How Long Does Bankruptcy Take?

On October 6, 2009, in Bankruptcy, by David C. Winton

Probably the most common question I am asked about the bankruptcy process is how long it takes to get through.  The short answer is 3 to 6 months, with the possibility of things staying open longer if there are assets to administer, or if anyone files a complaint to challenge dischargeability.  The very fastest you can get through it though is 3 months.

The case starts with the filing of the bankruptcy petition.  The date on which the petition is filed is referred to as the “petition date.”

Approximately 30 days thereafter, the trustee convenes what is called the “341 Meeting of Creditors.”  It is not a court appearance and there will not be a judge present.  However, the debtor MUST appear (both debtors if it’s a joint petition) and must respond to the trustee’s questions under oath.  While it is called the “meeting of creditors,” it is extremely rare for creditors to actually show up to a 341. Usually, it has been my experience that if creditors are going to show, the debtor and his lawyer usually know in advance.

30 days after the conclusion of the first meeting of creditors is the deadline for creditors or the trustee to file objections to the debtor’s claims of exemptions. Notice that I have italicized “conclusion.”  This is because some trustees will get clever and will try to trail the meeting of creditors–keep it open intentionally–in an effort to keep their ability to file objections open as long as possible.  This is something to remain aware of, through there may be little that can be done about it.

60 days after the commencement of the meeting of creditors is the deadline by which complaints to challenge dischargeability must be filed. This is the date by which any party in interest must file a complaint if they want to challenge the debtor’s right to a discharge.  The sorts of things that can trigger such events is beyond this post, but if this is going to happen, again, my experience is that the debtor and his lawyer see it coming. This is the sort of punch that is telegraphed way in advance.

After that date–which, if you’ve been counting, falls approximately 90 days after the petition is filed–the Court will issue the discharge. I’ve attached a redacted copy of a redacted generic discharge here so that you can see what it looks like.  Notice that it doesn’t list specific debts that are discharged; this is because the Bankruptcy Code is structured in such a way that, every debt that can be discharged is discharged, and if someone wants to challenge that discharge, they have the burden of proving that the debt falls outside the scope of discharged debts.

Again, the disclaimer: This is a basic case with basic deadlines, and in which no larger litigation is triggered. Things happen in legal proceedings, but if your case is relatively clean and there are not any substantial assets to administer, then you can expect to be in and out in 3 months or so, Not bad to get debt free.

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May 11, 2010 UPDATE since original post:   60 Minutes with Morley Safer did a piece on Strategic Defaults on May 9, 2010 that you may want to check out.

Following on the heels of my post the other day on the Option ARM perfect storm that’s brewing in the San Francisco Bay Area, the LA Times recently ran a piece on the growing phenomenon of“strategic defaults”, by which is meant the intentional defaulting on a mortgage loan by a borrower despite an ability and the wherewithal to make the payments. In other words, just walking away.

Why would someone do this? Simple: The debt far exceeds the value of the collateral by such a margin that continuing to make the payments can no longer be justified by sound economics or abstract moralizing, guilt, sense of duty or any other non-economic reasoning. In other words, the numbers just don’t crunch any more.

The Wall Street Journal Economic Insight Blog also recently ran a piece on the subject in June, called “When is it cheaper to walk away?” The answer, according to the writers of that piece is 10%. When the balance of the loan is more than 10 greater than the value of the property, economically, it makes more sense to just walk away rather than keep making the payments.

The WSJ articles was, in turn, based on a very thorough paper prepared jointly by the University of Chicago School of Business and Northwestern’s Kellogg School (under the auspices of the Financial Trust Index). The paper, called WHEN HOMEOWNERS WALK AWAY: NEW RESEARCH REVEALS MORE THAN 25 PERCENT OF MORTGAGE LOAN DEFAULTS ARE STRATEGIC” concludes about 25 percent of foreclosures are “strategic,” meaning intentional and driven by larger economic considerations than merely the borrowers’ ability to make the payments, and that…

Homeowners start to default at an increasing pace, and walk away massively after decreases of 15 percent and more. In fact, 17 percent of households would default, even if they can afford to pay their mortgage, when the equity shortfall reaches 50 percent of the value of the house.

As for “strategic bankruptcy,” this is just the next step after the “strategic default.” (I wrote about this last year in an only-partially tongue-in-cheek “Top 10” list for why bankruptcy is the “ultimate mortgage modification tool.” I won’t repeat myself here.)

What does all this mean? Well, for one thing, it means that what we’ve known all along is now starting to attract the attention of economists and journalists.

As for what it might mean for an individual or family? Probably not much frankly. It seems to be giving an academic gloss to what people tend to know at a gut level anyhow: That we’re not out of the woods yet, there are lots more foreclosures and bankruptcies to come, and the housing market probably has a few more bumps in the road awaiting it before things smooth out.

As to whether this data or these reports can help you or anyone you know as you wrestle with difficult decisions: whether to default, whether to file bankruptcy, what other options you have, it probably can’t. Everyone’s situation is unique. Just like everyone else’s as the old saying goes. But before you decide that you’re going to “strategically default,” or file a “strategic bankruptcy,” you should consult bankruptcy counsel. There are lots of moving parts, and the amount of your home loan and the value of your house are just two pieces or a much larger puzzle.

The San Francisco Chronicle is reporting that a recent study estimates that more than $30 billion in so-called “option ARM” resets in the Bay Area are due to hit the foreclosure stats next year.  (If the above link has expired, I have uploaded a reprint here.)  If you are one of the borrowers who fit into this difficult spot, you probably already know it. For those who don’t, here’s a brief primer.

An “Option ARM” is an adjustable rate mortgage that includes a feature which allows the borrower to decide whether he is going to pay just the interest or interest and principal.  There may be other flavors, variations or exotic trim packages, but that’s the basic idea: Borrower gets to choose the payment that they will make in any particular month. The problem with most of them is that they usually include a negative amortization (or “neg am”) risk, meaning that, if the borrower elects to make the minimum payments, the amount of the outstanding principal actually increases over time. So with housing prices declining and loan balances increasing, you have the perfect storm for a home loan disaster.  Whether it’s a whole new home loan disaster or just a continuation of the one we’re already in, well, I’m not sure that we need to slice it that thin.  In  short, more bad news coming.

The Chronicle article, written by Chronicle staffer Caroline Said, lays the problem out nicely, and does a good job of showing what’s on the horizon.  It’s not pretty.

To wit, the following frightening statistics:

  • Bay Area Mortgages written between 2004 and 2008 that have the Option ARM feature:  This varies by county, but the high is in Solano County, at 28.12%, and the low is in the San Francisco/Marin/Alameda/Contra Costa and San Mateo cluster at 19.52.  One fifth AT LEAST.
  • The percent of these loans that are either already in default or foreclosure, again varying by county, is a low of 27.23%, and a high of 36.91%
  • The average loan value across the 9-county range is $584,000, so we’re not talking studio condos. This is a problem that is going to hit the higher priced neighborhoods.
  • Total outstanding loan balance: $30.9 billion.
  • Borrowers who make the minimum payments? 94%  Eeek.  That is a scary number. And to my mind, it suggests that most of these properties are seriously under water and that the minimum-payment syndrome is a rent-paying strategy designed to buy time and make room for an unlikely “hail Mary option” to miraculously show up on the doorstep.
  • And the two most jarring stats: Average loan-to-value ratio at time of loan inception: 79%. Average now? 126%
  • 9-County figure of Option ARM borrowers who are delinquent now? 39.3%.

So what does all this mean? It’s pointless to try reading tea leaves with information like this, but it seems pretty clear that the Bay Area has a long way to go before our housing market is completely out of the woods. It’s very hard to believe that all of these loans are going to cure without some very painful side effects, like bankruptcies, foreclosures and other “rip cord” type solutions, hitting a higher income bracket than ever before. People who borrow a half-million dollars aren’t used to the word “bankruptcy” being in their day-to-day lexicon.

And what if you’re a homeowner who falls into this picture? Well, that’s beyond the scope of this little blog. But the question that presents itself is the same one that has been presenting to many, many other folks in the last couple of years: How underwater are you, and how long do you want to keep dumping good money after bad? To me, in most instances, the problem isn’t much more complicated than that.  The hard question isn’t what to do, it’s more a matter of when to do it and whether there are planning steps that can or should be considered.

There is no on-size-fits-all solution to this problem, and your strategy is going to have to depend on a very careful and detailed analysis of your total financial picture.

Do you need to see a lawyer? Maybe, but I wouldn’t start there. I’d start with an accountant and an appraiser to get the best picture of your exposure. The legal decisions after that are easy. In fact, the legal decision will probably be obvious once the true facts are known. What do you have? What do you owe? What do you want to do about it and are there any timing issues that need to be considered?