In Roman times, when poverty was rampant and deadly, the legal system viewed insolvency not as a “circumstance” but as a crime. Creditors in pre-Christian Rome held great power over their debtors. For instance, a creditor could force the entire estate of a debtor to be sold to one person who would then pay a certain percentage of the debts to the other creditors.1

When such a sale took place, the debtor still owed whatever debts remained after the sale; he was still required to pay all his creditors or face other consequences. Since all of his belongings had been sold, he and his family were left with nothing to live on while the debtor attempted to earn enough money to pay the remaining debts. He could be reduced to starvation and be forced to borrow again. Nothing could release him from these debts short of payment, and if he did not pay them, then he could be exiled, imprisoned, enslaved or executed.2 At one time in Roman history, the debtor who was executed was cut into pieces and then the pieces divided up among his creditors.3 At a later time in Roman history the debtor was protected from physical abuse, but he was never discharged from his debts. He took them to his grave.4 He was never free of them.

All of these measures had one thing in common: they all placed the value of the debt far above the value of the debtor.
Under these Roman laws, the rich were given the power of life and death over the poor. It is, of course, easy to criticize the poor and to fault them for borrowing money that they could not repay. But many of the poor starved. What does one do when one must borrow or starve, or see his children starve? The honest poor man does exactly what the honest rich man would do if he had no money to buy food. He borrows; he does not steal.

The society in which such laws had sway was a society of great cruelty. It is ironic to reflect upon the fact that although such heavy consequences were inflicted for failure to repay, the consequences themselves must have often rendered it impossible for a debtor to repay. Imprisonment, destitution and corporal punishment do not serve to create any income to repay debts; it stifles life and eliminates income.

Middle Ages

The situation had not significantly changed by the time of the middle ages, which ushered in the infamous debtor’s prison in England where the debtor would remain in prison until someone else paid his debts for him.5 The debtor was effectively held hostage until his relatives or friends would pay his debts. If he had no relatives or friends, he would live in prison until the day he died. He would never be free of his debts. If he had left a wife and children outside the prison, they might be forced to borrow money in order to eat, and the cycle of debt for the family would begin again, except this time without a father.

What the system of laws like these actually accomplished, aside from providing for useless and corpulent misery for a debtor, was to make it practically impossible for the debtor to ever extricate himself from his debts. The laws were self-defeating. Since the laws often made it impossible for the debt to be repaid, everyone lost, the creditors, the debtors, and also the society, which lost what may have been a productive wage earner and taxpayer. Even if he could escape prison, once a man became a debtor, he could easily remain one for the rest of his life.

The Roots of the Discharge of Debt

The first known bankruptcy statute is found in the bible in Deuteronomy 15. Here we find God’s intention to ensure that everyone would, by operation of law, have a fresh financial start every 7 years and to ensure that from the very first indebtedness would not be a crime in Jewish culture. These two profound rules of law were intended to create a society that was fair, equitable and did not permit the mistreatment of the poor.

If we look toward these roots and legal structure of the Jewish society set forth in the Old Testament, we see a picture exactly the opposite from that of the remainder of the world. We see a society where loans were kept to a minimum by force of law, and gratuity and charity, by force of law, were kept to a maximum. To accomplish this end, God did not outlaw borrowing and lending, but instead He provided that loans would eventually become gifts, and thereby limited loans only to those in need. He permitted the loan to take place, and the consequent legal obligation to repay to arise, but He limited the legal obligation to repay to a maximum of only seven years. Every seventh year all lenders were to release their debtors from all their debts. Every seventh year, the debtors were discharged from all their loans and were no longer legally obligated to repay them. The debtor was free of all loans, and by force of law the creditor had made a gift:

“At the end of every seven years thou salt make a release. And this is the manner of the release: every creditor who lends ought unto his neighbor, shall release it; he shall not exact it of his neighbor, or of his brother, because it is called the Lord’s release.” Deut. 15:1,2.

This has approximately the same effect as a discharge in bankruptcy today:

“A discharge in a case under this title . . . operates as an injunction against the commencement or continuation or an action, the employment of process, or an act, to collect, recover or offset any such debt . . . ” 11 USC Sec. 524(a)((2).

To underscore God’s demands for munificence, the scripture also provides that when the potential creditor was asked to lend money to the poor, he was forbidden to consider the fact that his debtor might soon be released from his obligation to repay because the seventh year was approaching! Indeed, the creditor was chastened if he withheld his bounty from a poor debtor even if he knew that he would never get it back:

“Beware that there be not a thought in thy wicked heart, saying, The seventh year, the year of release, is at hand; and thine eye be evil against thy poor brother, and thou givest him naught; and he cry unto the Lord against thee, and it be sin unto thee.” Deut. 15:9.

The concept is repeated in the New Testament:

“Give to him that asketh thee, and from him that would borrow of thee turn not away.” Mt. 5:42.
Under God’s plan it was the creditor who was given the onerous commandment to lend and to give, not the debtor who was punished because he could not repay. There was a stark contrast between God’s approach and the early laws of the Romans and the English. The approach in the Bible was precisely the opposite of the world view prevailing at the time.

In the view of the world today, as well as at that time it is the debt, and the paying of it, which is of paramount importance. The debt is far more important than the debtor. Creditors are not in the least concerned with the hardship they cause to debtors when they collect, nor are they concerned with what the debtor must do in order to pay the debt. The debtor is irrelevant; it is the debt that is important.

In scripture it is exactly the opposite; in scripture, it is the debtor who is far more important than the debt. And it is forgiveness of debt and charity and giving that is stressed and required, not repayment. In scripture, the person is more important than the money.

Today, with the introduction of interest and interest upon interest, and then penalties for failure to timely pay the principle and the interest on the principle, and interest on the penalties, much of the world is effectively obtaining payment without lending. God on the other hand was requiring lending without repayment and the exacting of any interest from a fellow Israelite was solidly against Old Testament law.6

But the power of the moneyed interests was successful in suppressing these laws both in Jewish culture and in the Western cultures that rested upon the ethics and doctrines of the Old and the New Testament. And the concept of the discharge of debt lay dormant.

The Discharge of Debt in the West

It was in 1705 that a relatively young British Queen named Anne was to act upon her conscience and upon scripture rather than to yield to the dictates of the moneyed interests of Britian. She decided that year to put an end all debtors’ prisons in England. Of all of the wars and the tragedies, all the victories and the glory that Anne was part of, it was this relatively insignificant edict that has echoed through the centuries and found its way into every single country in the West.

the British bankruptcy statute of Queen Anne provided for an opportunity for a debtor in Britain to be released from his debts.7 It was probably the world’s first discharge in bankruptcy in bankruptcy since the statutes of Moses. The common ground between the bankruptcy statutes of Moses (Deut. 15) and that of Queen Anne and modern bankruptcy law is release from debt. The release from debt means that at one point in time, the debtor can become free of his debts even if he cannot pay them.

This benign concept forms the core of the belief that a person should, in this life, possess the legal and moral ability to start over, no matter how much he owes. In Deuteronomy 15 and Leviticus 25, God not only permitted the release of debt but He also made release from debt an obligatory and a continuously recurring phenomenon. The release of debt found in Deuteronomy and Leviticus carries generally the same result as the release of debt provided in modern bankruptcy laws. The release of debt in modern bankruptcy laws is called a “Discharge of debt.” In both cases it is a release and a discharge from debt.

There are other similarities between the laws of today and the biblical laws. For instance, under modern United States bankruptcy laws the debtor cannot obtain a release more often than once every eight years, 11 USC Sec. 727 (a) (8); Moses provided for seven years, Dt. 15:1. Modern bankruptcy law provides for a discharge of certain debts, but not all, 11 USC Sec. 523; the biblical bankruptcy was also limited, but in different areas, Dt. 15:2, Lv. 25. Today, after a bankruptcy has been filed and after a discharge is obtained, the debtor is protected from any legal process to collect his debts (11 USC Sec. 362, 524); the same was true for Old Testament debtors whose creditors could not “exact” their debts (Dt. 15:2, Lv. 25:17).

There are several significant differences between the Deuteronomy 15 release of debt and the release afforded by modern bankruptcy laws. One of the differences is that the Deuteronomy 15 release did not require the debtor to give up any of his assets before he was released, nor did it require him not to be able to repay. The Old Testament release did not require the debtor to be destitute or to surrender anything of value in order to obtain a release from debt. This is not the case with a bankruptcy proceeding in the United States today. In a modern bankruptcy, the debtor is required to relinquish all that he owns, except for necessities of life, in exchange for the release of his debts. Under the United States bankruptcy laws, the instant that the debtor files bankruptcy, the trustee in bankruptcy effectively owns all of the debtor’s possessions and the trustee is charged with selling them to pay the creditors.8 Of course, certain well defined assets of the debtor are exempt from this process; these are the assets which have been defined as being necessary for the debtor to continue with life.9

Honest Bankruptcy is both Ethical and Biblical

An honest bankruptcy obtained under the United States Bankruptcy Code is certainly not necessarily unrighteous in the sight of God. The bankruptcy proceeding in the bible was far easier to obtain than the bankruptcy of today. In the release of debts found in the Bible there was no requirement that any assets be sold to pay creditors. There is such a requirement in current bankruptcy laws. In the biblical bankruptcy there was no requirement for any type of administrative or court proceeding, as there is with current bankruptcy laws. There were no lawyers, no fees, no judges or trustees; but instead, by pure fiat of law, at a particular time there was simply a blanket discharge of all loans, no matter how much property a debtor had. Therefore, within the scope of its application, the bankruptcy process in Deuteronomy and Leviticus was far more liberal and debtor oriented than the one provided for in the United States Bankruptcy Code.

It is righteous to forgive, and God’s grace and His demand for forgiveness does not expand to the point of reaching the dollar and then stop there. The principle of God’s forgiveness includes forgiveness of debt (Dt. 15:1,2; Luke 16:1-13), the forgiveness of lawsuits (1 Cor. 6:7, “Why not rather be defrauded?”), and the unlimited forgiveness of all wrongs (Mt. 18:21,22).

If God saw nothing unrighteous with a very debtor-oriented release in the Old Testament, it is difficult to believe that He would consider a more conservative and more difficult release of debt to be unrighteous under today’s laws. God invented the discharge of debts. God is a God of forgiveness and he wants His people to be forgiving people, and this includes financial forgiveness as well as moral forgiveness (Luke 16:1-13). A legal bankruptcy of today can therefore be fully in accord with scripture.

A Comparison with Scripture

There is no limit to the forgiveness that God offers through His Son Jesus Christ who paid for the sin of the world on the cross (Jn. 1:29; Rom. 5:8). We are called to be like Him (Jn. 17:23; Mt. 5:48) and to trust what He accomplished on the cross so that we may be saved. After a release from debt takes place, it is possible, even for a debtor with insurmountable debts, to owe nothing to anyone (Rom. 13:8) and to be at peace with God.

In one area, the bankruptcy in Deuteronomy was more limited than modern bankruptcy. In the Old Testament law, not all debts were released. It depended upon how the debts arose. The release of debt in Deuteronomy 15 was addressed to “the creditor who lends anything…” Thus, the Old Testament bankruptcy laws applied to debts that arose from the lending of something, and not necessarily to debts that arose for other reasons. For example, the Deuteronomy passage makes no provision for the release of debts that were owed for wages. In the Old Testament, a wage owed by an employer to an employee was probably a nondischargeable debt; wages were not even to be kept by the employer overnight and the failure to pay wages is likened to robbery (Lev. 19:13). See also Mal. 3:5, James 5:4. Thus, although today’s bankruptcy laws may permit the discharge of debts owed for wages, scripture would probably see the discharge of those debts as unrighteous. Another example might be a debt incurred by fraud, even if it was a loan. See Psalm 37:16, 21.

Of course, the bankruptcy of the Old Testament, or, more accurately, the discharge of the Old Testament, was written for the agrarian society of Old Testament times and not for the modern world’s system of commerce. In order to approximate the provisions of the Bible in today’s world, issues that did not exist in Old Testament times must be addressed and they must be addressed in the form of modern statutory law. But that statutory law should follow the underlying principles of honor and righteousness and truth and charity as we find throughout the scriptures.

Bankruptcy is a Calculated Risk for Lenders

The Old Testament lenders were certainly well aware of the law that limited their right to collect. This is clearly indicated in Deuteronomy 15:9. The same is true today.

One has only to read a mortgage or a lien used by any bank or professional lender to understand how deeply concerned creditors are of collecting what is owed to them. Banks are extremely careful to protect their security. The risk of bankruptcies being filed by borrowers is clearly anticipated by lenders and understood as a calculated expense of business. Banks and other commercial creditors lend money and extend credit with the express purpose of making more money. They are willing to lend money because they gain more money off of interest than they lose to insolvencies and bankruptcies. They lend money to make money. The success of the borrower’s enterprise or the borrower’s income is a calculated risk that the bank takes when it advances a business or a personal loan. The bank will make money if the enterprise succeeds and the loan is paid back, and the bank will lose if the enterprise doesn’t succeed or the loan is not paid back.

Therefore, when the bank makes a loan it makes an investment. To ensure that it does not lose its investment, the bank may take a larger ownership in the borrower’s enterprise than the borrower himself. This is normally taken in the form of a lien or a mortgage against the borrower’s property. Some security devices of banks give them their share of the profits and none of the risks – other than bankruptcy.

Since the loan that the bank makes is an investment for the bank as well as for the borrower and both the bank and the borrower are, or should be, well aware of the intrinsic risks. The bank and the borrower are, in a sense, united in a joint effort for the purpose of profit for both. In one sense, where there is a business loan, the bank almost becomes the unofficial “partner” of the borrower.

The same is true for the bank or credit card company that lends money or extends credit for consumer purchases rather than business purposes. These lenders are lending money and extending credit for the purpose of making as much money as possible and they are doing it with the understanding that some of the people who borrow from them will go bankrupt. They take the calculated risk that most borrowers will be able to pay back what they have borrowed. In one sense, they are “partners” with the borrowers and they are relying on the hope that most borrowers will be able to manage their affairs and income and pay back the lender much more money than the lender has lent out.
These “partnerships” rise and fall together. If one such “partnership” happens to fall, there is no biblical reason for the borrower in that partnership to isolate all the loss to him and to fail to apportion the lender’s loss to the lender in accordance with applicable bankruptcy law. In fact, by the time bankruptcy is considered the lender has probably already absorbed the loss by writing off the loan.

Therefore, unless there is a specific biblical provision to the contrary, utilization of today’s bankruptcy statutes is neither unexpected nor unscriptural nor necessarily unwise. Except where there is a biblical provision to the contrary, the United States Bankruptcy Code provides a breadth of application that permits a bankruptcy in accordance with scriptural principles.

Money Management

The Old Testament lending laws not only show us God’s principles that should underlie all debtor-creditor relations, but they also demonstrate righteous principles that should govern money management.

It is obvious that a society that released all loans every seven years was a society where few loans were made. And when
consumer loans were made, they were made only under the most compelling of circumstances or else they were made to borrowers who were very trustworthy and able to pay back their loans.
It is true that Deuteronomy 15:7-9 required the lender not to even consider the upcoming year of release and to lend to the poor even though he knew that the debt would soon be released. But this applied only to borrowers who were poor and in true need of help.10 It did not apply to borrowers who were not really in need.11 Lenders were not required to lend to people who did not need it. Therefore, the lenders of the Old Testament were probably very careful to determine if a prospective borrower was really in need before considering themselves bound under the Law of Moses to make a loan that would eventually become a gift. The effect of these laws was to require the motivation for consumer lending to be charity rather than profit. By the utilization of the year of release and the command against exacting interest12, God structured the law of Israel in such a way that living on credit was practically impossible to those who did not need it to survive; and to those who needed it, it became charity.
God’s provision for the protection of the creditors whose debts were released was not to permanently hold the debtor to the debt, but to make the risk of lending abundantly clear to the lenders, so the lenders would be fully aware of the risks that they were undertaking.

Precisely the same is true today. Every commercial and consumer lender knows of the risk of bankruptcy. The major difference between the Old Testament lending and to day’s methods is that today the release from debt is not automatic and there are no laws to prevent the charging of interest. The result is that massive profits can be generated by the use of eighteen and twenty percent interest rates in consumer credit transactions. These profits override the risk of bankruptcy and those who pay back their loans at these interest rates are in effect not only paying back their own loans but also the loans of the bankrupt borrowers as well – and a large profit to the usurious lenders.
Since the scripture is clear that God’s original idea was to curtail lending, and especially consumer lending, it follows that His original idea was also to curtail borrowing. This fact speaks volumes to today’s consumer credit lifestyles. From the scriptures it is clear that God never meant us to live on other people’s money, but to live on our own. Consumer borrowing as a way of life and consumer lending as a business have no basis in scripture. Living on credit cards and time payment plans and long easy terms are devices that were never intended to exist for the chosen people in biblical times. And these devices are a snare today. When misused, they are nothing more that the means of producing an illusion of wealth, a fiction, a belief that one can own or does own those things which, in reality, he does not really own and cannot obtain. Consumer borrowing is the ultimate in financial temptation: wealth without money. It is appearance without reality: it is a demon in the garb of an angel.

A Legitimate Purpose for Borrowing

Although interest and lending for profit was generally not permitted in Israel, what was permitted was for Israel to extend commercial credit at interest to the gentiles and heathen.13 It is foundational in Old Testament scripture that Israel should prevail over the gentiles and the heathen nations.14 One of the ways that Israel was to prevail over the gentiles was through commercial and consumer lending at interest by Israel to the gentile people and nations. In Deuteronomy 28, God set before the people of Israel blessings and curses. One of the blessings that were offered was that God would bless the labor of Israel so that Israel should lend to the Gentiles and not borrow from them. By doing so, Israel would be the “head and not the tail” and “above only and not beneath.”15

On the other hand, if Israel did not obey the commandments of God, they would suffer severe curses, one of which was to be the opposite of the blessing. The stranger in the land would lend and the children of Israel would borrow; the stranger would become “very high” and the children of Israel “very low”; the stranger would become the “head” and the children of Israel the “tail.”16 The curse of God was to make His people borrowers. This is one of God’s purposes for borrowing; it is His curse. But from the perspective of the money lender, the other purpose of borrowing was charity.

It is through lending at interest that one can gain domination over another: the borrower becomes the lender’s slave:

“. . . the borrower is servant of the lender.” Prov. 22:7
One of Gods purposes in the release of debt was to provide an escape from the civil bondage of debt and to provide freedom and a new start.

Bankruptcy and the New Testament Message

There is a striking resemblance between a discharge of debt in bankruptcy and a discharge of sin by Christ. When Jesus Christ was crucified on the cross, He died for the sins of the world. That means that when He died he paid the penalty for all sin. You and everyone else must ultimately make a choice. You must choose whether you will let Christ’s death pay for your sins or not. The trouble with choosing to let Christ’s death pay for your sins is that by making that choice you admit that you have sinned and that you need forgiveness. For some people, this is not so easy because pride gets in the way. However, once pride is ignored and the need is admitted, you make a conscious decision to trust in what Christ has done on the cross for the forgiveness of your sins. This is when you become a Christian. When this happens, you no longer have to pay for your sins. Instead, you have appropriated the payment made by Jesus Christ rather than trying to make your own payment. Your sins have been discharged and you have been spiritually healed.

This is called salvation. The meaning of the biblical word for salvation is “healing.” It comes from the word for salve, which is a healing ointment. Salvation is an experience, not simply a belief.

When you file a bankruptcy, you must come to a point where you must finally admit that you cannot pay your debts. For some people, this is not easy, because pride gets in the way. However, once pride is ignored and the need is admitted, you make a conscious decision to file bankruptcy and publicly admit how much you really owe and admit that you can’t pay it. Once this is done and your bankruptcy is finished, then it is as if all of your debts (all of your dischargeable debts) have been paid and you are free to begin again. This too can be very healing.

It is for this reason that we believe in what we do here, and we believe that an honest bankruptcy based upon honest needs is all right with God. After all, He invented it.

Conclusion

A bankruptcy is an effective means to deliver a debtor from the servitude of impossible debt and to break the cycle of borrowing. It will not, however, cure the debtor of the habit of living on borrowed money. Only the debtor himself can deliver the permanent cure. Bankruptcy, especially if it occurs because of consumer borrowing, is something that should happen no more than once in a lifetime, if then. It should be a means to change and to adjust one’s self to a way of life based upon the reality of ownership rather than the fiction of borrowing. It should be used in conjunction with a change of direction. A bankruptcy should be the beginning of something and the end of something. It should be the end of an overwhelming debt burden and the beginning of a new way of life.

Footnotes

1 Alexander L. Paskay, Trustees and Receivers in Bankruptcy, Matthew Bender (1968), p. 3; Dalhuisen, J.H., Compositions in Bankruptcy, Sijthoff-Leyden (1968), p. 6; Dalhuisin, J., Roman Law of Creditors Remedies, in ABA Section of International Law, European Bankruptcy Laws, 4-5 (1974).
2 Alexander L. Paskay, Trustees and Receivers in Bankruptcy, Matthew Bender (1968), p. 3; Dalhuisin, J., Roman Law of Creditors Remedies, in ABA Section of International Law, European Bankruptcy Laws, p. 3 (1974)
3 Id.; Nadler, The Humaneness of the Bankruptcy Law, 60 Com.L.J. 149 (1955)
4 Id.; Code of Justinian, Dig. 2, 4, 25, 48, 19, 1 Nov. 4, 3.
5 Paskay, Alexander L., Trustees and Receivers in Bankruptcy, Matthew Bender 1968; 11 Edward 1 (1283)
6 Dt. “Unto thy brother, thou shalt not lend upon usury.” Dt. 23:20.
7 Id.; Anne, Chapter 17.
8 11 USC Sec. 541, 363
9 11 USC Sec. 522
10 “If there be among ou a poor man of one of thy bretheren . . . thou shalt open thy hand wide unto him . . . beware that there be not a thought in thy wicked heart, saying, The seventh year, the year of release, is at hand; and thine eye be evil against thy brother and thou givest
him nothing; and he cry out unto the Lord against thee and it be sin unto thee.” Dt. 15:7-9.
11 Additionally, Leviticus 25:35-37 required loans without interest to thouse in need.
12 “Unto a stranger thou mayest lend upon usury, but unto thy brother thou shalt not lend upon usury, that the Lord thy God may bless thee in all that thou settest thine hand to do in the land to which thou goest to posssess it.” Dt. 23:20.
13 “Unto a stranger thou mayest lend upon usury, but unto thy brother thou shalt not lend upon usury . . .” Dt. 23:20.
14 “And it shall come to pass, if thou shalt harken diligently unto the voice of the Lord thy God, to observe and to do all his commandments which I command thee this day, that the Lord thy God will set thee on high above all nations of the earth.” Dt. 28:1.
15 “The Lord shall open unto thee his good treasure, the heavens to give the rain unto thy land, in its season, and to bless all the work of thine hand; and thou shalt lend unto many nations, and thou shalt not borrow. And the Lord shall make thee the head, and not the tail; and thou shalt be above only, and thou shalt not be beneath, if thou hearken unto the dommqndments of the Lord thy God, which I command thee this day, to observe and to do them.” Dt. 28:12,13.
16 “But it shall come to pass that if thou shall not harken to the voice of the Lord thy God, to observe and to do all his commandments . . . the stranger who is within thee shall get up above thee very high, and thou shalt come down very low. He shall lend to thee, and thou shalt not lend to him; he shall be the head, and thou shalt be the tail.” Dt. 28:15,43,44.

Charles Chesnutt, Dallas Bankruptcy Attorney

Sometimes it is not at all obvious when a bankruptcy is urgent. Certainly, bankruptcy is urgent if it must be filed to stop a foreclosure or to stop a lawsuit. But there are other urgencies that are far less evident. For instance:

Divorce. Are you engaged in a divorce? A bankruptcy filed before the divorce by one party may significantly impact the division of the community property. The way the divorce decree is composed could effect a future bankruptcy.

Phantom gains. Are you threatened with a foreclosure of property that is “upside down?” If you own (or if a subchapter S corporation or partnership that you have an interest in owns) property that has a value that is significantly more than its tax basis and that property is posted for foreclosure, then a bankruptcy may be urgent. Why? Because the foreclosure could create what is known as phantom gain and result you being taxed for the difference between the tax basis and the foreclosure sale price (which is often the total amount of the note plus attorney fees). This is called a phantom gain because you end up with the gain – and the tax – but no income from the sale to pay the tax. Phantom gains are non-dischargeable in a bankruptcy filed within in three years of the due date of the taxes for the year in which the gain was incurred. HOWEVER, a bankruptcy filed before the foreclosure can completely avoid phantom gain. It is for this reason that a bankruptcy filed before a foreclosure may be very urgent.

Federal tax lien. If the IRS about to file a federal tax lien against your house, then a bankruptcy may very be urgent. Why? Because a federal tax lien immediately removes equity from your home and you can stop prevent this by filing a bankruptcy before IRS files their lien. If those taxes are dischargeable in a bankruptcy (and sometimes they are), then you could save your house and discharge your taxes by filing a bankruptcy before IRS files their lien. If the taxes are not dischargeable, then you can file a reorganization type bankruptcy and pay out the taxes without interest and penalty.

Employment taxes and sales taxes. If your business is falling behind in employment taxes or sales taxes, a bankruptcy may be urgent. Why? Because these taxes are forever nondischargeable in bankruptcy and if you are defaulting on them, you are already in too deep. Now is the time to consider a bankruptcy. Delinquent employment tax is a clear indication that it is time to consider bankruptcy protection.

Exempt property. If you are using exempt property (401(k) funds, IRAs, retirement funds or home equity) to prop up your business, or to pay credit cards, then stop right now and reconsider what you are doing. You are throwing away your future – as well as what may be the only thing that will enable you to start a new business because you are giving away exempt assets – assets that the credit card companies never expected to get and assets that cannot be lost in a bankruptcy. If you are using exempt personal assets to prop up a business, it is foolhardy not to find out where you really stand and whether a bankruptcy proceeding could save those assets as well as your business.

Release of debt. If someone is just about to release you from a significant amount of debt, then a bankruptcy may be urgent. Why? Because release of debt outside of bankruptcy can create tax problems for you. The amount that is released can be considered taxable income. That same debt discharged in bankruptcy is tax free.

Contractors. Are you a contractor? Are you using money from one job to pay the expenses of another and not paying your suppliers or subs? In Texas, this is a crime. Bankruptcy may or may not be an option, but your situation is urgent.

Lawsuit alleging fraud. If someone sued you and alleged that you have committed fraud, then your bankruptcy may be urgent. Why? Because if you permit him to get a judgment for fraud, then you may have thrown away your opportunity to discharge the debt – even if there was no fraud involved at all. The bankruptcy court may have to take that judgment for fraud at face value. And just because you did not hire a lawyer or defend it may make no difference at all.

Ex-spouse bankruptcy. Has your ex-spouse filed a bankruptcy? Does he (or she) owe you money? Is there alimony or a community property division? Are you nearing the 60th day after the First Meeting of Creditors in the bankruptcy? If so, then you need to speak to a bankruptcy lawyer quickly. Why? Because after the 60th day passes you lose all rights to contest the discharge of any debt other than alimony, child support and other debt created by the divorce decree or community property separation (alimony, child support and other debt created by the family court is automatically non-dischargeable).

Tax basis too low. If you have property that you can’t sell because it has been depreciated too much, then bankruptcy can be useful in avoiding those taxes. How? By shifting the gain to the bankruptcy estate. How can this be done without triggering a gain? Bankruptcy causes all assets of the debtor to transfer into the bankruptcy estate. That transfer is not a taxable transfer.

Marriage cracking under debt stress? You can spend your life and your family and your future fighting an impossible debt burden hoping that somehow it will all get paid. But only one thing can really make the debt disappear and make you free again. Heavy stress on marriage is commonplace.

Feel guilty about bankruptcy? Consider this. The same Congress that passed the laws that make you vulnerable to creditors also wrote the Bankruptcy Code. Both of them apply. The laws of this country provide for both ends of the spectrum. There is a limit to what they can do to you.

Still feel guilty? Does God disapprove of those who file bankruptcy? Probably not, because God invented bankruptcy. See Deuteronomy 15 and look at our page on ethics and bankruptcy. No one, not even God, disapproves of a honest debtor who avails himself of his legal remedy to remove himself from an impossible burden of debt.

Judgments. Does someone have a judgment against you? If so, then a bankruptcy may well be urgent. Why? Because someone with a judgment can seize your bank account and other non-exempt property.

Charles Chesnutt

There are significant risks associated with not filing a bankruptcy when a bankruptcy is needed. Some of these risks are:

Income. Someone who is between jobs or with a low income may be in the best position to file a bankruptcy. Because if he waits until his income increases, he may not qualify for a Chapter 7 discharge. This is especially true for the tech sector and other high paying areas. Once the high paying job is secured, the chances of qualifying are greatly diminished.

Urgencies. Sometimes the filing of a bankruptcy by be urgent. But quite often the debtor does not recognize the urgency because he not familiar with bankruptcy law. You may wish to see our discussion relating to URGENCIES The failure to file a bankruptcy when an bankruptcy is necessary or urgent will result in the relinquishing of significant rights and financial advantages.

Judgments. Anyone who has a judgment against you can take your money right out of your bank account without your permission and engage in other equally disappealing collection procedures. A bankruptcy can prevent this.

Business bankruptcies. A bankruptcy can save a business – or provide the basis to begin a new one. But you must leave yourself both time and assets to fund a reorganization.

Tax problems. Talk to your CPA about the effect of write-offs and settlements outside of bankruptcy. If a credit card company or any other creditor decides not to sue you to collect, then it writes off the debt and takes a deduction on its taxes. When it writes off the debt, it sends notice of that write-off to the IRS. Under certain circumstances the IRS will require you to treat that write-off as income and pay tax on it (see Section 108, Internal Revenue Code). The same is true for settlements and for debts that can no longer be collected because a time period has run. The tax on that income is non-dischargeable in bankruptcy for at least three more years. A debtor who anticipates this and files a bankruptcy before the write-off erases the debt in bankruptcy and avoids both the debt and the tax. Debt discharged in bankruptcy cannot be treated as income under any circumstances.

IRS federal tax lien and garnishments. A federal tax lien effectively removes all of the equity in your homestead to the extent of the outstanding taxes, penalties and interest. A bankruptcy can prevent this.

Consumer Credit methods. If you can pay your debts within a reasonable time and with reasonable effort, you should do so and not file a bankruptcy. However, if the reality is that you cannot, but you engage a consumer credit organization to consolidate your bills anyway and you later default, then all you have paid to the consumer credit organization will be essentially lost. It is not wrong to file a bankruptcy if you need to do so. See our discussion relating to the ETHICS of filing a bankruptcy.

Credit rehabilitation. Contrary to popular belief, bankruptcy is not the end if your credit, but the beginning of it. If you are at the point of filing bankruptcy, then your credit is already at its end or will be quite soon. Bankruptcy is not the end of credit but the end of debt, and the beginning of the process of rebuilding your credit. Consider where you will be financially in two years. Suppose you file a bankruptcy and discharge your debt today, and then use the bankruptcy discharge to live debt free for two years. What will your credit be like in two years? It will be largely rehabilitated. But what will your credit be like in two years if you do not obtain a discharge of debt?

Suppose in two years you speak to a banker about a loan and he asks about your financial condition. Is it better to say that you never filed a bankruptcy but you still owe a large amount of money and have been named in several lawsuits, or is it better to say that you filed a bankruptcy two years ago and since that time you have lived totally without debt?

Suppose in two years you speak to a banker about a loan and he asks about your financial condition. Is it better to say that you never filed a bankruptcy but you still owe a large amount of money and have been named in several lawsuits, or is it better to say that you filed a bankruptcy two years ago and since that time you have lived totally without debt?

Foreclosures. Foreclosures of non-homestead property can produce drastic tax problems that can be avoided in a bankruptcy.

Patient creditors. Patient creditors with judgments can be dangerous. They often wait until you are on your feet again and then they will collect by taking your money right out of your account. And if you have a significant income by that time, you may not be able to obtain a Chapter 7 discharge even if you do file.

Charles Chesnutt, Dallas 2009

The benefits. The benefits of a successful bankruptcy are unequalled and can be obtained nowhere else. However, bankruptcy is not without its perils and the filing of a bankruptcy could be an irreversible decision. The goal is to identify and evaluate each of these risks and do it right the first time. If one does not do it right the first time, there may not be a second time.

Not all bankruptcies are risky. But for the ones that are, with full disclosure to bankruptcy counsel, the dangerous areas can normally be identified and avoided. Some of them we have seen:

Urgencies. The very first and most dangerous risk is not to know when a bankruptcy filing is urgent. Bankruptcy immediately alters the laws that govern the debtors, creditors and taxing authorities. Knowing when to file a bankruptcy – and when not to – is absolutely essential. Sometimes filing a bankruptcy very urgent.

Transfers. A transfer is selling or moving an asset into someone else’s name or otherwise putting it out of the reach of creditors. Practically any transfer is legal, but no significant transfer is without some impact on a future bankruptcy. Some transfers can render the filing of a bankruptcy to be a crime, or otherwise ruin ones chances for a bankruptcy discharge of debt. Transfers can be quite risky.

Tax impact. Although a bankruptcy discharge is not a taxable event, it is not without its taxable effects. This must be taken into account and firmly established before filing, so there is no doubt about the effect on taxes.

Chapter 11 perils. The two classic exposures for the Chapter 11 debtor are 1) loss of the business due to a conversion to a Chapter 7 because debtor has too little assets to finance a plan of reorganization, and 2) the (far less likely) loss of the business because the debtor has too much assets, so creditors file competing plans and take the business.

Irreversibility. The filing of a bankruptcy alters practically all of the civil laws that govern debtors, creditors and collections. To predict its impact, one must take into account all of those laws because the filing of a bankruptcy may be irreversible. One must be certain of what will happen before the case is filed.

Loss of assets. The instant that a debtor in Dallas or Plano (or anywhere) files a bankruptcy he or she transfers ownership of all of his assets to a trustee in bankruptcy. Later his exempt assets return in ownership to him. The debtor must make certain that he knows what will be lost and what will not be lost before he files. There are legal and effective ways to preserve assets, and there are illegal ways and ineffective ways to preserve assets. The latter can result in not only loss of assets but also result in criminal prosecution. Sometimes the law is just not clear about which is which. One must carefully review these issues to be able to tell the difference in advance.

Crimes. Concealment of assets and failure to make full disclosures are federal crimes.

Filing time. The filing time of a bankruptcy can have a vast impact. This must be anticipated before the case is filed.

Which Bankruptcy? It is often difficult to determine which bankruptcy proceeding is best. And once the case has been filed, switching from one type of bankruptcy to another can have adverse consequences.

Hidden creditors. Many people have creditors that they are not aware of. Creditors who don’t receive proper notice will not be discharged. Bankruptcy preparation should include some method to search for hidden creditors.

Lawsuits against family members and other creditors. Did you repay a family member a significant amount of money within a year of filing your bankruptcy? If the debt to the family member was past due, you may have to wait a year from the time of payment to file. Otherwise the family member may have to give it to the bankruptcy trustee.>

Loss of credit. Although the loss of credit is far less than some would have the debtor believe, bankruptcy will definitely injure credit. But the reality is that when it is impossible to pay all of ones debts, bad credit is inevitable. However, it is often worse when someone who should file does not. Good credit will ultimately return to the person who really needs to file bankruptcy, and gets a discharge of debt. That person has a fresh start, without debt, and he is then free to rebuild not only credit but financial security.

Bankruptcy is a very specialized field of law. It is the only area of the law that has its own courts, its own judges, its own procedure and its own laws. All of these exist just for bankruptcy. Bankruptcy can be immensely beneficial under the right circumstances, but it is not for everyone.

Charles Chesnutt, Dallas 2005

Bankruptcy for a business can be a solution. But bankruptcy for individuals is a cure. We have seen it cure stress, save , preserve financial futures and save lives. So, bankruptcy can be a cure, an answer, an alternative that can be obtained nowhere else. But more than this, bankruptcy is not an end, it is a beginning.

Properly executed, bankruptcy can put an end to existing debt, protect from lawsuits, foreclosures, seizures, bill collectors, judgment liens, tax liens, the IRS and other tax collectors. Some will say that bankruptcy is an anathema. But we disagree. Bankruptcy is nothing more than the final expression of financial reality and the beginning of recovery.

For consumers, bankruptcy can protect their present assets and guard their future. For the business owners, it can preserve their property, their leases, their equity and keep their business alive – or provide them with an opportunity to start another business with a clean slate.

Bankruptcy has peripheral benefits also. For instance, the reorganization of a business can be the means by which the obligations of guarantors are resolved. Bankruptcy can provide a forum for workouts and settlements in the criminal arena and it can be the vehicle for alimony and child support settlements (although these debts are not discharged in bankruptcy).

And bankruptcy can be turned right around and used as the most devastating collection mechanism imaginable – instantly creating both a judgment and a seizure of all property owned by the debtor, known and unknown and anywhere in the world.

Bankruptcy to the debtor can be the release from financial stress, or it can be the flash of a storm. It all depends on who is using the bankruptcy and whether it is used as a shield or a collection tool.

Dallas, 2008

Some of the reasons for insolvency that I have seen in my experience in Dallas and Plano include the following:

• Under-capitalization
• Breaches of contracts; untrustworthy associates; New York lenders
• Unavoidable delay in the commencement of a new restaurant
• Medical debt
• Accidents and illnesses
• Theft
• Precipitous fall in a market
• Loss of credit; change of bank officer
• Credit card overuse
• Making only minimum payments and not stopping use of credit cards
• Following the advice of inexperienced investors
• Buying into questionable tax avoidance schemes
• Supporting grown children
• Tuition
• Not paying taxes
• Trusting family members and friends without supervision
• Home equity loans
• Paying creditors with exempt property like IRA’s
• Inadequate medical insurance
• Irresponsible spending on consumables such as expensive cars
• Not knowing when to stop pouring money into a failing business
• Theft: scams and get rich quick schemes
• Refusal to get a bankruptcy discharge when you can: not getting legal advice,  misunderstanding of what is biblically permissible, false pride, unreasonable fears, not filing before a marriage, moving in with a man with significant debt before a marriage (it can prevent him from obtaining a bankruptcy discharge)
• Gigolos
• Highly leveraged investments
• Wives working and raising children at the same time
• Alcoholism, promiscuity, adultery, indolence
• Excessive spending on consumables
• Student loans
• Impulse buying
• Signing things like onerous leases, guarantees, co-signing promissory notes or signing promissory notes for pleasure items.  Think: what is your name on right now?
• Not reading what you are signing – or worse, thinking that it is not important
• Contracting with inflexible, unfair and gouging people
• Thinking that a potential spouse is honest and reliable because he or she is likeable; not checking them out
• Hiring cheap lawyers.
• Hiring lawyers because they are attractive and really nice rather than because they can really answer your questions and are trustworthy.
• Hiring cheap lawyers

Charles Chesnutt, Dallas 2010

There are three different kinds of bankruptcies. Each of these is described in the United States Code. The United States Code is the laws of the United States, all of which were passed by Congress. The United States Code is divided into various titles that are numbered. Title 11 is the title that contains the bankruptcy laws. Title 11 has various chapters that describe various bankruptcy laws. Chapter 7 of Title 11 describes a Chapter 7 bankruptcy, Chapter 13 of Title 11 describes a Chapter 13 bankruptcy and Chapter 11 describes a Chapter 11 bankruptcy.

What is a Chapter 11? Chapter 11 is a bankruptcy that is used for corporations and individuals with unique problems. Chapter 11 can force the return of seized assets, stop foreclosures, keep a business open, force a payout of tax debt, force a payout of mortgage debt or floor plans or equipment debt or lines of credit and others. It can be a shield for individuals who guaranteed notes and provide an umbrella of protection to guard the business from creditors, from lawsuits and the tax man until a reorganization plan can be approved by the bankruptcy judge. A reorganization plan is a court order that requires all parties (both debtor and all creditworthy live by its terms.

What is a Chapter 7? A Chapter 7 bankruptcy for a person (rather than a corporation) is a trade. It is an exchange. The person who files (the debtor) trades all of his non-exempt assets for a discharge of debt. Non-exempt assets are anything of value that the debtor would lose if someone sued the debtor for an unsecured debt and then took everything that the law allowed him to take. In Texas, most property owed by most people is exempt. That is, it cannot be lost to either a bankruptcy or someone collection on a judgment for an unsecured debt. Generally speaking, a homestead and its contents are exempt (not lost), one car for each person in the family is exempt (not lost), and insurance policies are exempt (not lost); retirement, pension plans and IRA’s are exempt (not lost) and sometimes some cash is also exempt (not lost). If all of the debtor’s assets are exempt, then the debtor loses nothing in the bankruptcy. That is, he trades nothing for a discharge of debt.

What is a Chapter 13? A Chapter 13 bankruptcy in Dallas and Plano is the same as a Chapter 7 bankruptcy, except the trade takes place over time and the debtor can make monthly payments instead of losing assets. Chapter 13 also provides terms to pay taxes – and IRS has to take whatever the Bankruptcy Code gives them. Chapter 13 gives terms to pay back missed mortgage payments – so the debtor can save his house from foreclosure and make up the missed payments over time. The debtor can also use Chapter 13 to pay back a portion of what he owes to all of his other creditors. In a Chapter 13, the debtor pays what he can for 36 to 60 months (his choice) and when he is finished paying all that he can pay, all that he could not pay is discharged.

Charles Chesnutt, Dallas 2009

In a Chapter 7:

Bankruptcy is a trade; it is an exchange. When one files a bankruptcy, one trades all non-exempt property for a discharge in debt. This means that the debtor loses all his or her non-exempt property. But the debtor keeps all exempt property. In Texas exempt property is generally a homestead, one car for each driver in the family, retirement, annuities, insurance policies and current wages. In other states, however, what one may keep in a bankruptcy is significantly different. See Bankruptcy in Other States.

The trade is initiated instantly upon filing. Upon filing a bankruptcy estate is created. That estate contains all of the assets of the debtor. So, immediately upon filing, the debtor transfers ownership of all of his assets to the bankruptcy estate. Later in the bankruptcy the exempt assets of the debtor return to him. The exempt assets are never really at risk because they are normally well defined.

Also upon filing a thing called an automatic stay comes into effect. That means that all collection efforts are automatically stayed (stopped) so the bankruptcy can go forward. The stay remains in effect until the discharge, and then then discharge prevents collection.

So what happens to these assets? If they are in this nebulous bankruptcy estate, where is it and who controls it? The bankruptcy trustee owns and controls the bankruptcy estate; he holds it in trust for the benefit of the creditors of the estate. It is the bankruptcy trustee’s job to gather all of the assets of the estate and sell them and divide the money among the creditors. If the debtor is mistaken about what is exempt and what is non-exempt, he may have a confrontation with the trustee. The debtor who confronts a trustee normally loses. So, it is is very important to be very sure about what is exempt and what is non-exempt before filing.

While the trustee is gathering the assets of the estate the creditors (as well as the trustee) have a chance to object to the debtor’s discharge or to his exemptions. An objection to a discharge of debt in any bankruptcy is very limited. That is, there are only a limited number of reasons that someone can object to a discharge. Some reasons for the denial of a discharge are false statement on bankruptcy papers, or stealing, or intentional harms or false financial statements.

Another reason for an objection to discharge is if the debtor makes too much money. Whether he does or does not can be complicated and depends on numerous factors. This is called the means test.

If no one objects, then the bankruptcy judge signs the discharge and the trustee distributes the assets of the estate and the case is closed.

In a Chapter 11:

A Chapter 11 bankruptcy is most often filed by corporations or partnerships, rather than individuals, and there is no exempt property for corporations or partnerships. So, when a business files a Chapter 11 all of its property and assets fall into the bankruptcy estate. However, the owner continues to operate the business and during the interim, no one can collect the previously existing debts.

The owner then uses the time that the bankruptcy gives him to reorganize. For instance, he may lay off some people, close a store, find a cheaper supplier, sell some equipment or whatever he can do do streamline his business. During this time he is paying no prior debts and he using the money to reorganize.

He then files a plan of reorganization that shows how he will continue to operate and use the extra money that he accumulates to make payments against the previously existing debts. Theoretically he has more money now because he does not have to pay all of his previously existing debts all at once. So, one type of a Chapter 11 plan is a payment plan where all or part of the previously existing debt is paid.

In a Chapter 13:

A Chapter 13 is the same as a Chapter 11, but it is for individuals, and the amount of the payments to the creditors is determined by the bankruptcy law.

A Chapter 13 is more structured and cheaper than a Chapter 11.

Knowing what will happen in advance is the most important piece of the bankruptcy puzzle.

Charles Chesnutt

Whether an individual should file a bankruptcy is a very personal question. On the other hand, whether a business should file a bankruptcy is, or should be, a business decision. The difficulty of this decision in both instances is eased by the fact that preparation for bankruptcy often makes good financial sense whether one ultimately files or not. It is always wise to keep in mind that the worst may happen – and be ready for it.

Why should a person file bankruptcy? Because it ends debt that cannot be paid, or because it provides an opportunity to pay debt that cannot be ended.

Why should a business file a bankruptcy? Because it provides an opportunity to reorganize and ease or erase some debt, or it can be an excellent way to liquidate a business in a manner that is calculated to protect the principals of that business and treat the creditors fairly.

What is a Chapter 11? Chapter 11 is a bankruptcy that is used for corporations and individuals with unique problems. Chapter 11 can force the return of seized assets, stop foreclosures, keep a business open, force a payout of tax debt, force a payout of mortgage debt or floor plans or equipment debt or lines of credit and others. It can be a shield for individuals who guaranteed notes and provide an umbrella of protection to guard the business from creditors, from lawsuits and the tax man until a reorganization plan can be approved by the bankruptcy judge. A reorganization plan is a court order that requires all parties (both debtor and all creditworthy live by its terms.

What is a Chapter 7? A Chapter 7 bankruptcy for a person (rather than a corporation) is a trade. It is an exchange. The person who files (the debtor) trades all of his non-exempt assets for a discharge of debt. Non-exempt assets are anything of value that the debtor would lose if someone sued the debtor for an unsecured debt and then took everything that the law allowed him to take. In Texas, most property owed by most people is exempt. That is, it cannot be lost to either a bankruptcy or someone collection on a judgment for an unsecured debt. Generally speaking, a homestead and its contents are exempt (not lost), one car for each person in the family is exempt (not lost), and insurance policies are exempt (not lost); retirement, pension plans and IRA’s are exempt (not lost) and sometimes some cash is also exempt (not lost). If all of the debtor’s assets are exempt, then the debtor loses nothing in the bankruptcy. That is, he trades nothing for a discharge of debt.

What is a Chapter 13? A Chapter 13 bankruptcy is the same as a Chapter 7 bankruptcy, except the trade takes place over time and the debtor can make monthly payments instead of losing assets. Chapter 13 also provides terms to pay taxes – and IRS has to take whatever the Bankruptcy Code gives them. Chapter 13 gives terms to pay back missed mortgage payments – so the debtor can save his house from foreclosure and make up the missed payments over time. The debtor can also use Chapter 13 to pay back a portion of what he owes to all of his other creditors. In a Chapter 13, the debtor pays what he can for 36 to 60 months (his choice) and when he is finished paying all that he can pay, all that he could not pay is discharged.

Charles Chesnutt, Dallas 2010

Bankruptcy law is indeed a different world. It is not a “subset” of another branch of law; it is its own world. Bankruptcy has its own laws, its own courts, its own judges, its own customs and its own rules of procedure. Lawyers must either live in that world or live elsewhere – bankruptcy is not the place for enterprising young lawyers to dabble. What occurs in the bankruptcy court is normally irreversible – whether the lawyer or the client understands it or not.

Half truths, exaggerations and fabrications in other courts may be ignored or warrant an admonishment. In bankruptcy court they are felonies and they are prosecuted.

Bankruptcy court is the only place where it is possible to wipe away all debt without a tax consequence.

Bankruptcy court is the only place that holds the power to stop the IRS and declare perfectly valid taxes to be non-collectible.

Bankruptcy court is the only place where one can go to have instant relief and bankruptcy is structured so as to extend that relief uninterrupted from the moment of filing through the closing of the case.

Clients who go to conventional lawyers often expect to see things happen. Perhaps it is a wrong that needs to be righted or a lawsuit to be defended or filed; they expect judges and juries and courtrooms and arguments and debates. Clients expect to see their lawyer go into action. But this is not the case with bankruptcy lawyers representing debtors. If a client hires a bankruptcy lawyer to file a bankruptcy for him and absolutely nothing happens to the client, the lawyer has done his job.

That is what we do for debtors. We protect them.

Charles Chesnutt