

Usually I am always upbeat and positive, and I like to make my clients feel like there is hope and a light at the end of the tunnel.  Sometimes the tunnel is long and dark in the beginning, but, the light eventually comes.

As you can tell, I really dislike co-signed agreements.  Most of the time, they were unnecessary to start with.  If a bank tells you that you cannot have a loan without a co-signer, walk away from the deal.  I have explained this too many times in my life, and it never gets easy.  I’ve told bankers no, I will not ask anyone to co-sign a loan for me.  If I won’t do it myself, think of how I feel when I see others fall for the lenders scam.  Yes, I said scam.

I don’t like explaining to people that their relatives and friends will be on the hook if they discharge their obligations.  I can see the utter disgust in their eyes and expressions on their faces.

This issue arose the other day when a Chapter 13 client asked me a question.  He said:  I want to short sale my house since the bank won’t work with me.  Can I do that?  My answer was simple:  Sure, you can. We can file a motion with the Court, and bada bing, it’s a done deal.

Then he asked the real question:  How will this effect my grandfather, the co-signer?  Ouch.

Well, this little turn of events creates a whole new set of issues.  First, in Florida the lender will have two options:  They can pursue the Grandfather for the deficiency or they can issue the Grandfather a 1099C debt cancellation notice.  Neither is a real good option, and both will have consequences for the Grandfather.

So, I guess my message is:  Buyer Beware.  If you are going to co-sign, pray that you will never be asked to repay the debt, but at the same time, be ready for the phone call to come that starts with, “  I’m really sorry, but…”

People in who face bankruptcy often find it to be an emotional experience. They have been hounded and abused by creditors. This places them in a tenuous situation emotionally.

Bankruptcy lawyers – now authoritatively considered to be “Debt Relief Agencies” by the United States Supreme Court – often find that their clients need more than just legal relief. They need emotional relief too. We frequently refer clients to professional counselors. We are not really Emotional Relief Agencies.

Although you come to see your bankruptcy lawyer for legal help – the elimination of debt you get through bankruptcy and a bankruptcy discharge – we often find that you need help dealing with the trauma of debt. It is almost as though you are facing a type of “post-traumatic stress syndrome.”

We lawyers haven’t been trained in psychology or social work. However, with experience, we have learned that you, our clients, need tender loving care when facing bankruptcy.

So as an attorney, I’ve learned to give some counsel to our clients recovering from the emotional trauma of debt.

Start each day with gratitude

We can be grateful for every day we are alive. We have our life, we have our life’s experience, and without the burden of debt, we face the day fresh with the potential to do the very best we can. So I say Live Gratefully.

Live life your life with a purpose

Each of us has unique skills and gifts as a human being. We have the potential each day to use these skills and gifts to the best of our ability. In so doing, we can make the world a better place for ourselves and all whose life we touch. So I say Live Purposefully.

Devote your purpose with gratitude for those you love and those who love you

If you wake up with gratitude for what the day has to offer, and you put your powers to use in a purposeful way, it will redound the benefit of those you love and those who love you. So I say, Live Lovingly.

These ideas have been very helpful to my clients who are recovering from the trauma of debt and are valuable tools to develop the emotional resources to achieve financial recovery.

According to statistics released by the Administrative Office of the U.S. Courts, bankruptcy filings increased 31.9% in 2009, increasing from 1,117,641 in 2008 to 1,473,675 in 2009.

Business filings for 2009 were up 40%, from 43,533 in 2008 to 60,837.

Non-business filings were up 32%, from 1,074,108 in 2008 to 1,412,838.

Chapter 7 filings totaled 1,050,832, up 41% from 744,364 in 2008.

Chapter 11 filings increased 50%: 15,189, up from 10,147 in 2008.

Chapter 13 filings totaled 406,962, up 12% from 362,705 in 2008.

If your employer goes into bankruptcy, there are a couple ways it could hurt your defined contribution plan (like a 401(k)).

One simple way is obvious:  If you owned the company’s stock in your 401(k), there’s a good chance it’ll be valueless in the long run.  It’s easy to accumulate employer stock if the employer matches your investment with its own stock.

Most financial advisers will recommend you minimize the amount you keep in your employer’s stock anyway.  After all, you have a huge investment in your employer — your career and livelihood for starters — so why also invest your retirement in it?  That’s high risk investing — if it goes well you do well but if it goes badly you lose your job and your retirement.  So diversify away from your employer’s stock as soon as you can.

But there’s another hidden problem that could surprise you and eat even “your” money in your 401(k):  Plan termination costs.  If your employer goes broke, the defined contribution plan may have to be closed down.  In order to do so, the plan administrator has to be paid.  If your employer is broke, who will pay this costs?  You — the current investors in the plan — will.

For example, the employees of Bernie’s stores in Connecticut have discovered that not did their Bernie’s stock become worthless in bankruptcy but they’re losing their own investments in the plan.   The costs of closing down the plan are being charged pro-rata among all the accounts.

So if you want to avoid paying the final funeral bills at your old employer, it may be a good idea to rollover your 401(k) plan to an IRA or a new employer’s plan if bankruptcy is a real possibility at the old employer.  What exactly to do will depend on your situation but doing nothing and hoping for the best may be expensive.

Representing yourself in a bankruptcy case has a non obvious downside:  if the case develops problems, capable bankruptcy lawyers  won’t step into a troubled case.

The judge in yesterday’s calendar was urging any number of individuals who represented themselves (in Chapter 11 cases, no less) to  get a lawyer.  He was candid with his expectation that their cases would not come to successful outcomes unless they got experienced counsel.

The problem in California, and in most other economically hard hit states, is that bankruptcy lawyers are extremely busy.   There is more demand for bankruptcy representation than there is supply of seasoned lawyers to do the work.  It’s a seller’s market.

Given a choice, lawyers will take a brand new case in the expectation of doing it right from the start rather than substituting in to a pending case that has hit snags.  And it is inevitable that any individual representing themselves in a bankruptcy case will hit snags.  General practice lawyers fumble in this field.  Most pro pers haven’t a chance.

Explore every other option before representing yourself in bankruptcy.  You may effectively cut yourself off from help if you go it alone.

More on how to pay for a bankruptcy lawyer

Thoughts on interviewing a bankruptcy lawyer

People who are thinking of filing bankruptcy cases tell me that they are ashamed.

Most bankruptcy lawyers keep tissues in their conference rooms. Many clients cry when they talk about filing their bankruptcy case. Sensitive attorneys are ready for this – we have tissues ready.

We can understand why our clients feel many emotions. For example, people who file bankruptcy cases might reasonably feel:

• sorrow
• embarrassment
• regret
• anger
• disappointment
• upset
• remorse

But remember Tom Hanks – playing the role of the baseball manager in “A League of their Own. I do.  In that movie, the women playing baseball in a professional baseball league during World War II are crying.  And Tom Hanks says – I’ll never forget it – “There’s no crying in baseball.”

I say – “There’s no shame in bankruptcy.” Bankruptcy is part of our social contract.  It is the ultimate safety net. It is a part of our civilization that an honest debtor should get a fresh start. Nobody should be so poor that they become permanently enslaved to their creditors.

Shame is for shameful behavior.  Here are just a few people who should be ashamed:

• Elliott Spitzer
• Tiger Woods
• Mark Sanford
• Jim McGreevey
• Larry Craig
• Mark Foley

Need I explain?  I think not. The list goes on and on.  Shame is for people who engage in reprehensible behavior voluntarily.  Shame is for those who would hold themselves out as standards but in fact who have no standards.

Most people who seek bankruptcy relief have nothing for which to be ashamed.  Most people who file bankruptcy are honest but unfortunate people who have faced problems through no fault of their own like:

• illness
• unemployment
• natural disaster
• accident  or injury
• foreclosure

If you are an honorable person but face financial difficulties, don’t let shame paralyze you. Find an attorney who will treat you with dignity as you navigate your way to a fresh financial start.

Bankruptcy – it’s easy, right?  Anyone can do it, right?  Read on.

So, intrepid readers, we are still learning how to file for bankruptcy. We’ve gotten just part way through the second page in this, our third installment.  After you read this third installment, you’ll almost be done with page 2 of your bankruptcy papers.

Now you need to figure out if  you have to attach Exhibits A, B, C, and D. Exhibit A is for publicly traded companies. You’re probably not one of those. Exhibit B is for your lawyer to fill out. Did he or she explain to you about all of the different chapters of the Bankruptcy Code? I’ll bet you that he didn’t say a word about chapter 12 to you. Probably nothing about chapter 11 either. But  your lawyer is supposed to explain to you your options under chapters 7, 11, 12 and 13 to you and state that he or she did so. Fat chance. Did you get the 342(b) notice? Do you have a clue as to what that notice is? I’ll give you even odds that you don’t.

Exhibit C is another interesting little land mine. You are asked, “Does the debtor own or have possession of any property that poses or is alleged to pose a threat of imminent and identifiable harm to public health or safety?”  Did you notice that one? So do you? Did anyone ask you about that. I’ll bet not.

Exhibit D asks you to state whether you took credit counseling before you filed your case. Better do that or you are not eligible to file your case. You’d be surprised how many people say that they did take credit counseling and didn’t, even though they completed Exhibit D.

Well, that’s all for today. We’re still not done with page 2. Next we’ll figure out if you can properly complete the petition stating that you have the right to file your case where you think you’d like to file it.

Good thing you’re getting an attorney, right?

Click here for part 1 and here for part 2.

People think it’s easy to file bankruptcy.  You’d be surprised how many people try to do it themselves.  And even more people pay so-called “petition preparers” who say that they know how to do it for them.  Usually, they mess up.  We spent an entire article discussing just how to fill out the first page of a bankruptcy petition!

Now, to continue to show you just how easy it is, I’m going to go through the things you need to thing about on page 2 of your bankruptcy petition.

Just for the fun of it, here’s a link to the official form for a bankruptcy petition so that you can follow along.

The first thing you have to mention on page 2 is whether you’ve filed a bankruptcy case anyplace during the past 8 years. This includes any case which you have filed, no matter what the outcome.  Don’t mess this one up.  If you filed a bankruptcy case and got a bankruptcy discharge in the past 8 years in chapter 7, you won’t get another one now.  And if you filed a bankruptcy case in the past 4 years and got a discharge, you can’t get a discharge in chapter 13 either.  Of course, this all presumes you know what a discharge is and the differences between chapter 7 and chapter 13.

Next, you have to list any pending bankruptcy case for your spouse, partner or affiliate.  You know what those terms mean, right?  If so, please enter the name of the case, the case number, the district and the judge handling the case along with the relationship that the other person or entity has with you.  Clear on that?  Great you can go on to the next part.

Of course that’s going to require another blog for another day.  Stay tuned.