Don’t Be Fooled By “Simple” Bankruptcy Forms!

04 Feb Don’t Be Fooled By “Simple” Bankruptcy Forms!

I saw that Katie Porter over at Credit Slips posted a blog that new, simplified forms for consumer bankruptcy cases are being considered by the Bankruptcy Rules Advisory Committee. The proposed forms can be accessed here and start at page 189 through page 315. One item of note is that the forms are being divided into two categories: a set of forms for “business” cases and a set of forms for “consumer” cases.

I looked through the forms and it seems as if the forms for “consumer” cases are designed to make it simpler for people to file bankruptcy without the assistance of an attorney. I fully acknowledge that people are entitled to represent themselves in legal proceedings, of which, bankruptcy is one. However, it bothers me a bit that the forms are billed as “simple”. Without expressing an opinion on the forms themselves, bankruptcy is not a “simple” legal proceeding.

As a case in point, I met with a client who was elderly and could exempt $60,000 in his $80,000 house. He also had a mortgage on his home of approximately $11,000, a judgment lien of about $11,000 against the house along with $50,000 in unsecured debt. He stated that he did not wish to have his house involved in the bankruptcy and that his adult children would pay off the mortgage. That way, when he came out of bankruptcy, he would have a place to live and not have to worry about creditors again. Right?

Not exactly. If the debtor paid off his mortgage, he would then have excess equity in his home. The chapter 7 trustee would then seek to either sell the debtor’s home or demand the excess equity so that funds could be distributed to unsecured creditors. Also, the judgment lien would be entitled to payment in full because the liens plus exemptions are less than the value of the property so the judgment lien could not be avoided. The debtor has just put himself into a mess.

However, a bankruptcy lawyer could have avoided this mess. The bankruptcy lawyer would tell the debtor not to pay off the mortgage but to file bankruptcy anyway. This way, the the debtor’s allowed exemption and the liens against the property including the judgment lien exceed the value of the property (the debtor’s interest) so the judgment lien can be avoided in its entirety. That is, the judgment lien is removed (or avoided) and treated as just another unsecured creditor. The trustee has no excess equity to go after and the case is treated as a “no-asset” case. The debtor’s debts are discharged, including the judgment lien, and his only debt remaining would be his mortgage debt. Then, after the bankruptcy case is over, if the adult children want to pay off the mortgage, they are free to do so.

This example, I’m sure, occurs many times every day across the country. It is the difference between obtaining the assistance of an experienced practitioner with trying to go it alone merely to save a couple thousand dollars in attorney’s fees (the adage penny wise but pound foolish springs to mind). Simplified bankruptcy forms do not “simplify” the Bankruptcy Code and there are many, many pitfalls that a consumer may fall into if they try to go it alone.

Even though I applaud the efforts of the Rules Committee to “simplify” the forms (particularly the “consumer”/”business” distinction), simple forms should not be construed by a potential consumer debtor that bankrupcy is an easy process to navigate. In that respect, an experienced bankruptcy attorney will be your best investment.



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Adrian Lapas, Esq.

I've been practicing bankruptcy law in North Carolina since 1993, and am certified as a specialist in consumer bankruptcy law by the North Carolina State Bar.
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