NOTICE: This paper is provided for informational purposes only. While every effort has been made to ensure accuracy, it cannot be relied upon as legal advice. Applicability of the legal principles discussed may differ substantially in individual situations, and you should consult with your legal advisor rather than assuming that the legal principals discussed will apply to you without exception or qualifications.

If you have fallen behind in paying bills, and it appears that you will not have the money to satisfy your creditors, you should take action rather than let the situation worsen.

Generally, there are two courses of action to consider: (1) you may try to obtain an agreement from all your creditors on a plan to repay your debts (this course of action is rarely successful unless the creditors are sophisticated and relatively few in number), or (2) you may, through a lawyer, request the help of the U.S. Bankruptcy Court, which may be able to order your creditors to accept what is available to pay their accounts and trouble you no more for any unpaid balances.

If your financial situation warrants, your creditors may agree to a voluntary repayment plan. A repayment plan spreads your obligations over time, which lowers your payments to match your expected income level. Your creditors eventually collect what they are owed, and you may be able to improve your credit record. However, attempting to work out a voluntary repayment plan with creditors can be costly in time, energy and money, and the advisability of continuing such an effort should be judged with a realistic assessment of the likelihood of actually reaching an agreement that you can keep and that will satisfy creditors' demands.

If some creditors will not agree to an informal plan and are threatening to proceed with collection efforts? such as obtaining judgments, filing liens, seizing property, and garnishing wages? then it may be time to consider filing a bankruptcy petition. This paper explains how the bankruptcy laws might help you.

To properly assess your need for bankruptcy protection, you should give your lawyer complete and detailed information about all your debts, assets, mortgages (or security interests in any assets), sources of income, contractual obligations (including leases and other rental agreements), existing and potential lawsuits by or against you, judgments, liens, and transfers of assets that you made in the last three months (or in the last year to "insiders", including family members, related artificial entities such as corporations and trusts, and close business associates).

If you and your lawyer conclude that you need the intervention of the U.S. Bankruptcy Court to protect you from your creditors, this same information can then be used to prepare a bankruptcy petition, and the accompanying lists, bankruptcy schedules, and statements that must be filed in a bankruptcy case.

When a bankruptcy petition is filed with the Bankruptcy Court, opening your bankruptcy case, you will receive the protection of an "automatic stay" under which all listed creditors will be prevented from further collection activities (except those specifically authorized to continue under the supervision of the Bankruptcy Court). The court will send notices to all creditors listed in the petition, ordering a halt to collection efforts against you, including most proceedings by non-governmental creditors (and some governmental units, such as most tax collectors) in State courts.

The court will also set a date for your "first meeting" with your creditors and any trustee serving in your case. At that meeting, creditors have an opportunity to question you about your property, debts, and other facts relating to the bankruptcy filing. Most creditors do not avail themselves of this opportunity, but secured creditors and creditors that are owed substantial amounts of money may. In most bankruptcy cases, a trustee appointed by an official of the United States Department of Justice will be present, and he or she can be expected to ask questions. A trustee has a duty to try to find property, that can be used to pay creditors.

Debtors are often tempted to try to protect assets from creditors by transferring them to someone else before filing the bankruptcy petition. Any such transfer could be a "fraudulent conveyance". Property transferred by fraudulent conveyance may be recovered by creditors or a bankruptcy trustee, from the person that received the property. A fraudulent conveyance is a transfer made without the receipt of equivalent value in return, or a transfer made with the intent to deceive or defraud creditors, or to hide property from them. Creditors or a trustee may recover such transfers made within a year before the bankruptcy filing, and, in some situations, even earlier? particularly in situations where the transfer has been kept from public knowledge or the knowledge of affected (usually secured) creditors.

Debtors may also try to favor certain creditors by paying them before the bankruptcy filing. The sort of payment is called a "preference". A preference is (generally speaking) a payment on account of a debt that is made within a limited period? usually ninety days prior to the filing for bankruptcy (but one year if an "insider" is involved)? that gives the creditor more then he or she would expect to receive if your property were liquidated in a Chapter 7 bankruptcy case. A bankruptcy trustee may recover the transferred assets from the recipients of "preferences".

Natural persons (people, as opposed to "artificial persons" such as corporations or partnerships) have a right to claim certain property as "exempt", that is, not available for liquidation to pay creditors' claims (unless the creditor has a legitimate "security interest" [mortgage] in the property, or is the government and has the right to collect taxes on or from the property). Texas residents can choose one of two statutory options for designating exempt property, and within each option certain important decisions can be made. It is usually important to designate exempt property with caution, to make sure that an individual or a family receives the benefit of the property that the Texas Legislature and the U.S. Congress has determined to be essential to an economic "fresh start", without making excessive claims that could lead to otherwise unnecessary property forfeiture or even (in extreme cases) criminal liability.

What may be designated as exempt property (by Texas residents) depends first on which of the two permissible exemption patterns are selected for the Debtor. Therefore, you should ask your lawyer to help you decide what property you should claim as exempt. For your guidance, below is a list of some assets that are usually exempt in most situations:

If done within appropriate limits, legitimate "pre-bankruptcy planning" is possible. However, the sheltering of assets in anticipation of bankruptcy is fraught with legal pitfalls, and should be undertaken only after careful analysis by a person that is familiar with the rules and practice of bankruptcy law.

There are two types of bankruptcy that most individuals can consider: (1) liquidation under "Chapter 7" of the Bankruptcy Code, and (2) a repayment plan under "Chapter 13". Corporations, partnerships and some individuals may consider a repayment plan under "Chapter 11", or liquidate under Chapter 7. Farmers or ranchers may use a repayment plan under "Chapter 12", in addition to Chapters 11 and 13, or they may liquidate under Chapter 7.

Under this type of bankruptcy, most types of debt will be discharged (unless the Debtor is a corporation), allowing a "fresh start". But this fresh start does not necessarily come easily to some debtors, and is not without exceptions.

Some of your assets might be liquidated because they are "nonexempt". A Chapter 7 Trustee appointed by the United States Trustee (an official of the U.S. Department of Justice) is responsible for the administration of your nonexempt property, and, with the authority of the court, may sell property that is nonexempt and that has value, and use the proceeds to pay your creditors. Property that is exempt under state or federal law may be retained by you.

After sorting out the effect of claimed exemptions, the trustee may arrange for liquidation of nonexempt assets. When property subject to secured debts (property that is mortgaged or otherwise has a valid lien on it) must be liquidated (because the property is nonexempt and the amount of the mortgage is less than the value of the property), the secured debt will be paid first from the sales proceeds of the mortgaged property.

After exemptions are taken into account and administration expenses and priority unsecured claims are paid (and after secured creditors have received the value of their collateral to the extent it is liquidated), unsecured creditors will receive the remaining proceeds proportionately. The portion of unsecured debts not fully paid will be discharged under an order from the Bankruptcy Court, except for non-dischargeable debts. Non-dischargeable debts include:

While Chapter 7 can clear away a mountain of debt, your fresh start is not completely fresh. The tarnished credit rating (that virtually everyone that files bankruptcy has, usually beginning long before filing a bankruptcy case) may not instantly improve, although for many people it does begin to improve within a matter of months after the case is filed. The filing of any bankruptcy case can be reported on your credit records for 10 years. For a period of time, you may find it difficult to obtain standard credit cards, mortgages, car loans, and personal credit lines. Prospective landlords may discover the bankruptcy-filing in a credit report. However, if you do not continue to have credit problems after the bankruptcy case is filed, your credit reputation will be rehabilitated fairly rapidly in most situations, certainly long before 10 years has passed and frequently within a matter of months.

If you are an individual with a sufficiently stable income and debts not higher than certain limits, you may be able to use a Chapter 13 repayment plan. This means making payments on some or all of your debts over a three-year period. The Bankruptcy Court may allow some debts to be repaid over a period of up to 5 years.

The court may also reduce the size of the debt to be paid. The unpaid amount may be discharged, except for:

In a Chapter 13 case, a proposed repayment plan is presented to a Chapter 13 Trustee appointed by the United States Trustee (an employee of the U.S. Department of Justice). If the plan is approved by the court as fair and equitable, unsecured creditors generally have no choice but to accept it.

After filing a Chapter 13 case, periodic (usually monthly) payments must be made to the Chapter 13 Trustee, as required by your plan or proposed plan. If the scheduled payments under the plan are not made, the case may be dismissed, or it may be "converted" to a Chapter 7 liquidation in some circumstances. In many cases, the court requires an "employer pay order" that requires an employer to wage-withhold and send the money directly to the Chapter 13 Trustee.

Farmers may take advantage of a repayment plan under more liberal rules than are generally available in Chapter 13. While Chapter 12 contains language similar to Chapter 13 in that the farm must have a sufficiently stable and regular income to use the repayment plan, it also states that an allowance will be made for income that is seasonal in nature.

For a financially troubled corporation or partnership (or an individual with substantial assets) that can no longer keep creditors at bay, the federal bankruptcy law can offer protection by providing additional time to satisfy debts from the continued operation of the business or from an orderly, non-fire-sale liquidation of assets. Under Chapter 11 of the Bankruptcy Code, a debtor may be able to reduce many debts, and then pay the remaining debts over a period of time, generally 3 to 5 years (but in many cases over a longer period).

During the Chapter 11 repayment period, a business may be allowed to continue operating under the control of the current owner. But if creditors can show unfit management or fraud, a trustee may be appointed to run the business.

For a successful reorganization under Chapter 11, a business must put together a feasible and good-faith business plan which shows that projected income over the repayment period will be adequate to cover its restructured debts. The plan must show that the creditors will receive more from the debt restructuring and extended payout than they would from the liquidation of the company. The debtor company's proposal may include deferred payments over the repayment period, exchange of some debt for equity, and outright reduction of certain debts.

The final restructuring of debt in a Chapter 11 case will usually depend upon reaching an agreement with creditors. Creditors will be allowed to vote on the approval of the plan. In the proposed plan, creditors must be divided into classes of similar claims. For the plan to be considered accepted by the creditors, it must be approved within each class of creditors by a majority of the number of those creditors actually voting and by two-thirds in amount owed. The bankruptcy court will then hold a hearing to determine if the plan should be approved. Under some circumstances, the bankruptcy court can approve a plan even if some (but not every) class of creditors rejects the plan.

Where a class of creditors has not accepted the plan, the court may force the plan on them (known in bankruptcy as a "cram down") if it considers the plan fair and equitable, and at least one class of creditors that is "impaired" (that is, getting less than the bargain that it originally made) has accepted the plan. Where a debtor cannot put together a successful plan of reorganization, or fails to satisfy a plan that has been approved, the alternative generally will be a liquidation, usually by a third-party trustee.

A company that foresees serious financial trouble should consult a lawyer about bankruptcy protection early, rather than waiting until business is wholly or partially disrupted.

The bankruptcy laws can help you or your business recover from financial difficulties. You or your company can obtain the most benefit from these laws if you consult your lawyer as soon as these difficulties appear, or are reasonably foreseen.

Barry Broughton is certified by the Texas Board of Legal Specialization as a specialist in Business Bankruptcy Law. Mr. Broughton graduated from the University of Texas School of Law in 1974, has been in private practice since 1975, and was certified as a bankruptcy specialist in 1989. He is admitted to practice before the State Courts of Texas, the United States Courts for the Western District of Texas, and the United States Court of Appeals for the Fifth Circuit. His practice emphasizes the representation of borrowers in financial distress, including debtors in bankruptcy cases.

and other expenses for a bankruptcy-case filer can be difficult to predict. Court filing fees are fixed, but they are a relatively small part of the expense of filing a bankruptcy case. Bankruptcy-case filing fees generally range from $194 to $839, depending on what sort of case is filed.

In Chapter 12 and 13 cases, the Trustee serving in the case is paid a percentage of the money that he or she collects.  This percentage can be as high as 10%, although it is frequently lower.

In Chapter 11 cases, fees must be paid quarterly to the Office of the United States Trustee (that has oversight responsibilities for Chapter 11 cases).  These fees are primarily based upon the amount of money that passes through the Debtor's hands, during the preceeding quarter.

Lawyer fees in this law firm are based on hourly charges for services rendered and on expenses, and not on fixed or contingency fees. Usually an advance of fees is required, although the bulk of the fees in Chapter 11, 12 and 13 cases is usually paid in the course of administering the case, over time.

In my experience, legal fees in Chapter 7 cases usually end up in the $750 to $2,500 range, unless a lawsuit (a "contested matter" or an "adversary proceeding") spins out of the bankruptcy case. A prediction of fees for defending a lawsuit is, in our experience, completely unrealistic, except by naming a range of fees that is so broad as to have little meaning.

A debtor in a Chapter 7 case usually does not have to hire other professionals (accountants, appraisers, investigators, etc.), to do anything that the debtor would not have to do anyway (such as prepare income tax returns).

Ultimate, "bottom line" lawyer fees in Chapter 13 cases are harder to predict because the Debtor will probably have a continuing need for legal services over the three-to-five year life of the case. It is our experience that most Chapter 13 debtors that do not operate their own businesses (and are not sued during the case) ultimately incur $2,000 to $3,000 in legal fees over the life of the case. For Chapter 13 debtors that are operating their own businesses (including people with irregular commission income), much more work is usually necessary in a Chapter 13 case, and the estimates of ultimate fees are usually much higher, in the $3,000-to-$5,000 range in most cases.

Chapter 13 debtors that are engaged in business sometimes have to hire accountants to help them report business results to the Chapter 13 Trustee. Accounting fees for these reports are usually relatively modest.

Chapter 12 professional expenses are usually estimated at the high end of what Chapter 13 expenses might be.

Chapter 11 professional expenses are almost always substantially higher than they would be in Chapters 7, 12 or 13. Lawyer fees are almost never lower than $5,000, and are usually much higher (mid-to-high 5-figure fees are not uncommon for "small" Chapter 11 cases) for the case that actually succeeds in reorganization. Chapter 11 debtors almost always have to hire accountants, and usually have to hire appraisers. In addition to tax returns and other sorts of reporting that a business would have to do whether or not it is a Chapter 11 debtor, Chapter 11 debtors frequently have to use accountants, appraisers and other professionals to help prepare what are, in effect, detailed business reports and plans for disclosure to third parties. "Reports" usually must be submitted monthly to the Office of the United States Trustee, and one or more "plans" are submitted to the Court and the entire creditor class, in an effort to exit Chapter 11 with success.  It is not unusual to see professional fees in a relatively small (successfully reorganized) Chapter 11 case reach the $20,000 to $50,000 level. Indeed,  professional fees are frequently a major hurdle in trying to reorganize in Chapter 11.

I am happy to discuss fees with my clients at any time. I attempt to keep my clients' out-of-pocket expenses, including my fees, as low as practical, consistent with my duties to provide the legal services necessary to preserve my clients' rights, and to help them meet their responsibilities to their creditors, the Court and the community at large.