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Bankruptcy can be an aid or aggravation as filings increase

April 05, 2008|By ARNOLD S. PLATOU

WASHINGTON COUNTY -- It's hard to understand sometimes, this American system of forgiving debts.

"It's just aggravating," said Irvin Martin, president of an area electrical contracting business, who is having to walk away from a debt of more than $27,000 owed him.

Martin's company and many others across the nation are being left pretty much empty-handed as Americans in ever-increasing numbers file for bankruptcy protection from debts.

"My belief is, you make a bill, you pay it," Martin said.

But under U.S. bankruptcy laws, people who get way behind on their debts are given an opportunity for a fresh start.

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Either most of the assets a debtor has left are sold for the benefit of creditors, or he or she agrees to make debt payments to a bankruptcy court for three to five years. Then any remaining debt can be forgiven.

Is there any value to a system that saves people from debts owed to others?

"There's a ton of value," said Steven Greenfeld, who is among seven Maryland attorneys appointed by the U.S. Justice Department to act as a trustee on bankruptcy cases heard in Hagerstown.

Most of the debtors he sees are "not people who went crazy with credit cards," Greenfeld said.

Rather, they are like the Realtor seeking debt protection two weeks ago in Hagerstown who "had no income for seven months," Greenfeld said. "And, there are not many people who can pay interest on credit lines getting, like, 24 percent interest.

"And others, who owe ... $300,000, and if their house is sold on the steps of the courthouse for ... $200,000, they can't afford to pay the $100,000" still owed.

So the system gives a creditor the chance to meet with a debtor and a court trustee, said Greenfeld, who has been a trustee for 18 years.

And, "in a case where there are assets, the distribution becomes orderly so instead of the first creditor in line getting all ... every one might get 10 cents on the dollar or 20 cents on the dollar."

A complex process

Filing for bankruptcy involves a lot of paperwork. A list is needed of all your secured and unsecured debt -- a mortgage is "secured" by the existence of the house, whereas what you owe on your credit card usually has no such tie.

Other papers required include tax returns for the last two years, deeds, car titles and documents on any other loans. You and an attorney, if you hire one, must fill out bankruptcy forms, detailing your financial situation.

If, say, you've got a house you'd like to keep, you might be able to file for what is called Chapter 13 protection. You'll need to tell the court how you could repay the debts.

If you've got a house but are too far in debt to save it and/or are swamped with other debts, you may be able to file for Chapter 7 protection. Often referred to as "no-asset cases," these are ones where there's little of any value left.

To file under Chapter 7, your income "must be below the median income for a family of your size" in Maryland, Greenfeld said. If it's over, "then you must pass a means test to see if you have the ability to pay your creditors," he said.

And, before you file, you are required to take a court-approved credit counseling course. And, after your case is heard, you need to take a financial management course.

In Maryland, Chapter 13 cases are held in Greenbelt, Md., or Baltimore.

Anyone who is seeking Chapter 7 protection and who lives in southern or central Maryland or from Frederick County west must come to Hagerstown to meet with creditors and a bankruptcy court trustee.

Your creditors can file an objection but only if they're alleging you committed fraud by, for example, saying you earn $100,000 when in fact you only make $25,000.

If none objects within 60 days, the trustee can make the bill collectors go away -- on all but such debts as child support, alimony, student loans, intentional malicious injury, fraud and taxes, except in limited circumstances.

And, remember the old image of a debtor standing with only a barrel to hide his nakedness?

That isn't so anymore for people who are given bankruptcy protection, according to Hagerstown attorney Roger Schlossberg.

"The theory behind this is, the honest debtor gets a fresh start," said Schlossberg, who is a bankrutcy trustee at the court in Greenbelt.

The court allows each debtor to leave with roughly $11,000 in exempt equity. So, for example, you can keep a $20,000 car on which you owe $18,500 because "you're only using $1,500 of your available exemptions," he said.

Bankrupt more than once

For some people, once is not enough when it comes to bankruptcy protection.

Indeed, two of the 41 debtors who came to the bankruptcy meetings in Hagerstown two weeks ago, told the trustee this wasn't their first time. In the brief meetings, neither offered an explanation why.

Under the law, Greenfeld said, people are allowed to be given debt protection as often as every eight years. "Every time I sit, which is two times a month, there are several that have filed before," he said.

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