1. You Cannot File Bankruptcy Under The New Law

Many people believe that the new bankruptcy law passed in 2005 essentially made bankruptcy unavailable to most people. While eligibility for a Chapter 7 bankruptcy may depend on your income, bankruptcy is still available. In many cases, all of the benefits under the old Michigan law remain under the new law.

2. You Will Lose Your House

While you cannot wipe out a mortgage in bankruptcy, if you are able to maintain your payments on your house you can keep it. If you file a Chapter 13 monthly payment bankruptcy, you can use your bankruptcy plan to catch up past due payments over a much longer period than the bank is like.

3. You Will Lose All Your Possessions

People are often afraid that if they file bankruptcy they will lose everything they have. The new Michigan bankruptcy laws generally allow you to keep personal items such as the equity in your home, appliances, furniture, vehicles and similar household property. In most cases, you can also keep your retirement accounts.

4. Your Bankruptcy Will Be Public Knowledge

While anyone in theory can go to the Bankruptcy Court and review case files, this is very uncommon. Most people that file bankruptcy do so without their friends or family knowing anything about it.

5. You Will Never Be Able To Get Credit Again

While bankruptcy has a negative effect on your credit rating, it also reduces your overall debt. Many individuals are able to rebuild their credit over a matter of a few years after filing bankruptcy, and find that bankruptcy itself does not prevent them from obtaining loans for a vehicle or a home.

6. Bankruptcy Cannot Wipe Out Court Judgments

Many people believe that once a there is a court judgment there is nothing they can do. In fact, bankruptcy prevents a court judgment from being collected. However, certain judgments, such as divorce judgments, generally are still collectible.

7. Creditors Will Continue To Call You

Once you file bankruptcy, the law prevents a creditor from contacting you directly or by phone or mail in an attempt to collect a debt.

8. You Can Pick Or Choose Which Debts To Include In A Bankruptcy

When you file Bankruptcy, you need to notify all of your creditors. Some people prefer to leave certain debts off their bankruptcy and “not include” them in the bankruptcy. While on some cases you can agree to pay a debt despite the bankruptcy, you must list all of your debts and creditors in the bankruptcy papers.

9. You Still Owe All The Unpaid Back Taxes

While taxes are sometimes non-dischargeable, you can often discharge personal income taxes as long as they are at least 3 years old and you have filed returns.

10. Filing Bankruptcy Is Difficult

While it is important to carefully review all of the information included in a bankruptcy filing, we strive to make the process very smooth and relatively painless.

Call Firebaugh & Andrews today for your free evaluation. 734-722-2999

We attorneys get reports almost every week or month reporting if case filings are up or down. People wonder if these patterns are attached to the stock market, the Fed rates, inflation, government stimulus or any number of other possibilities. One factor people like to examine is whether bankruptcy filing patterns can rise or fall determining what time of year it is.

Most know the quote “For every time there is a season.” So, is summer the season of bankruptcy?

In true lawyer fashion, the answer is yes and no. Consumer debt is cyclical. People tend to incur more debt in the holiday season than any other time of the year. Because of this, filings tend to increase in the early part of the year after the seasonal bills come due, but what about the other times of the year? With no seasonal debt associated with any time of the year, what other factors can lead to the ebbs and flows of bankruptcy filings?

The vast majority of consumer bankruptcy cases are people who have families. The stress of daily bills, loans and expenses can add up to the point that they need to get a fresh start, not just for themselves, but for their families.

For these people, the timing of the case filing is important.

When can a person with a family find the time to devote him or herself to the filing of a bankruptcy and the preparation that goes with it? The summertime seems to be the answer.

When kids are out of school, for some, that opens up time to focus on other matters. Instead of spending nights pouring over fractions or book reports, people can take a hard look at their financial situation and decide it may be time to file for bankruptcy protection. Also, the bills that may have been associated with a child’s schooling have been processed and these parents may have a better idea of the debt that was necessary to incur to help their children.

A bankruptcy filing is both a mental and financial decision. People need to have a clear mind to decide if they want to make this important decision.

Summer may be that time.

Some may shy away from a summer filing thinking that the filing will “ruin their summer.” However, for many people there is an immediate sense of relief when the filing occurs. The constant worry and stress from bills is relieved and they can start to live their lives again. What better time to do that than the summer?

If you have questions about your financial situation, or are considering filing for bankruptcy, contact Firebaught & Andrews for a free phone consultation. 734-722-2999

Because we couldn’t include everything in one article, you’ll want to check out its companion, What You Need to Know to File for Bankruptcy. You’ll find lots more details there.

How Does Bankruptcy Work in Michigan?

In most respects, filing for bankruptcy in Michigan isn’t different from filing in another state. The bankruptcy process falls under federal law, not Michigan state law, and works by unwinding the contracts between you and your creditors. That’s what gives you a fresh start.

But Michigan’s laws come into play in a significant way because they determine the property you can keep in your bankruptcy case. You’ll also need to know other filing information, which we explain after reviewing some basics.

How Do I Choose the Right Bankruptcy Chapter in Michigan?

Most people file either Chapter 7 or Chapter 13, and you’re not alone if you don’t know how the two differ. The short explanation below and our handy Chapter 7 versus 13 chart will help clarify things.

Filing for Chapter 7 in Michigan

Chapter 7 is often a bankruptcy filer’s first choice for several reasons. It’s quick, taking only a few months to complete. And it’s cheap. You don’t pay anything to creditors.

Chapter 7 bankruptcy works well for people who own mainly the essential items needed to live and work and not much else. People with more assets could lose them in Chapter 7 because the Chapter 7 trustee, the official responsible for the case, sells unnecessary luxury items and distributes the proceeds to creditors. For instance, you might have to give up your RV, baseball card collection, or timeshare in the Bahamas, even your house or vehicle if you have more equity than you’re allowed to keep.

Also, unlike Chapter 13, Chapter 7 has no payment plan option for catching up on late mortgage or car payments. So you could lose your home or car if you’re behind on the loan when you file.

Filing for Chapter 13 in Michigan

Chapter 13 involves repaying creditors some or all of what’s owed using a three- to five-year repayment plan. Chapter 13 filers keep everything they own, and the payment plan provides ways to improve sticky financial situations.

For instance, you can catch up on late payments and save your home from foreclosure or your car from repossession. Also, if you need time to repay a debt you can’t eliminate or “discharge” in bankruptcy, you can use Chapter 13 to force a creditor into a payment plan and repay your balance over time. Learn more about when filing for Chapter 13 is better than Chapter 7.

The biggest downside to this chapter? It can be expensive. Many people can’t afford the monthly payment. Also, businesses can’t file a Chapter 13 case. If you’re a business owner, it’s a good idea to learn about the ins and outs of small business bankruptcies before choosing the bankruptcy right for you.

Not Sure What to Expect in Bankruptcy?

Will Filing for Bankruptcy in Michigan Erase My Debts?

Bankruptcy wipes out many bills, like credit card balances, overdue utility payments, medical bills, personal loans, and more. You can even get rid of a mortgage or car payment if you’re willing to give up the house or car that secures the debt. (Putting property up as collateral creates a “secured debt.” If you don’t pay what you owe, the lender recovers the property.)

But you can’t discharge all debts. You’ll want to be sure that bankruptcy will discharge (get rid of) enough bills to make it worthwhile.

For instance, nondischargeable debts, like domestic support arrearages and recent tax debt, won’t go away in bankruptcy. Also, student loans aren’t easy to wipe out because you’d have to win a separate lawsuit (however, in 2024, steps have been taken to ease the student loan discharge process with a new student loan bankruptcy form).

How Do I Qualify for Chapter 7 or Chapter 13 Bankruptcy in Michigan?

You won’t be surprised to learn that qualifying for bankruptcy involves meeting several requirements. Because you’re only entitled to a discharge every few years, if you’ve filed before, you’ll want to check whether enough time has passed to allow you to file again. The waiting period varies depending on the chapter previously filed and the chapter you plan to file. Learn more about multiple bankruptcy filings.

You’ll also need to meet specific chapter requirements. Here are the qualification basics for Chapters 7 and 13.

Chapter 7 Bankruptcy Qualifications

You’ll qualify for Chapter 7 bankruptcy if your family’s gross income is lower than the median income for the same size family in your state. Add all gross income earned during the last six months and multiply it by two. Compare the figure to the income charts on the U.S. Trustee’s website (select “Means Testing Information”).

Want an easy way to do this online? Use the Quick Median Income Test. If you make too much, you still might qualify after taking the second part of the “means test.” If, after subtracting expenses, you don’t have enough remaining to pay into a Chapter 13 plan, you’ll qualify for Chapter 7.

Chapter 13 Bankruptcy Qualifications

Qualifying for Chapter 13 can be expensive because the extra benefits come at a hefty price, and many people can’t afford the monthly payment. To qualify, you’ll pay the larger of:

• your priority nondischargeable debt
• the value of nonexempt property, or
• your disposable income.

How Do I Keep Property in Michigan Using Bankruptcy Exemptions?

You won’t lose everything in bankruptcy. You’ll use bankruptcy exemption laws to protect your property. We list the significant exemptions below, but first, understanding the following will help you maximize what you’ll keep in your case.

• Exempt and nonexempt property. You can keep property protected by an exemption or “exempt” property. When a bankruptcy exemption doesn’t cover the property, you’ll either lose it in Chapter 7 or have to pay for it in the Chapter 13 repayment plan.
• Choosing state or federal exemptions. You can choose whether you use the state exemption list or the list of federal bankruptcy exemptions, but you can’t mix and match exemptions from both sets. Filers who use state exemptions can also use the federal nonbankruptcy exemptions.
• Doubling exemptions. In many instances, spouses filing together can double the exemption amount if both own the property.
• Retirement accounts all filers can protect. Federal law allows all filers to keep tax-exempt retirement accounts, including 401(K)s, 403(b)s, profit-sharing and money purchase plans, SEP and SIMPLE IRAs, defined benefit plans, and traditional and Roth IRAs to $1,512,350 per person (for cases filed between April 1, 2022, and March 31, 2025). (11 U.S.C. 522(b)(3)(C); (n).) Learn more about retirement accounts in bankruptcy.

What Are the Bankruptcy Exemptions in Michigan?

Filers can protect some home and vehicle equity, personal possessions, retirement accounts, and more. Below is a list of commonly used Michigan bankruptcy exemptions.

Caution: The state exemptions have not been updated and should not be relied on, but used as a general guide only. Some state exemption amounts could be higher and your state could have changed the law by adding new or deleting old exemptions. You must verify exemption availability through independent research or by consulting with a local bankruptcy attorney.

Michigan Homestead Exemption

You’ll be able to protect up to $46,125 in equity in your residence. If you are over 65 or disabled, the limit increases to $69,200. Spouses filing together cannot double these amounts. (Mich. Comp. Laws §§ 600.5451(1)(m).)

Learn more about the homestead exemption in bankruptcy.

How Do I Use the Michigan Homestead Exemption?

Michigan lets filers use either the federal exemption system or Michigan’s state exemption system, so you’ll have two homestead amounts to choose between. A unique aspect of the Michigan homestead exemption is a surviving spouse of the owner can claim the homestead exemption.

The homestead exemption applies to your principal residence only. It could include your house, condominium, co-op unit, mobile home, motor home, boat or other watercraft, or manufactured home. The homestead exemption also applies to appurtenances to the property. If the property is outside a city, village, or recorded plat, the homestead can include up to 40 acres. If the property is inside a city, village, or recorded plat, the exemption applies to one lot or parcel.

If you hold property as tenancy by entirety with your spouse: If one spouse files for bankruptcy—not both—the bankruptcy trustee might be prevented from using the property equity to pay off debts. (Mich. Comp. Laws §§ 600.5451(1)(n),(o).) However, this is a tricky area of law. Because your home is likely your most valuable asset, consider consulting with a bankruptcy lawyer to ensure you can protect it in bankruptcy.

Michigan Motor Vehicle Exemption

Filers can protect up to $4,250 of equity in a motor vehicle. (Mich. Comp. Laws § 600.5451(1)(g).) Find out how the motor vehicle exemption works in a Chapter 7 case.

Michigan Pension and Retirement Account Exemptions

Most pension and retirement accounts are completely protected. Most individual retirement accounts and annuities, as well as ERISA-qualified pension, profit-sharing, and stock bonus plans, are fully protected except for amounts contributed within the 120 days before filing for bankruptcy. (Mich. Comp. Laws §§ 600.5451(1)(j)(k).)

Here are some specific protections:

• Firefighter and police officer benefits. (Mich. Comp. Laws §§ 38.559, 38.1683.)
• Legislative member retirement benefits. (Mich. Comp. Laws §§ 38.1057, 38.1683.)
• Public school employee retirement benefits. (Mich. Comp. Laws §§ 38.1346, 38.1683.)
• State police retirement benefits. (Mich. Comp. Laws §§ 38.1346, 38.1683.)
• State employees’ retirement benefits. (Mich. Comp. Laws § 38.1683.)
• Judges’ retirement benefits. (Mich. Comp. Laws §§ 38.2308, 38.1683.)

Michigan Personal Property Exemptions

• Burial grounds. (Mich. Comp. Laws § 128.112.)
• Milk or cream sales proceeds. (Mich. Comp. Laws § 600.4031.)
• Wages up to 60% of earned but unpaid wages for the head of household or $15 per week plus $2 per week for each dependent other than the spouse; others can protect up to 40% or $10 per week. (Mich. Comp. Laws § 600.5311.)
• Family pictures. (Mich. Comp. Laws § 600.5451(1)(a)(i).)
• Arms and accouterments required to be kept by law. (Mich. Comp. Laws § 600.5451(1)(a)(ii).)
• Clothing other than furs. (Mich. Comp. Laws § 600.5451(1)(a)(iii).)
• Family cemetery lot, tombs, and burial rights. (Mich. Comp. Laws § 600.5451(1)(a)(iv).)
• Professionally prescribed health aids. (Mich. Comp. Laws § 600.5451(1)(a)(v).)
• Six-month supply of provisions and fuel. (Mich. Comp. Laws § 600.5451(1)(b).)
• Household goods such as furniture, utensils, books, appliances, and jewelry valued at up to $4,625. ($700 per item limit) (Mich. Comp. Laws § 600.5451(1)(c).)
• Seat, pew, or slip to $800. (Mich. Comp. Laws § 600.5451(1)(d).)
• Farm animals, feed, and crops to $3,075. (Mich. Comp. Laws § 600.5451(1)(e).)
• Household pets to $800. (Mich. Comp. Laws § 600.5451(1)(f).)
• Computer and accessories to $800. (Mich. Comp. Laws § 600.5451(1)(h).)
• Tools, implements, materials, and other items necessary to carry on your profession, trade, occupation, or business to $3,075. (Mich. Comp. Laws § 600.5451(1)(i)).

Michigan Public Benefit Exemptions

• Crime victims’ compensation. (Mich. Comp. Laws § 18.362.)
• Veterans’ benefits. (Mich. Comp. Laws §§ 35.977, 35.1027.)
• Welfare benefits. (Mich. Comp. Laws § 400.63.)
• Worker’s compensation benefits. (Mich. Comp. Laws § 418.821.)
• Unemployment compensation. (Mich. Comp. Laws § 421.30.)

Michigan Insurance Exemptions

• Fraternal benefit society benefits. (Mich. Comp. Laws § 500.8181.)
• Insurance benefits fully protected regardless of the amount. (Mich. Comp. Laws § 500.2207.)
• Insurance benefits paid on behalf of an employer. (Mich. Comp. Laws § 500.2210.)
• Insurance benefits paid by any stock, mutual life, health, or casualty insurance. (Mich. Comp. Laws § 600.5451(1)(j).)

State exemption amounts are adjusted periodically and are not being updated in this article. You’ll find the Michigan exemption statutes on the Michigan Legislature website. Check for updates with the Michigan Department of Treasury in the Economic Reports section.

When Can I Use Michigan Bankruptcy Exemptions?

You can file for bankruptcy in Michigan after living there for over 180 days. However, you must live in Michigan for at least 730 days before filing. Otherwise, you’d use the previous state’s exemptions.

If you lived in multiple states during the two years before filing for bankruptcy, you’d use the exemptions of the state you lived in for most of the 180 days before the two years immediately preceding your filing. (11 U.S.C. § 522(b)(3)(A).)

How Do I Prevent Bankruptcy Exemption Problems in Michigan?

Exempt your property carefully. The bankruptcy trustee, the court-appointed official assigned to manage your case, will review the exemptions. A trustee who disagrees with your exemptions will likely try to resolve the issue informally. If unsuccessful, the trustee will file an objection with the bankruptcy court, and the judge will decide whether you can keep the property.

Example. Mason owns a rare, classic car worth $15,000, but the state vehicle exemption doesn’t cover it entirely. Believing that the car qualifies as art, at least in his mind, Mason exempts it using his state’s unlimited artwork exemption. The trustee disagrees with Mason’s characterization and files an objection with the court. The judge will likely decide the vehicle doesn’t qualify as art.

Purposefully making inaccurate statements could be considered fraudulent. Bankruptcy fraud is punishable by up to $250,000, 20 years in prison, or both.

Should I Hire a Bankruptcy Lawyer in Michigan?

Most people find it worthwhile to get counsel. A bankruptcy attorney will help you:

• qualify for the chapter of your choice
• determine when it’s time to file
• help you keep the property you want
• make sure you don’t run afoul of fraud or other issues, and
• explain when you can stop paying the bills you’ll erase in your case.

You can expect creditors to call until you file. It’s usually best to ignore them because telling creditors about your bankruptcy can encourage them to take more drastic collection steps before losing the right to collect altogether. However, if you hire counsel and refer creditors to your lawyer, they’ll have to stop calling you.

How Do I File for Bankruptcy in Michigan Without a Lawyer?

You’ll complete the steps listed below in “What Steps Are Involved in a Michigan Bankruptcy?” But not everyone should file their own bankruptcy case.

The best candidate is a Chapter 7 debtor who meets qualification requirements, can eliminate all debts, and can protect all property with bankruptcy exemptions. People filing for Chapter 13 or Chapter 7 filers with complicated cases should seek representation.

Are you curious whether your case is simple enough to file yourself? Our quiz will help you identify potential complications while educating you about bankruptcy. You’ll find it here: Do I Need a Lawyer to File for Bankruptcy?

How Much Does It Cost to File for Bankruptcy in Michigan?

All filers pay a $338 filing fee in Chapter 7 unless the court grants a fee waiver and a $313 filing fee in Chapter 13 (amounts current as of August 2023). You’ll also pay approximately $50 to $75 for credit counseling and debt management courses.

If you hire a bankruptcy lawyer to represent you, you can expect to pay from $1,500 to $2,500 upfront for most Chapter 7 cases, although the price will depend on the going rates in your area and case complexity. Chapter 13 legal fees run about $1,000 to $1,500 more, but you can pay them in installments through the Chapter 13 payment plan.

Learn about your options if you can’t afford to hire a bankruptcy attorney. Call Firebaugh & Andrews for your free consultation. 734-722-2999

What Steps Are Involved in a Michigan Bankruptcy?

We all know that seeing the forest helps us recognize the trees. Similarly, understanding the significant steps you’ll take during your bankruptcy journey. will help you understand the bankruptcy process. Think of this checklist as a roadmap, but you can also use it to track your progress.

Bankruptcy Steps Checklist

 learn about Chapters 7 and 13

 check whether bankruptcy will erase debt

 find out if you can keep property

 determine whether you qualify

 consider hiring a bankruptcy lawyer

 stop paying qualifying debts

 gather necessary financial documents

 take a credit counseling course

 fill out and file paperwork

 turn over financial documents

 attend the 341 creditor’s meeting

 attend the confirmation hearing and make plan payments (Chapter 13 only)

 file a debtor’s education course certificate

 receive your debt discharge

What Do I Need to File for Bankruptcy in Michigan?

Once you decide to file, the fun begins! Well, not really. You’ll start by gathering your financial information, which can take time. But our bankruptcy document checklist should help you organize what you or your attorney will need.

Bankruptcy Document Checklist

Tax returns, unless you’re exempt:

 Two years for Chapter 7 bankruptcy (You’ll need both years to complete the paperwork and the most recent year for the bankruptcy trustee.)

 Four years for Chapter 13 bankruptcy

 Tax transcripts (Order transcripts from https://www.irs.gov/individuals/get-transcript if you don’t have copies of your returns)

Six months of the following:

 Proof of Income From Employer (paycheck stubs)

 Other Proof of Income (unemployment benefits stubs, proof of alimony or maintenance payments, income from any other source)

 Bank Statements (The bankruptcy trustee will want the most recent two months.)

 Investment and Retirement Statements (The bankruptcy trustee will want the most recent two months.)

Copies of the following (take original to court):

 Driver’s License, I.D. Card, Government I.D., or Passport (The name on the petition should match your identification exactly.)

 Social Security Card or proof of Social Security number

Things the trustee might ask for (current):

 Mortgage and Car Loan Statements (The trustee will check the balance owed.)

 Home Valuation (Realtor.com; Zillow)

 Car Valuation (Nada.com; Kelley Blue Book)

 Valuation of Antiques and Unusual Items (eBay)

 Photographs of Rare, Antique, and Collectable Items

 Photographs of Damaged Property

 Repair Estimates for Damaged Property

If you own a business, the trustee will likely want:

 Twelve monthly profit and loss statements

 Two yearly profit and loss statements

 Copies of any liability insurance policies

Things you’ll need to prepare your bankruptcy petition:

 Household Property List With Values (Group small items together, such as clothing, cookware, and bedding.)

 Credit Card and Other Billing Statements

 Credit Report (Get a free copy at annualcreditreport.com)

 Credit Counseling Completion Certificate

More things you might need at the creditors’ meeting:

 Bank statements showing the balance on the filing date (You’ll need to have exempted the entire balance.)

 Other Documents Reasonably Related to Your Financial Affairs

After the creditors’ meeting:

 Debtor’s Education Course Completion Certificate

Where Do I Find the Michigan Bankruptcy Court Websites and Locations?

Michigan has two bankruptcy districts—Eastern and Western. Each has multiple locations serving various geographical areas. Clicking on the district name will take you to the court homepage.

• Eastern District of Michigan
• Western District of Michigan

On the Michigan bankruptcy court website, you can access the district’s local rules and instructions for filing your paperwork on the navbar under “Filing Without an Attorney” or “For Debtors.”

What Happens After Filing for Bankruptcy in Michigan?

Your creditors will stop bothering you soon after you file. It takes a few days because the court mails your creditors notice of the “automatic stay” order that prevents most creditors from continuing to ask you to pay them. Here’s what will happen next:

• You’ll turn over financial documents proving the statements in your bankruptcy paperwork.
• You’ll attend the 341 meeting of creditors—the one appearance all filers must attend.
• You’ll complete a debtor education course and file the completion certificate.

These things must happen before you get a Chapter 7 bankruptcy discharge. Chapter 13 filers will also attend a repayment plan confirmation hearing and complete the three- to five-year payment plan.

Need More Bankruptcy Help?

It is often thought that pushing bankruptcy off until later is a better financial move, but there are many factors to consider before making a decision.

Discharge process

Filing for bankruptcy after the holidays may seem like a way of starting the new year with a clean slate. However, even if some debts are dischargeable, the process can take some time to go through. Another component to think about is potential year-end rewards such as bonuses, which can make the debtor’s income look higher than it is. If the court decides to change the chapter of the Bankruptcy Code due to a falsely represented income, a discharge can take several years.

Shopping debt

Some people file for bankruptcy after holiday shopping in hopes that their debt will go away. Unfortunately, large cash advances and credit purchases can be non-dischargeable if they accrued within three months before the bankruptcy filing. On top of this, the court may find the debtor guilty of fraud and reject the case. Understanding the terms and conditions of bankruptcy can help a person avoid owing a great deal of money later.

For many people, spring, summer and early fall are the most helpful seasons to file for bankruptcy. This way, a person is more likely to already have a discharge by the end of the year. The right timing can ensure peace of mind for the holiday season.

Are you considering filing for bankruptcy but feeling hesitant? In this video, we’ll explore six positive reasons why filing for bankruptcy may be the right decision for you.

Call Firebaugh & Andrews for your free evaluation 734-722-2999

Naturally, this is a stressful situation that you never envisioned yourself being in. The situation can be made easier by making good choices such as hiring a competent bankruptcy attorney and collecting and organizing your financial data.

What Paperwork Do I Need To File Bankruptcy?

Use the checklist below to gather the paperwork that an attorney will need to see to provide you with the best advice and representation. This checklist can be a useful proactive tool to help you collect and organize the proper paperwork before or during bankruptcy.

Financial Records

Your financial records are some of the first documents you should collect. These records will help determine which type of bankruptcy is best suited for you. For example, if your financial documents show you have a regular income, your best fit may be Chapter 13 bankruptcy. This may have significant implications because Chapter 13 will allow you to keep possession of your property and pay your debts over time. Financial records include:

• Most recent bank statements
• Most recent bills from every creditor
• Most recent payment coupons for vehicles (leased or purchased), real estate, and student loans
• Bills or invoices for purchases in the last year
• Receipts

Legal Records

Any legal history or pending litigation involving you is information you’ll want to disclose to your attorney. Previous judgments against you show debts that will factor into determining which bankruptcy is right according to your financial situation. In addition, any pending litigation or current court order will determine how much you can afford to pay your creditors at this time.

Legal records include:

• Files from previous litigation, especially any judgments that have been entered against you
• Files from previous attorneys
• Any divorce decree or other court order that requires you to pay child support or maintenance

Additional Documents

The following list is a combination of assets you own and what you need to verify your income. A proper, thorough organization of your assets is extremely important to show you have a set income level. This income determination can be essential in proving you can repay your debts over a period of time or in proving a lack of income.

• Canceled checks for any expense you cannot otherwise document
• All your correspondence with or regarding creditors, especially threat letters
• All insurance policies
• Tax returns for the last three years
• Vehicle titles
• Your lease or mortgage
• Any promissory notes you have signed
• Other documents relating to debts you owe other people
• Any proof that anyone owes you money
• Any lawsuits with which you have been served

Documents Needed To File Chapter 7

There are a number of documents you need before filing for a Chapter 7 bankruptcy. Although the specific documents may vary depending on your type of case and the district you file, you will at least need to gather the following before filing your petition:

• Your tax returns
• Pay stubs
• Appraisals of your home, jewelry, and other exempt assets
• Your car titles
• Evidence of child support/alimony obligations
• Bank statements
• Proof that you took credit counseling

Planning To File Bankruptcy? Get Help From an Attorney

Filing for bankruptcy is a complex process that is unique to your specific case. Call Firebaugh & Andrews to learn about the process or if you need help gathering the documents you’ll need for filing your case. Call us for a free consultation 734-722-2999

Washington, D.C. – Today, United States Senator Elizabeth Warren (D-Mass.) and House Judiciary Committee Chairman Jerrold Nadler (D-N.Y.) reintroduced the Consumer Bankruptcy Reform Act, bicameral legislation that would simplify and modernize the consumer bankruptcy system and make it easier for individuals and families forced into bankruptcy to get back on their feet. 

Originally introduced in 2020, this legislation would replace the two separate consumer bankruptcy chapters known as Chapters 7 and 13 with a single system available to all consumers, streamlining the filing process and reducing filing fees. The bill would also ensure that families can care for themselves, their children, and their elderly parents during the bankruptcy process by helping renters with back rent avoid eviction, giving people a path to protect their homes and cars, and letting filers discharge local government fines. 

“The Consumer Bankruptcy Reform Act takes long overdue steps to make it a little easier and a little less expensive for people who are in deep financial trouble to get meaningful bankruptcy relief,” said Senator Elizabeth Warren. “I’m grateful to be working with Chairman Nadler on this important legislation to give struggling families a better chance to get back on their feet.”

“Bankruptcy is an option of last resort, but it also promises a fresh start so that people can get back up and keep working and providing for their families,” said Chairman Jerrold Nadler.  “Today that promise rings hollow for many people because the bankruptcy system has become complex, unfair, and even punitive for ordinary consumers. The Consumer Bankruptcy Reform Act ensures that the bankruptcy system works for the American people and not just big corporate creditors. Senator Warren and I have worked on this issue for many years, and I look forward to continuing our fight for consumers with this new legislation.”

“For too many, bankruptcy relief is out of reach due to significant burdens and high costs but this relief is a lifeline to hardworking Americans in need,” said Representative David Cicilline. “The Consumer Bankruptcy Reform Act will remove undue barriers and bring much-needed reforms that will provide all Americans with a fair shot and a second chance at economic opportunity. I thank Senator Warren and Chairman Nadler for their leadership in this effort.”

On Thursday, September 29, 2022, Chairman Nadler will hold a hearing of the House Judiciary Committee on our current bankruptcy system and how the Consumer Bankruptcy Reform Act can help close loopholes that allow the wealthy to exploit the bankruptcy system, crack down on predatory practices, and hold corporate wrongdoers accountable.

This legislation is co-sponsored by Senator Sheldon Whitehouse (D-R.I.) and Representative David Cicilline (D-R.I.).

The bill is also supported by: the Action Center on Race and the Economy, the American Federation of State, Country, and Municipal Employees (AFSCME), Americans for Financial Reform, AFL-CIO, Association of Young Americans, the National Association of Consumer Advocates, the Consumer Federation of America, Demos, the National Alliance for Partnerships in Equality, the National Association for Equal Opportunity in Higher Education (NAFEO), the National Consumer Law Center, the Progressive Change Campaign Committee, Public Citizen, Service Employees International (SIEU), UnidosUS, U.S. PIRG, Young Invincibles, Tzedek DC, the Center for LGBTQ Economic Advancement and Research (CLEAR), the Asian Pacific American Labor Alliance, and the Center for Responsible Lending. A group of 86 law professors who specialize in bankruptcy and consumer law have also sent a letter in support of this legislation.

“The Association of Young Americans is proud to endorse the Consumer Bankruptcy Reform Act, reintroduced today,” said Lisa Giordano, Executive Director of the Association of Young Americans (AYA). “From student debt to skyrocketing rents nationwide, young Americans today face unique financial challenges. Senator Warren’s and Chairman Nadler’s legislation would be a lifesaver for young people forced into bankruptcy, with its notable provisions to streamline the bankruptcy filing process, ensure rent protections, make student loans dischargeable in bankruptcy, and protect filers from predatory practices and exploitation. AYA is grateful for Senator Warren’s and Chairman Nadler’s leadership and care for young consumers, and strongly advocates for the passage of this bill into law.”

“Senator Warren’s bill would keep those who must declare bankruptcy — disproportionately women and people of color; even more so post-pandemic — from losing everything, including their families’ homes and the cars they need to drive to work to make the money needed to keep a roof over their head,” said Brittany Brady, CEO of National Partnerships for Equity. “There is no reason for a bankruptcy filing to lead to more hardship. Senator Warren’s commonsense bill would establish some much-needed equity by streamlining the difficult, emotionally-fraught process of bankruptcy so that folks can move forward with their lives, their educations, and their careers, and reach financial stability and a place of peace.”

“The Consumer Bankruptcy Reform Act would ensure a financial safety net and allow for sustainable paths of recovery for families struggling with burdensome debt,” said Christine Hines, legislative director for National Association of Consumer Advocates. “We applaud Sen. Warren and Rep. Nadler for their commitment to help Americans get a fresh start, particularly in these perilous financial times.”

“Public Citizen enthusiastically supports this critical set of reforms from Senator Warren and Chairman Nadler,” said Lisa Gilbert, Executive Vice President, Public Citizen. “Modernizing and clarifying the consumer bankruptcy system is long overdue, and in this time of national economic crisis, making it easier for individuals and families forced into bankruptcy to get back on their feet is just the right thing to do.”

“U.S. PIRG supports the Consumer Bankruptcy Reform Act, which will re-balance consumer rights to a fairer bankruptcy process and will give them a better chance to reorganize their finances, especially during a pandemic,” said Ed Mierzwinski, Senior Director for Federal Consumer Programs, U.S. PIRG. “Importantly, the proposal includes protections for both homeowners and renters, prohibits and punishes illegal practices by debt collectors and others, addresses racial and gender disparities in the bankruptcy system and eliminates loopholes exploited by the wealthy. Finally, it also eliminates one of the cruelest provisions in U.S. law by removing the provision that makes private and federal student loans non-dischargeable.”

“Young people have struggled to obtain solid financial footing since the Great Recession and the challenges of the Covid-19 pandemic,” said Mervyn Jones, Senior Director of External Affairs at Young Invincibles. “We applaud Senator Warren’s and Chairman Nadler’s introduction of the Consumer Bankruptcy Reform Act, which would provide a more straightforward path for economically distressed Americans to move forward. In particular, the bill’s provision to make student loan debt dischargeable would be a much-needed change in law to help struggling student borrowers. This bill’s focus on racial and gender disparities in the bankruptcy system would also foster greater equity and strengthen the strained social safety net.

Many people we speak with care about two things:

1. How fast they can get relief from their debt burden.
2. How much is costs to get out of their debt burden?

When comparing debt-relief options, Chapter 7 bankruptcy often wins in both categories over alternatives such a Chapter 13 bankruptcy, debt negotiation, debt management, and debt payoff planning. Let’s explore those variables in greater detail.

How Fast Do You Get Relief in A Chapter 7 Bankruptcy in Michigan

You can often get a Chapter 7 bankruptcy discharge in as little as 120 days in Michigan. That is the typical time it takes to complete a no-asset Chapter 7 case in Michigan. No-asset generally means that you do not own a home or other assets that may be above the Michigan bankruptcy exemptions.  

How Much Does It Cost To File Chapter 7 bankruptcy in Michigan

The Chapter 7 bankruptcy cost nationwide tends to be between $500 and $3000. That said, Chapter 7 bankruptcy cost in Michigan is different. 

The Chapter 7 bankruptcy cost may even be different if you are filing in Warren vs. Grand Rapids. For example, you may pay a Chapter 7 bankruptcy attorney fee of $1,090 in Warren, but pay a bankruptcy attorney fee of $1,170 in Detroit.

You should check the cost to file Chapter 7 bankruptcy in Michigan for specific information about the cost in your city.

Also, there are instances where the cost to file bankruptcy can be reduced based on a filing fee waiver. You should consider seeing the information related to Michigan filing fee waiver.

So, How Do I Qualify For Chapter 7 Bankruptcy in Michigan?

Chapter 7 bankruptcies are intended for people who cannot afford to pay any portion of their debts. However, you must first pass an income evaluation to qualify for a bankruptcy discharge (forgiveness of debt) in Chapter 7.

If you pass the Michigan bankruptcy means test (which you can estimate below), you can erase most unsecured debts through Chapter 7. Unsecured debts discharged in Chapter 7 include medical bills, personal loans, some old income tax debt, old utility bills, credit card debts, and most personal judgments. Unsecured creditors hold debts that are not secured by collateral. 

What about secured debts in Chapter 7?

If, however, you want to get rid of secured debts, like car loans and mortgages in Chapter 7, you need to surrender the asset to the creditor. The creditor must accept the asset as full payment of the amount owed. 

Let’s go into how you qualify for Chapter 7 bankruptcy.

IMPORTANT: Chapter 7 Qualification via Michigan Means Test

An important element in filing for bankruptcy relief is the Bankruptcy Means Test. The Means Test is a bankruptcy form that calculates your average monthly and annual income. The test compares your income against the median income of other households in Michigan.

If your average annual income or median income is below the Michigan median income, you may qualify for a bankruptcy discharge under Chapter 7. You can estimate whether you qualify for a Chapter 7 bankruptcy using the free Michigan Chapter 7 Bankruptcy Means Test Calculator below.

Help! My Income Exceeded The Chapter 7 Means Test Allowable in Michigan

If your median income is above the state median income, you may need to look at part 2 of the means test or at an alternative. 

The Means Test is a two-part test, so it is not a simple pass-fail test. If you “fail” the first section, you can “pass” the second section and still qualify under Chapter 7.  

You can learn more about passing the Chapter 7 means test when income exceeds the median.

Chapter 7 Bankruptcy Michigan Income Limits

The Michigan median income figures for the Means Test are adjusted periodically, based on IRS and Census Bureau data. Michigan median income for bankruptcy cases filed on or after April 1, 2022, is:

For Michigan households with more than 9 members, add $9,000 for each additional family member. You should always double-check the US Trustees website for the most current figures when calculating the Means Test.

Will I lose my belongings if I file Chapter 7 bankruptcy? Understand Michigan bankruptcy exemptions

Bankruptcy exemptions protect the equity in your property in a bankruptcy case. Likewise, property not protected by bankruptcy exemptions may be sold in a Chapter 7 liquidation case. Note also that for Chapter 13 cases, non-exempt equity in the property can increase the bankruptcy plan payment. 

The most important asset most people like to protect is their home. See the Michigan bankruptcy homestead exemption below.

The homestead exemption is often broken down by age and whether you are married. 

• Single and under 65: $40,475
• Single is 65 or older: $60,725
• Married and under 65: $40,475
• Married is 65 or older: $60,725

Michigan specific homestead bankruptcy exemption text: “Mich. Comp. Laws Ann. § 600.5451(n). $30,000 / $45,000 if 65+ or disabled. ; property cannot exceed 1 lot in town, village, city, or 40 acres elsewhere; spouse or children of deceased owner may claim homestead exemption.” (Source)

It is important to review additional Michigan bankruptcy exemptions and choose those exemptions that best protect your assets.

The federal bankruptcy exemptions are detailed in 11 U.S. Code §522. The National Consumer Law Center maintains a list of federal bankruptcy exemptions on its website. Michigan is a state that allows you to use federal bankruptcy exemptions

Always check that you use the most current information available when analyzing bankruptcy exemptions. 

Chapter 7 Bankruptcy Michigan Pros and Cons

Like any debt relief option, Chapter 7 bankruptcy in Michigan has pros and cons to consider. For example, you may own a home in Detroit with equity well above the exemption. In a Chapter 7 bankruptcy, you may be at risk of losing your home. Let’s cover the different pros and cons.

Pros

1. Often the least expensive debt relief options
2. Receive discharge in about 120 days
3. Potentially keep your home and belongings
4. Stop debt collection lawsuits
5. No more deficiences
6. It can relieve an unaffordable unsecured debt

Cons

1. Income requirements for qualification
2. Potentially lose your home and other belongings when above the exemption
3. Negative credit report impact for 10 years
4. Negative credit score impact (in some situations)
5. Non-dischargeable debt
6. Difficult to prevent foreclosure

Now that we’ve covered the pros and cons, let’s chat about the Chapter 7 bankruptcy alternatives in Michigan.

2) Alternatives to Chapter 7 Bankruptcy in Michigan

Let’s cover the Chapter 7 bankruptcy alternatives in Michigan in case you do not qualify for Chapter 7 bankruptcy, have too many assets, or do not wish to pursue Chapter 7 bankruptcy.

a) Chapter 13 Bankruptcy in Michigan

For those who make above the income limit for Chapter 7, debt relief can still come through a filing a Chapter 13 bankruptcy. A Chapter 13 Bankruptcy in Michigan case allows you to restructure your debts into an affordable monthly plan. By restructuring debts, many people can afford to keep their homes and vehicles under Chapter 13.

Chapter 13 stops foreclosures, repossessions, and potentially stops Michigan wage garnishments. Chapter 13 bankruptcy also allows you to pay back mortgage payments, past-due car payments, and tax debt over three to five years through a bankruptcy plan. In addition, Michigan may also allow you to reduce unpaid child support and alimony. However, you must resume your normal domestic support payments to remain in Chapter 13.

In a Chapter 13 plan, some debtors (the person filing the bankruptcy case) can lower their car loan payments and erase second mortgages, if they meet certain requirements. 

Can you afford Chapter 13 bankruptcy?

Let’s say you do not qualify for a Michigan Chapter 7 bankruptcy and are wondering whether you should pursue a Chapter 13 bankruptcy. Can you afford it? It may be odd to ask whether you can afford bankruptcy, but it’s an important question to ask.

b) Debt Relief

MI debt relief can be less expensive than both Debt Management and Debt Payoff Planning because the debt management company is negotiating a lower amount on your total debt. We covered the pricing estimate differences in our article covering debt management vs debt settlement.

You should consider the following if you are pursuing debt settlement: Credit score impact, debt settlement pros and cons, and avoiding Debt Settlement companies with red flags.

c) Michigan Debt Management

Debt settlement companies negotiate lower amounts. Debt management companies negotiate lower interest rates. This is the key distinction. Often these programs last 3 or 5 years. This option is often more expensive than debt settlement and some creditors such as personal loan lenders may not work with the debt management company. There may be debt management credit score implications as well.

Who may debt management in Michigan best for? Debt management may be best for those that have all high-interest credit card debt, and a reduction from 22-30% interest rate to a 10% interest rate would continue to make the debt affordable.

d) Michigan Debt Payoff Planning

You may be able to get out of debt through debt payoff planning, which is often a combination of trying to reduce expenses and putting extra cash into specific debts to avoid interest. You may not be able to do this because of the size of the financial hardship, but if you are interested, we build the Savvy debt payoff planner to help prioritize your debts. The app saves about $2,000 in interest on average by using the savvy debt payoff method instead of the snowball debt payoff method.

3) Specific Michigan Chapter 7 Bankruptcy Information:

Let’s say you went through the 2 steps above and are now considering whether Chapter 7 bankruptcy is the right choice for you. Let’s go through some attributes about filing Chapter 7 bankruptcy in Michigan that would be helpful to consider.

Michigan Chapter 7 Bankruptcy Credit Counseling and Debtor Education Courses

When you file for bankruptcy relief under Chapter 7 bankruptcy, you must complete two bankruptcy courses to receive a bankruptcy discharge. This includes a credit counseling course prior to filing a bankruptcy case, and a debtor education course after filing. See below the approved courses for Michigan

• Credit Counseling Approved Courses
• Debtor Education Approved Courses

The United States Trustee’s office has approved state-specific companies that offer bankruptcy courses. You can access a list of companies in Michigan offering bankruptcy courses on the UST website. Both courses are available online for a small fee.

Michigan Chapter 7 bankruptcy Court Locations

Many 341 meetings of creditors have been over the phone or over Zoom due to the pandemic. That said, you may want to see where the courthouse is in Michigan if there are any meetings that need to take place in person. Below are the court locations for filing bankruptcy based on the bankruptcy district.

Eastern District

• Theodore Levin U.S. Courthouse
  
  231 W. Lafayette Blvd.
  
  Detroit, MI 48226
• Federal Building
  
  200 E. Liberty Street
  
  Ann Arbor, MI 48104
• United States Post Office Building
  
  1000 Washington Ave.
  
  Bay City, MI 48708
• Federal Building and U.S Courthouse
  
  600 Church Street
  
  Flint, MI 48502
• Federal Building and United States Courthouse
  
  526 Water Street
  
  Port Huron, MI 48060

Western

• 399 Federal Bldg
  110 Michigan St NW
  Grand Rapids MI 49503
• 113 Federal Bldg
  315 W Allegan St
  Lansing MI 48933
• 107 Federal Bldg
  410 W Michigan Ave
  Kalamazoo MI 49007
• 330 Federal Bldg
  202 W Washington St
  PO Box 698
  Marquette MI 49855

Chapter 7 Bankruptcy Trustees Michigan

Below are the Chapter 7 bankruptcy trustees in Michigan broken out by bankruptcy district. You can also find the list here. 

In addition to the above, review Michigan local bankruptcy rules before filing a bankruptcy case. Some local rules may differ slightly from the Federal Bankruptcy Rules.

Conclusion

Hopefully, now you know much more about Chapter 7 bankruptcy in Michigan. Call us for a free consultation 734-722-2999

Keep in mind that the very best time to deal with debt is the first moment you realize it is out of control. That’s when you will have the most options available to solve the problem. However, most people delay getting help for their debt, hoping that things will turn around. For some, when they do finally get help, their solutions are largely limited to declaring Bankruptcy. At that point, is there a best time to file your Bankruptcy? In some circumstances, the answer is “Yes!”

Bankruptcies don’t ever go “on sale”, nor will you ever find a coupon code for a discount, but there is a certain time of year, where it won’t cost you as much. I don’t recommend waiting months to deal with your debt, but if you are looking at your debt late in the calendar year, timing can be critical.

When you file an Assignment in Bankruptcy you are signing over everything that you own, have a right to or an interest in (except exempt assets) to the Trustee for the benefit of your unsecured creditors. A big part of the income for your creditors in a Bankruptcy estate can come from income tax refunds.

Bankruptcy and Current Year Tax

When you file for Bankruptcy, your Trustee will be filing any outstanding income tax returns for you as well as the income tax returns for the year of Bankruptcy. The return for the year of Bankruptcy is broken up into two pieces, a pre-bankruptcy tax return, and a post-bankruptcy tax return. There are two purposes for this. The first is to make sure that any tax you owe, gets included, and discharged, in the Bankruptcy. The second purpose is so that any tax refunds owing to you can go to your creditors.

The pre-bankruptcy tax return covers the period beginning January 1^st and ends on the date of Bankruptcy. Should there be a refund from this return, it will come to the Trustee for your creditors (if there is an outstanding debt owing to CRA, CRA may keep this refund). If there is anything owing to CRA on the pre-bankruptcy tax return, it will be included with your debts in the Bankruptcy.

The second return for the year of Bankruptcy is called the post-bankruptcy tax return. This return covers the period beginning at the date of Bankruptcy and ends December 31^st of the year of Bankruptcy. This return will also be filed by your Trustee and is filed at regular tax time. With the post-bankruptcy tax return, if there is a refund it will come to the Trustee for your creditors. If you owe taxes on this second return, it will be your responsibility to arrange for payment because it is a new, post-bankruptcy debt.

Bankruptcy and Prior Year Tax Returns

If your income tax return for the year prior to filing the Assignment in Bankruptcy is also outstanding, your Trustee will file that return as well. This return is like the pre-bankruptcy tax return in that, should there be a refund, it will be sent to your Trustee for your creditors.  If you owe on the prior year tax return, that debt will be included with the other debts listed in your bankruptcy.

This is where the timing of your Bankruptcy can become important.

If you are considering filing an Assignment in Bankruptcy in December 2022, your Trustee will file the two returns for the year of Bankruptcy and any refunds will come to the Trustee for your creditors. If you wait until January 1^st, 2023, to file the Bankruptcy, the Trustee will file the return for the year prior (2022), and the two returns for the year of Bankruptcy (2023). Any refunds from those three returns will be sent to the Trustee for the creditors. Also, any tax credits for the year of Bankruptcy will also be affected.

Tax and the Self-Employed

If you are self-employed, timing is also important. As previously mentioned, if you owe on the post-bankruptcy tax return, you will be responsible for paying the amount owing as it is a new, post-bankruptcy debt. When you are self-employed, you generally have amounts owing at the end of the year, because you have not had tax taken off at source. If you were to file an Assignment in Bankruptcy on December 31^st, you would not have earned any income in the post period, as such all amounts owing would fall in the pre-bankruptcy tax return and be included with your Bankruptcy debts.

Seasonal Workers

There can be other factors besides income tax and tax credits that can determine the best time of year to file an Assignment in Bankruptcy. For example, the length of time one is in Bankruptcy can be impacted by the amount of money earned each month. This could apply to you, for example, if you are a seasonal worker who applies for Employment Insurance at certain times of the year. If this is the case, you may want to explore your options with a Licensed Insolvency Trustee, since your income varies significantly depending on the time of year.

Regardless, if you feel that your debt load is not manageable, generally the ideal time to file is right now!  There is something to be said for dealing with the issue now, as opposed to struggling on, waiting for the optimal time.

Call us for your free consultation. 734-722-2999

The big surprise of the current pandemic is that the great bankruptcy wave of 2020 never materialized. The number of very large corporate bankruptcies increased,^[4] but overall business bankruptcies went down rather than up (from 22,780 in 2019 to 21,655 in 2020), and the decrease in consumer bankruptcy filings was even more dramatic (752,160 in 2019, 522,808 in 2020, a 28% drop).^[5] The most obvious reason for the surprising decline in bankruptcy filings was the enormous amount of stimulus money that buoyed the economy, including well over $1 trillion of business lending capacity in the CARES Act of March 2020 and subsequent boosters of the small business portion of the legislation. In addition, the buoyancy of the stock market provided access to equity capital for firms that might have found themselves in bankruptcy under other circumstances.

Although the pandemic confounded the typical pattern of rising bankruptcies during an economic crisis, in another respect the pandemic has proved true to form: It has provoked a populist backlash. During the 2007-2009 crisis, populist movements emerged on both ends of the political spectrum—the Tea Party on the right and Occupy Wall Street on the left—in each case, protesting bailouts of large financial institutions.

The current crisis has prompted another populist backlash, as can be seen in controversies that have arisen in the Purdue Pharma opioid bankruptcy and in the bankruptcy of USA Gymnastics after revelation of horrendous sexual abuse by former team doctor Larry Nassar. Unlike the Tea Party and Occupy Wall Street, the current outrage is directed at the bankruptcy process itself. There is a growing populist perception that Chapter 11—the bankruptcy provisions used to restructure financially distressed businesses—has become deeply unfair.  It benefits insiders—the “haves”—at the expense of outsiders—the “have nots.”

The closest analogy to the current populist backlash comes not from the most recent pre-pandemic crisis but much earlier, during the Great Depression.^[6] After emerging in the second half of the nineteenth century, the American approach to corporate reorganization (originally known as “equity receivership”) came to be dominated by large Wall Street banks such as J.P. Morgan and large Wall Street law firms such as Cravath, Swaine & Moore. The banks that had underwritten a class of bonds would offer to represent the investors who bought the bonds in negotiations with a financially distressed railroad or other business. In the 1930s, New Deal reformers such as William Douglas—a Yale law professor who became chairman of the Securities & Exchange Commission and later a Supreme Court Justice—concluded that the Wall Street banks and lawyers were profiting (through the fees they charged and by assuming positions of control) at the expense of the investors they purposed to represent. The reformers ripped control from Wall Street by persuading Congress to enact, and President Roosevelt to sign, the Chandler Act of 1938. The Chandler Act prohibited bankers or lawyers that had represented a company before bankruptcy from representing it after the bankruptcy filing, which meant the company’s underwriters could no longer run the reorganization process. Within a few years, Wall Street had disappeared from bankruptcy.

The pandemic has spurred a remarkably similar populist backlash. Even before the pandemic, concerns were growing about current developments in the restructuring of large corporations. Critics complained about companies’ ability to file for bankruptcy almost anywhere they want to (“forum shopping”), insider control of the restructuring process, the payment of bonuses to managers before and during bankruptcy, and the use of bankruptcy in cases like Purdue Pharma to resolve not only the obligations of the company itself but also of individuals or entities like the Sacklers who have not filed for bankruptcy themselves. During the pandemic, discontent with current bankruptcy practice has grown considerably.^[7] Lawmakers have introduced a spate of bills, each of which has been prompted by populist dissatisfaction with current Chapter 11 practice.

This report describes and comments on four practices that have prompted populist backlash. Several other controversial features of current practice that are not considered here are referenced in the footnote below.^[8]

BANKRUPTCY VENUE

The first and most longstanding magnet for populist outcry is a company’s choice of where to file its bankruptcy case—known as bankruptcy “venue.” Under the current filing rule a company can file for bankruptcy in any of the following locations: where its headquarters are; its principal assets are; it is domiciled; or an “affiliate” of the company has already filed for bankruptcy.^[9] Although this sounds like a limited set of options, in practice a company can file its bankruptcy case almost anywhere in the country due to the “affiliate” option. If a Pennsylvania company wished to file for bankruptcy in South Dakota, it could simply create a new, wholly owned entity in South Dakota and have the new entity file for bankruptcy in South Dakota. The Pennsylvania company could then file for bankruptcy in South Dakota since an “affiliate” is in bankruptcy there.

During the decade after the current bankruptcy code was enacted in 1970s, many large corporate debtors filed for bankruptcy in the Southern District of New York. Starting in 1990, Delaware joined New York as another popular filing location for large corporate debtors. The late 1990s saw the first serious challenge to this “forum shopping.” Critics complained that New York and Delaware judges lured companies to their districts by, among other things, allowing bankruptcy lawyers to charge high fees, quickly approving all of the debtor’s initial (“first day order”) requests, and by authorizing rapid sales of the debtors’ assets.^[10] They also complained that New York and Delaware were too inconvenient for employees and small creditors of companies whose operations were in other states, which it made it impossible for small parties to participate.

Venue reform was never enacted, but it continued to percolate, with support from both Democrats and Republicans. In recent years, several other locations have joined New York and Delaware as popular venues, including Richmond, Virginia and most recently the Southern District of Texas (Houston). The new twist in the controversy is that debtors in several of these locations can pick not just the district where they file but the particular judge.^[11] The Southern District of Texas has made this easy by committing to assign all large Chapter 11 cases to two judges in the district. In Southern District of New York, a debtor that files its bankruptcy case in White Plains was, until late last year, certain to get Judge Robert Drain, the only Southern District of New York judge sitting in White Plains.^[12] Purdue Pharma appears to have filed its case there for this reason.

Congress is currently considering legislation sponsored by Senators Cornyn (R-TX) and Warren (D-MA) that would ban venue shopping.^[13] Under the proposed legislation, large corporate debtors would generally be required to file for bankruptcy in the state where their headquarters or principal assets are.^[14] The reform would remove domicile—the state where a debtor is incorporated—as a venue option, and the debtor could only file for bankruptcy where an affiliate has filed if the affiliate owns a majority of the debtor’s stock—that is, if the affiliate is the parent corporation.

As often is the case with populist measures, the proposed legislation has beneficial features but also deeply problematic ones. Some of the forum shopping concerns are well taken.  Debtors should not be able to pick particular judges within a district and permitting a debtor to file anywhere an affiliate has filed is too easy to manipulate. But removing a debtor’s ability to file in its domicile would be seriously counterproductive. The loser here would be Delaware, where most large corporations are incorporated. Not only is the debtor’s state of domicile an obvious filing location for a large corporation, but substantial empirical evidence suggests that debtors that file for bankruptcy in Delaware file there because of the expertise of Delaware’s bankruptcy judges.^[15]

THIRD PARTY RELEASES

Another contentious practice is so-called “third party releases.” When a corporation completes a Chapter 11 reorganization, its prebankruptcy obligations are extinguished. The bankruptcy laws only contemplate that the corporate debtor’s obligations will be extinguished, however, not the obligations of other parties such as the directors or officers of the debtor or outside parties that were involved in wrongdoing by the debtor. In many cases, a corporate debtor asks the court to extinguish the obligations of some of these other parties, often in return for a payment by the third parties. In the Purdue Pharma case, the Sacklers agreed to pay roughly $4.5 billion in return for a court order extinguishing their potential liability related to the opioid crisis. When companies owned by private equity funds file for bankruptcy, the private equity sponsor often seeks this protection. Such a release is known as a third-party release.

Courts have struggled with the question of whether third party releases should be permitted. Except with corporate debtors that have asbestos liability, which are subject to a special rule,^[16] bankruptcy law does not speak to the question of whether third party releases are permissible. There are plausible arguments that they are constitutional and plausible arguments that they are not.^[17] Some courts allow them, while others do not. As a result, corporate debtors sometimes seek to file their case in a location where third-party releases are permitted.

The Sacklers’ efforts to obtain third party releases has triggered populist ire at their use. The bankruptcy judge approved the releases, although he required the debtor to reduce the scope of the releases. The district court subsequently reversed, concluding that the bankruptcy laws do not authorize third party releases.^[18] This decision has been appealed to the federal court of appeals.

As with bankruptcy venue, Congress is currently considering a dramatic intervention—legislation that would almost completely ban third party releases.^[19] Unlike with venue, there is a plausible argument for simply disallowing third party releases, even if they are legally permissible. The argument is that parties who have not themselves filed for bankruptcy should not be entitled to benefits of bankruptcy such as the extinguishing of debts. If the Sacklers or other third parties want this benefit, they need to file for bankruptcy.

The argument that third party releases should be permitted, at least on some occasions, is more pragmatic. Some argue that the treatment of nondebtors such as the Sacklers is so closely related to the debtor’s reorganization that the company’s financial distress cannot be resolved without also addressing potential claims against the nondebtors.^[20] Defenders of third party releases also contend that everyone, including victims, may be better off when a release is given in return for compensation by the third parties. The Sacklers have argued that if they were not given relief they would defend themselves vigorously outside of bankruptcy and victims would likely receive much less than the $4.5 billion the Sacklers have agreed to pay in the bankruptcy.

Rather than simply banning third party releases, a more nuanced response would be to insist that third parties seeking a release provide more transparency about their assets and ability to contribute.^[21] In a sense, they would be required to submit to some same rules about disclosure that would apply if they had filed for bankruptcy. Releases might also be limited to third parties that did in fact make a substantial contribution to the payment of victims or other creditors.

THE “TEXAS TWO-STEP”

A third controversial practice is moving assets from one entity to another—often creating a “good company” with plenty of assets and an asset poor “bad company”—and then subsequently putting one or both of the entities in bankruptcy. Private equity funds often conduct internal reorganizations that are alleged to have this effect after they acquire a company, as in the Chapter 11 cases of the Chicago Tribune and Caesar’s.^[22] More recently, financially distressed debtors have taken advantage of a Texas law that appears to bless these transactions.^[23] The most controversial current example is Johnson & Johnson. Johnson & Johnson created a separate entity for its talc line of business, which is subject to numerous lawsuits, and put the separate entity into bankruptcy. This strategy has become known as the “Texas Two-Step.”

These transactions also have spurred populist backlash, both because they seem to involve manipulation by insiders and because the manipulators often are private equity funds, a bête noire of many populists. The proposed legislation to ban third party releases mentioned earlier also would amend bankruptcy law to require dismissal of any case involving a divisional merger that “had the intent or foreseeable effect of … separating material assets from material liabilities … and … assigning all or a substantial portion of those liabilities to the debtor.”^[24]

As with the other issues, courts already have a more nuanced response available to them. When a company transfers assets from a “bad company” to a “good company” within its corporate structure and one or both later end up in bankruptcy, the transfer can be challenged as a “fraudulent conveyance” if the bad company did not receive adequate compensation for the assets it transferred. Fraudulent conveyance challenges were central to the Chicago Tribune and Caesar’s cases.

With a Texas Two-Step transaction, creditors also can challenge the bankruptcy case as having been filed in bad faith. If the transaction is abusive—if the bad company doesn’t have any real assets, for instance—the court can simply throw the case out.

LENDER CONTROL OF BANKRUPTCY OUTCOMES

Another controversial feature of current practice is lenders’ use of their financing agreement and related contracts to dictate the outcome of a Chapter 11 case. When Neiman Marcus filed for bankruptcy, it had signed a financing agreement with lenders to borrow $675 million, together with a so-called Restructuring Support Agreement that locked in a reorganization plan that required Neiman to transfer control to the lenders.^[25] Once the financing was approved, the case was over—no other outcome was possible.

If the market for providing financing to debtors in bankruptcy were competitive, lenders’ use of lending agreements to control the restructuring process might be less problematic. But the debtors’ current senior lenders have a monopoly, or nearly so, because other lenders fear that their loan will simply subsidize the senior lenders if the senior lenders have priority over the new lenders. Only if the court awards new lenders a “priming lien”—that is, priority over the current senior lenders—will new lenders offer to finance the debtor’s operations in bankruptcy.  Bankruptcy courts have the power to provide priming liens if the senior lenders will be “adequately protected,” but they have been reluctant to do so.^[26]

Although the monopoly of debtors’ current lenders has not yet gotten significant attention in policy circles, the issue is even more pervasive in practice. As with the issues discussed earlier, the problem does not require a legislative solution. Bankruptcy courts could facilitate competition by signaling a greater willingness to grant priming liens to new lenders and by declining to enforce contractual provisions that impede competition.^[27]

A BREAKING POINT?

Complaints about insider control of Chapter 11 were rising even before the recent pandemic. The pressure has steadily increased during the pandemic, due both to the pandemic and to the confluence of highly controversial bankruptcy filings by Purdue Pharma, USA Gymnastics, the Boy Scouts, and others.

The long-term implications of the populist backlash triggered by these developments may depend on how bankruptcy professionals and bankruptcy judges respond to this unrest. If courts address the legitimate concerns raised by bankruptcy populists, the credibility and effectiveness of Chapter 11 may be restored. The Johnson & Johnson and Purdue Sackler cases offer hints of such a trend. With the talc entity of Johnson & Johnson, a bankruptcy judge transferred the case from North Carolina to New Jersey after allegations of forum shopping, and a motion to dismiss the case as having been filed in bad faith is pending. In Purdue Pharma, a district court struck down the controversial Sackler releases.

If these problems continue to fester, the populist backlash may lead to sweeping bankruptcy reform. Such reform is unlikely to be carefully tailored to the problems that prompted it. It could even destroy traditional Chapter 11 practice, much as the Chandler Act of 1938 brought an end to the reorganization framework that presaged current Chapter 11.

Although the pandemic did not overwhelm the bankruptcy system as many expected, it did bring a spate of preexisting conditions to light.^[28] The lesson for bankruptcy insiders, the “haves” of the bankruptcy process, seems to be “Physician, heal thyself,” before it’s too late.

Let’s consider a basic timeline of events leading up to and following the housing bubble.

The United States saw a massive increase in mortgage fraud from 1997-2005. This contributed to the housing bubble that seemed to grow from approximately 2001 to 2005. In 2003, several actions were taken by the US government to make home ownership easier to accomplish for more Americans. In 2004, US home ownership peaked with an all time high of 69.2%. In 2005, we saw the bubble burst or, in other words, we saw the housing market correction in action. The booming housing market came to an abrupt halt in 2005. From the 4th quarter of 2005 to the first quarter of 2006, median housing prices nationwide dropped off 3.3%. As 2005 came to a close, 846,982 properties were in some stage of foreclosure and the market continued to experience substantial slow downs throughout 2006. Foreclosures were up 42% in 2006 in comparison to 2005, prices were down, there was an overwhelming inventory of housing, US Home Construction Index was down was down over 40% in comparison to the year before, etc. The problems created by the housing bubble bursting continued to escalate over the next several years with foreclosures hitting a peak in 2009 at 3,957,643. More than 2.21% of all households were in some stage of foreclosure in 2009. No one was living inside the housing bubble anymore.

This drastic halt to the real estate industry’s seemingly “healthy” housing market resulted in financial crisis for many Americans and American families. In a chain reaction that anyone could predict, the number of bankruptcy filings escalated right along with the number of families struggling not to lose their homes to foreclosure. Some experts suggest that the American public is recovering from their financial crises quickly in comparison to the housing market itself. The housing market will gradually correct itself, but the American public is actively taking steps to correct the situation. The immediate result of the housing bubble on Americans was financial panic in many households, but a few years after the fact, bankruptcy filings are at a much lower level. Some suggest that the American public is getting smart. They’re getting out of debt (with bankruptcy or other alternative methods) and cutting up their credit cards and socking away cash. They’ve learned the lesson handed down by the recent housing bubble correction and following recession.

Others point to the difficulty in obtaining new debt immediately following the burst of the housing bubble as the reason behind the decline in individual bankruptcy filings. If people don’t have debt, they don’t need to file for bankruptcy and for a few years, it was suddenly a lot harder to get approved for any type of loan. Whatever the reason, Americans seem to be getting back on track financially.

If you need help getting back on a healthy financial road, contact Firebaugh & Andrews for your free consultation 734-722-2999